HENRY SCHEIN INC - Quarter Report: 2023 September (Form 10-Q)

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

10

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

11

$

$

$

$

$

Medical

Total health care distribution

Technologyand value-added services

Total net sales

$

$

$

$

$

$

Three Months Ended

Nine Months Ended

September 24, 2022

September 24, 2022

North

America

International

Global

North

America

International

Global

Net sales:

Health care distribution

Dental

$

$

$

$

$

$

Medical

Total health care distribution

Technologyand value-added services

Total net sales

$

$

$

$

$

$

 

 

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

12

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, governmentand other

institutions.Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,emergency

medical technicians, dialysis centers, home health, federal and state governmentsand large enterprises, such as

group practices and integrated delivery networks, among other providersacross a wide range of specialties.Our

dental and medical groups serve practitioners in

countries worldwide.

The health care distribution reportable segment aggregates our global dentaland medical operating segments.This

segment distributes consumable products, dental specialty products, smallequipment, 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 providessoftware, 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-recoursebasis, 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 operatingsegments:

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

13

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

14

% voting equity interest in S.I.N. Implant System (“S.I.N.”), one of Brazil’s

leading manufacturers of dental implants.Based in São Paulo and founded in 2003, S.I.N. manufacturesan

extensive line of products to perform dental implant procedures andis focused on advancing the development of

value-priced dental implants.S.I.N. recently expanded the distribution of its products into the UnitedStates and

other international markets.

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

15

% voting equity interest in Biotech Dental (“Biotech Dental”), whichis a

provider of dental implants, clear aligners, individualized prosthetics,and innovative digital dental software based

in France.Biotech Dental has several important solutions for dental practicesand dental labs, including Nemotec, a

comprehensive, integrated suite of planning and diagnostic softwareusing open architecture that connects disparate

medical devices to create a digital view of the patient, offering greater diagnosticaccuracy and an improved patient

experience.The integration of Biotech Dental’s software with Henry Schein One’s industry-leading practice

management software solutions will help customers streamline theirclinical as well as administrative workflow for

the ultimate benefit of patients.

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

16

% to

%.

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

17

million related to the remeasurement to fair value of our previously heldequity investment, using a discounted cash

flow model based on Level 3 inputs, as defined in

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

18

million and $

million, respectively.Factors that we considered when estimating the fair

value of our debt include market conditions, such as interest rates and creditspreads.

Derivative contracts

Derivative contracts are valued using quoted market prices andsignificant other observable inputs.We use

derivative instruments to minimize our exposure to fluctuations in foreigncurrency exchange rates.Our derivative

instruments primarily include foreign currency forward agreements relatedto 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 designatedas net investment hedges, hedging of the

floating interest rate to a fixed interest rate on our $

million term loan

 

 

 

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

19

See

for additional information.

$

$

$

Derivative contracts undesignated

Total assets

$

$

$

$

Liabilities:

Derivative contracts designated as hedges

$

$

$

$

Derivative contracts undesignated

Total returnswaps

Total liabilities

$

$

$

$

Redeemable noncontrolling interests

$

$

$

$

December 31, 2022

Level 1

Level 2

Level 3

Total

Assets:

Derivative contracts designated as hedges

$

$

$

$

Derivative contracts undesignated

Total assets

$

$

$

$

Liabilities:

Derivative contracts designated as hedges

$

$

$

$

Derivative contracts undesignated

Total returnswaps

Total liabilities

$

$

$

$

Redeemable noncontrolling interests

$

$

$

$

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

20

, is approximately

€

million.During the three months ended September 30, 2023 and September24, 2022, we recorded an

increase of $

million and $

million, respectively, within other comprehensive income related to these foreign

currency forward contracts.During the nine months ended September 30, 2023 and September 24, 2022,we

recorded an increase of $

million and $

million, respectively, within other comprehensive income related to

these foreign currency forward contracts.

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

21

$

Other short-term bank credit lines

Total

$

$

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

22

$

U.S. trade accounts receivable securitization

Term loan

Variouscollateralized and uncollateralized loans payable with interest,

in varying installments through 2023 at interest rates

ranging from

% to

% at September 30, 2023 and

ranging from

% to

% at December 31, 2022

Finance lease obligations

Total

Less current maturities

()

()

Total long-term debt

$

$

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

23

.This facility agreement has a

purchase limit of $

million with

banks as agents, and expires on

.

As of September 30, 2023 and December 31, 2022, the borrowingsoutstanding under this securitization facility

were $

million and $

million, respectively.At September 30, 2023, the interest rate on borrowings under this

facility was based on the asset-backed commercial paper rate of

% plus

%, for a combined rate of

%.At December 31, 2022, the interest rate on borrowings underthis facility was based on the asset-backed

commercial paper rate of

% plus

%, for a combined rate of

%.

If our accounts receivable collection pattern changes due to customerseither 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

to

basis points depending upon program utilization.

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

24

%, compared to

% for the prior

year period.The difference between our effective tax rate and the federal statutory tax rate primarilyrelates to state

and foreign income taxes and interest expense.

The total amount of unrecognized tax benefits, which are included in“other liabilities” within our condensed

consolidated balance sheets, as of September 30, 2023 and December 31,2022 was $

million and $

million,

respectively, of which $

million and $

million, respectively, would affect the effective tax rate if recognized.

It is possible that the amount of unrecognized tax benefits willchange in the next 12 months, which may result in a

material impact on our condensed consolidated statements of income.

All tax returns audited by the IRS are officially closed through 2019.The tax years subject to examination by the

IRS include years 2020 and forward.In addition, limited positions reported in the 2017 tax year are subjectto IRS

examination.

The total amounts of interest and penalties are classified as a componentof the provision for income taxes.The

amount of tax interest expense was $

million for the nine months ended September 30, 2023 and $

million for the

nine months ended September 24, 2022.The total amount of accrued interest is included in “otherliabilities,” and

was $

million as of September 30, 2023 and $

million as of December 31, 2022.The amount of penalties

accrued for during the periods presented were not material to our condensedconsolidated financial statements.

 

 

 

 

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

25

$

-

$

$

Accelerated depreciation and amortization

-

Exit and other related costs

-

Total restructuringand integration costs

$

$

-

$

$

Three Months Ended September 24, 2022

Health-Care Distribution

Technologyand

Value-Added

Services

Restructuring

Costs

Integration

Costs

Restructuring

Costs

Total

Severance and employee-related costs

$

$

-

$

-

$

Accelerated depreciation and amortization

-

-

Exit and other related costs

-

-

Integration employee-related and other costs

-

-

Total restructuringand integration costs

$

$

$

-

$

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

26

$

$

Restructuring and integration costs

Non-cash asset impairment and accelerated

depreciation and amortization of right-of-use lease

assets and other long-lived assets

()

()

()

Non-cash impairment on disposal of a business

-

Cash payments and other adjustments

()

()

()

Balance, September 30, 2023

$

$

$

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

27

); one or more of Henry Schein, Inc.’s subsidiaries is also named as a defendant in a

number of those cases).Generally, the lawsuits allege that the manufacturers of prescription opioid drugs engaged

in a false advertising campaign to expand the market for such drugs andtheir own market share and that the entities

in the supply chain (including Henry Schein, Inc. and its subsidiaries) reapedfinancial rewards by refusing or

otherwise failing to monitor appropriately and restrict the improper distributionof 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 outsideof the MDL.At this time, the

following cases are set for trial: the action filed by Mobile County Boardof Health, et al. in Alabama state court,

which has been set for a jury trial on August 12, 2024; and the action filedby Florida Health Sciences Center, Inc.

(and

other hospitals located throughout the State of Florida) in Florida statecourt, which is currently scheduled

for a jury trial in September 2025.Of Henry Schein’s 2022 net sales of approximately $

billion from

continuing operations, sales of opioids represented less than two-tenths of 1 percent.Opioids represent a negligible

part of our business.We intend to defend ourselves vigorously against these actions.

In August 2022, Henry Schein received a Grand Jury Subpoena from the UnitedStates Attorney’s Office for the

Western District of Virginia,seeking documents in connection with an investigation of possible violationsof 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 drugsto certain customers.In

October 2022, Henry Schein received a second Grand Jury Subpoenafrom the United States Attorney’s Office for

the Western District of Virginia.The October Subpoena seeks documents relating to payments HenrySchein

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, governmentalinquiries and investigations (which may

in some cases involve our entering into settlement arrangements or consentdecrees), 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 currentlyanticipated to have a material adverse effect on our

consolidated financial position, liquidity or results of operations.

As of September 30, 2023, we had accrued our best estimate of potential lossesrelating to claims that were

probable to result in liability and for which we were able to reasonably estimatea 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 CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

28

from the

grant date and have a contractual term of

from the grant date, subject to earlier termination of the term

upon certain events.Compensation expense for these stock options is recognizedusing a graded vesting method.

We estimated the fair value of stock options using the Black-Scholes valuation model.During the nine months

ended September 30, 2023 we did

t grant any stock options.

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

29

million ($

million after-tax) and $

million ($

million after-tax) for the three and nine months ended

September 30, 2023, respectively.For the three and nine months ended September 24, 2022, werecorded pre-tax

share-based compensation expense of $

million ($

million after-tax) and $

million ($

million after-tax),

respectively.

Total unrecognized compensation cost related to unvested awards as of September 30, 2023 was $

million, which

is expected to be recognized over a weighted-average period of approximately

years.

Our accompanying condensed consolidated statements of cash flows presentour stock-based compensation expense

as an adjustment to reconcile net income to net cash provided by operatingactivities for all periods presented.In

the accompanying condensed consolidated statements of cash flows, there wereno benefits associated with tax

deductions in excess of recognized compensation as a cash inflow fromfinancing activities for the nine months

ended September 30, 2023 and September 24, 2022, respectively.

 

 

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

30

$

$

Granted

Vested

()

()

Forfeited

()

()

Outstanding at end of period

$

$

$

$

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

31

)

$

()

Attributable to noncontrolling interests:

Foreign currency translation adjustment

$

()

$

()

Attributable to Henry Schein, Inc.:

Foreign currency translation adjustment

$

()

$

()

Unrealized gain from foreign currency hedging activities

Pension adjustment loss

()

()

Accumulated other comprehensive loss

$

()

$

()

Total Accumulatedother comprehensive loss

$

()

$

()

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

32

$

$

$

Comprehensive income attributable to

noncontrolling interests

Comprehensive income attributable to

redeemable noncontrolling interests

Comprehensive income

$

$

$

$

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

33

$

Income taxes

 

HENRY SCHEIN, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(in millions, except share and per share data)

(unaudited

)

34

35

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

In accordance with the “Safe Harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, we

provide the following cautionary remarks regarding important factorsthat, among others, could cause future results

to differ materially from the forward-looking statements, expectations and assumptionsexpressed or implied

herein.All forward-looking statements made by us are subject torisks and uncertainties and are not guarantees of

future performance.These forward-looking statements involve known and unknownrisks, uncertainties and other

factors that may cause our actual results, performance and achievementsor industry results to be materially

different from any future results, performance or achievements expressed or implied by suchforward-looking

statements.These statements are generally identified by the use of suchterms 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 limitedto, 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 CoronavirusDisease 2019 (COVID-19) on us,

our results of operations, liquidity and financial condition (includingany estimates of the impact on these items),

the rate and consistency with which dental and other practices resume ormaintain normal operations in the United

States and internationally, expectations regarding PPE products and COVID-19 related product sales and inventory

levels, whether additional resurgences or variants of the virus will adversely impact theresumption of normal

operations, whether supply chain disruptions will adversely impact ourbusiness, the impact of the cybersecurity

incident disclosed in the Company’s Current Report on Form 8-K filed on October 15, 2023 on our business and

results of operations, including the accuracy of our estimates of theimpact, the timing and extent of any recovery

on insurance claims, the impact of integration and restructuring programsas well as of any future acquisitions,

general economic conditions including exchange rates, inflation andrecession, and more generally current

expectations regarding performance in current and future periods.Forward looking statements also include (i) our

ability to have continued access to a variety of COVID-19 test types,and COVID-19 vaccines and ancillary

supplies, and (ii) expectations regarding COVID-19 test sales, demand andinventory levels.

Risk factors and uncertainties that could cause actual results to differ materially fromcurrent and historical results

include, but are not limited to: risks associated with COVID-19and any variants thereof, as well as other disease

outbreaks, epidemics, pandemics, or similar wide-spread public health concernsand 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) andtechnologies that achieve market

acceptance with acceptable margins; transitional challenges associated with acquisitions,dispositions and joint

ventures, including the failure to achieve anticipated synergies/benefits; legal, regulatory, compliance,

cybersecurity, financial and tax risks associated with acquisitions, dispositions and joint ventures; certain provisions

in our governing documents that may discourage third-party acquisitionsof us; adverse changes in supplier rebates

or other purchasing incentives; risks related to the sale of corporate brandproducts; effects of a highly competitive

(including, without limitation, competition from third-party online commercesites) and consolidating market; the

repeal or judicial prohibition on implementation of the Affordable Care Act; changes in the healthcare industry;

risks from expansion of customer purchasing power and multi-tieredcosting structures; increases in shipping costs

for our products or other service issues with our third-party shippers; generalglobal and domestic macro-economic

and political conditions, including inflation, deflation, recession, fluctuationsin energy pricing and the value of the

U.S. dollar as compared to foreign currencies, and changes to other economicindicators, international trade

agreements, potential trade barriers and terrorism; geopolitical wars;failure to comply with existing and future

regulatory requirements; risks associated with the EU Medical Device Regulation;failure to comply with laws and

regulations relating to health care fraud or other laws and regulations; failureto comply with laws and regulations

relating to the collection, storage and processing of sensitive personalinformation or standards in electronic health

records or transmissions; changes in tax legislation; risks related toproduct liability, intellectual property and other

claims; litigation risks;new or unanticipated litigation developments and the statusof litigation matters; risks

associated with customs policies or legislative import restrictions; cyberattacksor other privacy or data security

breaches (including the recent October 2023 incident); risks associated withour global operations; our dependence

on our senior management, employee hiring and retention, and our relationshipswith customers, suppliers and

 

 

36

manufacturers; and disruptions in financial markets.The order in which these factors appear should not be

construed to indicate their relative importance or priority.

We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control

or predict.Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction

of actual results.We undertake no duty and have no obligation to update forward-looking statements except as

required by law.

Where YouCan 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 relationspage of our website (www.henryschein.com)

and the social media channels identified on the Newsroom page of our website.

Recent Developments

During the year ended December 31, 2022 we experienced a decreasein the sales of PPE and COVID-19 test kits

as compared to the comparable prior-year period.During the three and nine months ended September 30, 2023, we

continued to experience a decrease in the sales of PPE and COVID-19test kits, primarily due to ongoing decreases

in market prices for PPE (principally gloves) and lower market demandfor COVID-19 test kits compared with the

same periods in the prior year, and we expect further decreases in sales in 2023 compared to the prioryear.

While the U.S. economy has recently experienced inflationarypressures and strengthening of the U.S. dollar, their

impacts have not been material to our results of operations.The impact from inflation, including manufacturer

price increases excluding PPE products, was slightly more pronouncedin Europe.Though inflation impacts both

our revenues and costs, the depth and breadth of our product portfoliooften allows us to offer lower-cost national

brand solutions or corporate brand alternatives to our more price-sensitivecustomers who are unable to absorb

price increases, thus positioning us to protect our gross profit.

Our condensed consolidated financial statements reflect estimates andassumptions made by us that affect, among

other things, our goodwill, long-lived asset and definite-lived intangibleasset valuation; inventory valuation; equity

investment valuation; assessment of the annual effective tax rate; valuation ofdeferred 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 bonusplans; and pension plan

assumptions.

Cybersecurity Incident

On October 14, 2023, we became aware of a cybersecurity incidentthat primarily affected the operations of our

North American and European dental and medical distribution businesses.Henry Schein One, our practice

management software, revenue cycle management and patient relationshipmanagement solutions business was not

affected, and our manufacturing businesses and our equipment sales andservice operations were mostly unaffected.

Once we became aware of the issue, we took steps to assess, contain andremediate this incident.Our distribution

operations resumed and we reactivated our ecommerce platform.We also notified law enforcement and our

customers and suppliers informing them of both the incident andmanagement’s efforts to mitigate its impact on our

daily operations.As previously disclosed, while our forensic investigation is stillongoing, we have determined that

a data breach occurred.We are notifying potentially affected parties as appropriate.

On November 22, 2023, we experienced a disruption to our ecommerceplatform and related applications. The

Company has restored its ecommerce platform and certain otherapplications in the United States, Canada and

certain European countries.Our ecommerce platform in the remaining European countries and other applications

are expected to follow shortly.

 

37

We continue to review the impact of the incident on our business.As previously disclosed, we believe the incident

will adversely impact our financial results for the fourth quarter andfull year 2023.

We maintain cyber insurance, subject to certain retentions and policy limitations.There can be no assurance that

the insurance coverage we maintain is sufficient to cover costs and expenses relatedto this cybersecurity incident.

Executive-Level Overview

Henry Schein, Inc. is a solutions company for health care professionals poweredby 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, andambulatory surgery centers, as well

as government, institutional health care clinics and other alternate care clinics.

We

believe that we have a strong

brand identity due to our more than 91 years of experience distributing healthcare products.

We are headquartered in Melville, New York,employ approximately 24,000 people (of which approximately

11,500 are based outside of the United States) and have operations or affiliates in 33 countries and territories.Our

broad global footprint has evolved over time through our organic success as well asthrough contribution from

strategic acquisitions.

We

have established strategically located distribution centers aroundthe 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, enablesus to be a single source of

supply for our customers’ needs.

While our primary go-to-market strategy is in our capacity as a distributor, we also market and sell our own

corporate brand portfolio of cost-effective, high-quality consumable merchandise products,manufacture certain

dental specialty products in the areas of implants, orthodontics and endodontics,and repackage/relabel prescription

drugs and/or devices.

We

have achieved scale in these global businesses primarilythrough acquisitions, as

manufacturers of these products typically do not utilize a distribution channelto serve customers.

We

conduct our business through two reportable segments: (i) healthcare 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, governmentand other

institutions.Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,emergency

medical technicians, dialysis centers, home health, federal and state governmentsand large enterprises, such as

group practices and integrated delivery networks, among other providersacross a wide range of specialties.

The health care distribution reportable segment, combining our global dental andmedical operating segments,

distributes consumable products, small equipment, laboratory products, large equipment, equipmentrepair services,

branded and generic pharmaceuticals, vaccines, surgical products, dental specialtyproducts (including implant,

orthodontic and endodontic products), diagnostic tests, infection-control products,PPE products and vitamins.

Our global technology and value-added services business provides software, technologyand 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-recoursebasis, 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, whichis 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 thecombined value that we offer through a single

program.Specifically, One Schein provides customers with streamlined access to our comprehensive offering of

 

 

38

national brand products, our corporate brand products and proprietary specialtyproducts and solutions (including

implant, orthodontic and endodontic products).In addition, customers have access to a wide range of services,

including software and other value-added services.

Industry Overview

In recent years, the health care industry has increasingly focused on cost containment.This trend has benefited

distributors capable of providing a broad array of products and services at lowprices.It also has accelerated the

growth of HMOs, group practices, other managed care accounts and collective buyinggroups, which, in addition to

their emphasis on obtaining products at competitive prices, tend to favor distributorscapable 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 canenhance the efficiency and

facilitation of practice management.

Our operating results in recent years have been significantly affected by strategiesand transactions that we

undertook to expand our business, domestically and internationally, in part to address significant changes in the

health care industry, including consolidation of health care distribution companies, health care reform, trends

toward managed care, cuts in Medicare and collective purchasing arrangements.

Industry Consolidation

The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented

and diverse.The industry ranges from sole practitioners working out ofrelatively 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 managelarge quantities of supplies

in their offices, the distribution of health care supplies and small equipment to office-based healthcare 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 typicallymade by the

practitioner or an administrative assistant.Supplies and small equipment are generally purchased from morethan

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 groupsare 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 toresult in a number of distributors, particularly

those with limited financial, operating and marketing resources, seeking tocombine with larger companies that can

provide growth opportunities.This consolidation also may continue to result in distributors seekingto acquire

companies that can enhance their current product and service offerings or provideopportunities to serve a broader

customer base.

Our approach to acquisitions and joint ventures has been to expand our role asa provider of products and services

to the health care industry.This trend has resulted in our expansion into service areas that complementour existing

operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquiredbusinesses.

As industry consolidation continues, we believe that we are positioned tocapitalize on this trend, as we believe we

have the ability to support increased sales through our existing infrastructure, althoughthere 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 decisionmakers who do not reside in the office-

based practitioner setting.

39

As the health care industry continues to change, we continually evaluate possiblecandidates for joint venture or

acquisition and intend to continue to seek opportunities to expand ourrole as a provider of products and services to

the health care industry.There can be no assurance that we will be able to successfully pursueany 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 therecan 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 growthdue to the aging population,

increased health care awareness, the proliferation of medical technologyand testing, new pharmacological

treatments, and expanded third-party insurance coverage, partially offset by the effects of unemploymenton

insurance coverage.In addition, the physician market continues to benefit from theshift of procedures and

diagnostic testing from acute care settings to alternate-care sites, particularlyphysicians’ offices.

According to the U.S. Census Bureau’s International Database, between 2023 and 2033, the 45 and older

population is expected to grow by approximately 11%.Between 2023 and 2043, this age group is expected to grow

by approximately 21%.This compares with expected total U.S. population growthrates of approximately 6%

between 2023 and 2033 and approximately 11% between 2023 and 2043.

According to the U.S. Census Bureau’s International Database, in 2023 there are approximately seven million

Americans aged 85 years or older, the segment of the population most in need of long-term careand elder-care

services.By the year 2050, that number is projected to nearly triple to approximately19 million.The population

aged 65 to 84 years is projected to increase by approximately 23% duringthe same period.

As a result of these market dynamics, annual expenditures for healthcare 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” indicatingthat total national health care spending reached

approximately $4.3 trillion in 2021, or 18.3% of the nation’s gross domestic product, the benchmarkmeasure for

annual production of goods and services in the United States.Health care spending is projected to reach

approximately $7.2 trillion by 2031, or 19.6% of the nation’s projected gross domestic product.

Government

Certain of our businesses involve the distribution, manufacturing, importation,exportation, marketing and sale of,

and/or third party payment for, pharmaceuticals and/or medical devices, and in this regard, we are subjectto

extensive local, state, federal and foreign governmental laws and regulations,including as applicable to our

wholesale distribution of pharmaceuticals and medical devices, manufacturingactivities, and as part of our

specialty home medical supply business that distributes and sells medical equipmentand supplies directly to

patients.Federal, state and certain foreign governments have also increased enforcementactivity in the health care

sector, particularly in areas of fraud and abuse, anti-bribery and corruption, controlled substances handling,medical

device regulations and data privacy and security standards.

Certain of our businesses are subject to various additional federal, state,local and foreign laws and regulations,

including with respect to the sale, transportation, importation, storage, handlingand disposal of hazardous or

potentially hazardous substances; “forever chemicals” such as per-andpolyfluoroalkyl substances (PFAS); and safe

working conditions.In addition, certain of our businesses must operate in compliance with avariety of burdensome

and complex coding, billing and record-keeping requirements in order to substantiateclaims 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, althoughit was permitted to continue to perform

and bill for Medicare services.Such suspension was terminated on September 30, 2022.

Government and private insurance programs fund a large portion of the total cost of medical care,and there have

been efforts to limit such private and government insurance programs, including efforts, thus farunsuccessful, to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

seek repeal of the entire United States Patient Protection and Affordable Care Act,as amended by the Health Care

and Education Reconciliation Act, each enacted in March 2010.In addition, activities to control medical costs,

including laws and regulations lowering reimbursement rates for pharmaceuticals,medical devices, medical

supplies, and/or medical treatments or services, are ongoing.Many of these laws and regulations are subject to

change and their evolving implementation may impact our operations and ourfinancial performance.

Our businesses are generally subject to numerous laws and regulations that couldimpact our financial performance,

and failure to comply with such laws or regulations could have a material adverseeffect on our business.

A more detailed discussion of governmental laws and regulationsis included in Management’s Discussion &

Analysis of Financial Condition and Results of Operations, containedin our Annual Report on Form 10-K for the

fiscal year ended December 31, 2022, filed with the SEC on February 21, 2023.

Results of Operations

The following tables summarize the significant components of our operatingresults for the three and nine months

ended September 30, 2023 and September 24, 2022 and cash flows forthe nine months ended September 30, 2023

and September 24, 2022:

Three Months Ended

Nine Months Ended

September 30,

September 24,

September 30,

September 24,

2023

2022

2023

2022

Operating results:

Net sales

$

3,162

$

3,067

$

9,322

$

9,276

Cost of sales

2,167

2,153

6,386

6,444

Gross profit

995

914

2,936

2,832

Operating expenses:

Selling, general and administrative

725

648

2,149

2,010

Depreciation and amortization

59

45

152

137

Restructuring and integration costs

11

10

59

10

Operating income

$

200

$

211

$

576

$

675

Other expense, net

$

(21)

$

(6)

$

(48)

$

(17)

Net income

143

162

419

515

Net income attributable to Henry Schein, Inc.

137

150

398

491

Nine Months Ended

September 30,

September 24,

2023

2022

Cash flows:

Net cash provided by operating activities

$

532

$

348

Net cash used in investing activities

(808)

(211)

Net cash provided by (used in) financing activities

307

(121)

 

 

41

Plan of Restructuring and Integration Costs

On August 1, 2022, we committed to a restructuring plan focused onfunding the priorities of the strategic plan and

streamlining operations and other initiatives to increase efficiency.We revised our previous expectations of

completion and now expect this initiative to extend through 2024.We are currently unable in good faith to make a

determination of an estimate of the amount or range of amounts expected tobe incurred in connection with these

activities, both with respect to each major type of cost associatedtherewith and with respect to the total cost, or an

estimate of the amount or range of amounts that will result in futurecash expenditures.

During the three months ended September 30, 2023 and September 24, 2022,we recorded restructuring costs of

$11 million and $9 million, respectively.During the nine months ended September 30, 2023 and September24,

2022, we recorded restructuring costs of $59 million and $9 million, respectively.The restructuring costs for these

periods primarily related to severance and employee-related costs,accelerated amortization of right-of-use lease

assets and fixed assets, and other lease exit costs.Included in restructuring costs for the nine months ended

September 30, 2023 were immaterial amounts related to the disposalof an unprofitable U.S. business initiated

during 2022 and completed during the first quarter of 2023.

On August 26, 2022, we acquired Midway Dental Supply.In connection with this acquisition, during the three

months ended September 24, 2022, we recorded integration costsof $1 million related to one-time employee and

other costs, as well as restructuring charges of $2 million, which are includedin the $9 million of restructuring

charges discussed above.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

Three Months Ended September 30, 2023 Compared to Three Months Ended September 24, 2022

Net Sales

Net sales were as follows:

September 30,

% of

September 24,

% of

Increase / (Decrease)

2023

Total

2022

Total

$

%

Health care distribution

(1)

Dental

$

1,882

59.5

%

$

1,785

58.2

%

$

97

5.4

%

Medical

1,070

33.9

1,106

36.0

(36)

(3.1)

Total health care distribution

2,952

93.4

2,891

94.2

61

2.1

Technology and value-added services

(2)

210

6.6

176

5.8

34

18.8

Total

$

3,162

100.0

%

$

3,067

100.0

%

$

95

3.1

%

The components of our sales growth were as follows:

Total Local

Currency

Growth

Foreign

Exchange

Impact

Total Sales

Growth

Local Currency Growth

Local Internal

Growth

Acquisition

Growth

Health care distribution

(1)

Dental Merchandise

0.3

%

4.8

%

5.1

%

1.8

%

6.9

%

Dental Equipment

(2.0)

0.9

(1.1)

1.7

0.6

Total Dental

(0.2)

3.8

3.6

1.8

5.4

Medical

(4.6)

1.4

(3.2)

0.1

(3.1)

Total Health Care Distribution

(1.9)

2.9

1.0

1.1

2.1

Technology and value-added services

(2)

9.6

8.6

18.2

0.6

18.8

Total

(1.2)

%

3.2

%

2.0

%

1.1

%

3.1

%

Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on

actual values and may not recalculate due to rounding.

(1)

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and

generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic

products), diagnostic tests, infection-control products, PPE products and vitamins.

(2)

Consists of practice management software and other value-added products, which are distributed primarily to health care providers,

practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing

education services for practitioners, consulting and other services.

Global Sales

Global net sales for the three months ended September 30, 2023 increased 3.1%and was primarily attributable to

acquisitions.The components of our sales growth are presented in the tableabove.

The estimated increase in internally generated local currency sales, excludingPPE products and COVID-19 test

kits, was 1.1%.We estimate that sales of PPE products and COVID-19 test kits were approximately $175 million

and $244 million for the three months ended September 30, 2023 andSeptember 24, 2022, respectively,

representing an estimated decrease of $69 million or 28.2%versus the prior year, with the $69 million net decrease

year-over-year representing 2.2% of global net sales for the threemonths ended September 30, 2023.

Dental

Dental net sales for the three months ended September 30, 2023 increased 5.4%.The components of our sales

growth are presented in the table above.Our sales growth in local currency for dental merchandise was 5.1%and

was primarily attributable to acquisitions.Our decrease in sales in local currency for dental equipment was

primarily attributable to a slowdown in digital equipment sales, partiallyoffset by growth in North America for

traditional dental equipment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43

The estimated increase in internally generated local currency sales, excludingPPE products, was 0.3%.We

estimate that sales of PPE products were approximately $83 million and$94 million for the three months ended

September 30, 2023 and September 24, 2022,respectively, representing an estimated decrease of $10 million or

11.0%versus the prior year, with the $10 million net decrease year-over-year representing 0.5% of dental net sales

for the three months ended September 30, 2023.

Medical

Medical net sales for the three months ended September 30, 2023 decreased3.1%.The components of this

decrease are presented in the table above.The local currency decrease in medical sales is primarily attributableto

lower sales of PPE products and COVID-19 test kits.

The estimated increase in internally generated local currency sales, excludingPPE products and COVID-19 test

kits, was 0.8%and was adversely impacted by a replacement of branded pharmaceuticalsales with lower priced

generic products and an increase in lower priced corporate brand sales.We estimate that sales of PPE products and

COVID-19 test kits were approximately $92 million and $150 millionfor the three months ended September 30,

2023 and September 24, 2022,respectively, representing an estimated decrease of $59 million or 39.0% versus the

prior year, with the $59 million net decrease year-over-year representing 5.4%of medical net sales for the three

months ended September 30, 2023.

Technology and value-added services

Technology and value-added services net sales for the three months ended September 30, 2023 increased 18.8%

driven by acquisitions and revenue of practice management solutions.The components of our sales growth are

presented in the table above.During the three months ended September 30, 2023, the trend for salesof practice

management software growth remains strong as we continued to increasethe number of cloud-based users.

Gross Profit

Gross profit and gross margin percentages by segment and in total were as follows:

September 30,

Gross

September 24,

Gross

Increase

2023

Margin %

2022

Margin %

$

%

Health care distribution

$

851

28.8

%

$

799

27.7

%

$

52

6.5

%

Technology and value-added services

144

68.7

115

65.0

29

25.5

Total

$

995

31.5

$

914

29.8

$

81

8.8

As a result of different practices of categorizing costs associated with distribution networksthroughout 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 servicessegment 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 havebeen the most significant drivers affecting

our gross profit margin.For example, sales of our corporate brand products achievegross 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 highervolumes sold as opposed to the

gross margin on sales to office-based practitioners, who normally purchase lower volumes.

Health care distribution gross profit increased primarily due to the increasein net sales discussed above, including

$35 million of gross profit from acquisitions and gross margin expansion,mainly as a result of a favorable impact

of sales mix of higher-margin products.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44

Technology and value-added services gross profit increased as a result of a higher gross profit from internally

generated sales and gross profit of $13 million from acquisitions, as well asan increase in gross margin rates,

primarily due to product mix.

Operating Expenses

Operating expenses (consisting of selling, general and administrativeexpenses; depreciation and amortization; and

restructuring and integration costs) by segment and in total were as follows:

% of

% of

September 30,

Respective

September 24,

Respective

Increase

2023

Net Sales

2022

Net Sales

$

%

Health care distribution

$

691

23.4

%

$

620

21.5

%

$

71

11.3

%

Technology and value-added services

104

49.7

83

47.2

21

25.1

Total

$

795

25.1

$

703

22.9

$

92

12.9

The net increase in operating expenses is attributable to the following:

Restructuring and

Integration Costs

Operating Costs

Acquisitions

Total

Health care distribution

$

-

$

65

$

6

$

71

Technology and value-added services

1

(8)

28

21

Total

$

1

$

57

$

34

$

92

The restructuring and integration costs are primarily related to severanceand employee-related costs, and other

lease exit costs.The increase in operating costs includes increases in payroll andpayroll related costs,facility

related costs and consulting expenses in both of our reportable segments,and increased acquisition expenses in our

healthcare distribution segment.

Other Expense, Net

Other expense, net was as follows:

September 30,

September 24,

Variance

2023

2022

$

%

Interest income

$

6

$

1

$

5

300.2

%

Interest expense

(25)

(8)

(17)

(202.6)

Other, net

(2)

1

(3)

(292.4)

Other expense, net

$

(21)

$

(6)

$

(15)

(252.2)

Interest income increased primarily due to increased interest rates.Interest expense increased primarily due to

increased borrowings and increased interest rates.

Income Taxes

For the three months ended September 30, 2023 our effective tax rate was 21.9% comparedto 22.7% for the prior

year period.The difference between our effective tax rate and the federal statutory tax rate primarilyrelates to state

and foreign income taxes and interest expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September24, 2022

Net Sales

Net sales were as follows:

September 30,

% of

September 24,

% of

Increase / (Decrease)

2023

Total

2022

Total

$

%

Health care distribution

(1)

Dental

$

5,737

61.5

%

$

5,466

58.9

%

$

271

5.0

%

Medical

2,991

32.1

3,274

35.3

(283)

(8.6)

Total health care distribution

8,728

93.6

8,740

94.2

(12)

(0.1)

Technology and value-added services

(2)

594

6.4

536

5.8

58

10.7

Total

$

9,322

100.0

%

$

9,276

100.0

%

$

46

0.5

%

The components of our sales growth were as follows:

Total Local

Currency

Growth

Foreign

Exchange

Impact

Total Sales

Growth

Local Currency Growth

Local Internal

Growth

Acquisition

Growth

Health care distribution

(1)

Dental Merchandise

1.7

%

4.0

%

5.7

%

(0.4)

%

5.3

%

Dental Equipment

2.7

1.5

4.2

(0.4)

3.8

Total Dental

1.9

3.5

5.4

(0.4)

5.0

Medical

(9.3)

0.7

(8.6)

-

(8.6)

Total Health Care Distribution

(2.3)

2.4

0.1

(0.2)

(0.1)

Technology and value-added services

(2)

7.2

3.8

11.0

(0.3)

10.7

Total

(1.7)

%

2.5

%

0.8

%

(0.3)

%

0.5

%

Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on

actual values and may not recalculate due to rounding.

(1)

Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and

generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic

products), diagnostic tests, infection-control products, PPE products and vitamins.

(2)

Consists of practice management software and other value-added products, which are distributed primarily to health care providers,

practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing

education services for practitioners, consulting and other services.

Global Sales

Global net sales for the nine months ended September 30, 2023 increased 0.5%.The components of our sales

growth are presented in the table above.

The estimated increase in internally generated local currency sales, excludingPPE products and COVID-19 test

kits, was 3.5%.We estimate that sales of PPE products and COVID-19 test kits were approximately $540 million

and $990 million for the nine months ended September 30, 2023 andSeptember 24, 2022, respectively,

representing an estimated decrease of $450 million or 45.5% versus the prior year, with the $450 million net

decrease year-over-year representing 4.8% of global net sales for the nine months ended September 30,2023.

Dental

Dental net sales for the nine months ended September 30, 2023 increased5.0%.The components of our sales

growth are presented in the table above.Our sales growth in local currency for dental merchandise was primarily

attributable to acquisitions.Our sales growth in local currency for dental equipment was primarilyattributable to

growth in traditional equipment sales in North America.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46

The estimated increase in internally generated local currency sales, excludingPPE products and COVID-19 test

kits, was 3.8%.We estimate that sales of PPE products were approximately $264 million and $351 million for the

nine months ended September 30, 2023 and September 24, 2022, respectively, representing an estimated decrease

of $87 million or 25.0%versus the prior year, with the $87 million net decrease year-over-year representing 1.5%

of dental net sales for the nine months ended September 30, 2023.

Medical

Medical net sales for the nine months ended September 30, 2023 decreased8.6%.The components of this decrease

are presented in the table above.The local currency decrease in medical sales is primarily attributableto lower

sales of PPE products and COVID-19 test kits and other point-of-carediagnostic products.

The estimated increase in internally generated local currency sales, excludingPPE products and COVID-19 test

kits, was 2.3%.We estimate that sales of PPE products and COVID-19 test kits were approximately $276 million

and $639 million for the nine months ended September 30, 2023 andSeptember 24, 2022, respectively,

representing an estimated decrease of $363 million or 56.8% versusthe prior year, with the $363 million net

decrease year-over-year representing 12.1% of medical net sales for the nine months ended September 30, 2023.

Technology and value-added services

Technology and value-added services net sales for the nine months ended September 30, 2023 increased 10.7%.

The components of our sales growth are presented in the table above.During the nine months ended September 30,

2023, the trend for sales of practice management software growth remainsstrong as we continued to increase the

number of cloud-based users.We also experienced increased demand for our revenue cycle management solutions.

The increase in sales during the quarter ended September 30, 2023 waspartially offset by the expiration, during the

third quarter of 2022, of a modestly profitable government contract inone of our value-added services businesses.

Gross Profit

Gross profit and gross margin percentages by segment and in total were as follows:

September 30,

Gross

September 24,

Gross

Increase

2023

Margin %

2022

Margin %

$

%

Health care distribution

$

2,534

29.0

%

$

2,482

28.4

%

$

52

2.1

%

Technology and value-added services

402

67.6

350

65.3

52

14.8

Total

$

2,936

31.5

$

2,832

30.5

$

104

3.7

As a result of different practices of categorizing costs associated with distribution networksthroughout 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 servicessegment 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 havebeen the most significant drivers affecting

our gross profit margin.For example, sales of our corporate brand products achievegross 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 highervolumes sold as opposed to the

gross margin on sales to office-based practitioners, who normally purchase lower volumes.

Health care distribution gross profit for the nine months ended September 30, 2023increased compared to the

prior-year period due to the increase in sales, mainly due to a reduction in sales ofPPE products and COVID-19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

test kits offset by $74 million of gross profit from acquisitions and gross margin expansionas a result of a favorable

impact of sales mix of higher-margin products.

Technology and value-added services gross profit increased as a result of a higher gross profit from internally

generated sales and gross profit of $18 million from acquisitions, as wellas an increase in gross margin rates

primarily due to product mix and increases in productivity.

Operating Expenses

Operating expenses (consisting of selling, general and administrative expenses;depreciation and amortization; and

restructuring and integration costs) by segment and in total were as follows:

% of

% of

September 30,

Respective

September 24,

Respective

Increase

2023

Net Sales

2022

Net Sales

$

%

Health care distribution

$

2,063

23.6

%

$

1,903

21.8

%

$

160

8.4

%

Technology and value-added services

297

50.1

254

47.4

43

17.0

Total

$

2,360

25.3

$

2,157

23.3

$

203

9.4

The net increase in operating expenses is attributable to the following:

Restructuring and

Integration Costs

Operating Costs

Acquisitions

Total

Health care distribution

$

42

$

81

$

37

$

160

Technology and value-added services

7

4

32

43

Total

$

49

$

85

$

69

$

203

The restructuring and integration costs are primarily related to severanceand employee-related costs, accelerated

amortization of right-of-use lease assets and fixed assets, and other lease exitcosts.During the nine months ended

September 30, 2023, our operating expenses were favorably impactedby the recognition of a remeasurement gain

of $18 million following an acquisition of a controlling interest ofa previously held equity investment.The

increase in operating costs includes increases in payroll and payroll related costs,travel, convention, consulting,

and occupancy expenses in both of our reportable segments and increasedacquisition expenses in our healthcare

distribution segment.

Other Expense, Net

Other expense, net was as follows:

September 30,

September 24,

Variance

2023

2022

$

%

Interest income

$

12

$

5

$

7

132.2

%

Interest expense

(58)

(23)

(35)

(153.4)

Other, net

(2)

1

(3)

(331.4)

Other expense, net

$

(48)

$

(17)

$

(31)

(184.5)

Interest income increased primarily due to increased interest rates.Interest expense increased primarily due to

increased borrowings and increased interest rates.

Income Taxes

For the nine months ended September 30, 2023 our effective tax rate was 22.5% comparedto 23.5% for the prior

year period.The difference between our effective tax rate and the federal statutory tax rate primarilyrelates to state

and foreign income taxes and interest expense.

 

48

Liquidity and Capital Resources

Our principal capital requirements have included funding of acquisitions, purchasesof 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 receivablesand payables.Historically, sales have

tended to be stronger during the second half of the year and special inventoryforward buy-in opportunities have

been most prevalent just before the end of the year, and have caused our working capital requirementsto be higher

from the end of the third quarter to the end of the first quarter ofthe following year.

We finance our business primarily through cash generated from our operations, revolving credit facilities and debt

placements.Please see

for further information.Our ability to generate sufficient cash flows from

operations is dependent on the continued demand of our customersfor our products and services, and access to

products and services from our suppliers.

Our business requires a substantial investment in working capital, whichis 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, maychange.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 withsufficient liquidity to meet our currently

foreseeable short-term and long-term capital needs.

Our acquisition strategy is focused on investments in companies thatadd new customers and sales teams, increase

our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we

have already invested in businesses), and finally, those that enable us to access new products and technologies.As

part of our BOLD+1 Strategic Plan, including pursuing focused mergers and acquisitions,subsequent to September

30, 2023 we have announced acquisitions of companies specializingin clear aligners,homecare medical products

delivered directly to patients, and dental practice transition services.

Net cash provided by operating activities was $532 million for thenine months ended September 30, 2023,

compared to net cash provided by operating activities of $348 million forthe prior year.The net change of $184

million was primarily due to a favorable change in working capital (primarilyinventories), net of acquisitions,

partially offset by a decrease in operating income.

Net cash used in investing activities was $808 million for the nine monthsended September 30, 2023, compared to

net cash used in investing activities of $211 million for the prior year.The net change of $597 million was

primarily attributable to increased business combinations and investment activity.

Net cash provided by financing activities was $307 million for the ninemonths ended September 30, 2023,

compared to net cash used in financing activities of $121 million for the prioryear.The net change of $428 million

was primarily due to increased net borrowings from debt.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

The following table summarizes selected measures of liquidity and capitalresources:

September 30,

December 31,

2023

2022

Cash and cash equivalents

$

166

$

117

Workingcapital

(1)

2,020

1,764

Debt:

Bank credit lines

$

12

$

103

Current maturities of long-term debt

72

6

Long-term debt

1,815

1,040

Total debt

$

1,899

$

1,149

Leases:

Current operating lease liabilities

$

74

$

73

Non-current operating lease liabilities

314

275

(1)

Includes $0 million and $327 million of certain accounts receivable which serve as security for U.S. trade accounts receivable

securitization at September 30, 2023 and December 31, 2022, respectively.

Our cash and cash equivalents consist of bank balances and investmentsin 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 operationsincreased to 43.7 days as of September 30, 2023

from 42.9 days as of September 24, 2022.During the nine months ended September 30, 2023, we wroteoff

approximately $13 million of fully reserved accounts receivable againstour trade receivable reserve.Our inventory

turns from operations decreased to 4.5 as of September 30, 2023 from 4.7as of September 24, 2022.Our working

capital accounts may be impacted by current and future economic conditions.

Leases

We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles,

and certain equipment.Our leases have remaining terms of one year to approximately18 years, some of which

may include options to extend the leases for up to 15 years.As of September 30, 2023, our right-of-use assets

related to operating leases were $323 million and our current and non-currentoperating lease liabilities were $74

million and $314 million, respectively.

Stock Repurchases

On February 8, 2023, our Board of Directors authorized the repurchaseof up to an additional $400 million in shares

of our common stock.

From March 3, 2003 through September 30, 2023, we repurchased $4.7billion, or 89,702,364 shares, under our

common stock repurchase programs, with $315 million availableas of September 30, 2023 for future common

stock share repurchases.

50

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies andestimates from those disclosed in Item

7 of our Annual Report on Form 10-K for the year ended December 31, 2022,except accounting policies adopted

as of January 1, 2023, which are discussed in

of the Notes to the Condensed Consolidated Financial Statements includedunder Item 1.

Accounting Standards Update

For a discussion of accounting standards updates that have been adoptedor will be adopted, see

of the Notes to the Condensed Consolidated

Financial Statements included under Item 1.

ITEM 3.QUANTITATIVEAND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposure to market riskfrom that disclosed in Item 7A of our Annual

Report on Form 10-K for the year ended December 31, 2022.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, includingour 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 reportas such term is defined in Rules 13a-15(e)

and 15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”).Based

on this evaluation, our management, including our principal executiveofficer and principal financial officer,

concluded that our disclosure controls and procedures were effective as of September 30,2023, to ensure that all

material information required to be disclosed by us in reports that we fileor submit under the Exchange Act is

accumulated and communicated to them as appropriate to allow timelydecisions regarding required disclosure and

that all such information is recorded, processed, summarized and reportedwithin the time periods specified in the

SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2023, we acquired a 100% voting equityinterest in S.I.N Implant System,

an implant manufacturer headquartered in Brazil.The full integration of this acquisition, as well as our previously

reported acquisition of Biotech Dental, will extend beyond year-end and, therefore, we anticipateexcluding Biotech

Dental, and S.I.N. from our annual assessment of internal control overfinancial reporting as of December 30, 2023,

as permitted by SEC staff interpretive guidance for newly acquired businesses.

Post-acquisition integration related activities for other dental andmedical businesses acquired during prior quarters

across the U.S., Europe, Australia, China, and Brazil will continue, andwill be included in our annual assessment

of internal control over financial reporting as of December 30, 2023.These acquisitions, the majority of which

utilize separate information and financial accounting systems, have beenincluded in our condensed consolidated

financial statements since their respective dates of acquisition.

Finally, we continued systems implementation activities in the U.S. for two of our dental businesses.

The combination of acquisitions (including S.I.N., and Biotech Dental),continued acquisition integrations and

systems implementation activities undertaken during the quarter andcarried over from prior quarters when

considered in the aggregate, represents a material change in ourinternal control over financial reporting.

51

During the quarter, all acquisitions, continued acquisition integrations and systems implementation activities

involve necessary and appropriate change-management controlsthat are considered in our quarterly assessment of

changes in our internal control over financial reporting.

Subsequent to the September 30, 2023 quarter end, on October 14, 2023, weexperienced a cybersecurity incident

that primarily affected the operations of our North American and Europeandental and medical distribution

businesses.As part of the Company’s incident response plan, precautionary actions weretaken tocontain the

incident including shutting down connectivity to networks and key business,operating and financial accounting

systems globally.In addition to notifying customers and all relevant law enforcementauthorities, we engaged

external cyber-security experts to support our assessment of the cyber-incident’s impact as well as sanitize, rebuild

and restore our information systems.

On November 22, 2023, we experienced a disruption to our ecommerceplatform and related applications. The

Company has restored its ecommerce platform and certain otherapplications in the United States, Canada and

certain European countries.Our ecommerce platform in the remaining European countries and other applications

are expected to follow shortly.

In order to mitigate the impact of this disruption on our systems and on ourability to service customers, alternative

procedures and controls were temporarily implemented.An investigation is ongoing to assess the impact on our

businesses and internal controls over financial reporting.

Limitations of the Effectiveness of Internal Control

A control system, no matter how well conceived and operated, can provideonly 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 thatall control issues, if any, within a company

have been detected.

52

PARTII.OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

For a discussion of Legal Proceedings, see

of the Notes to the Condensed Consolidated

Financial Statements included under Item 1.

ITEM 1A. RISK FACTORS

Referring to risk factors disclosed in Part 1, Item 1A, of our Annual Reporton Form 10-K for the year ended

December 31, 2022, and in particular the first risk factor under General Risksaddressing security risks associated

with our information systems, the third paragraph is amended and restatedas follows:

While we have implemented measures to protect our IS systems, suchmeasures may not prevent these events.Any

such security incidents could disrupt our operations, harm our reputation, orotherwise have a material adverse

effect on our business.In addition to immaterial prior incidents, in October 2023,Henry Schein experienced a

cybersecurity incident that primarily affected the operations of our North Americanand European dental and

medical distribution businesses.Henry Schein One, our practice management software, revenue cyclemanagement

and patient relationship management solutions business was not affected, and ourmanufacturing businesses and our

equipment sales and service operations were mostly unaffected.Once we became aware of the issue, wetook steps

to assess, contain and remediate this incident.

We

restored affected systems and applications, our distribution

operations resumed and we reactivated our ecommerce platform.

We

also notified law enforcement and our

customers and suppliers, informing them of both the incident and management’s efforts to mitigate its impact on

our daily operations. As previously disclosed, while our forensic investigationis still ongoing, we have determined

that a data breach occurred.We are notifying potentially affected parties as appropriate.On November 22, 2023,

we experienced a disruption to our ecommerce platform and relatedapplications. The Company has restored its

ecommerce platform and certain other applications in the United States, Canadaand certain European

countries.Our ecommerce platform in the remaining European countriesand other applications are expected to

follow shortly.

We

continue to review the impact of the incident on the Company’s business.As previously

disclosed, we believe the incident will adversely impact our financial resultsfor the fourth quarter and full year

2023.We maintain cyber insurance, subject to certain retentions and policy limitations.There can be no assurance

that the insurance coverage we maintain is sufficient or will be available in adequateamounts or at a reasonable

cost to cover costs and expenses related to security incidents.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS

Purchases of equity securities by the issuer

Our share repurchase program, announced on March 3, 2003, originallyallowed us to repurchase up to two million

shares pre-stock splits (eight million shares post-stock splits) of our commonstock, which represented

approximately 2.3% of the shares outstanding at the commencementof the program.Subsequent additional

increases totaling $4.9billion, authorized by our Board of Directors, to the repurchase programprovide for a total

of $5.0 billion (including $400 million authorized on February 8, 2023) of sharesof our common stock to be

repurchased under this program.

As of September 30, 2023, we had repurchased approximately $4.7 billionof common stock (89,702,364 shares)

under these initiatives, with $315 million available for future commonstock share repurchases.

The following table summarizes repurchases of our common stockunder our stock repurchase program during the

fiscal quarter ended September 30, 2023:

Total Number

Maximum Number

Total

of Shares

of Shares

Number

Average

Purchased as Part

that May Yet

of Shares

Price Paid

of Our Publicly

Be Purchased Under

Fiscal Month

Purchased (1)

Per Share

Announced Program

Our Program (2)

7/2/2023 through 8/5/2023

-

$

-

-

4,674,091

8/6/2023 through 9/2/2023

330,000

76.86

330,000

4,448,396

9/3/2023 through 9/30/2023

329,681

74.72

329,681

4,242,422

659,681

659,681

(1)All repurchases were executed in the open market under our existing publicly announced authorized program.

(2)The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the

closing price of our common stock at that time.This table excludes shares withheld from employees to satisfy minimum tax withholding

requirements for equity-based transactions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

ITEM 5.OTHER INFORMATION

, the Company’s

, on behalf of himself and a family trust for which his wife servesas co-trustee,

and (ii)

, the Company’s

, each

a Rule

trading

arrangement which is a trading plan for the future sale of securities thatis intended to satisfy the affirmative

defense of Exchange Act

(c), as well as the requirements of the Company’s insider trading policy. Each

plan is subject to an initial “cooling off” period during which there may be no transactionsbetween the adoption

date and a date that is the later of 90 days or two business days followingthe Company’s filing of its next quarterly

report on Form 10-Q or Annual Report on form 10-K.On

, Mr. Bergman and the Bergman

Family 2010 Trust #2 adopted the trading plan to sell a total of

shares (

shares to be sold by Mr.

Bergman and

shares to be sold by the Bergman Family 2010 Trust #2) based on limit orders at specified

prices, with a term of eight months (

i.e.,

through May 7, 2024).On

, Mr. Breslawski adopted

the trading plan to sell

shares based on limit orders at specified prices, with a term throughDecember 31,

2024.

 

55

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this Report to

be signed on its behalf by the undersigned thereunto duly authorized.

Henry Schein, Inc.

(Registrant)

By: /s/ Ronald N. South

Ronald N. South

Senior Vice President and

Chief Financial Officer

(Authorized Signatory and Principal Financial

and Accounting Officer)

Dated: November 28, 2023