UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
,
(Address of principal executive offices)
(Zip Code)
(
)
(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
The
Nasdaq
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.
☒
☐
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 (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
☒
☐
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.
☒
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
☐
☒
As of October 28, 2024,
there were
shares of the registrant’s common stock outstanding.
HENRY SCHEIN, INC.
INDEX
Page
3
4
5
6
7
8
9
9
10
11
12
13
14
20
23
26
27
29
31
33
34
35
35
36
37
54
55
56
56
56
57
58
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 28,
December 30,
2024
2023
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
$
Accounts receivable, net of allowance for credit losses of $
Inventories, net
Prepaid expenses and other
Property and equipment, net
Operating lease right-of-use assets
Investments and other
$
$
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
$
$
Current maturities of long-term debt
Operating lease liabilities
Accrued expenses:
Total current liabilities
Long-term debt (1)
Operating lease liabilities
Redeemable noncontrolling interests
Commitments and contingencies
(nil)
(nil)
Stockholders' equity:
Preferred stock, $
Common stock, $
outstanding on September 28, 2024 and
outstanding on December 30, 2023
Additional paid-in capital
Accumulated other comprehensive loss
()
()
Total Henry Schein, Inc. stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
$
(1)
million, respectively, and long-term debt of $
million and $
See accompanying notes.
4
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(in millions,
except share and per share data)
(unaudited)
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
$
$
$
$
Selling, general and administrative
Depreciation and amortization
()
()
()
()
()
()
()
()
Income before taxes, equity in earnings of affiliates and
noncontrolling interests
()
()
()
()
Equity in earnings of affiliates, net of tax
Less: Net income attributable to noncontrolling interests
()
()
()
Net income attributable to Henry Schein, Inc.
$
$
$
$
Earnings per share attributable to Henry Schein, Inc.:
$
$
$
$
$
$
$
$
Weighted-average common
shares outstanding:
See accompanying notes.
5
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Net income
$
$
$
$
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)
()
()
()
Unrealized gain (loss) from hedging activities
()
()
Other comprehensive income (loss), net of tax
()
()
()
Comprehensive income attributable to noncontrolling interests:
Net income
()
()
()
Foreign currency translation loss (gain)
()
Comprehensive income attributable to noncontrolling
()
()
()
()
Comprehensive income attributable to Henry Schein, Inc.
$
$
$
$
See accompanying notes.
6
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in millions, except share data)
(unaudited)
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, June 29, 2024
$
$
$
$
()
$
$
Net income (loss) (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
()
Foreign currency translation gain (excluding gain of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
Unrealized loss from hedging activities,
net of tax benefit of $
-
-
-
-
()
-
()
Purchase of noncontrolling interests
-
-
()
-
-
()
()
Change in fair value of redeemable securities
-
-
()
-
-
-
()
Noncontrolling interests and adjustments related to
business acquisitions
-
-
()
-
-
()
Repurchase and retirement of common stock
()
-
()
()
-
-
()
Stock issued upon exercise of stock options
-
-
-
-
Stock-based compensation expense
-
-
-
-
Shares withheld for payroll taxes
()
-
-
-
-
Settlement of stock-based compensation awards
-
-
-
-
Transfer of charges in excess of
capital
-
-
()
-
-
Balance, September 28, 2024
$
$
$
$
()
$
$
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, July 1, 2023
$
$
$
$
()
$
$
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
()
-
()
Unrealized gain from hedging activities,
net of tax of $
-
-
-
-
-
Distributions to noncontrolling shareholders
-
-
-
-
-
()
()
Change in fair value of redeemable securities
-
-
-
-
-
Noncontrolling interests and adjustments related to
-
business acquisitions
-
-
()
-
-
()
Repurchases and retirement of common stock
()
-
()
()
-
-
()
Stock-based compensation expense
-
-
-
-
Stock issued upon exercise of stock options
-
-
-
-
-
-
Shares withheld for payroll taxes
()
-
-
-
-
Settlement of stock-based compensation awards
-
-
-
-
Transfer of charges in excess of
capital
-
-
()
-
-
Balance, September 30, 2023
$
$
$
$
()
$
$
See accompanying notes.
7
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN
STOCKHOLDERS' EQUITY
(in millions, except share data)
(unaudited)
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, December 30, 2023
$
$
$
$
()
$
$
Net income (excluding loss of $
0
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation gain/(loss) (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
()
()
Unrealized loss from hedging activities,
net of tax benefit of $
-
-
-
-
()
-
()
Distributions to noncontrolling shareholders
-
-
-
-
-
()
()
Purchase of noncontrolling interests
-
-
()
-
-
()
()
Change in fair value of redeemable securities
-
-
()
-
-
-
()
Noncontrolling interests and adjustments related to
business acquisitions
-
-
()
-
-
()
Repurchase and retirement of common stock
()
-
()
()
-
-
()
Stock issued upon exercise of stock options
-
-
-
-
Stock-based compensation expense
-
-
-
-
Shares withheld for payroll taxes
()
-
()
-
-
-
()
Settlement of stock-based compensation awards
-
-
-
-
Transfer of charges in excess of
capital
-
-
()
-
-
-
Balance, September 28, 2024
$
$
$
$
()
$
$
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Equity
Balance, December 31, 2022
$
$
$
$
()
$
$
Net income (excluding $
attributable to Redeemable
noncontrolling interests)
-
-
-
-
Foreign currency translation loss (excluding loss of $
attributable to Redeemable noncontrolling interests)
-
-
-
-
()
-
()
Unrealized gain from hedging activities,
net of tax of $
-
-
-
-
-
Distributions to noncontrolling shareholders
-
-
-
-
-
()
()
Change in fair value of redeemable securities
-
-
-
-
-
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
()
()
Repurchases and retirement of common stock
()
-
()
()
-
-
()
Stock-based compensation expense
-
-
-
-
Stock issued upon exercise of stock options
-
-
-
-
Shares withheld for payroll taxes
()
-
()
-
-
-
()
Settlement of stock-based compensation awards
()
-
-
-
-
Transfer of charges in excess of
capital
-
-
()
-
-
Balance, September 30, 2023
$
$
$
()
$
$
See accompanying notes.
8
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended
September 28,
September 30,
2024
2023
Cash flows from operating activities:
$
$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Non-cash restructuring charges
Stock-based compensation expense
Provision for losses on trade and other accounts receivable
Benefit from deferred income taxes
()
()
Equity in earnings of affiliates
()
()
Distributions from equity affiliates
Changes in unrecognized tax benefits
()
()
Changes in operating assets and liabilities, net of acquisitions:
()
()
Accounts payable and accrued expenses
()
()
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
()
()
Payments related to equity investments and business acquisitions,
()
()
Proceeds from loan to affiliate
Capitalized software costs
()
()
()
()
Net cash used in investing activities
()
()
Cash flows from financing activities:
Net change in bank credit lines
()
Proceeds from issuance of long-term debt
Principal payments for long-term debt
()
()
Debt issuance costs
()
Proceeds from issuance of stock upon exercise of stock options
Payments for repurchases and retirement of common stock
()
()
Payments for taxes related to shares withheld for employee taxes
()
()
Distributions to noncontrolling shareholders
()
()
Acquisitions of noncontrolling interests in subsidiaries
()
()
Net cash provided by (used in) financing activities
()
Effect of exchange rate changes on cash and cash equivalents
()
Net change in cash and cash equivalents
()
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
9
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 30, 2023 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.
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 credit losses; hedging activity; supplier
rebates; measurement of compensation
cost for certain share-based performance awards and cash bonus plans; and
pension plan assumptions.
million, respectively, and the liabilities of this VIE where the creditors have recourse
to us were $
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
10
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
11
of expenses directly related to the cyber incident, mostly consisting
of professional fees.
We maintain cyber
insurance, subject to certain retentions and policy limitations.
With respect to the October 2023 cyber incident, we
have a $
million insurance policy, following a $
million retention.
During the three and nine months ended
September 28, 2024, we received insurance proceeds of $
million, respectively, representing a
partial insurance recovery of losses related to the cyber incident.
The expenses and insurance recoveries related to
the cyber incident are included in the selling, general and administrative
line in our condensed consolidated
statements of income.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
12
$
$
$
$
$
Total health care distribution
Technology
and value-added services
Total net sales
$
$
$
$
$
$
Nine Months Ended
September 30, 2023
September 30, 2023
North
America
International
Global
North
America
International
Global
Net sales:
$
$
$
$
$
$
Total health care distribution
Technology
and value-added services
Total net sales
$
$
$
$
$
$
respectively.
During the nine months ended September 28, 2024, we recognized,
in net sales, $
amount that was previously deferred at December 30, 2023.
During the nine months ended September 30, 2023,
we recognized in net sales $
million of the amount that was previously deferred at December 31, 2022.
Current
contract liabilities are included in accrued expenses: other and the non-current
contract liabilities are included in
other liabilities within our consolidated balance sheets.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
13
reportable segments: (i) health care distribution and (ii) technology
and
value-added services.
These segments offer different products and services to the same customer base.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices, and integrated delivery networks, among other providers
across a wide range of specialties.
Our
dental and medical groups serve practitioners in
The health care distribution reportable segment aggregates our global dental
and medical operating segments.
This
segment distributes consumable products, dental specialty products (including
implant, orthodontic and endodontic
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”) products, vitamins and orthopedic implants.
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 practitioners.
Our value-added practice solutions include practice consultancy, education,
revenue cycle management and financial services on a non-recourse basis,
e-services, continuing education services
for practitioners,
practice technology, network and hardware services,
and other services.
The following tables present information about our reportable and operating
segments:
$
$
$
Total health care distribution
Technology
and value-added services
(2)
$
$
$
$
(1)
$
$
$
Technology
and value-added services
Total
$
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
14
% voting equity interest in TriMed Inc. (“TriMed”), a global developer of
solutions for the orthopedic treatment of lower and upper extremities, headquartered
in California.
Deferred consideration
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
()
Deferred income taxes
()
Other noncurrent liabilities
()
Total identifiable
net assets
Goodwill
Total net assets acquired
$
Trademarks / Tradenames
In process research & development
Not Applicable
Total
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
15
% to
%.
Total consideration for these acquisitions was $
million.
Net assets acquired primarily consisted
of $
million of goodwill and $
million of intangible assets.
The intangible assets acquired consisted of
customer relationships and lists of $
million, trademarks and tradenames of $
million, product development of
$
million and non-compete agreements of $
million.
Weighted average useful lives for these acquired intangible
assets were
During the nine months ended September 28, 2024, we completed the accounting
for certain acquisitions that
occurred in fiscal year 2024 and we did not record any material measurement
period adjustments related to these
acquisitions.
The accounting for other acquisitions in fiscal year 2024 has not
been completed in several areas,
including but not limited to pending assessment of accounts receivable,
right-of-use lease assets, lease liabilities,
accrued liabilities and non-income based taxes.
Goodwill is a result of the synergies and cross-selling opportunities that these acquisitions
are expected to provide
for us, as well as the expected growth potential.
The majority of the acquired goodwill is not deductible
for tax
purposes.
During the three and nine months ended September 28, 2024, in connection
with an acquisition of a controlling
interest of an affiliate, we recognized a gain of approximately $
million related to the remeasurement to fair value
of our previously held equity investment, using a discounted cash flow
model based on Level 3 inputs, as defined in
,
which was recorded in selling, general and administrative
in the condensed
consolidated statements of income.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
16
% voting equity interest in Shield Healthcare, Inc. (“Shield”), a
supplier of
homecare medical products delivered directly to patients in their homes,
for consideration of $
(including cash paid of $
million, deferred consideration of $
million and redeemable noncontrolling interests
of $
million).
Shield expands our existing medical business by delivering
a diverse range of products, including
items such as incontinence, urology, ostomy, enteral nutrition, advanced wound care and diabetes supplies.
Additionally, Shield offers continuous glucose monitoring devices directly to patients in their homes.
Deferred consideration
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
()
Deferred income taxes
()
Other noncurrent liabilities
()
Total identifiable
net assets
Goodwill
Total net assets acquired
$
Trademarks / Tradenames
Total
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
17
% voting equity interest in S.I.N. Implant System (“S.I.N.”) for consideration
of
$
million.
Based in São Paulo, S.I.N. manufactures an extensive line of products
to perform dental implant
procedures and is focused on advancing the development of value-priced dental
implants.
In 2023, S.I.N. expanded
the distribution of its products into the United States and other
international markets
.
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
()
Long-term debt
()
Deferred income taxes
()
Other noncurrent liabilities
()
Total identifiable
net assets
Goodwill
Total net assets acquired
$
Product development
Trademarks / Tradenames
Total
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
18
% voting equity interest in Biotech Dental, a provider of dental implants,
clear
aligners, individualized prosthetics and innovative digital dental software based
in France, for preliminary
consideration of $
million (including cash paid of $
million of contributed equity share in a
controlled subsidiary, and redeemable noncontrolling interests of $
million).
Biotech Dental has several
important solutions for dental practices and dental labs, including Nemotec,
a comprehensive, integrated suite of
planning and diagnostic software using open architecture that connects disparate
medical devices to create a digital
view of the patient, offering greater diagnostic accuracy and an improved patient
experience.
Fair value of contributed equity share in a controlled subsidiary
Redeemable noncontrolling interests
Total consideration
$
Identifiable assets acquired and liabilities assumed:
Current assets
$
Intangible assets
Other noncurrent assets
Current liabilities
()
Long-term debt
()
Deferred income taxes
()
Other noncurrent liabilities
()
Total identifiable
net assets
Goodwill
Total net assets acquired
$
Customer relationships and lists
Trademarks / Tradenames
Total
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
19
% to
%.
During the three and nine months ended September 28, 2024, we recorded
an adjustment of
$
million, respectively, within selling, general and administrative in our condensed consolidated
statements of income, representing a change in the fair value of contingent
consideration related to a 2023
acquisition.
During the nine months ended September 28, 2024, we completed the accounting
for certain fiscal year 2023
acquisitions.
In relation to these acquisitions, we did not record material
adjustments in our condensed
consolidated financial statements relating to changes in estimated values of
assets acquired, liabilities assumed and
contingent consideration assets and liabilities.
costs, respectively.
During the three and nine months ended September 30, 2023,
we incurred $
million in acquisition costs, respectively.
These costs are included in selling, general and administrative
in our
condensed consolidated statements of income.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
20
million, respectively.
Factors that we considered when estimating the fair
value of our debt include market conditions, such as interest rates and credit
spreads.
Derivative contracts
Derivative contracts are valued using quoted market prices and
significant other observable inputs.
Our derivative
instruments primarily include foreign currency forward agreements, forecasted
inventory purchase commitments,
foreign currency forward contracts, interest rate swaps and total return swaps.
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
are based on market rates for comparable
transactions that are classified within Level 2 of the fair value hierarchy.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
21
for additional information.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
22
$
$
$
Derivative contracts undesignated
$
$
$
$
Liabilities:
Derivative contracts designated as hedges
$
$
$
$
Derivative contracts undesignated
Contingent consideration
$
$
$
$
Redeemable noncontrolling interests
$
$
$
$
December 30, 2023
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
$
$
$
Derivative contracts undesignated
$
$
$
$
Liabilities:
Derivative contracts designated as hedges
$
$
$
$
Derivative contracts undesignated
$
$
$
$
Redeemable noncontrolling interests
$
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
23
$
Other short-term bank credit lines
$
$
, we entered into a $
billion revolving credit agreement (the “Revolving Credit Agreement”)
which was subsequently amended and restated on
to extend the maturity date to
update the interest rate provisions to reflect the current market approach
for a multicurrency facility.
The interest
rate on this revolving credit facility is based on Term Secured Overnight Financing Rate (“Term SOFR”) plus a
spread based on our leverage ratio at the end of each financial reporting
quarter.
As of September 28, 2024 the
interest rate on this revolving credit facility was
% plus
% for a combined rate of
30, 2023 the interest rate on this revolving credit facility was
% plus
% for a combined rate of
The Revolving Credit Agreement requires, among other things, that we
maintain certain maximum leverage ratios.
Additionally, the Revolving Credit Agreement contains customary representations, warranties and affirmative
covenants as well as customary negative covenants, subject to negotiated
exceptions, on liens, indebtedness,
significant corporate changes (including mergers), dispositions and certain restrictive
agreements.
As of September
28, 2024 and December 30, 2023, we had $
million in borrowings, respectively under this
revolving credit facility.
During the nine months ended September 28, 2024, the
average outstanding balance under
the Revolving Credit Agreement was approximately $
million.
As of September 28, 2024 and December 30,
2023, there were $
million of letters of credit, respectively, provided to third parties under the
Revolving Credit Agreement.
Other Short-Term Bank Credit
Lines
As of September 28, 2024 and December 30, 2023, we had various other
short-term bank credit lines available, in
various currencies, with a maximum borrowing capacity of $
million, respectively.
As of
September 28, 2024 and December 30, 2023, $
million, respectively, were outstanding.
During
the nine months ended September 28, 2024, the average outstanding balances
under our various other short-term
bank credit lines was approximately $
million.
As of September 28, 2024 and December 30, 2023, borrowings
under other short-term bank credit lines had weighted average interest
rates of
% and
%, respectively.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
24
$
Term loan
U.S. trade accounts receivable securitization
Various
collateralized and uncollateralized loans payable with interest,
in varying installments through 2031 at interest rates
from
% to
% at September 28, 2024 and
from
% to
% at December 30, 2023
Finance lease obligations
()
()
$
$
insurance companies, have a total facility amount of $
and are available on an uncommitted basis at fixed rate economic terms
to be agreed upon at the time of issuance,
from time to time through
.
The facilities allow us to issue senior promissory notes to the
lenders
at a fixed rate based on an agreed upon spread over applicable treasury
notes at the time of issuance.
The term of
each possible issuance will be selected by us and can range from
five
(with an average life no longer
than
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.
%, as of September 28, 2024 are presented in the following table:
%
December 24, 2024
June 16, 2017
June 16, 2027
September 15, 2017
September 15, 2029
January 2, 2018
January 2, 2028
September 2, 2020
September 2, 2030
June 2, 2021
June 2, 2031
June 2, 2021
June 2, 2033
May 4, 2023
May 4, 2028
May 4, 2023
May 4, 2030
May 4, 2023
May 4, 2033
May 4, 2023
May 4, 2033
Less: Deferred debt issuance costs
()
Total
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
25
million term loan credit agreement (the “Term Credit
Agreement”).
The interest rate on this term loan is based on the
plus a spread based on our leverage
ratio at the end of each financial reporting quarter.
This term loan matures on
make quarterly payments of $
million from September 2024 through June 2026, with the remaining
balance due in
July 2026.
Previously, we had been required to make quarterly payments of $
million from September 2023
through June 2024.
As of September 28, 2024, the borrowings outstanding under
this term loan were $
At September 28, 2024, the interest rate under the Term Credit Agreement was
% plus
% for a combined
rate of
%.
As of December 30, 2023, the borrowings outstanding under
this term loan were $
December 30, 2023, the interest rate under the Term Credit Agreement was
% plus
% for a combined rate
of
%.
However, we have a hedge in place that ultimately creates an effective fixed rate of
% and
% at
September 28, 2024 and December 30, 2023, respectively.
The Term Credit Agreement requires, among other
things, that we maintain certain maximum leverage ratios.
Additionally, the Term
Credit Agreement contains
customary representations, warranties and affirmative covenants as well as customary
negative covenants, subject
to negotiated exceptions, on liens, indebtedness, significant corporate changes
(including mergers), dispositions and
certain restrictive agreements.
.
This facility agreement has a purchase limit of
$
banks as agents, and expires on
.
As of September 28, 2024 and December 30, 2023, the borrowings
outstanding under this securitization facility
were $
million, respectively.
At September 28, 2024, the interest rate on borrowings under
this facility was based on the
asset-backed commercial paper rate
% plus
%, for a combined rate of
%.
At December 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
%.
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
basis points depending upon program utilization.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
26
%, compared to
% for the prior
year period.
The difference between our effective tax rate and the federal statutory tax rate primarily
relates to state
and foreign income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two rules in December 2021, which provides for a global minimum tax rate on the earnings of
large multinational businesses on a country-by-country basis.
Effective January 1, 2024, the minimum global tax
rate is 15% for various jurisdictions pursuant to the Pillar Two rules.
As of September 28, 2024,
the impact of the
Pillar Two rules to our financial statements was immaterial.
As we operate in jurisdictions which have adopted
Pillar Two,
we are continuing to analyze the implications to effectively manage the impact
for 2024 and beyond.
Future tax reform resulting from these developments may result in changes
to long-standing tax principles, which
may adversely impact our effective tax rate going forward or result in higher cash
tax liabilities.
The total amount of unrecognized tax benefits, which are included in
“other liabilities” within our condensed
consolidated balance sheets, as of September 28, 2024 and December 30,
2023, was $
respectively, of which $
million, respectively, would affect the effective tax rate if recognized.
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 2020.
The tax years subject to examination by the
IRS include years 2021 and forward.
In addition, limited positions reported in the 2017 tax year are subject
to IRS
examination.
The amount of tax interest expense included as a component of the provision
for taxes was $
million for the nine months ended September 28, 2024 and September
30, 2023,
respectively.
The total amount of
accrued interest is included in “other liabilities,” and was $
million as of September 28, 2024 and $
of December 30, 2023.
The amount of penalties accrued for during the periods presented was not
material to our
condensed consolidated financial statements.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
27
During the nine months ended September 28, 2024 and September 30, 2023,
in connection with our 2022 Plan, we
recorded restructuring costs of $
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 exit costs.
We expect to record immaterial charges associated with the 2022 Plan during the
On August 6, 2024, we committed to a new restructuring plan (the “2024
Plan”) to integrate recent acquisitions,
right-size operations and further increase efficiencies.
During the three and nine months ended September 28,
2024, we recorded restructuring charges associated with the 2024 Plan of $
million which primarily related to
severance and employee-related costs, accelerated amortization of right-of-use
lease assets and fixed assets, and
other lease exit costs.
We expect to record restructuring charges associated with the 2024 Plan during the fourth
quarter of 2024 and in 2025, however an estimate of the amount of these charges has not
yet been determined.
$
$
$
$
$
Accelerated depreciation and amortization
Exit and other related costs
Restructuring costs-2024 Plan
$
$
$
$
$
$
2022 Plan
Severance and employee-related costs
$
$
$
$
$
$
Accelerated depreciation and amortization
Exit and other related costs
Restructuring costs-2022 Plan
$
$
$
$
$
$
Total restructuring
costs
$
$
$
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
28
$
$
$
$
$
Accelerated depreciation and amortization
Exit and other related costs
Loss on disposal of a business
Total restructuring
costs
$
$
$
$
$
$
$
$
Restructuring costs
Non-cash accelerated depreciation and amortization
()
()
()
Cash payments and other adjustments
()
()
()
Balance, September 28, 2024
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
29
); one or more of Henry Schein, Inc.’s subsidiaries is also named as a defendant in a
number of those cases).
Generally, the lawsuits allege that the manufacturers of prescription opioid drugs engaged
in a false advertising campaign to expand the market for such drugs and
their own market share and that the entities
in the supply chain (including Henry Schein, Inc. and its subsidiaries) reaped
financial rewards by refusing or
otherwise failing to monitor appropriately and restrict the improper distribution
of those drugs.
These actions
consist of some that have been consolidated within the MultiDistrict Litigation
(“MDL”) proceeding In Re National
Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804)
and are currently stayed, and others which
remain pending in state courts and are proceeding independently and outside
of the MDL.
At this time, the
following case is set for trial: the action filed by Florida Health Sciences Center, Inc. (and
other hospitals located
throughout the State of Florida) in Florida state court, which is currently
scheduled for a jury trial in September
2025.
Of Henry Schein’s 2023 net sales of approximately $
billion, sales of opioids represented less than
four
-
tenths of 1 percent.
Opioids represent a negligible part of our business.
We intend to defend ourselves vigorously
against these actions.
In August 2022, Henry Schein received a Grand Jury Subpoena from the United
States Attorney’s Office for the
Western District of Virginia,
seeking documents in connection with an investigation of possible
violations of the
Federal Food, Drug & Cosmetic Act by Butler Animal Health Supply, LLC (“Butler”), a former subsidiary of
Henry Schein.
The investigation relates to the sale of veterinary prescription drugs
to certain customers.
In
October 2022, Henry Schein received a second Grand Jury Subpoena
from the United States Attorney’s Office for
the Western District of Virginia.
The October 2022 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.
On January 18, 2024, a putative class action was filed against the Company
in the U.S. District Court for the
Eastern District of New York (“EDNY”), Case No. 24-cv-387 (the “Cruz-Bermudez Action”), based on the
October 2023 cyber incident described in
million into a fund for class members.
The proposed settlement is subject to the court’s
final approval.
The court has scheduled a fairness hearing on the proposed settlement
for February 14, 2025.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
30
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
31
For these RSUs, we recognize the cost as compensation expense on a straight-line
basis.
For all RSUs, we estimate the fair value based on our closing stock
price on the grant date.
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 2024 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, amortization expense recorded for acquisition-related intangible assets (solely with
respect to performance-based RSUs granted in the 2023 and 2024 plan years),
certain litigation settlements or
payments, if any, changes in accounting principles or in applicable laws or regulations, changes in income tax rates
in certain markets, foreign exchange fluctuations, the financial impact
either positive or negative, of the difference
in projected earnings generated by COVID-19 test kits (solely with respect
to performance-based RSUs granted in
the 2022 and 2023 plan years) and impairment charges (solely with respect to performance-based
RSUs granted in
the 2023 and 2024 plan years), and unforeseen events or circumstances
affecting us.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
32
grant date and have a contractual term of
from the grant date, subject to earlier termination of term and
term acceleration upon certain events.
Compensation expense for stock options is recognized using
a graded
vesting method.
We estimate grant date fair value of stock options using the Black-Scholes valuation model.
During the nine months ended September 28, 2024, we did
t grant any stock options.
and $
million for the three and nine months ended September 28, 2024,
respectively.
For the three and nine
months ended September 30, 2023, we recorded pre-tax share-based compensation
expense of $
million.
Total unrecognized compensation cost related to unvested awards as of September 28, 2024 was $
is expected to be recognized over a weighted-average period of approximately
Our condensed consolidated statements of cash flows present our
stock-based compensation expense as a
reconciling adjustment between net income and net cash provided by operating
activities for all periods presented.
There were no cash benefits associated with tax deductions in excess of
recognized compensation for the nine
months ended September 28, 2024 and September 30, 2023.
$
-
()
()
Outstanding at end of period
$
$
Options exercisable at end of period
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
33
$
$
()
()
()
()
Outstanding at end of period
$
$
$
$
$
Decrease in redeemable noncontrolling interests due to acquisitions of
noncontrolling interests in subsidiaries
()
()
Increase in redeemable noncontrolling interests due to business acquisitions
Net income attributable to redeemable noncontrolling interests
Distributions declared, net of capital contributions
()
()
Effect of foreign currency translation gain (loss) attributable to
redeemable noncontrolling interests
()
Change in fair value of redeemable securities
()
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
34
)
$
()
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
$
()
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
()
$
()
Unrealized gain loss from hedging activities
()
()
()
()
Accumulated other comprehensive loss
$
()
$
()
Total Accumulated
other comprehensive loss
$
()
$
()
$
$
$
Foreign currency translation gain (loss)
()
()
()
Foreign currency translation gain (loss)
()
()
()
Unrealized gain (loss) from hedging activities
()
()
()
()
Unrealized gain (loss) from hedging activities
()
()
$
$
$
$
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
35
$
$
$
Comprehensive income attributable to
Comprehensive income (loss) attributable to
Redeemable noncontrolling interests
()
$
$
$
$
Effect of dilutive securities:
Stock options and restricted stock units
Restricted stock units
Total anti-dilutive
securities excluded from earnings per
share computation
$
Income taxes
)
non-cash net unrealized gains (losses) related to hedging activities,
respectively.
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
36
million annually for the use of their intellectual property.
During the three and
nine months ended September 28, 2024, we recorded $
million, respectively, within selling,
general and administrative in our condensed consolidated statements of income,
in connection with costs related to
this royalty agreement.
During the three and nine months ended September 30, 2023 we recorded
$
$
million, respectively, within selling, general and administrative in our condensed consolidated statements of
income, in connection with costs related to this royalty agreement.
As of September 28, 2024 and December 30,
2023, Henry Schein One, LLC had a net payable balance to Internet
Brands of $
respectively, comprised of amounts related to results of operations and the royalty agreement.
The components of
this payable are recorded within accrued expenses: other within our condensed
consolidated balance sheets.
We have interests in entities that we account for under the equity accounting method.
In our normal course of
business, during the three and nine months ended September 28, 2024, we
recorded net sales of $
$
million respectively, to such entities.
During the three and nine months ended September 30, 2023, we
recorded net sales of $
million respectively, to such entities.
During the three and nine months
ended September 28, 2024, we purchased $
million respectively, from such entities.
During the
three and nine months ended September 30, 2023, we purchased $
million respectively, from such
entities.
At September 28, 2024 and December 30, 2023, we had an aggregate
$
respectively, due from our equity affiliates, and $
million, respectively, due to our equity affiliates.
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
of September 28, 2024, current and non-current liabilities associated with related
party operating leases were $
million and $
million, respectively.
At September 28, 2024, related party leases represented
% and
% of
the total current and non-current operating lease liabilities, respectively.
At December 30, 2023, current and non-
current liabilities associated with related party operating leases were $
million, respectively.
At
December 30, 2023, related party leases represented
% and
% of the total current and non-current operating
lease liabilities, respectively.
37
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
In accordance with the “Safe Harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we
provide the following cautionary remarks regarding important factors
that, among others, could cause future results
to differ materially from the forward-looking statements, expectations and assumptions
expressed or implied
herein.
All forward-looking statements made by us are subject to
risks and uncertainties and are not guarantees of
future performance.
These forward-looking statements involve known and unknown
risks, uncertainties and other
factors that may cause our actual results, performance and achievements
or industry results to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking
statements.
These statements are generally identified by the use of such
terms as “may,” “could,” “expect,”
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,”
“to be,” “to make” or other comparable
terms.
Factors that could cause or contribute to such differences include, but are not limited
to, those discussed in
the documents we file with the Securities and Exchange Commission
(SEC), including our Annual Report on Form
Risk factors and uncertainties that could cause actual results to differ materially from
current and historical results
include, but are not limited to: 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, as well
as significant demands on our operations, information systems,
legal, regulatory, compliance, financial and human
resources functions in connection with acquisitions, dispositions and
joint ventures; certain provisions in our
governing documents that may discourage third-party acquisitions of us; adverse
changes in supplier rebates or
other purchasing incentives; risks related to the sale of corporate brand products;
security risks associated with our
information systems and technology products and services, such as
cyberattacks or other privacy or data security
breaches (including the October 2023 incident); effects of a highly competitive (including, without
limitation,
competition from third-party online commerce sites) and consolidating
market; 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, ongoing
wars, fluctuations in energy pricing and
the value of the U.S. dollar as compared to foreign currencies, and changes
to other economic indicators,
international trade agreements, potential trade barriers and terrorism; geopolitical
wars; failure to comply with
existing and future regulatory requirements; risks associated with the EU Medical
Device Regulation; failure to
comply with laws and regulations relating to health care fraud or other
laws and regulations; failure to comply with
laws and regulations relating to the collection, storage and processing of
sensitive personal information or standards
in electronic health records or transmissions; changes in tax legislation;
risks related to product liability, intellectual
property and other claims; risks associated with customs policies
or legislative import restrictions; risks associated
with disease outbreaks, epidemics, pandemics (such as the COVID-19
pandemic), or similar wide-spread public
health concerns and other natural or man-made disasters; risks associated with our
global operations; litigation
risks; new or unanticipated litigation developments and the status
of litigation matters; 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.
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.
38
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 About Media Center page
of our website.
Recent Developments
While the U.S. economy has experienced inflationary pressures and
strengthening of the U.S. dollar, their impacts
have not been material to our results of operations.
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 unwilling to
absorb price increases, thus positioning us
to protect our gross profit.
Cyber Incident
In October 2023 Henry Schein experienced a cyber incident that primarily
affected the operations of our North
American and European dental and medical distribution businesses.
Henry Schein One, our practice management
software, revenue cycle management and patient relationship management
solutions business, was not affected, and
our manufacturing businesses were mostly unaffected.
On November 22, 2023, we experienced a disruption of our
ecommerce platform and related applications, which was remediated.
During the three and nine months ended September 28, 2024, we had a
sales decrease in our dental and medical
distribution businesses, which we believe was primarily a result of lower sales
to episodic customers following last
year’s cyber incident.
We have a number of programs underway focused on re-establishing these customers.
We maintain cyber insurance, subject to certain retentions and policy limitations.
With respect to the October 2023
cyber incident, we have a $60 million insurance policy, following a $5 million retention.
During the three and nine
months ended September 28, 2024, we received insurance proceeds of
$10 million and $20 million, respectively,
representing a partial insurance recovery of losses related to the cyber incident.
39
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
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 92 years of experience distributing health
care products.
We are headquartered in Melville, New York,
employ approximately 26,000 people (of which approximately
13,000 are based outside of the United States) and have operations or
affiliates in 33 countries and territories.
Our
broad global footprint has evolved over time through our organic success as well as
through contribution from
strategic acquisitions.
We
have established strategically located distribution centers around
the world to enable us to better serve our
customers and increase our operating efficiency.
This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service, enables
us to be a single source of
supply for our customers’ needs.
While our primary go-to-market strategy is in our capacity as a distributor, we also market and sell our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products,
including in vitro
diagnostic devices, manufacture certain dental specialty products in
the areas of implants, orthodontics and
endodontics, manufacture drug products, and repackage/relabel prescription drugs
and/or devices.
We
have
achieved scale in these global businesses primarily through acquisitions, as
manufacturers of these products
typically do not utilize a distribution channel to serve customers.
We
conduct our business through two reportable segments: (i) health
care distribution and (ii) technology and
value-added services.
These segments offer different products and services to the same customer base.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, government
and other
institutions.
Our medical businesses serve physician offices, urgent care centers, ambulatory care sites,
emergency
medical technicians, dialysis centers, home health, federal and state governments
and large enterprises, such as
group practices, and integrated delivery networks, among other providers
across a wide range of specialties.
The health care distribution reportable segment, combining our global dental and
medical operating segments,
distributes consumable products, small equipment, laboratory products, large equipment, equipment
repair services,
branded and generic pharmaceuticals, vaccines, surgical products, dental specialty
products (including implant,
orthodontic and endodontic products), diagnostic tests, infection-control products,
personal protective equipment
(“PPE”) products, vitamins and orthopedic implants.
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.
40
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.
This trend has benefited
distributors capable of providing a broad array of products and services at low
prices.
It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying
groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to favor distributors
capable of providing
specialized management information support.
We
believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which can
enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies
and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
Industry Consolidation
The health care products distribution industry, as it relates to office-based health care practitioners, is fragmented
and diverse.
The industry ranges from sole practitioners working out of
relatively small offices to group practices
or service organizations ranging in size from a few practitioners to a large number of practitioners who have
combined or otherwise associated their practices.
Due in part to the inability of office-based health care practitioners to store and manage
large quantities of supplies
in their offices, the distribution of health care supplies and small equipment to office-based health
care practitioners
has been characterized by frequent, small quantity orders, and a need for rapid,
reliable and substantially complete
order fulfillment.
The purchasing decisions within an office-based health care practice are typically
made by the
practitioner or an administrative assistant.
Supplies and small equipment are generally purchased from more
than
one distributor, with one generally serving as the primary supplier.
The trend of consolidation extends to our customer base.
Health care practitioners are increasingly seeking to
partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician
hospital organizations.
In many cases, purchasing decisions for consolidated groups
are made at a centralized or
professional staff level; however, orders are delivered to the practitioners’ offices.
We
believe that consolidation within the industry will continue to
result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking to
combine with larger companies that can
provide growth opportunities.
This consolidation also may continue to result in distributors seeking
to acquire
companies that can enhance their current product and service offerings or provide
opportunities to serve a broader
customer base.
Our approach to acquisitions and joint ventures has been to expand our role as
a provider of products and services
to the health care industry.
This trend has resulted in our expansion into service areas that complement
our existing
operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired
businesses.
As industry consolidation continues, we believe that we are positioned to
capitalize on this trend, as we believe we
have the ability to support increased sales through our existing infrastructure, although
there can be no assurances
that we will be able to successfully accomplish this.
We
are focused 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.
41
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth
due to the aging population,
increased health care awareness, the proliferation of medical technology
and testing, new pharmacological
treatments, and expanded third-party insurance coverage, partially offset by the effects of unemployment
on
insurance coverage.
In addition, the physician market continues to benefit from the
shift of procedures and
diagnostic testing from acute care settings to alternate-care sites, particularly
physicians’ offices.
According to the U.S. Census Bureau’s International Database, between 2024
and 2034, the 45 and older
population is expected to grow by approximately 11%.
Between 2024 and 2044, this age group is expected to grow
by approximately 20%.
This compares with expected total U.S. population growth
rates of approximately 6%
between 2024 and 2034
and approximately 11% between 2024 and 2044.
According to the U.S. Census Bureau’s International Database, in 2024
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 20% 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
(“CMS”) published “National Health Expenditure Data” indicating that total
national health care spending reached
approximately $4.5 trillion in 2022, or 17.3% of the nation’s gross domestic product, the benchmark
measure for
annual production of goods and services in the United States.
Health care spending is projected to reach
approximately $7.7 trillion by 2032, or 19.7% of the nation’s projected gross domestic product.
Government
Certain of our businesses involve the distribution, manufacturing, importation,
exportation, marketing, sale and
promotion of 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
businesses that distribute and sell medical equipment and supplies directly
to patients.
Federal, state and certain
foreign governments have also increased enforcement activity in the health care
sector, particularly in areas of fraud
and abuse, anti-bribery and anti-corruption, controlled substances handling,
medical device regulations and data
privacy and security standards.
Certain of our businesses involve pharmaceuticals and/or medical devices,
including in vitro diagnostic devices,
that are paid for by third parties and must operate in compliance with a variety of
burdensome and complex coding,
billing and record-keeping requirements in order to substantiate claims for
payment under federal, state and
commercial healthcare reimbursement programs.
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.
Certain of our businesses are subject to various additional federal, state,
local and foreign laws and regulations,
including with respect to the sale, transportation, importation, storage, handling
and disposal of hazardous or
potentially hazardous substances; “forever chemicals” such as per-and
polyfluoroalkyl substances; amalgam bans;
pricing disclosures; supply chain transparency around labor practices; and safe working
conditions.
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.
CMS
recently released the 2024 durable medical equipment, prosthetics, orthotics
and supplies (“DMEPOS”)
42
reimbursement schedule, which, effective January 1, 2024, reduced the DMEPOS reimbursement
rates for non-
rural suppliers, such as us, by removing the Coronavirus Aid, Relief,
and Economic Security (aka CARES) Act
relief rates in effect during the COVID-19 pandemic.
This and other 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 30, 2023, filed with the SEC on February 28, 2024.
Results of Operations
The following tables summarize the significant components of our operating
results for the three and nine months
ended September 28, 2024 and September 30, 2023 and cash flows for
the nine months ended September 28, 2024
and September 30, 2023:
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Operating results:
$
3,174
$
3,162
$
9,482
$
9,322
2,181
2,167
6,459
6,386
993
995
3,023
2,936
Operating expenses:
Selling, general and administrative
724
725
2,296
2,149
Depreciation and amortization
64
59
188
152
Restructuring costs
48
11
73
59
Operating income
$
157
$
200
$
466
$
576
$
(29)
$
(21)
$
(79)
$
(48)
Net income
99
143
302
419
Net income attributable to Henry Schein, Inc.
99
137
296
398
Nine Months Ended
September 28,
September 30,
2024
2023
Net cash provided by operating activities
$
644
$
532
Net cash used in investing activities
(372)
(808)
Net cash provided by (used in) financing activities
(306)
307
43
Plans of Restructuring
On August 1, 2022, we committed to a restructuring plan (the “2022 Plan”)
focused on funding the priorities of the
BOLD+1 strategic plan, streamlining operations and other initiatives to
increase efficiency.
The 2022 Plan has
been completed as of July 31, 2024.
During the three months ended September 28, 2024 and
September 30, 2023,
in connection with our 2022 Plan, we recorded restructuring costs of
$12 million and $11 million, respectively.
During the nine months ended September 28, 2024 and September 30, 2023,
in connection with our 2022 Plan, we
recorded restructuring costs of $37 million and $59 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 exit costs.
We expect to record immaterial charges associated with the 2022 Plan during the
On August 6, 2024, we committed to a new restructuring plan (the “2024
Plan”) to integrate recent acquisitions,
right-size operations and further increase efficiencies.
During the three and nine months ended September 28,
2024, we recorded restructuring charges associated with the 2024 Plan of $36 million
which primarily related to
severance and employee-related costs, accelerated amortization of right-of-use
lease assets and fixed assets, and
other lease exit costs.
We expect to record restructuring charges associated with the 2024 Plan during the fourth
quarter of 2024 and in 2025, however an estimate of the amount of these charges has not
yet been determined.
44
Three Months Ended September 28, 2024 Compared to Three Months Ended September 30, 2023
Note: Percentages for Net Sales; Gross Profit; Operating Expenses; Other Expense,
Net; and Income Taxes are
based on actual values and may not recalculate due to rounding.
Net Sales
Net sales were as follows:
September 28,
% of
September 30,
% of
Increase / (Decrease)
2024
Total
2023
Total
$
%
Health care distribution
(1)
$
1,852
58.4
%
$
1,882
59.5
%
$
(30)
(1.6)
%
1,101
34.7
1,070
33.9
31
2.9
Total health care distribution
2,953
93.1
2,952
93.4
1
-
Technology and value-added services
(2)
221
6.9
210
6.6
11
5.1
$
3,174
100.0
%
$
3,162
100.0
%
$
12
0.4
%
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
(2.5)
%
0.3
%
(2.2)
%
(0.6)
%
(2.8)
%
Dental Equipment
1.8
0.9
2.7
0.1
2.8
Total Dental
(1.6)
0.5
(1.1)
(0.5)
(1.6)
Medical
(4.8)
7.6
2.8
0.1
2.9
Total Health Care Distribution
(2.7)
3.0
0.3
(0.3)
-
Technology and value-added services
(2)
(1.1)
6.0
4.9
0.2
5.1
Total
(2.6)
%
3.2
%
0.6
%
(0.2)
%
0.4
%
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products, vitamins and orthopedic implants.
(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, practice technology, network and hardware services, and other services.
Global Sales
Global net sales for the three months ended September 28, 2024 increased 0.4%.
The components of our sales
growth are presented in the table above.
The 2.6% decrease in our internally generated local currency sales was primarily
attributable to the slower than
anticipated pace of recovery from the cyber incident, the challenging economic
environment in certain markets and
lower sales of PPE products and COVID-19 test kits, partially offset by sales growth in
dental equipment and dental
specialty products.
For the three months ended September 28, 2024, the estimated
decrease in internally generated
local currency sales, excluding PPE products and COVID-19
test kits, was 2.2%.
We estimate that sales of PPE products and COVID-19 test kits were approximately $157 million and $175 million
for the three months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $18 million, or 10.1% versus the prior year, with the $18 million net decrease year-over-year
representing 0.6% of global net sales for the three months ended September
28, 2024.
45
Dental
Dental net sales for the three months ended September 28, 2024 decreased 1.6%.
The components of our sales
decline are presented in the table above.
The decrease in local currency sales was attributable to a 1.6% decrease
in internally generated local currency sales
of dental merchandise,
partially offset by an increase in internally generated local currency sales of dental
equipment and dental specialty products and sales from entities acquired
during the twelve months ended
September 28, 2024.
The decrease in internally generated local currency sales
of dental merchandise was primarily
attributable to the slower than anticipated pace of recovery from
the cyber incident,
the challenging economic
environment in certain markets, and lower sales of PPE products.
The increase in internally generated local
currency sales of dental equipment was primarily attributable to certain
international markets and traditional
equipment and our parts and service business in North America, partially offset by
a decline in digital imaging in
North America.
We estimate that sales of PPE products were approximately $72 million and $83 million for the three months ended
September 28, 2024 and September 30, 2023, respectively, representing an estimated decrease of $11 million, or
13.0% versus the prior year, with the $11 million net decrease year-over-year representing 0.6% of dental net sales
for the three months ended September 28, 2024.
The decrease in sales of PPE products was primarily due to lower
glove prices.
The estimated decrease in internally generated local currency
sales, excluding PPE products,
was
Medical
Medical net sales for the three months ended September 28, 2024
increased 2.9%.
The components of our sales
growth are presented in the table above.
The increase in local currency sales was attributable to our expansion
in the Home Solutions market,
including the
acquisition of Shield Healthcare during the year ended December
30, 2023, and our acquisition of TriMed, Inc.
during the second quarter of 2024, partially offset by a 4.8% decrease in internally
generated local currency medical
sales, resulting from
the slower than anticipated pace of recovery from the cyber incident,
the conversion of
certain pharmaceutical products
to lower priced generics,
and lower sales of influenza vaccines,
PPE products and
COVID-19 test kits.
We estimate that sales of PPE products and COVID-19 test kits were approximately $85 million and $92 million
for the three months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $7 million, or 7.5%
versus the prior year, with the $7 million net decrease year-over-year representing
0.6% of medical net sales for the three months ended September 28, 2024.
The decrease in sales of these products
was primarily due to lower market prices of PPE products (primarily lower
glove pricing).
The estimated decrease
in internally generated local currency sales, excluding PPE
products and COVID-19 test kits,
was 4.6%.
Technology and value-added services
Technology and value-added services net sales for the three months ended September 28, 2024 increased 5.1%.
The components of our sales growth are presented in the table above.
The internally generated local currency
increase in technology and value-added services sales was primarily attributable
to entities acquired during the
twelve months ended September 28, 2024,
a continued increase in the number of cloud-based users of our practice
management software and an increase in revenue cycle management solutions.
46
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 28,
Gross
September 30,
Gross
Increase / (Decrease)
2024
Margin %
2023
Margin %
$
%
$
844
28.6
%
$
851
28.8
%
$
(7)
(0.9)
%
Technology and value-added services
149
67.8
144
68.7
5
3.8
$
993
31.3
$
995
31.5
$
(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 product development.
Within our health care distribution segment, gross profit margins may vary between the periods as a result of
the
changes in the mix of products sold as well as changes in our customer
mix.
For example, sales of our corporate
brand and certain specialty products achieve gross profit margins that are higher than
average total gross profit
margins of all products.
With respect to customer mix, sales to our large-group customers are typically completed
at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based
practitioners, who normally purchase lower volumes.
Health care distribution gross profit for the three months ended September
28, 2024 was relatively flat compared to
the prior-year-period.
Technology and value-added services gross profit increased as a result of gross profit from acquisitions, partially
offset by lower internally generated sales.
Operating Expenses
Operating expenses (consisting of selling, general and administrative
expenses; depreciation and amortization; and
restructuring costs) by segment and in total were as follows:
% of
% of
September 28,
Respective
September 30,
Respective
Increase
2024
Net Sales
2023
Net Sales
$
%
$
726
24.6
%
$
691
23.4
%
$
35
5.1
%
Technology and value-added services
110
50.1
104
49.7
6
6.0
$
836
26.3
$
795
25.1
$
41
5.2
The net increase (decrease) in operating expenses is attributable to
the following:
Operating Costs
Restructuring Costs
Acquisitions
Total
$
(18)
$
28
$
25
$
35
Technology and value-added services
(6)
9
3
6
$
(24)
$
37
$
28
$
41
The components of the net increase in total operating expenses are presented
in the table above.
The increase in
operating costs during the three months ended September 28, 2024
includes increases in payroll and payroll related
costs in both of our reportable segments, as well as increased acquisition
intangible amortization in our healthcare
distribution segment, partially offset by a gain of $19 million related to the remeasurement
to fair value of a
previously held equity investment within our healthcare distribution segment.
47
During the three months ended September 28, 2024,
we also incurred $1 million of expenses, within our health care
distribution segment, directly related to the cyber incident,
mostly consisting of professional fees.
During the three
months ended September 28, 2024, we received insurance proceeds of
$10 million, recorded as a reduction of
selling, general and administrative expenses, representing a partial
insurance recovery of losses related to the cyber
incident.
Other Expense, Net
Other expense, net was as follows:
September 28,
September 30,
Variance
2024
2023
$
%
$
7
$
6
$
1
(3.2)
%
(34)
(25)
(9)
(31.9)
(2)
(2)
-
(45.4)
$
(29)
$
(21)
$
(8)
(36.4)
Interest expense increased primarily due to increased borrowings and increased
interest rates.
Income Taxes
Our effective tax rate was 24.7% for the three months ended September 28, 2024, compared
to 21.9% for the prior
year period.
The difference between our effective and federal statutory tax rates
primarily relates to state and
foreign income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two rules in December 2021, which provides for a global minimum tax rate on the earnings of
large multinational businesses on a country-by-country basis.
Effective January 1, 2024, the minimum global tax
rate is 15% for various jurisdictions pursuant to the Pillar Two rules.
As of September 28, 2024, the impact of the
Pillar Two rules to our financial statements was immaterial.
As we operate in jurisdictions which have adopted
Pillar Two, we are continuing to analyze the implications to effectively manage the impact for 2024 and beyond.
Future tax reform resulting from these developments may result in changes
to long-standing tax principles, which
may adversely impact our effective tax rate going forward or result in higher cash
tax liabilities.
48
Nine Months Ended September 28, 2024 Compared to Nine Months Ended September
30, 2023
Note: Percentages for Net Sales; Gross Profit; Operating Expenses; Other
Expense, Net; and Income Taxes are
based on actual values and may not recalculate due to rounding.
Net Sales
Net sales were as follows:
September 28,
% of
September 30,
% of
Increase / (Decrease)
2024
Total
2023
Total
$
%
Health care distribution
(1)
$
5,690
60.0
%
$
5,737
61.5
%
$
(47)
(0.8)
%
3,140
33.1
2,991
32.1
149
5.0
Total health care distribution
8,830
93.1
8,728
93.6
102
1.2
Technology and value-added services
(2)
652
6.9
594
6.4
58
9.7
$
9,482
100.0
%
$
9,322
100.0
%
$
160
1.7
%
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
(3.0)
%
1.9
%
(1.1)
%
(0.2)
%
(1.3)
%
Dental Equipment
0.5
0.4
0.9
-
0.9
Total Dental
(2.2)
1.5
(0.7)
(0.1)
(0.8)
Medical
(3.3)
8.3
5.0
-
5.0
Total Health Care Distribution
(2.6)
3.9
1.3
(0.1)
1.2
Technology and value-added services
(2)
1.9
7.7
9.6
0.1
9.7
Total
(2.3)
%
4.1
%
1.8
%
(0.1)
%
1.7
%
(1)
Consists of consumable products, dental specialty products (including implant, orthodontic and endodontic products), small
equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical
products, diagnostic tests, infection-control products, PPE products, vitamins and orthopedic implants.
(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, practice technology, network and hardware services, and other services.
Global Sales
Global net sales for the nine months ended September 28, 2024 increased 1.7%.
The components of our sales
growth are presented in the table above.
The 2.3% decrease in our internally generated local currency sales was primarily
attributable to the slower than
anticipated pace of recovery from the cyber incident, the challenging economic
environment in certain markets and
lower sales of PPE products.
For the nine months ended September 28, 2024, the estimated decrease
in internally
generated local currency sales, excluding PPE products and COVID-19
test kits, was 1.7%.
We estimate that sales of PPE products and COVID-19 test kits were approximately $478 million and $540 million
for the nine months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $62 million, or 11.3%
versus the prior year, with the $62 million net decrease year-over-year
representing 0.6% of global net sales for the nine months ended September
28, 2024.
49
Dental
Dental net sales for the nine months ended September 28, 2024 decreased
0.8%.
The components of our sales
decline are presented in the table above.
The decrease in local currency sales was attributable to a decrease
in internally generated local currency sales for
dental merchandise of 2.2%,
partially offset by sales growth in internally generated local currency sales for dental
equipment and dental specialty products.
The decrease in internally generated local currency sales of dental
merchandise was primarily attributable to the slower than anticipated pace
of recovery from the cyber incident, the
challenging economic environment in certain markets, and lower sales
of PPE products.
Our sales growth in
internally generated local currency sales for dental equipment was primarily
due to growth in North America for
traditional equipment and our parts and service business, partially offset by lower North American
digital
equipment sales and declines in certain international markets, and some
sales shifting into the first quarter of 2024
due to the delay of equipment installations during the fourth quarter of 2023
resulting from the impact of the cyber
incident.
We estimate that sales of PPE products were approximately $228 million and $264 million for the nine months
ended September 28, 2024 and September 30, 2023, respectively, representing an estimated decrease of $36
million, or 13.4%
versus the prior year, with the $36 million net decrease year-over-year representing 0.6%
of
dental net sales for the nine months ended September 28, 2024.
The decrease in sales of PPE products was
primarily due to lower glove prices and reduced demand following the
cyber incident.
The estimated decrease in
internally generated local currency sales, excluding PPE products,
was 1.6%.
Medical
Medical net sales for the nine months ended September 28, 2024 increased
5.0%.
The components of our sales
growth are presented in the table above.
The increase in local currency sales was attributable to our expansion
in the Home Solutions market,
including the
acquisition of Shield Healthcare during the year ended December 30, 2023,
offset by a decrease of 3.3% in
internally generated local currency medical sales, resulting from the slower
than anticipated pace of recovery from
the cyber incident, the conversion of certain pharmaceutical products to lower
priced generics, and lower sales of
PPE products and influenza vaccines,
partially offset by strong sales of point-of-care diagnostics including multi-
assay flu/COVID combination test kits.
We estimate that sales of PPE products and COVID-19 test kits were approximately $250 million and $276 million
for the nine months ended September 28, 2024 and September 30, 2023,
respectively, representing an estimated
decrease of $26 million, or 9.4% versus the prior year, with the $26 million net decrease year-over-year
representing 0.8% of medical net sales for the nine months ended September
28, 2024.
The decrease in sales of
these products was primarily due to lower market prices of PPE products (primarily
lower glove pricing).
The
estimated decrease in internally generated local currency sales, excluding
PPE products and COVID-19 test kits,
was 2.6%.
Technology and value-added services
Technology and value-added services net sales for the nine months ended September 28, 2024 increased 9.7%.
The
components of our sales growth are presented in the table above.
The internally generated local currency increase
of 1.9% in technology and value-added services sales was primarily
attributable to a continued increase in the
number of cloud-based users of our practice management software and an
increase in revenue cycle management
solutions and our analytical products.
50
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
September 28,
Gross
September 30,
Gross
Increase
2024
Margin %
2023
Margin %
$
%
$
2,586
29.3
%
$
2,534
29.0
%
$
52
2.0
%
Technology and value-added services
437
67.1
402
67.6
35
8.8
$
3,023
31.9
$
2,936
31.5
$
87
2.9
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 product development.
Within our health care distribution segment, gross profit margins may vary between the periods as a result of
the
changes in the mix of products sold as well as changes in our customer
mix.
For example, sales of our corporate
brand and certain specialty products achieve gross profit margins that are higher than
average total gross profit
margins of all products.
With respect to customer mix, sales to our large-group customers are typically completed
at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based
practitioners, who normally purchase lower volumes.
Health care distribution gross profit for the nine months ended September 28, 2024
increased compared to the
prior-year-period due to gross profit from acquisitions and gross margin expansion as a result of a favorable impact
of sales mix of higher-margin products.
Technology and value-added services gross profit increased as a result of a higher gross profit from internally
generated sales and gross profit from acquisitions.
Operating Expenses
Operating expenses (consisting of selling, general and administrative
expenses; depreciation and amortization; and
restructuring costs) by segment and in total were as follows:
% of
% of
September 28,
Respective
September 30,
Respective
Increase
2024
Net Sales
2023
Net Sales
$
%
$
2,196
24.9
%
$
2,063
23.6
%
$
133
6.5
%
Technology and value-added services
361
55.4
297
50.1
64
21.4
$
2,557
27.0
$
2,360
25.3
$
197
8.3
The net increase in operating expenses is attributable to the following:
Operating Costs
Restructuring Costs
Acquisitions
Total
$
11
$
9
$
113
$
133
Technology and value-added services
44
5
15
64
$
55
$
14
$
128
$
197
The components of the net increase in total operating expenses are presented
in the table above.
The increase in
operating costs during the nine months ended September 28, 2024
includes increases in payroll and payroll related
costs, travel, convention expenses and litigation settlement costs in both
of our reportable segments, as well as
increased acquisition intangible amortization in our healthcare distribution
segment, partially offset by a gain of
$19 million related to the remeasurement to fair value of a previously held
equity investment within our healthcare
51
distribution segment.
The impact from this remeasurement gain was similar to that of a
remeasurement gain related
to another buy-up of a business within our healthcare distribution segment
during the nine months ended September
30, 2023.
We
also recorded an increase of $38 million in accrued contingent consideration
related to a 2023 acquisition in our
technology and value-added services segment.
During the nine months ended September 28, 2024, we also
incurred $12 million of expenses, within our health care distribution segment,
directly related to the cyber incident,
mostly consisting of professional fees.
During the nine months ended September 28, 2024, we received
insurance
proceeds of $20 million, recorded as a reduction of selling, general
and administrative expenses, representing a
partial insurance recovery of losses related to the cyber incident.
Other Expense, Net
Other expense, net was as follows:
September 28,
September 30,
Variance
2024
2023
$
%
$
18
$
12
$
6
44.7
%
(96)
(58)
(38)
(64.7)
(1)
(2)
1
(82.4)
$
(79)
$
(48)
$
(31)
(63.8)
Interest income increased primarily due to increased interest rates.
Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
Our effective tax rate was 25.1% for the nine months ended September 28, 2024, compared
to 22.5% for the prior
year period.
The difference between our effective and federal statutory tax rates primarily relates to state
and
foreign income taxes and interest expense.
The Organization of Economic Co-Operation and Development (OECD) issued
technical and administrative
guidance on Pillar Two rules in December 2021, which provides for a global minimum tax rate on the earnings of
large multinational businesses on a country-by-country basis.
Effective January 1, 2024, the minimum global tax
rate is 15% for various jurisdictions pursuant to the Pillar Two rules.
As of September 28, 2024, the impact of the
Pillar Two rules to our financial statements was immaterial.
As we operate in jurisdictions which have adopted
Pillar Two, we are continuing to analyze the implications to effectively manage the impact for 2024 and beyond.
Future tax reform resulting from these developments may result in changes
to long-standing tax principles, which
may adversely impact our effective tax rate going forward or result in higher cash
tax liabilities.
52
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
for further information.
Our ability to generate sufficient cash flows from
operations is dependent on the continued demand of our customers
for our products and services, and access to
products and services from our suppliers.
Our business requires a substantial investment in working capital, which
is susceptible to fluctuations during the
year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of
sales activity, special inventory forward buy-in opportunities and our desired level of inventory.
We anticipate
future increases in our working capital requirements.
We finance our business to provide adequate funding for at least 12 months.
Funding requirements are based on
forecasted profitability and working capital needs, which, on occasion, may
change.
Consequently, we may change
our funding structure to reflect any new requirements.
We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets,
and our available funds under existing credit facilities provide us with
sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs.
Our acquisition strategy is focused on investments in companies that
add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies.
Net cash provided by operating activities was $644 million for the
nine months ended September 28, 2024,
compared to net cash provided by operating activities of $532 million for
the prior year.
The net change of $112
million was primarily attributable to changes in working capital accounts,
primarily accounts receivable and
inventory; partially offset by lower cash net income.
During the nine months ended September 28, 2024, the cyber
incident had several residual impacts to the operating cash flows from our
working capital, net of acquisitions,
including an increase in operating cash flows from accounts receivable due
to improved collection levels and
decreased cash flows from accounts payable and accrued expenses resulting
from previously delayed payments.
Net cash used in investing activities was $372 million for the nine
months ended September 28, 2024, compared to
net cash used in investing activities of $808 million for the prior year.
The net change of $436 million was
primarily attributable to decreased payments for equity investments
and business acquisitions.
Net cash used in financing activities was $306 million for the nine
months ended September 28, 2024, compared to
net cash provided by financing activities of $307 million for the
prior year.
The net change of $613 million was
primarily due to decreased net borrowings from debt to finance our investments
and increased acquisitions of
noncontrolling interests in subsidiaries and increased repurchases of common
stock.
53
The following table summarizes selected measures of liquidity and capital
resources:
September 28,
December 30,
2024
2023
Cash and cash equivalents
$
126
$
171
1,218
1,805
Debt:
$
638
$
264
Current maturities of long-term debt
109
150
1,906
1,937
$
2,653
$
2,351
Leases:
Current operating lease liabilities
$
77
$
80
Non-current operating lease liabilities
262
310
Includes $341 million and $284 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at September 28, 2024 and December 30, 2023, 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 48.6 days as of September 28, 2024
from 43.7 days as of September 30, 2023, which was primarily attributable
to the impact of the cyber incident.
During the nine months ended September 28, 2024, we wrote off approximately $7
million of fully reserved
accounts receivable against our trade receivable reserve.
Our inventory turns from operations increased to 5.0 as of
September 28, 2024 from 4.5 as of September 30, 2023.
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 approximately one year
to approximately 17 years,
some of which may include options to extend the leases for up to 15 years.
As of September 28, 2024, our right-of-
use assets related to operating leases were $304 million and our current and non-current
operating lease liabilities
were $77 million and $262 million, respectively.
Stock Repurchases
On July 31, 2024 our Board of Directors authorized the repurchase of up
to an additional $500 million in shares of
our common stock.
From March 3, 2003 through September 28, 2024, we repurchased $5.1
billion, or 94,763,315 shares, under our
common stock repurchase programs, with $455 million available
as of September 28, 2024 for future common
stock share repurchases.
Subject to market conditions and other factors, we plan to continue
to accelerate our share
repurchase activity in light of our favorable cash position.
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.
As of September 28, 2024 and December 30, 2023, our balance
for
54
redeemable noncontrolling interests was $832 million and $864 million,
respectively.
Please see
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 30, 2023.
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted
or will be adopted, see
of the Notes 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 30, 2023.
55
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 28,
2024, 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, and the rules of the Nasdaq stock exchange.
Changes in Internal Control over Financial Reporting
The combination of acquisitions,
including the acquisition of TriMed Inc. (“TriMed”), 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. As
previously reported, the full integration of TriMed will extend beyond year-end and, therefore, we anticipate
excluding TriMed from our annual assessment of internal control over financial reporting as of December
28, 2024,
as permitted by related SEC staff interpretive guidance for newly acquired businesses.
During the quarter ended September 28, 2024, we completed the acquisition
of a dental distribution business and
acquired a controlling interest of a dental affiliate in 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.
Also, during the quarter ended September 28, 2024, we completed the
systems implementation activities for
implementing a new e-commerce system for certain dental distribution
businesses in the UK and Ireland.
Additionally, we completed the systems implementation activities related to the integration of a previously acquired
Australian medical distribution business into our existing Australian
ERP system.
Finally, we continued systems
implementation activities for two of our dental distribution businesses in France
and Brazil.
All acquisitions, continued acquisition integrations and systems implementation
activities 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.
The deficiencies in internal control over financial reporting identified
as of December 30, 2023 at the application
control level related to logical and user access management and segregation
of duties have continued to be the
subject of ongoing remediation including implementation of specific
action plans and the testing/validation of
control operating effectiveness, which are expected to be substantially completed prior to year-end.
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.
56
PART
II.
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
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 30, 2023.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
Purchases of equity securities by the issuer
Our share repurchase program, announced on March 3, 2003, originally
allowed us to repurchase up to two million
shares pre-stock splits (eight million shares post-stock splits) of our common
stock, which represented
approximately 2.3% of the shares outstanding at the commencement
of the program.
Subsequent additional
increases totaling $4.9
billion, authorized by our Board of Directors, to the repurchase program
provide for a total
of $5.5 billion (including $500 million authorized on July 31, 2024) of shares of
our common stock to be
repurchased under this program.
As of September 28, 2024, we had repurchased approximately $5.1 billion
of common stock (94,763,315 shares)
under these initiatives, with $455 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 28, 2024:
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)
6/30/2024 through 8/3/2024
486,030
$
68.56
486,030
7,837,251
8//2024 through 8/31/2024
1,063,515
69.14
1,063,515
6,847,137
9/1/2024 through 9/28/2024
404,531
69.56
404,531
6,213,125
1,954,076
1,954,076
(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.
57
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 28, 2024, formatted in Inline XBRL (included
within
Exhibit 101 attachments).+
+ Filed or furnished herewith.
58
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 5, 2024
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