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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly
period ended
September 28, 2024
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the transition period from ____________ to ____________
Commission File Number:
0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
Delaware
11-3136595
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
135 Duryea Road
Melville
,
New York
(Address of principal executive offices)
11747
(Zip Code)
(
631
)
843-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share
HSIC
The
Nasdaq
Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,”
“accelerated filer,”
“smaller reporting company,”
and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for
complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
As of October 28, 2024,
there were
124,681,294
shares of the registrant’s common stock outstanding.
HENRY SCHEIN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
ITEM 1.
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
as of September 28, 2024 and December 30, 2023
3
Condensed Consolidated Statements of Income
for the three and nine months ended
September 28, 2024 and September 30, 2023
4
Condensed Consolidated Statements of Comprehensive Income
for the
three and nine months ended September 28, 2024 and September 30, 2023
5
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the three months ended
September 28, 2024 and September 30, 2023
6
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended
September 28, 2024 and September 30, 2023
7
Condensed Consolidated Statements of Cash Flows
for the nine months ended
September 28, 2024 and September 30, 2023
8
Notes to Condensed Consolidated Financial Statements
9
Note 1 – Basis of Presentation
9
Note 2 – Significant Accounting Policies and Recently
Issued Accounting Standards
10
Note 3 – Cyber Incident
11
Note 4 – Net Sales from Contracts with Customers
12
Note 5 – Segment Data
13
Note 6 – Business Acquisitions
14
Note 7 – Fair Value Measurements
20
Note 8 – Debt
23
Note 9 – Income Taxes
26
Note 10 – Plans of Restructuring
27
Note 11 – Legal Proceedings
29
Note 12 – Stock-Based Compensation
31
Note 13 – Redeemable Noncontrolling Interests
33
Note 14 – Comprehensive Income
34
Note 15 – Earnings Per Share
35
Note 16 – Supplemental Cash Flow Information
35
Note 17 – Related Party Transactions
36
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
37
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
54
ITEM 4.
Controls and Procedures
55
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
56
ITEM 1A.
Risk Factors
56
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
56
ITEM 6.
Exhibits
57
Signature
58
Table of Contents
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
$
126
$
171
Accounts receivable, net of allowance for credit losses of $
86
and $
83
(1)
1,660
1,863
Inventories, net
1,754
1,815
Prepaid expenses and other
607
639
Total current assets
4,147
4,488
Property and equipment, net
540
498
Operating lease right-of-use assets
304
325
Goodwill
3,986
3,875
Other intangibles, net
1,100
916
Investments and other
528
471
Total assets
$
10,605
$
10,573
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
1,026
$
1,020
Bank credit lines
638
264
Current maturities of long-term debt
109
150
Operating lease liabilities
77
80
Accrued expenses:
Payroll and related
289
332
Taxes
159
137
Other
631
700
Total current liabilities
2,929
2,683
Long-term debt (1)
1,906
1,937
Deferred income taxes
123
54
Operating lease liabilities
262
310
Other liabilities
414
436
Total liabilities
5,634
5,420
Redeemable noncontrolling interests
832
864
Commitments and contingencies
(nil)
(nil)
Stockholders' equity:
Preferred stock, $
0.01
par value,
1,000,000
shares authorized,
none
outstanding
-
-
Common stock, $
0.01
par value,
480,000,000
shares authorized,
125,154,194
outstanding on September 28, 2024 and
129,247,765
outstanding on December 30, 2023
1
1
Additional paid-in capital
-
-
Retained earnings
3,766
3,860
Accumulated other comprehensive loss
(264)
(206)
Total Henry Schein, Inc. stockholders' equity
3,503
3,655
Noncontrolling interests
636
634
Total stockholders' equity
4,139
4,289
Total liabilities, redeemable noncontrolling
interests and stockholders' equity
$
10,605
$
10,573
(1)
Amounts presented include balances held by our consolidated variable interest entity (“VIE”).
At September 28, 2024 and
December 30, 2023, includes trade accounts receivable of $
341
million and $
284
million, respectively, and long-term debt of $
210
million and $
210
million, respectively.
See
Note 1 – Basis of Presentation
for further information.
Table of Contents
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
Net sales
$
3,174
$
3,162
$
9,482
$
9,322
Cost of sales
2,181
2,167
6,459
6,386
Gross profit
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
Other income (expense):
Interest income
7
6
18
12
Interest expense
(34)
(25)
(96)
(58)
Other, net
(2)
(2)
(1)
(2)
Income before taxes, equity in earnings of affiliates and
noncontrolling interests
128
179
387
528
Income taxes
(32)
(39)
(97)
(119)
Equity in earnings of affiliates, net of tax
3
3
12
10
Net income
99
143
302
419
Less: Net income attributable to noncontrolling interests
-
(6)
(6)
(21)
Net income attributable to Henry Schein, Inc.
$
99
$
137
$
296
$
398
Earnings per share attributable to Henry Schein, Inc.:
Basic
$
0.79
$
1.06
$
2.32
$
3.04
Diluted
$
0.78
$
1.05
$
2.30
$
3.02
Weighted-average common
shares outstanding:
Basic
126,124,715
130,388,353
127,550,045
130,888,717
Diluted
127,054,934
131,442,135
128,498,494
132,149,172
Table of Contents
See accompanying notes.
5
HENRY SCHEIN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Net income
$
99
$
143
$
302
$
419
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)
58
(45)
(58)
(17)
Unrealized gain (loss) from hedging activities
(18)
6
(3)
2
Other comprehensive income (loss), net of tax
40
(39)
(61)
(15)
Comprehensive income
139
104
241
404
Comprehensive income attributable to noncontrolling interests:
Net income
-
(6)
(6)
(21)
Foreign currency translation loss (gain)
(12)
2
3
1
Comprehensive income attributable to noncontrolling
interests
(12)
(4)
(3)
(20)
Comprehensive income attributable to Henry Schein, Inc.
$
127
$
100
$
238
$
384
Table of Contents
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)
Interests
Equity
Balance, June 29, 2024
127,080,545
$
1
$
-
$
3,803
$
(292)
$
636
$
4,148
Net income (loss) (excluding $
1
attributable to Redeemable
noncontrolling interests)
-
-
-
99
-
(1)
98
Foreign currency translation gain (excluding gain of $
11
attributable to Redeemable noncontrolling interests)
-
-
-
-
46
1
47
Unrealized loss from hedging activities,
net of tax benefit of $
7
-
-
-
-
(18)
-
(18)
Purchase of noncontrolling interests
-
-
(1)
-
-
(1)
(2)
Change in fair value of redeemable securities
-
-
(6)
-
-
-
(6)
Noncontrolling interests and adjustments related to
business acquisitions
-
-
(4)
-
-
1
(3)
Repurchase and retirement of common stock
(1,954,076)
-
(18)
(119)
-
-
(137)
Stock issued upon exercise of stock options
22,448
-
1
-
-
-
1
Stock-based compensation expense
7,655
-
10
-
-
-
10
Shares withheld for payroll taxes
(2,403)
-
-
-
-
-
-
Settlement of stock-based compensation awards
25
-
1
-
-
-
1
Transfer of charges in excess of
capital
-
-
17
(17)
-
-
-
Balance, September 28, 2024
125,154,194
$
1
$
-
$
3,766
$
(264)
$
636
$
4,139
Accumulated
Common Stock
Additional
Other
Total
$0.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, July 1, 2023
130,576,806
$
1
$
-
$
3,769
$
(210)
$
626
$
4,186
Net income (excluding $
2
attributable to Redeemable
noncontrolling interests)
-
-
-
137
-
4
141
Foreign currency translation loss (excluding loss of $
2
attributable to Redeemable noncontrolling interests)
-
-
-
-
(43)
-
(43)
Unrealized gain from hedging activities,
net of tax of $
3
-
-
-
-
6
-
6
Distributions to noncontrolling shareholders
-
-
-
-
-
(1)
(1)
Change in fair value of redeemable securities
-
-
28
-
-
-
28
Noncontrolling interests and adjustments related to
-
business acquisitions
-
-
(1)
-
-
-
(1)
Repurchases and retirement of common stock
(659,681)
-
(6)
(44)
-
-
(50)
Stock-based compensation expense
23,985
-
14
-
-
-
14
Stock issued upon exercise of stock options
3,884
-
-
-
-
-
-
Shares withheld for payroll taxes
(9,183)
-
-
-
-
-
-
Settlement of stock-based compensation awards
72
-
-
-
-
-
-
Transfer of charges in excess of
capital
-
-
(35)
35
-
-
-
Balance, September 30, 2023
129,935,883
$
1
$
-
$
3,897
$
(247)
$
629
$
4,280
Table of Contents
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)
Interests
Equity
Balance, December 30, 2023
129,247,765
$
1
$
-
$
3,860
$
(206)
$
634
$
4,289
Net income (excluding loss of $
0
attributable to Redeemable
noncontrolling interests)
-
-
-
296
-
6
302
Foreign currency translation gain/(loss) (excluding loss of $
4
attributable to Redeemable noncontrolling interests)
-
-
-
-
(55)
1
(54)
Unrealized loss from hedging activities,
net of tax benefit of $
1
-
-
-
-
(3)
-
(3)
Distributions to noncontrolling shareholders
-
-
-
-
-
(5)
(5)
Purchase of noncontrolling interests
-
-
(7)
-
-
(1)
(8)
Change in fair value of redeemable securities
-
-
(87)
-
-
-
(87)
Noncontrolling interests and adjustments related to
business acquisitions
-
-
(8)
-
-
1
(7)
Repurchase and retirement of common stock
(4,368,510)
-
(42)
(271)
-
-
(313)
Stock issued upon exercise of stock options
47,688
-
3
-
-
-
3
Stock-based compensation expense
337,753
-
30
-
-
-
30
Shares withheld for payroll taxes
(110,566)
-
(9)
-
-
-
(9)
Settlement of stock-based compensation awards
64
-
1
-
-
-
1
Transfer of charges in excess of
capital
-
-
119
(119)
-
-
-
Balance, September 28, 2024
125,154,194
$
1
$
-
$
3,766
$
(264)
$
636
$
4,139
Accumulated
Common Stock
Additional
Other
Total
$.01 Par Value
Paid-in
Retained
Comprehensive
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income / (Loss)
Interests
Equity
Balance, December 31, 2022
131,792,817
$
1
$
-
$
3,678
$
(233)
$
649
$
4,095
Net income (excluding $
11
attributable to Redeemable
noncontrolling interests)
-
-
-
398
-
10
408
Foreign currency translation loss (excluding loss of $
1
attributable to Redeemable noncontrolling interests)
-
-
-
-
(16)
-
(16)
Unrealized gain from hedging activities,
net of tax of $
1
-
-
-
-
2
-
2
Distributions to noncontrolling shareholders
-
-
-
-
-
(28)
(28)
Change in fair value of redeemable securities
-
-
14
-
-
-
14
Noncontrolling interests and adjustments related to
business acquisitions
-
-
-
-
-
(2)
(2)
Repurchases and retirement of common stock
(2,521,695)
-
(26)
(175)
-
-
(201)
Stock-based compensation expense
1,060,883
-
38
-
-
-
38
Stock issued upon exercise of stock options
19,744
-
1
-
-
-
1
Shares withheld for payroll taxes
(415,048)
-
(32)
-
-
-
(32)
Settlement of stock-based compensation awards
(818)
-
1
-
-
-
1
Transfer of charges in excess of
capital
-
-
4
(4)
-
-
-
Balance, September 30, 2023
129,935,883
$
1
$
-
$
3,897
$
(247)
$
629
$
4,280
Table of Contents
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:
Net income
$
302
$
419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
221
180
Non-cash restructuring charges
11
13
Stock-based compensation expense
30
38
Provision for losses on trade and other accounts receivable
12
7
Benefit from deferred income taxes
(41)
(4)
Equity in earnings of affiliates
(12)
(10)
Distributions from equity affiliates
10
12
Changes in unrecognized tax benefits
3
5
Other
(25)
(11)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
188
(72)
Inventories
38
180
Other current assets
38
(55)
Accounts payable and accrued expenses
(131)
(170)
Net cash provided by operating activities
644
532
Cash flows from investing activities:
Purchases of property and equipment
(112)
(108)
Payments related to equity investments and business acquisitions,
net of cash acquired
(223)
(668)
Proceeds from loan to affiliate
3
4
Capitalized software costs
(30)
(30)
Other
(10)
(6)
Net cash used in investing activities
(372)
(808)
Cash flows from financing activities:
Net change in bank credit lines
374
(98)
Proceeds from issuance of long-term debt
120
1,158
Principal payments for long-term debt
(193)
(457)
Debt issuance costs
-
(3)
Proceeds from issuance of stock upon exercise of stock options
3
1
Payments for repurchases and retirement of common stock
(310)
(200)
Payments for taxes related to shares withheld for employee taxes
(9)
(34)
Distributions to noncontrolling shareholders
(36)
(41)
Acquisitions of noncontrolling interests in subsidiaries
(255)
(19)
Net cash provided by (used in) financing activities
(306)
307
Effect of exchange rate changes on cash and cash equivalents
(11)
18
Net change in cash and cash equivalents
(45)
49
Cash and cash equivalents, beginning of period
171
117
Cash and cash equivalents, end of period
$
126
$
166
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
9
Note 1 – Basis of Presentation
Our condensed consolidated financial statements include the accounts of Henry
Schein, Inc., and all of our
controlled subsidiaries (“we”, “us” and “our”).
All intercompany accounts and transactions are eliminated in
consolidation.
Investments in unconsolidated affiliates for which we have the ability to influence
the operating or
financial decisions are accounted for under the equity method.
Certain prior period amounts have been reclassified
to conform to the current period presentation.
These reclassifications, individually and in the aggregate, did
not
have a material impact on our condensed consolidated financial condition,
results of operations or cash flows.
Our accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with
accounting principles generally accepted in the United States
(“U.S. GAAP”) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the
information and footnote disclosures required by U.S. GAAP for complete
financial statements.
The unaudited interim condensed consolidated financial statements should be
read in conjunction with the audited
consolidated financial statements and notes to the consolidated financial
statements contained in our Annual Report
on Form 10-K for the year ended December 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.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United
States requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results of
operations for the three and nine months ended September 28, 2024
are not necessarily indicative of the results to
be expected for any other interim period or for the year ending December 28, 2024.
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.
We consolidate the results of operations and financial position of a trade accounts receivable securitization which
we consider a VIE because we are its primary beneficiary, as we have the power to direct activities that most
significantly affect its economic performance and have the obligation to absorb the
majority of its losses or
benefits.
For this VIE, the trade accounts receivable transferred
to the VIE are pledged as collateral to the related
debt.
The VIE’s creditors have recourse to us for losses on these trade accounts receivable.
At September 28, 2024
and December 30, 2023, certain trade accounts receivable that can
only be used to settle obligations of this VIE
were $
341
million and $
284
million, respectively, and the liabilities of this VIE where the creditors have recourse
to us were $
210
million and $
210
million, respectively.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
10
Note 2 – Significant Accounting Policies and Recently Issued Accounting
Standards
Significant Accounting Policies
There have been no material changes in our significant accounting policies during
the three and nine months ended
September 28, 2024, as compared to the significant accounting policies
described in Item 8 of our Annual Report
on Form 10-K for the year ended December 30, 2023.
Recently Issued Accounting Standards
In March 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2024-01, “
Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and
Similar Awards,
” which clarifies how to determine whether profits interest and
similar awards should be accounted
for as a share-based payment arrangement under Topic 718 or within the scope of other guidance.
The ASU
provides an illustrative example with multiple fact patterns and amends
the structure of paragraph 718-10-15-3 of
Topic 718 to improve its clarity and operability.
The guidance in ASU 2024-01 applies to all entities that
issue
profits interest awards as compensation to employees or nonemployees
in exchange for goods or services.
Entities
can apply the amendments either retrospectively to all periods presented
in the financial statements or prospectively
to profits interest awards granted or modified on or after the date
of adoption.
If prospective application is elected,
an entity must disclose the nature of and reason for the change in accounting principle
that resulted from the
adoption of the ASU.
This ASU is effective for fiscal years beginning after December 15, 2024,
including interim
periods within those fiscal years.
We do not expect that the requirements of ASU 2024 – 01 will have a material
impact on our consolidated financial statements.
In December 2023, FASB issued ASU 2023-09, “
Income Taxes (Topic
740): Improvements to Income Tax
Disclosures
,” which requires public business entities to disclose additional
information in specified categories with
respect to the reconciliation of the effective tax rate to the statutory rate for federal, state and
foreign income taxes.
It also requires greater detail about individual reconciling items in
the rate reconciliation to the extent the impact of
those items exceeds a specified threshold.
In addition to new disclosures associated with the rate reconciliation,
the
ASU requires information pertaining to taxes paid (net of refunds received)
to be disaggregated for federal, state
and foreign taxes and further disaggregated for specific jurisdictions
to the extent the related amounts exceed a
quantitative threshold.
The ASU also describes items that need to be disaggregated
based on their nature, which is
determined by reference to the item’s fundamental or essential characteristics, such as the transaction or event
that
triggered the establishment of the reconciling item and the activity with which
the reconciling item is associated.
The ASU eliminates the historic requirement that entities disclose information
concerning unrecognized tax
benefits having a reasonable possibility of significantly increasing
or decreasing in the 12 months following the
reporting date.
This ASU is effective for annual periods beginning after December 15, 2024.
Early adoption is
permitted for annual financial statements that have not yet been
issued or made available for issuance.
This ASU
should be applied on a prospective basis; however, retrospective application is permitted.
We are currently
evaluating the impact that ASU 2023-09 will have on our consolidated
financial statements.
In November 2023, the FASB issued ASU 2023-07, “
Segment Reporting (Topic 280): Improvements to Reportable
Segments
,” which aims to improve financial reporting by requiring disclosure
of incremental segment information
on an annual and interim basis for all public entities to enable investors to
develop more decision-useful financial
analyses.
Currently, Topic
280 requires that a public entity disclose certain information about its
reportable
segments.
For example, a public entity is required to report a measure of
segment profit or loss that the chief
operating decision maker uses to assess segment performance and
make decisions about allocating resources.
Topic 280 also requires other specified segment items and amounts, such as depreciation, amortization and
depletion expense, to be disclosed under certain circumstances.
The amendments in this ASU do not change or
remove those disclosure requirements and do not change how a public
entity identifies its operating segments,
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
11
aggregates those operating segments or applies the quantitative thresholds
to determine its reportable segments.
This ASU is effective for fiscal years beginning after December 15, 2023, and interim
periods within fiscal years
beginning after December 15, 2024.
Early adoption is permitted.
We are currently evaluating the impact that ASU
2023- 07 will have on our consolidated financial statements.
Note 3 – 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.
During the three and nine months ended September 28, 2024, we
incurred $
1
million and $
9
million, respectively,
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 $
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.
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.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
12
Note 4 – Net Sales from Contracts with Customers
Net sales are recognized in accordance with policies disclosed in Item
8 of our Annual Report on Form 10-K for
the year ended December 30, 2023.
Disaggregation of Net Sales
The following table disaggregates our net sales by reportable and operating segment
and geographic area:
Three Months Ended
Nine Months Ended
September 28, 2024
September 28, 2024
North
America
International
Global
North
America
International
Global
Net sales:
Health care distribution
Dental
$
1,089
$
763
$
1,852
$
3,321
$
2,369
$
5,690
Medical
1,076
25
1,101
3,060
80
3,140
Total health care distribution
2,165
788
2,953
6,381
2,449
8,830
Technology
and value-added services
190
31
221
565
87
652
Total net sales
$
2,355
$
819
$
3,174
$
6,946
$
2,536
$
9,482
Three Months Ended
Nine Months Ended
September 30, 2023
September 30, 2023
North
America
International
Global
North
America
International
Global
Net sales:
Health care distribution
Dental
$
1,134
$
748
$
1,882
$
3,447
$
2,290
$
5,737
Medical
1,044
26
1,070
2,920
71
2,991
Total health care distribution
2,178
774
2,952
6,367
2,361
8,728
Technology
and value-added services
185
25
210
519
75
594
Total net sales
$
2,363
$
799
$
3,162
$
6,886
$
2,436
$
9,322
Contract Liabilities
At September 28, 2024,
December 30, 2023, and December 31, 2022, the current and non-current
contract
liabilities were $
76
million and $
8
million; $
89
million and $
9
million; and $
86
million and $
8
million,
respectively.
During the nine months ended September 28, 2024, we recognized,
in net sales, $
72
million of the
amount that was previously deferred at December 30, 2023.
During the nine months ended September 30, 2023,
we recognized in net sales $
70
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.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
13
Note 5
–
Segment Data
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.
Our
dental and medical groups serve practitioners in
33
countries worldwide.
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:
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Net sales:
Health care distribution
(1)
Dental
$
1,852
$
1,882
$
5,690
$
5,737
Medical
1,101
1,070
3,140
2,991
Total health care distribution
2,953
2,952
8,830
8,728
Technology
and value-added services
(2)
221
210
652
594
Total
$
3,174
$
3,162
$
9,482
$
9,322
(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.
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Operating Income:
Health care distribution
$
118
$
160
$
390
$
471
Technology
and value-added services
39
40
76
105
Total
$
157
$
200
$
466
$
576
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
14
Note 6
–
Business Acquisitions
Our acquisition strategy is focused on investments in companies that
add new customers and sales teams, increase
our geographic footprint (whether entering a new country, such as emerging markets, or building scale where we
have already invested in businesses), and finally, those that enable us to access new products and technologies.
Acquisition of TriMed
On April 1, 2024, we acquired a
60
% voting equity interest in TriMed Inc. (“TriMed”), a global developer of
solutions for the orthopedic treatment of lower and upper extremities, headquartered
in California.
The following table aggregates
the preliminary estimated fair value, as of the date of acquisition, of
consideration
paid and net assets acquired in the TriMed acquisition:
2024
Acquisition consideration:
Cash
$
141
Deferred consideration
22
Redeemable noncontrolling interests
153
Total consideration
$
316
Identifiable assets acquired and liabilities assumed:
Current assets
$
36
Intangible assets
221
Other noncurrent assets
10
Current liabilities
(9)
Deferred income taxes
(62)
Other noncurrent liabilities
(6)
Total identifiable
net assets
190
Goodwill
126
Total net assets acquired
$
316
Goodwill is a result of synergies that are expected to originate from the acquisition as well as
the expected growth
potential of TriMed.
The acquired goodwill is not deductible for tax purposes.
The following table summarizes the identifiable intangible assets acquired
as part of the acquisition of TriMed:
2024
Weighted Average
Useful
Lives (in years)
Product development
$
204
9
Trademarks / Tradenames
9
7
In process research & development
8
Not Applicable
Total
$
221
Except for in-process research and development (“IPR&D”), intangible assets
acquired as a result of the TriMed
acquisition are being amortized over their estimated useful lives
using the straight-line method of amortization.
The IPR&D is accounted for as an indefinite-lived intangible asset and
is not amortized until completion or
abandonment of the associated research and development efforts.
IPR&D is tested for impairment annually or
periodically if an indicator of impairment exists during the period until completion.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
15
The accounting for the acquisition of TriMed has not been completed in several areas,
including but not limited to
pending assessments of accounts receivable, right-of-use lease assets,
accrued liabilities, lease liabilities, income
and non-income based taxes.
During the three months ended September 28, 2024, we did not
record any material
measurement period adjustments.
We expect to finalize these amounts as soon as possible but no later than one
year from the acquisition date.
Pro forma financial information has not been presented because the
impact of the TriMed acquisition during the
three and nine months ended September 28, 2024 was immaterial
to our condensed consolidated financial
statements.
Other 2024 Acquisitions
During the nine months ended September 28, 2024, we acquired companies
within the health care distribution and
technology and value-added services segments.
Our acquired ownership interest in these companies range from
51
% to
100
%.
Total consideration for these acquisitions was $
113
million.
Net assets acquired primarily consisted
of $
59
million of goodwill and $
64
million of intangible assets.
The intangible assets acquired consisted of
customer relationships and lists of $
33
million, trademarks and tradenames of $
24
million, product development of
$
5
million and non-compete agreements of $
2
million.
Weighted average useful lives for these acquired intangible
assets were
11
years,
7
years,
9
years and
5
years, respectively.
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 $
19
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
Note 7 – Fair Value Measurements
,
which was recorded in selling, general and administrative
in the condensed
consolidated statements of income.
The impact of these acquisitions, individually and in the aggregate, was
not considered material to our condensed
consolidated financial statements.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
16
2023 Acquisitions
Acquisition of Shield Healthcare
On October 2, 2023, we acquired a
90
% voting equity interest in Shield Healthcare, Inc. (“Shield”), a
supplier of
homecare medical products delivered directly to patients in their homes,
for consideration of $
348
million
(including cash paid of $
289
million, deferred consideration of $
22
million and redeemable noncontrolling interests
of $
37
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.
During the quarter ended June 29, 2024, we completed the accounting for our
acquisition of Shield.
The following
table aggregates the final fair value, as of the date of the acquisition, of consideration
paid and net assets acquired
in the Shield acquisition:
Final
Allocation
Acquisition consideration:
Cash
$
289
Deferred consideration
22
Redeemable noncontrolling interests
37
Total consideration
$
348
Identifiable assets acquired and liabilities assumed:
Current assets
$
41
Intangible assets
166
Other noncurrent assets
16
Current liabilities
(24)
Deferred income taxes
(43)
Other noncurrent liabilities
(7)
Total identifiable
net assets
149
Goodwill
199
Total net assets acquired
$
348
Goodwill is a result of synergies that are expected to originate from the acquisition as well as
the expected growth
potential of Shield.
The acquired goodwill is not deductible for tax purposes.
The following table summarizes the identifiable intangible assets acquired
as part of the acquisition of Shield:
2023
Weighted Average
Useful Lives
(in years)
Customer relationships and lists
$
156
12
Trademarks / Tradenames
10
5
Total
$
166
Pro forma financial information has not been presented because the impact of
the Shield acquisition was immaterial
to our consolidated financial statements.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
17
Acquisition of S.I.N. Implant System
On July 5, 2023, we acquired a
100
% voting equity interest in S.I.N. Implant System (“S.I.N.”) for consideration
of
$
329
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
.
During the quarter ended June 29, 2024, we completed the accounting for our
acquisition of S.I.N.
The following
table aggregates the final fair value, as of the date of acquisition, of consideration
paid and net assets acquired in
the S.I.N. acquisition:
Final Allocation
Acquisition consideration:
Cash
$
329
Total consideration
$
329
Identifiable assets acquired and liabilities assumed:
Current assets
$
73
Intangible assets
87
Other noncurrent assets
48
Current liabilities
(33)
Long-term debt
(22)
Deferred income taxes
(38)
Other noncurrent liabilities
(27)
Total identifiable
net assets
88
Goodwill
241
Total net assets acquired
$
329
Goodwill is a result of synergies that are expected to originate from the acquisition as well as
the expected growth
potential of S.I.N.
The acquired goodwill is not deductible for tax purposes.
The following table summarizes the identifiable intangible assets acquired
as part of the acquisition of S.I.N.:
2023
Weighted Average
Useful Lives
(in years)
Customer relationships and lists
$
38
7
Product development
36
8
Trademarks / Tradenames
13
10
Total
$
87
Pro forma financial information has not been presented because the impact
of the S.I.N. acquisition was immaterial
to our consolidated financial statements.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
18
Acquisition of Biotech Dental
On April 5, 2023, we acquired a
57
% 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 $
423
million (including cash paid of $
216
million, $
25
million of contributed equity share in a
controlled subsidiary, and redeemable noncontrolling interests of $
182
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.
During the quarter ended March 30, 2024, we completed the accounting
for our acquisition of Biotech Dental.
The
following table aggregates the final fair value, as of the date of acquisition,
of consideration paid and net assets
acquired in the Biotech Dental acquisition:
Final Allocation
Acquisition consideration:
Cash
$
216
Fair value of contributed equity share in a controlled subsidiary
25
Redeemable noncontrolling interests
182
Total consideration
$
423
Identifiable assets acquired and liabilities assumed:
Current assets
$
74
Intangible assets
189
Other noncurrent assets
69
Current liabilities
(60)
Long-term debt
(73)
Deferred income taxes
(53)
Other noncurrent liabilities
(20)
Total identifiable
net assets
126
Goodwill
297
Total net assets acquired
$
423
Goodwill is a result of synergies that are expected to originate from the acquisition as well as
the expected growth
potential of Biotech Dental.
The acquired goodwill is not deductible for tax purposes.
The following table summarizes the identifiable intangible assets acquired
as part of the acquisition of Biotech
Dental:
2023
Weighted Average
Useful
Lives (in years)
Product development
$
124
10
Customer relationships and lists
47
9
Trademarks / Tradenames
18
7
Total
$
189
Pro forma financial information has not been presented because the
impact of the Biotech Dental acquisition was
immaterial to our condensed consolidated financial statements.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
19
Other 2023 Acquisitions
During the year ended December 30, 2023, in addition to those noted above,
we acquired companies within the
health care distribution and technology and value-added services segments.
Our acquired ownership interest ranged
between
51
% to
100
%.
During the three and nine months ended September 28, 2024, we recorded
an adjustment of
$
0
million and $
38
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.
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 deductible for
tax
purposes.
Pro forma financial information for our 2023 acquisitions has not been
presented because the impact of the
acquisitions was immaterial to our condensed consolidated
financial statements.
Acquisition Costs
During the three and nine months ended September 28, 2024, we
incurred $
2
million and $
5
million in acquisition
costs, respectively.
During the three and nine months ended September 30, 2023,
we incurred $
6
million and $
18
million in acquisition costs, respectively.
These costs are included in selling, general and administrative
in our
condensed consolidated statements of income.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
20
Note 7 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The fair value hierarchy distinguishes between
(1) market participant assumptions developed based on market data obtained
from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the
highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority
to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described as follows:
•
Level 1— Unadjusted quoted prices in active markets for identical assets
or liabilities that are accessible at the
measurement date.
•
Level 2— Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability,
either directly or indirectly.
Level 2 inputs include: quoted prices for similar assets or liabilities in active
markets;
quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted
prices that are observable for the asset or liability; and inputs that are
derived principally from or corroborated by
observable market data by correlation or other means.
•
Level 3— Inputs that are unobservable for the asset or liability.
The following section describes the fair values of our financial instruments
and the methodologies that we used to
measure their fair values.
Investments and notes receivable
There are no quoted market prices available for investments in unconsolidated
affiliates and notes receivable.
Certain of our notes receivable contain variable interest rates.
We believe the carrying amounts are a reasonable
estimate of fair value based on the interest rates in the applicable
markets.
Our investments and notes receivable
fair value is based on Level 3 inputs within the fair value hierarchy.
Debt
The fair value of our debt (including bank credit lines, current maturities
of long-term debt and long-term debt) is
based on Level 3 inputs within the fair value hierarchy, and as of September 28, 2024 and December 30, 2023 was
estimated at $
2,653
million and $
2,351
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.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
21
The fair value of the interest rate swap, which is classified within Level 2
of the fair value hierarchy, is determined
by comparing our contract rate to a forward market rate as of the
valuation date.
The fair value of total return swaps is determined by valuing the underlying
exchange traded funds of the swap
using market-on-close pricing by industry providers as of the valuation
date that are classified within Level 2 of the
fair value hierarchy.
Redeemable noncontrolling interests
The values for redeemable noncontrolling interests are based on recent
transactions and/or implied multiples of
earnings that are classified within Level 3 of the fair value hierarchy.
See
Note 13 – Redeemable Noncontrolling
Interests
for additional information.
Intangible Assets
Assets measured on a non-recurring basis at fair value include intangibles.
Inputs for measuring intangibles are
classified as Level 3 within the fair value hierarchy.
Contingent Consideration
We estimate the fair value of contingent consideration payments as part of the acquisition price and record the
estimated fair value of contingent consideration as a liability on our
condensed consolidated balance sheet.
For
transactions accounted for as business combinations, subsequent changes
in the estimated fair value of contingent
consideration payments are included in selling, general, and administrative
expenses in our condensed consolidated
statements of income.
For transactions involving changes in our ownership in subsidiaries
without a change in our
control, subsequent changes in the estimated fair value of contingent consideration
payments are recognized in
additional paid-in capital in our condensed consolidated balance sheet.
We measure contingent consideration at the
fair value on a recurring basis using significant unobservable inputs classified
as Level 3 of the fair value
hierarchy.
We use various valuation techniques, including the Monte Carlo simulation and probability-weighted
scenarios, to determine the fair value of the contingent consideration liabilities on
the acquisition date and at each
reporting period.
Our fair value measurement inputs include expected operating
performance, discount and risk-
free rates, and credit spread.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
22
The following table presents our assets and liabilities that are measured and
recognized at fair value on a recurring
basis classified under the appropriate level of the fair value hierarchy as of
September 28, 2024 and December 30,
2023:
September 28, 2024
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
-
$
-
$
-
Derivative contracts undesignated
-
2
-
2
Total return
swap
-
2
-
2
Total assets
$
-
$
4
$
-
$
4
Liabilities:
Derivative contracts designated as hedges
$
-
$
18
$
-
$
18
Derivative contracts undesignated
-
3
-
3
Contingent consideration
-
-
49
49
Total liabilities
$
-
$
21
$
49
$
70
Redeemable noncontrolling interests
$
-
$
-
$
832
$
832
December 30, 2023
Level 1
Level 2
Level 3
Total
Assets:
Derivative contracts designated as hedges
$
-
$
1
$
-
$
1
Derivative contracts undesignated
-
1
-
1
Total return
swap
-
4
-
4
Total assets
$
-
$
6
$
-
$
6
Liabilities:
Derivative contracts designated as hedges
$
-
$
18
$
-
$
18
Derivative contracts undesignated
-
2
-
2
Total liabilities
$
-
$
20
$
-
$
20
Redeemable noncontrolling interests
$
-
$
-
$
864
$
864
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
23
Note 8 – Debt
Bank Credit Lines
Bank credit lines consisted of the following:
September 28,
December 30,
2024
2023
Revolving credit agreement
$
50
$
200
Other short-term bank credit lines
588
64
Total
$
638
$
264
Revolving Credit Agreement
On
August 20, 2021
, we entered into a $
1.0
billion revolving credit agreement (the “Revolving Credit Agreement”)
which was subsequently amended and restated on
July 11, 2023
to extend the maturity date to
July 11, 2028
and
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
4.96
% plus
1.18
% for a combined rate of
6.14
%.
As of December
30, 2023 the interest rate on this revolving credit facility was
5.36
% plus
1.00
% for a combined rate of
6.36
%.
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 $
50
million and $
200
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 $
64
million.
As of September 28, 2024 and December 30,
2023, there were $
11
million and $
10
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 $
689
million and $
368
million, respectively.
As of
September 28, 2024 and December 30, 2023, $
588
million and $
64
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 $
426
million.
As of September 28, 2024 and December 30, 2023, borrowings
under other short-term bank credit lines had weighted average interest
rates of
5.94
% and
6.02
%, respectively.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
24
Long-term debt
Long-term debt consisted of the following:
September 28,
December 30,
2024
2023
Private placement facilities
$
1,024
$
1,074
Term loan
722
741
U.S. trade accounts receivable securitization
210
210
Various
collateralized and uncollateralized loans payable with interest,
in varying installments through 2031 at interest rates
from
0.00
% to
9.42
% at September 28, 2024 and
from
0.00
% to
9.42
% at December 30, 2023
52
54
Finance lease obligations
7
8
Total
2,015
2,087
Less current maturities
(109)
(150)
Total long-term debt
$
1,906
$
1,937
Private Placement Facilities
Our private placement facilities provided by
four
insurance companies, have a total facility amount of $
1.5
billion,
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
October 20, 2026
.
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
to
15 years
(with an average life no longer
than
12
years).
The proceeds of any issuances under the facilities will be used
for general corporate purposes,
including working capital and capital expenditures, to refinance existing
indebtedness, and/or to fund potential
acquisitions.
The agreements provide, among other things, that we maintain
certain maximum leverage ratios, and
contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions,
disposal of assets and certain
changes in ownership.
These facilities contain make-whole provisions in the event that we
pay off the facilities
prior to the applicable due dates.
The components of our private placement facility borrowings, which
have a weighted average interest rate of
3.66
%, as of September 28, 2024 are presented in the following table:
Amount of
Date of
Borrowing
Borrowing
Borrowing
Outstanding
Rate
Due Date
December 24, 2012
$
50
3.00
%
December 24, 2024
June 16, 2017
100
3.42
June 16, 2027
September 15, 2017
100
3.52
September 15, 2029
January 2, 2018
100
3.32
January 2, 2028
September 2, 2020
100
2.35
September 2, 2030
June 2, 2021
100
2.48
June 2, 2031
June 2, 2021
100
2.58
June 2, 2033
May 4, 2023
75
4.79
May 4, 2028
May 4, 2023
75
4.84
May 4, 2030
May 4, 2023
75
4.96
May 4, 2033
May 4, 2023
150
4.94
May 4, 2033
Less: Deferred debt issuance costs
(1)
Total
$
1,024
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
25
Term Loan
On July 11, 2023, we entered into a
three-year
$
750
million term loan credit agreement (the “Term Credit
Agreement”).
The interest rate on this term loan is based on the
Term SOFR
plus a spread based on our leverage
ratio at the end of each financial reporting quarter.
This term loan matures on
July 11, 2026
.
We are required to
make quarterly payments of $
9
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 $
5
million from September 2023
through June 2024.
As of September 28, 2024, the borrowings outstanding under
this term loan were $
722
million.
At September 28, 2024, the interest rate under the Term Credit Agreement was
5.10
% plus
1.60
% for a combined
rate of
6.70
%.
As of December 30, 2023, the borrowings outstanding under
this term loan were $
741
million.
At
December 30, 2023, the interest rate under the Term Credit Agreement was
5.36
% plus
1.35
% for a combined rate
of
6.71
%.
However, we have a hedge in place that ultimately creates an effective fixed rate of
6.04
% and
5.79
% 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.
U.S. Trade Accounts Receivable Securitization
We have a facility agreement based on our U.S. trade accounts receivable that is structured as an asset-backed
securitization program with pricing committed for up to
three years
.
This facility agreement has a purchase limit of
$
450
million with
two
banks as agents, and expires on
December 15, 2025
.
As of September 28, 2024 and December 30, 2023, the borrowings
outstanding under this securitization facility
were $
210
million and $
210
million, respectively.
At September 28, 2024, the interest rate on borrowings under
this facility was based on the
asset-backed commercial paper rate
of
5.28
% plus
0.75
%, for a combined rate of
6.03
%.
At December 30, 2023, the interest rate on borrowings under
this facility was based on the asset-backed
commercial paper rate of
5.67
% plus
0.75
%, for a combined rate of
6.42
%.
If our accounts receivable collection pattern changes due to customers
either paying late or not making payments,
our ability to borrow under this facility may be reduced.
We are required to pay a commitment fee of
30
to
35
basis points depending upon program utilization.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
26
Note 9 – Income Taxes
For the nine months ended September 28, 2024 our effective tax rate was
25.1
%, compared to
22.5
% for the prior
year period.
The difference between our effective tax rate and the federal statutory tax rate primarily
relates to state
and foreign income taxes and interest expense.
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 $
107
million and $
115
million,
respectively, of which $
99
million and $
107
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 $
1
million and $
3
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 $
18
million as of September 28, 2024 and $
16
million as
of December 30, 2023.
The amount of penalties accrued for during the periods presented was not
material to our
condensed consolidated financial statements.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
27
Note 10 – 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
remainder of 2024.
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.
Restructuring costs recorded for the three and nine months ended September
28, 2024 and September 30, 2023, in
connection with the 2022 Plan and 2024 Plan consisted of the following:
Three Months Ended
September 28, 2024
Nine Months Ended
September 28, 2024
Health Care
Distribution
Technology
and Value-
Added Services
Total
Health Care
Distribution
Technology
and Value-
Added Services
Total
2024 Plan
Severance and employee-related costs
$
26
$
5
$
31
$
26
$
5
$
31
Accelerated depreciation and amortization
2
2
4
2
2
4
Exit and other related costs
1
-
1
1
-
1
Restructuring costs-2024 Plan
$
29
$
7
$
36
$
29
$
7
$
36
2022 Plan
Severance and employee-related costs
$
7
$
1
$
8
$
21
$
3
$
24
Accelerated depreciation and amortization
1
-
1
7
-
7
Exit and other related costs
1
2
3
4
2
6
Restructuring costs-2022 Plan
$
9
$
3
$
12
$
32
$
5
$
37
Total restructuring
costs
$
38
$
10
$
48
$
61
$
12
$
73
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
28
Three Months Ended
September 30, 2023
Nine Months Ended
September 30, 2023
Health Care
Distribution
Technology
and Value-
Added Services
Total
Health Care
Distribution
Technology
and Value-
Added Services
Total
2022 Plan
Severance and employee-related costs
$
6
$
-
$
6
$
36
$
4
$
40
Accelerated depreciation and amortization
3
1
4
12
2
14
Exit and other related costs
1
-
1
3
1
4
Loss on disposal of a business
-
-
-
1
-
1
Total restructuring
costs
$
10
$
1
$
11
$
52
$
7
$
59
The following table summarizes,
by plan year, the activity related to the liabilities associated with our restructuring
initiatives under the 2022 Plan and the 2024 Plan for the nine months
ended September 28, 2024.
The remaining
accrued balance of restructuring costs as of September 28, 2024, which
primarily relates to severance and
employee-related costs, is included in accrued expenses: other within
our condensed consolidated balance sheets.
Liabilities related to exited leased facilities are recorded within our current
and non-current operating lease
liabilities within our condensed consolidated balance sheets.
2022 Plan
2024 Plan
Total
Balance, December 30, 2023
$
23
$
-
$
23
Restructuring costs
37
36
73
Non-cash accelerated depreciation and amortization
(7)
(4)
(11)
Cash payments and other adjustments
(35)
(7)
(42)
Balance, September 28, 2024
$
18
$
25
$
43
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
29
Note 11 – Legal Proceedings
Henry Schein, Inc. has been named as a defendant in multiple opioid
related lawsuits (currently less than one-
hundred and seventy-five (
175
); 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
25
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 $
12.3
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
Note 3 – Cyber Incident
.
On January 26, 2024, a second putative class
action was filed against the Company based on the cyber incident, also
in the EDNY,
Case No. 24-cv-550 (the
“Depperschmidt Action”).
On February 12, 2024, the Depperschmidt Action was voluntarily dismissed
without
prejudice.
On February 16, 2024, an amended complaint was filed in
the Cruz-Bermudez Action with additional
plaintiffs’ counsel from the Depperschmidt Action and an additional new plaintiff.
Plaintiffs in the Cruz-Bermudez Action seek to represent a class of all individuals
whose personally identifying
information and personal health information was compromised by
the incident.
Plaintiffs generally claim to have
been harmed by alleged actions and/or omissions by the Company
in connection with the incident and that the
Company made deceptive public statements regarding privacy and data protection.
Plaintiffs assert a variety of
claims seeking monetary damages, injunctive relief, costs and attorneys’
fees, and other related relief.
On March
22, 2024, plaintiffs voluntarily withdrew two of their five causes of action.
On April 8, 2024, the court denied the
Company’s motion to dismiss the remaining claims.
The case remains pending.
On June 6, 2024, plaintiffs and the Company informed the court that they had agreed
to a term sheet for a class
action settlement of the Cruz-Bermudez Action.
Plaintiffs and the Company entered into a class action settlement
agreement on September 13, 2024, and the court preliminarily approved
the settlement on September 16,
2024.
Under the terms of the proposed settlement, all claims in the Cruz-Bermudez
Action will be dismissed, the
Cruz-Bermudez Action will be terminated, the Company will receive
a release of claims from the class, and the
Company will pay $
2.9
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.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
30
Henry Schein, Inc. and its subsidiary, North American Rescue, LLC (“NAR”), were named as defendants in a qui
tam lawsuit brought under the federal False Claims Act (“FCA”),
in an action entitled
Russ and Murphy ex rel.
United States v. North American Rescue, LLC et al.
; Case No. 21-cv-04238, filed in the United States District
Court
for the Eastern District of Pennsylvania.
The case was filed under seal in 2021 by two relators (Corey
Russ and
Chris Murphy) who worked for one of NAR’s competitors.
Relators also name C-A-T Resources, LLC (“CAT-R”)
as a defendant.
CAT
-R manufactures one of the products at issue in the case (the
combat application tourniquet, or
“CAT”).
After the Department of Justice declined to intervene, the case was unsealed,
and Relators filed their first
amended complaint in November 2023.
In response to motions to dismiss filed by Henry Schein, NAR
and CAT-
R, Relators requested and obtained leave to file their Second Amended
Complaint on April 24, 2024.
On July 26,
2024, the court ruled on motions to dismiss filed by Henry Schein,
NAR and CAT-R.
The court dismissed the
claims against Henry Schein (without prejudice).
The motions to dismiss filed by NAR and CAT-R were
denied.
Relators’ FCA claims are based on allegations that NAR made false
representations and certifications in
connection with, and sold and submitted false claims for payment to the federal
government for, various medical
products that Relators contend violated certain “Buy American”
laws (e.g., the Berry Amendment and Trade
Agreements Act of 1979) and/or were not properly sterilized as noted
on the products’ packaging, and thus
misbranded.
These products include the CAT,
syringes, compressed gauze, tracheostomy kits, hypothermia
blankets, eye, ear, nose and throat kits, and trauma dressing.
Relators sought three times the amount of damages to
be proved at trial, statutory civil penalties, reasonable expenses, attorneys’
fees and costs, and prejudgment
interest.
Pursuant to a settlement for an immaterial amount, the
court has dismissed the case with prejudice.
From time to time, we may become a party to other legal proceedings,
including, without limitation, product
liability claims, employment matters, commercial disputes, governmental
inquiries and investigations (which may
in some cases involve our entering into settlement arrangements or consent
decrees), and other matters arising out
of the ordinary course of our business.
While the results of any legal proceeding cannot be predicted with certainty,
in our opinion none of these other pending matters are currently
anticipated to have a material adverse effect on our
consolidated financial position, liquidity or results of operations.
As of September 28, 2024, we had accrued our best estimate of potential losses
relating to claims that were
probable to result in liability and for which we were able to reasonably
estimate a loss.
This accrued amount, as
well as related expenses, was not material to our financial position,
results of operations or cash flows.
Our method
for determining estimated losses considers currently available facts,
presently enacted laws and regulations and
other factors, including probable recoveries from third parties.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
31
Note 12 – Stock-Based Compensation
Stock-based awards are provided to certain employees under our 2024 Stock Incentive
Plan (formerly known as our
2020 Stock Incentive Plan) and to non-employee directors under our 2023 Non-Employee
Director Stock Incentive
Plan (together, the “Plans”).
The Plans are administered by the Compensation Committee of the Board
of Directors
(the “Compensation Committee”).
Historically, equity-based awards to our employees have been granted solely in
the form of time-based and performance-based restricted stock units (“RSUs”) with
the exception of our 2021 plan
year in which non-qualified stock options were issued in place of performance-based
RSUs and in 2022, when we
granted time-based and performance-based RSUs, as well as non-qualified
stock options.
Starting with our 2023
plan year,
we returned to granting our employees equity-based awards
solely in the form of time-based and
performance-based RSUs.
Our non-employee directors receive equity-based awards solely in the form
of time-
based RSUs.
RSUs are stock-based awards granted to recipients with specified vesting provisions.
In the case of RSUs, common
stock is delivered on or following satisfaction of vesting conditions.
We issue RSUs to employees that primarily
vest (i) solely based on the recipient’s continued service over time, primarily with
four
-year cliff vesting and/or (ii)
based on achieving specified performance measurements and the recipient’s continued service over time, primarily
with
three
-year cliff vesting.
RSUs granted to our non-employee directors primarily include
12
-month cliff vesting.
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.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
32
Over the performance period, the number of RSUs that will ultimately vest
and be issued and the related
compensation expense is adjusted upward or downward based upon our
estimation of achieving such performance
targets.
The ultimate number of shares delivered to recipients and the related compensation
cost recognized as an
expense is based on our actual performance against the pre-determined performance
metrics (in each case as
adjusted).
Stock options are awards that allow the recipient to purchase shares of our
common stock after vesting at a fixed
price set at the time of grant.
Stock options were granted at an exercise price equal to our
closing stock price on the
date of grant.
Stock options issued in 2021 and 2022 vest
one-third
per year based on the recipient’s continued
service, subject to the terms and conditions of the 2020 Stock Incentive Plan,
are fully vested
three years
from the
grant date and have a contractual term of
ten years
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
no
t grant any stock options.
Our condensed consolidated statements of income reflect pre-tax share-based compensation
expense of $
10
million,
and $
30
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 $
14
million, and $
38
million.
Total unrecognized compensation cost related to unvested awards as of September 28, 2024 was $
83
million, which
is expected to be recognized over a weighted-average period of approximately
2.6
years.
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.
The following table summarizes the stock option activity for the nine months
ended September 28, 2024:
Stock Options
Weighted Average
Weighted Average
Aggregate
Exercise
Remaining Contractual
Intrinsic
Shares
Price
Life (in years)
Value
Outstanding at beginning of period
1,078,459
$
71.46
Granted
-
-
Exercised
(48,842)
62.71
Forfeited
(10,980)
85.31
Outstanding at end of period
1,018,637
$
71.73
6.8
$
6
Options exercisable at end of period
887,589
$
69.70
Weighted Average
Weighted Average
Aggregate
Number of
Exercise
Remaining Contractual
Intrinsic
Options
Price
Life (in years)
Value
Expected to vest
131,048
$
85.51
7.5
$
-
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
33
The following tables summarize the activity of our unvested RSUs for
the nine months ended September 28, 2024:
Time-Based Restricted Stock Units
Performance-Based Restricted Stock Units
Weighted
Weighted
Average
Intrinsic
Average
Intrinsic
Grant Date Fair
Value
Grant Date Fair
Value
Shares/Units
Value Per Share
Per Share
Shares/Units
Value Per Share
Per Share
Outstanding at beginning of period
1,655,393
$
70.34
208,742
$
78.02
Granted
465,339
75.83
329,118
76.70
Vested
(329,115)
63.00
(8,262)
66.53
Forfeited
(87,304)
77.19
(55,976)
79.69
Outstanding at end of period
1,704,313
$
72.92
$
73.22
473,622
$
75.91
$
73.22
Note 13 – Redeemable Noncontrolling Interests
Some minority stockholders in certain of our subsidiaries have the right,
at certain times, to require us to acquire
their ownership interest in those entities at fair value.
Accounting Standards Codification Topic 480-10 is
applicable for noncontrolling interests where we are or may be required
to purchase all or a portion of the
outstanding interest in a consolidated subsidiary from the noncontrolling
interest holder under the terms of a put
option contained in contractual agreements.
The components of the change in the redeemable noncontrolling
interests for the nine months ended September 28, 2024 and the year
ended December 30, 2023 are presented in the
following table:
September 28,
December 30,
2024
2023
Balance, beginning of period
$
864
$
576
Decrease in redeemable noncontrolling interests due to acquisitions of
noncontrolling interests in subsidiaries
(257)
(19)
Increase in redeemable noncontrolling interests due to business acquisitions
172
326
Net income attributable to redeemable noncontrolling interests
-
6
Distributions declared, net of capital contributions
(30)
(19)
Effect of foreign currency translation gain (loss) attributable to
redeemable noncontrolling interests
(4)
5
Change in fair value of redeemable securities
87
(11)
Balance, end of period
$
832
$
864
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
34
Note 14 – Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income and
are recorded directly to stockholders’ equity.
The following table summarizes our Accumulated other comprehensive loss, net of
applicable taxes as of:
September 28,
December 30,
2024
2023
Attributable to redeemable noncontrolling interests:
Foreign currency translation adjustment
$
(36)
$
(32)
Attributable to noncontrolling interests:
Foreign currency translation adjustment
$
-
$
(1)
Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment
$
(243)
$
(188)
Unrealized gain loss from hedging activities
(16)
(13)
Pension adjustment loss
(5)
(5)
Accumulated other comprehensive loss
$
(264)
$
(206)
Total Accumulated
other comprehensive loss
$
(300)
$
(239)
The following table summarizes the components of comprehensive income, net
of applicable taxes as follows:
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Net income
$
99
$
143
$
302
$
419
Foreign currency translation gain (loss)
58
(45)
(58)
(17)
Tax effect
-
-
-
-
Foreign currency translation gain (loss)
58
(45)
(58)
(17)
Unrealized gain (loss) from hedging activities
(25)
9
(4)
3
Tax effect
7
(3)
1
(1)
Unrealized gain (loss) from hedging activities
(18)
6
(3)
2
Comprehensive income
$
139
$
104
$
241
$
404
Our financial statements are denominated in U.S. Dollars.
Fluctuations in the value of foreign currencies as
compared to the U.S. Dollar may have a significant impact on our
comprehensive income.
The foreign currency
translation gain (loss) during the nine months ended September 28, 2024 and
nine months ended September 30,
2023 was primarily due to changes in foreign currency exchange
rates of the Brazilian Real, British Pound, Euro,
Swiss Franc, Canadian Dollar, and Australian Dollar.
The hedging gain (loss) during the three and nine months ended September
28, 2024, and September 30, 2023 was
attributable to a net investment hedge.
The following table summarizes our total comprehensive income, net of
applicable taxes as follows:
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
35
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Comprehensive income attributable to
Henry Schein, Inc.
$
127
$
100
$
238
$
384
Comprehensive income attributable to
noncontrolling interests
-
4
7
10
Comprehensive income (loss) attributable to
Redeemable noncontrolling interests
12
-
(4)
10
Comprehensive income
$
139
$
104
$
241
$
404
Note 15
–
Earnings Per Share
Basic earnings per share is computed by dividing net income attributable
to Henry Schein, Inc. by the weighted-
average number of common shares outstanding for the period.
Our diluted earnings per share is computed similarly
to basic earnings per share, except that it reflects the effect of common shares issuable
for unvested RSUs and upon
exercise of stock options using the treasury stock method in periods
in which they have a dilutive effect.
A reconciliation of shares used in calculating earnings per basic and
diluted share follows:
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Basic
126,124,715
130,388,353
127,550,045
130,888,717
Effect of dilutive securities:
Stock options and restricted stock units
930,219
1,053,782
948,449
1,260,455
Diluted
127,054,934
131,442,135
128,498,494
132,149,172
The number of antidilutive securities that were excluded from the calculation
of diluted weighted average common
shares outstanding are as follows:
Three Months Ended
Nine Months Ended
September 28,
September 30,
September 28,
September 30,
2024
2023
2024
2023
Stock options
412,574
424,005
416,065
426,237
Restricted stock units
17,627
7,362
16,339
15,072
Total anti-dilutive
securities excluded from earnings per
share computation
430,201
431,367
432,404
441,309
Note 16 – Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
Nine Months Ended
September 28,
September 30,
2024
2023
Interest
$
92
$
52
Income taxes
127
178
For the nine months ended September 28, 2024 and September 30, 2023, we had
$
(4)
million and $
3
million of
non-cash net unrealized gains (losses) related to hedging activities,
respectively.
Table of Contents
HENRY SCHEIN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share and per share data)
(unaudited
)
36
Note 17 – Related Party Transactions
In connection with the formation of Henry Schein One, LLC, our joint venture
with Internet Brands, which was
formed on July 1, 2018, we entered into a
ten-year
royalty agreement with Internet Brands whereby we will pay
Internet Brands approximately $
31
million annually for the use of their intellectual property.
During the three and
nine months ended September 28, 2024, we recorded $
8
million and $
23
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
$
8
million and
$
23
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 $
10
million and $
1
million,
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 $
14
million and
$
38
million respectively, to such entities.
During the three and nine months ended September 30, 2023, we
recorded net sales of $
11
million and $
34
million respectively, to such entities.
During the three and nine months
ended September 28, 2024, we purchased $
2
million and $
8
million respectively, from such entities.
During the
three and nine months ended September 30, 2023, we purchased $
1
million and $
7
million respectively, from such
entities.
At September 28, 2024 and December 30, 2023, we had an aggregate
$
32
million and $
32
million,
respectively, due from our equity affiliates, and $
8
million and $
5
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
six months
to
13
years.
As
of September 28, 2024, current and non-current liabilities associated with related
party operating leases were $
6
million and $
22
million, respectively.
At September 28, 2024, related party leases represented
7.4
% and
8.3
% 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 $
5
million and $
23
million, respectively.
At
December 30, 2023, related party leases represented
6.3
% and
7.4
% of the total current and non-current operating
lease liabilities, respectively.
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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
10-K.
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.
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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.
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39
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We
believe we are the world’s largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care.
We
serve more than one million customers
worldwide including dental practitioners, laboratories, physician practices and
ambulatory surgery centers, as well
as government, institutional health care clinics and other alternate care clinics.
We
believe that we have a strong
brand identity due to our more than 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.
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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.
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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”)
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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:
Net sales
$
3,174
$
3,162
$
9,482
$
9,322
Cost of sales
2,181
2,167
6,459
6,386
Gross profit
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
Other expense, net
$
(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
Cash flows:
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
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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
remainder of 2024.
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.
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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)
Dental
$
1,852
58.4
%
$
1,882
59.5
%
$
(30)
(1.6)
%
Medical
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
Total
$
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.
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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
1.0%.
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.
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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 %
$
%
Health care distribution
$
844
28.6
%
$
851
28.8
%
$
(7)
(0.9)
%
Technology and value-added services
149
67.8
144
68.7
5
3.8
Total
$
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
$
%
Health care distribution
$
726
24.6
%
$
691
23.4
%
$
35
5.1
%
Technology and value-added services
110
50.1
104
49.7
6
6.0
Total
$
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
Health care distribution
$
(18)
$
28
$
25
$
35
Technology and value-added services
(6)
9
3
6
Total
$
(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.
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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
$
%
Interest income
$
7
$
6
$
1
(3.2)
%
Interest expense
(34)
(25)
(9)
(31.9)
Other, net
(2)
(2)
-
(45.4)
Other expense, net
$
(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.
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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)
Dental
$
5,690
60.0
%
$
5,737
61.5
%
$
(47)
(0.8)
%
Medical
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
Total
$
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.
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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.
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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 %
$
%
Health care distribution
$
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
Total
$
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
$
%
Health care distribution
$
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
Total
$
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
Health care distribution
$
11
$
9
$
113
$
133
Technology and value-added services
44
5
15
64
Total
$
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
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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
$
%
Interest income
$
18
$
12
$
6
44.7
%
Interest expense
(96)
(58)
(38)
(64.7)
Other, net
(1)
(2)
1
(82.4)
Other expense, net
$
(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.
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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
placements.
Please see
Note 8 – 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.
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53
The following table summarizes selected measures of liquidity and capital
resources:
September 28,
December 30,
2024
2023
Cash and cash equivalents
$
126
$
171
Working
capital
(1)
1,218
1,805
Debt:
Bank credit lines
$
638
$
264
Current maturities of long-term debt
109
150
Long-term debt
1,906
1,937
Total debt
$
2,653
$
2,351
Leases:
Current operating lease liabilities
$
77
$
80
Non-current operating lease liabilities
262
310
(1)
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
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54
redeemable noncontrolling interests was $832 million and $864 million,
respectively.
Please see
Note 13 –
Redeemable Noncontrolling Interests
for further information.
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
Note 2 - Significant
Accounting Policies and Recently Issued Accounting Standards
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.
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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.
Table of Contents
56
PART
II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
For a discussion of Legal Proceedings, see
Note 11–Legal Proceedings
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.
Table of Contents
57
ITEM 6.
EXHIBITS
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+
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.
Table of Contents
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