Henry Schein(HSIC) - 2023 Q4 - Annual Report

Part I Business Henry Schein is a global healthcare solutions company serving dental and medical practitioners through its Health Care Distribution and Technology segments General Overview and Business Segments Henry Schein provides healthcare products and services to over one million dental and medical practitioners via Health Care Distribution and Technology segments - The company is a solutions provider for healthcare professionals, serving over one million customers worldwide with operations in 33 countries and territories[13][14][15] - Business is conducted through two reportable segments: (i) health care distribution and (ii) technology and value-added services, serving the same customer base[17] - The Health Care Distribution segment combines global dental and medical operations, distributing a wide range of products from consumables and equipment to pharmaceuticals and PPE[18] - The Technology and Value-Added Services segment, led by Henry Schein One, offers dental practice management software, electronic health records, patient communication services, and financial service facilitation[19] Industry, Competition, and Strengths The global healthcare distribution industry is growing due to an aging population and shift to alternate-care sites, with Henry Schein leveraging its customer focus and broad offerings - The health care distribution industry is experiencing growth due to an aging population, increased health awareness, and a shift of procedures to alternate-care sites, with consolidation among distributors and customers as a key trend[23][24][25] - Key competitors in the U.S. dental market are Patterson Companies and Benco Dental Supply, while in the medical market, they are McKesson Corporation and Medline Industries, Inc[28] - Competitive strengths include a focus on customer needs, direct sales and marketing expertise, broad product offerings, superior customer service, integrated information systems, and efficient distribution[30][31][34] Products, Services, and Business Strategy In 2023, dental products comprised 61.1% of net sales, medical products 32.4%, and technology/value-added services 6.5%, with the BOLD+1 Strategic Plan guiding growth Percentage of Consolidated Net Sales by Product Category | | December 30, 2023 | December 31, 2022 | December 25, 2021 | | :--- | :--- | :--- | :--- | | Health care distribution: | | | | | Dental products | 61.1% | 59.1% | 60.8% | | Medical products | 32.4% | 35.2% | 34.0% | | Total health care distribution | 93.5% | 94.3% | 94.8% | | Technology and value-added services: | | | | | Software and other value-added products | 6.5% | 5.7% | 5.2% | | Total | 100.0% | 100.0% | 100.0% | - The company's BOLD+1 Strategic Plan focuses on: (B)uilding complementary businesses, (O)perationalizing One Distribution, (L)everaging One Schein, and (D)riving digital transformation[40] - Core strategies include increasing sales to the existing one million customers, acquiring new customers in various care settings, cross-selling key product lines like software and vaccines, and pursuing strategic acquisitions to expand geographic footprint and access new technologies[44] Governmental Regulations The company is subject to extensive and complex governmental regulations globally, covering pharmaceuticals, medical devices, healthcare fraud, and data privacy - The company is subject to extensive local, state, federal, and foreign laws for the distribution, manufacturing, and sale of pharmaceuticals and medical devices, with increased government enforcement in areas like fraud, anti-bribery, and data privacy[47][49] - U.S. regulations include the Controlled Substances Act, the FDC Act, and the Drug Supply Chain Security Act (DSCSA), which mandates an electronic system for tracing prescription drugs[54][55] - In the EU, the company is regulated by the EU Medical Device Regulation (EU MDR), which imposes stricter requirements for placing medical devices on the market, post-market surveillance, and traceability[64][65] - The company must comply with numerous data privacy and security laws, including HIPAA in the U.S., GDPR in the EU, PIPL in China, and CCPA/CPRA in California, which govern the handling of personal and health information[90][92][93] Human Capital and Executive Officers Henry Schein employs over 25,000 people globally, emphasizing a values-based culture focused on diversity, inclusion, and wellness, with key executive officers detailed - The company employs over 25,000 people, with about 45% based outside the United States, emphasizing a purpose-driven model focusing on five key stakeholders: suppliers, customers, employees (TSMs), stockholders, and society[108][109] - In 2023, human capital efforts focused on pay equity, expanding Diversity & Inclusion (D&I) learning, and driving a culture of wellness and engagement, with a global culture survey showing high employee satisfaction driven by the company's values-based culture[110][111] - The report provides detailed information on key executive officers, including Stanley M. Bergman (Chairman & CEO), James P. Breslawski (Vice Chairman & President), and Ronald N. South (SVP & CFO)[116][117][123] Risk Factors The company faces significant risks from supplier dependency, new technology development, acquisitions, and a material cybersecurity incident in October 2023, alongside intense competition and extensive regulatory burdens - Company Risks: Dependency on third-party suppliers (top 10 account for ~25% of purchases), risks in developing new technology, and challenges in integrating acquisitions[132][133][134] - Industry Risks: A significant cybersecurity incident in October 2023 disrupted North American and European distribution businesses, impacting financial results and leading to remediation costs, highlighting the vulnerability of the company's information systems to cyberattacks[141][149] - Regulatory & Litigation Risks: The business is subject to complex laws regarding healthcare fraud (Anti-Kickback, Stark Law), data privacy (HIPAA, GDPR, CCPA), and medical device regulations (EU MDR), with non-compliance posing risks of severe penalties[161][169][170] - Macro-Economic & General Risks: Uncertain global conditions, including inflation, supply chain disruptions, and geopolitical conflicts, could adversely affect operations, and the business is also dependent on its senior management, particularly Chairman and CEO Stanley M. Bergman[157][198][200] Unresolved Staff Comments The company reports no unresolved comments from the staff of the SEC that were issued 180 days or more before the end of the 2023 fiscal year - There are no unresolved SEC staff comments[202] Cybersecurity Henry Schein's cybersecurity strategy aligns with NIST, but a significant October 2023 incident disrupted operations and led to unauthorized data access, with Board oversight from the Regulatory, Compliance and Cybersecurity Committee - The company has a cybersecurity risk mitigation strategy aligned with the NIST Cybersecurity Framework, overseen by a Chief Information Security Officer (CISO) and an Office of Cybersecurity (OCS)[204][205] - In October 2023, a cybersecurity incident primarily affected North American and European dental and medical distribution operations, disrupting business and resulting in a threat actor obtaining personal and sensitive information[210] - A related disruption to the e-commerce platform occurred on November 22, 2023, which has since been remediated, and the incident adversely impacted financial results for Q4 and full-year 2023[211] - Board oversight is provided by the Regulatory, Compliance and Cybersecurity Committee and the Audit Committee, which receive regular updates from the CISO and CTO[213][214] Properties The company leases and/or owns approximately 5.7 million square feet of property for its health care distribution segment, including distribution centers, offices, and manufacturing facilities across numerous countries - The company leases and/or owns approximately 5.7 million square feet of properties for its health care distribution segment, including distribution, office, manufacturing, and sales space across its global locations[215] Legal Proceedings Henry Schein is a defendant in multiple opioid-related lawsuits and a putative class action lawsuit concerning the October 2023 cybersecurity incident, intending to vigorously defend itself - The company is a defendant in under 175 opioid-related lawsuits alleging failure to properly monitor and restrict improper drug distribution, with sales of opioids representing less than 0.4% of 2023 net sales[612] - In January 2024, a putative class action lawsuit was filed against the company related to the October 2023 cybersecurity incident, alleging harm from compromised personal and health information[616][617] Mine Safety Disclosures This item is not applicable to the company - Not applicable[218] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Henry Schein's common stock trades on Nasdaq under HSIC, with $265 million available for future share repurchases as of December 30, 2023, and no cash or stock dividends declared in 2022 or 2023 - The company's common stock is traded on the Nasdaq Global Select Market under the symbol HSIC[220] - Under its stock repurchase program, the company has repurchased approximately $4.7 billion of common stock as of December 30, 2023, with $265 million remaining available for future repurchases[222][223] - The company has not declared any cash or stock dividends in fiscal 2023 or 2022 and does not anticipate doing so in the foreseeable future, intending to retain earnings for business expansion and share repurchases[225] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net sales decreased 2.4% to $12.34 billion, primarily due to lower PPE/COVID-19 test kit sales and the October 2023 cybersecurity incident, leading to a decline in operating income and a significant increase in debt to fund acquisitions Recent Developments and Cybersecurity Incident Sales of PPE and COVID-19 test kits continued to decrease in 2023, and a significant cybersecurity incident in October 2023 adversely impacted financial results for Q4 and full year 2023 - Sales of PPE and COVID-19 test kits decreased in 2023 compared to 2022 due to lower market pricing and demand[235] - A cybersecurity incident in October 2023 disrupted North American and European distribution businesses, adversely impacting Q4 and full-year 2023 financial results, with a short-term residual impact expected in 2024[238] Results of Operations (2023 vs. 2022) For fiscal year 2023, net sales decreased by 2.4% to $12.34 billion, while gross profit increased by 0.8% to $3.86 billion, but operating income decreased by 17.7% to $615 million due to higher operating expenses Operating Results Summary (in millions) | | 2023 | 2022 | | :--- | :--- | :--- | | Net sales | $12,339 | $12,647 | | Gross profit | $3,861 | $3,831 | | Operating income | $615 | $747 | | Net income attributable to Henry Schein, Inc. | $416 | $538 | - Global net sales decreased 2.4% in 2023, with internally generated local currency sales, excluding PPE and COVID-19 test kits, flat compared to the prior year, negatively impacted by the cybersecurity incident[276][277] - Sales of PPE and COVID-19 test kits were approximately $713 million in 2023, a decrease of $532 million (42.7%) from $1,245 million in 2022[278][279] - Operating expenses increased by 5.3% to $3.25 billion, driven by higher payroll, travel, and acquisition-related costs, as well as $11 million in direct costs for cybersecurity incident remediation[290] Liquidity and Capital Resources In 2023, net cash from operating activities decreased to $500 million, while net cash used in investing activities surged to $1.14 billion due to acquisitions, leading to a significant increase in total debt to $2.35 billion Cash Flow Summary (in millions) | | Year Ended Dec 30, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $500 | $602 | | Net cash used in investing activities | $(1,135) | $(276) | | Net cash provided by (used in) financing activities | $701 | $(315) | Selected Liquidity Measures (in millions) | | Dec 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $171 | $117 | | Working capital | $1,805 | $1,764 | | Total debt | $2,351 | $1,149 | - The company's acquisition strategy focuses on adding customers, increasing geographic footprint, and accessing new technologies, with recent acquisitions in implant systems, clear aligners, and homecare medical products[300] Critical Accounting Estimates Management identifies critical accounting estimates including inventory valuation, business combinations, goodwill impairment (no impairment in 2023), definite-lived intangible asset impairment ($19 million charge in 2023), redeemable noncontrolling interests, and income tax provisions - Key estimates include inventory valuation, especially for PPE and COVID-19 test kits, which have experienced price and demand volatility[313][314] - Goodwill is tested for impairment annually, with no impairment recorded in 2023, but a $20 million goodwill impairment was recorded in 2022 related to the disposal of an unprofitable business[316][321] - Impairment charges for definite-lived intangible assets were $19 million in 2023, primarily related to customer lists and a planned business exit[324] - Redeemable noncontrolling interests are carried at their estimated redemption amounts, based on expected future earnings and cash flows, with the balance increasing to $864 million in 2023 from $576 million in 2022[327][310] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates and interest rates, using forward contracts and interest rate swaps to manage these exposures - The company is exposed to foreign currency risk, where a hypothetical 5% change in the average value of the U.S. dollar in 2023 would have changed net income by approximately $5 million[333] - Interest rate risk is managed through hedging, with the company entering into interest rate swap agreements to hedge its variable-rate $750 million term loan, effectively creating a fixed rate of 5.79%[341] - The company uses total return swaps to economically hedge its unfunded non-qualified supplemental retirement plan and deferred compensation plan obligations[335] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal year 2023, including balance sheets, income statements, cash flow statements, and detailed notes on significant accounting policies, the cybersecurity incident, acquisitions, debt, and legal contingencies Consolidated Financial Statements The consolidated financial statements show total assets of $10.57 billion and total liabilities of $5.42 billion as of December 30, 2023, with net sales of $12.34 billion and net income of $416 million for the year Key Balance Sheet Data (in millions) | | Dec 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $4,488 | $3,988 | | Total assets | $10,573 | $8,607 | | Total current liabilities | $2,683 | $2,224 | | Total liabilities | $5,420 | $3,936 | | Total stockholders' equity | $4,289 | $4,095 | Key Income Statement Data (in millions) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $12,339 | $12,647 | $12,401 | | Gross profit | $3,861 | $3,831 | $3,674 | | Operating income | $615 | $747 | $852 | | Net income attributable to Henry Schein, Inc. | $416 | $538 | $631 | | Diluted EPS | $3.16 | $3.91 | $4.45 | Notes to Consolidated Financial Statements The notes detail the $11 million in direct expenses from the October 2023 cybersecurity incident, major acquisitions (Shield Healthcare, S.I.N. Implant System, Biotech Dental) that increased goodwill, a rise in total debt to $2.35 billion including a new $750 million term loan, and $80 million in restructuring costs - Note 2 - Cybersecurity Incident: The company incurred $11 million in expenses directly related to the October 2023 incident, primarily professional fees, and maintains a $60 million insurance policy with a $5 million retention[455] - Note 5 - Business Acquisitions: Major acquisitions in 2023 included Shield Healthcare (homecare medical products), S.I.N. Implant System (dental implants), and Biotech Dental (dental implants and software), contributing to a significant increase in goodwill and intangible assets[474][479][484] - Note 13 - Debt: Total debt increased to $2.35 billion, and in July 2023, the company entered into a new three-year $750 million term loan and amended its $1.0 billion revolving credit agreement, extending the maturity to 2028[561][557][571] - Note 15 - Restructuring: The company recorded $80 million in restructuring costs in 2023 as part of its BOLD+1 strategic plan, primarily for severance, asset impairments, and business exit costs[595][596] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None[669] Controls and Procedures Management concluded that disclosure controls were effective as of December 30, 2023, despite the independent auditor issuing an adverse opinion on internal control over financial reporting due to a material weakness in IT access management - Management concluded that disclosure controls and procedures were effective as of December 30, 2023[670] - The independent auditor, BDO USA, P.C., issued an adverse opinion on internal control over financial reporting as of December 30, 2023[682] - The auditor identified a material weakness related to logical and user access management and segregation of duties at the application control level in certain IT environments[687] - Management's assessment of internal controls excluded the recently acquired Shield, S.I.N., and Biotech Dental businesses, as permitted by SEC guidance[671] Other Information This item is not applicable - Not applicable[692] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[693] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive 2024 Proxy Statement, which also includes the Code of Ethics for senior financial officers - Most information required by this item is incorporated by reference from the company's definitive 2024 Proxy Statement[695] - The company has adopted a Code of Ethics for its CEO and senior financial officers, available on its website[698] Executive Compensation Information required by this item, including the Compensation Discussion and Analysis and Compensation Committee Report, is incorporated by reference from the company's definitive 2024 Proxy Statement - Information is incorporated by reference from the definitive 2024 Proxy Statement[699] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 30, 2023, 7,166,543 common shares were available for future issuance under stockholder-approved equity incentive plans, with other information incorporated by reference from the 2024 Proxy Statement - As of December 30, 2023, 7,166,543 common shares were available for future issuance under stockholder-approved plans[701] Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's definitive 2024 Proxy Statement - Information is incorporated by reference from the definitive 2024 Proxy Statement[702] Principal Accounting Fees and Services Information required by this item is incorporated by reference from the company's definitive 2024 Proxy Statement - Information is incorporated by reference from the definitive 2024 Proxy Statement[703] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including the consolidated financial statements and a detailed index of all exhibits - This section contains the list of financial statements and an index to all exhibits filed with the report[705][706] Form 10-K Summary No Form 10-K summary is provided - None[716]