HENRY SCHEIN INC (HSIC) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7.
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
this Annual Report on Form 10-K, and in particular the risks discussed under
the caption “Risk Factors” in Item 1A
of this report and those that may be discussed in other documents we
file with the Securities and Exchange
Commission (SEC).
Forward looking statements include the overall impact of the Novel Coronavirus
Disease 2019
(COVID-19) on us, our results of operations, liquidity and financial condition
(including any estimates of the
impact on these items), the rate and consistency with which dental
and other practices resume or maintain normal
operations in the United States and internationally, expectations regarding personal protective equipment (“PPE”)
products and COVID-19 related product sales and inventory levels, whether
additional resurgences or variants of
the virus will adversely impact the resumption of normal operations, whether
supply chain disruptions will
adversely impact our business, the impact of integration and restructuring
programs as well as of any future
acquisitions, general economic conditions including exchange rates,
inflation and recession, and more generally
current expectations regarding performance in current and future periods.
Forward looking statements also include
the (i) our ability to have continued access to a variety of COVID-19
test types, expectations regarding COVID-19
test sales, demand and inventory levels, as well as the efficacy or relative efficacy of the test
results given that the
test efficacy has not been, or will not have been, independently verified under
normal FDA procedures and (ii)
potential for us to distribute the COVID-19 vaccines and ancillary supplies.
Risk factors and uncertainties that could cause actual results to differ materially from
current and historical results
include, but are not limited to: risks associated with COVID-19
and any variants thereof, as well as other disease
outbreaks, epidemics, pandemics, or similar wide-spread public health concerns
and other natural disasters; our
dependence on third parties for the manufacture and supply of our products;
our ability to develop or acquire and
maintain and protect new products (particularly technology products) and
technologies that achieve market
acceptance with acceptable margins; transitional challenges associated with acquisitions,
dispositions and joint
ventures, including the failure to achieve anticipated synergies/benefits; legal, regulatory, compliance,
cybersecurity, financial and tax risks associated with acquisitions, dispositions and joint ventures; certain provisions
in our governing documents that may discourage third-party acquisitions
of us; adverse changes in supplier rebates
or other purchasing incentives; risks related to the sale of corporate brand
products; effects of a highly competitive
(including, without limitation, competition from third-party online commerce
sites) and consolidating market; the
repeal or judicial prohibition on implementation of the Affordable Care Act; changes in the health
care industry;
risks from expansion of customer purchasing power and multi-tiered
costing structures; increases in shipping costs
for our products or other service issues with our third-party shippers; general
global and domestic macro-economic
and political conditions, including inflation, deflation, recession, fluctuations
in energy pricing and the value of the
U.S. dollar as compared to foreign currencies, and changes to other economic
indicators, international trade
agreements, potential trade barriers and terrorism; failure to comply with existing
and future regulatory
requirements; risks associated with the EU Medical Device Regulation; failure
to comply with laws and regulations
relating to health care fraud or other laws and regulations; failure to comply with
laws and regulations relating to
the collection, storage and processing of sensitive personal information
or standards in electronic health records or
transmissions; changes in tax legislation; risks related to product liability, intellectual property and other claims;
litigation risks;
new or unanticipated litigation developments and the status of litigation
matters; risks associated
with customs policies or legislative import restrictions; cyberattacks
or other privacy or data security breaches; risks
associated with our global operations; our dependence on our senior management,
employee hiring and retention,
and our relationships with customers, suppliers and manufacturers;
and disruptions in financial markets.
The order
in which these factors appear should not be construed to indicate their
relative importance or priority.
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44
We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control
or predict.
Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction
of actual results.
We undertake no duty and have no obligation to update forward-looking statements except as
required by law.
Where You
Can Find Important Information
We may disclose important information through one or more of the following channels: SEC filings, public
conference calls and webcasts, press releases, the investor relations
page of our website (www.henryschein.com)
and the social media channels identified on the Newsroom page of our website.
Recent Developments
The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains and created
significant volatility and disruption of global financial markets in
2020 and 2021.
The impact of COVID-19 had a
material adverse effect on our business, results of operations and cash flows in 2020.
During the year ended
December 25, 2021, patient traffic levels returned to levels approaching pre-pandemic
levels.
Demand for dental
products and certain medical products throughout 2021 was driven
by sales of PPE and COVID-19 test kits.
During the year ended December 31, 2022 we experienced a decrease
in the sales volume of PPE and COVID-19
test kits.
The volatility in sales of COVID-19 test kits has moderated, albeit at a significantly
lower level of sales
compared with 2021, resulting in us recording an inventory obsolescence
reserve of $17 million for COVID-19 test
kits during the year ended December 31, 2022.
While the U.S. economy has recently experienced inflationary
pressures and strengthening of the U.S dollar, their
impacts have not been material to our results of operations in the
fourth quarter or full year ended December 31,
2022, and we currently expect moderating of inflation and foreign currency
fluctuations.
Though inflation impacts
both our revenues and costs, the depth and breadth of our product portfolio
often allows us to offer lower-cost
national brand solutions or corporate brand alternatives to our more
price-sensitive customers who are unable to
absorb price increases, thus positioning us to protect our gross profit.
Our consolidated financial statements reflect estimates and assumptions
made by us that affect, among other things,
our goodwill, long-lived asset and definite-lived intangible asset valuation;
inventory valuation; equity investment
valuation; assessment of the annual effective tax rate; valuation of deferred income
taxes and income tax
contingencies; the allowance for doubtful accounts; hedging activity; supplier
rebates; measurement of
compensation cost for certain share-based performance awards and cash
bonus plans; and pension plan
assumptions.
Due to the significant uncertainty surrounding the future impact
of COVID-19, our judgments
regarding estimates and impairments could change in the future.
There is an ongoing risk that the COVID-19
pandemic may again have a material adverse effect on our business, results of operations
and cash flows and may
result in a material adverse effect on our financial condition and liquidity.
However, the extent of the potential
impact cannot be reasonably estimated at this time.
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45
Executive-Level Overview
Henry Schein, Inc. is a solutions company for health care professionals powered
by a network of people and
technology.
We believe we are the world’s
largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care.
We
serve more than one million customers
worldwide including dental practitioners, laboratories, physician practices, and
ambulatory surgery centers, as well
as government, institutional health care clinics and other alternate care clinics.
We
believe that we have a strong
brand identity due to our more than 90 years of experience distributing health
care products.
We are headquartered in Melville, New York,
employ approximately 22,000 people (of which approximately
10,700 are based outside of the United States) and have operations or
affiliates in 32 countries and territories.
Our
broad global footprint has evolved over time through our organic success as well as
through contribution from
strategic acquisitions.
We
have established strategically located distribution centers around
the world to enable us to better serve our
customers and increase our operating efficiency.
This infrastructure, together with broad product and service
offerings at competitive prices, and a strong commitment to customer service, enables
us to be a single source of
supply for our customers’ needs.
While our primary go-to-market strategy is in our capacity as a distributor, we also market and sell under
our own
corporate brand portfolio of cost-effective, high-quality consumable merchandise products,
and manufacture certain
dental specialty products in the areas of implants, orthodontics and endodontics.
We
have achieved scale in these
global businesses primarily through acquisitions as manufacturers of these
products typically do not utilize a
distribution channel to serve customers.
We
conduct our business through two reportable segments: (i) health
care distribution and (ii) technology and
value-added services.
These segments offer different products and services to the same customer base.
Our global
dental businesses serve office-based dental practitioners, dental laboratories, schools, 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,
PPE products and vitamins.
Our global technology and value-added services business provides software, technology
and other value-added
services to health care practitioners.
Our technology business offerings include practice management software
systems for dental and medical practitioners.
Our value-added practice solutions include practice consultancy,
education, revenue cycle management and financial services on a non-recourse
basis, e-services, practice
technology, network and hardware services, as well as consulting, and continuing education services for
practitioners.
A key element to grow closer to our customers is our One Schein initiative, which
is a unified go-to-market
approach that enables practitioners to work synergistically with our supply chain,
equipment sales and service and
other value-added services, allowing our customers to leverage the
combined value that we offer through a single
program.
Specifically, One Schein provides customers with streamlined access to our comprehensive offering of
national brand products, our corporate brand products and proprietary specialty
products and solutions (including
implant, orthodontic and endodontic products).
In addition, customers have access to a wide range of services,
including software and other value-added services.
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46
Industry Overview
In recent years, the health care industry has increasingly focused on cost containment.
This trend has benefited
distributors capable of providing a broad array of products and services at low
prices.
It also has accelerated the
growth of HMOs, group practices, other managed care accounts and collective buying
groups, which, in addition to
their emphasis on obtaining products at competitive prices, tend to favor distributors
capable of providing
specialized management information support.
We
believe that the trend towards cost containment has the potential
to favorably affect demand for technology solutions, including software, which can
enhance the efficiency and
facilitation of practice management.
Our operating results in recent years have been significantly affected by strategies
and transactions that we
undertook to expand our business, domestically and internationally, in part to address significant changes in the
health care industry, including consolidation of health care distribution companies, health care reform, trends
toward managed care, cuts in Medicare and collective purchasing arrangements.
Our current and future results have been and could be impacted by the COVID-19
pandemic, the current economic
environment and continued economic and public health uncertainty.
Since the onset of the COVID-19 pandemic in
early 2020, we have been carefully monitoring its impact on our global
operations and have taken appropriate steps
to minimize the risk to our employees.
We
have seen and expect to continue to see changes in demand trends
for
some of our products and services, supply chain challenges and labor
challenges, as rates of infection fluctuate, new
strains or variants of COVID-19 emerge and spread, governments adapt their approaches
to combatting the virus,
and local conditions change across geographies.
As a result, we expect to see continued volatility.
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
also have invested in expanding our sales/marketing
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47
infrastructure to include a focus on building relationships with decision
makers who do not reside in the office-
based practitioner setting.
As the health care industry continues to change, we continually evaluate possible
candidates for joint venture or
acquisition and intend to continue to seek opportunities to expand our
role as a provider of products and services to
the health care industry.
There can be no assurance that we will be able to successfully pursue
any such
opportunity or consummate any such transaction, if pursued.
If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and there
can be no assurance that the
integration efforts associated with any such transaction would be successful.
Aging Population and Other Market Influences
The health care products distribution industry continues to experience growth
due to the aging population,
increased health care awareness, the proliferation of medical technology
and testing, new pharmacology treatments,
and expanded third-party insurance coverage, partially offset by the effects of unemployment on insurance
coverage.
In addition, the physician market continues to benefit from
the shift of procedures and diagnostic testing
from acute care settings to alternate-care sites, particularly physicians’
offices.
According to the U.S. Census Bureau’s International Database, between 2022 and 2032, the 45 and older
population is expected to grow by approximately 11%.
Between 2022 and 2042, this age group is expected to grow
by approximately 21%.
This compares with expected total U.S. population growth
rates of approximately 6%
between 2022 and 2032 and approximately 12% between 2022 and 2042.
According to the U.S. Census Bureau’s International Database, in 2022 there are approximately seven million
Americans aged 85 years or older, the segment of the population most in need of long-term care
and elder-care
services.
By the year 2050, that number is projected to nearly triple to approximately
19 million.
The population
aged 65 to 84 years is projected to increase by approximately 27% during
the same period.
As a result of these market dynamics, annual expenditures for health care services
continue to increase in the
United States.
We believe that demand for our products and services will grow while continuing to be impacted by
current and future operating, economic, and industry conditions.
The Centers for Medicare and Medicaid Services,
or CMS, published “National Health Expenditure Data” indicating
that total national health care spending reached
approximately $4.3 trillion in 2021, or 18.3% 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 $6.2 trillion in 2028, or 19.7% of the nation’s projected gross domestic product.
Government
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.
See “
Item 1. Business – Governmental Regulations
” for a discussion of laws, regulations and governmental activity
that may affect our results of operations and financial condition.
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48
Results of Operations
Refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in
our 2021 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results
of operations for the fiscal year 2021 compared to fiscal year 2020.
The following tables summarize the significant components of our operating
results and cash flows from continuing
operations:
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Operating results:
Net sales
$
12,647
$
12,401
$
10,119
Cost of sales
8,816
8,727
7,303
Gross profit
3,831
3,674
2,816
Operating expenses:
Selling, general and administrative
2,771
2,634
2,086
Depreciation and amortization
182
180
163
Restructuring and integration costs
131
8
32
Operating income
$
747
$
852
$
535
Other expense, net
$
(26)
$
(21)
$
(35)
Gain on sale of equity investments, net of tax
-
7
2
Net income from continuing operations
566
660
419
Income from discontinued operations, net of tax
-
-
1
Net income attributable to Henry Schein, Inc.
538
631
404
Years
Ended
December 31,
December 25,
December 26,
2022
2021
2020
Cash flows:
Net cash provided by operating activities from continuing operations
$
602
$
710
$
594
Net cash used in investing activities from continuing operations
(276)
(677)
(115)
Net cash used in financing activities from continuing operations
(315)
(333)
(182)
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49
Plans of Restructuring and Integration Costs
On August 1, 2022, we committed to a restructuring plan focused on
funding the priorities of the strategic plan and
streamlining operations and other initiatives to increase efficiency.
We expect this initiative to extend through
2023.
We are currently unable in good faith to make a determination of an estimate of the amount or range of
amounts expected to be incurred in connection with these activities, both with
respect to each major type of cost
associated therewith and with respect to the total cost, or an estimate of the
amount or range of amounts that will
result in future cash expenditures.
During the year ended December 31, 2022, we recorded restructuring charges of $128
million primarily related to
severance and employee-related costs, accelerated amortization of right-of-use
lease assets, impairment of other
long-lived assets and lease exit costs.
During the three months ended December 31, 2022, in connection with our restructuring
plan, we vacated one of
the buildings at our corporate headquarters in Melville NY, which resulted in an accelerated amortization of right-
of-use lease asset of $34 million.
We also initiated the disposal of a non-profitable US business and recorded
related costs of $49 million which primarily consisted of impairment of
intangible assets and goodwill, inventory
impairment, and severance and employee-related costs.
These expenses are included in the $128 million of
restructuring charges discussed above.
The disposal is expected to be completed in the first quarter of 2023.
On August 26, 2022, we acquired Midway Dental Supply.
In connection with this acquisition, during the year
ended December 31, 2022, we recorded integration costs of $3 million related
to one-time employee and other
costs, as well as restructuring charges of $9 million, which are included in the
$128 million of restructuring charges
discussed above.
On November 20, 2019, we committed to a contemplated restructuring
initiative intended to mitigate stranded costs
associated with the spin-off of our animal health business and to rationalize operations
and provide expense
efficiencies.
These activities were originally expected to be completed by
the end of 2020 but we extended them to
the end of 2021 in light of the changes to the business environment brought
on by the COVID-19 pandemic.
The
restructuring activities under this prior initiative were completed
in 2021.
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50
2022 Compared to 2021
Net Sales
Net sales were as follows:
% of
% of
Increase / (Decrease)
2022
Total
2021
Total
$
%
Health care distribution
(1)
Dental
$
7,473
59.1
%
$
7,544
60.8
%
$
(71)
(0.9)
%
Medical
4,451
35.2
4,210
34.0
241
5.7
Total health care distribution
11,924
94.3
11,754
94.8
170
1.4
Technology and value-added services
(2)
723
5.7
647
5.2
76
11.8
Total
$
12,647
100.0
$
12,401
100.0
$
246
2.0
The components of our sales growth were as follows:
Local Currency Growth
Total Sales
Growth
Foreign
Exchange
Impact
Total Local
Currency
Growth
Acquisition
Growth
Extra Week
Impact
Local Internal
Growth
Health care distribution
(1)
Dental Merchandise
(2.6)
%
(3.5)
%
0.9
%
1.3
%
1.0
%
(1.4)
%
Dental Equipment
4.7
(4.6)
9.3
0.6
2.3
6.4
Total Dental
(0.9)
(3.7)
2.8
1.2
1.2
0.4
Medical
5.7
(0.3)
6.0
2.4
1.5
2.1
Total Health Care Distribution
1.4
(2.5)
3.9
1.6
1.3
1.0
Technology and value-added services
(2)
11.8
(1.5)
13.3
5.4
0.8
7.1
Total
2.0
(2.4)
4.4
1.8
1.3
1.3
Note: Percentages for Net Sales; Gross Profit; Selling, General and Administrative; Other Expense, Net; and Income Taxes are based on
actual values and may not recalculate due to rounding.
(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
generic pharmaceuticals, vaccines, surgical products, dental specialty products (including implant, orthodontic and endodontic
products), diagnostic tests, infection-control products, PPE products and vitamins.
(2)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
practice consultancy, education, revenue cycle management and financial services on a non-recourse basis, e-services, continuing
education services for practitioners, consulting and other services.
Global Sales
Global net sales for the year ended December 31, 2022 increased 2.0% based
upon the components presented in the
table above.
We estimate that sales for the year ended
December 31, 2022 of PPE products and COVID-19 test kits
were approximately $1,245 million, an estimated decrease of 34.7% versus the prior
year.
Excluding PPE products
and COVID-19 test kits,
the estimated increase in internally generated local currency sales was 6.7%.
Dental
Dental net sales for the year ended December 31, 2022 decreased 0.9% based
upon the components presented in the
table above.
Our sales growth in local currency for dental merchandise decreased
primarily due to a decrease in
PPE product sales.
We estimate that global dental sales for the year ended December 31, 2022 of PPE products
were approximately $447 million, an estimated decrease of 32.5% versus the prior
year.
Excluding PPE products,
the estimated increase in internally generated local currency dental sales
was 3.8%.
Dental equipment sales in local
currency increased in both our North American and international markets,
primarily due to increased demand.
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51
Medical
Medical net sales for the year ended December 31, 2022 increased 5.7% based
upon the components presented in
the table above.
Globally, we estimate our medical business recorded sales of approximately $798 million of
sales
of PPE products
and COVID-19 test kits for the year ended December 31, 2022, an estimated
decrease of
approximately 27.4% compared to the prior year.
Excluding PPE products and COVID-19 test kits, the estimated
increase in internally generated local currency medical sales was
2.1%.
Te
chnology and value-added services
Technology and value-added services net sales for the year ended December 31, 2022 increased 11.8% based upon
the components presented in the table above.
During the year ended December 31, 2022, the trend for transactional
software sales improved as we increased the number of users, generating demand
for our sales cycle management
solutions, and also from cloud-based solutions that drive practice efficiency and patient engagement.
Gross Profit
Gross profit and gross margin percentages by segment and in total were as follows:
Gross
Gross
Increase
2022
Margin %
2021
Margin %
$
%
Health care distribution
$
3,357
28.2
%
$
3,239
27.6
%
$
118
3.6
%
Technology and value-added services
474
65.5
435
67.2
39
9.0
Total
$
3,831
30.3
$
3,674
29.6
$
157
4.3
As a result of different practices of categorizing costs associated with distribution networks
throughout our
industry, our gross margins may not necessarily be comparable to other distribution companies.
Additionally, we
realize substantially higher gross margin percentages in our technology and value-added services
segment than in
our health care distribution segment.
These higher gross margins result from being both the developer and seller of
software products and services, as well as certain financial services.
The software industry typically realizes higher
gross margins to recover investments in research and development.
Within our health care distribution segment, gross profit margins may vary from one period to the next.
Changes in
the mix of products sold as well as changes in our customer mix have
been the most significant drivers affecting
our gross profit margin.
For example, sales of our corporate brand products achieve
gross profit margins that are
higher than average total gross profit margins of all products.
With respect to customer mix, sales to our large-
group customers are typically completed at lower gross margins due to the higher
volumes sold as opposed to the
gross margin on sales to office-based practitioners, who normally purchase lower volumes.
Health care distribution gross profit increased primarily due to the increase
in net sales discussed above.
The
overall increase in our health care distribution gross profit was attributable to
$67 million of gross profit from
acquisitions and gross margin expansion, mainly as a result of increased sales
mix of higher-margin products.
Technology and value-added services gross profit increased as a result of an increase in gross profit from internally
generated sales and gross profit from acquisitions, partially offset by a decrease in
gross margin rates.
Gross
margin rates decreased primarily due to lower gross margins of recently acquired companies in
the business
services sector and our continued investment in product development and customer
service.
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52
Operating Expenses
Operating expenses (consisting of selling, general and administrative
expenses; depreciation and amortization,
restructuring and integration costs) by segment and in total were as follows:
% of
% of
Respective
Respective
Increase
2022
Net Sales
2021
Net Sales
$
%
Health care distribution
$
2,738
23.0
%
$
2,512
21.4
%
$
226
9.0
%
Technology and value-added services
346
47.8
310
48.0
36
11.4
Total
$
3,084
24.4
$
2,822
22.8
$
262
9.3
The net increase in operating expenses is attributable to the
following:
Change in
Restructuring and
Integration Costs
Increase in
Operating Costs
Acquisitions
Total
Health care distribution
$
121
$
39
$
66
$
226
Technology and value-added services
2
20
14
36
Total
$
123
$
59
$
80
$
262
The increase in restructuring and integration costs is attributable to our disposal
of an unprofitable business,
acceleration of amortization of right-of-use lease assets related
to the exit from one of the properties at our
corporate headquarters, severance costs, and other costs relating to
the exit of some facilities.
The increase in
operating costs includes a $20 million intangible assets impairment charge within
our health care distribution
segment, and increases in payroll and payroll related costs and travel and convention
expenses in both of our
reportable segments.
While the U.S. economy has recently experienced inflationary
pressures and strengthening of
the U.S dollar, their impacts have not been material to our results of operations.
Other Expense, Net
Other expense, net was as follows:
Variance
2022
2021
$
%
Interest income
$
17
$
7
$
10
158.9
%
Interest expense
(44)
(28)
(16)
(59.1)
Other, net
1
-
1
n/a
Other expense, net
$
(26)
$
(21)
$
(5)
(26.0)
Interest income increased primarily due to increased interest rates.
Interest expense increased primarily due to
increased borrowings and increased interest rates.
Income Taxes
For the year ended December 31, 2022, our effective tax rate was 23.5% compared to 23.8%
for the prior year
period.
In 2022, the difference between our effective tax rate and the federal statutory tax rate primarily
relates to
state and foreign income taxes and interest expense.
In 2021, the difference between our effective tax rate and the
federal statutory tax rate was primarily due to state and foreign income
taxes and interest expense.
Gain on Sale of Equity Investment
In the third quarter of 2021, we received contingent proceeds of $10 million
from the 2019 sale of Hu-Friedy
resulting in the recognition of an additional after-tax gain of $7
million.
No further proceeds are expected from this
sale.
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53
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 12 – 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.
Net cash provided by operating activities was $602 million for the
year ended December 31, 2022, compared to net
cash from continuing operations provided by operating activities of $710 million
for the prior year.
The net change
of $108 million was primarily due to unfavorable net cash used by our working
capital accounts, net of
acquisitions, driven by an impact of timing of payments which
resulted in an increase in other current assets and
relative decreases in accounts payable and accrued expenses, partially offset by the
relative year over year impact
of inventory increases (2021 increase was more significant than the
2022 increase).
Net cash used in investing activities was $276 million for the year
ended December 31, 2022, compared to $677
million for the prior year.
The net change of $401 million was primarily attributable to decreased payments
for
equity investments and business acquisitions.
Net cash used in financing activities was $315 million for the year
ended December 31, 2022, compared to net cash
used in financing activities of $333 million for the prior year.
The net change of $18 million was primarily due to
increased net borrowings from debt, partially offset by increased repurchases of common
stock.
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54
The following table summarizes selected measures of liquidity and capital
resources:
December 31,
December 25,
2022
2021
Cash and cash equivalents
$
117
$
118
Working
capital
(1)
1,764
1,537
Debt:
Bank credit lines
$
103
$
51
Current maturities of long-term debt
6
11
Long-term debt
1,040
811
Total debt
$
1,149
$
873
Leases:
Current operating lease liabilities
$
73
$
76
Non-current operating lease liabilities
275
268
(1)
Includes $327 million and $138 million of certain accounts receivable which serve as security for U.S. trade accounts receivable
securitization at December 31, 2022 and December 25, 2021, respectively.
Our cash and cash equivalents consist of bank balances and investments
in money market funds representing
overnight investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
Our accounts receivable days sales outstanding from operations
increased to 41.9 days as of December 31, 2022
from 41.8 days as of December 25, 2021.
During the years ended December 31, 2022 and December
25, 2021, we
wrote off approximately $10 million and $8 million, respectively, of fully reserved accounts receivable against our
trade receivable reserve.
Our inventory turns from operations was 4.7 as of December
31, 2022 and 5.2 as of
December 25, 2021.
Our working capital accounts may be impacted by current and
future economic conditions.
Contractual obligations
The following table summarizes our contractual obligations related
to fixed and variable rate long-term debt and
finance lease obligations, including interest (assuming a weighted
average interest rate of 4.3%), as well as
inventory purchase commitments and operating lease obligations
as of December 31, 2022:
Payments due by period
1 year
2 - 3 years
4 - 5 years
5 years
Total
Contractual obligations:
Long-term debt, including interest
$
41
$
508
$
134
$
538
$
1,221
Inventory purchase commitments
5
8
8
-
21
Operating lease obligations
82
122
79
98
381
Transition tax obligations
19
23
-
-
42
Finance lease obligations, including interest
5
4
1
1
11
Total
$
152
$
665
$
222
$
637
$
1,676
For information relating to our debt please see
Note 12 – Debt
.
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55
Leases
We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles
and certain equipment.
Our leases have remaining terms of less than one year to approximately
19 years, some of
which may include options to extend the leases for up to 15 years.
As of December 31, 2022, our right-of-use
assets related to operating leases were $284 million and our current and non-current
operating lease liabilities were
$73 million and $275 million, respectively.
Please see
Note 6 – Leases
for further information.
Stock Repurchases
On March 8, 2021, we announced the reinstatement of our share repurchase
program, which had been temporarily
suspended in April of 2020.
From March 3, 2003 through December 31, 2022, we repurchased $4.5
billion, or 87,180,669 shares, under our
common stock repurchase programs, with $115 million available as of December 31, 2022 for future
common stock
share repurchases.
On February 8, 2023, our Board of Directors authorized the repurchase
of up to an additional $400 million in shares
of our common stock.
Redeemable Noncontrolling Interests
Some minority stockholders in certain of our consolidated subsidiaries have
the right, at certain times, to require us
to acquire their ownership interest in those entities.
Accounting Standards Codification (“ASC”) 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 December 31, 2022 and December 25, 2021, our balance
for
redeemable noncontrolling interests was $576 million and $613 million, respectively.
Please see
Note 18 –
Redeemable Noncontrolling Interests
for further information.
Unrecognized tax benefits
As more fully disclosed in
Note 13 – Income Taxes
of “Notes to Consolidated Financial Statements,” we cannot
reasonably estimate the timing of future cash flows related to the unrecognized
tax benefits, including accrued
interest, of $94 million as of December 31, 2022.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in
Note 1 – Basis of Presentation and Significant Accounting
Policies
of the consolidated financial statements.
The preparation of consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and
related disclosures of contingent assets and liabilities.
We base our estimates on historical data, when available,
experience, industry and market trends, and on various other assumptions
that are believed to be reasonable under
the circumstances, the combined results of which form the basis for
making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information
available to us at the time that these
estimates, judgments and assumptions are made.
However, by their nature, estimates are subject to various
assumptions and uncertainties.
Therefore, reported results may differ from estimates and any such differences may
be material to our consolidated financial statements.
We believe that the following critical accounting estimates, which have been discussed with the Audit Committee
of our Board of Directors, affect the significant estimates and judgments used in
the preparation of our financial
statements:
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56
Inventories and Reserves
Inventories consist primarily of finished goods and are valued at
the lower of cost or net realizable value.
Cost is
determined by the first-in, first-out method for merchandise or actual cost
for large equipment and high tech
equipment.
In estimating carrying value of inventory, we consider many factors including the condition and
salability of the inventory by reviewing on-hand quantities, historical sales,
forecasted sales and market and
economic trends.
Certain of our products, specifically PPE and COVID-19 test kits, have experienced
changes in
net realizable value, due to volatility of pricing and changes in demand
for these products.
Business Combinations
The estimated fair value of acquired identifiable intangible assets (trademarks
and trade names, customer
relationships and lists, non-compete agreements and product development)
is based on critical estimates, judgments
and assumptions derived from: analysis of market conditions; discount
rates; projected cash flows; customer
retention rates; and estimated useful lives.
Please see
Note 4 – Business Acquisitions and Divestitures
for further
discussion of our acquisitions.
Goodwill
Goodwill is subject to impairment analysis at least once annually as of
the first day of our fourth quarter, or if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit
below its carrying value.
Such impairment analyses for goodwill require a comparison of
the fair value to the
carrying value of reporting units.
We regard our reporting units to be our operating segments: global dental,
global
medical, and technology and value-added services.
Goodwill is allocated to such reporting units, for the purposes
of preparing our impairment analyses, based on a specific identification
basis.
Application of the goodwill impairment test requires judgment, including
the identification of reporting units,
assignment of assets and liabilities that are considered shared services
to the reporting units, and ultimately the
determination of the fair value of each reporting unit.
The fair value of each reporting unit is calculated by
applying the discounted cash flow methodology and confirming with
a market approach.
There are inherent
uncertainties, however, related to fair value models, the inputs and our judgments in applying them
to this analysis.
The most significant inputs include estimation of detailed future cash flows based
on budget expectations, and
determination of comparable companies to develop a weighted average
cost of capital for each reporting unit.
On an annual basis, we prepare annual and
medium-term financial projections.
These projections are based on
input from our leadership and are presented annually to our Board of Directors.
Influences on this year's forecasted
financial information and the fair value model include: the impact of planned
strategic initiatives, the continued
integration of recent acquisitions and overall market conditions.
The estimates used to calculate the fair value of a
reporting unit change from year to year based on operating results,
market conditions, and other factors.
Our third-party valuation specialists provide inputs into our determination
of the discount rate.
The rate is
dependent on a number of underlying assumptions, including the risk-free rate,
tax rate, equity risk premium, debt
to equity ratio
and pre-tax cost of debt.
Long-term growth rates are applied to our estimation of future cash flows.
The long-term growth rates are tied to
growth rates we expect to achieve beyond the years for which we have
forecasted operating results.
We also
consider external benchmarks, and other data points which we believe are
applicable to our industry and the
composition of our global operations.
Based on our quantitative assessment for the year ended December 31, 2022,
we recorded a $20 million impairment
of goodwill relating to the disposal of an unprofitable business whose
estimated fair value was lower than its
carrying value.
As part of our analysis for the rest of the goodwill balance,
we performed a sensitivity analysis on
the discount rate and long-term growth rate assumptions.
The sensitivities did not result in any additional
impairment charges.
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57
Definite-Lived Intangible Assets
Annually, definite-lived intangible assets such as non-compete agreements, trademarks, trade names, customer
relationships and lists, and product development are reviewed for impairment
indicators.
If any impairment
indicators exist, quantitative testing is performed on the asset.
The quantitative impairment model is a two-step test under which we
first calculate the recoverability of the
carrying value by comparing the undiscounted, probability-weighted value
of the projected cash flows associated
with the asset or asset group, including its estimated residual value, to
the carrying amount.
If the cash flows
associated with the asset or asset group are less than the carrying value,
we would perform a fair value assessment
of the asset, or asset group.
If the carrying amount is found to be greater than the fair value, we record an
impairment loss for the excess of book value over the fair value.
In addition, in all cases of an impairment review,
we re-evaluate the remaining useful lives of the assets and modify them,
as appropriate.
Although we believe our
judgments, estimates and/or assumptions used in estimating cash flows
and determining fair value are reasonable,
making material changes to such judgments, estimates and/or assumptions
could materially affect such impairment
analyses and our financial results.
During the years ended December 31, 2022, December 25, 2021
and December 26, 2020, we recorded total
impairment charges on intangible assets of approximately $49 million ($34 million
related to impairment of
customer lists and relationships attributable to customer attrition rates being higher
than expected in certain
businesses and $15 million due to the disposal of an unprofitable
business), $1 million and $20 million,
respectively.
For the year ended December 31, 2022 impairment charges were recorded
within our health care
distribution segment.
For the years ended December 25, 2021 and December 26,
2020, impairment charges were
recorded within our health care distribution and technology and value-added services
segments.
Income Tax
When determining if the realization of the deferred tax asset is likely by assessing
the need for a valuation
allowance, estimates and judgement are required.
We
consider all available evidence, both positive and negative,
including estimated future taxable earnings, ongoing planning strategies,
future reversals of existing temporary
differences and historical operating results.
Additionally, changes to tax laws and statutory tax rates can have an
impact on our determination.
Our intention is to evaluate the realizability of our deferred tax assets quarterly.
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with other provisions contained within this guidance.
This topic prescribes a recognition threshold and
a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected
to be taken in a tax return.
For those benefits to be recognized, a tax position must be more likely
than not to be
sustained upon examination by the taxing authorities.
The amount recognized is measured as the largest amount of
benefit that has a greater than 50% likely of being realized upon ultimate
audit settlement.
In the normal course of
business, our tax returns are subject to examination by various taxing
authorities.
Such examinations may result in
future tax and interest assessments by these taxing authorities for uncertain
tax positions taken in respect of certain
tax matters.
Please see
Note 13 – Income Taxes
for further discussion.
The FASB Staff Q&A, Topic
740 No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), states
that an entity can make an accounting policy election to either recognize deferred
taxes for temporary differences
expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is
incurred.
We elected to recognize the tax on GILTI
as a period expense in the period the tax is incurred.
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted
or will be adopted in the future, please see
Note 1 – Basis of Presentation and Significant Accounting Policies
included under Item 8.
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