Business Overview
Henry Schein, Inc., a leading provider of healthcare solutions, has demonstrated its resilience and adaptability in the face of evolving market dynamics. With a rich history spanning over nine decades, the company has established itself as a trusted partner to healthcare practitioners worldwide, offering a diverse portfolio of products, services, and innovative technologies.
Founded in 1932 by Henry Schein, who started the business out of his home in Queens, New York, selling healthcare supplies to local dentists, the company has grown from a small distribution company to a global powerhouse, serving more than one million customers across 33 countries. The company's success can be attributed to its unwavering commitment to delivering high-quality solutions, fostering strong customer relationships, and leveraging its extensive distribution network and technological capabilities.
Growth and Expansion
Henry Schein's growth trajectory has been marked by both organic expansion and strategic acquisitions. In the 1980s, the company began its international expansion, opening operations in Canada, the United Kingdom, and Australia. This global reach continued to grow throughout the 1990s and 2000s, establishing a presence in over 30 countries worldwide. The company's ability to adapt to industry changes has been crucial to its success, particularly in navigating the consolidation of the healthcare industry. As healthcare providers, such as dental and medical practices, began consolidating into larger groups and networks, Henry Schein successfully transitioned its sales and distribution strategies to serve these larger customers, leveraging its broad product portfolio and value-added services to become a trusted partner for larger healthcare organizations.
Business Model
One of the hallmarks of Henry Schein's business model is its two-pronged approach, encompassing both the healthcare distribution and technology and value-added services segments. The healthcare distribution segment, which accounted for 93.1% of the company's total net sales in the third quarter of 2024, distributes a wide range of consumable products, specialty items, equipment, and services to dental and medical practitioners. The technology and value-added services segment, representing 6.9% of net sales, provides software, practice management solutions, and other value-added offerings to healthcare professionals.
Henry Schein operates through two reportable segments: Health Care Distribution and Technology and Value-Added Services. The Health Care Distribution segment, accounting for 93.1% of total net sales in the nine months ended September 28, 2024, distributes a broad range of products including consumable products, dental specialty 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, and orthopedic implants. This segment serves office-based dental and medical practitioners, dental laboratories, schools, government, and other institutions.
The Technology and Value-Added Services segment, accounting for 6.9% of total net sales, provides software, technology, and other value-added services to health care practitioners. This includes practice management software systems, revenue cycle management and financial services, e-services, continuing education services, practice technology, network and hardware services, and consulting services.
Financial Performance
Despite the challenges posed by the COVID-19 pandemic and a recent cyber incident, Henry Schein has demonstrated its resilience and adaptability. The company's financial performance in the third quarter of 2024 reflects its ability to navigate market shifts and capitalize on emerging opportunities.
In the third quarter of 2024, Henry Schein reported net sales of $3.17 billion, a slight increase of 0.4% compared to the prior-year period. This growth was driven by a 3.2% contribution from acquisitions, partially offset by a 0.2% decrease due to unfavorable foreign currency exchange rates and a 0.4% decrease from lower sales of personal protective equipment (PPE) products, primarily resulting from lower glove pricing.
The company's dental segment reported net sales of $1.9 billion, a decrease of 1.6% compared to the third quarter of 2023. This decline was primarily attributable to a 2.5% decrease in internally generated local currency sales of dental merchandise, which was partially offset by a 1.8% increase in internally generated local currency sales of dental equipment. The medical segment, on the other hand, saw net sales of $1.1 billion, an increase of 2.9% compared to the prior-year period, driven by the company's expansion in the Home Solutions market and the acquisition of TriMed, Inc. during the second quarter of 2024.
The technology and value-added services segment reported net sales of $221 million, representing a 5.1% increase compared to the third quarter of 2023. This growth was fueled by the continued increase in the number of cloud-based users of the company's practice management software and an uptick in revenue cycle management solutions.
While the company's GAAP operating margin declined by 140 basis points to 4.94% in the third quarter, its non-GAAP operating margin decreased by a more modest 45 basis points to 7.64%. This performance reflects the ongoing recovery efforts from the cyber incident, as well as the company's strategic investments in high-growth, high-margin businesses, which now account for over 40% of its non-GAAP operating income.
For the most recent fiscal year (2023), Henry Schein reported revenue of $12.34 billion, net income of $416 million, operating cash flow of $500 million, and free cash flow of $313 million. In the most recent quarter (Q3 2024), the company reported revenue of $3.174 billion, net income of $99 million, operating cash flow of $151 million, and free cash flow of $117 million.
Comparing Q3 2024 to Q3 2023, revenue grew 0.4%, driven by 3.2% growth from acquisitions, partially offset by a 0.2% decrease from foreign exchange and a 0.4% decrease from lower PPE sales. Net income decreased 27.7%, primarily due to lower operating income in the distribution businesses following the cyber incident in 2023, partially offset by a $19 million remeasurement gain. Operating cash flow decreased 34.6% due to lower net income and changes in working capital, while free cash flow decreased 49.4%, driven by the decrease in operating cash flow.
Guidance and Outlook
Looking ahead, Henry Schein has updated its 2024 guidance, increasing its non-GAAP diluted earnings per share (EPS) attributable to the company to a range of $4.74 to $4.82, compared to the previous guidance of $4.70 to $4.82. This revised guidance reflects the company's confidence in its ability to capitalize on market opportunities and continue its recovery from the cyber incident.
The company expects total sales growth for 2024 to be 4% to 5% over 2023, adjusted from the prior guidance of 4% to 6% growth. Henry Schein anticipates its 2024 adjusted EBITDA to grow in the low double-digit percentages versus 2023 adjusted EBITDA of $984 million. The company also expects its 2024 non-GAAP effective tax rate to be approximately 25%.
This guidance is based on an expectation of modest improvement in the dental and medical markets next year, with Henry Schein continuing to grow faster than the markets. The company expects to achieve its restructuring goal, which should help offset headwinds from higher depreciation expense resulting from its global e-commerce platform and additional investments in technology.
Corporate Social Responsibility
In addition to its financial performance, Henry Schein has also demonstrated its commitment to corporate social responsibility. The company has been recognized for its sustainability initiatives, ethical business practices, and support for the communities it serves, further solidifying its reputation as a responsible corporate citizen. Throughout its history, Henry Schein has received numerous awards and accolades for its philanthropic efforts, environmental initiatives, and commitment to diversity and inclusion in the workplace.
Liquidity and Financial Position
As of September 28, 2024, Henry Schein maintained a strong financial position with a debt-to-equity ratio of 0.74x and cash holdings of $126 million. The company has access to a $1 billion revolving credit facility, with $50 million outstanding and $11 million in letters of credit issued. Additionally, Henry Schein has various other short-term bank credit lines totaling $689 million, with $588 million outstanding. The company's current ratio stands at 1.42x, while its quick ratio is 0.82x, indicating a solid short-term liquidity position.
Geographic Performance and Global Presence
Henry Schein operates globally, with a presence in 33 countries. The company's dental and medical distribution businesses serve customers worldwide, while the technology and value-added services segment is more heavily weighted toward the US market. This global footprint allows Henry Schein to capitalize on diverse market opportunities and mitigate risks associated with regional economic fluctuations.
Recent Challenges and Recovery Efforts
In October 2023, Henry Schein experienced a cyber incident that primarily affected its North American and European dental and medical distribution businesses. The company has been working diligently to recover from the incident, which resulted in decreased sales in the impacted businesses during Q3 2024. To mitigate potential financial impacts, Henry Schein maintains $60 million in cyber insurance coverage and has already received $20 million in insurance proceeds related to the incident as of Q3 2024.
Conclusion
As Henry Schein navigates the evolving healthcare landscape, the company remains well-positioned to leverage its diverse product and service offerings, extensive distribution network, and technological expertise to drive continued growth and deliver value to its shareholders. With a strong track record of innovation, strategic acquisitions, and operational excellence, Henry Schein is poised to capitalize on the long-term trends shaping the healthcare industry. The company's ability to adapt to market challenges, such as the recent cyber incident, while maintaining its focus on high-growth, high-margin businesses, demonstrates its resilience and strategic agility. As Henry Schein continues to execute its growth strategy and invest in key areas of its business, it is well-equipped to maintain its leadership position in the healthcare solutions market and drive long-term value creation for its stakeholders.