# HENRY SCHEIN INC (HSIC) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from HENRY SCHEIN INC's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1000228/000100022824000011/form10k20231230.htm Accession: 0001000228-24-000011 Filing date: 2024-02-28 Report date: 2023-12-30 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/HSIC/ All MD&A years: /company/HSIC/mda/ Previous year: /company/HSIC/mda/fy2022/ (FY 2022) Next year: /company/HSIC/mda/fy2024/ (FY 2024) 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”). 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. Table of Contents 45 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 During the years ended December 30, 2023 and December 31, 2022 we   continued to experience a decrease in the sales of PPE and COVID-19 test kits as compared to the comparable   prior-year periods, primarily due to lower market pricing of PPE and lower market demand for COVID-19   test kits. 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.   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. 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. Cybersecurity Incident In addition to immaterial and unrelated prior incidents at certain of   our subsidiaries, in October 2023 Henry Schein experienced a cybersecurity 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. Once we became aware of the issue, we took steps   to assess, contain and remediate this incident.   We restored affected systems and applications, our distribution operations resumed and we reactivated our ecommerce platform.   We also notified law enforcement and our employees, customers, suppliers and investors, informing them of both the incident and management’s efforts to mitigate its impact on our daily operations and data maintained on the Company’s systems.   Subsequently, on or about November 8, 2023, we determined that the threat actor obtained personal and sensitive information   maintained on our systems belonging to certain third parties and since that date we have notified affected and potentially affected parties   as appropriate. The scope of personal and sensitive data impacted is still under investigation.   On November 22, 2023, we experienced a related disruption to our ecommerce platform and related   applications, which has since been remediated.   As described in “Management’s Discussion & Analysis – 2023 Compared to 2022, the incident adversely impacted our financial results for the fourth quarter and full year 2023.   We also expect some short-term residual impact on our financial results in 2024. We maintain cybersecurity insurance, subject to certain retentions and policy limitations.   With respect to the October 2023 cybersecurity incident, we have a $60 million insurance policy, following a $5 million retention. Table of Contents 46 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 91 years of experience distributing health   care products. We are headquartered in Melville, New York,   employ approximately 25,000 people (of which approximately 11,500 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,   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. Table of Contents 47 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 also have invested in expanding our sales/marketing 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. Table of Contents 48 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 2023   and 2033, the 45 and older population is expected to grow by approximately 11%.   Between 2023 and 2043, this age group is expected to grow by approximately 21%.   This compares with expected total U.S. population growth   rates of approximately 6% between 2023 and 2033   and approximately 11% between 2023 and 2043. According to the U.S. Census Bureau’s International Database, in 2023   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 23% 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 $4.5 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 $7.2 trillion by 2031, or 19.6% 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. Table of Contents 49 Results of Operations Refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations   in our 2022 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results of operations for the fiscal year 2022 compared to fiscal year 2021. The following tables summarize the significant components of our operating   results and cash flows: Years   Ended December 30, December 31, December 25, 2023 2022 2021 Operating results: Net sales $ 12,339 $ 12,647 $ 12,401 Cost of sales 8,478 8,816 8,727 Gross profit 3,861 3,831 3,674 Operating expenses: Selling, general and administrative 2,956 2,771 2,634 Depreciation and amortization 210 182 180 Restructuring and integration costs 80 131 8 Operating income $ 615 $ 747 $ 852 Other expense, net $ (73) $ (26) $ (21) Gain on sale of equity investment - - 7 Net income 436 566 660 Net income attributable to Henry Schein, Inc. 416 538 631 Years   Ended December 30, December 31, December 25, 2023 2022 2021 Cash flows: Net cash provided by operating activities $ 500 $ 602 $ 710 Net cash used in investing activities (1,135) (276) (677) Net cash provided by (used in) financing activities 701 (315) (333) Table of Contents 50 Plans of Restructuring and Integration Costs On August 1, 2022, we committed to a restructuring plan focused on   funding the priorities of the BOLD+1 strategic plan, streamlining operations and other initiatives to increase efficiency.   We revised our previous expectations of completion and we have extended this initiative through the end of 2024.   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 to the total cost, or an estimate of the amount or range of amounts that will result in future   cash expenditures. During the years ended December 30, 2023, December 31, 2022, and December   25, 2021, we recorded restructuring costs of $80 million, $128 million, and $8 million, respectively.   The restructuring costs for these periods primarily related to severance and employee-related costs,   impairment of intangible assets, accelerated amortization of right-of-use lease assets and fixed assets, other lease exit   costs, and certain business exit costs discussed below. During the year ended December 30, 2023, in connection with our restructuring   plan, we recorded an impairment of an intangible asset of $12 million related to a planned disposal of a non-U.S.   business.   The disposal is expected to be completed in 2024.   This impairment is included in the $80 million of restructuring   charges discussed above. During the year ended December 31, 2022, in connection with our   restructuring plan, we vacated one of the buildings at our corporate headquarters in Melville, New York, which resulted in an accelerated amortization of a right-of-use lease asset of $34 million.   We also initiated the disposal of a non-profitable U.S. 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 was completed during 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. Table of Contents 51 2023 Compared to 2022 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: % of % of Increase / (Decrease) 2023 Total 2022 Total $ % Health care distribution (1) Dental $ 7,539 61.1 % $ 7,473 59.1 % $ 66 0.9 % Medical 3,994 32.4 4,451 35.2 (457) (10.3) Total health care distribution 11,533 93.5 11,924 94.3 (391) (3.3) Technology and value-added services (2) 806 6.5 723 5.7 83 11.4 Total $ 12,339 100.0 $ 12,647 100.0 $ (308) (2.4) The components of our sales growth were as follows: Local Currency Growth/(Decline) Total Local Currency Growth/(Decline) Foreign Exchange Impact Total Sales Growth/(Decline) Local Internal Growth Acquisition Growth Extra Week Impact Health care distribution (1) Dental Merchandise (1.6) % 4.2 % (1.0) % 1.6 % 0.1 % 1.7 % Dental Equipment (0.9) 1.1 (2.1) (1.9) - (1.9) Total Dental (1.4) 3.4 (1.3) 0.7 0.2 0.9 Medical (11.2) 2.2 (1.3) (10.3) - (10.3) Total Health Care Distribution (5.1) 2.9 (1.2) (3.4) 0.1 (3.3) Technology and value-added services (2) 7.2 5.0 (0.8) 11.4 - 11.4 Total (4.4) 3.1 (1.2) (2.5) 0.1 (2.4) (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 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 We report our results of operations on a 52 or 53 weeks per fiscal year basis ending on the last Saturday of December.   The year ended December 30, 2023, consisted of 52 weeks,   and the year ended, December 31, 2022 consisted of 53 weeks,   resulting in an extra week of sales. Global net sales for the year ended December 30, 2023 decreased 2.4%.   The components of our sales growth are presented in the table above. The 4.4% decrease in our internally generated local currency sales was primarily   attributable to a decrease in sales of PPE products and COVID-19 test kits.   For the nine months ended September 30, 2023, the estimated   increase in internally generated local currency sales, excluding PPE products   and COVID-19 test kits, was 3.5%.   However, as a result of the adverse impact of the cybersecurity incident during the quarter   ended December 30, 2023, our internally generated local currency sales, excluding sales of PPE products   and COVID-19 test kits, on a full year basis were flat compared to the prior year. In addition, we estimate that sales of PPE products and COVID-19   test kits were approximately $713 million and $1,245 million for the years ended December 30, 2023 and December 31,   2022, respectively, representing an Table of Contents 52 estimated decrease of $532 million or 42.7%   versus the prior year, with the $532 million net decrease year-over- year representing 4.2%   of global net sales for the year ended December 30, 2023. Dental Dental net sales for the year ended December 30, 2023 increased 0.9%.   The components of our sales growth are presented in the table above.   Our decrease in internally generated local currency sales for dental   merchandise was primarily attributable to the negative impact of the cybersecurity incident.   Our sales decrease in internally generated local currency for dental equipment was also primarily attributable   to the impact of the cybersecurity incident. We estimate that sales of PPE products were approximately $338 million and $448 million for the years ended December 30, 2023 and December 31, 2022, respectively, representing an estimated decrease of $110 million or 24.5% versus the prior year, with the $110 million net decrease year-over-year representing 1.5% of dental net sales for the year ended December 30, 2023.   The decrease in sales of PPE products is primarily due to lower   market prices and loss of demand during the cybersecurity incident.   Our estimated internally generated local currency sales, excluding PPE products were flat compared to the prior year. Medical Medical net sales for the year ended December 30, 2023 decreased 10.3%.   The components of our sales growth are presented in the table above.   The internally generated local currency decrease in medical sales   is primarily attributable to the impact of the cybersecurity incident that occurred   during the fourth quarter of the year ended December 30, 2023 and to lower sales of PPE products and COVID-19   test kits and other point-of-care diagnostic products. We estimate that sales of PPE products and COVID-19 test kits were approximately $375 million and $797 million for the years ended December 30, 2023 and December 31, 2022, respectively, representing an estimated decrease   of $422 million or 52.9% versus the prior year, with the $422 million net decrease year-over-year representing 10.6% of medical net sales for the year ended December 30, 2023.   The decrease in sales of these products is primarily due to lower market prices of PPE, lower market demand of COVID-19   test kits, and loss of sales of both product categories during the cybersecurity incident.   The estimated decrease in internally generated local currency   sales, excluding PPE products and COVID-19 test kits was 2.2%. Technology and value-added services Technology and value-added services net sales for the year ended December 30, 2023 increased 11.4%.   The components of our sales growth are presented in the table above.   During the year ended December 30, 2023, the trend for sales of practice management software growth remains   strong as we continued to increase the number of cloud-based users.   We also experienced increased demand for our revenue cycle management solutions and our analytical products.   The increase in sales during the year ended December 30, 2023   was partially offset by the expiration, during the year ended December 31, 2022, of a modestly profitable   government contract in one of our value-added services businesses.   This segment of our business was largely unaffected by the cybersecurity incident in the fourth quarter. Gross Profit Gross profit and gross margin percentages by segment and in total were as follows: Gross Gross Increase / (Decrease) 2023 Margin % 2022 Margin % $ % Health care distribution $ 3,312 28.7 % $ 3,357 28.2 % $ (45) (1.3) % Technology and value-added services 549 68.0 474 65.5 75 15.7 Total $ 3,861 31.3 $ 3,831 30.3 $ 30 0.8 Table of Contents 53 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 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 year ended December 30, 2023   decreased compared to the prior-year- period due to the decrease in sales resulting from the cybersecurity   incident and a reduction in sales of PPE products and COVID-19 test kits, partially offset by 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, as well as an increase   in gross margin rates primarily due to product mix and increases in productivity. 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 2023 Net Sales 2022 Net Sales $ % Health care distribution $ 2,842 24.6 % $ 2,738 23.0 % $ 104 3.8 % Technology and value-added services 404 50.1 346 47.8 58 16.8 Total $ 3,246 26.3 % $ 3,084 24.4 % $ 162 5.3 % The net increase in operating expenses is attributable to the following: Operating Costs Restructuring and Integration Costs Acquisitions Total Health care distribution $ 92 $ (55) $ 67 $ 104 Technology and value-added services 5 4 49 58 Total $ 97 $ (51) $ 116 $ 162 The increase in operating costs during the year ended December 30, 2023 includes   increases in payroll and payroll related costs, travel, convention and consulting expenses in both of our reportable   segments and increased acquisition expenses in our healthcare distribution segment.   During the year ended December 30, 2023, our operating expenses were favorably impacted by the recognition of   a remeasurement gain of $18 million following an acquisition of a controlling interest of a previously held equity   investment, and were negatively impacted by restructuring, an impairment of capitalized costs of $27 million and impairment   of intangible assets of $7 million within our health care distribution segment.   During the year ended December 30, 2023, we also incurred $11 million of direct costs, primarily professional fees, for the remediation of   the cybersecurity incident.   The restructuring and integration costs are primarily related to severance and   employee-related costs, accelerated amortization of right-of-use lease assets and fixed assets, and other lease exit   costs. Table of Contents 54 Other Expense, Net Other expense, net was as follows: Variance 2023 2022 $ % Interest income $ 17 $ 8 $ 9 125.1 % Interest expense (87) (35) (52) (148.7) Other, net (3) 1 (4) n/a Other expense, net $ (73) $ (26) $ (47) (172.9) % 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 22.1% for the year ended December 30, 2023 compared to 23.5%   for the prior year.   In each year, 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 Model 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 framework.   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.   As we operate in jurisdictions which have adopted Pillar 2, we are continuing to analyze the implications to effectively manage   the impact for 2024 and beyond. Table of Contents 55 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 13 – 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.   As part of our BOLD+1 Strategic Plan, including pursuing focused mergers and acquisitions,   during the year ended December 30, 2023 we have announced acquisitions of companies specializing   in implant systems, clear aligners, homecare medical products delivered directly to patients, and dental practice   transition services. Net cash provided by operating activities was $500 million for the   year ended December 30, 2023, compared to net cash provided by operating activities of $602 million for the prior year.   The net change of $102 million was primarily attributable to lower cash net income.   During the quarter ended December 30, 2023, the cybersecurity incident had several offsetting impacts to the operating cash flows from our working   capital, net of acquisitions, including a decrease in operating cash flows from accounts receivable   due to delayed timing of billings and limited collection efforts resulting from the impact of the cybersecurity incident, and an increase   in operating cash flows resulting from reduced inventory purchases. Net cash used in investing activities was $1,135 million for the   year ended December 30, 2023, compared to net cash used in investing activities of $276 million for the prior year.   The net change of $859 million was primarily attributable to increased payments for equity investments and business acquisitions,   and increased purchases of fixed assets resulting from our continued investment in our facilities and operations. Net cash provided by financing activities was $701 million for the year   ended December 30, 2023, compared to net cash used in financing activities of $315 million for the prior year.   The net change of $1,016 million was primarily due to increased net borrowings from debt   to finance our investments, partially offset by decreased repurchases of common stock. Table of Contents 56 The following table summarizes selected measures of liquidity and capital   resources: December 30, December 31, 2023 2022 Cash and cash equivalents $ 171 $ 117 Working   capital (1) 1,805 1,764 Debt: Bank credit lines $ 264 $ 103 Current maturities of long-term debt 150 6 Long-term debt 1,937 1,040 Total debt $ 2,351 $ 1,149 Leases: Current operating lease liabilities $ 80 $ 73 Non-current operating lease liabilities 310 275 (1) Includes $284 million and $327 million of certain accounts receivable which serve as security for U.S. trade accounts receivable securitizations at December 30, 2023 and December 31, 2022, 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 46.2 days as of December 30, 2023 from 41.9 days as of December 31, 2022 due to delays in billings   leading to limited collections in the quarter ended December 30, 2023 as a result of the cybersecurity incident.   During the years ended December 30, 2023 and December 31, 2022, we wrote off approximately $16 million and $10 million, respectively, of fully reserved accounts receivable against our trade receivable reserve.   Our inventory turns from operations was 4.5 as of December 30, 2023 and 4.7 as of December 31, 2022.   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 4.8%), as well as inventory purchase commitments and operating lease obligations   as of December 30, 2023: Payments due by period 1 year 2 - 3 years 4 - 5 years 5 years Total Contractual obligations: Long-term debt, including interest $ 243 $ 1,097 $ 346 $ 783 $ 2,469 Inventory purchase commitments 5 8 4 - 17 Operating lease obligations 92 141 86 119 438 Transition tax obligations 11 24 - - 35 Finance lease obligations, including interest 4 3 2 - 9 Total $ 355 $ 1,273 $ 438 $ 902 $ 2,968 For information relating to our debt please see Note 13 – Debt . Table of Contents 57 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 18 years, some of which may include options to extend the leases for up to 15 years.   As of December 30, 2023, our right-of-use assets related to operating leases were $325 million and our current and non-current   operating lease liabilities were $80 million and $310 million, respectively.   Please see Note 7 – Leases for further information. Stock Repurchases On February 8, 2023, our Board authorized the repurchase of up   to an additional $400 million in shares of our common stock. From March 3, 2003 through December 30, 2023, we repurchased $4.7   billion, or 90,394,805 shares, under our common stock repurchase programs, with $265 million available   as of December 30, 2023 for future common stock share repurchases. 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 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 30, 2023 and December 31, 2022,   our balance for redeemable noncontrolling interests was $864 million and $576 million, respectively.   Please see Note 19 – Redeemable Noncontrolling Interests for further information. Unrecognized tax benefits As more fully disclosed in Note 14 – Income Taxes of “Notes to Consolidated Financial Statements,” we cannot reasonably estimate the timing of future cash flows related to our unrecognized   tax benefits, including accrued interest, of $115 million as of December 30, 2023. Critical Accounting 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, affect the significant estimates and judgments used in the preparation   of our consolidated financial statements: 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 and actual cost   for large equipment and high tech equipment.   In estimating carrying value of inventory, we consider many factors including the condition and Table of Contents 58 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 (i.e., customer   relationships and lists, trademarks and trade names, product development and non-compete agreements)   is based on critical judgments and assumptions derived from analysis of market conditions, including discount   rates, projected revenue growth rates (which are based on historical trends and assessment of financial projections),   estimated customer attrition and projected cash flows.   These assumptions are forward-looking and could be affected by future economic   and market conditions.   Please see Note 5 – 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 a reporting unit’s fair value below carrying value.   We regard our reporting units to be our operating segments: our global dental and medical businesses, 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 financial projections.   These projections are based on input from our leadership and are presented annually to our Board.   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. For the years ended December 30, 2023 and December 25, 2021, we believe   the fair value of each of our reporting units sufficiently exceeds the carrying values and thus we did not record any amount   for goodwill impairment. 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 for which   estimated fair value was lower than 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. Table of Contents 59 Definite-Lived Intangible Assets Annually or if we identify an impairment indicator,   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 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 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 year ended December 30, 2023 we recorded $19 million of   impairment charges related to businesses in our health care distribution segment, the components of which were   $7 million primarily related to customer lists and relationships attributable to lower than anticipated operating   margins in certain businesses, and a $12 million charge related to the planned exit of a business.   These impairment charges were calculated as the differences between the carrying values and the estimated fair values of the impaired   intangible assets, using a discounted estimate of future cash flows.   Please see Note 15 – Plans of Restructuring and Integration Costs for additional details. During the year ended December 31, 2022 we recorded $49 million of   impairment charges related to businesses in our health care distribution segment, the components of which were   a $15 million charge related to the disposal of an unprofitable business and a $34 million charge related to customer lists and relationships   attributable to customer attrition rates being higher than expected in certain other   health care distribution businesses.   These impairment charges were calculated as the differences between the carrying values and the   estimated fair values of the impaired intangible assets, using a discounted estimate of future   cash flows.   Please see Note 15 – Plans of Restructuring and Integration Costs for additional details. During the year ended December 25, 2021, we recorded a $1 million   impairment charge related ratably to a business within our health care distribution segment and a business within   our technology and value-added services segment. 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 at fair value.   The redemption amounts have been estimated based on recent transactions, expected future earnings and cash flows   and, if such earnings and cash flows are not achieved, the value of the redeemable noncontrolling interests might be impacted.   See Note 1 – Basis of Presentation and Significant Accounting Policies and Note 19 – Redeemable Noncontrolling Interests for additional information. Income Tax When determining if the realization of a deferred tax asset is likely to assess   the need to record 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 provisions contained within its 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 Table of Contents 60 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% likelihood 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 14 – Income Taxes for further discussion. The Financial Accounting Standards Board 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 have 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.