Henry Schein, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 27, 2020. Financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
Henry Schein distributes dental and medical products and provides healthcare technology and value-added services. It reports two segments: health care distribution and technology and value-added services. Animal health is presented as a discontinued operation following its 2019 separation.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1.684bn | $2.448bn | $4.113bn | $4.808bn |
| Gross profit | $454.3m | $767.4m | $1.200bn | $1.519bn |
| Gross margin | 27.0% | 31.4% | 29.2% | 31.6% |
| Operating income (loss) | $(7.4)m | $162.3m | $166.4m | $334.7m |
| Net income (loss) attributable to Henry Schein | $(10.8)m | $114.5m | $119.5m | $224.3m |
| Diluted EPS | $(0.08) | $0.77 | $0.84 | $1.49 |
- Q2 sales fell 31.2% year over year; first-half sales fell 14.5%. The filing attributes the decline primarily to COVID-19-related practice closures and reduced patient volumes.
- Q2 health care distribution sales declined 32.2% and technology and value-added services sales declined 15.9%. Dental sales fell 41.2% and medical sales fell 11.4%. In the first half, dental sales fell 23.2%, while medical sales increased 2.7%.
- Q2 distribution gross margin fell to 24.4% from 29.4%; technology and value-added services margin fell to 69.1% from 72.3%. Management cited PPE inventory valuation charges and pricing volatility, lower vendor rebates, sales mix, and fixed costs against lower volumes.
- Q2 SG&A and restructuring costs together were $461.7m, down 23.7% year over year; their share of sales increased to 27.4% from 24.7%, reflecting the sharp revenue contraction.
- First-half cash from continuing operations was a use of $0.8m, versus $298.8m provided in the prior-year period. Continuing-operations investing used $81.6m and financing provided $262.1m.
Liquidity and debt
- At June 27, 2020, cash was $296.1m, up from $106.1m at year-end 2019; working capital was $1.102bn, down from $1.188bn.
- Total debt was $1.129bn, compared with $756.7m at December 28, 2019. The increase included $500m drawn under a new $700m 364-day facility, taken out amid potential COVID-19 cash needs. The facility matures April 16, 2021, and $200m remained available at quarter-end.
- The company amended its $750m revolving credit agreement, including changing the leverage covenant and temporarily increasing its maximum permitted leverage ratio through March 31, 2021. No borrowings were outstanding under that facility.
- Management said cash, access to debt and equity markets, and available credit facilities were expected to meet foreseeable capital needs. It also noted pandemic-related uncertainty could materially affect future cash flows, financial condition, and liquidity.
Material changes, outlook, and risks
- Practices began reopening in the latter half of Q2, and sales improved as patient traffic returned. Management said volumes remained below pre-pandemic levels and warned that case increases could again impair demand. No specific earnings or revenue guidance was provided.
- Global PPE sales increased more than 30% in dental and nearly 140% in medical in Q2 versus the prior year. PPE inventory price volatility also generated significant charges, which could recur; management warned that weaker demand or oversupply could further hurt margins and inventory values.
- Cost actions included payroll reductions, furloughs and reduced hours, lower capital spending, and cuts to planned and non-strategic spending. Some customer-facing employees returned as markets recovered. Acquisitions and share repurchases were temporarily suspended; no common shares were repurchased during the quarter.
- First-half results included approximately $10m of incremental dental bad-debt reserves, a $12.4m net stock-based compensation credit reflecting lower expected performance-award vesting, and $6.1m of impairment charges recorded in Q1. Restructuring costs were $20.7m for the first half.
- A proposed $35m securities-litigation settlement, expected to be covered by insurance and to have no earnings impact, had preliminary court approval and remained subject to final approval. Other matters include an antitrust case with proceedings stayed pending Supreme Court review, a medical-supply antitrust case remanded for further proceedings, opioid-related suits, and a Covetrus-related securities action. The company said accrued probable legal losses were not material.
- Unrecognized tax benefits were approximately $110.5m; the company said resolution of remaining IRS matters could have a material impact. Other key risks include customer credit and collections, supplier and PPE availability, rebate targets, covenant compliance, foreign exchange, and pandemic-related operational and cybersecurity risks.
Important facts for investors to verify
- Whether dental and medical practice activity and patient volumes continue recovering, and how any renewed COVID-19 disruption affects sales and cash flow.
- Whether PPE supply, pricing, inventory levels, and vendor rebates stabilize or lead to further margin or inventory charges.
- Debt and liquidity developments, including repayment or refinancing of the $500m 364-day borrowing and compliance with amended leverage covenants.
- Final court approval and insurance coverage for the proposed $35m securities settlement, and material developments in other litigation and IRS matters.
- Whether the company’s cost reductions and restructuring actions can offset lower volumes without impairing operations or future growth.