Henry Schein, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 29, 2019. Henry Schein distributes dental and medical products and provides technology and value-added services. Its two reportable segments are health care distribution and technology and value-added services. The Animal Health business was spun off in February 2019 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,447.8 million | $2,316.0 million | $4,808.1 million | $4,589.5 million |
| Gross profit | $767.4 million | $718.3 million | $1,519.1 million | $1,437.5 million |
| Operating income | $162.3 million | $157.1 million | $334.7 million | $319.3 million |
| Continuing-operations net income attributable to Henry Schein | $116.8 million | $110.6 million | $235.2 million | $222.2 million |
| Diluted EPS from continuing operations | $0.78 | $0.72 | $1.56 | $1.44 |
- Q2 sales rose 5.7%; excluding $23.9 million of transition-services sales to Covetrus, sales increased 4.7%. Management attributed growth to acquisitions and internally generated revenue, partly offset by foreign exchange.
- Q2 gross margin was 31.4%, compared with 31.0%. Operating income increased 3.3%. Medical sales grew 13.6%; technology and value-added services sales grew 39.9%, primarily reflecting acquisitions. Dental sales declined 0.7%, including weaker equipment sales.
- Total net income attributable to Henry Schein was $114.5 million in Q2 versus $141.2 million a year earlier; discontinued operations recorded a $2.2 million loss in 2019 versus $30.6 million of income in 2018. For the six-month period, discontinued operations contributed a $10.9 million loss versus $59.3 million of income.
- Six-month continuing-operations operating cash flow was $298.8 million, up from $111.9 million. Management cited lower working-capital needs and increased distributions from equity affiliates. Continuing-operations investing cash use was $635.5 million, mainly reflecting acquisitions and equity investments.
Balance sheet and liquidity
- At June 29, 2019, cash was $84.9 million and working capital was $1.283 billion, compared with $56.9 million and $956.4 million, respectively, at December 29, 2018.
- Total debt was $1.225 billion, down from $1.940 billion at year-end 2018; bank credit lines fell to $242.8 million from $951.5 million. The debt reduction followed the Animal Health transaction and repayment of a $400 million committed loan.
- Operating lease liabilities were $246.5 million, recognized following adoption of the new lease standard. The company reported that adoption did not materially affect net income or cash flows.
- The company said cash, access to debt and equity markets, and available credit facilities were sufficient for foreseeable short- and long-term needs. Its $750 million revolving facility matures in April 2022; $200 million was drawn at quarter-end.
Material changes, outlook and risks
- Animal Health separation: Henry Schein completed the spin-off and Covetrus merger on February 7, 2019. It received $1.120 billion in a distribution and $361.1 million from a Covetrus share sale. A transition-services agreement, including certain product sales, is expected to continue through 2020.
- Acquisitions: The company acquired North American Rescue, with annual sales of approximately $184 million, and Lighthouse 360, with annual sales of approximately $50 million. Acquisition payments and equity investments totaled $622.4 million in the first half.
- Restructuring: Q2 and first-half charges were $11.9 million and $16.6 million. The initiative eliminated approximately 4% of the workforce and closed facilities. It was complete at quarter-end; no additional 2019 charges were expected.
- Guidance: The supplied filing text does not provide a clear numerical earnings or revenue forecast. Management described its 2018–2020 strategic plan as focused on expense efficiencies and funding growth initiatives.
- Legal matters: The dental-supplies antitrust class settlement received final court approval, but an objector appealed. Other matters include the FTC antitrust proceeding, private antitrust and securities claims, and opioid-related litigation; the company said it intends to defend itself. It described the FTC matter as not expected to materially affect financial position, liquidity or results, and reported that accrued probable legal losses were not material.
- Other risks: The filing highlights competition and industry consolidation, acquisition integration, foreign exchange, regulation and reimbursement changes, data privacy and cybersecurity, supplier dependence, and litigation. The company said LIBOR’s expected discontinuation in 2021 was not expected to materially affect its financial position or interest expense.
Investor verification priorities
- Separate continuing-operations performance from discontinued-operation results when assessing earnings comparisons.
- Assess how much reported growth reflects acquisitions and transition-services revenue versus internally generated sales, and monitor dental equipment trends.
- Review acquisition integration, cash deployment, and the durability of improved operating cash flow and working capital.
- Track debt, lease obligations, credit availability, and the company’s substantial first-half share repurchases.
- Monitor outcomes and potential exposure from pending antitrust, securities and opioid litigation, including the appeal of the approved dental-supplies settlement.