Henry Schein, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
The filing covers the quarter and nine months ended September 24, 2016, compared with periods ended September 26, 2015. Henry Schein distributes health care products and provides technology and value-added services, principally to dental, animal health and medical practitioners, across 33 countries.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $2.865 billion | $2.686 billion | $8.451 billion | $7.779 billion |
| Gross profit | $789.5 million | $748.9 million | $2.372 billion | $2.213 billion |
| Operating income | $200.7 million | $188.9 million | $557.6 million | $533.3 million |
| Net income attributable to Henry Schein | $133.7 million | $127.7 million | $367.6 million | $349.1 million |
| Diluted EPS | $1.63 | $1.52 | $4.47 | $4.14 |
- Q3 sales increased 6.7%; local-currency growth was 7.7%, including 6.0% internally generated growth and 1.7% from acquisitions, partly offset by 1.0% foreign-exchange headwind. Nine-month sales increased 8.6%.
- Q3 gross margin was 27.6%, down from 27.9%; operating margin was approximately 7.0% in both periods. Nine-month gross margin declined to 28.1% from 28.4%, while operating margin was approximately 6.6% versus 6.9%.
- Q3 health care distribution sales grew 6.3%; technology and value-added services grew 16.7%. Nine-month growth was 8.3% and 18.3%, respectively. Animal health and medical growth included a change in accounting from agency to gross revenue recognition for certain products; management reported underlying internally generated growth of 6.8% and 9.2%, respectively, for the nine-month period after excluding that effect.
- Nine-month cash from operations was $351.0 million, versus $288.5 million. Investing used $179.8 million and financing used $171.1 million. Cash at September 24 was $76.2 million.
- Total debt was $1.069 billion, up from $809.7 million at December 26, 2015; working capital was $1.246 billion. The company reported $333.1 million outstanding on short-term bank credit lines and $350.0 million under its receivables securitization facility.
Changes, outlook, and notable items
- Q3 net income attributable to Henry Schein rose 4.7% and diluted EPS rose 7.2%; nine-month net income attributable to the company increased 5.3%. Higher sales and operating income were partly offset by lower gross-margin rates and increased interest expense.
- The ongoing restructuring is expected to eliminate approximately 3%–4% of the workforce and includes facility closures. Costs recorded were $29.8 million in the first nine months of 2016, following $34.9 million in 2015. Management estimated another $17 million–$22 million of costs in Q4 2016. No full-year revenue or earnings guidance is stated in the provided filing text.
- The company repurchased $350.0 million of shares in the first nine months. On October 18, 2016, the board authorized an additional $400.0 million repurchase program.
- Q3 effective tax rate was 28.9%, compared with 26.5% a year earlier; the prior-year quarter included a $6.3 million tax benefit. The nine-month 2016 rate was 29.0%, including an approximately $4.5 million benefit from a federal tax audit settlement.
- Foreign-currency translation reduced comprehensive income by $2.0 million in the first nine months, compared with a $112.9 million loss in the prior-year period. Management notes that currency movements can affect reported results.
- Henry Schein faces private and class-action antitrust lawsuits alleging, among other things, exclusionary conduct, price fixing and customer allocation. The company says it will defend itself vigorously; accrued probable and estimable losses were not material. The filing does not provide a clear estimate of potential exposure from these cases.
- Other cited risks include competition and industry consolidation, supplier dependence, acquisition integration, health care regulation, data privacy and cybersecurity, foreign-exchange exposure, and economic and political uncertainty, including the UK referendum outcome.
Most important facts for investors to verify
- Whether reported animal health and medical growth reflects underlying demand or the gross-versus-agency revenue-recognition change.
- Whether gross-margin pressure persists, and how product and customer mix affect distribution margins.
- Debt levels, borrowing costs, and the use of debt to fund working capital, acquisitions and share repurchases.
- Actual Q4 restructuring charges compared with the estimated $17 million–$22 million, and the resulting savings.
- Developments, potential damages and legal costs in the antitrust litigation.
- Cash conversion and working-capital trends, including receivable days outstanding, which rose to 41.9 from 40.6 a year earlier, and inventory turns, which declined to 5.4 from 5.5.