Henry Schein, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 27, 2014 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where disclosed. Amounts are in U.S. dollars.
Business context
Henry Schein distributes health care products and provides related services, primarily to office-based dental, animal health and medical practitioners. It reported two segments: health care distribution and technology and value-added services. The company served more than 1 million customers, operated in 28 countries and employed more than 17,500 people.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $10,371.4 million | $9,560.6 million | +8.5% |
| Gross profit / margin | $2,911.3 million / 28.1% | $2,656.0 million / 27.8% | Profit +9.6% |
| Operating income / margin | $715.1 million / 6.9% | $677.1 million / 7.1% | +5.6% |
| Net income attributable to Henry Schein | $466.1 million | $431.6 million | +8.0% |
| Diluted EPS | $5.44 | $4.93 | +10.3% |
| Operating cash flow | $592.5 million | $664.2 million | Down $71.7 million |
- Sales by market: dental $5,381.2 million (+7.7%); animal health $2,898.6 million (+11.5%); medical $1,742.7 million (+6.1%); technology and value-added services $348.9 million (+9.0%). Total sales growth included 4.6% internally generated growth, 4.0% acquisition growth and a 0.1% foreign-exchange decline.
- Health care distribution gross margin rose to 26.7% from 26.5%; technology and value-added services margin rose to 66.2% from 64.0%. Company-wide SG&A increased 11.0% and rose to 21.2% of sales from 20.7%, outpacing revenue growth and contributing to lower operating margin.
- FY2014 investing cash outflow was $516.6 million, primarily reflecting higher acquisition, equity-investment and fixed-asset spending. Financing cash outflow was $154.6 million. Capital expenditures were $82.1 million; common-stock repurchases were $300.0 million.
- Cash and cash equivalents were $89.5 million, versus $188.6 million a year earlier; working capital was $1,133.1 million, versus $1,284.0 million. Management attributed lower operating cash flow mainly to unfavorable working-capital changes; the prior year benefited from inventory reductions related to the medical-device excise tax.
- Total debt was $731.5 million, up from $485.2 million, including $182.9 million drawn on short-term bank credit lines and $542.8 million of long-term debt. The company also had a $500 million revolving facility, with a $200 million expansion feature, and no balance drawn on that facility at year-end. Management said available cash, debt-market access and credit facilities were sufficient for foreseeable needs.
- Quarter ended December 27, 2014: sales were $2,702.1 million, operating income $202.9 million, net income attributable to Henry Schein $133.0 million and diluted EPS $1.56. Versus the year-ago quarter, these increased approximately 7.0%, 8.6%, 7.0% and 9.1%, respectively.
Material changes and notable transactions
- Growth accelerated from FY2013’s 6.9% sales increase to 8.5% in FY2014; animal health remained the fastest-growing major market. Acquisition contributions accounted for 4.0 percentage points of FY2014 local-currency sales growth.
- FY2014 included acquisitions of European dental businesses from Arseus, Polish animal-health distributor Medivet and a 60% interest in SmartPak Equine. The company also acquired BioHorizons in December 2013. Acquisition and investment payments were $424.3 million in FY2014.
- In November 2014, Henry Schein entered a strategic agreement to acquire Cardinal Health’s physician-office commercial organization, with annual sales exceeding $300 million. Cardinal was to provide transitional order fulfillment and distribution until integration, expected in the second quarter of 2015; the agreement also included purchases of Cardinal-branded and other medical products.
- Foreign-currency translation reduced comprehensive income: total other comprehensive loss was $167.1 million, primarily from currency translation, and Henry Schein’s accumulated other comprehensive income turned to a $95.1 million loss from $67.8 million of income.
- Share repurchases totaled approximately $300.0 million in FY2014. At year-end, $299.9 million remained authorized for repurchases. No cash or stock dividend was declared, and management did not anticipate one in the foreseeable future.
Outlook, risks and contingencies
- Management forecast a 2015 effective tax rate of approximately 30%; the filing does not provide a company-wide revenue, earnings or EPS forecast. Management described growth initiatives as part of its 2015–2017 strategic planning cycle.
- A restructuring initiative announced in November 2014 was expected to occur throughout FY2015, eliminate approximately 2%–3% of the workforce and close certain facilities. Estimated pretax costs were $35–$40 million, or approximately $0.29–$0.33 per diluted share; the company had not yet estimated the cost breakdown or related cash expenditures.
- Key risks include intense price competition; reliance on third-party suppliers; seasonal and working-capital fluctuations; acquisition integration and execution; shipping costs; foreign-exchange exposure; cybersecurity and privacy risks; and evolving pharmaceutical, medical-device, fraud-and-abuse and health-information regulations.
- The Drug Supply Chain Security Act began taking effect in January 2015, and Henry Schein said it was assessing its impact. The filing also noted upcoming EHR and ICD-10 implementation requirements that could increase support costs or disrupt customers.
- Pending legal matters were not expected by management to have a material adverse effect; recorded estimated legal losses were not material. The company said a December 2014 IRS notice of deficiency for tax years 2009–2011 was not expected to significantly affect financial position, liquidity or results. Unrecognized tax benefits, including accrued interest, totaled $80.6 million; management could not reasonably estimate their future cash-flow timing.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls, while noting that acquisition integrations and systems implementations constituted a material change in internal control during the quarter.
Important facts for investors to verify
- Whether the planned restructuring delivers the targeted expense efficiencies, and how its $35–$40 million estimated cost and cash outlays develop.
- Whether Cardinal Health integration proceeds on the expected schedule and contributes as planned, alongside the performance and returns of recent acquisitions.
- Whether working capital, cash generation and debt remain manageable as acquisition spending, inventory needs and seasonal demand fluctuate.
- Whether margin trends improve: SG&A grew faster than sales and operating margin declined, despite stronger gross margin.
- Whether compliance with new drug-tracing, EHR, privacy and other health-care regulations results in material costs, disruption or liability.
- Whether currency movements, tax examinations and the $80.6 million of unrecognized tax benefits materially affect future reported results or cash flows.