Henry Schein, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; comparisons are to the quarter ended September 24, 2011. Year-to-date figures cover the nine months ended on those respective dates. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Net sales | $2,231.1 | $2,111.7 | +5.7% |
| Gross profit / margin | $609.0 / 27.3% | $587.4 / 27.8% | +3.7%; margin down 0.5 percentage points |
| Operating income | $149.6 | $143.3 | +4.4% |
| Net income attributable to Henry Schein | $96.8 | $92.0 | +5.2% |
| Diluted EPS | $1.08 | $0.99 | +9.1% |
For the nine months, sales were $6,531.5 million (+5.5%), operating income $437.6 million (+4.5%), and net income attributable to Henry Schein $275.6 million (+4.8%). Diluted EPS was $3.06, versus $2.82. Nine-month gross margin was 28.2%, down from 28.5%.
Revenue, margins, and operating trends
- Q3 health care distribution sales rose 5.4%; technology and value-added services rose 14.1%. By business group, animal health grew 19.2%, technology and value-added services 14.1%, medical 4.2%, while dental declined 0.3% as reported.
- Management attributed Q3 sales growth to 8.9% local-currency growth, partly offset by a 3.2% foreign-exchange headwind. Excluding seasonal influenza vaccine sales, sales grew 6.4% overall.
- Distribution gross margin fell to 26.1% from 26.7%, primarily reflecting stronger animal-health sales, which include a higher share of lower-margin pharmaceuticals. Technology gross margin declined to 64.4% from 65.4%, reflecting product mix and higher customer-support costs.
- SG&A increased 3.4% to $459.4 million, but declined to 20.6% of sales from 21.0%. Q3 effective tax rate was 30.5%, versus 31.5%.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $208.4 million, down from $276.8 million. The company cited working-capital changes; accounts receivable and inventory uses of cash were $106.0 million and $85.0 million, respectively.
- Investing cash outflow was $237.3 million, including $206.3 million for equity investments and acquisitions. Financing cash outflow was $29.3 million. Cash ended the period at $89.3 million, down from $147.3 million at year-end 2011.
- At September 29, 2012, total debt was $609.4 million, versus $441.4 million at December 31, 2011; this comprised $155.2 million of bank credit lines, $17.7 million of current long-term debt maturities, and $436.4 million of long-term debt. Working capital was $1,063.2 million.
- A new $500 million revolving facility, with a $200 million expansion feature, replaced the prior facility and expires in September 2017. $125 million was drawn under it; additional short-term bank lines had $30.2 million outstanding. The company stated that cash, borrowing access, and available facilities were sufficient for foreseeable needs.
- Management expected to spend approximately $10–$20 million on capital projects during the remainder of fiscal 2012. It also noted that working-capital needs typically rise from late Q3 through Q1.
Material changes, outlook, and risks
- During the first nine months, the company recorded $15.2 million in restructuring costs ($10.5 million after tax), associated with eliminating approximately 200 positions and closing facilities. The program was complete, with no further 2012 costs expected.
- Acquisitions contributed to sales growth; acquisitions completed in the period were described as immaterial individually and in aggregate. Integration activity continued, and management identified acquisition activity and integration as a material change to internal controls over financial reporting. Disclosure controls were assessed as effective.
- No specific earnings or sales guidance was provided in the supplied filing text. Management said demand could grow at slower rates given economic and industry conditions.
- Key disclosed risks include competition, macroeconomic uncertainty, supplier and customer dependence, acquisition integration and execution, foreign exchange, regulatory changes in health care and pharmaceuticals, privacy and data-security requirements, litigation, and technology and information-system risks.
- Auction-rate securities had a carrying value of $5.7 million and remained difficult to liquidate because auctions had failed. The company reported no known issuer defaults and said the illiquidity was not expected to affect operating funding.
- Pending legal matters and accrued estimated losses were described as not material. The company reported $30.5 million of unrecognized tax benefits and did not expect changes over the next 12 months to have a material financial-statement impact.
Most important facts for investors to verify
- Whether sales growth, particularly in animal health and technology, continues and how much depends on acquisitions, vaccine comparisons, and currency movements.
- Whether gross-margin pressure from product and customer mix persists, and whether technology support costs moderate.
- Whether working-capital investment continues to weigh on operating cash flow, given rising receivables and inventory.
- Debt and liquidity capacity, covenant compliance, and any further borrowing or share repurchases; $84.3 million remained authorized for repurchases at quarter-end.
- Progress and costs of acquisition integration, including the effect of acquired systems on internal controls.
- Developments in health-care regulation, privacy and security obligations, tax examinations, litigation, and the liquidity valuation of auction-rate securities.