Henry Schein, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The year contained 53 weeks, versus 52 weeks in 2010. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are shown below.
Business context
Henry Schein distributes healthcare products and services primarily to office-based dental, medical and animal-health practitioners. It serves nearly 775,000 customers through two reportable segments: healthcare distribution and technology. Distribution accounted for 97.1% of 2011 sales; technology accounted for 2.9%. International sales represented approximately 28% of consolidated sales.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $8.530 billion | $7.527 billion | +13.3% |
| Gross profit | $2.418 billion | $2.171 billion | +11.4% |
| Gross margin | 28.3% | 28.8% | Down 0.5 percentage points |
| Operating income | $582.1 million | $521.1 million | +11.7% |
| Operating margin | 6.8% | 6.9% | Down about 0.1 percentage point |
| Net income attributable to Henry Schein | $367.7 million | $325.8 million | +12.9% |
| Diluted EPS | $3.97 | $3.49 | +13.8% |
| Cash from operating activities | $554.6 million | $395.5 million | +$159.1 million |
Management reported 10.9% local-currency sales growth, comprising 4.5% internally generated growth, 1.5% from the extra week and 4.9% from acquisitions; foreign exchange added 2.4%. Healthcare distribution gross margin fell to 27.2% from 27.8%, primarily because animal-health growth increased the mix of lower-margin pharmaceutical sales. Technology gross margin declined to 65.5% from 68.5%, mainly due to a higher share of lower-margin hardware and installation revenue. SG&A declined as a share of sales to 21.5% from 21.8%.
Fourth quarter: Net sales were $2.340 billion versus $2.024 billion in Q4 2010; operating income was $163.4 million versus $142.0 million; net income attributable to Henry Schein was $104.7 million versus $93.0 million; diluted EPS was $1.15 versus $1.00.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $147.3 million and working capital was $1.001 billion. Working capital was essentially unchanged from 2010.
- Total debt, including bank credit lines and current maturities, was $441.4 million, broadly unchanged year over year. Long-term debt was $363.5 million. The company reported a $400 million revolving facility, with $25 million drawn, expiring in September 2013.
- Operating cash flow increased to $554.6 million. Investing activities used $196.1 million, primarily reflecting lower acquisition and equity-investment payments than in 2010; financing activities used $354.4 million, including $200.0 million of share repurchases and $170.2 million to acquire noncontrolling interests.
- The company repurchased $500 million cumulatively under its program through year-end, with $100 million remaining authorized. It paid no cash dividends and did not expect to initiate them in the foreseeable future.
- On December 30, 2011, Henry Schein paid $155 million for Oak Hill Capital Partners’ remaining interests in Butler Animal Health Supply, raising its ownership to approximately 71.7%. The subsidiary had $251.7 million of debt outstanding at year-end.
- In January 2012, the company drew an additional $100 million under its private placement facilities. It held $11.3 million of auction-rate securities classified as long-term; failed auctions had limited near-term liquidity, though management said this did not impair funding for operations or growth.
Outlook, risks and unusual items
- Management gave no explicit 2012 revenue, earnings or EPS guidance in the provided filing text. It expected a 2012 effective tax rate of approximately 31%, capital investment of $50–$60 million, and first-half restructuring charges of approximately $11–$13 million, or $0.08–$0.10 per diluted share.
- Management said demand growth could be slower under current economic and industry conditions. It expects historical seasonality to continue, with sales and operating profits generally higher in Q3 and Q4.
- Key risks include intense price competition, reliance on third-party suppliers, European economic and currency exposure, customer credit and working-capital needs, acquisition integration, shipping costs, product liability, healthcare regulation and fraud enforcement, privacy and cybersecurity, and technology execution.
- Acquisitions and the extra fiscal week materially contributed to reported growth. The company acquired Provet at the end of 2010 and completed additional acquisitions during 2011; international growth also benefited from foreign exchange. The filing says 2011 net income increased approximately 16.9% excluding seasonal influenza vaccine sales from both periods.
- Pending legal matters and accrued product-liability and other claims were described as not material to financial position, results or cash flows. Goodwill impairment testing identified no impairment for 2009–2011.
- BDO USA, LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective, while noting acquisition integration and systems implementation constituted a material change in internal control activity during the quarter.
Important facts for investors to verify
- How much of sales and earnings growth reflects underlying demand versus acquisitions, the extra week, foreign exchange and seasonal vaccine sales.
- Whether gross-margin pressure persists, particularly from animal-health and pharmaceutical product mix and lower-margin technology hardware sales.
- Cash conversion and working-capital trends, including inventory growth, receivables collection and the seasonally higher funding needs.
- Debt repayment capacity and the potential cash requirements associated with Butler Animal Health debt, minority-interest puts and future acquisitions.
- Progress and actual cost of the planned 2012 restructuring, capital spending and European systems integration.
- Exposure from illiquid auction-rate securities, regulatory changes, supplier concentration and European economic conditions.