Business Context and Reporting Period
Company: Henry Schein, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 26, 2009
Business Overview: Henry Schein is a leading distributor of healthcare products and services to office-based practitioners, including dental, medical, and animal health sectors. The company operates through two reportable segments: Healthcare Distribution and Technology. It serves over 575,000 customers globally with operations in the U.S., Canada, and 21 other countries.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 26, 2009 |
Nine Months Ended Sep 26, 2009 |
Nine Months Ended Sep 27, 2008 |
|---|---|---|---|
| Net Sales | $1,659,433 | $4,752,255 | $4,799,234 |
| Gross Profit | $476,267 | $1,390,548 | $1,409,387 |
| Gross Margin % | 28.7% | 29.3% | 29.4% |
| Operating Income | $113,885 | $326,443 | $314,875 |
| Net Income (Total) | $100,748 | $240,473 | $199,157 |
| Net Income Attributable to Henry Schein | $96,421 | $224,745 | $183,498 |
| Diluted EPS (Continuing Ops) | $1.03 | $2.45 | $2.00 |
| Cash from Operating Activities | N/A | $218,377 | $188,664 |
| Cash and Cash Equivalents | $317,607 | $317,607 | $288,364 |
| Total Debt | $268,175 | $268,175 | $417,989 |
| Working Capital | $1,050,619 | $1,050,619 | $882,401 |
Material Changes vs. Prior Period
- Revenue: Net sales for the nine months ended September 26, 2009, decreased by 1.0% ($47.0 million) compared to the prior year. This decline was driven by a 5.9% negative impact from foreign currency exchange, which offset 4.9% growth in local currencies (driven by acquisitions).
- Segment Performance: Dental sales declined 3.5% due to lower equipment sales. Medical sales increased 0.8%, while International sales rose 0.4% despite significant currency headwinds. Technology sales grew 4.3%.
- Profitability: Net income attributable to Henry Schein increased 22.5% year-over-year for the nine-month period. This improvement was primarily due to a significant reduction in the effective tax rate (26.3% in 2009 vs. 33.5% in 2008) resulting from a $21.0 million reduction in valuation allowance on foreign deferred tax assets.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased 3.1% ($34.5 million) due to cost reduction initiatives and favorable foreign exchange effects.
- Debt Reduction: Total debt decreased significantly from $418.0 million to $268.2 million. This was largely due to the repayment of $130.0 million in senior notes on June 30, 2009, and other principal payments.
- Interest Expense: Interest expense decreased by $8.5 million year-over-year due to debt repayments and lower interest rates.
- Restructuring: The company recorded $4.0 million in restructuring costs for the nine months ended September 26, 2009, related to a plan announced in November 2008 to eliminate 430 positions and close facilities.
Guidance, Outlook, and Risks
- Outlook: Management expects demand for products and services to grow at slower rates given current economic conditions. The company anticipates continued seasonality with stronger sales in the third and fourth quarters.
- Capital Expenditures: The company expects to invest approximately $10 million to $20 million in capital projects for the remainder of the fiscal year to modernize facilities and integrate acquisitions.
- Liquidity: The company maintains a $400.0 million revolving credit facility with no outstanding borrowings as of September 26, 2009. Management believes cash, credit facilities, and access to capital markets are sufficient to meet short-term and long-term needs.
- Share Repurchases: No shares were repurchased in the quarter. $57.7 million remains available under the current repurchase program.
- Risks and Contingencies:
- Auction-Rate Securities (ARS): Approximately $22.3 million is invested in ARS which have failed to settle since February 2008. While rated AAA and currently paying interest, the company cannot liquidate these in the near term. A temporary impairment of $2.0 million has been recorded.
- Money Market Fund: Holdings in the Reserve Primary Fund (approx. $2.5 million) were impacted by the Lehman Brothers bankruptcy, with the fund liquidating below $1.00 NAV. A reserve of $0.3 million remains.
- Regulatory Environment: The company faces risks related to healthcare reform, FDA enforcement, and state laws regarding drug pedigree tracking.
Investor Verification Checklist
- Tax Rate Sustainability: Verify the sustainability of the reduced effective tax rate (14.0% for Q3, 26.3% for YTD) which was heavily influenced by a one-time $21.0 million valuation allowance reversal.
- ARS Liquidity Risk: Assess the potential impact of the $22.3 million illiquid Auction-Rate Securities investment on future liquidity if market conditions worsen or if redemptions are delayed further.
- Debt Maturity Profile: Review the maturity schedule of remaining debt, specifically the $20.0 million senior notes maturing in September 2010 and the $240.0 million convertible notes due in 2034.
- Acquisition Integration: Monitor the integration of recent acquisitions (approx. $116 million in annual revenue) and the impact on internal controls, as noted in Item 4.
- Working Capital Trends: Track Days Sales Outstanding (increased to 41.7 days) and Inventory Turns (decreased to 6.1) to ensure efficient capital management in a slowing economic environment.