Henry Schein, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 25, 2021; comparisons are to the periods ended September 26, 2020. Amounts below are in U.S. dollars unless noted. The filing is unaudited.
Business context and results
Henry Schein distributes dental and medical products and provides technology and value-added services. Its reportable segments are health care distribution and technology and value-added services. Management said patient traffic during the first nine months of 2021 approached pre-pandemic levels; sales growth also reflected PPE and COVID-19-related products, acquisitions and foreign-exchange effects.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $3,178.3 million | $2,840.1 million | $9,070.5 million | $6,953.4 million |
| Gross profit | $912.1 million | $754.3 million | $2,692.7 million | $1,954.5 million |
| Gross margin | 28.7% | 26.6% | 29.7% | 28.1% |
| Operating income | $210.8 million | $187.7 million | $651.1 million | $354.1 million |
| Net income attributable to Henry Schein | $162.3 million | $141.7 million | $484.0 million | $261.2 million |
| Diluted EPS | $1.15 | $0.99 | $3.40 | $1.82 |
| Cash from operating activities | Not presented for quarter | Not presented for quarter | $432.9 million | $248.4 million |
Financial position, cash flow and liquidity
- At September 25, 2021, cash was $119.1 million, down from $421.2 million at December 26, 2020. Working capital was $1.611 billion, compared with $1.508 billion.
- Total debt was $774.6 million, up from $699.0 million at year-end 2020. This excludes operating lease liabilities; reported operating lease liabilities totaled $347.5 million.
- Nine-month investing cash use was $479.0 million, mainly reflecting higher acquisition and equity-investment payments. Financing cash use was $254.5 million, including $251.2 million of share repurchases.
- Inventory increased $271.6 million from year-end. Management cited continued stocking of PPE and COVID-19-related products. Accounts receivable days sales outstanding improved to 42.6 from 48.8 a year earlier; inventory turns increased to 5.1 from 4.7.
- The company reported no borrowings under its revolving credit facility or receivables securitization facility at quarter-end. Its new $1 billion revolving credit facility matures in August 2026. Management said cash, debt-market access and available credit provide sufficient liquidity for foreseeable needs.
Material changes and drivers
- Third-quarter sales rose 11.9% as reported; excluding prior-year Corporate TSA revenue, sales rose 12.9%. Management attributed local-currency growth to 7.2% internally generated growth and 3.9% from acquisitions, with 0.8% from foreign exchange. Estimated PPE and COVID-19-related sales were $494.5 million.
- For nine months, sales rose 30.4% as reported and 31.7% excluding prior-year TSA revenue. Excluding PPE and COVID-19-related products, estimated internally generated local-currency sales growth was 21.3%.
- Health care distribution drove the majority of sales: third-quarter segment sales increased 12.4%, while technology and value-added services sales increased 21.9%. Distribution gross margin improved, primarily due to lower PPE inventory adjustments and higher vendor rebates. Technology and value-added services gross margin declined, partly due to acquired businesses with lower margins and certain U.S. federal government transactions.
- SG&A increased 23.8% in the quarter; management cited the end of temporary pandemic cost-saving measures in 2020, higher payroll-related costs and acquisitions. Nine-month SG&A rose 27.6%, but declined as a share of sales to 22.5% from 23.0%.
- Quarterly and nine-month earnings included a $7.3 million after-tax gain from contingent proceeds on the 2019 sale of Hu-Friedy. The prior-year nine-month comparison included a $15.6 million tax benefit from a U.S. federal tax settlement.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management expects continued volatility during the pandemic and says the potential impact on results, financial condition and liquidity cannot be reasonably estimated.
- Management identified possible supply-chain and labor disruptions, changing demand, COVID-19 resurgences and vaccine mandates as risks. Mandates could increase costs or cause staffing shortages that affect fulfillment, sales and profitability.
- The company extended its restructuring initiative through the end of 2021. It recorded $3.4 million of restructuring costs in the first nine months of 2021 and said it could not reliably estimate remaining costs or future cash expenditures.
- Henry Schein and/or affiliates were defendants in approximately 150 opioid-related lawsuits; the company said it would defend itself and that opioid sales were negligible. One Alabama case was scheduled for a July 2022 liability trial. A separate Covetrus-related securities action dismissed Henry Schein and its CFO with prejudice in August 2021. Accrued legal losses were not material, according to the filing.
- Unrecognized tax benefits were approximately $79.0 million; $64.3 million would affect the effective tax rate if recognized. The filing notes potential for changes in the next 12 months.
- After quarter-end, on October 20, 2021, the company increased its private placement facility capacity to $1.5 billion and extended maturities to 2026; it also increased its receivables facility limit to $450 million and extended it to October 2024.
Important facts for investors to verify
- Whether revenue and margins remain resilient as PPE and COVID-19-related product demand changes, and whether reported growth translates into comparable organic growth.
- Whether elevated inventory and acquisition spending convert to cash without reducing liquidity; monitor cash, working capital, debt and acquisition-related obligations.
- Whether improved distribution margins persist, given management’s comments on PPE inventory adjustments and vendor rebates, and whether technology-segment margin pressure continues.
- Progress and remaining costs of restructuring, acquisition integration and material systems integration; management identified a material change in internal controls related to these activities, while concluding disclosure controls were effective.
- Developments in opioid litigation, tax uncertainties, pandemic-related operating risks and the company’s ability to meet debt covenant requirements.