Henry Schein, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter ended June 29, 2013; comparisons are with the quarter ended June 30, 2012. Six-month results are also summarized below. Henry Schein distributes health care products and provides technology and value-added services to dental, medical and animal health practitioners.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2,391.8m | $2,201.5m | $4,685.3m | $4,300.5m |
| Gross profit | $669.9m | $624.4m | $1,316.8m | $1,235.0m |
| Gross margin | 28.0% | 28.4% | 28.1% | 28.7% |
| Operating income | $176.1m | $154.7m | $329.7m | $288.0m |
| Net income attributable to Henry Schein | $108.4m | $98.1m | $199.9m | $178.8m |
| Diluted EPS | $1.23 | $1.08 | $2.27 | $1.98 |
- Q2 sales rose 8.6%; management attributed 8.7% growth to local-currency sales, comprising 4.0% internally generated growth and 4.7% from acquisitions, partly offset by foreign exchange. Six-month sales increased 8.9%, including 3.7% internally generated growth and 5.2% from acquisitions.
- Q2 operating income increased 13.8% and Henry Schein-attributable net income increased 10.5%. Six-month attributable net income rose 11.8%. Q2 diluted EPS rose about 13.9%; six-month diluted EPS rose about 14.6%.
- Q2 segment sales increased 6.2% in dental, 7.4% in medical, 13.7% in animal health and 14.5% in technology and value-added services. Animal health growth included 9.9% from acquisitions; technology growth included 5.3% from acquisitions.
- Gross margin declined year over year in both periods. Management cited greater animal-health sales, including lower-margin pharmaceuticals, for distribution margin pressure; technology margins also declined, mainly from sales mix and higher customer support costs.
- SG&A rose 5.9% in Q2 and in the first half, but fell as a share of sales: 20.6% versus 21.2% in Q2 and 21.1% versus 21.7% for six months. No restructuring costs were recorded in 2013 periods, versus $3.4m in Q2 2012 and $15.2m in the first half of 2012.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $236.8m, versus $129.9m; investing cash outflow was $60.7m, versus $142.1m; and financing cash outflow was $212.7m, versus $43.9m. Operating cash flow less fixed-asset purchases was approximately $214.8m, compared with $108.5m in the prior-year period.
- Cash was $78.8m at June 29, down from $122.1m at year-end 2012. Working capital was $1,258.9m, up from $1,231.7m.
- Total debt was $468.2m, down from $533.3m at year-end. This included $15.6m of bank credit-line borrowings, $5.9m of current long-term debt and $446.7m of long-term debt. The $500m revolving facility had no borrowings outstanding; $9.2m of letters of credit were issued under it. The company also had $155m outstanding under a receivables securitization facility of up to $300m.
- Management said cash, access to debt and equity markets, and available credit facilities were sufficient for foreseeable short- and long-term needs, and reported no off-balance-sheet arrangements. It expects $35m–$45m of capital investment during the remainder of fiscal 2013.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said current economic and industry conditions may result in slower demand growth and anticipated future increases in working-capital requirements.
- A $6.2m one-time interest expense in Q1 2013 resulted from accelerated amortization of deferred financing costs after repayment of Henry Schein Animal Health debt. For the first half, higher interest expense also reflected this charge; refinancing provided partial interest savings.
- On July 10, 2013, the company divested a Middle East dental distributor investment and expected a Q3 2013 one-time loss of $11m–$13m, or $0.13–$0.15 per diluted share.
- Foreign-currency translation loss was $55.7m for the first half, compared with $10.3m in the prior-year period, contributing to a sharp decline in accumulated other comprehensive income. The company uses currency hedges but says they provide only limited protection.
- Key disclosed risks include competition, supplier and customer dependence, economic conditions, acquisition integration, regulatory and health-care-law changes, fraud-and-abuse compliance, privacy and cybersecurity, software regulation, and foreign-currency exposure. New Sunshine Act reporting requirements and HIPAA rule compliance were expected to add costs. Management said pending legal matters and recorded related loss accruals were not material.
Important facts for investors to verify
- How much reported sales growth reflects ongoing internal growth versus acquisitions, particularly in animal health.
- Whether distribution and technology gross-margin declines persist as product and customer mix changes.
- Working-capital trends, including inventory turns, which decreased to 5.9 from 6.3 year over year, and receivables days, which edged up to 40.0 from 39.9.
- Debt and liquidity implications of the receivables securitization, future capital spending, and potential redemptions of noncontrolling interests; redeemable noncontrolling interests were $466.0m.
- The actual Q3 impact of the Middle East divestiture against the estimated $11m–$13m loss, and any additional regulatory compliance costs.