Henry Schein, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The year included 53 weeks, versus 52 weeks in FY 2015; reported growth therefore includes an extra-week contribution. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
Henry Schein distributes health care products and services primarily to dental, animal health and medical practitioners, with a technology and value-added services business. It served more than 1 million customers, operated in 33 countries and reported through health care distribution and technology/value-added services segments.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $11.572 billion | $10.630 billion | +8.9% |
| Gross profit / margin | $3.234 billion / 27.9% | $3.012 billion / 28.3% | Profit +7.4%; margin down 0.4 points |
| Operating income | $771.6 million | $734.0 million | +5.1% |
| Net income attributable to Henry Schein | $506.8 million | $479.1 million | +5.8% |
| Diluted EPS | $6.19 | $5.69 | +8.8% |
| Cash from operating activities | $615.5 million | $586.8 million | +$28.7 million |
Health care distribution sales rose 8.5% to $11.146 billion; technology and value-added services rose 18.6% to $425.6 million. By market, animal health grew 11.3%, medical 12.8%, and dental 5.3%. Management reported that constant-currency growth included contributions from acquisitions and the additional week; foreign exchange reduced reported sales growth by 1.2 percentage points overall. Comparable internally generated growth in animal health and medical was 7.1% and 7.9%, respectively, after excluding changes in gross-versus-agency revenue recognition.
Cash and cash equivalents were $62.4 million, down from $72.1 million. Working capital was $1.022 billion, down from $1.084 billion. Total debt, including bank credit lines and current maturities, was $1.219 billion, up from $809.7 million. Operating cash flow increased; investing cash use was $316.4 million, principally reflecting acquisitions and equity investments, and financing cash use was $300.2 million, including $550.0 million of share repurchases. Management said cash, capital-market access and available credit facilities were sufficient for foreseeable needs. No off-balance-sheet arrangements were reported.
Material changes and unusual items
- Gross margin declined to 27.9% from 28.3%; health care distribution margin fell to 26.5% from 27.0%, and technology/value-added margin fell to 66.0% from 67.9%. Management cited product and customer mix among the factors affecting distribution margins.
- Operating results included $45.9 million of restructuring costs in 2016, following $34.9 million in 2015. The program eliminated approximately 900 positions, slightly more than 4% of the workforce, and was complete at year-end; no further 2017 charges were expected.
- FY 2016 acquisitions and investments included Vetstreet, RxWorks, a majority interest in Dental Cremer, and a 50% interest in One Piece Corp. Acquisition activity contributed to sales and goodwill growth.
- Share repurchases totaled $550.0 million in 2016; $250 million remained authorized at year-end. The company declared no common-stock dividends in 2015 or 2016 and did not anticipate dividends in the foreseeable future.
Outlook, risks and contingencies
Management expected an FY 2017 effective tax rate of approximately 28%. The filing provides no clear numerical sales or earnings guidance. Management expects historical seasonality to continue, with sales and profitability generally stronger in the third and fourth quarters.
Key disclosed risks include intense competition and industry/customer consolidation; supplier dependence and product availability; reimbursement and health-care regulatory changes; foreign-exchange and macroeconomic exposure; acquisition integration; cybersecurity, privacy and information-system disruptions; and shipping costs. The filing also identifies uncertainty around U.S. health-care reform and evolving EHR/MACRA requirements.
Henry Schein faced a private antitrust action and class-action complaints alleging, among other claims, unlawful agreements in dental supplies distribution. The company said it intended to defend itself vigorously. It reported that accrued probable and estimable losses were not material, but litigation outcomes cannot be predicted. Separately, a subsidiary had resolved an FTC investigation concerning advertising of certain software data-security features through a consent order and fine; the filing does not state the fine amount in the supplied text.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of December 31, 2016.
Most important facts for investors to verify
- How much of reported sales and EPS growth reflected the extra week, acquisitions, foreign exchange and accounting changes in revenue presentation.
- Whether lower gross margins persist and how product/customer mix and acquisition integration affect profitability.
- Debt growth, borrowing costs and liquidity needs, including the increased use of the receivables securitization facility and bank lines.
- Potential exposure and developments in the dental antitrust cases, and the FTC consent-order matter.
- Progress toward the 2017 tax-rate expectation and the effect of changing health-care, EHR and privacy regulations.