Henry Schein, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 30, 2013; comparisons are with the three months ended March 31, 2012 unless stated otherwise. Henry Schein distributes health care products and provides technology and other services to dental, medical and animal health practitioners.
Financial results
| Metric | Q1 2013 | Prior period | Change |
|---|---|---|---|
| Net sales | $2,293.5 million | $2,099.0 million | +9.3% |
| Gross profit / margin | $647.0 million / 28.2% | $610.6 million / 29.1% | Profit +6.0%; margin down 0.9 percentage points |
| Operating income | $153.6 million | $133.3 million | +15.3% |
| Net income | $98.7 million | $89.1 million | +10.8% |
| Net income attributable to Henry Schein | $91.5 million | $80.8 million | +13.3% |
| Diluted EPS | $1.03 | $0.89 | +15.7% |
| Cash from operating activities | $(38.0) million | $(48.6) million | Outflow narrowed |
| Cash from investing activities | $(44.3) million | $(32.1) million | Outflow increased |
| Cash from financing activities | $56.1 million | $30.9 million | Increase |
Gross margin contracted mainly because animal health, which has a higher share of lower-margin pharmaceutical products, grew rapidly. Technology and value-added services margin also declined, to 64.0% from 65.2%, amid product mix shifts and higher customer-support costs. SG&A rose 6.0% but declined as a share of sales, to 21.5% from 22.2%. Operating income benefited in part from no restructuring charge in Q1 2013, compared with $11.8 million in Q1 2012.
Revenue mix and material changes
- Health care distribution sales increased 9.0% to $2,218.8 million; technology and value-added services increased 18.7% to $74.7 million.
- Dental sales rose 3.0% to $1,190.8 million; medical rose 9.6% to $388.9 million; animal health rose 21.6% to $639.1 million.
- Management attributed overall sales growth to 3.3% internally generated revenue growth and 5.9% growth from acquisitions, with foreign exchange adding 0.1%.
- Animal health growth included 14.9% from acquisitions and 6.8% internally generated growth. Dental internally generated revenue declined 0.3%, while medical and technology internally generated revenue grew 8.3% and 11.7%, respectively.
- Interest expense increased to $12.7 million from $7.6 million, primarily due to a one-time $6.2 million accelerated amortization charge on deferred financing costs after early repayment of Butler Schein Animal Health debt.
- Foreign currency translation produced a $40.4 million comprehensive loss, versus a $31.7 million gain in the prior-year quarter; company-attributable comprehensive income consequently fell to $53.1 million from $111.9 million.
Cash, debt and liquidity
At March 30, 2013, cash was $90.6 million, down from $122.1 million at December 29, 2012. Working capital was $1,342.8 million, up from $1,231.7 million. Total debt was $652.6 million, compared with $533.3 million at year-end; this comprised $50.1 million of bank credit lines, $1.9 million of current maturities and $600.6 million of long-term debt. The $500 million revolving credit facility had $305.0 million drawn; private-placement notes outstanding were $250.0 million. Management reported a 1.62% weighted-average rate on borrowings under credit lines.
Operating cash outflow narrowed year over year, primarily reflecting improved net income, partly offset by working-capital movements. Accounts payable and accrued expenses reduced operating cash by $235.8 million. Investing outflow included $32.4 million for equity investments and acquisitions. The company repurchased $73.4 million of stock in the quarter. Management stated that cash, capital-market access and available credit facilities were sufficient for foreseeable needs, and reported no off-balance-sheet arrangements.
Outlook, risks and other notable items
- No specific full-year earnings or revenue guidance was provided. Management said it expected demand to grow at slower rates given operating, economic and industry conditions.
- Management expected to invest approximately $45–$55 million during the remainder of fiscal 2013 in capital projects, including facility and computer-system upgrades and integration work.
- On April 17, 2013, after quarter-end, the company entered into a receivables-securitization facility of up to $300 million, with pricing committed for up to three years. It was intended to replace approximately $220 million of higher-rate BSAH public debt and support working capital and general corporate purposes.
- Key disclosed risks include competition, supplier and customer dependence, economic uncertainty, acquisition integration and execution, health-care regulation and reimbursement changes, privacy and cybersecurity, foreign-exchange exposure, and evolving compliance requirements. The company noted the new Physician Payment Sunshine Act reporting requirements and upcoming HIPAA compliance obligations.
- Redeemable noncontrolling interests increased to $463.4 million from $435.2 million, including a $17.7 million fair-value adjustment; these interests can be put to the company at specified times.
- Management said pending legal matters and accrued estimated losses were not material. It reported disclosure controls effective, while noting acquisition integrations constituted a material change in internal control over financial reporting.
Investor facts to verify
- How much of reported sales and profit growth is sustainable organic growth versus acquisition contribution, particularly in animal health?
- Whether distribution gross-margin pressure persists as product and customer mix changes.
- How debt levels, interest costs and the receivables facility develop, including facility usage and covenant headroom.
- Whether working-capital cash outflows and slower inventory turns reverse; inventory turns declined to 5.6 from 6.2 year over year, while days sales outstanding rose to 40.6 from 40.1.
- The integration performance of acquired businesses and the effect of related system and control changes.
- The financial and operational effects of regulatory, privacy, reimbursement and compliance changes, and any material change in tax or legal contingencies.