Henry Schein, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 26, 2011, compared with the three months ended March 27, 2010. Henry Schein distributes healthcare products and provides technology and related services through healthcare distribution and technology segments.
Financial results
| Metric | Q1 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,947.8 million | $1,760.3 million | Up 10.6% |
| Gross profit / margin | $565.8 million / 29.0% | $513.0 million / 29.1% | Profit up 10.3% |
| Operating income | $124.3 million | $103.8 million | Up 19.8% |
| Net income | $83.0 million | $67.3 million | |
| Net income attributable to Henry Schein | $76.5 million | $60.9 million | |
| Diluted EPS | $0.82 | $0.66 | Up 24.2% |
| Cash from operations | $47.6 million | $21.7 million |
- Sales by business: Healthcare distribution revenue was $1,892.1 million, up 10.3%; technology revenue was $55.6 million, up 23.7%. Within distribution, dental sales rose 7.8%, medical 12.4%, animal health 11.6%, and international 11.4%.
- Management attributed total sales growth to 3.8% internally generated growth, 6.1% acquisition growth, and 0.7% foreign-exchange benefit. Technology sales growth included 13.8% internally generated growth and 9.1% from acquisitions.
- Healthcare distribution gross margin eased to 28.0% from 28.1%, primarily reflecting a greater share of lower-margin pharmaceutical sales following the Butler Animal Health acquisition. Technology gross margin declined to 66.1% from 69.0%, reflecting product mix.
- SG&A was $441.5 million, or 22.7% of sales, versus $397.0 million, or 22.6%. No restructuring charge was recorded in Q1 2011; the prior-year quarter included $12.3 million.
Cash, debt and liquidity
- Cash and cash equivalents were $116.7 million at March 26, 2011, down from $150.3 million at December 25, 2010. Working capital was $1,027.3 million, up from $1,001.2 million.
- Operating cash flow was $47.6 million. Investing activities used $140.7 million, including $133.6 million for acquisitions and equity investments; financing activities provided $53.1 million. Cash ended the quarter at $116.7 million.
- Total debt was $513.0 million, compared with $441.3 million at year-end 2010. It included $97.2 million in bank credit lines, $8.4 million in current maturities and $407.5 million in long-term debt.
- BAHS debt was $278.4 million, with a stated effective interest rate of 5.5% and a large final installment due December 31, 2015. A $100 million private-placement note carried a fixed 3.79% rate and is due in 2020. The company reported access to a $400 million revolving facility, subject to its terms and covenants.
- Management stated that cash, access to debt and equity markets, and available credit facilities were sufficient for foreseeable short- and long-term capital needs. It expected to spend approximately $40–$50 million on capital projects during the remainder of fiscal 2011.
Changes, outlook and risks
- Growth included acquisitions, notably Provet Holdings, acquired December 31, 2010 for approximately $91 million, as well as other acquisitions. Q1 2011 acquisitions were described as having an immaterial impact individually and in aggregate on reported operating results.
- Redeemable noncontrolling interests increased to $426.1 million from $304.1 million at year-end. The reported change included a $101.0 million fair-value adjustment, which reduced additional paid-in capital rather than earnings. Put rights held by minority owners may require future cash purchases; contractual payment limits and exercise timing vary.
- The filing provides no specific full-year revenue or earnings guidance. Management said demand could grow at slower rates under current economic and industry conditions and noted that working-capital requirements may increase.
- Risks cited include healthcare regulation and reform, competition, economic conditions and customer demand, acquisition integration and financing, supplier dependence, international exposure, technology and systems disruption, and changes in shipping costs. The company also described failed auctions in its auction-rate securities market: $11.3 million net carrying value remained classified as long-term, and near-term liquidity was limited, though management said this would not impair operating funding.
- Management said pending legal matters and accrued probable claims were not material. Disclosure controls were considered effective; acquisition integrations and systems implementations were identified as a material change in internal control activities during the quarter.
Important facts for investors to verify
- How much reported growth reflects ongoing operations versus acquisitions and foreign exchange, especially in international and animal-health sales.
- Whether gross-margin pressure and higher SG&A as a share of sales persist, and how product and customer mix affects profitability.
- Cash conversion and working-capital trends: receivables days rose to 42.7 from 39.6 year over year, while inventory turns fell to 6.1 from 6.3.
- Debt levels, BAHS’s 2015 final payment, credit-facility covenant compliance, and potential cash requirements under minority-owner put rights.
- Acquisition integration progress and the effect of acquired businesses on future revenue, margins, cash flow and controls.