Business context and reporting period
Henry Schein, Inc. filed this unaudited Form 10-Q for the quarter ended June 26, 2021. It distributes dental and medical products and provides practice-management technology and other services. Results are compared with the period ended June 27, 2020, when COVID-19 restrictions sharply reduced demand in dental and certain medical markets.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,967.2 | $1,684.4 | $5,892.2 | $4,113.3 |
| Gross profit / margin | $889.8 / 30.0% | $454.3 / 27.0% | $1,780.6 / 30.2% | $1,200.3 / 29.2% |
| Operating income (loss) | $210.3 | $(7.4) | $440.3 | $166.4 |
| Net income (loss) attributable to Henry Schein | $155.7 | $(10.8) | $321.7 | $119.5 |
| Diluted EPS | $1.10 | $(0.08) | $2.26 | $0.84 |
- Q2 revenue increased 76.2%; six-month revenue increased 43.2%. In the first half, management attributed growth to 35.6% internally generated local-currency growth, 4.2% acquisitions and 3.4% foreign exchange.
- Health care distribution generated $2,815.2 million of Q2 sales; technology and value-added services generated $152.1 million. First-half segment sales were $5,597.1 million and $295.0 million, respectively.
- Operating cash flow was $221.7 million for the first half, versus a $12.8 million use a year earlier. Investing activities used $341.1 million and financing activities used $139.4 million.
- At June 26, cash was $167.2 million, working capital was $1,648.6 million, and total debt was $788.4 million, compared with $421.2 million, $1,508.3 million and $699.0 million, respectively, at year-end 2020. Debt less cash was approximately $621.2 million. Operating lease liabilities totaled $318.2 million.
- The $750 million revolving credit facility and $350 million receivables securitization facility had no borrowings outstanding. Other short-term bank lines had $72.1 million outstanding. The company reported $400 million remaining under its share-repurchase authorization.
Material changes versus the prior comparable period
- Recovery from the pandemic-affected Q2 2020 drove the sharp sales and earnings improvement. Q2 2021 sales were 15.2% higher in local currency than Q2 2019; first-half sales were 16.3% higher than the comparable 2019 period.
- Q2 sales included approximately $354.2 million of PPE and COVID-19-related products; first-half sales included approximately $811.7 million. Excluding those products, internally generated local-currency sales still grew, but at lower rates.
- Health care distribution gross margin rose to 27.9% in Q2 from 24.4%, and to 28.1% for the first half from 27.0%. The company cited lower PPE inventory adjustments and increased vendor rebates from higher purchase volumes. It did not expect further material inventory adjustments in 2021, while noting adjustments could recur.
- SG&A increased in dollars as temporary pandemic cost savings from 2020 unwound, but decreased as a percentage of sales: 22.9% versus 27.4% in Q2 and 22.7% versus 25.1% for the first half. Restructuring costs were $0.6 million in Q2 and $3.5 million for the first half, down from $15.9 million and $20.7 million, respectively.
- Investing cash outflow rose primarily due to increased payments for equity investments and acquisitions. First-half acquisitions were described as immaterial to the financial statements; acquisition consideration included $310.5 million cash and $129.3 million of redeemable noncontrolling interests.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said patient traffic in the first half of 2021 approached pre-pandemic levels, but expects continued volatility as infection rates, variants, vaccine uptake and local conditions change. The future COVID-19 impact on results, cash flows, financial condition and liquidity could not be reasonably estimated.
- The restructuring program, intended to mitigate stranded costs and improve efficiency, was extended through the end of 2021. Management said it could not estimate the remaining 2021 cost range or future cash expenditures.
- A total-return swap generated gains recorded in SG&A of approximately $5.4 million in Q2 and $8.1 million in the first half. It economically hedges deferred-compensation and supplemental-retirement-plan liabilities; management expects a neutral impact over time.
- COVID-19, supplier dependence and supply-chain disruption, acquisition integration, competition, regulation, cybersecurity, foreign exchange and litigation are among the disclosed risks. Opioid-related cases remained pending; the company reported fewer than 150 similar lawsuits and intends to defend them. An antitrust case brought by Archer and White was settled for an amount the company said was not material and dismissed with prejudice in May 2021. Other notable litigation includes a Covetrus securities class action and a related derivative action.
- The company reported $79.3 million of unrecognized tax benefits, of which $63.9 million would affect the effective tax rate if recognized. The filing also identifies redeemable noncontrolling interests of $604.1 million, up from $327.7 million at year-end, including a $132.7 million increase from changes in fair value.
Important facts for investors to verify
- How much of sales growth and gross-margin improvement is sustainable after separating pandemic comparisons, PPE/COVID-related sales, acquisitions, foreign exchange, inventory adjustments and vendor rebates.
- Whether increased inventory and acquisition-related investment convert into cash generation; first-half inventory rose to $1,688.2 million from $1,512.5 million at year-end.
- Debt, liquidity and covenant headroom, including the April 2022 maturity of the revolving credit agreement and the transition from LIBOR-based rates.
- Future cash requirements from acquisitions, share repurchases, restructuring and put rights tied to redeemable noncontrolling interests.
- Developments in opioid litigation and the Covetrus-related securities and derivative actions, as well as any resulting financial exposure.