Henry Schein, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 25, 2011; comparative periods ended June 26, 2010. Financial statements are unaudited. Henry Schein distributes healthcare products and provides technology and related services to dental, medical, and animal-health customers.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $2,130.6m | $1,849.4m | $4,078.4m | $3,609.7m |
| Gross profit | $612.2m | $545.6m | $1,178.0m | $1,058.7m |
| Gross margin | 28.7% | 29.5% | 28.9% | 29.3% |
| Operating income | $151.2m | $138.0m | $275.5m | $241.8m |
| Net income attributable to Henry Schein | $94.5m | $84.0m | $171.0m | $144.9m |
| Diluted EPS | $1.01 | $0.90 | $1.83 | $1.56 |
- Q2 sales grew 15.2% year over year; management attributed growth to 10.1% local-currency growth (5.6% internally generated and 4.5% acquisitions) and a 5.1% foreign-exchange benefit. Six-month sales increased 13.0%, including 10.0% local-currency growth and 3.0% foreign-exchange benefit.
- International distribution was the largest growth contributor: Q2 sales rose 29.8%, including 11.3% acquisition growth and 14.7% currency benefit. Technology sales increased 28.3% in Q2, including 13.7% acquisition growth. These reported segment figures are revenue, not segment profit.
- Gross margin narrowed in both periods. Management cited higher animal-health sales, which include a greater share of lower-margin pharmaceuticals, and a technology mix shift toward lower-margin network installations.
- Six-month cash flow from operations was $185.3m, versus $129.0m a year earlier. Investing used $162.0m, including $143.6m for equity investments and acquisitions; financing used $20.3m. Cash ended the period at $161.8m.
- At June 25, 2011, working capital was $1,112.1m and total debt was $443.3m ($49.2m bank lines, $21.2m current maturities, and $372.9m long-term debt). Cash exceeded debt by about $281.6m, before other liquidity considerations. The company reported no off-balance-sheet arrangements.
Changes, outlook, and key risks
- Compared with the prior year, Q2 sales, operating income, attributable net income, and diluted EPS rose; gross margin declined. Six-month SG&A increased 12.2% in dollars but fell to 22.1% of sales from 22.3%. The prior-year six-month period included $12.3m of restructuring costs; none were recorded in the 2011 first half.
- BAHS refinanced its debt on May 27, 2011. Consolidated BAHS debt was $280.8m; the new term loans carry floating LIBOR-based rates and have large final payments due in 2014 and 2015. BAHS also entered into $160m of interest-rate caps protecting against LIBOR above 3.0% through March 30, 2012.
- The company acquired Provet Holdings at the end of 2010 for approximately $91m; other first-half 2011 acquisitions individually and collectively had an immaterial impact on reported operating results. Management expected to spend approximately $30m–$40m on capital projects during the remainder of fiscal 2011. No full-year earnings or revenue guidance is stated in the supplied filing text.
- Management said demand could grow at slower rates given economic and industry conditions, and anticipated future increases in working-capital needs. It considered available cash, debt-market access, equity-market access, and credit facilities sufficient for foreseeable capital needs.
- Risks include economic weakness and reduced customer demand, competitive and regulatory pressures, supplier dependence, acquisition integration, foreign-exchange and interest-rate exposure, technology and information-system disruptions, and healthcare legislation. Management said there were no material changes to the risk factors in its prior Form 10-K.
- Auction-rate securities had a reported fair value of $11.4m and remained illiquid because auctions had failed to settle since 2008; management said it knew of no issuer defaults and did not expect the illiquidity to affect operations. Put rights held by certain subsidiary minority owners create potential future cash obligations; redeemable noncontrolling interests rose to $424.2m, including a $96.7m fair-value adjustment. The filing also discloses routine legal claims, with accrued estimated losses not material.
Important facts for investors to verify
- How much reported growth reflects sustainable internal demand versus acquisitions and favorable currency movements, particularly in international operations and technology.
- Whether lower gross margins persist as animal-health and technology revenue mix changes.
- BAHS debt repayment capacity, floating-rate exposure, covenant compliance, and the large final loan installments.
- The timing and amount of possible minority-owner put exercises and the related cash-funding needs.
- Liquidity, valuation assumptions, and eventual recovery of the illiquid auction-rate securities; also monitor receivable days sales outstanding, which increased to 41.5 days from 39.7 days a year earlier.
- Integration and financial-reporting controls for acquisitions and system changes. Management reported effective disclosure controls, while noting material changes in internal control over financial reporting associated with acquisition integration and systems implementations.