Henry Schein, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 26, 2020 (52 weeks); the filing also reports unaudited fourth-quarter results. Henry Schein distributes dental and medical products and provides practice-management software and other services. Its reportable segments are health care distribution and technology and value-added services.
Financial results and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $10.119 billion | $9.986 billion | +1.3% |
| Gross profit / margin | $2.814 billion / 27.8% | $3.091 billion / 31.0% | Profit down 8.9%; margin down 3.2 points |
| Operating income | $535.3 million | $718.3 million | Down 25.5% |
| Net income attributable to Henry Schein | $403.8 million | $694.7 million | Down 41.9% |
| Diluted EPS | $2.82 | $4.65 | Down 39.4% |
| Operating cash flow, continuing operations | $593.5 million | $820.5 million | Down $227.0 million |
| Cash and cash equivalents at year-end | $421.2 million | $106.1 million | Up $315.1 million |
| Total debt | $699.0 million | $756.7 million | Down $57.8 million |
| Working capital | $1.508 billion | $1.188 billion | Up $320.2 million |
Net sales excluding Corporate transition-services-agreement revenue increased 1.4%. Sales of PPE and COVID-19-related products were approximately $1.298 billion, up about 208% from 2019. Those sales helped offset weaker dental demand, but associated product-price volatility and inventory adjustments weighed on margins.
- Health care distribution: Revenue rose 1.5% to $9.530 billion. Medical sales grew 21.6% to $3.617 billion, while dental sales fell 7.8% to $5.913 billion.
- Technology and value-added services: Revenue was $514.3 million, down 0.2%; segment operating income fell to $99.1 million from $126.9 million.
- Margins and costs: Health care distribution gross margin fell to 25.7% from 28.9%; technology and value-added services margin fell to 70.6% from 72.0%. SG&A, including restructuring costs, declined 3.9%, helped by temporary pandemic cost reductions that mostly ended in the second half.
- Debt and liquidity: Year-end debt comprised $73.4 million of short-term bank credit lines, $109.8 million of current debt maturities and $515.8 million of long-term debt. The company reported no borrowings on its $750 million revolving credit agreement or its receivables securitization facility at year-end. Cash less reported total debt was approximately $277.8 million; this excludes lease liabilities.
Fourth quarter: Net sales were $3.166 billion versus $2.669 billion a year earlier; gross profit was $859.7 million versus $810.6 million. Operating income was $181.2 million versus $196.3 million, and continuing-operations income attributable to Henry Schein was $141.9 million versus $330.6 million. Prior-year quarterly earnings included a $186.8 million after-tax gain on equity-investment sales. Continuing-operations diluted EPS was $0.99 versus $2.25.
Material changes versus the prior comparable period
- COVID-19 sharply disrupted dental and some medical activity, particularly in the second quarter; dental revenue fell 41.2% in that quarter year over year. Practices reopened and demand improved in the second half, but patient volumes remained below pre-pandemic levels.
- Medical growth, led by PPE and COVID-19-related products, more than offset the annual decline in dental sales. PPE and related products generated approximately $807 million of medical sales and $491 million of dental sales.
- Gross margin and operating income declined despite slightly higher revenue. PPE pricing and demand volatility, inventory adjustments, lower vendor rebates and sales mix were cited as pressures.
- FY2019 earnings included a substantial gain from selling equity investments: approximately $250.2 million pretax and $186.8 million after tax. FY2020 recorded only a $1.6 million after-tax contingent gain related to the Hu-Friedy sale.
- Operating cash flow fell as earnings and distributions from equity affiliates declined and working capital increased, including higher receivables and PPE-related inventory. The company reduced capital spending; fixed-asset purchases were $48.8 million versus $76.2 million.
- FY2020 included $32.1 million of restructuring costs, compared with $14.7 million in FY2019; restructuring activity continues into 2021.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear numerical earnings or revenue forecast. Management says the continuing pandemic, possible resurgences, practice capacity and patient willingness make the impact on future results and liquidity difficult to estimate.
- Management expects PPE-related inventory adjustments not to continue at a material level into 2021, while cautioning that lower PPE pricing or demand could further pressure margins and inventory values. It expects order-fulfillment performance to return toward historical levels as PPE demand stabilizes.
- The positive effect of a U.S. transfer-pricing agreement and other audit resolutions reduced the 2020 effective tax rate to 19.1% from 23.4%; management expects the rate to be higher in future periods because these benefits are not expected to recur.
- Restructuring efforts continue into 2021, and management could not estimate the expected 2021 costs or related cash expenditures.
- In response to pandemic conditions, the company amended debt covenants and extended its receivables facility. A $700 million 364-day facility matures April 16, 2021; its terms prohibit share repurchases until the company reports second-quarter 2021 results. The company also temporarily suspended repurchases and reported no cash or stock dividends in 2020 or 2019.
- Material risks include COVID-19 demand and supply-chain effects; PPE price and inventory volatility; customer credit and collections; supplier concentration and rebate terms; regulatory, drug-pricing and reimbursement changes; cybersecurity and privacy; competition and online distribution; foreign exchange; and acquisitions and integration.
- Legal matters include the Archer antitrust case, which may proceed to trial, opioid-related lawsuits, and securities litigation associated with the Covetrus separation. The company says its accrued best estimate for probable, estimable legal losses was not material at year-end; outcomes of the ongoing cases remain uncertain.
- Other notable items: the Animal Health separation and Covetrus transaction were completed in 2019, and the related transition-services agreement ended in December 2020. FY2020 included approximately $20.3 million of intangible-asset impairment charges, nearly all in technology and value-added services, and approximately $10 million of incremental global dental bad-debt reserves.
Important facts for investors to verify
- How much of the 2020 sales increase came from pandemic-related PPE and diagnostic products, and how their demand, pricing and inventory values evolved after year-end.
- Whether dental practice activity and patient volumes recovered, and whether distribution gross margins and vendor rebates improved from FY2020 levels.
- The timing and terms of refinancing or replacing the 364-day credit facility, covenant compliance, and debt maturities, including $109.8 million due in 2021.
- Developments and potential financial exposure in the Archer antitrust matter, opioid litigation and Covetrus-related securities cases.
- The cost and cash-flow impact of restructuring continuing into 2021, and the effective tax rate after nonrecurring audit-resolution benefits.
- Whether acquisition integration, cybersecurity controls and compliance with changing health-care and privacy regulations affect results or require additional investment.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The filing identifies uncertain transfer-pricing tax positions as a critical audit matter.