Henry Schein, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 26, 2016; comparable period ended March 28, 2015. Amounts below are in U.S. dollars unless noted.
Business context
Henry Schein distributes health care products and provides technology and value-added services, primarily to dental, animal health and medical practitioners. It reports two segments: health care distribution and technology and value-added services.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $2,713 million | $2,464 million; up 10.1% |
| Gross profit / margin | $779 million / 28.7% | $713 million / 29.0% |
| Operating income | $176 million | $161 million |
| Net income | $125 million | $112 million; up 11.6% |
| Net income attributable to Henry Schein | $114 million | $103 million |
| Diluted EPS | $1.37 | $1.22 |
| Operating cash flow | $(102) million | $(27) million |
| Investing cash flow | $(71) million | $(30) million |
| Financing cash flow | $169 million | $36 million |
- Sales growth comprised 12.0% local-currency growth, including 9.3% internally generated growth and 2.7% from acquisitions, partly offset by a 1.9% foreign-exchange impact.
- Distribution sales rose 9.8%; technology and value-added services sales rose 18.6%. Medical sales increased 21.3% reported, but 10.8% excluding the effect of changing certain sales from agency to gross accounting. Animal health internally generated growth was 5.2% excluding a similar accounting presentation change.
- Gross margin declined 0.3 percentage points. Distribution margin fell to 27.2% from 27.6%, primarily reflecting the medical sales presentation change; technology margin fell to 66.7% from 67.5%.
- SG&A increased 9.9% to $599 million, while remaining 22.1% of sales. Restructuring expense was $4.1 million versus $6.9 million.
- Cash and cash equivalents were $72 million at quarter-end. Working capital was $1,283 million, compared with $1,084 million at year-end 2015.
- Total debt was $1,108 million, up from $810 million at year-end, including $424 million of bank credit lines and $666 million of long-term debt. The increase included higher receivables-securitization borrowings. Credit-line borrowings carried a 1.29% weighted-average rate.
Changes, outlook and notable matters
- Operating cash use increased, primarily due to working-capital changes, including a larger use of cash from accounts payable and accrued expenses. Investing outflows rose mainly because of increased acquisition and equity-investment spending.
- The company said cash, access to debt and equity markets, and available credit facilities were sufficient for foreseeable short- and long-term needs; it also anticipated future increases in working-capital requirements. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- Management expected the restructuring program to cost $46–$49 million pre-tax in total. By quarter-end, $34.9 million had been recorded in 2015 and $4.1 million in Q1 2016; remaining costs were estimated at $7–$10 million, mainly severance. The program includes workforce reductions and facility closures and was intended to lower costs and fund growth initiatives.
- Acquisitions included RxWorks and an 80.1% interest in Vetstreet. A proposed transaction with J. Morita would give Henry Schein a 50% interest in One Piece Corp.; closing was expected in Q2 2016, subject to customary conditions.
- Antitrust litigation includes a 2015 competitor action and class actions filed beginning in January 2016 alleging, among other matters, market exclusion, price fixing and customer allocation. Plaintiffs seek equitable relief and damages, including treble damages. The company said it intends to defend itself vigorously; the filing does not provide a clear estimate of potential exposure.
- The IRS issued a notice of deficiency concerning 2009–2011; the company disputed the proposed adjustments and said it did not expect a significant effect on its financial position, liquidity or results. An Appeals conference was scheduled for Q2 2016.
- Risk factors include competition and industry consolidation, supplier dependence, acquisition integration, foreign-exchange exposure, regulatory and health care law compliance, litigation, cybersecurity and data privacy, and economic conditions. Management reported disclosure controls were effective as of March 26, 2016 and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported sales growth reflects underlying volume and pricing versus acquisitions, foreign exchange and the agency-to-gross accounting changes.
- Whether gross-margin pressure persists and whether restructuring savings offset implementation costs and higher operating expenses.
- Working-capital trends, operating cash conversion and the company’s ability to fund acquisitions, redemptions and share repurchases while debt is elevated.
- Progress and final costs of restructuring, and the closing and financial contribution of the proposed One Piece transaction.
- Developments in the antitrust cases and IRS dispute, including any change in estimated financial exposure.