Henry Schein, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Henry Schein distributes health care products and services, primarily to office-based dental, animal health and medical practitioners. It operates through health care distribution and technology/value-added services segments, serving more than 1 million customers in 33 countries. This 10-K covers the 52-week fiscal year ended December 26, 2015; it is an annual report, not a standalone fourth-quarter filing.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $10.630 billion | $10.371 billion | +2.5% |
| Gross profit / margin | $3.012 billion / 28.3% | $2.911 billion / 28.1% | +3.5%; margin +0.2 percentage points |
| Operating income | $734.0 million | $715.1 million | +2.6% |
| Net income attributable to Henry Schein | $479.1 million | $466.1 million | +2.8% |
| Diluted EPS | $5.69 | $5.44 | +4.6% |
| Operating cash flow | $586.8 million | $592.5 million | Down $5.7 million |
Reported sales growth included 8.4% local-currency growth (5.0% internally generated and 3.4% from acquisitions), offset by a 5.9% foreign-exchange impact. Medical sales rose 18.9%, animal health 0.8%, and dental sales fell 1.9% in reported dollars. Technology and value-added services sales rose 2.8%. Health care distribution gross margin improved to 27.0% from 26.7%; technology and value-added services margin rose to 67.9% from 66.2%.
Net cash used in investing was $260.0 million, including $171.9 million for acquisitions and equity investments and $71.7 million for fixed assets. Net cash used in financing was $319.4 million, including $299.9 million of share repurchases. Cash and equivalents were $72.1 million at year-end, versus $89.5 million. Working capital was $1.084 billion, down from $1.133 billion. Total debt, including bank credit lines and current maturities, was $809.7 million, versus $731.5 million; long-term debt alone was $463.8 million. Inventory turns declined to 5.5 from 5.9, while receivable days increased to 40.1 from 39.9.
Material changes and unusual items
- Sales growth slowed to 2.5% reported from 8.5% in 2014, with foreign exchange a substantial headwind; acquisitions contributed to growth, particularly in medical and animal health.
- Operating income included $34.9 million of restructuring costs, primarily severance and facility closures. The company expects total pre-tax costs of $41–$47 million and estimated $6–$12 million remained after year-end; completion was extended into the first half of 2016.
- A favorable tax petition produced a $6.3 million tax benefit. The effective tax rate was 29.3%, compared with 30.4% in 2014; excluding the benefit, management said it would have been 30.2%.
- Foreign currency translation reduced other comprehensive income by $134.0 million. This is not an earnings charge but reflects translation of foreign operations.
- 2015 acquisitions included scil, KRUUSE and Dental Trey, among other smaller deals. In February 2016, the company announced an agreement to acquire a majority interest in Dental Cremer in Brazil.
- The company repurchased approximately $300 million of shares in 2015 and had $400 million of authorization remaining at year-end. It declared no dividend and did not anticipate one in the foreseeable future.
Outlook, commentary and risks
Management expects a roughly 30% effective tax rate for 2016 and described restructuring as a means to reduce costs and fund growth initiatives under its 2015–2017 strategic plan. The filing provides no explicit 2016 revenue, earnings or EPS guidance. Management expects historical seasonality to continue, with sales and profitability generally stronger in the third and fourth quarters.
Key risks include intense price competition and industry consolidation; reliance on third-party suppliers; foreign-exchange exposure; acquisition integration and contingent purchase obligations; working-capital needs; regulatory compliance involving pharmaceuticals, devices and health data; cybersecurity and system disruption; and changing health care reimbursement and policy. The company reported antitrust litigation alleging exclusionary conduct in dental distribution, including class actions filed beginning January 2016; it intends to defend itself. It also disclosed that a subsidiary resolved an FTC investigation concerning advertising of dental software data-security features through a consent order and fine. Accrued probable legal losses at year-end were described as not material. BDO issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective despite material changes from acquisitions, integrations and systems implementations.
Important facts for investors to verify
- How much of future growth is internally generated versus acquired, and whether foreign-exchange pressure persists.
- Whether the restructuring finishes on schedule and delivers the expected expense efficiencies, including the remaining $6–$12 million cost estimate.
- Cash conversion and working-capital trends, particularly inventory growth and the decline in inventory turns.
- Debt levels, borrowing costs, covenant headroom and potential cash requirements from redeemable noncontrolling interests, carried at $542.2 million.
- Developments and potential exposure from the dental antitrust matters and the FTC consent order.
- Integration and returns from recent acquisitions, including the announced Dental Cremer transaction.