Business context and reporting period
Henry Schein, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2012. The company distributes health care products and services and provides practice-management software and related services. It reports two segments: Health Care Distribution and Technology and Value-Added Services.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
| Metric | Q1 2012 | Comparable 2011 period | Change |
|---|---|---|---|
| Net sales | $2,099.0 | $1,947.8 | +7.8% |
| Gross profit / margin | $610.6 / 29.1% | $565.8 / 29.0% | +7.9% |
| Operating income | $133.3 | $124.3 | +7.2% |
| Net income | $89.1 | $83.0 | +7.3% |
| Net income attributable to Henry Schein | $80.8 | $76.5 | +5.6% |
| Diluted EPS | $0.89 | $0.82 | +8.5% |
| Cash from operating activities | $(48.6) | $48.5 | Decrease of $97.1 |
- Health Care Distribution sales rose 7.6% to $2,036.1 million; Technology and Value-Added Services sales rose 13.1% to $62.9 million.
- Animal health sales grew 15.3%, dental 5.5%, and medical 4.0%. Management attributed total sales growth to 8.4% local-currency growth, including 7.8% internally generated growth and 0.6% from acquisitions, offset by 0.6% foreign-exchange impact.
- Distribution gross margin held at 28.0%; technology gross margin declined to 65.2% from 66.1%, primarily due to a greater mix of lower-margin hardware and installation revenue. SG&A declined to 22.2% of sales from 22.7%.
- At March 31, cash was $101.8 million, working capital $1,167.9 million, and total debt $481.1 million, versus $147.3 million, $1,000.9 million, and $441.4 million, respectively, at December 31, 2011. Debt includes $241.9 million of Butler Animal Health Supply debt.
- Operating cash use reflected working-capital movements, including cash outflows from receivables and accounts payable/accrued expenses. Investing cash use was $32.1 million, compared with $141.6 million in the prior period, mainly because acquisition and equity-investment payments were lower. Financing provided $30.9 million.
Changes, outlook and notable items
- Q1 included $11.8 million of restructuring costs, about $8.3 million after tax, associated with eliminating approximately 150 positions, facility closures and related fees. The company expected another $2 million to $4 million of charges in Q2, or $0.02 to $0.03 per diluted share.
- Management expected to spend approximately $43 million to $48 million on capital projects during the remainder of fiscal 2012. It stated that cash, access to debt and equity markets, and available credit facilities were sufficient for foreseeable short- and long-term needs. No full-year revenue or EPS guidance is provided in the filing text.
- On April 11, 2012, the company agreed to acquire AUV Veterinary Services in the Netherlands for approximately $38 million; closing was pending regulatory approval and expected in Q2. AUV reported 2011 sales of approximately $270.4 million.
- On April 30, 2012, the company increased available private-placement facilities by $375 million. On April 18, its board authorized up to an additional $200 million of share repurchases; $61.4 million remained under the prior authorization at quarter-end. These are post-quarter announcements.
- Redeemable noncontrolling interests were $369.0 million at quarter-end, and certain minority holders can require the company to acquire their interests at fair value. Auction-rate securities were carried at $10.1 million net of impairment and remained illiquid because auctions had failed to settle; the company continued to receive interest and reported no known issuer conditions affecting repayment.
- Risks discussed include competition, supplier dependence, economic uncertainty, acquisition integration, regulatory and health-care-law changes, privacy and data-security obligations, technology changes, foreign-currency exposure, and legal proceedings. The company said pending legal matters and accrued estimated claims were not material to its financial position, results or cash flows. It reported no material changes to previously disclosed risk factors or market-risk exposure, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether working-capital outflows reverse in subsequent quarters and operating cash flow improves.
- Progress and final costs of the restructuring, including the expected Q2 charges and realized savings.
- Debt levels, BAHS repayment and covenant compliance, and the use and terms of expanded private-placement facilities.
- Completion and integration of the AUV acquisition, including its impact on growth and funding needs.
- Liquidity and valuation assumptions for auction-rate securities, and potential cash requirements from redeemable noncontrolling interests.
- Effects of health-care regulation, reimbursement changes, privacy requirements and other disclosed business risks.