Henry Schein, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 24, 2011; comparisons are with the three and nine months ended September 25, 2010. Henry Schein distributes healthcare products and provides technology and practice-management services. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net sales | $2,111.7 | $1,893.5 | $6,190.1 | $5,503.2 |
| Gross profit | $587.4 | $537.5 | $1,765.5 | $1,596.1 |
| Operating income | $143.3 | $137.4 | $418.8 | $379.1 |
| Net income attributable to Henry Schein | $92.0 | $87.9 | $262.9 | $232.8 |
| Diluted EPS | $0.99 | $0.94 | $2.82 | $2.50 |
- Q3 sales rose 11.5%; management reported 7.4% local-currency growth, comprising 3.3% internally generated growth and 4.1% acquisition growth, plus 4.1% foreign-exchange benefit. Nine-month sales rose 12.5%, including 4.2% internally generated growth, 4.9% acquisition growth and 3.4% foreign-exchange benefit.
- Q3 gross margin was 27.8%, down from 28.4%; operating margin was approximately 6.8%, versus 7.3%. For the first nine months, gross margin was 28.5%, versus 29.0%; operating margin was approximately 6.8%, versus 6.9%.
- Q3 net income attributable to Henry Schein increased 4.6%; management said growth was approximately 11% excluding seasonal influenza vaccine sales in both periods. Nine-month net income attributable to Henry Schein increased 12.9%, or approximately 15% excluding those vaccine sales.
- Q3 segment sales growth was strongest in international distribution (+28.0%) and technology (+26.5%); dental grew 2.5%, medical 2.6%, and animal health 9.4%. International growth included acquisitions and currency effects. Technology growth also included acquisition contributions.
- For the first nine months, healthcare distribution gross margin declined to 27.4% from 27.9%, mainly due to a larger proportion of lower-margin animal-health pharmaceutical sales. Technology gross margin fell to 65.4% from 68.8%, primarily because software installations grew faster than higher-margin electronic services.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $266.6 million, up from $176.8 million, reflecting improved working-capital changes and higher net income. Investing cash outflow was $165.4 million, compared with $327.0 million, primarily because acquisition and equity-investment payments were lower. Financing cash outflow was $141.1 million, compared with $123.2 million.
- Cash and equivalents were $106.9 million at September 24, 2011, versus $150.3 million at December 25, 2010. Working capital was $1,115.8 million, up from $1,001.2 million.
- Total debt was $432.0 million, down from $441.3 million at year-end 2010. It included $40.0 million of bank credit lines, $20.1 million of current debt maturities and $371.9 million of long-term debt. The company reported a $100 million private-placement note at 3.79%, due in 2020, and approximately $30 million drawn on its $400 million revolving facility.
- Majority-owned Butler Animal Health Supply refinanced its debt in May 2011; $259.9 million remained outstanding. Its term loans carry variable LIBOR-based rates and include substantial final payments: approximately $74.4 million due in 2014 and $206.8 million due in 2015. The company reports interest-rate caps on $160 million of notional exposure through March 30, 2012.
- Management said available cash, debt and equity-market access, and credit facilities were sufficient for foreseeable short- and long-term needs, and that the company finances itself to cover at least 12 months. It expects $15–$20 million of capital-project investment during the remainder of fiscal 2011.
Material changes, outlook and risks
- BAHS debt refinancing changed the subsidiary’s debt terms and amount. The company also acquired Provet Holdings at the end of 2010; 2011 acquisition contributions and currency movements materially supported reported sales growth. Other 2011 acquisitions had no material reported operating-results impact individually or in aggregate.
- The company repurchased $132.5 million of common stock in the first nine months. The board authorized an additional $200 million repurchase program in August; $167.5 million remained available at September 24.
- Redeemable noncontrolling interests rose to $417.1 million from $304.1 million at year-end, including an $85.9 million fair-value increase. Certain minority owners can require the company to purchase their interests at fair value; the filing describes annual payment limits and put rights related to BAHS.
- Approximately $11.3 million of auction-rate securities were carried net of temporary impairment as long-term investments. Auctions had failed since 2008, limiting near-term liquidity; the company reported continued interest payments and no known issuer conditions threatening principal or interest.
- Management described slower demand growth under current economic and industry conditions and cited risks including healthcare regulation, competition, economic weakness, acquisition integration and financing, supplier dependence, international operations, technology change, information-system disruptions, and foreign-exchange and interest-rate exposure. The filing provides no numerical earnings guidance.
- There were no material changes to the company’s previously disclosed risk factors or market-risk exposures. Management reported effective disclosure controls and no material change in internal control over financial reporting. Pending legal matters and accrued estimated losses were described as not material to financial position, results or cash flows.
Important facts for investors to verify
- How much of sales and profit growth came from underlying demand versus acquisitions and foreign exchange, particularly in international and technology operations.
- Whether gross-margin pressure from product and customer mix persists, and whether technology’s lower-margin installation mix continues.
- BAHS covenant headroom, variable-rate exposure, required hedging and capacity to meet its large 2014 and 2015 final debt payments.
- The valuation and timing of put rights on redeemable noncontrolling interests, and the potential cash demands they could create.
- Liquidity and recoverability of auction-rate securities, and working-capital needs as seasonal purchasing increases.
- Whether the announced share-repurchase capacity and planned capital spending remain consistent with acquisition, debt-repayment and liquidity priorities.