Business context and reporting period
Henry Schein, Inc. filed this Form 10-K for the fiscal year ended December 29, 2012 (52 weeks). The filing also reports unaudited fourth-quarter results. Henry Schein distributes dental, medical and animal health products and provides practice-management software and related services, serving more than 775,000 customers in 25 countries.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. Annual comparisons are fiscal 2012 versus fiscal 2011; the prior year contained 53 weeks versus 52 weeks in 2012.
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $8,940.0 | $8,530.2 | +4.8% |
| Gross profit | $2,507.5 | $2,418.1 | +3.7% |
| Gross margin | 28.0% | 28.3% | -0.3 percentage points |
| Operating income | $619.0 | $582.1 | +6.3% |
| Net income attributable to Henry Schein | $388.1 | $367.7 | +5.6% |
| Diluted EPS | $4.32 | $3.97 | +8.8% |
| Cash from operating activities | $408.1 | $554.6 | -$146.5 |
Operating margin was approximately 6.9%, versus 6.8% in 2011. The effective tax rate declined to 31.1% from 31.7%. Management attributed the lower rate to tax planning, tax-audit settlements and higher income from lower-tax jurisdictions.
Quarter four net sales were $2,408.4 million versus $2,340.1 million in the prior-year quarter; operating income was $181.3 million versus $163.4 million; net income attributable to Henry Schein was $112.5 million versus $104.7 million; and diluted EPS was $1.26 versus $1.15.
Business segments and growth drivers
- Health care distribution sales rose 4.6% to $8,656.6 million. Dental sales were nearly flat (+0.2%); medical sales increased 3.8%; animal health sales rose 15.5%.
- Technology and value-added services sales increased 13.1% to $283.4 million.
- Overall sales growth included 5.1% internally generated growth and 3.1% growth from acquisitions, offset by a 1.9% foreign-exchange impact and a 1.5% reduction from the extra week in the 2011 comparison.
- Gross margin pressure reflected a higher share of animal-health pharmaceutical sales, generally lower margin, and a mix shift and higher customer-support costs in technology services.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $122.1 million, down from $147.3 million. Working capital increased to $1,231.7 million from $1,000.9 million.
- Total debt was $533.3 million, up from $441.4 million; this comprised $27.2 million in bank credit lines, $18.0 million of current maturities and $488.1 million of long-term debt. The company had no borrowings outstanding on its $500 million revolving credit facility at year-end, which included a $200 million expansion feature and matures in 2017.
- Operating cash flow fell to $408.1 million, primarily due to fourth-quarter inventory purchases ahead of potential medical-device excise-tax-related price increases. Inventory turns decreased to 6.2 from 6.6; receivables days improved to 39.8 from 40.6.
- Investing cash use was $269.6 million, including $220.2 million for acquisitions and equity investments and $51.2 million for fixed assets. Financing cash use was $170.6 million, including $299.9 million of share repurchases.
- The company had $300.1 million available under its share-repurchase authorization at year-end. It did not pay dividends and did not expect to do so in the foreseeable future.
Outlook, commentary, risks and unusual items
- Management said demand growth was expected to be slower under current economic and industry conditions. No overall 2013 sales or EPS guidance is stated in the provided filing text.
- Management expected a 2013 effective tax rate of approximately 31% and planned $60–$65 million of capital spending.
- The company intended to refinance approximately $220 million of Butler Schein Animal Health debt near the end of the first quarter of 2013. It expected annualized EPS accretion of $0.02–$0.03 and a one-time, non-cash charge of $0.04–$0.05 per diluted share.
- Fiscal 2012 included $15.2 million of restructuring costs, mainly severance associated with approximately 200 eliminated positions and facility-related costs. The program was complete; most costs were expected to be paid in 2013.
- Key risks include competition and pricing pressure; reliance on third-party suppliers and sales personnel; economic and currency exposure; acquisition integration and contingent minority-interest put rights; regulatory and health-care fraud compliance; privacy, cybersecurity and evolving software requirements; and seasonal quarterly fluctuations. Management described pending legal matters and accrued claims as not material.
- New or evolving requirements include the medical-device excise tax, Physician Payment Sunshine Act reporting, and expanded HIPAA privacy and security obligations. The company said implementation would add compliance costs; the application of Sunshine Act rules to distributors was described as unclear.
- Operating cash flow and reported growth warrant attention in light of inventory build-up, acquisitions, foreign exchange and the comparison against a 53-week prior year. The filing reports effective disclosure controls and an unqualified audit opinion on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether underlying organic growth and margins remain durable after separating acquisitions, foreign exchange and the extra-week comparison.
- Whether inventory purchased ahead of potential excise-tax-related price increases is sold through without impairing cash conversion or inventory turns.
- Actual terms, timing, EPS impact and non-cash charge from the planned Butler Schein Animal Health refinancing.
- Debt trends, liquidity and potential cash requirements from acquisitions and redeemable noncontrolling interests, reported at $435.2 million at year-end.
- The cost and operational impact of regulatory reporting, privacy, cybersecurity and compliance requirements, including any outcome of government discussions about marketing practices.