Henry Schein, Inc. — FY2010 Form 10-K
Business context and reporting period. The filing covers the 52-week fiscal year ended December 25, 2010; it is an annual report, not a standalone fourth-quarter filing. Henry Schein distributes healthcare products and services to office-based dental, medical and animal-health practitioners and provides practice-management software and related services. Its reportable segments are healthcare distribution and technology.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $7.527 billion | $6.538 billion |
| Gross profit / margin | $2.171 billion / 28.8% | $1.917 billion / 29.3% |
| Operating income | $521.1 million | $464.1 million |
| Net income attributable to Henry Schein | $325.8 million | $311.2 million |
| Diluted EPS | $3.49 | $3.44 |
| Operating cash flow | $388.9 million | $396.9 million |
| Cash and cash equivalents, year-end | $150.3 million | $471.2 million |
| Total debt, as presented in liquidity discussion | $441.3 million | $267.9 million |
Fourth quarter: Net sales were $2.024 billion, operating income $142.0 million and net income attributable to Henry Schein $93.0 million; diluted EPS was $1.00. For Q4 2009, the comparable figures were $1.786 billion, $137.6 million, $86.4 million and $0.94, respectively.
Healthcare distribution generated $7.327 billion of FY2010 sales, up 15.1%; technology generated $200.0 million, up 15.4%. Healthcare distribution gross margin fell to 27.8% from 28.2%, and technology gross margin to 68.5% from 71.8%, with mix cited as the primary reason. SG&A was 21.8% of sales versus 22.2%; operating margin was approximately 6.9% versus 7.1%.
Changes versus FY2009
- Sales rose 15.1%, including 12.3% growth from acquisitions and 3.1% internally generated revenue; foreign exchange reduced growth by 0.3%.
- Animal-health sales increased 270.4%, primarily reflecting the acquisition of a majority interest in Butler Animal Health Supply (BAHS), effective December 31, 2009. Dental sales grew 6.7%, medical 6.0%, international 2.9% and technology 15.4%.
- Operating income increased 12.3%; net income attributable to Henry Schein rose 4.7%, while diluted EPS increased from $3.41 to $3.49. Higher sales were partly offset by lower gross margins, higher interest expense and a higher reported effective tax rate.
- Operating cash flow decreased $8.0 million, mainly due to unfavorable working-capital movements. Investing cash outflow increased to $428.4 million, largely from acquisitions; financing cash outflow was $283.3 million.
- Year-end cash declined by $320.8 million and total debt increased by $173.4 million. The company redeemed $240 million of convertible notes with cash and shares, and incurred substantial BAHS-related debt.
Outlook, commentary, risks and unusual items
- Management expects demand to grow at slower rates given economic and industry conditions. No specific revenue or EPS guidance is provided in the supplied filing text.
- The company expected to spend approximately $55–$60 million on capital projects in 2011. Its announced acquisition of Provet Holdings for approximately $91 million closed after year-end.
- Management described liquidity as sufficient for foreseeable short- and long-term needs, citing cash, capital-market access and available credit facilities. Working-capital needs are seasonal and management anticipated future increases.
- BAHS debt was approximately $279.1 million at year-end, with a 5.5% effective interest rate and a large final installment due in 2015. BAHS debt covenants, interest-rate exposure and put rights held by minority owners are important financing considerations. Redeemable noncontrolling interests rose to $304.1 million from $178.6 million.
- Approximately $15.1 million of auction-rate securities remained illiquid because auctions had failed; the balance-sheet amount was $13.4 million after temporary impairment. The company reported no known issuer defaults and said the illiquidity was not expected to affect operations.
- FY2010 restructuring costs were $12.3 million, including a first-quarter program involving 184 position reductions and facility closures. The 2010 effective tax rate was 31.9%; the prior-year rate benefited from a $20.9 million valuation-allowance reduction.
- Principal risks include intense price competition, reliance on third-party suppliers, acquisition integration and financing, economic and customer-credit conditions, regulation and healthcare reform, product liability, international currency exposure, technology and information-system risks, and shipping costs. The filing discusses uncertainty over PPACA provisions and pending court appeals as of its filing date.
- Pending litigation and other claims were not expected by management to have a material adverse effect; accrued probable and estimable losses were described as immaterial. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of sales and earnings growth was organic versus acquisition-driven, especially following BAHS, and whether acquired operations are being integrated as planned.
- BAHS’s debt repayment capacity, 2015 maturity, covenant headroom and potential cash requirements under minority-owner put rights.
- Whether gross-margin pressure persists and how sales mix, supplier rebates and pricing competition affect profitability.
- Working-capital conversion and cash generation, given lower year-end cash and higher receivables and inventory.
- Progress on the Provet acquisition, the 2011 capital-spending plan, and material developments in healthcare regulation and litigation.