Henry Schein, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 27, 2021; comparisons are with the three months ended March 28, 2020 unless otherwise noted. Amounts below are in U.S. dollars.
Business context and results
Henry Schein distributes health care products and provides technology and value-added services, primarily to dental and medical practitioners. Its reportable segments are health care distribution and technology and value-added services.
- Revenue: $2.925 billion, up 20.4%. The filing attributes the increase to 18.2% local-currency growth (14.9% internally generated and 3.3% from acquisitions) and 2.2% foreign-exchange benefit.
- Segment revenue: Health care distribution was $2.782 billion, up 22.2%; technology and value-added services was $143.0 million, up 8.4%. Prior-year revenue included $21.1 million of Covetrus transition-services sales, which ended in December 2020.
- Pandemic-related sales: PPE and COVID-19-related products contributed approximately $457.5 million, up about 189.5%. Excluding these products, internally generated local-currency dental sales rose 11.9%, while medical sales declined 6.8%.
- Gross profit and margin: $890.9 million, up 19.4%; gross margin was 30.5%, compared with 30.7%. Health care distribution margin declined to 28.4% from 28.7%; technology and value-added services margin increased to 70.5% from 69.8%.
- Operating expenses and income: SG&A was $658.0 million and restructuring costs were $2.9 million. Operating income was $229.9 million, versus $173.9 million.
- Net income and EPS: Net income attributable to Henry Schein was $166.0 million, versus $130.3 million. Diluted EPS was $1.16, versus $0.91. The effective tax rate rose to 25.1% from 22.4%.
- Cash flow: Operating cash flow from continuing operations was $63.3 million, versus $78.8 million. Investing cash outflow was $223.2 million, largely reflecting acquisitions and equity investments; financing cash outflow was $119.4 million. The filing does not provide a free-cash-flow measure.
Liquidity, debt and balance sheet
- At March 27, 2021, cash and cash equivalents were $144.5 million, compared with $421.2 million at December 26, 2020. Working capital was $1.448 billion, down from $1.508 billion.
- Total debt was $685.1 million, including $67.4 million of short-term bank borrowings, $111.2 million of current maturities and $506.5 million of long-term debt. The company had no borrowings on its $750 million revolving credit agreement or its $350 million receivables securitization facility.
- The company repaid and terminated its $700 million 364-day credit agreement on March 4, 2021. It reported that cash, access to debt and equity markets, and available credit facilities were sufficient for currently foreseeable capital needs.
- Operating cash-flow pressure reflected working-capital needs, including inventory stocking of PPE and COVID-19-related products. Inventory was $1.626 billion, up from $1.512 billion at year-end.
Material changes and notable items
- Revenue growth benefited from dental-practice activity recovering toward pre-pandemic levels, PPE and COVID-19 product sales, acquisitions and foreign-exchange movements. The prior-year comparison was affected by the pandemic’s impact on practices beginning in mid-March 2020.
- Distribution gross margin was pressured by inventory adjustments for PPE, COVID-19 products and influenza diagnostic kits amid pricing and demand volatility. Management did not expect further material inventory adjustments in 2021, but noted conditions could recur.
- SG&A as a share of revenue fell to 22.6% from 23.6%. Comparability was affected by prior-year incremental dental bad-debt reserves, a $17.5 million stock-compensation credit and approximately $6.1 million of impairment charges; Q1 2021 had $12.8 million of stock-compensation expense and no material impairment charges.
- Acquisition and equity-investment payments were $204.0 million. Q1 acquisitions were described as immaterial to the financial statements; consideration included $213.8 million cash and $75.2 million of redeemable noncontrolling interests.
- Share repurchases resumed in March. The company repurchased 1.33 million shares for $88.7 million during the quarter; $112.6 million remained available under the program at quarter-end.
- Restructuring costs were $2.9 million, versus $4.8 million. The initiative was extended through 2021, and management could not estimate the expected 2021 cost range or related future cash expenditures.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said patient traffic had approached pre-pandemic levels in Q1, while warning that regional COVID-19 case increases and continued pandemic uncertainty could again materially affect results, cash flows, financial condition and liquidity; the potential impact could not be reasonably estimated.
- Management expected ongoing volatility in product and service demand as infection rates, variants, vaccination and government responses change. PPE and COVID-19 product sales and inventory levels are identified as uncertain forward-looking factors.
- Key risks include supplier dependence, competition and online commerce, acquisition integration, regulation and compliance, cybersecurity and data privacy, foreign-currency exposure, litigation, and working-capital needs. The company uses hedges for selected currency exposures but states they provide limited protection.
- Legal matters include opioid-related lawsuits and a Covetrus-related securities class action and derivative action. The company said it would defend itself vigorously in the opioid matters; opioid sales were less than one-tenth of 1% of 2020 continuing-operations revenue. The Archer antitrust matter was agreed to be settled for an amount described as not material.
- Redeemable noncontrolling interests increased to $452.9 million from $327.7 million, including acquisition-related additions and fair-value changes; certain minority holders have rights to require the company to purchase their interests.
Most important facts for investors to verify
- How much of reported growth and profitability is sustainable after separating PPE and COVID-19 product sales, acquisition contributions, currency effects and the unusual prior-year comparison.
- Whether gross margins and inventory valuations stabilize after the disclosed product-price and demand volatility.
- How working capital, cash generation and cash balances develop as inventory needs and acquisition spending continue.
- The amounts and timing of future restructuring cash costs, acquisition-related obligations and potential redemptions of noncontrolling interests.
- Developments in the opioid and Covetrus-related litigation, and any changes to the company’s stated assessment of potential financial exposure.