Henry Schein, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; unaudited. Financial amounts below are in U.S. dollars. The 2019 comparison presents continuing operations unless noted.
Business context and results
Henry Schein distributes dental and medical products and provides technology and value-added services. The company operates through health care distribution and technology and value-added services segments. Its former Animal Health business is reported as discontinued operations.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $2,428.9 million | $2,360.3 million |
| Gross profit / margin | $746.0 million / 30.7% | $751.7 million / 31.8% |
| Operating income | $173.9 million | $172.4 million |
| Net income from continuing operations | $133.8 million | $123.6 million |
| Net income attributable to Henry Schein | $130.3 million | $109.8 million |
| Diluted EPS attributable to Henry Schein | $0.91 | $0.73 |
| Operating cash flow from continuing operations | $90.8 million | $133.3 million |
Net sales grew 2.9%, but gross profit declined 0.8% and gross margin fell 1.1 percentage points. Dental sales decreased 4.6%; medical sales increased 17.1%, supported in part by strong demand for personal protective equipment. Technology and value-added services sales grew 14.2%. COVID-19 began to materially affect sales in mid-March as dental and medical offices closed or limited activity.
Liquidity, debt and cash flow
At March 28, 2020, cash and cash equivalents were $617.4 million, compared with $106.1 million at year-end 2019; working capital was $1,413.3 million. Total debt, including bank credit lines, was $1,357.2 million, up from $756.7 million. The company said it increased borrowing to strengthen cash levels amid the pandemic. Operating cash flow from continuing operations was $90.8 million; investing activities used $65.6 million and financing activities provided $491.6 million. Cash growth therefore relied substantially on financing inflows.
Material changes and unusual items
- Health care distribution sales rose 2.1% overall, with dental weakness offset by medical growth. Excluding Covetrus transition-services sales, total sales increased 2.6%.
- Health care distribution gross margin fell to 28.7% from 29.9%; management cited lower margin rates and expected lower vendor rebates. Technology and value-added services margin declined to 69.8% from 72.1%.
- Quarterly SG&A included approximately $10 million of incremental dental-business bad-debt reserves, a $17.5 million stock-based compensation credit reflecting reduced expected performance-award vesting, and $6.1 million of impairment charges related to prepaid royalties and a customer-relationship intangible asset.
- Continuing-operations operating cash flow declined from the prior-year quarter, primarily due to lower distributions from equity affiliates and working-capital movements. The company repurchased $73.8 million of shares during the quarter.
- Animal Health discontinued operations generated no sales in Q1 2020 and a $0.3 million loss; Q1 2019 included $319.5 million of sales and an $9.0 million loss.
Outlook, risks and contingencies
The company withdrew its 2020 earnings guidance because of COVID-19 and stated that the pandemic had materially adversely affected its business, results and cash flows. Management expected significant effects to continue at least until medical and dental offices reopened; it said the potential impact on financial condition and liquidity could not then be reasonably estimated. Measures included payroll reductions, substantially lower capital expenditures, reduced corporate spending, temporary suspension of acquisitions and suspension of share repurchases announced April 6.
After quarter-end, Henry Schein amended its $750 million revolving facility and entered into a new $700 million, 364-day facility; $500 million of the new facility’s term-loan portion was drawn at closing, with $200 million available on a revolving basis. It also refinanced a $100 million private-placement borrowing due in September 2020 with a 10-year borrowing at 2.35%. These actions provide financing but increase the importance of leverage, covenant and refinancing monitoring.
Key stated risks include prolonged office closures and reduced demand, PPE shortages and higher prices, customer payment delays or defaults, supply-chain disruption, reduced availability under receivables financing, and the ability to meet debt covenants. The company also disclosed multiple legal matters. A proposed $35 million securities-litigation settlement was expected to be covered by insurance and have no earnings impact, subject to court approval. Opioid-related lawsuits remain pending; the company stated opioid sales were less than one-tenth of 1% of 2019 continuing-operations revenue. Management said accrued probable legal losses were not material.
Important facts for investors to verify
- Subsequent quarterly sales, margins and cash flows as dental and medical practices reopen, and any reinstatement or revision of earnings guidance.
- Customer collections, bad-debt reserves and the availability of the receivables securitization facility, particularly if payment patterns worsen.
- Debt balances, liquidity and compliance with amended leverage covenants, including terms and use of the post-quarter credit facilities.
- Whether expected performance-award vesting, impairment estimates and vendor rebates change as the pandemic’s effects become clearer.
- Court approval and insurance coverage of the proposed securities settlement, and developments in the remaining antitrust, securities and opioid-related matters.