Henry Schein, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
The filing reports results for the three months ended April 1, 2017, compared with the three months ended March 26, 2016. Henry Schein distributes health care products and services, primarily to dental, animal health and medical practitioners, and provides practice technology and related services. It reports two segments: health care distribution and technology and value-added services.
Financial performance and liquidity
| Metric | Q1 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2,922.9 million | $2,713.0 million | +7.7% |
| Gross profit / margin | $822.9 million / 28.2% | $777.8 million / 28.7% | +5.8%; margin down 0.5 percentage points |
| Operating income / margin | $194.0 million / 6.6% | $176.2 million / 6.5% | +10.1% |
| Net income attributable to Henry Schein | $140.7 million | $113.8 million | +23.7% |
| Diluted earnings per share | $1.76 | $1.37 | +28.5% |
| Cash from operating activities | $(52.6) million | $(77.8) million | Cash use decreased by $25.2 million |
Sales growth included 8.7% growth in local currencies, comprising 5.9% internally generated growth and 2.8% from acquisitions, partly offset by a 1.0% foreign-exchange impact. Health care distribution sales rose 7.9%; technology and value-added services sales rose 4.2%. Distribution gross margin declined to 26.8% from 27.2%, while technology gross margin was unchanged at 65.3%.
Cash and cash equivalents were $62.9 million at April 1, 2017, and working capital was $1,106.8 million. Total debt was $1,398.8 million, up from $1,218.9 million at December 31, 2016; this included $671.7 million in bank credit lines and $708.4 million in long-term debt. The company reported sufficient liquidity for foreseeable short- and long-term needs. It used $34.7 million in investing activities and generated $83.7 million from financing activities during the quarter.
Changes, outlook, risks and unusual items
- The effective tax rate fell to 20.7% from 30.5%. Adoption of stock-compensation accounting guidance reduced income tax expense by approximately $17.0 million in the quarter, contributing to the earnings increase.
- Interest expense rose $4.3 million, primarily from higher borrowings and rates and a Brazil financing arrangement. The company repurchased 308,036 shares for $50.0 million and had $200.0 million remaining under its repurchase authorization.
- Restructuring activities were complete; management did not expect restructuring charges in 2017. No material acquisitions were completed during the quarter.
- After quarter-end, the company increased its revolving credit facility from $500 million to $750 million and extended its maturity to April 18, 2022. Its separate $975 million private-placement facilities were available through September 22, 2017.
- Redeemable noncontrolling interests increased to $719.4 million from $607.6 million, including a $100.8 million fair-value adjustment. These interests can be put back to the company at fair value under certain agreements.
- Management provided no numerical earnings or revenue guidance in the supplied filing text. It cited ongoing industry consolidation and cost-containment trends, while noting that economic conditions could affect demand.
- Key disclosed risks include competition, supplier dependence, foreign-exchange and macroeconomic exposure, health care regulation and reimbursement changes, acquisition integration, cybersecurity and data privacy, and litigation. The company is defending antitrust claims relating to alleged conduct in dental supplies distribution; it said accrued estimated losses for probable and estimable claims were not material.
- Management concluded disclosure controls were effective. It also reported a material change in internal control over financial reporting from continuing acquisition integrations and systems implementations; acquired businesses remained on separate systems during integration.
Investor facts to verify
- How much of sales and earnings growth was organic, acquisition-related, foreign-exchange-driven, or affected by the animal-health gross-versus-agency revenue presentation?
- Whether the lower tax rate and $17.0 million stock-compensation tax benefit are indicative of future tax rates or earnings.
- Drivers of the increase in debt and redeemable noncontrolling interests, including potential cash requirements from redemption rights.
- Whether distribution gross-margin pressure persists and how working-capital needs affect operating cash flow.
- Developments in the antitrust litigation, IRS audit matters, and integration and internal-control work.
- Availability and terms of financing after the private-placement facilities’ September 2017 expiration, and use of the expanded revolving facility.