Henry Schein, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 25, 2016; comparisons are to the periods ended June 27, 2015. Amounts below are in U.S. dollars unless noted. The company distributes health care products and provides technology and value-added services, principally to dental, animal health and medical practitioners.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $2.873 billion | $2.629 billion | $5.586 billion | $5.093 billion |
| Gross profit | $803.3 million | $750.7 million | $1.583 billion | $1.464 billion |
| Operating income | $180.7 million | $183.0 million | $356.9 million | $344.4 million |
| Net income attributable to Henry Schein | $120.1 million | $117.9 million | $233.8 million | $221.4 million |
| Diluted EPS | $1.46 | $1.40 | $2.83 | $2.62 |
| Gross margin | 28.0% | 28.6% | 28.3% | 28.7% |
- Q2 sales rose 9.3%; management reported 9.7% local-currency growth, comprising 7.6% internally generated growth and 2.1% from acquisitions, partly offset by a 0.4% foreign-exchange effect. Six-month sales rose 9.7%, with 10.8% local-currency growth partly offset by a 1.1% currency effect.
- For the six months, operating cash flow was $172.9 million, versus $181.1 million a year earlier. Investing cash outflow was $120.4 million, including $92.4 million for equity investments and acquisitions; financing cash outflow was $65.4 million. Cash declined $8.5 million from year-end to $63.6 million.
- At June 25, cash was $63.6 million, working capital was $1.367 billion, and total debt was $955.1 million, compared with $809.7 million at December 26, 2015. Debt included $237.8 million of bank credit lines and $700.1 million of long-term debt. The company said available cash, debt and equity-market access, and credit facilities were sufficient for foreseeable short- and long-term needs.
- Six-month effective tax rate was 29.1%, compared with 30.4%; a proposed federal tax audit settlement reduced tax expense by approximately $4.5 million. The settlement remained subject to documentation and review.
Segments and changes versus prior period
- Q2 health care distribution sales increased 8.9% to $2.766 billion; technology and value-added services sales increased 19.6% to $107.0 million. Animal health and medical sales grew 14.0% and 14.5%, respectively; dental grew 4.0%.
- Six-month segment sales increased 9.3% in health care distribution to $5.377 billion and 19.1% in technology and value-added services to $208.7 million.
- Despite higher sales, Q2 operating income decreased 1.3% year over year, while attributable net income rose 1.8%. Six-month attributable net income rose 5.6%.
- Gross margin contracted in both segments. Management attributed lower distribution margins in part to certain medical and animal-health sales being reported gross in 2016 rather than on an agency basis previously. Excluding that presentation effect, internally generated animal-health growth was 8.2% in Q2 and 6.8% for the six months; corresponding medical growth was 10.1% and 10.5%.
- Restructuring costs were $20.4 million in Q2 and $24.4 million for the six months, versus $7.2 million and $14.1 million in the comparable 2015 periods. SG&A as a share of sales improved modestly to 21.0% in Q2 and 21.5% for the six months.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management described restructuring as a way to reduce costs and fund growth initiatives under its 2015–2017 strategic plan. On August 4, 2016, the company announced that restructuring would continue through year-end 2016; additional second-half costs were not estimated.
- The company disclosed antitrust litigation, including a SourceOne Dental action and class-action complaints alleging price fixing, customer allocation and competitor boycotts. It intends to defend itself; recorded accruals for probable and estimable legal losses were not material. The filing does not provide a clear estimate of potential exposure from these cases.
- The U.K.’s June 2016 vote to leave the EU was identified as a risk due to potential currency volatility, trade restrictions and regulatory or tax complexity. In 2015, approximately 8% of sales were invoiced in the U.K. and 27% in Europe overall.
- Other stated risks include competition and industry consolidation, supplier dependence, health-care regulation and reimbursement changes, acquisition integration, cybersecurity and data privacy, foreign-exchange exposure, and economic uncertainty.
- Debt increased substantially, chiefly reflecting receivables securitization borrowings of $334.0 million, up from $90.0 million at year-end. The facility limit was increased to $350 million and extended to April 29, 2019. Receivables days outstanding rose to 41.4 from 40.5 a year earlier; inventory turns declined to 5.3 from 5.5.
Important facts for investors to verify
- Whether sales and earnings growth persist after separating acquisitions, foreign exchange, and gross-versus-agency revenue presentation effects.
- Whether gross-margin pressure continues and whether restructuring delivers savings; the company had not estimated additional second-half restructuring costs.
- Debt, receivables-securitization usage, working-capital needs, and operating cash-flow conversion.
- The status and potential financial consequences of the antitrust cases and the proposed IRS settlement.
- Developments from Brexit and foreign-exchange movements, given the company’s European sales exposure.