Henry Schein, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are to the periods ended June 25, 2011. Financial amounts below are in millions unless noted.
Business context
Henry Schein distributes health care products and provides technology and value-added services to dental, medical and animal health practitioners. It reported two segments: health care distribution and technology and value-added services. The company served nearly 775,000 customers worldwide.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $2,201.5 | $2,130.6 | $4,300.5 | $4,078.4 |
| Gross profit | $624.4 | $612.2 | $1,235.0 | $1,178.0 |
| Operating income | $154.7 | $151.2 | $288.0 | $275.5 |
| Net income | $107.3 | $105.1 | $196.4 | $188.0 |
| Net income attributable to Henry Schein | $98.1 | $94.5 | $178.8 | $171.0 |
| Diluted EPS | $1.08 | $1.01 | $1.98 | $1.83 |
- Q2 sales rose 3.3%; management attributed this to 6.5% local-currency growth, partly offset by a 3.2% foreign-exchange headwind. Six-month sales rose 5.4%, reflecting 7.4% local-currency growth less a 2.0% currency impact.
- Q2 gross margin was 28.4%, down from 28.7%; six-month gross margin was 28.7%, down from 28.9%. Health care distribution margins declined, partly reflecting growth in animal health, which has a greater mix of lower-margin pharmaceuticals.
- Q2 SG&A was 21.2% of sales versus 21.6%; six-month SG&A was 21.7% versus 22.1%. Restructuring costs were $3.4 million in Q2 and $15.2 million for the first half.
- Q2 net income attributable to Henry Schein increased 3.8%, while diluted EPS increased 6.9%. For the first half, those measures rose 4.6% and 8.2%, respectively.
Segments and material changes
- Q2 health care distribution sales increased 3.1% to $2,133.3 million. Dental sales declined 1.3% reported, but grew 2.6% in local currencies; medical sales rose 5.9%, and animal health rose 11.4%.
- Q2 technology and value-added services sales increased 9.8% to $68.2 million; segment gross margin was 65.0% versus 64.8%.
- For the first half, animal health sales grew 13.2%, technology and value-added services 11.4%, medical 5.0%, and dental 2.0%.
- The company repurchased $156.9 million of stock in the first half, compared with $32.1 million in the prior-year period. It authorized an additional $200 million repurchase program in April; $143.1 million remained available at June 30.
Cash flow, debt and liquidity
- First-half operating cash flow was $129.9 million, down from $186.5 million, primarily due to working-capital changes. Investing cash use was $142.1 million, and financing cash use was $43.9 million. Cash declined to $87.9 million from $147.3 million at year-end 2011.
- Working capital was $1,047.7 million, compared with $1,000.9 million at December 31, 2011. Accounts-receivable days outstanding improved to 39.9 from 41.5 year over year; inventory turns eased to 6.3 from 6.4.
- Total debt was $535.0 million, up from $441.4 million at year-end 2011; long-term debt was $434.4 million and bank credit lines were $83.5 million. The $400 million revolving facility had $55 million outstanding and expires in September 2013.
- In April, the company increased its uncommitted private-placement facilities by $375 million. Private-placement borrowings outstanding were $200 million. BAHS debt outstanding was $224.3 million, secured by BAHS assets and subject to financial covenants.
- Management stated that cash, access to debt and equity markets, and available credit facilities were sufficient for currently foreseeable short- and long-term capital needs. It expected to spend approximately $30–$40 million on capital projects during the remainder of fiscal 2012.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management said demand growth could be slower under current economic and industry conditions and anticipated future increases in working-capital requirements.
- The 2012 restructuring eliminated approximately 200 positions and included severance, facility closures and related costs. The program was complete; management did not expect further charges from it in the remainder of fiscal 2012.
- Acquisitions completed in Q2 included animal health, technology and dental businesses with approximately $334 million of aggregate annual revenue. The company also continued integration work on businesses acquired in 2011 and early 2012. Acquisitions were described as immaterial to the financial statements individually and in aggregate.
- Foreign-currency movements reduced reported sales and contributed to a $42.0 million Q2 currency-translation loss in other comprehensive income. The company’s first-half comprehensive income attributable to Henry Schein was $169.1 million, down from $243.4 million.
- Approximately $7.5 million of auction-rate securities were carried at fair value; failed auctions have restricted near-term liquidity. Management reported no known issuer defaults and said this illiquidity was not expected to affect operations or growth funding.
- Risks highlighted include competition, supplier dependence, economic conditions, acquisition integration, health care regulation and reform, fraud-and-abuse rules, privacy and data-security requirements, technology change, litigation, and foreign-exchange exposure. The company said pending legal matters and accrued estimated losses were not material.
- Management judged disclosure controls effective at June 30, 2012. Acquisition activity and integration constituted a material change in internal control over financial reporting; the filing describes related change-management controls.
Important facts for investors to verify
- Whether sales growth remains positive after separating organic growth, acquisitions and foreign-exchange effects—particularly in dental and animal health.
- Whether working-capital needs continue to constrain operating cash flow, and how cash conversion compares with earnings.
- Debt levels, BAHS covenant compliance and refinancing needs, including the September 2013 revolving-credit expiration.
- The valuation and eventual liquidity of auction-rate securities, and the size and timing of potential subsidiary noncontrolling-interest redemptions.
- Whether the completed restructuring delivers expected cost benefits and whether acquisition integrations affect margins, controls or cash requirements.