HSIC

Business Context and Reporting Period

Company: Henry Schein, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 26, 2009
Business Overview: Henry Schein is the largest distributor of healthcare products and services to office-based practitioners, serving over 600,000 customers globally. Operations are divided into two reportable segments: Healthcare Distribution (dental, medical, animal health, and international) and Technology (practice management software and value-added services). The company operates in the U.S., Europe, and other international markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2.5% to $6.54 billion. Growth was driven by a 5.7% increase in local currency (0.9% organic, 4.8% acquisitions), partially offset by a 3.2% negative impact from foreign currency exchange.
• Segment Performance:
  • International: Sales grew 8.0% (16.4% in local currency), driven by acquisitions and organic growth.
  • Medical: Sales grew 2.0%, excluding influenza vaccine sales which declined due to manufacturer shortages.
  • Dental: Sales declined 2.2% due to a drop in dental equipment sales and service revenues.
  • Technology: Sales grew 6.1%.
• Profitability: Net income attributable to Henry Schein increased 30% to $311.2 million. Operating income rose 10.7% to $464.1 million.
• Restructuring: Restructuring costs decreased significantly to $3.0 million in 2009 from $23.2 million in 2008. The 2008 costs related to a plan announced in November 2008 to eliminate 430 positions and close facilities.
• Debt Reduction: Total debt decreased by approximately $150 million, primarily due to the repayment of $130 million in senior notes in June 2009.
• Discontinued Operations: The company recognized a net gain of $2.6 million from the sale of a dental consumables wholesaler in August 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective tax rate for 2010 to be in the range of 32.5% to 33.5%. The company anticipates investing $50 million to $55 million in capital projects in 2010.
• Future Restructuring: An additional restructuring plan is expected to be completed in the first quarter of 2010, primarily in European operations, with estimated costs of $10 million to $12 million.
• Subsequent Event: Effective December 31, 2009, the company acquired a majority interest in Butler Animal Health Supply, LLC, incurring approximately $320 million in debt.
• Risks:
  • Economic Conditions: Declining economic conditions and financial market disruptions could reduce customer demand and affect credit terms.
  • Regulatory: The company faces significant regulatory risks regarding pharmaceutical distribution, drug pedigree requirements, and healthcare fraud laws.
  • Competition: Intense competition from other distributors and manufacturers, including potential direct-to-consumer sales by manufacturers.
  • Supply Chain: Dependence on third-party suppliers for substantially all products; supply interruptions could adversely affect results.
  • Foreign Currency: Fluctuations in exchange rates negatively impacted reported sales growth in 2009.

Investor Verification Checklist

• Debt Structure: Verify the impact of the $320 million debt incurred for the Butler Animal Health acquisition on future leverage ratios and interest expense.
• Restructuring Costs: Monitor the timing and actual cost of the planned Q1 2010 European restructuring ($10M-$12M).
• Influenza Vaccine Sales: Assess the volatility of medical segment sales due to manufacturer supply shortages of influenza vaccines.
• Foreign Currency Exposure: Evaluate the sensitivity of future earnings to foreign exchange rate fluctuations, given the significant international revenue base.
• Regulatory Compliance: Review ongoing compliance with evolving drug pedigree and healthcare fraud regulations, which could increase operational costs.
• Discontinued Operations: Confirm the final accounting treatment and cash proceeds from the sale of the dental consumables wholesaler.