Henry Schein, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 28, 2014; comparisons are with the periods ended June 29, 2013. Unaudited results. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Business context
Henry Schein distributes dental, animal health and medical products and provides healthcare technology and value-added services. It operates in 27 countries and reports two segments: health care distribution and technology and value-added services.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $2,615.4 | $2,391.8 | $5,045.6 | $4,685.3 |
| Gross profit | $728.5 | $669.9 | $1,425.2 | $1,316.8 |
| Gross margin | 27.9% | 28.0% | 28.2% | 28.1% |
| Operating income | $180.8 | $176.1 | $338.1 | $329.7 |
| Net income attributable to Henry Schein | $116.2 | $108.4 | $218.3 | $199.9 |
| Diluted EPS | $1.35 | $1.23 | $2.53 | $2.27 |
- Q2 sales grew 9.3%; management attributed 7.9 percentage points to local-currency growth—4.3 points internally generated and 3.6 points from acquisitions—and 1.4 points to foreign exchange. First-half sales rose 7.7%.
- Q2 SG&A was $547.6 million, or 20.9% of sales versus 20.6% a year earlier. Q2 operating income increased 2.7%; net income attributable to the company increased 7.2%.
- Health care distribution generated 96.6% of Q2 sales. Q2 sales grew 8.6% in dental, 13.2% in animal health, 4.0% in medical, and 14.2% in technology and value-added services. Technology’s Q2 gross margin increased to 65.7% from 64.5%; distribution gross margin declined to 26.5% from 26.8%.
- First-half operating cash flow was $144.0 million, down from $236.8 million. Investing used $267.3 million, including $222.9 million for equity investments and acquisitions; financing provided $21.3 million. Cash fell to $89.7 million from $188.6 million at year-end 2013.
- At June 28, total debt was $755.9 million, up from $485.2 million at December 28, 2013; working capital was $1,368.1 million. Debt included $274.4 million outstanding under the receivables securitization facility and $350.0 million of private-placement notes. Management said available cash, credit facilities and access to debt and equity markets were sufficient for foreseeable needs.
Material changes and notable items
- Sales growth included acquisition contributions. The company completed its 80% acquisition of Polish animal-health distributor Medivet in April. It completed the acquisition of a 60% interest in SmartPak Equine on June 30, two days after quarter-end.
- First-half operating cash flow declined by $92.8 million, which management primarily attributed to working-capital changes. Investing cash outflow rose by $206.6 million, primarily from acquisitions and equity investments.
- First-half share repurchases were $151.4 million; the company reported $148.4 million remaining under its repurchase authorization. Debt issuance and repayment activity also increased debt compared with year-end.
- First-half other income, net, was $0.6 million versus expense of $11.5 million a year earlier. The comparison benefited from the prior-year $6.2 million accelerated amortization charge on deferred financing costs and a $5.0 million increase in other income, primarily a contractual payment from a European animal-health supplier.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided in the filing. Management noted that current economic and industry conditions could slow demand growth and anticipated future increases in working-capital requirements.
- Key disclosed risks include competition, supplier and third-party shipping dependencies, macroeconomic conditions, healthcare regulation and reimbursement changes, acquisition integration and returns, cybersecurity and information-system disruption, privacy requirements, and foreign-exchange exposure. The company uses currency forwards for certain exposures but does not hedge translation of foreign profits.
- Redeemable noncontrolling interests were $497.9 million. Certain minority holders can require the company to acquire their interests at fair value; estimated redemption values depend in part on expected subsidiary earnings.
- Unrecognized tax benefits were approximately $61.5 million, including $47.2 million that would affect the effective tax rate if recognized. Management did not expect changes over the next 12 months to materially affect the financial statements.
- The company reported ordinary-course legal matters and said accrued estimated losses were not material. It stated there were no material changes in previously disclosed risk factors, market-risk exposure or internal controls; disclosure controls were deemed effective.
- ASU 2014-09, the new revenue recognition standard, was issued in May 2014. The company was assessing its impact and had not selected a transition method.
Important facts for investors to verify
- How much reported sales growth came from acquisitions and currency versus underlying demand, particularly in animal health and dental.
- Whether working-capital trends and lower operating cash flow persist, and how acquisition spending affects liquidity and debt.
- Debt maturities, covenant headroom, and the company’s capacity to fund acquisitions, noncontrolling-interest redemptions and share repurchases.
- Whether segment margins—especially distribution margins—recover or remain affected by product and customer mix.
- Integration and performance of Medivet and SmartPak, and the potential cash cost of put rights and other acquisition-related obligations.
- Developments in healthcare compliance and reporting requirements, including drug supply-chain rules, privacy obligations and tax examinations.