Henry Schein, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 28, 2013; comparisons are with the periods ended September 29, 2012. Dollar amounts below are in millions unless stated otherwise. The company distributes health care products and provides technology and value-added services, principally to dental, animal health and medical practitioners.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,349.0 | $2,231.1 | $7,034.3 | $6,531.5 |
| Gross profit / margin | $639.6 / 27.2% | $609.0 / 27.3% | $1,956.5 / 27.8% | $1,844.0 / 28.2% |
| Operating income / margin | $160.5 / 6.8% | $149.6 / 6.7% | $490.2 / 7.0% | $437.6 / 6.7% |
| Net income attributable to Henry Schein | $107.4 | $96.8 | $307.3 | $275.6 |
| Diluted EPS | $1.23 | $1.08 | $3.49 | $3.06 |
- Sales increased 5.3% in Q3 and 7.7% for the first nine months. Nine-month growth included 3.6% internally generated revenue and 4.1% from acquisitions.
- Q3 segment sales growth: dental 5.7%, animal health 7.4%, medical 0.5%, and technology and value-added services 11.2%. Nine-month growth was 5.0%, 13.9%, 5.4%, and 14.7%, respectively. Animal health growth included acquisitions and a mix with more lower-margin pharmaceuticals.
- Gross margin declined year over year in both periods, primarily reflecting product mix in distribution; technology margins also fell, partly due to product mix and increased customer support costs. SG&A as a share of sales improved to 20.4% from 20.6% in Q3 and to 20.8% from 21.3% year to date.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $389.5 million, versus $208.4 million a year earlier. Investing used $93.8 million, compared with $237.3 million; financing used $349.2 million, compared with $29.3 million. Capital expenditures were $38.7 million. Operating cash flow less capital expenditures was approximately $350.8 million; this is a simple calculation, not a company-defined measure.
- Cash was $69.9 million at September 28, 2013, down from $122.1 million at December 29, 2012. Working capital was $1,189.0 million, versus $1,231.7 million.
- Total debt was $407.8 million, down from $533.3 million at year-end 2012. It included $15.8 million of bank credit lines, $80.6 million of current maturities and $311.5 million of long-term debt. The $500 million revolving facility had no borrowings outstanding; $10.1 million of letters of credit were provided under it. The company reported $20.0 million outstanding under its receivables securitization facility and $75.0 million on a term loan, which it says was repaid in Q4 2013.
- Redeemable noncontrolling interests were $475.0 million. Certain subsidiary minority holders can require the company to purchase their interests at fair value.
Material changes, outlook and risks
- Q3 included a $12.5 million loss on the sale of a Middle East equity affiliate, equal to $0.14 per diluted share, with no tax benefit. The company also paid $13.4 million in connection with the divestiture. The investment had been fully impaired by year-end 2012.
- A $13.4 million reduction in the tax valuation allowance for foreign loss carryforwards lowered the Q3 effective tax rate to 21.7%; without it, the rate would have been 30.1%. The nine-month effective rate was 28.3%, or 31.1% excluding the allowance release.
- Early repayment of HSAH-related debt in Q1 generated a one-time $6.2 million charge for accelerated amortization of deferred financing costs. No restructuring costs were recorded in 2013; the prior-year program was complete.
- Management said demand could grow at slower rates under current economic and industry conditions, and anticipated higher working-capital needs. It described existing cash, debt-market access and credit facilities as sufficient for foreseeable short- and long-term needs. Expected capital investment for the remainder of fiscal 2013 was $15 million to $25 million. No specific earnings or revenue guidance was provided in the supplied filing text.
- Risks include competition, supplier and customer dependence, economic and health-care industry changes, acquisition integration, regulation and reimbursement, privacy and information-system security, foreign operations, litigation, and technology change. The company noted new health-care reporting and compliance requirements and evolving drug and device tracking rules.
- Management reported disclosure controls were effective at quarter-end. It also identified acquisition integration and systems implementations, considered together, as a material change in internal control over financial reporting; the filing describes related change-management controls.
Important facts for investors to verify
- How much reported profit growth depended on the tax valuation-allowance release, and how results compare excluding the $12.5 million divestiture loss.
- Whether distribution and technology gross-margin pressure persists, particularly from animal health product mix and higher software support costs.
- Cash conversion and working-capital trends, including the decline in inventory turns to 5.9 from 6.3 year over year and the increase in days sales outstanding to 40.7 from 40.4.
- Debt repayment and refinancing activity after quarter-end, covenant headroom, and potential cash requirements from redeemable noncontrolling interests.
- Execution and compliance costs associated with acquisitions, system integrations, health-care regulations, drug tracking, and privacy requirements.