Henry Schein Reports First Quarter 2020 Financial Results

• Q1 GAAP diluted EPS from continuing operations of $0.91 versus prior-year GAAP diluted EPS from continuing operations of $0.78
• Q1 non-GAAP diluted EPS from continuing operations of $0.94 versus prior-year non-GAAP diluted EPS from continuing operations of $0.80
• Prioritizing safety of Team Schein Members across the globe; assisting customers in building a roadmap to navigate through practice disruptions and prepare for resumption of procedures
• Implemented broad-based cost reduction initiatives in response to COVID-19
• Company has access to approximately $1.7 billion in liquidity and a low debt-to-EBITDA ratio
• Affirms confidence in long-term business strategy

MELVILLE, N.Y.--(BUSINESS WIRE)-- Henry Schein, Inc. (Nasdaq: HSIC), the world’s largest provider of health care solutions to office-based dental and medical practitioners, today reported first quarter 2020 financial results from continuing operations. Results from continuing operations exclude contributions from Henry Schein’s former Animal Health business, which was spun off in February 2019 to form a new publicly traded company, Covetrus (Nasdaq: CVET).

Net sales for the quarter ended March 28, 2020, were $2.4 billion, an increase of 2.9% compared with the first quarter of 2019. The 2.9% increase consisted of 4.0% growth in local currencies and a 1.1% decline related to foreign currency exchange. In local currencies, internally generated sales increased 2.1% and acquisition growth was 1.9%. Excluding approximately $21.1 million in corporate revenues from product sales to Covetrus under the transition services agreement entered into in connection with the Animal Health spin-off, internal sales growth in local currencies was 1.8% (see Exhibit A for details of sales growth and a reconciliation of this non-GAAP measure to GAAP sales).

Net income attributable to Henry Schein, Inc. from continuing operations for the first quarter of 2020 was $130.5 million, or $0.91 per diluted share, compared with prior-year net income from continuing operations of $118.4 million, or $0.78 per diluted share. Non-GAAP net income from continuing operations for the first quarter of 2020 was $134.1 million, or $0.94 per diluted share, compared with non-GAAP net income from continuing operations of $120.6 million, or $0.80 per diluted share, for the first quarter of 2019. Non-GAAP results for the first quarter of 2020 and 2019 exclude certain items noted in Exhibit B, which provides a reconciliation of GAAP net income from continuing operations and diluted EPS from continuing operations to non-GAAP net income and diluted EPS from continuing operations.

“The COVID-19 pandemic has had a significant impact on our worldwide results for the month of March, and continues to impact our Dental business, in particular, as many dental practices are closed except for emergency procedures. Our Medical and Technology and Value-Added Services businesses have been somewhat more resilient, although each is also currently experiencing sales declines due to COVID-19,” said Stanley M. Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein.

Dental sales for the first quarter of 2020 of $1.5 billion decreased 4.6%, consisting of a decline of 3.0% in local currencies and a 1.6% decline related to foreign currency exchange. In local currencies, internally generated sales decreased 3.7% and acquisition growth was 0.7%. The 3.7% internal decline in local currencies included a decrease of 3.9% in North America and a decrease of 3.4% internationally.

“North America dental sales were relatively in-line with our expectations in January and February. North America dental consumable merchandise and equipment internal sales were significantly impacted by U.S. dental office closures following the American Dental Association’s recommendation in mid-March that practices suspend operations except for emergency procedures. Similarly, in Canada most provinces recommended that dental practices suspend operations except for emergency procedures, significantly impacting sales late in the quarter,” noted Mr. Bergman. “International dental consumable merchandise and equipment internal sales were also relatively in-line during January and February. However, these sales were significantly impacted in March by social distancing practices across virtually all dental markets served by Henry Schein, including Europe and China. I would note that Germany, and to a lesser extent Australia and Brazil, did not experience as severe an impact compared with other international geographies that we serve. We have begun to see some dental clinics reopen in China, however the rate of practices reopening has been at a gradual pace. In other parts of the world we expect that as stay at home orders are relaxed, dental practices will also begin to resume operations.”

Medical sales for the first quarter of 2020 of $800.7 million increased 17.1%, consisting of 17.2% growth in local currencies and a 0.1% decrease related to foreign currency exchange. In local currencies, internally generated sales increased 13.4% and acquisition growth was 3.8%.

“Internal sales growth of 13.4% in local currencies was driven by solid organic growth earlier in the quarter, as well as an increase of personal protective equipment sales in March. However, current sales in our Medical business are also significantly impacted by COVID-19,” remarked Mr. Bergman.

Technology and Value-Added Services sales from continuing operations of $132.0 million increased 14.2%, consisting of 14.5% growth in local currencies and a 0.3% decline related to foreign currency exchange. In local currencies, internally generated sales increased 6.4% and acquisition growth was 8.1%.

“Technology and Value-Added Services sales growth in the first quarter was primarily driven by positive trends in recurring revenue associated with our practice management, patient engagement and patient demand creation software solutions. In mid-March, the impact from COVID-19 began to materially impact sales in these categories, as well as in new system installations, our DentalPlans.com and our financial services businesses,” said Mr. Bergman. “We are working with our customers to utilize Henry Schein patient engagement solutions so our customers can remain in touch with patients and plan for the resumption of booking of procedures.”

Response to COVID-19

“Due to the speed and severity of the COVID-19 health care and related economic crisis, this is one of the most trying moments in modern history for everyone,” said Mr. Bergman. “Henry Schein immediately responded to the spread of the virus by prioritizing the safety of Team Schein Members across the globe, while we remained committed to continuing to provide outstanding customer service, driving operating efficiencies across the organization and conserving capital in the face of financial headwinds. We took swift and decisive action to reduce our cost structure to best position Henry Schein through this crisis and beyond. I have the utmost confidence in our business strategy, in our leadership team and in all of Team Schein. Together we are making critical decisions to manage the Company in the interest of all constituents - Team Schein, customers, suppliers, investors and society - and in doing so, we are building value for the long-term.”

Response to COVID-19 - Financial

In a focused effort to generate cash savings, Henry Schein has initiated a number of measures. The Company is aggressively reducing overhead and SG&A expenses, including having implemented a payroll cost reduction plan centered around furloughs, reduced work hours, voluntary unpaid time off, suspension of the 401(k) match, and job reductions. As previously disclosed, the Company temporarily reduced the salary of management at the Director level through Executive Management, ranging from 10% to 100%, respectively. The Company’s Board of Directors has agreed to a temporary reduction of 25% of its non-employee directors’ cash retainer. The Company will closely monitor the health of its business and is prepared to take additional cost saving measures, as warranted.

Henry Schein has reduced or eliminated all non-essential capital expenditures, and in early March, the Company temporarily suspended its acquisition activity and share repurchase program. Prior to this, the Company repurchased 1.2 million shares of its common stock during the first quarter at an average price of $61.49 per share, or a total of approximately $73.8 million. The impact of the repurchase of shares on first quarter 2020 diluted EPS was immaterial. As of today, Henry Schein has $201.2 million authorized and available for future stock repurchases.

Henry Schein has maintained a strong balance sheet as well as a low debt-to-EBITDA ratio at the end of the first quarter of 2020, positioning the Company to weather economic uncertainty. The Company currently has access to approximately $1.7 billion in liquidity, providing flexibility during this challenging time.

Response to COVID-19 – Customer Service

The COVID-19 pandemic is an unprecedented challenge for public health and for the global economy. As this crisis rapidly evolved, Henry Schein worked with its suppliers to expand availability and prioritize the delivery of critical personal protective equipment (PPE) and also brought to market rapid test solutions for health care professionals. As most of our dental and many medical practices began to suspend operations, Henry Schein stepped in to help customers build a roadmap to navigate through the disruptions to their practices, including access to third-party financing resources. Henry Schein is working closely to assist customers with business continuity planning for today, and also in anticipation of practices resuming activity.

As part of the Company’s commitment to delivering essential products to health care professionals fighting the COVID-19 pandemic in the United States, Henry Schein is a participant in the White House’s COVID-19 Supply Chain Task Force. The Company has also worked with the Strategic National Stockpile to deliver personal protective equipment to COVID-19 testing sites and with the Federal Emergency Management Agency to deliver critical supplies to health care professionals and institutions.

In the United States, Henry Schein recently introduced two rapid point-of-care test kits that can detect antibodies associated with COVID-19 in as little as 15 minutes and without the need for machine equipment. These tests are important because they deliver results quickly and at low cost and can easily and quickly be deployed in large quantities where they are needed. Health care professionals can utilize these test results, along with clinical judgment and assessment of symptoms, to make informed decisions. Henry Schein believes public health officials can also use these tests, as part of broader testing, to better understand the spread of the disease. The Company is working to bring additional tests as well as more PPE to market.

Currently, the COVID-19 antibody tests offered by Henry Schein are being marketed under an FDA emergency enforcement policy, and have not been independently reviewed by FDA. Under that policy, the tests may be administered by labs and health care professionals at locations that are Clinical Laboratory Improvement Amendments (CLIA) certified to perform high complexity tests.

Financial Guidance

Henry Schein’s financial guidance announced on February 20, 2020, specifically noted that guidance assumed no significant supply chain disruption related to COVID-19. On April 6, 2020, in light of the growing impact of COVID-19 on the business operations of the Company and its customers, Henry Schein announced the withdrawal of its previously announced financial guidance for 2020. Due to the continued uncertainty surrounding COVID-19 and its impact to business operations, Henry Schein is not providing 2020 financial guidance at this time.

First Quarter 2020 Conference Call Webcast

The Company will hold a conference call to discuss first quarter 2020 financial results today, beginning at 10:00 a.m. Eastern time. Individual investors are invited to listen to the conference call through Henry Schein’s website by visiting www.henryschein.com/IRwebcasts. In addition, a replay will be available beginning shortly after the call has ended.

About Henry Schein, Inc.

Henry Schein, Inc. (Nasdaq: HSIC) is a solutions company for health care professionals powered by a network of people and technology. With more than 19,000 Team Schein Members worldwide, the Company’s network of trusted advisors provides more than 1 million customers globally with more than 300 valued solutions that improve operational success and clinical outcomes. Our Business, Clinical, Technology, and Supply Chain solutions help office-based dental and medical practitioners work more efficiently so they can provide quality care more effectively. These solutions also support dental laboratories, government and institutional health care clinics, as well as other alternate care sites.

Henry Schein operates through a centralized and automated distribution network, with a selection of more than 120,000 branded products and Henry Schein private-brand products in stock, as well as more than 180,000 additional products available as special-order items.

A FORTUNE 500 Company and a member of the S&P 500® index, Henry Schein is headquartered in Melville, N.Y., and has operations or affiliates in 31 countries. The Company’s sales from continuing operations reached $10.0 billion in 2019, and have grown at a compound annual rate of approximately 13 percent since Henry Schein became a public company in 1995.

For more information, visit Henry Schein at www.henryschein.com, Facebook.com/HenrySchein, and @HenrySchein on Twitter.

Cautionary Note Regarding Forward-Looking Statements and Use of Non-GAAP Financial Information

In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements include EPS guidance and are generally identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” “to be,” “to make” or other comparable terms. Forward looking statements include the overall impact of the COVID-19 pandemic on the Company, its results of operations, liquidity, and financial condition (including any estimates of the percentage impact on these items), the efficacy and impact of the Company’s cost reduction initiatives, and the rate at which dental and other practices may begin to resume normal operations in the United States and internationally. Forward looking statements also include the Company’s ability to make additional testing available, the nature of those tests and the number of tests intended to be made available and the timing for availability, the nature of the target market, as well as the efficacy or relative efficacy of the test results given that the test efficacy has not been, or will not have been, independently verified under normal FDA procedures. A full discussion of our operations and financial condition, status of litigation matters, including factors that may affect our business and future prospects, is contained in documents we have filed with the United States Securities and Exchange Commission, or SEC, and will be contained in all subsequent periodic filings we make with the SEC. These documents identify in detail important risk factors that could cause our actual performance to differ materially from current expectations.

Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: effects of a highly competitive and consolidating market; increased competition by third party online commerce sites; our dependence on third parties for the manufacture and supply of our products; our dependence upon sales personnel, customers, suppliers and manufacturers; our dependence on our senior management; fluctuations in quarterly earnings; risks from expansion of customer purchasing power and multi-tiered costing structures; increases in shipping costs for our products or other service issues with our third-party shippers; general global macro-economic conditions; risks associated with currency fluctuations; risks associated with political and economic uncertainty; disruptions in financial markets; volatility of the market price of our common stock; changes in the health care industry; implementation of health care laws; failure to comply with regulatory requirements and data privacy laws; risks associated with our global operations; risks associated with the Novel Coronavirus Disease 2019 (COVID-19); risks associated with the United Kingdom’s withdrawal from the European Union; transitional challenges associated with acquisitions, dispositions and joint ventures, including the failure to achieve anticipated synergies/benefits; financial and tax risks associated with acquisitions, dispositions and joint ventures; litigation risks; new or unanticipated litigation developments and the status of litigation matters; the dependence on our continued product development, technical support and successful marketing in the technology segment; our dependence on third parties for certain technologically advanced components; risks from disruption to our information systems; cyberattacks or other privacy or data security breaches; certain provisions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation. The order in which these factors appear should not be construed to indicate their relative importance or priority.

We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict. Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results. We undertake no duty and have no obligation to update forward-looking statements.

Included within the press release are non-GAAP financial measures that supplement the Company’s Consolidated Statements of Income prepared under generally accepted accounting principles (GAAP). These non-GAAP financial measures adjust the Company’s actual results prepared under GAAP to exclude certain items. In the schedules attached to this press release, the non-GAAP measures have been reconciled to and should be considered together with the Consolidated Statements of Income. Management believes that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures.

(TABLES TO FOLLOW)

Management believes that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures. Earnings per share numbers may not sum due to rounding.

1. Represents Q1 2020 restructuring costs of $4,787, net of $1,197 tax benefit, resulting in an after-tax effect of $3,590 and Q1 2019 restructuring costs of $4,641, net of $1,160 tax benefit, resulting in an after-tax effect of $3,481.
2. Represents a change in estimate of $1,333 to income tax expense related to a one-time tax expense recorded in Q4 2018 as a result of a reorganization of legal entities completed in preparation for the Animal Health spin-off, which was completed on February 7th, 2019.

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