UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended September 29, 2001
OR
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Commission File Number: 0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 Duryea Road
Melville, New York
(Address of principal executive offices)
11747
(Zip Code)
Registrant's telephone number, including area code: (631) 843-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
As of November 8, 2001 there were 42,680,355 shares of the Registrant's
Common Stock outstanding.
HENRY SCHEIN, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of September 29, 2001 and December 30, 2000.... 3
Statements of Operations for the three and nine months ended
September 29, 2001 and September 23, 2000...................... 4
Statements of Cash Flows for the nine months ended
September 29, 2001 and September 23, 2000...................... 5
Notes to Consolidated Financial Statements....................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....... 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 21
ITEM 6. Exhibits and Reports on Form 8-K................................. 22
Signature........................................................ 22
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 29, December 30,
2001 2000
------------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 107,854 $ 58,362
Accounts receivable, less reserves of $28,863 and $27,556, respectively.... 416,106 371,668
Inventories................................................................ 248,956 276,473
Deferred income taxes...................................................... 22,945 21,001
Prepaid expenses and other................................................. 45,917 60,900
--------- ----------
Total current assets............................................. 841,778 788,404
Property and equipment, net of accumulated depreciation and amortization
of $89,113 and $73,134, respectively...................................... 109,008 94,663
Goodwill and other intangibles, net of accumulated amortization
of $53,216 and $44,419, respectively...................................... 276,189 292,018
Investments and other........................................................... 54,461 55,983
---------- ----------
$1,281,436 $1,231,068
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 200,243 $ 216,535
Bank credit lines.......................................................... 8,878 4,390
Accruals:
Salaries and related expenses......................................... 32,737 39,830
Merger, integration and restructuring costs........................... 7,489 13,735
Accrued income taxes.................................................. 23,731 1,720
Other................................................................. 76,213 82,568
Current maturities of long-term debt....................................... 8,459 6,079
---------- ----------
Total current liabilities........................................ 357,750 364,857
Long-term debt.................................................................. 250,651 266,224
Other liabilities............................................................... 12,477 12,931
---------- ----------
Total liabilities................................................ 620,878 644,012
---------- ----------
Minority interest............................................................... 6,161 7,996
---------- ----------
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000,
issued: 42,668,355 and 41,946,284, respectively....................... 426 419
Additional paid-in capital................................................. 390,789 373,413
Retained earnings.......................................................... 285,266 225,029
Treasury stock, at cost, 62,479 shares..................................... (1,156) (1,156)
Accumulated comprehensive loss............................................. (20,556) (18,179)
Deferred compensation...................................................... (372) (466)
---------- ----------
Total stockholders' equity....................................... 654,397 579,060
---------- ----------
$1,281,436 $1,231,068
========== ==========
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 29, September 23, September 29, September 23,
2001 2000 2001 2000
------------- ------------- ------------- -------------
(reclassified) (reclassified)
Net sales.........................................$ 659,774 $ 603,319 $ 1,859,954 $ 1,726,089
Cost of sales..................................... 480,918 441,368 1,354,849 1,256,207
--------- --------- ---------- ----------
Gross profit................................. 178,856 161,951 505,105 469,882
Operating expenses:
Selling, general and administrative.......... 136,981 127,620 400,375 380,507
Merger and integration costs................. - - - 585
Restructuring costs.......................... - 5,387 - 5,387
--------- --------- ---------- ----------
Operating income........................ 41,875 28,944 104,730 83,403
Other income (expense):
Interest income.............................. 2,266 2,322 6,684 4,342
Interest expense............................. (3,843) (4,841) (14,107) (15,540)
Other - net.................................. 87 108 384 (538)
--------- --------- ---------- ----------
Income before taxes on income,
minority interest and equity
earnings (losses) of affiliates.... 40,385 26,533 97,691 71,667
Taxes on income................................... 14,942 9,623 36,146 26,175
Minority interest in net income of subsidiaries... 322 338 1,647 1,375
Equity in earnings (losses) of affiliates......... 74 (334) 339 (100)
--------- --------- ---------- ----------
Net income........................................$ 25,195 $ 16,238 $ 60,237 $ 44,017
========= ========= ========== ==========
Net income per common share:
Basic........................................$ 0.59 $ 0.39 $ 1.42 $ 1.07
========= ========= ========== ==========
Diluted......................................$ 0.58 $ 0.39 $ 1.39 $ 1.06
========= ========= ========== ==========
Weighted average common shares outstanding:
Basic........................................ 42,488 41,251 42,276 41,062
========= ========= ========== ==========
Diluted...................................... 43,517 41,860 43,188 41,568
========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
4
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
-----------------------------
September 29, September 23,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income................................................................... $ 60,237 $ 44,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................................... 26,249 24,002
Provision for losses and allowances on trade and other receivables..... 4,921 3,715
Stock issued to ESOP trust............................................. 2,224 2,193
Change in deferred income taxes........................................ (3,943) (2,010)
Undistributed (earnings) losses of affiliates.......................... (339) 100
Minority interest in net income of subsidiaries........................ 1,647 1,375
Other.................................................................. 5,465 (45)
Changes in operating assets and liabilities (net of purchase acquisitions):
Increase in accounts receivable........................................... (47,442) (9,172)
Decrease in inventories................................................... 24,723 17,907
Decrease (increase) in other current assets............................... 14,701 (6,591)
(Decrease) increase in accounts payable and accruals...................... (9,320) 9,614
--------- ---------
Net cash provided by operating activities....................................... 79,123 85,105
--------- ---------
Cash flows from investing activities:
Capital expenditures......................................................... (30,010) (19,516)
Business acquisitions, net of cash acquired.................................. (336) (6,838)
Other........................................................................ (2,587) (2,390)
--------- ---------
Net cash used in investing activities........................................... (32,933) (28,744)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt..................................... 10,166 -
Principal payments on long-term debt......................................... (11,972) (3,909)
Proceeds from issuance of stock upon exercise of stock
options by employees...................................................... 12,374 839
Proceeds from borrowings from banks......................................... 6,193 9,714
Payments on borrowings from banks............................................ (12,017) (56,556)
Other........................................................................ (396) 1,049
--------- ---------
Net cash provided by (used in) financing activities............................. 4,348 (48,863)
--------- ---------
Net increase in cash and cash equivalents....................................... 50,538 7,498
Effect of foreign exchange rate changes on cash................................. (1,046) 3,725
--------- ---------
Cash and cash equivalents, beginning of period.................................. 58,362 26,019
--------- ---------
Cash and cash equivalents, end of period........................................ $ 107,854 $ 37,242
========= =========
See accompanying notes to consolidated financial statements.
5
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except employee and per share data)
(unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Henry Schein,
Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company").
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth therein. These consolidated financial statements are condensed and
therefore do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. The consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 30, 2000. The Company follows the same accounting policies in
preparation of interim financial statements. The results of operations and cash
flows for the nine months ended September 29, 2001 are not necessarily
indicative of the results to be expected for the fiscal year ending December 29,
2001 or any other period. Certain amounts from prior periods have been
reclassified to conform to the current period's presentation.
Note 2. Accounting Policy - Derivative Financial Instruments
The Company uses derivatives to reduce its exposure to fluctuations in
foreign currencies and interest rates. Derivative products, such as foreign
currency forward contracts, are used to hedge the foreign currency market
exposures underlying certain intercompany debt and forecasted transactions with
customers and vendors. The Company also enters into interest rate swap and cap
agreements to modify the interest characteristics of its outstanding floating
rate long-term debt. The Company's accounting policies for these instruments are
based on its designation of such instruments as hedging transactions. The
Company does not enter such contracts for speculative purposes. The Company
records all derivative instruments on the balance sheet at fair value.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk), the gain or loss on the derivative instrument as well as the offsetting
gain or loss on the hedged item attributable to the hedged risk are recognized
in earnings in the current period. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e., hedging the exposure of
variability in expected future cash flows that is attributable to a particular
risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component of Accumulated Comprehensive Loss (a component of
stockholders' equity) and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The remaining gain
or loss on the derivative instrument, if any (i.e. the ineffective portion and
any portion of the derivative instrument excluded from the assessment of
effectiveness) is recognized in earnings in the current period. For derivative
instruments not designated as hedging instruments, changes in their fair values
are recognized in earnings in the current period.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(in thousands, except employee and per share data)
(unaudited)
Note 2. Accounting Policy - Derivative Financial Instruments-- (Continued)
On December 31, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133 ("FAS 133") Accounting for Derivative Instruments and Hedging
Activities, as amended, and interpreted, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. The impact of
adopting FAS 133 on the Company's Statement of Operations and Balance Sheet was
not material.
Note 3. Business Acquisitions
In connection with the prior years' acquisitions, the Company incurred
certain merger and integration costs. The following table shows amounts paid
against the merger and integration accrual during the nine months ended
September 29, 2001:
Balance at Balance at
December 30, Payments September 29,
2000 2001
------------ -------- -------------
Severance and other direct costs... $ 747 $ (344) $ 403
Direct transaction and other
integration costs............ 4,140 (1,191) 2,949
------- ------- -------
$ 4,887 $(1,535) $ 3,352
======= ======= =======
For the nine months ended September 29, 2001, 11 employees received
severance and 1 was owed severance at September 29, 2001.
Note 4. Plan of Restructuring
On August 1, 2000, the Company announced a comprehensive restructuring plan
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infrastructure. In addition to closing or
downsizing certain facilities, this world-wide initiative included the
elimination of approximately 300 positions, including open positions, or about
5% of the total workforce, throughout all levels within the organization. The
restructuring plan was substantially completed at December 30, 2000.
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(in thousands, except employee and per share data)
(unaudited)
Note 4. Plan of Restructuring-- (Continued)
The following table shows amounts paid against the restructuring accrual
during the nine months ended September 29, 2001:
Balance at Adjustments Balance at
December 30, Payments to Reflect September 29,
2000 Actual Cost 2001
------------ --------- ----------- -------------
Severance costs........................... $ 4,007 $(3,573) $ 305 $ 739
Facility closing costs.................... 3,684 (939) 289 3,034
Other professional and consulting costs... 1,157 (199) (594) 364
------- ------- ------ -------
$ 8,848 $(4,711) $ - $ 4,137
======= ======= ======= =======
For the nine months ended September 29, 2001, 104 employees received
severance and 17 were owed severance at September 29, 2001.
Note 5. Comprehensive Income
Net comprehensive income for the three and nine months ended September 29,
2001 and September 23, 2000 is as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 29, September 23, September 29, September 23,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net income................................. $ 25,195 $ 16,238 $ 60,237 $ 44,017
Foreign currency translation adjustments... 4,952 (6,941) (2,377) (13,614)
-------- -------- -------- --------
Net comprehensive income................... $ 30,147 $ 9,297 $ 57,860 $ 30,403
======== ======== ======== ========
Note 6. Segment Data
The Company has two reportable segments, healthcare distribution and
technology. The healthcare distribution segment, which is comprised of the
Company's dental, medical, veterinary and international business groups,
distributes healthcare products (primarily consumable) and services to
office-based healthcare practitioners and professionals primarily in the
combined North American and European markets. Products, which are similar for
each business group, are maintained and distributed from strategically located
distribution centers in North America and Europe. The technology segment
consists primarily of the Company's practice management software business and
certain other value-added products and services which are distributed primarily
to healthcare professionals in the North American market.
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(in thousands, except employee and per share data)
(unaudited)
Note 6. Segment Data-- (Continued)
The Company's reportable segments are strategic business units that offer
different products and services, albeit to the same customer base. The following
tables present information about the Company's business segments:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 29, September 23, September 29, September 23,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net Sales:
Healthcare distribution (1):
Dental...............................$ 276,163 $ 264,351 $ 818,113 $ 783,630
Medical.............................. 260,002 219,323 658,274 563,356
Veterinary........................... 13,432 14,358 39,595 41,993
International (2).................... 92,811 89,374 291,284 286,909
-------- -------- --------- ---------
Total healthcare distribution... 642,408 587,406 1,807,266 1,675,888
Technology (3)............................ 17,366 15,913 52,688 50,201
-------- -------- --------- ---------
$ 659,774 $ 603,319 $ 1,859,954 $ 1,726,089
======== ======== ========= =========
- ----------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, infection control and vitamins.
(2) Consists of products sold in Dental, Medical and Veterinary groups
primarily in European markets.
(3) Consists of practice management software and other value-added products and
services.
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(in thousands, except employee and per share data)
(unaudited)
Note 6. Segment Data -- (Continued)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 29, September 23, September 29, September 23,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Operating income:
Healthcare distribution (includes
restructuring costs of $0 and $5,029,
and $0 and $5,029, respectively)........... $ 35,922 $ 23,301 $ 85,338 $ 65,692
Technology (includes merger and integration
and restructuring costs of $0, $358,
and $0 and $943, respectively) ........... 5,953 5,643 19,392 17,711
------ ------ ------- ------
Total .............................................. $ 41,875 $ 28,944 $ 104,730 $ 83,403
====== ====== ======= ======
September 29, September 23,
2001 2000
------------- -------------
Total assets:
Healthcare distribution........................ $ 1,219,620 $ 1,150,260
Technology..................................... 124,766 90,593
--------- ---------
Total assets for reportable segments................ 1,344,386 1,240,853
Receivables due from healthcare distribution
segment................................... (58,478) (49,694)
Receivables due from technology segment........ (4,472) (6,853)
--------- ---------
Consolidated total assets........................... $ 1,281,436 $ 1,184,306
========= =========
Note 7. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 29, September 23, September 29, September 23,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Basic .................................. $ 42,488 $ 41,251 $ 42,276 $ 41,062
Effect of assumed conversion of employee
stock options ..................... 1,029 609 912 506
------ ------ ------ ------
Diluted ................................ $ 43,517 $ 41,860 $ 43,188 $ 41,568
====== ====== ====== ======
Options to purchase approximately 1,142, 3,458, 1,528, and 3,797 shares of
common stock at prices ranging from $35.38 to $46.00, $17.24 to $46.00, $35.13
to $46.00 and $15.99 to $46.00 per share that were outstanding during the three
months ended and nine months ended September 29, 2001 and September 23, 2000,
respectively, were excluded from the computation of diluted earnings per share
for each of the respective periods because the options' exercise prices exceeded
the fair market value of the Company's common stock.
10
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(in thousands, except employee and per share data)
(unaudited)
Note 8. Effect of Recently Issued Accounting Standards
(A) In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and
Other Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. FAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of FAS 142, that the Company reclassifies, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in FAS 142. FAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. FAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of FAS 142.
Certain of the Company's business combinations effected prior to June 30,
2001 were accounted for using the pooling-of-interests method. The
pooling-of-interests method does not result in the recognition of acquired
goodwill or other intangible assets. As a result, the adoption of FAS 141 and
FAS 142 will not have any effect with respect to the Company's prior
transactions that were accounted for under the pooling-of-interests method.
However, all future business combinations will be accounted for under the
purchase method, which may result in the recognition of goodwill and other
intangible assets. With respect to the Company's business combinations that were
effected prior to June 30, 2001, using the purchase method of accounting, the
net carrying amounts of the resulting goodwill and other intangible assets as of
September 29, 2001 were $268,035 and $8,154, respectively. Amortization expense
during the nine-month period ended September 29, 2001 was $9,532 of which $8,936
was amortization of goodwill and $596 was amortization of other intangibles. At
present, the Company is currently assessing, but has not yet determined, the
impact the adoption of FAS 141 and FAS 142 will have on its financial position
and results of operations.
11
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(in thousands, except employee and per share data)
(unaudited)
Note 8. Effect of Recently Issued Accounting Standards -- (Continued)
(B) In August 2001, the FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS144"). This statement
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("FAS121") and Accounting
Principles Board Opinion No. 30, Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraodinary, Unusual and
Infrequently Occurring Events and Transactions. FAS144 retains the fundamental
provisions of FAS 121 for recognition and measurement of impairment, but amends
the accounting and reporting standards for segments of a business to be disposed
of. FAS144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The provisions of FAS144 generally are to be applied prospectively. The Company
believes that the adoption of FAS144 will not have a material impact on the
Company's financial position or results of operations.
Note 9. Subsequent Event
On November 5, 2001, the Company announced it has acquired the full-service
dental distribution operations of Zila, Inc. ("Zila") in an all cash
transaction. The Company does not expect to incur any one-time charges related
to this acquisition. The acquisition of Zila's full-service dental distribution
operation was not significant to the Company.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our consolidated financial
condition and consolidated results of operations should be read in conjunction
with our consolidated financial statements and related notes thereto in our
Annual Report on Form 10-K for the fiscal year ended December 30, 2000.
Recent Developments
On November 5, 2001, the Company announced it has acquired the full-service
dental distribution operations of Zila, Inc. ("Zila") in an all cash
transaction. Zila's full-service dental distribution operation had net sales of
approximately $21.0 million for the twelve months ended July 31, 2001. The
Company does not expect to incur any one-time charges related to this
acquisition. The acquisition of Zila's full-service dental distribution
operation was not significant to the Company.
Three Months Ended September 29, 2001 compared to Three months ended September
23, 2000
Net sales increased $56.5 million, or 9.4%, to $659.8 million for the three
months ended September 29, 2001 from $603.3 million for the three months ended
September 23, 2000. Of the $56.5 million increase, approximately $55.0 million,
or 97.4%, represented a 9.4% increase in the Company's healthcare distribution
business. As part of this increase, approximately $40.7 million represented a
18.5% increase in the Company's medical business, $11.8 million represented a
4.5% increase in its dental business, $3.4 million represented a 3.8% increase
in its international business, and $(0.9) million represented a 6.4% decrease in
its veterinary business. The increase in medical net sales was primarily
attributable to increased sales to core physicians' office and alternate care
markets. In the dental market, the increase in net sales was primarily due to
increased account penetration. In the international market, the increase in net
sales was primarily due to increased account penetration in Germany, France and
Spain, partially offset by unfavorable exchange rates to the U.S. dollar. Had
net sales for the international market been translated at the same rates as
2000, international net sales would have increased by 5.2%. In the veterinary
market, the decrease in net sales was primarily due to a loss of a product line.
The remaining increase in third quarter 2001 net sales was due to the technology
and value-added services business, which increased $1.5 million, or 9.1%, to
$17.4 million for the three months ended September 29, 2001, from $15.9 million
for the three months ended September 23, 2000. The increase in technology and
value-added product net sales was primarily due to increased sales of practice
management software products and related services.
Gross profit increased by $16.9 million, or 10.4%, to $178.9 million for
the three months ended September 29, 2001 from $162.0 million for the three
months ended September 23, 2000. Gross profit margin increased 0.3% to 27.1%
from 26.8% for the same period last year. Healthcare distribution gross profit
increased $15.7 million, or 10.4%, to $166.6 million for the three months ended
September 29, 2001 from $150.9 million for the three months ended September 23,
2000. Healthcare distribution gross profit margin increased by 0.2% to 25.9% for
the three months ended September 29, 2001 from 25.7% for the three months ended
September 23, 2000, primarily due to changes in sales mix. Technology gross
profit increased by $1.2 million or 11.6% to $12.3 million for the three months
ended September 29, 2001 from $11.1 million for the three months ended September
23, 2000, primarily due to sales volume. Technology gross profit margins
increased by 1.6% to 70.9% for three months ended September 29, 2001 from 69.3%
for the three months ended September 23, 2000, primarily due to changes in sales
mix.
13
Selling, general and administrative expenses increased by $9.4 million, or
7.4%, to $137.0 million for the three months ended September 29, 2001 from
$127.6 million for the three months ended September 23, 2000. Selling and
shipping expenses increased by $7.9 million, or 10.4%, to $83.9 million for the
three months ended September 29, 2001 from $76.0 million for the three months
ended September 23, 2000. As a percentage of net sales, selling and shipping
expenses increased by 0.1% to 12.7% for the three months ended September 29,
2001 from 12.6% for the three months ended September 23, 2000. General and
administrative expenses increased $1.5 million, or 2.9%, to $53.1 million for
the three months ended September 29, 2001 from $51.6 million for the three
months ended September 23, 2000. As a percentage of net sales, general and
administrative expenses decreased 0.6% to 8.0% for the three months ended
September 29, 2001 from 8.6% for the three months ended September 23, 2000. The
decrease was primarily due to reductions in payroll expenses associated with the
Company's restructuring program announced in the third quarter of last year.
Other income (expense) - net decreased by $0.9 million, to $(1.5) million
for the three months ended September 29, 2001, compared to $(2.4) million for
the three months ended September 23, 2000, due primarily to lower interest
expense as a result of reduced debt levels, and lower interest rates.
Equity in earnings of affiliates increased $0.4 million to $0.1 million for
the three months ended September 29, 2001 from $(0.3) million for the three
months ended September 23, 2000.
For the three months ended September 29, 2001 the Company's effective tax
rate was 37.0%. The difference between the Company's effective tax rate and the
Federal statutory rate relates primarily to state income taxes. For the three
months ended September 23, 2000, the Company's effective tax rate was 36.3%.
Excluding merger, integration and restructuring costs, net of applicable taxes,
the Company's effective tax rate for the three months ended September 23, 2000
would have been 36.5%. The difference between the Company's effective tax rate
and the Federal statutory rate relates primarily to state income taxes.
Nine Months Ended September 29, 2001 compared to Nine Months Ended September 23,
2000
Net sales increased $133.9 million, or 7.8%, to $1,860.0 million for the
nine months ended September 29, 2001 from $1,726.1 million for the nine months
ended September 23, 2000. Of the $133.9 million increase, approximately $131.4
million, or 98.1%, represented a 7.8% increase in the Company's healthcare
distribution business. As part of this increase approximately $94.9 million
represented a 16.8% increase in the Company's medical business, $34.5 million
represented a 4.4% increase in its dental business, $4.4 million represented a
1.5% increase in its international business and $(2.4) million represented a
5.7% decrease in its veterinary business. The increase in medical net sales was
primarily attributable to increased sales to core physicians' office and
alternate care markets. In the dental market, the increase in net sales was
primarily due to increased account penetration. In the international market, the
increase in net sales was primarily due to increased account penetration in
Germany, France and the United Kingdom offset by unfavorable exchange rates to
the U.S. dollar. Had net sales for the international market been translated at
the same rates as 2000, international net sales would have increased by 7.3%. In
the veterinary market, the decrease in net sales was primarily due to a loss of
a product line. The remaining increase in 2001 net sales was due to the
technology and value-added services business, which increased $2.5 million, or
5.0%, to $52.7 million for the nine months ended September 29, 2001, from $50.2
million for the nine months ended September 23, 2000. The increase in technology
and value-added product net sales was primarily due to increased sales of
practice management software products and related services.
14
Gross profit increased by $35.2 million, or 7.5%, to $505.1 million for the
nine months ended September 29, 2001 from $469.9 million for the nine months
ended September 23, 2000. Gross profit margin remained the same at 27.2% for
each period. Healthcare distribution gross profit increased $31.6 million, or
7.2%, to $467.4 million for the nine months ended September 29, 2001 from $435.8
million for the nine months ended September 23, 2000. Healthcare distribution
gross profit margin decreased by 0.1% to 25.9% for the nine months ended
September 29, 2001 from 26.0% for the nine months ended September 23, 2000,
primarily due to changes in sales mix. Technology gross profit increased by $3.6
million or 10.9% to $37.7 million for the nine months ended September 29, 2001
from $34.1 million for the nine months ended September 23, 2000 primarily due to
sales volume. Technology gross profit margins increased by 3.9% to 71.7% for the
nine months ended September 29, 2001 from 67.8% for the nine months ended
September 23, 2000, primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $19.9 million, or
5.2%, to $400.4 million for the nine months ended September 29, 2001 from $380.5
million for the nine months ended September 23, 2000. Selling and shipping
expenses increased by $14.1 million, or 6.2%, to $243.2 million for the nine
months ended September 29, 2001 from $229.1 million for the nine months ended
September 23, 2000. As a percentage of net sales, selling and shipping expenses
decreased 0.2% to 13.1% for the nine months ended September 29, 2001 from 13.3%
for the nine months ended September 23, 2000. The decrease was primarily due to
reductions in payroll expenses associated with the Company's restructuring
program announced in the third quarter of last year. General and administrative
expenses increased $5.8 million, or 3.8%, to $157.2 million for the nine months
ended September 29, 2001 from $151.4 million for the nine months ended September
23, 2000. As a percentage of net sales, general and administrative expenses
decreased 0.3% to 8.5% for the nine months ended September 29, 2001 from 8.8%
for the nine months ended September 23, 2000. The decrease was primarily due to
reductions in payroll expenses also associated with the Company's restructuring
program.
Other income (expense) - net decreased by $4.7 million, to $(7.0) million
for the nine months ended September 29, 2001, compared to $(11.7) million for
the nine months ended September 23, 2000, due primarily to higher interest
income on long-term loans receivable and short term investments, higher finance
charge income on trade accounts receivable, foreign currency gains, and lower
interest expense due to reductions in long-term debt and bank credit line
balances and lower interest rates.
Equity in earnings of affiliates increased $0.4 million to $0.3 million for
the nine months ended September 29, 2001 from $(0.1) million for the nine months
ended September 23, 2000.
For the nine months ended September 29, 2001 the Company's effective tax
rate was 37.0%. The difference between the Company's effective tax rate and the
Federal statutory rate relates primarily to state income taxes. For the nine
months ended September 23, 2000, the Company's effective tax rate was 36.5%.
Excluding merger, integration and restructuring costs, net of applicable taxes,
the Company's effective tax rate for the nine months ended September 23, 2000
would have been 36.3%. The difference between the Company's effective tax rate
and the Federal statutory rate relates primarily to state income taxes.
15
Fluctuations in Quarterly Earnings
The Company's business has been subject to seasonal and other quarterly
fluctuations. Net sales and operating profits generally have been higher in the
fourth quarter due to purchasing patterns of office-based healthcare
practitioners and year-end promotions. Net sales and operating profits have been
lower in the first quarter, primarily due to increased purchases in the prior
quarter. Our quarterly results may also be adversely affected by a variety of
other factors, including fluctuations in exchange rates associated with
international operations, the timing of acquisitions and related costs, the
effectiveness of sales and marketing programs and adverse weather conditions.
Effect of Recently Issued Accounting Standards
(A) In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and
Other Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. FAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of FAS 142, that the Company reclassifies, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in FAS 142. FAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. FAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of FAS 142.
Certain of the Company's business combinations effected prior to June 30,
2001 were accounted for using the pooling-of-interests method. The
pooling-of-interests method does not result in the recognition of acquired
goodwill or other intangible assets. As a result, the adoption of FAS 141 and
FAS 142 will not have any effect with respect to the Company's prior
transactions that were accounted for under the pooling-of-interests method.
However, all future business combinations will be accounted for under the
purchase method, which may result in the recognition of goodwill and other
intangible assets. With respect to the Company's business combinations that were
effected prior to June 30, 2001, using the purchase method of accounting, the
net carrying amounts of the resulting goodwill and other intangible assets as of
September 29, 2001 were $268.0 million and $8.2 million, respectively.
Amortization expense during the nine-month period ended September 29, 2001 was
$9.5 million of which $8.9 million was amortization of goodwill and $0.6 million
was amortization of other intangibles. At present, the Company is currently
assessing, but has not yet determined, the impact the adoption of FAS 141 and
FAS 142 will have on its financial position and results of operations.
16
(B) In August 2001, the FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS144"). This statement
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("FAS121") and Accounting
Principles Board Opinion No. 30, Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. FAS144 retains the fundamental
provisions of FAS 121 for recognition and measurement of impairment, but amends
the accounting and reporting standards for segments of a business to be disposed
of. FAS144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The provisions of FAS144 generally are to be applied prospectively. The Company
believes that the adoption of FAS144 will not have a material impact on the
Company's financial position or results of operations.
Euro Conversion
Effective January 1, 1999, 11 of the 15 member countries of the European
Union have adopted the Euro as their common legal currency. On that date, the
participating countries established fixed Euro conversion rates between their
existing sovereign currencies and the Euro. The Euro now trades on currency
exchanges and is available for non-cash transactions. The participating
countries now issue sovereign debt exclusively in Euro, and have re-denominated
outstanding sovereign debt. The authority to direct monetary policy for the
participating countries, including money supply and official interest rates for
the Euro, is now exercised by the new European Central Bank.
Beginning on January 1, 2002, Euro bank notes and coins will be put into
circulation. There will be a changeover period of two months where there will be
dual circulation - where both Euro and national currencies will be used
together. Following the changeover period, the national currencies will be
completely replaced by the Euro.
The Company is currently addressing the impact of the Euro on its
information systems as well as product and customer concerns. The Company
expects to achieve timely Euro information system and product readiness, so as
to conduct transactions in the Euro, in accordance with implementation schedules
as they are established by the European Commission. The Company does not
anticipate that the costs of the overall effort will have a material adverse
impact on future results.
E-Commerce
Traditional healthcare supply and distribution relationships are being
challenged by electronic on-line commerce solutions. The Company's distribution
business is characterized by rapid technological developments and intense
competition. The rapid evolution of on-line commerce will require continuous
improvement in performance, features and reliability of Internet content and
technology by the Company, particularly in response to competitive offerings.
Through the Company's proprietary technologically based suite of products,
customers are offered a variety of competitive alternatives. The Company
believes that its tradition of reliable service, proven name recognition, and
large customer base built on solid customer relationships makes it well situated
to participate fully in this rapidly growing aspect of the distribution
business. The Company is exploring ways and means of improving and expanding its
Internet presence and will continue to do so. In January 2001, the Company
announced the unveiling of an enhanced website (http://www.henryschein.com),
which includes an array of value-added features. As part of this effort, the
Company also launched http://www.sullivanschein.com for its office-based dental
practitioner customers.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) capital
expenditures, (b) repayments on bank borrowings and (c) working capital needs
resulting from increased sales, and special inventory forward buy-in
opportunities. Since sales tend to be strongest during the fourth quarter and
special inventory forward buy-in opportunities are most prevalent just before
the end of the year, the Company's working capital requirements have been
generally higher from the end of the third quarter to the end of the first
quarter of the following year. The Company has financed its business primarily
through operations, its revolving credit facilities, private placement loans and
stock issuances.
Net cash provided by operating activities for the nine months ended
September 29, 2001 of $79.1 million resulted primarily from net income of $60.2
million and non-cash charges of approximately $36.2 million, offset by a net
increase of cash used in operating items of working capital of approximately
$17.3 million. The increase in working capital needs was primarily due to an
increase in accounts receivable of $47.4 million and a decrease in accounts
payable and accruals of $9.3 million, offset by a $24.7 million decrease in
inventories and $14.7 million decrease in other current assets. The Company
anticipates future increases in working capital requirements as a result of its
continued sales growth, extended payment terms and special inventory forward
buy-in opportunities.
Net cash used in investing activities for the nine months ended September
29, 2001 of $32.9 million resulted primarily from cash used for capital
expenditures of $30.0 million of which $10.2 million was for the Company's new
mid-west distribution center. The Company expects that it will invest more than
$55.0 million during the year ending December 29, 2001, in capital projects to
modernize and expand its facilities and infrastructure systems and integrate
operations.
Net cash provided by financing activities for the nine months ended
September 29, 2001 of $4.3 million resulted primarily from proceeds from the
issuance of stock upon exercise of stock options of $12.4 million, offset
primarily by net payments on borrowings from banks of $5.8 million and net
payments on long-term debt of $1.8 million.
Certain holders of minority interests in acquired entities or ventures have
the right at certain times to require the Company to acquire their interest at
either fair market value or a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of September 29, 2001 of $107.9
million consist of bank balances and investments in commercial paper rated AAA
by Moody's (or an equivalent rating). These investments have staggered maturity
dates, none of which exceed three months, and have a high degree of liquidity
since the securities are actively traded in public markets.
The Company has a $150.0 million revolving credit facility, which has a
termination date of August 15, 2002, none of which had been borrowed at
September 29, 2001. The Company also has one uncommitted bank line of $15.0
million, none of which had been borrowed at September 29, 2001. Certain of the
Company's subsidiaries have revolving credit facilities that total approximately
$45.4 million at September 29, 2001, under which $8.9 million has been borrowed.
18
On June 30, 1999 and September 25, 1998, the Company completed private
placement transactions under which it issued $130.0 million and $100.0 million,
respectively, in Senior Notes, the proceeds of which were used respectively, for
the permanent financing of its acquisitions of General Injectables and Vaccines
and the Heiland Group, as well as repaying and retiring a portion of four
uncommitted bank lines and to pay down amounts owed under its revolving credit
facility. The $130.0 million notes come due on June 30, 2009 and bear interest
at a rate of 6.94% per annum. Principal payments totaling $20.0 million are due
annually starting September 25, 2006 on the $100.0 million notes and bear
interest at a rate of 6.66% per annum. Interest on both notes are payable
semi-annually.
The Company believes that its cash and cash equivalents of $107.9 million
as of September 29, 2001, its ability to access public and private debt and
equity markets, and the availability of funds under its existing credit
agreements will provide it with sufficient liquidity to meet its currently
foreseeable short-term and long-term capital needs.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in this Form 10-Q
contains information that is forward-looking, such as the Company's
opportunities to increase sales through, among other things, acquisitions; its
exposure to fluctuations in foreign currencies; its anticipated liquidity and
capital requirements; competitive product and pricing pressures and the ability
to gain or maintain share of sales in global markets as a result of actions by
competitors; and the results of legal proceedings. The matters referred to in
forward-looking statements could be affected by the risks and uncertainties
involved in the Company's business. These risks and uncertainties include, but
are not limited to, the effect of economic and market conditions, the impact of
the consolidation of health care practitioners, the impact of health care
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the acceptance and quality of software products,
acceptance and ability to manage operations in foreign markets, the ability to
maintain favorable supplier arrangements and relationships, possible disruptions
in the Company's computer systems or telephone systems, possible increases in
shipping rates or interruptions in shipping service, the level and volatility of
interest rates and currency values, economic and political conditions in
international markets, including civil unrest, government changes and
restrictions on the ability to transfer capital across borders, the impact of
current or pending legislation, regulation and changes in accounting standards
and taxation requirements, environmental laws in domestic and foreign
jurisdictions, as well as certain other risks described in this Form 10-Q and
prior SEC filings. Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph and
elsewhere described in this Form 10-Q and prior SEC filings.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the disclosures made in our report 10-K
for the year ended December 30, 2000, on this matter.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's business involves a risk of product liability claims and
other claims in the ordinary course of business, and from time to time the
Company is named as a defendant in cases as a result of its distribution of
pharmaceutical and other healthcare products. As of September 29, 2001, the
Company was named a defendant in approximately 70 product liability cases. Of
these claims, 54 involve claims made by healthcare workers who claim allergic
reaction relating to exposure to latex gloves. In each of these cases, the
Company acted as a distributor of both brand name and "Henry Schein" private
brand latex gloves, which were manufactured by third parties. To date, discovery
in these cases has generally been limited to product identification issues. The
manufacturers in these cases have withheld indemnification of the Company
pending product identification; however, the Company is taking steps to implead
those manufacturers into each case in which the Company is a defendant. The
Company is also a named defendant in nine lawsuits involving the sale of
phentermine and fenfluramin. Plaintiffs in the cases allege injuries from the
combined use of the drugs known as "Phen/fen." The Company expects to obtain
indemnification from the manufacturers of these products, although this is
dependent upon, among other things, the financial viability of the manufacturer
and their insurers.
In Texas District Court, Travis County, the Company and one of its
subsidiaries are defendants in a matter entitled Shelly E. Stromboe & Jeanne N.
Taylor, on Behalf of Themselves and All Other Similarly Situated vs. Henry
Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc., Case No. 98-00886.
This complaint alleges among other things, negligence, breach of contract, fraud
and violations of certain Texas commercial statutes involving the sale of
certain practice management software products sold prior to 1998 under the Easy
Dental(R) name. In October 1999, the Court, on motion, certified both a
Windows(R) Sub-Class and a DOS Sub-Class to proceed as a class action pursuant
to Tex. R.Civ. P.42. It is estimated that 5,000 Windows(R) customers and 15,000
DOS customers could be covered by the judge's ruling. In November of 1999, the
Company filed an interlocutory appeal of the District Court's determination to
the Texas Court of Appeals on the issue of whether this case was properly
certified as a class action. On September 14, 2000, the Court of Appeals
affirmed the District Court's certification order. On January 5, 2001, the
Company filed a Petition for Review in the Texas Supreme Court asking this court
to find "conflicts jurisdiction" to permit review of the District Court's
certification order, which appeal is now pending. On April 5, 2001 the Texas
Supreme Court requested that the parties file briefs on the merits. On August
23, 2001, the Texas Supreme Court dismissed the Company's Petition for Review
based on lack of conflicts jurisdiction. The Company filed a motion for
rehearing on September 24, 2001 requesting that the Texas Supreme Court
reconsider and reverse its finding that it is without conflicts jurisdiction to
review the case. On November 8, 2001, the Texas Supreme Court granted the motion
for rehearing and withdrew its order of August 23, 2001. The date and time for
oral argument has yet to be determined. Pending the Petition for Review, a trial
on the merits is stayed. The Company intends to vigorously defend itself against
this claim, as well as all other claims, suits and complaints.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many cases in
which the Company has been sued in connection with products manufactured by
others, the Company is provided indemnification by the manufacturer. There can
be no assurance that the coverage maintained by the Company is sufficient or
will be available in adequate amounts or at a reasonable cost, or that
indemnification agreements will provide adequate protection for the Company. In
the opinion of the Company, all pending matters are covered by insurance or will
not otherwise seriously harm the Company's financial condition.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HENRY SCHEIN, INC.
(Registrant)
By: /s/ Steven Paladino
-------------------------------------------
STEVEN PALADINO
Executive Vice President and
Chief Financial Officer and Director
(principal financial officer and accounting officer)
Dated: November 13, 2001
22