<PAGE>
================================================================================
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 25, 1999
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
(State or other jurisdiction 11-3136595
of incorporation or (I.R.S. Employer
organization) Identification No.)
135 Duryea Road
Melville, New York 11747
(Address of principal executive offices)
Telephone Number (516) 843-5500
(Registrant's telephone number, including area code)
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 5, 1999, there were 40,701,393 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
HENRY SCHEIN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements: Page No.
--------
Consolidated Balance Sheets
September 25, 1999 and December 26, 1998..................... 3
Consolidated Statements of Operations
Three and Nine Months ended September 25, 1999
and September 26, 1998....................................... 4
Consolidated Statements of Cash Flows
Nine Months ended September 25, 1999 and September
26, 1998..................................................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations........................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 20
Item 6. Exhibits and Reports on Form 8-K................................. 20
Signature........................................................ 21
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 25, December 26,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 39,065 $ 28,222
Accounts receivable, less reserves of $21,107 and $20,136, respectively 386,997 338,121
Inventories ........................................................... 267,824 270,008
Deferred income taxes ................................................. 12,926 14,532
Prepaid expenses and other ............................................ 61,681 53,646
----------- -----------
Total current assets .............................................. 768,493 704,529
Property and equipment, net of accumulated depreciation and amortization of
$63,716 and $53,756, respectively ....................................... 74,955 67,646
Goodwill and other intangibles, net of accumulated amortization of $28,556
and $18,123, respectively ............................................... 282,249 148,428
Investments and other ..................................................... 43,166 41,437
----------- -----------
$ 1,168,863 $ 962,040
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 185,607 $ 169,860
Bank credit lines ..................................................... 46,238 19,372
Accruals:
Salaries and related expenses ..................................... 30,718 29,675
Merger and integration costs ...................................... 15,739 21,992
Other ............................................................. 75,086 50,404
Current maturities of long-term debt .................................. 5,571 9,634
----------- -----------
Total current liabilities ......................................... 358,959 300,937
Long-term debt ............................................................ 293,503 180,445
Other liabilities ......................................................... 10,095 11,720
----------- -----------
Total liabilities ................................................. 662,557 493,102
----------- -----------
Minority interest ......................................................... 7,259 5,904
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000; issued 40,760,532
and 40,250,936, respectively ........................................ 407 402
Additional paid-in capital ............................................ 357,380 348,119
Retained earnings ..................................................... 152,269 119,064
Treasury stock, at cost (62,479 shares) ............................... (1,156) (1,156)
Accumulated comprehensive income ...................................... (8,684) (2,057)
Deferred compensation ................................................. (1,169) (1,338)
----------- -----------
Total stockholders' equity ........................................ 499,047 463,034
----------- -----------
$ 1,168,863 $ 962,040
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .................................................. $ 578,794 $ 492,634 $ 1,674,439 $ 1,418,968
Cost of sales .............................................. 404,830 338,935 1,163,008 978,979
----------- ----------- ----------- -----------
Gross profit ............................................. 173,964 153,699 511,431 439,989
Operating expenses:
Selling, general and administrative ..................... 141,452 128,631 423,222 377,272
Merger and integration costs ............................ 5,993 20,240 13,467 32,640
----------- ----------- ----------- -----------
Operating income ................................... 26,519 4,828 74,742 30,077
Other income (expense):
Interest income ......................................... 1,386 1,638 5,207 4,826
Interest expense ........................................ (5,526) (2,606) (16,566) (8,556)
Other - net ............................................. 207 289 315 850
----------- ----------- ----------- -----------
Income before taxes on income, minority interest and
equity in earnings (losses) of affiliates ..... 22,586 4,149 63,698 27,197
Taxes on income ............................................ 10,114 2,572 26,199 12,483
Minority interest in net income (loss) of subsidiaries ..... 353 86 1,272 (57)
Equity in earnings (losses) of affiliates .................. (596) 815 (1,454) 1,470
----------- ----------- ----------- -----------
Net income ......................................... $ 11,523 $ 2,306 $ 34,773 $ 16,241
=========== =========== =========== ===========
Net income per common share:
Basic .................................................. $ 0.28 $ 0.06 $ 0.86 $ 0.41
=========== =========== =========== ===========
Diluted ................................................ $ 0.28 $ 0.06 $ 0.84 $ 0.39
=========== =========== =========== ===========
Pro forma:
Historical net income .................................. $ 2,306 $ 16,241
Pro forma adjustment (provision for taxes on previously
untaxed earnings of an acquisition) ................ (2,240) (2,579)
----------- -----------
Pro forma net income ....................................... $ 66 $ 13,662
=========== ===========
Pro forma net income per common share:
Basic ................................................. $ 0.00 $ 0.34
=========== ===========
Diluted ............................................... $ 0.00 $ 0.33
=========== ===========
Weighted average shares outstanding:
Basic ................................................. 40,608 39,787 40,546 39,729
=========== =========== =========== ===========
Diluted ............................................... 41,104 41,828 41,437 41,588
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 25, September 26,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 34,773 $ 16,241
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 22,479 13,953
Provision (benefit) for losses and allowances on accounts receivable (1,185) 1,813
Provision (benefit) for deferred income taxes ...................... 3,074 (1,901)
Undistributed losses (earnings) of affiliates ...................... 1,454 (1,470)
Stock issued to retirement plans ................................... 1,768 1,311
Minority interest in net income (loss) of subsidiaries ............. 1,272 (57)
Other .............................................................. (142) 50
Changes in assets and liabilities:
Increase in accounts receivable .................................... (22,092) (59,443)
Decrease (increase) in inventories ................................. 30,150 (27,775)
Decrease in other current assets ................................... 12,862 5,961
(Decrease) increase in accounts payable and accruals ............... (40,847) 50,765
--------- ---------
Net cash provided by (used in) operating activities .................... 43,566 (552)
--------- ---------
Cash flows from investing activities:
Capital expenditures ................................................. (20,654) (28,094)
Business acquisitions, net of cash acquired .......................... (128,113) (11,549)
Proceeds from sale of fixed assets ................................... 8,583 --
Other ................................................................ 2,527 (11,831)
--------- ---------
Net cash used in investing activities .................................. (137,657) (51,474)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ............................. 130,491 129,492
Principal payments on long-term debt ................................. (12,048) (19,812)
Proceeds from issuance of stock ...................................... 7,533 7,308
Proceeds from borrowings from banks .................................. 142,485 104,836
Payments on borrowings from banks .................................... (157,234) (163,406)
Other ................................................................ (6,293) (2,129)
--------- ---------
Net cash provided by financing activities .............................. 104,934 56,289
--------- ---------
Net increase in cash and cash equivalents .............................. 10,843 4,263
Cash and cash equivalents, beginning of period ......................... 28,222 11,813
--------- ---------
Cash and cash equivalents, end of period ............................... $ 39,065 $ 16,076
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except 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
generally accepted accounting principles for complete financial statements. The
financial statements for the three and nine months ended September 26, 1998
include adjustments to give effect to the acquisition of the H. Meer Dental
Supply Co. ("Meer"), effective August 14, 1998, which was accounted for under
the pooling of interests method. 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 26, 1998. The Company follows the same accounting policies in
preparation of interim reports. The results of operations for the nine months
ended September 25, 1999 are not necessarily indicative of the results to be
expected for the fiscal year ending December 25, 1999 or any other period.
Note 2. Business Acquisitions
During the nine months ended September 25, 1999, the Company completed
eight acquisitions. The 1999 completed acquisitions included General Injectibles
and Vaccines, Inc. ("GIV"), a leading direct marketer of vaccines and other
injectibles serving 32,000 customers throughout the United States, with 1998 net
sales of approximately $120,000 and the Heiland Group GmbH ("Heiland"), a
leading direct marketer of healthcare supplies to medical, dental and veterinary
office-based practitioners, headquartered in Hamburg, Germany, with 1998 net
sales of approximately $130,000. Of the eight completed acquisitions, seven were
accounted for under the purchase method of accounting and the remaining
acquisition was accounted for under the pooling of interests method of
accounting. Results of operations of the business acquisitions accounted for
under the purchase method of accounting have been included in the consolidated
financial statements commencing with the acquisition date. The pooling
transaction was not material and has been included in the consolidated financial
statements from the beginning of the first quarter of 1999.
The total cash purchase price for the seven acquisitions accounted for
under the purchase method of accounting was approximately $149,295. The excess
of the acquisition costs over the fair value of identifiable net assets acquired
will be amortized on a straight-line basis over 30 years. The Company issued
231,304 shares of its Common Stock, with an aggregate value of approximately
$6,400 in connection with the pooling transaction.
6
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions --(Continued)
In connection with the 1999 and 1998 acquisitions accounted for under the
pooling of interests method, the Company incurred certain merger and integration
costs during the three and nine months ended September 25, 1999 and September
26, 1998, of approximately $6,000 and $20,200, and $13,500 and $32,600,
respectively. These costs consist primarily of compensation, rent and other
costs in connection with the closure of distribution centers, as well as other
integration costs associated with these mergers. Net of taxes, for the three and
nine months ended September 25, 1999 and September 26, 1998, merger and
integration costs were approximately $0.12 and $0.38 per share, and $0.23 and
$0.60 per share, respectively, on a diluted basis.
Estimated merger and integration costs accrued at December 26, 1998 were
not in excess of actual amounts incurred. Amounts accrued at September 25, 1999
consist primarily of severance, professional and consulting fees, and rent. The
Company expects substantially all the costs accrued at September 25, 1999 to be
paid within the next year.
The summarized unaudited pro forma results of operations set forth below
for the nine months ended September 26, 1998 assume the acquisitions completed
during the nine months ended September 25, 1999, which were either non-material
pooling transactions included in the consolidated financial statements from the
beginning of the quarter in which the acquisitions occurred, or were accounted
for under the purchase method of accounting, occurred as of the beginning of
each of these periods.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 25, September 26,
1999 1998
------------- -------------
<S> <C> <C>
Net sales ........................................... $ 1,678,009 $ 1,658,513
Net income(1) ....................................... $ 44,152 $ 42,125
Net income per common share:
Basic ............................................. $ 1.09 $ 1.06
Diluted ........................................... $ 1.07 $ 1.01
Pro forma net income, reflecting adjustment for
income taxes on previously untaxed earnings of Meer $ 39,579
Pro forma net income per common share:
Basic ............................................. $ 1.00
Diluted ........................................... $ 0.95
</TABLE>
- ----------
(1) Includes merger and integration costs of approximately $13,500 and $32,600,
and related tax benefits of $4,000 and $7,800, respectively.
7
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions -- (Continued)
Pro forma adjusted net income per common share, including acquisitions,
may not be indicative of actual results, primarily because pro forma earnings
include historical results of operations of acquired entities and do not reflect
any cost savings or potential sales erosion that may result from the Company's
integration efforts.
The Meer net income for the three and nine months ended September 26, 1998
includes a pro forma adjustment of $2,240 and $2,579 respectively. For the
period ended August 14, 1998, the effective date of the Meer acquisition, Meer's
net sales and pro forma net income were approximately $118,073 and $1,646,
respectively. The pro forma adjustments are for taxes on previously untaxed
earnings of Meer as an S Corporation.
Note 3. Senior Notes
On June 30, 1999, the Company completed a private placement transaction
under which it issued $130,000 in Senior Notes, the proceeds of which were used
for the permanent financing of its recent acquisitions, GIV and Heiland, as well
as repaying and retiring a portion of four uncommitted bank lines. The notes
come due on June 30, 2009 and bear interest at a rate of 6.94% per annum.
Interest is payable semi-annually.
Note 4. Comprehensive Income
Total comprehensive income (loss) for the three and nine months ended
September 25, 1999 and September 26, 1998 are as follows:
Three Months Ended
------------------
September 25, September 26,
1999 1998
---- ----
Net income .............................. $ 11,523 $ 2,306
========
Pro forma net income, reflecting the
Meer tax adjustment ................... -- $ 66
Foreign currency translation
adjustments ........................... (151) (374)
-------- --------
Pro forma comprehensive income(loss) .... $ 11,372 $ (308)
======== ========
Nine Months Ended
-----------------
September 25, September 26,
1999 1998
---- ----
Net income .............................. $ 34,773 $ 16,241
========
Pro forma net income, reflecting the
Meer tax adjustment ................... -- $ 13,662
Foreign currency translation
adjustments ........................... (6,627) (448)
-------- --------
Pro forma comprehensive income .......... $ 28,146 $ 13,214
======== ========
8
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 5. 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 in the combined North American,
European and the Pacific Rim markets. 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.
The Company's reportable segments are strategic business units that offer
different products and services, albeit to the same customer base. Most of the
technology business was acquired as a unit, and the management at the time of
acquisition was retained. The following tables present information about the
Company's business segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales:
Healthcare distribution (1):
Dental ......................... $ 259,182 $ 265,954 $ 773,067 $ 809,906
Medical ........................ 194,492 147,278 515,097 380,961
Veterinary ..................... 13,275 12,322 39,472 36,441
International(2) ............... 95,876 56,473 298,307 162,129
---------- ---------- ---------- ----------
Total healthcare distribution 562,825 482,027 1,625,943 1,389,437
Technology(3) ........................ 15,969 10,607 48,496 29,531
---------- ---------- ---------- ----------
$ 578,794 $ 492,634 $1,674,439 $1,418,968
========== ========== ========== ==========
</TABLE>
- ----------
(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 in the
European and Pacific Rim markets.
(3) Consists of practice management software, financial products and other
value-added products.
9
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 5. Segment Data -- (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Income:
Healthcare distribution (includes merger and
integration costs of $5,993 and $20,240,
$13,467 and $32,640, respectively) .... $ 20,331 $ 1 $ 56,325 $ 20,870
Technology ............................ 6,188 4,827 18,417 9,207
----------- ----------- ----------- -----------
Total .......................................... $ 26,519 $ 4,828 $ 74,742 $ 30,077
=========== =========== =========== ===========
<CAPTION>
Nine Months Ended
-----------------
September 25, September 26,
1999 1998
---- ----
<S> <C> <C>
Total Assets:
Healthcare distribution .................... $ 1,148,494 $ 934,412
Technology ................................. 57,007 28,882
----------- -----------
Total assets for reportable segments ............ 1,205,501 963,294
Receivables due from healthcare
distribution segment .................... (33,631) (11,867)
Receivables due from technology segment ... (3,007) (1,027)
----------- -----------
Consolidated total assets ....................... $ 1,168,863 $ 950,400
=========== ===========
</TABLE>
10
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 6. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings
per share follows (in thousands):
Three Months Ended
------------------
September 25, September 26,
1999 1998
------ ------
Basic ............................... 40,608 39,787
Effect of assumed conversion of
employee stock options ............ 496 2,041
------ ------
Diluted ............................. 41,104 41,828
====== ======
Nine Months Ended
-----------------
September 25, September 26,
1999 1998
------ ------
Basic ............................... 40,546 39,729
Effect of assumed conversion of
employee stock options ............ 891 1,859
------ ------
Diluted ............................. 41,437 41,588
====== ======
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations has been restated to
give retroactive effect to the transactions that are described below accounted
for under the pooling of interests method of accounting and should be read in
conjunction with the consolidated financial statements and notes thereto
included herein.
During the nine months ended September 25, 1999, the Company completed
eight acquisitions. The 1999 completed acquisitions included GIV, a leading
direct marketer of vaccines and other injectibles serving 32,000 customers
throughout the United States, with 1998 net sales of approximately $120.0
million and Heiland, a leading direct marketer of healthcare supplies to
medical, dental and veterinary office-based practitioners, headquartered in
Hamburg, Germany, with 1998 net sales of approximately $130.0 million. Of the
eight completed acquisitions, seven were accounted for under the purchase method
and the remaining acquisition was accounted for under the pooling of interests
method of accounting. Results of operations of the business acquisitions
accounted for under the purchase method of accounting have been included in the
consolidated financial statements commencing with the acquisition date. The
pooling transaction was not material and has been included in the consolidated
financial statements from the beginning of the first quarter of 1999.
The total cash purchase price for the seven acquisitions accounted for
under the purchase method of accounting was approximately $149.3 million. The
excess of the acquisition costs over the fair value of identifiable net assets
acquired will be amortized on a straight-line basis over 30 years. The Company
issued 231,304 shares of its Common Stock, with an aggregate value of
approximately $6.4 million, in connection with the pooling transaction.
In connection with the 1999 and 1998 acquisitions accounted for under the
pooling of interest method, the Company incurred certain merger and integration
costs during the three and nine months ended September 25, 1999 and September
26, 1998, of approximately $6.0 million and $20.2 million, and $13.5 million and
$32.6 million, respectively. These costs consist primarily of compensation, rent
and other costs in connection with the closure of distribution centers, as well
as other integration costs associated with these mergers. Net of taxes, for the
three and nine months ended September 25, 1999 and September 26, 1998, merger
and integration costs were approximately $0.12 and $0.38 per share, and $0.23
and $0.60 per share, respectively, on a diluted basis.
Excluding the merger and integration costs, net of taxes, net income and
pro forma net income, and net income per diluted common share and pro forma net
income per diluted common share would have been $16.6 million and $0.40, and
$15.8 million and $0.38, respectively, for the three months ended September 25,
1999 and September 26, 1998 and $44.3 million and $1.07 and $38.5 million and
$0.92, respectively, for the nine months ended September 25, 1999 and September
26, 1998.
RESULTS OF OPERATIONS
Three Months Ended September 25, 1999 compared to Three Months Ended September
26, 1998
Net sales increased $86.2 million, or 17.5%, to $578.8 million for the
three months ended September 25, 1999 from $492.6 million for the three months
ended September 26, 1998. Of the $86.2 million increase, approximately $80.8
million, or 93.7%, represented a 16.8% increase in the Company's healthcare
distribution business. As part of this increase approximately, $47.2 million
represented a 32.1% increase in the Company's medical business, $39.4 million
represented a 69.8% increase in its international business, and $1.0 million
represented a 7.7% increase in its veterinary business, while $(6.8) million
represented a 2.5% decrease in its dental business. The increase in
12
<PAGE>
medical net sales is primarily attributable to increased sales to hospitals, and
acquisitions. In the international market, the increase in net sales was
primarily due to acquisitions in Germany and the United Kingdom, and increased
account penetration in the United Kingdom, Belgium, and Spain. In the veterinary
market, the increase in net sales was primarily due to increased account
penetration with core accounts, and veterinary groups. The decrease in dental
net sales was primarily due to weakness in dental equipment sales and service
business. The remaining increase in third quarter 1999 net sales was due to the
technology business, which increased $5.4 million, or 50.9%, to $16.0 million
for the three months ended September 25, 1999, from $10.6 million for the three
months ended September 26, 1998. The increase in technology and value-added
product net sales was primarily due to increased practice management software
sales, and an acquisition.
Gross profit increased by $20.3 million, or 13.2%, to $174.0 million for
the three months ended September 25, 1999, from $153.7 million for the three
months ended September 26, 1998. Gross profit margin decreased 1.1% to 30.1%
from 31.2% for the same period last year. Healthcare distribution gross profit
increased $17.6 million, or 12.1%, to $162.6 million for the three months ended
September 25, 1999, from $145.0 for the three months ended September 26, 1998.
Healthcare distribution gross profit margin decreased by 1.2% to 28.9% for the
three months ended September 25, 1999, from 30.1% for the three months ended
September 26, 1998, primarily due to lower equipment sales which have a higher
margin than dental consumables, and lower manufacturers rebates as a result of
reduced annual sales expectations. Technology gross profit increased by $2.7
million or 31.0% to $11.4 million for the three months ended September 25, 1999
from $8.7 million for the three months ended September 26, 1998. Technology
gross profit margins decreased by 10.6% to 71.6% for three months ended
September 25, 1999 from 82.2% for the three months ended September 26, 1998,
primarily due to increased support and training costs along with changes in
sales mix.
Selling, general and administrative expenses increased by $12.8 million,
or 10.0%, to $141.4 million for the three months ended September 25, 1999 from
$128.6 million for the three months ended September 26, 1998. Selling and
shipping expenses increased by $5.7 million, or 6.4%, to $94.4 million for the
three months ended September 25, 1999 from $88.7 million for the three months
ended September 26, 1998. As a percentage of net sales, selling and shipping
expenses decreased 1.7% to 16.3% for the three months ended September 25, 1999,
from 18.0% for the three months ended September 26, 1998. The decrease was
primarily due to improvements in the Company's distribution efficiencies.
General and administrative expenses increased $7.1 million, or 17.8%, to $47.0
million for the three months ended September 25, 1999, from $39.9 million for
the three months ended September 26, 1998, primarily due to acquisitions. As a
percentage of net sales, general and administrative expenses remained constant
at 8.1% for the three months ended September 25, 1999 and for the three months
ended September 26, 1998.
Other income (expense) - net decreased by $3.2 million, to $(3.9) million
for the three months ended September 25, 1999, compared to $(0.7) million for
the three months ended September 26, 1998, due primarily to an increase in
interest expense, which resulted from an increase in average borrowings, and to
a lesser extent, an increase in interest rates.
Equity in earnings of affiliates decreased $1.4 million to $(0.6) million
for the three months ended September 25, 1999 from $0.8 million for the three
months ended September 26, 1998. The decline was due to reduced earnings
resulting from temporary suspension of manufacturing operations in connection
with a voluntary recall of anesthetic products sold by Novocol Pharmaceutical of
Canada, Inc. ("Novocol") an affiliate in which the Company owns a
non-controlling interest. On September 23, 1999 the United States Food and Drug
Administration ("FDA") gave Novocol approval to resume production of its
anesthetic products for shipment into the United States. Novocol resumed
limited production and shipment of products in the fourth quarter of 1999.
13
<PAGE>
For the three months ended September 25, 1999 the Company's effective tax
rate was 44.8%. Excluding merger and integration costs net of applicable taxes
the Company's effective tax rate for the three months ended September 25, 1999
would have been 38.4%. The difference between the Company's effective tax rate
and the Federal statutory rate relates primarily to state income taxes and
non-deductible goodwill associated with certain stock acquisitions. For the
three months ended September 26, 1998, the Company's effective tax rate was
62.0%. Excluding merger and integration costs net of applicable taxes and
including a pro forma adjustment for assumed tax expenses arising from the
previously untaxed earnings of Meer, the Company's effective tax rate for the
three months ended September 26, 1998 would have been 38.2%. The difference
between the Company's effective tax rate, excluding certain non-deductible
merger and integration costs and the Meer tax adjustment, and the Federal
statutory rate relates primarily to state income taxes.
Nine Months Ended September 25, 1999 compared to Nine Months Ended September 26,
1998
Net sales increased $255.4 million, or 18.0%, to $1,674.4 million for the
nine months ended September 25, 1999 from $1,419.0 million for the nine months
ended September 26, 1998. Of the $255.4 million increase, approximately $236.5
million, or 92.6%, represented a 17.0% increase in the Company's healthcare
distribution business. As part of this increase, approximately $136.2 million
represented a 84.0% increase in the Company's international business, $134.1
million represented a 35.2% increase in its medical business, and $3.0 million
represented a 8.3% increase in its veterinary business, while $(36.8) million
represented a 4.5% decrease in its dental business. In the international market,
the increase in net sales was primarily due to acquisitions in Germany and the
United Kingdom and increased account penetration in the United Kingdom, Belgium,
Spain, and France. The increase in medical net sales is primarily attributable
to increased sales to hospitals, acquisitions, and the continuing favorable
impact of a new telesales structure, partially offset by a decline in sales to
the Company's largest renal dialysis customer, Renal Treatment Centers, Inc.
("RTC"). In the veterinary market, the increase in net sales was primarily due
to increased account penetration with core accounts, and veterinary groups. The
decrease in dental net sales was primarily due to sales erosion related to the
Meer acquisition and a reduction in dental equipment sales, primarily resulting
from the Company's disposal of Marus in August 1998. The remaining increase in
1999 net sales was due to the technology business, which increased $18.9
million, or 64.1%, to $48.4 for the nine months ended September 25, 1999, from
$29.5 million for the nine months ended September 26, 1998. The increase in
technology and value-added product net sales was primarily due to increased
practice management software sales and an acquisition.
Gross profit increased by $71.4 million, or 16.2%, to $511.4 million for
the nine months ended September 25, 1999, from $440.0 million for the nine
months ended September 26, 1998. Gross profit margin decreased by 0.5% to 30.5%
from 31.0% last year. Healthcare distribution gross profit increased $61.0
million, or 14.6%, to $478.3 million for the nine months ended September 25,
1999, from $417.3 for the nine months ended September 26, 1998. Healthcare
distribution gross profit margin decreased by 0.6% to 29.4% for the nine months
ended September 25, 1999, from 30.0% for the nine months ended September 26,
1998, primarily due to sales mix and lower manufacturers rebates as a result of
reduced annual sales estimates. Technology gross profit increased by $10.4
million or 45.8% to $33.1 million for the nine months ended September 25, 1999
from $22.7 million for the nine months ended September 26, 1998. Technology
gross profit margins decreased by 8.5%
14
<PAGE>
to 68.3% for nine months ended September 25, 1999 from 76.8% for the nine months
ended September 26, 1998, primarily due to increased support and training costs
along with changes in sales mix.
Selling, general and administrative expenses increased by $45.9 million,
or 12.2%, to $423.2 million for the nine months ended September 25, 1999 from
$377.3 million for the nine months ended September 26, 1998. Selling and
shipping expenses increased by $26.0 million, or 10.0%, to $285.0 million for
the nine months ended September 25, 1999 from $259.0 million for the nine months
ended September 26, 1998. As a percentage of net sales, selling and shipping
expenses decreased 1.3% to 17.0% for the nine months ended September 25, 1999,
from 18.3% for the nine months ended September 26, 1998. The decrease was
primarily due to improvements in the Company's distribution efficiencies
resulting from the leveraging of the Company's distribution infrastructure.
General and administrative expenses increased $19.9 million, or 16.8%, to $138.2
million for the nine months ended September 25, 1999, from $118.3 million for
the nine months ended September 26, 1998, primarily due to acquisitions. As a
percentage of net sales, general and administrative expenses remained constant
at 8.3% for the nine months ended September 25, 1999 and for the nine months
ended September 26, 1998.
Other income (expense) - net decreased by $8.1 million, to $(11.0) million
for the nine months ended September 25, 1999, compared to $(2.9) million for the
nine months ended September 26, 1998, due primarily to an increase in interest
expense resulting from an increase in average borrowings and to a lesser extent
an increase in interest rates, offset by higher interest income on notes
receivable and accounts receivable balances.
Equity in earnings of affiliates decreased $2.9 million to $(1.4) million
for the nine months ended September 25, 1999 from $1.5 million for the nine
months ended September 26, 1998. The decline was due to reduced earnings
resulting from temporary suspension of manufacturing operations in connection
with a voluntary recall of anesthetic products sold by Novocol an affiliate, in
which the Company owns a non-controlling interest. On September 23, 1999 the FDA
gave Novocol approval to resume production of its anesthetic products for
shipment into the United States. Novocol resumed limited production and
shipment of products in the fourth quarter.
For the nine months ended September 25, 1999 the Company's effective tax
rate was 41.1%. Excluding merger and integration costs, net of applicable taxes,
the Company's effective tax rate for the nine months ended September 25, 1999
would have been 39.1%. The difference between the Company's effective tax rate
and the Federal statutory rate relates primarily to state income taxes and
non-deductible goodwill associated with certain stock acquisitions. For the nine
months ended September 26, 1998, the Company's effective tax rate was 45.9%.
Excluding merger and integration costs, net of applicable taxes, and including a
pro forma adjustment for assumed tax expenses arising from the previously
untaxed earnings of Meer, the Company's effective tax rate for the nine months
ended September 26, 1998 would have been 38.3%. The difference between the
Company's effective tax rate, excluding certain non-deductible merger and
integration costs and the Meer tax adjustment, and the Federal statutory rate
relates primarily to state income taxes.
Year 2000
Management has conducted a company-wide program to prepare the Company's
computer systems, applications and software products for the year 2000, as well
as, to assess the readiness for
15
<PAGE>
the year 2000 of critical vendors and other third parties upon which the Company
relies to operate its business. The Year 2000 issue arises from the widespread
use of computer programs that rely on two-digit date codes to perform
computations or decision-making functions. The inability of computer programs
worldwide to correctly process data after December 31, 1999 can have grave
consequences for governments, businesses and consumers alike.
The Company created a Year 2000 Task Force (the "Task Force") to assess
the business risks associated with all phases of the Company's operations and to
prioritize corrective actions to avoid or mitigate the consequences of each of
the Company's and its critical vendors' and third parties' non-compliant
systems, applications and products so as to minimize potential disruptions to
its business and service to its customers. Consequently, the Task Force's
efforts have been divided into three main categories; (i) internal business
systems and products and services, (ii) critical vendor and other third party
business systems and products and services, and (iii) customer business system
interfaces.
The Company has completed an inventory of all major business systems and
has made modifications to substantially all of the business critical systems.
The process is expected to continue through the end of the year as systems
continue to be tested. At this time, all of the Company's software products
currently offered for sale are year 2000 compliant. The vast majority of the
Company's principal domestic suppliers have indicated that their systems and
(where applicable) products currently offered are year 2000 compliant. The
Company will seek alternate sources for products that are determined to be at
risk. There can be no assurance that the Company will be able to identify
sufficient alternative supply sources for all products and services such that
disruption to the Company's business would not be affected. The Company
currently ships substantially all of its orders in the United States by United
Parcel Service ("UPS"). UPS has advised the Company that their systems are year
2000 compliant, including those systems used by the Company in its distribution
centers.
The Company has incurred internal payroll costs as well as consulting
costs and other expenses related to customer and vendor relations,
infrastructure, facility enhancements and software upgrades necessary to prepare
the Company's products, services and systems for the year 2000. Management
estimates that to date, the cost of this program to be between $2.0 million and
$3.0 million, with approximately $1.5 million representing incremental costs to
the Company. This cost does not include normal upgrading of business and
financial systems that would be year 2000 compliant already.
Business disruptions in the form of floods, blizzards, hurricanes,
earthquakes and power failures are a normal part of the Company's contingency
planning. In an effort to reduce the risks associated with Year 2000 problems,
the Company has established and is currently continuing to develop Year 2000
contingency plans that build upon existing disaster recovery and contingency
plans. Examples of the Company's existing contingency plans include alternative
electronic means for placing and receiving orders, rerouting orders to alternate
warehouses if necessary, and alternative communication lines.
The Company's contingency planning methodology attempts to identify,
explore and document potential failure points, internal and external in each of
the Company's businesses. Failure points are then prioritized based on
likelihood and criticality. Contingency plans are then developed for each of the
potential failure points deemed likely and/or critical. Included in the
Company's contingency plan are preparations that need to be completed currently
(such as identifying the triggers for shifting into contingency mode and
appointing and training resource response teams), identification of alternate
processes to be used in the event of contingencies, as well as design of the
process for
16
<PAGE>
exiting contingency mode.
Contingency planning for all possible disruptions including Year 2000
disruptions will continue to be defined, improved and implemented.
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 Euros, 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.
In 1998, the Company established a Euro Task Force to address its
information system, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a)
acquisitions, (b) capital expenditures, and (c) working capital needs resulting
from increased sales, extended payment terms on various products, special
inventory forward buy-in opportunities, and initial start-up inventory
requirements for new distribution centers. Since sales have been 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 revolving credit facilities, private placement loans,
and stock issuances.
Net cash provided by operating activities for the nine months ended
September 25, 1999 of $43.6 million resulted primarily from net income of $34.8
million, adjusted for non-cash charges of $28.7 million, offset by an increase
in operating items of working capital of $19.9 million. The increase in working
capital was primarily due to a decrease in accounts payable and other accrued
expenses of $40.9 million primarily due to payments made to vendors for year-end
inventory buy-ins, and an increase in accounts receivable of $22.1 million
offset by a $30.2 million decrease in inventory, and a $12.9 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
25, 1999 of $137.7 million resulted primarily from cash used to make
acquisitions of $128.1 million and capital expenditures of $20.7 million, offset
primarily by the sale of certain equipment at two of the Company's distribution
facilities that was subsequently leased back to the Company. The Company expects
that it will invest in excess of $25.0 million during the year ending December
25, 1999, in capital projects to modernize and expand its facilities and
infrastructure systems and integrate operations.
17
<PAGE>
Net cash provided by financing activities for the nine months ended
September 25, 1999 of $104.9 million resulted primarily from borrowings under a
new $130.0 million of new privately placed Senior Notes, offset primarily by
repayments on the Company's revolving credit facility and other long-term debt.
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 25, 1999 of $39.1
million consist of bank balances and money market funds.
The Company has a $150.0 million revolving credit facility, which has a
termination date of August 15, 2002. Borrowings under the credit facility were
$42.9 million at September 25, 1999. Certain of the Company's subsidiaries have
revolving credit facilities that total approximately $52.8 million at September
25, 1999, under which $46.2 million has been borrowed.
On June 30, 1999, the Company completed a private placement transaction
under which it issued $130.0 million in Senior Notes, the proceeds of which were
used for the permanent financing of its recent acquisitions, GIV and Heiland, as
well as repaying and retiring a portion of the four uncommitted bank lines. The
notes come due on June 30, 2009 and bear interest at a rate of 6.94% per annum.
Interest is payable semi-annually.
The Company believes that its cash and cash equivalents, its anticipated
cash flow from operations, its ability to access private and public debt and
equity markets, and the availability of funds under its existing credit
agreements will provide it with liquidity sufficient to meet its short and
long-term capital needs.
18
<PAGE>
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 26, 1998, on this matter.
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, the Company's ability
and its customers and suppliers ability to replace, modify or upgrade computer
programs in ways that adequately address the Year 2000 issue (see "Year 2000"),
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. 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.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As disclosed in the Company's 1998 Annual Report on Form 10K, Henry
Schein, Inc. and one of its subsidiaries, are defendants in a matter in Texas
District Court, Travis County, entitled Shelly E. Stromboe & Jeanne N. Taylor,
et. al. on behalf of themselves and all others similarly situated vs.
Henry Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc. Case No.
09-00886. This complaint alleges among other things, negligence and breach of
contract involving the sale of certain practice management software products
sold prior to 1998 under the Easy Dental name. In October, 1999, the Court, on
motion, certified both a Windows 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
customers and 15,000 DOS customers could be covered by the judge's ruling. The
Company intends to file an appeal of the Court's determination, during which
time a trial on the merits is stayed. The Company intends to continue to
vigorously defend itself against this claim, as well as all other claims,
suits and complaints.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Report dated July 2, 1999. The Company issued a press release with
respect to its consummation of a $130.0 million dollar private note
placement. The notes have a 10-year term and bear interest at the
rate of 6.94% per annum.
Report dated September 9, 1999. The Company issued a press release
with respect to the naming of Michael Racioppi, Vice President and
General Manager of the Company's Medical Marketing Division, as
interim President of the Company's Medical Group. Mr. Racioppi
succeeds Bruce J. Haber who resigned as President of the Company's
Medical group and also as a member of the Company's Board of
Directors.
20
<PAGE>
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
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: November 9, 1999
21
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The schedule contains summary financial information extracted from the
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</LEGEND>
<MULTIPLIER> 1000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> SEP-25-1999
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