<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 June 24, 2000
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 August 3, 2000 there were 41,286,794 shares of the Registrant's Common
Stock outstanding.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of June 24, 2000 and
December 25, 1999 ..................................... 3
Statements of Operations for the three and six months ended
June 24, 2000 and June 26, 1999 ....................... 4
Statements of Cash Flows for the six months ended
June 24, 2000 and June 26, 1999 ....................... 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.. 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 16
ITEM 2. Changes in Securities and Use of Proceeds................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders......... 17
ITEM 6. Exhibits and Reports on Form 8-K............................ 18
Signature................................................... 19
</TABLE>
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>
June 24, 2000 December 25, 1999
------------- -----------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 45,900 $ 26,019
Accounts receivable, less reserves of $21,685 and $20,391,
respectively......................................................... 357,215 388,063
Inventories ............................................................ 274,668 285,590
Deferred income taxes .................................................. 18,435 15,520
Prepaid expenses and other ............................................. 62,109 63,617
------------- -----------------
Total current assets ......................................... 758,327 778,809
Property and equipment, net of accumulated depreciation and amortization
of $67,196 and $60,702, respectively ................................... 87,489 86,627
Goodwill and other intangibles, net of accumulated amortization
of $37,937 and $31,356, respectively ................................... 283,389 295,113
Investments and other ....................................................... 41,702 43,553
------------- -----------------
$ 1,170,907 $ 1,204,102
============= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 183,586 $ 198,983
Bank credit lines ...................................................... 37,730 41,527
Accruals:
Salaries and related expenses ..................................... 32,650 31,188
Merger and integration costs ...................................... 6,729 10,093
Other ............................................................. 64,136 64,710
Current maturities of long-term debt ................................... 5,484 3,879
------------- -----------------
Total current liabilities .................................... 330,315 350,380
Long-term debt .............................................................. 280,128 318,218
Other liabilities ........................................................... 11,855 9,782
------------- -----------------
Total liabilities ............................................ 622,298 678,380
------------- -----------------
Minority interest ........................................................... 8,324 7,855
------------- -----------------
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000,
issued: 41,276,794 and 40,768,306, respectively ................... 413 407
Additional paid-in capital ............................................. 362,529 361,757
Retained earnings ...................................................... 196,060 167,809
Treasury stock, at cost, 62,479 shares ................................. (1,156) (1,156)
Accumulated comprehensive loss ......................................... (17,032) (10,359)
Deferred compensation .................................................. (529) (591)
------------- -----------------
Total stockholders' equity ................................... 540,285 517,867
------------- -----------------
$ 1,170,907 $ 1,204,102
============= =================
</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 Six Months Ended
------------------------------ ------------------------------
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales .................................................. $ 568,174 $ 559,310 $ 1,121,984 $ 1,095,645
Cost of sales .............................................. 385,443 385,260 770,049 758,178
------------- ------------- ------------- -------------
Gross profit .......................................... 182,731 174,050 351,935 337,467
Operating expenses:
Selling, general and administrative ................... 151,164 142,001 296,891 281,770
Merger and integration costs .......................... 585 5,271 585 7,474
------------- ------------- ------------- -------------
Operating income .................................... 30,982 26,778 54,459 48,223
Other income (expense):
Interest income ....................................... 924 1,488 2,020 3,821
Interest expense ...................................... (4,847) (5,316) (10,699) (11,040)
Other - net ........................................... (495) 297 (646) 108
------------- ------------- ------------- -------------
Income before taxes on income, minority interest
and equity in earnings (losses) of affiliates... 26,564 23,247 45,134 41,112
Taxes on income ............................................ 9,774 8,958 16,552 16,085
Minority interest in net income of subsidiaries ............ 549 322 1,037 919
Equity in earnings (losses) of affiliates .................. 140 (630) 234 (858)
------------- ------------- ------------- -------------
Net income ................................................. $ 16,381 $ 13,337 $ 27,779 $ 23,250
============= ============= ============= =============
Net income per common share:
Basic ................................................. $ 0.40 $ 0.33 $ 0.68 $ 0.57
============= ============= ============= =============
Diluted ............................................... $ 0.39 $ 0.32 $ 0.67 $ 0.56
============= ============= ============= =============
Weighted average common shares outstanding:
Basic ................................................. 41,204 40,491 40,959 40,456
============= ============= ============= =============
Diluted ............................................... 41,702 41,547 41,401 41,621
============= ============= ============= =============
</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>
Six Months Ended
------------------------------
June 24, 2000 June 26, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................................... $ 27,779 $ 23,250
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................................... 15,950 14,729
Provision (benefit) for losses and allowances on accounts receivable .... 1,294 (530)
(Benefit) provision for deferred income taxes ........................... (654) 949
Undistributed (earnings) losses of affiliates ........................... (234) 858
Minority interest in net income of subsidiaries ......................... 1,037 919
Other ................................................................... -- (144)
Changes in operating assets and liabilities (net of acquisitions):
Decrease in accounts receivable ........................................... 26,190 2,910
Decrease in inventories ................................................... 7,331 19,200
Decrease in other current assets .......................................... 815 10,071
Decrease in accounts payable and accruals ................................. (14,163) (66,953)
------------- -------------
Net cash provided by operating activities ........................................... 65,345 5,259
------------- -------------
Cash flows from investing activities:
Capital expenditures ........................................................... (11,573) (11,731)
Business acquisitions, net of cash acquired .................................... (1,171) (127,319)
Proceeds from sale of fixed assets ............................................. -- 6,402
Other .......................................................................... 1,135 2,183
------------- -------------
Net cash used in investing activities ............................................... (11,609) (130,465)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ....................................... -- 491
Principal payments on long-term debt ........................................... (2,762) (10,680)
Proceeds from common stock options exercised by
employees under stock option plans ........................................ 545 5,062
Proceeds from borrowings from banks ........................................... 5,661 135,508
Payments on borrowings from banks .............................................. (39,982) (2,211)
Other .......................................................................... 960 (6,111)
------------- -------------
Net cash (used in) provided by financing activities ................................. (35,578) 122,059
------------- -------------
Net increase (decrease) in cash and cash equivalents ................................ 18,158 (3,147)
Effect of exchange rate changes on cash and cash equivalents ........................ 1,723 --
------------- -------------
Cash and cash equivalents, beginning of period ...................................... 26,019 28,222
------------- -------------
Cash and cash equivalents, end of period ............................................ $ 45,900 $ 25,075
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except employee and 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
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 25, 1999. The
Company follows the same accounting policies in preparation of interim reports.
The results of operations for the six months ended June 24, 2000 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 30, 2000, or any other period.
Note 2. Business Acquisitions
During the six months ended June 24, 2000, the Company completed three
acquisitions. None of the acquisitions completed in 2000 were material. Of the
three completed acquisitions, two were accounted for under the purchase method
of accounting and the remaining acquisition was accounted for under the pooling
of interests method of accounting. The Company issued 465,480 shares of its
Common Stock, with an aggregate value of approximately $7,900 in connection with
the pooling transaction. The transactions completed under the purchase method of
accounting have been included in the consolidated financial statements from
their respective acquisition dates. The pooling transaction was not material and
has been included in the consolidated financial statements from the beginning of
the second quarter of 2000.
During the six months ended June 26, 1999 the Company completed eight
acquisitions. The 1999 completed acquisitions included General Injectables and
Vaccines, Inc. ("GIV"), through the purchase of all of the outstanding common
stock of Biological and Popular Culture, Inc., a leading independent direct
marketer of vaccines and other injectables to office-based practitioners
throughout the United States; and the Heiland Group GmbH ("Heiland"), the
largest direct marketer of healthcare supplies to medical, dental and veterinary
office-based practitioners, in Germany. 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. The transactions completed under the purchase method of accounting
have been included in the consolidated financial statements from their
respective acquisition dates. The pooling transaction was not material and has
been included in the consolidated financial statements from the beginning of the
first quarter of 1999. Due to the closing dates of the GIV and Heiland
acquisitions, which occurred on December 30, 1998 and December 27, 1998,
respectively, there were no material differences between actual and pro forma
results of operations.
6
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except employee and share data)
(unaudited)
Note 2. Business Acquisitions - (Continued)
In connection with the 2000, 1999 and 1998 acquisitions accounted for
under the pooling of interests method, the Company incurred certain merger and
integration costs during the three and six months ended June 24, 2000 and June
26, 1999 of approximately $585 and $585, and $5,271 and $7,474, respectively.
These costs consist primarily of compensation and rent as well as other
integration costs associated with these mergers. Net of taxes, for the three and
six months ended June 24, 2000 and June 26, 1999, merger and integration costs
were approximately $0.02 and $0.02 per share, and $0.07 and $0.11 per share,
respectively, on a diluted basis.
The following table shows amounts expensed, paid and charged against
the merger and integration accrual during the six months ended June 24, 2000:
<TABLE>
<CAPTION>
Balance at Balance at
December 25, 1999 Provision Payments June 24, 2000
----------------- --------- -------- -------------
<S> <C> <C> <C> <C>
Severance and other
direct costs.............. $ 1,694 $ -- $ 748 $ 946
Direct transaction and other
integration costs ........ 8,399 585 3,201 5,783
----------------- --------- -------- -------------
$ 10,093 $ 585 $ 3,949 $ 6,729
================= ========= ======== =============
</TABLE>
For the six months ended June 24, 2000, 39 employees received severance
and 17 were owed severance at June 24, 2000.
Note 3. Comprehensive Income
Net comprehensive income for the three and six months ended June 24,
2000 and June 26, 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income ................................. $ 16,381 $ 13,337 $ 27,779 $ 23,250
Foreign currency translation adjustments ... (3,259) (2,792) (6,673) (6,476)
------------- ------------- ------------- -------------
Net comprehensive income ................... $ 13,122 $ 10,545 $ 21,106 $ 16,774
============= ============= ============= =============
</TABLE>
7
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except employee and share data)
(unaudited)
Note 4. 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 Six Months Ended
----------------------------- -----------------------------
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales:
Healthcare distribution (1):
Dental ................................. $ 265,408 $ 260,632 $ 520,196 $ 513,885
Medical ................................ 173,454 162,530 342,329 320,605
Veterinary ............................. 14,305 13,508 27,762 26,197
International (2) ...................... 97,455 104,113 197,410 202,431
------------- ------------- ------------- -------------
Total healthcare distribution ..... 550,622 540,783 1,087,697 1,063,118
Technology (3) .............................. 17,552 18,527 34,287 32,527
------------- ------------- ------------- -------------
$ 568,174 $ 559,310 $ 1,121,984 $ 1,095,645
============= ============= ============= =============
</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
European and Pacific Rim markets.
(3) Consists of practice management software and other value-added products
and services.
8
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands, except employee and share data)
(unaudited)
Note 4. Segment Data -- (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ------------------------------
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income:
Healthcare distribution (includes merger and
integration costs of $0 and $5,271, and
$0 and $7,474, respectively) ............... $ 25,082 $ 19,038 $ 42,391 $ 35,994
Technology (includes merger and
integration costs of $585 and $0, and
$585 and $0, respectively) ................. 5,900 7,740 12,068 12,229
------------- ------------- ------------- -------------
Total ................................................. $ 30,982 $ 26,778 $ 54,459 $ 48,223
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
June 24, 2000 June 26, 1999
------------- -------------
<S> <C> <C>
Total assets:
Healthcare distribution .......................... $ 1,137,551 $ 1,125,163
Technology ....................................... 83,689 51,014
------------- -------------
Total assets for reportable segments .................. 1,221,240 1,176,177
Receivables due from healthcare distribution
segment ..................................... (44,752) (27,601)
Receivables due from technology segment .......... (5,581) (2,867)
------------- -------------
Consolidated total assets ............................. $ 1,170,907 $ 1,145,709
============= =============
</TABLE>
Note 5. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ------------------------------
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic ................................................. 41,204 40,491 40,959 40,456
Effect of assumed conversion of employee
stock options .................................... 498 1,056 442 1,165
------------- ------------- ------------- -------------
Diluted ............................................... 41,702 41,547 41,401 41,621
============= ============= ============= =============
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended June 24, 2000 compared to Three Months Ended June 26, 1999
Net sales increased $8.9 million, or 1.6%, to $568.2 million for the
three months ended June 24, 2000 from $559.3 million for the three months ended
June 26, 1999. Net sales of the Company's healthcare distribution business
increased approximately $9.8 million, or 1.8%. As part of this increase
approximately $10.9 million represented a 6.7% increase in the Company's medical
business, $4.8 million represented a 1.8% increase in its dental business, $0.8
million represented a 5.9% increase in its veterinary business, and $(6.7)
million represented a 6.4% decrease in its international business. The increase
in medical net sales is primarily attributable to telesales and marketing
activities, partially offset by a decrease in sales to hospitals. The increase
in dental net sales was primarily due to improved dental consumable merchandise
sales. In the veterinary market, the increase in net sales was primarily due to
increased account penetration. In the international market, the decrease in net
sales was primarily due to unfavorable foreign exchange rates offset partially
by increased account penetration in France, Germany and Spain. Unfavorable
exchange rate translation adjustments decreased net sales in the international
market by $9.4 million. Had net sales for the international market been
translated at the same rates in effect during the second quarter of 1999,
international net sales would have increased by 2.6%. The technology business
decreased $0.9 million, or 4.8%, to $17.6 million for the three months ended
June 24, 2000, from $18.5 million for the three months ended June 26, 1999.
The decrease in technology and value-added product net sales was primarily due
to lower sales of non-software related value-added services. Excluding
value-added services, net sales were up 7.0% in the Company's practice
management software and related technologies business when compared to the
second quarter of 1999.
Gross profit increased by $8.6 million, or 4.9%, to $182.7 million for
the three months ended June 24, 2000 from $174.1 million for the three months
ended June 26, 1999. Gross profit margin increased 1.1% to 32.2% from 31.1% for
the same period last year. Healthcare distribution gross profit increased $9.1
million, or 5.6%, to $170.9 million for the three months ended June 24, 2000
from $161.8 million for the three months ended June 26, 1999. Healthcare
distribution gross profit margin increased by 1.1% to 31.0% for the three months
ended June 24, 2000 from 29.9% for the three months ended June 26, 1999,
primarily due to sales mix. Technology gross profit decreased by $0.5 million or
4.1% to $11.8 million for the three months ended June 24, 2000 from $12.3
million for the three months ended June 26, 1999 primarily due to sales volume.
Technology gross profit margins increased by 0.6% to 67.1% for three months
ended June 24, 2000 from 66.5% for the three months ended June 26, 1999,
primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $9.2 million,
or 6.5%, to $151.2 million for the three months ended June 24, 2000 from $142.0
million for the three months ended June 26, 1999. Selling and shipping expenses
increased by $4.6 million, or 4.8%, to $100.4 million for the three months ended
June 24, 2000 from $95.8 million for the three months ended June 26, 1999. As a
percentage of net sales, selling and shipping expenses increased 0.6% to 17.7%
for the three months ended June 24, 2000 from 17.1% for the three months ended
June 26, 1999. General and administrative expenses increased $4.6 million, or
10.0%, to $50.8 million for the three months ended June 24, 2000 from $46.2
million for the three months ended June 26, 1999. As a percentage of net sales,
general and administrative expenses increased 0.6% to 8.9% for the three months
ended June 24, 2000 from 8.3% for the three months ended June 26, 1999.
10
<PAGE>
Other income (expense) - net changed by $0.9 million, to $(4.4) million
for the three months ended June 24, 2000, compared to $(3.5) million for the
three months ended June 26, 1999, due primarily to foreign currency losses and
lower finance charge income on receivables, offset by lower interest expense, as
a result of reduced debt levels.
Equity in earnings (losses) of affiliates increased $0.7 million to
$0.1 million for the three months ended June 24, 2000 from $(0.6) million for
the three months ended June 26, 1999. The increase is due to a reduced loss in
2000 from HS Pharmaceutical, an affiliated company, which is accounted for under
the equity method. In 1998, HS Pharmaceutical suspended manufacturing of certain
anesthetic products. On September 23, 1999, the United States Food and Drug
Administration ("FDA") issued clearance for HS Pharmaceutical to resume
production of its anesthetic products for shipment into the United States. HS
Pharmaceutical resumed limited production and shipment of its products in the
fourth quarter of 1999.
For the three months ended June 24, 2000 the Company's effective tax
rate was 36.8%. For the three months ended June 26, 1999, the Company's
effective tax rate was 38.5%. Excluding merger and integration costs, net of
applicable taxes, the Company's effective tax rate for the three months ended
June 24, 2000 and June 26, 1999 would have been 36.0% and 39.0%, respectively.
The difference between the Company's effective tax rate, excluding certain
non-deductible merger and integration costs, and the Federal statutory rate
relates primarily to state income taxes.
Six Months Ended June 24, 2000 compared to Six Months Ended June 26, 1999
Net sales increased $26.4 million, or 2.4%, to $1,122.0 million for the
six months ended June 24, 2000 from $1,095.6 million for the six months ended
June 26, 1999. Of the $26.4 million increase, approximately $24.6 million, or
93.2%, represented a 2.3% increase in the Company's healthcare distribution
business. As part of this increase approximately $21.7 million represented a
6.8% increase in the Company's medical business, $6.3 million represented a 1.2%
increase in its dental business, $1.6 million represented a 6.0% increase in its
veterinary business and $(5.0) million represented a 2.5% decrease in its
international business. The increase in medical net sales is primarily
attributable to telesales and marketing activities, partially offset by a
decrease in sales to hospitals. The increase in dental net sales was primarily
due to improved dental consumable merchandise sales. In the veterinary market,
the increase in net sales was primarily due to increased account penetration. In
the international market, the decrease in net sales was primarily due to
unfavorable foreign exchange rates, partially offset by increased account
penetration in Germany, France and Spain. Unfavorable exchange rate translation
adjustments decreased net sales in the international market by $18.0 million.
Had net sales for the international market been translated at the same rates in
effect during the first six months of 1999, international net sales would have
increased by 6.4%. The remaining increase in 2000 net sales was due to the
technology business, which increased $1.8 million, or 5.5%, to $34.3 million for
the six months ended June 24, 2000, from $32.5 million for the six months ended
June 26, 1999. The increase in technology and value-added product net sales was
primarily due to increased practice management software and related technology
sales.
Gross profit increased by $14.4 million, or 4.3%, to $351.9 million for
the six months ended June 24, 2000 from $337.5 million for the six months ended
June 26, 1999. Gross profit margin increased 0.6% to 31.4% from 30.8% for the
same period last year. Healthcare distribution gross profit increased $12.9
million, or 4.1%, to $328.7 million for the six months ended June 24, 2000 from
$315.8 million for the six months ended June 26, 1999. Healthcare distribution
gross profit margin increased by 0.5% to
11
<PAGE>
30.2% for the six months ended June 24, 2000 from 29.7% for the six months ended
June 26, 1999, primarily due to sales mix. Technology gross profit increased by
$1.5 million or 6.9% to $23.2 million for the six months ended June 24, 2000
from $21.7 million for the six months ended June 26, 1999. Technology gross
profit margins increased by 1.1% to 67.8% for six months ended June 24, 2000
from 66.7% for the six months ended June 26, 1999, primarily due to changes in
sales mix.
Selling, general and administrative expenses increased by $15.1
million, or 5.4%, to $296.9 million for the six months ended June 24, 2000 from
$281.8 million for the six months ended June 26, 1999. Selling and shipping
expenses increased by $5.5 million, or 2.9%, to $196.0 million for the six
months ended June 24, 2000 from $190.5 million for the six months ended June 26,
1999. As a percentage of net sales, selling and shipping expenses increased 0.1%
to 17.5% for the six months ended June 24, 2000 from 17.4% for the six months
ended June 26, 1999. General and administrative expenses increased $9.6 million,
or 10.5%, to $100.9 million for the six months ended June 24, 2000 from $91.3
million for the six months ended June 26, 1999. As a percentage of net sales,
general and administrative expenses increased 0.7% to 9.0% for the six months
ended June 24, 2000 from 8.3% for the six months ended June 26, 1999.
Other income (expense) - net changed by $2.2 million, to $(9.3) million
for the six months ended June 24, 2000, compared to $(7.1) million for the six
months ended June 26, 1999, due primarily to lower finance charge income on
receivables and foreign currency losses, offset by lower interest expense, as a
result of reduced debt levels.
Equity in earnings (losses) of affiliates increased $1.1 million to
$0.2 million for the six months ended June 24, 2000 from $(0.9) million for the
six months ended June 26, 1999. The increase is due to a reduced loss in 2000
from HS Pharmaceutical, an affiliated company, which is accounted for under the
equity method. In 1998, HS Pharmaceutical suspended manufacturing of certain
anesthetic products. On September 23, 1999, the FDA issued clearance for HS
Pharmaceutical to resume production of its anesthetic products for shipment into
the United States. HS Pharmaceutical resumed limited production and shipment of
its products in the fourth quarter of 1999.
For the six months ended June 24, 2000 the Company's effective tax rate
was 36.7%. For the six months ended June 26, 1999, the Company's effective tax
rate was 39.1%. Excluding merger and integration costs net of applicable taxes
the Company's effective tax rate for the six months ended June 24, 2000 and June
26, 1999 would have been 36.2% and 39.3%, respectively. The difference between
the Company's effective tax rate, excluding certain non-deductible merger and
integration costs, and the Federal statutory rate relates primarily to state
income taxes.
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 Company's infrastructure. This worldwide initiative includes the
elimination of approximately 300 positions, or about 5% of the total workforce,
throughout the organization and at all levels.
It is expected that the restructuring plan will be implemented over the
balance of 2000 and will be completed by December 30, 2000. The Company expects
to record a one-time restructuring charge of approximately $14.0 million pre-tax
($8.4 million after tax), or $0.20 per diluted share, during the second half of
2000.
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This restructuring charge will primarily be composed of severance pay, facility
closing costs, and outside professional and consulting fees directly related to
the restructuring plan.
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.
The Company has established an 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.
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's
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a)
repayments on bank borrowings, (b) capital expenditures, (c) acquisitions, and
(d) working capital needs resulting from increased sales and special inventory
forward buy-in opportunities. 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 six months ended June
24, 2000 of $65.3 million resulted primarily from net income of $27.8 million,
an increase in components of working capital of $20.2 million and non-cash
charges of $17.3 million. The increase in components of working capital was
primarily due to a decrease in accounts receivable of $26.2 million, a decrease
in inventory of $7.3 million, and a decrease in accounts payable and accruals of
$14.2 million. The Company anticipates future increases in working capital
requirements as a result of sales
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growth and special inventory forward buy-in opportunities.
Net cash used in investing activities for the six months ended June 24,
2000 of $11.6 million resulted primarily from cash used for capital
expenditures. The Company expects that it will invest more than $25.0 million
during the year ending December 30, 2000, in capital projects to modernize and
expand its facilities and infrastructure systems and integrate operations.
Net cash used in financing activities for the six months ended June 24,
2000 of $35.6 million resulted primarily from repayments on the Company's
revolving credit facility and other long-term debt, offset by proceeds from new
borrowings and issuances of stock resulting from option conversions.
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 June 24, 2000 of $45.9
million consist of bank balances, money market funds and other short-term
investments.
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
$21.0 million at June 24, 2000. The Company also has one uncommitted bank line
totaling $15.0 million, none of which has been borrowed at June 24, 2000.
Certain of the Company's subsidiaries have revolving credit facilities that
total approximately $52.1 million at June 24, 2000, under which $37.7 million
has been borrowed.
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 the GIV and Heiland acquisitions, 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 in
full 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
through 2010. The notes bear interest at a rate of 6.66% per annum. Interest on
both notes 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 sufficient liquidity to meet its short and
long-term capital needs.
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 25, 1999, 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
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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. 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of the end of
the Company's second fiscal quarter of 2000, the Company was named a defendant
in approximately seventy-two such cases. Of these product liability claims,
fifty-eight involve claims made by healthcare workers who claim allergic
reaction relating to exposure to latex gloves. In these cases, the Company acted
as a distributor of both brand name and/or "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 these 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 the financial viability of the manufacturer and their insurers.
In addition, the Company is subject to other claims, suits and
complaints, which arise in the course of the Company's business. 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
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 has filed an appeal of the Court's
determination, during which time 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 the
Company is provided indemnification by the manufacturer of the product. There
can be no assurance that the coverage maintained by the Company is sufficient to
cover all future claims or will be available in adequate amounts or at a
reasonable cost, or that indemnification agreements will provide adequate
protection for the Company. The Company intends to vigorously defend all such
claims, suits and complaints. In the opinion of the Company, all such pending
matters are covered by insurance or are of such kind, or involve such amounts,
as would not have a material adverse effect on the financial statements of the
Company if disposed of unfavorably.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the second fiscal quarter of 2000, the Company issued 465,480 shares
of common stock in connection with an acquisition. The offer and sale of such
shares were not registered under the Securities Act of 1933 in reliance upon the
exemption provided by Section 4(2) of such act.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 31, 2000,
the stockholders of the Company took the following actions:
(i) Re-elected the following individuals to the Company's Board of
Directors:
<TABLE>
<S> <C>
Stanley M. Bergman (24,104,201 shares voting for; 80,660 shares withheld)
James P. Breslawski (24,105,893 shares voting for; 78,968 shares withheld)
Gerald A. Benjamin (24,104,163 shares voting for; 80,698 shares withheld)
Steven Paladino (24,105,331 shares voting for; 79,530 shares withheld)
Leonard A. David (24,074,431 shares voting for; 110,430 shares withheld)
Mark E. Mlotek (24,105,543 shares voting for; 79,318 shares withheld)
Barry J. Alperin (24,104,993 shares voting for; 79,868 shares withheld)
Pamela Joseph (24,108,986 shares voting for; 75,875 shares withheld)
Donald J. Kabat (24,079,343 shares voting for; 105,518 shares withheld)
Marvin H. Schein (24,110,243 shares voting for; 74,618 shares withheld)
Irving Shafran (24,079,074 shares voting for; 105,787 shares withheld)
</TABLE>
(ii) Ratified the selection of BDO Seidman, LLP as the Company's
independent auditors for the year ended December 30, 2000 (24,138,773
shares voting for; 36,961 shares voting against; 14,127 abstaining).
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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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: August 8, 2000
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