<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 23, 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 November 1, 2000 there were 41,547,643 shares of the Registrant's Common
Stock outstanding.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of September 23, 2000 and December 25, 1999 .............................. 3
Statements of Operations for the three and nine months ended
September 23, 2000 and September 25, 1999 ............................................. 4
Statements of Cash Flows for the nine months ended
September 23, 2000 and September 25, 1999 ............................................. 5
Notes to Consolidated Financial Statements ................................................. 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .......................................................................... 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>
September 23, December 25,
2000 1999
------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 37,242 $ 26,019
Accounts receivable, less reserves of $24,174 and $20,391, respectively ... 386,672 388,063
Inventories ............................................................... 260,194 285,590
Deferred income taxes ..................................................... 19,982 15,520
Prepaid expenses and other ................................................ 62,143 63,617
----------- ----------
Total current assets ............................................ 766,233 778,809
Property and equipment, net of accumulated depreciation and amortization
of $70,084 and $60,702, respectively ..................................... 89,111 86,627
Goodwill and other intangibles, net of accumulated amortization
of $40,936 and $31,356, respectively ..................................... 280,293 295,113
Investments and other .......................................................... 48,669 43,553
----------- ----------
$ 1,184,306 $1,204,102
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 198,679 $ 198,983
Bank credit lines ......................................................... 29,359 41,527
Accruals:
Salaries and related expenses ........................................ 33,665 31,188
Merger, integration and restructuring costs .......................... 8,805 10,093
Other ................................................................ 66,655 64,710
Current maturities of long-term debt ...................................... 4,246 3,879
----------- ----------
Total current liabilities ....................................... 341,409 350,380
Long-term debt ................................................................. 272,176 318,218
Other liabilities .............................................................. 11,207 9,782
----------- ----------
Total liabilities ............................................... 624,792 678,380
----------- ----------
Minority interest .............................................................. 7,297 7,855
----------- ----------
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000,
issued: 41,447,857 and 40,768,306, respectively ...................... 414 407
Additional paid-in capital ................................................ 365,132 361,757
Retained earnings ......................................................... 212,297 167,809
Treasury stock, at cost, 62,479 shares .................................... (1,156) (1,156)
Accumulated comprehensive loss ............................................ (23,973) (10,359)
Deferred compensation ..................................................... (497) (591)
----------- ----------
Total stockholders' equity ...................................... 552,217 517,867
----------- ----------
$ 1,184,306 $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 Nine Months Ended
----------------------------- -----------------------------
September 23, September 25, September 23, September 25,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ............................................... $ 603,037 $ 578,794 $1,725,021 $1,674,439
Cost of sales ........................................... 417,927 404,830 1,187,976 1,163,008
----------- --------- ---------- ----------
Gross profit ....................................... 185,110 173,964 537,045 511,431
Operating expenses:
Selling, general and administrative ................ 150,779 141,452 447,670 423,222
Merger and integration costs ....................... - 5,993 585 13,467
Restructuring costs ................................ 5,387 - 5,387 -
----------- --------- ---------- ----------
Operating income .............................. 28,944 26,519 83,403 74,742
Other income (expense):
Interest income .................................... 2,322 1,386 4,342 5,207
Interest expense ................................... (4,841) (5,526) (15,540) (16,566)
Other - net ........................................ 108 207 (538) 315
----------- --------- ---------- ----------
Income before taxes on income, minority interest
and equity in losses of affiliates ............ 26,533 22,586 71,667 63,698
Taxes on income ......................................... 9,623 10,114 26,175 26,199
Minority interest in net income of subsidiaries ......... 338 353 1,375 1,272
Equity in losses of affiliates .......................... (334) (596) (100) (1,454)
----------- --------- ---------- ----------
Net income .............................................. $ 16,238 $ 11,523 $ 44,017 $ 34,773
=========== ========= ========== ==========
Net income per common share:
Basic .............................................. $ 0.39 $ 0.28 $ 1.07 $ 0.86
=========== ========= ========== ==========
Diluted ............................................ $ 0.39 $ 0.28 $ 1.06 $ 0.84
=========== ========= ========== ==========
Weighted average common shares outstanding:
Basic .............................................. 41,251 40,608 41,062 40,546
=========== ========= ========== ==========
Diluted ............................................ 41,860 41,104 41,568 41,437
=========== ========= ========== ==========
</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 23, September 25,
2000 1999
---------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................................... $ 44,017 $ 34,773
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................................. 24,002 22,479
Provision (benefit) for losses and allowances on accounts receivable ....... 3,715 (1,185)
Stock issued to ESOP trust ................................................. 2,193 1,768
(Benefit) provision for deferred income taxes .............................. (2,010) 3,074
Undistributed losses of affiliates ......................................... 100 1,454
Minority interest in net income of subsidiaries ............................ 1,375 1,272
Other ...................................................................... (45) (142)
Changes in operating assets and liabilities (net of acquisitions):
Increase in accounts receivable ................................................. (9,172) (22,092)
Decrease in inventories ......................................................... 17,907 30,150
(Increase) decrease in other current assets ..................................... (6,591) 12,862
Increase (decrease) in accounts payable and accruals ............................ 9,614 (40,847)
-------- --------
Net cash provided by operating activities ................................................. 85,105 43,566
-------- --------
Cash flows from investing activities:
Capital expenditures ................................................................. (19,516) (20,654)
Business acquisitions, net of cash acquired .......................................... (6,838) (128,113)
Proceeds from sale of fixed assets ................................................... - 8,583
Other ................................................................................ (2,390) 2,527
-------- --------
Net cash used in investing activities ..................................................... (28,744) (137,657)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ............................................. - 130,491
Principal payments on long-term debt ................................................. (3,909) (12,048)
Proceeds from common stock options exercised by
employees under stock option plans .............................................. 839 7,533
Proceeds from borrowings from banks ................................................. 9,714 142,485
Payments on borrowings from banks .................................................... (56,556) (157,234)
Other ................................................................................ 1,049 (6,293)
-------- --------
Net cash (used in) provided by financing activities ....................................... (48,863) 104,934
-------- --------
Net increase in cash and cash equivalents ................................................. 7,498 10,843
Effect of exchange rate changes on cash and cash equivalents .............................. 3,725 -
-------- --------
Cash and cash equivalents, beginning of period ............................................ 26,019 28,222
-------- --------
Cash and cash equivalents, end of period .................................................. $ 37,242 $ 39,065
======== ========
</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 the preparation of interim
reports. The results of operations for the nine months ended September 23, 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 nine months ended September 23, 2000, the Company completed three
acquisitions, none of which were considered 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 nine months ended September 25, 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 1999 actual and pro
forma results of operations.
6
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 nine months ended September 23, 2000, and
September 25, 1999, of approximately $0 and $585, and $5,993 and $13,467,
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 nine months ended September 23, 2000, and September 25, 1999, merger
and integration costs were approximately $0.00 and $0.01 per share, and $0.12
and $0.23 per share, respectively, on a diluted basis.
The following table shows amounts expensed, paid and charged against the
merger and integration accrual that were incurred and accrued in the third
quarter:
<TABLE>
<CAPTION>
Balance at Balance at
December 25, September 23,
1999 Provision Payments 2000
------------- --------- -------- -------------
<S> <C> <C> <C> <C>
Severance and other direct costs .. $ 1,694 $ - $ 1,018 $ 676
Direct transaction and other
integration costs ........... 8,399 585 4,091 4,893
------- ----- ------- -------
$ 10,093 $ 585 $ 5,109 $ 5,569
======== ===== ======= =======
</TABLE>
For the nine months ended September 23, 2000, 40 employees received
severance and 14 were owed severance at September 23, 2000.
Note 3. Plan of Restructuring
On August 1, 2000, the Company announced a comprehensive restructuring
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infractructure. This world wide initiative
includes the elimination of approximately 300 positions, including open
positions, or about 5% of the total workforce, throughout all levels within the
organization.
Through the three months ended September 23, 2000, the Company has incurred
one-time restructuring costs of approximately $5,400 ($3,400 after taxes, or
approximately $0.08 per diluted share), consisting of employee severance pay and
benefits, facility closing costs representing primarily lease termination and
asset write-off costs, outside professional and consulting fees.
7
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except employee and share data)
(unaudited)
Note 3. Plan of Restructuring - (Continued)
The Company expects to incur additional one-time restructuring costs of a
similar nature of approximately $8,600 ($5,000 after taxes, or $0.12 per diluted
share) during the fourth quarter of 2000, wherein the restructuring plan will be
substantially completed.
The following table shows amounts expensed, and paid for restructuring
costs that were incurred and accrued in the third quarter:
Balance at
September 23,
Provision Payments 2000
--------- -------- -------------
Severance costs ....................... $3,649 $1,313 $2,336
Facility closing costs ................ 1,130 230 900
Other professional and consulting costs 608 608 --
------ ------ ------
$5,387 $2,151 $3,236
====== ====== ======
For the three months ended September 23, 2000, 164 employees were separated
from the Company, received severance and 105 were owed severance pay and
benefits at September 23, 2000. These employees were from nearly all functional
areas of the Company's operations.
Note 4. Comprehensive Income
Net comprehensive income for the three and nine months ended September 23,
2000, and September 25, 1999, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ------------------------------
September 23, September 25, September 23, September 25,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income .................................. $16,238 $ 11,523 $ 44,017 $ 34,773
Foreign currency translation adjustments .... (6,941) (151) (13,614) (6,627)
------- -------- -------- --------
Net comprehensive income ................... $ 9,297 $ 11,372 $ 30,403 $ 28,146
======= ======== ======== ========
</TABLE>
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:
8
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except employee and share data)
(unaudited)
Note 5. Segment Data -- (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
September 23, September 25, September 23, September 25,
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Sales:
Healthcare distribution (1):
Dental .............................. $ 264,975 $ 259,182 $ 785,171 $ 773,067
Medical ............................. 218,355 194,492 560,684 515,097
Veterinary .......................... 14,450 13,275 42,212 39,472
International (2) ................... 89,343 95,876 286,753 298,307
---------------- ---------------- ---------------- ----------------
Total healthcare distribution .. 587,123 562,825 1,674,820 1,625,943
Technology (3) ........................... 15,914 15,969 50,201 48,496
---------------- ---------------- ---------------- ----------------
$ 603,037 $ 578,794 $ 1,725,021 $ 1,674,439
================ ================ ================ ================
</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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ----------------------------------
September 23, September 25, September 23, September 25,
2000 1999 2000 1999
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Operating income:
Healthcare distribution (includes merger,
integration and restrucuring costs
of $5,029, $5,993, $5,029,
$13,467, respectively) ..................... $ 23,301 $ 20,331 $ 65,692 $ 56,325
Technology (includes merger, integration and
restructuring costs of $358, $0,
$943, $0, respectively) .................... 5,643 6,188 17,711 18,417
--------------- --------------- ---------------- ---------------
Total ................................................ $ 28,944 $ 26,519 $ 83,403 $ 74,742
=============== =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
September 23, September 25,
2000 1999
----------------- ----------------
<S> <C> <C>
Total assets:
Healthcare distribution ......................... $ 1,150,260 $ 1,148,494
Technology ...................................... 90,593 57,007
---------------- ---------------
Total assets for reportable segments ................. 1,240,853 1,205,501
Receivables due from healthcare distribution
segment .................................... (49,694) (33,631)
Receivables due from technology segment ......... (6,853) (3,007)
---------------- ---------------
Consolidated total assets ............................ $ 1,184,306 $ 1,168,863
================ ===============
</TABLE>
9
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except employee and share data)
(unaudited)
Note 6. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 23, September 25, September 23, September 25,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic ................................................... 41,251 40,608 41,062 40,546
Effect of assumed conversion of employee
stock options ........................................ 609 496 506 891
----------- --------- ---------- ----------
Diluted ................................................. 41,860 41,104 41,568 41,437
=========== ========= ========== ==========
</TABLE>
Note 7. Subsequent Event
On October 23, 2000, the Company announced that in an ongoing effort to sharpen
its focus on the Company's core value-added distribution business it has sold
its 50% interest in dental anesthetic manufacturer HS Pharmaceutical, which owns
Novocol Pharmaceutical of Canada, Inc. (Novocol). The Company expects to take a
non-recurring loss on the divestiture of approximately $.05 per share in the
fourth quarter of 2000.
Note 8. Effect of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements".
In June 2000, the SEC delayed the effective date of SAB 101 to no later than the
fourth quarter of fiscal years beginning after December 15, 1999. The Company
does not expect the impact that the adoption of SAB 101 will have on its results
of operations and financial position to be material.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Plan of Restructuring
On August 1, 2000, the Company announced a comprehensive restructuring plan
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infrastructure. This world wide initiative
includes the elimination of approximately 300 positions, including open
positions, or about 5% of the total workforce, throughout all levels within the
organization.
Through the three months ended September 23, 2000, the Company has incurred
one-time restructuring costs of approximately $5.4 million ($3.4 million after
taxes, or approximately $0.08 per diluted share), of which approximately $3.7
million related to employee severance pay and benefits, $1.1 million related to
facility closing costs representing primarily lease termination and asset
write-off costs, and $0.6 million related to outside professional and consulting
fees directly related to the restructuring plan. Of the $5.4 million in
restructuring cost incurred during the three months ended September 23, 2000,
approximately $0.4 million related to the Technology segment of the Company's
business.
The Company expects to incur additional one-time restructuring costs of
approximately $8.6 million ($5.0 million after taxes, or $0.12 per diluted
share) during the fourth quarter of 2000, wherein the restructuring plan will be
substantially completed.
The Company estimates that annual savings derived from the restructuring
plan and the previously announced dental rightsizing plan will be approximately
$20.0 million on a pre-tax basis ($12.0 million after taxes), equating to
approximately $0.29 per diluted share.
Three Months Ended September 23, 2000, compared to Three Months Ended
September 25, 1999
Net sales increased $24.2 million, or 4.2%, to $603.0 million for the three
months ended September 23, 2000, from $578.8 million for the three months ended
September 25, 1999. Net sales of the Company's healthcare distribution business
increased approximately $24.3 million, or 4.3%. As part of this increase
approximately $23.9 million represented a 12.3% increase in the Company's
Medical business, $5.7 million represented a 2.2% increase in its Dental
business, $1.2 million represented a 8.9% increase in its Veterinary business,
and $(6.5) million represented a 6.8% decrease in its International business.
The increase in medical net sales is attributable to strong sales to the
Company's core physician office and alternate care markets. The increase in
dental net sales was primarily due to improved dental equipment sales and
service. 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 due to unfavorable foreign exchange rates offset partially by
increased account penetration in Germany, France, the United Kingdom and Spain.
Unfavorable exchange rate translation adjustments decreased net sales in the
international market by approximately $12.6 million. Had net sales for the
international market been translated at the same rates in effect during the
third quarter of 1999, international net sales would have increased by 6.3%. The
technology business remained unchanged for the three months ended September 23,
2000, when compared to the three months ended September 25, 1999, when sales
were exceptionally strong due to Y2K conversions.
Gross profit increased by $11.1 million, or 6.4%, to $185.1 million for the
three months ended September 23, 2000, from $174.0 million for the three months
ended September 25, 1999. Gross profit margin increased 0.6% to 30.7% from 30.1%
for the same period last year. Healthcare distribution gross profit increased
$11.5 million, or 7.1%, to $174.0 million for the three months ended September
23, 2000, from $162.5 million for the three months ended September 25, 1999.
Healthcare distribution gross profit margin increased by 0.7% to 29.6% for the
three months ended September 23, 2000, from 28.9% for the three months ended
September 25, 1999, primarily due to changes in sales mix. Technology gross
profit decreased by $0.4 million or 3.0% to $11.1 million for the three months
ended September 23, 2000, from $11.5 million for the three months ended
September 25, 1999, primarily due to sales volume. Technology gross profit
margins decreased by 1.9% to 69.7% for three months ended September 23, 2000,
from 71.6% for the three months ended September 25, 1999, primarily due to
changes in sales mix.
Selling, general and administrative expenses increased by $9.3 million, or
6.6%, to $150.8 million for the three months ended September 23, 2000, from
$141.5 million for the three months ended September 25, 1999. Selling and
shipping expenses increased by $4.2 million, or 4.4%, to $98.7 million for the
three months ended September 23, 2000, from $94.5 million for the three months
11
<PAGE>
ended September 25, 1999. As a percentage of net sales, selling and shipping
expenses increased 0.1% to 16.4% for the three months ended September 23, 2000,
from 16.3% for the three months ended September 25, 1999. General and
administrative expenses increased $5.1 million, or 10.9%, to $52.1 million for
the three months ended September 23, 2000, from $47.0 million for the three
months ended September 25, 1999. As a percentage of net sales, general and
administrative expenses increased 0.5% to 8.6% for the three months ended
September 23, 2000, from 8.1% for the three months ended September 25, 1999.
Other income (expense) - net changed by $1.5 million, to $(2.4) million for
the three months ended September 23, 2000, compared to $(3.9) million for the
three months ended September 25, 1999, primarily due to lower interest expense,
as a result of reduced debt levels and higher finance charge income on
receivables.
Equity in losses of affiliates increased $0.3 million to $(0.3)
million for the three months ended September 23, 2000, from $(0.6) million for
the three months ended September 25, 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 September 23, 2000, the Company's effective tax
rate was 36.3%. For the three months ended September 25, 1999, the Company's
effective tax rate was 44.8%. Excluding merger, integration and restructuring
costs, net of applicable taxes, the Company's effective tax rate for the three
months ended September 23, 2000, and September 25, 1999, would have been 36.5%
and 38.8%, respectively. The difference between the Company's effective tax
rate, excluding certain non-deductible merger, integration and restructuring
costs, and the Federal statutory rate relates primarily to state income taxes.
Excluding the merger, integration and restructuring costs, net of taxes, pro
forma net income, and pro forma net income per diluted common share would have
been $19.6 million and $0.47, and $16.6 million and $0.40, respectively for the
three months ended September 23, 2000, and September 25, 1999.
Nine Months Ended September 23, 2000, compared to Nine Months Ended
September 25, 1999
Net sales increased $50.6 million, or 3.0%, to $1,725.0 million for the nine
months ended September 23, 2000, from $1,674.4 million for the nine months ended
September 25, 1999. Of the $50.6 million increase, approximately $48.8 million,
or 96.4%, represented a 3.0% increase in the Company's healthcare distribution
business. As part of this increase approximately $45.5 million represented an
8.9% increase in the Company's Medical business, $12.1 million represented a
1.6% increase in its Dental business, $2.7 million represented a 6.9% increase
in its Veterinary business, and $(11.5) million represented a 3.9% decrease in
its International business. The increase in medical net sales is attributable to
strong sales to the Company's core physician office and alternate care markets.
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
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decrease in net sales was 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 $30.6 million. Had net sales for the international
market been translated at the same rates in effect during the first nine 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
$1.7 million, or 3.5%, to $50.2 million for the nine months ended September 23,
2000, from $48.5 million for the nine months ended September 25, 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 $25.6 million, or 5.0%, to $537.0 million for the
nine months ended September 23, 2000, from $511.4 million for the nine months
ended September 25, 1999. Gross profit margin increased 0.6% to 31.1%, from
30.5% for the same period last year. Healthcare distribution gross profit
increased $24.4 million, or 5.1%, to $502.7 million for the nine months ended
September 23, 2000, from $478.3 million for the nine months ended September 25,
1999. Healthcare distribution gross profit margin increased by 0.6% to 30.0% for
the nine months ended September 23, 2000, from 29.4% for the nine months ended
September 25, 1999, primarily due to changes in sales mix. Technology gross
profit increased by $1.2 million, or 3.6%, to $34.3 million for the nine months
ended September 23, 2000, from $33.1 million for the nine months ended September
25, 1999. Technology gross profit margins increased by 0.1% to 68.4% for nine
months ended September 23, 2000, from 68.3% for the nine months ended September
25, 1999, primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $24.5 million, or
5.8%, to $447.7 million for the nine months ended September 23, 2000, from
$423.2 million for the nine months ended September 25, 1999. Selling and
shipping expenses increased by $9.7 million, or 3.4%, to $294.7 million for the
nine months ended September 23, 2000, from $285.0 million for the nine months
ended September 25, 1999. As a percentage of net sales, selling and shipping
expenses increased 0.1% to 17.1% for the nine months ended September 23, 2000,
from 17.0% for the nine months ended September 25, 1999. General and
administrative expenses increased $14.8 million, or 10.7%, to $153.0 million for
the nine months ended September 23, 2000, from $138.2 million for the nine
months ended September 25, 1999. As a percentage of net sales, general and
administrative expenses increased 0.6% to 8.9% for the nine months ended
September 23, 2000, from 8.3% for the nine months ended September 25, 1999.
Other income (expense) - net changed by $0.7 million, to $(11.7) million for
the nine months ended September 23, 2000, compared to $(11.0) million for the
nine months ended September 25, 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 losses of affiliates increased $1.3 million to $(0.1) million for
the nine months ended September 23, 2000 from $(1.4) million for the nine months
ended September 25, 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.
Excluding the merger, integration and restructuring costs, net of taxes, pro
forma net income, and pro forma net income per diluted common share would have
been $48.0 million and $1.15 and $44.3 million and $1.07, respectively, for the
nine months ended September 23, 2000 and September 25, 1999.
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For the nine months ended September 23, 2000, the Company's effective tax
rate was 36.5%. For the nine months ended September 25, 1999, the Company's
effective tax rate was 41.1%. Excluding merger, integration and restructuring
costs net of applicable taxes, the Company's effective tax rate for the nine
months ended September 23, 2000, and September 25, 1999, would have been 36.3%
and 39.1%, respectively. The difference between the Company's effective tax
rate, excluding certain non-deductible merger, integration and restructuring
costs, and the Federal statutory rate relates primarily to state income taxes.
Subsequent Event
On October 23, 2000, the Company announced that in an ongoing effort to
sharpen its focus on the Company's core value-added distribution business it has
sold its 50% interest in dental anesthetic manufacturer HS Pharmaceutical, which
owns Novocol Pharmaceutical of Canada, Inc. (Novocol). The Company expects to
take a non-recurring loss on the divestiture of approximately $.05 per share in
the fourth quarter of 2000.
Effect of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". In
June 2000, the SEC delayed the effective date of SAB 101 to no later than the
fourth quarter of fiscal years beginning after December 15, 1999. The Company
does not expect the impact that the adoption of SAB 101 will have on its results
of operations and financial position to be material.
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
systems, product and customer concerns. The Company expects to achieve timely
Euro information systems 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.
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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, a private placement loan, and stock
issuances.
Net cash provided by operating activities for the nine months ended
September 23, 2000, of $85.1 million resulted primarily from net income of $44.0
million, non-cash charges of $29.3 million, and an increase in net working
capital of $11.8 million. The increase in working capital was primarily due to a
decrease in inventories of $17.9 million and an increase in accounts payable,
and accruals of $9.6 million, partially offset by an increase in accounts
receivable of $9.1 million, and an increase in other current assets of $6.6
million. The Company anticipates future increases in working capital
requirements as a result of sales growth and special inventory forward buy-in
opportunities.
Net cash used in investing activities for the nine months ended September
23, 2000, of $28.7 million resulted primarily from cash used for capital
expenditures and contingent earn-out payments for past acquisitions. 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 nine months ended September
23, 2000, of $48.9 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 exercises.
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 23, 2000, of $37.2
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
$15.1 million at September 23, 2000. The Company also has one uncommitted bank
line totaling $15.0 million, upon which nothing has been borrowed at September
23, 2000. Certain of the Company's subsidiaries have revolving credit facilities
that total approximately $49.0 million at September 23, 2000, under which $29.4
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 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.
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 sufficient liquidity to meet its short and
long-term capital needs.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the disclosures made in our annual 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 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
third fiscal quarter of 2000, the Company was named a defendant in approximately
seventy-six such cases. Of these product liability claims, fifty-nine 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 manufacturers 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 ("District Court"), 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 District 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. In November of 1999, the
Company filed an interlocutory appeal of the District Court's determination to
the Texas Court of Appeals on the issue of whether this case was properly
certified as a class action. On September 14, 2000, the Court of Appeals
affirmed the District Court's certification order. The Company plans to pursue
an appeal of the class certification order before the Texas Supreme Court.
During the appeal of the class certification order, 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.
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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: November 6, 2000
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