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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
FOR THE PERIOD ENDED June 29, 2002
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 08, 2002 there were 43,799,051 shares of the Registrant's Common
Stock outstanding.
HENRY SCHEIN, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of June 29, 2002 and December 29, 2001..... 3
Statements of Income and Comprehensive Income for the three
and six months ended June 29, 2002 and June 30, 2001.... 4
Statements of Cash Flows for the six months ended
June 29, 2002 and June 30, 2001......................... 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 4. Submission of Matters to a Vote of Security Holders............... 19
ITEM 6. Exhibits and Reports on Form 8-K.................................. 20
Signature......................................................... 20
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 29, December 29,
2002 2001
----------- -----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 132,508 $ 193,367
Marketable securities..................................................... 14,640 -
Accounts receivable, less reserves of $33,147 and $31,929, respectively... 362,744 363,700
Inventories............................................................... 314,512 291,231
Deferred income taxes..................................................... 26,227 25,751
Prepaid expenses and other................................................ 59,518 52,922
----------- -----------
Total current assets................................................. 910,149 926,971
Property and equipment, net of accumulated depreciation and amortization
of $94,739 and $90,823, respectively...................................... 135,409 117,980
Goodwill, net.................................................................. 295,319 279,981
Other intangibles, net of accumulated amortization
of $3,881 and $3,348, respectively........................................ 8,834 8,023
Investments and other.......................................................... 60,446 52,473
----------- -----------
$ 1,410,157 $ 1,385,428
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 204,959 $ 263,190
Bank credit lines......................................................... 3,914 4,025
Accruals:
Salaries and related expenses........................................ 42,155 41,602
Merger and integration, and restructuring costs...................... 4,706 5,867
Acquisition earnout payments......................................... - 26,800
Other................................................................ 104,446 80,355
Current maturities of long-term debt...................................... 2,548 15,223
----------- -----------
Total current liabilities............................................ 362,728 437,062
Long-term debt................................................................. 242,990 242,169
Other liabilities.............................................................. 19,622 18,954
----------- -----------
Total liabilities.................................................... 625,340 698,185
----------- -----------
Minority interest.............................................................. 7,882 6,786
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000,
issued and outstanding: 0 and 0, respectively........................ - -
Common stock, $.01 par value, authorized 120,000,000,
issued: 43,773,451 and 42,745,204, respectively...................... 437 427
Additional paid-in capital................................................ 428,218 393,047
Retained earnings......................................................... 360,198 312,402
Treasury stock, at cost, 62,479 shares.................................... (1,156) (1,156)
Accumulated comprehensive loss............................................ (10,483) (23,922)
Deferred compensation..................................................... (279) (341)
----------- -----------
Total stockholders' equity........................................... 776,935 680,457
----------- -----------
$ 1,410,157 $ 1,385,428
=========== ===========
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
---------------------- --------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- --------- ----------- -----------
Net sales.................................................... $ 671,432 $ 606,285 $ 1,318,525 $ 1,200,180
Cost of sales................................................ 479,036 439,393 947,739 873,931
--------- --------- ----------- -----------
Gross profit............................................ 192,396 166,892 370,786 326,249
Operating expenses:
Selling, general and administrative..................... 145,407 131,620 288,599 263,394
--------- --------- ----------- -----------
Operating income................................... 46,989 35,272 82,187 62,855
Other income (expense):
Interest income......................................... 2,481 3,177 4,920 4,418
Interest expense........................................ (4,367) (4,896) (9,195) (10,264)
Other - net............................................. 706 651 140 297
--------- --------- ----------- -----------
Income before taxes on income, minority interest
and equity in earnings of affiliates.......... 45,809 34,204 78,052 57,306
Taxes on income.............................................. 16,996 12,656 29,060 21,204
Minority interest in net income of subsidiaries.............. 932 794 1,501 1,325
Equity in earnings of affiliates............................. 185 156 305 265
--------- --------- ----------- -----------
Net income................................................... $ 28,066 $ 20,910 $ 47,796 $ 35,042
========= ========= =========== ===========
Comprehensive income:
Net income................................................. $ 28,066 $ 20,910 $ 47,796 $ 35,042
Foreign currency translation adjustments............... 14,699 (2,395) 13,382 (7,329)
Other.................................................. 118 128 57 (91)
--------- --------- ----------- -----------
Comprehensive income......................................... $ 42,883 $ 18,643 $ 61,235 $ 27,622
========= ========= =========== ===========
Net income per common share:
Basic................................................... $ 0.65 $ 0.49 $ 1.11 $ 0.83
========= ========= =========== ===========
Diluted................................................. $ 0.63 $ 0.48 $ 1.07 $ 0.81
========= ========= =========== ===========
Weighted average common shares outstanding:
Basic................................................... 43,389 42,363 43,090 42,168
========= ========= =========== ===========
Diluted................................................. 44,747 43,543 44,559 43,125
========= ========= =========== ===========
See accompanying notes to consolidated financial statements.
4
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
---------------------
June 29, June 30,
2002 2001
--------- --------
Cash flows from operating activities:
Net income................................................................. $ 47,796 $ 35,042
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................... 13,009 17,056
Provision for losses and allowances on accounts receivable....... 1,219 950
Benefit for deferred income taxes................................ (293) (1,581)
Undistributed earnings of affiliates............................ (305) (265)
Minority interest in net income of subsidiaries.................. 1,501 1,325
Other............................................................ (123) 83
Changes in operating assets and liabilities (net of purchase acquisitions):
Decrease (increase) in accounts receivable............................ 4,071 (375)
(Increase) decrease in inventories.................................... (17,760) 13,032
(Increase) decrease in other current assets........................... (4,707) 13,774
Decrease in accounts payable and accruals............................. (31,027) (49,762)
--------- --------
Net cash provided by operating activities....................................... 13,381 29,279
--------- --------
Cash flows from investing activities:
Capital expenditures....................................................... (28,120) (12,986)
Business acquisitions, net of cash acquired................................ (34,887) -
Purchase of marketable securities with maturities of
more than three months................................................ (20,639) -
Other...................................................................... (574) (1,031)
--------- --------
Net cash used in investing activities........................................... (84,220) (14,017)
--------- --------
Cash flows from financing activities:
Principal payments on long-term debt....................................... (13,604) (3,889)
Proceeds from issuance of stock upon exercise of stock
options by employees.................................................. 26,490 10,381
Proceeds from borrowings from banks........................................ 481 5,340
Payments on borrowings from banks.......................................... (916) (10,868)
Other...................................................................... (426) (175)
--------- --------
Net cash provided by financing activities....................................... 12,025 789
--------- --------
Net (decrease) increase in cash and cash equivalents............................ (58,814) 16,051
Effect of foreign exchange rate changes on cash................................. (2,045) 1,434
Cash and cash equivalents, beginning of period.................................. 193,367 58,362
--------- --------
Cash and cash equivalents, end of period........................................ $ 132,508 $ 75,847
========= ========
See accompanying notes to consolidated financial statements.
5
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Henry Schein,
Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company").
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth therein. These consolidated financial statements are condensed and
therefore do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. The consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
supplementary data included in the Company's Annual Report on Form 10-K for the
year ended December 29, 2001. The Company follows the same accounting policies
in preparation of interim financial statements. The results of operations and
cash flows for the six months ended June 29, 2002 are not necessarily indicative
of the results to be expected for the fiscal year ending December 28, 2002 or
any other period. Certain amounts from prior periods have been reclassified to
conform to the current period's presentation.
NOTE 2. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141"), and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"), effective for fiscal
years beginning after December 15, 2001. Under the new standards, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with FAS 142. Other
intangible assets continue to be amortized over their estimated useful lives.
The Company adopted the new standards beginning in the first quarter of
fiscal 2002. Effective with the adoption of FAS 142, goodwill, which is
substantially related to the healthcare distribution segment, is no longer
amortized but is instead subject to an annual impairment test. The Company has
reassessed the estimated useful lives of its intangible assets, which primarily
consist of non-compete agreements, and no changes have been deemed necessary.
The Company completed the transitional goodwill impairment test in connection
with the adoption of FAS 142 during the second quarter of fiscal 2002, and has
determined that there is no impairment as of the adoption date, December 30,
2001.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 2--GOODWILL AND INTANGIBLE ASSETS--(CONTINUED)
Other intangible assets as of June 29, 2002 and December 29, 2001 are
as follows:
June 29, 2002 December 29, 2001
---------------------- ----------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- ------------ -------- ------------
Other intangible assets:
Non-compete agreements... $ 11,614 $ (3,318) $ 10,426 $ (2,850)
Other.................... 1,101 (563) 945 (498)
-------- --------- -------- ---------
Total....................... $ 12,715 $ (3,881) $ 11,371 $ (3,348)
======== ========= ======== =========
Amortization of other intangible assets for the six months ended June 29,
2002 and June 30, 2001 was approximately $563 and $403, respectively. The annual
amortization expense expected for the years 2002 through 2006 is $996, $956,
$873, $639, and $403, respectively.
The changes in the carrying amount of goodwill for the six months ended
June 29, 2002 are as follows:
Healthcare
Distribution Technology Total
------------ ---------- ---------
Balance as of December 29, 2001............ $ 279,666 $ 315 $ 279,981
Adjustments to goodwill:
Acquisitions cost incurred during six
months ended June 29, 2002........ 7,756 - 7,756
Foreign currency translation.......... 7,824 - 7,824
Other................................. (242) - (242)
--------- ------- ---------
Balance as of June 29, 2002................ $ 295,004 $ 315 $ 295,319
========= ======= =========
The acquisition costs incurred during the six months ended June 29, 2002
related to the acquisition of a dental consumable supply business, increased
ownership interest in a consolidated subsidiary and contingent earnout payments
relating to a prior acquisition. The acquisition of the dental consumable supply
business was not considered material.
With the adoption of FAS 142, the Company ceased amortization of goodwill
as of December 30, 2001. The following table presents the results of the Company
for all periods presented on a comparable basis:
Three Months Ended Six Months Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net income...................................... $ 28,066 $ 20,910 $ 47,796 $ 35,042
Add back goodwill amortization, net of
tax provision.............................. - 1,824 - 3,648
-------- -------- -------- --------
Adjusted net income............................. $ 28,066 $ 22,734 $ 47,796 $ 38,690
======== ======== ======== ========
Diluted net income per share:
Net income................................... $ 0.63 $ 0.48 $ 1.07 $ 0.81
Add back goodwill amortization, net of
tax provision........................... - 0.04 - 0.09
-------- -------- -------- --------
Adjusted diluted net income per share........... $ 0.63 $ 0.52 $ 1.07 $ 0.90
======== ======== ======== ========
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 3. BUSINESS ACQUISITIONS
In connection with prior years' acquisitions, the Company incurred certain
merger and integration costs. The following table shows amounts paid against the
merger and integration accrual during the six months ended June 29, 2002:
Balance at Balance at
December 29, June 29,
2001 Payments 2002
----------- -------- ----------
Severance and other direct costs... $ 365 $ (103) $ 262
Direct transaction and other
integration costs............ 2,183 (437) 1,746
------- ------- -------
$ 2,548 $ (540) $ 2,008
======= ======= =======
For the six months ended June 29, 2002, one employee received severance and
was owed severance at June 29, 2002.
NOTE 4. PLAN OF RESTRUCTURING
On August 1, 2000, the Company announced a comprehensive restructuring plan
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infrastructure. In addition to closing or
downsizing certain facilities, this world-wide initiative included the
elimination of approximately 300 positions, including open positions, or about
5% of the total workforce, throughout all levels within the organization. The
restructuring plan was substantially completed at December 30, 2000.
The following table shows amounts paid against the restructuring accrual
during the six months ended June 29, 2002:
Balance at Balance at
December 29, June 29,
2001 Payments 2002
------------ -------- ----------
Severance costs (1)...................... $ 633 $ (230) $ 403
Facility closing costs (2)............... 2,645 (390) 2,255
Other ................................... 41 (1) 40
------- ------- -------
$ 3,319 $ (621) $ 2,698
======= ======= =======
- ----------
(1) Represents salaries and related benefits for employees separated from the
Company.
(2) Represents costs associated with the closing of certain equipment branches
(primarily lease termination costs).
For the six months ended June 29, 2002, four employees received severance
and one was owed severance at June 29, 2002.
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 5. SEGMENT DATA
The Company has two reportable segments: healthcare distribution and
technology. The healthcare distribution segment, which is comprised of the
Company's dental, medical and international business groups, distributes
healthcare products (primarily consumable) and services to office-based
healthcare practitioners and professionals in the combined North American and
international markets. Products, which are similar for each business group, are
maintained and distributed from strategically located distribution centers. The
technology segment consists primarily of the Company's practice management
software business and certain other value-added products and services that 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:
Three Months Ended Six Months Ended
--------------------- -------------------------
June 29, June 30, June 29, June 30,
2002 2001 (1) 2002 2001 (1)
--------- --------- ----------- -----------
Net Sales:
Healthcare distribution (2):
Dental (3)....................... $ 306,287 $ 280,146 $ 601,568 $ 549,332
Medical (4)...................... 242,683 215,761 474,105 424,435
International (5)................ 106,779 95,729 212,617 198,473
--------- --------- ----------- -----------
Total healthcare distribution.. 655,749 591,636 1,288,290 1,172,240
Technology (6)..................... 15,683 14,649 30,235 27,940
--------- --------- ----------- -----------
$ 671,432 $ 606,285 $ 1,318,525 $ 1,200,180
========= ========= =========== ===========
- ----------
(1) Reclassified to conform to current period presentation.
(2) Includes consumable products, small equipment, laboratory products, large
dental equipment, branded and generic pharmaceuticals, surgical products,
diagnostic tests, infection control and vitamins.
(3) Consists of products sold in the U.S. and Canadian Dental markets.
(4) Consists of products sold in the U.S. Medical and Veterinary markets.
(5) Consists of products primarily sold in the European Dental and Medical
(including Veterinary) markets.
(6) Consists of practice management software and other value-added products and
services that are distributed primarily to healthcare professionals in the
U.S. and Canadian markets.
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 5. SEGMENT DATA -- (CONTINUED)
Three Months Ended Six Months Ended
------------------------ ---------------------------
June 29, June 30, June 29, June 30,
2002 2001 (1) 2002 2001 (1)
-------- -------- ----------- -----------
Operating income:
Healthcare distribution... $ 40,237 $ 29,503 $ 70,093 $ 52,079
Technology................ 6,752 5,769 12,094 10,776
-------- -------- ----------- -----------
Total.......................... $ 46,989 $ 35,272 $ 82,187 $ 62,855
======== ======== =========== ===========
June 29, June 30,
2002 2001 (1)
----------- -----------
Total assets:
Healthcare distribution................................ $ 1,385,447 $ 1,181,218
Technology............................................. 101,160 87,537
----------- -----------
Total assets for reportable segments.............. 1,486,607 1,268,755
Receivables due from healthcare distribution segment... (74,880) (58,821)
Receivables due from technology segment................ (1,570) (8,147)
----------- -----------
Consolidated total assets................................... $ 1,410,157 $ 1,201,787
=========== ===========
- ----------
(1) Reclassified to conform to current period presentation.
NOTE 6. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
Three Months Ended Six Months Ended
------------------ -----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Basic...................................... 43,389 42,363 43,090 42,168
Effect of assumed conversion of employee
stock options......................... 1,358 1,180 1,469 957
------ ------ ------ ------
Diluted.................................... 44,747 43,543 44,559 43,125
====== ====== ====== ======
Options to purchase approximately 6 and 1,084 shares of common stock at
prices ranging from $48.25 to $49.85 and $37.50 to $46.00 per share, which were
outstanding during the three months ended June 29, 2002 and June 30, 2001,
respectively, were excluded from the computation of diluted earnings per share.
Options to purchase approximately 16 and 1,535 shares of common stock at prices
ranging from $45.96 to $49.85 and $34.52 to $46.00 per share, which were
outstanding during the six months ended June 29, 2002 and June 30, 2001,
respectively, were excluded from the computation of diluted earnings per share.
In each of the respective periods, the options' exercise prices exceeded the
fair market value of the Company's common stock.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net sales increased $65.1 million, or 10.7%, to $671.4 million for the three
months ended June 29, 2002 from $606.3 million for the three months ended June
30, 2001. Of the $65.1 million increase, approximately $64.1 million, or 98.5%,
represented a 10.8% increase in the Company's healthcare distribution business.
As part of this increase approximately $26.9 million represented a 12.5%
increase in the Company's medical business, $26.1 million represented a 9.3%
increase in its dental business, and $11.1 million represented an 11.5% increase
in its international business. The increase in medical net sales was primarily
attributable to increased sales to core physicians' office and alternate care
markets. In the dental market, the increase in net sales was primarily due to
increased account penetration. In the international market, the increase in net
sales was primarily due to increased account penetration in Germany, United
Kingdom, Australia, and France, and to favorable exchange rates to the U.S.
dollar. Had net sales for the international market been translated at the same
rates as 2001, international net sales would have increased by 7.5%. The
remaining increase in second quarter 2002 net sales was due to the technology
business, which increased $1.0 million, or 7.1%, to $15.7 million for the three
months ended June 29, 2002, from $14.7 million for the three months ended June
30, 2001. The increase in technology and value-added product net sales was
primarily due to increased sales of practice management software products and
related services.
Gross profit increased by $25.5 million, or 15.3%, to $192.4 million for the
three months ended June 29, 2002 from $166.9 million for the three months ended
June 30, 2001. Gross profit margin increased 1.2% to 28.7% from 27.5% for the
same period last year. Healthcare distribution gross profit increased $23.9
million, or 15.3%, to $180.5 million for the three months ended June 29, 2002
from $156.6 million for the three months ended June 30, 2001, primarily due to
sales volume. Healthcare distribution gross profit margin increased by 1.0% to
27.5% for the three months ended June 29, 2002 from 26.5% for the three months
ended June 30, 2001, primarily due to changes in sales mix and purchasing
efficiencies. Technology gross profit increased by $1.6 million or 15.5% to
$11.9 million for the three months ended June 29, 2002 from $10.3 million for
the three months ended June 30, 2001 primarily due to sales volume and sales of
higher margin items. Technology gross profit margins increased by 5.2% to 75.6%
for three months ended June 29, 2002 from 70.4% for the three months ended June
30, 2001, primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $13.8 million, or
10.5%, to $145.4 million for the three months ended June 29, 2002 from $131.6
million for the three months ended June 30, 2001. Selling and shipping expenses
increased by $8.9 million, or 10.9%, to $90.6 million for the three months ended
June 29, 2002 from $81.7 million for the three months ended June 30, 2001,
primarily due to sales volume. As a percentage of net sales, selling and
shipping expenses remained constant at 13.5% for the three months ended June 29,
2002 compared to the three months ended June 30, 2001. General and
administrative expenses increased $4.9 million, or 9.8%, to $54.8 million for
the three months ended June 29, 2002 from $49.9 million for the three months
ended June 30, 2001, primarily due to sales volume. As a percentage of net
sales, general and administrative expenses remained constant at 8.2% for the
three months ended June 29, 2002 compared to the three months ended June 30,
2001.
11
Other income (expense) - net increased by $0.1 million, to $(1.2) million
for the three months ended June 29, 2002, compared to $(1.1) million for the
three months ended June 30, 2001, due primarily to lower interest income reduced
by lower interest expense and foreign currency gains.
Equity in earnings of affiliates was substantially unchanged from the prior
period.
For the three months ended June 29, 2002, the Company's effective tax rate
was 37.1%. For the three months ended June 30, 2001, the Company's effective tax
rate was 37.0%. The difference between the Company's effective tax rates and the
Federal statutory rate relates primarily to state income taxes.
SIX MONTHS ENDED JUNE 29, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net sales increased $118.3 million, or 9.9%, to $1,318.5 million for the six
months ended June 29, 2002 from $1,200.2 million for the six months ended June
30, 2001. Of the $118.3 million increase, approximately $116.0 million, or
98.1%, represented a 9.9% increase in the Company's healthcare distribution
business. As part of this increase approximately $52.2 million represented a
9.5% increase in its dental business, $49.7 million represented an 11.7%
increase in the Company's medical business, and $14.1 million represented a 7.1%
increase in its international business. In the dental market, the increase in
net sales was primarily due to increased account penetration. The increase in
medical net sales was primarily attributable to increased sales to core
physicians' office and alternate care markets. In the international market, the
increase in net sales was primarily due to increased account penetration in
Germany, United Kingdom, Australia, and France. Had net sales for the
international market been translated at the same rates as 2001, international
net sales would have increased by 6.8%. The remaining increase in 2002 net sales
was due to the technology business, which increased $2.3 million, or 8.2%, to
$30.2 million for the six months ended June 29, 2002, from $27.9 million for the
six months ended June 30, 2001. The increase in technology and value-added
product net sales was primarily due to increased practice management software
products and related services.
Gross profit increased by $44.6 million, or 13.7%, to $370.8 million for
the six months ended June 29, 2002 from $326.2 million for the six months ended
June 30, 2001. Gross profit margin increased 0.9% to 28.1% from 27.2% for the
same period last year. Healthcare distribution gross profit increased $42.1
million, or 13.8%, to $348.0 million for the six months ended June 29, 2002 from
$305.9 million for the six months ended June 30, 2001, primarily due to sales
volume. Healthcare distribution gross profit margin increased by 0.9% to 27.0%
for the six months ended June 29, 2002 from 26.1% for the six months ended June
30, 2001, primarily due to changes in sales mix and purchasing efficiencies.
Technology gross profit increased by $2.5 million or 12.3% to $22.8 million for
the six months ended June 29, 2002 from $20.3 million for the six months ended
June 30, 2001 primarily due to sales volume and sales of higher margin items.
Technology gross profit margins increased by 2.6% to 75.4% for the six months
ended June 29, 2002 from 72.8% for the six months ended June 30, 2001, primarily
due to changes in sales mix.
Selling, general and administrative expenses increased by $25.2 million, or
9.6%, to $288.6 million for the six months ended June 29, 2002 from $263.4
million for the six months ended June 30, 2001. Selling and shipping expenses
increased by $19.4 million, or 12.2%, to $178.7 million for the six months ended
June 29, 2002 from $159.3 million for the six months ended June 30, 2001,
primarily due to sales
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volume. As a percentage of net sales, selling and shipping expenses increased
0.3% to 13.6% for the six months ended June 29, 2002 from 13.3% for the six
months ended June 30, 2001. General and administrative expenses increased $5.8
million, or 5.6%, to $109.9 million for the six months ended June 29, 2002 from
$104.1 million for the six months ended June 30, 2001, primarily due to sales
volume. As a percentage of net sales, general and administrative expenses
decreased 0.4% to 8.3% for the six months ended June 29, 2002 from 8.7% for the
six months ended June 30, 2001.
Other income (expense) - net decreased by $1.4 million, to $(4.1) million
for the six months ended June 29, 2002, compared to $(5.5) million for the six
months ended June 30, 2001, due primarily to lower interest expense and
increased interest income.
Equity in earnings of affiliates was substantially unchanged from the prior
period.
For the six months ended June 29, 2002, the Company's effective tax rate was
37.2%. For the six months ended June 30, 2001, the Company's effective tax rate
was 37.0%. The difference between the Company's effective tax rates and the
Federal statutory rate relates primarily to state income taxes.
SEASONALITY
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software and equipment, year-end promotions
and purchasing patterns of office-based healthcare practitioners and are
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, timing of purchases, special promotional campaigns, seasonal products,
fluctuations in exchange rates associated with international operations and
adverse weather conditions.
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.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, and special inventory forward
buy-in opportunities, (b) acquisitions, and (c) capital expenditures. Since
sales tend to be strongest during the fourth quarter and special inventory
forward buy-in opportunities are most prevalent just before the end of the year,
the Company's working capital requirements have been generally higher from the
end of the third quarter to the end of the first quarter of the following year.
The Company has financed its business primarily through operations, its
revolving credit facilities, private placement loans and stock issuances.
Net cash provided by operating activities for the six months ended June 29,
2002 of $13.4 million resulted primarily from net income of $47.8 million and
non-cash charges of approximately $15.0 million, offset by a net increase of
cash used in operating items of working capital of approximately $49.4 million.
The increase in working capital needs was primarily due to a decrease in
accounts payable and accruals of $31.0 million, a $17.8 million increase in
inventory, due primarily to stocking of the Company's newly opened distribution
center, and a $4.7 million increase in other current assets, partially offset by
a $4.1 million decrease in accounts receivable. The Company's accounts
receivable days sales outstanding ratio improved to 49.96 days for the six
months ended June 29, 2002 from 55.60 days for the six months ended June 30,
2001. The Company's inventory turns were 6.32 turns for the six months ended
June 29, 2002 compared to 6.48 turns for the six months ended June 30, 2001. The
Company anticipates future increases in working capital requirements as a result
of its continued sales growth and special inventory forward buy-in
opportunities.
Net cash used in investing activities for the six months ended June 29,
2002 of $84.2 million resulted primarily from cash used for business acquisition
related payments of $34.9 million, of which $27.4 million represented contingent
earnout payments associated with an acquisition made in a prior year, capital
expenditures of $28.1 million, of which approximately $11.6 million was for the
purchase of a building used for the Company's corporate headquarters, and the
purchases of United States government and agency bonds rated AAA by Moody's (or
an equivalent rating) and commercial paper rated P-1 by Moody's (or an
equivalent rating) with maturities of more than three months of $20.6 million.
The Company expects that it will invest more than $50.0 million during the year
ending December 28, 2002 in capital projects to modernize and expand facilities,
on computer infrastructure systems and to integrate operations.
Net cash provided by financing activities for the six months ended June 29,
2002 of $12.0 million resulted primarily from proceeds from the issuance of
stock upon exercise of stock options of $26.5 million, offset primarily by debt
repayments of $14.5 million.
Certain holders of minority interests in acquired entities or ventures have
the right at certain times to require the Company to acquire their interest at
either fair market value or a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of June 29, 2002 of $132.5
million consist of bank balances and investments in money market funds. These
investments have staggered maturity dates, none of which exceed three months,
and have a high degree of liquidity since the securities are actively traded in
public markets.
14
On May 2, 2002, the Company renewed and increased its revolving credit
facility to $200.0 million from $150.0 million. The new facility is a four year
committed line. As of June 29, 2002, none of the credit facility was utilized.
The Company also has one uncommitted bank line of $15.0 million, none of
which had been borrowed at June 29, 2002. Certain of the Company's subsidiaries
have revolving credit facilities that total approximately $45.8 million at June
29, 2002, under which $3.9 million had 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 $130.0 million notes come due on June 30,
2009 and bear interest at a rate of 6.94% per annum. Principal payments totaling
$20.0 million are due annually starting September 25, 2006 on the $100.0 million
notes and bear interest at a rate of 6.66% per annum. Interest on both notes is
payable semi-annually.
The Company believes that its cash and cash equivalents of $132.5 million
and its investment in marketable securities as of June 29, 2002, its ability to
access public and private debt and equity markets, and the availability of funds
under its existing credit agreements will provide it with sufficient liquidity
to meet its currently foreseeable short-term and long-term capital needs.
15
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 29, 2001, 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.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's business involves a risk of product liability claims and
other claims in the ordinary course of business, and from time to time the
Company is named as a defendant in cases as a result of its distribution of
pharmaceutical and other healthcare products. As of June 29, 2002, the Company
was named a defendant in approximately 75 product liability cases. Of these
claims, 60 involve claims made by healthcare workers who claim allergic reaction
relating to exposure to latex gloves. In each of these cases, the Company acted
as a distributor of both brand name and "Henry Schein" private brand latex
gloves, which were manufactured by third parties. To date, discovery in these
cases has generally been limited to product identification issues. The
manufacturers in these cases have withheld indemnification of the Company
pending product identification; however, the Company is taking steps to implead
those manufacturers into each case in which the Company is a defendant. The
Company is also a named defendant in nine lawsuits involving the sale of
phentermine and fenfluramin. Plaintiffs in the cases allege injuries from the
combined use of the drugs known as "Phen/fen." The Company expects to obtain
indemnification from the manufacturers of these products, although this is
dependent upon, among other things, the financial viability of the manufacturer
and their insurers.
On January 27, 1998, in District Court in Travis County, Texas, the Company
and one of its subsidiaries were named as defendants in a matter entitled Shelly
E. Stromboe & Jeanne N. Taylor, on Behalf of Themselves and All Other Similarly
Situated vs. Henry Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc.,
Case No. 98-00886. This complaint alleges among other things, negligence, breach
of contract, fraud and violations of certain Texas commercial statutes involving
the sale of certain practice management software products sold prior to 1998
under the Easy Dental(R) name. In October 1999, the Court, on motion, certified
both a Windows(R) Sub-Class and a DOS Sub-Class to proceed as a class action
pursuant to Tex. R.Civ. P.42. It is estimated that 5,000 Windows(R) customers
and 15,000 DOS customers could be covered by the judge's ruling. In November of
1999, the Company filed an interlocutory appeal of the District Court's
determination to the Texas Court of Appeals on the issue of whether this case
was properly certified as a class action. On September 14, 2000, the Court of
Appeals affirmed the District Court's certification order. On January 5, 2001,
the Company filed a Petition for Review in the Texas Supreme Court asking this
court to find "conflicts jurisdiction" to permit review of the District Court's
certification order, which appeal is now pending. On April 5, 2001 the Texas
Supreme Court requested that the parties file briefs on the merits.
On August 23, 2001, the Texas Supreme Court dismissed the Company's
Petition for Review based on lack of conflicts jurisdiction. The Company filed a
motion for rehearing on September 24, 2001 requesting that the Texas Supreme
Court reconsider and reverse its finding that it is without conflicts
jurisdiction to review the case. On November 8, 2001, the Texas Supreme Court
granted the motion for rehearing and withdrew its order of August 23, 2001. The
Texas Supreme Court heard oral argument on February 6, 2002. Pending a decision
by the Supreme Court on the Petition for Review, a trial on the merits will be
stayed. Because procedural issues relating to the propriety of class
certification remain to be determined, because the class representatives have
not pleaded damage amounts with specificity, and because each purported class
member's damages, if any, may vary, and other factors, it is not possible to
determine the possible range of damages or other relief sought by the plaintiffs
in the event the class certification is upheld and the case proceeds to trial as
a class action.
17
In February 2002, the Company was served with a summons and complaint in an
action commenced in the Superior Court of New Jersey, Law Division, Morris
County, entitled West Morris Pediatrics, P.A. vs. Henry Schein, Inc., doing
business as Caligor, no. MRSL-421-02. The complaint by West Morris Pediatrics
purports to be on behalf of a nationwide class, but there has been no court
determination that the case may proceed as a class action. Plaintiff seeks to
represent a class of all physicians, hospitals and other healthcare providers
throughout New Jersey and across the United States. This complaint alleges,
among other things, breach of oral contract, breach of implied covenant of good
faith and fair dealing, violation of the New Jersey Consumer Fraud Act, unjust
enrichment, and conversion relating to sales of a vaccine product in the years
2001 and 2002. The Company's time to file an answer has been extended until
September 1, 2002. Because damages have not been specified by the plaintiffs, it
is not possible to determine the range of damages or other relief sought by the
plaintiffs. The Company intends to vigorously defend itself against this claim,
as well as all other claims, suits and complaints.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many cases in
which the Company has been sued in connection with products manufactured by
others, the Company is provided indemnification by the manufacturer. There can
be no assurance that the coverage maintained by the Company is sufficient or
will be available in adequate amounts or at a reasonable cost, or that
indemnification agreements will provide adequate protection for the Company. In
the opinion of the Company, all pending matters are covered by insurance or will
not otherwise seriously harm the Company's financial condition.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 5, 2002, the
stockholders of the Company took the following actions:
(i) Re-elected the following individuals to the Company's Board of Directors:
Stanley M. Bergman (35,384,642 shares voting for; 1,560,263 shares withheld)
James P. Breslawski (35,383,457 shares voting for; 1,561,448 shares withheld)
Gerald A. Benjamin (35,383,962 shares voting for; 1,560,943 shares withheld)
Leonard A. David (35,383,787 shares voting for; 1,561,118 shares withheld)
Mark E. Mlotek (35,383,762 shares voting for; 1,561,143 shares withheld)
Steven Paladino (35,383,987 shares voting for; 1,560,918 shares withheld)
Barry J. Alperin (35,644,860 shares voting for; 1,300,045 shares withheld)
Pamela Joseph (35,699,360 shares voting for; 1,245,545 shares withheld)
Donald J. Kabat (35,643,485 shares voting for; 1,301,420 shares withheld)
Marvin H. Schein (35,241,537 shares voting for; 1,703,368 shares withheld)
Irving Shafran (35,644,665 shares voting for; 1,300,240 shares withheld)
Philip A. Laskawy (35,605,995 shares voting for; 1,338,910 shares withheld)
Norman S. Matthews (35,698,915 shares voting for; 1,245,990 shares withheld)
(ii) Approved the amendment to the Company's 1996 Non-Employee Director Stock
Option Plan (29,608,766 shares voting for; 7,129,038 shares voting
against; 207,101 abstaining).
(iii) Ratified the selection of BDO Seidman, LLP as the Company's independent
auditors for the year ended December 28, 2002 (34,465,064 shares voting
for; 2,456,102 shares voting against; 23,736 abstaining).
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certificate of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HENRY SCHEIN, INC.
(Registrant)
By: /s/ Steven Paladino
-------------------------------------------
STEVEN PALADINO
Executive Vice President,
Chief Financial Officer and Director
(principal financial officer and accounting officer)
Dated: August 13, 2002
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