Back to GetFilings.com
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 QUARTERLY PERIOD ENDED SEPTEMBER 27, 2003
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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
--
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--
As of November 3, 2003 there were 43,646,271 shares of the registrant's common
stock outstanding.
HENRY SCHEIN, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of September 27, 2003 and December 28, 2002... 3
Statements of Income for the three and nine months ended
September 27, 2003 and September 28, 2002.................. 4
Statements of Cash Flows for the nine months ended
September 27, 2003 and September 28, 2002.................. 5
Notes to Consolidated Financial Statements...................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......... 24
ITEM 4. Controls and Procedures............................................ 24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 25
ITEM 6. Exhibits and Reports on Form 8-K................................... 27
Signature.......................................................... 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
September 27, December 28,
2003 2002
------------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 92,857 $ 200,651
Marketable securities ......................................... 12,902 31,209
Accounts receivable, net of reserves of $40,116 and $36,200 .. 498,016 368,263
Inventories, net .............................................. 372,082 323,080
Deferred income taxes ......................................... 26,839 29,919
Prepaid expenses and other .................................... 85,067 74,407
----------- -----------
Total current assets ................................... 1,087,763 1,027,529
Property and equipment, net ........................................ 150,817 142,532
Goodwill ........................................................... 354,402 302,687
Other intangibles, net ............................................. 22,997 7,661
Investments and other .............................................. 81,008 77,643
----------- -----------
Total assets ............................................ $ 1,696,987 $ 1,558,052
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 246,710 $ 243,166
Bank credit lines ............................................. 6,475 4,790
Current maturities of long-term debt .......................... 4,357 2,662
Accruals:
Salaries and related expenses .............................. 52,946 53,954
Taxes ...................................................... 56,792 32,196
Other expenses ............................................. 93,202 86,562
----------- -----------
Total current liabilities ............................... 460,482 423,330
Long-term debt ..................................................... 245,389 242,561
Other liabilities .................................................. 28,955 24,196
Minority interest .................................................. 10,041 6,748
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 authorized,
none outstanding ......................................... -- --
Common stock, $.01 par value, 120,000,000 authorized,
43,645,938 and 44,041,591 outstanding .................... 436 440
Additional paid-in capital .................................... 439,337 436,554
Retained earnings ............................................. 501,024 430,389
Treasury stock, at cost, 0 and 62,479 shares .................. -- (1,156)
Accumulated other comprehensive income (loss) ................. 11,445 (4,794)
Deferred compensation ......................................... (122) (216)
----------- -----------
Total stockholders' equity ............................. 952,120 861,217
----------- -----------
Total liabilities and stockholders' equity ............. $ 1,696,987 $ 1,558,052
=========== ===========
See accompanying notes.
3
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales ................................................ $ 892,718 $ 759,073 $ 2,406,881 $ 2,077,598
Cost of sales ............................................ 641,218 542,601 1,733,435 1,490,340
----------- ----------- ----------- -----------
Gross profit ........................................ 251,500 216,472 673,446 587,258
Operating expenses:
Selling, general and administrative ................. 175,100 152,187 498,811 440,786
----------- ----------- ----------- -----------
Operating income ............................... 76,400 64,285 174,635 146,472
Other income (expense):
Interest income ..................................... 2,197 2,536 6,510 7,456
Interest expense .................................... (4,812) (4,787) (14,140) (13,982)
Other, net .......................................... 328 877 1,255 1,017
----------- ----------- ----------- -----------
Income before taxes, minority interest,
equity in earnings of affiliates and
loss on sale of discontinued operation .... 74,113 62,911 168,260 140,963
Taxes on income from continuing operations ............... (27,569) (23,468) (62,982) (52,528)
Minority interest in net income of subsidiaries .......... (363) (337) (1,974) (1,838)
Equity in earnings of affiliates ......................... 178 122 676 427
----------- ----------- ----------- -----------
Net income from continuing operations .................... 46,359 39,228 103,980 87,024
Loss on sale of discontinued operation, net of tax ....... (2,012) -- (2,012) --
----------- ----------- ----------- -----------
Net income ............................................... $ 44,347 $ 39,228 $ 101,968 $ 87,024
=========== =========== =========== ===========
Net income from continuing operations per
common share:
Basic ............................................... $ 1.06 $ 0.90 $ 2.38 $ 2.01
=========== =========== =========== ===========
Diluted ............................................. $ 1.03 $ 0.87 $ 2.32 $ 1.94
=========== =========== =========== ===========
Loss on sale of discontinued operation, net of tax
per common share:
Basic ............................................... $ (0.05) $ -- $ (0.05) $ --
=========== =========== =========== ===========
Diluted ............................................. $ (0.04) $ -- $ (0.04) $ --
=========== =========== =========== ===========
Net income per common share:
Basic ............................................... $ 1.02 $ 0.90 $ 2.33 $ 2.01
=========== =========== =========== ===========
Diluted ............................................. $ 0.99 $ 0.87 $ 2.27 $ 1.94
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic ............................................... 43,609 43,808 43,706 43,329
=========== =========== =========== ===========
Diluted ............................................. 44,885 45,000 44,896 44,779
=========== =========== =========== ===========
See accompanying notes.
4
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
----------------------------
September 27, September 28,
2003 2002
------------- -------------
Cash flows from operating activities of continuing operations:
Net income ....................................................................... $ 101,968 $ 87,024
Loss on sale of discontinued operation, net of tax ......................... 2,012 --
--------- ---------
Net income from continuing operations ............................................ 103,980 87,024
Adjustments to reconcile net income to net cash provided by operating activities
of continuing operations:
Depreciation and amortization .............................................. 25,956 20,086
Provision for losses and allowances on trade receivables ................... 4,374 5,114
Stock issued to ESOP trust ................................................. 2,300 1,340
Provision (benefit) for deferred income taxes .............................. 6,962 (2,147)
Undistributed earnings of affiliates ....................................... (676) (427)
Minority interest in net income of subsidiaries ............................ 1,974 1,838
Other ...................................................................... (102) (31)
Changes in operating assets and liabilities, net of effect of acquisitions:
Increase in accounts receivable ............................................... (115,673) (52,958)
Increase in inventories, net .................................................. (27,456) (18,136)
Decrease (increase) in other current assets ................................... 4,893 (8,662)
Increase in accounts payable and accruals ..................................... 11,559 32,609
--------- ---------
Net cash provided by operating activities of continuing operations .................. 18,091 65,650
--------- ---------
Cash flows from investing activities:
Purchases of capital expenditures ................................................ (29,045) (36,260)
Payments for business acquisitions, net of cash acquired ......................... (67,797) (34,887)
Purchases of marketable securities ............................................... (39,139) (50,293)
Proceeds from sales of marketable securities ..................................... 20,104 --
Proceeds from maturities of marketable securities ................................ 38,130 --
Other, including discontinued operation .......................................... (671) (3,047)
--------- ---------
Net cash used in investing activities ............................................... (78,418) (124,487)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt ............................................. (7,186) (14,388)
Proceeds from issuance of stock upon exercise of stock options ................... 18,378 32,753
Net proceeds from borrowings from banks .......................................... 682 1,743
Payments for repurchases of common stock ......................................... (57,727) --
Other ............................................................................ (118) (2,757)
--------- ---------
Net cash (used in) provided by financing activities ................................. (45,971) 17,351
--------- ---------
Net change in cash and cash equivalents ............................................. (106,298) (41,486)
Effect of exchange rate changes on cash and cash equivalents ........................ (1,496) (2,582)
Cash and cash equivalents, beginning of period ...................................... 200,651 193,367
--------- ---------
Cash and cash equivalents, end of period ............................................ $ 92,857 $ 149,299
========= =========
See accompanying notes.
5
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Our consolidated financial statements include our accounts as well as those
of our wholly-owned and majority-owned subsidiaries.
We believe the accompanying unaudited consolidated financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the information set forth therein. These
unaudited interim consolidated financial statements are condensed and therefore
do not include all of the information and footnote disclosures required by
accounting principles generally accepted in the United States for complete
financial statements. These unaudited interim consolidated financial statements
should be read in conjunction with our audited annual consolidated financial
statements and accompanying footnotes included in our Form 10-K for the year
ended December 28, 2002. We follow the same accounting policies in preparation
of interim financial statements as we do in preparation of our annual financial
statements.
The results of operations and cash flows for the nine months ended
September 27, 2003 are not necessarily indicative of the results to be expected
for the fiscal year ending December 27, 2003 or any other period.
Certain amounts from prior periods have been reclassified to conform to the
current period presentation.
NOTE 2. SEGMENT DATA
Our reportable segments are strategic business units that offer different
products and services to the same customer base. We conduct our business through
two segments: healthcare distribution and technology.
Our healthcare distribution segment, which is comprised of our dental,
medical (including veterinary) and international business groups, distributes
healthcare products (primarily consumable) and services to office-based
healthcare practitioners and professionals in the United States, Canada and
international markets. Products, which are similar for each business group, are
maintained and distributed from strategically located distribution centers.
Our technology segment consists primarily of our practice management
software business and certain other value-added products and services that are
distributed primarily to healthcare professionals in the United States and
Canada. Most of the technology business, including members of its management,
was acquired as a unit.
6
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The following tables present information about our business segments (in
thousands):
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net Sales:
Healthcare distribution (1):
Dental (2) ......................... $ 339,409 $ 300,714 $ 985,318 $ 902,282
Medical (3) ........................ 396,464 337,529 957,909 811,634
International (4) .................. 138,411 103,386 409,181 316,003
------------- ------------- ------------- -------------
Total healthcare distribution .. 874,284 741,629 2,352,408 2,029,919
Technology (5) ......................... 18,434 17,444 54,473 47,679
------------- ------------- ------------- -------------
Total .......................... $ 892,718 $ 759,073 $ 2,406,881 $ 2,077,598
============= ============= ============= =============
- ----------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, infection control products and vitamins.
(2) Consists of products sold in the United States and Canada.
(3) Consists of products sold in the United States' Medical and Veterinary
markets.
(4) Consists of products sold in the Dental, Medical and Veterinary markets,
primarily in Europe.
(5) Consists of practice management software and other value-added products and
services, which are sold primarily to healthcare professionals in the
United States and Canada.
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Operating Income:
Healthcare distribution ....... $ 69,137 $ 57,487 $ 152,559 $ 127,580
Technology..................... 7,263 6,798 22,076 18,892
------------- ------------- ------------- -------------
Total.......................... $ 76,400 $ 64,285 $ 174,635 $ 146,472
============= ============= ============= =============
September 27, December 28,
2003 2002
------------- -------------
Total Assets:
Healthcare distribution ........................................ $ 1,675,836 $ 1,533,529
Technology ..................................................... 133,517 106,319
------------- -------------
Total assets for reportable segments ....................... 1,809,353 1,639,848
Receivables due from healthcare distribution segment ........... (111,277) (80,855)
Receivables due from technology segment ........................ (1,089) (941)
------------- -------------
Total consolidated assets .................................. $ 1,696,987 $ 1,558,052
============= =============
7
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". This statement amends FAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, FAS No. 148 amends the
disclosure requirements of FAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
Pursuant to FAS No. 148, we have elected to continue to account for
employee stock-based compensation under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," using an intrinsic value
approach to measure compensation expense. Accordingly, no compensation expense
has been recognized for options granted under our stock compensation plans since
all such options were granted at exercise prices equal to or greater than fair
market value on the date of grant.
The following table summarizes relevant information as to our reported
results under the intrinsic value method of accounting for stock awards, with
supplemental information, as if the fair value recognition provisions of FAS No.
123 had been applied to each of the three and nine month periods ended September
27, 2003 and September 28, 2002. The following assumptions were used in
determining the fair values: weighted average risk-free interest rates of 3.0% -
4.2%, stock price volatility of 45%, dividend yield of 0% and weighted average
expected option life of five years in 2003 and 2002 (in thousands, except per
share data):
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income as reported ............ $ 44,347 $ 39,228 $ 101,968 $ 87,024
Stock-based compensation expense
determined under fair value
method, net of tax ............ (1,995) (1,431) (5,395) (4,294)
------------- ------------- ------------- -------------
Pro forma net income .............. $ 42,352 $ 37,797 $ 96,573 $ 82,730
============= ============= ============= =============
Net income per common share
as reported:
Basic ........................... $ 1.02 $ 0.90 $ 2.33 $ 2.01
============= ============= ============= =============
Diluted ......................... $ 0.99 $ 0.87 $ 2.27 $ 1.94
============= ============= ============= =============
Net income per common share
pro forma:
Basic ........................... $ 0.97 $ 0.86 $ 2.21 $ 1.91
============= ============= ============= =============
Diluted ......................... $ 0.94 $ 0.84 $ 2.15 $ 1.85
============= ============= ============= =============
8
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4. BUSINESS ACQUISITIONS AND DIVESTITURE
During the nine months ended September 27, 2003, we acquired two healthcare
distribution businesses. On May 28, 2003, we acquired all of the outstanding
common stock of Hager Dental GmbH, a dental distributor of consumable supplies
and equipment located in Germany. On June 2, 2003, we acquired the assets of
Colonial Surgical Supply, Inc., a United States dental distributor of consumable
supplies, primarily examination gloves. The acquisition agreement for Colonial
Surgical requires us to pay additional cash consideration of up to $10.0
million, if certain profitability targets are met. These transactions were not
considered material on either an individual or aggregate basis.
Hager Dental reported 2002 net sales of approximately $50.0 million.
Colonial Surgical reported 2002 net sales of approximately $40.0 million. The
transactions were accounted for under the purchase method of accounting and have
been included in our consolidated financial statements from their respective
acquisition dates.
On August 29, 2003, we divested PMA Bode GmbH, an x-ray film distribution
business located in Germany, which was a component of our healthcare
distribution business segment. PMA Bode generated annual net sales of
approximately $31.0 million. The loss recorded on the sale of PMA Bode was
approximately $2.0 million (net of $54 thousand tax benefit) and is presented
separately as a loss on sale of discontinued operation in our statements of
income for the three and nine months ended September 27, 2003. Due to
immateriality, we have not reflected the operating results of PMA Bode
separately as a discontinued operation for any of the prior periods presented.
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended
September 27, 2003 were as follows (in thousands):
Healthcare
Distribution Technology Total
------------ ------------ ------------
Balance as of December 28, 2002 .... $ 302,352 $ 335 $ 302,687
Adjustments to goodwill:
Acquisitions ................... 45,706 1,530 47,236
Divestiture .................... (2,358) -- (2,358)
Foreign currency translation ... 6,837 -- 6,837
------------ ------------ ------------
Balance as of September 27, 2003 ... $ 352,537 $ 1,865 $ 354,402
============ ============ ============
9
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Other intangible assets as of September 27, 2003 and December 28, 2002 were
as follows (in thousands):
September 27, 2003 December 28, 2002
--------------------------- ---------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------------ ------------ ------------ ------------
Other intangible assets:
Non-compete agreements ....... $ 15,295 $ (4,694) $ 10,826 $ (3,549)
Trademarks and trade names ... 7,972 (34) 89 (18)
Customer relationships ....... 4,074 (430) -- --
Other ........................ 3,083 (2,269) 897 (584)
------------ ------------ ------------ ------------
Total .......................... $ 30,424 $ (7,427) $ 11,812 $ (4,151)
============ ============ ============ ============
Amortization of other intangible assets for the nine months ended September
27, 2003 and September 28, 2002 was approximately $1.9 million and $806
thousand. The annual amortization expense expected for the years 2004 through
2008 is $2.7 million, $1.8 million, $1.2 million, $1.0 million and $687
thousand.
NOTE 6. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per common share follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Basic ......................... 43,608,925 43,807,578 43,705,692 43,328,701
Effect of assumed conversion
of stock options ............ 1,276,045 1,192,156 1,190,056 1,449,933
------------- ------------- ------------- -------------
Diluted ....................... 44,884,970 44,999,734 44,895,748 44,778,634
============= ============= ============= =============
Weighted average options to purchase 4,077 and 16,857 shares of common stock at
prices ranging from $57.00 to $59.10 and $48.25 to $50.39 per share that were
outstanding during the three months ended September 27, 2003 and September 28,
2002 were excluded from the computation of diluted earnings per common share.
Weighted average options to purchase 41,988 and 23,245 shares of common stock at
prices ranging from $48.81 to $59.10 and $46.00 to $50.39 per share that were
outstanding during the nine months ended September 27, 2003 and September 28,
2002 were excluded from the computation of diluted earnings per common share. In
each of these periods, the options' exercise prices exceeded the average fair
market value of our common stock.
10
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7. COMPREHENSIVE INCOME
Components of comprehensive income primarily include foreign currency
translation adjustments, but also include unrealized gains and losses arising
from effective portions of foreign currency hedges and from marketable
securities. Comprehensive income totaled $43.7 million and $118.2 million for
the three and nine months ended September 27, 2003 and $36.4 million and $97.7
million for the three and nine months ended September 28, 2002.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that we "expect",
"estimate", "anticipate", or "believe" and all other statements concerning
future financial results, product or service offerings or other events that have
not yet occurred) are forward-looking statements that are made pursuant to the
safe harbor provisions of applicable securities legislation and regulations.
Forward-looking statements involve known and unknown factors, risks and
uncertainties which may cause our actual results in future periods to differ
materially from those expressed in any forward-looking statements. Those
factors, risks and uncertainties include, but are not limited to, the factors
described under "Risk Factors" discussed later in this Form 10-Q.
OVERVIEW
We are the largest distributor of healthcare products and services to
office-based healthcare practitioners in the combined North American and
European markets with operations in the United States, Canada, the United
Kingdom, the Netherlands, Belgium, Germany, France, Austria, Spain, Ireland,
Portugal, Australia and New Zealand.
We sell products and services to over 400,000 customers, primarily dental
practices and dental laboratories, as well as physician practices, veterinary
clinics and institutions. Through our comprehensive catalogs and other direct
sales and marketing programs, we offer customers a broad product selection of
both branded and private brand products.
Our reportable segments are strategic business units that offer different
products and services to the same customer base. We conduct our business through
two segments: healthcare distribution and technology.
Our healthcare distribution segment, which is comprised of our dental,
medical (including veterinary) and international business groups, distributes
healthcare products (primarily consumable) and services to office-based
healthcare practitioners and professionals in the United States, Canada and
international markets. Products, which are similar for each business group, are
maintained and distributed from strategically located distribution centers.
Our technology segment consists primarily of our practice management
software business and certain other value-added products and services that are
distributed primarily to healthcare professionals in the United States and
Canada. Most of the technology business, including members of its management,
was acquired as a unit.
12
RESULTS OF OPERATIONS
The following table summarizes the significant components of our operating
results and cash flows for the three and nine months ended September 27, 2003
and September 28, 2002 (in thousands):
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Operating Results:
Net sales ............................................ $ 892,718 $ 759,073 $ 2,406,881 $ 2,077,598
Cost of sales ........................................ 641,218 542,601 1,733,435 1,490,340
------------- ------------- ------------- -------------
Gross profit ....................................... 251,500 216,472 673,446 587,258
Operating expenses:
Selling, general and administrative ................ 175,100 152,187 498,811 440,786
------------- ------------- ------------- -------------
Operating income ................................. $ 76,400 $ 64,285 $ 174,635 $ 146,472
============= ============= ============= =============
Other expense, net ................................... $ (2,287) $ (1,374) $ (6,375) $ (5,509)
Net income from continuing operations ................ 46,359 39,228 103,980 87,024
Net income ........................................... 44,347 39,228 101,968 87,024
Cash Flows:
Net cash (used in) provided by operating activities
from continuing operations ......................... $ (22,940) $ 52,269 $ 18,091 $ 65,650
Net cash provided by (used in) investing activities .. 461 (40,267) (78,418) (124,487)
Net cash (used in) provided by financing activities .. (5,161) 5,326 (45,971) 17,351
THREE MONTHS ENDED SEPTEMBER 27, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
28, 2002
Net sales for the three months ended September 27, 2003 and September 28,
2002 were as follows (in thousands):
September 27, % of Total September 28, % of Total
2003 Net Sales 2002 Net Sales
------------- ---------- ------------- ----------
Net Sales:
Healthcare distribution (1):
Dental (2) ........................ $ 339,409 38.0% $ 300,714 39.6%
Medical (3) ....................... 396,464 44.4% 337,529 44.5%
International (4) ................. 138,411 15.5% 103,386 13.6%
------------- ---------- ------------- ----------
Total healthcare distribution .. 874,284 97.9% 741,629 97.7%
Technology (5) ......................... 18,434 2.1% 17,444 2.3%
------------- ---------- ------------- ----------
Total .......................... $ 892,718 100.0% $ 759,073 100.0%
============= ========== ============= ==========
- ----------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, infection control products and vitamins.
(2) Consists of products sold in the United States and Canada.
(3) Consists of products sold in the United States' Medical and Veterinary
markets.
(4) Consists of products sold in the Dental, Medical and Veterinary markets,
primarily in Europe.
(5) Consists of practice management software and other value-added products and
services, which are sold primarily to healthcare professionals in the
United States and Canada.
13
For the three months ended September 27, 2003, our net sales increased
$133.6 million or 17.6% from the comparable prior year period. Of the increase
in total net sales, $132.6 million or 99.3% resulted from a 17.9% increase in
our healthcare distribution business. Of this increase, $38.7 million resulted
from a 12.9% increase in our dental business, $58.9 million resulted from a
17.5% increase in our medical business and $35.0 million resulted from a 33.9%
increase in our international business. The remaining increase in net sales of
$1.0 million resulted from our technology business.
The $38.7 million or 12.9% increase in dental net sales, comprised of
dental consumable merchandise of $31.1 million or 12.9% and dental equipment of
$7.6 million or 12.7%, was primarily due to increased account penetration of
existing customers driven by our Privileges loyalty program and an acquisition
which accounted for $14.5 million of the increase in consumable merchandise net
sales. Excluding the effects of the acquisition and exchange rates, net sales
for the dental business increased $22.0 million or 7.3%. The $58.9 million or
17.5% increase in medical net sales was primarily due to increased sales to
physicians' office and alternate care markets. The $35.0 million or 33.9%
increase in international net sales was primarily due to an acquisition,
favorable exchange rates and increased account penetration in France, Spain and
Australia, partially offset by a divestiture. Excluding the effect of the
exchange rates, the acquisition and divestiture, net sales for the international
market increased $9.3 million or 9.7%. Finally, the increase in technology net
sales of $1.0 million or 5.7% was primarily due to increased sales of
value-added products including software products and related services.
Gross profit increased $35.0 million or 16.2%, to $251.5 million for the
three months ended September 27, 2003 compared to the prior year period. Gross
profit margin decreased to 28.2% for the three months ended September 27, 2003
from 28.5% for the comparable prior year period.
Healthcare distribution gross profit increased $34.4 million or 17.0%, to
$237.3 million for the three months ended September 27, 2003 compared to the
prior year period. Healthcare distribution gross profit margin decreased to
27.1% for the three months ended September 27, 2003 from 27.4% for the
comparable prior year period, primarily due to changes in sales mix in our
medical and international businesses.
Technology gross profit increased $573 thousand or 4.2%, to $14.2 million
for the three months ended September 27, 2003 compared to the prior year period.
Technology gross profit margins decreased to 77.0% for the three months ended
September 27, 2003 from 78.2% for the comparable prior year period, primarily
due to changes in sales mix.
Selling, general and administrative expenses increased $22.9 million or
15.1%, to $175.1 million for the three months ended September 27, 2003 compared
to the prior year period.
Selling and shipping expenses increased $18.4 million or 19.7%, to $112.0
million for the three months ended September 27, 2003 from $93.6 million for the
comparable prior year period. The increase was primarily due to expenses
directly associated with supporting increased sales volume. As a percentage of
net sales, selling and shipping expenses increased to 12.5% for the three months
ended September 27, 2003 from 12.3% for the comparable prior year period.
14
General and administrative expenses increased $4.5 million or 7.7%, to
$63.1 million for the three months ended September 27, 2003 from $58.6 million
for the comparable prior year period. As a percentage of net sales, general and
administrative expenses decreased to 7.1% for the three months ended September
27, 2003 from 7.7% for the comparable prior year period. The decrease was
primary due to leveraging of our infrastructure with increased sales volume.
Other expense, net increased $913 thousand to $2.3 million for the three
months ended September 27, 2003 compared to the prior year period. The net
increase was primarily due to lower interest income and other expenses.
For the three months ended September 27, 2003, our effective tax rate was
37.2% compared to 37.3% for the comparable prior year period. The difference
between our effective tax rates and the federal statutory rates for both periods
primarily relates to state income taxes.
NINE MONTHS ENDED SEPTEMBER 27, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 28,
2002
Net sales for the nine months ended September 27, 2003 and September 28,
2002 were as follows (in thousands):
September 27, % of Total September 28, % of Total
2003 Net Sales 2002 Net Sales
------------- ---------- ------------- ----------
Net Sales:
Healthcare distribution (1):
Dental (2) ........................ $ 985,318 40.9% $ 902,282 43.4%
Medical (3) ....................... 957,909 39.8% 811,634 39.1%
International (4) ................. 409,181 17.0% 316,003 15.2%
------------- ---------- ------------- ----------
Total healthcare distribution .. 2,352,408 97.7% 2,029,919 97.7%
Technology (5) ......................... 54,473 2.3% 47,679 2.3%
------------- ---------- ------------- ----------
Total .......................... $ 2,406,881 100.0% $ 2,077,598 100.0%
============= ========== ============= ==========
- ----------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, infection control products and vitamins.
(2) Consists of products sold in the United States and Canada.
(3) Consists of products sold in the United States' Medical and Veterinary
markets.
(4) Consists of products sold in the Dental, Medical and Veterinary markets,
primarily in Europe.
(5) Consists of practice management software and other value-added products and
services, which are sold primarily to healthcare professionals in the
United States and Canada.
For the nine months ended September 27, 2003, our net sales increased
$329.3 million or 15.8% from the comparable prior year period. Of this increase
in total net sales, $322.5 million or 97.9% resulted from a 15.9% increase in
our healthcare distribution business. Of this increase, $83.0 million resulted
from a 9.2% increase in our dental business, $146.3 million resulted from an
18.0% increase in our medical business and $93.2 million resulted from a 29.5%
increase in our international business. The remaining increase in net sales of
$6.8 million resulted from our technology business.
The $83.0 million or 9.2% increase in dental net sales, comprised of dental
consumable merchandise of $57.6 million or 7.9% and dental equipment of $25.4
million or 14.9%, was primarily due to increased account penetration of existing
customers driven primarily by our Privileges loyalty program and an acquisition
which accounted for $19.1 million of the increase in consumable merchandise net
15
sales. Excluding the effects of the acquisition and exchange rates, net sales
for the dental business increased $58.6 million or 6.5%. The $146.3 million or
18.0% increase in medical net sales was primarily due to increased sales to
physicians' office and alternate care markets. The $93.2 million or 29.5%
increase in international net sales was primarily due to favorable exchange
rates, an acquisition, and increased account penetration in France, Spain and
Australia. Excluding the effect of the exchange rates, acquisition and
divestiture, net sales for the international market increased $19.1 million or
6.2%. Finally, the increase in technology net sales of $6.8 million or 14.2% was
primarily due to increased sales of value-added products including software and
related services.
Gross profit increased $86.2 million or 14.7%, to $673.4 million for the
nine months ended September 27, 2003 compared to the prior year period. Gross
profit margin decreased to 28.0% for the nine months ended September 27, 2003
from 28.3% for the comparable prior year period.
Healthcare distribution gross profit increased $80.5 million or 14.6%, to
$631.3 million for the nine months ended September 27, 2003 compared to the
prior year period. Healthcare distribution gross profit margin decreased to
26.8% for the nine months ended September 27, 2003 from 27.1% for the comparable
prior year period, primarily due to changes in sales mix in our medical and
international businesses.
Technology gross profit increased $5.7 million or 15.6%, to $42.1 million
for the nine months ended September 27, 2003 compared to the prior year period.
Technology gross profit margins increased to 77.3% for the nine months ended
September 27, 2003 from 76.3% for the comparable prior year period, primarily
due to changes in sales mix.
Selling, general and administrative expenses increased $58.0 million or
13.2%, to $498.8 million for the nine months ended September 27, 2003 compared
to the prior year period.
Selling and shipping expenses increased $42.2 million or 15.5%, to $314.5
million for the nine months ended September 27, 2003 from $272.3 million for the
comparable prior year period. The increase was primarily due to expenses
directly associated with supporting increased sales volume. As a percentage of
net sales, selling and shipping expenses remained unchanged at 13.1% for the
nine months ended September 27, 2003 and for the comparable prior year period.
General and administrative expenses increased $15.8 million or 9.4%, to
$184.3 million for the nine months ended September 27, 2003 from $168.5 million
for the comparable prior year period. As a percentage of net sales, general and
administrative expenses decreased to 7.7% for the nine months ended September
27, 2003 from 8.1% for the comparable prior year period. The decrease was
primarily due to leveraging of our infrastructure with increased sales volume.
Other expense, net increased $866 thousand to $6.4 million for the nine
months ended September 27, 2003 compared to the prior year period. The net
increase was primarily due to lower interest income.
For the nine months ended September 27, 2003, our effective tax rate was
37.4% compared to 37.3% for the comparable prior year period. The difference
between our effective tax rates and the Federal statutory rates for both periods
primarily relates to state income taxes.
16
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements include the funding of working capital
needs resulting from increased sales and special inventory forward buy-in
opportunities, acquisitions, repurchases of our common stock and capital
expenditures. Since sales tend to be strong during the fourth quarter and
special inventory forward buy-in opportunities are most prevalent just before
the end of the year, our working capital requirements have generally been higher
from the end of the third quarter to the end of the first quarter of the
following year.
We finance our business primarily through our operations, revolving credit
facilities, private placement loans and stock issuances. Our principal source of
cash is derived from our operations. Our ability to generate sufficient cash
flows from operations is dependent on the continued demand of our customers for
our products and services. Given current operating, economic and industry
conditions, we believe that demand for our products and services will remain
strong in the foreseeable future.
Net cash flow provided by operating activities of continuing operations was
$18.1 million for the nine months ended September 27, 2003 compared to $65.7
million for the comparable prior year period. This decrease was primarily due to
increased trade receivable and inventory levels as of September 27, 2003
resulting from increased sales activity in 2003 compared to 2002.
Net cash used in investing activities was $78.4 million for the nine months
ended September 27, 2003 compared to $124.5 million for the comparable prior
year period. The decrease was primarily due to a reduction in cash used to
purchase marketable securities and capital expenditures and increased cash
proceeds from sales and maturities of marketable securities, partially offset by
an increase in cash used for acquisitions. We expect to invest approximately
$6.0 million during the three months ending December 27, 2003 in capital
projects to modernize and expand our facilities, on computer infrastructure
systems and to integrate operations.
Net cash (used in) provided by financing activities was $(46.0) million for
the nine months ended September 27, 2003 compared to $17.4 million for the
comparable prior year period. The net change was primarily due to increased
payments made to repurchase our common stock and reduced proceeds received
through the exercise of stock options, partially offset by reduced principal
payments on long-term debt. On March 12, 2003, we announced that our Board of
Directors had authorized the repurchase of up to two million shares of our
common stock, which represented approximately 4.5% of shares outstanding on the
announcement date. During the nine months ended September 27, 2003, we
repurchased and retired 1,283,500 shares at an average price of $45.41 per
share.
17
The following table summarizes selected measures of liquidity and capital
resources (in thousands):
September 27, December 28,
2003 2002
------------- ------------
Cash and cash equivalents ...................... $ 92,857 $ 200,651
Marketable securities, including non-current ... 35,814 55,184
Working capital ................................ 627,281 604,199
Debt, net of cash and cash equivalents and
marketable securities ........................ 127,550 --
Our cash and cash equivalents 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 traded in public markets. During the nine months ended September
27, 2003, significant uses of cash included $67.8 million for acquisitions,
$57.7 million for repurchases of our common stock and $29.0 million for capital
expenditures.
Our marketable securities consist of short and long-term debt securities
classified as available for sale, including corporate bonds rated AAA by Moody's
(or an equivalent rating) and commercial paper rated P-1 by Moody's (or an
equivalent rating). The fair values of our marketable securities are determined
by quoted market prices.
Our business requires a substantial investment in working capital which is
susceptible to large variations during the year as a result of inventory
purchase patterns and seasonal demands. Inventory purchase activity is a
function of sales activity, special inventory forward buy-in opportunities, new
customer build-up requirements and the desired level of investment inventory.
Working capital has increased primarily as a result of our higher sales volume.
Our accounts receivable days sales outstanding improved to 47.4 days for
the nine months ended September 27, 2003 from 49.4 days for the comparable prior
year period primarily due to our continued focus on this area. Our inventory
turns improved to 6.7 turns for the nine months ended September 27, 2003 from
6.6 turns for the comparable prior year period. We anticipate future increases
in our working capital requirements as a result of continued sales growth.
On June 30, 1999 and September 25, 1998, we completed private placement
transactions under which we issued $130.0 million and $100.0 million in Senior
Notes. The $130.0 million notes come due on June 30, 2009 and bear interest at a
fixed 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 fixed rate of 6.66% per annum. Interest on both notes is payable
semi-annually.
Subsequent to September 27, 2003, we entered into agreements relating to
the $230.0 million senior notes to exchange our fixed interest rates for
variable interest rates. The weighted average variable interest rate is 4.25%.
This variable rate is comprised of LIBOR plus the spreads and resets on the
interest due dates for the senior notes.
We have a revolving credit facility of $200.0 million that is a four-year
committed line scheduled to terminate in May 2006. There were no borrowings
under this credit facility at September 27, 2003. As of September 27, 2003,
certain of our subsidiaries had revolving credit facilities, which had
18
outstanding balances of $6.5 million, against aggregate borrowing limits of
$36.4 million.
Some holders of minority interests in entities we have acquired have the
right at certain times to require us to acquire their interest at a price that
approximates fair value pursuant to a formula price based on earnings of the
entity. Additionally, some prior owners of acquired businesses are eligible to
receive additional purchase price cash consideration if certain profitability
targets are met. Due to uncertainty, we have not accrued any liabilities that
may arise from these transactions.
We believe that our cash and cash equivalents, investments in short and
long-term marketable securities, ability to access public and private debt and
equity markets and availability of funds under our existing credit facilities
will provide us with sufficient liquidity to meet our currently foreseeable
short-term and long-term capital needs.
SEASONALITY AND OTHER FACTORS AFFECTING OUR BUSINESS
Our business is subject to seasonal and other quarterly influences. Net
sales and operating profits are generally higher in the third and fourth
quarters due to timing of seasonal product sales, software and equipment sales,
year-end promotions and purchasing patterns of office-based healthcare
practitioners and are generally lower in the first quarter primarily due 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
sales, special promotional campaigns, fluctuations in exchange rates associated
with international operations and adverse weather conditions.
E-COMMERCE
Traditional healthcare supply and distribution relationships are impacted
by the advancement of electronic on-line commerce solutions. Our distribution
business is characterized by rapid technological developments and is highly
competitive. The rapid advancement of on-line commerce requires us to provide
continuous improvement in performance, security, features and reliability of
Internet content and technology, particularly in response to competitive
offerings.
Through our proprietary technologically-based suite of products, we offer
customers a variety of competitive alternatives. We believe that our tradition
of reliable service coupled with our name recognition and large customer base
built on solid customer relationships positions us well to participate in this
growing aspect of the distribution business. We continue to explore ways and
means to improve and expand our Internet presence and capabilities.
19
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate estimates, including those related
to sales allowance provisions, as described below, volume purchase rebates,
income taxes, inventory and bad debt reserves and contingencies. We base our
estimates on historical data, when available, experience, industry and market
trends, and on various other assumptions that are believed to be reasonable
under the circumstances, the combined results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
We believe that the following critical accounting policies affect the
significant estimates and judgments used in the preparation of our financial
statements:
Revenue Recognition
We generate revenue from the sale of dental, medical and veterinary
consumable products, as well as dental equipment, software products and services
and other sources. Provisions for discounts, rebates to customers, customer
returns and other adjustments are recorded based upon historical data and are
provided for in the period in which the related sales are recognized.
Revenue derived from the sale of consumable products is recognized when
products are shipped to customers. Such sales typically entail high-volume,
low-dollar orders shipped utilizing third-party common carriers. We believe that
the shipment date is the most appropriate point in time indicating the
completion of the earnings process because we have no post-shipment obligations,
the product price is fixed and determinable, collection of the resulting
receivable is probable and product returns are reasonably estimable.
Revenue derived from the sale of dental equipment is recognized when
products are delivered to customers. Such sales typically entail scheduled
deliveries of large equipment primarily by equipment service technicians. Some
equipment sales require minimal installation, which is completed at the time of
delivery.
Revenue derived from the sale of software products is recognized when
products are shipped to customers. Such software is generally installed by
customers and does not require extensive training due to the nature of its
design. Revenue derived from post-contract customer support for software,
including annual support and/or training, is recognized ratably over the period
in which the services are provided.
Revenue derived from other sources including freight charges, equipment
repairs and financial services, is recognized when the related product revenue
is recognized or when the services are provided.
20
Accounts Receivable and Credit Policies
The carrying amount of accounts receivable reflects a reserve representing
our best estimate of the amounts that will not be collected. In addition to
reviewing delinquent accounts receivable, we consider many factors in estimating
our reserve, including historical data, experience, customer types, credit
worthiness, and economic trends. From time to time, we may adjust our
assumptions for anticipated changes in any of those or other factors expected to
affect collectability.
Long-Lived Assets
Long-lived assets, other than goodwill and other indefinite-lived
intangible assets, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
such assets. When any impairment exists, the related assets are written down to
fair value.
Other definite-lived intangible assets are amortized over their estimated
useful lives. We have reassessed the estimated useful lives of our
definite-lived intangible assets, which primarily consist of non-compete
agreements, trademarks and trade names and customer relationships, and deemed no
changes necessary.
Goodwill and Other Indefinite-Lived Intangibles
In accordance with FAS No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", goodwill and intangible assets deemed to
have indefinite lives are no longer amortized but are subject to annual
impairment tests. We assess the impairment of goodwill and other
indefinite-lived intangible assets annually and on an interim basis whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Some factors we consider important which could trigger an
impairment review include the following:
o Significant underperformance relative to expected historical or
projected future operating results;
o Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and
o Significant negative industry or economic trends.
When we determine that the carrying value of goodwill and other
indefinite-lived intangibles may not be recoverable based upon the existence of
one or more of the above indicators of impairment, we perform an interim
impairment review. If we determine through the impairment review process that
goodwill has been impaired, we record an impairment charge in our consolidated
income statement.
Stock-Based Compensation
We account for stock option awards to employees under the intrinsic
value-based method of accounting prescribed by APB No. 25, "Accounting for Stock
Issued to Employees". Under this method, no compensation expense is recorded
provided the exercise price is equal to or greater than the quoted market price
of the stock at the date of grant.
21
We make pro forma disclosures of net income and earnings per share as if
the fair value-based method of accounting (the alternative method of accounting
for stock-based compensation) had been applied as required by FAS No. 123,
"Accounting for Stock-Based Compensation". The fair value-based method requires
us to make assumptions to determine expected risk-free interest rates, stock
price volatility, dividend yield and weighted average option life.
RISK FACTORS
Stockholders and investors should carefully consider the risks described
below and other information in this quarterly report. Our business, financial
condition and operating results, and the trading price of our common stock could
be adversely affected if any of these risks materialize.
o The healthcare products distribution industry is highly competitive,
and we compete with numerous companies, including major manufacturers
and distributors that have greater financial and other resources than
us. Competitors could obtain exclusive rights to market particular
products or manufacturers could increase their efforts to sell
directly to end-users, thereby bypassing distributors like us.
Consolidation among healthcare products distributors could result in
existing competitors increasing their market position. In addition,
unavailability of products, whether due to our inability to gain
access to products or interruptions in supply of products from
manufacturers, could adversely affect our operating results.
o In recent years, the healthcare industry has undergone significant
change driven by various efforts to reduce costs, including the
reduction of spending budgets by government and private insurance
programs, such as Medicare, Medicaid and corporate health insurance
plans; trends toward managed care; consolidation of healthcare
distribution companies; electronic commerce; and collective purchasing
arrangements among office-based healthcare practitioners. If we are
unable to react effectively to these and other changes in the
healthcare industry, our operating results could be adversely
affected.
o Our technology segment, which primarily sells practice management
software and other value-added products, depends upon continued
product development, technical support and marketing. Failures in
these and related areas could adversely affect our results of
operations.
o Our business is subject to requirements under various local, state,
federal and foreign governmental laws and regulations applicable to
the manufacture and distribution of pharmaceuticals and medical
devices, including the Federal Food, Drug, and Cosmetic Act, the
Prescription Drug Marketing Act of 1987 and the Controlled Substances
Act. There is no assurance that current or future government
regulations will not adversely affect our business.
o Our business involves a risk of product liability and other claims in
the ordinary course of business, and from time to time we are named as
a defendant in cases as a result of our distribution of pharmaceutical
and other healthcare products. We have insurance policies, including
product liability insurance, and in many cases we have indemnification
rights from manufacturers with respect to the products we distribute.
There is no assurance that insurance coverage or manufacturers'
indemnity will be available in all of the pending or any future cases
22
brought against us, or that an unfavorable result in any such case
will not adversely affect our financial condition or results of
operations.
o Our business is dependent upon our ability to hire and retain
qualified sales representatives, service specialists and other sales
agents. Due to the relationships developed between our field sales
representatives and their customers, upon the departure of a sales
representative we face the risk of losing the representative's
customers, especially if the representative becomes an employee of one
of our competitors.
o Our business is subject to seasonal and other quarterly influences.
Net sales and operating profits are generally higher in the third and
fourth quarters due to timing of seasonal product sales, software and
equipment sales, year-end promotions and purchasing patterns of
office-based healthcare practitioners and are generally lower in the
first quarter primarily due to the increased purchases in the prior
quarter.
o Our international operations are subject to inherent risks, which
could adversely affect our operating results. These risks include
difficulties in opening and managing foreign offices and distribution
centers; difficulties in establishing channels of distribution;
fluctuations in the value of foreign currencies; longer payment cycles
of foreign customers and difficulty in collecting receivables in
foreign jurisdictions; import/export duties and quotas; and unexpected
regulatory, economic and political changes in foreign markets.
o Our expansion through acquisitions and/or joint ventures could result
in a loss of customers, diversion of management attention and
increased demands on our operations, information systems and financial
resources.
o We rely on third parties to ship products to our customers. Increases
in shipping rates or interruptions of service could adversely affect
our operating results.
o Changes in e-commerce could affect our business relationships and
could require significant resources. The rapid advancement of on-line
commerce requires us to provide continuous improvement in performance,
security, features and reliability of Internet content and technology,
particularly in response to competitive offerings.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the disclosures made in our Annual Report
on Form 10-K for the year ended December 28, 2002, on this matter.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive officer
and principal financial officer, has carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report as required by applicable securities legislation
and regulations. Based on such evaluation, our principal executive officer and
principal financial officer have concluded that, as of the end of such period,
our disclosure controls and procedures were effective in recording, processing,
summarizing and reporting, on a timely basis, the information required to be
disclosed by us in this report.
There have not been any changes in our internal controls over financial
reporting (as such term is defined by applicable securities legislation and
regulations) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
It should be noted that a control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. As a result, there can be no assurance
that a control system will succeed in preventing all possible instances of error
or fraud. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and the Chief Executive
Officer and Chief Financial Officer have concluded that these controls and
procedures are effective at the "reasonable assurance" level.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our business involves a risk of product liability claims and other claims
in the ordinary course of business, and from time to time we are named as a
defendant in cases as a result of our distribution of pharmaceutical and other
healthcare products. As a business practice, we generally obtain product
indemnification from our suppliers for manufactured products.
We have various insurance policies, including product liability insurance,
covering risks and in amounts we consider adequate. In many cases in which we
have been sued in connection with products manufactured by others, the
manufacturer provides us with indemnification. There can be no assurance that
the coverage we maintain is sufficient or will be available in adequate amounts
or at a reasonable cost, or that indemnification agreements will provide us with
adequate protection. In our opinion, all pending matters, including those
described below, are covered by insurance or will not otherwise seriously harm
our financial condition.
PRODUCT LIABILITY CLAIMS
As of September 27, 2003, we were a defendant in approximately 45 product
liability cases. Of these cases, 42 involve claims made by healthcare workers
who claim allergic reaction relating to exposure to latex gloves. In each of
these cases, we 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 us
pending product identification; however, we have impleaded or filed cross claims
against those manufacturers in each case in which we are a defendant.
As of September 27, 2003, we had accrued our best estimate of potential
losses relating to product liability claims for which we were able to determine
a reasonable estimated loss. This accrued amount was not material to our
financial position, results of operations or cash flows. Our method for
determining estimated losses considers currently available facts, presently
enacted laws and regulations and other external factors, including potential
recoveries from third parties.
TEXAS CLASS ACTION
On January 27, 1998, in District Court in Travis County, Texas, we and one
of our subsidiaries were named as defendants in a matter entitled "Shelly E.
Stromboe and Jeanne Taylor, on Behalf of Themselves and all others Similarly
Situated vs. Henry Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc.",
Case No. 98-00886. The petition 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 trial 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 10,000 DOS
customers were covered by the class action that was certified by the trial
court. In November of 1999, we filed an interlocutory appeal of the trial
25
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 trial court's certification order. On January 5, 2001,
we filed a Petition for Review in the Texas Supreme Court asking the Court to
find that it had "conflicts jurisdiction" to permit review of the trial court's
certification order. The Texas Supreme Court heard oral argument on February 6,
2002. On October 31, 2002, the Texas Supreme Court issued an opinion in the case
holding that it had conflicts jurisdiction to review the decision of the Court
of Appeals and finding that the trial court's certification of the case as a
class action was improper. The Texas Supreme Court further held that the
judgment of the Court of Appeals, which affirmed the class certification order,
must be reversed in its entirety. Upon reversal of the class certification
order, the Texas Supreme Court remanded the case to the trial court for further
proceedings consistent with its opinion.
On January 31, 2003, counsel for the class filed a Motion for Rehearing
with the Texas Supreme Court seeking a reversal for the Supreme Court's earlier
opinion reversing the class certification order. On May 8, 2003, the Texas
Supreme Court denied the Motion for Rehearing, letting stand its opinion dated
October 31, 2002, which decertified both sub-classes in their entirety. On
August 29, 2003, class counsel filed amended papers seeking certification of an
amended Windows class and an amended DOS class. The only claim now asserted for
class certification by the Windows class is for the alleged breach of the
implied warranty of merchantability. The only claim now asserted for class
certification by the DOS class is a claim for alleged violations of the Texas
Unsolicited Goods Statute and the Federal Unordered Merchandise Act. A hearing
on Plaintiffs' Amended Motion to Certify a Class is currently set for November
18-20, 2003. At this time, however, it is not possible to determine whether the
trial court will certify a different class upon motion, if any, or the possible
range of damages or other relief sought by the plaintiffs in the trial court.
PURPORTED CLASS ACTION IN NEW JERSEY
In February 2002, we were 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. and Avenel-Iselin Medical Group, P.A. vs.
Henry Schein, Inc., doing business as Caligor", Case No. MRS-L-421-02. The
plaintiffs' complaint 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.
Plaintiffs seek to represent a class of all physicians, hospitals and other
healthcare providers throughout New Jersey and across the United States. This
complaint, as amended in August 2002, 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, conversion
and promissory estoppel relating to sales of a vaccine product in the year 2001.
We filed an answer in October 2002. Because the plaintiffs have not specified
damages, it is not possible to determine the range of damages or other relief
sought by the plaintiffs. We intend to vigorously defend ourselves against this
claim, as well as all other claims, suits and complaints.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Letter Agreement dated October 10, 2003 between the Company and Stanley
Komaroff
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification 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 and
accounting officer)
Dated: November 10, 2003
27