UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 28, 1998
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
incorporation or organization) Identification No.)
135 Duryea Road
Melville, New York 11747
(Address of principal executive offices)
Telephone Number (516) 843-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [X] No [ ]
As of May 6, 1998, there were 35,447,039 shares of the Registrant's
Common Stock outstanding.
HENRY SCHEIN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 28, 1998 and December 27, 1997..........................3
Consolidated Statements of Operations
Three months ended March 28, 1998 and March 29, 1997 .........4
Consolidated Statements of Cash Flows
Three months ended March 28, 1998 and March 29, 1997 .......5
Notes to Consolidated Financial Statements ......................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..........................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..............................................12
Item 6. Exhibits and Reports on Form 8-K ...............................12
Signature ......................................................13
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 28, December 27,
1998 1997
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 12,244 $ 7,824
Accounts receivable, less reserves of $12,712 and $13,048,
respectively .................................................................... 258,136 261,665
Inventories ......................................................................... 220,065 212,848
Deferred income taxes ............................................................... 13,358 13,323
Other ............................................................................... 40,999 39,396
--------- ---------
Total current assets .................................................... 544,802 535,056
Property and equipment, net of accumulated depreciation and
amortization of $59,974 and $57,997, respectively ................................... 58,301 54,449
Goodwill and other intangibles, net of accumulated
amortization of $11,657 and $10,395, respectively .................................... 127,054 122,217
Investments and other .................................................................. 28,924 29,472
--------- ---------
$ 759,081 $ 741,194
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 116,021 $ 129,806
Bank credit lines ................................................................... 11,665 11,973
Accruals:
Salaries and related expenses ..................................................... 22,967 20,729
Merger and integration costs ...................................................... 13,220 17,056
Other ............................................................................. 32,586 39,095
Current maturities of long-term debt ................................................ 8,361 9,370
--------- ---------
Total current liabilities ............................................... 204,820 228,029
Long-term debt ......................................................................... 123,439 93,192
Other liabilities ...................................................................... 6,234 6,550
--------- ---------
Total liabilities ....................................................... 334,493 327,771
--------- ---------
Minority interest ...................................................................... 2,267 2,225
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000; issued
35,410,714 and 35,146,892, respectively ........................................ 354 352
Additional paid-in capital .......................................................... 328,473 322,998
Retained earnings ................................................................... 98,202 92,238
Treasury stock, at cost (62,479 shares) ............................................. (1,156) (1,156)
Accumulated other comprehensive income .............................................. (1,927) (1,609)
Deferred compensation ............................................................... (1,625) (1,625)
--------- ---------
Total stockholders' equity .............................................. 422,321 411,198
--------- ---------
$ 759,081 $ 741,194
========= =========
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
---------------------------------
March 28, March 29,
1998 1997
--------- ---------
(restated)
Net sales .......................................................................... $ 403,032 $ 339,049
Cost of sales ...................................................................... 281,541 239,012
--------- ---------
Gross profit ................................................................... 121,491 100,037
Operating expenses:
Selling, general and administrative ............................................ 107,225 90,402
Merger and integration costs ................................................... 3,864 2,527
--------- ---------
Operating income .......................................................... 10,402 7,108
Other income (expense):
Interest income ................................................................ 1,712 1,537
Interest expense ............................................................... (2,157) (1,020)
Other - net .................................................................... 80 (75)
--------- ---------
Income before taxes on income,
minority interest and equity in
earnings (losses) of affiliates .......................................... 10,037 7,550
Taxes on income .................................................................... 4,253 4,008
Minority interest in net income (loss) of subsidiaries ............................. 1 (14)
Equity in earnings (losses) of affiliates .......................................... 181 (50)
--------- ---------
Net income ......................................................................... $ 5,964 $ 3,506
========= =========
Net income per common share:
Basic ...................................................................... $ 0.17 $ 0.10
========= =========
Diluted .................................................................... $ 0.16 $ 0.10
========= =========
Weighted average shares outstanding:
Basic ...................................................................... 35,518 33,640
========= =========
Diluted .................................................................... 37,606 35,115
========= =========
See accompanying notes to consolidated financial statements.
4
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
--------------------------
March 28, March 29,
1998 1997
-------- --------
(restated)
Cash flows from operating activities:
Net income ................................................................ $ 5,964 $ 3,506
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ......................................... 3,554 3,287
Provision (benefit) for losses on accounts receivable ................. (314) 494
Benefit from deferred income taxes .................................... (99) (200)
Undistributed (earnings) losses of affiliates ......................... (181) 50
Benefit for merger and integration costs .............................. (3,836) --
Minority interest in net income (loss) of subsidiaries ................ 1 (14)
Other ................................................................. (134) (5)
Changes in assets and liabilities:
Decrease in accounts receivable ....................................... 6,407 1,289
(Increase) decrease in inventories .................................... (6,981) 6,727
(Increase) decrease in other current assets ........................... (1,375) 610
Decrease in accounts payable and accruals ............................. (16,477) (27,981)
-------- --------
Net cash used in operating activities ......................................... (13,471) (12,237)
-------- --------
Cash flows from investing activities:
Capital expenditures ...................................................... (6,700) (2,827)
Business acquisitions, net of cash acquired ............................... (4,353) (4,377)
Other ..................................................................... (3,160) (943)
-------- --------
Net cash used in investing activities ......................................... (14,213) (8,147)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................................. -- 1,011
Principal payments on long-term debt ...................................... (1,813) (1,210)
Proceeds from issuance of stock upon exercise of options .................. 3,840 269
Proceeds from borrowings from banks ....................................... 32,279 1,283
Payments on borrowings from banks ......................................... (1,846) (3,841)
Purchase of treasury stock ................................................ -- (341)
Dividends paid ............................................................ -- (484)
Other ..................................................................... (356) (1,184)
-------- --------
Net cash provided by (used in) financing activities ........................... 32,104 (4,497)
-------- --------
Net increase (decrease) in cash and cash equivalents .......................... 4,420 (24,881)
Cash and cash equivalents, beginning of period ................................ 7,824 45,814
-------- --------
Cash and cash equivalents, end of period ...................................... $ 12,244 $ 20,933
======== ========
See accompanying notes to consolidated financial statements.
5
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Henry Schein,
Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company").
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth therein. These consolidated financial statements are condensed and
therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The financial statements include adjustments to give effect to the
acquisitions of Micro Bio-Medics, Inc. ("MBMI"), effective August 1, 1997 and
Sullivan Dental Products, Inc. ("Sullivan"), effective November 12, 1997,
which were accounted for under the pooling of interests method. The
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K and 10-K/A for the year ended December
27, 1997. The Company follows the same accounting policies in preparation of
interim reports. The results of operations for the three months ended March
28, 1998 are not necessarily indicative of the results to be expected for the
fiscal year ending December 26, 1998 or any other period.
Note 2. Merger and Integration Costs
In connection with certain acquisitions accounted for under the pooling of
interests method of accounting, the Company incurred certain merger and
integration costs during the three months ended March 28, 1998 and March 29,
1997. These costs consist primarily of investment banking, legal, accounting
and advisory fees, compensation and other integration costs associated with
these mergers. Net of taxes, for the three months ended March 28, 1998 and
March 29, 1997, merger and integration costs were approximately $0.08 and
$0.07 per share, on a diluted basis, respectively.
Note 3. Comprehensive Income
The Company adopted SFAS No. 130 Reporting Comprehensive Income, which
requires that all components of comprehensive income and total comprehensive
income be reported on one of the following: a statement of income and
comprehensive income, a statement of comprehensive income or a statement of
stockholders' equity. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by owners
(changes in paid in capital) and distributions to owners (dividends). For
interim reporting purposes, SFAS 130 requires disclosure of total
comprehensive income.
6
Total comprehensive income for the three months ended March 28, 1998 and March
29, 1997 is as follows:
Three Months Ended
March 28, 1998 March 29, 1997
----------------------------------
Net income $5,964 $3,906
Foreign currency translation adjustments (318) (978)
---------- ---------
Comprehensive income $5,646 $2,928
========== =========
Note 4. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings per
share follows (in thousands):
March 28, 1998 Historical
------------
Basic....................................... 35,518
Effect of assumed conversion of
employee stock options.................. 2,088
---------
Diluted..................................... 37,606
=========
March 29, 1997
Basic....................................... 33,640
Effect of assumed conversion of
employee stock options.................. 1,475
---------
Diluted..................................... 35,115
=========
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 28, 1998 compared to Three Months Ended March 29, 1997
Net sales increased $64.0 million, or 18.9%, to $403.0 million for the three
months ended March 28, 1998 from $339.0 million for the three months ended
March 29, 1997. Of the $64.0 million increase, approximately $27.8 million
represented a 14.9% increase in the Company's dental business, $20.1 million
represented a 21.3% increase in its medical business, $11.6 million
represented a 28.5% increase in its international business, $2.6 million
represented a 36.4% increase in the Company's technology and value-added
product business, and $1.9 million, represented a 19.5% increase in its
veterinary business. The increase in dental net sales was primarily the result
of the continuing favorable impact of the Company's integrated sales and
marketing approach (which coordinates the efforts of its field sales
consultants with its direct marketing and telesales personnel), and continued
success of the Company's targeted marketing programs and acquisitions
completed subsequent to the first quarter of 1997. The increase in medical net
sales is primarily attributable to sales to hospitals, acquisitions, and the
benefits of a new telesales structure, partially offset by a decline in sales
to renal dialysis centers. In the first quarter of 1998 the Company's largest
renal dialysis customer, Renal Treatment Centers, Inc., ("RTC") was acquired
by Total Renal Care, Inc. which currently is not a customer of the Company. In
March of this year, RTC stopped purchasing Epogen from the Company, but
continues to purchase other products. During fiscal year 1997, the Company's
sales of Epogen to RTC amounted to $38.7 million. In the international market,
the increase in net sales was due to acquisitions, primarily in Germany, the
United Kingdom and The Netherlands, and increased account penetration in
France, Germany and Spain. Unfavorable exchange rate translation adjustments
reduced the net increase in the international market by approximately $2.0
million. Had net sales for the international market been translated at the
same exchange rates in effect during the first quarter of 1997, net sales
would have increased by an additional 4.9%. In the veterinary market, the
increase in net sales was primarily due to increased account penetration with
core accounts and veterinary groups. The increase in technology and
value-added product sales was primarily due to acquisitions completed
subsequent to the first quarter of 1997.
Gross profit increased by $21.5 million, or 21.5%, to $121.5 million for the
three months ended March 28, 1998, from $100.0 million for the three months
ended March 29, 1997. Gross profit margin increased by 0.6% to 30.1% from
29.5% last year, with improvements primarily in medical margins, and to a
lesser extent, dental and veterinary margins, partially offset by declines in
technology and value-added product and international margins, all the result
of changes in product mix.
Selling, general and administrative expenses increased by $16.8 million, or
18.6%, to $107.2 million for the three months ended March 28, 1998 from $90.4
million for the three months ended March 29, 1997. Selling and shipping
expenses increased by $11.2 million, or 18.5%, to $71.8 million for the three
months ended March 28, 1998 from $60.6 million for the three months ended
March 29, 1997. As a percentage of net sales, selling and shipping expenses
decreased 0.1% to 17.8% for the three months ended March 28, 1998 from 17.9%
for the three months ended March 29, 1997. This decrease was primarily due to
improvements of the Company's distribution efficiencies. General
8
and administrative expenses increased $5.6 million, or 18.8%, to $35.4 million
for the three months ended March 28, 1998 from $29.8 million for the three
months ended March 29, 1997, primarily as a result of acquisitions.
As a percentage of net sales, general and administrative expenses remained
unchanged at 8.8%.
Other income (expense) - net decreased by $0.8 million, to ($0.4) million for
the three months ended March 28, 1998, compared to $0.4 million for the three
months ended March 29, 1997 due to an increase in interest expense resulting
from an increase in average borrowings, partially offset by an increase in
interest income from finance charges and imputed interest arising from
non-interest bearing extended payment term sales.
Equity in earnings of affiliates increased $0.3 million to $0.2 million for
the three months ended March 28, 1998 from ($0.1) million for the three months
ended March 29, 1997. This increase was primarily due to increased sales
volume and improved margins for the products sold by an unconsolidated
50%-owned company.
For the three months ended March 28, 1998 the Company's effective tax rate was
42.4%. Excluding merger and integration costs, the majority of which are not
deductible for income tax purposes, the Company's effective tax rate would
have been 38.1%. For the three months ended March 29, 1997, the Company's
effective tax rate was 53.1%. Excluding merger and integration costs, the
Company's effective tax rate would have been 39.8%. The difference between the
Company's effective tax rate (excluding merger and integration costs), and the
Federal statutory rate relates primarily to state income taxes.
Year 2000
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the year 2000, as well as identify
critical third parties which the Company relies upon to operate its business
to assess their readiness for the year 2000. The year 2000 issue arises from
the widespread use of computer programs that rely on two-digit date codes to
perform computations or decision-making functions. The Company expects to
incur internal payroll costs as well as consulting costs and other expenses
related to infrastructure and facilities enhancements necessary to prepare for
the Company's systems for the year 2000. Management estimates that the cost of
this program will be between $2.0 million and $3.0 million, with approximately
$1.5 million representing incremental costs to the Company. There can be no
assurance that the systems of other companies which the Company's systems rely
upon will be timely converted, or that such failure to convert by another
company would not have a material adverse effect on the Company's systems and
results of operations.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on
various products, special inventory forward buy-in opportunities, and to fund
initial start-up inventory requirements for new distribution centers, (b)
acquisitions and (c) capital expenditures. Since sales have been strongest
during the fourth quarter and special inventory forward buy-in opportunities
are most prevalent just before the end of the year, the Company's working
capital requirements have been generally higher from the end of the third
quarter to the end of the first quarter of the following year. The Company has
financed its business primarily through revolving credit facilities and stock
issuances.
Net cash used in operating activities for the three months ended March 28,
1998 of $13.5 million resulted primarily from a net increase in operating
items of working capital of $18.4 million offset, in part, by net income of
$6.0 million adjusted for non-cash charges of $1.1 million. The increase in
working capital was primarily due to (i) a decrease in accounts payable and
other accrued expenses of $16.5 million resulting primarily from payments to
vendors for inventory purchased as part of the Company's year-end inventory
forward buy-in program, (ii) a $7.0 million increase in inventory, and (iii) a
$1.4 million increase in other current assets, offset by a $6.4 million
decrease in accounts receivable. The Company anticipates future increases in
working capital as a result of its continued sales growth.
Net cash used in investing activities for the three months ended March 28,
1998 of $14.2 million resulted primarily from cash outlays for capital
expenditures of $6.7 million and cash paid for acquisitions of $4.4 million.
The increased amount of capital expenditures over the comparable prior year
period was due to expenditures for additional operating facilities, as well
as the development of new computer systems. The Company expects that it
will invest in excess of $30.0 million during the year ending December 26,
1998, including approximately $10.0 million to $12.0 million relating to the
consolidation and integration of facilities and systems as a result of recent
acquisitions. Thereafter, the Company expects to invest in excess of $20.0
million per year in capital projects to modernize and expand its facilities
and infrastructure systems and integrate operations.
Net cash provided by financing activities for the three months ended March 28,
1998 of $32.1 million resulted primarily from net borrowings on bank credit
lines of $30.5 million.
In addition, with respect to certain acquisitions and joint ventures, holders
of minority interest in the 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 March 28, 1998 of $12.2 million
consist of bank balances and investments in commercial paper rated AAA by
Moodys (or an equivalent rating). These investments have staggered maturity
dates, none greater than three months, and have a high degree of liquidity
since the securities are actively traded in public markets.
The Company's main credit facility is a $150.0 million revolving credit
facility which has a termination date of August 15, 2002. Borrowings under the
credit facility were $106.9 million at March 28, 1998. Certain of the
Company's subsidiaries have revolving credit facilities that total
approximately $35.3 million under which $11.7 million have been borrowed at
March 28, 1998.
10
The Company believes that its cash and cash equivalents, its anticipated cash
flow from operations, its ability to access private and public debt and equity
markets, and the availability of funds under its existing credit agreements
will provide it with liquidity sufficient to meet its short and long-term
capital needs.
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 healthcare practitioners, the impact of healthcare
reform, opportunities for acquisitions and the Company's ability to
effectively integrate acquired companies, the acceptance and quality of
software products, acceptance and ability to manage operations in foreign
markets, the ability to maintain favorable supplier arrangements and
relationships, possible disruptions in the Company's computer systems or
telephone systems, the Company's ability and its customers' and suppliers'
ability to replace, modify or upgrade computer programs in ways that
adequately address the Year 2000 issue, 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.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the first quarter of 1998, the Company became involved in a dispute
with Premier Laser Systems, Inc. ("PLS") involving the alleged purchase of
certain products distributed by PLS. The parties are discussing a resolution
to the dispute. The Company does not believe that this dispute will have a
material adverse effect on the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.106 Amendment No. 3 dated as of November 10, 1997 to Credit
Agreement (filed herein).
10.107 Amendment No. 4 dated as of December 10, 1997 to Credit
Agreement (filed herein).
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
During the fourth quarter of 1997, the Company filed one Form 8-K:
The Report, dated November 12, 1997 and filed on November 26, 1997,
reported the Company's acquisition of Sullivan and incorporated by
reference Sullivan's audited financial statements filed as part of
Sullivan's Annual Report on Form 10-K for the year ended December 31,
1996. On January 26, 1998, the Company filed Amendment No. 1 to the
foregoing report on Form 8- K/A which, among other things, included
(i) unaudited pro forma combined condensed financial information
pursuant to Article 11 of Regulation S-X giving effect to the merger,
(ii) Sullivan's unaudited balance sheets as of September 30, 1997 and
December 31, 1996 and the related unaudited statements of income and
cash flow for the three-month and nine-month periods ended September
30, 1997 and (iii) consolidated balance sheets of the Company as of
December 28, 1996 and December 30, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 28, 1996,
restated to give effect to the Company's acquisition of MBMI.
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HENRY SCHEIN, INC.
(Registrant)
By: /s/ STEVEN PALADINO
--------------------------------
STEVEN PALADINO
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: May 12, 1998
13