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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 26, 1999
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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 August 6, 1999, there were 40,690,856 shares of the Registrant's Common
Stock outstanding.
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HENRY SCHEIN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements: Page No.
Consolidated Balance Sheets
June 26, 1999 and December 26, 1998..................................................3
Consolidated Statements of Operations
Three and Six Months ended June 26, 1999 and June 27, 1998...........................4
Consolidated Statements of Cashflows
Six Months ended June 26, 1999 and June 27, 1998.....................................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.............................19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................20
Item 6. Exhibits and Reports on Form 8-K.......................................................21
Signature..............................................................................22
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 26, December 26,
1999 1998
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 25,075 $ 28,222
Accounts receivable, less reserves of $21,763 and $20,136, respectively.. 361,340 338,121
Inventories ............................................................. 278,774 270,008
Deferred income taxes.................................................... 14,011 14,532
Prepaid expenses and other .............................................. 64,447 53,646
---------- --------
Total current assets................................................. 743,647 704,529
Property and equipment, net of accumulated depreciation and amortization
of $60,229 and $53,756, respectively..................................... 72,115 67,646
Goodwill and other intangibles, net of accumulated amortization of
$24,685 and $18,123, respectively........................................ 286,565 148,428
Investments and other ....................................................... 43,382 41,437
---------- --------
$1,145,709 $ 962,040
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $165,705 $169,860
Bank credit lines........................................................ 40,458 19,372
Accruals:
Salaries and related expenses........................................ 30,613 29,675
Merger and integration costs......................................... 13,901 21,992
Other................................................................ 69,362 50,404
Current maturities of long-term debt..................................... 6,257 9,634
---------- --------
Total current liabilities............................................ 326,296 300,937
Long-term debt............................................................... 318,157 180,445
Other liabilities ........................................................... 9,153 11,720
---------- --------
Total liabilities ................................................... 653,606 493,102
---------- --------
Minority interest............................................................ 6,900 5,904
---------- --------
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000; issued
40,578,109 and 40,250,936, respectively ............................. 406 402
Additional paid-in capital .............................................. 355,078 348,119
Retained earnings ...................................................... 140,746 119,064
Treasury stock, at cost (62,479 shares) ................................. (1,156) (1,156)
Accumulated comprehensive income ........................................ (8,533) (2,057)
Deferred compensation.................................................... (1,338) (1,338)
---------- --------
Total stockholders' equity .......................................... 485,203 463,034
---------- --------
$1,145,709 $962,040
========== ========
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 Six Months Ended
---------------------- -----------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
-------- -------- -------- ---------
(restated) (restated)
Net sales..................................................... $559,310 $475,992 $1,095,645 $926,334
Cost of sales................................................. 385,260 326,409 758,178 640,044
-------- -------- ---------- ---------
Gross profit................................................ 174,050 149,583 337,467 286,290
Operating expenses:
Selling, general and administrative........................ 142,001 126,735 281,770 248,641
Merger and integration costs .............................. 5,271 8,536 7,474 12,400
-------- -------- ---------- ---------
Operating income ..................................... 26,778 14,312 48,223 25,249
Other income (expense):.......................................
Interest income ........................................... 1,488 1,448 3,821 3,188
Interest expense .......................................... (5,316) (3,165) (11,040) (5,950)
Other - net ............................................... 297 227 108 561
-------- -------- ---------- ---------
Income before taxes on income, minority interest and
equity in earnings (losses) of affiliates........ 23,247 12,822 41,112 23,048
Taxes on income .............................................. 8,958 5,618 16,085 9,911
Minority interest in net income (loss) of subsidiaries ....... 322 (144) 919 (143)
Equity in earnings (losses) of affiliates ................... (630) 474 (858) 655
-------- -------- ---------- ---------
Net income ........................................... $ 13,337 $ 7,822 $ 23,250 $ 13,935
======== ======== ---------- ---------
Net income per common share:
Basic ..................................................... $ 0.33 $ 0.20 $ 0.57 $ 0.35
======== ======== ========== =========
Diluted.................................................... $ 0.32 $ 0.19 $ 0.56 $ 0.34
======== ======== ========== =========
Pro forma:
Historical net income..................................... $ 7,822 $ 13,935
Pro forma adjustment (provision for taxes on
previously untaxed earnings of an acquisition) ......... (263) (339)
-------- ---------
Pro forma net income.......................................... $ 7,559 $ 13,596
======== =========
Pro forma net income per common share:
Basic...................................................... $ 0.19 $ 0.35
======== ========
Diluted.................................................... $ 0.18 $ 0.33
======== =========
Weighted average shares outstanding:
Basic...................................................... 40,491 39,738 40,456 39,299
======== ======== ========== =========
Diluted.................................................... 41,547 41,710 41,621 41,195
======== ======== ========== =========
See accompanying notes to consolidated financial statements.
4
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
-------------------------
June 26, June 27,
1999 1998
------- --------
(restated)
Cash flows from operating activities:
Net income .................................................................. $ 23,250 $ 13,935
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation and amortization.............................................. 14,729 8,521
Provision for losses and allowances on accounts receivable ................ (530) (130)
Provision for deferred income taxes ....................................... 949 802
Undistributed losses (earnings) of affiliates.............................. 858 (655)
Minority interest in net income (loss) of subsidiaries..................... 919 (143)
Other ..................................................................... (144) 201
Changes in assets and liabilities:
Decrease (increase) in accounts receivable................................. 2,910 (22,878)
Decrease (increase) in inventories ........................................ 19,200 (22,593)
Decrease (increase) in other current assets ............................... 10,071 (5,675)
(Decrease) increase in accounts payable and accruals ...................... (66,953) 34,341
--------- ---------
Net cash provided by operating activities...................................... 5,259 5,726
--------- ---------
Cash flows from investing activities:
Capital expenditures ........................................................ (11,731) (16,206)
Business acquisitions, net of cash acquired.................................. (127,319) (5,946)
Proceeds from sale of fixed assets........................................... 6,402 --
Other ....................................................................... 2,183 (7,503)
--------- ---------
Net cash used in investing activities ......................................... (130,465) (29,655)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................................... 491 -----
Principal payments on long-term debt ........................................ (10,680) (9,289)
Proceeds from issuance of stock ............................................. 5,062 6,100
Proceeds from borrowings from banks.......................................... 135,508 33,382
Payments on borrowings from banks .......................................... (2,211) (181)
Other ....................................................................... (6,111) (139)
--------- --------
Net cash provided by financing activities .................................... 122,059 29,873
--------- --------
Net (decrease) increase in cash and cash equivalents ......................... (3,147) 5,944
Cash and cash equivalents, beginning of period ............................... 28,222 11,813
--------- --------
Cash and cash equivalents, end of period ...................................... $ 25,075 $ 17,757
========= =========
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 for the three and six months ended June 27, 1998 have been
restated and include adjustments to give effect to the acquisition of the H.
Meer Dental Supply Co. ("Meer"), effective August 14, 1998, which was 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 for the year ended December 26, 1998. The Company follows the same
accounting policies in preparation of interim reports. The results of operations
for the six months ended June 26, 1999 are not necessarily indicative of the
results to be expected for the fiscal year ending December 25, 1999 or any other
period.
Note 2. Business Acquisitions
During the six months ended June 26, 1999, the Company completed eight
acquisitions. The 1999 completed acquisitions included General Injectibles and
Vaccines, Inc. ("GIV"), a leading direct marketer of vaccines and other
injectibles serving 32,000 customers throughout the United States, with 1998 net
sales of approximately $120,000 and the Heiland Group GmbH ("Heiland"), a
leading direct marketer of healthcare supplies to medical, dental and veterinary
office-based practitioners, headquartered in Hamburg, Germany, with 1998 net
sales of approximately $130,000. Of the eight completed acquisitions, seven were
accounted for under the purchase method of accounting and the remaining
acquisition was accounted for under the pooling of interests method of
accounting. Results of operations of the business acquisitions accounted for
under the purchase method of accounting have been included in the consolidated
financial statements commencing with the acquisition date. The pooling
transaction was not material and has been included in the consolidated financial
statements from the beginning of the first quarter of 1999.
The total cash purchase price for the seven acquisitions accounted for under
the purchase method of accounting was approximately $149,295. The excess of the
acquisition costs over the fair value of identifiable net assets acquired will
be amortized on a straight-line basis over 30 years. The Company issued 231,304
shares of its Common Stock, with an aggregate value of approximately $6,400 in
connection with the pooling transaction.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions -- (Continued)
In connection with the 1999 and 1998 acquisitions accounted for under the
pooling of interests method, the Company incurred certain merger and integration
costs during the three and six months ended June 26, 1999 and June 27, 1998, of
approximately $5,300 and $7,500, and $8,500 and $12,400, respectively. These
costs consist primarily of compensation, rent and other costs in connection with
the closure of distribution centers, as well as other integration costs
associated with these mergers. Net of taxes, for the three and six months ended
June 26, 1999 and June 27, 1998, merger and integration costs were approximately
$0.07 and $0.11 per share, and $0.15 and $0.22 per share, respectively, on a
diluted basis.
Estimated merger and integration costs accrued at December 26, 1998 were not
in excess of actual amounts incurred. Amounts accrued at June 26, 1999 consist
primarily of severance, stay-bonuses and rent, which the Company expects will be
paid in 1999.
The summarized unaudited pro forma results of operations set forth below for
the six months ended June 27, 1998 assume the acquisitions, completed during the
second half of 1998 and the first six months of 1999, which were either
non-material pooling transactions included in the consolidated financial
statements from the beginning of the quarter in which the acquisitions occurred,
or were accounted for under the purchase method of accounting, occurred as of
the beginning of each of these periods.
Six Months Ended
----------------
June 26, June 27,
1999 1998
---- ----
Net sales .................................................. $ 1,099,215 $ 1,074,131
Net income (1)................................................ $ 27,596 $ 8,414
Net income per common share:
Basic ...................................................... $ 0.68 $ 0.21
Diluted .................................................... $ 0.66 $ 0.20
Pro forma net income, reflecting adjustment for
income taxes on previously untaxed earnings
of Meer .................................................. $ 27,596 $ 8,075
Pro forma net income per common share:
Basic ...................................................... $ 0.68 $ 0.21
Diluted .................................................... $ 0.66 $ 0.20
- -------------------
(1) Includes merger and integration costs of approximately $7,474 and $12,400,
and related tax benefits of $3,022 and $3,331, respectively.
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions -- (Continued)
Pro forma adjusted net income per common share, including acquisitions, may
not be indicative of actual results, primarily because pro forma earnings
include historical results of operations of acquired entities and do not reflect
any cost savings or potential sales erosion that may result from the Company's
integration efforts.
Net sales and net income of the Company and Meer were $427,873 and $7,213,
and $48,119, and $346, respectively, for the three months ended June 27, 1998
and $878,215 and $13,177 and $48,119 and $419, respectively, for the six months
ended June 27, 1998. The Meer net income for the three and six months ended June
27, 1998 includes a pro forma adjustment of $76 and $263, respectively. For the
period ended August 14, 1998, the effective date of the Meer acquisition, Meer's
net sales and pro forma net income was approximately $118,073 and $1,646,
respectively. The pro forma adjustments are for taxes on previously untaxed
earnings of Meer as an S Corporation.
Note 3. Comprehensive Income
Total comprehensive income for the three and six months ended June 26, 1999
and June 27, 1998 are as follows:
Three Months Ended
------------------
June 26, June 27,
1999 1998
-------- --------
(restated)
Net income....................................... $ 13,337 $ 7,822
-------- --------
Pro forma net income, reflecting the Meer tax
adjustment....................................... $ 13,337 $ 7,559
Foreign currency translation adjustments ........ (2,792) 244
-------- --------
Pro forma comprehensive income................... $ 10,545 $ 7,803
======== ========
Six Months Ended
----------------
June 26, June 27,
1999 1998
-------- --------
(restated)
Net income....................................... $ 23,250 $ 13,935
======== ========
Pro forma net income, reflecting the Meer tax
adjustment....................................... $ 23,250 $ 13,596
Foreign currency translation adjustments ........ (6,476) (74)
-------- ---------
Pro forma comprehensive income................... $ 16,774 $ 13,522
======== ========
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 4. Segment Data
The Company has two reportable segments: healthcare distribution and
technology. The healthcare distribution segment which is comprised of the
Company's dental, medical, veterinary and international business groups,
distributes healthcare products (primarily consumable) and services to office
based healthcare practitioners and professionals in the combined North American,
European and the Pacific Rim markets. The technology segment consists primarily
of the Company's practice management software business and certain other
value-added products and services which are distributed primarily to healthcare
professionals in the North American market.
The Company's reportable segments are strategic business units that offer
different products and services, albeit to the same customer base. Most of the
technology business was acquired as a unit, and the management at the time of
acquisition was retained. The following tables present information about the
Company's business segments:
Three Months Ended Six Months Ended
------------------ ----------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
-------- -------- ---------- ----------
(restated) (restated)
Net Sales:
Healthcare distribution (1):
Dental...................................... $260,632 $281,702 $ 513,885 $ 543,952
Medical..................................... 162,530 119,188 320,605 233,683
Veterinary.................................. 13,508 12,296 26,197 24,119
International (2)........................... 104,113 53,378 202,431 105,656
-------- -------- ---------- ----------
Total healthcare distribution............ 540,783 466,564 1,063,118 907,410
Technology (3)................................... 18,527 9,428 32,527 18,924
-------- -------- ---------- ----------
$559,310 $475,992 $1,095,645 $ 926,334
======== ======== ========== ==========
- -------------------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, infection control and vitamins.
(2) Consists of products sold in Dental, Medical and Veterinary groups in the
European and Pacific Rim markets.
(3) Consists of practice management software, financial products and other
value-added products.
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 4. Segment Data -- (Continued)
Three Months Ended Six Months Ended
------------------ ----------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
-------- -------- -------- --------
(restated) (restated)
Operating income:
Healthcare distribution (includes merger and
integration costs of $5,271 and $8,536,
$7,474,and $12,400, respectively).............. $ 19,038 $ 11,750 $ 35,994 $ 20,869
Technology........................................ 7,740 2,562 12,229 4,380
-------- -------- ---------- ---------
Total.................................................. $ 26,778 $ 14,312 $ 48,223 $ 25,249
======== ======== ========== =========
June 26, June 27,
1999 1998
----------- --------
(restated)
Total Assets:
Healthcare distribution............................ $1,125,163 $ 888,106
Technology......................................... 51,014 25,570
---------- ---------
Total assets for reportable segments.................... 1,176,177 913,676
Receivables due from healthcare
distribution segment............................ (27,601) (11,867)
Receivables due from technology segment........... (2,867) (1,027)
---------- ---------
Consolidated total assets............................... $1,145,709 $ 900,782
========== =========
10
Note 5. Earnings per Share
A reconciliation of shares used in calculating basic and diluted
earnings per share follows (in thousands):
Three Months Ended
------------------
June 26, June 27,
1999 1998
-------- --------
(restated)
Basic......................................... 40,491 39,738
Effect of assumed conversion of employee
stock options................................. 1,056 1,972
------- -------
Diluted....................................... 41,547 41,710
======= =======
Six Months Ended
----------------
June 26, June 27,
1999 1998
-------- --------
(restated)
Basic......................................... 40,456 39,299
Effect of assumed conversion of employee
stock options................................. 1,165 1,896
------- -------
Diluted....................................... 41,621 41,195
======= =======
Note 6. Subsequent Events
Subsequent to June 26, 1999, the Company completed a private placement
transaction under which it issued $130,000, in Senior Notes, the proceeds of
which were used for the permanent financing of its recent acquisitions GIV and
Heiland, as well as repaying and retiring a portion of its four uncommitted bank
lines. The notes come due on July 2, 2009 and bear interest at a rate of 6.94%
per annum. Interest is payable semi-annually.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the six months ended June 26, 1999, the Company completed eight
acquisitions. The 1999 completed acquisitions included GIV, a leading direct
marketer of vaccines and other injectibles serving 32,000 customers throughout
the United States, with 1998 net sales of approximately $120.0 million and
Heiland, a leading direct marketer of healthcare supplies to medical, dental and
veterinary office-based practitioners, headquartered in Hamburg, Germany, with
1998 net sales of approximately $130.0 million. Of the eight completed
acquisitions, seven were accounted for under the purchase method and the
remaining acquisition was accounted for under the pooling of interests method of
accounting. Results of operations of the business acquisitions accounted for
under the purchase method of accounting have been included in the consolidated
financial statements commencing with the acquisition date. The pooling
transaction was not material and has been included in the consolidated financial
statements from the beginning of the first quarter of 1999.
The total cash purchase price for the seven acquisitions accounted for under
the purchase method of accounting was approximately $149.3 million. The excess
of the acquisition costs over the fair value of identifiable net assets acquired
will be amortized on a straight-line basis over 30 years. The Company issued
231,304 shares of its Common Stock, with an aggregate value of approximately
$6.4 million, in connection with the pooling transaction.
In connection with the 1999 and 1998 acquisitions accounted for under the
pooling of interests method, the Company incurred certain merger and integration
costs during the three and six months ended June 26, 1999 and June 27, 1998, of
approximately $5.3 million and $7.5 million for 1999 and $8.5 million and $12.4
million for 1998, respectively. These costs consist primarily of compensation,
rent, and other costs associated with the closure of distribution centers, as
well as other integration costs associated with these mergers. Net of taxes, for
the three and six months ended June 26, 1999 and June 27, 1998, merger and
integration costs were approximately $0.07 and $0.11 per share, and $0.15 and
$0.22 per share, respectively, on a diluted basis.
Excluding the merger and integration costs, net of taxes, pro forma net
income and pro forma net income per diluted common share would have been $16.4
million and $0.40, and $13.8 million and $0.33, respectively, for the three
months ended June 26, 1999 and June 27, 1998 and $27.7 million and $0.67 and
$22.7 million and $0.55, respectively, for the six months ended June 26, 1999
and June 27, 1998.
RESULTS OF OPERATIONS
Three Months Ended June 26, 1999 compared to Three Months Ended June 27, 1998
Net sales increased $83.3 million, or 17.5%, to $559.3 million for the three
months ended June 26, 1999 from $476.0 million for the three months ended June
27, 1998. Of the $83.3 million increase, approximately $74.2 million, or 89.1%,
represented a 15.9% increase in the Company's healthcare distribution business.
As part of this increase approximately, $50.7 million represented a 95.0%
increase in the Company's international business, $43.4 million represented a
36.4% increase in its medical business, $1.2 million represented a 9.8% increase
in its veterinary business, and $(21.1) million represented a 7.5% decrease in
its dental business. The increase in medical net sales is primarily attributable
to sales to hospitals, acquisitions, and the continuing favorable impact
12
of a new telesales structure. In the veterinary market, the increase in net
sales was primarily due to increased account penetration with core accounts and
veterinary groups. In the international market, the increase in net sales was
primarily due to acquisitions in Germany and the United Kingdom and increased
account penetration in Belgium, France and Spain. The decrease in dental net
sales was primarily due to sales erosion related to integration of acquisitions
and a reduction in dental equipment sales resulting from the Company's disposal
of its equipment manufacturing subsidiary, Marus Dental International ("Marus")
in August 1998. The remaining increase in second quarter 1999 net sales was due
to the technology business, which increased $9.1 million, or 96.8%, to $18.5
million for the three months ended June 26, 1999, from $9.4 million for the
three months ended June 27, 1998. The increase in technology and value-added
product net sales was primarily due to increased practice management software
sales and an acquisition.
Gross profit increased by $24.5 million, or 16.4%, to $174.1 million for the
three months ended June 26, 1999, from $149.6 million for the three months ended
June 27, 1998. Gross profit margin decreased 0.3% to 31.1% from 31.4% last
year. Healthcare distribution gross profit increased $19.8 million, or 13.9%, to
$161.8 million for the three months ended June 26, 1999, from $142.0 for the
three months ended June 27, 1998. Healthcare distribution gross profit margin
decreased by 0.5% to 29.9% for the three months ended June 26, 1999, from 30.4%
for the three months ended June 27, 1998, primarily due to sales mix. Technology
gross profit increased by $4.7 million or 62.7% to $12.2 million for the three
months ended June 26, 1999 from $7.5 million for the three months ended June 27,
1998. Technology gross profit margins decreased by 13.7% to 66.0% for three
months ended June 26, 1999 from 79.7% for the three months ended June 27, 1998,
which was primarily due to increased support and training costs and changes in
sales mix.
Selling, general and administrative expenses increased by $15.3 million, or
12.1%, to $142.0 million for the three months ended June 26, 1999 from $126.7
million for the three months ended June 27, 1998. Selling and shipping expenses
increased by $8.2 million, or 9.4%, to $95.8 million for the three months ended
June 26, 1999 from $87.6 million for the three months ended June 27, 1998. As a
percentage of net sales, selling and shipping expenses decreased 1.3% to 17.1%
for the three months ended June 26, 1999, from 18.4% for the three months ended
June 27, 1998. The decrease was primarily due to improvements in the Company's
distribution efficiencies. General and administrative expenses increased $7.1
million, or 18.2%, to $46.2 million for the three months ended June 26, 1999,
from $39.1 million for the three months ended June 27, 1998, was primarily due
to acquisitions. As a percentage of net sales, general and administrative
expenses remained relatively constant at 8.3% for the three months ended June
26, 1999 verses 8.2% for the three months ended June 27, 1998.
Other income (expense) - net decreased by $2.0 million, to $(3.5) million
for the three months ended June 26, 1999, compared to $(1.5) million for the
three months ended June 27, 1998, due to an increase in interest expense
resulting from an increase in average borrowings and an increase in interest
rates, offset by higher interest income on notes receivable and accounts
receivable balances.
Equity in earnings of affiliates decreased $1.1 million to $(0.6) million
for the three months ended June 26, 1999 from $0.5 million for the three months
ended June 27, 1998. The decline was due to reduced earnings resulting from
temporary suspension of manufacturing operations in connection with a voluntary
recall of anesthetic products sold by Novocol Pharmaceutical of Canada, Inc.
("Novocol") an affiliate which the Company owns a non-controlling interest. The
U.S. Food and Drug Administration (FDA) has completed an inspection of Novocol's
manufacturing facility.
13
While Novocol believes that the inspection report will conclude that Novocol has
adequately addressed the issues previously raised, they are still awaiting final
authorization from the FDA to begin shipping product to the United States.
Assuming the final report on the inspection is favorable, Novocol will then
resume full production.
For the three months ended June 26, 1999 the Company's effective tax rate
was 38.5%. The difference between the Company's effective tax rate and the
Federal statutory rate relates primarily to state income taxes and
non-deductible goodwill associated with certain stock acquisitions. For the
three months ended June 27, 1998, the Company's effective tax rate was 43.8%.
Excluding merger and integration costs and including a pro forma adjustment for
assumed tax expenses arising from the previously untaxed earnings of Meer, the
Company's effective tax rate for the three months ended June 27, 1998 would have
been 38.3%. The difference between the Company's effective tax rate, excluding
certain non-deductible merger and integration costs and the Meer tax adjustment,
and the Federal statutory rate relates primarily to state income taxes.
Six Months Ended June 26, 1999 compared to Six Months Ended June 27, 1998
Net sales increased $169.3 million, or 18.3%, to $1,095.6 million for the
six months ended June 26, 1999 from $926.3 million for the six months ended June
27, 1998. Of the $169.3 million increase, approximately $155.7 million, or
92.0%, represented a 17.2% increase in the Company's healthcare distribution
business. As part of this increase, approximately $96.8 million represented a
91.6% increase in the Company's international business, $86.9 million
represented a 37.2% increase in its medical business, $2.1 million represented a
8.7% increase in its veterinary business, and $(30.1) million represented a 5.5%
decrease in its dental business. The increase in medical net sales is primarily
attributable to sales to hospitals, acquisitions and the continuing favorable
impact of a new telesales structure, partially offset by a decline in sales to
the Company's largest renal dialysis customer, Renal Treatment Centers, Inc.
("RTC"). In the international market, the increase in net sales was primarily
due to acquisitions in Germany and the United Kingdom and increased account
penetration in France, Belgium and the United Kingdom. In the veterinary market,
the increase in net sales was primarily due to increased account penetration
with core accounts and veterinary groups. The decrease in dental net sales was
primarily due to sales erosion related to the Meer acquisition and a reduction
in dental equipment sales resulting from the Company's disposal of Marus in
August 1998. The remaining increase in 1999 net sales was due to the technology
business, which increased $13.6 million, or 72.0%, to $32.5 for the six months
ended June 26, 1999, from $18.9 million for the six months ended June 27, 1998.
The increase in technology and value-added product net sales was primarily due
to increased practice management software sales and an acquisition.
Gross profit increased by $51.2 million, or 17.9%, to $337.5 million for the
six months ended June 26, 1999, from $286.3 million for the six months ended
June 27, 1998. Gross profit margin decreased by 0.1% to 30.8% from 30.9% last
year. Healthcare distribution gross profit increased $43.5 million, or 16.0%, to
$315.8 million for the six months ended June 26, 1999, from $272.3 for the six
months ended June 27, 1998. Healthcare distribution gross profit margin
decreased by 0.3% to 29.7% for the six months ended June 26, 1999, from 30.0%
for the six months ended June 27, 1998, primarily due to sales mix. Technology
gross profit increased by $7.7 million or 55.0% to $21.7 million for the six
months ended June 26, 1999 from $14.0 million for the six months ended June 27,
1998. Technology gross profit margins decreased by 7.1% to 66.7% for six months
ended
14
June 26, 1999 from 73.8% for the six months ended June 27, 1998, which was
primarily due to increased support and training costs and changes in sales mix.
Selling, general and administrative expenses increased by $33.2 million, or
13.4%, to $281.8 million for the six months ended June 26, 1999 from $248.6
million for the six months ended June 27, 1998. Selling and shipping expenses
increased by $20.3 million, or 11.9%, to $190.5 million for the six months ended
June 26, 1999 from $170.2 million for the six months ended June 27, 1998. As a
percentage of net sales, selling and shipping expenses decreased 1.0% to 17.4%
for the six months ended June 26, 1999, from 18.4% for the six months ended June
27, 1998. General and administrative expenses increased $12.9 million, or 16.5%,
to $91.3 million for the six months ended June 26, 1999, from $78.4 million for
the six months ended June 27, 1998, primarily due to acquisitions. As a
percentage of net sales, general and administrative expenses decreased 0.2% to
8.3% for the six months ended June 26, 1999, from 8.5% for the six months ended
June 27, 1998. The decrease was primarily due to improvements in the Company's
distribution efficiencies, resulting from the leveraging of the Company's
distribution infrastructure.
Other income (expense) - net decreased by $4.9 million, to $(7.1) million
for the six months ended June 26, 1999, compared to $(2.2) million for the six
months ended June 27, 1998, due to an increase in interest expense resulting
from an increase in average borrowings and an increase in interest rates, offset
by higher interest income on notes receivable and accounts receivable balances.
Equity in earnings of affiliates decreased $1.6 million to $(0.9) million
for the six months ended June 26, 1999 from $0.7 million for the six months
ended June 27, 1998. The decline was due to reduced earnings resulting from
temporary suspension of manufacturing operations in connection with a voluntary
recall of anesthetic products sold by Novocol. The FDA has completed an
inspection of Novocol's manufacturing facility. While Novocol believes that the
inspection report will conclude that Novocol has adequately addressed the issues
previously raised, they are still awaiting final authorization from the FDA to
begin shipping product to the United States. Assuming the final report on the
inspection is favorable, Novocol will then resume full production.
For the six months ended June 26, 1999 the Company's effective tax rate was
39.1%. The difference between the Company's effective tax rate and the Federal
statutory rate relates primarily to state income taxes and non-deductible
goodwill associated with certain stock acquisitions. For the six months ended
June 27, 1998, the Company's effective tax rate was 43.0%. Excluding merger and
integration costs and including a pro forma adjustment for assumed tax expenses
arising from the previously untaxed earnings of Meer, the Company's effective
tax rate for the six months ended June 27, 1998 would have been 38.3%. The
difference between the Company's effective tax rate, excluding certain
non-deductible merger and integration costs and the Meer tax adjustment, and the
Federal statutory rate relates primarily to state income taxes.
15
Year 2000
Management continued to conduct a company-wide program to prepare the
Company's computer systems, applications and software products for the year
2000, as well as, to assess the readiness for the year 2000 of critical vendors
and other third parties upon which the Company relies to operate its business.
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 inability of computer programs worldwide to correctly process
data after December 31, 1999 can have grave consequences for governments,
businesses and consumers alike.
The Company has created a Year 2000 Task Force (the "Task Force") to assess
the business risks associated with all phases of the Company's operations and to
prioritize corrective actions to avoid or mitigate the consequences of each of
the Company's and its critical vendors' and third parties' non-compliant
systems, applications and products so as to minimize potential disruptions to
its business and service to its customers. Consequently, the Task Force's
efforts are divided into three main categories; (i) internal business systems
and products and services, (ii) critical vendor and other third party business
systems and products and services, and (iii) customer business system
interfaces.
The Company has completed an inventory of all major business systems and has
made modifications to many of these business critical systems. This process is
expected to continue through the third quarter of 1999 as systems continue to be
modified and tested. At this time all of the Company's software products
currently offered for sale are year 2000 compliant. The Company continues to
work with vendors to remedy products or services considered to be at-risk with
the objective to either correct any potential issues by the end of the third
quarter of 1999, or seek alternative sources. There can be no assurance that the
Company will be able to identify sufficient alternative supply sources of
products and services such that disruption to the Company's business would not
be material. The Company currently ships substantially all of its orders in the
United States by United Parcel Service ("UPS"). UPS has advised the Company that
their systems are year 2000 compliant, including those systems used by the
Company in its distribution centers.
The Company expects to incur internal payroll costs as well as consulting
costs and other expenses related to customer and vendor relations,
infrastructure, facility enhancements and software upgrades necessary to prepare
the Company's products, services and 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. This cost does not include normal upgrading of business and financial
systems that would be year 2000 compliant already.
Business disruptions in the form of floods, blizzards, hurricanes,
earthquakes and power failures are a normal part of the Company's contingency
planning. In an effort to reduce the risks associated with Year 2000 problems,
the Company has established and is currently continuing to develop Year 2000
contingency plans that build upon existing disaster recovery and contingency
plans. Examples of the Company's existing contingency plans include alternative
electronic means for placing and receiving orders, rerouting orders to
alternative warehouses if necessary and alternative communication lines.
The Company's contingency planning methodology attempts to identify, explore
and document potential failure points, internal and external in each of the
Company's businesses. Failure points are then prioritized based on likelihood
and criticality. Contingency plans are then developed for each of the potential
failure points deemed likely and/or critical. Included in the Company's
16
contingency plan are preparations that need to be completed currently (such as
identifying the triggers for shifting into contingency mode and appointing and
training resource response teams), identification of alternate processes to be
used in the event of contingencies, as well as design of the process for exiting
contingency mode.
Contingency planning for possible Year 2000 disruptions will continue to be
defined, improved and implemented.
Euro Conversion
Effective January 1, 1999, 11 of the 15 member countries of the European
Union have adopted the Euro as their common legal currency. On that date, the
participating countries established fixed Euro conversion rates between their
existing sovereign currencies and the Euro. The Euro now trades on currency
exchanges and is available for non-cash transactions. The participating
countries now issue sovereign debt exclusively in Euros, and have re-denominated
outstanding sovereign debt. The authority to direct monetary policy for the
participating countries, including money supply and official interest rates for
the Euro, is now exercised by the new European Central Bank.
In 1998 the Company established a Euro Task Force to address its information
system, product and customer concerns. The Company expects to achieve timely
Euro information system and product readiness, so as to conduct transactions in
the Euro, in accordance with implementation schedules as they are established by
the European Commission. The Company does not anticipate that the costs of the
overall effort will have a material adverse impact on future results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a)
acquisitions, (b) working capital needs resulting from increased sales, extended
payment terms on various products, special inventory forward buy-in
opportunities, and initial start-up inventory requirements for new distribution
centers 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, private placement loans,
and stock issuances.
Net cash provided by operating activities for the six months ended June 26,
1999 of $5.3 million resulted primarily from net income of $23.3 million,
adjusted for non-cash charges of $16.8 million, offset by an increase in
operating items of working capital of $34.8 million. The increase in working
capital was primarily due to a decrease in accounts payable and other accrued
expenses of $67.0 million primarily due to payments made to vendors for year-end
inventory buy-ins, offset by a $19.2 million decrease in inventory, a $10.1
million decrease in other current assets, and a $2.9 million decrease in
accounts receivable. The Company anticipates future increases in working capital
requirements as a result of its continued sales growth, extended payment terms
and special inventory forward buy-in opportunities.
Net cash used in investing activities for the six months ended June 26, 1999
of $130.5 million resulted primarily from cash used to make acquisitions of
$127.3 million and capital expenditures
17
of $11.7 million, offset primarily by the sale of certain equipment at one of
the Company's distribution facilities that was subsequently leased back. The
Company expects that it will invest in excess of $25.0 million during the year
ending December 25, 1999, in capital projects to modernize and expand its
facilities and infrastructure systems and integrate operations.
Net cash provided by financing activities for the six months ended June 26,
1999 of $122.1 million resulted primarily from borrowings under the Company's
revolving credit facilities of approximately $135.5, offset by debt repayments
of $12.9 million.
Certain holders of minority interests in acquired entities or ventures have
the right at certain times to require the Company to acquire their interest at
either fair market value or a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of June 26, 1999 of $25.1
million consist of bank balances and money market funds.
The Company has a $150.0 million revolving credit facility, which has a
termination date of August 15, 2002. Borrowings under the credit facility were
$136.8 million at June 26, 1999. The Company also has four uncommitted bank
lines totaling $90.0 million under which $59.7 million has been borrowed at June
26, 1999. Certain of the Company's subsidiaries have revolving credit facilities
that total approximately $52.5 million at June 26, 1999 under which $40.5
million has been borrowed.
Subsequent to June 26, 1999, the Company completed a private placement
transaction under which it issued $130.0 million in Senior Notes, the proceeds
of which were used for the permanent financing of its recent acquisitions, GIV
and Heiland, as well as repaying and retiring a portion of the four uncommitted
bank lines referred to above. The notes come due on July 2, 2009 and bear
interest at a rate of 6.94% per annum. Interest is payable semi-annually.
The Company believes that its cash and cash equivalents, its anticipated
cash flow from operations, its ability to access private and public debt and
equity markets, and the availability of funds under its existing credit
agreements will provide it with liquidity sufficient to meet its short and
long-term capital needs.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the disclosures made in our report 10-K
for the year ended December 26, 1998, on this matter.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. Certain information in this Form 10-Q contains
information that is forward-looking, such as the Company's opportunities to
increase sales through, among other things, acquisitions; its exposure to
fluctuations in foreign currencies; its anticipated liquidity and capital
requirements; competitive product and pricing pressures and the ability to gain
or maintain share of sales in global markets as a result of actions by
competitors; and the results of legal proceedings. The matters referred to in
forward-looking statements could be affected by the risks and uncertainties
involved in the Company's business. These risks and uncertainties include, but
are not limited to, the effect of economic and market conditions, the impact of
the consolidation of health care practitioners, the impact of health care
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the acceptance and quality of software products,
acceptance and ability to manage operations in foreign markets, the ability to
maintain favorable supplier arrangements and relationships, possible disruptions
in the Company's computer systems or telephone systems, 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 (see "Year 2000"),
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.
19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 26, 1999, the
stockholders of the Company took the following actions:
(i) Re-elected the following individuals to the Company's Board of Directors:
Stanley M. Bergman (33,414,626 shares voting for; 328,968 shares withheld)
James P. Breslawski (33,414,626 shares voting for; 328,968 shares withheld)
Bruce J. Haber (33,413,446 shares voting for; 329,848 shares withheld)
Gerald A. Benjamin (33,414,626 shares voting for; 328,968 shares withheld)
Steven Paladino (33,414,626 shares voting for; 328,968 shares withheld)
Leonard A. David (33,414,626 shares voting for; 328,968 shares withheld)
Mark E. Mlotek (33,414,626 shares voting for; 328,968 shares withheld)
Barry J. Alperin (33,414,626 shares voting for; 328,968 shares withheld)
Pamela Joseph (33,414,626 shares voting for; 328,968 shares withheld)
Donald J. Kabat (33,414,626 shares voting for; 328,968 shares withheld)
Marvin H. Schein (33,414,626 shares voting for; 328,968 shares withheld)
Irving Shafran (33,414,626 shares voting for; 328,968 shares withheld)
(ii) Amended the Company's 1994 Stock Option Plan to (a) increase the number of
shares issuable under the Plan by 1,250,000 shares, and (b) permit the
grant of options to Consultants (as defined) to the Company and its
subsidiaries. (32,032,130 shares voting for; 1,355,687 shares voting
against; 356,571 shares abstaining).
(iii) Ratified the selection of BDO Seidman, LLP as the Company's independent
auditors for the year ended December 25, 1999 (33,512,131 shares voting
for; 207,232 shares voting against; 24,985 shares abstaining).
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Form of the Note Purchase Agreements between the Company and
the Purchasers listed on Schedule A thereto relating to an
aggregate of $130,000,000 with principal amount of the
Company's 6.94% Senior Notes due June 30, 2009.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
21
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: August 10, 1999
22
EXHIBIT INDEX
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Form of the Note Purchase Agreements between the Company and
the Purchasers listed on Schedule A thereto relating to an
aggregate of $130,000,000 with principal amount of the
Company's 6.94% Senior Notes due June 30, 2009.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
23