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 30, 2002
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
COMMISSION FILE NUMBER: 0-27078
HENRY SCHEIN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3136595
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
135 DURYEA ROAD
MELVILLE, NEW YORK
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
11747
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 843-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
-- --
As of May 08, 2002 there were 43,201,656 shares of the Registrant's Common Stock
outstanding.
HENRY SCHEIN, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of March 30, 2002 and December 29, 2001 .... 3
Statements of Income and Comprehensive Income for the three
months ended March 30, 2002 and March 31, 2001 ............. 4
Statements of Cash Flows for the three months ended
March 30, 2002 and March 31, 2001 .......................... 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 ..... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................. 17
ITEM 6. Exhibits and Reports on Form 8-K ............................... 19
Signature ...................................................... 19
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 30, December 29,
2002 2001
--------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 93,421 $ 193,367
Accounts receivable, less reserves of $33,163 and $31,929, respectively ... 356,453 363,700
Inventories ............................................................... 293,764 291,231
Deferred income taxes ..................................................... 26,626 25,751
Prepaid expenses and other ................................................ 57,145 52,922
----------- -----------
Total current assets ................................................. 827,409 926,971
Property and equipment, net of accumulated depreciation and amortization
of $93,354 and $90,823, respectively ...................................... 129,498 117,980
Goodwill, net .................................................................. 284,844 279,981
Other intangibles, net of accumulated amortization
of $3,513 and $3,348, respectively ........................................ 8,262 8,023
Investments and other .......................................................... 59,506 52,473
----------- -----------
$ 1,309,519 $ 1,385,428
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 205,717 $ 263,190
Bank credit lines ......................................................... 4,031 4,025
Accruals:
Salaries and related expenses ........................................ 32,353 41,602
Merger and integration, and restructuring costs ...................... 5,067 5,867
Acquisition earnout payments ......................................... 4,680 26,800
Other ................................................................ 79,353 80,355
Current maturities of long-term debt ...................................... 3,212 15,223
----------- -----------
Total current liabilities ............................................ 334,413 437,062
Long-term debt ................................................................. 241,968 242,169
Other liabilities .............................................................. 18,174 18,954
----------- -----------
Total liabilities .................................................... 594,555 698,185
----------- -----------
Minority interest .............................................................. 7,539 6,786
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000,
issued and outstanding: 0 and 0, respectively ........................ -- --
Common stock, $.01 par value, authorized 120,000,000,
issued: 43,020,590 and 42,745,204, respectively ...................... 430 427
Additional paid-in capital ................................................ 401,629 393,047
Retained earnings ......................................................... 332,132 312,402
Treasury stock, at cost, 62,479 shares .................................... (1,156) (1,156)
Accumulated comprehensive loss ............................................ (25,300) (23,922)
Deferred compensation ..................................................... (310) (341)
----------- -----------
Total stockholders' equity ........................................... 707,425 680,457
----------- -----------
$ 1,309,519 $ 1,385,428
=========== ===========
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
----------------------
March 30, March 31,
2002 2001
--------- ---------
Net sales ................................................................ $ 647,093 $ 593,895
Cost of sales ............................................................ 468,703 434,538
--------- ---------
Gross profit ........................................................ 178,390 159,357
Operating expenses:
Selling, general and administrative ................................. 143,192 131,774
--------- ---------
Operating income ............................................... 35,198 27,583
Other income (expense):
Interest income ..................................................... 2,439 1,241
Interest expense .................................................... (4,828) (5,368)
Other - net ......................................................... (566) (354)
--------- ---------
Income before taxes on income, minority interest and equity
in earnings of affiliates ................................. 32,243 23,102
Taxes on income .......................................................... 12,064 8,548
Minority interest in net income of subsidiaries .......................... 569 531
Equity in earnings of affiliates ......................................... 120 109
--------- ---------
Net income ............................................................... $ 19,730 $ 14,132
========= =========
Comprehensive income:
Net income ............................................................. $ 19,730 $ 14,132
Foreign currency translation adjustments ........................... (1,317) (4,934)
Other .............................................................. (61) (219)
--------- ---------
Comprehensive income ..................................................... $ 18,352 $ 8,979
========= =========
Net income per common share:
Basic ............................................................... $ 0.46 $ 0.34
========= =========
Diluted ............................................................. $ 0.45 $ 0.33
========= =========
Weighted average common shares outstanding:
Basic ............................................................... 42,791 41,975
========= =========
Diluted ............................................................. 44,069 43,146
========= =========
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 30, March 31,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income ................................................................ $ 19,730 $ 14,132
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ................................... 5,798 9,466
Provision for allowances on trade receivables ................... 1,234 550
Benefit for deferred income taxes ............................... (1,716) (665)
Undistributed earnings of affiliates ............................ (120) (109)
Minority interest in net income of subsidiaries ................. 569 531
Other ........................................................... 30 48
Changes in operating assets and liabilities (net of purchase acquisitions):
Decrease in accounts receivable ...................................... 4,613 8,742
Increase in inventories .............................................. (3,796) (331)
(Increase) decrease in other current assets .......................... (195) 7,190
Decrease in accounts payable and accruals ............................ (64,933) (51,645)
--------- ---------
Net cash used in operating activities .......................................... (38,786) (12,091)
--------- ---------
Cash flows from investing activities:
Capital expenditures ...................................................... (17,590) (6,157)
Business acquisitions, net of cash acquired ............................... (28,150) --
Purchase of marketable securities with maturities of more than
three months ...................................................... (10,455) --
Other ..................................................................... (302) (1,022)
--------- ---------
Net cash used in investing activities .......................................... (56,497) (7,179)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt ...................................... (12,013) (1,888)
Proceeds from issuance of stock upon exercise of stock
options by employees .................................................. 7,183 6,842
Proceeds from borrowings from banks ....................................... 481 4,798
Payments on borrowings from banks ......................................... (394) (11,663)
Other ..................................................................... (423) (333)
--------- ---------
Net cash used in financing activities .......................................... (5,166) (2,244)
--------- ---------
Net decrease in cash and cash equivalents ...................................... (100,449) (21,514)
Effect of foreign exchange rate changes on cash ................................ 503 1,264
--------- ---------
Cash and cash equivalents, beginning of period ................................. 193,367 58,362
--------- ---------
Cash and cash equivalents, end of period ....................................... $ 93,421 $ 38,112
========= =========
See accompanying notes to consolidated financial statements.
5
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Henry Schein,
Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company").
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth therein. These consolidated financial statements are condensed and
therefore do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. The consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
supplementary data included in the Company's Annual Report on Form 10-K for the
year ended December 29, 2001. The Company follows the same accounting policies
in preparation of interim financial statements. The results of operations and
cash flows for the three months ended March 30, 2002 are not necessarily
indicative of the results to be expected for the fiscal year ending December 28,
2002 or any other period. Certain amounts from prior periods have been
reclassified to conform to the current period's presentation.
NOTE 2. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141"), and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"), effective for fiscal
years beginning after December 15, 2001. Under the new standards, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with FAS 142. Other
intangible assets continue to be amortized over their estimated useful lives.
The Company adopted the new standards beginning in the first quarter of
fiscal 2002. Effective with the adoption of FAS 142, goodwill, which is
substantially related to the healthcare distribution segment, is no longer
amortized but is instead subject to an annual impairment test. The Company has
reassessed the estimated useful lives of its intangible assets, which primarily
consist of non-compete agreements, and no changes have been deemed necessary.
The Company will complete the first step of the transitional goodwill impairment
test in connection with the adoption of FAS 142 during the second quarter of
fiscal 2002, and is currently evaluating the effect that the impairment review
may have on its consolidated results of operations and financial position.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 2--GOODWILL AND INTANGIBLE ASSETS--(CONTINUED)
Other intangible assets as of March 30, 2002 and December 29, 2001 are as
follows:
March 30, 2002 December 29, 2001
---------------------- ----------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- ------------ -------- ------------
Other intangible assets:
Non-compete agreements.. $ 10,780 $ (2,984) $ 10,426 $ (2,850)
Other .................. 995 (529) 945 (498)
-------- -------- -------- --------
Total ..................... $ 11,775 $ (3,513) $ 11,371 $ (3,348)
======== ======== ======== ========
Amortization of other intangible assets for the three months ended March
30, 2002 and March 31, 2001 was approximately $227 and $126, respectively. The
annual amortization expense expected for the years 2002 through 2006 is $913,
$843, $718, $445, and $335, respectively.
The changes in the carrying amount of goodwill for the quarter ended March
30, 2002 are as follows:
Healthcare
Distribution Technology Total
------------ ---------- -----
Balance as of December 29, 2001 ......... $ 279,666 $ 315 $ 279,981
Adjustments to goodwill:
Acquisition completed during three
months ended March 30, 2002 .... 6,110 - 6,110
Foreign currency translation ....... (1,005) (1,005)
Other .............................. (242) - (242)
--------- ------ ---------
Balance as of March 30, 2002 ............ $ 284,529 $ 315 $ 284,844
========= ====== =========
During the quarter ended March 30, 2002, the Company completed the
acquisition of a dental business that was not considered material.
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 2--GOODWILL AND INTANGIBLE ASSETS--(CONTINUED)
With the adoption of FAS 142, the Company ceased amortization of goodwill
as of December 30, 2001. The following table presents the results of the Company
for all periods presented on a comparable basis:
Three Months Ended
-----------------------
March 30, March,31,
2002 2001
---------- ----------
Net income ...................................... $ 19,730 $ 14,132
Add back goodwill amortization, net of
tax provision .............................. -- 1,824
---------- ----------
Adjusted net income ............................. $ 19,730 $ 15,956
========== ==========
Diluted net income per share
Net income ................................... $ 0.45 $ 0.33
Goodwill amortization, net of tax provision... -- 0.04
---------- ----------
Adjusted diluted net income per share ........... $ 0.45 $ 0.37
========== ==========
NOTE 3. BUSINESS ACQUISITIONS
In connection with the prior years' acquisitions, the Company incurred
certain merger and integration costs. The following table shows amounts paid
against the merger and integration accrual during the three months ended March
30, 2002:
Balance at Balance at
December 29, March 30,
2001 Payments 2002
------------ -------- ----------
Severance and other direct costs ........... $ 365 $ (66) $ 299
Direct transaction and other
integration costs .................... 2,183 (254) 1,929
------- ------- -------
$ 2,548 $ (320) $ 2,228
======= ======= =======
For the three months ended March 30, 2002, one employee received severance,
and one was owed severance at March 30, 2002.
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 4. PLAN OF RESTRUCTURING
On August 1, 2000, the Company announced a comprehensive restructuring plan
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infrastructure. In addition to closing or
downsizing certain facilities, this world-wide initiative included the
elimination of approximately 300 positions, including open positions, or about
5% of the total workforce, throughout all levels within the organization. The
restructuring plan was substantially completed at December 30, 2000.
The following table shows amounts paid against the restructuring accrual
during the three months ended March 30, 2002:
Balance at Balance at
December 29, March 30,
2001 Payments 2002
------------ -------- ----------
Severance costs (1) ......................... $ 633 $ (230) $ 403
Facility closing costs (2) .................. 2,645 (249) 2,396
Other professional and consulting costs ...... 41 (1) 40
------- ------- -------
$ 3,319 $ (480) $ 2,839
======= ======= =======
- ----------
<FN>
(1) Represents salaries and related benefits for employees separated from the
Company.
(2) Represents costs associated with the closing of certain equipment branches
(primarily lease termination costs) and property and equipment write-offs.
</FN>
For the three months ended March 30, 2002, six employees received severance
payments, and four were owed severance pay and benefits at March 30, 2002.
NOTE 5. SEGMENT DATA
The Company has two reportable segments: healthcare distribution and
technology. The healthcare distribution segment, which is comprised of the
Company's dental, medical, and international business groups, distributes
healthcare products (primarily consumable) and services to office-based
healthcare practitioners and professionals in the combined North American and
international markets. Products, which are similar for each business group, are
maintained and distributed from strategically located distribution centers. The
technology segment consists primarily of the Company's practice management
software business and certain other value-added products and services that are
distributed primarily to healthcare professionals in the North American market.
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 5-- SEGMENT DATA -- (CONTINUED)
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
------------------------
March 30, March 31,
2002 2001 (1)
--------- ---------
Net Sales:
Healthcare distribution (2):
Dental (3) ........................... $ 295,281 $ 269,186
Medical (4) .......................... 231,422 208,674
International (5) .................... 105,838 102,744
--------- ---------
Total healthcare distribution .... 632,541 580,604
Technology (6) ........................... 14,552 13,291
--------- ---------
$ 647,093 $ 593,895
========= =========
- ----------
<FN>
(1) Reclassified to conform to current period presentation.
(2) Includes consumable products, small equipment, laboratory products, large
dental equipment, branded and generic pharmaceuticals, surgical products,
diagnostic tests, infection control and vitamins.
(3) Consists of products sold in the U.S. and Canadian Dental markets.
(4) Consists of products sold in the U.S. Medical and Veterinary markets.
(5) Consists of products primarily sold in the European Dental and Medical
(including Veterinary) markets.
(6) Consists of practice management software and other value-added products and
services, which are distributed to healthcare professionals in the U.S. and
Canadian markets.
</FN>
10
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA)
(UNAUDITED)
NOTE 5-- SEGMENT DATA -- (CONTINUED)
Three Months Ended
--------------------------
March 30, March 31,
2002 2001 (1)
--------- ---------
Operating Income:
Healthcare distribution ................................... $ 29,856 $ 22,576
Technology ................................................ 5,342 5,007
----------- -----------
Total ..................................................... $ 35,198 $ 27,583
=========== ===========
March 30, March 31,
2002 2001 (1)
--------- ---------
Total Assets:
Healthcare distribution ................................... $ 1,280,671 $ 1,151,171
Technology ................................................ 96,124 85,131
----------- -----------
Total assets for reportable segments ................. 1,376,795 1,236,302
Receivables due from healthcare distribution segment ...... (65,875) (49,928)
Receivables due from technology segment ................... (1,401) (5,199)
----------- -----------
Consolidated total assets ............................ $ 1,309,519 $ 1,181,175
=========== ===========
- ----------
<FN>
(1) Reclassified to conform to current period presentation.
</FN>
NOTE 6. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Three Months Ended
------------------------
March 30, March 31,
2002 2001
--------- ---------
Basic .................................... 42,791 41,975
Effect of assumed conversion
of employee stock options ............... 1,278 1,171
------ ------
Diluted .................................. 44,069 43,146
====== ======
Options to purchase approximately 10 and 1,559 shares of common stock at
prices ranging from $42.75 to $46.00 and $33.00 to $46.00 per share that were
outstanding during the three months ended March 30, 2002 and March 31, 2001,
respectively, were not included in the computation of diluted earnings per share
for each of the respective periods because the options' exercise prices exceeded
the fair market value of the Company's common stock.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net sales increased $53.2 million, or 9.0%, to $647.1 million for the three
months ended March 30, 2002 from $593.9 million for the three months ended March
31, 2001. Of the $53.2 million increase, approximately $51.9 million, or 97.6%,
represented an 8.9% increase in the Company's healthcare distribution business.
As part of this increase approximately $26.1 million represented a 9.7% increase
in its dental business, $22.7 million represented a 10.9% increase in the
Company's medical business, and $3.1 million represented a 3.0% increase in its
international business. The increase in dental sales was primarily due to
increased account penetration. The increase in medical net sales was primarily
attributable to increased sales to physicians' office and alternate care
markets. In the international market, the increase in net sales was primarily
due to increased account penetration in the United Kingdom, France, Germany and
Spain, somewhat offset by unfavorable exchange rates to the U.S. dollar. Had net
sales for the international market been translated at the same rates in 2001,
net sales would have increased by 6.2%. The remaining increase in first quarter
2002 net sales was due to the technology business, which increased $1.3 million,
or 9.5%, to $14.6 million for the three months ended March 30, 2002, from $13.3
million for the three months ended March 31, 2001. The increase in technology
net sales was primarily due to increased sales of technology products and
related services.
Gross profit increased by $19.0 million, or 11.9%, to $178.4 million for
the three months ended March 30, 2002 from $159.4 million for the three months
ended March 31, 2001. Gross profit margin increased 0.8% to 27.6% from 26.8% for
the same period last year. Healthcare distribution gross profit increased $18.1
million, or 12.1%, to $167.5 million for the three months ended March 30, 2002
from $149.4 million for the three months ended March 31, 2001. Healthcare
distribution gross profit margin increased by 0.8% to 26.5% for the three months
ended March 30, 2002 from 25.7% for the three months ended March 31, 2001,
primarily due to changes in sales mix in the dental business. Technology gross
profit increased by $0.9 million or 9.0% to $10.9 million for the three months
ended March 30, 2002 from $10.0 million for the three months ended March 31,
2001. Technology gross profit margins decreased by 0.3% to 75.1% for the three
months ended March 30, 2002 from 75.4% for the three months ended March 31,
2001, also primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $11.4 million, or
8.6%, to $143.2 million for the three months ended March 30, 2002 from $131.8
million for the three months ended March 31, 2001. Selling and shipping expenses
increased by $10.4 million, or 13.4%, to $88.0 million for the three months
ended March 30, 2002 from $77.6 million for the three months ended March 31,
2001. As a percentage of net sales, selling and shipping expenses increased 0.5%
to 13.6% for the three months ended March 30, 2002 from 13.1% for the three
months ended March 31, 2001. The increase was primarily due to higher
commissions in the dental business. General and administrative expenses
increased $1.0 million, or 1.8%, to $55.2 million for the three months ended
March 30, 2002 from $54.2 million for the three months ended March 31, 2001. As
a percentage of net sales, general and administrative expenses decreased 0.6% to
8.5% for the three months ended March 30, 2002 from 9.1% for the three months
ended March 31, 2001. The decrease was primarily related to the elimination of
goodwill amortization expense in accordance with Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, which was adopted in the first
quarter of 2002, which amounted to approximately
12
$2.9 million and represented 0.5% of the decrease for the three months ended
March 30, 2002.
Other income (expense) - net decreased by $(1.5) million, to $(3.0) million
for the three months ended March 30, 2002, compared to $(4.5) million for the
three months ended March 31, 2001. The net decrease was due primarily to higher
interest income on long-term loans receivable and investments, higher finance
charge income, lower interest expense due to reductions in long-term debt and
bank credit line balances and lower interest rates.
Equity in earnings of affiliates remained unchanged at $0.1 million for the
three months ended March 30, 2002 and for the three months ended March 31, 2001.
For the three months ended March 30, 2002, the Company's effective tax rate
was 37.4%. The difference between the Company's effective tax rate and the
Federal statutory rate relates primarily to state income taxes. For the three
months ended March 31, 2001, the Company's effective tax rate was 37.0%. The
difference between the Company's effective tax rate and the Federal statutory
rate relates primarily to state income taxes.
SEASONALITY
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software and equipment, year-end promotions
and purchasing patterns of office-based healthcare practitioners and are
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, timing of purchases, special promotional campaigns, seasonal products,
fluctuations in exchange rates associated with international operations and
adverse weather conditions.
E-COMMERCE
Traditional healthcare supply and distribution relationships are being
challenged by electronic on-line commerce solutions. The Company's distribution
business is characterized by rapid technological developments and intense
competition. The rapid evolution of on-line commerce will require continuous
improvement in performance, features and reliability of Internet content and
technology by the Company, particularly in response to competitive offerings.
Through the Company's proprietary technologically based suite of products,
customers are offered a variety of competitive alternatives. The Company's
tradition of reliable service, proven name recognition, and large customer base
built on solid customer relationships makes it well situated to participate
fully in this rapidly growing aspect of the distribution business. The Company
is exploring ways and means of improving and expanding its Internet presence and
will continue to do so. In January 2001, the Company announced the unveiling of
a new website (http://www.henryschein.com), which includes an array of
value-added features. As part of this effort, the Company also launched
http://www.sullivanschein.com website for its office-based dental practitioner
customers.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, and special inventory forward
buy-in opportunities, (b) acquisitions, (c) capital expenditures, and (d)
repayments on long-term debt. Since sales tend to be strongest during the fourth
quarter and special inventory forward buy-in opportunities are most prevalent
just before the end of the year, the Company's working capital requirements have
been generally higher from the end of the third quarter to the end of the first
quarter of the following year. The Company has financed its business primarily
through operations, its revolving credit facilities, private placement loans and
stock issuances.
Net cash used in operating activities for the three months ended March 30,
2002 of $38.8 million resulted primarily from a net increase of cash used in
operating items of working capital of approximately $64.3 million, offset by net
income of $19.7 million, adjusted for non-cash charges of approximately $5.8
million. The increase in working capital needs was primarily due to a decrease
in accounts payable and other accrued expenses of $64.9 million, mostly due to
payments made to vendors for year-end inventory buy-ins, a $3.8 million increase
in inventory, and a $0.2 million increase in other current assets, offset by a
$4.6 million decrease in accounts receivable. The Company's accounts receivable
days sales outstanding ratio improved to 50.78 days for the three months ended
March 30, 2002 from 56.13 days for the three months ended March 31, 2001. The
Company's inventory turns improved to 6.41 turns for the three months ended
March 30, 2002 from 6.32 turns for the three months ended March 31, 2001. The
Company anticipates future increases in working capital requirements as a result
of its continued sales growth and special inventory forward buy-in
opportunities.
Net cash used in investing activities for the three months ended March 30,
2002 of $56.5 million resulted primarily from cash used for business
acquisitions of $28.2 million, of which $22.1 million was an acquisition earnout
payment associated with an acquisition made in a prior year, capital
expenditures of $17.6 million, of which $11.6 million was for the purchase of a
building used for the Company's corporate headquarters, and purchases of U.S.
government and agency bonds rated AAA by Moody's (or an equivalent rating) and
commercial paper rated P-1 by Moody's (or an equivalent rating) with maturities
of more than three months of $10.5 million. The Company expects that it will
invest more than $50.0 million during the year ending December 28, 2002, in
capital projects to modernize and expand its facilities and computer
infrastructure systems and integrate operations.
Net cash used in financing activities for the three months ended March 30,
2002 of $5.2 million resulted primarily from debt repayments of $12.0 million,
offset primarily by proceeds from the issuance of stock upon exercise of stock
options of $7.2 million.
Certain holders of minority interests in acquired entities have the right at
certain times to require the Company to acquire their interest at fair value
pursuant to a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of March 30, 2002 of $93.4
million consist of bank balances and investments in money market funds. These
investments have staggered maturity dates, none of which exceed three months,
and have a high degree of liquidity since the securities are actively traded in
public markets.
14
On May 2, 2002, the Company renewed and increased its revolving credit
facility to $200.0 million from $150.0 million. The new facility is a four year
committed line. As of March 30, 2002, none of the credit facility was utilized.
The Company also has one uncommitted bank line of $15.0 million, none of
which had been borrowed at March 30, 2002. Certain of the Company's subsidiaries
have revolving credit facilities that total approximately $39.3 million at March
30, 2002, under which $4.0 million had been borrowed.
On June 30, 1999 and September 25, 1998, the Company completed private
placement transactions under which it issued $130.0 million and $100.0 million,
respectively, in Senior Notes. The $130.0 million notes come due on June 30,
2009 and bear interest at a rate of 6.94% per annum. Principal payments totaling
$20.0 million are due annually starting September 25, 2006 on the $100.0 million
notes and bear interest at a rate of 6.66% per annum. Interest on both notes is
payable semi-annually.
The Company believes that its cash and cash equivalents of $93.4 million as
of March 30, 2002, its ability to access public and private debt and equity
markets, and the availability of funds under its existing credit agreements will
provide it with sufficient liquidity to meet its currently foreseeable
short-term and long-term capital needs.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the disclosures made in our Annual Report
on Form 10-K for the year ended December 29, 2001, on this matter.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in this Form 10-Q
contains information that is forward-looking, such as the Company's
opportunities to increase sales through, among other things, acquisitions; its
exposure to fluctuations in foreign currencies; its anticipated liquidity and
capital requirements; competitive product and pricing pressures and the ability
to gain or maintain share of sales in global markets as a result of actions by
competitors; and the results of legal proceedings. The matters referred to in
forward-looking statements could be affected by the risks and uncertainties
involved in the Company's business. These risks and uncertainties include, but
are not limited to, the effect of economic and market conditions, the impact of
the consolidation of health care practitioners, the impact of health care
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the acceptance and quality of software products,
acceptance and ability to manage operations in foreign markets, the ability to
maintain favorable supplier arrangements and relationships, possible disruptions
in the Company's computer systems or telephone systems, possible increases in
shipping rates or interruptions in shipping service, the level and volatility of
interest rates and currency values, economic and political conditions in
international markets, including civil unrest, government changes and
restrictions on the ability to transfer capital across borders, the impact of
current or pending legislation, regulation and changes in accounting standards
and taxation requirements, environmental laws in domestic and foreign
jurisdictions, as well as certain other risks described in this Form 10-Q.
Subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere described
in this Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's business involves a risk of product liability claims and
other claims in the ordinary course of business, and from time to time the
Company is named as a defendant in cases as a result of its distribution of
pharmaceutical and other healthcare products. As of March 30, 2002, the Company
was named a defendant in approximately 74 product liability cases. Of these
claims, 59 involve claims made by healthcare workers who claim allergic reaction
relating to exposure to latex gloves. In each of these cases, the Company acted
as a distributor of both brand name and "Henry Schein" private brand latex
gloves, which were manufactured by third parties. To date, discovery in these
cases has generally been limited to product identification issues. The
manufacturers in these cases have withheld indemnification of the Company
pending product identification; however, the Company is taking steps to implead
those manufacturers into each case in which the Company is a defendant. The
Company is also a named defendant in nine lawsuits involving the sale of
phentermine and fenfluramin. Plaintiffs in the cases allege injuries from the
combined use of the drugs known as "Phen/fen." The Company expects to obtain
indemnification from the manufacturers of these products, although this is
dependent upon, among other things, the financial viability of the manufacturer
and their insurers.
In Texas District Court, Travis County, the Company and one of its
subsidiaries are defendants in a matter entitled Shelly E. Stromboe & Jeanne N.
Taylor, on Behalf of Themselves and All Other Similarly Situated vs. Henry
Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc., Case No. 98-00886.
This complaint alleges among other things, negligence, breach of contract, fraud
and violations of certain Texas commercial statutes involving the sale of
certain practice management software products sold prior to 1998 under the Easy
Dental(R) name. In October 1999, the Court, on motion, certified both a
Windows(R) Sub-Class and a DOS Sub-Class to proceed as a class action pursuant
to Tex. R.Civ. P.42. It is estimated that 5,000 Windows(R) customers and 15,000
DOS customers could be covered by the judge's ruling. In November of 1999, the
Company filed an interlocutory appeal of the District Court's determination to
the Texas Court of Appeals on the issue of whether this case was properly
certified as a class action. On September 14, 2000, the Court of Appeals
affirmed the District Court's certification order. On January 5, 2001, the
Company filed a Petition for Review in the Texas Supreme Court asking this court
to find "conflicts jurisdiction" to permit review of the District Court's
certification order, which appeal is now pending. On April 5, 2001 the Texas
Supreme Court requested that the parties file briefs on the merits.
On August 23, 2001, the Texas Supreme Court dismissed the Company's Petition
for Review based on lack of conflicts jurisdiction. The Company filed a motion
for rehearing on September 24, 2001 requesting that the Texas Supreme Court
reconsider and reverse its finding that it is without conflicts jurisdiction to
review the case. On November 8, 2001, the Texas Supreme Court granted the motion
for rehearing and withdrew its order of August 23, 2001. The Texas Supreme Court
heard oral argument on February 6, 2002. Pending a decision by the Supreme Court
on the Petition for Review, a trial on the merits, currently scheduled for July,
2002, will be stayed.
In February 2002, the Company was served with a summons and complaint in an
action commenced in the Superior Court of New Jersey, Law Division, Morris
County, entitled West Morris Pediatrics, P.A. vs. Henry Schein, Inc., doing
business as Caligor, no. MRSL-421-02. The complaint by West Morris Pediatrics
purports to be on behalf of a nationwide class, but there has been no court
determination that the case may proceed as a class action. Plaintiff seeks to
represent a class of all physicians, hospitals and other healthcare providers
17
throughout New Jersey and across the United States. This complaint alleges,
among other things, breach of oral contract, breach of implied covenant of good
faith and fair dealing, violation of the New Jersey Consumer Fraud Act, unjust
enrichment, and conversion. The Company has not yet submitted its response to
this complaint. The Company intends to vigorously defend itself against this
claim, as well as all other claims, suits and complaints.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many cases in
which the Company has been sued in connection with products manufactured by
others, the Company is provided indemnification by the manufacturer. There can
be no assurance that the coverage maintained by the Company is sufficient or
will be available in adequate amounts or at a reasonable cost, or that
indemnification agreements will provide adequate protection for the Company. In
the opinion of the Company, all pending matters are covered by insurance or will
not otherwise seriously harm the Company's financial condition.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.35 Credit Agreement, dated as of May 2, 2002, among the Company, the
several guarantors from time to time parties thereto, JPMorgan Chase Bank, as
administrative agent, issuing lender, sole lead arranger and sole book runner,
Fleet National Bank, as syndication agent, and the several lenders from time to
time parties thereto.
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HENRY SCHEIN, INC.
(Registrant)
By: /s/ Steven Paladino
------------------------------------
STEVEN PALADINO
Executive Vice President,
Chief Financial Officer and Director
(principal financial officer and
accounting officer)
Dated: May 13, 2002
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