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 31, 2001
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 8, 2001 there were 42,363,098 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 31, 2001 and December 30, 2000 ....... 3
Statements of Operations for the three months ended
March 31, 2001 and March 25, 2000 ............................... 4
Statements of Cash Flows for the three months ended
March 31, 2001 and March 25, 2000 ............................... 5
Notes to Consolidated Financial Statements ........................ 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ........ 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................. 16
ITEM 6. Exhibits and Reports on Form 8-K .................................. 17
Signature ......................................................... 17
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 30,
2001 2000
----------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ....................................................................... $ 38,112 $ 58,362
Accounts receivable, less reserves of $28,107 and $27,556, respectively ......................... 358,951 371,668
Inventories ..................................................................................... 273,697 276,473
Deferred income taxes ........................................................................... 20,221 21,001
Prepaid expenses and other ...................................................................... 52,892 60,900
----------- -----------
Total current assets .......................................................................... 743,873 788,404
Property and equipment, net of accumulated depreciation and amortization
of $78,612 and $73,134, respectively ............................................................ 96,347 94,663
Goodwill and other intangibles, net of accumulated amortization
of $46,533 and $44,419, respectively ............................................................ 286,420 292,018
Investments and other ............................................................................. 54,535 55,983
----------- -----------
$ 1,181,175 $ 1,231,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................................ $ 176,744 $ 216,535
Bank credit lines ............................................................................... 7,831 4,390
Accruals:
Salaries and related expenses ................................................................. 31,780 39,830
Merger and integration, and restructuring costs ............................................... 11,391 13,735
Other ......................................................................................... 78,925 84,288
Current maturities of long-term debt ............................................................ 4,930 6,079
----------- -----------
Total current liabilities ..................................................................... 311,601 364,857
Long-term debt .................................................................................... 253,870 266,224
Other liabilities ................................................................................. 11,405 12,931
----------- -----------
Total liabilities ............................................................................. 576,876 644,012
----------- -----------
Minority interest ................................................................................. 7,339 7,996
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000,
issued: 42,335,576 and 41,946,284, respectively ............................................... 423 419
Additional paid-in capital ...................................................................... 382,299 373,413
Retained earnings ............................................................................... 239,161 225,029
Treasury stock, at cost, 62,479 shares .......................................................... (1,156) (1,156)
Accumulated comprehensive loss .................................................................. (23,332) (18,179)
Deferred compensation ........................................................................... (435) (466)
----------- -----------
Total stockholders' equity .................................................................... 596,960 579,060
----------- -----------
$ 1,181,175 $ 1,231,068
=========== ===========
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
----------------------------
March 31, March 25,
2001 2000
------------ --------------
(reclassified)
Net sales ..................................................................... $ 593,895 $ 554,139
Cost of sales .................................................................. 434,538 405,023
--------- ---------
Gross profit ................................................................. 159,357 149,116
Operating expenses:
Selling, general and administrative .......................................... 131,774 125,639
--------- ---------
Operating income ........................................................... 27,583 23,477
Other income (expense):
Interest income .............................................................. 1,241 1,096
Interest expense ............................................................. (5,368) (5,852)
Other - net .................................................................. (354) (151)
--------- ---------
Income before taxes on income, minority interest and equity
in earnings of affiliates ................................................ 23,102 18,570
Taxes on income ................................................................ 8,548 6,778
Minority interest in net income of subsidiaries ............................... 531 488
Equity in earnings of affiliates ............................................... 109 94
--------- ---------
Net income ..................................................................... $ 14,132 $ 11,398
========= =========
Net income per common share:
Basic ........................................................................ $ 0.34 $ 0.28
========= =========
Diluted ...................................................................... $ 0.33 $ 0.28
========= =========
Weighted average common shares outstanding:
Basic ........................................................................ 41,975 40,715
========= =========
Diluted ...................................................................... 43,146 41,084
========= =========
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 31, March 25,
2001 2000
------------ --------------
Cash flows from operating activities:
Net income ................................................................... $ 14,132 $ 11,398
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization ............................................ 9,466 7,926
Provision for losses and allowances on accounts receivable ............... 550 671
Benefit for deferred income taxes ........................................ (665) (484)
Undistributed earnings of affiliates ..................................... (109) (94)
Minority interest in net income of subsidiaries .......................... 531 488
Other .................................................................... 48 93
Changes in operating assets and liabilities (net of purchase acquisitions):
Decrease in accounts receivable .......................................... 8,742 27,057
Increase in inventories .................................................. (331) (9,287)
Decrease (increase) in other current assets .............................. 7,190 (3,403)
Decrease in accounts payable and accruals ................................ (51,645) (25,510)
--------- ---------
Net cash (used in) provided by operating activities ............................ (12,091) 8,855
--------- ---------
Cash flows from investing activities:
Capital expenditures ......................................................... (6,157) (6,041)
Business acquisitions, net of cash acquired .................................. - (470)
Other ........................................................................ (1,022) (457)
--------- ---------
Net cash used in investing activities .......................................... (7,179) (6,968)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt ......................................... (1,888) (2,317)
Proceeds from issuance of stock upon exercise of stock
options by employees ....................................................... 6,842 435
Proceeds from borrowing from banks .......................................... 4,798 3,730
Payments on borrowings from banks ............................................ (11,663) (13,467)
Other ........................................................................ (333) 58
--------- ---------
Net cash used in financing activities .......................................... (2,244) (11,561)
--------- ---------
Net decrease in cash and cash equivalents ...................................... (21,514) (9,674)
Effect of foreign exchange rate changes on cash ............................... 1,264 1,060
--------- ---------
Cash and cash equivalents, beginning of period ................................. 58,362 26,019
--------- ---------
Cash and cash equivalents, end of period ....................................... $ 38,112 $ 17,405
========= =========
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 notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 30, 2000. 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 31, 2001 are not necessarily indicative
of the results to be expected for the fiscal year ending December 29, 2001 or
any other period. Certain amounts from prior periods have been reclassified to
conform to the current period's presentation.
Note 2. Accounting Policy - Derivative Financial Instruments
The Company uses derivatives to reduce its exposure to fluctuations in
foreign currencies and interest rates. Derivative products, such as foreign
currency forward contracts, are used to hedge the foreign currency market
exposures underlying certain intercompany debt and forecasted transactions with
customers and vendors. The Company also enters into interest rate swap and cap
agreements to modify the interest characteristics of its outstanding floating
rate long-term debt. The Company's accounting policies for these instruments are
based on its designation of such instruments as hedging transactions. The
Company does not enter into such contracts for speculative purposes. The Company
records all derivative instruments on the balance sheet at fair value.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk), the gain or loss on the derivative instrument as well as the offsetting
gain or loss on the hedged item attributable to the hedged risk are recognized
in earnings in the current period. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e., hedging the exposure of
variability in expected future cash flows that is attributable to a particular
risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component of Accumulated Comprehensive Loss (a component of
stockholders' equity) and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The remaining gain
or loss on the derivative instrument, if any (i.e. the ineffective portion and
any portion of the derivative instrument excluded from the assessment of
effectiveness) is recognized in earnings in the current period. For derivative
instruments not designated as hedging instruments, changes in their fair values
are recognized in earnings in the current period.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except employee and per share data)
(unaudited)
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
31, 2001:
Balance at Balance at
December 30, 2000 Payments March 31, 2001
------------------ -------- --------------
Severance and other direct costs .......... $ 747 $ (184) $ 563
Direct transaction and other
integration costs ................... 4,140 (560) 3,580
------- ------ -------
$ 4,887 $ (744) $ 4,143
======= ====== =======
For the three months ended March 31, 2001, 11 employees received severance
and 4 were owed severance at March 31, 2001.
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.
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except employee and per share data)
(unaudited)
Note 4. Plan of Restructuring--(Continued)
The following table shows amounts paid against the restructuring accrual
during the three months ended March 31, 2001:
Balance at Adjustments Balance at
December 30, to Reflect March 31,
2000 Payments Actual Cost 2001
------------ -------- ----------- ----------
Severance costs .............................. $ 4,007 $ (1,376) $ 305 $ 2,936
Facility closing costs ....................... 3,684 (163) 289 3,810
Other professional and consulting costs ...... 1,157 (61) (594) 502
------- -------- ----- -------
$ 8,848 $ (1,600) $ - $ 7,248
======= ======== ===== =======
For the three months ended March 31, 2001, 104 employees received severance
and 74 were owed severance at March 31, 2001.
Note 5. Derivative Financial Instruments
On December 31, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging
Activities", as amended, and interpreted, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. The impact of
adopting FAS 133 on the Company's Statement of Operations and Balance Sheet was
not material.
The Company purchases short-term foreign currency forward contracts to
protect against currency exchange risks associated primarily with the ultimate
repayment of certain intercompany loans. All gains and losses relating to the
Company's foreign currency forward contracts were not material for the three
months ended March 31, 2001 and are included in the Statement of Operations
under Other-net.
In addition, to manage its exposure to changes in interest rates, the
Company has entered into interest rate swaps agreements and an interest rate cap
to hedge a portion of its total long-term debt that is subject to variable
interest rates. These contracts are considered to be a hedge against changes in
the amount of future cash flows associated with the interest payments on
variable rate debt obligations.
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except employee and per share data)
(unaudited)
Note 5. Derivative Financial Instruments--(Continued)
All gains and losses recognized in earnings during the period relating to
the interest rate swaps and cap were not material for the three months ended
March 31, 2001 and are included in the Statement of Operations under Interest
expense. Any values reported in Comprehensive Income will be reclassified to
earnings over the term of the agreements, through 2005. The Company does not
expect material amounts to be reclassified to earnings during 2001.
Note 6. Comprehensive Income
Net comprehensive income for the three months ended March 31, 2001 and March
30, 2000 is as follows:
Three Months Ended
-----------------------
March 31, March 25,
2001 2000
--------- ---------
Net income ...................................... $ 14,132 $ 11,398
Unrealized loss on derivative instruments ...... (219) -
Foreign currency translation adjustments ........ (4,934) (3,414)
-------- --------
Net comprehensive income ....................... $ 8,979 $ 7,984
======== ========
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except employee and per share data)
(unaudited)
Note 7. 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. Products, which are similar for
each business group, are maintained and distributed from strategically located
distribution centers in North America, Europe and the Pacific Rim. 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
----------------------------------------
March 31, 2001 March 25, 2000
-------------- --------------
Net Sales:
Healthcare distribution (1):
Dental ................................................. $ 265,495 $ 254,307
Medical ................................................ 195,908 169,701
Veterinary ............................................. 12,766 13,361
International (2) ...................................... 102,744 100,035
--------- ---------
Total healthcare distribution ..................... 576,913 537,404
Technology (3) .............................................. 16,982 16,735
--------- ---------
$ 593,895 $ 554,139
========= =========
- --------------------
(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
European and Pacific Rim markets.
(3) Consists of practice management software and other value-added products and
services.
10
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except employee and per share data)
(unaudited)
Note 7. Segment Data -- (Continued)
Three Months Ended
------------------------------------------
March 31, 2001 March 25, 2000
-------------- --------------
Operating Income:
Healthcare distribution ................................................... $ 21,055 $ 17,343
Technology ............................................................... 6,528 6,134
----------- -----------
Total ..................................................................... $ 27,583 $ 23,477
=========== ===========
March 31, 2001 March 25, 2000
-------------- --------------
Total Assets:
Healthcare distribution ................................................... $ 1,142,389 $ 1,143,207
Technology ................................................................ 93,913 72,411
----------- -----------
Total assets for reportable segments ................................. 1,236,302 1,215,618
Receivables due from healthcare distribution segment ...................... (49,928) (40,544)
Receivables due from technology segment ................................... (5,199) (2,735)
----------- -----------
Consolidated total assets ............................................ $ 1,181,175 $ 1,172,339
=========== ===========
Note 8. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
Three Months Ended
------------------------------------------
March 31, 2001 March 25, 2000
-------------- --------------
Basic .......................................................................... 41,975 40,715
Effect of assumed conversion of employee stock options ......................... 1,171 369
----------- -----------
Diluted ........................................................................ 43,146 41,084
=========== ===========
Options to purchase approximately 1,559 and 3,954 shares of common stock at
prices ranging from $33.00 to $46.00 and $15.14 to $46.00 per share that were
outstanding during the three months ended March 31, 2001 and March 25, 2000,
respectively, were excluded from 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 31, 2001 compared to Three Months Ended
March 25, 2000
Net sales increased $39.8 million, or 7.2%, to $593.9 million for the three
months ended March 31, 2001 from $554.1 million for the three months ended March
25, 2000. Of the $39.8 million increase, approximately $39.5 million, or 99.2%,
represented a 7.4% increase in the Company's healthcare distribution business.
As part of this increase approximately $26.2 million represented a 15.4%
increase in the Company's medical business, $11.2 million represented a 4.4%
increase in its dental business, $2.7 million represented a 2.7% increase in its
international business, and $(0.6) million represented a 4.5% decrease in its
veterinary business. The increase in medical net sales was primarily
attributable to increased sales to core physicians office and alternate care
markets. In the dental market, the increase in net sales was primarily due to
increased account penetration. In the international market, the increase in net
sales was primarily due to increased account penetration in Spain, France,
Germany and the United Kingdom, offset by unfavorable foreign exchange rates to
the U.S. dollar. In the veterinary market, the decrease in net sales was
primarily due to a loss of a product line. The remaining increase in first
quarter 2001 net sales was due to the technology business, which increased $0.3
million, or 1.8%, to $17.0 million for the three months ended March 31, 2001,
from $16.7 million for the three months ended March 25, 2000. The increase in
technology and value-added product net sales was primarily due to increased
practice management software products and related services.
Gross profit increased by $10.3 million, or 6.9%, to $159.4 million for the
three months ended March 31, 2001 from $149.1 million for the three months ended
March 25, 2000. Gross profit margin decreased 0.1% to 26.8% from 26.9% for the
same period last year. Healthcare distribution gross profit increased $9.2
million, or 6.7%, to $147.0 million for the three months ended March 31, 2001
from $137.8 million for the three months ended March 25, 2000. Healthcare
distribution gross profit margin decreased by 0.1% to 25.5% for the three months
ended March 31, 2001 from 25.6% for the three months ended March 25, 2000,
primarily due to changes in sales mix. Technology and value added services gross
profit increased by $1.1 million or 9.7% to $12.4 million for the three months
ended March 31, 2001 from $11.3 million for the three months ended March 25,
2000. Technology and value added services gross profit margins increased by 5.2%
to 72.9% for three months ended March 31, 2001 from 67.7% for the three months
ended March 25, 2000, also primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $6.2 million, or
4.9%, to $131.8 million for the three months ended March 31, 2001 from $125.6
million for the three months ended March 30, 2000. Selling and shipping expenses
increased by $1.5 million, or 2.0%, to $77.6 million for the three months ended
March 31, 2001 from $76.1 million for the three months ended March 30, 2000. As
a percentage of net sales, selling and shipping expenses decreased 0.6% to 13.1%
for the three months ended March 31, 2001 from 13.7% for the three months ended
March 30, 2000. The decrease was primarily due to reductions in payroll expenses
associated with the Company's restructuring program. General and administrative
expenses increased $4.7 million, or 9.5%, to $54.2 million for the three months
ended March 31, 2001 from $49.5 million for the three months ended March 30,
2000. As a percentage of net sales, general and administrative expenses
increased 0.2% to 9.1% for the three months ended March 31, 2001 from 8.9% for
the three months ended March 30, 2000. The increase was primarily due to higher
depreciation expense associated with increased capital expenditures.
12
Other income (expense) - net decreased by $0.4 million, to $(4.5) million
for the three months ended March 31, 2001, compared to $(4.9) million for the
three months ended March 25, 2000, due primarily to less interest expense on
lower long-term debt and bank credit line balances.
Equity in earnings of affiliates remained unchanged at $0.1 million for the
three months ended March 31, 2001 and for the three months ended March 25, 2000.
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. For the three
months ended March 25, 2000, the Company's effective tax rate was 36.5%. The
difference between the Company's effective tax rate and the Federal statutory
rate relates primarily to state income taxes.
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 Euro, 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.
Beginning on January 1, 2002, Euro banknotes and coins will be put into
circulation. There will be a changeover period of two months where there will be
dual circulation - where both Euro and national currencies will be used
together. Following the changeover period, the national currencies will be
completely replaced by the Euro.
The Company is currently addressing the impact of the Euro on its
information systems as well as 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.
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 for its office-based dental practitioner
customers.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a)
repayments on bank borrowings, (b) capital expenditures and (c) working capital
needs resulting from increased sales, and special inventory forward buy-in
opportunities. 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 31,
2001 of $12.1 million resulted primarily from a net increase of cash used in
operating items of working capital of approximately $36.0 million offset by net
income of $14.1 million, adjusted for non-cash charges of approximately $9.8
million. The increase in working capital needs was primarily due to a decrease
in accounts payable and other accrued expenses of $51.6 million, mostly due to
payments made to vendors for year-end inventory buy-ins, and a $0.3 million
increase in inventory, offset by a $8.7 million decrease in accounts receivable
and a $7.2 million decrease in other current assets. 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 three months ended March 31,
2001 of $7.2 million resulted primarily from cash used for capital expenditures
of $6.2 million. The Company expects that it will invest more than $45.0 million
during the year ending December 29, 2001, in capital projects to modernize and
expand its facilities and infrastructure systems and integrate operations.
Net cash used in financing activities for the three months ended March 31,
2001 of $2.2 million resulted primarily from debt repayments of $8.8 million
offset primarily by proceeds from the issuance of stock upon exercise of stock
options of $6.8 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 March 31, 2001 of $38.1
million consist of bank balances and investments in commercial paper rated AAA
by Moody's (or an equivalent rating). 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
The Company has a $150.0 million revolving credit facility, which has a
termination date of August 15, 2002, none of which had been borrowed at March
31, 2001. The Company also has two uncommitted bank lines totaling $30.0
million, none of which had been borrowed at March 31, 2001. Certain of the
Company's subsidiaries have revolving credit facilities that total approximately
$51.6 million at March 31, 2001, under which $7.8 million has 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 proceeds of which were used respectively, for
the permanent financing of its acquisitions of General Injectables and Vaccines
and the Heiland Group, as well as repaying and retiring a portion of four
uncommitted bank lines and to pay down amounts owed under its revolving credit
facility. 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 are payable
semi-annually.
The Company believes that its cash and cash equivalents of $38.1 million as
of March 31, 2001, its ability to access public and private debt and equity
markets, and the availability of funds under its existing credit agreements will
provide it with sufficient liquidity to meet its currently foreseeable
short-term and long-term capital needs.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the disclosures made in our annual report
on form 10-K for the year ended December 30, 2000, on this matter.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in this Form 10-Q
contains information that is forward-looking, such as the Company's
opportunities to increase sales through, among other things, acquisitions; its
exposure to fluctuations in foreign currencies; its anticipated liquidity and
capital requirements; competitive product and pricing pressures and the ability
to gain or maintain share of sales in global markets as a result of actions by
competitors; and the results of legal proceedings. The matters referred to in
forward-looking statements could be affected by the risks and uncertainties
involved in the Company's business. These risks and uncertainties include, but
are not limited to, the effect of economic and market conditions, the impact of
the consolidation of health care practitioners, the impact of health care
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the acceptance and quality of software products,
acceptance and ability to manage operations in foreign markets, the ability to
maintain favorable supplier arrangements and relationships, possible disruptions
in the Company's computer systems or telephone systems, possible increases in
shipping rates or interruptions in shipping service, the level and volatility of
interest rates and currency values, economic and political conditions in
international markets, including civil unrest, government changes and
restrictions on the ability to transfer capital across borders, the impact of
current or pending legislation, regulation and changes in accounting standards
and taxation requirements, environmental laws in domestic and foreign
jurisdictions, as well as certain other risks described in this Form 10-Q.
Subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere described
in this Form 10-Q.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The manufacture or distribution of certain products by the Company involves
a risk of product liability claims, and from time to time the Company is named
as a defendant in products liability cases as a result of its distribution of
pharmaceutical and other healthcare products. As of the end of the Company's
first fiscal quarter of 2001, the Company was named a defendant in approximately
68 such cases. Of these product liability claims, 52 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 eight
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 addition, the Company is subject to other claims, suits and complaints
arising in the course of the Company business. 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. During the appeal of the class certification, a trial on the merits is
stayed. 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
the Company is provided by indemnification by the manufacturer of the product.
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 have a material adverse effect on the Company's
financial condition.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(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 11, 2001
18