FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2006
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
11-3136595
(I.R.S. Employer Identification No.) |
135 Duryea Road
Melville, New York
(Address of principal executive offices)
11747
(Zip Code)
Registrants 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:
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
As of August 2, 2006, there were 88,172,118 shares of the registrants common stock
outstanding.
HENRY SCHEIN, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
(Adjusted - Note 3) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
138,334 |
|
|
$ |
210,683 |
|
Available-for-sale securities |
|
|
101,107 |
|
|
|
124,010 |
|
Accounts receivable, net of reserves of $41,648 and $52,308 |
|
|
579,766 |
|
|
|
582,617 |
|
Inventories |
|
|
551,552 |
|
|
|
505,542 |
|
Deferred income taxes |
|
|
27,868 |
|
|
|
35,505 |
|
Prepaid expenses and other |
|
|
124,113 |
|
|
|
126,052 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,522,740 |
|
|
|
1,584,409 |
|
Property and equipment, net |
|
|
209,876 |
|
|
|
190,746 |
|
Goodwill |
|
|
717,734 |
|
|
|
626,869 |
|
Other intangibles, net |
|
|
140,270 |
|
|
|
123,204 |
|
Investments and other |
|
|
59,433 |
|
|
|
57,892 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,650,053 |
|
|
$ |
2,583,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
351,566 |
|
|
$ |
371,392 |
|
Bank credit lines |
|
|
2,262 |
|
|
|
2,093 |
|
Current maturities of long-term debt |
|
|
31,182 |
|
|
|
33,013 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
Payroll and related |
|
|
87,538 |
|
|
|
96,113 |
|
Taxes |
|
|
41,414 |
|
|
|
65,070 |
|
Other |
|
|
158,122 |
|
|
|
156,433 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
672,084 |
|
|
|
724,114 |
|
Long-term debt |
|
|
486,014 |
|
|
|
489,520 |
|
Deferred income taxes |
|
|
60,282 |
|
|
|
54,432 |
|
Other liabilities |
|
|
59,572 |
|
|
|
53,547 |
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
17,253 |
|
|
|
12,353 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none outstanding |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 240,000,000 shares authorized,
88,160,672 outstanding on July 1, 2006 and
87,092,238 outstanding on December 31, 2005 |
|
|
882 |
|
|
|
871 |
|
Additional paid-in capital |
|
|
593,120 |
|
|
|
559,266 |
|
Retained earnings |
|
|
716,100 |
|
|
|
667,958 |
|
Accumulated other comprehensive income |
|
|
44,746 |
|
|
|
21,059 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,354,848 |
|
|
|
1,249,154 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,650,053 |
|
|
$ |
2,583,120 |
|
|
|
|
|
|
|
|
See accompanying notes.
3
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Adjusted - Note 3) |
|
|
|
|
|
|
(Adjusted - Note 3) |
|
|
Net sales |
|
$ |
1,220,360 |
|
|
$ |
1,104,428 |
|
|
$ |
2,382,141 |
|
|
$ |
2,167,425 |
|
Cost of sales |
|
|
860,900 |
|
|
|
783,092 |
|
|
|
1,685,079 |
|
|
|
1,544,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
359,460 |
|
|
|
321,336 |
|
|
|
697,062 |
|
|
|
622,730 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
282,712 |
|
|
|
254,278 |
|
|
|
559,396 |
|
|
|
502,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
76,748 |
|
|
|
67,058 |
|
|
|
137,666 |
|
|
|
120,320 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
3,969 |
|
|
|
1,228 |
|
|
|
8,525 |
|
|
|
2,527 |
|
Interest expense |
|
|
(7,302 |
) |
|
|
(5,084 |
) |
|
|
(14,696 |
) |
|
|
(11,310 |
) |
Other, net |
|
|
(339 |
) |
|
|
|
|
|
|
(118 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
taxes, minority interest and equity in
earnings of affiliates |
|
|
73,076 |
|
|
|
63,202 |
|
|
|
131,377 |
|
|
|
111,424 |
|
Income taxes |
|
|
(26,379 |
) |
|
|
(23,211 |
) |
|
|
(47,601 |
) |
|
|
(41,072 |
) |
Minority interest in net income of subsidiaries |
|
|
(1,706 |
) |
|
|
(2,469 |
) |
|
|
(3,266 |
) |
|
|
(2,514 |
) |
Equity in earnings of affiliates |
|
|
227 |
|
|
|
248 |
|
|
|
335 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
45,218 |
|
|
|
37,770 |
|
|
|
80,845 |
|
|
|
68,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued components |
|
|
|
|
|
|
(1,008 |
) |
|
|
(32,279 |
) |
|
|
(448 |
) |
Income tax benefit |
|
|
|
|
|
|
195 |
|
|
|
12,911 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations |
|
|
|
|
|
|
(813 |
) |
|
|
(19,368 |
) |
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
45,218 |
|
|
$ |
36,957 |
|
|
$ |
61,477 |
|
|
$ |
67,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.51 |
|
|
$ |
0.43 |
|
|
$ |
0.92 |
|
|
$ |
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.50 |
|
|
$ |
0.43 |
|
|
$ |
0.90 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
0.00 |
|
|
$ |
(0.22 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.51 |
|
|
$ |
0.43 |
|
|
$ |
0.70 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.50 |
|
|
$ |
0.42 |
|
|
$ |
0.69 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
88,381 |
|
|
|
86,927 |
|
|
|
87,713 |
|
|
|
86,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
89,823 |
|
|
|
88,154 |
|
|
|
89,344 |
|
|
|
88,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Adjusted - Note 3) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
61,477 |
|
|
$ |
67,830 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Loss on sale of discontinued operation, net of tax |
|
|
19,363 |
|
|
|
|
|
Depreciation and amortization |
|
|
30,158 |
|
|
|
28,348 |
|
Stock-based compensation expense |
|
|
9,374 |
|
|
|
8,536 |
|
Provision for (recovery of) losses on trade and
other accounts receivable |
|
|
679 |
|
|
|
(50 |
) |
Deferred income taxes |
|
|
5,937 |
|
|
|
1,485 |
|
Undistributed earnings of affiliates |
|
|
(335 |
) |
|
|
(435 |
) |
Minority interest in net income of subsidiaries |
|
|
3,266 |
|
|
|
2,514 |
|
Other |
|
|
(412 |
) |
|
|
10 |
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,023 |
) |
|
|
(5,066 |
) |
Inventories |
|
|
(31,755 |
) |
|
|
21,263 |
|
Other current assets |
|
|
8,146 |
|
|
|
28,557 |
|
Accounts payable and accrued expenses |
|
|
(102,258 |
) |
|
|
(85,835 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
617 |
|
|
|
67,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of fixed assets |
|
|
(32,654 |
) |
|
|
(22,033 |
) |
Payments for business acquisitions, net of cash acquired |
|
|
(105,187 |
) |
|
|
(54,752 |
) |
Cash received from business divestiture |
|
|
36,527 |
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(147,340 |
) |
|
|
|
|
Proceeds from sales of available-for-sale securities |
|
|
168,961 |
|
|
|
|
|
Proceeds from maturities of available-for-sale securities |
|
|
1,280 |
|
|
|
|
|
Net proceeds from (payments for) foreign exchange forward
contract settlements |
|
|
(14,805 |
) |
|
|
15,515 |
|
Other |
|
|
165 |
|
|
|
(1,887 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(93,053 |
) |
|
|
(63,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net payments on bank borrowings |
|
|
|
|
|
|
(1,416 |
) |
Principal payments for long-term debt |
|
|
(6,475 |
) |
|
|
(2,565 |
) |
Payments for establishing a new credit facility |
|
|
|
|
|
|
(650 |
) |
Proceeds from issuance of stock upon exercise of stock options |
|
|
25,600 |
|
|
|
19,053 |
|
Payments for repurchases of common stock |
|
|
(23,439 |
) |
|
|
(21,009 |
) |
Proceeds from excess tax benefits related to stock-based
compensation |
|
|
9,788 |
|
|
|
5,458 |
|
Other |
|
|
2,049 |
|
|
|
(559 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
7,523 |
|
|
|
(1,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(84,913 |
) |
|
|
2,312 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
12,564 |
|
|
|
(1,825 |
) |
Cash and cash equivalents, beginning of period |
|
|
210,683 |
|
|
|
186,621 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
138,334 |
|
|
$ |
187,108 |
|
|
|
|
|
|
|
|
See accompanying notes.
5
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Note 1. Basis of Presentation
Our consolidated financial statements include our accounts, as well as those of our
wholly-owned and majority-owned subsidiaries. Certain prior period amounts have been reclassified
to conform to the current period presentation.
Our accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (U.S. GAAP) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures required by U.S.
GAAP for complete financial statements.
The consolidated financial statements reflect all adjustments considered necessary for a fair
presentation of the consolidated results of operations and financial position for the interim
periods presented. All such adjustments are of a normal recurring nature. These unaudited interim
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes to the consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended December 31, 2005.
The preparation of financial statements in conformity with U.S. GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. The results of operations for the six months ended July 1, 2006 are not
necessarily indicative of the results to be expected of any other interim period or for the year
ending December 30, 2006.
Note 2. Segment Data
We conduct our business through two reportable segments: healthcare distribution and
technology. These segments offer different products and services to the same customer base. The
healthcare distribution reportable segment aggregates our dental, medical (including animal health)
and international operating segments. Products distributed include consumable products, small
equipment, laboratory products, large equipment, branded and generic pharmaceuticals, vaccines,
surgical products, diagnostic tests, infection-control products and vitamins.
Our dental group serves office-based dental practices, schools and other institutions in the
combined United States and Canadian dental market. Our medical group serves office-based physician
practices, surgical centers, other alternate-care settings, animal health clinics and other
institutions throughout the United States. Our international group serves 17 countries outside of
North America and is what we believe to be a leading European healthcare supplier serving
office-based practices.
Our technology group provides software, technology and other value-added services to
healthcare providers, primarily in the United States and Canada. Our value-added practice
solutions include practice-management software systems for dental and medical practices and animal
health clinics. Our technology group offerings also include financial services and continuing
education services for practitioners.
6
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 2. Segment Data (Continued)
The following tables present information about our business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 (1) |
|
|
2006 |
|
|
2005 (1) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare distribution (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental (3) |
|
$ |
511,870 |
|
|
$ |
462,147 |
|
|
$ |
993,906 |
|
|
$ |
898,669 |
|
Medical (4) |
|
|
348,603 |
|
|
|
305,078 |
|
|
|
683,234 |
|
|
|
618,448 |
|
International (5) |
|
|
336,533 |
|
|
|
314,680 |
|
|
|
658,839 |
|
|
|
606,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total healthcare distribution |
|
|
1,197,006 |
|
|
|
1,081,905 |
|
|
|
2,335,979 |
|
|
|
2,123,895 |
|
Technology (6) |
|
|
23,354 |
|
|
|
22,523 |
|
|
|
46,162 |
|
|
|
43,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,220,360 |
|
|
$ |
1,104,428 |
|
|
$ |
2,382,141 |
|
|
$ |
2,167,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations. |
|
(2) |
|
Consists of consumable products, small equipment, laboratory products, large equipment,
branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests,
infection-control products and vitamins. |
|
(3) |
|
Consists of products sold in the United States and Canada. |
|
(4) |
|
Consists of products sold in the United States medical and animal health markets. |
|
(5) |
|
Consists of products sold in the dental, medical and animal health markets, primarily in
Europe. |
|
(6) |
|
Consists of practice-management software and other value-added products and services, which
are distributed primarily to healthcare providers in the United States and Canada. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 (1) |
|
|
2006 |
|
|
2005 (1) |
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare distribution |
|
$ |
67,615 |
|
|
$ |
58,462 |
|
|
$ |
119,777 |
|
|
$ |
103,545 |
|
Technology |
|
|
9,133 |
|
|
|
8,596 |
|
|
|
17,889 |
|
|
|
16,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
76,748 |
|
|
$ |
67,058 |
|
|
$ |
137,666 |
|
|
$ |
120,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations and the effect of our adoption
of FAS 123(R) using the modified
retrospective application as discussed in Note 3. |
7
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (FAS) No. 123(R), Share-Based Payment. We previously applied Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations and
provided the required pro forma disclosures of FAS 123, Accounting for Stock-Based Compensation
in our consolidated financial statements. We elected to adopt the modified retrospective
application method provided by FAS 123(R), and accordingly, financial statement amounts for the
periods presented herein reflect results as if the fair value method of expensing had been applied
from the original effective date of FAS 123. Such results are consistent with the previously
reported pro forma disclosures required under FAS 123.
As part of our adoption of FAS 123(R), we recorded the cumulative share-based
compensation expense, net of taxes, for the period 1995 through 2005, resulting in a reduction of
our retained earnings of $67.1 million and our deferred income tax liability of $19.6 million, with
an offsetting increase to additional paid-in capital of $86.3 million in the accompanying
consolidated balance sheet as of December 31, 2005. The $19.6 million reduction to our deferred
income tax liability represents the cumulative expense related to stock options expected to result
in a future tax deduction. Additionally, we reclassified $425 of deferred compensation to
additional paid-in capital as of December 31, 2005.
Our accompanying unaudited consolidated statements of income reflect pre-tax share-based
compensation expense of $5.5 million ($3.5 million after-tax) and $9.4 million ($6.0 million
after-tax) for the three and six months ended July 1, 2006 and $4.8 million ($3.0 million
after-tax) and $8.5 million ($5.4 million after-tax) for the three and six months ended June 25,
2005. Our basic and diluted earnings per share as originally reported for the three and six months
ended June 25, 2005 were reduced by $.03 and $.06 as a result of our modified retrospective
application of FAS 123(R).
Our accompanying unaudited consolidated statements of cash flows present our stock-based
compensation expense as an adjustment to reconcile net income to net cash provided by operating
activities for all periods presented. Additionally, prior to adopting FAS 123(R), benefits
associated with tax deductions in excess of recognized compensation expense were presented as part
of operating cash flow on our consolidated statements of cash flows. However, FAS 123(R) requires
that such excess tax benefits be presented as a cash inflow from financing activities. In the
accompanying consolidated statements of cash flows, we presented $9.8 million and $5.5 million of
such excess tax benefits as a cash inflow from financing activities for the six months ended July
1, 2006 and June 25, 2005.
Stock-based compensation represents the cost related to stock-based awards granted to
employees and non-employee directors. We measure stock-based compensation at the grant date, based
on the estimated fair value of the award, and recognize the cost as compensation expense on a
straight-line basis (net of estimated forfeitures) over the requisite service period. Our
stock-based compensation expense is reflected in selling, general and administrative expenses in
our consolidated statements of income.
Stock-based awards are provided to certain employees and non-employee directors under the
terms of our 1994 Stock Incentive Plan, as amended, and our 1996 Non-Employee Director Stock
Incentive Plan, as amended (the Plans). The Plans are administered by the Compensation Committee
of the Board of Directors. Awards under the Plans principally include a combination of
at-the-money stock options and restricted stock (including restricted stock units). As of July 1,
2006, there were 20,157,270 shares authorized and 2,348,266 shares available to be granted under
the 1994 Stock Incentive Plan and 800,000 shares authorized and 333,694 shares available to be
granted under the 1996 Non-Employee Director Plan.
8
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation (Continued)
Stock options are awards that allow the recipient to purchase shares of our common stock at a
fixed price. Stock options are granted at an exercise price equal to our closing stock price on
the date of grant. These awards, which generally vest 25% per year, are fully vested four years
from the grant date and have a contractual term of ten years from the grant date. Additionally,
recipients may not sell any shares that they acquire through exercising their options until the
third anniversary of the date of grant of such options. We estimate the fair value of stock
options using the Black-Scholes valuation model.
Grants of restricted stock are common stock awards granted to recipients with specified
vesting provisions. We issue restricted stock that vests based on the recipients continued
service over time (four-year cliff vesting) and restricted stock that vests based on our achieving
specified performance measurements (three-year cliff vesting).
With respect to time-based restricted stock, we estimate the fair value on the date of grant
based on our closing stock price. With respect to performance-based restricted stock, the number
of shares that ultimately vest and are received by the recipient depends on our earnings per share
performance measured against specified targets over a three-year period. The fair value of
performance-based restricted stock is determined on the date of grant, based on our closing stock
price, and assumes that performance targets will be achieved. Over the performance period, the
number of shares of common stock that will ultimately vest and be issued is adjusted upward or
downward based upon our estimation of achieving such performance targets. The ultimate number of
shares delivered to recipients and the related compensation cost recognized as expense will be
based on a comparison of the final performance metrics to the specified targets.
Restricted stock units (RSUs) are unit awards we grant to certain non-U.S. employees that
entitle the recipient to shares of common stock upon vesting after four years for time-based awards
or three years for performance-based awards. The fair value of RSUs is determined on the date of
grant, based on our closing stock price.
We record deferred tax assets for awards that result in deductions on our income tax returns,
based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction
in which we will receive a deduction. Differences between the deferred tax assets recognized for
financial reporting purposes and the actual tax deduction reported on our income tax return are
recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in
earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital
exists from previous awards).
The majority of stock-based compensation expense for the six months ended July 1, 2006 and
June 25, 2005 was generated through stock options. The weighted-average grant date fair value of
stock-based awards granted was $361 and $798 during the three months ended July 1, 2006 and June
25, 2005 and $24.5 million and $21.6 million for the six months ended July 1, 2006 and June 25,
2005. For the three and six months ended July 1, 2006, the fair value of stock-based awards issued
was evenly divided between stock options and restricted stock (including RSUs).
Total unrecognized compensation cost related to non-vested awards as of July 1, 2006 was
$48.8 million, which is expected to be recognized over a weighted-average period of approximately 3
years. There were no significant capitalized stock-based compensation costs as of July 1, 2006.
9
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation (Continued)
The following table summarizes stock option activity under the Plans during the six
months ended July 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Exercise |
|
|
|
Shares |
|
|
Price |
|
Outstanding at beginning of period |
|
|
8,882,557 |
|
|
$ |
26.37 |
|
Granted |
|
|
819,713 |
|
|
|
47.31 |
|
Exercised |
|
|
(1,325,443 |
) |
|
|
19.31 |
|
Forfeited |
|
|
(102,295 |
) |
|
|
29.46 |
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
8,274,532 |
|
|
|
29.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
5,484,365 |
|
|
|
24.12 |
|
|
|
|
|
|
|
|
|
The shares under option at July 1, 2006, were in the following exercise price ranges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Contractual Life |
|
|
Average Exercise |
|
|
Intrinsic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
in Years |
|
|
Price |
|
|
Value |
|
Range of Exercise Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.91 |
|
|
to |
|
$ |
9.87 |
|
|
|
401,797 |
|
|
|
2.6 |
|
|
$ |
7.06 |
|
|
$ |
15,938,323 |
|
|
|
|
10.75 |
|
|
to |
|
|
15.03 |
|
|
|
575,640 |
|
|
|
3.5 |
|
|
|
13.22 |
|
|
|
19,290,969 |
|
|
|
|
16.10 |
|
|
to |
|
|
24.13 |
|
|
|
2,521,298 |
|
|
|
5.3 |
|
|
|
19.66 |
|
|
|
68,244,375 |
|
|
|
|
24.41 |
|
|
to |
|
|
47.31 |
|
|
|
4,775,797 |
|
|
|
8.4 |
|
|
|
38.60 |
|
|
|
38,813,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,274,532 |
|
|
|
6.8 |
|
|
|
29.53 |
|
|
$ |
142,286,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Contractual Life |
|
|
Average Exercise |
|
|
Intrinsic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
in Years |
|
|
Price |
|
|
Value |
|
Range of Exercise Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.91 |
|
|
to |
|
$ |
9.87 |
|
|
|
401,797 |
|
|
|
2.6 |
|
|
$ |
7.06 |
|
|
$ |
15,938,323 |
|
|
|
|
10.75 |
|
|
to |
|
|
15.03 |
|
|
|
575,640 |
|
|
|
3.5 |
|
|
|
13.22 |
|
|
|
19,290,969 |
|
|
|
|
16.10 |
|
|
to |
|
|
24.13 |
|
|
|
2,521,298 |
|
|
|
5.3 |
|
|
|
19.66 |
|
|
|
68,244,375 |
|
|
|
|
24.41 |
|
|
to |
|
|
47.31 |
|
|
|
1,985,630 |
|
|
|
8.0 |
|
|
|
36.40 |
|
|
|
20,502,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,484,365 |
|
|
|
5.9 |
|
|
|
24.12 |
|
|
$ |
123,976,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation (Continued)
The following weighted-average assumptions were used in determining the fair values of stock
options using the Black-Scholes valuation model:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected stock price volatility |
|
|
25 |
% |
|
|
30 |
% |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
4.0 |
% |
Expected life of options (years) |
|
|
5 |
|
|
|
5 |
|
We have not declared cash dividends on our stock in the past and we do not anticipate
declaring cash dividends in the foreseeable future. The expected stock price volatility is based
on implied volatilities from traded options on our stock, historical volatility of our stock, and
other factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant in conjunction with considering the expected life of options. The expected life
of options is based on historical data on option exercises and represents the approximate period of
time that granted options are expected to be outstanding. Estimates of fair value are not intended
to predict actual future events or the value ultimately realized by recipients of stock options,
and subsequent events are not indicative of the reasonableness of the original estimates of fair
value made by us.
The total intrinsic value of stock options exercised was $11.1 million and $10.8 million for the
three months ended July 1, 2006 and June 25, 2005 and $36.6 million and $23.3 million for the six
months ended July 1, 2006 and June 25, 2005. The total cash received as a result of stock option
exercises for the six months ended July 1, 2006 and June 25, 2005 was approximately $25.6 million
and $19.1 million. In connection with these exercises, the tax benefits realized by us for the six
months ended July 1, 2006 and June 25, 2005 were $13.3 million and $8.7 million. We settle
employee stock option exercises with newly issued common shares.
11
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation (Continued)
The total intrinsic value of restricted stock (including RSUs) that vested was $36 and $30
during the three months ended July 1, 2006 and June 25, 2005 and $72 and $58 during the six months
ended July 1, 2006 and June 25, 2005. The following table summarizes the status of our non-vested
restricted shares for the six months ended July 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
Time-Based Restricted Stock |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Grant Date Fair Value |
|
Outstanding at beginning of period |
|
|
17,478 |
|
|
$ |
424,766 |
|
Granted |
|
|
104,269 |
|
|
|
4,932,961 |
|
Vested |
|
|
(1,545 |
) |
|
|
(48,561 |
) |
Forfeited |
|
|
(3,411 |
) |
|
|
(159,054 |
) |
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
116,791 |
|
|
$ |
5,150,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based Restricted Stock |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Grant Date Fair Value |
|
Outstanding at beginning of period |
|
|
|
|
|
|
|
|
Granted |
|
|
151,263 |
|
|
$ |
7,156,512 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(3,411 |
) |
|
|
(159,054 |
) |
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
147,852 |
|
|
$ |
6,997,458 |
|
|
|
|
|
|
|
|
Note 4. Business Acquisitions, Divestiture and Other Transactions
Acquisitions
On March 31, 2006, we completed the acquisition of NLS Animal Health (NLS), a privately
held, full-service animal health distribution business with annual revenues of approximately $110.0
million. We recorded $50.9 million of goodwill related to this acquisition through a preliminary
purchase price allocation.
On
June 30, 2006, we acquired certain assets and assumed certain
liabilities of Island Dental Co., Inc. (Island Dental), a
privately held full-service distributor of dental merchandise and equipment with annual revenues of
approximately $84.0 million. We recorded $4.7 million of goodwill related to this acquisition
through a preliminary purchase price allocation.
In addition to the NLS and Island Dental acquisitions, we completed three other acquisitions
during the six months ended July 1, 2006. The operating results of our acquisitions were reflected
in our financial statements from their respective acquisition dates. Such acquisitions were
immaterial to our financial statements individually and in the aggregate.
12
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 4. Business Acquisitions, Divestiture and Other Transactions (Continued)
Divestiture
On April 1, 2006, we sold substantially all of the assets of our Hospital Supply
Business, previously reported as part of our healthcare distribution reportable segment. The sale
price was $36.5 million, which was received during the second quarter of 2006. As a result of this
sale, included in the operating results from discontinued operations for the three months ended
April 1, 2006 is a $32.3 million ($19.4 million after-tax) loss on the sale, including $3.5 million
($2.1 million after-tax) of transitional service obligations and selling costs.
Net sales generated by our Hospital Supply Business were $37.9 million for the three months
ended April 1, 2006 and $37.2 million and $75.6 million for the three and six months ended June 25,
2005. We have classified the operating results of the Hospital Supply Business as a discontinued
operation in the accompanying consolidated statements of income for all periods presented. The
carrying amounts of the major classes of the Hospital Supply Business assets held-for-sale as of
December 31, 2005 included accounts receivable, net of reserves, of approximately $43.9 million and
inventories, net of reserves, of approximately $16.2 million.
As part of the sale agreement, we are obligated to make payments to the buyer, up to a maximum
of $13.0 million, contingent upon the buyers collection of specified accounts receivable within
one year and the maintenance of a specified level of aggregate sales of the Hospital Supply
Business during the two-year post-closing period. Any future payments made in connection with
these contingencies will be presented as part of the results from discontinued operations.
Loan and Investment Agreement
On July 18, 2006, we loaned D4D Technologies, LLC (D4D) $7.6 million and agreed to loan
an additional $5.7 million contingent upon the achievement of specified D4D operational milestones.
If such operational milestones are achieved, the additional $5.7 million loan is expected to be
made in the latter part of 2006. The loans will be payable in July 2013.
We also agreed to make two equity investments in D4D totaling $27.7 million contingent upon
the achievement of specified D4D operational milestones. If such operational milestones are
achieved, we
expect to make these investments in 2007. We have the option to fund a portion of our second
equity investment in D4D by utilizing the loan amounts due to us from D4D. We expect to account
for such investments under the equity method prospectively from the date of our first equity
investment.
Note 5. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of
common shares outstanding for the period. Our diluted earnings per share is computed similarly to
basic earnings per share, except that it reflects the effect of common shares issuable upon vesting
of restricted stock and upon exercise of stock options using the treasury stock method in periods
in which they have a dilutive effect.
13
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 5. Earnings Per Share (Continued)
For the three and six months ended July 1, 2006, diluted earnings per share includes the
effect of common shares issuable upon conversion of our convertible debt. During the period the
debt was convertible at a premium as a result of the conditions of the debt, therefore the amount
in excess of the principal is presumed to be settled in common shares and is reflected in our
calculation of diluted earnings per share.
A reconciliation of shares used in calculating earnings per basic and diluted share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic |
|
|
88,381,298 |
|
|
|
86,926,514 |
|
|
|
87,712,692 |
|
|
|
86,818,449 |
|
Effect of assumed exercise of stock options |
|
|
1,422,244 |
|
|
|
1,227,038 |
|
|
|
1,455,679 |
|
|
|
1,377,748 |
|
Effect of assumed vesting of restricted stock |
|
|
2,967 |
|
|
|
|
|
|
|
169,083 |
|
|
|
|
|
Effect of assumed conversion of convertible debt |
|
|
16,266 |
|
|
|
|
|
|
|
7,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
89,822,775 |
|
|
|
88,153,552 |
|
|
|
89,344,486 |
|
|
|
88,196,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average options to purchase 818,213 shares of common stock at an exercise price
of $47.31 per share and 1,567,021 shares of common stock at exercise prices ranging from $39.43 to
$40.45 per share, that were outstanding during the three months ended July 1, 2006 and June 25,
2005, were excluded from the computation of diluted earnings per share. Weighted-average options
to purchase 548,473 shares of common stock at an exercise price of $47.31 per share and 948,023
shares of common stock at exercise prices ranging from $37.45 to $40.45 per share, that were
outstanding during the six months ended July 1, 2006 and June 25, 2005, were excluded from the
computation of diluted earnings per share. In each of these periods, such options exercise prices
exceeded the average market price of our common stock, thereby causing the effect of such options
to be anti-dilutive.
Note 6. Comprehensive Income
Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded
from net income, as these amounts are recorded directly as adjustments to stockholders equity.
Our comprehensive income primarily includes net income, foreign currency translation adjustments
and unrealized gains and losses on hedging activities. Comprehensive income totaled $63.3 million
and $85.2 million for the three and six months ended July 1, 2006, and $23.5 million and $44.2
million for the three and six months ended June 25, 2005.
14
HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 7. Supplemental Cash Flow Information
Cash paid for interest and income taxes was:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
July 1, |
|
June 25, |
|
|
2006 |
|
2005 |
Interest |
|
$ |
18,233 |
|
|
$ |
11,567 |
|
Income taxes |
|
|
49,169 |
|
|
|
12,540 |
|
During the six months ended July 1, 2006 and June 25, 2005, we had a $5.6 million
non-cash net unrealized loss and a $20.7 million non-cash net unrealized gain related to hedging
activities. Additionally, in connection with our acquisition of Austrodent, during the six months
ended June 25, 2005, we reclassified approximately $11.4 million ($13.5 million paid in 2004, less
$2.1 million received in 2005 upon closing the acquisition) from other current assets to the
respective assets and liabilities acquired.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform
Act of 1995, we provide the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the forward-looking statements,
expectations and assumptions expressed or implied herein. All forward-looking statements made by
us are subject to risks and uncertainties and are not guarantees of future performance.
These forward-looking statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance and achievements, or industry results to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking statements. These statements are identified by the use of such terms as may,
could, expect, intend, believe, plan, estimate, forecast, project, anticipate or
other comparable terms.
Risk factors and uncertainties that could cause actual results to differ materially
from current and historical results include, but are not limited to: competitive factors;
changes in the healthcare industry; changes in government regulations that affect us; financial
risks associated with our international operations; fluctuations in quarterly earnings; our dependence
on third parties for the manufacture and supply of our products; transitional challenges associated
with acquisitions; regulatory and litigation risks; the dependence on our continued product development,
technical support and successful marketing in the technology segment; our dependence upon sales personnel
and key customers; our dependence on our senior management; possible increases in the cost of
shipping our products or other service trouble with our third-party shippers; risks from rapid
technological change; risks from potential increases in variable interest rates; financial risks
associated with acquisitions; possible volatility of the market price of our common stock; certain
provisions in our governing documents that may discourage third-party acquisitions of us; and changes
in tax legislation that affect us. The order in which these factors appear should not be construed
to indicate their relative importance or priority.
We caution that these factors may not be exhaustive and that many of these factors are beyond
our ability to control or predict. Accordingly, forward-looking statements should not be
relied upon as a prediction of actual results. We undertake no duty and have no obligation
to update forward-looking statements.
Executive-Level Overview
We believe we are the largest distributor of healthcare products and services primarily to office-based
healthcare practitioners in the combined North American and European markets. We serve more than 500,000
customers worldwide, including dental practices and laboratories, physician practices and animal health
clinics, as well as government and other institutions. We believe that we have a strong brand identity
due to our 74 years of experience distributing healthcare products.
We are headquartered in Melville, New York, employ nearly 11,000 people and have operations in the
United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Portugal,
Spain, the Czech Republic, Luxembourg, Italy, Ireland, Switzerland, Israel, Australia and New Zealand.
We also have an affiliate in Iceland.
We have established strategically located distribution centers to enable us to better serve our customers
and increase our operating efficiency. This infrastructure, together with broad product and
16
service
offerings at competitive prices, and a strong commitment to customer service, enables us to be a single
source of supply for our customers needs. Our infrastructure also allows us to provide convenient ordering
and rapid, accurate and complete order fulfillment.
We conduct our business through two reportable segments: healthcare distribution and technology. These segments
offer different products and services to the same customer base. The healthcare distribution reportable
segment aggregates our dental, medical (including animal health) and international operating segments.
Products distributed include consumable products, small equipment, laboratory products, large equipment,
branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control
products and vitamins.
Our dental group serves office-based dental practices, schools and other institutions in the combined
United States and Canadian dental market. Our medical group serves office-based physician practices,
surgical centers, other alternate-care settings, animal health clinics and other institutions throughout
the United States. Our international group serves 17 countries outside of North America and is what we
believe to be a leading European healthcare supplier serving office-based practices.
Our technology group provides software, technology and other value-added services to healthcare providers,
primarily in the United States and Canada. Our value-added practice solutions include practice-management
software systems for dental and medical practices and animal health clinics. Our technology group offerings
also include financial services and continuing education services for practitioners.
Industry Overview
In recent years, the healthcare industry has increasingly focused on cost containment.
This trend has benefited distributors capable of providing a broad array of products and services at
low prices. It also has accelerated the growth of HMOs, group practices, other managed care accounts
and collective buying groups, which, in addition to their emphasis on obtaining products at competitive
prices, tend to favor distributors capable of providing specialized management information support.
We believe that the trend towards cost containment has the potential to favorably affect demand for
technology solutions, including software, which can enhance the efficiency and facilitation of
practice management.
Our operating results in recent years have been significantly affected by strategies and transactions
that we undertook to expand our business, domestically and internationally, in part to address
significant changes in the healthcare industry, including consolidation of healthcare distribution
companies, potential healthcare reform, trends toward managed care, cuts in Medicare and collective
purchasing arrangements.
Industry Consolidation
The healthcare products distribution industry, as it relates to office-based healthcare practitioners,
is highly fragmented and diverse. This industry, which encompasses the dental, medical and animal
health markets, was estimated to produce revenues of approximately $21 billion in 2005 in the combined
North American and Western and Central European markets. The industry ranges from sole practitioners
working out of relatively small offices to group practices or service organizations ranging in size from
a few practitioners to a large number of practitioners who have combined or otherwise associated
their practices.
Due in part to the inability of office-based healthcare practitioners to store and manage large
quantities of supplies in their offices, the distribution of healthcare supplies and small equipment
to office-based healthcare practitioners has been characterized by frequent, small-quantity orders,
and a need for rapid, reliable and substantially complete order fulfillment. The purchasing decisions
within an office-based healthcare practice are typically made by the practitioner or an administrative
assistant, and
17
supplies and small equipment are generally purchased from more than one distributor, with
one generally serving as the primary supplier.
We believe that consolidation within the industry will continue to result in a number of distributors,
particularly those with limited financial and marketing resources, seeking to combine with larger
companies that can provide growth opportunities. This consolidation also may continue to result in
distributors seeking to acquire companies that can enhance their current product and service offerings
or provide opportunities to serve a broader customer base.
Our trend with regard to acquisitions has been to expand our role as a provider of products and
services to the healthcare industry. This trend has resulted in expansion into service areas that
complement our existing operations and provide opportunities for us to develop synergies with, and
thus strengthen, the acquired businesses.
As industry consolidation continues, we believe that we are positioned to capitalize on this trend,
as we believe we have the ability to support increased sales through our existing infrastructure.
In the U.S. dental market, we estimate that there are currently more than 300 smaller distributors
holding approximately 35% of the market. In the U.S. medical market, we estimate that more than 500
smaller distributors hold approximately 50% of the market, and in the European dental market, we estimate
that more than 200 smaller distributors hold approximately 80% of the market.
As the healthcare industry continues to change, we continually evaluate possible candidates for merger or
acquisition and intend to continue to seek opportunities to expand our role as a provider of products
and services to the healthcare industry. There can be no assurance that we will be able to successfully
pursue any such opportunity or consummate any such transaction, if pursued. If additional transactions are
entered into or consummated, we would incur additional merger and acquisition-related costs, and there
can be no assurance that the integration efforts associated with any such transaction would be successful.
Aging Population and Other Market Influences
The healthcare products distribution industry continues to experience growth due to the aging population,
increased healthcare awareness, the proliferation of medical technology and testing, new pharmacology
treatments and expanded third-party insurance coverage. In addition, the physician market continues to
benefit from the shift of procedures and diagnostic testing from hospitals to alternate-care
sites, particularly physicians offices. As the cosmetic surgery and elective procedure markets continue
to grow, physicians are increasingly performing more of these procedures in their offices.
The elder-care market continues to benefit from the increasing growth rate of the population of elderly Americans.
The January 2000 U.S. Bureau of the Census estimated that the elderly population in the United
States will more than double by the year 2040. In 2000, four million Americans were aged 85 or
older, the segment of the population most in need of long-term care and elder-care services.
By the year 2040, that number is projected to more than triple to more than 14 million.
The population aged 65 to 84 years is projected to more than double in the same time period.
As a result of these market dynamics, the annual expenditures for healthcare services continue to increase
in the United States. The Centers for Medicare and Medicaid Services (CMS) published National Health
Care Expenditures Projections: 2005 2015 indicating that total national healthcare spending reached
$1.9 trillion in 2004, or 16.0% of the nations gross domestic product, the benchmark measure for annual
production of goods and services in the United States. Healthcare spending is projected to reach
$4.0 trillion in 2015, an estimated 20.0% of the nations gross domestic product.
18
Results of Operations
The following table summarizes the significant components of our operating results from
continuing operations and cash flows for the three and six months ended July 1, 2006 and June 25,
2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 (1) |
|
|
2006 |
|
|
2005 (1) |
|
Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,220,360 |
|
|
$ |
1,104,428 |
|
|
$ |
2,382,141 |
|
|
$ |
2,167,425 |
|
Cost of sales |
|
|
860,900 |
|
|
|
783,092 |
|
|
|
1,685,079 |
|
|
|
1,544,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
359,460 |
|
|
|
321,336 |
|
|
|
697,062 |
|
|
|
622,730 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
282,712 |
|
|
|
254,278 |
|
|
|
559,396 |
|
|
|
502,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
76,748 |
|
|
$ |
67,058 |
|
|
$ |
137,666 |
|
|
$ |
120,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
$ |
(3,672 |
) |
|
$ |
(3,856 |
) |
|
$ |
(6,289 |
) |
|
$ |
(8,896 |
) |
Income from continuing operations |
|
|
45,218 |
|
|
|
37,770 |
|
|
|
80,845 |
|
|
|
68,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
$ |
617 |
|
|
$ |
67,157 |
|
Net cash used in investing activities |
|
|
|
|
|
|
|
|
|
|
(93,053 |
) |
|
|
(63,157 |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
|
|
|
|
7,523 |
|
|
|
(1,688 |
) |
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations and the effect of our adoption
of FAS 123(R) using the modified retrospective application. |
Three Months Ended July 1, 2006 Compared to Three Months Ended June 25, 2005
Net Sales
Net sales from continuing operations for the three months ended July 1, 2006 and June 25, 2005
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
% of |
|
|
June 25, |
|
|
% of |
|
|
|
2006 |
|
|
Total |
|
|
2005 (1) |
|
|
Total |
|
Healthcare distribution (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental (3) |
|
$ |
511,870 |
|
|
|
41.9 |
% |
|
$ |
462,147 |
|
|
|
41.9 |
% |
Medical (4) |
|
|
348,603 |
|
|
|
28.6 |
|
|
|
305,078 |
|
|
|
27.6 |
|
International (5) |
|
|
336,533 |
|
|
|
27.6 |
|
|
|
314,680 |
|
|
|
28.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total healthcare distribution |
|
|
1,197,006 |
|
|
|
98.1 |
|
|
|
1,081,905 |
|
|
|
98.0 |
|
Technology (6) |
|
|
23,354 |
|
|
|
1.9 |
|
|
|
22,523 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,220,360 |
|
|
|
100.0 |
% |
|
$ |
1,104,428 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations. |
|
(2) |
|
Consists of consumable products, small equipment, laboratory products, large equipment,
branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests,
infection-control products and vitamins. |
|
(3) |
|
Consists of products sold in the United States and Canada. |
|
(4) |
|
Consists of products sold in the United States medical and animal health markets. |
|
(5) |
|
Consists of products sold in the dental, medical and animal health markets, primarily in Europe. |
|
(6) |
|
Consists of practice-management software and other value-added products and services, which
are distributed primarily to healthcare providers in the United States and Canada. |
19
The $115.9 million, or 10.5%, increase in net sales for the three months ended July 1,
2006, includes increases of 10.3% local currency growth (5.9% internally generated primarily due to
volume growth and 4.4% from acquisitions) and a 0.2% increase related to foreign currency exchange.
The $49.7 million, or 10.8%, increase in dental net sales for the three months ended July 1,
2006, includes increases of 9.4% local currency growth (9.3% internally generated and 0.1% from
acquisitions) and 1.4% related to foreign currency exchange. The 9.4% local currency growth was
due to dental consumable merchandise sales growth of 6.9% (6.8% internal growth and 0.1%
acquisition growth) and dental equipment sales and service growth of 18.1% (18.0% internal growth
and 0.1% acquisition growth). Internally generated dental net sales growth was primarily due to
increased volume.
The $43.5 million, or 14.3%, increase in medical net sales for the three months ended July 1,
2006, includes internal growth of 3.3% primarily due to volume growth and acquisition growth of
11.0%.
The $21.9 million, or 6.9%, increase in international net sales for the three months ended
July 1, 2006, includes increases of 8.1% in local currencies (4.5% from acquisitions and 3.6%
internally generated primarily due to volume growth), offset by a 1.2% decline related to foreign
currency exchange.
The $0.8 million, or 3.7%, increase in technology net sales for the three months ended July 1,
2006, includes increases of 3.1% in local currency growth and 0.6% due to foreign currency
exchange. The increase was primarily due to increased electronic and financial services sales.
Gross Profit
Gross profit and gross margin percentages from continuing operations by segment and in total
for the three months ended July 1, 2006 and June 25, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
Gross |
|
|
June 25, |
|
|
Gross |
|
|
|
2006 |
|
|
Margin % |
|
|
2005 (1) |
|
|
Margin % |
|
Healthcare distribution |
|
$ |
341,460 |
|
|
|
28.5 |
% |
|
$ |
304,241 |
|
|
|
28.1 |
% |
Technology |
|
|
18,000 |
|
|
|
77.1 |
|
|
|
17,095 |
|
|
|
75.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
359,460 |
|
|
|
29.5 |
|
|
$ |
321,336 |
|
|
|
29.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations. |
For the three months ended July 1, 2006, gross profit increased $38.1 million, or 11.9%,
from the comparable prior year period. As a result of different practices of categorizing costs
associated with distribution networks throughout our industry, our gross margins may not
necessarily be comparable to other distribution companies. Additionally, we realize substantially
higher gross margin percentages in our technology segment than in our healthcare distribution
segment. These higher gross margins result from being both the developer and seller of software
products combined with the nature of the software industry, in which developers typically realize
higher gross margins to recover investments in research and development.
Healthcare distribution gross profit increased $37.2 million, or 12.2%, for the three months
ended July 1, 2006 from the comparable prior year period. Healthcare distribution gross profit
margin increased to 28.5% for the three months ended July 1, 2006 from 28.1% for the comparable
prior year period, which reflects improved margin management.
20
Technology gross profit increased $0.9 million, or 5.3%, for the three months ended July
1, 2006 from the comparable prior year period. Technology gross profit margin increased to 77.1%
for the three months ended July 1, 2006 from 75.9% for the comparable prior year period primarily
due to a favorable sales mix of higher margin product sales.
Selling, General and Administrative
Selling, general and administrative expenses from continuing operations by segment and in
total for the three months ended July 1, 2006 and June 25, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
July 1, |
|
|
Respective |
|
|
June 25, |
|
|
Respective |
|
|
|
2006 |
|
|
Net Sales |
|
|
2005 (1) |
|
|
Net Sales |
|
Healthcare distribution |
|
$ |
273,845 |
|
|
|
22.9 |
% |
|
$ |
245,779 |
|
|
|
22.7 |
% |
Technology |
|
|
8,867 |
|
|
|
38.0 |
|
|
|
8,499 |
|
|
|
37.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
282,712 |
|
|
|
23.2 |
|
|
$ |
254,278 |
|
|
|
23.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations and the effect of our adoption
of FAS 123(R) using the modified
retrospective application. |
Selling, general and administrative expenses increased $28.4 million, or 11.2%, to $282.7
million for the three months ended July 1, 2006 from the comparable prior year period. As a
percentage of net sales, selling, general and administrative expenses increased to 23.2% from 23.0%
for the comparable prior year period. The increase of 0.2% was primarily due to payroll and
expenses related to recent acquisitions.
As a component of selling, general and administrative expenses, selling expenses increased
$18.9 million, or 11.2%, to $186.9 million for the three months ended July 1, 2006 from the
comparable prior year period. As a percentage of net sales, selling expenses increased to 15.3%
from 15.2% for the comparable prior year period.
As a component of selling, general and administrative expenses, general and administrative
expenses increased $9.5 million, or 11.1%, to $95.8 million for the three months ended July 1, 2006
from the comparable prior year period. As a percentage of net sales, general and administrative
expenses increased to 7.9% from 7.8% for the comparable prior year period.
Other Expense, Net
Other expense, net from continuing operations for the three months ended July 1, 2006 and June
25, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 (1) |
|
Interest income |
|
$ |
3,969 |
|
|
$ |
1,228 |
|
Interest expense |
|
|
(7,302 |
) |
|
|
(5,084 |
) |
Other, net |
|
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
$ |
(3,672 |
) |
|
$ |
(3,856 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations. |
Other expense, net decreased $184 thousand for the three months ended July 1, 2006 from
the comparable prior year period, primarily due to increases in interest income resulting from
higher interest
21
rates being applied to higher cash, cash equivalent and security balances,
predominantly offset by increased interest expense due to rising interest rates.
Income Taxes
For the three months ended July 1, 2006, our effective tax rate from continuing operations
decreased to 36.1% from 36.7% for the comparable prior year period. The difference between our
effective tax rates and the federal statutory tax rates for both periods related primarily to
foreign and state income taxes.
Six Months Ended July 1, 2006 Compared to Six Months Ended June 25, 2005
Net Sales
Net sales from continuing operations for the six months ended July 1, 2006 and June 25, 2005
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
% of |
|
|
June 25, |
|
|
% of |
|
|
|
2006 |
|
|
Total |
|
|
2005 (1) |
|
|
Total |
|
Healthcare distribution (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental (3) |
|
$ |
993,906 |
|
|
|
41.7 |
% |
|
$ |
898,669 |
|
|
|
41.5 |
% |
Medical (4) |
|
|
683,234 |
|
|
|
28.7 |
|
|
|
618,448 |
|
|
|
28.5 |
|
International (5) |
|
|
658,839 |
|
|
|
27.7 |
|
|
|
606,778 |
|
|
|
28.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total healthcare distribution |
|
|
2,335,979 |
|
|
|
98.1 |
|
|
|
2,123,895 |
|
|
|
98.0 |
|
Technology (6) |
|
|
46,162 |
|
|
|
1.9 |
|
|
|
43,530 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,382,141 |
|
|
|
100.0 |
% |
|
$ |
2,167,425 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations. |
|
(2) |
|
Consists of consumable products, small equipment, laboratory products, large equipment,
branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests,
infection-control products and vitamins. |
|
(3) |
|
Consists of products sold in the United States and Canada. |
|
(4) |
|
Consists of products sold in the United States medical and animal health markets. |
|
(5) |
|
Consists of products sold in the dental, medical and animal health markets, primarily in
Europe. |
|
(6) |
|
Consists of practice-management software and other value-added products and services, which
are distributed primarily to healthcare providers in the United States and Canada. |
The $214.7 million, or 9.9%, increase in net sales for the six months ended July 1, 2006,
includes increases of 10.9% local currency growth (7.1% internally generated primarily due to
volume growth and 3.8% from acquisitions), offset by a 1.0% decline related to foreign currency
exchange.
The $95.2 million, or 10.6%, increase in dental net sales for the six months ended July 1,
2006, includes increases of 9.6% local currency growth (9.2% internally generated and 0.4% from
acquisitions) and 1.0% related to foreign currency exchange. The 9.6% local currency growth was
due to dental consumable merchandise sales growth of 8.4% (8.0% internal growth and 0.4%
acquisition growth) and dental equipment sales and service growth of 13.9% (13.5% internal growth
and 0.4% acquisition growth). Internally generated dental net sales growth was primarily due to
increased volume.
The $64.8 million, or 10.5%, increase in medical net sales for the six months ended July 1,
2006, includes internal growth of 4.3% primarily due to volume growth and acquisition growth of
6.2%.
The $52.1 million, or 8.6%, increase in international net sales for the six months ended July
1, 2006, includes increases of 13.8% in local currencies (6.8% from acquisitions and 7.0%
internally generated
22
primarily due to volume growth), offset by a 5.2% decline related to foreign
currency exchange.
The $2.6 million, or 6.0%, increase in technology net sales for the six months ended July 1,
2006, includes increases of 5.6% in local currency growth and 0.4% due to foreign currency
exchange. The increase was primarily due to increased electronic and financial services sales.
Gross Profit
Gross profit and gross margin percentages from continuing operations by segment and in total
for the six months ended July 1, 2006 and June 25, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
Gross |
|
|
June 25, |
|
|
Gross |
|
|
|
2006 |
|
|
Margin % |
|
|
2005 (1) |
|
|
Margin % |
|
Healthcare distribution |
|
$ |
661,575 |
|
|
|
28.3 |
% |
|
$ |
589,508 |
|
|
|
27.8 |
% |
Technology |
|
|
35,487 |
|
|
|
76.9 |
|
|
|
33,222 |
|
|
|
76.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
697,062 |
|
|
|
29.3 |
|
|
$ |
622,730 |
|
|
|
28.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations. |
For the six months ended July 1, 2006, gross profit increased $74.3 million, or 11.9%,
from the comparable prior year period.
Healthcare distribution gross profit increased $72.0 million, or 12.2%, for the six months
ended July 1, 2006 from the comparable prior year period. Healthcare distribution gross profit
margin increased to 28.3% for the six months ended July 1, 2006 from 27.8% for the comparable prior
year period, which reflects improved margin management.
Technology gross profit increased $2.3 million, or 6.8%, for the six months ended July 1, 2006
from the comparable prior year period. Technology gross profit margin increased slightly to 76.9%
for the six months ended July 1, 2006 from 76.3% for the comparable prior year period.
Selling, General and Administrative
Selling, general and administrative expenses from continuing operations by segment and in
total for the six months ended July 1, 2006 and June 25, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
July 1, |
|
|
Respective |
|
|
June 25, |
|
|
Respective |
|
|
|
2006 |
|
|
Net Sales |
|
|
2005 (1) |
|
|
Net Sales |
|
Healthcare distribution |
|
$ |
541,798 |
|
|
|
23.2 |
% |
|
$ |
485,963 |
|
|
|
22.9 |
% |
Technology |
|
|
17,598 |
|
|
|
38.1 |
|
|
|
16,447 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
559,396 |
|
|
|
23.5 |
|
|
$ |
502,410 |
|
|
|
23.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations and the effect of our
adoption of FAS 123(R) using the
modified retrospective application. |
Selling, general and administrative expenses increased $57.0 million, or 11.3%, to $559.4
million for the six months ended July 1, 2006 from the comparable prior year period. As a
percentage of net sales, selling, general and administrative expenses increased to 23.5% from 23.2%
for the comparable prior year period. The increase of 0.3% was primarily due to payroll and
expenses related to recent acquisitions.
23
As a component of selling, general and administrative expenses, selling expenses increased
$42.3 million, or 12.9%, to $368.9 million for the six months ended July 1, 2006 from the
comparable prior year period. As a percentage of net sales, selling expenses increased to 15.5%
from 15.1% for the comparable prior year period.
As a component of selling, general and administrative expenses, general and administrative
expenses increased $14.7 million, or 8.4%, to $190.5 million for the six months ended July 1, 2006
from the comparable prior year period. As a percentage of net sales, general and administrative
expenses decreased to 8.0% from 8.1% for the comparable prior year period.
Other Expense, Net
Other expense, net from continuing operations for the six months ended July 1, 2006 and June
25, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
June 25, |
|
|
|
2006 |
|
|
2005 (1) |
|
Interest income |
|
$ |
8,525 |
|
|
$ |
2,527 |
|
Interest expense |
|
|
(14,696 |
) |
|
|
(11,310 |
) |
Other, net |
|
|
(118 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
Other expense, net |
|
$ |
(6,289 |
) |
|
$ |
(8,896 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect the effects of discontinued operations. |
Other expense, net decreased $2.6 million for the six months ended July 1, 2006 from the
comparable prior year period, primarily due to increases in interest income resulting from higher
interest rates being applied to higher cash, cash equivalent and security balances, predominantly
offset by increased interest expense due to rising interest rates.
Income Taxes
For the six months ended July 1, 2006, our effective tax rate from continuing operations
decreased to 36.2% from 36.9% for the comparable prior year period. The difference between our
effective tax rates and the federal statutory tax rates for both periods related primarily to
foreign and state income taxes.
24
Liquidity and Capital Resources
Our principal capital requirements include the funding of working capital needs,
acquisitions, capital expenditures and repurchases of common stock. Working capital requirements
generally result from increased sales, special inventory forward buy-in opportunities, and payment
terms for receivables and payables. Because sales tend to be stronger during the third and fourth
quarters and special inventory forward buy-in opportunities are most prevalent just before the end
of the year, our working capital requirements have generally been higher from the end of the third
quarter to the end of the first quarter of the following year.
We finance our business primarily through cash generated from our operations, revolving credit
facilities, debt placements and stock issuances. Our ability to generate sufficient cash flows
from operations is dependent on the continued demand of our customers for, and supply by our
vendors of, our products and services. Given current operating, economic and industry conditions,
we believe that demand for our products and services will remain consistent in the foreseeable
future. We do not expect the loss of cash flows from discontinued operations to have a material
impact on our future liquidity or capital resources.
Net cash flow provided by operating activities was $617 thousand for the six months ended July
1, 2006, compared to $67.2 million for the comparable prior year period. This net change of $66.5
million was due primarily to timing changes in inventory, other current assets, accounts payable
and accrued expenses, partially offset by increased sales volume.
Net cash used in investing activities was $93.1 million for the six months ended July 1, 2006,
compared to $63.2 million for the comparable prior year period. The net change of $29.9 million
was primarily due to acquisitions, net settlements of foreign exchange forward contracts and
purchases of fixed assets, partially offset by proceeds received from a business divestiture and
net proceeds from security transactions. We expect to invest up to approximately $35.0 million
during the remainder of the fiscal year in capital projects to modernize and expand our facilities
and computer systems infrastructure and to integrate subsidiary operations into our core
infrastructure.
Net cash provided by financing activities was $7.5 million for the six months ended July 1,
2006, compared to $1.7 million used in financing activities for the comparable prior year period.
The net change of $9.2 million was primarily due to increased proceeds from the exercise of stock
options and increased proceeds from excess tax benefits related to stock-based compensation,
partially offset by long-term debt repayments and increased repurchases of our common stock.
The following table summarizes selected measures of liquidity and capital resources (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 (1) |
|
Cash and cash equivalents |
|
$ |
138,334 |
|
|
$ |
210,683 |
|
Available-for-sale securities |
|
|
101,107 |
|
|
|
124,010 |
|
Working capital |
|
|
850,656 |
|
|
|
860,295 |
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
Bank credit lines |
|
$ |
2,262 |
|
|
$ |
2,093 |
|
Current maturities of long-term debt |
|
|
31,182 |
|
|
|
33,013 |
|
Long-term debt |
|
|
486,014 |
|
|
|
489,520 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
519,458 |
|
|
$ |
524,626 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted to reflect our reclassification of variable-rate demand notes from cash
and cash equivalents to available-for-sale securities within our consolidated balance sheets. |
25
Our cash and cash equivalents consist of bank balances and investments in money market
funds representing overnight investments with a high degree of liquidity. Our available-for-sale
securities consist of highly liquid tax-efficient securities, including primarily auction-rate
securities and variable-rate demand notes. Based on recent
interpretations suggesting that variable-rate demand notes should
not be presented as cash equivalents unless the instrument can be
tendered directly to the issuer, we have presented the balance of our
variable-rate demand notes as part of available-for-sale securities
in our consolidated balance sheet. For comparative purposes, we have
reclassified approximately $43 million from cash and cash equivalents
to available-for-sale securities in our consolidated balance sheet as
of December 31, 2005.
Our business requires a substantial investment in working capital, which is susceptible to
large variations during the year as a result of inventory purchase patterns and seasonal demands.
Inventory purchase activity is a function of sales activity, special inventory forward buy-in
opportunities and our desired level of inventory.
Our accounts receivable days sales outstanding from continuing operations improved to 42.5
days for the six months ended July 1, 2006 from 43.4 days for the comparable prior year period.
Our inventory turnover from continuing operations for the six months ended July 1, 2006 and June
25, 2005 was 6.5 turns. We anticipate future increases in the value of our working capital as a
result of continued sales growth.
In 2004, we completed an issuance of $240.0 million of convertible debt. These notes are
senior unsecured obligations bearing a fixed annual interest rate of 3.0% and are due to mature on
August 15, 2034. Interest on the notes is payable on February 15 and August 15 of each year, and
commenced on February 15, 2005. The notes are convertible into our common stock at a conversion
ratio of 21.58 shares per one thousand dollars of principal amount of notes, which is the
equivalent conversion price of $46.34 per share, under the following circumstances:
|
|
|
if the last price of our common stock is above 130% of the conversion
price measured over a specified number of trading days; |
|
|
|
|
during the five business-day period following any 10 consecutive
trading-day period in which the average of the trading prices for the notes for that 10
trading-day period was less than 98% of the average conversion value for the notes
during that period; |
|
|
|
|
if the notes have been called for redemption; or |
|
|
|
|
upon the occurrence of a fundamental change or specified corporate
transactions, as defined in the note agreement. |
Upon conversion, we are required to satisfy our conversion obligation with respect to the
principal amount of the notes to be converted, in cash, with any remaining amount to be satisfied
in shares of our common stock. We currently have sufficient availability of funds through our
$300.0 million revolving credit facility (discussed below) along with cash on hand to fully satisfy
the cash portion of our conversion obligation. We also will pay contingent interest during any
six-month interest period beginning August 20, 2010, if the average trading price of the notes is
above specified levels. We may redeem some or all of the notes on or after August 20, 2010. The
note holders may require us to purchase all or a portion of the notes on August 15, 2010, 2014,
2019, 2024 and 2029 or, subject to specified exceptions, upon a change of control event.
Our $130.0 million senior notes are due on June 30, 2009 and bear interest at a fixed rate of
6.94% per annum. Beginning September 25, 2006, principal payments totaling $20.0 million are due
annually on our $100.0 million senior notes which bear interest at a fixed rate of 6.66% per annum.
Interest on both notes is payable semi-annually.
In 2003, we entered into agreements relating to our $230.0 million senior notes to exchange
their fixed interest rates for variable interest rates. For the six months ended July 1, 2006, the
weighted-
26
average variable interest rate was 7.7%. This weighted-average variable interest rate
comprises LIBOR plus a spread and resets on the interest due dates for such senior notes.
On May 24, 2005, we entered into a $300.0 million revolving credit facility with a $100.0
million expansion feature. This facility, which expires in May 2010, replaced our previous
revolving credit facility of $200.0 million, which was scheduled to expire in May 2006. As of July
1, 2006, there were $8.2 million of letters of credit provided to third parties and no borrowings
outstanding under this revolving credit facility.
On June 21, 2004, we announced that our Board of Directors had authorized a common stock
repurchase program. This program previously allowed us to repurchase up to $100.0 million in
shares of our common stock, which represented approximately 3.5% of the shares outstanding on the
announcement date. On October 31, 2005, our Board of Directors authorized an additional $100.0
million of shares of our common stock to be repurchased under this program. As of July 1, 2006, we
had repurchased $112.0 million or 3,030,144 shares under this initiative, with $88.0 million
remaining for future common stock share repurchases.
Some minority shareholders in certain of our subsidiaries have the right, at certain times, to
require us to acquire their ownership interest in those entities at a price that approximates fair
value pursuant to a formula price as defined in the agreements. Additionally, some prior owners of
such acquired subsidiaries are eligible to receive additional purchase price cash consideration if
certain profitability targets are met. We accrue liabilities that may arise from these
transactions when we believe that the outcome of the contingency is determinable beyond a
reasonable doubt.
We finance our business to provide adequate funding for at least 12 months. Funding
requirements are based on forecasted profitability and working capital needs, which, on occasion,
may change. Consequently, we may change our funding structure to reflect any new requirements.
We believe that our cash and cash equivalents, available-for-sale securities, our ability to
access private debt markets and public equity markets, and our available funds under existing
credit facilities provide us with sufficient liquidity to meet our currently foreseeable short-term
and long-term capital needs.
E-Commerce
Traditional healthcare supply and distribution relationships are being challenged by
electronic online commerce solutions. Our distribution business is characterized by rapid
technological developments and intense competition. The advancement of online commerce will
require us to cost-effectively adapt to changing technologies, to enhance existing services and to
develop and introduce a variety of new services to address the changing demands of consumers and
our customers on a timely basis, particularly in response to competitive offerings.
Through our proprietary, technologically-based suite of products, we offer customers a variety
of competitive alternatives. We believe that our tradition of reliable service, our name
recognition and large customer base built on solid customer relationships position us well to
participate in this growing aspect of the distribution business. We continue to explore ways and
means to improve and expand our Internet presence and capabilities.
27
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates
from those disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31,
2005.
Recently Issued Accounting Standard
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN
48 prescribes a recognition threshold and measurement attribute for a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on future changes,
classification, interest and penalties, accounting in interim periods, disclosures, and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the impact of FIN 48 on our consolidated financial statements.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk from that disclosed in
Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our principal
executive officer and principal financial officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
quarterly report as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our
management, including our principal executive officer and principal financial officer, concluded
that our disclosure controls and procedures were effective as of July 1, 2006 to ensure that all
material information required to be disclosed by us in reports that we file or submit under the
Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions
regarding required disclosure and that all such information is recorded, processed, summarized and
reported as specified in the SECs rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred
during the quarter ended July 1, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the internal control system are met. Because of the
inherent limitations of any internal control system, no evaluation of controls can provide absolute
assurance that all control issues, if any, within a company have been detected.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our business involves a risk of product liability claims and other claims in the ordinary
course of business, and from time to time we are named as a defendant in cases as a result of our
distribution of pharmaceutical and other healthcare products. As a business practice, we generally
obtain product indemnification from our suppliers.
We have various insurance policies, including product liability insurance, covering risks in
amounts that we consider adequate. In many cases in which we have been sued in connection with
products manufactured by others, the manufacturer provides us with indemnification. There can be
no assurance that the insurance coverage we maintain is sufficient or will be available in adequate
amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate
protection. In our opinion, all pending matters, including those described below, are covered by
insurance or will not otherwise have a material adverse effect on our financial condition or
results of operations.
As of July 1, 2006, we had accrued our best estimate of potential losses relating to product
liability and other claims that were probable to result in a liability and for which we were able
to reasonably estimate a loss. This accrued amount, as well as related expenses, was not material
to our financial position, results of operations or cash flows. Our method for determining
estimated losses considers currently available facts, presently enacted laws and regulations and
other external factors, including probable recoveries from third parties.
Product Liability Claims
As of July 1, 2006, we were a defendant in approximately 47 product liability cases. We have
obtained defense and indemnification commitments from the manufacturer in many of these cases. The
manufacturer has withheld indemnification commitments in some of these cases pending product
identification. In our opinion, these cases are covered by insurance or will not otherwise have a
material adverse effect on our financial condition or results of operations.
30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of equity securities by the issuer
Our current share repurchase program, announced on June 21, 2004, originally allowed us to
repurchase up to $100.0 million in shares of our common stock, which represented approximately 3.5%
of the shares outstanding at the commencement of the program. On October 31, 2005, our Board of
Directors authorized an additional $100.0 million of shares in our common stock to be repurchased
under this program. As of July 1, 2006, we had repurchased $112.0 million or 3,030,144 shares
under this initiative, with $88.0 million remaining for future common stock share repurchases.
The following table summarizes repurchases of our common stock under our stock repurchase
program during the fiscal quarter ended July 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total Number |
|
|
Maximum Number of |
|
|
|
Number |
|
|
Average |
|
|
of Shares Purchased |
|
|
Shares that May Yet |
|
|
|
of Shares |
|
|
Price Paid |
|
|
as Part of Our Publicly |
|
|
Be Purchased Under |
|
Fiscal Month |
|
Purchased (1) |
|
|
per Share |
|
|
Announced Program |
|
|
Our Program (2) |
|
04/02/06 through 04/29/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,391,154 |
|
04/30/06 through 06/03/06 |
|
|
110,000 |
|
|
$ |
46.71 |
|
|
|
110,000 |
|
|
|
2,267,326 |
|
06/04/06 through 07/01/06 |
|
|
402,034 |
|
|
|
45.52 |
|
|
|
402,034 |
|
|
|
1,883,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
512,034 |
|
|
|
|
|
|
|
512,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All repurchases were executed in the open market under our existing publicly announced
authorized program. |
|
(2) |
|
The maximum number of shares that may yet be purchased under this program is determined at
the end of each month based on the closing price of our common stock at that time. |
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on May 18, 2006, our stockholders took the following actions:
|
(i) |
|
Re-elected the following individuals to our Board of Directors: |
|
|
|
Barry J. Alperin
|
|
(71,585,763 shares voting for, 7,440,735 shares withheld) |
Gerald A. Benjamin
|
|
(71,187,259 shares voting for, 7,839,239 shares withheld) |
Stanley M. Bergman
|
|
(71,659,116 shares voting for, 7,367,382 shares withheld) |
James P. Breslawski
|
|
(71,196,918 shares voting for, 7,829,580 shares withheld) |
Paul Brons
|
|
(72,745,202 shares voting for, 6,281,296 shares withheld) |
Dr. Margaret A. Hamburg
|
|
(72,786,948 shares voting for, 6,239,550 shares withheld) |
Donald J. Kabat
|
|
(72,752,930 shares voting for, 6,273,568 shares withheld) |
Philip A. Laskawy
|
|
(71,511,805 shares voting for, 7,514,693 shares withheld) |
Norman S. Matthews
|
|
(72,754,087 shares voting for, 6,272,411 shares withheld) |
Mark E. Mlotek
|
|
(71,186,977 shares voting for, 7,839,521 shares withheld) |
Steven Paladino
|
|
(70,021,888 shares voting for, 9,004,610 shares withheld) |
Marvin H. Schein
|
|
(40,924,930 shares voting for, 38,101,568 shares withheld) |
Dr. Louis W. Sullivan
|
|
(69,952,615 shares voting for, 9,073,883 shares withheld) |
|
(ii) |
|
Ratified the selection of BDO Seidman, LLP as our independent registered public accounting
firm for the year ending December 30, 2006 (76,846,809 shares voting for; 2,099,929 shares voting
against; 79,760 shares abstaining). |
32
ITEM 6. EXHIBITS
Exhibits.
|
31.1 |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31.2 |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32.1 |
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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 and Chief Financial Officer
(Authorized Signatory and Principal Financial and Accounting Officer) |
|
|
Dated: August 8, 2006
33