Business Context and Reporting Period
Company: Henry Schein, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 29, 2001
Business Overview: The Company operates two primary segments: Healthcare Distribution (dental, medical, veterinary, and international) and Technology (practice management software). It distributes healthcare products and services to office-based practitioners primarily in North America and Europe.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 29, 2001 |
Nine Months Ended Sep 29, 2001 |
Nine Months Ended Sep 23, 2000 |
|---|---|---|---|
| Net Sales | $659,774 | $1,859,954 | $1,726,089 |
| Gross Profit | $178,856 | $505,105 | $469,882 |
| Gross Margin | 27.1% | 27.2% | 27.2% |
| Operating Income | $41,875 | $104,730 | $83,403 |
| Net Income | $25,195 | $60,237 | $44,017 |
| Diluted EPS | $0.58 | $1.39 | $1.06 |
| Cash from Operations (9mo) | $79,123 | ||
| Cash & Equivalents (End of Period) | $107,854 | ||
| Total Debt (Current + Long-term) | $267,988 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.4% ($56.5 million) in the third quarter and 7.8% ($133.9 million) for the nine-month period compared to the prior year.
- Medical Segment: Strongest growth driver, up 18.5% in Q3 and 16.8% for the nine months, driven by core physicians' offices and alternate care markets.
- Dental Segment: Increased 4.5% in Q3 and 4.4% for the nine months due to account penetration.
- International: Increased 3.8% in Q3 and 1.5% for the nine months; growth was partially offset by unfavorable foreign exchange rates.
- Veterinary: Declined 6.4% in Q3 and 5.7% for the nine months due to the loss of a product line.
- Profitability: Operating income rose 44.7% in Q3 and 25.6% for the nine months. This was aided by a reduction in restructuring costs (none in 2001 vs. $5.4 million in 2000) and lower interest expense due to reduced debt levels.
- Working Capital: Accounts receivable increased by $47.4 million during the nine months, while inventories decreased by $24.7 million.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects to invest more than $55.0 million in capital projects for the fiscal year ending December 29, 2001, to modernize facilities and infrastructure.
- Acquisitions: On November 5, 2001, the Company acquired the dental distribution operations of Zila, Inc. for cash. The acquisition is not considered significant, with Zila's net sales at approximately $21.0 million for the prior 12 months.
- Accounting Standards: The Company is assessing the impact of FAS 141 and FAS 142, which will eliminate goodwill amortization and require annual impairment testing. Adoption is required for fiscal years beginning after December 15, 2001.
- Legal Proceedings:
- Latex Gloves: Defendant in approximately 54 cases involving allergic reactions to latex gloves; seeking indemnification from manufacturers.
- Phen/Fen: Defendant in nine lawsuits regarding the sale of phentermine and fenfluramine; expects indemnification.
- Software Class Action: A class action suit regarding practice management software (Easy Dental) is pending before the Texas Supreme Court. The trial on merits is stayed pending the court's review of the certification order.
- Liquidity: The Company maintains $107.9 million in cash and equivalents and has access to a $150.0 million revolving credit facility (unused) and other lines of credit.
Investor Verification Checklist
- Verify the sustainability of the 18.5% growth in the Medical segment and its contribution to overall margin expansion.
- Monitor the resolution of the pending Texas Supreme Court class action regarding practice management software.
- Assess the impact of foreign exchange rates on the International segment, which currently offsets organic growth.
- Review the timeline and financial impact of the upcoming adoption of FAS 142 (Goodwill and Intangibles) on future earnings.
- Confirm the status of indemnification agreements with manufacturers regarding the latex glove and Phen/Fen litigation.