UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 26, 2004

OR

For the transition period from ____________ to ____________

Commission File Number: 0-27078

HENRY SCHEIN, INC.

135 Duryea Road
Melville, New York
(Address of principal executive offices)
11747
(Zip Code)

Registrant’s telephone number, including area code: (631) 843-5500

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     As of July 28, 2004, there were 43,583,372 shares of the registrant’s common stock outstanding.

HENRY SCHEIN, INC.
INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.

See accompanying notes.

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HENRY SCHEIN, INC.

See accompanying notes.

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HENRY SCHEIN, INC.

See accompanying notes.

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HENRY SCHEIN, INC.

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 (“US 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 US GAAP for complete financial statements.

     The consolidated financial statements reflect all adjustments considered necessary for a fair statement 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 27, 2003.

     The preparation of financial statements in conformity with US 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 June 26, 2004 are not necessarily indicative of the results to be expected of any other interim period or for the year ending December 25, 2004.

Note 2. Segment Data

     We conduct our business through two segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution segment consists of our dental, medical (including veterinary) and international groups. Products distributed consist of consumable products, small equipment, laboratory products, large dental equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

     Our dental group serves office-based dental practices in the combined United States and Canadian dental market. Our medical group serves office-based physician practices in the United States, as well as surgical centers and other alternate-care settings and veterinarian clinics throughout the United States. Our international group serves practices in 14 countries outside of North America and is a leading Pan-European healthcare supplier serving office-based dental, medical, and veterinary 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 practices and veterinary clinics. The technology group offerings also include financial services and continuing education services for practitioners.

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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:

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 3. Stock-Based Compensation

     We account for stock option awards under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, no compensation expense is recorded, provided the exercise price is equal to or greater than the quoted market price of the stock at the grant date.

     We make pro forma disclosures of net income and earnings per share as if the fair value-based method of accounting (the alternative method of accounting for stock-based compensation) had been applied as required by Financial Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based Compensation.” The fair value-based method requires us to make assumptions regarding future stock price volatility, risk-free interest rates, dividend yield and weighted-average option life.

     Under the accounting provisions of FAS 123, our net income and net income per common share would have been adjusted to the pro forma amounts indicated in the table below. The following assumptions were used in determining the fair values: stock price volatility of 30.0% (2004) and 45.0% (2003), weighted-average risk-free interest rate of 3.0%, dividend yield of 0.0%, and weighted-average expected option life of five years:

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 4. Acquisitions

     On January 8, 2004, as a means of expanding our international presence, we entered into agreements to purchase demedis GmbH, a leading full-service distributor of dental consumables and equipment in Germany, Austria, and the Benelux countries, and Euro Dental Holding GmbH, which includes KRUGG S.p.A., Italy’s leading distributor of dental consumable products, and DentalMV GmbH (otherwise known as Muller & Weygandt, or “M&W”), one of Germany’s leading direct marketing distributors of dental consumable products. We refer to these entities collectively as the “Demedis Group”.

     On June 18, 2004, we acquired all of the outstanding equity shares of the Demedis Group, excluding its Austrian operations, for approximately 259.5 million euro (or $315.5 million), including transaction costs and the assumption of debt. We allocated $88.4 million of the total purchase price to tangible assets and liabilities, $59.2 million to identifiable intangible assets ($28.0 million to definite-lived customer relationships with an average life of approximately 7 years and $31.2 million to indefinite-lived trademarks and trade names) and the remainder of $167.9 million to goodwill. This preliminary purchase price allocation is based on our best estimates and is subject to completion of a final fair market valuation.

     We financed the acquisition primarily with cash on hand, borrowings under our existing revolving credit facility and with proceeds from a bridge loan in the amount of $150.0 million. This bridge loan had a variable interest rate of 2.0% as of June 26, 2004 and matures on the earlier of the day following the receipt of proceeds from a permanent financing or December 17, 2004. We classified the bridge loan as non-current in our accompanying balance sheet because we expect to repay it with the net proceeds from a long-term financing and currently have the ability to repay such debt through our existing revolving credit facility.

     As part of our agreement with the German regulatory authorities, we agreed to divest M&W shortly after the consummation of the acquisition. On July 16, 2004, this divestiture was completed for 50.0 million euro (or $62.2 million), including the assumption of debt of approximately 27.5 million euro (or $34.2 million), resulting in no gain or loss on disposal. Our investment in M&W was included in other current assets as a business held-for-sale at a net realizable value of 22.5 million euro (or $27.4 million) as of June 26, 2004. As part of the agreement to divest M&W, we are entitled to receive 50% of the net sale proceeds in excess of 55.0 million euro, in the event M&W is subsequently resold before June 18, 2005.

     The regulatory authorities are continuing their review of our pending acquisition of the Demedis Group business in Austria, which operates under the Austrodent brand. Of the total purchase price, 11.0 million euro (or $13.4 million) was attributable to Austrodent, which is included in other non-current assets as of June 26, 2004. In the event that we receive regulatory approval to acquire Austrodent, we will reclassify this amount to the fair value of the assets and liabilities acquired through a purchase price allocation with any excess of purchase price over fair value allocated to goodwill. In the event that we do not receive regulatory approval to acquire Austrodent, we are entitled to receive the proceeds through a sale of Austrodent, net of selling costs, up to $13.4 million. Any difference between the $13.4 million and the proceeds received upon a subsequent sale of Austrodent will be recorded as an addition to goodwill of the acquired entities of the Demedis Group.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 4. Acquisitions — (Continued)

     The operating results of the Demedis Group, including M&W (which is being accounted for using the equity method through the date of the divestiture) and excluding Austrodent, are included in the accompanying financial statements since the acquisition date of June 18, 2004.

     Assuming the acquisition of the Demedis Group occurred at the beginning of our fiscal year ended December 27, 2003, excluding the results of M&W and Austrodent, our pro forma net sales would have been approximately $1.0 billion and $863.7 million for the three month periods ended June 26, 2004 and June 28, 2003 and $2.0 billion and $1.7 billion for the six month periods ended June 26, 2004 and June 28, 2003. These unaudited net sales amounts do not purport (i) to be indicative of what our net sales would have been had the above transaction been completed at the beginning of our fiscal year ended December 27, 2003 or (ii) to project our net sales for any other interim period or for the year ending December 25, 2004. The pro forma effect of the acquisition of the Demedis Group on our net income and earnings per share was not material.

     During the first quarter of 2004, we paid approximately $43.0 million towards an acquisition of Camlog Holding AG (“Camlog”), a Swiss manufacturer and marketer of dental implants used in tooth replacement. On July 2, 2004, we made a nominal final payment upon the closing of this acquisition in which we acquired 50.1% of the outstanding equity shares of Camlog. We will begin consolidating Camlog’s financial statements from the acquisition date.

     During the six months ended June 26, 2004, we also made an earn-out payment related to a prior period acquisition and completed other transactions that resulted in recording additional goodwill. None of these transactions were material individually or in the aggregate.

Note 5. Earnings Per Share

     A reconciliation of shares used in calculating earnings per basic and diluted common share follows:

     Weighted-average options to purchase 1,047,650 shares of common stock priced at $70.98 per share and 37,319 shares of common stock at prices ranging from $48.25 to $54.00 per share that were outstanding during the three months ended June 26, 2004 and June 28, 2003 were excluded from the computation of earnings per diluted common share. Weighted-average options to purchase 748,322 shares of common stock priced at $70.98 per share and 74,294 shares of common stock at prices ranging from $44.90 to $54.00 per share that were outstanding during the six months ended June 26, 2004 and June 28, 2003, were excluded from the computation of earnings per diluted common share. In each of these periods, the exercise prices of the options exceeded the average fair market value of our common stock.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 6. Comprehensive Income

     Comprehensive income includes certain gains and losses that, under US GAAP, are excluded from net income, as these amounts are recorded directly as an adjustment to stockholders’ equity. Our comprehensive income primarily includes net income and foreign currency translation adjustments, but also includes unrealized gains and losses on hedging activities and marketable securities. Comprehensive income totaled $39.0 million and $62.3 million for the three and six months ended June 26, 2004, respectively, and $45.6 million and $74.5 million for the three and six months ended June 28, 2003, respectively.

Note 7. Supplemental Cash Flow Information

     Cash paid for interest and income taxes was:

     In connection with two acquisitions we made during the six months ended June 26, 2004, we assumed $21.1 million of debt, and issued $2.0 million of debt, which remained outstanding as of June 26, 2004. This was offset by a $6.0 million interest rate swap mark-to-market adjustment to long-term debt for the six months ended June 26, 2004.

     During the six months ended June 28, 2003, we issued a $5.0 million note payable in connection with an acquisition.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

     Except for historical information contained herein, the statements in this report (including, without limitation, statements indicating that we “expect,” “estimate,” “anticipate,” or “believe” and all other statements concerning future financial results, product or service offerings, or other events that have not yet occurred) are forward-looking statements that are made pursuant to the safe harbor provisions of applicable securities legislation and regulations. Forward-looking statements involve known and unknown factors, risks and uncertainties that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statements. Those factors, risks and uncertainties include, but are not limited to, the factors described under “Risk Factors” discussed later in this Form 10-Q.

Executive-Level Overview

     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 450,000 customers worldwide, including dental practices and laboratories, physician practices and veterinary clinics, as well as government and other institutions. We believe that we have a strong brand identity due to our more than 70 years of experience distributing healthcare products. We are headquartered in Melville, New York; employ more than 9,000 people; and have operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Spain, the Czech Republic, Luxembourg, Italy, Ireland, Portugal, Australia and New Zealand.

     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 service offerings at competitive pricing, 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 segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution segment consists of our dental, medical (including veterinary) and international groups. Products distributed consist of consumable products, small equipment, laboratory products, large dental equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

     Our dental group serves office-based dental practices in the combined United States and Canadian dental market. Our medical group serves office-based physician practices in the United States, as well as surgical centers and other alternate-care settings and veterinarian clinics throughout the United States. Our international group serves practices in 14 countries outside of North America and is a leading Pan-European healthcare supplier serving office-based dental, medical, and veterinary 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 practices and veterinary clinics. To date, more than 50,000 of our software systems have been installed. The technology group offerings also include financial services and continuing education services for practitioners.

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Industry Overview

     In recent years, the healthcare industry has increasingly focused on cost containment. This trend has benefited distributors who provide a broad array of products and services at competitive prices. This trend has also 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, favor distributors capable of providing specialized management-information support. We believe that the trend towards cost containment has the potential to positively affect demand for practice-management systems and software that enhance the efficiency and facilitation of practice management.

     Our operating results in recent years have been significantly affected by strategies and transactions we undertook to expand our business, both domestically and internationally. In part, these were taken 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 veterinary markets, produced revenues of approximately $17 billion in 2003 in the combined North American and European markets. The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations comprising anywhere 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 decision within an office-based healthcare practice is typically made by the practitioner or an administrative assistant, and supplies and small equipment are generally purchased from more than one distributor with one distributor 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 opportunities for growth. This consolidation may also 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 (a) complement our existing operations, and (b) provide opportunities for us to develop synergies with, and thus strengthen, the acquired businesses.

     As the healthcare industry continues to change, we continually evaluate possible candidates to merge with or acquire 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.

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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 procedures and diagnostic testing shifting from hospitals to alternate-care sites, particularly physicians’ offices, despite significantly lower costs of procedures. As the cosmetic surgery and elective procedure markets continue to grow, physicians are increasingly performing more of these procedures in their offices.

     The January 2000 report by the U.S. Bureau of the Census estimated that the elderly population in America 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 healthcare products and services. By the year 2040, that number is projected to more than triple to over 14 million. The population aged 65 to 84 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 Medicaid and Medicare Services (CMS), Office of the Actuary published “Health Spending Projections Through 2013” in 2004, indicating that total national healthcare spending reached $1.6 trillion in 2002, or 14.9% of the nation’s gross domestic product, the benchmark measure for annual production of goods and services in the United States. Healthcare spending is projected to reach $3.4 trillion in 2013, an estimated 18.4% of the gross domestic product.

Governmental Influences

     The healthcare industry is subject to extensive government regulation, licensure, and operating compliance procedures. National healthcare reform has been the subject of a number of legislative initiatives by Congress. Additionally, government and private insurance programs fund a large portion of the total cost of medical care. The Balanced Budget Act passed by Congress in 1997 significantly reduced reimbursement rates for nursing homes and home healthcare providers, affecting the spending levels and overall financial viability of these institutions.

     The Medicare Prescription Drug, Improvement, and Modernization Act (the “Medicare Act”) was passed by Congress and enacted by President Bush on December 8, 2003. The Medicare Act is the largest expansion of the Medicare program since its inception and provides beneficiaries with voluntary prescription drug benefits effective in 2006. In the meantime, Medicare beneficiaries can apply for an interim drug discount card. The Medicare Act also includes provisions relating to medication management programs, generic substitution and provider reimbursement. Based upon current information, we believe the Medicare Act may create additional volume demand and provide incentives for additional use of generic drugs, both of which have potentially positive implications for our pharmaceutical distribution business.

Product Integrity

     Certain pharmaceutical and medical-surgical product manufacturers are in discussions with legislators about the risks of counterfeit products in the supply chain and manufacturers’ concerns regarding the impact of secondary market distribution on counterfeiting. As a distributor of such products, we continue to work with our suppliers to help minimize the risks associated with counterfeit products in the supply chain and potential litigation.

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Results of Operations

     The following table summarizes the significant components of our operating results and cash flows for the three and six months ended June 26, 2004 and June 28, 2003 (in thousands):