Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - HENRY SCHEIN INC | exhibit31_2.htm |
EX-32.1 - EXHIBIT 32.1 - HENRY SCHEIN INC | exhibit32_1.htm |
EX-31.1 - EXHIBIT 31.1 - HENRY SCHEIN INC | exhibit31_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
X
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 26, 2009
Or
__
|
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
|
11-3136595
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
135
Duryea Road
Melville,
New York
(Address
of principal executive offices)
11747
(Zip
Code)
(631)
843-5500
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
X
|
No __
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
__
|
No __
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer X
|
Accelerated
filer __
|
|
Non-accelerated
filer __
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company __
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
__
|
No X
|
As of
October 29, 2009, there were 90,483,640 shares of the registrant’s
common stock outstanding.
HENRY
SCHEIN, INC.
INDEX
Page
|
|||
PART
I. FINANCIAL INFORMATION
|
|||
ITEM
1.
|
Consolidated
Financial Statements:
|
||
3
|
|||
4
|
|||
5
|
|||
6
|
|||
7
|
|||
ITEM
2.
|
|||
21
|
|||
ITEM
3.
|
36
|
||
ITEM
4.
|
36
|
||
PART
II. OTHER INFORMATION
|
|||
ITEM
1.
|
37
|
||
ITEM
2.
|
37
|
||
ITEM
6.
|
38
|
||
38
|
2
PART
I. FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL
STATEMENTS
CONSOLIDATED
BALANCE SHEETS
|
||||||||
(in
thousands, except share and per share data)
|
||||||||
September
26,
|
December
27,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
(Adjusted
- Notes 1 & 8)
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 317,607 | $ | 369,570 | ||||
Accounts
receivable, net of reserves of $47,890 and $42,855
|
764,285 | 734,027 | ||||||
Inventories,
net
|
770,370 | 731,654 | ||||||
Deferred
income taxes
|
40,747 | 36,974 | ||||||
Prepaid
expenses and other
|
186,744 | 193,841 | ||||||
Total
current assets
|
2,079,753 | 2,066,066 | ||||||
Property
and equipment, net
|
257,602 | 247,835 | ||||||
Goodwill
|
977,054 | 922,952 | ||||||
Other
intangibles, net
|
212,042 | 214,093 | ||||||
Investments
and other
|
176,888 | 148,264 | ||||||
Total
assets
|
$ | 3,703,339 | $ | 3,599,210 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 507,462 | $ | 554,773 | ||||
Bank
credit lines
|
1,731 | 4,936 | ||||||
Current
maturities of long-term debt
|
23,933 | 156,405 | ||||||
Accrued
expenses:
|
||||||||
Payroll
and related
|
148,665 | 135,523 | ||||||
Taxes
|
83,951 | 69,792 | ||||||
Other
|
263,392 | 262,236 | ||||||
Total
current liabilities
|
1,029,134 | 1,183,665 | ||||||
Long-term
debt
|
242,511 | 256,648 | ||||||
Deferred
income taxes
|
107,953 | 95,399 | ||||||
Other
liabilities
|
72,038 | 58,109 | ||||||
Redeemable
noncontrolling interests
|
177,513 | 233,035 | ||||||
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,
|
||||||||
90,448,417
outstanding on September 26, 2009 and
|
||||||||
89,351,849
outstanding on December 27, 2008
|
904 | 894 | ||||||
Additional
paid-in capital
|
533,508 | 492,505 | ||||||
Retained
earnings
|
1,406,199 | 1,181,454 | ||||||
Accumulated
other comprehensive income
|
71,863 | 29,721 | ||||||
Total
Henry Schein, Inc. stockholders' equity
|
2,012,474 | 1,704,574 | ||||||
Noncontrolling
interests
|
61,716 | 67,780 | ||||||
Total
stockholders' equity
|
2,074,190 | 1,772,354 | ||||||
Total
liabilities and stockholders' equity
|
$ | 3,703,339 | $ | 3,599,210 |
See
accompanying notes.
3
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||
(unaudited)
|
||||||||||||||||
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
26,
|
September
27,
|
September
26,
|
September
27,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Adjusted
- Notes 1, 4 & 8)
|
(Adjusted
- Note 4)
|
(Adjusted
- Notes 1, 4 & 8)
|
||||||||||||||
Net
sales
|
$ | 1,659,433 | $ | 1,644,209 | $ | 4,752,255 | $ | 4,799,234 | ||||||||
Cost
of sales
|
1,183,166 | 1,168,615 | 3,361,707 | 3,389,847 | ||||||||||||
Gross
profit
|
476,267 | 475,594 | 1,390,548 | 1,409,387 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general and administrative
|
362,382 | 360,180 | 1,060,062 | 1,094,512 | ||||||||||||
Restructuring
costs
|
- | - | 4,043 | - | ||||||||||||
Operating
income
|
113,885 | 115,414 | 326,443 | 314,875 | ||||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
2,387 | 4,260 | 7,674 | 12,217 | ||||||||||||
Interest
expense
|
(5,171 | ) | (9,240 | ) | (18,329 | ) | (26,816 | ) | ||||||||
Other,
net
|
1,938 | (4,863 | ) | 1,595 | (5,524 | ) | ||||||||||
Income
from continuing operations before
|
||||||||||||||||
taxes,
equity in earnings of affiliates and
|
||||||||||||||||
noncontrolling
interests
|
113,039 | 105,571 | 317,383 | 294,752 | ||||||||||||
Income
taxes
|
(15,864 | ) | (34,355 | ) | (83,402 | ) | (98,787 | ) | ||||||||
Equity
in earnings of affiliates
|
1,200 | 1,602 | 3,777 | 4,020 | ||||||||||||
Income
from continuing operations
|
98,375 | 72,818 | 237,758 | 199,985 | ||||||||||||
Income
(loss) from discontinued operations, net of tax
|
2,373 | (52 | ) | 2,715 | (828 | ) | ||||||||||
Net
income
|
100,748 | 72,766 | 240,473 | 199,157 | ||||||||||||
Less:
Net income attributable to noncontrolling interests
|
(4,327 | ) | (5,278 | ) | (15,728 | ) | (15,659 | ) | ||||||||
Net
income attributable to Henry Schein, Inc.
|
$ | 96,421 | $ | 67,488 | $ | 224,745 | $ | 183,498 | ||||||||
Amounts
attributable to Henry Schein, Inc.:
|
||||||||||||||||
Income
from continuing operations
|
$ | 94,045 | $ | 67,548 | $ | 222,143 | $ | 184,239 | ||||||||
Income
(loss) from discontinued operations, net of tax
|
2,376 | (60 | ) | 2,602 | (741 | ) | ||||||||||
Net
income
|
$ | 96,421 | $ | 67,488 | $ | 224,745 | $ | 183,498 | ||||||||
Earnings
per share attributable to Henry Schein, Inc.:
|
||||||||||||||||
From
continuing operations:
|
||||||||||||||||
Basic
|
$ | 1.06 | $ | 0.76 | $ | 2.50 | $ | 2.07 | ||||||||
Diluted
|
$ | 1.03 | $ | 0.74 | $ | 2.45 | $ | 2.00 | ||||||||
From
discontinued operations:
|
||||||||||||||||
Basic
|
$ | 0.03 | $ | 0.00 | $ | 0.03 | $ | (0.01 | ) | |||||||
Diluted
|
$ | 0.02 | $ | 0.00 | $ | 0.03 | $ | 0.00 | ||||||||
From
net income:
|
||||||||||||||||
Basic
|
$ | 1.09 | $ | 0.76 | $ | 2.53 | $ | 2.06 | ||||||||
Diluted
|
$ | 1.05 | $ | 0.74 | $ | 2.48 | $ | 2.00 | ||||||||
Weighted-average
common shares outstanding:
|
||||||||||||||||
Basic
|
88,796 | 88,930 | 88,843 | 89,216 | ||||||||||||
Diluted
|
91,513 | 91,376 | 90,576 | 91,908 |
See
accompanying notes.
4
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
(in
thousands, except share data)
|
||||||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||||||
Common
Stock
$.01
Par Value
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Comprehensive Income
|
Noncontrolling
Interests
|
Total
Stockholders'
Equity
|
|||||||||||||||||||||||
Shares
|
Amount
|
|||||||||||||||||||||||||||
Balance,
December 27, 2008 - as previously reported
|
89,351,849 | $ | 894 | $ | 705,799 | $ | 1,195,771 | $ | 29,721 | $ | - | $ | 1,932,185 | |||||||||||||||
Cumulative
impact of adopting ASC Topic 470-20
|
- | - | 19,741 | (14,317 | ) | - | - | 5,424 | ||||||||||||||||||||
Cumulative
impact of adopting ASC Topic 810-10-65
|
- | - | - | - | - | 67,780 | 67,780 | |||||||||||||||||||||
Cumulative
impact of adopting ASC Topic 480-10
|
- | - | (233,035 | ) | - | - | - | (233,035 | ) | |||||||||||||||||||
Balance,
December 27, 2008 - as adjusted
|
89,351,849 | $ | 894 | $ | 492,505 | $ | 1,181,454 | $ | 29,721 | $ | 67,780 | $ | 1,772,354 | |||||||||||||||
Net
income
|
- | - | - | 224,745 | - | 15,728 | 240,473 | |||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | 29,060 | 4,180 | 33,240 | |||||||||||||||||||||
Unrealized
gain from foreign currency hedging activities,
|
||||||||||||||||||||||||||||
net
of tax of $7,774
|
- | - | - | - | 14,029 | - | 14,029 | |||||||||||||||||||||
Unrealized
investment gain, net of tax of $42
|
- | - | - | - | 13 | - | 13 | |||||||||||||||||||||
Pension
adjustment loss, net of tax of $120
|
- | - | - | - | (960 | ) | - | (960 | ) | |||||||||||||||||||
Total
comprehensive income
|
19,908 | 286,795 | ||||||||||||||||||||||||||
Dividends
paid
|
- | - | - | - | - | (2,382 | ) | (2,382 | ) | |||||||||||||||||||
Noncontrolling
interest of acquired companies
|
- | - | (47,533 | ) | - | - | (23,590 | ) | (71,123 | ) | ||||||||||||||||||
Decrease
in redeemable noncontrolling interests
|
- | - | 55,522 | - | - | - | 55,522 | |||||||||||||||||||||
Shares
issued to 401(k) plan
|
100,778 | 1 | 5,300 | - | - | - | 5,301 | |||||||||||||||||||||
Shares
issued upon exercise of stock options,
|
||||||||||||||||||||||||||||
including
tax benefit of $1,635
|
311,491 | 3 | 11,321 | - | - | - | 11,324 | |||||||||||||||||||||
Stock-based
compensation expense
|
751,560 | 7 | 18,337 | - | - | - | 18,344 | |||||||||||||||||||||
Shares
withheld for payroll taxes
|
(67,261 | ) | (1 | ) | (2,028 | ) | - | - | - | (2,029 | ) | |||||||||||||||||
Liability
for cash settlement stock option awards and other
|
- | - | 84 | - | - | - | 84 | |||||||||||||||||||||
Balance,
September 26, 2009
|
90,448,417 | $ | 904 | $ | 533,508 | $ | 1,406,199 | $ | 71,863 | $ | 61,716 | $ | 2,074,190 |
See
accompanying notes.
5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
(in
thousands)
|
||||||||
(unaudited)
|
||||||||
Nine
Months Ended
|
||||||||
September
26,
|
September
27,
|
|||||||
2009
|
2008
|
|||||||
(Adjusted
- Notes 1 & 8)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 240,473 | $ | 199,157 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Gain
on sale of discontinued operation, net of tax
|
(2,382 | ) | - | |||||
Depreciation
and amortization
|
60,930 | 59,183 | ||||||
Amortization
of bond discount
|
4,473 | 4,214 | ||||||
Stock-based
compensation expense
|
18,344 | 23,060 | ||||||
Provision
for losses on trade and other accounts receivable
|
2,754 | 3,711 | ||||||
Benefit
from deferred income taxes
|
(29,633 | ) | (2,705 | ) | ||||
Stock
issued to 401(k) plan
|
5,301 | 4,662 | ||||||
Undistributed
earnings of affiliates
|
(3,777 | ) | (4,020 | ) | ||||
Other
|
2,535 | (2,132 | ) | |||||
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||
Accounts
receivable
|
(12,788 | ) | (66,751 | ) | ||||
Inventories
|
(10,234 | ) | (68,182 | ) | ||||
Other
current assets
|
(806 | ) | (3,460 | ) | ||||
Accounts
payable and accrued expenses
|
(56,813 | ) | 41,927 | |||||
Net
cash provided by operating activities
|
218,377 | 188,664 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of fixed assets
|
(38,417 | ) | (38,119 | ) | ||||
Payments
for equity investment and business
|
||||||||
acquisitions,
net of cash acquired
|
(97,911 | ) | (25,930 | ) | ||||
Cash
received from business divestitures
|
12,716 | - | ||||||
Purchases
of available-for-sale securities
|
- | (35,925 | ) | |||||
Proceeds
from sales of available-for-sale securities
|
8,730 | 1,572 | ||||||
Net
proceeds from foreign exchange forward contract
settlements
|
275 | 9,090 | ||||||
Other
|
(11,258 | ) | 3,607 | |||||
Net
cash used in investing activities
|
(125,865 | ) | (85,705 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Repayments
of bank borrowings
|
(3,829 | ) | (5,786 | ) | ||||
Principal
payments for long-term debt
|
(153,452 | ) | (30,139 | ) | ||||
Proceeds
from issuance of stock upon exercise of stock options
|
9,689 | 25,041 | ||||||
Payments
for repurchases of common stock
|
- | (54,945 | ) | |||||
Excess
tax benefits related to stock-based compensation
|
2,821 | 10,635 | ||||||
Other
|
(2,127 | ) | (1,856 | ) | ||||
Net
cash used in financing activities
|
(146,898 | ) | (57,050 | ) | ||||
Net
change in cash and cash equivalents
|
(54,386 | ) | 45,909 | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
2,423 | (5,135 | ) | |||||
Cash
and cash equivalents, beginning of period
|
369,570 | 247,590 | ||||||
Cash
and cash equivalents, end of period
|
$ | 317,607 | $ | 288,364 |
See
accompanying notes.
6
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 27,
2008.
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 nine months ended
September 26, 2009 are not necessarily indicative of the results to be expected
for any other interim period or for the year ending December 26,
2009.
Effective
December 28, 2008, we adopted the provisions of Accounting Standards
Codification (“ASC”) Topic 810-10-65, which requires that a noncontrolling
interest in a subsidiary be reported as equity in the consolidated financial
statements. Consolidated net income includes the net income for both the parent
and the noncontrolling interest with disclosure of both amounts on the
consolidated statement of income. The calculation of earnings per share will
continue to be based on income amounts attributable to the parent. As
of December 27, 2008, we included noncontrolling interests totaling
approximately $67.8 million in Stockholders’ equity within our consolidated
balance sheets, as the cumulative impact of adopting ASC Topic
810-10-65.
Effective
December 28, 2008, we have adopted the provisions of ASC Topic
480-10. ASC Topic 480-10 is applicable for noncontrolling interests
where we are or may be required to purchase all or a portion of the outstanding
interest in a consolidated subsidiary from the noncontrolling interest holder
under the terms of a put option or other contractual
agreements. As a result of the adoption of the provisions of
ASC Topic 480-10, we have recorded the approximate redemption amount fair value
of the put options as Redeemable noncontrolling interests ($177.5 million and
$233.0 million at September 26, 2009 and December 27, 2008, respectively) and
reduced Additional paid-in capital within the Stockholders’ equity section of
our consolidated balance sheets. The change in fair value of put
options at September 26, 2009 compared to December 27, 2008 was primarily due to
purchases of additional interests in consolidated subsidiaries offset by changes
in the fair value of the put options. Changes in the estimated
redemption amounts of the noncontrolling interests subject to put options are
adjusted at each reporting period with a corresponding adjustment to
equity. These adjustments will not impact the calculation of earnings
per share.
7
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
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. This segment consists of consumable
products, small equipment, laboratory products, large dental and medical
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic tests, infection-control products and
vitamins.
Our
dental group serves office-based dental practitioners, schools and other
institutions in the combined United States and Canadian dental
market. Our medical group serves office-based medical practitioners,
surgical centers, other alternate-care settings, animal health clinics and other
institutions throughout the United States. Our international group
serves 21 countries outside of North America.
Our
technology group provides software, technology and other value-added services to
healthcare practitioners, primarily in the United States, Canada, the United
Kingdom, Australia and New Zealand. Our value-added practice
solutions include practice management software systems for dental and medical
practitioners and animal health clinics. Our technology group
offerings also include financial services, e-services and continuing education
services for practitioners.
The
following tables present information about our reportable segments:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
26,
|
September
27,
|
September
26,
|
September
27,
|
|||||||||||||
2009
|
2008
(1)
|
2009
(1)
|
2008
(1)
|
|||||||||||||
Net
Sales:
|
||||||||||||||||
Healthcare
distribution (2):
|
||||||||||||||||
Dental
(3)
|
$ | 622,065 | $ | 641,487 | $ | 1,838,240 | $ | 1,905,206 | ||||||||
Medical
(4)
|
410,617 | 423,675 | 1,088,875 | 1,080,084 | ||||||||||||
International
(5)
|
583,540 | 538,033 | 1,699,053 | 1,693,017 | ||||||||||||
Total
healthcare distribution
|
1,616,222 | 1,603,195 | 4,626,168 | 4,678,307 | ||||||||||||
Technology
(6)
|
43,211 | 41,014 | 126,087 | 120,927 | ||||||||||||
Total
|
$ | 1,659,433 | $ | 1,644,209 | $ | 4,752,255 | $ | 4,799,234 | ||||||||
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
(2)
|
Consists
of consumable products, small equipment, laboratory products, large dental
and medical equipment, equipment repair services, 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, Canada, the United Kingdom, Australia and New
Zealand.
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
26,
|
September
27,
|
September
26,
|
September
27,
|
|||||||||||||
2009
|
2008
(1)
|
2009
(1)
|
2008
(1)
|
|||||||||||||
Operating
Income:
|
||||||||||||||||
Healthcare
distribution
|
$ | 98,250 | $ | 100,887 | $ | 280,618 | $ | 272,952 | ||||||||
Technology
|
15,635 | 14,527 | 45,825 | 41,923 | ||||||||||||
Total
|
$ | 113,885 | $ | 115,414 | $ | 326,443 | $ | 314,875 | ||||||||
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
8
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based
Compensation
Our
accompanying unaudited consolidated statements of income reflect share-based
pretax compensation expense, recorded in accordance with the provisions of ASC
Topic 718, “Stock Compensation,” of $6.0 million ($4.1 million after-tax) and
$18.3 million ($12.4 million after-tax) for the three and nine months ended
September 26, 2009, respectively, and $6.9 million ($4.7 million after-tax) and
$23.1 million ($15.3 million after-tax) for the three and nine months ended
September 27, 2008, respectively.
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 (net of estimated forfeitures) as compensation expense on
a straight-line basis 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 (together, the
“Plans”). The Plans are administered by the Compensation Committee of
the Board of Directors. Prior to March 2009, awards under the Plans
principally included a combination of at-the-money stock options and restricted
stock (including restricted stock units).
In March
2009, equity-based awards were granted solely in the form of restricted stock
and restricted stock units, with the exception of stock options for certain
pre-existing contractual obligations.
Grants of
restricted stock are common stock awards granted to recipients with specified
vesting provisions. We issue restricted stock that vests solely based on
the recipient’s continued service over time (four-year cliff vesting) and
restricted stock that vests based on our achieving specified performance
measurements and the recipient’s continued service over time (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 is based upon our earnings per share
performance as measured against specified targets over a three-year period as
determined by the Compensation Committee of the Board of
Directors. Though there is no guarantee that performance targets will
be achieved, we estimate the fair value of performance-based restricted stock,
based on our closing stock price at time of grant.
The Plans
provide for adjustments to the performance-based restricted stock targets for
significant events such as acquisitions, divestitures, new business ventures and
share repurchases. Over the performance period, the number of shares
of common stock that will ultimately vest and be issued and the related
compensation expense 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 an
expense will be based on our actual performance metrics as defined under the
Plans.
Restricted
stock units are unit awards that we grant to certain employees that entitle the
recipient to shares of common stock upon vesting. We grant restricted
stock units with the same time-based and performance-based vesting that we use
for restricted stock. The fair value of restricted stock units is
determined on the date of grant, based on our closing stock price.
Total
unrecognized compensation cost related to non-vested awards as of September 26,
2009 was $54.9 million, which is expected to be recognized over a
weighted-average period of approximately 2.4 years.
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 weighted-average assumptions were used in determining the fair values
of stock options using the Black-Scholes valuation model:
2009
|
2008
|
||
Expected
dividend yield
|
0%
|
0%
|
|
Expected
stock price volatility
|
28%
|
20%
|
|
Risk-free
interest rate
|
1.88%
|
2.75%
|
|
Expected
life of options (years)
|
4.5
|
4.5
|
The
following table summarizes stock option activity under the Plans during the nine
months ended September 26, 2009:
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Contractual Life in Years
|
Aggregate
Intrinsic
Value
|
||||||||||||
Outstanding
at beginning of period
|
6,791,828 | $ | 39.85 | ||||||||||||
Granted
|
42,206 | 38.33 | |||||||||||||
Exercised
|
(311,491 | ) | 31.11 | ||||||||||||
Forfeited
|
(90,427 | ) | 48.53 | ||||||||||||
Outstanding
at end of period
|
6,432,116 | $ | 40.16 | 5.6 | $ | 99,208 | |||||||||
Options
exercisable at end of period
|
4,957,845 | $ | 35.76 | 4.9 | $ | 95,507 |
The
following tables summarize the status of our non-vested restricted stock/units
for the nine months ended September 26, 2009:
Time-Based
Restricted Stock/Units
|
||||||||||
Shares/Units
|
Weighted
Average
Grant
Date Fair Value
|
Aggregate
Intrinsic
Value
|
||||||||
Outstanding
at beginning of period
|
285,225 | $ | 14,771 | |||||||
Granted
|
344,036 | 12,013 | ||||||||
Vested
|
(1,315 | ) | (49 | ) | ||||||
Forfeited
|
(22,783 | ) | (1,100 | ) | ||||||
Outstanding
at end of period
|
605,163 | $ | 25,635 | $ |
33,139
|
Performance-Based
Restricted Stock/Units
|
||||||||||
Shares/Units
|
Weighted
Average
Grant
Date Fair Value
|
Aggregate
Intrinsic
Value
|
||||||||
Outstanding
at beginning of period
|
347,141 | $ | 17,704 | |||||||
Granted
|
780,289 | 12,110 | ||||||||
Vested
|
(179,719 | ) | (8,503 | ) | ||||||
Forfeited
|
(7,980 | ) | (372 | ) | ||||||
Outstanding
at end of period
|
939,731 | $ | 20,939 | $ |
51,460
|
10
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
4. Business Acquisitions and Other Transactions
Acquisitions
We
completed certain acquisitions during the nine months ended September 26,
2009. The operating results of our acquisitions are reflected in our
financial statements from their respective acquisition dates. Such
acquisitions were immaterial to our financial statements individually and in the
aggregate.
Divestitures
On August
5, 2009, we completed the sale of a wholesaler of dental consumables for
aggregate consideration of $14.2 million. Prior results for this
business have been presented as discontinued operations in the accompanying
consolidated statements of income. The total pretax income from
discontinued operations is $6.5 million ($2.6 million after taxes) consisting of
a $6.0 million ($2.4 million after taxes) gain on the sale and $0.5 million
($0.2 million after taxes) income from operations.
Loan
and Investment Agreement
On
December 12, 2008, we converted $10.4 million of loan receivables and related
accrued interest into an equity interest of 15.33% in D4D Technologies, LLC
(“D4D”). Due to the conversion, we now account for our equity
interest in D4D under the equity method of accounting prospectively from the
date of conversion.
In
addition, under our previous agreement, if certain product specification and
performance milestones occurred, we were required to pay additional amounts (as
equity contributions) to D4D and certain of its members equal to $16.0
million. On August 3, 2009, we entered into an amendment whereby we
paid D4D and certain of its members approximately $8.0 million and agreed to
make two contingent payments in each of 2010 and 2011 of up to $4.0 million each
based on D4D’s financial performance. All payments made under the
amended agreement are being accounted for as increases in the carrying value of
our investment in D4D and any underlying allocations to intangible assets are
being determined at time of payment.
Note
5. Earnings Per Share
Basic
earnings per share is computed by dividing net income attributable to Henry
Schein, Inc. 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.
For the
nine months ended September 26, 2009, our convertible debt was not convertible
at a premium and thus the impact of an assumed conversion was not
applicable.
For the
three months ended September 26, 2009 and the three and nine months ended
September 27, 2008, 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. As a result, 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.
11
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
5. Earnings Per Share (Continued)
A
reconciliation of shares used in calculating earnings per basic and diluted
share follows:
Three
Months Ended
|
Nine
Months Ended
|
||||||
September
26,
|
September
27,
|
September
26,
|
September
27,
|
||||
2009
|
2008
|
2009
|
2008
|
||||
Basic
|
88,796,152
|
88,929,672
|
88,843,067
|
89,216,159
|
|||
Effect
of dilutive securities:
|
|||||||
Stock
options, restricted stock and restricted units
|
2,241,503
|
1,579,672
|
1,732,922
|
1,760,015
|
|||
Effect
of assumed conversion of convertible debt
|
475,081
|
866,457
|
-
|
932,091
|
|||
Diluted
|
91,512,736
|
91,375,801
|
90,575,989
|
91,908,265
|
Weighted-average
options to purchase 1,971,851 shares of common stock at exercise prices ranging
from $51.10 to $62.05 per share and 1,087,289 shares of common stock at exercise
prices ranging from $56.21 to $62.05 per share that were outstanding during the
three months ended September 26, 2009 and September 27, 2008, respectively, were
excluded from the computation of diluted earnings per
share. Weighted-average options to purchase 2,741,364 shares of
common stock at exercise prices ranging from $45.85 to $62.05 per share and
833,041 shares of common stock at exercise prices ranging from $56.69 to $62.05
per share that were outstanding during the nine months ended September 26, 2009
and September 27, 2008, respectively, 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 such amounts are recorded directly as an adjustment to
stockholders’ equity. Our comprehensive income is primarily comprised
of net income, foreign currency translation adjustments, unrealized gains
(losses) on hedging activity and investment and pension
adjustments. The following table presents our comprehensive
income:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
26,
|
September
27,
|
September
26,
|
September
27,
|
|||||||||||||
2009
|
2008
(1) (2)
|
2009
(1)
|
2008
(1) (2)
|
|||||||||||||
Comprehensive
income
|
$ | 130,098 | $ | 17,938 | $ | 286,795 | $ | 175,892 | ||||||||
Comprehensive
income attributable to
|
||||||||||||||||
Henry
Schein, Inc.
|
122,706 | 15,836 | 266,887 | 161,024 | ||||||||||||
Comprehensive
income attributable to
|
||||||||||||||||
noncontrolling
interests
|
7,392 | 2,102 | 19,908 | 14,868 | ||||||||||||
(1) Adjusted
to reflect the effects of discontinued
operations.
|
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
12
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
7. Fair Value Measurements
Effective
December 30, 2007, we adopted provisions of ASC Topic 820, “Fair Value
Measurements and Disclosures” (“ASC Topic 820”) as they relate to financial
assets and financial liabilities. ASC Topic 820 establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. ASC Topic 820
applies under other previously issued accounting pronouncements that require or
permit fair value measurements but does not require any new fair value
measurements. The adoption of ASC Topic 820 did not have a material
impact on our consolidated financial statements.
ASC Topic
820 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC Topic 820 establishes a
fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources
(observable inputs) and (2) an entity’s own assumptions about market
participant assumptions developed based on the best information available in the
circumstances (unobservable inputs).
The fair
value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under ASC Topic 820 are described
as follows:
•
|
Level
1— Unadjusted quoted prices in active markets for identical assets or
liabilities that are accessible at the measurement
date.
|
•
|
Level
2— Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are not active; inputs other
than quoted prices that are observable for the asset or liability; and
inputs that are derived principally from or corroborated by observable
market data by correlation or other
means.
|
•
|
Level
3— Inputs that are unobservable for the asset or
liability.
|
The
following section describes the valuation methodologies that we used to measure
different financial instruments at fair value.
Cash equivalents and trade
receivables
Due to
the short-term maturity of such investments, the carrying amounts are a
reasonable estimate of fair value.
Available-for-sale
securities
The fair
value of available-for-sale securities at September 26, 2009 is estimated based
on internally generated discounted cash flow models.
Long-term investments and
notes receivable
There are
no quoted market prices available for investments in unconsolidated affiliates
and long-term notes receivable; however, we believe the carrying amounts are a
reasonable estimate of fair value.
13
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
7. Fair Value Measurements (Continued)
Auction-rate
securities
As of
September 26, 2009, we have approximately $22.3 million ($20.3 million net of
temporary impairments) invested in auction-rate securities (“ARS”), which are
included as part of Investments and other within our consolidated balance
sheets. ARS are publicly issued securities that represent long-term
investments, typically 10-30 years, in which interest rates had reset
periodically (typically every 7, 28 or 35 days) through a “dutch auction”
process. Approximately $19.6 million ($17.6 million net of temporary
impairments) of our ARS are backed by student loans that are backed by the
federal government and the remaining $2.7 million are invested in closed-end
municipal bond funds. Our ARS portfolio is comprised of investments
that are rated AAA by major independent rating agencies. Since the
middle of February 2008, ARS auctions have failed to settle due to an excess
number of sellers compared to buyers. The failure of these auctions
has resulted in our inability to liquidate our ARS in the near
term. We are currently not aware of any defaults or financial
conditions that would negatively affect the issuers’ ability to continue to pay
interest and principal on our ARS. We continue to earn and receive
interest at contractually agreed upon rates.
During
2009, we have received approximately $4.6 million and $4.2 million of
redemptions, at par, for our closed-end municipal bond funds and our student
loan portfolios, respectively.
As of
September 26, 2009, we have classified our closed-end municipal bond funds, as
well as our student loan portfolios, as Level 3 within the fair value hierarchy
due to the lack of observable inputs and the absence of significant refinancing
activity.
Based
upon the information currently available and the use of a discounted cash flow
model in accordance with applicable authoritative guidance, our previously
recorded cumulative temporary impairment at December 27, 2008 of $2.0 million
related to our closed-end municipal bond funds and our student loan portfolios
was unchanged during the nine months ended September 26, 2009. The
temporary impairment has been recorded as part of Accumulated other
comprehensive income within the equity section of our consolidated balance
sheet.
Money market
fund
As of
September 26, 2009, we had an investment of approximately $2.5 million ($2.2
million net of reserves) invested in the Reserve Primary Fund. This
money market fund included in its holdings commercial paper of Lehman
Brothers. As a result of the Chapter 11 bankruptcy of Lehman Brothers
Holdings, Inc., the net asset value of the fund decreased below
$1.00. Currently, this fund is in the process of being
liquidated. During 2009, we have received approximately $2.7 million
of distributions from the Reserve Primary Fund. As of September 26,
2009, the value of our holdings in this fund are included within Prepaid
expenses and other in our consolidated balance sheets and as Level 3 within the
fair value hierarchy, due to the lack of observable inputs and the absence of
trading activity.
Debt
The fair
value of our debt is estimated based on quoted market prices for our traded debt
and on market prices of similar issues for our private debt. The fair
value of our debt as of September 26, 2009 and December 27, 2008 was estimated
at $311.4 million and $426.8 million.
14
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
7. Fair Value Measurements (Continued)
Derivative
contracts
Derivative
contracts are valued using quoted market prices and significant other observable
and unobservable inputs. We use derivative instruments to minimize
our exposure to fluctuations in interest rates and foreign currency exchange
rates. Our derivative instruments include interest rate swap
agreements related to our long-term fixed rate debt and foreign currency forward
and swap agreements related to intercompany loans and certain forecasted
inventory purchase commitments with suppliers.
The fair
values for the majority of our foreign currency derivative contracts are
obtained by comparing our contract rate to a published forward price of the
underlying currency, which is based on market rates for comparable transactions
and are classified within Level 2 of the fair value hierarchy.
The
following table presents our assets and liabilities that are measured and
recognized at fair value on a recurring basis classified under the appropriate
level of the fair value hierarchy as of September 26, 2009:
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Assets:
|
||||||||||||||||
Auction-rate
securities
|
$ | - | $ | - | $ | 20,353 | $ | 20,353 | ||||||||
Money
market fund
|
- | - | 2,234 | 2,234 | ||||||||||||
Derivative
contracts
|
- | 3,773 | - | 3,773 | ||||||||||||
Total
assets
|
$ | - | $ | 3,773 | $ | 22,587 | $ | 26,360 | ||||||||
Liabilities:
|
||||||||||||||||
Derivative
contracts
|
$ | - | $ | 7,416 | $ | - | $ | 7,416 | ||||||||
Total
liabilities
|
$ | - | $ | 7,416 | $ | - | $ | 7,416 |
15
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
7. Fair Value Measurements (Continued)
As of
September 26, 2009, we have estimated the value of our closed-end municipal bond
fund ARS portfolio and our student loan backed ARS portfolio based upon a
discounted cash flow model. The assumptions used in our valuation
model include estimates for interest rates, timing and amount of cash flows and
expected holding periods for the ARS portfolio. As a result of these
analyses, our previously recorded cumulative temporary impairment at December
27, 2008 of $2.0 million was unchanged during the nine months ended September
26, 2009.
We
estimated the value of our holdings within the Reserve Primary Fund based upon
the net asset value of the fund as of September 16, 2008, subsequent to the
declaration of bankruptcy by Lehman Brothers Holdings, Inc. The
reserve recorded in 2008 of $0.8 million related to our holdings within the
Reserve Primary Fund was reduced by $0.5 million during the third quarter of
2009, based upon anticipated collections, and as of September 26, 2009 the
reserve is $0.3 million. The following table presents a
reconciliation of our assets measured at fair value on a recurring basis using
unobservable inputs (Level 3):
Level
3 (Unobservable Inputs)
|
||||
Closed-End
Municipal Bond Fund and
|
||||
Student
Loan Backed
|
||||
Auction-Rate
Securities
|
||||
and
Money Market Fund
|
||||
Balance,
December 27, 2008
|
$ | 33,546 | ||
Transfers
to Level 3
|
- | |||
Redemptions
(at par)
|
(11,514 | ) | ||
Gains
and (losses):
|
||||
Reported
in earnings - Reserve Primary Fund reserve reduction
|
500 | |||
Reported
in accumulated other comprehensive income
|
55 | |||
Balance,
September 26, 2009
|
$ | 22,587 |
Note
8. Convertible Debt
Effective
December 28, 2008, we adopted the provisions of ASC Topic 470-20, “Debt with
Conversion and Other Options,” as it relates to our convertible
debt. ASC Topic 470-20 requires that we allocate the liability and
equity components of the convertible debt and reflect our non-convertible debt
borrowing rate for the interest component of the convertible debt.
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. 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 equivalent to a
conversion price of $46.34 per share. For the nine months ended
September 26, 2009, our convertible debt was not convertible at a premium and
thus the impact of an assumed conversion was not applicable.
Upon the
retrospective implementation of ASC Topic 470-20, we recorded a debt discount of
$32.6 million, as of August 9, 2004, representing the difference between the
fair value of our $240.0 million 3% convertible debt at the time of issuance and
the face amount of the convertible debt. We also recorded a related
deferred tax liability of $12.1 million representing the tax impact of recording
the debt discount. This debt discount is being amortized over a
period of six years from the date our convertible debt was issued until August
9, 2010. An offsetting amount was recorded in Additional paid-in
capital to reflect the impact of the debt discount, net of the related deferred
tax liability.
16
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
8. Convertible Debt (Continued)
The
principal amounts of the outstanding notes, the unamortized discount and the net
carrying value at September 26, 2009 were $240.0 million, $5.5 million and
$234.5 million and at December 27, 2008 were $240.0 million, $10.0 million and
$230.0 million.
As of
December 28, 2008, retained earnings includes a cumulative adjustment to
interest expense of $22.6 million ($14.7 million, net of taxes) representing the
non-cash difference between the stated interest rate (3%) on our convertible
debt and our non-convertible debt borrowing rate (5.74%) at the time of issuance
of our convertible debt.
For the
three and nine months ended September 26, 2009, we recorded additional non-cash
interest expense of $1.5 million ($1.0 million, net of taxes) and $4.5 million
($3.0 million, net of taxes), respectively, and for the three and nine months
ended September 27, 2008 we recorded additional non-cash interest expense of
$1.4 million ($1.0 million, net of taxes) and $4.2 million ($2.8 million, net of
taxes), respectively, representing the difference between the stated interest
rate on our convertible debt and our non-convertible debt borrowing rate at the
time of issuance of our convertible debt.
For the
three and nine month periods ended September 26, 2009 and September 27, 2008,
contractual interest expense relating to our convertible debt was $1.8 million
($1.2 million, net of taxes) and $5.4 million ($3.6 million, net of taxes),
respectively.
Note
9. Income Taxes
For the
three months ended September 26, 2009, our effective tax rate from continuing
operations was 14.0% compared to 32.5% for the prior year period. The
difference in our effective tax rates is primarily related to a reduction in the
valuation allowance on foreign deferred tax assets during the third quarter of
2009.
During
the third quarter of 2009, we were able to substantially complete a planned
reorganization outside the United States that will allow us to utilize tax loss
carryforwards to offset taxable income beginning in 2010 in certain tax
jurisdictions. As a result, we have determined that it is more likely
than not that a portion of deferred tax assets previously fully reserved will be
realized. Therefore, the provision for income taxes includes a $21.0
million reduction of the valuation allowance which is based on an estimate of
future taxable income available to be offset by the tax loss
carryforwards.
The total
amount of unrecognized tax benefits as of September 26, 2009 was approximately
$13.9 million, all of which would affect the effective tax rate if
recognized. It is expected that the amount of unrecognized tax benefits
will change in the next 12 months. However, we do not expect the
change to have a material impact on our consolidated financial
statements.
The total
amounts of interest and penalties resulting from unrecognized tax benefits were
approximately $2.4 million and $0, respectively, for the nine months ended
September 26, 2009. It is expected that the amount of interest will change
in the next twelve months. However, we do not expect the change to have a
material impact on our consolidated financial statements.
The tax
years subject to examination by major tax jurisdictions include the years 2006
and forward by the U.S. Internal Revenue Service, the years 1996 and forward for
certain states and the years 1997 and forward for certain foreign
jurisdictions.
17
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note
10. Supplemental Cash Flow Information
Cash paid
for interest and income taxes was:
Nine
Months Ended
|
||||||||
September
26,
|
September
27,
|
|||||||
2009
|
2008
|
|||||||
Interest
|
$ | 20,892 | $ | 28,513 | ||||
Income
taxes
|
114,176 | 77,516 |
During
the nine months ended September 26, 2009, we had a $15.4 million non-cash net
unrealized gain related to hedging activities. During the nine months
ended September 27, 2008, we had a $0.4 million non-cash net unrealized loss
related to hedging activities.
Note
11. Plan of Restructuring
On
November 5, 2008, we announced certain actions to reduce operating costs, which
have resulted in the elimination of 430 positions from our operations and the
closing of several smaller facilities. For the nine months ended
September 26, 2009, we recorded restructuring costs of approximately $4.0
million (approximately $2.8 million after taxes). The costs
associated with the restructuring are included in a separate line item,
“Restructuring costs” within our consolidated statements of income.
The
following table shows the amounts expensed and paid for restructuring costs that
were incurred during the nine months ended September 26, 2009 and the remaining
accrued balance of restructuring costs as of September 26, 2009, which is
included in Accrued expenses: Other and Other liabilities within our
consolidated balance sheets:
Balance
at
December
27, 2008
|
Provision
|
Payments
and
Other
Adjustments
|
Balance
at
September
26, 2009
|
|||||||||||||
Severance
costs (1)
|
$ | 14,330 | $ | 2,451 | $ | (12,289 | ) | $ | 4,492 | |||||||
Facility
closing costs (2)
|
3,688 | 1,531 | (2,933 | ) | 2,286 | |||||||||||
Other
professional and consulting costs
|
519 | 61 | (379 | ) | 201 | |||||||||||
Total
|
$ | 18,537 | $ | 4,043 | $ | (15,601 | ) | $ | 6,979 | |||||||
(1)
|
Represents
salaries and related benefits for employees separated from the
Company.
|
(2)
|
Represents
costs associated with the closing of certain smaller facilities (primarily
lease termination costs) and property and equipment
write-offs.
|
We expect
that the majority of these costs will be paid in 2009.
The
following table shows, by reportable segment, the restructuring costs incurred
during 2009 and the remaining accrued balance of restructuring costs as of
September 26, 2009:
Balance
at
December
27, 2008
|
Provision
|
Payments
and
Other
Adjustments
|
Balance
at
September
26, 2009
|
|||||||||||||
Healthcare
distribution
|
$ | 18,457 | $ | 4,043 | $ | (15,592 | ) | $ | 6,908 | |||||||
Technology
|
80 | - | (9 | ) | 71 | |||||||||||
Total
|
$ | 18,537 | $ | 4,043 | $ | (15,601 | ) | $ | 6,979 |
18
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note 12. Derivatives and Hedging
Activities
Effective
December 28, 2008, we adopted provisions of ASC Topic 815-10 relating to our
derivative and hedging activities. ASC Topic 815-10 requires enhanced
disclosures of our derivatives and hedging activities. ASC Topic
815-10 does not change the accounting for derivatives and hedging activities,
but rather provides more detailed disclosures concerning our objectives for our
use of derivatives, the locations within our consolidated financial statements
of both the derivative positions existing at period end and the effect of using
derivatives during the period and the impact that the use of derivatives and
hedging activities had on our consolidated financial statements.
We are
exposed to market risks, which include changes in interest rates, as well as
changes in foreign currency exchange rates as measured against the U.S. dollar
and each other, and changes to the credit markets. We attempt to
minimize these risks by using interest rate swap agreements, foreign currency
forward and swap contracts and by maintaining counter-party credit
limits. These hedging activities provide only limited protection
against interest rate, currency exchange and credit risks. Factors
that could influence the effectiveness of our hedging programs include interest
rate volatility, currency markets and availability of hedging instruments and
liquidity of the credit markets. All interest rate swap and foreign
currency forward and swap contracts that we enter into are components of hedging
programs and are entered into for the sole purpose of hedging an existing or
anticipated interest rate and currency exposure. We do not enter into
such contracts for speculative purposes and we manage our credit risks by
diversifying our investments, maintaining a strong balance sheet and having
multiple sources of capital.
The value
of certain foreign currencies as compared to the U.S. dollar may affect our
financial results. Fluctuations in foreign exchange rates may
positively or negatively affect our revenues, gross margins, operating expenses,
and retained earnings, all of which are expressed in U.S.
dollars. Where we deem it prudent, we engage in hedging programs
using primarily foreign currency forward and swap contracts aimed at limiting
the impact of foreign currency exchange rate fluctuations on
earnings. We purchase short-term (i.e., 12 months or less) foreign
currency forward and swap contracts to protect against currency exchange risks
associated with intercompany loans due from our international subsidiaries and
the payment of merchandise purchases to our foreign suppliers. We do
not hedge the translation of foreign currency profits into U.S. dollars, as we
regard this as an accounting exposure, not an economic exposure.
The
following table presents the fair value of our derivative
instruments:
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||
September
26, 2009
|
September
26, 2009
|
|||||||||
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
Derivatives
designated as
|
||||||||||
hedging
instruments under
|
||||||||||
ASC
Topic 815-10:
|
||||||||||
Interest
rate contracts
|
Prepaid
expenses and other
|
$ | 568 |
Accrued
expenses other
|
$ | - | ||||
Foreign
exchange contracts
|
Prepaid
expenses and other
|
1,789 |
Accrued
expenses other
|
4,260 | ||||||
Total
|
2,357 | 4,260 | ||||||||
Derivatives
not designated as
|
||||||||||
hedging
instruments under
|
||||||||||
ASC
Topic 815-10:
|
||||||||||
Foreign
exchange contracts
|
Prepaid
expenses and other
|
1,416 |
Accrued
expenses other
|
3,156 | ||||||
Total
derivatives
|
$ | 3,773 | $ | 7,416 |
19
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in
thousands, except share and per share data)
(unaudited)
Note 12. Derivatives and Hedging Activities
(Continued)
Fair Value
Hedges
Our fair
value hedges consist of interest rate swaps and foreign exchange
contracts. Gains (losses) associated with these foreign exchange
contracts are recorded in Other, net within our consolidated statements of
income and totaled $(0.5) million and $7.4 million for the three and nine months
ended September 26, 2009. Forward points related to these foreign
exchange contracts, recorded in Interest expense within our consolidated
statements of income, totaled $0 and $0.4 million for the three and nine months
ended September 26, 2009.
Cash Flow
Hedges
Our cash
flow hedges consist of foreign exchange contracts. The amounts
recorded in Accumulated other comprehensive income (“AOCI”) primarily represent
the change in spot rates at the time of the initial hedge compared to the spot
rate when marked to market. The gain recognized in AOCI (effective
portion) for the three and nine months ended September 26, 2009 was $1.5 million
and $2.0 million, respectively.
The
activity recorded within our consolidated statements of income relating to cash
flow hedges include amounts reclassified from AOCI (effective portion) and
forward points (ineffective portion). The following table presents
the effect of our cash flow hedges:
Gain
(Loss) Reclassified from
AOCI
into Income (Effective
Portion)
|
Amount
of Forward Points
Recognized
in Income on
Derivative
(Ineffective Portion)
|
||||||||||||||||
Location
of Gain
(Loss)
Reclassified
from
AOCI into
Income
(Effective
Portion)
|
Three
Months Ended September 26, 2009
|
Nine
Months Ended September 26, 2009
|
Location
where
Forward
Points are
Recognized
in Income
on
Derivative
(Ineffective
Portion)
|
Three
Months Ended September 26, 2009
|
Nine
Months Ended September 26, 2009
|
||||||||||||
Other,
net
|
$ | (2,262 | ) | $ | (370 | ) |
Interest
income
|
$ | 123 | $ | 140 | ||||||
Cost
of sales
|
4,069 | 4,279 |
Other,
net
|
(1 | ) | (15 | ) |
Undesignated
Hedges
Our
undesignated hedges consist of foreign exchange contracts. Losses
associated with these foreign exchange contracts are recorded in Other, net
within our consolidated statements of income and totaled $3.4 million and $8.9
million for the three and nine months ended September 26, 2009,
respectively. Forward points related to these foreign exchange
contracts, which are recorded in Interest expense within our consolidated
statements of income, totaled $0 and $0.1 million for the three and nine
months ended September 26, 2009, respectively.
20
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 that, 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: decreased
customer demand and changes in vendor credit terms; disruptions in financial
markets; general economic conditions; competitive factors; changes in the
healthcare industry; changes in regulatory requirements that affect us; 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, including the
failure to achieve anticipated synergies; financial risks 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 issues with our third-party shippers; risks from
rapid technological change; risks from potential increases in variable interest
rates; 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, any
forward-looking statements contained herein 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. We serve more
than 575,000 customers worldwide, including dental practitioners 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 more than 76 years of experience distributing
healthcare products.
We are
headquartered in Melville, New York, employ more than 12,500 people (of which
approximately 5,000 are based outside the United States) and have operations in
the United States, Australia, Austria, Belgium, Canada, China, the Czech
Republic, France, Germany, Ireland, Israel, Italy, Luxembourg, the Netherlands,
New Zealand, Portugal, Slovakia, Spain, Switzerland and the United
Kingdom. We also have affiliates in Iceland, Saudi Arabia and the
United Arab Emirates.
21
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
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. This segment consists of consumable
products, small equipment, laboratory products, large dental and medical
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic tests, infection-control products and
vitamins.
Our
dental group serves office-based dental practitioners, schools and other
institutions in the combined United States and Canadian dental
market. Our medical group serves office-based medical practitioners,
surgical centers, other alternate-care settings, animal health clinics and other
institutions throughout the United States. Our international group
serves 21 countries outside of North America and is what we believe to be a
leading European healthcare supplier serving office-based
practitioners.
Our
technology group provides software, technology and other value-added services to
healthcare practitioners, primarily in the United States, Canada, the United
Kingdom, Australia and New Zealand. Our value-added practice
solutions include practice management software systems for dental and medical
practitioners and animal health clinics. Our technology group
offerings also include financial services, e-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.
Our
current and future results have been and could be impacted by the current
economic environment and uncertainty, particularly impacting overall demand for
our products and services.
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 $27.5 billion in 2008 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 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.
22
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.
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 merger and/or 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, partially offset by the affects of increased
unemployment on insurance coverage. In addition, the physician market
continues to benefit from the shift of procedures and diagnostic testing from
acute care settings to alternate-care sites, particularly physicians’
offices.
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, annual expenditures for healthcare services
continue to increase in the United States. Given current operating,
economic and industry conditions, we believe that demand for our products and
services will grow at slower rates. The Centers for Medicare and
Medicaid Services, or CMS, published “National Health Expenditure
Projections 2008 – 2018” indicating that total national healthcare spending
reached $2.4 trillion in 2008, or 16.6% 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 $4.4 trillion in
2018, approximately 20.3% of the nation’s gross domestic product.
23
Government
Influences
The
healthcare industry is subject to extensive government regulation, licensure and
operating compliance procedures. National healthcare reform is
currently the subject of a major Presidential initiative, and legislation
expanding coverage and making other significant changes in the healthcare system
is expected. Currently, and for the foreseeable future, a large
portion of the total cost of medical care is and will be paid by government and
private insurance programs. The reform effort may substantially
modify rules governing such programs, affecting payment methods, rates and
limits, as well as other matters. Additionally, the U.S. Food and
Drug Administration (“FDA”) has announced a new enforcement strategy to achieve
more effective enforcement through new policies and accelerated
procedures. We continue to work with our suppliers to comply with all
applicable FDA rules and regulations.
The
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 has been
the largest expansion of the Medicare program since its inception, and provides
participants with voluntary outpatient prescription drug
benefits. This Act also includes provisions relating to medication
management programs, generic substitution and provider
reimbursement.
As a
distributor of equipment, supplies and drugs for medical, dental and animal
health offices, we are subject to numerous federal laws regulating the
intersection between healthcare providers and suppliers of goods and services to
those providers. These laws make it unlawful to pay any remuneration,
direct or indirect, to induce the referral, recommendation or arrangement of any
healthcare services paid by a federal reimbursement program (e.g., Medicare and
Medicaid). A violation may result in criminal or severe civil
damages, and recent changes to the federal False Claims Act adopted in 2009 have
expanded the potential liability. Many states have adopted similar
laws, and recently, their own state false claims acts. A number of
states have also recently passed legislation regulating interactions between
vendors and practitioners, and more states may effect similar laws in the
future.
There
have been increasing efforts by various levels of government, including state
departments of health, state boards of pharmacy and comparable agencies, to
regulate the human pharmaceutical distribution system in order to prevent the
introduction of counterfeit, adulterated or mislabeled pharmaceuticals into the
distribution system. An increasing number of states, including Florida,
have already adopted laws and regulations, including drug pedigree tracking
requirements, that are intended to protect the integrity of the human
pharmaceutical distribution system. Regulations adopted under the federal
Prescription Drug Marketing Act, effective December 2006, require the
identification and documentation of transactions involving the receipt and
distribution of human prescription drugs, that is, drug pedigree information.
Other states and government agencies are currently considering similar laws and
regulations. We continue to work with our suppliers to help minimize the risks
associated with counterfeit products in the supply chain and potential
litigation.
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.
24
Results
of Operations
The
following table summarizes the significant components of our operating results
from continuing operations for the three and nine months ended September 26,
2009 and September 27, 2008 and cash flows for the nine months ended September
26, 2009 and September 27, 2008 (in thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
26,
|
September
27,
|
September
26,
|
September
27,
|
|||||||||||||
2009
|
2008
(1) (2)
|
2009
(1)
|
2008
(1) (2)
|
|||||||||||||
Operating
results:
|
||||||||||||||||
Net
sales
|
$ | 1,659,433 | $ | 1,644,209 | $ | 4,752,255 | $ | 4,799,234 | ||||||||
Cost
of sales
|
1,183,166 | 1,168,615 | 3,361,707 | 3,389,847 | ||||||||||||
Gross
profit
|
476,267 | 475,594 | 1,390,548 | 1,409,387 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general and administrative
|
362,382 | 360,180 | 1,060,062 | 1,094,512 | ||||||||||||
Restructuring
costs
|
- | - | 4,043 | - | ||||||||||||
Operating
income
|
$ | 113,885 | $ | 115,414 | $ | 326,443 | $ | 314,875 | ||||||||
Other
expense, net
|
$ | (846 | ) | $ | (9,843 | ) | $ | (9,060 | ) | $ | (20,123 | ) | ||||
Income
from continuing operations
|
98,375 | 72,818 | 237,758 | 199,985 | ||||||||||||
Income
from continuing operations attributable
|
||||||||||||||||
to
Henry Schein, Inc.
|
96,421 | 67,488 | 224,745 | 183,498 | ||||||||||||
Cash
flows:
|
||||||||||||||||
Net
cash provided by operating activities
|
$ | 218,377 | $ | 188,664 | ||||||||||||
Net
cash used in investing activities
|
(125,865 | ) | (85,705 | ) | ||||||||||||
Net
cash used in financing activities
|
(146,898 | ) | (57,050 | ) | ||||||||||||
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
(2)
|
Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
Plan
of Restructuring
On
November 5, 2008, we announced certain actions to reduce operating costs, which
included the elimination of 430 positions from our operations and the closing of
several smaller facilities. For the nine months ended September 26,
2009, we recorded restructuring costs of approximately $4.0 million
(approximately $2.8 million after taxes). The costs associated with
the restructuring are included in a separate line item, “Restructuring costs,”
within our consolidated statements of income. We expect that the majority of
these costs will be paid in 2009.
Annual
pretax cost savings from this initiative are expected to be between $24.0
million and $27.0 million.
25
Three
Months Ended September 26, 2009 Compared to Three Months Ended September 27,
2008
Net
Sales
Net sales
from continuing operations for the three months ended September 26, 2009 and
September 27, 2008 were as follows (in thousands):
September
26,
|
%
of
|
September
27,
|
%
of
|
Increase
/ (Decrease)
|
||||||||||||||||||||
2009
|
Total
|
2008
(1)
|
Total
|
$ | % | |||||||||||||||||||
Healthcare
distribution (2):
|
||||||||||||||||||||||||
Dental
(3)
|
$ | 622,065 | 37.5 | % | $ | 641,487 | 39.0 | % | $ | (19,422 | ) | (3.0 | )% | |||||||||||
Medical
(4)
|
410,617 | 24.7 | 423,675 | 25.8 | (13,058 | ) | (3.1 | ) | ||||||||||||||||
International
(5)
|
583,540 | 35.2 | 538,033 | 32.7 | 45,507 | 8.5 | ||||||||||||||||||
Total
healthcare distribution
|
1,616,222 | 97.4 | 1,603,195 | 97.5 | 13,027 | 0.8 | ||||||||||||||||||
Technology
(6)
|
43,211 | 2.6 | 41,014 | 2.5 | 2,197 | 5.4 | ||||||||||||||||||
Total
|
$ | 1,659,433 | 100.0 | % | $ | 1,644,209 | 100.0 | % | $ | 15,224 | 0.9 | |||||||||||||
(1) Adjusted
to reflect the effects of discontinued
operations.
|
(2) Consists
of consumable products, small equipment, laboratory products, large dental
and medical equipment, equipment repair services, 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 and equipment 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, Canada, the United Kingdom, Australia and New
Zealand.
|
The $15.2
million, or 0.9%, increase in net sales for the three months ended September 26,
2009 includes an increase of 4.0% local currency growth (0.6% decline internally
generated revenue offset by 4.6% growth from acquisitions) offset by a decrease
of 3.1% related to foreign currency exchange. Excluding sales of
seasonal influenza vaccines, which declined from prior year’s third quarter, net
sales increased 3.7%, or 6.9% growth in local currencies.
The $19.4
million, or 3.0%, decrease in dental net sales for the three months ended
September 26, 2009 includes a decrease of 2.5% in local currencies (4.9% decline
in internally generated revenue offset by 2.4% growth from acquisitions) and a
decrease of 0.5% related to foreign currency exchange. The 2.5%
decline in local currency sales was due to a decline in dental equipment sales
and service revenues of 12.8% (13.4% decline in internally generated revenue
offset by 0.6% growth from acquisitions) offset by dental consumable merchandise
sales growth of 1.3% (1.8% decline in internally generated revenue offset by
3.1% growth from acquisitions).
The $13.1
million, or 3.1%, decrease in medical net sales for the three months ended
September 26, 2009 includes a decrease in internally generated revenue of 4.2%
offset by acquisition growth of 1.1%. The decrease in medical net
sales is primarily due to significantly lower sales of influenza vaccines versus
the prior year. Excluding the effect of influenza vaccine sales,
internal medical net sales increased 7.2%. Approximately 3.1% of that
growth was due to products related to the H1N1 virus.
The $45.5
million, or 8.5%, increase in international net sales for the three months ended
September 26, 2009 includes sales growth of 16.9% in local currencies (7.0%
internally generated growth and 9.9% growth from acquisitions) offset by a
decrease of 8.4% related to foreign currency exchange.
The $2.2
million, or 5.4%, increase in technology net sales for the three months ended
September 26, 2009 includes an increase of 7.3% local currency growth (4.6%
internally generated growth and 2.7% growth from acquisitions) offset by a
decrease of 1.9% related to foreign currency exchange.
26
Gross
Profit
Gross
profit and gross margin percentages from continuing operations by segment and in
total for the three months ended September 26, 2009 and September 27, 2008 were
as follows (in thousands):
September
26,
|
Gross
|
September
27,
|
Gross
|
Increase
/ (Decrease)
|
||||||||||||||||||||
2009
|
Margin
%
|
2008
(1)
|
Margin
%
|
$ | % | |||||||||||||||||||
Healthcare
distribution
|
$ | 445,060 | 27.5 | % | $ | 445,245 | 27.8 | % | $ | (185 | ) | 0.0 | % | |||||||||||
Technology
|
31,207 | 72.2 | 30,349 | 74.0 | 858 | 2.8 | ||||||||||||||||||
Total
|
$ | 476,267 | 28.7 | $ | 475,594 | 28.9 | $ | 673 | 0.1 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
For the
three months ended September 26, 2009, gross profit increased $0.7 million, or
0.1%, 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, as well as certain financial
services. The software industry typically realizes higher gross
margins to recover investments in research and development.
Healthcare
distribution gross profit decreased $0.2 million for the three months ended
September 26, 2009 from the comparable prior year period. Healthcare
distribution gross profit margin decreased to 27.5% for the three months ended
September 26, 2009 from 27.8% for the comparable prior year period primarily due
to changes in the product sales mix.
Technology
gross profit increased $0.9 million, or 2.8%, for the three months ended
September 26, 2009 from the comparable prior year period. Technology
gross profit margin decreased to 72.2% for the three months ended September 26,
2009 from 74.0% for the comparable prior year period primarily due to changes in
the product sales mix.
Selling,
General and Administrative
Selling,
general and administrative expenses from continuing operations by segment and in
total for the three months ended September 26, 2009 and September 27, 2008 were
as follows (in thousands):
%
of
|
%
of
|
|||||||||||||||||||||||
September
26,
|
Respective
|
September
27,
|
Respective
|
Increase
/ (Decrease)
|
||||||||||||||||||||
2009
|
Net
Sales
|
2008
(1)
|
Net
Sales
|
$ | % | |||||||||||||||||||
Healthcare
distribution
|
$ | 346,810 | 21.5 | % | $ | 344,358 | 21.5 | % | $ | 2,452 | 0.7 | % | ||||||||||||
Technology
|
15,572 | 36.0 | 15,822 | 38.6 | (250 | ) | (1.6 | ) | ||||||||||||||||
Total
|
$ | 362,382 | 21.8 | $ | 360,180 | 21.9 | $ | 2,202 | 0.6 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Selling,
general and administrative expenses increased $2.2 million, or 0.6%, to $362.4
million for the three months ended September 26, 2009 from the comparable prior
year period. This increase results from $5.7 million in expense
reductions offset by a $7.9 million net increase from selling, general and
administrative costs of operations acquired offset by foreign exchange
favorability. As a percentage of net sales, selling, general and
administrative expenses decreased to 21.8% from 21.9% for the comparable prior
year period.
27
As a
component of selling, general and administrative expenses, selling expenses of
$241.5 million for the three months ended September 26, 2009 remained consistent
with the comparable prior year period. As a percentage of net sales,
selling expenses decreased to 14.6% from 14.7% for the comparable prior year
period.
As a
component of selling, general and administrative expenses, general and
administrative expenses increased $2.2 million, or 1.9%, to $120.9 million for
the three months ended September 26, 2009 from the comparable prior year
period. As a percentage of net sales, general and administrative
expenses increased to 7.3% from 7.2% for the comparable prior year
period.
Other
Expense, Net
Other
expense, net, from continuing operations for the three months ended September
26, 2009 and September 27, 2008 were as follows (in thousands):
September
26,
|
September
27,
|
Increase
/ (Decrease)
|
||||||||||||||
2009
|
2008
(1)
|
$ | % | |||||||||||||
Interest
income
|
$ | 2,387 | $ | 4,260 | $ | (1,873 | ) | (44.0 | )% | |||||||
Interest
expense
|
(5,171 | ) | (9,240 | ) | 4,069 | 44.0 | ||||||||||
Other,
net
|
1,938 | (4,863 | ) | 6,801 | 139.9 | |||||||||||
Other
expense, net
|
$ | (846 | ) | $ | (9,843 | ) | $ | 8,997 | 91.4 | |||||||
(1) Adjusted
to reflect the effects of discontinued operations and the adoption of
provisions contained within ASC Topic 470-20, “Debt with Conversion and
Other Options.”
|
Other
expense, net decreased $9.0 million for the three months ended September 26,
2009 from the comparable prior year period. This decrease was
primarily the result of decreased interest expense of $4.1 million due to
repayment of our $130.0 million senior notes on June 30, 2009, interest rate
swaps as well as lower interest rates on our floating rate debt, partially
offset by a decrease in interest income of $1.9 million resulting from lower
interest rates on our invested funds. In addition, Other, net
increased by $6.8 million due primarily to net proceeds received from litigation
settlements in the third quarter of 2009 and non-recurring charges incurred
during the third quarter of 2008 relating to the bankruptcy of Lehman Brothers
Holdings, Inc.
Income
Taxes
For the
three months ended September 26, 2009, our effective tax rate from continuing
operations was 14.0% compared to 32.5% for the prior year period. The
difference in our effective tax rates is primarily related to a reduction in the
valuation allowance on foreign deferred tax assets during the third quarter of
2009. Absent the effects of the reversal of a portion of the
valuation allowance on certain foreign deferred tax assets in the third quarter
of 2009, our effective tax rate for the three months ended September 26, 2009
would have been 32.5%.
28
Nine
Months Ended September 26, 2009 Compared to Nine Months Ended September 27,
2008
Net
Sales
Net sales
from continuing operations for the nine months ended September 26, 2009 and
September 27, 2008 were as follows (in thousands):
September
26,
|
%
of
|
September
27,
|
%
of
|
Increase
/ (Decrease)
|
||||||||||||||||||||
2009
(1)
|
Total
|
2008
(1)
|
Total
|
$ | % | |||||||||||||||||||
Healthcare
distribution (2):
|
||||||||||||||||||||||||
Dental
(3)
|
$ | 1,838,240 | 38.7 | % | $ | 1,905,206 | 39.7 | % | $ | (66,966 | ) | (3.5 | )% | |||||||||||
Medical
(4)
|
1,088,875 | 22.9 | 1,080,084 | 22.5 | 8,791 | 0.8 | ||||||||||||||||||
International
(5)
|
1,699,053 | 35.8 | 1,693,017 | 35.3 | 6,036 | 0.4 | ||||||||||||||||||
Total
healthcare distribution
|
4,626,168 | 97.4 | 4,678,307 | 97.5 | (52,139 | ) | (1.1 | ) | ||||||||||||||||
Technology
(6)
|
126,087 | 2.6 | 120,927 | 2.5 | 5,160 | 4.3 | ||||||||||||||||||
Total
|
$ | 4,752,255 | 100.0 | % | $ | 4,799,234 | 100.0 | % | $ | (46,979 | ) | (1.0 | ) | |||||||||||
(1) Adjusted
to reflect the effects of discontinued
operations.
|
(2) Consists
of consumable products, small equipment, laboratory products, large dental
and medical equipment, equipment repair services, 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 and equipment 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, Canada, the United Kingdom, Australia and New
Zealand.
|
The $47.0
million, or 1.0%, decrease in net sales for the nine months ended September 26,
2009 includes an increase of 4.9% local currency growth (4.7% growth from
acquisitions and 0.2% internally generated revenue) offset by a decrease of 5.9%
related to foreign currency exchange. Excluding sales of seasonal
influenza vaccines, which declined from prior year’s comparable period, net
sales decreased 0.1% and increased 5.9% in local currencies.
The $67.0
million, or 3.5%, decrease in dental net sales for the nine months ended
September 26, 2009 includes a decrease of 2.2% in local currencies (4.5% decline
in internally generated revenue offset by 2.3% growth from acquisitions) and a
decrease of 1.3% related to foreign currency exchange. The 2.2%
decline in local currency sales was due to a decline in dental equipment sales
and service revenues of 12.2% (12.7% decline in internally generated revenue
offset by 0.5% growth from acquisitions) offset by dental consumable merchandise
sales growth of 1.3% (1.7% decline in internally generated revenue offset by
3.0% growth from acquisitions).
The $8.8
million, or 0.8%, increase in medical net sales for the nine months ended
September 26, 2009 includes a decrease in internally generated revenue of 0.4%
offset by acquisition growth of 1.2%.
The $6.0
million, or 0.4%, increase in international net sales for the nine months ended
September 26, 2009 includes sales growth of 15.4% in local currencies (5.3%
internally generated growth and 10.1% growth from acquisitions) offset by a
decrease of 15.0% related to foreign currency exchange.
The $5.2
million, or 4.3%, increase in technology net sales for the nine months ended
September 26, 2009 includes sales growth of 7.7% in local currencies (6.8%
internally generated growth and 0.9% growth from acquisitions) offset by a
decrease of 3.4% related to foreign currency exchange.
29
Gross
Profit
Gross
profit and gross margin percentages from continuing operations by segment and in
total for the nine months ended September 26, 2009 and September 27, 2008 were
as follows (in thousands):
September
26,
|
Gross
|
September
27,
|
Gross
|
Increase
/ (Decrease)
|
||||||||||||||||||||
2009
(1)
|
Margin
%
|
2008
(1)
|
Margin
%
|
$ | % | |||||||||||||||||||
Healthcare
distribution
|
$ | 1,299,397 | 28.1 | % | $ | 1,319,791 | 28.2 | % | $ | (20,394 | ) | (1.5 | )% | |||||||||||
Technology
|
91,151 | 72.3 | 89,596 | 74.1 | 1,555 | 1.7 | ||||||||||||||||||
Total
|
$ | 1,390,548 | 29.3 | $ | 1,409,387 | 29.4 | $ | (18,839 | ) | (1.3 | ) | |||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
For the
nine months ended September 26, 2009, gross profit decreased $18.8 million, or
1.3%, from the comparable prior year period.
Healthcare
distribution gross profit decreased $20.4 million, or 1.5%, for the nine months
ended September 26, 2009 from the comparable prior year
period. Healthcare distribution gross profit margin decreased to
28.1% for the nine months ended September 26, 2009 from 28.2% for the comparable
prior year period primarily due to changes in the product sales
mix.
Technology
gross profit increased $1.6 million, or 1.7%, for the nine months ended
September 26, 2009 from the comparable prior year period. Technology
gross profit margin decreased to 72.3% for the nine months ended September 26,
2009 from 74.1% for the comparable prior year period primarily due to changes in
the product sales mix.
Selling,
General and Administrative
Selling,
general and administrative expenses from continuing operations by segment and in
total for the nine months ended September 26, 2009 and September 27, 2008 were
as follows (in thousands):
%
of
|
%
of
|
|||||||||||||||||||||||
September
26,
|
Respective
|
September
27,
|
Respective
|
Increase
/ (Decrease)
|
||||||||||||||||||||
2009
(1)
|
Net
Sales
|
2008
(1)
|
Net
Sales
|
$ | % | |||||||||||||||||||
Healthcare
distribution
|
$ | 1,014,736 | 21.9 | % | $ | 1,046,839 | 22.4 | % | $ | (32,103 | ) | (3.1 | )% | |||||||||||
Technology
|
45,326 | 35.9 | 47,673 | 39.4 | (2,347 | ) | (4.9 | ) | ||||||||||||||||
Total
|
$ | 1,060,062 | 22.3 | $ | 1,094,512 | 22.8 | $ | (34,450 | ) | (3.1 | ) | |||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Selling,
general and administrative expenses decreased $34.5 million, or 3.1%, to $1.1
billion for the nine months ended September 26, 2009 from the comparable prior
year period. This decrease consists of $29.7 million in expense
reductions and a $4.8 million net reduction from the effects of favorable
foreign exchange offset by the additional selling, general and administrative
costs from operations acquired. As a percentage of net sales,
selling, general and administrative expenses decreased to 22.3% from 22.8% for
the comparable prior year period.
30
As a
component of selling, general and administrative expenses, selling expenses
decreased $32.9 million, or 4.5%, to $703.8 million for the nine months ended
September 26, 2009 from the comparable prior year period. As a
percentage of net sales, selling expenses decreased to 14.8% from 15.4% for the
comparable prior year period.
As a
component of selling, general and administrative expenses, general and
administrative expenses decreased $1.6 million, or 0.4%, to $356.3 million for
the nine months ended September 26, 2009 from the comparable prior year
period. As a percentage of net sales, general and administrative
expenses remained constant at 7.5% when compared with the comparable prior year
period.
Other
Expense, Net
Other
expense, net, from continuing operations for the nine months ended September 26,
2009 and September 27, 2008 were as follows (in thousands):
September
26,
|
September
27,
|
Increase
/ (Decrease)
|
||||||||||||||
2009
(1)
|
2008
(1) (2)
|
$ | % | |||||||||||||
Interest
income
|
$ | 7,674 | $ | 12,217 | $ | (4,543 | ) | (37.2 | )% | |||||||
Interest
expense
|
(18,329 | ) | (26,816 | ) | 8,487 | 31.6 | ||||||||||
Other,
net
|
1,595 | (5,524 | ) | 7,119 | 128.9 | |||||||||||
Other
expense, net
|
$ | (9,060 | ) | $ | (20,123 | ) | $ | 11,063 | 55.0 | |||||||
(1) Adjusted
to reflect the effects of discontinued
operations.
|
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
Other
expense, net decreased $11.1 million for the nine months ended September 26,
2009 from the comparable prior year period. This decrease was
primarily the result of decreased interest expense of $8.5 million due to
interest rate swaps, repayment of our $130.0 million senior notes on June 30,
2009, as well as lower interest rates on our floating rate debt, partially
offset by a decrease in interest income of $4.5 million resulting from lower
interest rates on our invested funds. In addition, Other, net
increased by $7.1 million due primarily to net proceeds received from litigation
settlements in the third quarter of 2009 and non-recurring charges incurred
during the third quarter of 2008 relating to the bankruptcy of Lehman Brothers
Holdings, Inc.
Income
Taxes
For the
nine months ended September 26, 2009, our effective tax rate from continuing
operations was 26.3% compared to 33.5% for the prior year period. The
difference in our effective tax rates is primarily related to a reduction in the
valuation allowance on foreign deferred tax assets during the third quarter of
2009. Absent the effects of the reversal of a portion of the
valuation allowance on certain foreign deferred tax assets in the third quarter
of 2009, our effective tax rate for the nine months ended September 26, 2009
would have been 32.9%. The remaining difference in our effective tax
rate between 2009 and 2008 is due to foreign and state income
taxes.
31
Liquidity
and Capital Resources
Our
principal capital requirements include the funding of working capital needs,
repayments of debt principal, funding of acquisitions, purchases of securities
and fixed assets 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. Historically, sales have tended to be stronger during the
third and fourth quarters and special inventory forward buy-in opportunities
have been most prevalent just before the end of the year, causing our working
capital requirements to have been higher from the end of the third quarter to
the end of the first quarter of the following year. While recent
history has resulted in flat to declining sales, we expect our historical
seasonality of sales to continue in the foreseeable future.
We
finance our business primarily through cash generated from our operations,
revolving credit facilities and debt placements. Our ability to
generate sufficient cash flows from operations is dependent on the continued
demand of our customers for our products and services, and access to products
and services from our suppliers. Given current operating, economic
and industry conditions, we believe that demand for our products and services
may decline slightly.
Net cash
flow provided by operating activities was $218.4 million for the nine months
ended September 26, 2009, compared to $188.7 million for the comparable prior
year period. This net change of $29.7 million was primarily due to
increased net income and changes in working capital. The timing of
certain vendor payments occurring early in the year unfavorably affected cash
flow by approximately $40 million to $50 million.
Net cash
used in investing activities was $125.9 million for the nine months ended
September 26, 2009, compared to $85.7 million for the comparable prior year
period. The net change of $40.2 million was primarily due to
increases in payments for business acquisitions and other investments, partially
offset by proceeds received from a business divestiture and the absence of
purchases of available-for-sale securities in the current year. We
expect to invest approximately $10 million to $20 million during the remainder
of the fiscal year in capital projects to modernize and expand our facilities
and computer systems and to integrate certain operations into our existing
structure.
Net cash
used in financing activities was $146.9 million for the nine months ended
September 26, 2009, compared to net cash used in financing activities of $57.1
million for the comparable prior year period. The net change of $89.8
million was primarily due to increased payments for long-term debt, including
repayment of $130.0 million of our senior notes on June 30, 2009, partially
offset by the absence of stock repurchases in the current year.
The
following table summarizes selected measures of liquidity and capital resources
(in thousands):
September
26,
|
December
27,
|
|||||||
2009
|
2008
(1)
|
|||||||
Cash
and cash equivalents
|
$ | 317,607 | $ | 369,570 | ||||
Available-for-sale
securities - long-term
|
20,353 | 29,028 | ||||||
Working
capital
|
1,050,619 | 882,401 | ||||||
Debt:
|
||||||||
Bank
credit lines
|
$ | 1,731 | $ | 4,936 | ||||
Current
maturities of long-term debt
|
23,933 | 156,405 | ||||||
Long-term
debt
|
242,511 | 256,648 | ||||||
Total
debt
|
$ | 268,175 | $ | 417,989 | ||||
(1) Adjusted
to reflect the adoption of provisions contained within ASC Topic 470-20,
“Debt with Conversion and Other
Options.”
|
32
Our cash
and cash equivalents consist of bank balances and investments in money market
funds representing overnight investments with a high degree of
liquidity.
As of
September 26, 2009, we have approximately $22.3 million ($20.3 million net of
temporary impairments) invested in auction-rate securities
(“ARS”). ARS are publicly issued securities that represent long-term
investments, typically 10-30 years, in which interest rates had reset
periodically (typically every 7, 28 or 35 days) through a “dutch auction”
process. Approximately $19.6 million ($17.6 million net of temporary
impairments) of our ARS are backed by student loans that are backed by the
federal government and the remaining $2.7 million are invested in closed-end
municipal bond funds. Our ARS portfolio is comprised of investments
that are rated AAA by major independent rating agencies. Since the
middle of February 2008, these auctions have failed to settle due to an excess
number of sellers compared to buyers. The failure of these auctions
has resulted in our inability to liquidate our ARS in the near
term. We are currently not aware of any defaults or financial
conditions that would negatively affect the issuers’ ability to continue to pay
interest and principal on our ARS. We continue to earn and receive
interest at contractually agreed upon rates. We believe that the
current lack of liquidity related to our ARS investments will have no impact on
our ability to fund our ongoing operations and growth
opportunities. As of September 26, 2009, we have classified ARS
holdings as long-term, available-for-sale and they are included in the
Investment and other line within our consolidated balance sheets.
Our
business requires a substantial investment in working capital, which is
susceptible to fluctuations 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. We anticipate future increases in our
working capital requirements.
Our
accounts receivable days sales outstanding from continuing operations increased
to 41.7 days as of September 26, 2009 from 41.2 days as of September 27,
2008. Our inventory turns from continuing operations decreased to 6.1
as of September 26, 2009 from 6.6 as of September 27, 2008. Our
working capital accounts may be impacted by current and future economic
conditions.
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. 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 equivalent to a
conversion price of $46.34 per share, under the following
circumstances:
·
|
if
the 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 $400.0 million revolving
credit facility (discussed below) along with cash on hand to fully satisfy our
debt obligations, including the cash portion of our convertible
debt. 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.
33
Our $20.0
million of remaining senior notes bear interest at a fixed rate of 6.7% per
annum and mature on September 27, 2010. Interest on our senior notes
is payable semi-annually.
In 2003,
we entered into swap agreements relating to our $230.0 million senior notes to
exchange their fixed interest rates for variable interest rates. The
value of debt exchanged to a variable rate of interest reduces according to the
repayment schedule of the senior notes. As of September 26, 2009,
there is $20.0 million of principal remaining with a weighted-average interest
rate of 4.72%. This weighted-average variable interest rate is
comprised of LIBOR plus a spread and resets on the interest due dates for such
senior notes.
On
September 5, 2008, we entered into a new $400.0 million revolving credit
facility with a $100.0 million expansion feature. The $400.0 million
credit line expires in September 2013. This credit line replaced our
then existing $300.0 million revolving credit line, which would have expired in
May 2010. As of September 26, 2009, there were no borrowings
outstanding under this revolving credit facility and there were $10.3 million of
letters of credit provided to third parties.
Under our
common stock repurchase programs approved by our Board of Directors, we have
$57.7 million available for future common stock share
repurchases. During the quarter ended September 26, 2009, we did not
repurchase any of our common stock.
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
fair value based on third-party valuations or at a price pursuant to a formula
as defined in the agreements, which approximates fair
value. Effective December 28, 2008, we have adopted the provisions of
ASC Topic 480-10. ASC Topic 480-10 is applicable for noncontrolling
interests where we are or may be required to purchase all or a portion of the
outstanding interest in a consolidated subsidiary from the noncontrolling
interest holder under the terms of a put option or other contractual
agreements. As a result of the adoption of the provisions of
ASC Topic 480-10, we have recorded the approximate redemption amount fair value
of the put options as Redeemable noncontrolling interests ($177.5 million and
$233.0 million at September 26, 2009 and December 27, 2008, respectively) and
reduced Additional paid-in capital within the Stockholders’ equity section of
our consolidated balance sheets. The change in fair value of put
options at September 26, 2009 compared to December 27, 2008 was primarily due to
purchases of additional interests in consolidated subsidiaries offset by changes
in the fair value of the put options. Changes in the estimated
redemption amounts of the noncontrolling interests subject to put options are
adjusted at each reporting period with a corresponding adjustment to
equity. These adjustments will not impact the calculation of earnings
per share. Additionally,
some prior owners of such acquired subsidiaries are eligible to receive
additional purchase price cash consideration if certain profitability targets
are met. For acquisitions completed prior to 2009, we accrue
liabilities that may arise from these transactions when we believe that the
outcome of the contingency is determinable beyond a reasonable
doubt. For 2009 and future acquisitions, as required by provisions
contained within ASC Topic 805, “Business Combinations,” we will accrue
liabilities for the estimated fair value of additional purchase price
adjustments at the time of the acquisition. Any adjustments to these
accrual amounts will be recorded in our consolidated statement of
income.
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, 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. We have no off
balance sheet arrangements.
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 27, 2008.
34
Recently
Issued Accounting Standards
Accounting
Pronouncements Adopted
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC
Topic 105) which establishes the FASB Accounting Standards Codification (“the
Codification” or “ASC”) as the official single source of authoritative U.S.
generally accepted accounting principles (“GAAP”). All existing
accounting standards are superseded. All other accounting guidance
not included in the Codification will be considered
non-authoritative. The Codification also includes all relevant
Securities and Exchange Commission (“SEC”) guidance organized using the same
topical structure in separate sections within the
Codification. Following the Codification, the Board will not issue
new standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards
Updates (“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third
quarter 2009 financial statements and the principal impact on our financial
statements is limited to disclosures as all future references to authoritative
accounting literature will be referenced in accordance with the
Codification.
Effective
December 28, 2008, we have adopted the provisions of ASC Topic
480-10. ASC Topic 480-10 is applicable for noncontrolling interests
where we are or may be required to purchase all or a portion of the outstanding
interest in a consolidated subsidiary from the noncontrolling interest holder
under the terms of a put option or other contractual
agreements. As a result of the adoption of the provisions of
ASC Topic 480-10, we have recorded the approximate redemption amount fair value
of the put options as Redeemable noncontrolling interests ($177.5 million and
$233.0 million at September 26, 2009 and December 27, 2008, respectively) and
reduced Additional paid-in capital within the Stockholders’ equity section of
our consolidated balance sheets. The change in fair value of put
options at September 26, 2009 compared to December 27, 2008 was primarily due to
purchases of additional interests in consolidated subsidiaries offset by changes
in the fair value of the put options. Changes in the estimated
redemption amounts of the noncontrolling interests subject to put options are
adjusted at each reporting period with a corresponding adjustment to
equity. These adjustments will not impact the calculation of earnings
per share.
New
Accounting Pronouncements Not Yet Adopted
35
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 27,
2008.
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 September 26, 2009 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 within the time
periods specified in the SEC’s rules and forms.
Changes
in Internal Control Over Financial Reporting
The
combination of continued acquisition activity, ongoing acquisition integrations
and systems implementations undertaken during the quarter and carried over from
prior quarters, when considered in the aggregate, represents a material change
in our internal control over financial reporting.
Post-acquisition
related activities continued for dental, medical and technology businesses
acquired between December 2008 and September 2009 within the United States and
internationally with approximate aggregate annual revenues of $116.0
million. These acquisitions continue to utilize separate information
and financial accounting systems, and have been included in our consolidated
financial statements.
During
the quarter, systems implementation activities related to the upgrade of SAP
were completed for European dental, medical, and animal health businesses with
approximate aggregate annual revenues of $992.0
million. Additionally, acquisition integration activities were
completed for international dental businesses with approximate aggregate annual
revenues of $38.0 million.
All
acquisitions, acquisition integrations and systems implementations involve
necessary and appropriate change-management controls that are considered in our
annual assessment of the design and operating effectiveness of 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.
36
PART
II. OTHER INFORMATION
Our
business involves a risk of product liability 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, medical devices and other
healthcare products. As a business practice, we generally obtain
product liability 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 are covered by insurance or will not have a material adverse
effect on our financial condition or results of operations.
As of
September 26, 2009, 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.
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 of shares of our common stock, which
represented approximately 3.5% of the shares outstanding at the commencement of
the program. On both October 31, 2005 and March 28, 2007, our Board
of Directors authorized an additional $100.0 million, for a total of $300.0
million, of shares of our common stock to be repurchased under this
program. As of September 26, 2009, we had repurchased $242.3 million
of common stock (5,633,952 shares) under this initiative, with $57.7 million
available for future common stock share repurchases.
During
the fiscal quarter ended September 26, 2009, we did not repurchase any of our
common stock. The maximum number of shares that may yet be purchased
under this program, as shown below, is determined at the end of each month based
on the closing price of our common stock at that time.
Maximum
Number
|
||
of
Shares that May Yet
|
||
Fiscal
Month
|
Be
Purchased Under Our Program
|
|
06/28/09
through 08/01/09
|
1,123,694
|
|
08/02/09
through 08/29/09
|
1,097,631
|
|
08/30/09
through 09/26/09
|
1,054,335
|
37
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
|
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:
November 4, 2009
38