UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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X
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 26,
2009
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__
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission
file number 0-27078
HENRY SCHEIN,
INC.(Exact
name of registrant as specified in its charter)
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DELAWARE
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135
Duryea Road
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(State
or other jurisdiction of
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Melville,
New York
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incorporation
or organization)
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(Address
of principal executive offices)
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11-3136595
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11747
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(I.R.S.
Employer Identification No.)
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(Zip
Code)
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(631)
843-5500
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $.01 per share
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The
Nasdaq Stock Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES: X NO:
__
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES: __ NO:
X
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
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:
__ Smaller
reporting company: __
(Do
not check if a 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
The
aggregate market value of the registrant’s voting stock held by non-affiliates
of the registrant, computed by reference to the closing sales price as quoted on
the NASDAQ National Market on June 27, 2009 was approximately
$4,283,865,000.
As of
February 12, 2010, there were 90,684,358 shares of registrant’s Common Stock,
par value $.01 per share, outstanding.
Documents
Incorporated by Reference:
Portions
of the Registrant’s definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 26, 2009) are incorporated by reference in Part III
hereof.
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Page
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Number
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PART
I
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3
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15
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22
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23
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23
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24
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PART
II
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24
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27
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29
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50
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51
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103
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103
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105
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PART
III
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105
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105
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106
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106
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106
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PART
IV
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107
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108
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111
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PART
I
General
We
believe we are the largest distributor of healthcare products and services
primarily to office-based healthcare practitioners. We serve more
than 600,000 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 77 years of experience distributing
healthcare products.
We are
headquartered in Melville, New York, employ more than 12,500 people (of which
over 5,500 are based outside the United States) and have operations in the
United States, Australia, Austria, Belgium, Canada, China, the Czech Republic,
France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the
Netherlands, New Zealand, Portugal, Spain, Switzerland and the United
Kingdom. We also have affiliates in Iceland, Saudi Arabia and the
United Arab Emirates.
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.
Industry
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 2009 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. Supplies and small
equipment are generally purchased from more than one distributor, with one
generally serving as the primary supplier.
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 effects of reduced
insurance coverage due to unemployment. 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.
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.
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.
Competition
The
distribution and manufacture of healthcare supplies and equipment is highly
competitive. Many of the healthcare distribution products we sell are
available to our customers from a number of suppliers. In addition,
our competitors could obtain exclusive rights from manufacturers to market
particular products. Manufacturers also could seek to sell directly
to end-users, and thereby eliminate or reduce our role and that of other
distributors.
In North
America, we compete with other distributors, as well as several manufacturers,
of dental, medical and animal health products, primarily on the basis of price,
breadth of product line, customer service and value-added products and
services. In the sale of our dental products, our primary competitors
are the Patterson Dental division of Patterson Companies, Inc. and Benco Dental
Supply Company. In addition, we compete against a number of other
distributors that operate on a national, regional and local
level. Our primary competitors in the sale of medical products are
the General Medical division of McKesson Corp., PSS World Medical, Inc. and the
Allegiance division of Cardinal Health, Inc., which are national
distributors. In the animal health market, our primary competitors
are MWI Veterinary Supply Inc. and the Webster Veterinary division of Patterson
Companies, Inc. We also compete against a number of regional and
local medical and animal health distributors, as well as a number of
manufacturers that sell directly to physicians and
veterinarians. With regard to our dental practice management
software, we compete against numerous companies, including PracticeWorks, Inc.
and Patterson Dental division. In the animal health practice
management market, our primary competitor is IDEXX Laboratories,
Inc. The medical practice management and electronic medical records
market is very fragmented and therefore we compete with numerous companies such
as NextGen Healthcare Information Systems, Inc., eClinicalWorks, Allscripts, LLC
and athenahealth, Inc.
We also
face significant competition internationally, where we compete on the basis of
price and customer service against several large competitors, including the GACD
Group, Pluradent AG & Co., Planmeca Oy, Omega Pharma NV, Billericay Dental
Supply Co. Ltd., National Veterinary Services and Alcyon SA, as well as a large
number of dental, medical and animal health product distributors and
manufacturers in Australia, Austria, Belgium, China, the Czech Republic, France,
Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the Netherlands, New
Zealand, Portugal, Spain, Switzerland and the United Kingdom.
Significant
price reductions by our competitors could result in a similar reduction in our
prices. Any of these competitive pressures may materially adversely
affect our operating results.
Competitive
Strengths
We have
more than 77 years of experience in distributing products to healthcare
practitioners resulting in strong awareness of the “Henry Schein”
brand. Our competitive strengths include:
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Direct sales and marketing
expertise. Our sales and marketing efforts are designed
to establish and solidify customer relationships through personal visits
by field sales representatives, frequent direct marketing and telesales
contact, emphasizing our broad product lines, including exclusive
distribution agreements, competitive prices and ease of order
placement. The key elements of our direct sales and marketing
efforts are:
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•
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Field sales
consultants. We have approximately 2,750 field sales
consultants, including equipment sales specialists, covering major North
American, European and other international markets. These
consultants complement our direct marketing and telesales efforts and
enable us to better market, service and support the sale of more
sophisticated products and
equipment.
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•
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Direct
marketing. During 2009, we distributed approximately
27.0 million pieces of direct marketing material, including catalogs,
flyers, order stuffers and other promotional materials to existing and
potential office-based healthcare
customers.
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•
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Telesales. We
support our direct marketing effort with approximately 1,400 inbound and
outbound telesales representatives, who facilitate order processing and
generate new sales through direct and frequent contact with
customers.
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Broad product and service
offerings at competitive prices. We offer a broad range
of products and services to our customers, at competitive prices, in the
following categories:
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•
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Consumable supplies and
equipment. We offer over 90,000 Stock Keeping Units, or
SKUs, to our customers. Of the SKUs offered, approximately
49,000 are offered to our dental customers, approximately 39,000 to our
medical customers and approximately 22,000 to our animal health
customers. We offer over 100,000 additional SKUs to our
customers in the form of special order
items.
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•
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Technology and other
value-added products and services. We sell practice
management software systems to our dental, medical and animal health
customers. Our practice management software solutions provide
practitioners with patient treatment history, billing, accounts receivable
analyses and management, appointment calendars, electronic claims
processing and word processing programs. As of December 26,
2009, we have an active user base of more than 65,000 practices, including
Dentrix®, Easy Dental®, Oasis® and EXACT® for dental practices, MicroMD®
for physician practices and AVImark® for animal health
clinics.
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•
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Repair
services. We have 192 equipment sales and service
centers worldwide that provide a variety of repair, installation and
technical services for our healthcare customers. Our ProRepair
technicians provide installation and repair services for dental
handpieces; dental, medical and animal health small equipment; table top
sterilizers; and large dental
equipment.
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•
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Financial
services. We offer our customers solutions in operating
their practices by providing access to a number of financial services and
products (including non-recourse financing for equipment, technology and
software products; non-recourse patient financing; collection services and
credit card processing) at rates that we believe are generally lower than
what they would be able to secure
independently.
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Commitment to superior
customer service. We maintain a strong commitment to
providing superior customer service. We frequently monitor our
customer service through customer surveys, focus groups and statistical
reports. Our customer service policy primarily focuses
on:
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•
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Exceptional order
fulfillment. Approximately 99% of items ordered in the
United States and Canada are shipped without back ordering and are shipped
on the same business day the order is
received.
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•
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Streamlined ordering
process. Customers may place orders 24 hours a day,
7 days a week by mail, fax, telephone, e-mail, Internet and by using
our computerized order entry
systems.
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Integrated management
information systems. Our information systems generally
allow for centralized management of key functions, including accounts
receivable, inventory, accounts payable, payroll, purchasing, sales and
order fulfillment. These systems allow us to manage our growth,
deliver superior customer service, properly target customers, manage
financial performance and monitor daily operational
statistics.
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Cost-effective
purchasing. We believe that cost-effective purchasing is
a key element to maintaining and enhancing our position as a
competitive-pricing provider of healthcare products. We
continuously evaluate our purchase requirements and suppliers’ offerings
and prices in order to obtain products at the lowest possible
cost. In 2009, our top 10 healthcare distribution suppliers and
our single largest supplier accounted for approximately 31% and 8%,
respectively, of our aggregate
purchases.
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Efficient
distribution. We distribute our products from our
strategically located distribution centers. We strive to
maintain optimal inventory levels in order to satisfy customer demand for
prompt delivery and complete order fulfillment. These inventory
levels are managed on a daily basis with the aid of our management
information systems. Once an order is entered, it is
electronically transmitted to the distribution center nearest the
customer’s location and a packing slip for the entire order is printed for
order fulfillment.
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Products
The
following table sets forth the percentage of consolidated net sales by principal
categories of products offered through our healthcare distribution and
technology reportable segments:
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2009
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2008
(1)
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2007
(1)
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Healthcare
Distribution
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Dental:
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Consumable
dental products, dental laboratory products
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and
small equipment (2)
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45.9
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%
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46.4
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%
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46.0
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%
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Large
dental equipment (3)
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17.1
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17.9
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18.3
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Total
dental
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63.0
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64.3
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64.3
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Medical:
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Medical
products (4)
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23.4
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22.9
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27.0
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Animal
health products (5)
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11.0
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10.2
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6.5
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Total
medical
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34.4
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33.1
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33.5
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Total
Healthcare Distribution
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97.4
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97.4
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97.8
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Technology
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Software
and related products and
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other
value-added products (6)
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2.6
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2.6
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2.2
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|||||
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Total
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100.0
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%
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100.0
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%
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100.0
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%
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(1)
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Adjusted
to reflect the effects of discontinued
operations.
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(2)
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Includes
X-ray products, infection-control products, handpieces, preventatives,
impression materials, composites, anesthetics, teeth, dental implants,
gypsum, acrylics, articulators and
abrasives.
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(3)
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Includes
dental chairs, delivery units and lights, X-ray equipment, equipment
repair and high-tech equipment.
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(4)
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Includes
branded and generic pharmaceuticals, vaccines, surgical products,
diagnostic tests, infection-control products, X-ray products, equipment
and vitamins.
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(5)
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Includes
branded and generic pharmaceuticals, surgical and consumable products and
services and equipment.
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(6)
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Includes
software and related products and other value-added products, including
financial products and continuing
education.
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Business
Strategy
Our
objective is to continue to expand as a value-added distributor of healthcare
products and services to office-based healthcare practitioners. To
accomplish this, we will apply our competitive strengths in executing the
following strategies:
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•
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Increase penetration of our
existing customer base. We have over 600,000 customers
worldwide and we intend to increase sales to our existing customer base
and enhance our position as their primary
supplier.
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•
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Increase the number of
customers we serve. This strategy includes increasing
the number and productivity of field sales consultants, as well as using
our customer database to focus our marketing
efforts.
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•
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Leverage our value-added
products and services. We continue to increase
cross-selling efforts for key product lines. In the dental
business, we have significant cross-selling opportunities between our
dental practice management software users and our dental distribution
customers. In the medical business, we have opportunities to
expand our vaccine, injectables and other pharmaceuticals sales to medical
distribution customers, as well as cross-selling core products and
practice management software with these key products. In the
animal health business, we have opportunities to cross-sell practice
management software and other
products.
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•
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Pursue strategic acquisitions
and joint ventures. Our acquisition strategy includes
acquiring businesses complementary to ours that will provide, among other
things, additional sales to be channeled through our existing distribution
infrastructure, access to additional product lines and networks of field
sales consultants and an opportunity to further expand into new geographic
markets.
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Markets
Served
Demographic
trends indicate that our markets are growing, as an aging U.S. population is
increasingly using healthcare services. Between 2009 and 2019, the 45
and older population is expected to grow by approximately
16%. Between 2009 and 2029, this age group is expected to grow by
approximately 30%. This compares with expected total U.S. population
growth rates of approximately 10% between 2009 and 2019 and approximately 21%
between 2009 and 2029.
In the
dental industry, there is predicted to be a rise in oral healthcare expenditures
as the 45 and older segment of the population increases. Cosmetic
dentistry is another growing aspect of dental practices as new technologies
allow dentists to offer cosmetic solutions that patients seek. At the
same time, there is an increase in dental insurance
coverage. Approximately 56% of the U.S. population now has some form
of dental coverage, up from 49% in 1996.
We
support our dental professionals through the many SKUs that we offer, as well as
through important value-added services, including practice management software,
electronic claims processing, financial services and continuing education, all
designed to help maximize a practitioner’s efficiency.
There
continues to be a migration of procedures from acute-care settings to
physicians’ offices, a trend that we believe provides additional opportunities
for us. There also is the continuing use of vaccines, injectables and
other pharmaceuticals in alternate-care settings. We believe we have
established a leading position as a vaccine supplier to the office-based
physician practitioner.
We
believe our international group is a leading European healthcare supplier
servicing office-based dental, medical and animal health
practices. We are in the process of implementing SAP software across
continental Europe. Additionally, we are expanding our dental
full-service model and our animal health presence in Europe, as well as our
medical offerings in countries where opportunities exist. Through our
“Schein Direct” program, we also have the capability to provide door-to-door air
package delivery to practitioners in over 200 countries around the
world.
For
information on revenues and long-lived assets by geographic area, see Note 13 of
“Notes to Consolidated Financial Statements,” which is incorporated herein by
reference.
Seasonality
and Other Factors Affecting Our Business and Quarterly Results
We
experience fluctuations in quarterly earnings. As a result, we may
fail to meet or exceed the expectations of securities analysts and investors,
which could cause our stock price to decline.
Our
business is subject to seasonal and other quarterly fluctuations. Net
sales and operating profits generally have been higher in the third and fourth
quarters due to the timing of sales of seasonal products (including influenza
vaccine, equipment and software products), purchasing patterns of office-based
healthcare practitioners and year-end promotions. Net sales and
operating profits generally have been lower in the first quarter, primarily due
to increased sales in the prior two quarters. While recent history
has resulted in flat to declining sales, we expect our historical seasonality of
sales to continue in the foreseeable future. Quarterly results also
may be adversely affected by a variety of other factors, including:
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•
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costs
of developing new applications and services;
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•
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costs
related to acquisitions and/or integrations of technologies or
businesses;
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•
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timing
and amount of sales and marketing expenditures;
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|||
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•
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timing
of pricing changes offered by our vendors;
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•
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timing
of the introduction of new products and services by our
vendors;
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•
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changes
in or availability of vendor contracts or rebate programs;
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•
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vendor
rebates based upon attaining certain growth goals;
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•
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changes
in the way vendors introduce or deliver products to
market;
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•
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exclusivity
requirements with certain vendors may prohibit us from distributing
competitive products manufactured by other vendors;
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•
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loss
of sales representatives;
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•
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general
economic conditions, as well as those specific to the healthcare industry
and related industries;
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•
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timing
of the release of upgrades and enhancements to our technology-related
products and services;
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•
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our
success in establishing or maintaining business
relationships;
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•
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restructuring
charges;
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•
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changes
in accounting principles;
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•
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unexpected
difficulties in developing and manufacturing
products;
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•
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product
demand and availability or recalls by
manufacturers;
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•
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exposure
to product liability and other claims in the event that the use of the
products we sell results in injury;
and
|
|
•
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increases
in the cost of shipping or service issues with our third-party
shippers.
|
Any
change in one or more of these or other factors could cause our annual or
quarterly operating results to fluctuate. If our operating results do
not meet market expectations, our stock price may decline.
Governmental
Regulations
Certain
of our businesses involve the distribution of pharmaceuticals and medical
devices, and in this regard we are subject to various local, state, federal and
foreign governmental laws and regulations applicable to the distribution of
pharmaceuticals and medical devices. Among the federal laws
applicable to us are the Controlled Substances Act, the Federal Food, Drug, and
Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987, and
Section 361 of the Public Health Service Act. We are also subject to
comparable foreign regulations.
The
Federal Food, Drug, and Cosmetic Act generally regulates the introduction,
manufacture, advertising, labeling, packaging, storage, handling, reporting,
marketing and distribution of, and record keeping for, pharmaceuticals and
medical devices shipped in interstate commerce, and states may similarly
regulate such activities within the state. Section 361 of the Public
Health Service Act (“Regulations to Control Communicable Diseases”) serves as
the legal basis for such regulation of human cells, tissues, and cellular and
tissue-based products.
The
Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug,
and Cosmetic Act, establishes certain requirements applicable to the wholesale
distribution of prescription drugs, including the requirement that wholesale
drug distributors be licensed by each state in which they conduct business,
provide certain drug pedigree information on the distribution of prescription
drugs and act in accordance with federally established guidelines on storage,
handling and record maintenance.
Under the
Controlled Substances Act, as a distributor of controlled substances, we are
required to obtain a registration annually from the United States Drug
Enforcement Administration and are subject to other regulatory requirements
relating to the sale, marketing, handling and distribution of such drugs, in
accordance with specified rules and regulations. We are subject to
inspection by the United States Drug Enforcement Administration.
Certain
of our businesses are required to register for permits and/or licenses with, and
comply with operating and security standards of, the United States Drug
Enforcement Administration, the United States Food and Drug Administration, the
Department of Health and Human Services, and various state boards of pharmacy,
state health departments and/or comparable state agencies as well as foreign
agencies, and certain accrediting bodies depending on the type of operations and
location of product distribution, manufacturing or sale. These
businesses include those that distribute, manufacture and/or repackage
prescription pharmaceuticals and/or medical devices and/or human cells, tissues,
and cellular and tissue-based products, or own pharmacy operations, or install,
maintain or repair equipment. In addition, Section 301 of the
National Organ Transplant Act, and a number of comparable state laws, impose
civil and/or criminal penalties for the transfer of certain human tissue (for
example human bone products) for valuable consideration, while generally
permitting payments for the reasonable costs incurred in procuring, processing,
storing and distributing that tissue. The United States Drug Enforcement
Administration, the United States Food and Drug Administration and state
regulatory authorities have broad enforcement powers, including the ability to
suspend or limit the distribution of products by our distribution centers, seize
or order the recall of products and impose significant criminal, civil and
administrative sanctions for violations of these laws and
regulations. Our customers are also subject to significant federal,
state, local and foreign governmental regulation.
Certain
of our businesses are subject to federal and state (and similar foreign)
healthcare fraud and abuse, referral and reimbursement laws, and regulations
with respect to their operations. Such laws prohibit, among other
things, the submission or causing the submission of false or fraudulent claims
for reimbursement, and soliciting, offering, receiving or paying remuneration in
order to induce the referral of a patient or ordering, purchasing, leasing or
arranging for or recommending ordering, purchasing or leasing, of items or
services that are paid for by government health care programs. The
fraud and abuse laws and regulations have been subject to heightened enforcement
activity over the past few years, particularly through “relators,” who
file
complaints
in the name of the United States (and if applicable, particular states) under
federal and state False Claims Act statutes. These laws and
regulations are subject to frequent modification and varied interpretation, and
can have a material adverse impact on us if a violation is
found. Certain of our businesses also maintain contracts with the
governments and are subject to certain regulatory requirements relating to
government contractors.
Certain
of our businesses are subject to various additional federal, state, local and
foreign laws and regulations, including with respect to the sale,
transportation, storage, handling and disposal of hazardous or potentially
hazardous substances, and safe working conditions. In recent years,
some states have passed or proposed laws and regulations that are intended to
protect the integrity of the supply channel. For example, Florida and
certain other states have implemented or are implementing drug pedigree
requirements that require that prescription drugs be distributed with records or
information documenting the prior distribution of the drug, back to the
manufacturers. California has enacted a law requiring the
implementation of an electronic drug pedigree system that provides track and
trace chain of custody technologies, such as radio frequency identification, or
RFID, technologies, although the effective date has been postponed until January
1, 2015 for pharmaceutical manufacturers and repackagers, and July 1, 2016 for
pharmaceutical wholesalers. There have been increasing efforts by
various levels of government to regulate the pharmaceutical distribution system
in order to prevent the introduction of counterfeit, adulterated or misbranded
pharmaceuticals into the distribution system. At the federal level,
the United States Food and Drug Administration issued final regulations pursuant
to the Prescription Drug Marketing Act, or PDMA, that became effective in
December 2006. The regulations impose drug pedigree and other chain of custody
requirements that increase the costs and/or burden to us of selling our products
and handling product returns. In early December 2006, the federal
District Court for the Eastern District of New York issued a preliminary
injunction, enjoining the implementation of some of the federal drug pedigree
requirements, in response to a case initiated by secondary
distributors. On December 31, 2009, the U.S. District Court
granted a motion to extend the time for either party to re-open the matter
(which had been administratively closed in light of potential legislative action
by Congress), and the court in effect extended the injunction through September
30, 2010.
The
United States Food and Drug Administration Amendments Act of 2007, which went
into effect on September 27, 2007, requires the United States Food and Drug
Administration to establish standards and identify and validate effective
technologies for the purpose of securing the pharmaceutical supply chain against
counterfeit drugs. These standards include any track and trace or
authentication technologies, such as RFID and other technologies. The
United States Food and Drug Administration is currently conducting pilot
programs and seeking feedback from medical device manufacturers and distributors
who are willing to comment prior to unique device identifier (UDI) rulemaking
expected mid-2010.
Certain
of our businesses involve access to personal health, medical, financial and
other information of individuals, and are accordingly subject to numerous
federal, state, local and foreign laws and regulations that protect the privacy
and security of such information, and require, among other things, the
implementation of various recordkeeping, operational, notice and other practices
intended to safeguard that information, limit its use to allowed purposes, and
notify individuals in the event of privacy breaches.
In
addition, United States and international import and export laws and regulations
require us to abide by certain standards relating to the importation and
exportation of products. We also are subject to certain laws and
regulations concerning the conduct of our foreign operations, including the U.S.
Foreign Corrupt Practices Act and anti-bribery laws and laws pertaining to the
accuracy of our internal books and records.
While we
believe that we are substantially compliant with the foregoing laws and
regulations promulgated thereunder and possess all material permits and licenses
required for the conduct of our business, there can be no assurance that
regulations that impact our business or customers’ practices will not have a
material adverse impact on our business. As a result of political,
economic and regulatory influences, the healthcare distribution industry in the
United States is under intense scrutiny and subject to fundamental
changes. We cannot predict what reform proposals, if any, will be
adopted, when they may be adopted, or what impact they may have on
us.
See “ITEM
1A. Risk Factors” for a discussion of additional regulatory developments that
may affect our results of operations and financial condition.
Proprietary
Rights
We hold
trademarks relating to the “Henry Schein” name and logo, as well as certain
other trademarks. Pursuant to agreements executed in connection with
our reorganization in 1994, both Henry Schein, Inc. and Schein Pharmaceutical,
Inc. (which was acquired by Watson Pharmaceuticals, Inc. in 2000), a company
previously engaged in the manufacture and distribution of multi-source
pharmaceutical products, are entitled to use the “Schein” name in connection
with their respective businesses, but Schein Pharmaceutical, Inc. must always
use “Schein” in combination with the word “Pharmaceutical” and is not entitled
to use the name “Henry Schein” or to use “Schein” alone or with any other word
(other than “Pharmaceutical”). We intend to protect our trademarks to
the fullest extent practicable.
Employees
As of
December 26, 2009, we employed more than 12,500 full-time employees, including
approximately 1,400 telesales representatives, 2,750 field sales consultants,
including equipment sales specialists, 2,250 warehouse employees, 500
computer programmers and technicians, 1,150 management employees and 4,800
office, clerical and administrative employees. Approximately 279 or
2.2% of our employees were subject to collective bargaining
agreements. We believe that our relations with our employees are
excellent.
Available
Information
We make
available free of charge through our Internet Web site, www.henryschein.com,
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, statements of beneficial ownership of securities on Forms 3, 4 and
5 and amendments to these reports and statements filed or furnished pursuant to
Section 13(a) and Section 16 of the Securities Exchange Act of 1934 as soon as
reasonably practicable after such materials are electronically filed with, or
furnished to, the SEC.
The above
information is also available at the SEC’s Office of Investor Education and
Advocacy at United States Securities and Exchange Commission, 100 F Street,
N.E., Washington, D.C. 20549-0213 or obtainable by calling the SEC at (800)
732-0330. In addition, the SEC maintains an Internet Web site at
www.sec.gov,
where the above information can be viewed.
Our
principal executive offices are located at 135 Duryea Road, Melville, New York
11747, and our telephone number is (631) 843-5500. Unless the context
specifically requires otherwise, the terms the “Company,” “Henry Schein,” “we,”
“us” and “our” mean Henry Schein, Inc., a Delaware corporation, and its
consolidated subsidiaries.
Executive
Officers of the Registrant
The
following table sets forth certain information regarding our executive
officers:
|
Name
|
Age
|
Position
|
||
|
Stanley
M. Bergman
|
60
|
Chairman,
Chief Executive Officer, Director
|
||
|
Gerald
A. Benjamin
|
57
|
Executive
Vice President, Chief Administrative Officer, Director
|
||
|
James
P. Breslawski
|
56
|
President,
Chief Operating Officer, Director
|
||
|
Leonard
A. David
|
61
|
Senior
Vice President, Chief Compliance Officer
|
||
|
James
Harding
|
54
|
Senior
Vice President, Chief Technology Officer
|
||
|
Stanley
Komaroff
|
74
|
Senior
Advisor
|
||
|
Mark
E. Mlotek
|
54
|
Executive
Vice President, Corporate Business Development,
Director
|
||
|
Steven
Paladino
|
52
|
Executive
Vice President, Chief Financial Officer, Director
|
||
|
Michael
Racioppi
|
55
|
Senior
Vice President, Chief Merchandising Officer
|
||
|
Lonnie
Shoff
|
51
|
President,
Global Healthcare Specialties Group
|
||
|
Michael
Zack
|
57
|
President,
International Group
|
Stanley M. Bergman has been
our Chairman and Chief Executive Officer since 1989 and a director since
1982. Mr. Bergman held the position of President from 1989 to
2005. Mr. Bergman held the position of Executive Vice President from
1985 to 1989 and Vice President of Finance and Administration from 1980 to
1985.
Gerald A. Benjamin has been
our Executive Vice President and Chief Administrative Officer since 2000 and a
director since 1994. Prior to holding his current position, Mr.
Benjamin was Senior Vice President of Administration and Customer Satisfaction
since 1993. Mr. Benjamin was Vice President of Distribution
Operations from 1990 to 1992 and Director of Materials Management from 1988 to
1990. Before joining us in 1988, Mr. Benjamin was employed for 13
years in various management positions at Estée Lauder, Inc., where his last
position was Director of Materials Planning and Control.
James P. Breslawski has been
our President and Chief Operating Officer since 2005 and a director since
1992. Mr. Breslawski held the position of Executive Vice President
and President of U.S. Dental from 1990 to 2005, with primary responsibility for
the North American Dental Group. Between 1980 and 1990, Mr.
Breslawski held various positions with us, including Chief Financial Officer,
Vice President of Finance and Administration and Controller.
Leonard A. David has been our
Senior Vice President and Chief Compliance Officer since 2006. Mr.
David held the position of Vice President and Chief Compliance Officer from 2005
to 2006. Mr. David held the position of Vice President of Human
Resources and Special Counsel from 1995 to 2005. Mr. David held the
position of Vice President, General Counsel and Secretary from 1990 through 1994
and practiced corporate and business law for eight years prior to joining
us.
James Harding has been our
Chief Technology Officer since 2005 and Senior Vice President since
2001. Prior to holding his current position, Mr. Harding was Chief
Information Officer since 2001, with primary responsibility for worldwide
information technology.
Stanley Komaroff has been our
Senior Advisor since 2003. Prior to joining us, Mr. Komaroff was a
partner for 35 years in the law firm of Proskauer Rose LLP, counsel to
us. He served as Chairman of that firm from 1991 to
1999.
Mark E. Mlotek has been
Executive Vice President of our Corporate Business Development Group since 2004
and was Senior Vice President of Corporate Business Development from 2000 to
2004. Prior to that, Mr. Mlotek was Vice President, General Counsel
and Secretary from 1994 to 1999 and became a director in 1995. Prior
to joining us, Mr. Mlotek was a partner in the law firm of Proskauer Rose LLP,
counsel to us, specializing in mergers and acquisitions, corporate
reorganizations and tax law from 1989 to 1994.
Steven Paladino has been our
Executive Vice President and Chief Financial Officer since
2000. Prior to holding his current position, Mr. Paladino was Senior
Vice President and Chief Financial Officer from 1993 to 2000 and has been a
director since 1992. From 1990 to 1992, Mr. Paladino served as Vice
President and Treasurer and from 1987 to 1990 served as Corporate
Controller. Before joining us, Mr. Paladino was employed in public
accounting for seven years, most recently with the international accounting firm
of BDO Seidman, LLP. Mr. Paladino is a certified public
accountant.
Michael Racioppi has been our
Senior Vice President, Chief Merchandising Officer since 2008. Prior to holding
his current position, Mr. Racioppi was President of the Medical Division from
2000 to 2008 and Interim President from 1999 to 2000, and Corporate Vice
President from 1994 to 2008. Mr. Racioppi served as Senior Director,
Corporate Merchandising from 1992 to 1994. Before joining us in 1992,
Mr. Racioppi was employed by Ketchum Distributors, Inc. as the Vice President of
Purchasing and Marketing.
Lonnie Shoff has been
President of the Henry Schein Global Healthcare Specialties Group since
September 2009. Prior to joining us, Ms. Shoff was employed with
Roche Diagnostics, most recently as Senior Vice President General Manager,
Applied Science.
Michael Zack has been
President of our International Group since 2006. Mr. Zack held the
position of Senior Vice President of our International Group from 1989 to
2006. Mr. Zack was employed by Polymer Technology (a subsidiary of
Bausch & Lomb) as Vice President of International Operations from 1984 to
1989 and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975
to 1984.
Declining
economic conditions could adversely affect our results of operations and
financial condition.
Disruptions
in the financial markets and other macro-economic uncertainties that affect the
economy and the economic outlook of the United States and other parts of the
world could adversely impact our customers and vendors, which could adversely
affect us. Recessionary conditions and depressed levels of consumer
and commercial spending have caused and may continue to cause customers to
reduce, modify, delay or cancel plans to purchase our products and may cause
vendors to reduce their output or change their terms of sales. We
generally sell products to customers with payment terms. If
customers’ cash flow or operating and financial performance deteriorates, or if
they are unable to make scheduled payments or obtain credit, they may not be
able to pay, or may delay payment to us. Likewise, for similar
reasons vendors may restrict credit or impose different payment
terms. Any inability of current and/or potential customers to pay us
for our products and/or services or any demands by vendors for different payment
terms may adversely affect our results of operations and financial
condition.
Disruptions
in the financial market may adversely affect the availability and cost of credit
to us.
Our
ability to make scheduled payments or refinance our obligations with respect to
indebtedness will depend on our operating and financial performance, which in
turn is subject to prevailing economic conditions and financial, business and
other factors beyond our control. Disruptions in the financial
markets may adversely affect the availability and cost of credit to
us.
The healthcare products distribution
industry is highly competitive, and we may not be able to compete
successfully.
We
compete with numerous companies, including several major manufacturers and
distributors. Some of our competitors have greater financial and
other resources than we do, which could allow them to compete more
successfully. Most of our products are available from several sources
and our customers tend to have relationships with several
distributors. Competitors could obtain exclusive rights to market
particular products, which we would then be unable to
market. Manufacturers also could increase their efforts to sell
directly to end-users and thereby eliminate or reduce our role and that of other
distributors. Industry consolidation among healthcare products
distributors, price competition, the unavailability of products, whether due to
our inability to gain access to products or to interruptions in supply from
manufacturers, or the emergence of new competitors also could increase
competition. In the future, we may be unable to compete successfully
and competitive pressures may reduce our revenues.
The
healthcare industry is experiencing changes that could adversely affect our
business.
The
healthcare industry is highly regulated and subject to changing political,
economic and regulatory influences. In recent years, the healthcare
industry has undergone significant change driven by various efforts to reduce
costs, including the reduction of spending budgets by government and private
insurance programs, such as Medicare, Medicaid and corporate health insurance
plans; pressures relating to potential healthcare reform; trends toward managed
care; consolidation of healthcare distribution companies; consolidation of
healthcare manufacturers; collective purchasing arrangements and consolidation
among office-based healthcare practitioners; and changes in reimbursements to
customers. Both our own profit margins and the profit margins of our
customers may be adversely affected by laws and regulations reducing
reimbursement rates for pharmaceuticals and/or medical treatments or services or
changing the methodology by which reimbursement levels are
determined. If we are unable to react effectively to these and other
changes in the healthcare industry, our operating results could be adversely
affected. In addition, the enactment of any significant healthcare
reforms could have a material adverse effect on our business.
Failure
to comply with existing and future regulatory requirements could negatively
affect our business.
Our
business is subject to requirements under various local, state, federal and
international laws and regulations applicable to the distribution of
pharmaceuticals and medical devices, and human cells, tissue, and cellular and
tissue-based products (“HCT/P”). Among the federal laws with which we
must comply are the Controlled Substances Act, the Federal Food, Drug, and
Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987, and
Section 361 of the Public Health Services Act (“Regulations to Control
Communicable Diseases”). Among other things, such laws, and the
regulations promulgated thereunder:
|
·
|
regulate
the storage and distribution, labeling, packaging, handling, reporting,
record keeping, introduction, manufacturing and marketing of drugs, HCT/P
and medical devices;
|
|
·
|
subject
us to inspection by the United States Food and Drug Administration and the
United States Drug Enforcement
Administration;
|
|
·
|
regulate
the storage, transportation and disposal of certain of our products that
are considered hazardous materials;
|
|
·
|
require
registration with the United States Food and Drug Administration and the
United States Drug Enforcement Administration and various state
agencies;
|
|
·
|
require
record keeping and documentation of transactions involving drug
products;
|
|
·
|
require
us to design and operate a system to identify and report suspicious orders
of controlled substances to the United States Drug Enforcement
Agency;
|
|
·
|
require
us to manage returns of products that have been recalled and subject us to
inspection of our recall procedures and activities;
and
|
|
·
|
impose
reporting requirements if a pharmaceutical, HCT/P or medical device causes
serious illness, injury or death.
|
Applicable
federal, state and local laws and regulations also may require us to meet
various standards relating to, among other things, licensure or registration,
sales and marketing practices, product integrity and supply tracking to the
manufacturer of the product, personnel, privacy and security of health or other
personal information, installation, maintenance and repair of equipment, and the
importation and exportation of products. Our business also is subject
to requirements of similar and other foreign governmental laws and regulations
affecting our operations abroad. The United States Food and Drug
Administration and Drug Enforcement Administration have recently increased their
regulatory and enforcement activities.
The
failure to comply with any of these regulations, or new interpretations of
existing laws and regulations, or the imposition of any additional laws and
regulations, could negatively affect our business. There can be no
assurance that current government regulations will not adversely affect our
business. The costs to us associated with complying with the various
applicable statutes and regulations, as they now exist and as they may be
modified, could be material. Allegations by a governmental body that we have not
complied with these laws could have a material adverse impact on our
businesses. If it is determined that we have not complied with these
laws, we are potentially subject to penalties including warning letters, civil
and criminal penalties, mandatory recall of product, seizure of product and
injunction, and suspension or limitation of product sale and
distribution. If we enter into settlement agreements to resolve
allegations of non-compliance, we could be required to make settlement payments
or be subject to civil and criminal penalties, including fines and the loss of
licenses. Non-compliance with government requirements could adversely
affect our ability to participate in federal and state government healthcare
programs, and damage our reputation. Any of the foregoing could have
a material adverse impact on our businesses. We believe that the
healthcare services industry will continue to be subject to extensive domestic
and foreign government regulation and that we have adequate compliance programs
and controls in place to ensure substantial compliance with the laws and
regulations.
If
we fail to comply with laws and regulations relating to healthcare fraud, we
could suffer penalties or be required to make significant changes to our
operations.
We are
subject to extensive and frequently changing federal and state laws and
regulations relating to healthcare fraud. These measures, which focus
on our relationships with pharmaceutical manufacturers and healthcare providers,
have been subject to varying interpretations, as well as heightened enforcement
activity, over the past few years. Significant enforcement activity
has been the result of actions brought by “relators,” who file complaints in the
name of the United States (and if applicable, particular states) under federal
and state False Claims Act statutes. Damages can be catastrophic if a
violation is found. These healthcare fraud laws and regulations,
among other things, (i) prohibit persons from soliciting, offering, receiving or
paying any remuneration in order to induce the referral of a patient for
treatment or to induce the ordering, purchasing, leasing or arranging for or
recommending ordering, purchasing or leasing of items or services that are in
any way paid for by government-sponsored healthcare programs and (ii) impose a
number of restrictions upon referring physicians and providers of designated
health services under government healthcare programs. While we
believe that we are substantially compliant with all applicable laws, many of
the regulations applicable to us are vague or indefinite and have not been
interpreted by the courts. They may be interpreted or applied by a
prosecutorial, regulatory or judicial authority in a manner that could require
us to make changes in our operations. If we fail to comply with
applicable laws and regulations, we could suffer civil and criminal penalties,
including the loss of licenses or our ability to participate in federal and
state healthcare programs.
Expansion
of group purchasing organizations (“GPO”) or hospital purchasing power and the
multi-tiered costing structure may place us at a competitive
disadvantage.
The
medical-products industry is subject to a multi-tiered costing structure, which
can vary by manufacturer and/or product. Under this structure, certain
institutions can obtain more favorable prices for medical products than we are
able to obtain. The multi-tiered costing structure continues to expand as many
large integrated healthcare providers and others with significant purchasing
power, such as GPOs, demand more favorable pricing terms. This may threaten our
ability to compete effectively, which would in turn negatively impact our
results of operations. Although we are seeking to obtain similar terms from
manufacturers and obtain access to lower prices demanded by GPO contracts or
other contracts, we cannot assure such terms will be obtained or contracts will
be executed.
Our
international operations are subject to inherent risks that could adversely
affect our operating results.
International
operations are subject to risks that may materially adversely affect our
business, results of operations and financial condition. The risks
that our international operations are subject to include, among other
things:
|
·
|
difficulties
and costs relating to staffing and managing foreign
operations;
|
|
·
|
difficulties
in establishing channels of
distribution;
|
|
·
|
fluctuations
in the value of foreign currencies;
|
|
·
|
longer
payment cycles of foreign customers and difficulty of collecting
receivables in foreign
jurisdictions;
|
|
·
|
repatriation
of cash from our foreign operations to the United
States;
|
|
·
|
regulatory
requirements;
|
|
·
|
unexpected
difficulties in importing or exporting our
products;
|
|
·
|
imposition
of import/export duties, quotas, sanctions or penalties;
and
|
|
·
|
unexpected
regulatory, economic and political changes in foreign
markets.
|
We
experience fluctuations in quarterly earnings. As a result, we may
fail to meet or exceed the expectations of securities analysts and investors,
which could cause our stock price to decline.
Our
business is subject to seasonal and other quarterly fluctuations. Net
sales and operating profits generally have been higher in the third and fourth
quarters due to the timing of sales of seasonal products (including influenza
vaccine, equipment and software products), purchasing patterns of office-based
healthcare practitioners and year-end promotions. Net sales and
operating profits generally have been lower in the first quarter, primarily due
to increased sales in the prior two quarters. While recent history
has resulted in flat to declining sales, we expect our historical seasonality of
sales to continue in the foreseeable future. Quarterly results may
also be adversely affected by a variety of other factors,
including:
|
·
|
costs
of developing new applications and
services;
|
|
·
|
costs
related to acquisitions and/or integrations of technologies or
businesses;
|
|
·
|
timing
and amount of sales and marketing
expenditures;
|
|
·
|
timing
of pricing changes offered by our
vendors;
|
|
·
|
timing
of the introduction of new products and services by our
vendors;
|
|
·
|
changes
in or availability of vendor contracts or rebate
programs;
|
|
·
|
vendor
rebates based upon attaining certain growth
goals;
|
|
·
|
changes
in the way vendors introduce or deliver products to
market;
|
|
·
|
exclusivity
requirements with certain vendors may prohibit us from distributing
competitive products manufactured by other
vendors;
|
|
·
|
loss
of sales representatives;
|
|
·
|
general
economic conditions, as well as those specific to the healthcare industry
and related industries;
|
|
·
|
timing
of the release of upgrades and enhancements to our technology-related
products and services;
|
|
·
|
our
success in establishing or maintaining business
relationships;
|
|
·
|
restructuring
charges;
|
|
·
|
changes
in accounting principles;
|
|
·
|
unexpected
difficulties in developing and manufacturing
products;
|
|
·
|
product
demand and availability or recalls by
manufacturers;
|
|
·
|
exposure
to product liability and other claims in the event that the use of the
products we sell results in injury;
and
|
|
·
|
increases
in the cost of shipping or service issues with our third-party
shippers.
|
Any
change in one or more of these or other factors could cause our annual or
quarterly operating results to fluctuate. If our operating results do
not meet market expectations, our stock price may decline.
Because
substantially all of the products that we distribute are not manufactured by us,
we are dependent upon third parties for the manufacture and supply of
substantially all of our products.
We obtain
substantially all of our products from third-party suppliers. Generally, we do
not have long-term contracts with our suppliers committing them to supply
products to us. Therefore, suppliers may not provide the products we
need in the quantities we request. Because we generally do not
control the actual production of the products we sell, we may be subject to
delays caused by interruption in production based on conditions outside of our
control. In the event that any of our third-party suppliers were to
become unable or unwilling to continue to provide the products in required
volumes, we would need to identify and obtain
acceptable
replacement sources on a timely basis. There is no guarantee that we
would be able to obtain such alternative sources of supply on a timely basis, if
at all. An extended interruption in the supply of our products,
including the supply of our influenza vaccine and any other high sales volume
product, would have an adverse effect on our results of operations, which most
likely would adversely affect the value of our common stock.
Our
expansion through acquisitions and joint ventures involves risks.
We have
expanded our domestic and international markets in part through acquisitions and
joint ventures, and we expect to continue to make acquisitions and enter into
joint ventures in the future. Such transactions involve numerous
risks, including possible adverse effects on our operating results or the market
price of our common stock. Some of our acquisitions and future
acquisitions may also give rise to an obligation by us to make contingent
payments or to satisfy certain repurchase obligations, which payments could have
an adverse effect on our results of operations. In addition,
integrating acquired businesses and joint ventures:
|
·
|
may
result in a loss of customers or product lines of the acquired businesses
or joint ventures;
|
|
·
|
requires
significant management attention;
and
|
|
·
|
may
place significant demands on our operations, information systems and
financial resources.
|
There can
be no assurance that our future acquisitions or joint ventures will be
successful. Our ability to continue to successfully effect
acquisitions and joint ventures will depend upon the following:
|
·
|
the
availability of suitable acquisition or joint venture candidates at
acceptable prices;
|
|
·
|
our
ability to consummate such transactions, which could potentially be
prohibited due to U.S. or foreign antitrust
regulations;
|
|
·
|
the
availability of financing on acceptable terms, in the case of non-stock
transactions; and
|
|
·
|
the
liquidity of our investments and our ability to raise capital could be
affected by the financial credit
markets.
|
Our
acquisitions may not result in the benefits and revenue growth we
expect.
We are in
the process of integrating companies that we acquired and including the
operations, services, products and personnel of each company within our
management policies, procedures and strategies. We cannot be sure
that we will achieve the benefits of revenue growth that we expect from these
acquisitions or that we will not incur unforeseen additional costs or expenses
in connection with these acquisitions. To effectively manage our
expected future growth, we must continue to successfully manage our integration
of these companies and continue to improve our operational systems, internal
procedures, working capital management, financial and operational
controls. If we fail in any of these areas, our business could be
adversely affected.
We
face inherent risk of exposure to product liability and other claims in the
event that the use of the products we sell results in injury.
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 products, medical devices,
bone regeneration and other healthcare products. Additionally, we own
a majority interest in companies that manufacture certain dental products. As a
result, we are subject to the potential risk of product liability or other
claims relating to the manufacture and distribution of products by those
entities. One of the potential risks we face in the distribution of
our products is liability resulting from counterfeit or tainted products
infiltrating the supply chain. In addition, some of the products that
we transport and sell are considered hazardous materials. The
improper handling of such materials or accidents involving the
transportation
of such materials could subject us to liability. We have various
insurance policies, including product liability insurance, covering risks and in
amounts that we consider adequate. In many cases in which we have
been sued in connection with products manufactured by others, the manufacturer
of the product 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. A successful
claim brought against us in excess of available insurance or not covered by
indemnification agreements, or any claim that results in significant adverse
publicity against us, could have an adverse effect on our business.
Our
technology segment depends upon continued software and e-services product
development, technical support and successful marketing.
Competition
among companies supplying practice management software and/or e-services is
intense and increasing. Our future sales of practice management
software and e-services will depend on, among other factors:
|
·
|
the
effectiveness of our sales and marketing
programs;
|
|
·
|
our
ability to enhance our products and services;
and
|
|
·
|
our
ability to provide ongoing technical
support.
|
We cannot
be sure that we will be successful in introducing and marketing new software,
software enhancements or e-services, or that such software, software
enhancements and e-services will be released on time or accepted by the
market. Our software and applicable e-services products, like
software products generally, may contain undetected errors or bugs when
introduced or as new versions are released. We cannot be sure that
future problems with post-release software errors or bugs will not
occur. Any such defective software may result in increased expenses
related to the software and could adversely affect our relationships with the
customers using such software. We do not have any patents on our
software or e-services, and rely upon copyright, trademark and trade secret
laws, as well as contractual and common law protections. We cannot
provide assurance that such legal protections will be available or enforceable
to protect our software or e-services products.
Risks
generally associated with our information systems could adversely affect our
results of operations.
We rely
on information systems in our business to obtain, rapidly process, analyze and
manage data to, among other things:
|
·
|
maintain
and manage worldwide systems to facilitate the purchase and distribution
of thousands of inventory items from numerous distribution
centers;
|
|
·
|
receive,
process and ship orders on a timely
basis;
|
|
·
|
manage
the accurate billing and collections for thousands of customers;
and
|
|
·
|
process
payments to suppliers.
|
Our
results of operations could be adversely affected if these systems are
interrupted, damaged by unforeseen events, or fail for any extended period of
time.
Our
revenues depend on our relationships with capable sales personnel as well as
customers, suppliers and manufacturers of the products that we
distribute.
Our
future operating results depend on our ability to maintain satisfactory
relationships with qualified sales personnel as well as customers, suppliers and
manufacturers. If we fail to maintain our existing relationships with
such persons or fail to acquire relationships with such key persons in the
future, our business may be adversely affected.
Our
future success is substantially dependent upon our senior
management.
Our
future success is substantially dependent upon the efforts and abilities of
members of our existing senior management, particularly Stanley M. Bergman,
Chairman and Chief Executive Officer, among others. The loss of the
services of Mr. Bergman could have a material adverse effect on our
business. We have an employment agreement with Mr.
Bergman. We do not currently have “key man” life insurance policies
on any of our employees. Competition for senior management is
intense, and we may not be successful in attracting and retaining key
personnel.
Increases
in the cost of shipping or service issues with our third-party shippers could
harm our business.
Shipping
is a significant expense in the operation of our business. We ship
almost all of our orders through third-party delivery services, and typically
bear the cost of shipment. Accordingly, any significant increase in
shipping rates could have an adverse effect on our operating
results. Similarly, strikes or other service interruptions by those
shippers could cause our operating expenses to rise and adversely affect our
ability to deliver products on a timely basis.
We
may not be able to respond to technological change effectively.
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 continued 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 changing demands of consumers and our clients on a timely basis,
particularly in response to competitive offerings. Our inability to
anticipate and effectively respond to changes on a timely basis could have an
adverse effect on our business.
The
market price for our common stock may be highly volatile.
The
market price for our common stock may be highly volatile. A variety
of factors may have a significant impact on the market price of our common
stock, including:
|
·
|
the
publication of earnings estimates or other research reports and
speculation in the press or investment
community;
|
|
·
|
changes
in our industry and competitors;
|
|
·
|
our
financial condition, results of operations and cash flows and
prospects;
|
|
·
|
stock
repurchases;
|
|
·
|
any
future issuances of our common stock, which may include primary offerings
for cash, stock splits, issuances in connection with business
acquisitions, restricted stock/units and the grant or exercise of stock
options from time to time;
|
|
·
|
the
dilutive impact of convertible debt on our earnings per
share;
|
|
·
|
general
market and economic conditions; and
|
|
·
|
any
outbreak or escalation of hostilities in areas where we do
business.
|
In
addition, the Nasdaq Stock Market can experience extreme price and volume
fluctuations that can be unrelated or disproportionate to the operating
performance of the companies listed on Nasdaq. Broad market and
industry factors may negatively affect the market price of our common stock,
regardless of actual operating performance. In the past, following
periods of volatility in the market price of a company’s securities, securities
class action litigation has often been instituted against
companies. This type of litigation, if instituted, could result in
substantial costs and a diversion of management’s attention and resources, which
would have an adverse effect on our business.
Certain
provisions in our governing documents and other documents to which we are a
party may discourage third-party offers to acquire us that might otherwise
result in our stockholders receiving a premium over the market price of their
shares.
The
provisions of our certificate of incorporation and by-laws may make it more
difficult for a third party to acquire us, may discourage acquisition bids and
may limit the price that certain investors might be willing to pay in the future
for shares of our common stock. These provisions, among other
things:
|
·
|
require
the affirmative vote of the holders of at least 60% of the shares of
common stock entitled to vote to approve a merger, consolidation, or a
sale, lease, transfer or exchange of all or substantially all of our
assets; and
|
|
·
|
require
the affirmative vote of the holders of at least 66 2/3% of our common
stock entitled to vote to:
|
|
·
|
remove
a director; and
|
|
·
|
to
amend or repeal our by-laws, with certain limited
exceptions.
|
In
addition, our 1994 Stock Incentive Plan, 1996 Non-Employee Director Stock
Incentive Plan and 2001 Non-Employee Director Incentive Plan provide for
accelerated vesting of stock options upon a change in control, and certain
agreements between us and our executive officers provide for increased severance
payments if those executive officers are terminated without cause by the Company
or if they terminate for good reason in each case, within two years after a
change in control or within ninety days prior to the effective date of the
change in control or after the first public announcement of the pendency of the
change in control.
Tax legislation initiatives could
adversely affect our net earnings and tax liabilities.
We are
subject to the tax laws and regulations of the United States federal, state and
local governments, as well as foreign jurisdictions. From time to
time, various legislative initiatives may be proposed that could adversely
affect our tax positions. There can be no assurance that our effective tax rate
will not be adversely affected by these initiatives. In addition, tax
laws and regulations are extremely complex and subject to varying
interpretations. Although we believe that our historical tax
positions are sound and consistent with applicable laws, regulations and
existing precedent, there can be no assurance that our tax positions will not be
challenged by relevant tax authorities or that we would be successful in any
such challenge.
We have
no unresolved comments from the staff of the United States Securities and
Exchange Commission that were issued 180 days or more preceding the end of our
2009 fiscal year.
We own or
lease the following properties:
|
Own
or
|
Approximate
|
Lease
Expiration
|
||||||
|
Property
|
Location
|
Lease
|
Square
Footage
|
Date
|
||||
|
Corporate
Headquarters
|
Melville,
NY
|
Own
|
105,000
|
N/A
|
||||
|
Corporate
Headquarters
|
Melville,
NY
|
Lease
|
185,000
|
July
2020
|
||||
|
Office
and Distribution Center
|
West
Allis, WI
|
Lease
|
106,000
|
October
2017
|
||||
|
Distribution
Center
|
Denver,
PA
|
Lease
|
613,000
|
February
2013
|
||||
|
Distribution
Center
|
Indianapolis,
IN
|
Own
|
287,000
|
N/A
|
||||
|
Distribution
Center
|
Indianapolis,
IN
|
Lease
|
144,000
|
June
2011
|
||||
|
Distribution
Center
|
Grapevine,
TX
|
Lease
|
242,000
|
July
2013
|
||||
|
Distribution
Center
|
Gallin,
Germany
|
Own
|
215,000
|
N/A
|
||||
|
Distribution
Center
|
Jacksonville,
FL
|
Lease
|
212,000
|
June
2013
|
||||
|
Distribution
Center
|
Niagara
on the Lake, Canada
|
Lease
|
94,000
|
September
2016
|
||||
|
Distribution
Center
|
Sparks,
NV
|
Lease
|
338,000
|
February
2011
|
||||
|
Office
and Distribution Center
|
Gillingham,
United Kingdom
|
Lease
|
103,000
|
April
2010
|
||||
|
Distribution
Center
|
Tours,
France
|
Own
|
133,000
|
N/A
|
||||
|
Distribution
Center
|
Lyssach,
Switzerland
|
Lease
|
180,000
|
July
2016
|
The
properties listed in the table above are our principal properties primarily used
by our healthcare distribution segment. In addition, we lease
numerous other distribution, office, showroom, manufacturing and sales space in
locations including the United States, Australia, Austria, Belgium, Canada,
China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel,
Italy, Luxembourg, the Netherlands, New Zealand, Portugal, Spain, Switzerland
and the United Kingdom.
We
believe that our properties are in good condition, are well maintained and are
suitable and adequate to carry on our business. We have additional
operating capacity at certain distribution center facilities.
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 otherwise have a
material adverse effect on our financial condition or results of
operations.
As of
December 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.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of fiscal 2009.
PART
II
Our
common stock is traded on the NASDAQ Global Select Market tier of the Nasdaq
Stock Market, or NASDAQ, under the symbol HSIC. On October 2, 2007,
our common stock became a component of the NASDAQ-100 stock market
index. The following table sets forth, for the periods indicated, the
high and low reported sales prices of our common stock as reported on NASDAQ for
each quarterly period in fiscal 2009 and 2008:
|
High
|
Low
|
|||||||
|
Fiscal
2009:
|
||||||||
|
1st
Quarter
|
$ | 40.60 | $ | 33.55 | ||||
|
2nd
Quarter
|
47.70 | 38.77 | ||||||
|
3rd
Quarter
|
56.50 | 43.82 | ||||||
|
4th
Quarter
|
56.92 | 49.10 | ||||||
|
Fiscal
2008:
|
||||||||
|
1st
Quarter
|
$ | 63.62 | $ | 55.25 | ||||
|
2nd
Quarter
|
59.43 | 50.74 | ||||||
|
3rd
Quarter
|
60.42 | 48.93 | ||||||
|
4th
Quarter
|
55.66 | 32.08 | ||||||
On
February 12, 2010, there were approximately 1,040 holders of record of our
common stock and the last reported sales price was $56.17.
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 December 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 December 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
|
|
|
09/27/09
through 10/31/09
|
1,092,852
|
|
|
11/01/09
through 11/28/09
|
1,146,226
|
|
|
11/29/09
through 12/26/09
|
1,089,142
|
Dividend
Policy
We have
not declared any cash dividends on our common stock during fiscal years 2009 or
2008. We currently do not anticipate declaring any cash dividends on
our common stock in the foreseeable future. We intend to retain
earnings to finance the expansion of our business and for general corporate
purposes, including our stock repurchase program. Any declaration of
dividends will be at the discretion of our Board of Directors and will depend
upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The agreements governing our senior notes limit the
distribution of dividends without the prior written consent of the lenders
(limited to $25.0 million, plus 80% of cumulative net income, plus net proceeds
from the issuance of additional capital stock). As of December 26,
2009, the amount of retained earnings free of restrictions was $962.6
million.
Stock
Performance Graph
The graph
below compares the cumulative total stockholder return on $100 invested,
assuming the reinvestment of all dividends, on December 25, 2004, the last
trading day before the beginning of our 2005 fiscal year, through the end of
fiscal 2009 with the cumulative total return on $100 invested for the same
period in the Dow Jones U.S. Health Care Index and the NASDAQ Stock Market (U.S.
companies) Composite Index.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
ASSUMES
$100 INVESTED ON DECEMBER 25, 2004
ASSUMES
DIVIDENDS REINVESTED
|
December
25,
|
December
31,
|
December
30,
|
December
29,
|
December
27,
|
December
26,
|
|||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
|
Henry
Schein, Inc.
|
$ | 100.00 | $ | 129.04 | $ | 144.83 | $ | 183.47 | $ | 104.61 | $ | 156.74 | ||||||||||||
|
Dow
Jones U.S. Health
|
||||||||||||||||||||||||
|
Care
Index
|
100.00 | 108.32 | 115.78 | 125.46 | 96.85 | 117.87 | ||||||||||||||||||
|
NASDAQ
Stock Market
|
||||||||||||||||||||||||
|
(U.S.
companies) Composite Index
|
100.00 | 101.33 | 114.01 | 123.71 | 73.11 | 105.61 | ||||||||||||||||||
The
following selected financial data, with respect to our financial position and
results of operations for each of the five fiscal years in the period ended
December 26, 2009, set forth below, has been derived from, should be read in
conjunction with and is qualified in its entirety by reference to, our
consolidated financial statements and notes thereto. The selected
financial data presented below should also be read in conjunction with ITEM 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and ITEM 8, “Financial Statements and Supplementary
Data.”
|
Years
ended
|
||||||||||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
December
30,
|
December
31,
|
||||||||||||||||
|
2009
|
2008
(1) (2)
|
2007
(1) (2)
|
2006
(1) (2)
|
2005
(1) (2)
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | $ | 5,021,523 | $ | 4,513,127 | ||||||||||
|
Gross
profit
|
1,916,820 | 1,874,295 | 1,706,092 | 1,459,330 | 1,299,562 | |||||||||||||||
|
Selling,
general and administrative
|
||||||||||||||||||||
|
expenses
|
1,449,715 | 1,431,769 | 1,319,153 | 1,155,215 | 1,037,445 | |||||||||||||||
|
Restructuring
costs (3)
|
3,020 | 23,240 | - | - | - | |||||||||||||||
|
Operating
income
|
464,085 | 419,286 | 386,939 | 304,115 | 262,117 | |||||||||||||||
|
Other
expense, net
|
(11,365 | ) | (23,837 | ) | (8,430 | ) | (13,529 | ) | (20,765 | ) | ||||||||||
|
Income
from continuing operations before taxes,
|
||||||||||||||||||||
|
equity
in earnings (losses) of affiliates and
|
||||||||||||||||||||
|
noncontrolling
interests
|
452,720 | 395,449 | 378,509 | 290,586 | 241,352 | |||||||||||||||
|
Income
taxes
|
(127,521 | ) | (131,210 | ) | (128,556 | ) | (103,440 | ) | (88,299 | ) | ||||||||||
|
Equity
in earnings (losses)
|
||||||||||||||||||||
|
of
affiliates
|
5,243 | 5,037 | (73 | ) | 835 | 827 | ||||||||||||||
|
Income
from continuing operations
|
330,442 | 269,276 | 249,880 | 187,981 | 153,880 | |||||||||||||||
|
Income
(loss) from discontinued
|
||||||||||||||||||||
|
operations,
net of tax (4)
|
2,715 | (7,902 | ) | (20,704 | ) | (19,304 | ) | (11,161 | ) | |||||||||||
|
Net
income
|
333,157 | 261,374 | 229,176 | 168,677 | 142,719 | |||||||||||||||
|
Less:
Net income attributable to
|
||||||||||||||||||||
|
noncontrolling
interests
|
(22,004 | ) | (21,917 | ) | (17,442 | ) | (8,090 | ) | (5,963 | ) | ||||||||||
|
Net
income attributable to
|
||||||||||||||||||||
|
Henry
Schein, Inc.
|
$ | 311,153 | $ | 239,457 | $ | 211,734 | $ | 160,587 | $ | 136,756 | ||||||||||
|
Amounts
attributable to
|
||||||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||||||
|
Income
from continuing operations
|
308,551 | 247,347 | 232,529 | 180,049 | 147,848 | |||||||||||||||
|
Income
(loss) from discontinued
|
||||||||||||||||||||
|
operations,
net of tax
|
2,602 | (7,890 | ) | (20,795 | ) | (19,462 | ) | (11,092 | ) | |||||||||||
|
Net
income
|
$ | 311,153 | $ | 239,457 | $ | 211,734 | $ | 160,587 | $ | 136,756 | ||||||||||
|
Earnings
(loss) per share attributable to
|
||||||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||||||
|
From
continuing operations:
|
||||||||||||||||||||
|
Basic
|
$ | 3.47 | $ | 2.78 | $ | 2.63 | $ | 2.05 | $ | 1.70 | ||||||||||
|
Diluted
|
3.41 | 2.71 | 2.55 | 2.00 | 1.67 | |||||||||||||||
|
From
discontinued operations:
|
||||||||||||||||||||
|
Basic
|
$ | 0.03 | $ | (0.09 | ) | $ | (0.24 | ) | $ | (0.22 | ) | $ | (0.13 | ) | ||||||
|
Diluted
|
0.03 | (0.08 | ) | (0.23 | ) | (0.21 | ) | (0.12 | ) | |||||||||||
|
From
net income:
|
||||||||||||||||||||
|
Basic
|
$ | 3.50 | $ | 2.69 | $ | 2.39 | $ | 1.83 | $ | 1.57 | ||||||||||
|
Diluted
|
3.44 | 2.63 | 2.32 | 1.79 | 1.55 | |||||||||||||||
|
Weighted-average
common
|
||||||||||||||||||||
|
shares
outstanding:
|
||||||||||||||||||||
|
Basic
|
88,872 | 89,080 | 88,559 | 87,952 | 87,006 | |||||||||||||||
|
Diluted
|
90,556 | 91,221 | 91,163 | 89,820 | 88,489 | |||||||||||||||
|
Years
ended
|
||||||||||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
December
30,
|
December
31,
|
||||||||||||||||
|
2009
|
2008
(1)
|
2007
(1)
|
2006
(1)
|
2005
(1)
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Net
Sales by Market Data:
|
||||||||||||||||||||
|
Healthcare
distribution (5):
|
||||||||||||||||||||
|
Dental
(6)
|
$ | 2,509,921 | $ | 2,567,064 | $ | 2,447,841 | $ | 2,122,415 | $ | 1,883,748 | ||||||||||
|
Medical
(7)
|
1,457,102 | 1,428,968 | 1,540,269 | 1,398,996 | 1,284,214 | |||||||||||||||
|
International
(8)
|
2,398,105 | 2,221,092 | 1,769,881 | 1,401,889 | 1,256,910 | |||||||||||||||
|
Total
healthcare distribution
|
6,365,128 | 6,217,124 | 5,757,991 | 4,923,300 | 4,424,872 | |||||||||||||||
|
Technology
(9)
|
173,208 | 163,289 | 131,893 | 98,223 | 88,255 | |||||||||||||||
|
Total
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | $ | 5,021,523 | $ | 4,513,127 | ||||||||||
|
As
of
|
||||||||||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
December
30,
|
December
31,
|
||||||||||||||||
| 2009 | 2008 (2) | 2007 (2) | 2006 (2) | 2005 (2) | ||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
Sheet data:
|
||||||||||||||||||||
|
Total
assets
|
$ | 3,835,985 | $ | 3,599,210 | $ | 3,313,472 | $ | 2,880,547 | $ | 2,582,436 | ||||||||||
|
Long-term
debt
|
243,373 | 256,648 | 407,627 | 434,804 | 463,455 | |||||||||||||||
|
Redeemable
noncontrolling interests
|
178,570 | 233,035 | 150,028 | 111,902 | 72,433 | |||||||||||||||
|
Stockholders'
equity
|
2,161,508 | 1,772,354 | 1,674,987 | 1,393,356 | 1,204,795 | |||||||||||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued operations as further described
below.
|
|
(2)
|
Adjusted
to reflect the effects of the 2009 adoption of provisions contained within
Accounting Standards Codification (“ASC”) Topic 470-20, “Debt with
Conversion and Other Options.” Also, reflects the adoption of ASC Topic
810-10-65, relating to consolidations, that requires a noncontrolling
interest in a subsidiary be reported as equity in our consolidated
financial statements. Consolidated net income includes the net
income for both the parent and the noncontrolling
interest. Additionally, reflects the adoption of provisions of
ASC Topic 480-10 related to 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
agreement.
|
|
(3)
|
Restructuring
costs for the year ended December 26, 2009 consist primarily of employee
severance costs, including severance pay and benefits of $1.5 million and
facility closing costs of $1.5 million. Restructuring costs for
the year ended December 27, 2008 consist primarily of employee severance
costs, including severance pay and benefits of $18.6 million, facility
closing costs of $3.8 million and other professional and consulting costs
of $0.8 million. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Plans of Restructuring”
herein and the consolidated financial statements and related notes
contained in ITEM 8.
|
|
(4)
|
On
August 5, 2009, we completed the sale of a wholesaler of dental
consumables for aggregate consideration of $14.2 million, of which $13.2
million has been received as of December 26, 2009. As a result
of this sale, included in operating results from discontinued operations
for 2009 is a net gain, net of tax, of $2.6 million or $0.03 per diluted
share.
|
During
the fourth quarter of 2008, we recorded an impairment charge of $11.2 million
($7.3 million, net of tax), or $0.08 per diluted share, related to the exit from
our wholesale ultrasound business.
During
2007, we sold substantially all of the assets of our oncology pharmaceutical and
specialty pharmacy businesses, previously reported as part of our healthcare
distribution reportable segment. The aggregate sales price was $14.3
million, which was received during the third and fourth quarters of
2007. As a result of these sales, included in the operating results
from discontinued operations for 2007 is a net gain, net of tax, of
approximately $0.7 million or $0.01 per diluted share. We recorded an impairment
charge to our related long-lived assets of approximately $20.6 million, net of
tax, or $(0.23) per diluted share in 2007.
On April
1, 2006, we sold substantially all of the assets of our Hospital Supply
Business, previously reported as part of our healthcare distribution reportable
segment. The sale price was $36.5 million, which was received during
the second quarter of 2006. As a result of this sale, included in the
operating results from discontinued operations for 2007 is a $0.3 million ($0.2
million after-tax) expense relating to contract
contingencies. Included in operating results from discontinued
operations for 2006 is a $32.3 million ($19.4 million after-tax) loss on the
sale, including $3.5 million ($2.1 million after-tax) of transitional service
obligations and selling costs. Also, because the decision to divest
this business was reached in 2005, we recorded an impairment charge to our
long-lived assets of approximately $7.0 million, net of tax, or $(0.08) per
diluted share in 2005.
|
(5)
|
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.
|
|
(6)
|
Consists
of products sold in the United States and
Canada.
|
|
(7)
|
Consists
of products sold in the United States’ medical and animal health
markets.
|
|
(8)
|
Consists
of products sold in the dental, medical and animal health markets,
primarily in Europe.
|
|
(9)
|
Consists
of practice management software and other value-added products and
services, which are sold primarily to healthcare providers in the United
States, Canada, the United Kingdom, Australia and New Zealand for the
years 2007 through 2009 and the United States and Canada for the years
2005 and 2006.
|
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; effects of a highly competitive market;
changes in the healthcare industry; changes in regulatory requirements; risks
from expansion of customer purchasing power and multi-tiered costing structures;
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; risks from disruption to our information systems; our
dependence upon sales personnel, manufacturers and 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; 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. 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 600,000 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 77 years of experience distributing
healthcare products.
We are
headquartered in Melville, New York, employ more than 12,500 people (of which
over 5,500 are based outside the United States) and have operations in the
United States, Australia, Austria, Belgium, Canada, China, the Czech Republic,
France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the
Netherlands, New Zealand, Portugal, Spain, Switzerland and the United
Kingdom. We also have affiliates in Iceland, Saudi Arabia and the
United Arab Emirates.
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, on a non-recourse basis, 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 2009 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. 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.
Government
Influences
The
healthcare industry is subject to extensive government regulation, licensure and
operating compliance procedures. National healthcare reform has been
the subject of a number of legislative initiatives by
Congress. Additionally, government and private insurance programs
fund a large portion of the total cost of medical care. The Balanced
Budget Act passed by Congress in 1997 significantly reduced reimbursement rates
for nursing homes and home healthcare providers, affecting spending levels and
the overall financial viability of these institutions.
The
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 is 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.
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 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
pharmaceutical distribution system. Regulations adopted under the federal
Prescription Drug Marketing Act, or PDMA, effective December 2006, require the
identification and documentation of transactions involving the receipt and
distribution of prescription drugs, that is, drug pedigree
information. In early December 2006, the federal District Court for
the Eastern District of New York issued a preliminary injunction, enjoining the
implementation of some of the federal drug pedigree requirements, in response to
a case initiated by secondary distributors. On December 31, 2009, the
U.S. District Court granted a motion to extend the time for either party to
re-open the matter (which had been administratively closed in light of potential
legislative action by Congress), and the Court in effect extended the injunction
through September 30, 2010. 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.
Results
of Operations
The
following table summarizes the significant components of our operating results
and cash flows for each of the three years ended December 26, 2009, December 27,
2008 and December 29, 2007 (in thousands):
|
Years
ended
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(1) (2)
|
2007
(1) (2)
|
||||||||||
|
Operating
Results:
|
||||||||||||
|
Net
sales
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | ||||||
|
Cost
of sales
|
4,621,516 | 4,506,118 | 4,183,792 | |||||||||
|
Gross
profit
|
1,916,820 | 1,874,295 | 1,706,092 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Selling,
general and administrative
|
1,449,715 | 1,431,769 | 1,319,153 | |||||||||
|
Restructuring
costs
|
3,020 | 23,240 | - | |||||||||
|
Operating
income
|
$ | 464,085 | $ | 419,286 | $ | 386,939 | ||||||
|
Other
expense, net
|
$ | (11,365 | ) | $ | (23,837 | ) | $ | (8,430 | ) | |||
|
Income
from continuing operations
|
330,442 | 269,276 | 249,880 | |||||||||
|
Income
from continuing operations attributable
|
||||||||||||
|
to
Henry Schein, Inc.
|
308,551 | 247,347 | 232,529 | |||||||||
|
Years
ended
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(2)
|
2007
(2)
|
||||||||||
|
Cash
Flows:
|
||||||||||||
|
Net
cash provided by operating activities
|
$ | 396,890 | $ | 384,782 | $ | 270,344 | ||||||
|
Net
cash used in investing activities
|
(97,448 | ) | (168,010 | ) | (235,292 | ) | ||||||
|
Net
cash used in financing activities
|
(197,675 | ) | (87,970 | ) | (38,008 | ) | ||||||
|
(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.”
|
Plans
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. During the years ended December 26, 2009
and December 27, 2008, we recorded one-time restructuring costs of approximately
$3.0 million (approximately $2.1 million after taxes) and $23.2 million
(approximately $16.0 million after taxes), respectively. The costs
associated with the restructuring are included in a separate line item,
“Restructuring costs,” within our consolidated statements of income. The
majority of these costs have been paid as of December 26,
2009. Annual pretax cost savings from this initiative are expected to
be between $24.0 million and $27.0 million.
In
addition, during the first quarter of 2010, we expect to complete an additional
restructuring in order to further reduce operating expenses. This
restructuring includes headcount reductions, as well as the closing of
facilities. The restructure is primarily concentrated in our European
operations and is part of our overall plan to increase international operating
margins. These restructuring costs are expected to be in the $10
million to $12 million range ($7 million to $9 million after taxes) and are
expected to be reported in the first quarter of 2010. However, timing
of certain actions may cause some restructuring costs to be reported
later.
2009
Compared to 2008
Net
Sales
Net sales
for 2009 and 2008 were as follows (in thousands):
|
%
of
|
%
of
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2009
|
Total
|
2008
(1)
|
Total
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution (2):
|
||||||||||||||||||||||||
|
Dental
(3)
|
$ | 2,509,921 | 38.4 | % | $ | 2,567,064 | 40.2 | % | $ | (57,143 | ) | (2.2 | )% | |||||||||||
|
Medical
(4)
|
1,457,102 | 22.3 | 1,428,968 | 22.4 | 28,134 | 2.0 | ||||||||||||||||||
|
International
(5)
|
2,398,105 | 36.7 | 2,221,092 | 34.8 | 177,013 | 8.0 | ||||||||||||||||||
|
Total
healthcare distribution
|
6,365,128 | 97.4 | 6,217,124 | 97.4 | 148,004 | 2.4 | ||||||||||||||||||
|
Technology
(6)
|
173,208 | 2.6 | 163,289 | 2.6 | 9,919 | 6.1 | ||||||||||||||||||
|
Total
|
$ | 6,538,336 | 100.0 | % | $ | 6,380,413 | 100.0 | % | $ | 157,923 | 2.5 | |||||||||||||
|
(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 sold primarily to healthcare providers in the United
States, Canada, the United Kingdom, Australia and New
Zealand.
|
The
$157.9 million, or 2.5%, increase in net sales for the year ended December 26,
2009 includes an increase of 5.7% local currency growth (0.9% internally
generated revenue and 4.8% growth from acquisitions) offset by a decrease of
3.2% related to foreign currency exchange. Excluding sales of
influenza vaccines, sales increased 6.6%. Sales of influenza vaccines
declined in 2009 compared to 2008 due to manufacturers’ supply
shortage.
The $57.1
million, or 2.2%, decrease in dental net sales for the year ended December 26,
2009 includes a decrease of 1.6% in local currencies (4.0% decline in internally
generated revenue offset by 2.4% growth from acquisitions) and a decrease of
0.6% related to foreign currency exchange. The 1.6% decline in local
currency sales was due to a decline in dental equipment sales and service
revenues of 10.6% (11.3% decline in internally generated revenue reduced by 0.7%
growth from acquisitions) offset by dental consumable merchandise sales growth
of 1.9% (1.2% decrease in internally generated revenue reduced by 3.1% growth
from acquisitions).
The $28.1
million, or 2.0%, increase in medical net sales for the year ended December 26,
2009 includes an increase in internally generated revenue of 0.8% and
acquisition growth of 1.2%. Excluding sales of influenza vaccines,
which declined in 2009, medical sales increased 5.9%.
The
$177.0 million, or 8.0%, increase in international net sales for the year ended
December 26, 2009 includes sales growth of 16.4% in local currencies (6.2%
internally generated growth and 10.2% growth from acquisitions) offset by a
decrease of 8.4% related to foreign currency exchange.
The $9.9
million, or 6.1%, increase in technology net sales for the year ended December
26, 2009 includes an increase of 8.3% in local currency growth (6.7% internally
generated growth and 1.6% growth from acquisitions) offset by a decrease of 2.2%
related to foreign currency exchange. During the year, we experienced
continued growth in electronic services as well as solid sales of technology
products in our international markets.
Gross
Profit
Gross
profit and gross margins for 2009 and 2008 by segment and in total were as
follows (in thousands):
|
Gross
|
Gross
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2009
|
Margin
%
|
2008
(1)
|
Margin
%
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution
|
$ | 1,792,516 | 28.2 | % | $ | 1,753,655 | 28.2 | % | $ | 38,861 | 2.2 | % | ||||||||||||
|
Technology
|
124,304 | 71.8 | 120,640 | 73.9 | 3,664 | 3.0 | ||||||||||||||||||
|
Total
|
$ | 1,916,820 | 29.3 | $ | 1,874,295 | 29.4 | $ | 42,525 | 2.3 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Gross
profit increased $42.5 million, or 2.3%, for the year ended December 26, 2009
compared to the 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. For a number of reasons, the software industry typically realizes
higher gross margins to recover investments in research and
development.
Healthcare
distribution gross profit increased $38.9 million, or 2.2%, for the year ended
December 26, 2009 compared to the prior year period. Healthcare
distribution gross profit margin remained constant at 28.2% for the year ended
December 26, 2009 compared with the comparable prior year period.
Technology
gross profit increased $3.7 million, or 3.0%, for the year ended December 26,
2009 compared to the prior year period. Technology gross profit
margin decreased to 71.8% for the year ended December 26, 2009 from 73.9% for
the comparable prior year period, primarily due to changes in the product sales
mix.
Selling,
General and Administrative
Selling,
general and administrative expenses by segment and in total for 2009 and 2008
were as follows (in thousands):
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Respective
|
Respective
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2009
|
Net
Sales
|
2008
(1)
|
Net
Sales
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution
|
$ | 1,387,581 | 21.8 | % | $ | 1,368,108 | 22.0 | % | $ | 19,473 | 1.4 | % | ||||||||||||
|
Technology
|
62,134 | 35.9 | 63,661 | 39.0 | (1,527 | ) | (2.4 | ) | ||||||||||||||||
|
Total
|
$ | 1,449,715 | 22.2 | $ | 1,431,769 | 22.4 | $ | 17,946 | 1.3 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Selling,
general and administrative expenses increased by $17.9 million, or 1.3%, for the
year ended December 26, 2009 compared to the prior year period. This
increase results from $10.5 million in expense reductions and a $28.4 million
net increase from the effects of 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 22.2% from 22.4% from the comparable year
period.
As a
component of total selling, general and administrative expenses, selling
expenses decreased $9.7 million, or 1.0%, for the year ended December 26, 2009
from the prior year period. As a percentage of net sales, selling
expenses decreased to 14.7% from 15.2% for the comparable prior year
period.
As a
component of total selling, general and administrative expenses, general and
administrative expenses increased $27.6 million, or 6.0%, for the year ended
December 26, 2009 from the prior year period. As a percentage of net
sales, general and administrative expenses increased to 7.5% from 7.2% for the
comparable prior year period.
Other
Expense, Net
Other
expense, net for the years ended 2009 and 2008 was as follows (in
thousands):
|
Increase
/ (Decrease)
|
||||||||||||||||
|
2009
|
2008
(1) (2)
|
$ | % | |||||||||||||
|
Interest
income
|
$ | 9,979 | $ | 16,355 | $ | (6,376 | ) | (39.0 | )% | |||||||
|
Interest
expense
|
(23,370 | ) | (34,605 | ) | 11,235 | 32.5 | ||||||||||
|
Other,
net
|
2,026 | (5,587 | ) | 7,613 | 136.3 | |||||||||||
|
Other
expense, net
|
$ | (11,365 | ) | $ | (23,837 | ) | $ | 12,472 | 52.3 | |||||||
|
(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 $12.5 million to $11.4 million for the year ended
December 26, 2009 from the comparable prior year period. The decrease
was primarily the result of decreased interest expense of $11.2 million due to
repayment of our $130.0 million senior notes on June 30, 2009, as well as lower
interest rates on our floating debt, partially offset by a decrease in interest
income of $6.4 million resulting from lower interest rates on our invested
funds. In addition, Other, net increased by $7.6 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
year ended December 26, 2009, our effective tax rate from continuing operations
was 28.2% compared to 33.2% for the prior year period. The difference
is primarily related to a reduction in the valuation allowance on certain
foreign deferred tax assets related to net operating losses, as well as
additional tax planning, settlements of tax audits and higher income from lower
taxing countries. 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 year ended December 26, 2009
would have been 32.8%. The remaining difference in our effective tax
rate between 2009 and 2008 is due to foreign and state income
taxes. For 2010, we expect our effective tax rate to be in the range
of 32.5% to 33.5%.
Loss
from Discontinued Operations
During
the years ended December 26, 2009 and December 27, 2008, respectively, we
recognized aggregate gains and (losses) of $2.6 million and $(7.9) million, net
of tax, respectively, related to discontinued operations (see Note 7 in the
accompanying annual consolidated financial statements for further
discussion).
Net
Income
Net
income increased $71.8 million, or 27.5%, for the year ended December 26, 2009
compared to the prior year period. The increase in net income is
primarily due to the factors noted above.
2008 Compared to
2007
Net
Sales
Net sales
for 2008 and 2007 were as follows (in thousands):
|
%
of
|
%
of
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2008
(1)
|
Total
|
2007
(1)
|
Total
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution (2):
|
||||||||||||||||||||||||
|
Dental
(3)
|
$ | 2,567,064 | 40.2 | % | $ | 2,447,841 | 41.6 | % | $ | 119,223 | 4.9 | % | ||||||||||||
|
Medical
(4)
|
1,428,968 | 22.4 | 1,540,269 | 26.2 | (111,301 | ) | (7.2 | ) | ||||||||||||||||
|
International
(5)
|
2,221,092 | 34.8 | 1,769,881 | 30.0 | 451,211 | 25.5 | ||||||||||||||||||
|
Total
healthcare distribution
|
6,217,124 | 97.4 | 5,757,991 | 97.8 | 459,133 | 8.0 | ||||||||||||||||||
|
Technology
(6)
|
163,289 | 2.6 | 131,893 | 2.2 | 31,396 | 23.8 | ||||||||||||||||||
|
Total
|
$ | 6,380,413 | 100.0 | % | $ | 5,889,884 | 100.0 | % | $ | 490,529 | 8.3 | |||||||||||||
|
(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 sold primarily to healthcare providers in the United
States, Canada, the United Kingdom, Australia and New
Zealand.
|
The
$490.5 million, or 8.3%, increase in net sales for the year ended December 27,
2008 includes an increase of 7.5% local currency growth (1.3% internally
generated revenue and 6.2% growth from acquisitions) and 0.8% related to foreign
currency exchange.
The
$119.2 million, or 4.9%, increase in dental net sales for the year ended
December 27, 2008 includes an increase of 4.8% in local currencies (4.0%
internally generated revenue and 0.8% growth from acquisitions) and 0.1% related
to foreign exchange. The 4.8% local currency growth was due to dental
consumable merchandise sales growth of 5.0% (4.2% internally generated revenue
and 0.8% growth from acquisitions) and dental equipment sales and service growth
of 4.2% (3.6% internally generated revenue and 0.6% growth from
acquisitions). The growth in equipment sales was primarily due to
gains in both traditional equipment and high-tech products.
The
$111.3 million, or 7.2%, decrease in medical net sales for the year ended
December 27, 2008 includes a decrease in internally generated revenue of 7.8%
offset by acquisition growth of 0.6%. During 2008, we stopped selling
certain low margin pharmaceutical products, which represented approximately
$153.0 million of net sales in 2007. Excluding sales of these
lower-margin pharmaceutical products, internal medical net sales increased by
0.9%.
The
$451.2 million, or 25.5%, increase in international net sales for the year ended
December 27, 2008 includes sales growth of 22.8% in local currencies (17.9%
growth from acquisitions and 4.9% internally generated growth) and 2.7% related
to foreign currency exchange.
The $31.4
million, or 23.8%, increase in technology net sales for the year ended December
27, 2008 includes sales growth of 25.3% in local currency growth (8.7%
internally generated growth and 16.6% growth from acquisitions) offset by a
decrease of 1.5% related to foreign currency exchange. The internal
net sales growth was driven by growth in electronic services, financial services
and support revenue.
Gross
Profit
Gross
profit and gross margins for 2008 and 2007 by segment and in total were as
follows (in thousands):
|
Gross
|
Gross
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2008
(1)
|
Margin
%
|
2007
(1)
|
Margin
%
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution
|
$ | 1,753,655 | 28.2 | % | $ | 1,607,967 | 27.9 | % | $ | 145,688 | 9.1 | % | ||||||||||||
|
Technology
|
120,640 | 73.9 | 98,125 | 74.4 | 22,515 | 22.9 | ||||||||||||||||||
|
Total
|
$ | 1,874,295 | 29.4 | $ | 1,706,092 | 29.0 | $ | 168,203 | 9.9 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Gross
profit increased $168.2 million, or 9.9%, for the year ended December 27, 2008
compared to the 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. For a number of reasons, the software industry typically realizes
higher gross margins to recover investments in research and
development.
Healthcare
distribution gross profit increased $145.7 million, or 9.1%, for the year ended
December 27, 2008 compared to the prior year period. Healthcare
distribution gross profit margin increased to 28.2% for the year ended December
27, 2008 from 27.9% for the comparable prior year period.
Technology
gross profit increased $22.5 million, or 22.9%, for the year ended December 27,
2008 compared to the prior year period. Technology gross profit
margin decreased to 73.9% for the year ended December 27, 2008 from 74.4% for
the comparable prior year period, primarily due to changes in the product sales
mix.
Selling,
General and Administrative
Selling,
general and administrative expenses by segment and in total for 2008 and 2007
were as follows (in thousands):
|
%
of
|
%
of
|
|||||||||||||||||||||||