HENRY SCHEIN INC - Annual Report: 2013 (Form 10-K)

X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

__   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

DELAWARE	135 Duryea Road
(State or other jurisdiction of	Melville, New York
incorporation or organization)	(Address of principal executive offices)
11-3136595	11747
(I.R.S. Employer Identification No.)	(Zip Code)

Title of each class	Name of each exchange on which registered
Common Stock, par value $.01 per share	The NASDAQ Global Select Market

 

 

 

TABLE OF CONTENTS
					Page
					Number
PART I.
	ITEM 1.		Business		3
	ITEM 1A.		Risk Factors		18
	ITEM 1B.		Unresolved Staff Comments		28
	ITEM 2.		Properties		29
	ITEM 3.		Legal Proceedings		29
	ITEM 4.		Mine Safety Disclosures		29
PART II
	ITEM 5.		Market for Registrant's Common Equity, Related Stockholder Matters
				and Issuer Purchases of Equity Securities	30
	ITEM 6.		Selected Financial Data		33
	ITEM 7.		Management's Discussion and Analysis of Financial Condition
				and Results of Operations	35
	ITEM 7A.		Quantitative and Qualitative Disclosures About Market Risk		56
	ITEM 8.		Financial Statements and Supplementary Data		57
	ITEM 9.		Changes in and Disagreements With Accountants on Accounting
				and Financial Disclosure	99
	ITEM 9A.		Controls and Procedures		99
	ITEM 9B.		Other Information		101
PART III
	ITEM 10.		Directors, Executive Officers and Corporate Governance		101
	ITEM 11.		Executive Compensation		101
	ITEM 12.		Security Ownership of Certain Beneficial Owners and Management
				and Related Stockholder Matters	102
	ITEM 13.		Certain Relationships and Related Transactions, and Director Independence		102
	ITEM 14.		Principal Accountant Fees and Services		102
PART IV
	ITEM 15.		Exhibits, Financial Statement Schedules		103
			Signatures		104
			Exhibit Index		107

 

A focus on meeting our customers’ unique needs.  We are committed to providing customized solutions to our customers that are driven by our understanding of the market and reflect the technology-driven products and services best suited for their practice needs.

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:
•		Field sales consultants.  We have approximately 3,400 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.

•

Direct marketing.  During 2013, we distributed approximately 29.8 million pieces of direct marketing material, including catalogs, flyers, order stuffers and other promotional materials to existing and potential office-based health care customers.

•

Telesales.  We support our direct marketing effort with approximately 1,700 inbound and outbound telesales representatives, who facilitate order processing and generate new sales through direct and frequent contact with customers.

•

Electronic commerce solutions.  We provide our customers and sales teams with innovative and competitive Internet, PC and mobile e-commerce solutions.

•

Social media.  Our operating entities and employees engage our customers and supplier partners through various social media platforms.

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:

•

Consumable supplies and equipment.  We offer over 96,000 Stock Keeping Units, or SKUs, to our customers.  Of the SKUs offered, approximately 52,000 are offered to our dental customers, approximately 14,000 to our animal health customers and approximately 41,000 to our medical customers.  We offer over 110,000 additional SKUs to our customers in the form of special order items.

•

Technology and other value-added products and services.  We sell practice management software systems to our dental, animal health and medical customers.  Our practice management solutions provide practitioners with electronic medical records, patient treatment history, billing, accounts receivable analyses and management, appointment calendars, electronic claims processing and word processing programs.  As of December 28, 2013, we have an active user base of more than 80,000 practices, including Dentrix® Enterprise, Dentrix® Dental Vision®, Dentrix AscendTM, Easy Dental®, Oasis®, Evolution® and EXACT®, Power Practice Px, AxiUm, EndoVision®, PerioVision®, OMSVision® and Viive® for dental practices, Advantage+, AVImark®, DVM Manager®, Infinity, Sunpoint, Triple Crown® and Vetech Advantage for animal health practices and MicroMD® for physician practices.

•

Repair services.  We have 187 equipment sales and service centers worldwide that provide a variety of repair, installation and technical services for our health care customers.  Our ProRepair technicians provide installation and repair services for: dental handpieces; dental, animal health and medical small equipment; table top sterilizers; and large dental equipment.

 

•

Financial services.  We offer our customers solutions in operating their practices more efficiently 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 our customers would be able to secure independently. We also provide dental practice valuation and brokerage services.

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:

•

Exceptional order fulfillment.  We ship an average of approximately 130,000 cartons daily.  Approximately 99% of items ordered are shipped without back ordering and are shipped on the same business day the order is received.

•

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.

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.

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 health care products.  We continuously evaluate our purchase requirements and suppliers’ offerings and prices in order to obtain products at the lowest possible cost.  In 2013, our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 37% and 8%, respectively, of our aggregate purchases.

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.

					2013			2012			2011
Health care distribution:
	Dental products (1)				52.3			53.4			55.9
	Animal health products (2)				27.2			26.0			23.6
	Medical products (3)				17.2			17.4			17.6
	Total health care distribution				96.7			96.8			97.1
Technology:
		Software and related products and
			other value-added products (4)		3.3			3.2			2.9
Total					100.0	%		100.0	%		100.0	%
(1)	Includes infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants,
	gypsum, acrylics, articulators, abrasives, dental chairs, delivery units and lights, X-ray supplies and equipment, equipment
	repair and high-tech equipment.
(2)	Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment.
(3)	Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products,
	equipment and vitamins.
(4)	Includes software and related products and other value-added products, including financial products and other services, including
	e-services and continuing education services for practitioners.

•

Increase penetration of our existing customer base.  We have over 800,000 customers worldwide and we intend to increase sales to our existing customer base and enhance our position as their primary supplier.

•

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 in all of our operating segments.  In the dental business, we provide products and services to traditional dental practices as well as new emerging segments, such as dental service organizations and community health centers.  Leveraging our unique assets and capabilities, we offer solutions to address these new markets.  In the medical business, we have expanded to serve customers located in settings outside of the traditional office, such as urgent care clinics, retail and occupational health settings.  As settings of health care shift, we remain committed to serving these practitioners and providing them with the products and services they need.

 

•

Leverage our value-added products and services.  We continue to increase cross-selling efforts for key product lines utilizing a consultative selling process.  In the dental business, we have significant cross-selling opportunities between our dental practice management software users and our dental distribution customers.  In the animal health business, we have opportunities to cross-sell practice management software and other products.  In the medical business, we have opportunities to expand our vaccine, injectables and other pharmaceuticals sales to health care practitioners, as well as cross-selling core products and electronic health record and practice management software.  Our strategy extends to providing health systems, integrated delivery networks and other large group and multi-site health care organizations, that include physician clinics, these same value added products and services.  As physicians and health systems closely align, we have increased access to opportunities for cross-marketing and selling our product and service portfolios.

•

Pursue strategic acquisitions and joint ventures.  Our acquisition strategy includes acquiring businesses and entering into joint ventures 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 field sales consultants and an opportunity to further expand into new geographic markets.

•

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;

•

timing of the release of upgrades and enhancements to our technology-related products and services;

•

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;

•

costs of developing new applications and services;

•

our ability to correctly identify customer needs and preferences and predict future needs and preferences;

•

exclusivity requirements with certain vendors may prohibit us from distributing competitive products manufactured by other vendors;

•

loss of sales representatives;

•

costs related to acquisitions and/or integrations of technologies or businesses;

•

costs associated with our self-insured medical and dental insurance programs;

•

general market and economic conditions, as well as those specific to the health care industry and related industries;

•

our success in establishing or maintaining business relationships;

•

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;

•

increases in the cost of shipping or service issues with our third-party shippers;

•

restructuring costs; and

•

changes in accounting principles.

 

 

Failure to comply with these laws can result in substantial penalties and other liabilities. As a result of the federal Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was passed in 2009, some of our businesses that were previously only indirectly subject to federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) privacy and security rules became directly subject to such rules because such businesses serve as “business associates” of HIPAA covered entities, such as health care providers. On January 17, 2013 the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements.  Compliance with the rule was required by September 23, 2013, and increases the requirements applicable to some of our businesses.

 

Name		Age		Position
Stanley M. Bergman		64		Chairman, Chief Executive Officer, Director
Gerald A. Benjamin		61		Executive Vice President, Chief Administrative Officer, Director
James P. Breslawski		60		President, Henry Schein and CEO, Global Dental Group, Director
Leonard A. David		65		Senior Vice President, Chief Compliance Officer
Michael S. Ettinger		52		Senior Vice President, Corporate and Legal Affairs & Secretary
James A. Harding		58		Senior Vice President, Chief Technology Officer
Stanley Komaroff		78		Senior Advisor
Lorelei McGlynn		50		Senior Vice President, Global Human Resources and Financial Operations
David C. McKinley		61		President, Medical Group
Bob Minowitz		55		President, International Dental Group
Mark E. Mlotek		58		Executive Vice President, Chief Strategic Officer, Director
Steven Paladino		56		Executive Vice President, Chief Financial Officer, Director
Michael Racioppi		59		Senior Vice President, Chief Merchandising Officer
Paul Rose		56		Senior Vice President, Global Supply Chain
Lonnie Shoff		55		CEO, Global Animal Health and Strategic Partnership Group
Walter Siegel		54		Senior Vice President and General Counsel

•

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;

•

timing of the release of upgrades and enhancements to our technology-related products and services;

•

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;

•

costs of developing new applications and services;

•

our ability to correctly identify customer needs and preferences and predict future needs and preferences;

•

exclusivity requirements with certain vendors may prohibit us from distributing competitive products manufactured by other vendors;

•

loss of sales representatives;

•

costs related to acquisitions and/or integrations of technologies or businesses;

•

costs associated with our self-insured medical and dental insurance programs;

•

general market and economic conditions, as well as those specific to the health care industry and related industries;

•

our success in establishing or maintaining business relationships;

•

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;

•

increases in the cost of shipping or service issues with our third-party shippers;

•

restructuring costs; and

•

changes in accounting principles.

 

•	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;

•	general market and economic conditions; and

•	any outbreak or escalation of hostilities in areas where we do business.

 

•	regulate the storage and distribution, labeling, packaging, handling, reporting, record keeping, introduction, manufacturing and marketing of drugs, HCT/P products and medical devices;

•	subject us to inspection by the FDA and the United States Drug Enforcement Administration;

•	regulate the storage, transportation and disposal of certain of our products that are considered hazardous materials;

•	require us to advertise and promote our drugs and devices in accordance with applicable FDA requirements;

•	require registration with the FDA 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 product or medical device causes serious illness, injury or death.

 

 

•	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;

•	anti-bribery, anti-corruption and laws pertaining to the accuracy of our internal books and records;

•	unexpected difficulties in importing or exporting our products;

•	imposition of import/export duties, quotas, sanctions or penalties;

 

•	difficulties and delays inherent in sourcing products and contract manufacturing in foreign markets;

•	limitations on our ability under local laws to protect our intellectual property;

•	unexpected regulatory, legal, economic and political changes in foreign markets;

•	civil disturbances, geopolitical turmoil, including terrorism, war or political or military coups; and

•	public health emergencies.

•	may result in a loss of customers or product lines of the acquired businesses or joint ventures;

•	requires significant management attention;

•	may place significant demands on our operations, information systems and financial resources; and

•	results in additional acquisition and integration expenses.

•	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.

 

•	the effectiveness of our sales and marketing programs;

•	our ability to enhance our products and services to satisfy customer requirements; and

•	our ability to provide ongoing technical support.

 

•	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;

•	process payments to suppliers; and

•	maintain certain of our customers’ electronic medical records.

•	future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property;

•	operational or business delays resulting from the disruption of IS systems and subsequent clean-up and mitigation activities; and

•	negative publicity resulting in reputation or brand damage with our customers, partners or industry peers.

 

•	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 (i) remove a director; and (ii) to amend or repeal our by-laws, with certain limited exceptions.

				Own or		Approximate		Lease Expiration
Property		Location		Lease		Square Footage		Date
Corporate Headquarters		Melville, NY		Lease		185,000		July 2020
Corporate Headquarters		Melville, NY		Own		105,000		N/A
Office and Distribution Center		Lyssach, Switzerland		Lease		180,000		July 2016
Office and Distribution Center		Tours, France		Own		161,000		N/A
Office and Distribution Center		Niagara on the Lake, Canada		Lease		128,000		September 2021
Office and Distribution Center		Bastian, VA		Own		108,000		N/A
Office and Distribution Center		West Allis, WI		Lease		106,000		October 2017
Office and Distribution Center		Gillingham, United Kingdom		Lease		105,000		June 2033
Office and Distribution Center		Cuijk, Netherlands		Lease		101,000		May 2022
Distribution Center		Denver, PA		Lease		624,000		December 2021
Distribution Center		Indianapolis, IN		Lease		380,000		February 2019
Distribution Center		Sparks, NV		Lease		370,000		December 2016
Distribution Center		Indianapolis, IN		Own		287,000		N/A
Distribution Center		Grapevine, TX		Lease		242,000		July 2018
Distribution Center		Gallin, Germany		Own		215,000		N/A
Distribution Center		Jacksonville, FL		Lease		212,000		February 2019

		High			Low
Fiscal 2013:
1st Quarter		$	92.66		$	79.57
2nd Quarter			98.28			88.90
3rd Quarter			107.75			95.94
4th Quarter			116.07			102.50
Fiscal 2012:
1st Quarter		$	77.05		$	64.74
2nd Quarter			80.38			71.97
3rd Quarter			80.75			72.84
4th Quarter			82.91			73.35

Date of		Amount of Additional
Authorization		Repurchases Authorized
October 31, 2005		$	100,000,000
March 28, 2007			100,000,000
November 16, 2010			100,000,000
August 18, 2011			200,000,000
April 18, 2012			200,000,000
November 12, 2012			300,000,000
December 9, 2013			300,000,000

								Total Number		Maximum Number
			Total					of Shares		of Shares
			Number		Average			Purchased as Part		that May Yet
			of Shares		Price Paid			of Our Publicly		Be Purchased Under
Fiscal Month			Purchased (1)		Per Share			Announced Program		Our Program (2)
09/29/13 through 11/02/13			231,000		$	107.78		231,000		433,702
11/03/13 through 11/30/13			248,057			112.54		248,057		182,662
12/01/13 through 12/28/13			185,300			113.11		185,300		2,620,504
			664,357					664,357
(1)	All repurchases were executed in the open market under our existing publicly announced authorized program.
(2)	The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
	closing price of our common stock at that time.

ASSUMES $100 INVESTED ON DECEMBER 27, 2008
ASSUMES DIVIDENDS REINVESTED
	December 27,			December 26,			December 25,			December 31,			December 29,			December 28,
	2008			2009			2010			2011			2012			2013
Henry Schein, Inc.	$	100.00		$	149.83		$	175.69		$	182.11		$	226.00		$	323.43
Dow Jones U.S. Health
Care Index		100.00			126.14			131.45			145.91			171.89			246.52
NASDAQ Stock Market
Composite Index		100.00			150.88			177.79			175.57			202.67			288.35

		Years ended
		December 28,				December 29,				December 31,				December 25,				December 26,
		2013				2012				2011				2010				2009
		(in thousands, except per share data)
Income Statement Data:
Net sales		$	9,560,647			$	8,939,967			$	8,530,242			$	7,526,790			$	6,538,336
Gross profit			2,656,014				2,507,513				2,418,055				2,170,876				1,916,820
Selling, general and administrative expenses			1,978,960				1,873,360				1,835,906				1,637,460				1,449,715
Restructuring costs (1)			-				15,192				-				12,285				3,020
Operating income			677,054				618,961				582,149				521,131				464,085
Other expense, net (2)			(12,360	)			(14,773	)			(12,842	)			(19,096	)			(11,365	)
Income from continuing operations before taxes
and equity in earnings of affiliates			664,694				604,188				569,307				502,035				452,720
Income taxes (3)			(190,891	)			(187,858	)			(180,212	)			(160,069	)			(127,521	)
Equity in earnings of affiliates			10,194				7,058				15,561				10,165				5,243
Loss on sale of equity investment (4)			(12,535	)			-				-				-				-
Income from continuing operations			471,462				423,388				404,656				352,131				330,442
Income from discontinued operations,
net of tax (5)			-				-				-				-				2,715
Net income			471,462				423,388				404,656				352,131				333,157
Less: Net income attributable to
noncontrolling interests			(39,908	)			(35,312	)			(36,995	)			(26,342	)			(22,004	)
Net income attributable to Henry Schein, Inc.		$	431,554			$	388,076			$	367,661			$	325,789			$	311,153
Amounts attributable to Henry Schein, Inc.:
Income from continuing operations		$	431,554			$	388,076			$	367,661			$	325,789			$	308,551
Income from discontinued operations,
net of tax			-				-				-				-				2,602
Net income		$	431,554			$	388,076			$	367,661			$	325,789			$	311,153
Earnings per share attributable to
Henry Schein, Inc.:
From continuing operations:
Basic		$	5.02			$	4.44			$	4.08			$	3.62			$	3.47
Diluted			4.93				4.32				3.97				3.49				3.41
From discontinued operations:
Basic		$	-			$	-			$	-			$	-			$	0.03
Diluted			-				-				-				-				0.03
From net income:
Basic		$	5.02			$	4.44			$	4.08			$	3.62			$	3.50
Diluted			4.93				4.32				3.97				3.49				3.44
Weighted-average common shares outstanding:
Basic			85,926				87,499				90,120				90,097				88,872
Diluted			87,622				89,823				92,620				93,268				90,556