RESTRUCTURING

Schein to cut 300 jobs Layoffs expected to save medical supplies cataloger $15 million a year

In a restructuring effort designed to improve profitability, $2.28 billion dental, medical, and veterinary supplies cataloger Henry Schein said on Aug. 1 that it would eliminate 300 jobs, or about 5% of its total work force. The job cuts were announced on the same day that Henry Schein reported a 4% increase in second-quarter net income gain, from $16.4 million to $17.0 million for the three months ended June 24.

Having bought some 50 companies during the past three years, “we lost a little more than we initially expected when we made the acquisitions,” admits Steven Paladino, executive vice president/chief financial officer for the Melville, NY-based company. A decrease in revenue from a newly acquired business is expected, as staffers often leave the company and take some accounts with them.

“On our last acquisition [Meer Dental Supply], for example, we expected 20% of sales to be lost, and it ended up being 30%,” Paladino says. “And because we have a relatively fixed cost infrastructure, the more volume we can pump through the infrastructure, the more profitable we can be on a percentage of sales.”

In fact, “Schein built up an infrastructure that was capable of handling significantly higher volumes of business” than it currently has, says Scott Jones, vice president/research analyst for Atlanta-based investment banking firm Wachovia Securities. “But since revenue growth has been somewhat tepid as of late, the company didn’t need all the people it had.” Second-quarter sales rose less than 2%, to $568 million from $559 million last year.

With the layoffs, “we tried to do a couple of things,” Paladino says. “One, to align the organizational structure with our current business needs. Also, we tried to flatten the organization by reducing non-value-added functions from a customer perspective to enhance our services to customers while providing a nice financial return to our investors.” Although Paladino doesn’t specify what those “non-value-added functions” are, he adds that the layoffs will come from all levels of the company, including several vice presidents.

In the long run, Henry Schein expects it will save $15 million a year ($9 million after taxes) from the job cuts on a pretax basis, or $0.22 per diluted share.

Still, the layoffs certainly don’t mean that the company is in dire straits. “Schein generated a large amount of operating cash flow in the quarter and has a reasonable long-term debt-to-capital ratio,” Jones says. “So it’s in no danger of going away.”

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