HELPINGHEALTHHAPPEN® A N N U A L R E P O R T 2 0 0 8 ABOUT THE COVER During these times of economic uncertainty when healthcare practitioners are facing new challenges and opportunities, Henry Schein is “helping health happen®” in all that we do – through the expert advice and superior service we provide to our customers; the comprehensive selection of technology-driven products and value-added services we offer; the unsurpassed efficiency and accuracy of our worldwide operations; and the global, national and local healthcare issues we address through Henry Schein Cares. quarksHKnew6 4/14/09 2:47 PM Page 1 ABOUT HENRY SCHEIN One of Henry Schein’s strengths is the Company’s centralized, leveragable infrastructure, which has capacity for additional growth. enry Schein, Inc., a FORTUNE 500® H company and a member of the NASDAQ business groups—Dental, Medical, for healthcare professionals, such as International and Technology—serve ARUBA®, the Company’s electronic 100® Index, is the largest distributor more than 575,000 healthcare practition- catalog and ordering system. Its leading of healthcare products and services ers worldwide, as well as governments dental and medical practice-manage- to office-based practitioners in the and other institutions providing health- ment and electronic medical records combined North American and European care services. The Company operates software solutions have an active user markets. The Company has been named “Most Admired” in its industry in FORTUNE’s list of the World’s Most Admired Companies, and number one in its industry in social responsibility for five consecutive years. through a centralized and automated distribution network, which provides customers in more than 200 countries base of more than 60,000 practices. Headquartered in Melville, New York, with a comprehensive selection of more Henry Schein employs more than than 90,000 national and Henry Schein 12,500 people and has operations or brand products in stock, as well as affiliates in 23 countries. The Company’s more than 100,000 additional products net sales reached a record $6.4 billion Henry Schein is recognized for its available as special-order items. in 2008. For more information, excellent customer service and highly Henry Schein also offers a wide range of visit the Henry Schein Web site at competitive prices. The Company’s four innovative value-added practice solutions www.henryschein.com. 1 quarksHKnew6 4/14/09 2:47 PM Page 2 FINANCIAL HIGHLIGHTS NET SALES from Continuing Operations ($ in Millions) $7,000 $5,000 CAGR 14%* $6,395 $5,904 $5,036 $4,526 $3,795 $3,000 $1,000 $0 $3.00 $2.00 $1.00 $0 2004 2005 2006 2007 2008 EARNINGS PER DILUTED SHARE from Continuing Operations CAGR 21%* $2.96 $2.59 $2.04 $1.70 $1.39 2004 2005 2006 2007 2008 *Compound Annual Growth Rate OPERATING INCOME from Continuing Operations ($ in Millions) CAGR 21%* $443 $388 $305 $262 $500 $400 $300 $200 $205 $100 $0 $400 $300 $200 $100 $0 2004 2005 2006 2007 2008 OPERATING CASH FLOW AND CAPITAL EXPENDITURES • ($ in Millions) $385 $270 $255 $235 $183 $51 $38 $67 $57 $51 2004 2005 2006 2007 2008 NOTE: Operating Income and Earnings Per Diluted Share from Continuing Operations have been adjusted to exclude certain one-time items. Refer to Non-GAAP Disclosures on page 8. Additionally, refer to our annual consolidated financial statements for a complete presentation of our Consolidated Statements of Cash Flows. 2 quarksHKnew6 4/14/09 2:47 PM Page 3 HENRY SCHEIN AT A GLANCE DENTAL MEDICAL INTERNATIONAL • Includes Henry Schein Dental (U.S.), • Serves approximately 45% of the • Serves approximately 240,000 office- TECHNOLOGY AND VALUE-ADDED SERVICES Henry Schein Canada and Zahn Dental estimated 250,000 U.S. office-based based dental, medical and animal health • Henry Schein Practice Solutions supports Laboratory (U.S.) physician practices, as well as surgical practices through operations or affiliates dental clients and Henry Schein Medical • Serves approximately 85% of the centers and other alternate-care sites in 21 countries outside of North America Systems supports medical clients estimated 136,000 U.S. and Canadian • Offers approximately 32,000 medical • Countries served are Australia, Austria, • Practice management and electronic office-based dental practices, dental products in stock and many more as Belgium, China, the Czech Republic, medical records systems active user laboratories, as well as governments special-order items France, Germany, Iceland, Ireland, Israel, base of more than 60,000 dental, Camlog™ dental implant system; the American Academy of Ophthalmology Impianti (Dental, Italy); Medka (Medical, American Academy of Dermatology, and • Key 2008 acquisitions: DNA Anthos and other institutions • Leading supplier of medical consum- • Offers approximately 46,000 ables, a wide range of pharmaceuticals in-stock products and many more and technology-driven equipment to as special-order items physicians and alternate-care sites • Key product exclusives/semi-exclusives: • Purchase plans provide for the American E4D CAD/CAM restorative system; Arestin® by Orapharma; Ortho Organizers® orthodontic products; Medical Association, the American Society of Plastic Surgeons, the Colgate® Oral Care Products; DEXIS® digital radiography products; i-CAT® 3-D Imaging Systems; BIOLASE® dental laser systems; KaVo; Noritake dental materials; Pelton & Crane; Pentron® Laboratory Products; Gendex®; surgical instruments from A. Titan Instruments; Snap-on Smile® restorative appliances; Shade-X™ and ShadeVision® from X-Rite • Key 2008 acquisition: Ortho Organizers • Key product exclusives/semi-exclusives: Medline products and services for office- based practitioners, Ambulatory Surgery Centers and Integrated Delivery Networks; Henry Schein Rx Samples Service powered by MedManage™ ANIMAL HEALTH • Serves approximately 75% of the estimated 27,000 U.S. animal health practices • Offers approximately 22,000 animal health products in stock and many more as special-order items • Important new animal health product introductions in 2008: Promeris® and Vectra 3D™ topical flea and tick treat- ments for dogs and cats; Comfortis™ monthly flea treatment pill; MyVetDirect online pharmacy for home delivery of prescriptions written by veterinarians Italy, Luxembourg, the Netherlands, medical and animal health practices New Zealand, Portugal, Saudi Arabia, Slovakia, Spain, Switzerland, the United Arab Emirates, and the United Kingdom • Key products include: DENTRIX®, Dental Vision, Oasis®, EXACT®, and Easy Dental® for dental practices; • Schein Direct provides direct air package MicroMD® for medical providers delivery service to practitioners in more in primary care and all major specialties; than 200 countries around the world LabNet® for dental laboratories; and AVImark® for animal health practices • Value-added services include: repair services through ProRepair® and COMPLETEcare; office design Germany); Noviko (Animal Health, Czech Republic); ABC Group of Companies (Dental, Hong Kong); services; continuing education for Minerva Dental (Dental, U.K.); Sirona Ibérica (Dental, Spain) healthcare professionals; electronic health claims processing (52 million claims processed in 2008); Office Automation Technology Solutions; 24/7 ordering capability through the ARUBA® Web-based electronic catalog; and Financial Services such as equipment leasing and financing, patient financing, and electronic credit card processing 2008 WORLDWIDE NET SALES from Continuing Operations $6.4 Billion 40% Dental 22% Medical 35% International 3% Technology 3 quarksHKnew6 4/14/09 2:47 PM Page 4 TO OUR STOCKHOLDERS “Healthcare is historically more resistant to macroeconomic challenges.” B y any measure, 2008 was a challenging year for corporations Growth during 2008 continued to be enhanced by strategic around the world, particularly those operating in the United acquisitions, which included: States. Henry Schein was not immune to these challenges, • Minerva Dental, a full-service dental distributor in the although our Company fared better than most. Healthcare is U.K., which strengthens our presence in the U.K. dental historically more resistant to macroeconomic challenges. equipment market; Henry Schein is strategically and geographically diversified, operationally efficient and customer focused, making us more resilient to these turbulent times. Our financial results for 2008 clearly illustrate this fact. 2008 Financial Results Our 2008 record net sales of $6.4 billion represent an increase of 8.3% compared with 2007. This increase includes 7.5% • Noviko, the leading distributor of animal health supplies in the Czech Republic, the addition of which we believe makes Henry Schein the largest Pan-European animal health distributor; • DNA Anthos Impianti, which adds national equipment sales and service capabilities to Henry Schein’s offering in Italy; local currency growth (1.3% internally generated and 6.2% from • Medka, a full-service provider of medical consumables, acquisitions) and 0.8% related to foreign currency exchange. equipment and technical services in Germany, which Excluding sales of certain lower-margin pharmaceutical products complements our current German operations; that we discontinued selling in 2008, internal net sales growth in local currencies was 3.6%. • ABC Group of Companies, a Hong Kong-based dental equipment and merchandise distributor that extends our Our income from continuing operations for 2008 was presence in the growing Chinese dental market; $251.0 million, or $2.75 per diluted share. Excluding certain one-time charges1, income from continuing operations for 2008 was $270.0 million, or $2.96 per diluted share, reflecting growth of 14.4% and 14.3%, respectively, compared with 2007. Our operating margin excluding certain one-time charges for 2008 was 6.9%, an increase of 35 basis points, which is in line with our stated Company goal for annual operating margin expansion. We also generated record operating cash flow of $384.6 million for the year. 4 • Sirona Ibérica, a distribution subsidiary of Sirona Dental Systems, which enhances our offering of capital equipment and technology-driven products in Spain; and • Ortho Organizers, a California-based orthodontics manufacturer and distributor. 1 Third quarter 2008 charge related to the Lehman Brothers bankruptcy ($0.03 per diluted share after tax) and fourth quarter 2008 restructuring costs ($0.18 per diluted share after tax). quarksHKnew6 4/14/09 2:47 PM Page 5 Resiliency, Reinvention and Relevancy The resiliency of a company during challenging times is “Helping Health Happen” Henry Schein is “helping health happen®” in a number largely based on its ability to reinvent itself and become more of ways, including helping our customers with financing. relevant to customers. Henry Schein’s continued success will Through Henry Schein Financial Services, a strategic advantage come through our commitment to more effectively help our for our Company, we can help ensure that customers have customers meet growing practice challenges. competitive financing options for their patients and their Our mission is to help our customers run more efficient and profitable practices as they provide patients the highest standards of patient care. By continuously answering our customers’ most important question—“How can Henry Schein help me thrive during this unstable economic time?”—we are practices, making it easier to purchase equipment and technology—driving practice success now and in the future. In 2008, we helped more than 11,000 Henry Schein customers in the United States enhance their practices with financing options through third parties, at no credit risk to us. determined to become even more relevant to the success of We also are providing value to our customers through our customers’ practices. our nearly 20,000 proprietary Henry Schein brand products, Relevancy begins by listening to our customers. In 2008, we launched the inaugural Henry Schein Survey of Healthcare Practitioners, in which we asked our dental, medical and animal health customers for their opinions on a number of topics. many of which have a leading market share in their respective categories. These high-quality products come with the Henry Schein Seal of Excellence, which guarantees satisfaction to our customers. The number one “top of mind” issue that emerged was that We also will continue to meet our commitment to our other our customers are forced to spend more time managing four constituencies. Our supplier partners are relying on us practices at the expense of providing patient care (52% to develop a trusted relationship with our customers, offering medical, 42% animal health and 41% dental). Additionally, our our suppliers’ products as solutions to practice needs. customers remain committed to incorporating new technology Our investors expect us to take all necessary steps to improve in their practices, with nearly 9 of 10 customers surveyed our organizational efficiency and build market share, so saying that technology will play an increasingly important role. we will continue to grow, be profitable and provide a good Environmental consequences also are influencing practices, return on investment. The more than 12,500 members and we saw a sustained commitment to volunteer activity of Team Schein will be crucial to the reinvention of our across all three customer groups. Company if we are to take advantage of the opportunities “Henry Schein’s continued success will come through our commitment to more effectively help our customers meet growing practice challenges.” resulting from the enormous economic changes we are now experiencing. And, our Company’s ongoing vitality will enable us to continue to participate in innovative public-private partnerships that give back to society and address important healthcare issues, many of which become more acute during times of economic challenge. For our efforts through Henry Schein Cares, our global social responsibility program, we are proud that Henry Schein has been named “Most Admired” in our industry in FORTUNE’s list of the World’s Most Admired Companies, and ranked number one in our industry in social responsibility for five consecutive years. Through flagship programs such as Give Kids A Smile and Healthy Children, Healthy Lifestyles, 5 quarksHKnew6 4/14/09 2:47 PM Page 6 The wide range of Henry Schein Cares programs—including (from left to right) Give Kids A Smile, Holiday Cheer for Children, Back to School, and Healthy Children, Healthy Lifestyles—are helping to enhance healthcare advocacy and education; increase access to care; strengthen community wellness programs; and further humanitarian relief and disaster response. through our core donation program, and through partnerships There is a growing demand for office-based healthcare with other companies, academia, government and non-govern- services driven by baby boomers and emerging markets, mental organizations, we are supporting a wide range of as well as the potential that government policy, especially in initiatives that enhance healthcare advocacy and education; the United States, will expand access to care. Henry Schein is increase access to care among underserved populations; well positioned to arrange for customer financing during this strengthen community wellness programs and volunteer time of limited access to credit. And we remain committed to activities; and further humanitarian relief and disaster response. the five constituencies of our Company’s mosaic of success: To continue to expand the impact of our social responsibility our customers, supplier partners, investors, Team Schein, programs, in 2008 we began the process of creating the and society. Henry Schein Cares Foundation. Shared Commitment and Optimism As we face today’s challenges and opportunities, Henry Schein’s senior leadership is resolved to take the steps necessary to ensure the long-term vitality of our Company, and all Team Schein Members are committed to our shared vision. We share a sense of optimism based on our Company’s financial strength, values, strong partnerships, ideal markets and strategic focus on the future. These facts, coupled with our entrepreneurial Team Schein culture, make our Company more resilient in turbulent times and position us well to take advantage of emerging opportunities. Without question, this is a remarkable time—a time that requires reinvention and increased relevancy for our Company, as well as consistent expense management—but Henry Schein continues to be well positioned, and I remain convinced that our best years are yet to come. On behalf of our Board of Directors and my Team Schein colleagues, we thank you for your continued support. We have an outstanding business and a solid balance sheet. The markets we serve remain fragmented, with about one-half Sincerely, of them in the hands of smaller competitors. With nearly $370 million in cash and equivalents, low debt levels, positive cash flow and an unused $400 million five-year credit facility, we are in a very strong financial position to implement our Stanley M. Bergman strategic plan and to seize new business opportunities, while Chairman and Chief Executive Officer at the same time, we continue to focus on expense reduction and margin management. 6 quarksHKnew6 4/14/09 2:48 PM Page 7 EXECUTIVE OFFICERS EXECUTIVE OFFICERS AND BOARD OF DIRECTORS Stanley M. Bergman (5) Chairman and Chief Executive Officer Stanley Komaroff Senior Advisor Gerald A. Benjamin (5) Executive Vice President and Chief Administrative Officer Mark E. Mlotek (5) Executive Vice President, Corporate Business Development James P. Breslawski (5) President and Chief Operating Officer Leonard A. David Senior Vice President and Chief Compliance Officer James Harding Senior Vice President and Chief Technology Officer Steven Paladino (5) Executive Vice President and Chief Financial Officer Michael Racioppi Senior Vice President and Chief Merchandising Officer Michael Zack President, International Group INDEPENDENT BOARD OF DIRECTORS Barry J. Alperin (1) (2) (3) Retired Vice Chairman, Hasbro, Inc. Philip A. Laskawy (1) (3) (4) Retired Chairman, Ernst & Young LLP Paul Brons (4) Former Member, Board of Management, Akzo Nobel, N.V. Margaret A. Hamburg, M.D. (4) Former Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services; Former Commissioner of Health for the City of New York Donald J. Kabat (1) (2) Retired Partner, Accenture, Ltd. Karyn Mashima (4) Private Consultant; Former Senior Vice President, Strategy and Technology, Avaya Norman S. Matthews (2) (4) Former President, Federated Department Stores, Inc. Louis W. Sullivan, M.D. (3) (4) Former U.S. Secretary of Health and Human Services; Founding Dean, Director and President Emeritus of the Morehouse School of Medicine (1) Member Audit Committee (3) Member Nominating and Governance Committee (5) Member Board of Directors (2) Member Compensation Committee (4) Member Strategic Advisory Committee 7 quarksHKnew6 4/14/09 2:48 PM Page 8 NON-GAAP DISCLOSURES The following table sets forth, for the periods indicated, a reconciliation of operating income and income from continuing operations adjusted to reflect the effects of discontinued operations, as reported to adjusted operating income and adjusted income from continuing operations. The diluted earnings from continuing operations per share and weighted-average common shares outstanding information reflects a two-for-one stock split effected in the form of a dividend that became effective on February 28, 2005. Years ended December 27, 2008 December 25, 2004 December 27, 2003 (in thousands, except per share data) De Operating income, as reported $ 419,603 $ 191,949 $ 217,432 Adjustments: Restructuring costs (1) One-time charge related to influenza vaccine contract (2) Adjusted operating income Adjusted operating margin 23,240 - 442,843 6.9% - 13,246 205,195 5.4% - - 217,432 6.8% Income from continuing operations, as reported 251,011 114,129 128,759 Adjustments, net of tax: Restructuring costs (1) One-time charge related to influenza vaccine contract (2) Loss related to the Lehman Brothers bankruptcy (3) 15,991 - 3,045 - 8,358 - - - - Adjusted income from continuing operations $ 270,047 $ 122,487 $ 128,305 Diluted earnings from continuing operations per share: As reported Adjusted $ 2.75 2.96 $ 1.29 1.39 $ 1.45 1.44 Diluted weighted-average common shares outstanding: 91,221 89,646 89,099 USE OF NON-GAAP MEASURES: The above information includes financial measures that are not calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”). The above table reconciles operating income, income from continuing operations and diluted earnings from continuing operations per share, our most directly comparable measure calculated and presented in accordance with GAAP, to comparable amounts as adjusted to eliminate the effect of one-time items. We eliminated the effect of such one-time items to assist in evaluating the underlying operational performance of our business, excluding such one-time items, over the periods presented. We believe that this presentation is appropriate and facilitates such an evaluation by us, investors and analysts. These measures should be considered supplemental to, and not a substitute for or superior to, financial measures calculated in accordance with GAAP. NOTES: (1) During 2008, we recorded restructuring costs of $23.4 million pre-tax ($16.0 million post-tax). The effect that this charge had on earnings per diluted share from continuing operations for the year ended December 27, 2008 was ($0.18). (2) During 2004, we recorded a non-recurring $13.2 million pre-tax ($8.4 million post-tax) charge related to the Fluvirin® contract with Chiron Corporation. The effect that this charge had on earnings per diluted share from continuing operations for the year ended December 25, 2004 was ($0.10). Excluding this charge, our earnings per diluted share from continuing operations for 2004 was $1.39. (3) During 2008, we recorded a charge related to the Lehman Brothers bankruptcy of $4.5 million pre-tax ($3.0 million post-tax). The effect that this charge had on earnings per diluted share from continuing operations for the year ended December 27, 2008 was ($0.03). 8 Henry Schein, Inc. 135 Duryea Road Melville, New York 11747 U.S.A. (631) 843-5500 www.henryschein.com