Henry Schein
Annual Report 2009

Plain-text annual report

UNCOVERING NEW OPPORTUNITES... EMERGING STRONGER THAN EVER A N N U A L R E P O R T 2 0 0 9 ABOUT HENRY SCHEIN Henry Schein, Inc., a Fortune 500® as well as more than 100,000 additional company and a member of the products available as special-order NASDAQ 100® Index, is the largest items. Henry Schein also provides provider of health care products and exclusive, innovative technology offerings services to office-based practitioners. for dental, medical and veterinary Recognized for its excellent customer professionals, including value-added service and highly competitive prices, practice management software and the Company’s four business groups – electronic health record solutions. Headquartered in Melville, New York, Henry Schein employs more than 12,500 people and has operations or affiliates in 23 countries. The Company’s net sales reached a record $6.5 billion in 2009. For more information, visit the Henry Schein Web site at www.henryschein.com. Dental, Medical, International and Technology – serve more than 600,000 customers worldwide, including dental practitioners and laboratories, physician practices and companion animal health clinics, as well as government and other institutions. Henry Schein operates through a centralized and automated distribution network, which provides customers in more than 200 countries with a comprehensive selection of more than 90,000 national and Henry Schein private-brand products in stock, HENRY SCHEIN ANNUAL REPORT 1 FINANCIAL HIGHLIGHTS NET SALES from Continuing Operations ($ in Millions) OPERATING INCOME from Continuing Operations ($ in Millions) CAGR 12%* CAGR 18%* EARNINGS PER DILUTED SHARE from Continuing Operations attributable to Henry Schein, Inc. CAGR 18%* OPERATING CASH FLOW AND CAPITAL EXPENDITURES ($ in Millions) *Five-year Compound Annual Growth Rate NOTE: Operating Income and Earnings Per Diluted Share from Continuing Operations attributable to Henry Schein, Inc. have been adjusted to exclude certain one-time items. Refer to Non-GAAP Disclosures on page 10. Additionally, refer to our annual consolidated financial statements for a complete presentation of our Consolidated Statements of Cash Flows. 2 HENRY SCHEIN AT A GLANCE DENTAL • Includes Henry Schein Dental (U.S.), Henry Schein Canada, Zahn Dental Laboratory (U.S.) and Henry Schein Special Markets • Serves approximately 87% of the estimated 143,000 U.S. and Canadian office-based dental practices, as well as dental laboratories • Offers approximately 49,000 in-stock products and many more as special-order items • Key product exclusives/semi-exclusives: E4D CAD/CAM restorative system; Arestin® by Orapharma; Ortho Organizers orthodontic products; Camlog™ dental implant system; 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®; Henry Schein Guru™ patient education software; Demandforce Dental™ online patient communication system; surgical instruments from A. Titan Instruments; Shade-X™ and ShadeVision™ from X-Rite MEDICAL • Serves over 40% of the estimated 244,000 U.S. office-based physician practices, surgical centers and other alternate-care sites • Offers approximately 39,000 products in stock and many more as special-order items • A leading supplier of medical consum- ables, a wide range of pharmaceuticals and technology-driven equipment to physicians and alternate-care sites • Purchase plan provides for the American Medical Association, the American Society of Plastic Surgeons, the American Academy of Dermatology, and the American Academy of Ophthalmology • Key product exclusive/semi-exclusives: Allscripts Electronic Health Records; Medline products and services for office-based practitioners, Ambulatory Surgery Centers and Integrated Delivery Networks; Henry Schein Rx Samples Service powered by MedManage™; Siemens Diagnostics; GlaxoSmithKline Flulaval® influenza virus vaccine; Novartis Ixiaro® Japanese encephalitis vaccine; DermWorks LidoWorks; ThinkLabs Digital Stethoscope ANIMAL HEALTH* • Serves over 75% of the estimated 27,000 U.S. animal health practices • Offers approximately 30,000 animal health products in stock and as special-order items • Key animal health products: Bayer Advantage®, Advantage Multi®, K9 Advantix® and Profender®; Novartis Capstar®, Interceptor® and Sentinel®; Elanco/Lilly Comfortis®; Virbac Iverhart Max® and Iverhart Plus®; Intervet/Schering Plough Tri-Heart Plus® and Proticall®; and Summit VetPharm Vectra 3D®, Vectra® and Vectra for Cats® *Pro forma to include Butler Schein Animal Health acquisition in Q1 2010 TECHNOLOGY AND VALUE-ADDED SERVICES • Provides support to dental, medical and veterinary practices • Practice management and electronic medical records systems active user base of more than 65,000 dental, medical and animal health practices • Key products: DENTRIX®, Oasis®, EXACT®, and Easy Dental® for dental practices; MicroMD® for medical providers in primary care and all major specialties; LabNet® for dental laboratories; and AVImark® and DVM Manager for animal health practices • Value-added services include: repair services through ProRepair® and COMPLETEcare; office design services; continuing education for health care professionals; electronic health claims processing; 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, electronic credit card processing INTERNATIONAL • Serves approximately 260,000 office-based dental, medical and animal health practices through operations or affiliates in 21 countries outside of North America: • Australia, Austria, Belgium, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Luxembourg, the Netherlands, New Zealand, Portugal, Saudi Arabia, Spain, Switzerland, the United Arab Emirates, the United Kingdom • Schein Direct provides direct air package delivery service to practitioners in more than 200 countries around the world 2009 WORLDWIDE NET SALES from Continuing Operations $6.5 Billion 38% DENTAL 22% MEDICAL 37% INTERNATIONAL 3% TECHNOLOGY HENRY SCHEIN ANNUAL REPORT 3 TO OUR STOCKHOLDERS Excluding unusual items, income from continuing operations attributable to Henry Schein, Inc. for 2009 was $289.5 million or $3.20 per diluted share, an increase of 8.7% and 9.6%, respectively, compared with 2008. We are pleased to have achieved the earnings per diluted share goal during a challenging economy and despite receiving reduced seasonal influenza vaccine product. We also achieved 23 basis point operating margin expansion (on a non-GAAP basis), and had a record operating cash flow of almost $400 million. As the theme of this Annual Report In 2009, our net sales of $6.5 billion suggests, 2009 was a time of economic challenge for most represent growth of 2.5% compared with We finished the year strongly in each 2008. This includes 5.7% growth in local of our four business groups. We saw currencies and 3.2% decline related to quarterly growth in dental consumable companies. Yet during the year, foreign currency exchange. Income from merchandise and less of a decline in Henry Schein successfully uncovered new opportunities and positioned our Company to continuing operations attributable to dental equipment for both the third and Henry Schein, Inc. for 2009 was fourth quarters of 2009, which we $308.6 million or $3.41 per diluted share, believe indicates positive trends in the an increase of 24.7% and 25.8%, dental market. emerge stronger than ever. respectively, compared with 2008. Henry Schein International Growth In the fourth quarter of 2009, for the first time in the Company’s history, Henry Schein’s International Group led all other business groups in sales. This milestone was the result of the Company’s continued commitment to build a business portfolio that is balanced between its North American and International operations. Since 1991, when Henry Schein established its first European operation in the Netherlands, the Company’s International Group has grown to include operations in 21 countries outside of North America. Throughout Europe and the Middle East, in Australia, New Zealand, China and Hong Kong SAR, Henry Schein now has operations or affiliates. And with a steady stream of strategic international mergers and acquisitions – most recently an animal health business in the Czech Republic, a dental business in Italy, and a medical business in Germany – the Company remains committed to being a leader in the growing number of global markets it serves. 4 Our medical sales growth reflects strong the last 12 months of approximately In 2009 we continued our strategy of sales of consumable products and $850 million, an increase of $620 million offering exclusive and non-exclusive products related to the treatment and from our existing sales levels. With the products to our customers. An example prevention of the H1N1 virus. In the addition of Butler Schein Animal Health, of this is our relationship with Allscripts fourth quarter of 2009, our International on a worldwide basis our veterinary sales for their Professional Electronic Health Group’s sales were the largest of our will represent approximately $1.4 billion Record, which became the foundation four business groups for the first time in annual sales. for Henry Schein’s ConnectHealthSM ever (see sidebar article on page 4), and we had double-digit growth in our International dental, medical and animal health businesses. We also saw continued strong growth in electronic services and solid sales of international products in our Technology and Value-Added Services Group. Other recent important mergers and initiative (see sidebar article on page 6). acquisitions include the leading To take advantage of emerging new distributor of animal health supplies in market opportunities, we created our the Czech Republic; a national dental Global Health Care Specialties Group. equipment sales and service distributor This important new group – which in Italy; a full-service provider of medical includes our Dental Specialties, consumables, equipment and technical Exclusive Brands, and Handpiece Repair services in Germany; and a U.S. businesses – reflects the strong In 2009 we took advantage of new orthodontics manufacturer and entrepreneurial spirit that has driven our opportunities to expand and evolve. distributor. While Butler Schein Animal Company since we were founded, and One of the most significant events Health adds about $600 million in will be instrumental as we help drive the announced in November was the annualized net sales, smaller acquisitions success of our customers’ practices creation of Butler Schein Animal Health, represent approximately $120 million in around the world. a transaction that was completed in annualized net sales. Additionally, there early fiscal 2010 (see sidebar article are many opportunities for further below). Butler Schein Animal Health expansion as approximately 40-45% began operations with the largest of the global markets we serve are veterinary sales and distribution footprint currently represented by smaller in the United States with revenues for independent distributors. Butler Schein Animal Health Butler Schein Animal Health, the largest veterinary sales and distribution company in the United States with revenues of approximately $850 million for the past 12 months ($620 million incremental to Henry Schein), was announced on January 4, 2010 through the combination of Butler Animal Health Supply and Henry Schein’s U.S. companion animal health business. Butler Schein Animal Health builds upon the outstanding reputation and strong customer focus that are the long-standing hall- marks of these organizations. Approximately 900 Butler Schein Animal Health team members – including approximately 300 field sales representatives and approximately 200 telesales and customer support representatives – serve companion animal health customers in all 50 states. Among the many benefits the new company provides to our customers are the broadest selection of products and value-added services in the industry, and the efficiency and convenience of ordering from one primary supplier. Butler Schein Animal Health also provides manufacturers with unmatched marketplace reach and insight. Among Butler Schein Animal Health’s supplier partners are Novartis, Bayer, Lilly, Sumitomo, Fort Dodge, Virbac and Schering (previously only sold by Henry Schein), as well as Merial products (previously only sold by Butler Animal Health Supply). Butler Schein Animal Health complements Henry Schein’s domestic operations as well as Henry Schein Animal Health International’s platform in Europe. Henry Schein owns a majority interest in Butler Schein Animal Health, with the remainder held by the previous owners of Butler Animal Health Supply. HENRY SCHEIN ANNUAL REPORT 5 We also believe that we reached a mile- With the achievements of 2009, we products in the marketplace. We will stone during 2009, as the more than believe that Henry Schein is well continue to operate our business in an 600,000 customer accounts we serve positioned to meet future challenges to efficient and fiscally responsible manner now represent more than one million take advantage of future opportunities to ensure our stockholders a good return health care providers. We are proud that that will benefit the five constituencies on investment. We will ensure that more than one million professionals we serve. We will remain focused on Team Schein, our most important asset, worldwide are benefitting from our meeting the needs of our dental, medical remains committed to the values that products and services, which we believe and veterinary customers, helping them have been the foundation of our is more than any other company. operate more efficient and successful success. And we will continue to give In January 2010 we announced the appointment of Bradley T. Sheares, Ph.D. to our Board of Directors. Dr. Sheares served as CEO of Reliant Pharmaceuticals through its acquisition by GlaxoSmithKline, and for 19 years was with Merck. Dr. Sheares brings to our Board a wealth of health care knowledge in a quickly changing medical landscape. practices so they can deliver high quality back to the communities in which we care to patients. We will continue to operate through the expanding scope forge strong partnerships with our of our Henry Schein Cares activities suppliers who trust us to represent their (see page 8 for more information about these activities). PAYORS STATE IMMUNIZATION REGISTRIES SURGERY CENTERS & HOSPITALS LABS COMMUNITY HEALTH CENTERS OTHER PHYSICIAN PRACTICES PHARMACIES Allscripts and ConnectHealth In 2009, Henry Schein signed an exclusive marketing agreement for the Allscripts ProfessionalTM Electronic Health Records, an easy-to-deploy, physician-centric solution that improves the delivery of safe, cost-effective, high-quality care. Adding this award-winning product to Henry Schein’s extensive portfolio of medical supplies, pharmaceutical, equipment, financial and other services enabled Henry Schein to serve as a one-stop provider for physician practice needs. The strategic partnership with Allscripts became the centerpiece of Henry Schein’s ConnectHealthSM initiative, which launched in 2010. Health care reform initiatives in the United States include a focus on wellness and preventative care rather than disease treatment, and cost savings through the more efficient practice of medicine. To Henry Schein’s customers, this translates into better outcomes for patients and increased practice efficiency and profitability. ConnectHealth helps physicians achieve these goals by combining Allscripts, the leading practice management software company with more installed systems than any other; Midmark, Siemens and Welch Allyn, leading medical device companies; Dell, one of the leading computer services company in the world; Medline, a primary health care manufacturer and distributor; and Henry Schein, the trusted advisor for all of a physi- cian customer’s needs. ConnectHealth delivers a unique integrated technology solution that works simply and reliably; is relevant to a physician’s specialty; provides seamless integration and functionality, and is affordable through financing and bundling options. Henry Schein coordinates its installation and management, and it provides physicians with an excellent return on investment. ConnectHealth is the right offering at the right time for the 500,000 American physicians in private practice and in numerous specialties who are looking for the best way to introduce electronic health records into their practice. 6 Henry Schein has done very well weathering the economic challenges of 2009 and finding new opportunities for growth. Importantly, we also have helped our customers weather these challenges and sustain the success of their practices. Reflecting on the positive market trends from the fourth quarter of 2009, we look forward to continuing market improvements in 2010 as our business model drives market share gains, 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. Sincerely, Stanley M. Bergman Chairman and Chief Executive Officer Henry Schein Dental – We Do That! Henry Schein’s mission is to do everything possible to help our customers operate more efficient and successful practices, so health care practitioners can focus on providing the best clinical care to patients. We strive to be as relevant as possible to our customers, especially during challenging economic times. Henry Schein Dental’s “We do that!” campaign underscores this relevance by highlighting the wide variety of products and services that we provide to dentists to maximize productivity, manage overhead, and attract and retain patients. Through our exclusive Practice Discovery Service, Henry Schein Dental Consultants analyze a customer’s practice and provide tailored solutions to meet that customer’s unique professional goals. Whether it is fee structure and analysis; hygiene; radiography; periodontal programs; general exams; practice marketing; case presentation; or team harmony, at Henry Schein Dental “We do that!” HENRY SCHEIN ANNUAL REPORT 7 HENRY SCHEIN CARES HELPING HEALTH HAPPEN Henry Schein Cares, the Company’s • The 4th annual “Healthy Children, global social responsibility, and the Healthy Lifestyles”™ program, which Henry Schein Cares Foundation are provided more than 4,000 children in six “Helping Health Happen”™ by supporting U.S. cities with free medical and dental initiatives that enhance health care screenings that addressed hypertension, advocacy and education; increase asthma, diabetes, obesity and access to care among underserved poor oral health. • The 11th annual “Holiday Cheer for Children” program, which furnished gifts to more than 1,000 less fortunate children and their families. populations; strengthen community wellness programs; further health care diplomacy; and help prepare for and respond to disasters. • The 12th annual Henry Schein By using its core competencies— “Back to School” extensive health care product offerings program, which and logistical distribution capabilities, In addition to Haitian earthquake relief provided clothing, close relationships with customers and (see sidebar article below) and the backpacks, books supplier partners, and an extensive ongoing Henry Schein Global Product and school supplies communication network—in creative Donation Program, key initiatives to more than and innovative ways, the Company in 2009 included: 2,000 underserved children in 18 furthers the goals of nearly 100 nonprofit U.S. and Canadian communities. organizations across the United States • The 7th annual American Dental • The 4th annual “Think Pink, Practice Association “Give Kids Pink” campaign, with funds generated A Smile”™ day, in from the sale of special “pink” products which Henry Schein benefitting the American Cancer and 38 supplier part- Society’s goal of raising awareness and ners donated products finding a cure for breast cancer. and abroad. By “Helping Health Happen” in these ways, the Company is furthering its long-term success—a concept of enlightened self-interest that Benjamin Franklin described as “doing well by doing good.” to provide free dental services for nearly 500,000 underserved children across the United States. In response to the earth- quake that devastated Haiti on January 12, 2010, Henry Schein and its supplier partners shipped $1 million in essential medical supplies to partner non-govern- mental organizations (NGOs) providing relief. Henry Schein Cares, the Company’s global social responsibility program, worked with 8 Crosstex, a Cantel Medical Company; Derma Sciences; Dukal Corporation; Hu-Friedy Mfg. Co.; J&J Instruments; Medicom; Miltex; Sempermed USA; Angiotech; and Tidi Products to earmark the supplies within days of the earthquake. More than 200 pallets of medical supplies were shipped to Henry Schein Cares partner NGOs, including Airline Ambassadors, AmeriCares, Direct Relief International, Health Partners International of Canada, Heart to Heart International, Humane Society International, International Medical Corps, LDS Charities, Medshare, and Real Medicine Foundation. At an event hosted by U.S. Representative Steve Israel (N.Y.) announcing the donation, Stanley M. Bergman, Chairman and Chief Executive Officer for Henry Schein, said, “Our collective efforts exemplify the power of strategic public-private partnerships. Through our close collaboration with participating supplier Haitian Earthquake Relief pleased to serve as a catalyst by providing a vehicle for interested industry partners to provide direct support for the Haiti relief effort and other social responsibility initiatives.” partners and committed NGOs, we have been able to make a positive impact on the lives of Haitians that is exponentially stronger than any single partner could have made individually. With many companies looking for ways to provide support but unsure of how to do it, Henry Schein Cares is BOARD OF DIRECTORS Seated from left to right: Donald J. Kabat,(1) (2) Retired Partner, Accenture, Ltd.; James P. Breslawski, President and Chief Operating Officer; Stanley M. Bergman, Chairman and Chief Executive Officer; Karyn Mashima,(4) Private Consultant; Former Senior Vice President, Strategy and Technology, Avaya; Barry J. Alperin,(1) (2) (3) Retired Vice Chairman, Hasbro, Inc. Standing from left to right: Paul Brons,(4) Former Member, Board of Management, Akzo Nobel, N.V.; Gerald A. Benjamin, Executive Vice President and Chief Administrative Officer; 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; Philip A. Laskawy,(1) (3) (4) Retired Chairman, Ernst & Young LLP; Norman S. Matthews,(2) (4) Former President, Federated Department Stores, Inc.; Mark E. Mlotek, Executive Vice President, Corporate Business Development; Bradley T. Sheares, Ph.D., Former CEO, Reliant Pharmaceuticals; Former President of U.S. Human Health, Merck & Co.; Steven Paladino, Executive Vice President and Chief Financial Officer (1) Member Audit Committee (2) Member Compensation Committee (3) Member Nominating and Governance Committee (4) Member Strategic Advisory Committee EXECUTIVE OFFICERS Stanley M. Bergman Chairman and Chief Executive Officer Gerald A. Benjamin Executive Vice President and Chief Administrative Officer James P. Breslawski President and Chief Operating Officer Leonard A. David Senior Vice President and Chief Compliance Officer James Harding Senior Vice President and Chief Technology Officer Stanley Komaroff Senior Advisor Mark E. Mlotek Executive Vice President, Corporate Business Development Steven Paladino Executive Vice President and Chief Financial Officer Michael Racioppi Senior Vice President and Chief Merchandising Officer Lonnie Shoff President, Global Health Care Specialties Michael Zack President, International Group HENRY SCHEIN ANNUAL REPORT 9 NON-GAAP DISCLOSURES The following table sets forth, for the periods indicated, a reconciliation of operating income and income from continuing operations attributable to Henry Schein, Inc. adjusted to reflect the effects of discontinued operations, as reported to adjusted operating income and adjusted income from continuing operations. Years ended December 26, 2009 December 27, 2008 December 25, 2004 (in thousands, except per share data) Operating income, as reported $ 464,085 $ 419,286 $ 191,949 Adjustments: Restructuring costs (1) Costs related to foreign tax benefit (2) Adjusted operating income Adjusted operating margin 3,020 1,600 23,240 - $ 468,705 $ 442,526 7.2% 6.9% - - 205,195 5.4% Income from continuing operations attributable to attributable to Henry Schein, Inc.: As reported Adjustments, net of tax: Restructuring costs (1) Costs related to foreign tax benefit (2) Foreign tax benefit (3) Adjustments related to the Lehman Brothers bankruptcy (4) Other non-recurring income/expense, net (5) $ 308,551 $ 247,347 114,129 2,058 1,080 (20,845) (338) (1,028) 15,991 - - 3,045 - - 8,358 8,358 - - Adjusted income from continuing operations attributable to Henry Schein, Inc.: $ 289,478 $ 266,383 $ 122,487 Diluted earnings from continuing operations per share attributable to Henry Schein, Inc.: As reported Adjusted $ $ 3.41 3.20 $ $ 2.71 2.92 $ 1.29 1.39 Diluted weighted-average common shares outstanding: 90,556 91,221 89,099 Dece $ $ $ 26,8 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 attributable to Henry Schein, Inc. and diluted earnings from continuing operations per share attributable to Henry Schein, Inc., 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 2009 and 2008, we recorded restructuring costs of $3.0 million pre-tax ($2.1 million post-tax) and $23.2 million pre-tax ($16.0 million post-tax), respectively. The effect that these charges had on earnings per diluted share from continuing operations attributable to Henry Schein, Inc. for the years ended December 26, 2009 was ($0.02) and December 27, 2008 was ($0.18), respectively. (2) During 2009, we incurred professional fees of $1.6 million pre-tax ($1.1 million post-tax) related to a plan of reorganization outside the United States that will allow us to utilize tax loss carryforwards beginning in 2010 in certain foreign tax jurisdictions. The effect that this charge had on earnings per diluted share from continuing operations attributable to Henry Schein, Inc. for the year ended December 26, 2009 was ($0.01) (3) During 2009, we completed a planned reorganization outside the United states that will allow us to utilize tax loss carryforwards to offset taxable income beginning in 2010 in certain foreign tax jurisdictions. As a result of this reorganization we reduced our valuation allowance by $20.8 million during the year ended December 26, 2009. The effect that this had on earnings per diluted share from continuing operations attributable to Henry Schein, Inc. for the year ended December 26, 2009 was $0.23. (4) During 2009 and 2008, we recorded (credits)/charges related to the Lehman Brothers bankruptcy of ($0.5) million pre-tax (($0.3) million post-tax) and $4.5 million pre-tax ($3.0 million post-tax), respectively. The effect that this charge had on earnings per diluted share from continuing operations attributable to Henry Schein, Inc. for the years ended December 26, 2009 and December 27, 2008 was $0.00 and ($0.03), respectively. (5) Other non-recurring income/expense, net consists of income of $2.4 million pre-tax ($1.6 million post-tax) relating to proceeds received from litigation settlements and a charge of $0.9 million pre-tax ($0.6 million post-tax) relating to foreign exchange. The impact of the total after-tax income of $1.0 million on our earnings per diluted share of continuing operations attributable to Henry Schein, Inc. for the year ended December 26, 2009 was $0.01. 10 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 26, 2009 __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-27078 HENRY SCHEIN, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 11-3136595 (I.R.S. Employer Identification No.) 135 Duryea Road Melville, New York (Address of principal executive offices) 11747 (Zip Code) (631) 843-5500 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.01 per share The Nasdaq Stock Market 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. 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. Documents Incorporated by Reference: TABLE OF CONTENTS PART I ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. PART II ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. PART III ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. PART IV ITEM 15. Business ........................................................................................................................... Risk Factors ..................................................................................................................... Unresolved Staff Comments ............................................................................................ Properties ......................................................................................................................... Legal Proceedings ............................................................................................................ Submission of Matters to a Vote of Security Holders ...................................................... Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ................................................................... Selected Financial Data .................................................................................................... Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................................... Quantitative and Qualitative Disclosures About Market Risk ......................................... Financial Statements and Supplementary Data ................................................................ Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ............................................................................................. Controls and Procedures .................................................................................................. Other Information ............................................................................................................ Directors, Executive Officers and Corporate Governance ............................................... Executive Compensation ................................................................................................. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................................................................................ Certain Relationships and Related Transactions, and Director Independence ................. Principal Accountant Fees and Services .......................................................................... Exhibits and Financial Statement Schedules ................................................................... Signatures ......................................................................................................................... Exhibit Index .................................................................................................................... Page Number 3 15 22 23 23 24 24 27 29 50 51 103 103 105 105 105 106 106 106 107 108 111 2 PART I ITEM 1. Business 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. 3 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. 4 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: 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 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. • 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. • 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. 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 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. • 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. • 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. • 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. 5  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. 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. • 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 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. 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. 6 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: 2009 2008 (1) 2007 (1) Healthcare Distribution Dental: Consumable dental products, dental laboratory products and small equipment (2) ............................................................ Large dental equipment (3) ................................................................. Total dental Medical: Medical products (4) .......................................................................... Animal health products (5) ................................................................ Total medical .............................................................................. Total Healthcare Distribution ............................................................ Technology Software and related products and 45.9 % 46.4 % 46.0 % 17.1 63.0 23.4 11.0 34.4 97.4 17.9 64.3 22.9 10.2 33.1 97.4 18.3 64.3 27.0 6.5 33.5 97.8 other value-added products (6) .................................................. 2.6 2.6 2.2 Total ........................................................................................................... 100.0 % 100.0 % 100.0 % (1) Adjusted to reflect the effects of discontinued operations. (2) Includes X-ray products, infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants, gypsum, acrylics, articulators and abrasives. (3) Includes dental chairs, delivery units and lights, X-ray equipment, equipment repair and high-tech equipment. (4) Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products, equipment and vitamins. (5) Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment. (6) Includes software and related products and other value-added products, including financial products and continuing education. 7 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: • 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. • 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. • 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. • 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. 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. 8 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: • 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. 9 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 10 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. 11 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. 12 Executive Officers of the Registrant The following table sets forth certain information regarding our executive officers: Name Age Position Stanley M. Bergman ......... Gerald A. Benjamin .......... James P. Breslawski ......... Leonard A. David ............. James Harding .................. Stanley Komaroff ............. Mark E. Mlotek ................ Steven Paladino ............... Michael Racioppi ............ Lonnie Shoff ..................... Michael Zack .................... 60 57 56 61 54 74 54 52 55 51 57 Chairman, Chief Executive Officer, Director Executive Vice President, Chief Administrative Officer, Director President, Chief Operating Officer, Director Senior Vice President, Chief Compliance Officer Senior Vice President, Chief Technology Officer Senior Advisor Executive Vice President, Corporate Business Development, Director Executive Vice President, Chief Financial Officer, Director Senior Vice President, Chief Merchandising Officer President, Global Healthcare Specialties Group 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. 13 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. 14 ITEM 1A. Risk Factors 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. 15 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. 16 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. 17 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 18 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 19 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. 20 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. 21 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. Item 1B. Unresolved Staff Comments 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. 22 ITEM 2. Properties We own or lease the following properties: Property Corporate Headquarters .................. Corporate Headquarters .................. Office and Distribution Center ........ Distribution Center .......................... Distribution Center .......................... Distribution Center .......................... Distribution Center .......................... Distribution Center .......................... Distribution Center .......................... Distribution Center .......................... Distribution Center .......................... Office and Distribution Center ........ Distribution Center .......................... Distribution Center .......................... Location Melville, NY Melville, NY West Allis, WI Denver, PA Indianapolis, IN Indianapolis, IN Grapevine, TX Gallin, Germany Jacksonville, FL Niagara on the Lake, Canada Sparks, NV Gillingham, United Kingdom Tours, France Lyssach, Switzerland Own or Lease Own Lease Lease Lease Own Lease Lease Own Lease Lease Lease Lease Own Lease Approximate Square Footage 105,000 185,000 106,000 613,000 287,000 144,000 242,000 215,000 212,000 94,000 338,000 103,000 133,000 180,000 Lease Expiration Date N/A July 2020 October 2017 February 2013 N/A June 2011 July 2013 N/A June 2013 September 2016 February 2011 April 2010 N/A 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. ITEM 3. Legal Proceedings 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. 23 ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2009. PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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: Fiscal 2009: 1st Quarter ............................................................................................ 2nd Quarter .......................................................................................... 3rd Quarter ........................................................................................... 4th Quarter ........................................................................................... $ 40.60 47.70 56.50 56.92 $ 33.55 38.77 43.82 49.10 High Low Fiscal 2008: 1st Quarter ............................................................................................ 2nd Quarter .......................................................................................... 3rd Quarter ........................................................................................... 4th Quarter ........................................................................................... $ 63.62 59.43 60.42 55.66 $ 55.25 50.74 48.93 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. 24 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. Fiscal Month 09/27/09 through 10/31/09 11/01/09 through 11/28/09 11/29/09 through 12/26/09 Maximum Number of Shares that May Yet Be Purchased Under Our Program 1,092,852 1,146,226 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. 25 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 ............................................... NASDAQ Stock Market (U.S. companies) Composite Index ......... 100.00 108.32 115.78 125.46 96.85 117.87 100.00 101.33 114.01 123.71 73.11 105.61 26 ITEM 6. Selected Financial Data 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.” December 26, 2009 December 27, 2008 (1) (2) Years ended December 29, 2007 (1) (2) (in thousands, except per share data) December 30, 2006 (1) (2) December 31, 2005 (1) (2) Income Statement Data: Net sales .............................................................................. Gross profit .......................................................................... Selling, general and administrative expenses ........................................................................... Restructuring costs (3) ......................................................... Operating income ................................................................ Other expense, net ............................................................... Income from continuing operations before taxes, equity in earnings (losses) of affiliates and noncontrolling interests ................................................... Income taxes Equity in earnings (losses) of affiliates ....................................................................... Income from continuing operations ..................................... Income (loss) from discontinued operations, net of tax (4) .................................................. Net income .......................................................................... Less: Net income attributable to $ 6,538,336 1,916,820 $ 6,380,413 1,874,295 $ 5,889,884 1,706,092 $ 5,021,523 1,459,330 $ 4,513,127 1,299,562 1,449,715 3,020 464,085 (11,365) 452,720 (127,521) 5,243 330,442 2,715 333,157 1,431,769 23,240 419,286 (23,837) 395,449 (131,210) 5,037 269,276 (7,902) 261,374 1,319,153 - 386,939 (8,430) 378,509 (128,556) (73) 249,880 (20,704) 229,176 1,155,215 - 304,115 (13,529) 290,586 (103,440) 835 187,981 (19,304) 168,677 1,037,445 - 262,117 (20,765) 241,352 (88,299) 827 153,880 (11,161) 142,719 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 ................................... Income (loss) from discontinued operations, net of tax ...................................................... Net income ........................................................................ Earnings (loss) per share attributable to Henry Schein, Inc.: From continuing operations: 308,551 247,347 232,529 180,049 147,848 2,602 311,153 $ (7,890) 239,457 $ (20,795) 211,734 $ (19,462) 160,587 $ (11,092) 136,756 $ Basic ................................................................................ Diluted ............................................................................. $ 3.47 3.41 $ 2.78 2.71 $ 2.63 2.55 $ 2.05 2.00 $ 1.70 1.67 From discontinued operations: Basic ................................................................................ Diluted ............................................................................. $ 0.03 0.03 $ (0.09) (0.08) $ (0.24) (0.23) $ (0.22) (0.21) $ (0.13) (0.12) From net income: Basic ................................................................................ Diluted ............................................................................. $ 3.50 3.44 $ 2.69 2.63 $ 2.39 2.32 $ 1.83 1.79 $ 1.57 1.55 Weighted-average common shares outstanding: Basic ................................................................................ Diluted ............................................................................. 88,872 90,556 89,080 91,221 88,559 91,163 87,952 89,820 87,006 88,489 27 December 26, 2009 December 27, 2008 (1) Years ended December 29, 2007 (1) (in thousands) December 30, 2006 (1) December 31, 2005 (1) Net Sales by Market Data: Healthcare distribution (5): Dental (6) ................................................................ Medical (7) .............................................................. International (8) ...................................................... Total healthcare distribution ................................ Technology (9) ............................................................ Total .................................................................... $ $ $ $ $ 2,509,921 1,457,102 2,398,105 6,365,128 173,208 6,538,336 2,567,064 1,428,968 2,221,092 6,217,124 163,289 6,380,413 2,447,841 1,540,269 1,769,881 5,757,991 131,893 5,889,884 2,122,415 1,398,996 1,401,889 4,923,300 98,223 5,021,523 $ $ $ $ $ 1,883,748 1,284,214 1,256,910 4,424,872 88,255 4,513,127 December 26, 2009 December 27, 2008 (2) As of December 29, 2007 (2) (in thousands) December 30, 2006 (2) December 31, 2005 (2) Balance Sheet data: Total assets ................................................................. Long-term debt ........................................................... Redeemable noncontrolling interests .......................... Stockholders' equity ................................................... $ 3,835,985 243,373 178,570 2,161,508 $ 3,599,210 256,648 233,035 1,772,354 $ 3,313,472 407,627 150,028 1,674,987 $ 2,880,547 434,804 111,902 1,393,356 $ 2,582,436 463,455 72,433 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. 28 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. 29 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 30 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. 31 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. 32 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 ................................................................................................. Gross profit .............................................................................................. 4,621,516 1,916,820 Operating expenses: Selling, general and administrative ......................................................... 1,449,715 Restructuring costs ................................................................................... 3,020 4,506,118 1,874,295 1,431,769 23,240 4,183,792 1,706,092 1,319,153 - 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 ............................................................. Net cash used in financing activities ............................................................. (97,448) (197,675) (168,010) (87,970) (235,292) (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. 33 2009 Compared to 2008 Net Sales Net sales for 2009 and 2008 were as follows (in thousands): Healthcare distribution (2): Dental (3) ........................................ Medical (4) ..................................... International (5) ............................... Total healthcare distribution ........ Technology (6) ...................................... Total ............................................. 2009 $ 2,509,921 1,457,102 2,398,105 6,365,128 173,208 6,538,336 $ % of Total 38.4 % 22.3 36.7 97.4 2.6 100.0 % 2008 (1) % of Total Increase / (Decrease) $ % $ 2,567,064 1,428,968 2,221,092 6,217,124 163,289 6,380,413 $ 40.2 % 22.4 34.8 97.4 2.6 100.0 % $ (57,143) 28,134 177,013 148,004 9,919 157,923 $ (2.2) % 2.0 8.0 2.4 6.1 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. 34 Gross Profit Gross profit and gross margins for 2009 and 2008 by segment and in total were as follows (in thousands): 2009 Gross Margin % 2008 (1) Gross Margin % Increase / (Decrease) $ % Healthcare distribution ................ Technology .................................. Total ................................... $ $ 1,792,516 124,304 1,916,820 28.2 % 71.8 29.3 $ $ 1,753,655 120,640 1,874,295 28.2 % 73.9 29.4 $ $ 38,861 3,664 42,525 2.2 % 3.0 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): 2009 Healthcare distribution .............. Technology ............................... Total ................................. $ $ 1,387,581 62,134 1,449,715 % of Respective Net Sales 21.8 % 35.9 22.2 2008 (1) $ $ 1,368,108 63,661 1,431,769 % of Respective Net Sales 22.0 % 39.0 22.4 Increase / (Decrease) % $ $ $ 19,473 (1,527) 17,946 1.4 % (2.4) 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. 35 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): 2009 2008 (1) (2) Increase / (Decrease) % $ Interest income ................................................. Interest expense ................................................ Other, net ......................................................... Other expense, net .................................... 9,979 (23,370) 2,026 (11,365) 16,355 (34,605) (5,587) (23,837) (6,376) 11,235 7,613 12,472 (39.0) % 32.5 136.3 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. 36 2008 Compared to 2007 Net Sales Net sales for 2008 and 2007 were as follows (in thousands): Healthcare distribution (2): Dental (3) ........................................ Medical (4) ..................................... International (5) ............................... Total healthcare distribution ........ Technology (6) ...................................... Total ............................................. 2008 (1) $ 2,567,064 1,428,968 2,221,092 6,217,124 163,289 6,380,413 $ % of Total 40.2 % 22.4 34.8 97.4 2.6 100.0 % 2007 (1) % of Total Increase / (Decrease) $ % $ 2,447,841 1,540,269 1,769,881 5,757,991 131,893 5,889,884 $ 41.6 % 26.2 30.0 97.8 2.2 100.0 % $ 119,223 (111,301) 451,211 459,133 31,396 490,529 $ 4.9 % (7.2) 25.5 8.0 23.8 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. 37 Gross Profit Gross profit and gross margins for 2008 and 2007 by segment and in total were as follows (in thousands): 2008 (1) Gross Margin % 2007 (1) Gross Margin % Increase / (Decrease) $ % Healthcare distribution ................ Technology .................................. Total ................................... $ $ 1,753,655 120,640 1,874,295 28.2 % 73.9 29.4 $ $ 1,607,967 98,125 1,706,092 27.9 % 74.4 29.0 $ $ 145,688 22,515 168,203 9.1 % 22.9 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): 2008 (1) Healthcare distribution .............. Technology ............................... Total ................................. $ $ 1,368,108 63,661 1,431,769 % of Respective Net Sales 22.0 % 39.0 22.4 2007 (1) $ $ 1,268,030 51,123 1,319,153 % of Respective Net Sales 22.0 % 38.8 22.4 Increase / (Decrease) % $ $ $ 100,078 12,538 112,616 7.9 % 24.5 8.5 (1) Adjusted to reflect the effects of discontinued operations. Selling, general and administrative expenses increased by $112.6 million, or 8.5%, for the year ended December 27, 2008 compared to the prior year period. As a percentage of net sales, selling, general and administrative expenses remained constant at 22.4% compared with the comparable prior year period. As a component of total selling, general and administrative expenses, selling expenses increased $87.1 million, or 9.8%, for the year ended December 27, 2008 from the prior year period. This increase was primarily due to payroll, as well as other expenses related to recent acquisitions. As a percentage of net sales, selling expenses increased to 15.2% from 15.0% for the comparable prior year period. 38 As a component of total selling, general and administrative expenses, general and administrative expenses increased $25.5 million, or 5.9%, for the year ended December 27, 2008 from the prior year period. As a percentage of net sales, general and administrative expenses decreased to 7.2% from 7.4% for the comparable prior year period. Other Expense, Net Other expense, net for the years ended 2008 and 2007 was as follows (in thousands): 2008 (1) (2) 2007 (1) (2) Increase / (Decrease) % $ Interest income ................................................. Interest expense ................................................ Other, net ......................................................... Other expense, net .................................... 16,355 (34,605) (5,587) (23,837) 16,531 (29,607) 4,646 (8,430) (176) (4,998) (10,233) (15,407) (1.1) % (16.9) (220.3) (182.8) $ $ $ $ $ $ (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 increased $15.4 million to $23.8 million for the year ended December 27, 2008 from the comparable prior year period. As a component of Other expense, net, Interest income was substantially unchanged from the prior year. Interest expense increased $5.0 million primarily due to forward points related to foreign currency hedging transactions and the impact of the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options,” partially offset by lower interest rates on our floating rate debt. The change in Other, net resulted from a reserve for losses of $3.7 million for foreign exchange contracts for hedging intercompany loans with Lehman Brothers Special Financing, Inc., whose parent, Lehman Brothers Holdings, Inc., filed for Chapter 11 bankruptcy on September 15, 2008. An additional $0.8 million was attributable to a reserve for losses in our investment in the Reserve Primary Fund, a money market fund that decreased its net asset value from $1.00 to $0.97 due to investments in Lehman Brothers debt. The impact of fluctuations in foreign exchange rates also contributed to the increase in Other, net. The prior period’s Other, net included a gain from the divestiture of certain non-core businesses related to the acquisition of a dental supply company in 2007. Income Taxes For the year ended December 27, 2008, our effective tax rate from continuing operations was 33.2% compared to 34.0% for the prior year period. The difference was impacted by additional tax planning initiatives, settlements of tax audits and higher income from lower taxing countries. The difference between our effective tax rate and the federal statutory tax rate for both periods related primarily to foreign and state income taxes. Loss from Discontinued Operations During the years ended December 27, 2008 and December 29, 2007, respectively, we recognized aggregate losses of $7.9 million and $20.7 million, net of tax, related to discontinued operations (see Note 7 in the accompanying annual consolidated financial statements for further discussion). Net Income Net income increased $32.2 million, or 14.0%, for the year ended December 27, 2008 compared to the prior year period. The increase in net income is primarily due to an increase in income from continuing operations. In 2007, net income included a gain on the sale of discontinued operations of $0.7 million, net of taxes. 39 Liquidity and Capital Resources Our principal capital requirements include the funding of working capital needs, repayments of debt principal, funding of acquisitions, purchases of securities and fixed assets and repurchases of common stock. Working capital requirements generally result from increased sales, special inventory forward buy-in opportunities and payment terms for receivables and payables. Historically, sales have tended to be stronger during the third and fourth quarters and special inventory forward buy-in opportunities have been most prevalent just before the end of the year, causing our working capital requirements to have been higher from the end of the third quarter to the end of the first quarter of the following year. We finance our business primarily through cash generated from our operations, revolving credit facilities and debt placements. Our ability to generate sufficient cash flows from operations is dependent on the continued demand of our customers for our products and services, and access to products and services from our suppliers. Net cash provided by operating activities was $396.9 million for the year ended December 26, 2009 compared to $384.8 million for the comparable prior year period. The net change of $12.1 million results from net income improvements, offset by decreases related to components of our working capital. Net cash used in investing activities was $97.4 million for the year ended December 26, 2009 compared to $168.0 million for the comparable prior year period. The net change of $70.6 million was primarily due to a reduction in payments for business acquisitions, proceeds received from a business divestiture and the absence of purchases of available-for-sale securities in the current year, partially offset by a reduction in proceeds from foreign exchange forward contract settlements. Net cash used in financing activities was $197.7 million for the year ended December 26, 2009 compared to $88.0 million for the comparable prior year period. The net change of $109.7 million was primarily due to increased payments for long-term debt, including repayment of $130.0 million of our senior notes on June 30, 2009, as well as an increase in acquisitions of noncontrolling interests of subsidiaries, partially offset by the absence of stock repurchases in the current year. We expect to invest approximately $50 million to $55 million during 2010 in capital projects to modernize and expand our facilities and computer systems and to integrate certain operations into our core structure. The following table summarizes selected measures of liquidity and capital resources (in thousands): Cash and cash equivalents .......................................................................... Available-for-sale securities - long-term .................................................... Working capital .......................................................................................... $ 471,154 18,848 1,127,279 $ 369,570 29,028 882,401 December 26, 2009 December 27, 2008 (1) Debt: Bank credit lines .................................................................................... Current maturities of long-term debt ..................................................... Long-term debt ...................................................................................... Total debt ......................................................................................... $ $ 932 23,560 243,373 267,865 4,936 156,405 256,648 417,989 $ $ (1) Adjusted to reflect the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” 40 Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity. As of December 26, 2009, we have approximately $21.1 million ($18.9 million net of temporary impairments) invested in auction-rate securities (“ARS”). ARS are publicly issued securities that represent long-term investments, typically 10-30 years, in which interest rates had reset periodically (typically every 7, 28 or 35 days) through a “dutch auction” process. Approximately $18.7 million ($16.5 million net of temporary impairments) of our ARS are backed by student loans that are backed by the federal government and the remaining $2.4 million are invested in closed-end municipal bond funds. Our ARS portfolio is comprised of investments that are rated AAA by major independent rating agencies. Since the middle of February 2008, these auctions have failed to settle due to an excess number of sellers compared to buyers. The failure of these auctions has resulted in our inability to liquidate our ARS in the near term. We are currently not aware of any defaults or financial conditions that would negatively affect the issuers’ ability to continue to pay interest and principal on our ARS. We continue to earn and receive interest at contractually agreed upon rates. We believe that the current lack of liquidity related to our ARS investments will have no impact on our ability to fund our ongoing operations and growth opportunities. As of December 26, 2009, we have classified ARS holdings as long-term, available-for-sale and they are included in the Investments and other line within our consolidated balance sheets. Our business requires a substantial investment in working capital, which is susceptible to fluctuations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, special inventory forward buy-in opportunities and our desired level of inventory. We anticipate future increases in our working capital requirements. Our accounts receivable days sales outstanding from continuing operations decreased to 40.4 days as of December 26, 2009 from 41.4 days as of December 27, 2008. During the years ended December 26, 2009 and December 27, 2008, we wrote off approximately $6.1 million and $6.5 million, respectively, of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from continuing operations decreased to 6.2 for the year ended December 26, 2009 from 6.5 for the year ended December 27, 2008. Our working capital accounts may be impacted by current and future economic conditions. The following table summarizes our contractual obligations related to fixed and variable rate long-term debt, including interest (assuming an average long-term rate of interest of 3.2%), as well as operating and capital lease obligations, capital expenditure obligations and inventory purchase commitments as of December 26, 2009: Payments due by period (in thousands) < 1 year 1 - 3 years 4 - 5 years > 5 years Total Contractual obligations: Long-term debt, including interest ......................... $ 29,402 $ 15,920 $ 17,106 $ 384,000 $ 446,428 Inventory purchase commitments ........................... 162,505 273,282 Operating lease obligations .................................... Capital lease obligations, including interest ........... 59,611 2,320 77,453 2,683 78,634 33,259 1,115 145,479 41,355 - 659,900 211,678 6,118 Total ....................................................................... $ 253,838 $ 369,338 $ 130,114 $ 570,834 $ 1,324,124 Inventory purchase commitments include obligations to purchase influenza vaccine from a manufacturer through 2012, which require us to pay an amount per dose based on the prevailing market price or formula price in each respective year. The amounts included in the above table related to these purchase commitments were determined using current market conditions. We also have obligations to purchase influenza vaccine from another manufacturer. Actual amounts may differ. 41 In 2004, we completed an issuance of $240.0 million of convertible debt. These notes are senior unsecured obligations bearing a fixed annual interest rate of 3.0% and are due to mature on August 15, 2034. Interest on the notes is payable on February 15 and August 15 of each year. The notes are convertible into our common stock at a conversion ratio of 21.58 shares per one thousand dollars of principal amount of notes, which is equivalent to a conversion price of $46.34 per share, under the following circumstances: • if the price of our common stock is above 130% of the conversion price measured over a specified number of trading days; • during the five-business-day period following any 10-consecutive-trading-day period in which the average of the trading prices for the notes for that 10-trading-day period was less than 98% of the average conversion value for the notes during that period; • if the notes have been called for redemption; or • upon the occurrence of a fundamental change or specified corporate transactions, as defined in the note agreement. Upon conversion, we are required to satisfy our conversion obligation with respect to the principal amount of the notes to be converted, in cash, with any remaining amount to be satisfied in shares of our common stock. We currently have sufficient availability of funds through our $400.0 million revolving credit facility (discussed below) along with cash on hand to fully satisfy our debt obligations, including the cash portion of our convertible debt. We also will pay contingent interest during any six-month-interest period beginning August 20, 2010, if the average trading price of the notes is above specified levels. We may redeem some or all of the notes on or after August 20, 2010. The note holders may require us to purchase all or a portion of the notes on August 15, 2010, 2014, 2019, 2024 and 2029 or, subject to specified exceptions, upon a change of control event. If we are required by the note holders to purchase all or a portion of the notes, we will use our existing credit line to fund such purchase; therefore, we have classified our convertible debt as long-term in our consolidated balance sheet. Our $20.0 million of remaining senior notes bear interest at a fixed rate of 6.7% per annum and mature on September 27, 2010. Interest on our senior notes is payable semi-annually. On September 5, 2008, we entered into a new $400.0 million revolving credit facility with a $100.0 million expansion feature. The $400.0 million credit line expires in September 2013. This credit line replaced our then existing $300.0 million revolving credit line, which would have expired in May 2010. As of December 26, 2009, there were no borrowings outstanding under this revolving credit facility and there were $10.2 million of letters of credit provided to third parties. As further discussed in Note 18 of “Notes to Consolidated Financial Statements,” which is incorporated herein by reference, effective December 31, 2009 we incurred approximately $320.0 million of debt in connection with the acquisition of a majority interest in Butler Animal Health Supply, LLC. Under our common stock repurchase programs approved by our Board of Directors, we have $57.7 million available for future common stock share repurchases. During the year ended December 26, 2009, we did not repurchase any of our common stock. 42 Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value based on third-party valuations. Effective December 28, 2008, we have adopted the provisions of ASC Topic 480-10. ASC Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. As a result of the adoption of the provisions of ASC Topic 480-10, we have recorded the estimated fair value of the redeemable securities ($178.6 million, $233.0 million and $150.0 million at December 26, 2009, December 27, 2008 and December 29, 2007, respectively) and reduced Additional paid-in capital and Noncontrolling interests within the Stockholders’ equity section of our consolidated balance sheets. The components of the change in the fair value of the Redeemable noncontrolling interests for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 are presented in the following table: Balance, beginning of year ......................................................... Acquisitions of additional ownership from noncontrolling interests ......................................................... Initial noncontrolling interests and adjustments related to business acquisitions ............................................................. Net income attributable to noncontrolling interests .................... Dividends paid ........................................................................... Effect of foreign currency translation attributable to noncontrolling interests ......................................................... Change in fair value of redeemable securities ............................ Balance, end of year ................................................................... December 26, 2009 December 27, 2008 December 29, 2007 $ 233,035 $ 150,028 $ 111,902 (69,157) - - (3,270) 21,975 (5,973) 14,994 21,929 (2,994) 270 17,350 (1,362) 2,541 (581) 178,570 $ (2,060) 51,138 233,035 $ 854 21,014 150,028 $ Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments will not impact the calculation of earnings per share. Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain profitability targets are met. For acquisitions completed prior to 2009, we accrue liabilities that may arise from these transactions when we believe that the outcome of the contingency is determinable beyond a reasonable doubt. For 2009 and future acquisitions, as required by ASC Topic 805, “Business Combinations,” we will accrue liabilities for the estimated fair value of additional purchase price adjustments at the time of the acquisition. Any adjustments to these accrual amounts will be recorded in our consolidated statement of income. As more fully disclosed in Note 10 of “Notes to Consolidated Financial Statements,” we adopted ASC Topic 740, “Income Taxes,” effective December 31, 2006. We cannot reasonably estimate the timing of future cash flows related to the unrecognized tax benefits, including accrued interest, of $20.9 million as of December 26, 2009. 43 We finance our business to provide adequate funding for at least 12 months. Funding requirements are based on forecasted profitability and working capital needs, which, on occasion, may change. Consequently, we may change our funding structure to reflect any new requirements. We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets, and our available funds under existing credit facilities provide us with sufficient liquidity to meet our currently foreseeable short-term and long-term capital needs. We have no off-balance sheet arrangements. Critical Accounting Policies and Estimates The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical data, when available, experience, industry and market trends, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, by their nature, estimates are subject to various assumptions and uncertainties. Reported results are therefore sensitive to any changes in our assumptions, judgments and estimates, including the possibility of obtaining materially different results if different assumptions were to be applied. We believe that the following critical accounting policies, which have been discussed with our audit committee, affect the significant estimates and judgments used in the preparation of our financial statements: Revenue Recognition We generate revenue from the sale of dental, medical and animal health consumable products, as well as equipment, software products and services and other sources. Provisions for discounts, rebates to customers, customer returns and other contra-revenue adjustments are recorded based upon historical data and estimates and are provided for in the period in which the related sales are recognized. Revenue derived from the sale of consumable products is recognized when products are shipped to customers. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating the completion of the earnings process because we have no post-shipment obligations, the product price is fixed and determinable, collection of the resulting receivable is probable and product returns are reasonably estimable. Revenue derived from the sale of equipment is recognized when products are delivered to customers. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation, which is typically completed at the time of delivery. Revenue derived from the sale of software products is recognized when products are shipped to customers. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is recognized over the period in which the services are provided. Revenue derived from the sale of products consisting of multiple elements (i.e., hardware, software, installation, training and technical support) is allocated to the various elements based upon vendor-specific objective evidence of fair value. Revenue derived from other sources including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided. 44 Accounts Receivable and Reserves The carrying amount of accounts receivable reflects a reserve representing our best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectibility. Although we believe our judgments, estimates and/or assumptions related to accounts receivable and reserves are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results. Inventories and Reserves Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined by the first-in, first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with our policy for inventory valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect salability. Although we believe our judgments, estimates and/or assumptions related to inventory and reserves are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill and other indefinite-lived intangible assets (primarily trademarks) are not amortized, but are subject to at least an annual impairment analysis. Such impairment analyses for goodwill require the comparison of the fair value to the carrying value of reporting units. Measuring fair value of a reporting unit is generally based on valuation techniques using multiples of sales or earnings, unless supportable information is available for using a present value technique, such as estimates of future cash flows. Although we believe our judgments, estimates and/or assumptions used in determining fair value are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect such impairment analyses and our financial results. We regard our reporting units to be our operating segments (dental, medical (including animal health), international and technology). Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis. Our impairment analysis for indefinite- lived intangibles consists of a review of historical, current and forecasted sales and gross profit levels, as well as a review of any factors that may indicate potential impairment. We assess the potential impairment of goodwill and other indefinite-lived intangible assets annually (at the end of our third quarter) and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. There were no events or circumstances from the date of that assessment through December 26, 2009 that impacted our analysis. Some factors we consider important, which could trigger an interim impairment review, include: • significant underperformance relative to expected historical or projected future operating results; • significant changes in the manner of our use of acquired assets or the strategy for our overall business (e.g., decision to divest a business); or • significant negative industry or economic trends. If we determine through the impairment review process that goodwill or other indefinite-lived intangible assets are impaired, we will record an impairment charge in our consolidated statement of income. 45 Supplier Rebates Supplier rebates are included as a reduction of cost of sales and are recognized over the period they are earned. The factors we consider in estimating supplier rebate accruals include forecasted inventory purchases and sales, in conjunction with supplier rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume. Although we believe our judgments, estimates and/or assumptions related to supplier rebates are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results. Long-Lived Assets Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer lists, customer relationships and intellectual property. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability- weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. Although we believe our judgments, estimates and/or assumptions used in estimating cash flows and determining fair value are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect such impairment analyses and our financial results. Stock-Based Compensation We measure stock-based compensation at the grant date, based on the estimated fair value of the award. Prior to March 2009, awards principally included a combination of at-the-money stock options and restricted stock (including restricted stock units). In March 2009, equity-based awards were granted solely in the form of restricted stock and restricted stock units, with the exception of stock options for certain pre-existing contractual obligations. We estimate the fair value of stock options using the Black-Scholes valuation model which requires us to make assumptions about the expected life of options, stock price volatility, risk-free interest rates and dividend yields. We issue restricted stock that vests based on the recipient’s continued service over time (four-year cliff vesting) and restricted stock that vests based on our achieving specified performance measurements (three- year cliff vesting). With respect to time-based restricted stock, we estimate the fair value on the date of grant based on our closing stock price. With respect to performance-based restricted stock, the number of shares that ultimately vest and are received by the recipient is based upon our earnings per share performance as measured against specified targets over a three-year period as determined by the Compensation Committee of the Board of Directors. Though there is no guarantee that performance targets will be achieved, we estimate the fair value of performance-based restricted stock, based on our closing stock price at time of grant. Adjustments to the performance-based restricted stock targets are provided for significant events such as acquisitions, divestitures, new business ventures and share repurchases. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined. Although we believe our judgments, estimates and/or assumptions related to stock-based compensation are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results. 46 Recently Issued Accounting Standards Accounting Pronouncements Adopted In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification. Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification was effective for our third quarter 2009 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In May 2009, the FASB issued guidance within Topic 855-10 relating to subsequent events. This guidance establishes principles and requirements for subsequent events. This guidance defines the period after the balance sheet date during which events or transactions that may occur would be required to be disclosed in a company’s financial statements. Public entities are required to evaluate subsequent events through the date that financial statements are issued. This guidance also provides guidelines in evaluating whether or not events or transactions occurring after the balance sheet date should be recognized in the financial statements. This guidance requires disclosure of the date through which subsequent events have been evaluated. We have evaluated subsequent events through the date of issuance of this report. In April 2009, the FASB issued guidance within ASC Topic 825-10 concerning interim disclosures about fair value instruments. This guidance requires that disclosures about the fair value of a company’s financial instruments be made whenever summarized financial information for interim reporting periods is made. The provisions of this guidance are effective for interim reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. In April 2009, the FASB issued, within ASC 820, additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. The provisions of this additional guidance are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this additional guidance did not have a material impact on our consolidated financial statements. In April 2009, the FASB amended previous guidance and issued additional guidance within ASC 320 relating to the disclosure requirements for other-than-temporary impairments for debt and equity securities. This guidance addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The provisions of this guidance are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. In April 2009, the FASB issued guidance within ASC Topic 805, “Business Combinations.” ASC Topic 805 amends the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this guidance did not have a material impact on our consolidated financial statements. 47 Effective December 28, 2008, we have adopted the provisions of ASC Topic 480-10. ASC Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase (for a price equal to fair value based on third-party valuations) all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of put options contained in contractual agreements. As a result of the adoption of the provisions of ASC Topic 480-10, we have recorded the maximum redemption amount which approximates fair value of the noncontrolling interests subject to put options as redeemable noncontrolling interests ($178.6 million, $233.0 million and $150.0 million at December 26, 2009, December 27, 2008 and December 29, 2007, respectively) and reduced Additional paid-in capital and Noncontrolling interests within the Stockholders’ equity section of our consolidated balance sheets. The change in fair value of the noncontrolling interests subject to put options at December 26, 2009 compared to December 27, 2008 was primarily due to purchases of additional interests in consolidated subsidiaries and income attributable to noncontrolling interests. Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at each reporting period with a corresponding adjustment to Additional paid-in capital. These adjustments will not impact the calculation of earnings per share. In June 2008, the FASB issued guidance within ASC Topic 815-40, “Contracts in Entity’s Own Equity.” This guidance provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and the instrument’s settlement provisions. ASC Topic 815-40 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. This guidance is effective for fiscal years beginning after December 15, 2008. The implementation of this guidance did not have a material impact on our consolidated financial statements. In May 2008, the FASB issued guidance within ASC Topic 470-20, “Debt with Conversion and Other Options.” This guidance requires us to allocate the liability and equity components of our convertible debt and reflect our non-convertible debt borrowing rate for the interest component of the convertible debt. ASC Topic 470-20 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and is applied retrospectively to all periods presented. Upon the retrospective implementation of this guidance, we recorded a debt discount of approximately $32.6 million as of August 9, 2004, which is being amortized over a period of six years from the date our convertible debt was issued until August 9, 2010, the first date that the debt can be called. We also recorded a related deferred tax liability of $12.1 million representing the tax impact of recording the debt discount. In March 2008, the FASB issued guidance within ASC Topic 815, “Derivatives and Hedging.” ASC Topic 815 requires disclosures of the fair values of derivative instruments and their gains and losses in a tabular format. ASC Topic 815 also requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance did not have a material impact on our consolidated financial statements. In February 2008, the FASB issued guidance within ASC Topic 820, “Fair Value Measurements and Disclosures.” This guidance within ASC Topic 820 delayed the effective date of certain provisions of ASC Topic 820 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued further guidance under ASC Topic 820 specifically related to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with ASC Topic 820. This guidance clarifies the application of ASC Topic 820 in determining the fair values of assets or liabilities in a market that is not active. ASC Topic 820 was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of this guidance did not have a material impact on our consolidated financial statements. 48 In January 2008, the FASB issued guidance within ASC Topic 260, “Earnings Per Share.” ASC Topic 260 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the two- class method of computing earnings per share. ASC Topic 260 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC Topic 260 did not have a material impact on our consolidated financial statements. In December 2007, the FASB issued guidance within ASC Topic 805-20, “Identifiable Assets and Liabilities, And Any Noncontrolling Interest,” and ASC Topic 810-10-65, relating to consolidations. ASC Topic 805-20 requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This guidance also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies. ASC Topic 805-20 applies prospectively to business combinations and is effective for fiscal years beginning on or after December 15, 2008. ASC Topic 810-10-65 requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements. Consolidated net income includes the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share continues to be based on income amounts attributable to the parent. The presentation provisions of ASC Topic 810-10-65 are applied retrospectively, and ASC Topic 810-10-65 is effective for fiscal years beginning on or after December 15, 2008. The adoption of ASC Topic 805-20 did not have a material impact on our consolidated financial statements. The cumulative impact of the adoption of ASC Topic 810-10-65 and ASC Topic 480-10 (discussed above) on our consolidated financial statements was to decrease Additional paid-in capital by $93.4 million and increase Noncontrolling interests by $3.2 million as of December 30, 2006. New Accounting Pronouncements Not Yet Adopted During January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1 and 2 and information about purchases, sales, issuances and settlements for Level 3 fair value measurements. This update also clarifies existing disclosure requirements relating to levels of disaggregation and disclosures of inputs and valuation techniques. The new disclosures are required in interim and annual reporting periods beginning after December 15, 2009, except the disclosures relating to Level 3 activity are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We are currently evaluating the potential impact that these provisions within ASU 2010-06 will have on our consolidated financial statements. During October 2009, the FASB issued ASU 2009-13 which amended guidance contained within ASC Topic 605-25 related to revenue recognition for multiple-element arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. These amendments also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The guidance in this update will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the potential impact that these provisions within ASU 2009-13 will have on our consolidated financial statements. 49 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks, which include changes in interest rates, as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other, and changes to the credit markets. We attempt to minimize these risks by using interest rate swap agreements and foreign currency forward and swap contracts and through maintaining counter-party credit limits. These hedging activities provide only limited protection against interest rate and currency exchange and credit risks. Factors that could influence the effectiveness of our programs include volatility of the interest rate and currency markets and availability of hedging instruments and liquidity of the credit markets. All interest rate swap and foreign currency forward and swap contracts that we enter into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated interest rate and currency exposure. We do not enter into such contracts for speculative purposes. We manage our credit risks by diversifying our investments, maintaining a strong balance sheet and having multiple sources of capital. Interest Rate Swap Agreements We have remaining fixed rate senior notes of $20.0 million at 6.7%. During 2003, we entered into interest rate swap agreements to exchange these fixed interest rates for variable interest rates. The variable rates are comprised of LIBOR plus spreads and reset on the interest due dates for the senior notes. As a result of these interest rate swap agreements, as well as our existing variable rate credit lines and loan agreements, we are exposed to risk from changes in interest rates. A hypothetical 100 basis point increase in interest rates would increase our annual interest expense by approximately $0.2 million. As of December 26, 2009, the fair value of our interest rate swap agreements recorded in other current and non-current assets in our consolidated balance sheet was $0.5 million, which represented the amount that would be received upon unwinding the interest rate swap agreements based on market conditions at that time. Changes in the fair value of these interest rate swap agreements are reflected as an adjustment to current and non-current assets or liabilities with an offsetting adjustment to the carrying value of the $20.0 million notes as such hedges are deemed fully effective. Foreign Currency Agreements The value of certain foreign currencies as compared to the U.S. dollar may affect our financial results. Fluctuations in exchange rates may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward and swap contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., 12 months or less) foreign currency forward and swap contracts to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the payment of merchandise purchases to foreign suppliers. We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. As of December 26, 2009, the fair value of our foreign currency exchange agreements, which expire through August 3, 2010, recorded in other current liabilities was $1.9 million, as determined by quoted market prices. A hypothetical 5% change in the value of the U.S. dollar would change the fair value of our foreign currency exchange agreements by $2.7 million. For the year ended December 26, 2009, we had realized net gains of $1.2 million and unrealized losses of $2.5 million relating to such agreements. Short-Term Investments We limit our credit risk with respect to our cash equivalents, available-for-sale securities, short-term investments and derivative instruments, by monitoring the credit worthiness of the financial institutions who are the counter-parties to such financial instruments. As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing numerous investment grade counter-parties. 50 ITEM 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS HENRY SCHEIN, INC. Report of Independent Registered Public Accounting Firm ................................................................ Consolidated Financial Statements: Balance Sheets as of December 26, 2009 and December 27, 2008 ............................................... Statements of Income for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 ....................................................................... Statements of Changes in Stockholders’ Equity for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 ...................................... Statements of Cash Flows for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 ....................................................................... Notes to Consolidated Financial Statements ................................................................................. Page 52 53 54 55 56 57 Report of Independent Registered Public Accounting Firm ................................................................ 109 Schedule II - Valuation and Qualifying Accounts for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 ........................................................................ 110 All other schedules are omitted because the required information is either inapplicable or is included in the consolidated financial statements or the notes thereto. 51 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Henry Schein, Inc. Melville, New York We have audited the accompanying consolidated balance sheets of Henry Schein, Inc. as of December 26, 2009 and December 27, 2008 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 26, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Henry Schein, Inc. at December 26, 2009 and December 27, 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 26, 2009, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Henry Schein, Inc.'s internal control over financial reporting as of December 26, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 23, 2010 expressed an unqualified opinion thereon. /s/ BDO SEIDMAN, LLP New York, New York February 23, 2010 52 HENRY SCHEIN, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 26, 2009 December 27, 2008 (Adjusted - Notes 1 & 9) ASSETS Current assets: Cash and cash equivalents ............................................................................................................ Accounts receivable, net of reserves of $51,724 and $42,855 ..................................................... Inventories, net ............................................................................................................................. Deferred income taxes .................................................................................................................. Prepaid expenses and other .......................................................................................................... Total current assets ............................................................................................................... Property and equipment, net ............................................................................................................. Goodwill ........................................................................................................................................... Other intangibles, net ....................................................................................................................... Investments and other ....................................................................................................................... Total assets ........................................................................................................................... LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................................................................................... Bank credit lines ........................................................................................................................... Current maturities of long-term debt ............................................................................................ Accrued expenses: Payroll and related .................................................................................................................... Taxes ......................................................................................................................................... Other ......................................................................................................................................... Total current liabilities ......................................................................................................... Long-term debt ................................................................................................................................. Deferred income taxes ...................................................................................................................... Other liabilities ................................................................................................................................. Total liabilities ...................................................................................................................... Redeemable noncontrolling interests ................................................................................................ Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding Common stock, $.01 par value, 240,000,000 shares authorized, 90,630,889 outstanding on December 26, 2009 and $ $ 471,154 725,397 775,199 48,001 183,782 2,203,533 259,576 986,395 204,445 182,036 3,835,985 369,570 734,027 731,654 36,974 193,841 2,066,066 247,835 922,952 214,093 148,264 3,599,210 $ $ $ 521,079 932 23,560 $ 554,773 4,936 156,405 155,298 86,034 289,351 1,076,254 243,373 100,976 75,304 1,495,907 178,570 135,523 69,792 262,236 1,183,665 256,648 95,399 58,109 1,593,821 233,035 - - 89,351,849 outstanding on December 27, 2008 ....................................................................... Additional paid-in capital .............................................................................................................. Retained earnings .......................................................................................................................... Accumulated other comprehensive income .................................................................................. Total Henry Schein, Inc. stockholders' equity ............................................................................... Noncontrolling interest .................................................................................................................. 906 603,772 1,492,607 64,194 2,161,479 29 894 560,023 1,181,454 29,721 1,772,092 262 Total stockholders' equity ..................................................................................................... Total liabilities, redeemable noncontrolling interests and stockholders' equity .................... 2,161,508 3,835,985 $ 1,772,354 3,599,210 $ See accompanying notes. 53 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Net sales .......................................................................................... Cost of sales .................................................................................... Gross profit ................................................................................ Operating expenses: Selling, general and administrative ............................................ Restructuring costs ..................................................................... Operating income .................................................................. Other income (expense): Interest income ........................................................................... Interest expense .......................................................................... Other, net ................................................................................... Income from continuing operations before taxes, equity in earnings (losses) of affiliates and noncontrolling interests .................................................... Income taxes ................................................................................... Equity in earnings (losses) of affiliates ........................................... Income from continuing operations ................................................. Income (loss) from discontinued operations, net of tax ............. Net income ...................................................................................... Less: Net income attributable to noncontrolling interests .......... Net income attributable to Henry Schein, Inc. ................................ Amounts attributable to Henry Schein, Inc.: Income from continuing operations ............................................... Income (loss) from discontinued operations, net of tax ................ Net income .................................................................................... Earnings (loss) per share attributable to Henry Schein, Inc.: From continuing operations: Basic .......................................................................................... Diluted ....................................................................................... From discontinued operations: Basic .......................................................................................... Diluted ....................................................................................... From net income: Basic .......................................................................................... Diluted ....................................................................................... Weighted-average common shares outstanding: Basic .......................................................................................... Diluted ....................................................................................... December 26, 2009 Years ended December 27, 2008 December 29, 2007 (Adjusted - Notes 1, 7 & 9) (Adjusted - Notes 1, 7 & 9) $ 6,538,336 4,621,516 1,916,820 $ 6,380,413 4,506,118 1,874,295 $ 5,889,884 4,183,792 1,706,092 1,449,715 3,020 464,085 9,979 (23,370) 2,026 1,431,769 23,240 419,286 16,355 (34,605) (5,587) 1,319,153 - 386,939 16,531 (29,607) 4,646 452,720 (127,521) 5,243 330,442 2,715 333,157 (22,004) 311,153 $ 395,449 (131,210) 5,037 269,276 (7,902) 261,374 (21,917) 239,457 $ 378,509 (128,556) (73) 249,880 (20,704) 229,176 (17,442) 211,734 $ $ $ 308,551 2,602 311,153 $ $ 247,347 (7,890) 239,457 $ $ 232,529 (20,795) 211,734 $ $ 3.47 3.41 $ $ 2.78 2.71 $ $ 2.63 2.55 $ $ 0.03 0.03 $ $ (0.09) (0.08) $ $ (0.24) (0.23) $ $ 3.50 3.44 $ $ 2.69 2.63 $ $ 2.39 2.32 88,872 90,556 89,080 91,221 88,559 91,163 See accompanying notes. 54 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share and per share data) Common Stock $.01 Par Value Shares 88,499,321 - Amount $ 885 - Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Noncontrolling Interests Total Stockholders' Equity $ 614,551 19,741 $ 808,164 (7,192) $ 47,363 - - $ - $ 1,470,963 12,549 - 88,499,321 - 885 $ (93,365) 540,927 $ - 800,972 $ - 47,363 $ 3,209 3,209 $ (90,156) 1,393,356 $ Balance, December 30, 2006 - as previously reported ............................ Cumulative impact of adopting ASC Topic 470-20 ................................ Cumulative impact of adopting ASC Topic 810-10-65 and ASC Topic 480-10 ......................................................................... Balance, December 30, 2006 - as adjusted .............................................. Net income (excluding $17,350 attributable to Redeemable noncontrolling interests) ................................................................... Foreign currency translation gain (excluding $854 attributable to Redeemable noncontrolling interests) .............................................. Unrealized gain from foreign currency hedging activities, net of tax of $603 .............................................................................. Pension adjustment gain, net of tax of $2,493 ......................................... Total comprehensive income ............................................................ Dividends paid ........................................................................................ Purchase of noncontrolling interests ....................................................... Change in fair value of redeemable securities ......................................... Stock issued to 401(k) plan ..................................................................... Cumulative adjustment for ASC Topic 740 ............................................ Repurchase and retirement of common stock ......................................... Stock issued upon exercise of stock options, including tax benefit of $9,977 ....................................................... Stock-based compensation expense ........................................................ - - - - - - - 70,525 - (639,100) 1,487,238 185,676 Balance, December 29, 2007 .................................................................. 89,603,660 Net income (loss) (excluding $21,929 attributable to Redeemable noncontrolling interests) ................................................................... Foreign currency translation loss (excluding $2,060 attributable to Redeemable noncontrolling interests) .............................................. Unrealized gain from foreign currency hedging activities, net of tax of $530 .............................................................................. Unrealized investment loss, net of tax of $821 ....................................... Pension adjustment loss, net of tax of $438 ............................................ Total comprehensive income ............................................................ - - - - - Change in fair value of redeemable securities ......................................... Stock issued to 401(k) plan ..................................................................... Repurchase and retirement of common stock ......................................... Stock issued upon exercise of stock options, including tax benefit of $6,977 ....................................................... Stock-based compensation expense ........................................................ - 79,723 (1,621,710) 991,259 298,917 Balance, December 27, 2008 .................................................................. 89,351,849 Net income (excluding $21,975 attributable to Redeemable noncontrolling interests) ................................................................... Foreign currency translation gain (excluding $2,541 attributable to Redeemable noncontrolling interests) .............................................. Unrealized gain from foreign currency hedging activities, net of tax of $8,184 ........................................................................... Unrealized investment loss, net of tax of $105 ....................................... Pension adjustment loss, net of tax of $1,092 ......................................... Total comprehensive income ............................................................ Purchase of noncontrolling interest ......................................................... Change in fair value of redeemable securities ......................................... Stock issued to 401(k) plan ..................................................................... Stock issued upon exercise of stock options, including tax benefit of $2,642 ....................................................... Stock-based compensation expense ........................................................ Shares withheld for payroll taxes ............................................................ Liability for cash settlement stock option awards ................................... Balance, December 26, 2009 .................................................................. - - - - - - - 100,778 - - - - - - - 1 - (6) 14 2 896 - - - - - - 1 (16) 10 3 894 - - - - - - - 1 - - - - - - (21,014) 4,103 - (12,681) 45,422 22,368 579,125 - - - - - (51,138) 4,661 (30,345) 32,616 25,104 560,023 - - - - - - 581 5,300 211,734 - - - - - - - (280) (18,002) - - - 48,039 1,071 3,795 - - - - - - - - 994,424 100,268 92 - - - (100) (2,927) - - - - - - 274 211,826 48,039 1,071 3,795 264,731 (100) (2,927) (21,014) 4,104 (280) (30,689) 45,436 22,370 1,674,987 239,457 - (12) 239,445 - - - - - - (52,427) - - (69,420) 86 (1,201) (12) - - - - - 1,181,454 29,721 311,153 - - - - - - - - 25,406 13,317 (120) (4,130) - - - - - - - - - - - - 262 29 - - - - (262) - - (69,420) 86 (1,201) (12) 168,898 (51,138) 4,662 (82,788) 32,626 25,107 1,772,354 311,182 25,406 13,317 (120) (4,130) 345,655 (262) 581 5,301 445,916 802,068 (69,722) - 90,630,889 4 8 (1) - 906 $ 14,508 25,916 (2,149) (407) 603,772 - - - - 1,492,607 $ $ - - - - 64,194 $ - - - - 29 $ 14,512 25,924 (2,150) (407) 2,161,508 $ See accompanying notes. 55 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) December 26, 2009 Years ended December 27, 2008 December 29, 2007 (Adjusted Notes 1, 7 & 9) (Adjusted Notes 1, 7 & 9) $ 333,157 $ 261,374 $ 229,176 Cash flows from operating activities: Net income ............................................................................................ Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of discontinued operation, net of tax ......................... Impairment from write-down of long-lived assets of discontinued operation ................................................................ Depreciation and amortization ........................................................ Amortization of bond discount ....................................................... Stock-based compensation expense ................................................ Provision for losses on trade and other accounts receivable ........... Benefit from deferred income taxes ................................................ Stock issued to 401(k) plan ............................................................ Undistributed (earnings) losses of affiliates ................................... Other ............................................................................................... Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ........................................................................ Inventories ...................................................................................... Other current assets ........................................................................ Accounts payable and accrued expenses ........................................ Net cash provided by operating activities ................................................... Cash flows from investing activities: Purchases of fixed assets ....................................................................... Payments for equity investment and business acquisitions, net of cash acquired ........................................................ Cash received from business divestiture ................................................ Purchases of available-for-sale securities .............................................. Proceeds from sales of available-for-sale securities .............................. Net proceeds from (payments for) foreign exchange forward contract settlements ................................................................ Other ...................................................................................................... Net cash used in investing activities ........................................................... Cash flows from financing activities: Proceeds from (repayments of) bank borrowings .................................. Proceeds from issuance of long-term debt ............................................. Principal payments for long-term debt .................................................. Proceeds from issuance of stock upon exercise of stock options ........... Acquisitions of noncontrolling interests in subsidiaries ........................ Payments for repurchases of common stock .......................................... Excess tax benefits related to stock-based compensation ...................... Other ...................................................................................................... Net cash used in financing activities ........................................................... (2,382) - 81,493 5,990 25,924 4,747 (26,214) 5,301 (5,243) 2,373 20,445 (19,242) 375 (29,834) 396,890 (51,627) (56,648) 12,716 - 9,955 275 (12,119) (97,448) (4,481) - (154,329) 11,870 (52,453) - 4,680 (2,962) (197,675) - 8,484 78,127 5,649 25,429 6,255 (5,958) 4,662 (5,037) 150 (26,834) (68,360) 11,261 89,580 384,782 (673) 32,667 73,936 5,355 22,553 1,384 (9,233) 4,104 73 (6,512) (21,964) (15,946) (58,148) 13,572 270,344 (50,870) (56,821) (128,470) - (35,925) 5,722 41,336 197 (168,010) (7,197) - (33,721) 25,649 - (82,788) 11,041 (954) (87,970) (199,294) 15,827 (115,066) 163,065 (32,241) (10,762) (235,292) 1,212 483 (47,903) 35,459 (6,888) (30,689) 12,668 (2,350) (38,008) (2,956) 1,899 248,647 247,590 Net change in cash and cash equivalents .................................................... Effect of exchange rate changes on cash and cash equivalents ................... Cash and cash equivalents, beginning of year ............................................ Cash and cash equivalents, end of year ...................................................... 101,767 (183) 369,570 471,154 128,802 (6,822) 247,590 369,570 $ $ $ See accompanying notes. 56 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 1 – Significant Accounting Policies Nature of Operations We distribute healthcare products and services primarily to office-based healthcare practitioners in the combined North American and European markets, with 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. Principles of Consolidation Our consolidated financial statements include the accounts of Henry Schein, Inc. and all of our controlled subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. Investments in unconsolidated affiliates, which are greater than or equal to 20% and less than or equal to 50% owned, are accounted for under the equity method. Certain prior period amounts have been reclassified to conform to the current period presentation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year We report our results of operations and cash flows on a 52-53 week basis ending on the last Saturday of December. The years ended December 26, 2009, December 27, 2008 and December 29, 2007 consisted of 52 weeks. Revenue Recognition We generate revenue from the sale of dental, medical and animal health consumable products, as well as equipment, software products and services and other sources. Provisions for discounts, rebates to customers, customer returns and other contra-revenue adjustments are recorded based upon historical data and estimates and are provided for in the period in which the related sales are recognized. Revenue derived from the sale of consumable products is recognized when products are shipped to customers. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating the completion of the earnings process because we have no post-shipment obligations, the product price is fixed and determinable, collection of the resulting receivable is probable and product returns are reasonably estimable. 57 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) Revenue derived from the sale of equipment is recognized when products are delivered to customers. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation, which is completed at the time of delivery. Revenue derived from the sale of software products is recognized when products are shipped to customers. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is recognized over the period in which the services are provided. Revenue derived from the sale of products consisting of multiple elements (i.e., hardware, software, installation, training and technical support) is allocated to the various elements based upon vendor-specific objective evidence of fair value. Revenue derived from other sources including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided. Cash and Cash Equivalents We consider all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Outstanding checks in excess of funds on deposit of $48.3 million and $55.1 million, primarily related to payments for inventory, were classified as accounts payable as of December 26, 2009 and December 27, 2008. Available-for-sale Securities As of December 26, 2009, we have approximately $21.1 million invested in auction-rate securities (“ARS”). ARS are publicly issued securities that represent long-term investments, typically 10-30 years, in which interest rates had reset periodically (typically every 7, 28 or 35 days) through a “dutch auction” process. Approximately $18.7 million of our ARS are backed by student loans that are backed by the federal government and the remaining $2.4 million are invested in closed-end municipal bond funds. We determine cost of investments in available-for-sale securities on a specific identification basis. As of December 26, 2009 and December 27, 2008, unrealized losses, which are recorded in Accumulated other comprehensive income within the equity section of our consolidated balance sheets, on our available- for-sale securities totaled $2.2 million and $2.0 million, respectively. Gross realized gains and losses were immaterial in all periods presented. Accounts Receivable and Reserves The carrying amount of accounts receivable is reduced by a valuation allowance that reflects our best estimate of the amounts that will not be collected. The reserve for accounts receivable is comprised of allowance for doubtful accounts and sales returns. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectibility. 58 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) Inventories and Reserves Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined by the first-in, first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with our policy for inventory valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory. Direct Shipping and Handling Costs Freight and other direct shipping costs are included in cost of sales. Direct handling costs, which represent primarily direct compensation costs of employees who pick, pack and otherwise prepare, if necessary, merchandise for shipment to our customers are reflected in selling, general and administrative expenses. Direct shipping and handling costs from continuing operations were $46.6 million, $49.6 million and $48.8 million for the years ended December 26, 2009, December 27, 2008 and December 29, 2007. Advertising and Promotional Costs We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses from continuing operations were $12.4 million, $18.4 million and $19.0 million for the years ended December 26, 2009, December 27, 2008 and December 29, 2007. Additionally, advertising and promotional costs incurred in connection with direct marketing, including product catalogs and printed material, are deferred and amortized on a straight-line basis over the period which is benefited, generally not exceeding one year. As of December 26, 2009 and December 27, 2008, we had $3.4 million and $3.5 million of deferred direct marketing expenses included in other current assets. Supplier Rebates Supplier rebates are included as a reduction of cost of sales and are recognized over the period they are earned. The factors we consider in estimating supplier rebate accruals include forecasted inventory purchases and sales, in conjunction with supplier rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation or amortization. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term. Depreciation is computed primarily under the straight-line method over the following estimated useful lives: Buildings and permanent improvements ........... Machinery and warehouse equipment .............. Furniture, fixtures and other ............................. Computer equipment and software ................... Years 40 5-10 3-10 3-10 59 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) Capitalized software costs consist of costs to purchase and develop software. Costs incurred during the application development stage for software bought and further customized by outside suppliers for our use and software developed by a supplier for our proprietary use are capitalized. Costs incurred for our own personnel who are directly associated with software development are capitalized. Income Taxes We account for income taxes under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in tax laws or rates. The effect on deferred income tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date. We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries. Foreign Currency Translation and Transactions The financial position and results of operations of our foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated other comprehensive income in stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings. Risk Management and Derivative Financial Instruments We use derivative instruments to minimize our exposure to fluctuations in interest rates and foreign currency exchange rates. Our objective is to manage the impact that interest rate and foreign currency exchange rate fluctuations could have on recognized asset and liability fair values, earnings and cash flows. Our risk management policy requires that derivative contracts used as hedges be effective at reducing the risks associated with the exposure being hedged and be designated as a hedge at the inception of the contract. We do not enter into derivative instruments for speculative purposes. Our derivative instruments primarily include interest rate swap agreements related to our long-term fixed rate debt and foreign currency forward and swap agreements related to certain intercompany loans and certain forecasted inventory purchase commitments with foreign suppliers. Our interest rate swap agreements are designated as fair value hedges. The terms of our interest rate swap agreements are identical to the senior notes and consequently qualify for an assumption of no ineffectiveness under the provisions of ASC Topic 815, “Derivatives and Hedging.” Both the interest rate swap agreements and the underlying senior notes are marked-to-market through earnings at the end of each period; however, since our interest rate swap agreements are deemed fully effective, these mark-to-market adjustments have no net impact on earnings. Our foreign currency forward and swap agreements related to forecasted inventory purchase commitments are designated as cash flow hedges. Our foreign currency forward and swap agreements related to foreign currency balance sheet exposure provide economic hedges but are not designated as hedges for accounting purposes. 60 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) For agreements not designated as hedges, changes in the value of the derivative, along with the transaction gain or loss on the hedged item, are recorded in earnings. For cash flow hedges, the effective portion of the changes in the fair value of the derivative, along with any gain or loss on the hedged item, is recorded as a component of Accumulated other comprehensive income in stockholders’ equity and subsequently reclassified into earnings in the period(s) during which the hedged transaction affects earnings. We classify the cash flows related to our hedging activities in the same category on our consolidated statements of cash flows as the cash flows related to the hedged item. Acquisitions The net assets of businesses purchased are recorded at their fair value at the acquisition date and our consolidated financial statements include their results of operations from that date. Any excess of acquisition consideration over the fair value of identifiable net assets acquired is recorded as goodwill. Certain acquisitions provide for contingent consideration, primarily cash, to be paid in the event certain financial performance targets are satisfied over future periods. We have not accrued any liabilities that may arise from these transactions because the outcome of the contingencies is not determinable beyond a reasonable doubt. For 2009 and future acquisitions, as required by the provisions contained within ASC Topic 805, “Business Combinations,” we will accrue a liability for additional contingent purchase price based on the estimated fair value at the time of the acquisition. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill and other indefinite-lived intangible assets (primarily trademarks) are not amortized, but are subject to at least an annual impairment analysis. Such impairment analyses for goodwill require a comparison of the fair value to the carrying value of reporting units. Measuring fair value of a reporting unit is generally based on valuation techniques using multiples of sales or earnings, unless supportable information is available for using a present value technique, such as estimates of future cash flows. We regard our reporting units to be our operating segments (dental, medical (including animal health), international and technology). Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis. Our impairment analysis for indefinite-lived intangibles consists of a review of historical, current and forecasted sales and gross profit levels, as well as a review of any factors that may indicate potential impairment. We assess the potential impairment of goodwill and other indefinite-lived intangible assets annually (at the end of our third quarter) and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. There were no events or circumstances from the date of that assessment through December 26, 2009 that impacted our analysis. Some factors we consider important that could trigger an interim impairment review include: • significant underperformance relative to expected historical or projected future operating results; • significant changes in the manner of our use of acquired assets or the strategy for our overall business (e.g., decision to divest a business); or • significant negative industry or economic trends. If we determine through the impairment review process that indefinite-lived intangible assets are impaired, we record an impairment charge in our consolidated statements of income. 61 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) Long-Lived Assets Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer lists, customer relationships and intellectual property. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. Cost of Sales The primary components of cost of sales include the cost of the product (net of purchase discounts, supplier chargebacks and rebates) and inbound and outbound freight charges. Costs related to purchasing, receiving, inspections, warehousing, internal inventory transfers and other costs of our distribution network are included in selling, general and administrative expenses along with other operating costs. 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. Total distribution network costs from continuing operations were $54.6 million, $56.4 million and $48.8 million for the years ended December 26, 2009, December 27, 2008 and December 29, 2007. Comprehensive Income Comprehensive income includes certain gains and losses that, under accounting principles generally accepted in the United States, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity. Our comprehensive income is primarily comprised of net income, foreign currency translation adjustments, unrealized gains (losses) on hedging activity and investment and pension adjustments. 62 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) The following table summarizes our Accumulated other comprehensive income, net of applicable taxes as of: Attributable to Redeemable noncontrolling interests: Foreign currency translation adjustment ............................. $ 1,893 $ (648) $ 1,412 December 26, 2009 December 27, 2008 December 29, 2007 Attributable to Henry Schein, Inc.: Foreign currency translation adjustment .................................. Unrealized gain from foreign currency hedging activities ....... Unrealized investment loss ....................................................... Pension adjustment gain (loss) ................................................. Accumulated other comprehensive income ......................... $ $ $ 54,729 14,537 (1,321) (3,751) 64,194 29,323 1,220 (1,201) 379 29,721 98,743 1,134 - 391 100,268 $ $ $ Total Accumulated other comprehensive income .................... $ 66,087 $ 29,073 $ 101,680 The following table summarizes other comprehensive income attributable to our Redeemable noncontrolling interests, net of applicable taxes for the years ended: December 26, 2009 December 27, 2008 December 29, 2007 Foreign currency translation adjustment ..................................... $ 2,541 $ (2,060) $ 854 The following table summarizes our total comprehensive income, net of applicable taxes for the years ended: Comprehensive income attributable to Henry Schein, Inc. ......................................................... Comprehensive income (loss) attributable to noncontrolling interests ................................................. Comprehensive income attributable to redeemable noncontrolling interests ................................................. Comprehensive income ........................................................ (1) Adjusted to reflect the effects of discontinued operations. December 26, 2009 December 27, 2008 (1) (2) December 29, 2007 (1) (2) $ 345,626 $ 168,910 $ 264,639 29 (12) 92 24,516 370,171 $ 19,869 188,767 $ 18,204 282,935 $ (2) Adjusted to reflect the effects of the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” 63 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) Accounting Pronouncements Adopted In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non- authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification. Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification was effective for our third quarter 2009 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In May 2009, the FASB issued guidance within Topic 855-10 relating to subsequent events. This guidance establishes principles and requirements for subsequent events. This guidance defines the period after the balance sheet date during which events or transactions that may occur would be required to be disclosed in a company’s financial statements. Public entities are required to evaluate subsequent events through the date that financial statements are issued. This guidance also provides guidelines in evaluating whether or not events or transactions occurring after the balance sheet date should be recognized in the financial statements. This guidance requires disclosure of the date through which subsequent events have been evaluated. In April 2009, the FASB issued guidance within ASC Topic 825-10 concerning interim disclosures about fair value instruments. This guidance requires that disclosures about the fair value of a company’s financial instruments be made whenever summarized financial information for interim reporting periods is made. The provisions of this guidance are effective for interim reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. In April 2009, the FASB issued, within ASC 820, additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. The provisions of this additional guidance are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this additional guidance did not have a material impact on our consolidated financial statements. In April 2009, the FASB amended previous guidance and issued additional guidance within ASC 320 relating to the disclosure requirements for other-than-temporary impairments for debt and equity securities. This guidance addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The provisions of this guidance are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. 64 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) In April 2009, the FASB issued guidance within ASC Topic 805, “Business Combinations.” ASC Topic 805 amends the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this guidance did not have a material impact on our consolidated financial statements. Effective December 28, 2008, we have adopted the provisions of ASC Topic 480-10. ASC Topic 480- 10 is applicable for noncontrolling interests where we are or may be required to purchase (for a price equal to fair value based on third-party valuations) all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of put options contained in contractual agreements. As a result of the adoption of the provisions of ASC Topic 480-10, we have recorded the maximum redemption amount, which approximates fair value of the noncontrolling interests subject to put options as redeemable noncontrolling interests ($178.6 million, $233.0 million and $150.0 million at December 26, 2009, December 27, 2008 and December 29, 2007, respectively) and reduced Additional paid-in capital and Noncontrolling interests within the Stockholders’ equity section of our consolidated balance sheets. The components of the change in fair value of put options at December 26, 2009, December 27, 2008 and December 29, 2007 are presented in the following table: Balance, beginning of year ......................................................... Acquisitions of additional ownership from noncontrolling interests ......................................................... Initial noncontrolling interests and adjustments related to business acquisitions ............................................................. Net income attributable to noncontrolling interests .................... Dividends paid ........................................................................... Effect of foreign currency translation attributable to noncontrolling interests ......................................................... Change in fair value of redeemable securities ............................ Balance, end of year ................................................................... December 26, 2009 December 27, 2008 December 29, 2007 $ 233,035 $ 150,028 $ 111,902 (69,157) - - (3,270) 21,975 (5,973) 14,994 21,929 (2,994) 270 17,350 (1,362) 2,541 (581) 178,570 $ (2,060) 51,138 233,035 $ 854 21,014 150,028 $ Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at each reporting period with a corresponding adjustment to Additional paid-in capital. Future changes to the estimated redemption amounts are subject to a “floor” amount that is equal to the fair value of the redeemable put option at the time it was originally issued. The recorded value of the redeemable put option cannot go below the floor level. These adjustments will not impact the calculation of earnings per share. In June 2008, the FASB issued guidance within ASC Topic 815-40, “Contracts in Entity’s Own Equity.” This guidance provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and the instruments settlement provisions. ASC Topic 815-40 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. This guidance is effective for fiscal years beginning after 65 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) December 15, 2008. The implementation of this guidance did not have a material impact on our consolidated financial statements. In May 2008, the FASB issued guidance within ASC Topic 470-20, “Debt with Conversion and Other Options.” This guidance requires us to allocate the liability and equity components of our convertible debt and reflect our non-convertible debt borrowing rate for the interest component of the convertible debt. ASC Topic 470-20 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and is applied retrospectively to all periods presented. Upon the retrospective implementation of this guidance, we recorded a debt discount of approximately $32.6 million as of August 9, 2004, which is being amortized over a period of six years from the date our convertible debt was issued until August 9, 2010, the first date that the debt can be called. We also recorded a related deferred tax liability of $12.1 million representing the tax impact of recording the debt discount. In March 2008, the FASB issued guidance within ASC Topic 815, “Derivatives and Hedging.” ASC Topic 815 requires disclosures of the fair values of derivative instruments and their gains and losses in a tabular format. ASC Topic 815 also requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance did not have a material impact on our consolidated financial statements. In February 2008, the FASB issued guidance within ASC Topic 820, “Fair Value Measurements and Disclosures.” This guidance within ASC Topic 820 delayed the effective date of certain provisions of ASC Topic 820 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued further guidance under ASC Topic 820 specifically related to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with ASC Topic 820. This guidance clarifies the application of ASC Topic 820 in determining the fair values of assets or liabilities in a market that is not active. ASC Topic 820 was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of this guidance did not have an impact on our consolidated financial statements. In January 2008, the FASB issued guidance within ASC Topic 260, “Earnings Per Share.” ASC Topic 260 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the two-class method of computing earnings per share. ASC Topic 260 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC Topic 260 did not have a material impact on our consolidated financial statements. In December 2007, the FASB issued guidance within ASC Topic 805-20, “Identifiable Assets and Liabilities, And Any Noncontrolling Interest,” and ASC Topic 810-10-65, relating to consolidations. ASC Topic 805-20 requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This guidance also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies. ASC Topic 805-20 applies prospectively to business combinations and is effective for fiscal years beginning on or after December 15, 2008. 66 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 1 – Significant Accounting Policies – (Continued) ASC Topic 810-10-65 requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements. Consolidated net income includes the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share continues to be based on income amounts attributable to the parent. The presentation provisions of ASC Topic 810-10-65 are applied retrospectively, and ASC Topic 810-10- 65 is effective for fiscal years beginning on or after December 15, 2008. The adoption of ASC Topic 805- 20 did not have a material impact on our consolidated financial statements. The cumulative impact of the adoption of ASC Topic 810-10-65 and ASC Topic 480-10 (discussed above) on our consolidated financial statements was to decrease Additional paid-in capital by $93.4 million and increase Noncontrolling interests by $3.2 million as of December 30, 2006. New Accounting Pronouncements Not Yet Adopted During January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1 and 2 and information about purchases, sales, issuances and settlements for Level 3 fair value measurements. This update also clarifies existing disclosure requirements relating to levels of disaggregation and disclosures of inputs and valuation techniques. The new disclosures are required in interim and annual reporting periods beginning after December 15, 2009, except the disclosures relating to Level 3 activity are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We are currently evaluating the potential impact that these provisions within ASU 2010-06 will have on our consolidated financial statements. During October 2009, the FASB issued ASU 2009-13 which amended guidance contained within ASC Topic 605-25 related to revenue recognition for multiple-element arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. These amendments also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The guidance in this update will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the potential impact that these provisions within ASU 2009-13 will have on our consolidated financial statements. 67 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 2 – Earnings Per Share Basic earnings per share is computed by dividing net income attributable to Henry Schein, Inc. by the weighted-average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable upon vesting of restricted stock and upon exercise of stock options using the treasury stock method in periods in which they have a dilutive effect. For the year ended December 26, 2009, our convertible debt was not convertible at a premium and thus the impact of an assumed conversion was not applicable. For the years ended December 27, 2008 and December 29, 2007, diluted earnings per share includes the effect of common shares issuable upon conversion of our convertible debt. During the period, the debt was convertible at a premium as a result of the conditions of the debt. As a result, the amount in excess of the principal is presumed to be settled in common shares and is reflected in our calculation of diluted earnings per share. A reconciliation of shares used in calculating basic and diluted earnings per share follows: Basic ................................................................................... Effect of dilutive securities: Stock options, restricted stock and restricted units .......... Effect of assumed conversion of convertible debt .............. Diluted ........................................................................... December 26, 2009 Years ended December 27, 2008 December 29, 2007 88,872,032 89,080,457 88,558,553 1,684,306 - 90,556,338 1,514,623 625,906 91,220,986 1,740,798 864,131 91,163,482 Weighted-average options to purchase 2,737,820 and 910,359 shares of common stock at prices ranging from $47.31 to $62.05 and $53.43 to $62.05 per share that were outstanding during the years ended December 26, 2009 and December 27, 2008 were excluded from each respective year’s computation of diluted earnings per share. In each of these years, such options’ exercise prices exceeded the average market price of our common stock, thereby causing the effect of such options to be anti-dilutive. During the year ended December 29, 2007, the average market price of our common stock exceeded the exercise price of our options outstanding, resulting in no options being anti-dilutive during 2007. 68 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 3 – Property and Equipment, Net Property and equipment consisted of the following: Land ..................................................................................................... Buildings and permanent improvements .............................................. Leasehold improvements ..................................................................... Machinery and warehouse equipment .................................................. Furniture, fixtures and other ................................................................ Computer equipment and software ...................................................... Less accumulated depreciation and amortization ................................ Property and equipment, net ........................................................... December 26, 2009 December 27, 2008 $ $ 12,644 97,983 60,392 73,003 73,069 239,543 556,634 (297,058) 259,576 12,380 80,026 56,596 69,106 62,894 217,276 498,278 (250,443) 247,835 $ $ The net carrying value of equipment held under capital leases amounted to approximately $5.5 million and $7.1 million as of December 26, 2009 and December 27, 2008. Property and equipment related depreciation expense, from continuing operations, for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 was $46.4 million, $45.1 million and $46.1 million. Note 4 – Goodwill and Other Intangibles, Net The changes in the carrying amount of goodwill for the years ended December 26, 2009 and December 27, 2008 were as follows: Balance as of December 29, 2007 .................................... Adjustments to goodwill: Acquisitions ................................................................. Discontinued operation impairment ............................ Foreign currency translation ........................................ Balance as of December 27, 2008 .................................... Adjustments to goodwill: Acquisitions ................................................................. Discontinued operation impairment ............................ Foreign currency translation ........................................ Balance as of December 26, 2009 .................................... Healthcare Distribution Technology Total $ 836,796 $ 80,398 $ 917,194 67,446 (6,706) (40,913) 856,623 - - (14,069) 66,329 67,446 (6,706) (54,982) 922,952 40,817 (444) 15,674 912,670 $ 4,383 - 3,013 73,725 $ 45,200 (444) 18,687 986,395 $ 69 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 4 – Goodwill and Other Intangibles, Net – (Continued) Other intangible assets consisted of the following: December 26, 2009 Accumulated December 27, 2008 Accumulated Cost Amortization Net Cost Amortization Net Non-compete agreements ..................... $ 27,800 $ (6,460) $ 21,340 $ 23,874 $ (4,489) $ 19,385 Trademarks and trade names ................ Customer relationships and lists ........... Other .................................................... 45,612 192,004 36,728 (11,026) (69,235) (10,978) 34,586 122,769 25,750 43,939 183,051 32,431 (6,479) (49,293) (8,941) 37,460 133,758 23,490 Total ............................................... $ 302,144 $ (97,699) $ 204,445 $ 283,295 $ (69,202) $ 214,093 Non-compete agreements represent amounts paid primarily to key employees and prior owners of acquired businesses in exchange for placing restrictions on their ability to pose a competitive risk to us. Such amounts are amortized, on a straight-line basis over the respective non-compete period, which generally commences upon termination of employment or separation from us. The weighted-average non- compete period for agreements currently being amortized was approximately six years as of December 26, 2009. Trademarks, trade names, customer lists and customer relationships were established through business acquisitions. Certain trademarks and trade names, totaling $26.7 million and $26.2 million as of December 26, 2009 and December 27, 2008, are deemed indefinite-lived intangible assets and are not amortized. The remainder are deemed definite-lived and are amortized on a straight-line basis over a weighted-average period of approximately six years as of December 26, 2009. Customer relationships and customer lists are definite-lived intangible assets that are amortized on a straight-line basis over a weighted-average period of approximately 10 years as of December 26, 2009. Amortization expense, attributable to continuing operations, related to definite-lived intangible assets for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 was $30.6 million, $27.9 million and $23.0 million. The annual amortization expense expected for the years 2010 through 2014 is $27.8 million, $26.1 million, $23.9 million, $20.0 million and $14.8 million. 70 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 5 – Investments and Other Investments and other consisted of the following: Investment in unconsolidated affiliates ......................................................... Non-current deferred foreign, state and local income taxes ........................... Notes receivable (2) ....................................................................................... Auction rate securities, net of temporary impairment .................................... Distribution rights, net of amortization .......................................................... Security deposits ............................................................................................ Debt issuance costs, net of amortization ........................................................ Other long-term assets ................................................................................... Total ........................................................................................................... December 26, 2009 December 27, 2008 (1) $ $ 86,117 33,201 23,437 18,848 5,311 3,197 1,931 9,994 182,036 60,439 15,231 18,613 29,028 5,898 4,037 2,669 12,349 148,264 $ $ (1) Adjusted to reflect the effects of adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” (2) Long-term notes receivable carry interest rates ranging from 1.49% to 12.0% and are due in varying installments through 2020. Amortization of other long-term assets, from continuing operations, for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 was $4.5 million, $4.5 million and $3.5 million. Note 6 – Fair Value Measurements Effective December 30, 2007, we adopted provisions of ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) as they relate to financial assets and financial liabilities. ASC Topic 820 establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC Topic 820 applies under other previously issued accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements. The adoption of ASC Topic 820 did not have a material impact on our consolidated financial statements. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). 71 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 6 – Fair Value Measurements – (Continued) The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows: • Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. • Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3— Inputs that are unobservable for the asset or liability. The following section describes the valuation methodologies that we used to measure different financial instruments at fair value. Cash equivalents and trade receivables Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. Long-term investments and notes receivable There are no quoted market prices available for investments in unconsolidated affiliates and long-term notes receivable; however, we believe the carrying amounts are a reasonable estimate of fair value. Auction-rate securities As of December 26, 2009, we have approximately $21.1 million ($18.9 million net of temporary impairments) invested in auction-rate securities (“ARS”), which are included as part of Investments and other within our consolidated balance sheets. ARS are publicly issued securities that represent long-term investments, typically 10-30 years, in which interest rates had reset periodically (typically every 7, 28 or 35 days) through a “dutch auction” process. Approximately $18.7 million ($16.5 million net of temporary impairments) of our ARS are backed by student loans that are backed by the federal government and the remaining $2.4 million are invested in closed-end municipal bond funds. Our ARS portfolio is comprised of investments that are rated AAA by major independent rating agencies. Since the middle of February 2008, ARS auctions have failed to settle due to an excess number of sellers compared to buyers. The failure of these auctions has resulted in our inability to liquidate our ARS in the near term. We are currently not aware of any defaults or financial conditions that would negatively affect the issuers’ ability to continue to pay interest and principal on our ARS. We continue to earn and receive interest at contractually agreed upon rates. During 2009, we have received approximately $4.8 million and $5.2 million of redemptions, at par, for our closed-end municipal bond funds and our student loan portfolios, respectively. 72 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 6 – Fair Value Measurements – (Continued) As of December 26, 2009, we have classified our closed-end municipal bond funds, as well as our student loan portfolios, as Level 3 within the fair value hierarchy due to the lack of observable inputs and the absence of significant refinancing activity. Based upon the information currently available and the use of a discounted cash flow model in accordance with applicable authoritative guidance, our previously recorded cumulative temporary impairment at December 27, 2008 of $2.0 million related to our closed-end municipal bond funds and our student loan portfolios was increased to $2.2 million during the year ended December 26, 2009. The temporary impairment has been recorded as part of Accumulated other comprehensive income within the equity section of our consolidated balance sheet. Money market fund As of December 26, 2009, we had an investment of approximately $2.0 million ($1.7 million net of reserves) invested in the Reserve Primary Fund. This money market fund included in its holdings commercial paper of Lehman Brothers. As a result of the Chapter 11 bankruptcy of Lehman Brothers Holdings, Inc., the net asset value of the fund decreased below $1.00. Currently, this fund is in the process of being liquidated. During 2009, we have received approximately $3.3 million of distributions from the Reserve Primary Fund. As of December 26, 2009, the value of our holdings in this fund are included within Prepaid expenses and other in our consolidated balance sheets and as Level 3 within the fair value hierarchy, due to the lack of observable inputs and the absence of trading activity. Accounts payable and accrued expenses Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities. The carrying value of these financial instruments approximates fair value due to their short maturities or variable interest rates that approximate current market rates. Debt The fair value of our debt is estimated based on quoted market prices for our traded debt and on market prices of similar issues for our private debt. The fair value of our debt as of December 26, 2009 and December 27, 2008 was estimated at $307.5 million and $426.8 million. Derivative contracts Derivative contracts are valued using quoted market prices and significant other observable and unobservable inputs. We use derivative instruments to minimize our exposure to fluctuations in interest rates and foreign currency exchange rates. Our derivative instruments primarily include interest rate swap agreements related to our long-term fixed rate debt and foreign currency forward and swap agreements related to intercompany loans and certain forecasted inventory purchase commitments with suppliers. The fair values for the majority of our foreign currency derivative contracts are obtained by comparing our contract rate to a published forward price of the underlying currency, which is based on market rates for comparable transactions and are classified within Level 2 of the fair value hierarchy. 73 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 6 – Fair Value Measurements – (Continued) Redeemable noncontrolling interests Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value based on third-party valuations. The noncontrolling interests subject to put options are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to Additional paid-in capital. In accordance with ASC Topic 480-10, future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments will not impact the calculation of earnings per share. The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 26, 2009 and December 27, 2008: December 26, 2009 Level 1 Level 2 Level 3 Total Assets: Available-for-sale securities ........................ Money market fund ...................................... Derivative contracts ..................................... Total assets ........................................... - $ - - $ - - $ - 6,177 6,177 $ $ $ 18,848 1,746 - 20,594 18,848 1,746 6,177 26,771 $ $ Liabilities: Derivative contracts ..................................... Total liabilities ...................................... $ - $ - $ $ 3,829 3,829 $ - $ - $ $ 3,829 3,829 Redeemable noncontrolling interests .................. $ - $ - $ 178,570 $ 178,570 December 27, 2008 Level 1 Level 2 Level 3 Total Assets: Available-for-sale securities ........................ Money market fund ...................................... Derivative contracts ..................................... Total assets ........................................... - $ - - $ - - $ - 12,955 12,955 $ $ $ 29,028 4,518 - 33,546 29,028 4,518 12,955 46,501 $ $ Liabilities: Derivative contracts ..................................... Total liabilities ...................................... $ - $ - $ $ 6,580 6,580 $ - $ - $ $ 6,580 6,580 Redeemable noncontrolling interests .................. $ - $ - $ 233,035 $ 233,035 74 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 6 – Fair Value Measurements – (Continued) As of December 26, 2009, we have estimated the value of our closed-end municipal bond fund ARS portfolio and our student loan backed ARS portfolio based upon a discounted cash flow model. The assumptions used in our valuation model include estimates for interest rates, timing and amount of cash flows and expected holding periods for the ARS portfolio. As a result of these analyses, our previously recorded cumulative temporary impairment at December 27, 2008 of $2.0 million was increased by $0.2 million to $2.2 million during the year ended December 26, 2009. We estimated the value of our holdings within the Reserve Primary Fund based upon the net asset value of the fund as of September 16, 2008, subsequent to the declaration of bankruptcy by Lehman Brothers Holdings, Inc. The reserve recorded in 2008 of $0.8 million related to our holdings within the Reserve Primary Fund was reduced by $0.5 million during 2009, based upon collections, and as of December 26, 2009 the reserve is $0.3 million. The following table presents a reconciliation of our assets and Redeemable noncontrolling interests measured at fair value on a recurring basis using unobservable inputs (Level 3). The details of the changes in Redeemable noncontrolling interests are shown in Note 1: Balance, December 29, 2007 ....................................................... Transfers to Level 3 ..................................................................... Change in redeemable noncontrolling interests ............................ Gains and (losses): Reported in earnings - Reserve Primary Fund increase ............. Reported in accumulated other comprehensive income ............ Balance, December 27, 2008 ....................................................... Transfers to Level 3 ..................................................................... Change in redeemable noncontrolling interests ............................ Redemptions at par ....................................................................... Gains and (losses): Reported in earnings - Reserve Primary Fund reduction ........... Reported in accumulated other comprehensive income ............ Balance, December 26, 2009 ....................................................... Level 3 (Unobservable Inputs) Closed-End Municipal Bond Funds, Student Loan Backed Auction-Rate Securities, Money Market Fund and Redeemable Noncontrolling Interests $ 150,028 36,318 83,007 (750) (2,022) 266,581 - (54,465) (13,227) $ 500 (225) 199,164 Note 7 – Business Acquisitions, Discontinued Operations, Divestitures and Other Transactions Acquisitions The operating results of all acquisitions are reflected in our financial statements from their respective acquisition dates. We completed certain acquisitions during the year ended December 26, 2009, which were immaterial to our financial statements individually and in the aggregate. 75 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 7 – Business Acquisitions, Discontinued Operations, Divestitures and Other Transactions – (Continued) On December 23, 2008, we acquired DNA Anthos Impianti (DNA), Medka and Noviko. DNA is a distributor of the Anthos brand of dental equipment in Italy. DNA also sells dental consumable merchandise and provides technical services. Medka, headquartered in Berlin, is a full-service provider of medical consumables, equipment and technical services primarily to physicians. Noviko, headquartered in Brno, is a distributor of veterinary supplies in the Czech Republic. The aggregate initial purchase price for the acquisitions of DNA, Medka and Noviko was approximately $52.9 million. The aggregate 2008 sales for these three companies were approximately $165.0 million. As of December 27, 2008, we recorded initial goodwill of approximately $34.8 million related to these acquisitions. In addition to these acquisitions, we completed other acquisitions during the year ended December 27, 2008 which resulted in the recording of approximately $28.9 million of initial goodwill through preliminary purchase price allocations. These other acquisitions were immaterial to our financial statements individually and in the aggregate. Effective September 29, 2007, we acquired Software of Excellence International Ltd., (NZX: SOE), a provider of clinical and practice management solutions for dental professionals, for NZ$2.90 per share. The total purchase price, including fees, was approximately $62.2 million. We recorded approximately $56.5 million of goodwill related to this acquisition. On August 29, 2007, we acquired W&J Dunlop, Ltd., a leading supplier of animal health products and services to veterinary clinics in the United Kingdom, with annual revenues of approximately $297.0 million, for a purchase price, including fees, of approximately $68.4 million. We recorded approximately $33.1 million of goodwill related to this acquisition. On July 2, 2007, we completed the acquisition of the 50% of Becker-Parkin Dental Supply Co. (“Becker-Parkin”), with annual revenues of approximately $69.5 million, which we did not own for a purchase price of approximately $22 million, less Becker-Parkin debt and subject to an earnout and certain other adjustments. We then integrated the full service and special markets portions of this business into our existing dental operations. We recorded a pretax gain of approximately $2.4 million relating to the dispositions of certain non-core businesses of Becker-Parkin. These dispositions included the contribution of certain non-core businesses of Becker-Parkin into an unconsolidated entity. In addition to the foregoing acquisitions, we completed other acquisitions during the year ended December 29, 2007. These other acquisitions were immaterial to our financial statements individually and in the aggregate. See Note 18 – Subsequent Event for a discussion regarding Butler Animal Health Supply, LLC. Discontinued Operations and Divestitures On August 5, 2009, we completed the sale of a wholesaler of dental consumables for aggregate consideration of $14.2 million. Prior results for this business have been presented as discontinued operations in the accompanying consolidated statements of income. The total pretax income from discontinued operations for the year ended December 26, 2009 is $6.5 million ($2.6 million after taxes) consisting of a $6.0 million ($2.4 million after taxes) gain on the sale and $0.5 million ($0.2 million after taxes) income from operations. The total pretax income (loss) from discontinued operations for this business for the years ended December 27, 2008 and December 29, 2007 was $(0.1) million (nil after taxes) and $0.5 million ($0.3 million after taxes), respectively. 76 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 7 – Business Acquisitions, Discontinued Operations, Divestitures and Other Transactions – (Continued) Net sales generated by our wholesaler of dental consumables were $8.0 million, $14.5 million and $14.5 million for the years ended December 26, 2009, December 27, 2008 and December 29, 2007, respectively. During November 2008, we reached a decision to exit the wholesale ultrasound business and dispose of such operations during the fourth quarter of 2008. This business was a component of our healthcare distribution business. In connection with this decision, we assessed our long-lived assets for impairment, which resulted in the recording of an impairment charge of approximately $11.2 million (approximately $7.3 million after- tax) for the write-down of all long-lived assets, including goodwill of $6.7 million. The total pretax loss from discontinued operations for this business for the years ended December 27, 2008 and December 29, 2007 was $12.1 million ($7.9 million after taxes) and $2.0 million ($1.2 million after taxes), respectively. Net sales generated by this business were $12.7 million and $15.8 million for the years ended December 27, 2008 and December 29, 2007, respectively. 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 in 2007. As a result of this sale, included in the operating results from discontinued operations for 2007 is a $1.1 million ($0.7 million after-tax) net gain on the sale of the businesses. Also, because the decision to divest this business was reached in 2007, we recorded an impairment charge to our long-lived assets of approximately $20.6 million, net of tax, or $(0.23) per diluted share in 2007. Net sales generated by our oncology pharmaceutical and specialty pharmacy businesses were $81.1 million for the year ended December 29, 2007. We have classified the operating results of these businesses as discontinued operations in the accompanying consolidated statements of income for all periods presented. Loan and Investment Agreement On December 12, 2008, we converted $10.4 million of loan receivables and related accrued interest into an equity interest of 15.33% in D4D Technologies, LLC (“D4D”). Due to the conversion, we now account for our equity interest in D4D under the equity method of accounting prospectively from the date of conversion. In addition, under our previous agreement, if certain product specification and performance milestones occurred, we were required to pay additional amounts (as equity contributions) to D4D and certain of its members equal to $16.0 million. On August 3, 2009, we entered into an amendment whereby we paid D4D and certain of its members approximately $8.0 million and agreed to make two contingent payments in each of 2010 and 2011 of up to $4.0 million each based on D4D’s financial performance. The August 3, 2009 payment of approximately $8.0 million is included in Investments and other in our consolidated financial statements and is being amortized over a period of 15 years. Amounts due under the amended agreement are being accounted for as increases in the carrying value of our investment in D4D when paid or at such earlier time as the payment is determined to be probable. Any underlying allocations to intangible assets will be determined at that time. 77 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 8 – Plans of Restructuring On November 5, 2008, we announced certain actions to reduce operating costs. These actions included the elimination of approximately 430 positions from our operations and the closing of several smaller facilities. For the years ended December 26, 2009 and December 27, 2008, we incurred 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, consisting of employee severance pay and benefits, facility closing costs, representing primarily lease termination and asset write-off costs, and outside professional and consulting fees directly related to the restructuring plan. The costs associated with the restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income. The following table shows the amounts expensed and paid for restructuring costs that were incurred during 2009 and 2008 and the remaining accrued balance of restructuring costs as of December 26, 2009 and December 27, 2008, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet: Balance at December 29, 2007 - $ - Provision 18,643 $ 3,846 Payments and Other Adjustments Balance at December 27, 2008 $ 4,313 158 $ 14,330 3,688 Provision 1,532 $ 1,452 Payments and Other Adjustments Balance at December 26, 2009 $ 13,697 3,110 $ 2,165 2,030 - $ - 751 23,240 $ 232 4,703 $ 519 18,537 $ 36 3,020 $ 453 17,260 $ 102 4,297 $ Severance costs (1) ................ Facility closing costs (2) ....... Other professional and consulting costs ................... Total ................................. (1) Represents salaries and related benefits for employees separated from the Company. (2) Represents costs associated with the closing of certain smaller facilities (primarily lease termination costs) and property and equipment write-offs. The majority of these costs have been paid as of December 26, 2009. The following table shows, by reportable segment, the restructuring costs incurred during 2009 and 2008 and the remaining accrued balance of restructuring costs as of December 26, 2009 and December 27, 2008: Balance at December 29, 2007 Healthcare distribution .......... Technology ............................ Total ................................. - $ - $ - Provision 22,650 $ 590 23,240 $ Payments and Other Adjustments Balance at December 27, 2008 4,193 510 4,703 Provision 3,020 $ - 3,020 $ 18,457 80 18,537 Payments and Other Adjustments Balance at December 26, 2009 17,252 8 17,260 4,225 72 4,297 $ $ $ $ $ $ $ $ 78 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 8 – Plans of Restructuring – (Continued) 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. Note 9 – Debt Bank Credit Lines On September 5, 2008, we entered into a new $400.0 million revolving credit facility with a $100.0 million expansion feature. The $400.0 million credit line expires in September 2013. This credit line replaced our then existing $300.0 million revolving credit line, which would have expired in May 2010. The interest rate is based on USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. The agreement provides, among other things, that we maintain certain interest coverage and maximum leverage ratios, and contains restrictions relating to subsidiary indebtedness, liens, employee and shareholder loans, disposal of businesses and certain changes in ownership. As of December 26, 2009, there were no borrowings outstanding under this revolving credit facility and there were $10.2 million of letters of credit provided to third parties. As of December 26, 2009, we had various short-term bank credit lines available, of which approximately $0.9 million was outstanding. As of December 26, 2009, such credit lines, which are uncollateralized, had a weighted average interest rate of 3.8%. Long-term debt Long-term debt consisted of the following: Senior notes ....................................................................................................... Convertible debt (net of discount of $4.0 million and $10.0 million) ............... Notes payable to banks, at a weighted average interest rate of 4.8% ................. Various uncollateralized loans payable with interest, in varying installments through 2014 ............................................................................. Capital lease obligations (see Note 15) ............................................................. Total .................................................................................................................. Less current maturities ....................................................................................... Total long-term debt .................................................................................... December 26, 2009 December 27, 2008 (1) $ 20,453 235,993 19 $ 172,501 230,002 623 4,836 5,632 266,933 (23,560) 243,373 $ 2,677 7,250 413,053 (156,405) 256,648 $ (1) Adjusted to reflect the effects of the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” Our $20.0 million of remaining senior notes bear interest at a fixed rate of 6.7% per annum and mature on September 27, 2010. Interest on our senior notes is payable semi-annually. 79 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 9 – Debt – (Continued) The agreement governing our senior notes provides, among other things, that we will maintain on a consolidated basis, certain leverage and priority debt ratios and a minimum net worth. The agreement also contains restrictions relating to transactions with affiliates, annual dividends, mergers and acquisitions and liens. The agreements 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. In 2004, we completed an issuance of $240.0 million of convertible debt. These notes are senior unsecured obligations bearing a fixed annual interest rate of 3.0% and are due to mature on August 15, 2034. Interest on the notes is payable on February 15 and August 15 of each year. The notes are convertible into our common stock at a conversion ratio of 21.58 shares per one thousand dollars of principal amount of notes, which is equivalent to a conversion price of $46.34 per share, under the following circumstances: • if the price of our common stock is above 130% of the conversion price measured over a specified number of trading days; • during the five-business-day period following any 10-consecutive-trading-day period in which the average of the trading prices for the notes for that 10-trading-day period was less than 98% of the average conversion value for the notes during that period; • if the notes have been called for redemption; or • upon the occurrence of a fundamental change or specified corporate transactions, as defined in the note agreement. Upon conversion, we are required to satisfy our conversion obligation with respect to the principal amount of the notes to be converted, in cash, with any remaining amount to be satisfied in shares of our common stock. We currently have sufficient availability of funds through our $400.0 million revolving credit facility (discussed above) along with cash on hand to fully satisfy our debt obligations, including the cash portion of our convertible debt. We also will pay contingent interest during any six-month-interest period beginning August 20, 2010, if the average trading price of the notes is above specified levels. We may redeem some or all of the notes on or after August 20, 2010. The note holders may require us to purchase all or a portion of the notes on August 15, 2010, 2014, 2019, 2024 and 2029 or, subject to specified exceptions, upon a change of control event. If we are required by the note holders to purchase all or a portion of the notes, we will use our existing credit line to fund such purchase; therefore, we have classified our convertible debt as long-term in our consolidated balance sheet. Effective December 28, 2008, we adopted the provisions of ASC Topic 470-20, “Debt with Conversion and Other Options,” as it relates to our convertible debt. ASC Topic 470-20 requires that we allocate the liability and equity components of the convertible debt and reflect our non-convertible debt borrowing rate for the interest component of the convertible debt. 80 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 9 – Debt – (Continued) Upon the retrospective implementation of ASC Topic 470-20, we recorded a debt discount of $32.6 million, as of August 9, 2004, representing the difference between the fair value of our $240.0 million 3% convertible debt at the time of issuance and the face amount of the convertible debt. We also recorded a related deferred tax liability of $12.1 million representing the tax impact of recording the debt discount. This debt discount is being amortized over a period of six years from the date our convertible debt was issued until August 9, 2010, the first date that the debt can be called. An offsetting amount was recorded in Additional paid-in capital to reflect the impact of the debt discount, net of the related deferred tax liability. The principal amounts of the outstanding notes, the unamortized discount and the net carrying value at December 26, 2009 were $240.0 million, $4.0 million and $236.0 million and at December 27, 2008 they were $240.0 million, $10.0 million and $230.0 million. As of December 28, 2008, retained earnings includes a cumulative adjustment to interest expense of $22.0 million ($14.3 million, net of taxes) representing the unamortized non-cash difference between the amount of our non-convertible debt, which has a stated interest rate of 3%, and the fair value of our debt computed using our non-convertible debt borrowing rate of 5.74% at the time of issuance of our convertible debt. The cumulative adjustment to interest expense from August 9, 2004 through December 30, 2006 was $11.3 million ($7.2 million, net of taxes). For the years ended December 27, 2008 and December 29, 2007, the adjustments to interest expense were $5.5 million ($3.7 million, net of taxes) and $5.2 million ($3.4 million, net of taxes), respectively. For the years ended December 26, 2009, December 27, 2008 and December 29, 2007, we recorded additional non-cash interest expense of $6.0 million ($4.0 million, net of taxes), $5.6 million ($3.8 million, net of taxes) and $5.4 million ($3.5 million, net of taxes), respectively, representing the difference between the stated interest rate on our convertible debt and our non-convertible debt borrowing rate at the time of issuance of our convertible debt. For each of the years ended December 26, 2009, December 27, 2008 and December 29, 2007, contractual interest expense relating to our convertible debt was $7.2 million ($4.8 million, net of taxes). As of December 26, 2009, the aggregate amounts of long-term debt, including capital leases, maturing in each of the next five years and thereafter are as follows: 2010 ............................................................................................. 2011 ............................................................................................. 2012 ............................................................................................. 2013 ............................................................................................. 2014 ............................................................................................. Thereafter ..................................................................................... $ 23,560 1,418 2,295 438 3,229 235,993 Total ........................................................................................ $ 266,933 81 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 10 – Income Taxes Income from continuing operations before taxes, equity in earnings (losses) of affiliates and noncontrolling interests was as follows: December 26, 2009 Years ended December 27, 2008 (1) (2) December 29, 2007 (1) (2) Domestic ................................................................................ Foreign ................................................................................... Total .................................................................................. (1) Adjusted to reflect the effects of discontinued operations. $ $ $ 308,238 144,482 452,720 300,227 95,222 395,449 $ $ $ 293,851 84,658 378,509 (2) Adjusted to reflect the effects of the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” The provisions for income taxes attributable to continuing operations were as follows: December 26, 2009 Years ended December 27, 2008 (1) (2) December 29, 2007 (1) (2) Current income tax expense: U.S. Federal .................................................................. State and local ............................................................... Foreign .......................................................................... Total current ............................................................ $ 101,092 16,649 35,965 153,706 $ 94,215 14,310 22,741 131,266 $ 83,971 22,907 22,478 129,356 Deferred income tax expense (benefit): U.S. Federal .................................................................. State and local ............................................................... Foreign .......................................................................... Total deferred .......................................................... Total provision ..................................................... (5,059) (722) (20,404) (26,185) 127,521 $ 499 72 (627) (56) 131,210 $ (40) (5) (755) (800) 128,556 $ (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.” 82 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 10 – Income Taxes – (Continued) The tax effects of temporary differences that give rise to our deferred income tax asset (liability) were as follows: Current deferred income tax assets: Inventory, premium coupon redemptions and accounts receivable valuation allowances .............................................................................. Uniform capitalization adjustments to inventories ...................................... Other current assets ..................................................................................... Current deferred income tax asset (3) ......................................................... Non-current deferred income tax asset (liability): Property and equipment .............................................................................. Stock-based compensation .......................................................................... Other non-current liabilities ........................................................................ Net operating losses of domestic subsidiaries ............................................. Net operating losses of foreign subsidiaries ................................................ Total non-current deferred tax liability .................................................. Valuation allowance for non-current deferred tax assets (2) ................. Net non-current deferred tax liability (3) ................................................... Net deferred income tax liability ...................................................................... Years Ended December 26, 2009 December 27, 2008 (1) $ 18,734 9,690 6,742 35,166 $ 12,348 8,712 2,497 23,557 (14,658) 35,312 (120,737) 9,411 58,980 (31,692) (36,083) (67,775) (32,609) $ (14,321) 28,275 (110,802) 8,537 75,562 (12,749) (67,418) (80,167) (56,610) $ (1) (2) (3) Adjusted to reflect the effects of the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” Primarily relates to operating losses of acquired foreign subsidiaries, the benefits of which are uncertain. Any future reductions of such valuation allowances will be reflected as a reduction of income tax expense in accordance with the provisions of ASC Topic 805, “Business Combinations.” Certain deferred tax amounts do not have a right of offset and are therefore reflected on a gross basis in current assets and non-current liabilities in our consolidated balance sheets. The deferred income tax asset is realizable as we have sufficient taxable income in prior years and anticipate sufficient taxable income in future years to realize the tax benefit for deductible temporary differences. As of December 26, 2009, we have net operating loss carryforwards of $25.1 million relating to our domestic unconsolidated affiliates. Of such losses, $16.2 million can be utilized against future federal income through 2026, and $8.9 million can be utilized against future federal income through 2027. Foreign net operating loss carryforwards totaled $205.1 million as of December 26, 2009. Of such losses, $0.8 million can be utilized against future foreign income through 2012, $1.6 million can be utilized against future foreign income through 2013, $2.6 million can be utilized against future foreign income through 2014, $2.9 million can be utilized against future foreign income through 2015, $1.7 million can be utilized against future foreign income through 2016 and $195.5 million has an indefinite life. 83 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 10 – Income Taxes – (Continued) The tax provisions attributable to continuing operations differ from the amount computed using the federal statutory income tax rate as follows: December 26, 2009 Years ended December 27, 2008 (1) (2) December 29, 2007 (1)(2) Income tax provision at federal statutory rate ............................. State income tax provision, net of federal income tax effect ...... Foreign income tax benefit ......................................................... Valuation allowance .................................................................... Interest expense related to loans ................................................. Other ........................................................................................... Total income tax provision .................................................... 158,452 10,078 (16,743) (19,467) (7,014) 2,215 127,521 138,407 9,426 (11,902) 3,090 (7,254) (557) 131,210 $ $ $ $ $ $ 132,479 15,031 (6,503) (551) (8,855) (3,045) 128,556 (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.” 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 resulted primarily from the reduction of a valuation allowance which is explained below, additional tax planning, settlements of tax audits and higher income from lower taxing countries. In addition, the difference between our effective tax rate and the federal statutory tax rate for both periods related primarily to foreign and state income taxes. Without the effect of the reduction of the valuation allowance described below, our effective tax rate from continuing operations for the year ended December 26, 2009 would have been 32.8%. During the third quarter of 2009, we substantially completed a plan of reorganization outside the United States that will allow us to utilize tax loss carryforwards to offset taxable income beginning in 2010 in certain foreign tax jurisdictions. As a result, we have determined that it is more likely than not that a portion of deferred tax assets previously fully reserved will be realized. Therefore, the provision for income taxes includes a $20.9 million reduction of the valuation allowance which is based on an estimate of future taxable income available to be offset by the tax loss carryforwards. Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries, which have been, and will continue to be, reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to us or a U.S. affiliate, or if we should sell our stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on such foreign earnings. As of December 26, 2009, the cumulative amount of reinvested earnings was approximately $243.0 million. In July 2006, the FASB issued guidance within ASC Topic 740, “Income Taxes,” which we adopted effective December 31, 2006. ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. 84 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 10 – Income Taxes – (Continued) ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. The total amount of unrecognized tax benefits, including accrued interest, as of December 26, 2009 was approximately $20.9 million, all of which would affect the effective tax rate if recognized. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a material impact on our consolidated financial statements. The total amounts of interest and penalties accrued were approximately $3.9 million and $0, respectively, as of December 26, 2009. It is expected that the amount of interest will change in the next twelve months. However, we do not expect the change to have a material impact on our consolidated financial statements. The tax years subject to examination by major tax jurisdictions include the years 2006 and forward by the U.S. Internal Revenue Service, the years 1996 and forward for certain states and the years 1998 and forward for certain foreign jurisdictions. The following table provides a reconciliation of unrecognized tax benefits excluding the effects of deferred taxes: December 26, 2009 December 27, 2008 $ $ 11,800 1,600 6,700 (100) (2,000) (1,000) 17,000 12,100 800 3,300 (2,100) (2,000) (300) 11,800 $ $ Balance, beginning of period ........................................................................ Additions based on current year tax positions .............................................. Additions based on prior year tax positions .................................................. Reductions based on prior year tax positions ............................................... Reductions resulting from settlements with taxing authorities ...................... Reductions resulting from lapse in statutes of limitations ............................ Balance, end of period .................................................................................. 85 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 11 – Concentrations of Risk Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments consist primarily of cash equivalents, available-for-sale securities, trade receivables, long-term investments, notes receivable and derivative instruments. In all cases, our maximum exposure to loss from credit risk equals the gross fair value of the financial instruments. We continuously assess the need for reserves for such losses, which have been within our expectations. We do not require collateral or other security to support financial instruments subject to credit risk, except for long-term notes receivable. We limit our credit risk with respect to our cash equivalents, available-for-sale securities, short-term and long-term investments and derivative instruments, by monitoring the credit worthiness of the financial institutions who are the counter-parties to such financial instruments. As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing numerous investment grade counter- parties. With respect to our trade receivables, our credit risk is somewhat limited due to a relatively large customer base and its dispersion across different types of healthcare professionals and geographic areas. No single customer accounted for more than 1.1% of our net sales in 2009. With respect to our sources of supply, our top 10 healthcare distribution suppliers and our single largest supplier accounted for approximately 31% and 8%, respectively, of our aggregate purchases in 2009. Our long-term notes receivable represent strategic financing arrangements with certain industry affiliates and amounts owed to us from sales of certain businesses. Generally, these notes are secured by certain assets of the counter-party; however, in most cases our security is subordinate to other commercial financial institutions. While we have exposure to credit loss in the event of non-performance by these counter-parties, we conduct ongoing assessments of their financial and operational performance. Note 12 – Derivatives and Hedging Activities We are exposed to market risks, which include changes in interest rates, as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other, and changes to the credit markets. We attempt to minimize these risks by primarily using interest rate swap agreements, foreign currency forward and swap contracts and by maintaining counter-party credit limits. These hedging activities provide only limited protection against interest rate, currency exchange and credit risks. Factors that could influence the effectiveness of our hedging programs include interest rate volatility, currency markets and availability of hedging instruments and liquidity of the credit markets. All interest rate swap and foreign currency forward and swap contracts that we enter into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated interest rate and currency exposure. We do not enter into such contracts for speculative purposes and we manage our credit risks by diversifying our investments, maintaining a strong balance sheet and having multiple sources of capital. 86 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 12 – Derivatives and Hedging Activities – (Continued) Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward and swap contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., 12 months or less) foreign currency forward and swap contracts to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the payment of merchandise purchases to our foreign suppliers. We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. The following table presents the fair value of our derivative instruments: Asset Derivatives December 26, 2009 Liability Derivatives December 26, 2009 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments under ASC Topic 815-10: Interest rate contracts Foreign exchange contracts Total Derivatives not designated as hedging instruments under ASC Topic 815-10: Foreign exchange contracts Total derivatives Fair Value Hedges Prepaid expenses and other Prepaid expenses and other $ 453 427 Accrued expenses other Accrued expenses other $ - 2,023 880 2,023 Prepaid expenses and other 5,297 Accrued expenses other 1,806 $ 6,177 $ 3,829 Our fair value hedges consist of interest rate swaps and foreign exchange contracts. Gains associated with these interest rate swaps and foreign exchange contracts are recorded in Other, net within our consolidated statements of income and totaled $1.7 million and $7.5 million, respectively, for the year ended December 26, 2009. Forward points related to these foreign exchange contracts, recorded in Interest expense within our consolidated statements of income, totaled $0.5 million for the year ended December 26, 2009. Cash Flow Hedges Our cash flow hedges consist of foreign exchange contracts. The amounts recorded in Accumulated other comprehensive income (“AOCI”) primarily represent the change in spot rates at the time of the initial hedge compared to the spot rate when marked to market. The loss recognized in AOCI (effective portion) for the year ended December 26, 2009 was $0.1 million. 87 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 12 – Derivatives and Hedging Activities – (Continued) The activity recorded within our consolidated statements of income relating to cash flow hedges include amounts reclassified from AOCI (effective portion) and forward points (ineffective portion). The following table presents the effect of our cash flow hedges: Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Year Ended December 26, 2009 Location where Forward Points are Recognized in Income on Derivative (Ineffective Portion) Amount of Forward Points Recognized in Income on Derivative (Ineffective Portion) Year Ended December 26, 2009 $ (1,081) Interest income $ 39 4,886 Other, net 5 Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Other, net Cost of sales Economic Hedges We are also a party to contracts that serve as economic hedges that we have not designated as hedges for accounting purposes, which consist of foreign exchange contracts. Losses associated with these foreign exchange contracts are recorded in Other, net within our consolidated statements of income and totaled $4.3 million for the year ended December 26, 2009. Forward points related to these foreign exchange contracts, which are recorded in Interest expense within our consolidated statements of income, totaled $0.2 million for the year ended December 26, 2009. 88 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 13 – Segment and Geographic Data We conduct our business through two reportable segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution reportable segment aggregates our dental, medical (including animal health) and international operating segments. This segment consists of consumable products, small equipment, laboratory products, large dental and medical equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. Our dental group serves office-based dental practitioners, schools and other institutions in the combined United States and Canadian dental market. Our medical group serves office-based medical practitioners, surgical centers, other alternate-care settings, animal health clinics and other institutions throughout the United States. Our international group serves 21 countries outside of North America. Our technology group provides software, technology and other value-added services to healthcare practitioners, primarily in the United States, Canada, the United Kingdom, Australia and New Zealand. Our value-added practice solutions include practice management software systems for dental and medical practitioners and animal health clinics. Our technology group offerings also include financial services, e- services and continuing education services for practitioners. The following tables present information about our business segments: December 26, 2009 Years ended December 27, 2008 (1) December 29, 2007 (1) Net Sales: Healthcare distribution (2): Dental (3) .................................................................... Medical (4) ................................................................. International (5) .......................................................... Total healthcare distribution .................................. Technology (6) ................................................................ Total ........................................................................... $ $ 2,509,921 1,457,102 2,398,105 6,365,128 173,208 6,538,336 $ $ 2,567,064 1,428,968 2,221,092 6,217,124 163,289 6,380,413 $ $ 2,447,841 1,540,269 1,769,881 5,757,991 131,893 5,889,884 (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 dental, medical and animal health markets, primarily in Europe. (6) Consists of practice management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States, Canada, the United Kingdom, Australia and New Zealand. 89 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 13 – Segment and Geographic Data – (Continued) Years ended December 26, December 27, December 29, 2008 (1) (2) 2007 (1) (2) 2009 Operating Income: Healthcare distribution .............................................................. Technology ................................................................................ Total ...................................................................................... Income from continuing operations before taxes, equity in earnings (losses) of affiliates and noncontrolling interests : Healthcare distribution ............................................................... Technology ................................................................................ Total ...................................................................................... Depreciation and Amortization: Healthcare distribution ............................................................... Technology ................................................................................ Total ...................................................................................... Income Tax Expense Attributable to Continuing Operations: Healthcare distribution ............................................................... Technology ................................................................................ Total ...................................................................................... Interest Income: Healthcare distribution ............................................................... Technology ................................................................................ Total ...................................................................................... Interest Expense: Healthcare distribution ............................................................... Technology ................................................................................ Total ...................................................................................... Purchases of Fixed Assets: Healthcare distribution ............................................................... Technology ................................................................................ Total ...................................................................................... Total Assets: Healthcare distribution ............................................................... Technology ................................................................................ Total ...................................................................................... $ $ 401,915 62,170 464,085 $ $ 373,444 79,276 452,720 $ $ 362,307 56,979 419,286 $ $ 320,167 75,282 395,449 $ $ 339,937 47,002 386,939 $ $ 318,068 60,441 378,509 $ $ $ 75,290 6,203 81,493 71,731 6,396 78,127 $ $ $ 69,815 4,121 73,936 $ $ 99,000 28,521 127,521 $ $ 103,344 27,866 131,210 $ $ 105,371 23,185 128,556 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 15,982 373 16,355 34,583 22 34,605 49,336 1,534 50,870 9,929 50 9,979 23,362 8 23,370 49,282 2,345 51,627 16,467 64 16,531 29,601 6 29,607 54,683 2,138 56,821 As of December 26, December 27, December 29, 2008 (2) 2007 (2) 2009 $ $ 3,703,315 132,670 3,835,985 $ $ 3,457,391 141,819 3,599,210 $ $ 3,160,063 153,409 3,313,472 (1) Adjusted to reflect the effects of discontinued operations, except depreciation and amortization amounts. (2) Adjusted to reflect the effects of the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” 90 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 13 – Segment and Geographic Data – (Continued) The following table sets forth our net sales by principal categories of products offered through our healthcare distribution and technology reportable segments: December 26, 2009 Years Ended December 27, 2008 (1) December 29, 2007 (1) Healthcare Distribution Dental: Consumable dental products, dental laboratory products and small equipment (2) ......................... Large dental equipment (3) ............................................ Total dental .............................................................. $ 2,994,714 1,118,500 4,113,214 $ 2,963,657 1,142,948 4,106,605 $ 2,711,714 1,076,084 3,787,798 Medical: Medical products (4) ...................................................... Animal health products (5) ............................................. Total medical ........................................................... 1,530,704 721,210 2,251,914 Total Healthcare distribution ........................................ 6,365,128 1,458,629 651,890 2,110,519 6,217,124 1,586,608 383,585 1,970,193 5,757,991 Technology Software and related products and other value-added products (6) ................................. 173,208 163,289 131,893 Total ................................................................................ $ 6,538,336 $ 6,380,413 $ 5,889,884 (1) Adjusted to reflect the effects of discontinued operations. (2) Includes X-ray products, infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants, gypsum, acrylics, articulators and abrasives. (3) Includes dental chairs, delivery units and lights, X-ray equipment, equipment repair and high-tech equipment. (4) Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products, equipment and vitamins. (5) Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment. (6) Includes software and related products and other value-added products, including financial products and continuing education. The following table presents information about our operations by geographic area as of and for the three years ended December 26, 2009. Net sales by geographic area are based on the respective locations of our subsidiaries. No country, except for the United States and Germany, generated net sales greater than 10% of consolidated net sales. There were no material amounts of sales or transfers among geographic areas and there were no material amounts of export sales. 2009 2008 2007 United States ................... Germany .......................... Other ................................ Consolidated total ....... Net Sales 3,902,353 699,309 1,936,674 6,538,336 $ $ $ Long-Lived Assets 590,917 182,590 676,909 1,450,416 $ (1) Adjusted to reflect the effects of discontinued operations. $ Long-Lived Assets 588,308 184,729 611,843 1,384,880 $ Net Sales (1) $ 3,878,585 620,210 1,391,089 5,889,884 $ Net Sales (1) $ 3,897,520 671,341 1,811,552 6,380,413 $ 91 $ Long-Lived Assets 551,840 186,784 618,661 1,357,285 $ HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 14 – Employee Benefit Plans Stock-based Compensation Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense, recorded in accordance with the provisions of ASC Topic 718, “Stock Compensation,” of $25.9 million ($17.5 million after-tax), $25.4 million ($17.0 million after-tax) and $22.6 million ($14.9 million after-tax) for the years ended December 26, 2009, December 27, 2008 and December 29, 2007. Our accompanying consolidated statements of cash flows present our stock-based compensation expense as an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. Additionally, prior to adopting ASC Topic 718, benefits associated with tax deductions in excess of recognized compensation expense were presented as part of operating cash flows on our consolidated statements of cash flows. However, ASC Topic 718 requires that such excess tax benefits be presented as a cash inflow from financing activities. In the accompanying consolidated statements of cash flows, we presented $4.7 million, $11.0 million and $12.7 million of such excess tax benefits as a cash inflow from financing activities for the years ended December 26, 2009, December 27, 2008 and December 29, 2007. Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. We measure stock-based compensation at the grant date, based on the estimated fair value of the award, and recognize the cost (net of estimated forfeitures) as compensation expense on a straight-line basis over the requisite service period. Our stock-based compensation expense is reflected in selling, general and administrative expenses in our consolidated statements of income. Stock-based awards are provided to certain employees and non-employee directors under the terms of our 1994 Stock Incentive Plan, as amended, and our 1996 Non-Employee Director Stock Incentive Plan, as amended (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Prior to March 2009, awards under the Plans principally include a combination of at- the-money stock options and restricted stock (including restricted stock units). In March 2009, equity- based awards were granted solely in the form of restricted stock and restricted stock units, with the exception of stock options for certain pre-existing contractual obligations. As of December 26, 2009, there were 27,077,270 shares authorized and 6,637,926 shares available to be granted under the 1994 Stock Incentive Plan and 800,000 shares authorized and 173,789 shares available to be granted under the 1996 Non-Employee Director Stock Incentive Plan. Stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price. Stock options are granted at an exercise price equal to our closing stock price on the date of grant. These awards, which generally vest 25% per year based on the recipient’s continued service subject to the terms and conditions of the Plans, are fully vested four years from the grant date and have a contractual term of ten years from the grant date. Additionally, recipients may not sell any shares that they acquire through exercising their stock options until the third anniversary of the date of grant of such options. We estimate the fair value of stock options using the Black-Scholes valuation model. Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. We issue restricted stock that vests solely based on the recipient’s continued service over time (four-year cliff vesting) and restricted stock that vests based on our achieving specified performance measurements and the recipient’s continued service over time (three-year cliff vesting). 92 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 14 – Employee Benefit Plans – (Continued) With respect to time-based restricted stock, we estimate the fair value on the date of grant based on our closing stock price. With respect to performance-based restricted stock, the number of shares that ultimately vest and are received by the recipient is based upon our earnings per share performance as measured against specified targets over a three-year period as determined by the Compensation Committee of the Board of Directors. Though there is no guarantee that performance targets will be achieved, we estimate the fair value of performance-based restricted stock, based on our closing stock price at time of grant. The Plans provide for adjustments to the performance-based restricted stock targets for significant events such as acquisitions, divestitures, new business ventures and share repurchases. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans. Restricted stock units are unit awards that we grant to certain employees that entitle the recipient to shares of common stock upon vesting. We grant restricted stock units with the same time-based and performance-based vesting that we use for restricted stock. The fair value of restricted stock units is determined on the date of grant, based on our closing stock price. We record deferred income tax assets for awards that result in deductions on our income tax returns based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the deferred income tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred income tax asset) or in earnings (if the deferred income tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards). Stock-based compensation grants for the year ended December 26, 2009 primarily consisted of restricted stock and restricted stock unit grants. Stock-based compensation grants for the years ended December 27, 2008 and December 29, 2007 consisted of stock options, restricted stock and restricted stock unit grants. Certain options granted require us to settle the option in the form of a cash payment. As of December 26, 2009, we have recorded a liability of $0.4 million relating to fair value measurement of these options. The weighted-average grant date fair value of stock-based awards granted before forfeitures was $34.35, $18.44 and $21.61 per share during the years ended December 26, 2009, December 27, 2008 and December 29, 2007. For the year ended December 26, 2009, the fair value of stock-based awards issued consisted mainly of restricted stock (including restricted stock units). Total unrecognized compensation cost related to non-vested awards as of December 26, 2009 was $49.1 million, which is expected to be recognized over a weighted-average period of approximately two years. 93 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 14 – Employee Benefit Plans – (Continued) A summary of the stock option activity under the Plans is presented below: December 26, 2009 Weighted Average Exercise Price $ 39.85 38.33 26.62 48.83 40.66 Shares 6,791,828 42,206 (445,916) (93,376) 6,294,742 Years ended December 27, 2008 December 29, 2007 Weighted Average Exercise Price Weighted Average Exercise Price Shares $ 34.67 59.78 25.87 45.29 39.85 7,477,321 930,112 (1,487,238) (90,742) 6,829,453 $ 30.54 51.26 23.85 41.92 34.67 Shares 6,829,453 1,124,795 (991,259) (171,161) 6,791,828 4,835,120 36.31 5,141,140 35.11 5,138,783 30.80 Outstanding at beginning of year .................................... Granted ....................................... Exercised .................................... Forfeited ..................................... Outstanding at end of year .......... Options exercisable at end of year .................................... The following weighted-average assumptions were used in determining the fair values of stock options using the Black-Scholes valuation model: Expected dividend yield ........................................................................... Expected stock price volatility .................................................................. Risk-free interest rate ................................................................................ Expected life of options (years) ................................................................ 2009 0% 28% 1.88% 4.5 2008 0% 20% 2.75% 4.5 2007 0% 20% 4.75% 4.5 We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in the foreseeable future. The expected stock price volatility is based on the evaluation of implied volatilities from traded call options on our stock and from call options embedded in our existing convertible debt, historical volatility of our stock and other factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant in conjunction with considering the expected life of options. The expected life of options represents the approximate period of time that granted options are expected to be outstanding and is based on historical data, including, among other things, option exercises, forfeitures and cancellations. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by recipients of stock options, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us. The following table represents the intrinsic values of: Stock options outstanding ................................................... Stock options exercisable .................................................... 94 December 26, 2009 $ 84,880 82,476 As of December 27, 2008 $ 24,928 24,928 December 29, 2007 186,956 160,606 $ HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 14 – Employee Benefit Plans – (Continued) The total cash received as a result of stock option exercises for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 was approximately $11.9 million, $25.6 million and $35.5 million. In connection with these exercises, the tax benefits that we realized for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 were $2.6 million, $7.0 million and $10.0 million. We settle employee stock option exercises with newly issued common shares. The total intrinsic value of restricted stock (including RSUs) that vested was $8.7 million, $1.4 million and $172 during the years ended December 26, 2009, December 27, 2008 and December 29, 2007. The following table summarizes the status of our non-vested restricted shares/units for the year ended December 26, 2009: Time-Based Restricted Stock/Units Shares/Units 285,225 341,931 (7,982) (21,569) 597,605 Weighted Average Grant Date Fair Value $ 14,771 11,913 (333) (689) 25,662 $ Aggregate Intrinsic Value $ 31,679 Performance-Based Restricted Stock/Units Shares/Units 347,141 852,211 (179,881) (9,509) 1,009,962 Weighted Average Grant Date Fair Value 17,704 $ 13,495 (8,512) (416) 22,271 $ Aggregate Intrinsic Value $ 53,538 Outstanding at beginning of period ............. Granted ........................................................ Vested ......................................................... Forfeited ...................................................... Outstanding at end of period ....................... Outstanding at beginning of period ............. Granted ........................................................ Vested ......................................................... Forfeited ...................................................... Outstanding at end of period ....................... 401(k) Plans We offer qualified 401(k) plans to substantially all our domestic full-time employees. As determined by our Board of Directors, matching contributions to these plans generally do not exceed 100% of the participants’ contributions up to 7% of their base compensation, subject to applicable legal limits. Matching contributions include both cash and our common stock. Forfeitures attributable to participants whose employment terminates prior to becoming fully vested are used to reduce our matching contributions. Assets of the 401(k) and other defined contribution plans are held in self-directed accounts enabling participants to choose from various investment fund options. Matching contributions and administrative expenses related to these plans charged to operations during the years ended December 26, 2009, December 27, 2008 and December 29, 2007 amounted to $18.9 million, $17.3 million and $17.4 million. Supplemental Executive Retirement Plan We offer an unfunded, non-qualified supplemental executive retirement plan to eligible employees. This plan generally covers officers and certain highly-compensated employees after they have reached the maximum IRS allowed pre-tax 401(k) contribution limit. Our contributions to this plan are equal to the 95 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 14 – Employee Benefit Plans – (Continued) 401(k) employee-elected contribution percentage applied to base compensation for the portion of the year in which such employees are not eligible to make pre-tax contributions to the 401(k) plan. The amounts charged (credited) to operations during the years ended December 26, 2009, December 27, 2008 and December 29, 2007 amounted to $1.9 million, $(1.6) million and $1.7 million. The reduction in expense during the year ended December 27, 2008 was due to a decrease in the market value of the plan’s investments during the period. Note 15 – Commitments and Contingencies Operating Leases We lease facilities and equipment under non-cancelable operating leases expiring through 2025. We expect that in the normal course of business, leases will be renewed or replaced by other leases. Future minimum annual rental payments under our non-cancelable operating leases as of December 26, 2009 were: 2010 ............................................................................................ 2011 ............................................................................................ 2012 ............................................................................................ 2013 ............................................................................................ 2014 ............................................................................................ Thereafter ................................................................................... $ 59,611 44,313 33,140 20,427 12,832 41,355 Total minimum operating lease payments ............................. $ 211,678 Total rental expense attributable to continuing operations for the years ended December 26, 2009, December 27, 2008 and December 29, 2007 was $56.1 million, $59.0 million and $50.4 million. Capital Leases We lease certain equipment under capital leases. Future minimum annual lease payments under our capital leases together with the present value of the minimum capital lease payments as of December 26, 2009 were: 2010 ............................................................................................. 2011 ............................................................................................. 2012 ............................................................................................. 2013 ............................................................................................. 2014 ............................................................................................. Thereafter ..................................................................................... Total minimum capital lease payments ........................................ Less: Amount representing interest at 3.20% to 12.27% ............. Total present value of minimum capital lease payments ......... 96 $ $ 2,320 1,541 1,142 416 699 - 6,118 (486) 5,632 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 15 – Commitments and Contingencies – (Continued) Purchase Commitments In our healthcare distribution business, we sometimes enter into long-term purchase commitments to ensure the availability of products for distribution. Future minimum annual payments for inventory purchase commitments as of December 26, 2009 were: 2010 ............................................................................................. 2011 ............................................................................................. 2012 ............................................................................................. 2013 ............................................................................................. 2014 ............................................................................................. Thereafter ..................................................................................... Total minimum inventory purchase commitment payments ........................................................ $ 162,505 134,323 138,959 55,697 22,937 145,479 $ 659,900 We have obligations to purchase influenza vaccine from a manufacturer through 2012, which require us to pay an amount per dose based on the prevailing market price or a formula price in each respective year. The amounts included in the above table related to these purchase commitments were determined using current market conditions. We also have obligations to purchase influenza vaccine from another manufacturer. Actual amounts may differ. Litigation 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. 97 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 15 – Commitments and Contingencies – (Continued) Employment, Consulting and Non-Compete Agreements We have definite-lived employment, consulting and non-compete agreements expiring through 2013 that have varying base aggregate annual payments of approximately $9.8 million in 2010, which decrease periodically to approximately $0.2 million in 2013. We also have lifetime consulting agreements that provide for current compensation of $0.4 million per year, increasing $25 every fifth year with the next increase in 2012. In addition, some agreements have provisions for additional incentives and compensation. Note 16 – Supplemental Cash Flow Information Cash paid for interest and income taxes was: December 26, 2009 Years ended December 27, 2008 December 29, 2007 Interest .......................................................................... Income taxes ................................................................. $ 22,202 170,024 $ 30,249 109,103 $ 26,891 100,476 There was approximately $3.7 million, $0.8 million and $2.0 million of debt assumed as a part of the acquisitions for the years ended December 26, 2009, December 27, 2008 and December 29, 2007, respectively. During the years ended December 26, 2009, December 27, 2008 and December 29, 2007, we had $21.5 million, $0.6 million and $1.7 million of non-cash net unrealized gains related to foreign currency hedging activities. During the year ended December 26, 2009, we exchanged a loan receivable from D4D in the amount of $7.6 million for equity securities in D4D. 98 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 17 – Quarterly Information (Unaudited) The following presents certain quarterly financial data: Quarters ended March 28, 2009 (1) (2) June 27, 2009 (1) (2) September 26, 2009 (2) December 26, 2009 Net sales ..................................................... Gross profit ................................................ Operating income ....................................... Income from continuing operations ............ Net income ................................................. $ 1,485,388 438,363 90,588 59,183 59,300 $ 1,607,434 475,918 121,970 80,200 80,425 $ 1,659,433 476,267 113,885 98,375 100,748 $ 1,786,081 526,272 137,642 92,684 92,684 Amounts attributable to Henry Schein, Inc.: Income from continuing operations ............ Income from discontinued operations, net of tax ................................................ Net income ................................................. Earnings per share attributable to Henry Schein, Inc.: From continuing operations per share: Basic ...................................................... Diluted ................................................... From net income: Basic ...................................................... Diluted ................................................... $ 54,774 $ 73,324 $ 94,045 $ 86,408 77 54,851 149 73,473 2,376 96,421 - 86,408 $ 0.62 0.61 $ 0.83 0.81 $ 1.06 1.03 $ 0.97 0.94 $ 0.62 0.61 $ 0.83 0.81 $ 1.09 1.05 $ 0.97 0.94 99 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 17 – Quarterly Information (Unaudited) – (Continued) March 29, 2008 (1) (2) (3) June 28, 2008 (1) (2) (3) September 27, 2008 (1) (2) (3) December 27, 2008 (1) (2) (3) Quarters ended Net sales ..................................................... Gross profit ................................................ Operating income ....................................... Income from continuing operations ............ Net income ................................................. $ 1,518,243 448,427 85,665 55,144 54,690 $ 1,636,782 485,366 113,796 72,023 71,701 $ 1,644,209 475,594 115,414 72,818 72,766 $ 1,581,179 464,908 104,411 69,291 62,217 Amounts attributable to Henry Schein, Inc.: Income from continuing operations ............ Loss from discontinued operations, net of tax ................................................ Net income ................................................. Earnings per share attributable to Henry Schein, Inc.: From continuing operations per share: Basic ...................................................... Diluted ................................................... From net income: Basic ...................................................... Diluted ................................................... $ 51,767 $ 64,924 $ 67,548 $ 63,108 (327) 51,440 (354) 64,570 (60) 67,488 (7,149) 55,959 $ 0.58 0.56 $ 0.72 0.70 $ 0.76 0.74 $ 0.71 0.71 $ 0.58 0.56 $ 0.72 0.70 $ 0.76 0.74 $ 0.63 0.63 (1) Adjusted to reflect the effects of discontinued operations. (2) 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 November 2008, we reached a decision to exit the wholesale ultrasound business and dispose of such operations during the fourth quarter of 2008. This business was a component of our healthcare distribution business. We have classified the operating results of this business as discontinued operations in the accompanying consolidated statements of income for all periods presented. In connection with this decision, we assessed our long-lived assets for impairment, which resulted in the recording of an impairment charge of $11.2 million ($7.3 million after-tax) for the write-down of all long-lived assets, including goodwill of $6.7 million. On November 5, 2008, we announced certain actions to reduce operating costs. These actions included the elimination of approximately 300 positions from our global operations, or approximately 2.5% of our workforce at that time, and the closing of several smaller facilities. During the years ended December 26, 2009 and December 27, 2008, we incurred 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, consisting of employee severance pay and benefits, facility closing costs, representing primarily lease termination and asset write-off costs, and outside professional and consulting fees directly related to the restructuring plan. (3) Adjusted to reflect the effects of the adoption of provisions contained within ASC Topic 470-20, “Debt with Conversion and Other Options.” 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. 100 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 17 – Quarterly Information (Unaudited) – (Continued) Our business has been 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 software, equipment and 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. 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; • the timing and amount of sales and marketing expenditures; • timing or 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; • the 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 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 or exceed market expectations, our stock price may decline. 101 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except share and per share data) Note 18 – Subsequent Events We have evaluated subsequent events through February 23, 2010, the date that we filed our Annual Report on Form 10-K for the year ended December 26, 2009 with the Securities and Exchange Commission. With the exception of the item listed below, there have been no other subsequent events after December 26, 2009 for which disclosure is required. Butler Animal Health Effective December 31, 2009, we acquired a majority interest in Butler Animal Health Supply, LLC (“BAHS”), a distributor of companion animal health supplies to veterinarians. BAHS further complements our domestic and international animal health operations. We and certain of our subsidiaries contributed certain assets and liabilities with a net book value of approximately $91.6 million, related to our United States animal health business to BAHS and paid approximately $43.5 million in cash to acquire 50.1% of the equity interests in Butler Animal Health Holding Company LLC (“Butler Holding”) indirectly through W.A. Butler Company, a holding company that will be jointly owned with Oak Hill Capital Partners (“OHCP”). As part of a recapitalization at closing, BAHS incurred approximately $320.0 million in debt, which will be reflected on our consolidated balance sheet. The owners of BAHS received a total of approximately $170.5 million in cash from the transaction with us and the recapitalization. As of February 23, 2010, the date of issuance of this report, we are in the process of calculating the allocation of purchase price to assets acquired and liabilities assumed, as well as valuations for goodwill and other intangible assets. In connection with the acquisition of a majority interest in BAHS, we entered into (i) a Put Rights Agreement with OHCP and Butler Holding (the “Oak Hill Put Rights Agreement”), and (ii) a Put Rights Agreement with Burns Veterinary Supply, Inc. (“Burns”) and Butler Holding (the “Burns Put Rights Agreement” and together with the Oak Hill Put Rights Agreement, the “Put Rights Agreements”), which provide each of OHCP and Burns with certain rights to require us to purchase their respective direct and indirect ownership interests in Butler Holding at fair value based on third-party valuations (“Put Rights”). Pursuant to the Oak Hill Put Rights Agreement, OHCP can exercise its Put Rights from and after the earlier of (a) the first anniversary of the closing, and (b) a change of control of us. Except in connection with a change of control of us prior to the first anniversary of the closing (in which case there will not be any maximum), our maximum annual payment to OHCP under the Oak Hill Put Rights Agreement will not exceed $125.0 million for the first year during which OHCP can exercise its rights, $137.5 million for the second year and $150.0 million for the third year and for each year thereafter. Pursuant to the Burns Put Rights Agreement, Burns can exercise its Put Rights from and after the fifth anniversary of the closing of the acquisition, at which time Burns will be permitted to sell to us up to 20%, based on fair value, of its ownership interest in Butler Holding, which ownership interest will be measured as of the date of the closing of the acquisition. If OHCP still owns ownership interests in Butler Holding at the time the Burns Put Rights begin, then the put amounts payable by us to OHCP and Burns in any year will not exceed $150.0 million in the aggregate. 102 ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report as such term is defined in Rules 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of December 26, 2009 to ensure that all material information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported as specified in the SEC’s rules and forms. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 26, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Based on our evaluation under the COSO Framework, our management concluded that our internal control over financial reporting was effective at a reasonable assurance level as of December 26, 2009. The effectiveness of our internal control over financial reporting as of December 26, 2009 has been independently audited by BDO Seidman, LLP, an independent registered public accounting firm, and their attestation is included herein. Limitations of the Effectiveness of Internal Control A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. 103 Report of Independent Registered Public Accounting Firm Board of Directors Henry Schein, Inc. Melville, New York We have audited Henry Schein, Inc.’s internal control over financial reporting as of December 26, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Henry Schein, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Henry Schein, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 26, 2009, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Henry Schein, Inc. as of December 26, 2009 and December 27, 2008, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 26, 2009 and our report dated February 23, 2010 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP New York, New York February 23, 2010 104 ITEM 9B. Other Information. None. ITEM 10. Directors, Executive Officers and Corporate Governance PART III Information required by this item regarding our directors and executive officers and our corporate governance is hereby incorporated by reference to the Section entitled “Election of Directors”, with respect to directors, and the first paragraph of the Section entitled “Corporate Governance - Board of Directors Meetings and Committees - Audit Committee”, with respect to corporate governance, in each case in our definitive 2010 Proxy Statement to be filed pursuant to Regulation 14A and to the Section entitled “Executive Officers of the Registrant” in Part I of this report, with respect to executive officers. There have been no changes to the procedures by which stockholders may recommend nominees to our Board of Directors since our last disclosure of such procedures, which appeared in our definitive 2009 Proxy Statement filed pursuant to Regulation 14A on April 16, 2009. Information required by this item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is hereby incorporated by reference to the Section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive 2010 Proxy Statement. We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer and Vice President of Corporate Finance. We make available free of charge through our Internet Web site, www.henryschein.com, under the “About Henry Schein—Corporate Governance” caption, our Code of Ethics. We intend to disclose on our Web site any amendment to, or waiver of, a provision of the Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer or Vice President of Corporate Finance. ITEM 11. Executive Compensation The information required by this item is hereby incorporated by reference to the Section entitled “Compensation Discussion and Analysis”, “Compensation Committee Report” (which information shall be deemed furnished in this Annual Report on Form 10-K), “Executive and Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in our definitive 2010 Proxy Statement to be filed pursuant to Regulation 14A. 105 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters We maintain several stock incentive plans for the benefit of certain officers, directors and employees. Certain plans are subject to stockholder approval, while other plans have been authorized solely by the Board of Directors. Descriptions of these plans appear in the notes to our consolidated financial statements. The following table summarizes information relating to these plans as of December 26, 2009: Number of Common Shares to be Issued Upon Exercise of Outstanding Options and Rights Weighted-Average Exercise Price of Outstanding Options Number of Common Shares Available for Future Issuances Plans Approved by Stockholders ...................... Plans Not Approved by Stockholders ...................... Total .................................. 6,244,742 50,000 6,294,742 $40.82 20.41 $40.66 6,811,715 - 6,811,715 The other information required by this item is hereby incorporated by reference to the Section entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive 2010 Proxy Statement to be filed pursuant to Regulation 14A. ITEM 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is hereby incorporated by reference to the Section entitled “Certain Relationships and Related Transactions” and “Corporate Governance – Board of Directors Meetings and Committees – Independent Directors” in our definitive 2010 Proxy Statement to be filed pursuant to Regulation 14A. ITEM 14. Principal Accountant Fees and Services The information required by this item is hereby incorporated by reference to the Section entitled “Independent Registered Public Accounting Firm Fees and Pre-Approval Policies and Procedures” in our definitive 2010 Proxy Statement to be filed pursuant to Regulation 14A. 106 ITEM 15. Exhibits and Financial Statement Schedules PART IV 1. Financial Statements: Our Consolidated Financial Statements filed as a part of this report are listed on the index on page 51. 2. Financial Statement Schedules: Schedule II No other schedules are required. 3. Exhibits: The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit List immediately preceding the exhibits. 107 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Henry Schein, Inc. By: /s/ STANLEY M. BERGMAN Stanley M. Bergman Chairman and Chief Executive Officer February 23, 2010 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity /s/ STANLEY M. BERGMAN Stanley M. Bergman Chairman, Chief Executive Officer and Director (principal executive officer) /s/ STEVEN PALADINO Steven Paladino /s/ JAMES P. BRESLAWSKI James P. Breslawski /s/ GERALD A. BENJAMIN Gerald A. Benjamin /s/ MARK E. MLOTEK Mark E. Mlotek /s/ BARRY J. ALPERIN Barry J. Alperin /s/ PAUL BRONS Paul Brons /s/ DONALD J. KABAT Donald J. Kabat /s/ PHILIP A. LASKAWY Philip A. Laskawy /s/ KARYN MASHIMA Karyn Mashima /s/ NORMAN S. MATTHEWS Norman S. Matthews /s/ BRADLEY T. SHEARES, PH. D. Bradley T. Sheares, Ph. D. /s/ LOUIS W. SULLIVAN, MD Louis W. Sullivan, MD Executive Vice President, Chief Financial Officer and Director (principal financial and accounting officer) Director Director Director Director Director Director Director Director Director Director Director 108 Date February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 February 23, 2010 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Henry Schein, Inc. Melville, New York The audits referred to in our report dated February 23, 2010 relating to the consolidated financial statements of Henry Schein, Inc. which is contained in Item 15 of this Form 10-K included the audits of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP New York, New York February 23, 2010 109 Schedule II Valuation and Qualifying Accounts Additions Balance at beginning of period Charged to statement of income Charged to other accounts Deductions Balance at end of period $ 42,855 $ 4,747 $ 10,269 $ (6,147) $ 51,724 41,315 6,255 1,959 (6,674) 42,855 40,536 1,384 2,600 (3,205) 41,315 Description Year ended December 26, 2009: Allowance for doubtful accounts, sales returns and other ..................... Year ended December 27, 2008: Allowance for doubtful accounts, sales returns and other ..................... Year ended December 29, 2007: Allowance for doubtful accounts, sales returns and other ..................... 110 Exhibits 3.1 Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.) 3.2 Amendment dated November 12, 1997 to Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.) 3.3 Amendment dated June 16, 1998 to Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-3, Reg. No. 333-59793.) 3.4 Amendment dated May 25, 2005 to Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 25, 2005.) 3.5 Amended and Restated By-Laws. (Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1, Reg. No. 33-96528.) 3.6 Amendments to Amended and Restated By-Laws adopted July 15, 1997. (Incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-4, Reg. No. 33-36081.) 4.1 Indenture by and between us and The Bank of New York, as trustee, dated as of August 9, 2004, including form of Note. (Incorporated by reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 25, 2004.) 4.2 Registration Rights Agreement dated as of August 9, 2004 by and between us, Lehman Brothers, Inc. and J.P. Morgan Securities Inc. as Initial Purchasers. (Incorporated by reference to Exhibit 4.3 to our Quarterly Report of Form 10-Q for the fiscal quarter ended September 25, 2004.) 10.1 Henry Schein, Inc. 1994 Stock Incentive Plan, as amended and restated effective as of March 27, 2007. (Incorporated by reference to our definitive 2007 Proxy Statement on Schedule 14A filed on April 10, 2007.)** 10.2 Amendment No. One to the Henry Schein, Inc. 1994 Stock Incentive Plan, effective as of January 1, 2005. (Incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)** 10.3 Amendment No. Two to the Henry Schein, Inc. 1994 Stock Incentive Plan, effective as of May 28, 2009. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2009.)** 10.4 Henry Schein, Inc. Supplemental Executive Retirement Plan, amended and restated effective as of January 1, 2008. (Incorporated by reference to Exhibit 10.3 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)** 10.5 Amendment No. One to the Henry Schein, Inc. Supplemental Executive Retirement Plan, effective as of January 1, 2008. (Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2009.)** 111 Exhibits 10.6 Henry Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan, as amended by Amendment No. One, effective as of May 25, 2004. (Incorporated by reference to our definitive 2004 Proxy Statement on Schedule 14A filed on April 27, 2004.)** 10.7 Amendment No. Two to the Henry Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan, effective as of January 1, 2005. (Incorporated by reference to Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)** 10.8 2001 Henry Schein, Inc. Section 162(m) Cash Bonus Plan effective as of June 6, 2001. (Incorporated by reference to our definitive 2001 Proxy Statement on Schedule 14A, filed on April 30, 2001.)** 10.9 Amendment No. One to 2001 Henry Schein, Inc. Section 162(m) Cash Bonus Plan, effective as of May 24, 2005. (Incorporated by reference to our definitive 2005 Proxy Statement on Schedule 14A, filed on April 22, 2005.)** 10.10 Amendment No. Two to 2001 Henry Schein, Inc. Section 162(m) Cash Bonus Plan, effective as of January 1, 2007. (Incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10- K for the fiscal year ended December 27, 2008.)** 10.11 Amendment No. Three to Henry Schein, Inc. Section 162(m) Cash Bonus Plan effective as of December 31, 2009. (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2009.)** 10.12 Henry Schein, Inc. 2001 Non-Employee Director Incentive Plan. (Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the fiscal year ended December 28, 2002.)** 10.13 Henry Schein, Inc. 2004 Employee Stock Purchase Plan, effective as of May 25, 2004. (Incorporated by reference to our definitive 2004 Proxy Statement on Schedule 14A, filed on April 27, 2004.)** 10.14 Henry Schein, Inc. Non-Employee Director Deferred Compensation Plan, amended and restated effective as of January 1, 2005. (Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)** 10.15 Henry Schein Management Team Performance Incentive Plan and Plan Summary. (Incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the fiscal year ended December 29, 2007.)** 10.16 Amended and Restated Employment Agreement dated as of December 31, 2008 between us and Stanley M. Bergman. (Incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)** 10.17 Amended and Restated Letter Agreement effective as of December 11, 2008 between us and Stanley Komaroff. (Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10- K for the fiscal year ended December 27, 2008.)** 112 Exhibits 10.18 Amended and Restated Change in Control Agreements dated December 12, 2008 between us and Gerald Benjamin, James Breslawski, Leonard David, Stanley Komaroff, Mark Mlotek, Steven Paladino, Michael Racioppi and Michael Zack, respectively. (Incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)** 10.19 Form of Note Purchase Agreements between us and the Purchasers listed on Schedule A thereto relating to an aggregate of $100,000,000 in principal amount of our 6.66% senior notes due July 15, 2010. (Incorporated by reference to Exhibit 10.111 to our Quarterly Report on Form 10-Q for the quarter ended September 26, 1998.) 10.20 Credit Agreement among us, the several lenders parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and HSBC Bank USA, N.A., The Bank of New York Mellon, and UniCredit Markets and Investment Banking, acting through Bayerische Hypo- und Vereinsbank AG, New York Branch, as co-syndication agents, dated as of September 5, 2008. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008.) 10.21 Amendment dated November 29, 2009 to the Credit Agreement among us, the several lenders parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and HSBC Bank USA, N.A., The Bank of New York Mellon, and UniCredit Markets and Investment Banking, acting through Bayerische Hypo- und Vereinsbank AG, New York Branch, as co-syndication agents, dated as of September 5, 2008.+ 10.22 Distribution Agreement entered into as of December 2, 2004, by and between us and ID Biomedical Corporation. (Incorporated by reference to Exhibit 10.31 to our Annual Report on form 10-K for the year ended December 25, 2004.)* 10.23 Amendment dated October 2, 2006 to Distribution Agreement, dated as of December 2, 2004, by and between us and ID Biomedical Corporation. (Incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)* 10.24 Second Amendment dated October 5, 2006 to Distribution Agreement, dated as of December 2, 2004, by and between us and ID Biomedical Corporation. (Incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.) 10.25 Amendment dated December 20, 2007 to Distribution Agreement, dated as of December 2, 2004, by and between us and ID Biomedical Corporation. (Incorporated by reference to Exhibit 10.22 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.) 10.26 Amendment dated October 15, 2008 to Distribution Agreement, dated as of December 2, 2004, by and between us and ID Biomedical Corporation. (Incorporated by reference to Exhibit 10.23 to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.)* 10.27 Amendment dated February 9, 2010 to Distribution Agreement, dated as of December 2, 2004, by and between us and ID Biomedical Corporation.*+ 113 Exhibits 10.28 Omnibus Agreement, dated November 29, 2009, by and among Henry Schein, Inc., National Logistics Services, LLC, Winslow Acquisition Company, Butler Animal Health Holding Company LLC, Butler Animal Health Supply, LLC, Oak Hill Capital Partners II, L.P., Oak Hill Capital Management Partners II, L.P., W.A. Butler Company, Burns Veterinary Supply, Inc., and certain other persons party thereto. (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 30, 2009.) 10.29 Amendment No. 1 to Omnibus Agreement, dated December 31, 209, by and between Henry Schein, Inc. and Butler Animal Health Holding Company LLC. (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 4, 2010.) 10.30 Put Rights Agreement, dated December 31, 2009, by and among Henry Schein, Inc., Oak Hill Capital Partners II, L.P., Oak Hill Capital Management Partners II, L.P., and Butler Animal Health Holding Company LLC. (Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on January 4, 2010.) 10.31 Put Rights Agreement, dated December 31, 2009, by and among Henry Schein, Inc., Burns Veterinary Supply, Inc., and Butler Animal Health Holding Company LLC. (Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on January 4, 2010.) 21.1 List of our Subsidiaries.+ 23.1 Consent of BDO Seidman, LLP.+ 31.1 Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+ 31.2 Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+ 32.1 Certification of our Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+ _________ + Filed herewith * Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934, as amended. ** Indicates management contract or compensatory plan or agreement 114 Henry Schein, Inc. 135 Duryea Road Melville, New York 11747 U.S.A. (631) 843-5500 www.henryschein.com 

Continue reading text version or see original annual report in PDF format above