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