Henry Schein
Annual Report 2010

Plain-text annual report

H E N R Y S C H E I N (cid:129) A N N U A L R E P O R T 2 0 1 0 Henry Schein, Inc. 135 Duryea Road Melville, New York 11747 U.S.A. (631) 843-5500 www.henryschein.com A N N U A L R E P O RT 2 010 FINANCIAL HIGHLIGHTS NET SALES from Continuing Operations ($ in Millions) CAGR 11%* OPERATING INCOME from Continuing Operations ($ in Millions) CAGR 15%* EARNINGS PER DILUTED SHARE from Continuing Operations CAGR 16%* OPERATING CASH FLOW AND CAPITAL EXPENDITURES ($ in Millions) OPERATING CASH FLOW CAPITAL EXPENDITURES *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 12. Additionally, refer to our annual consolidated financial statements for a complete presentation of our Consolidated Statements of Cash Flows. inside2010_11:Layout 1 4/7/11 3:52 PM Page 1 ABOUT HENRY SCHEIN Henry Schein, Inc. (NASDAQ: HSIC), the largest provider of health care products and services to office-based practitioners, is a Fortune 500® company and a member of the NASDAQ 100® Index. The Company is recognized for its excellent customer service and highly competitive prices. Henry Schein’s five businesses – Dental, Medical, Animal Health, International and Technology & Value-Added Services – serve more than 700,000 customers worldwide, including dental practitioners and laboratories, physician practices and animal health practices, as well as government and other institutions. The Company 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 corporate brand products in stock, as well as more than 100,000 additional products available as special-order items. Henry Schein also provides exclusive, innovative technology offerings for dental, medical and animal health professionals, including value-added practice management software and electronic health record solutions. Headquartered in Melville, New York, Henry Schein employs more than 14,000 people and has operations or affiliates in 25 countries. The Company’s net sales reached a record $7.5 billion in 2010. For more information, visit the Henry Schein Web site at www.henryschein.com. About the Cover: Global Expansion, Local Focus. As Henry Schein continues to expand its operations around the world, the Company never loses sight of the unique customer dynamics in the markets it serves. By combining global resources and best practices with deep understanding of the local environment, Henry Schein is expanding globally while focusing on bringing value to customers locally. HENRY SCHEIN ANNUAL REPORT 1 inside2010_11:Layout 1 4/7/11 3:53 PM Page 2 HENRY SCHEIN AT A GLANCE DENTAL MEDICAL ANIMAL HEALTH (cid:129) Includes Henry Schein Dental (U.S.), Henry Schein Canada and Zahn Dental Laboratory (U.S.) (cid:129) Serves U.S. office-based physician practices, surgical centers and other alternate-care sites (cid:129) Serves U.S. animal health practices (cid:129) Offers approximately 40,000 products in stock and as special-order items (cid:129) Supplier partners: Merial; Novartis; Bayer; Royal Canin USA; Idexx Laboratories, Inc.; Intervet/Schering-Plough Animal Health; Elanco; Pfizer Inc.; Boehringer Ingelheim; Virbac; Purina; Abbott; Nutramax™ Laboratories; Covidien; Sogeval; Vétoquinol; CEVA; Jorgensen Laboratories Inc.; Veterinary Products Laboratories; Sound-Eklin; Kelly Foods Corporation; Terumo Medical Corporation; Vet-A-Mix, A Division of Lloyd, Inc.; and PRN Pharmacal (cid:129) Valued-added strategic solutions: Cubex™ Inventory Management; MyVetDirect.com Home Delivery; practice design solutions; Human Resources Solution by Sequent®; Office Supply Solutions by OfficeMax®; Professional Development Program; and new practice order program (cid:129) Offers approximately 38,000 products in stock with access to more than 109,000 traditional office, laboratory and ambulatory surgical equipment, diagnostic, pharmaceutical and medical/surgical products (cid:129) Consultative selling approach through field, telesales and specialty representatives, along with a Health Care Services team focusing on larger customers (cid:129) Branded solutions: SurgiTeam™; DxRx Solutions™; LabTeam; ConnectHealth®; and PrimePlus (cid:129) National contracts with key group purchasing organizations (GPOs) and affinity programs (cid:129) Key product exclusives/semi- exclusives: Allscripts™ Electronic Health Records; Rx Samples Service; Siemens Healthcare Diagnostics Inc.; Thinklabs Digital Stethoscopes; TxSystems® B-LIFTx®; AFIRM®; Lupin Ceftriaxone antibiotic; Quidel® RapidVue® hCG test; Axis Three 3D Patient Imaging; Alma Laser; 3M™ Microchannel Skin Systems; HealthCare Success Strategies; AtmosAir™ Solutions; and HemaClear® Henry Schein Marketing and Operational Excellence Field Sales Consultants – approximately 3,100 Telesales Representatives – approximately 1,600 Direct Marketing Pieces Distributed in 2010 – approximately 30.8 million Equipment Sales and Service Centers – 188 Distribution Centers – 63 Distribution Center Square Feet – more than 4 million Order Fulfillment Rate – 99% Orders Shipped Same Day – 99% Order Accuracy – 99.9% (cid:129) Serves U.S. and Canadian office-based dental practices, as well as dental laboratories (cid:129) Offers approximately 51,000 products in stock and many more as special-order items (cid:129) The Special Markets team focuses on customers at dental service organizations, Federal accounts, institutions, schools, community health centers, emergency medical services, sports teams and dental and medical practitioners in Puerto Rico (cid:129) Key product exclusives/semi- exclusives: E4D Dentist® CAD/CAM restorative system; ARESTIN® by OraPharma, Inc.; Ortho Organizers® orthodontic products; Camlog™ dental implant system; Colgate® Oral Care Products; DEXIS® digital radiography products; i-CAT® Cone Beam 3-D Imaging System; KaVo; Noritake Dental Materials; Pelton & Crane; Pentron Laboratory Products; Gendex®; Demandforce® dental online patient communication system; surgical instruments from A. Titan Instruments; Snap-on Smile® restorative appliances; Aquoral™ from Bi-Coastal Pharmaceutical Corp.; The Dental Button® from m2partnership; Loyal Patient™ Rewards and Loyal Team™ Rewards from Loyal Patients™; NatureZone® and Brain-Pad® Mouth Guards from Brain-Pad®; NovaBone® and PerioGlas® from NovaBone®; MyPerioPath®, MyPerioID® PST® and OraRisk® HPV from OralDNA® Labs; CAO Group products; and VELscope® Vx from LED Dental 2 inside2010_11:Layout 1 4/7/11 3:53 PM Page 3 INTERNATIONAL (cid:129) Serves approximately 260,000 office-based dental, medical and animal health practices through operations or affiliates in 23 countries outside of North America: (cid:129) Australia; Austria; Belgium; China; the Czech Republic; France; Germany; Hong Kong SAR; Iceland; Ireland; Israel; Italy; Luxembourg; the Netherlands; New Zealand; Portugal; Saudi Arabia; Slovakia; Spain; Switzerland; Turkey; the United Arab Emirates; and the United Kingdom (cid:129) Schein Direct provides direct air package delivery service to practitioners in more than 200 countries around the world 2010 WORLDWIDE NET SALES from Continuing Operations $7.5 Billion TECHNOLOGY & VALUE-ADDED SERVICES (cid:129) Software and value-added solutions that support dental, medical and animal health practitioners (cid:129) Practice management and electronic medical records systems with an installed active user base of more than 70,000 dental, medical and animal health practices (cid:129) 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® from McAllister® Software Systems, Infinity® from ImproMed™ Software Systems, DVM Manager, and Software of Excellence solutions from Vet Solutions and Midshire Veterinary Systems for animal health practices (cid:129) Value-added services include: repair services through ProRepair® and COMPLETEcare; office design services; continuing education for health care professionals; electronic health claims processing (51 million claims processed in 2010); Office Automation Technology Solutions; 24/7 ordering capability through the ArubA® Web-based electronic catalog; and Financial Services such as equipment leasing and financing, patient financing and electronic credit card processing 35% DENTAL 17% MEDICAL 12% ANIMAL HEALTH 33% INTERNATIONAL 3% TECHNOLOGY & VALUE-ADDED SERVICES HENRY SCHEIN ANNUAL REPORT 3 inside2010_11:Layout 1 4/7/11 3:53 PM Page 4 TO OUR SHAREHOLDERS For the year, our net sales of $7.5 consecutive quarters of internal billion represented an increase of Dental consumable merchandise 15.1% compared with 2009. This sales growth in local currencies, includes 15.4% growth in local which provides further evidence of currencies and a decline of 0.3% stability in our markets as well as related to foreign currency exchange. the effectiveness of our consultative Income from continuing operations approach to sales and customer for 2010 was $325.8 million or service. We also recorded growth $3.49 per diluted share. Non-GAAP in sales of Dental equipment for income* from continuing operations each quarter of 2010. for 2010 was $334.0 million or $3.58 per diluted share, representing increases of 15.4% and 11.9%, respectively, compared with 2009. Through our Global Health Care Specialties Group, we continued to build our specialty businesses and expand our exclusive and semi- In 2010, we gained market share exclusive product and service in each of our business groups, offerings (see sidebar article at right). which affirms our growth strategy Over the past several years we and the underlying strength of our have made excellent progress in business. In addition, for the deepening our presence in the global first time in the fourth quarter of dental specialties markets including 2010 our quarterly net sales reached orthodontics, endodontics, $2 billion. Quarterly net sales first CAD/CAM and instrumentation, as surpassed the $1 billion mark in well as dental implants, restorations the third quarter of 2004, and this and alloys—products that typically 2010 was a year in which Henry Schein continued “helping health happen” — expanding globally as we focused on meeting the needs of our customers locally. It was a year in which we continued to use our many global resources and worldwide perspective, while using our understanding of the many local markets in which we operate to enhance our customers’ practices. It also was a year of solid financial performance; ongoing diversification doubling of quarterly sales represents carry gross margins that are higher and expansion to enhance our Company’s relevance to our customers’ practices; and continuing commitment to our five constituencies—our customers, compound annual growth of 12% than Company averages. In 2010, since then, a timeframe that includes we also made an investment in the recent years of global economic Brasseler USA, a leading distributor challenges. of dental specialty products. supplier partners, investors, At the time that this Annual Report Team Schein Members and society. is published, we have marked five 4 * Includes certain non-GAAP adjustments to provide a more comparable basis for analysis (see page 12). inside2010_11:Layout 1 4/7/11 3:53 PM Page 5 GLOBAL HEALTH CARE SPECIALTIES GROUP Reflecting the strong entrepreneurial spirit that has driven Henry Schein since it was founded, the Company has created the Global Health Care Specialties Group to complement its North American and International Groups and enhance our relevance to customers around the world. Through specialty businesses and expanded exclusive and semi-exclusive product and service offerings, the Global Health Care Specialties Group helps drive the success of our customers. In the Medical business, we sold customers such well-respected 12.5 million doses of seasonal software brands as AVImark and influenza vaccine in 2010, which Infinity, as well as award-winning was in line with our expectations. technology support plus ancillary We estimate that Medical internal products and services. sales growth was 3%, excluding sales of products related to the H1N1 virus and seasonal influenza vaccines. Through strong organic growth and strategic acquisitions, our International Group represented approximately 33% of our At the beginning of the year, we consolidated 2010 net sales. completed the creation of Butler Our International Group posted Schein Animal Health, the leading strong internal growth in local The Global Health Care Specialties companion animal health distribution currencies in our international Group includes the Dental Specialties Group; Exclusive Brands, including Henry Schein’s market leading corporate brand; and Handpiece Repairs. company in the United States. The dental business, particularly in consolidation and integration of this international dental equipment, business has gone very well, and as well as solid sales growth in we recently announced two strategic local currencies for our international veterinary software acquisitions animal health business. that further support our industry leadership position. By adding the products and services of McAllister Software Systems and ImproMed Software Systems, we have further enhanced the vital role of Butler Schein Animal Health with our customers, as well as our ability to forge even stronger relationships with manufacturers of veterinary pharmaceuticals, diagnostics and pet food companies. McAllister Software Systems serves nearly 10,000 veterinary practices in the United States, and ImproMed Software Systems has approximately 4,000 users. We now offer our In January 2011, we completed our acquisition of Provet Holdings Limited, the leader in the Australasia animal health distribution market. While we already were the leader in the Australia and New Zealand dental distribution market, Provet Holdings marks our entry into the Australasian veterinary market, and the business continues to be run by its existing, excellent management team. With the addition of Provet Holdings, Henry Schein is now the animal health distribution market leader on three continents (see sidebar article on next page). HENRY SCHEIN ANNUAL REPORT 5 inside2010_11:Layout 1 4/7/11 3:53 PM Page 6 TO OUR SHAREHOLDERS (CONTINUED) A GLOBAL COMMITMENT TO ANIMAL HEALTH Through strategic mergers and acquisitions over the past five years, Henry Schein has become the leading provider of animal health products and services in the United States, across Europe and throughout Australasia, with annual sales of approximately $2 billon. In January 2010, the Company announced the formation of Butler ScheinTM Animal Health, the largest veterinary sales and distribution company in the United States. Combining the strengths of Butler Animal Health Supply, NLS Animal Health and the U.S. animal health division of Henry Schein, Butler Schein Animal Health offers U.S. veterinary practitioners the broadest selection We expanded our international of U.S. Human Health, has footprint in October 2010 brought to our Board a wealth by entering Turkey, increasing of health care knowledge in the number of countries a quickly changing medical in which we operate to 25. landscape. Henry Schein acquired a 50% non-consolidating interest in Guney Dis Deposu, the leading Dental distributor in Turkey and an excellent strategic and cultural fit with our Company. During the year we continued development of our ConnectHealth and ConnectDental initiatives, which are more closely linking the medical, dental and Our Technology & Value-Added dental laboratory markets of products and value-added services in the Services Group posted solid that we serve. We also rolled industry, and the efficiency and convenience of ordering from one primary supplier. Henry Schein also is the leading Pan-European distributor of animal health products and serves sales growth throughout 2010. out our initiative to address The continued excellent the strategically important performance of this group endodontic dental specialty more than 18,000 European animal health is a clear competitive advantage segment. And we are now customers with operations in eight countries – Austria, the Czech Republic, France, Germany, Portugal, Spain, Switzerland and for our Company, providing a focused on the future as we valuable platform for enhancing complete the development of the United Kingdom. relationships with our our new three-year strategic Henry Schein began 2011 with the acquisition of Provet® Holdings Limited, Australasia’s largest full-service veterinary distributor and service provider. Provet Holdings provides approximately 1,900 independent veterinary practices in Australasia with pharmaceuticals, pet nutrition customers and increasing plan, determining the path market penetration. ahead for Henry Schein. 2010 was marked by other important developments. In products, consumables, instruments and January, Bradley T. Sheares, equipment, and training and software. Based in Brisbane, Queensland, Provet Holdings has approximately 375 team members, and owns Ph.D. was appointed to our Board of Directors. Dr. Sheares, and operates 10 warehouses across Australia who served as CEO of Reliant and three in New Zealand. The rapid growth of Henry Schein’s global animal health presence reflects the Company’s long- term commitment to its animal health customers Pharmaceuticals through its acquisition by GlaxoSmithKline, and for 19 years was with and a firm belief in the excellent potential Merck, ultimately as President of the animal health market. Along with its large dental and physician customer base, Henry Schein’s animal health customers now represent a significant portion of its total customers worldwide. Through the comprehensive array of products and services the Company offers animal health practitioners, it is helping them to operate more efficient and successful practices so they can focus on providing the best quality care to their patients. 6 inside2010_11:Layout 1 4/7/11 3:53 PM Page 7 Emerging from the economic challenges of recent years, 2010 was a very solid year on which we can confidently build for continued success around the world. We look forward to continuing to help our dental, medical and animal health customers operate more efficient and successful practices so they can deliver high quality care to patients; to representing the products of our supplier partners in the market; to delivering our stockholders an excellent return on investment; to ensuring that Team Schein remains our most important asset in our values-based culture; and to increasing access to care around the world through Henry Schein Cares, our global corporate social responsibility program. We are eagerly anticipating the new opportunities that 2011 will present and 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 NEW HEADQUARTERS FOR HENRY SCHEIN DENTAL GERMANY, EUROPEAN DENTAL AND EUROPEAN SHARED SERVICES In November 2010, Henry Schein opened a new state-of-the-art facility in Langen, Germany that includes the Company’s headquarters for Henry Schein Dental Germany, European Dental and European Shared Services. The new facility reflects the continued growth of Henry Schein in the German dental market (Europe’s largest) as the leading Pan-European provider of products and services to dentists, physicians and veterinarians. The new headquarters also underscores the Company’s commitment to better serve its customers and become an even more valuable partner to its suppliers. The new 5,000-square-meter facility combines Henry Schein’s three former sites in the region, and includes a new Customer Service Center and consolidated Information Technology department. As part of the Company’s commitment to environmental stewardship, Henry Schein’s Langen facility also features new low-voltage lighting systems with built-in motion sensors, energy-saving computer monitors and refrigerators, and shared printers. The building significantly reduces the Company’s environmental footprint, lowers CO2 emissions, and reduces energy costs. HENRY SCHEIN ANNUAL REPORT 7 inside2010_11:Layout 1 4/7/11 3:53 PM Page 8 HENRY SCHEIN CARES- EXPANDING ACCESS TO CARE Throughout 2010, Henry Schein (cid:129) The Company established the (cid:129) The 9th annual American Dental continued to expand access to care Japan Earthquake and Tsunami Association Give Kids A Smile® for underserved communities around Relief Fund in response to the program, for which Henry Schein is the world through many activities disaster that struck Northern Japan the exclusive professional product supported by Henry Schein Cares, on March 11, 2011. sponsor, provided 400,000 the Company’s global social responsibility program, and facilitated by the Henry Schein Cares Foundation. The Company’s work in this area has resulted in Henry Schein being ranked first in its industry for social responsibility for six of the past seven years in Fortune’s list of the World’s Most Admired Companies.* Activities supported by Henry Schein Cares focus on three main areas: advancing wellness, building capacity in the delivery of health care services, and assisting in emergency preparedness and relief. By using its core competencies—extensive health care product offerings and logistical distribution capabilities, close relationships with customers and supplier partners, and an extensive communication network— in creative and innovative ways, the Company furthers the goals of nonprofit organizations across the United States and abroad. (cid:129) In addition to the ongoing Henry Schein Global Product Donation Program, Henry Schein and its supplier and non-governmental organization partners shipped more than $1 million in health care products to help Haitian earthquake survivors. (cid:129) Responding to the Christchurch, New Zealand earthquake in February underserved children with free dental services and educational programs. 2011 and the Lockyer Valley Flood (cid:129) Henry Schein’s 5th annual Healthy in Queensland, Australia in January Lifestyles Healthy Communities™ 2011, the Company established program provided free medical and relief funds and provided assistance dental services to more than 5,000 through product donations and children and their caregivers in five customer recovery packages cities throughout the United States. through Henry Schein Shalfoon, Provet and Henry Schein Halas. (cid:129) The Company once again partnered with the American Cancer (cid:129) Disaster relief efforts during 2010 Society for the 5th annual Think Pink also extended into China, Chile, Practice Pink program to raise Pakistan and the United States. breast cancer awareness. (cid:129) The Company donated equipment (cid:129) The 13th annual Henry Schein and oral health care supplies to the Back to School program served new Diospi Suyana Hospital Dental a record 2,200 children in 15 Clinic in Peru; helped open the cities, and the Company’s 12th Center for Pediatric Dentistry at the annual Holiday Cheer for Children University of Washington School program made the holidays of Dentistry; and supported the brighter for hundreds of children Deamonte Driver Dental Project’s and their families. Mobile Dental Clinic to increase access to care for children in Prince George’s County, Maryland. The philosophy of Henry Schein Cares is a vision of “doing well by doing good” – the concept of (cid:129) The New York University College of enlightened self-interest championed Dentistry Henry Schein Cares Global by Benjamin Franklin. By expanding Student Outreach Program treated access to care in these many ways patients in Grenada, Nicaragua, the through Henry Schein Cares, the Dominican Republic, Maine, Alaska Company firmly believes that it is and New York. furthering its long-term success. *Information current as of 2010 Annual Report publication date. 8 inside2010_11:Layout 1 4/7/11 3:53 PM Page 9 Back to School Global Product Donation Program www.henryschein.com/hscares www.hscaresfoundation.org NYU College of Dentistry Henry Schein Cares Global Student Outreach Program Holiday Cheer for Children Think Pink Practice Pink Healthy Lifestyles Healthy Communities Haitian earthquake relief ADA Give Kids A Smile Diospi Suyana Hospital Dental Clinic HENRY SCHEIN ANNUAL REPORT 9 inside2010_11:Layout 1 4/7/11 3:53 PM Page 10 BOARD OF DIRECTORS Seated from left to right: Barry J. Alperin,(1) (2) (3) Retired Vice Chairman, Hasbro, Inc.; Karyn Mashima,(4) Private Consultant; Former Senior Vice President, Strategy and Technology, Avaya; Stanley M. Bergman, Chairman and Chief Executive Officer; James P. Breslawski, President and Chief Operating Officer; Donald J. Kabat,(1) (2) Retired Partner, Accenture PLC Ireland Standing from left to right: Steven Paladino, Executive Vice President and Chief Financial Officer; Gerald A. Benjamin, Executive Vice President and Chief Administrative Officer; Paul Brons,(4) Former Member, Board of Management, Akzo Nobel, N.V.; 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; Mark E. Mlotek, Executive Vice President, Corporate Business Development; Philip A. Laskawy,(1) (3) (4) Retired Chairman, Ernst & Young LLP; Norman S. Matthews,(2) (4) Former President, Federated Department Stores, Inc.; Bradley T. Sheares, Ph.D.,(4) Former CEO, Reliant Pharmaceuticals (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 10 inside2010_11:Layout 1 4/7/11 3:53 PM Page 11 CORPORATE INFORMATION Henry Schein, Inc. 135 Duryea Road, Melville, New York 11747 U.S.A. (631) 843-5500 www.henryschein.com COMMON STOCK Henry Schein Common Stock trades on the NASDAQ Stock Market® under the symbol “HSIC.” ANNUAL SHAREHOLDERS MEETING Our Annual Meeting of Shareholders will be held on May 18, 2011 at 11:00 a.m. EDT, at the Melville Marriott Long Island, 1350 Old Walt Whitman Road, Melville, New York 11747. FOLLOW HENRY SCHEIN ON http://www.facebook.com/henryschein http://twitter.com/henryschein http://www.youtube.com/user/henryscheininc SHAREHOLDER REPORTS AND INVESTOR INQUIRIES For shareholder inquiries, including requests for quarterly and annual reports, contact our Investor Relations department via e-mail at investor@henryschein.com. Printed materials can also be requested through the Company’s Web site. FORM 10-K A copy of the Company’s annual report on Form 10-K for the fiscal year ended December 25, 2010, is available without charge to shareholders upon request to the Company’s Investor Relations department. The report also is available on the Company’s Web site. INDEPENDENT AUDITORS BDO USA, LLP 100 Park Avenue, New York, New York 10017 LEGAL COUNSEL Proskauer Rose, LLP Eleven Times Square, New York, New York 10036 STOCK TRANSFER AGENT For address changes, account cancellation, registration changes and lost stock certificates, please contact: Continental Stock Transfer & Trust Company 17 Battery Place, New York, New York 10004 (212) 509-4000 HENRY SCHEIN ANNUAL REPORT 11 inside2010_11:Layout 1 4/7/11 3:53 PM Page 12 NON-GAAP DISCLOSURES The following table sets forth, for the applicable periods, 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. Operating income, as reported Operating margin, as reported Adjustments: Restructuring costs (1) Costs related to foreign tax benefit (2) Adjusted operating income Adjusted operating margin December 25, 2010 Years ended December 26, 2009 December 27, 2008 (in thousands, except per share data) $ 521,131 $ 464,085 $ 419,286 6.9% 7.1% 6.6% 12,285 - 3,020 1,600 23,240 - $ 533,416 $ 468,705 $ 442,526 7.1% 7.2% 6.9% Income from continuing operations 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) $ 325,789 $ 308,551 $ 247,347 8,260 - - - - 2,058 1,080 (20,845) (338) (1,028) 15,991 - - 3,045 - Adjusted income from continuing operations attributable to Henry Schein, Inc.: $ 334,049 $ 289,478 $ 266,383 Diluted earnings from continuing operations per share attributable to Henry Schein, Inc.: As reported Adjusted $ $ 3.49 3.58 $ $ 3.41 3.20 $ $ 2.71 2.92 December 3 1995 $ $ (1,47 (1,47 19,3 3.1 (10,47 $ $ 9,1 (0.3 0. Diluted weighted-average common shares outstanding: 93,268 90,556 91,221 26,894 ...... 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 2010, 2009 and 2008, we recorded restructuring costs of $12.3 million pre-tax ($8.3 million post-tax), $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 25, 2010 was ($0.09), 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. 12 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 25, 2010 __ 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 Global Select 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: X 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. X 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 Global Select Market on June 26, 2010 was approximately $5,099,185,000. As of February 11, 2011, there were 91,897,104 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 25, 2010) 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 ............................................................................................................. [Removed and Reserved] ................................................................................................... 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 16 24 25 25 25 26 29 31 51 52 104 104 107 107 107 108 108 108 109 110 113 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 700,000 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 78 years of experience distributing healthcare products. We are headquartered in Melville, New York, employ more than 13,500 people (of which over 6,000 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, Slovakia, Spain, Switzerland and the United Kingdom. We also have affiliates in Iceland, Saudi Arabia, Turkey 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, animal health and international operating segments. This segment consists of consumable products, small equipment, laboratory products, large dental equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. 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 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 $28 billion in 2010 in the combined North American, European and Australian/New Zealand 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. 3 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. 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 McKesson Corp., PSS World Medical, Inc. and 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 the Patterson Dental division of Patterson Companies, 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. In the animal health practice management market, our primary competitors are IDEXX Laboratories, Inc. and the Webster Veterinary division of Patterson Companies, 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, Arseus 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, Slovakia, Spain, Switzerland, Turkey and the United Kingdom. 4 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. Competitive Strengths We have more than 78 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 3,100 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 2010, we distributed approximately 30.8 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 1,600 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 51,000 are offered to our dental customers, approximately 38,000 to our medical customers and approximately 21,000 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 and electronic medical records 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 25, 2010, we have an active user base of more than 70,000 practices, including Dentrix®, Easy Dental®, Oasis® and EXACT® for dental practices, MicroMD® for physician practices and AVImark® and DVM Manager® for animal health clinics. • Repair services. We have 188 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. We also provide dental practice valuation and brokerage services. 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 2010, 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: 2010 2009 2008 Healthcare Distribution Dental: Consumable dental products, dental laboratory products and small equipment (1) ............................................................ Large dental equipment (2) ................................................................. Total dental Medical products (3) ............................................................................... Animal health products (4) ..................................................................... Total Healthcare Distribution ............................................................ Technology Software and related products and 42.2 % 45.9 % 46.4 % 15.5 57.7 19.2 20.4 97.3 17.1 63.0 23.4 11.0 97.4 17.9 64.3 22.9 10.2 97.4 other value-added products (5) .................................................. 2.7 2.6 2.6 Total ........................................................................................................... 100.0 % 100.0 % 100.0 % (1) Includes X-ray products, infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants, gypsum, acrylics, articulators and abrasives. (2) Includes dental chairs, delivery units and lights, X-ray equipment, equipment repair and high-tech equipment. (3) Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products, equipment and vitamins. (4) Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment. (5) 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 700,000 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 and entering into joint ventures complementary to ours that will provide, among other things, additional sales to be channeled through our existing distribution infrastructure, access to additional product lines and field sales consultants and an opportunity to further expand into new geographic markets. Markets Served Demographic trends indicate that our markets are growing, as an aging U.S. population is increasingly using healthcare services. Between 2010 and 2020, the 45 and older population is expected to grow by approximately 15%. Between 2010 and 2030, this age group is expected to grow by approximately 29%. This compares with expected total U.S. population growth rates of approximately 10% between 2010 and 2020 and approximately 20% between 2010 and 2030. 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 expected increase in dental insurance coverage. 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 15 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. 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 costs; • 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, which provides authority to prevent the spread of communicable diseases, serves as the legal basis for the United States Food and Drug Administration’s regulation of human cells, tissues, and cellular and tissue-based products, also known as HCT/P products. The Prescription Drug Marketing Act of 1987, or PDMA, 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 United States 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 HCT/P 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 (known as “anti-kickback” laws). Violations of these laws could result in civil and criminal penalties. The fraud and abuse laws and regulations have been subject 10 to heightened enforcement activity over the past few years, particularly through “relators,” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state False Claims Act statutes, and an anti-kickback violation could be a basis for a False Claims action. 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. The Patient Protection and Affordable Care Act, enacted in March 2010, known as The Health Care Reform Bill or PPACA, significantly strengthened the federal False Claims Act, and the anti-kickback provisions, which could lead to the possibility of increased whistleblower or relator suits. PPACA also included other provisions to reduce fraud and abuse and Medicare expenditures and the cost of healthcare generally, to increase federal oversight of private health insurance plans and to provide access to health coverage for an additional 32 million people, some of which impact and further regulate some of our businesses. In addition to the foregoing, PPACA imposed new reporting and disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to certain practitioners, including physicians and dentists, and teaching hospitals beginning in January 2012. A provision in PPACA requiring those without insurance to pay a penalty was recently declared unconstitutional by a Virginia federal district court, which permitted other provisions of the legislation that do not relate to health insurance, as well as those provisions that could improve insurance coverage, to remain in effect. PPACA in its entirety was declared unconstitutional by a Florida federal district court on January 31, 2011. Two other federal district courts (in Michigan and Virginia) have affirmed the constitutionality of PPACA. Appeals are pending, and the matter is expected to be determined by the Supreme Court of the United States. Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory requirements specific 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 medical 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 July 1, 2016 for pharmaceutical wholesalers and repackagers. 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 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. The court has continued to extend the injunction. 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 has indicated that it is currently drafting a proposed rule as required by the statute. The United States Food and Drug Administration has also indicated that it is developing a proposal to require unique device identifiers for medical devices. 11 Certain of our businesses involve access to personal health, medical, financial and other information of individuals, and are accordingly directly or indirectly 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 and security breaches. As a result of the federal Health Information Technology for Economic and Clinical Health Act (HITECH Act), which was passed in 2009, some of our businesses that were previously only indirectly subject to federal HIPAA privacy and security rules became directly subject to such rules because such businesses serve as “business associates” of HIPAA covered entities, such as health care providers. Additional rules under the HITECH Act are expected to be issued in early 2011, further expanding the privacy and security requirements applicable to some of our businesses. 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. 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 further 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 25, 2010, we employed more than 13,500 full-time employees, including approximately 1,600 telesales representatives, 3,100 field sales consultants, including equipment sales specialists, 2,575 warehouse employees, 600 computer programmers and technicians, 1,250 management employees and 4,775 office, clerical and administrative employees. Approximately 305 or 2.3% of our employees were subject to collective bargaining agreements. We believe that our relations with our employees are excellent. 12 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 United States Securities and Exchange Commission, or 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. 13 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 .................... 61 58 57 62 55 75 55 53 56 52 58 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. 14 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 USA, 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 Global Healthcare Specialties Group since September 2009. Prior to joining us, Ms. Shoff was employed with Roche Diagnostics, where she held a series of positions of increasing responsibility in the United States and Switzerland over the past 20 years, 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. 15 ITEM 1A. Risk Factors Recently enacted legislation may adversely impact us. The Patient Protection and Affordable Care Act enacted in March 2010, generally known as The Health Care Reform Bill, imposes new reporting and disclosure requirements for pharmaceutical and medical device manufacturers with regard to payments or other transfers of value made to physicians and teaching hospitals beginning in January 2012. Implementing regulations have not yet been issued, but it is possible that such regulations, when issued, will treat us or one or more of our subsidiaries as a “manufacturer” subject to these reporting requirements. In addition, several states require pharmaceutical and/or device companies to report expenses relating to the marketing and promotion of products as well as gifts and payments to individual practitioners in the states, or prohibit certain marketing related activities. Other states, such as California, Nevada, and Massachusetts, require pharmaceutical and/or device companies to implement compliance programs or marketing codes. Wholesale distributors are covered by the laws in certain of these states. In others, it is possible that our activities or the activities of one or more of our subsidiaries will subject us to the state’s reporting requirements and prohibitions. The Patient Protection and Affordable Care Act also imposes (i) a 2.3% excise tax on domestic sales of medical devices by manufacturers and importers beginning in 2013, which we may need to assist in implementing and which may affect sales, and (ii) mandates pharmacy benefit manager transparency regarding rebates, discounts and price concessions, which could affect pricing and competition. 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. 16 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, also known as HCT/P products. 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. 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 products 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 products 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. 17 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. 18 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. 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 costs; 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. 19 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 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; • may place significant demands on our operations, information systems and financial resources and; • results in additional acquisition and integration expenses. 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. 20 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 interests 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 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. 21 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. Declining economic conditions could adversely affect our results of operations and financial condition. 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 may 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 markets 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. 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. 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. 22 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; • 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. 23 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 SEC that were issued 180 days or more preceding the end of our 2010 fiscal year. 24 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 .......................... Office and 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 105,000 185,000 106,000 613,000 287,000 243,000 242,000 215,000 212,000 128,000 338,000 103,000 133,000 180,000 Lease Expiration Date N/A July 2020 October 2017 February 2013 N/A August 2013 July 2013 N/A June 2013 September 2016 February 2013 April 2020 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, Slovakia, Spain, Switzerland, Turkey 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 From time to time, we may become a party to legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes and other matters arising out of the ordinary course of our business. In our opinion, pending matters will not have a material adverse effect on our financial condition or results of operations. 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. As of December 25, 2010, 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. ITEM 4. [Removed and Reserved] 25 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 2010 and 2009: Fiscal 2010: 1st Quarter ............................................................................................ 2nd Quarter .......................................................................................... 3rd Quarter ........................................................................................... 4th Quarter ........................................................................................... $ 58.50 62.63 57.60 62.62 $ 51.49 53.41 50.96 55.55 High Low 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 On February 11, 2011, there were approximately 962 holders of record of our common stock and the last reported sales price was $67.36. 26 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 October 31, 2005, March 28, 2007 and November 16, 2010, our Board of Directors authorized an additional $100.0 million, for a total of $400.0 million, of shares of our common stock to be repurchased under this program. As of December 25, 2010, we had repurchased $300.0 million of common stock (6,639,821 shares) under this initiative, with $100.0 million available for future common stock share repurchases. The following table summarizes repurchases of our common stock under our stock repurchase program during the fiscal quarter ended December 25, 2010: Fiscal Month 09/26/10 through 10/30/10 10/31/10 through 11/27/10 11/28/10 through 12/25/10 Total Number of Shares Purchased (1) 127,085 792,613 - 919,698 Average Price Paid Per Share $ 59.02 57.30 - Total Number of Shares Purchased as Part of Our Publicly Announced Program 127,085 792,613 - 919,698 Maximum Number of Shares that May Yet Be Purchased Under Our Program (2) 808,847 1,732,202 1,608,752 (1) All repurchases were executed in the open market under our existing publicly announced authorized program. (2) The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the closing price of our common stock at that time. Dividend Policy We have not declared any cash dividends on our common stock during fiscal years 2010 or 2009. 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. 27 Stock Performance Graph The graph below compares the cumulative total stockholder return on $100 invested, assuming the reinvestment of all dividends, on December 31, 2005, the last trading day before the beginning of our 2006 fiscal year, through the end of fiscal 2010 with the cumulative total return on $100 invested for the same period in the Dow Jones U.S. Health Care Index, the NASDAQ Stock Market (U.S. companies) Composite Index and the NASDAQ Stock Market Composite Index. This year, we selected the NASDAQ Stock Market Composite Index for the comparison as opposed to only the U.S. companies of the NASDAQ Stock Market Composite Index in order to compare our stock performance against a published index as opposed to a segment of a published index. We included both in the graph below for comparison purposes. COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN ASSUMES $100 INVESTED ON DECEMBER 31, 2005 ASSUMES DIVIDENDS REINVESTED Henry Schein, Inc. ...................................... $ 100.00 $ 112.24 $ 142.19 2005 2006 2007 2008 $ 81.07 2009 2010 $ 121.47 $ 142.44 December 31, December 30, December 29, December 27, December 26, December 25, Dow Jones U.S. Health Care Index ............................................... NASDAQ Stock Market Composite Index ...................................... NASDAQ Stock Market (U.S. companies) Composite Index ......... 100.00 106.88 116.82 87.10 109.87 114.50 100.00 110.25 122.90 70.92 106.98 125.95 100.00 112.51 122.09 72.15 104.22 120.63 28 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 25, 2010, 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 25, 2010 December 26, 2009 Years ended December 27, 2008 (in thousands, except per share data) December 29, 2007 December 30, 2006 Income Statement Data: Net sales .............................................................................. Gross profit .......................................................................... Selling, general and administrative expenses ........................................................................... Restructuring costs (1) ......................................................... 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 (2) .................................................. Net income .......................................................................... Less: Net income attributable to $ 7,526,790 2,170,876 $ 6,538,336 1,916,820 $ 6,380,413 1,874,295 $ 5,889,884 1,706,092 $ 5,021,523 1,459,330 1,637,460 12,285 521,131 (19,096) 502,035 (160,069) 10,165 352,131 - 352,131 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 noncontrolling interests .................................................... Net income attributable to Henry Schein, Inc. ..................... (26,342) 325,789 $ (22,004) 311,153 $ (21,917) 239,457 $ (17,442) 211,734 $ (8,090) 160,587 $ 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: 325,789 308,551 247,347 232,529 180,049 - 325,789 $ 2,602 311,153 $ (7,890) 239,457 $ (20,795) 211,734 $ (19,462) 160,587 $ Basic ................................................................................ Diluted ............................................................................. $ 3.62 3.49 $ 3.47 3.41 $ 2.78 2.71 $ 2.63 2.55 $ 2.05 2.00 From discontinued operations: Basic ................................................................................ Diluted ............................................................................. - $ - $ 0.03 0.03 $ (0.09) (0.08) $ (0.24) (0.23) $ (0.22) (0.21) From net income: Basic ................................................................................ Diluted ............................................................................. $ 3.62 3.49 $ 3.50 3.44 $ 2.69 2.63 $ 2.39 2.32 $ 1.83 1.79 Weighted-average common shares outstanding: Basic ................................................................................ Diluted ............................................................................. 90,097 93,268 88,872 90,556 89,080 91,221 88,559 91,163 87,952 89,820 29 December 25, 2010 December 26, 2009 Years ended December 27, 2008 (in thousands) December 29, 2007 December 30, 2006 Net Sales by Market Data: Healthcare distribution (3): Dental (4) ................................................................ Medical (5) .............................................................. Animal health (6) .................................................... International (7) ...................................................... Total healthcare distribution ................................ Technology (8) ............................................................ Total .................................................................... $ $ $ $ $ 2,678,830 1,290,428 889,303 2,468,277 7,326,838 199,952 7,526,790 2,509,921 1,217,020 240,082 2,398,105 6,365,128 173,208 6,538,336 2,567,064 1,210,875 218,093 2,221,092 6,217,124 163,289 6,380,413 2,447,841 1,340,146 200,123 1,769,881 5,757,991 131,893 5,889,884 2,122,415 1,235,125 163,871 1,401,889 4,923,300 98,223 5,021,523 $ $ $ $ $ December 25, 2010 December 26, 2009 As of December 27, 2008 (in thousands) December 29, 2007 December 30, 2006 Balance Sheet data: Total assets ................................................................. Long-term debt ........................................................... Redeemable noncontrolling interests .......................... Stockholders' equity ................................................... $ 4,547,471 395,309 304,140 2,412,957 $ 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 (1) Restructuring costs for the year ended December 25, 2010 consist primarily of severance costs, including severance pay and benefits of $8.8 million, facility closing costs of $3.4 million and other professional and consulting costs of $0.1 million. 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. (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 the fourth quarter of 2008, included in operating results from discontinued operations, 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. (3) 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. (4) Consists of products sold in the United States and Canadian dental markets. (5) Consists of products sold in the United States’ medical market. (6) Consists of products sold in the United States’ animal health market. (7) Consists of products sold in the dental, medical and animal health markets, primarily in Europe, Australia and New Zealand. (8) Consists of practice management software, financial services 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 for the years 2007 through 2010 and the United States and Canada for the year 2006. 30 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: recently enacted healthcare legislation; 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; general economic conditions; decreased customer demand and changes in vendor credit terms; disruptions in financial markets; 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 700,000 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 78 years of experience distributing healthcare products. We are headquartered in Melville, New York, employ more than 13,500 people (of which over 6,000 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, Slovakia, Spain, Switzerland and the United Kingdom. We also have affiliates in Iceland, Saudi Arabia, Turkey 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. 31 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, animal health and international operating segments. This segment consists of consumable products, small equipment, laboratory products, large 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 and other institutions throughout the United States. Our animal health group serves animal health practices and clinics throughout the United States. Our international group serves dental, medical and animal health practitioners in 23 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 $28 billion in 2010 in the combined North American, European and Australian/New Zealand 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. 32 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. Our trend with regard to acquisitions and joint ventures 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 2009 – 2019” indicating that total national healthcare spending reached approximately $2.5 trillion in 2009, or 17.3% 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 approximately $4.6 trillion in 2019, approximately 19.6% of the nation’s gross domestic product. 33 Government The healthcare industry is subject to extensive government regulation, licensure and operating compliance procedures. Additionally, government and private insurance programs fund a large portion of the total cost of medical care. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, was the largest expansion of the Medicare program since its inception, and provided participants with voluntary outpatient prescription drug benefits beginning in 2006. The MMA also included provisions relating to medication management programs, generic substitution and provider reimbursement. The Patient Protection and Affordable Care Act, enacted in March 2010, generally known as The Health Care Reform Bill or PPACA, increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of healthcare generally, to reduce fraud and abuse, and to provide access to health coverage for an additional 32 million people. PPACA also imposes (i) a 2.3% excise tax on domestic sales of medical devices by manufacturers and importers beginning in 2013, and a “fee” on branded prescription drugs and biologics beginning in 2011, which may affect sales, (ii) mandates pharmacy benefit manager transparency regarding rebates, discounts and price concessions, which could affect pricing and competition and (iii) reduces the amount of out-of-pocket liability for patients participating in the Medicare outpatient drug benefit program created by the MMA. A provision in PPACA requiring those without insurance to pay a penalty was recently declared unconstitutional by a Virginia federal district court, which permitted other provisions of the legislation that do not relate to health insurance, as well as those provisions that could improve insurance coverage, to remain in effect. PPACA in its entirety was declared unconstitutional by a Florida federal district court on January 31, 2011. Two other federal district courts (in Michigan and Virginia) have affirmed the constitutionality of PPACA. Appeals are pending, and the matter is expected to be determined by the Supreme Court of the United States. In addition to the foregoing, PPACA imposed new reporting and disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to certain practitioners, including physicians and dentists, and teaching hospitals beginning in January 2012. Implementing regulations have not yet been issued, but it is possible that such regulations, when issued, will treat us or one or more of our subsidiaries as a “manufacturer” subject to these reporting requirements. In addition, several states require pharmaceutical and/or device companies to report expenses relating to the marketing and promotion of products as well as gifts and payments to individual practitioners in the states, or prohibit certain marketing related activities. Other states, such as California, Nevada, Massachusetts and Connecticut, require pharmaceutical and/or device companies to implement compliance programs or marketing codes. Wholesale distributors are covered by the laws in certain of these states. In others, it is possible that our activities, including on behalf of manufacturers, or the activities of one or more of our subsidiaries will subject us to the state’s reporting requirements and prohibitions. Regulations adopted under the federal Prescription Drug Marketing Act, 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 June 30, 2011. 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. 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. California has enacted a statute that, beginning in 2015, will require manufacturers to 34 identify each package of a prescription pharmaceutical with a standard, machine-readable numerical identifier, and will require manufacturers and distributors to participate in an electronic track-and-trace system and provide or receive an electronic pedigree for each transaction in the drug distribution chain. Other states have passed or are reviewing the same type of requirements. Bills have been introduced in Congress that would impose similar requirements at the federal level. The Combat Methamphetamine Enhancement Act of 2009, signed by President Obama in October 2010, prohibits distributors from selling listed chemical products, used to manufacture methamphetamine and amphetamine illegally, to individuals not currently registered with the Drug Enforcement Administration (DEA) or not on the United States Attorney General’s published list of self-certified entities. The Secure and Responsible Drug Disposal Act of 2010, also signed by President Obama in October 2010, is intended to allow individuals to more easily and safely dispose of controlled substances while reducing the chance of diversion, by facilitating the return of unused portions of controlled substances to designated entities including long term care facilities and law enforcement agencies. The law does not authorize the DEA to mandate that entities establish a drug disposal program. There may be additional legislative initiatives in the future impacting healthcare. 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. 35 Results of Operations The following tables summarize the significant components of our operating results and cash flows for each of the three years ended December 25, 2010, December 26, 2009 and December 27, 2008 (in thousands): Years ended December 25, December 26, December 27, 2010 2009 2008 Operating Results: Net sales ....................................................................................................... $ 7,526,790 $ 6,538,336 $ 6,380,413 Cost of sales ................................................................................................. Gross profit .............................................................................................. Operating expenses: Selling, general and administrative ......................................................... Restructuring costs ................................................................................... 5,355,914 2,170,876 1,637,460 12,285 4,621,516 1,916,820 1,449,715 3,020 4,506,118 1,874,295 1,431,769 23,240 Operating income ............................................................................... $ 521,131 $ 464,085 $ 419,286 Other expense, net ......................................................................................... $ (19,096) $ (11,365) $ (23,837) Income from continuing operations ............................................................... 352,131 330,442 269,276 Income from continuing operations attributable to Henry Schein, Inc. ................................................................................ 325,789 308,551 247,347 Years ended December 25, December 26, December 27, 2010 2009 2008 Cash Flows: Net cash provided by operating activities ..................................................... $ 388,874 $ 396,890 $ 384,782 Net cash used in investing activities ............................................................. Net cash used in financing activities ............................................................. (428,404) (283,256) (97,448) (197,675) (168,010) (87,970) 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. Also, during the first quarter of 2010, we completed an additional restructuring in order to further reduce operating expenses. This restructuring included headcount reductions of 184 positions, as well as the closing of a number of smaller locations. During the years ended December 25, 2010, December 26, 2009 and December 27, 2008, we recorded restructuring costs of approximately $12.3 million (approximately $8.3 million after taxes), $3.0 million (approximately $2.1 million after taxes) and $23.2 million (approximately $16.0 million after taxes), respectively. These costs primarily consisted 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 plans. The costs associated with these restructurings are included in a separate line item, “Restructuring costs,” within our consolidated statements of income. 36 2010 Compared to 2009 Net Sales Net sales for 2010 and 2009 were as follows (in thousands): Healthcare distribution (1): Dental (2) ........................................ Medical (3) ..................................... Animal health (4) ............................ International (5) ............................... Total healthcare distribution ........ Technology (6) ...................................... Total ............................................. 2010 $ 2,678,830 1,290,428 889,303 2,468,277 7,326,838 199,952 7,526,790 $ % of Total 35.6 % 17.1 11.8 32.8 97.3 2.7 100.0 % 2009 $ 2,509,921 1,217,020 240,082 2,398,105 6,365,128 173,208 6,538,336 $ % of Total 38.4 % 18.6 3.7 36.7 97.4 2.6 100.0 % Increase $ % $ $ 168,909 73,408 649,221 70,172 961,710 26,744 988,454 6.7 % 6.0 270.4 2.9 15.1 15.4 15.1 (1) 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. (2) Consists of products sold in the United States and Canadian dental markets. (3) Consists of products sold in the United States’ medical market. (4) Consists of products sold in the United States’ animal health market. (5) Consists of products sold in the dental, medical and animal health markets, primarily in Europe, Australia and New Zealand. (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. The $988.5 million, or 15.1%, increase in net sales for the year ended December 25, 2010 includes an increase of 15.4% local currency growth (3.1% internally generated revenue and 12.3% growth from acquisitions) offset by a decrease of 0.3% related to foreign currency exchange. The $168.9 million, or 6.7%, increase in dental net sales for the year ended December 25, 2010 includes a increase of 5.7% in local currencies (2.2% increase in internally generated revenue and 3.5% growth from acquisitions) and an increase of 1.0% related to foreign currency exchange. The 5.7% increase in local currency sales was due to increases in dental equipment sales and service revenues of 2.5% (2.3% increase in internally generated revenue and 0.2% growth from acquisitions) and dental consumable merchandise sales growth of 6.7% (2.2% increase in internally generated revenue and 4.5% growth from acquisitions). The $73.4 million, or 6.0%, increase in medical net sales for the year ended December 25, 2010 includes an increase in internally generated revenue of 2.3% and acquisition growth of 3.7%. The $649.2 million, or 270.4%, increase in animal health net sales for the year ended December 25, 2010 includes acquisition growth of 269.8%, due to the acquisition of a majority interest in Butler Animal Health Supply, LLC as of December 31, 2009, as well as internally generated revenue of 0.6%. The $70.1 million, or 2.9%, increase in international net sales for the year ended December 25, 2010 includes sales growth of 4.9% in local currencies (4.2% internally generated growth and 0.7% growth from acquisitions) offset by a decrease of 2.0% related to foreign currency exchange. The $26.7 million, or 15.4%, increase in technology net sales for the year ended December 25, 2010 includes an increase of 14.8% in local currency growth (10.4% internally generated growth and 4.4% growth from acquisitions) and an increase of 0.6% related to foreign currency exchange. 37 Gross Profit Gross profit and gross margins for 2010 and 2009 by segment and in total were as follows (in thousands): 2010 Gross Margin % 2009 Gross Margin % Increase $ % Healthcare distribution ................ Technology .................................. Total ................................... $ $ 2,033,860 137,016 2,170,876 27.8 % 68.5 28.8 $ $ 1,792,516 124,304 1,916,820 28.2 % 71.8 29.3 $ $ 241,344 12,712 254,056 13.5 % 10.2 13.3 Gross profit increased $254.1 million, or 13.3%, for the year ended December 25, 2010 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 and services, 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 $241.3 million, or 13.5%, for the year ended December 25, 2010 compared to the prior year period. Healthcare distribution gross profit margin decreased to 27.8% for the year ended December 25, 2010 from 28.2% for the comparable prior year period due to changes in product sales mix. Technology gross profit increased $12.7 million, or 10.2%, for the year ended December 25, 2010 compared to the prior year period. Technology gross profit margin decreased to 68.5% for the year ended December 25, 2010 from 71.8% 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 2010 and 2009 were as follows (in thousands): 2010 Healthcare distribution .............. Technology ............................... Total ................................. $ $ 1,566,915 70,545 1,637,460 % of Respective Net Sales 21.4 % 35.3 21.8 2009 $ $ 1,387,581 62,134 1,449,715 % of Respective Net Sales 21.8 % 35.9 22.2 Increase $ % $ $ 179,334 8,411 187,745 12.9 % 13.5 13.0 Selling, general and administrative expenses increased by $187.7 million, or 13.0%, for the year ended December 25, 2010 compared to the prior year period. As a percentage of net sales, selling, general and administrative expenses decreased to 21.8% from 22.2% from the comparable year period. As a component of total selling, general and administrative expenses, selling expenses increased $117.7 million, or 12.2%, for the year ended December 25, 2010 from the prior year period. As a percentage of net sales, selling expenses decreased to 14.3% from 14.7% for the comparable prior year period. As a component of total selling, general and administrative expenses, general and administrative expenses increased $70.0 million, or 14.4%, for the year ended December 25, 2010 from the prior year period. As a percentage of net sales, general and administrative expenses decreased to 7.4% from 7.5% for the comparable prior year period. 38 Other Expense, Net Other expense, net for the years ended 2010 and 2009 was as follows (in thousands): 2010 2009 Increase / (Decrease) % $ Interest income ................................................. Interest expense ................................................ Other, net ......................................................... Other expense, net .................................... 14,098 (33,641) 447 (19,096) 9,979 (23,370) 2,026 (11,365) 4,119 (10,271) (1,579) (7,731) 41.3 % (43.9) (77.9) (68.0) $ $ $ $ $ $ Other expense, net increased $7.7 million to $19.1 million for the year ended December 25, 2010 from the comparable prior year period. Interest expense increased $10.3 million primarily due to debt associated with the acquisition of a majority interest in Butler Animal Health Supply, LLC, partially offset by reduced interest expense from the redemption of all of our Convertible Notes on September 3, 2010 and from repayment of our $130.0 million senior notes on June 30, 2009. Interest income increased $4.1 million as a result of increased late fee income, partially offset by lower interest income on our invested funds. Other, net decreased by $1.6 million due primarily to net proceeds received from litigation settlements in the third quarter of 2009, partially offset by the impact of foreign currency exchange. Income Taxes For the year ended December 25, 2010, our effective tax rate from continuing operations was 31.9% compared to 28.2% for the prior year period. The difference resulted primarily from the reduction of a valuation allowance in 2009 as explained below. 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%. The net reduction in our 2010 effective tax rate results from additional tax planning initiatives, settlements of tax audits, a reduction of valuation allowances 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. During the third quarter of 2009, we substantially completed a plan of reorganization outside the United States that allowed us to utilize tax loss carryforwards to offset taxable income beginning in 2010 in certain foreign tax jurisdictions. As a result, we determined that it is more likely than not that a portion of deferred tax assets previously fully reserved will be realized. Therefore, the 2009 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. Loss from Discontinued Operations During the year ended December 26, 2009, we recognized aggregate gains of $2.6 million, net of tax, related to discontinued operations (see Note 9 in the accompanying annual consolidated financial statements for further discussion). Net Income Net income increased $19.0 million, or 5.7%, for the year ended December 25, 2010 compared to the prior year period. The increase in net income is primarily due to increased net sales. 39 2009 Compared to 2008 Net Sales Net sales for 2009 and 2008 were as follows (in thousands): Healthcare distribution (1): Dental (2) ........................................ Medical (3) ..................................... Animal health (4) ............................ International (5) ............................... Total healthcare distribution ........ Technology (6) ...................................... Total ............................................. 2009 $ 2,509,921 1,217,020 240,082 2,398,105 6,365,128 173,208 6,538,336 $ % of Total 38.4 % 18.6 3.7 36.7 97.4 2.6 100.0 % 2008 % of Total Increase / (Decrease) $ % $ 2,567,064 1,210,875 218,093 2,221,092 6,217,124 163,289 6,380,413 $ 40.2 % 19.0 3.4 34.8 97.4 2.6 100.0 % $ (57,143) 6,145 21,989 177,013 148,004 9,919 157,923 $ (2.2) % 0.5 10.1 8.0 2.4 6.1 2.5 (1) 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. (2) Consists of products sold in the United States and Canadian dental markets. (3) Consists of products sold in the United States’ medical market. (4) Consists of products sold in the United States’ animal health market. (5) Consists of products sold in the dental, medical and animal health markets, primarily in Europe, Australia and New Zealand. (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. 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 $6.1 million, or 0.5%, increase in medical net sales for the year ended December 26, 2009 includes a decline in internally generated revenue of 0.9% and acquisition growth of 1.4%. Excluding sales of influenza vaccines, which declined in 2009, medical sales increased 5.0%. The $22.0 million, or 10.1%, increase in animal net sales for the year ended December 26, 2009 was all internally generated. 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 sales of technology products in our international markets. 40 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 Gross Margin % Increase $ % 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 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 $ $ 1,368,108 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 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. 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. 41 Other Expense, Net Other expense, net for the years ended 2009 and 2008 was as follows (in thousands): 2009 2008 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 $ $ $ $ $ $ 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, as well as additional tax planning initiatives, 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 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. 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. 42 Liquidity and Capital Resources Our principal capital requirements include funding of acquisitions, repayments of debt principal, the funding of working capital needs, 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. 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. 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. Net cash provided by operating activities was $388.9 million for the year ended December 25, 2010 compared to $396.9 million for the comparable prior year period. The net change of $8.0 million was primarily attributable to unfavorable working capital changes, offset by net income improvements. Net cash used in investing activities was $428.4 million for the year ended December 25, 2010 compared to $97.4 million for the comparable prior year period. The net change of $331.0 million was primarily due to increased payments for business acquisitions. Net cash used in financing activities was $283.3 million for the year ended December 25, 2010 compared to $197.7 million for the comparable prior year period. The net change of $85.6 million was primarily due to increased acquisitions of noncontrolling interests in certain subsidiaries, net repayments of long-term debt and increased repurchases of our common stock, partially offset by an increase in proceeds from stock option exercises. We expect to invest approximately $55 million to $60 million during 2011 in capital projects to modernize and expand our facilities and computer systems and to integrate certain operations into our existing structure. 43 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 .......................................................................................... $ 150,348 13,367 1,001,215 $ 471,154 18,848 1,127,279 December 25, 2010 December 26, 2009 Debt: Bank credit lines .................................................................................... Current maturities of long-term debt ..................................................... Long-term debt ...................................................................................... Total debt ......................................................................................... $ $ 41,508 4,487 395,309 441,304 932 23,560 243,373 267,865 $ $ Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity. Available-for-sale securities As of December 25, 2010, we have approximately $15.1 million ($13.4 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 $13.1 million ($11.4 million net of temporary impairments) of our ARS are backed by student loans that are backed by the federal government and the remaining $2.0 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 25, 2010, 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. Accounts receivable days sales outstanding and inventory turns Our accounts receivable days sales outstanding from continuing operations remained constant at 40.4 days as of December 25, 2010 when compared to the prior year. During the years ended December 25, 2010 and December 26, 2009, we wrote off approximately $6.7 million and $6.1 million, respectively, of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from continuing operations increased to 6.5 for the year ended December 25, 2010 from 6.2 for the year ended December 26, 2009. Our working capital accounts may be impacted by current and future economic conditions. 44 Contractual obligations 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 4.9%), as well as operating and capital lease obligations, capital expenditure obligations and inventory purchase commitments as of December 25, 2010: Payments due by period (in thousands) < 1 year 2 - 3 years 4 - 5 years > 5 years Total Contractual obligations: Long-term debt, including interest .......................... $ 23,129 $ 46,987 $ 58,388 $ 385,409 $ 513,913 Inventory purchase commitments ............................ 127,518 131,907 Operating lease obligations ..................................... Capital lease obligations, including interest ............ 60,100 1,959 79,156 2,062 44,100 32,333 507 124,091 35,423 - 427,616 207,012 4,528 Total ........................................................................ $ 212,706 $ 260,112 $ 135,328 $ 544,923 $ 1,153,069 Inventory purchase commitments include obligations to purchase certain pharmaceutical products from a manufacturer through 2013, which require us to pay a price 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 certain pharmaceutical products from another manufacturer. Actual amounts may differ. Redemption of convertible debt On September 3, 2010, we paid approximately $240 million in cash and issued 732,422 shares of our common stock in connection with the redemption of our $240.0 million of Convertible Notes, which were issued in 2004. The Convertible Notes were senior unsecured obligations bearing a fixed annual interest rate of 3.0% and were due to mature on August 15, 2034. The Convertible Notes were 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 was 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 Convertible Notes for that 10-trading-day period was less than 98% of the average conversion value for the Convertible Notes during that period; • if the Convertible Notes have been called for redemption; or • upon the occurrence of a fundamental change or specified corporate transactions, as defined in the Convertible Note agreement. 45 Debt On September 5, 2008, we entered into a $400.0 million revolving credit facility with a $100.0 million expansion feature. The $400.0 million credit line expires in September 2013. In addition to the amounts outstanding under our shelf facilities, as discussed below, we have outstanding borrowings of approximately $30.0 million under our $400.0 million credit facility. As of December 25, 2010, there were $9.8 million of letters of credit provided to third parties. On August 10, 2010, we entered into a $400.0 million private placement facilities with two insurance companies. These shelf facilities are available through August 2013 on an uncommitted basis. The facilities allow us to issue senior promissory notes to the lenders at a fixed rate based on an agreed upon spread over applicable treasury notes at the time of issuance. The term of each possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12 years). The proceeds of any issuances under the facilities will be used for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions. As of December 25, 2010, we have an outstanding balance under the facilities of $100.0 million at a fixed rate of 3.79%, which is due on September 2, 2020. Acquisitions and acquisition commitment On October 14, 2010, we announced an agreement to acquire 100% of the outstanding shares of Provet Holdings Limited (ASX: PVT), Australia's largest distributor of veterinary products with sales in its 2010 fiscal year of approximately $278 million, for approximately $91 million, in a cash-for-stock exchange. This transaction closed after year end. Effective December 31, 2009, Butler Animal Health Supply, LLC, or BAHS, a majority-owned subsidiary whose financial information is consolidated with ours, incurred approximately $320.0 million of debt (of which $37.5 million was provided by Henry Schein, Inc.) in connection with our acquisition of a majority interest in BAHS. The remaining outstanding balance of $279.1 million is reflected in our consolidated balance sheet as of December 25, 2010. The debt incurred as part of the acquisition of BAHS is repayable in 23 quarterly installments of $0.8 million through September 30, 2015, and a final installment of $301.6 million on December 31, 2015. Interest on the BAHS debt is charged at LIBOR plus a margin of 3.5% with a LIBOR floor of 2% for a current effective rate of 5.5% as of December 25, 2010. The debt agreement contains provisions which, under certain circumstances, require BAHS to make prepayments of the loan commitment based on excess cash flows of BAHS as defined in the debt agreement. The debt agreement also contains provisions that require BAHS to hedge risks related to potential rising interest rates. As a result, BAHS entered into a series of interest rate caps with a notional amount of $160.0 million, protecting against LIBOR interest rates rising above 3.0% through March 30, 2012. Stock repurchases From June 21, 2004 through December 25, 2010, we repurchased $300.0 million, or 6,639,821 shares, under our common stock repurchase programs. On November 16, 2010, our Board of Directors authorized an additional $100.0 million for additional repurchases of our common stock, all of which is available as of December 25, 2010 for future common stock share repurchases. 46 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. Such redemption prices are equal to fair value based on third-party valuations. 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. The components of the change in the Redeemable noncontrolling interests for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 are presented in the following table: Balance, beginning of period ................................................................ Net increase (decrease) in redeemable noncontrolling interests due to business acquisitions or redemptions .................................... Net income attributable to redeemable noncontrolling interests ........... Dividends declared ............................................................................... Effect of foreign currency translation attributable to redeemable noncontrolling interests ................................................ Change in fair value of redeemable securities ....................................... Balance, end of period .......................................................................... December 25, 2010 December 26, 2009 December 27, 2008 $ 178,570 $ 233,035 $ 150,028 62,314 26,054 (12,360) (71,951) 21,975 (5,973) 14,994 21,929 (2,994) (2,281) 51,843 304,140 $ 2,065 (581) 178,570 $ (2,060) 51,138 233,035 $ 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 do 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 financial 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 have and 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. Unrecognized tax benefits As more fully disclosed in Note 12 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 $26.9 million as of December 25, 2010. 47 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 reasonably assured 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 or deferred until such time as vendor-specific objective evidence of fair value is obtained. 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. 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. 48 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 impairment analysis at least once annually. 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. 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, animal health and 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. For certain indefinite-lived intangible assets, a present value technique, such as estimates of future cash flows, is utilized. There were no events or circumstances from the date of that assessment through December 25, 2010 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. For the year ended December 25, 2010, the results of our goodwill impairment testing did not result in any impairments. 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. 49 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 and March 2010, 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 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. Recently Issued Accounting Standards Accounting pronouncements adopted by us and recently issued accounting pronouncements not yet adopted by us are included in “Note 1 – Significant Accounting Policies” to the consolidated financial statements in Part II, Item 8 of this Form 10-K. 50 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 an interest rate cap agreement and foreign currency forward 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 cap and foreign currency forward 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 or 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 Hedges In connection with the debt incurred as part of the acquisition of Butler Animal Health Supply, LLC (“BAHS”), BAHS incurred $320.0 million of debt. Interest on the debt is charged at LIBOR plus a margin of 3.5% with a LIBOR floor of 2%. The debt agreement contains a provision that required BAHS to hedge risks related to potential rising interest rates. As a result, BAHS has entered into series of interest rate caps, with a notional amount of $160.0 million, protecting against LIBOR interest rates rising above 3% through March 12, 2012. As of December 25, 2010, the fair value of our interest rate cap agreements recorded in other current and non-current assets in our consolidated balance sheet was $14 thousand, which represented the amount that would be received upon unwinding the interest rate cap agreements based on market conditions at that time. Changes in the fair value of these interest rate cap agreements are reflected as an adjustment to current and non-current assets or liabilities with an offsetting adjustment to Accumulated other comprehensive income since the hedge is 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 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 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 25, 2010, the fair value of our foreign currency exchange agreements, which expire through May 26, 2011, recorded in other current liabilities was $1.6 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 $2.3 million. 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. 51 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 25, 2010 and December 26, 2009 ............................................... Statements of Income for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 ....................................................................... Statements of Changes in Stockholders’ Equity for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 ...................................... Statements of Cash Flows for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 ....................................................................... Notes to Consolidated Financial Statements ................................................................................. Page 53 54 55 56 57 58 Report of Independent Registered Public Accounting Firm ................................................................ 111 Schedule II - Valuation and Qualifying Accounts for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 ........................................................................ 112 All other schedules are omitted because the required information is either inapplicable or is included in the consolidated financial statements or the notes thereto. 52 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 25, 2010 and December 26, 2009 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 25, 2010. 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 25, 2010 and December 26, 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2010, 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 25, 2010, 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 22, 2011 expressed an unqualified opinion thereon. /s/ BDO USA, LLP New York, New York February 22, 2011 53 HENRY SCHEIN, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 25, 2010 December 26, 2009 ASSETS Current assets: Cash and cash equivalents ............................................................................................................ Accounts receivable, net of reserves of $56,267 and $51,724 ..................................................... 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, 91,939,477 outstanding on December 25, 2010 and $ $ 150,348 885,784 870,206 48,951 214,013 2,169,302 252,573 1,424,794 405,468 295,334 4,547,471 471,154 725,397 775,199 48,001 183,782 2,203,533 259,576 986,395 204,445 182,036 3,835,985 $ $ $ 590,029 41,508 4,487 $ 521,079 932 23,560 172,746 91,581 267,736 1,168,087 395,309 190,225 76,753 1,830,374 304,140 155,298 86,034 289,351 1,076,254 243,373 100,976 75,304 1,495,907 178,570 - - 90,630,889 outstanding on December 26, 2009 ....................................................................... Additional paid-in capital .............................................................................................................. Retained earnings .......................................................................................................................... Accumulated other comprehensive income .................................................................................. Total Henry Schein, Inc. stockholders' equity ............................................................................... Noncontrolling interests ................................................................................................................ 919 601,014 1,779,178 30,514 2,411,625 1,332 906 603,772 1,492,607 64,194 2,161,479 29 Total stockholders' equity ..................................................................................................... Total liabilities, redeemable noncontrolling interests and stockholders' equity .................... 2,412,957 4,547,471 $ 2,161,508 3,835,985 $ See accompanying notes. 54 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 of affiliates and noncontrolling interests ............................................................................ Income taxes ................................................................................... Equity in earnings 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 25, 2010 $ 7,526,790 5,355,914 2,170,876 Years ended December 26, 2009 $ 6,538,336 4,621,516 1,916,820 December 27, 2008 $ 6,380,413 4,506,118 1,874,295 1,637,460 12,285 521,131 14,098 (33,641) 447 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) 502,035 (160,069) 10,165 352,131 - 352,131 (26,342) 325,789 $ 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 $ $ $ 325,789 - 325,789 $ $ 308,551 2,602 311,153 $ $ 247,347 (7,890) 239,457 $ $ 3.62 3.49 $ $ 3.47 3.41 $ $ 2.78 2.71 $ $ - - $ $ 0.03 0.03 $ $ (0.09) (0.08) $ $ 3.62 3.49 $ $ 3.50 3.44 $ $ 2.69 2.63 90,097 93,268 88,872 90,556 89,080 91,221 See accompanying notes. 55 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share and per share data) Common Stock $.01 Par Value Shares 89,603,660 Amount $ 896 Additional Paid-in Capital $ 579,125 Accumulated Other Comprehensive Income Retained Earnings Noncontrolling Interests Total Stockholders' Equity $ 994,424 $ 100,268 $ 274 $ 1,674,987 239,457 - (12) 239,445 Balance, December 29, 2007 .................................................................... 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 $2,526 ............................................................................ Unrealized investment loss, net of tax benefit of $821 ............................. Pension adjustment loss, net of tax benefit of $443 ................................. 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 $2,065 attributable to Redeemable noncontrolling interests) ................................................ Unrealized gain from foreign currency hedging activities, net of tax benefit of $3,228 ................................................................ Unrealized investment loss, net of tax benefit of $105 ............................. Pension adjustment loss, net of tax benefit of $1,086 .............................. 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 ..................................... - - - - - - - 100,778 445,916 802,068 (69,722) - - - - - - - 1 (16) 10 3 894 - - - - - - - 1 4 8 (1) - - - - - - (51,138) 4,661 (30,345) 32,616 25,104 560,023 - - - - - - 581 5,300 14,508 25,916 (2,149) (407) - - - - - - (52,427) - - (75,666) 6,929 (1,201) (609) - - - - - 1,181,454 29,721 311,153 - - - - - - - - - - - - 46,364 (8,238) (120) (3,533) - - - - - - - Balance, December 26, 2009 .................................................................... 90,630,889 906 603,772 1,492,607 64,194 Net income (excluding $26,054 attributable to Redeemable noncontrolling interests) .................................................................... Foreign currency translation loss (excluding $2,281 attributable to Redeemable noncontrolling interests) ................................................ Unrealized loss from foreign currency hedging activities, net of tax benefit of $255 ................................................................... Unrealized investment gain, net of tax of $215 ........................................ Pension adjustment loss, net of tax benefit of $1,710 .............................. Total comprehensive income ............................................................. Dividends paid ......................................................................................... Reclassification of noncontrolling interests no longer subject to redemption ......................................................................... Initial noncontrollling interests and adjustments related to business acquisitions .......................................................................... Change in fair value of redeemable securities .......................................... Stock issued upon conversion of convertible senior notes ....................... Stock issued to 401(k) plan ...................................................................... Repurchase and retirement of common stock ........................................... Stock issued upon exercise of stock options, including tax benefit of $8,304 ......................................................... Stock-based compensation expense .......................................................... Shares withheld for payroll taxes ............................................................. Liability for cash settlement stock option awards ..................................... - - - - - - - - - 732,422 107,662 (1,005,869) 1,248,643 285,742 (60,012) - - - - - - - - - - 7 1 (10) 12 3 - - - - - - - - - (22,077) (51,843) 12,129 5,720 (18,507) 46,729 29,907 (4,260) (556) 325,789 - - - - - - - - - - - (39,218) - - - - (28,303) (885) 145 (4,637) - - - - - - - - - - - - - - - - - - - - 262 29 - - - - (262) - - - - - - 29 288 - - - - (501) 1,516 - - - - - - - - - (75,666) 6,929 (1,201) (609) 168,898 (51,138) 4,662 (82,788) 32,626 25,107 1,772,354 311,182 46,364 (8,238) (120) (3,533) 345,655 (262) 581 5,301 14,512 25,924 (2,150) (407) 2,161,508 326,077 (28,303) (885) 145 (4,637) 292,397 (501) 1,516 (22,077) (51,843) 12,136 5,721 (57,735) 46,741 29,910 (4,260) (556) Balance, December 25, 2010 .................................................................... 91,939,477 $ 919 $ 601,014 $ 1,779,178 $ 30,514 $ 1,332 $ 2,412,957 See accompanying notes. 56 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) December 25, 2010 Years ended December 26, 2009 December 27, 2008 $ 352,131 $ 333,157 $ 261,374 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 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 investments 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 .............................. Proceeds from maturities of available-for-sale securities ...................... Net proceeds from 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 ........... Payments for repurchases of common stock .......................................... Excess tax benefits related to stock-based compensation ...................... Distributions to noncontrolling shareholders ........................................ Acquisitions of noncontrolling interests in subsidiaries ........................ Other ...................................................................................................... Net cash used in financing activities ........................................................... - - 101,214 4,007 29,910 5,564 (6,051) 5,721 (10,165) 3,702 (76,129) (21,307) (26,640) 26,917 388,874 (39,000) (399,575) - (26,984) 6,000 26,984 - 4,171 (428,404) 40,500 110,000 (266,051) 38,437 (57,735) 11,292 (12,531) (146,811) (357) (283,256) (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 - 4,680 (2,604) (52,453) (358) (197,675) 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 ...................................................... (322,786) 1,980 471,154 150,348 $ 101,767 (183) 369,570 471,154 $ $ See accompanying notes. 57 - 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 (50,870) (128,470) - (35,925) 5,722 - 41,336 197 (168,010) (7,197) - (33,721) 25,649 (82,788) 11,041 (2,150) - 1,196 (87,970) 128,802 (6,822) 247,590 369,570 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except 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, Slovakia, Spain, Switzerland and the United Kingdom. We also have affiliates in Iceland, Saudi Arabia, Turkey 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 or investments in unconsolidated affiliates of less than 20% in which we have the ability to influence the operating or financial decisions, are accounted for under the equity method. See Note 6 for accounting treatment of Redeemable noncontrolling interests. 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 25, 2010, December 26, 2009 and December 27, 2008 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 reasonably assured and product returns are reasonably estimable. 58 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except 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 or deferred until such time as vendor-specific evidence of fair value is obtained. 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 $44.7 million and $48.3 million, primarily related to payments for inventory, were classified as accounts payable as of December 25, 2010 and December 26, 2009. Available-for-sale Securities As of December 25, 2010, we have approximately $15.1 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 $13.1 million of our ARS are backed by student loans that are backed by the federal government and the remaining $2.0 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 25, 2010 and December 26, 2009, 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 $1.7 million and $2.2 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. 59 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except 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 $57.0 million, $46.6 million and $49.6 million for the years ended December 25, 2010, December 26, 2009 and December 27, 2008. Advertising and Promotional Costs We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses from continuing operations were $12.7 million, $12.4 million and $18.4 million for the years ended December 25, 2010, December 26, 2009 and December 27, 2008. 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 25, 2010 and December 26, 2009, we had $3.5 million and $3.4 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 (see Note 2, Property and Equipment, Net for estimated useful lives). 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. 60 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) 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 caps related to our long-term floating rate debt and foreign currency forward agreements related to certain intercompany loans and certain forecasted inventory purchase commitments with foreign suppliers. Our interest rate cap agreements are designated as cash flow hedges. At each balance sheet date, the interest rate caps are recorded at estimated fair value. Changes in the fair value of the cap are expected to be highly effective in offsetting the unpredictability in expected future cash flows on floating rate indebtedness attributable to fluctuations in interest rates. Unrealized gains and losses on the outstanding balances of the interest rate caps are recorded as a component of Accumulated other comprehensive income. Gains and losses realized at the time of our quarterly interest payments due to the expiration of applicable portions of the interest rate caps are reclassified to Interest expense. Our foreign currency forward agreements related to forecasted inventory purchase commitments are designated as cash flow hedges. Our foreign currency forward agreements related to foreign currency balance sheet exposure provide economic hedges but are not designated as hedges for accounting purposes. 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. 61 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) 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. Some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial 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. Starting in our 2009 fiscal year, as required by ASC Topic 805, “Business Combinations,” we have accrued 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. For the year ended December 25, 2010, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill and other indefinite-lived intangible assets (primarily trademarks) are not amortized, but are subject to impairment analysis at least once annually. 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. We regard our reporting units to be our operating segments (dental, medical, animal health and 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. For certain indefinite-lived intangible assets, a present value technique, such as estimates of future cash flows, is utilized. There were no events or circumstances from the date of that assessment through December 25, 2010 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 goodwill or other indefinite-lived intangible assets are impaired, we record an impairment charge in our consolidated statements of income. For the year ended December 25, 2010, the results of our goodwill impairment testing did not result in any impairments. 62 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except 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 $54.2 million, $54.6 million and $56.4 million for the years ended December 25, 2010, December 26, 2009 and December 27, 2008. 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 and investment activity and pension adjustments. Accounting Pronouncements Adopted During February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-09, “Subsequent Events (Topic 855)”. The amended guidance in ASU 2010-09 states that an entity that is an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued, but is not required to disclose the date through which subsequent events have been evaluated. The adoption of the provisions of this amendment did not have a material impact on our consolidated financial statements. 63 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) During January 2010, the FASB issued 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. Effective December 27, 2009, we have adopted the provisions relating to Level 1 and Level 2 disclosures and such provisions did not have a material impact on our consolidated financial statements. We do not expect the provisions relating to Level 3 disclosures to have a material impact on our consolidated financial statements. In June 2009, the 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 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. 64 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) 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. 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 ($304.1 million, $178.6 million and $233.0 million at December 25, 2010, December 26, 2009 and December 27, 2008, respectively) and reduced Additional paid-in capital and Noncontrolling interests within the Stockholders’ equity section of our consolidated balance sheets. The change in carrying value of the noncontrolling interests subject to put options at December 25, 2010 compared to December 26, 2009 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 do 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 December 15, 2008. The implementation of this guidance did not have a material impact on our consolidated financial statements. 65 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) 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. New Accounting Pronouncements Not Yet Adopted In December 2010, the FASB issued ASU 2010-29, which contains updated accounting guidance to clarify the acquisition date that should be used for reporting pro forma financial information when comparative financial statements are issued. This update requires that a company should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This update also requires disclosure of the nature and amount of material, nonrecurring pro forma adjustments. The provisions of this update, which are to be applied prospectively, are effective for 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, 2010, with early adoption permitted. The impact of this update on our consolidated financial statements will depend on the size and nature of future business combinations. 66 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) 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. The provisions are not expected to have a material impact on our consolidated financial statements. Note 2 – 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 25, 2010 December 26, 2009 $ $ 13,151 98,501 58,228 60,927 72,406 209,095 512,308 (259,735) 252,573 12,644 97,983 60,392 73,003 73,069 239,543 556,634 (297,058) 259,576 $ $ The decrease in gross property and equipment during the year ended December 25, 2010 is primarily attributable to the write-off of fully depreciated property and equipment. 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 The net carrying value of equipment held under capital leases amounted to approximately $3.2 million and $5.5 million as of December 25, 2010 and December 26, 2009. Property and equipment related depreciation expense, from continuing operations, for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 was $49.1 million, $46.4 million and $45.1 million. 67 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 3 – Goodwill and Other Intangibles, Net The changes in the carrying amount of goodwill for the years ended December 25, 2010 and December 26, 2009 were as follows: Balance as of December 27, 2008 .................................... Adjustments to goodwill: Acquisitions ................................................................. Discontinued operation impairment ............................ Foreign currency translation ........................................ Balance as of December 26, 2009 .................................... Adjustments to goodwill: Acquisitions ................................................................. Foreign currency translation ........................................ Balance as of December 25, 2010 .................................... Other intangible assets consisted of the following: Healthcare Distribution Technology Total $ 856,623 $ 66,329 $ 922,952 40,817 (444) 15,674 912,670 4,383 - 3,013 73,725 45,200 (444) 18,687 986,395 445,089 (10,934) 1,346,825 $ 5,530 (1,286) 77,969 $ 450,619 (12,220) 1,424,794 $ December 25, 2010 Accumulated December 26, 2009 Accumulated Cost Amortization Net Cost Amortization Net Non-compete agreements ................................... $ 44,309 $ (6,089) $ 38,220 $ 27,800 $ (6,460) $ 21,340 Trademarks / trade names - definite lived ........... Trademarks / trade names - indefinite lived ........ Customer relationships and lists ......................... Other ................................................................... 40,346 25,059 384,365 42,309 (13,666) - (98,906) (12,259) 26,680 25,059 285,459 30,050 18,892 26,720 192,004 36,728 (11,026) - (69,235) (10,978) 7,866 26,720 122,769 25,750 Total ............................................................. $ 536,388 $ (130,920) $ 405,468 $ 302,144 $ (97,699) $ 204,445 Non-compete agreements represent amounts paid primarily to key employees and prior owners of acquired businesses, as well as certain sales persons, 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 25, 2010. Trademarks, trade names, customer lists and customer relationships were established through business acquisitions. Definite-lived trademarks and trade names are amortized on a straight-line basis over a weighted-average period of approximately six years as of December 25, 2010. 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 11 years as of December 25, 2010. The increase in customer relationships and customer lists during the year ended December 25, 2010 is primarily attributable to the acquisition of BAHS. Amortization expense, attributable to continuing operations, related to definite-lived intangible assets for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 was $47.2 million, $30.6 million and $27.9 million. The annual amortization expense expected for the years 2011 through 2015 is $50.2 million, $48.3 million, $41.2 million, $35.0 million and $32.3 million. 68 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 4 – Investments and Other Investments and other consisted of the following: December 25, 2010 December 26, 2009 $ $ Investment in unconsolidated affiliates (1) .................................................... Non-current deferred foreign, state and local income taxes ........................... Notes receivable (2) ....................................................................................... Auction rate securities, net of temporary impairment .................................... Distribution rights and exclusivity agreements, net of amortization .............. Security deposits ............................................................................................ Debt issuance costs, net of amortization ........................................................ Other long-term assets ................................................................................... Total ........................................................................................................... 198,613 30,894 17,098 13,367 4,978 3,435 9,015 17,934 295,334 $ $ 86,117 33,201 23,437 18,848 5,311 3,197 1,931 9,994 182,036 (1) Increase in investment in unconsolidated affiliates during the year ended December 25, 2010 is primarily due to the purchase of new equity interests. (2) Long-term notes receivable carry interest rates ranging from 1.52% 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 25, 2010, December 26, 2009 and December 27, 2008 was $4.9 million, $4.5 million and $4.5 million. Note 5 – Debt Bank Credit Lines On September 5, 2008, we entered into a $400 million revolving credit facility with a $100 million expansion feature. The $400 million credit line expires in September 2013. This credit line replaced our then existing $300 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. In addition to the amounts outstanding under our shelf facilities, discussed below, we have outstanding borrowings of approximately $30.0 million under our $400 million credit facility. As of December 25, 2010, there were $9.8 million of letters of credit provided to third parties. As of December 25, 2010, we had various other short-term bank credit lines available, of which approximately $11.5 million was outstanding. As of December 25, 2010, borrowings under our credit lines had a weighted average interest rate of 2.58% and were collateralized by assets with an aggregate net carrying value of $245.6 million. 69 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 5 – Debt – (Continued) On August 10, 2010, we entered into a $400 million private placement shelf facilities with two insurance companies. These shelf facilities are available through August 2013 on an uncommitted basis. The facilities allow us to issue senior promissory notes to the lenders at a fixed rate based on an agreed upon spread over applicable treasury notes at the time of issuance. The term of each possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12 years). The proceeds of any issuances under the facilities will be used for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions. The agreement provides, among other things, that we maintain certain 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 25, 2010, we have an outstanding balance under the facilities of $100.0 million at a fixed rate of 3.79%, which is due on September 2, 2020. The debt incurred as part of the acquisition of Butler Animal Health Supply, LLC (“BAHS”) is repayable in 23 quarterly installments of $0.8 million through September 30, 2015, and a final installment of $301.6 million on December 31, 2015. Interest on the BAHS debt is charged at LIBOR plus a margin of 3.5% with a LIBOR floor of 2% for a current effective rate of 5.5% as of December 25, 2010. The agreement provides, among other things, that we maintain certain interest coverage and maximum leverage ratios, and contains restrictions relating to subsidiary indebtedness, capital expenditures, liens, employee and shareholder loans, disposal of businesses and certain changes in ownership. In addition, the debt agreement contains provisions which, under certain circumstances, require BAHS to make prepayments based on excess cash flows of BAHS as defined in the debt agreement. The debt agreement also contains provisions that require BAHS to hedge risks related to potential rising interest rates. As a result, BAHS entered into a series of interest rate caps, with a notional amount of $160.0 million, protecting against LIBOR interest rates rising above 3.0% through March 30, 2012. Long-term debt Long-term debt consisted of the following: Private placement debt ....................................................................................... Senior notes ....................................................................................................... Convertible debt (net of discount of $4.0 million) ............................................. Notes payable to banks (net of a discount of $1.3 million) at an interest rate of 5.5% (1) ................................................................................ Various collateralized and uncollateralized loans payable with interest, in varying installments through 2015 at interest rates ranging from 3.3% to 8.25% ..................................................................................... Capital lease obligations (see Note 17) ............................................................. Total .................................................................................................................. Less current maturities ....................................................................................... Total long-term debt .................................................................................... December 25, 2010 December 26, 2009 $ 100,000 - - $ - 20,453 235,993 279,055 19 16,522 4,219 399,796 (4,487) 395,309 $ 4,836 5,632 266,933 (23,560) 243,373 $ (1) Increase in notes payable balance at December 25, 2010 is primarily attributable to the debt incurred as part of the acquisition of BAHS. 70 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 5 – Debt – (Continued) The Convertible Notes were senior unsecured obligations bearing a fixed annual interest rate of 3.0% and were due to mature on August 15, 2034. The Convertible Notes were 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 was 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 Convertible Notes for that 10-trading-day period was less than 98% of the average conversion value for the Convertible Notes during that period; • if the Convertible Notes have been called for redemption; or • upon the occurrence of a fundamental change or specified corporate transactions, as defined in the Convertible Note agreement. On September 3, 2010, we paid approximately $240 million in cash and issued 732 shares of our common stock in connection with the redemption of our $240.0 million of Convertible Notes, which were issued in 2004. As of December 25, 2010, the aggregate amounts of long-term debt, including capital leases, maturing in each of the next five years and thereafter are as follows: 2011 ............................................................................................. 2012 ............................................................................................. 2013 ............................................................................................. 2014 ............................................................................................. 2015 ............................................................................................. Thereafter ..................................................................................... $ 4,487 5,533 3,322 15,298 4,899 366,257 Total ........................................................................................ $ 399,796 71 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 6 – 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. Such redemption prices are equal to fair value based on third-party valuations. 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. The components of the change in the Redeemable noncontrolling interests for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 are presented in the following table: Balance, beginning of period ................................................................ Net increase (decrease) in redeemable noncontrolling interests due to business acquisitions or redemptions .................................... Net income attributable to redeemable noncontrolling interests ........... Dividends declared ............................................................................... Effect of foreign currency translation attributable to redeemable noncontrolling interests ................................................ Change in fair value of redeemable securities ....................................... Balance, end of period .......................................................................... December 25, 2010 December 26, 2009 December 27, 2008 $ 178,570 $ 233,035 $ 150,028 62,314 26,054 (12,360) (71,951) 21,975 (5,973) 14,994 21,929 (2,994) (2,281) 51,843 304,140 $ 2,065 (581) 178,570 $ (2,060) 51,138 233,035 $ 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 do not impact the calculation of earnings per share. Some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial 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. Starting in our 2009 fiscal year, as required by ASC Topic 805, “Business Combinations,” we have accrued 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. For the year ended December 25, 2010, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities. 72 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 7 – Comprehensive Income Comprehensive income includes certain gains and losses that, under GAAP, 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 and investment activity and pension adjustments. The following table summarizes our Accumulated other comprehensive income, net of applicable taxes as of: Attributable to Redeemable noncontrolling interests: Foreign currency translation adjustment ............................ $ (864) $ 1,417 $ (648) December 25, 2010 December 26, 2009 December 27, 2008 Attributable to Henry Schein, Inc.: Foreign currency translation adjustment ................................. Unrealized gain (loss) from foreign currency hedging activities ............................................................... Unrealized investment loss ..................................................... Pension adjustment loss .......................................................... Accumulated other comprehensive income ....................... $ 41,138 $ 69,441 $ 23,077 (1,060) (1,176) (8,388) 30,514 $ (175) (1,321) (3,751) 64,194 $ 8,063 (1,201) (218) 29,721 $ Total Accumulated other comprehensive income ................... $ 29,650 $ 65,611 $ 29,073 The following table summarizes other comprehensive income attributable to our Redeemable noncontrolling interests, net of applicable taxes for the years ended: December 25, 2010 December 26, 2009 December 27, 2008 Foreign currency translation adjustment ..................................... $ (2,281) $ 2,065 $ (2,060) The following table summarizes our total comprehensive income, net of applicable taxes for the years ended: December 25, 2010 December 26, 2009 December 27, 2008 Comprehensive income attributable to Henry Schein, Inc. ......................................................... Comprehensive income (loss) attributable to noncontrolling interests ................................................. Comprehensive income attributable to Redeemable noncontrolling interests ................................................. Comprehensive income ........................................................ $ 292,109 $ 345,626 $ 168,910 288 29 (12) 23,773 316,170 $ 24,040 369,695 $ 19,869 188,767 $ 73 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 8 – Fair Value Measurements ASC Topic 820 “Fair Value Measurements and Disclosures” (“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. 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). 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. 74 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 8 – Fair Value Measurements – (Continued) Auction-rate securities As of December 25, 2010, we have approximately $15.1 million ($13.4 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 $13.1 million ($11.4 million net of temporary impairments) of our ARS are backed by student loans that are backed by the federal government and the remaining $2.0 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 2010, we received approximately $0.4 million and $5.6 million of redemptions, at par, for our closed-end municipal bond funds and our student loan portfolios, respectively. As of December 25, 2010, we have continued to classify 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 26, 2009 of $2.2 million related to our closed-end municipal bond funds and our student loan portfolios was decreased to $1.7 million during the year ended December 25, 2010. The decrease in the temporary impairment was due to the level of redemptions and changes in interest rates during the year. 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 25, 2010, we had approximately $0.2 million, $0 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. During the year ended December 25, 2010, we received approximately $1.8 million of distributions from the Reserve Primary Fund. We do not expect to receive any additional redemptions from the Reserve Primary Fund. As of December 25, 2010, the value of our holdings in this fund are classified 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. 75 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 8 – Fair Value Measurements – (Continued) 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 25, 2010 and December 26, 2009 was estimated at $441.3 million and $307.5 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 caps related to our long-term floating rate debt and foreign currency forward agreements related to intercompany loans and certain forecasted inventory purchase commitments with suppliers. The fair values for the majority of our foreign currency and interest rate derivative contracts are obtained by comparing our contract rate to a published forward price of the underlying market rates, which is based on market rates for comparable transactions and are classified within Level 2 of the fair value hierarchy. 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. 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 details of the changes in Redeemable noncontrolling interests are shown in Note 6. 76 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 8 – Fair Value Measurements – (Continued) 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 25, 2010 and December 26, 2009: December 25, 2010 Level 1 Level 2 Level 3 Total Assets: Available-for-sale securities ........................ Money market fund ...................................... Derivative contracts ..................................... Total assets ........................................... - $ - - $ - - $ - 1,213 1,213 $ $ $ 13,367 - - 13,367 13,367 - 1,213 14,580 $ $ Liabilities: Derivative contracts ..................................... Total liabilities ...................................... $ - $ - $ $ 2,771 2,771 $ - $ - $ $ 2,771 2,771 Redeemable noncontrolling interests .................. $ - $ - $ 304,140 $ 304,140 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 ...................................... $ - $ - $ $ 5,234 5,234 $ - $ - $ $ 5,234 5,234 Redeemable noncontrolling interests .................. $ - $ - $ 178,570 $ 178,570 77 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 8 – Fair Value Measurements – (Continued) As of December 25, 2010, 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 26, 2009 of $2.2 million was decreased by $0.5 million to $1.7 million during the year ended December 25, 2010. 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. During the year ended December 25, 2010, we received approximately $1.8 million of distributions from The Reserve Primary Fund, leaving a remaining balance of approximately $0.2 million, $0 net of reserves, as of December 25, 2010. The following table presents a reconciliation of our assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3): Balance, December 29, 2007 .............................................................................................. Transfers to Level 3 ............................................................................................................ Change in redeemable noncontrolling interests .................................................................. Losses: Reported in earnings - Reserve Primary Fund increase ................................................... Reported in accumulated other comprehensive income ................................................... Balance, December 27, 2008 .............................................................................................. 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 .............................................................................................. Change in redeemable noncontrolling interests .................................................................. Redemptions at par ............................................................................................................. Gains: Reported in earnings - Reserve Primary Fund reduction ................................................. Reported in accumulated other comprehensive income ................................................... Balance, December 25, 2010 .............................................................................................. Level 3 (1) $ 150,028 36,318 83,007 $ (750) (2,022) 266,581 (54,465) (13,227) $ 500 (225) 199,164 125,728 (7,781) 36 360 317,507 $ (1) Level 3 amounts consist of closed-end municipal bond funds, student loan backed auction-rate securities, money market fund and redeemable noncontrolling interests. See Note 6 for the components of the changes in Redeemable noncontrolling interests. 78 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 9 – 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. Effective December 31, 2009, we acquired a majority interest in Butler Animal Health Holding Company, LLC (“Butler Holding”), the holding company of BAHS, a distributor of companion animal health supplies to veterinarians. BAHS further complements our domestic and international animal health operations and accordingly has been included in our Animal health operating segment, which is reported as part of Healthcare distribution. We contributed certain assets and liabilities with a net book value of approximately $86.0 million related to our United States animal health business to BAHS and paid approximately $42.0 million in cash to acquire 50.1% of the equity interests in Butler Holding indirectly through W.A. Butler Company, a holding company that is partially owned by Oak Hill Capital Partners (“OHCP”). As part of a recapitalization at closing, BAHS combined with our animal health business to form Butler Schein Animal Health (“BSAH”), while incurring approximately $127.0 million in incremental debt used primarily to finance Butler Holding stock redemptions. As a result, BSAH had $320.0 million of debt at closing, $37.5 million of which was provided by Henry Schein, Inc. and is eliminated in the accompanying consolidated financial statements. Total consideration for the acquisition of BAHS, including $96.1 million of value for noncontrolling interests, was $351.1 million and was allocated as follows: Net assets of BAHS at fair value: Current assets ...................................................................................................................................... $ 164,789 Intangible assets: Trade name (useful life 3 years) ...................................................................................................... Customer relationships (useful life 12 years) ................................................................................... Non-compete agreements (useful life 2 years) ................................................................................. Goodwill ............................................................................................................................................. Other assets ......................................................................................................................................... Current liabilities ................................................................................................................................ Bank indebtedness .............................................................................................................................. Deferred income tax liabilities ............................................................................................................ Net book value of our assets and liabilities contributed ..................................................................... Total allocation of consideration ................................................................................................... 10,000 140,000 2,600 270,714 14,138 (62,770) (200,100) (74,271) 86,048 351,148 $ The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of BAHS. The goodwill is not expected to be tax deductible for income tax purposes. As a result of our contributed business being under the control of Henry Schein before and after the transaction, the assets and liabilities of this business remain at their original historical accounting basis in the accompanying consolidated financial statements. 79 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 9 – Business Acquisitions, Discontinued Operations, Divestitures and Other Transactions – (Continued) The debt incurred as part of the acquisition of BAHS is repayable in 23 quarterly installments of $0.8 million through September 30, 2015, and a final installment of $301.6 million on December 31, 2015. Interest on the BAHS debt is charged at LIBOR plus a margin of 3.5% with a LIBOR floor of 2% for a current effective rate of 5.5% as of December 25, 2010. The debt agreement contains provisions which, under certain circumstances, require BAHS to make prepayments based on excess cash flows of BAHS as defined in the debt agreement. The debt agreement also contains provisions that require BAHS to hedge risks related to potential rising interest rates. As a result, BAHS entered into a series of interest rate caps, with a notional amount of $160.0 million, protecting against LIBOR interest rates rising above 3.0% through March 30, 2012. 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”). 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 December 31, 2014, at which time Burns will be permitted to sell to us up to 20% of its closing date ownership interest in Butler Holding each year. If OHCP still holds 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. As a result of the Put Right Agreements, the noncontrolling interest in BAHS has been reflected as part of Redeemable noncontrolling interests in the accompanying consolidated balance sheet. In addition to the BAHS acquisition, we completed certain other acquisitions during the year ended December 25, 2010, which were immaterial to our financial statements individually and in the aggregate and resulted in the recording of approximately $162.9 million of initial goodwill through preliminary purchase price allocations. We completed certain acquisitions during the year ended December 26, 2009, which were immaterial to our financial statements individually and in the aggregate. 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. 80 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 9 – Business Acquisitions, Discontinued Operations, Divestitures and Other Transactions – (Continued) 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. 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 was $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 loss from discontinued operations for this business for the year ended December 27, 2008 was $0.1 million (nil after taxes). Net sales generated by our wholesaler of dental consumables were $8.0 million and $14.5 million for the years ended December 26, 2009 and December 27, 2008, 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 year ended December 27, 2008 was $12.1 million ($7.9 million after taxes). Net sales generated by this business were $12.7 million for the year ended December 27, 2008. 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. 81 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 9 – Business Acquisitions, Discontinued Operations, Divestitures and Other Transactions – (Continued) 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 certain of D4D’s members equal to $16.0 million. On August 3, 2009, we entered into an amendment whereby we paid certain of D4D’s members approximately $8.0 million and agreed to make two contingent payments of up to $4.0 million each based on D4D meeting certain financial performance criteria in 2009, 2010 and 2011. A total of $2.6 million of these amounts have been earned and will be paid in two equal payments upon receipt of audited financials for fiscal 2010 and 2011. A contingent payment with respect to fiscal 2010 and 2011 of up to an additional $2.7 million per year may be earned 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. Note 10 – 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 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. During the first quarter of 2010, we completed an additional restructuring in order to further reduce operating expenses. This restructuring included headcount reductions of 184 positions, as well as the closing of a number of smaller locations. For the year ended December 25, 2010, we recorded restructuring costs of approximately $12.3 million (approximately $8.3 million after taxes) 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 these restructurings are included in a separate line item, “Restructuring costs” within our consolidated statements of income. 82 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 10 – Plans of Restructuring – (Continued) The following table shows the amounts expensed and paid for restructuring costs that were incurred during 2010 and 2009 and the remaining accrued balance of restructuring costs as of December 25, 2010 and December 26, 2009, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet: Balance at December 27, 2008 $ 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 Provision 8,800 $ 3,355 Payments and Other Adjustments Balance at December 25, 2010 $ 8,978 3,034 $ 1,987 2,351 519 18,537 $ 36 3,020 $ 453 17,260 $ 102 4,297 $ 130 12,285 $ 227 12,239 $ 5 4,343 $ 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 following table shows, by reportable segment, the restructuring costs incurred during 2010 and 2009 and the remaining accrued balance of restructuring costs as of December 25, 2010 and December 26, 2009: Balance at December 27, 2008 Healthcare distribution .......... Technology ............................ Total ................................. $ $ 18,457 80 18,537 Provision 3,020 $ - 3,020 $ Payments and Other Adjustments Balance at December 26, 2009 17,252 8 17,260 Provision 12,063 $ 222 12,285 $ 4,225 72 4,297 Payments and Other Adjustments Balance at December 25, 2010 11,945 294 12,239 4,343 - 4,343 $ $ $ $ $ $ $ $ 83 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 11 – 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. On September 3, 2010, we redeemed all of our 3% convertible contingent notes originally due in 2034 (the “Convertible Notes”) for approximately $240 million in cash and issued 732 shares of our common stock. The effect of assumed conversion of our Convertible Notes, as it relates to the impact on diluted earnings per share, was included through September 3, 2010. For the years ended December 25, 2010 and December 27, 2008, diluted earnings per share includes the effect of common shares issuable upon conversion of our convertible debt. During these periods, 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. 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. 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 25, 2010 Years ended December 26, 2009 December 27, 2008 90,097 88,872 89,080 2,271 900 93,268 1,684 - 90,556 1,515 626 91,221 Weighted-average options to purchase 991, 2,738 and 910 shares of common stock at prices ranging from $59.89 to $62.05, $47.31 to $62.05 and $53.43 to $62.05 per share that were outstanding during the years ended December 25, 2010, December 26, 2009 and December 27, 2008, respectively, 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. 84 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 12 – Income Taxes Income from continuing operations before taxes, equity in earnings of affiliates and noncontrolling interests was as follows: December 25, 2010 Years ended December 26, 2009 December 27, 2008 Domestic ................................................................................ Foreign ................................................................................... Total .................................................................................. 343,502 158,533 502,035 308,238 144,482 452,720 $ $ $ $ $ $ 300,227 95,222 395,449 The provisions for income taxes attributable to continuing operations were as follows: December 25, 2010 Years ended December 26, 2009 December 27, 2008 Current income tax expense: U.S. Federal .................................................................. State and local ............................................................... Foreign .......................................................................... Total current ............................................................ $ 108,540 22,227 35,353 166,120 $ 101,092 16,649 35,965 153,706 $ 94,215 14,310 22,741 131,266 Deferred income tax expense (benefit): U.S. Federal .................................................................. State and local ............................................................... Foreign .......................................................................... Total deferred .......................................................... Total provision ..................................................... (9,096) (1,299) 4,344 (6,051) 160,069 $ (5,059) (722) (20,404) (26,185) 127,521 $ 499 72 (627) (56) 131,210 $ 85 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 12 – 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 (1) ......................................................... 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 (1) ................................................... Net deferred income tax liability ...................................................................... Years Ended December 25, 2010 December 26, 2009 $ 18,047 8,131 19,244 45,422 $ 18,734 9,690 6,742 35,166 (13,131) 38,663 (215,162) 8,300 49,107 (132,223) (27,108) (159,331) (113,909) $ (14,658) 35,312 (120,737) 9,411 58,980 (31,692) (36,083) (67,775) (32,609) $ (1) (2) 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. 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.” All net deferred income tax assets are 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 25, 2010, we have federal net operating loss carryforwards of $21.7 million relating to our domestic subsidiaries. Of such losses, $16.2 million can be utilized against future federal income through 2026, and $5.5 million can be utilized against future federal income through 2027. We have state net operating loss carryforwards of $7.0 million relating to our domestic subsidiaries, which can be utilized against future state income through 2029. Foreign net operating loss carryforwards totaled $178.0 million as of December 25, 2010. Of such losses, $0.8 million can be utilized against future foreign income through 2012, $1.5 million can be utilized against future foreign income through 2013, $2.4 million can be utilized against future foreign income through 2014, $3.2 million can be utilized against future foreign income through 2015, $1.5 million can be utilized against future foreign income through 2016, $1.1 million can be utilized against future foreign income through 2017 and $167.5 million has an indefinite life. 86 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 12 – 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 25, 2010 Years ended December 26, 2009 December 27, 2008 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 .................................................... 175,713 13,224 (17,109) (7,085) (9,714) 5,040 160,069 158,452 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 For the year ended December 25, 2010, our effective tax rate from continuing operations was 31.9% compared to 28.2% for the prior year period. The difference resulted primarily from the reduction of a valuation allowance in 2009 as explained below. 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%. The net reduction in our 2010 effective tax rate results from additional tax planning initiatives, settlements of tax audits, a reduction of valuation allowances 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. During the third quarter of 2009, we substantially completed a plan of reorganization outside the United States that allowed us to utilize tax loss carryforwards to offset taxable income beginning in 2010 in certain foreign tax jurisdictions. As a result, we determined that it is more likely than not that a portion of deferred tax assets previously fully reserved will be realized. Therefore, the 2009 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 the foreign earnings. As of December 25, 2010, the cumulative amount of reinvested earnings was approximately $344.0 million. 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. This topic 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. 87 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 12 – Income Taxes – (Continued) The total amount of unrecognized tax benefits as of December 25, 2010 was approximately $26.9 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 were approximately $5.1 million and $0, respectively, as of December 25, 2010. 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 1997 and forward for certain states and the years 2003 and forward for certain foreign jurisdictions. The following table provides a reconciliation of unrecognized tax benefits excluding the effects of deferred taxes: December 25, 2010 December 26, 2009 $ $ 17,000 2,500 5,100 (700) (2,100) - 21,800 11,800 1,600 6,700 (100) (2,000) (1,000) 17,000 $ $ 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 .................................................................................. 88 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 13 – 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 0.9% of our net sales in 2010. 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 2010. 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 14 – 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 cap agreements, foreign currency forward 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 cap and foreign currency forward and interest rate cap contracts (see Note 5 for discussion of interest rate cap related to BAHS) 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. 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 interest rate caps contracts aimed at limiting the impact of foreign currency exchange rate and interest rate fluctuations on earnings. We purchase short-term (i.e., 12 months or less) foreign currency forward 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 purchase interest rate caps to protect against interest rate risk on variable rate debt payable to third parties. 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. 89 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 14 – Derivatives and Hedging Activities – (Continued) The following table presents the fair value of our derivative instruments: 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 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 Asset Derivatives December 25, 2010 Liability Derivatives December 25, 2010 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Prepaid expenses and other Prepaid expenses and other $ 14 509 Accrued expenses other Accrued expenses other $ - 1,178 523 1,178 Prepaid expenses and other 690 Accrued expenses other 1,593 $ 1,213 $ 2,771 Asset Derivatives December 26, 2009 Liability Derivatives December 26, 2009 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Prepaid expenses and other Prepaid expenses and other $ 453 427 Accrued expenses other Accrued expenses other $ - 3,428 880 3,428 Prepaid expenses and other 5,297 Accrued expenses other 1,806 $ 6,177 $ 5,234 90 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 14 – Derivatives and Hedging Activities – (Continued) Cash Flow Hedges Our cash flow hedges consist of foreign exchange contracts and interest rate caps. 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 years ended December 25, 2010 and December 26, 2009 was $0.5 million and $0.1 million, respectively. 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: Location of Loss Reclassified from AOCI into Income (Effective Portion) Other, net Cost of sales Loss Reclassified from AOCI into Income (Effective Portion) Year Ended December 25, 2010 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 25, 2010 $ (593) Interest expense $ (185) (2,440) 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. Gains (losses) associated with these foreign exchange contracts are recorded in Other, net within our consolidated statements of income and totaled $1.4 million and $(4.3) million for the years ended December 25, 2010 and December 26, 2009, respectively. Forward points related to these foreign exchange contracts, which are recorded in Interest expense within our consolidated statements of income, totaled $0.5 and $0.2 million for the years ended December 25, 2010 and December 26, 2009, respectively. 91 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 15 – 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, animal health and international operating segments. This segment consists of consumable products, small equipment, laboratory products, large 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 and other institutions throughout the United States. Our animal health group serves animal health practices and clinics throughout the United States. Our international group serves dental, medical and animal health practitioners in 23 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 on a non-recourse basis, e-services and continuing education services for practitioners. The following tables present information about our business segments: December 25, 2010 Years ended December 26, 2009 December 27, 2008 Net Sales: Healthcare distribution (1): Dental (2) .................................................................... Medical (3) ................................................................. Animal health (4) ........................................................ International (5) .......................................................... Total healthcare distribution .................................. Technology (6) ................................................................ Total ........................................................................... $ $ 2,678,830 1,290,428 889,303 2,468,277 7,326,838 199,952 7,526,790 $ $ 2,509,921 1,217,020 240,082 2,398,105 6,365,128 173,208 6,538,336 $ $ 2,567,064 1,210,875 218,093 2,221,092 6,217,124 163,289 6,380,413 (1) 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. (2) Consists of products sold in the United States and Canadian dental markets. (3) Consists of products sold in the United States’ medical market. (4) Consists of products sold in the United States’ animal health market. (5) Consists of products sold in dental, medical and animal health markets, primarily in Europe, Australia and New Zealand. (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. 92 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 15 – Segment and Geographic Data – (Continued) Years ended December 25, December 26, December 27, 2009 2010 2008 Operating Income: Healthcare distribution .............................................................. Technology ................................................................................ Total ...................................................................................... Income from continuing operations before taxes, equity in earnings 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 ...................................................................................... 93 $ $ 454,660 66,471 521,131 $ $ 437,971 64,064 502,035 $ $ 401,915 62,170 464,085 $ $ 392,431 60,289 452,720 $ $ 362,307 56,979 419,286 $ $ 337,617 57,832 395,449 $ $ $ $ $ $ 95,267 5,947 101,214 75,290 6,203 81,493 99,000 28,521 127,521 9,929 50 9,979 23,362 8 23,370 49,282 2,345 51,627 $ $ 132,785 27,284 160,069 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 14,088 10 14,098 33,627 14 33,641 37,158 1,842 39,000 71,731 6,396 78,127 103,344 27,866 131,210 15,982 373 16,355 34,583 22 34,605 49,336 1,534 50,870 As of December 25, December 26, December 27, 2009 2010 2008 $ $ 4,405,389 142,082 4,547,471 $ $ 3,703,315 132,670 3,835,985 $ $ 3,457,391 141,819 3,599,210 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 15 – 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 25, 2010 Years Ended December 26, 2009 December 27, 2008 Healthcare Distribution Dental: Consumable dental products, dental laboratory products and small equipment (1) ......................... Large dental equipment (2) ............................................ Total dental .............................................................. $ 3,180,366 1,167,934 4,348,300 $ 2,994,714 1,118,500 4,113,214 $ 2,963,657 1,142,948 4,106,605 Medical products (3) ......................................................... Animal health products (4) ................................................ 1,441,396 1,537,142 Total Healthcare distribution ........................................ 7,326,838 1,530,704 721,210 6,365,128 1,458,629 651,890 6,217,124 Technology Software and related products and other value-added products (5) ................................. 199,952 173,208 163,289 Total ................................................................................ $ 7,526,790 $ 6,538,336 $ 6,380,413 (1) Includes X-ray products, infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants, gypsum, acrylics, articulators and abrasives. (2) Includes dental chairs, delivery units and lights, X-ray equipment, equipment repair and high-tech equipment. (3) Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products, equipment and vitamins. (4) Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment. (5) 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 25, 2010. 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. 2010 2009 2008 United States ................... Germany .......................... Other ................................ Consolidated total ....... Net Sales 4,777,172 689,159 2,060,459 7,526,790 $ $ $ Long-Lived Assets 1,248,837 187,112 646,886 2,082,835 $ 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 $ Net Sales 3,897,520 671,341 1,811,552 6,380,413 $ $ $ Long-Lived Assets 588,308 184,729 611,843 1,384,880 $ 94 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 16 – 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 $29.9 million ($20.4 million after-tax), $25.9 million ($17.5 million after-tax) and $25.4 million ($17.0 million after-tax) for the years ended December 25, 2010, December 26, 2009 and December 27, 2008. 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. In the accompanying consolidated statements of cash flows, we presented $11.3 million, $4.7 million and $11.0 million of benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities for the years ended December 25, 2010, December 26, 2009 and December 27, 2008. 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 and March 2010, 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 25, 2010, there were 27,077 shares authorized and 5,730 shares available to be granted under the 1994 Stock Incentive Plan and 800 shares authorized and 147 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). 95 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 16 – 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 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 years ended December 25, 2010 and December 26, 2009 primarily consisted of restricted stock and restricted stock unit grants. Stock-based compensation grants for the year ended December 27, 2008 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 25, 2010, we have recorded a liability of $0.6 million relating to fair value measurement of these options. The weighted-average grant date fair value of stock-based awards granted before forfeitures was $55.59, $34.35 and $18.44 per share during the years ended December 25, 2010, December 26, 2009 and December 27, 2008. Total unrecognized compensation cost related to non-vested awards as of December 25, 2010 was $56.2 million, which is expected to be recognized over a weighted-average period of approximately 2.0 years. 96 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 16 – Employee Benefit Plans – (Continued) A summary of the stock option activity under the Plans is presented below: December 25, 2010 Years ended December 26, 2009 December 27, 2008 Weighted Average Exercise Price Weighted Average Exercise Price Shares Shares Weighted Average Exercise Price Shares 6,295 10 (1,249) (44) 5,012 $ 40.66 56.03 30.84 50.12 43.05 6,792 42 (446) (93) 6,295 $ 39.85 38.33 26.62 48.83 40.66 6,829 1,125 (991) (171) 6,792 $ 34.67 59.78 25.87 45.29 39.85 4,252 40.58 4,835 36.31 5,141 35.11 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) ................................................................ 2010 0% 20% 2.37% 4.5 2009 0% 28% 1.88% 4.5 2008 0% 20% 2.75% 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 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: December 25, 2010 $ 95,777 91,741 As of December 26, 2009 $ 84,880 82,476 December 27, 2008 $ 24,928 24,928 Stock options outstanding ................................................... Stock options exercisable .................................................... 97 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 16 – Employee Benefit Plans – (Continued) The total cash received as a result of stock option exercises for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 was approximately $38.4 million, $11.9 million and $25.6 million. In connection with these exercises, the tax benefits that we realized for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 were $8.3 million, $2.6 million and $7.0 million. We settle employee stock option exercises with newly issued common shares. The total intrinsic value of restricted stock (including RSUs) that vested was $12.3 million, $8.7 million and $1.4 million during the years ended December 25, 2010, December 26, 2009 and December 27, 2008. The following table summarizes the status of our non-vested restricted shares/units for the year ended December 25, 2010: Time-Based Restricted Stock/Units Shares/Units Weighted Average Grant Date Fair Value $ 25,662 13,881 (4,125) (614) 34,804 $ 598 246 (87) (14) 743 Aggregate Intrinsic Value $ 46,190 Performance-Based Restricted Stock/Units Shares/Units 1,010 478 (129) (12) 1,347 Weighted Average Grant Date Fair Value 22,271 $ 26,942 (6,622) (508) 42,083 $ Aggregate Intrinsic Value $ 83,748 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 25, 2010, December 26, 2009 and December 27, 2008 amounted to $22.2 million, $18.9 million and $17.3 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 98 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 16 – 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 25, 2010, December 26, 2009 and December 27, 2008 amounted to $0.6 million, $1.9 million and $(1.6) 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 17 – 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 25, 2010 were: 2011 ............................................................................................. 2012 ............................................................................................. 2013 ............................................................................................. 2014 ............................................................................................. 2015 ............................................................................................. Thereafter ..................................................................................... $ 60,100 48,162 30,994 18,608 13,725 35,423 Total minimum operating lease payments ............................... $ 207,012 Total rental expense attributable to continuing operations for the years ended December 25, 2010, December 26, 2009 and December 27, 2008 was $62.6 million, $56.1 million and $59.0 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 25, 2010 were: 2011 ............................................................................................. 2012 ............................................................................................. 2013 ............................................................................................. 2014 ............................................................................................. 2015 ............................................................................................. Thereafter ..................................................................................... Total minimum capital lease payments ........................................ Less: Amount representing interest at 2.80% to 10.71% ............. Total present value of minimum capital lease payments ......... 99 $ $ 1,959 1,537 525 496 11 - 4,528 (309) 4,219 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 17 – 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 25, 2010 were: 2011 ............................................................................................. 2012 ............................................................................................. 2013 ............................................................................................. 2014 ............................................................................................. 2015 ............................................................................................. Thereafter ..................................................................................... Total minimum inventory purchase commitment payments ........................................................ $ 127,518 110,165 21,742 22,712 21,388 124,091 $ 427,616 We have obligations to purchase certain pharmaceutical products from a manufacturer through 2013, which require us to pay a price 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 certain pharmaceutical products from another manufacturer. Actual amounts may differ. Litigation From time to time, we may become a party to legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes and other matters arising out of the ordinary course of our business. In our opinion, pending matters will not have a material adverse effect on our financial condition or results of operations. 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. As of December 25, 2010, 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. Employment, Consulting and Non-Compete Agreements We have definite-lived employment, consulting and non-compete agreements expiring through 2015 that have varying base aggregate annual payments of approximately $13.4 million in 2011, which decrease periodically to approximately $0.3 million in 2015. We also have a lifetime consulting agreement that provides 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. 100 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 18 – Quarterly Information (Unaudited) The following presents certain quarterly financial data: Net sales ..................................................... Gross profit ................................................ Operating income ....................................... Net income ................................................. Amounts attributable to Henry Schein, Inc.: Net income ................................................. Earnings per share attributable to Henry Schein, Inc.: From net income: Basic ...................................................... Diluted ................................................... Net sales ..................................................... Gross profit ................................................ Operating income ....................................... Income from continuing operations ............ Net income ................................................. 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 ................................................... Quarters ended March 27, June 26, $ 2010 1,760,310 513,033 103,759 67,252 $ 2010 1,849,401 545,644 138,006 93,163 $ September 25, 2010 1,893,511 537,456 137,368 94,490 $ December 25, 2010 2,023,568 574,743 141,998 97,226 60,900 84,001 87,893 92,995 $ 0.68 0.66 $ 0.93 0.90 $ 0.97 0.94 $ 1.03 1.00 Quarters ended March 28, 2009 (1) June 27, 2009 (1) September 26, 2009 (1) $ 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 $ December 26, 2009 1,786,081 526,272 137,642 92,684 92,684 $ 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 (1) 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. 101 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 18 – Quarterly Information (Unaudited) – (Continued) 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 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 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; • 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 costs; • 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 or exceed market expectations, our stock price may decline. 102 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (In thousands, except per share data) Note 19 – Supplemental Cash Flow Information Cash paid for interest and income taxes was: December 25, 2010 Years ended December 26, 2009 December 27, 2008 Interest .......................................................................... Income taxes ................................................................. $ 25,531 145,758 $ 22,202 170,024 $ 30,249 109,103 There was approximately $286.3 million, $3.7 million and $0.8 million of debt assumed as a part of the acquisitions for the years ended December 25, 2010, December 26, 2009 and December 27, 2008, respectively. Debt assumed in the year ended December 25, 2010 primarily relates to the acquisition of Butler Animal Health Supply, LLC. On September 3, 2010, we paid approximately $240 million in cash and issued 732 shares of our common stock in connection with the redemption of our $240.0 million Convertible Notes, which were issued in 2004. During the years ended December 25, 2010, December 26, 2009 and December 27, 2008, we had $(1.1) million, $(11.5) million and $9.5 million of non-cash net unrealized gains (losses) 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. 103 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) and 15d-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 25, 2010 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 within the time periods specified in the SEC’s rules and forms. Changes in Internal Control over Financial Reporting The combination of continued acquisition activity, ongoing acquisition integrations and systems implementations undertaken during the quarter and carried over from prior quarters, when considered in the aggregate, represents a material change in our internal control over financial reporting. During the quarter ended December 25, 2010, post-acquisition and integration related activities continued for the North American Animal Health, Dental and Medical businesses acquired during 2010 representing aggregate annual revenues of approximately $756.0 million. These acquisitions, the majority of which utilize separate information and financial accounting systems, have been included in our consolidated financial statements. In addition, for our Dental business in the United States, post- implementation related activities continued for the new sales compensation system which supports accounting for annual sales commissions of approximately $131.0 million. All acquisitions, acquisition integrations and systems implementations involved necessary and appropriate change-management controls that are considered in our annual assessment of the design and operating effectiveness of our internal control over financial reporting. 104 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 25, 2010. The effectiveness of our internal control over financial reporting as of December 25, 2010 has been independently audited by BDO USA, 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. 105 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 25, 2010, 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 25, 2010, 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 25, 2010 and December 26, 2009, 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 25, 2010 and our report dated February 22, 2011 expressed an unqualified opinion thereon. /s/ BDO USA, LLP New York, New York February 22, 2011 106 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 2011 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 2010 Proxy Statement filed pursuant to Regulation 14A on March 31, 2010. 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 2011 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 2011 Proxy Statement to be filed pursuant to Regulation 14A. 107 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 25, 2010: 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 .................................. 4,961,763 50,000 5,011,763 $43.28 20.41 $43.05 5,877,277 - 5,877,277 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 2011 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 2011 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 2011 Proxy Statement to be filed pursuant to Regulation 14A. 108 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 52. 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. 109 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 22, 2011 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 110 Date February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 February 22, 2011 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 22, 2011 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 USA, LLP New York, New York February 22, 2011 111 Schedule II Valuation and Qualifying Accounts Additions Description Year ended December 25, 2010: Allowance for doubtful accounts, sales returns and other ................... 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 ................... Balance at beginning of period Charged to statement of income (1) Charged to other accounts (2) Deductions (3) Balance at end of period $ 51,724 $ 5,564 $ 5,700 $ (6,721) $ 56,267 $ 42,855 $ 4,747 $ 10,269 $ (6,147) $ 51,724 $ 41,315 $ 6,255 $ 1,959 $ (6,674) $ 42,855 (1) Represents amounts charged to bad debt expense. (2) Amounts charged to net sales primarily relate to increases in allowances for sales returns. (3) Deductions primarily consist of fully reserved accounts receivable that have been written off. 112 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 Master Note Facility, dated as of August 9, 2010, by and among us, New York Life Investment Management LLC and each New York Life affiliate which becomes party thereto. (Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on August 10, 2010.) 4.2 Private Shelf Agreement, dated as of August 9, 2010, by and among the Company, Prudential Investment Management, Inc. and each Prudential affiliate which becomes party thereto. (Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on August 10, 2010.) 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 Amendment Number Three 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 March 27, 2010.)** 113 Exhibits 10.5 Form of Restricted Stock Agreement for time-based restricted stock awards pursuant to the Henry Schein, Inc. 1994 Stock Incentive Plan (as amended and restated effective as of March 27, 2007). (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 2010.)** 10.6 Form of Restricted Stock Agreement for performance-based restricted stock awards pursuant to the Henry Schein, Inc. 1994 Stock Incentive Plan (as amended and restated effective as of March 27, 2007). (Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 2010.)** 10.7 Form of Restricted Stock Unit Agreement for time-based restricted stock awards pursuant to the Henry Schein, Inc. 1994 Stock Incentive Plan (as amended and restated effective as of March 27, 2007). (Incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 2010.)** 10.8 Form of Restricted Stock Unit Agreement for performance-based restricted stock awards pursuant to the Henry Schein, Inc. 1994 Stock Incentive Plan (as amended and restated effective as of March 27, 2007). (Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10- Q for the fiscal quarter ended March 27, 2010.)** 10.9 Form of Restricted Stock Unit Agreement for time-based restricted stock awards pursuant to the Henry Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan (as amended and restated effective as of April 1, 2003, and as further amended effective as of April 1, 2004 and January 1, 2005). (Incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 2010.)** 10.10 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.)** 10.11 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.)** 10.12 Amendment Number Two to the Henry Schein, Inc. Supplemental Executive Retirement Plan, effective as of January 1, 2008.** + 10.13 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.)** 10.14 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.)** 10.15 Amendment Number Three to the Henry Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan, effective as of May 10, 2010. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 26, 2010.)** 114 Exhibits 10.16 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.)** 10.17 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.)** 10.18 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.)** 10.19 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.)** 10.20 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.)** 10.21 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.)** 10.22 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.)** 10.23 Henry Schein, Inc. Deferred Compensation Plan effective as of January 1, 2011.**+ 10.24 Henry Schein Management Team Performance Incentive Plan and Plan Summary, effective as of January 1, 2010. (Incorporated by reference to Exhibit 10.7 to our Quarterly Report on Form 10- Q for the fiscal quarter ended March 27, 2010.)** 10.25 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.)** 10.26 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.)** 10.27 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.)** 115 Exhibits 10.28 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.) 10.29 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. (Incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the fiscal year ended December 26, 2009.) 10.30 Second Amendment dated August 9, 2010 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.+ 10.31 Third Amendment dated October 29, 2010 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.+ 10.32 Credit Agreement among Butler Animal Health Supply, LLC, the several lenders parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent, dated as of December 31, 2009. + 10.33 First Amendment dated December 21, 2010 to the Credit Agreement among Butler Animal Health Supply, LLC, the several lenders parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent, dated as of December 31, 2009. *+ 10.34 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.)* 10.35 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.)* 10.36 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.) 10.37 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.) 116 Exhibits 10.38 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.)* 10.39 Amendment dated February 9, 2010 to Distribution Agreement, dated as of December 2, 2004, by and between us and ID Biomedical Corporation.* (Incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K for the fiscal year ended December 26, 2009.) 10.40 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.) 10.41 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.) 10.42 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.) 10.43 First Amendment dated December 1, 2010 to Put Rights Agreement 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.+ 10.44 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.) 10.45 First Amendment dated December 1, 2010 to Put Rights Agreement among Henry Schein, Inc., Burns Veterinary Supply, Inc. and Butler Animal Health Holding Company LLC.+ 21.1 List of our Subsidiaries.+ 23.1 Consent of BDO USA, 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. 117 H E N R Y S C H E I N (cid:129) A N N U A L R E P O R T 2 0 1 0 Henry Schein, Inc. 135 Duryea Road Melville, New York 11747 U.S.A. (631) 843-5500 www.henryschein.com A N N U A L R E P O RT 2 010 

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