Henry Schein
Annual Report 2012

Plain-text annual report

inside2012_13:Layout 1 4/3/13 11:52 AM Page 1 HELPING HEALTH HAPPEN THROUGH INTEGRATED SOLUTIONS A N N U A L R E P O RT 2 012 HENRY SCHEIN FINANCIAL HIGHLIGHTS 2008–2012 $10,000 $8,000 NET SALES from Continuing Operations ($ in Millions) CAGR 9%* $7,527 $8,940 $8,530 $6,000 $6,380 $6,538 OPERATING INCOME from Continuing Operations ($ in Millions) CAGR 10%* $634 $582 $533 $700 $600 $500 $469 $400 $443 $4,000 $2,000 $0 $5.00 $4.00 2008 2009 2010 2011 2012 EARNINGS PER DILUTED SHARE from Continuing Operations CAGR 12%* $4.44 $3.97 $3.58 $3.00 $3.20 $2.92 $2.00 $1.00 $0 $300 $200 $100 $0 $600 $500 $400 $300 $200 $100 $0 2008 2009 2010 2011 2012 OPERATING CASH FLOW AND CAPITAL EXPENDITURES ($ in Millions) $555 $385 $398 $395 $408 (1) $51 $52 $39 $45 $51 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 *Five-year Compound Annual Growth Rate OPERATING CASH FLOW CAPITAL EXPENDITURES (1) Net of temporary forward inventory buy-ins of $150MM. 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 8. Additionally, refer to our annual consolidated financial statements for a complete presentation of our Consolidated Statements of Cash Flows. inside2012_13:Layout 1 4/3/13 11:52 AM Page 1 ABOUT HENRY SCHEIN Henry Schein, Inc. is the world’s largest provider of health care products and services to office-based dental, medical and animal health practitioners. The Company also serves dental laboratories, government and institutional health care clinics, and other alternate-care sites. A Fortune 500® Company and a member of the NASDAQ 100® Index, Henry Schein employs more than 15,000 Team Schein Members and serves more than 775,000 customers. The Company offers a comprehensive selection of products and services, including value-added solutions for operating efficient practices and delivering high-quality care. Henry Schein operates through a centralized and automated distribution network, with a selection of more than 96,000 branded products and Henry Schein private-brand products in stock, as well as more than 110,000 additional products available as special-order items. The Company also offers its customers exclusive, innovative technology solutions, including practice management software and e-commerce solutions, as well as a broad range of financial services. Headquartered in Melville, New York, Henry Schein has operations or affiliates in 25 countries. The Company’s sales reached a record $8.9 billion in 2012, and have grown at a compound annual rate of 17 percent since Henry Schein became a public company in 1995. For more information, visit the Henry Schein Web site at www.henryschein.com. (As of March 2013) About the cover theme: Henry Schein is “helping health happen” through the integrated solutions that we offer to our dental, medical and animal health customers around the world. By sharing our customers’ patient-centric perspective and focusing not on individual products, but on creating tailored solutions that meet our customers’ unique practice needs, we are establishing Henry Schein as the “go-to” company for our constituencies– a valuable long-term business partner that thinks globally and acts locally. HENRY SCHEIN ANNUAL REPORT 1 inside2012_13:Layout 1 4/3/13 11:52 AM Page 2 HENRY SCHEIN AT A GLANCE HENRY SCHEIN GLOBAL BUSINESS UNITS: DENTAL (cid:129) 53.4% of total net sales (cid:129) Serves office-based dental practitioners, schools and other institutions ANIMAL HEALTH (cid:129) 26.0% of total net sales (cid:129) Serves animal health practices and clinics MEDICAL (cid:129) 17.4% of total net sales (cid:129) Serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions TECHNOLOGY & VALUE-ADDED SERVICES (cid:129) 3.2% of total net sales (cid:129) Offerings include practice management software systems for dental and medical practitioners and animal health clinics. Our value-added practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, plus continuing education services for practitioners. 2012 GLOBAL NET SALES $8.9 Billion 53.4% DENTAL 26.0% ANIMAL HEALTH 17.4% MEDICAL 3.2% TECHNOLOGY & VALUE-ADDED SERVICES WORLDWIDE MARKETING AND OPERATIONAL EXCELLENCE: (cid:129) 3,300 Field Sales Consultants (cid:129) 1,650 Telesales Representatives (cid:129) Average of 120,000 Cartons Shipped Daily (cid:129) 99.9% Order Accuracy (cid:129) 31.6 Million Direct Marketing Pieces Distributed in 2012 (cid:129) 99% Order Fulfillment Rate; (cid:129) 187 Equipment Sales and Service Centers (cid:129) 67 Distribution Centers Orders Shipped Same Day; Orders Delivered in 2 Days (cid:129) 4.5 Million Square Feet of Space in Distribution Centers (cid:129) 91% Orders Delivered Next Day HENRY SCHEIN’S MISSION STATEMENT: To provide innovative, integrated health care products and services; and to be trusted advisors and consultants to our customers–enabling them to deliver the best quality patient care and enhance their practice management efficiency and profitability. 2 inside2012_13:Layout 1 4/3/13 11:53 AM Page 3 TO OUR SHAREHOLDERS In 2012, we celebrated 80 years in business by continuing the work of reinvention that is the hallmark of Henry Schein. Ever since Henry and Esther Schein founded our company in 1932, we have committed ourselves to continuously adapting our business model to remain relevant to the customers we serve. In 2012, we took another step in our journey of reinvention with the implementation of our 2012–2014 Strategic Plan. We established three global business lines: Dental, Animal Health and Medical, each supported by our Technology and Value-Added Services group. This change sharpened our customer focus in each market we serve and more tightly integrated the management of our operations across borders. I am pleased to report that we gained market share in each business last year, with strong domestic results across the board and despite some challenges in certain overseas markets. Another hallmark of Henry Schein is consistent growth in key financial and company metrics, and 2012 was no exception: (cid:129) We posted record net sales of $8.9 billion and record adjusted net income of $398.6 million, or $4.44 per diluted share; (cid:129) We expanded operating margin by 41 basis points, excluding the impact of acquisitions made during the year; (cid:129) We achieved our annual stated goal of generating operating cash flow in excess of adjusted net income attributable to Henry Schein, Inc.; (cid:129) We passed the 1 million mark in terms of the number of dental, medical, and animal health practitioners, operating out of more than 775,000 practices that we serve worldwide; and (cid:129) Underscoring our commitment to returning cash to shareholders, we spent $300 million to repurchase over 3.9 million shares of our common stock, and, in November, our Board of Directors authorized the repurchase of up to an additional $300 million of shares. HENRY SCHEIN ANNUAL REPORT 3 inside2012_13:Layout 1 4/3/13 11:53 AM Page 4 TO OUR SHAREHOLDERS (CONTINUED) Beyond our financial results, veterinary surgeons in the U.K.; 2012 also was a year of significant 2012 was notable for the external AUV Veterinary Services, the evolution for our company as a recognition of our growth and leading distributor serving leading contributor to the global success. We continued our steady animal health practitioners in dialogue on prevention and climb up the Fortune 500, reaching the Netherlands and Belgium; wellness. We shared our views on #303, and we were ranked #10 C&M Vetlink, which expanded our expanding access to health care and on the Barron’s 500, an exclusive animal health presence to Ireland; the importance of public-private listing of the 500 largest publicly and Accord, a full-service dental partnerships with a variety of traded companies in the U.S. provider in Thailand. We acquired audiences, including the World and Canada, as measured by a Modern Laboratory Services, which Economic Forum at Davos; combination of revenue growth, cash strengthened our U.S. physician the Global Conference for Social flow growth and investment return. office laboratory presence, and we Change; and the Alliance for We also enjoyed growth in the important category of Team Schein. We welcomed Carol Raphael to our Board of Directors, and we completed a number of strategic transactions during 2012 involving each of our global businesses. bolstered our product offering by Oral Health Across Borders, acquiring Ortho Technology, which among other venues. enhanced our position in the dental specialty market. We also acquired a majority interest in the Exan Group, a leading Canadian developer of software for dental schools. We continued our deep commitment to social responsibility, ranking #1 overall in our industry in Fortune’s 2012 list of the World’s Most Admired Companies, and #1 in We expanded our market presence Henry Schein now has more than the industry in the categories of by welcoming Team Schein Members 15,000 Team Schein Members corporate social responsibility, from Veterinary Instrumentation, around the world, connecting 3,000 global competitiveness, quality of the leading supplier of surgical supplier partners to more than 775,000 management, quality of products/ instruments and implants to customers in over 190 countries. services and long-term investment. Examples of how we partner with our customers to help them achieve their goals: ““After 5 years as a missionary dentist in Hong Kong, I moved back to New England a Camlog implant course, I met a Henry Schein Equipment Sales Specialist, who a beautiful setting, I quickly found that the space was limiting the equipment and of our space while introducing new technology to help me run a more profitable and purchased an established dental practice housed in a historic farmhouse. While services I could offer, as well as the number of staff I could bring on. While attending business. In addition, Henry Schein’s Financial Services team was a partner in helping was also trained as an architect. He had a clear vision of how to improve the efficiency me fulfill my aspiration to design and equip a state-of-the-art practice to best serve my patients. Today, our office showcases its past alongside modern technology and equipment thanks to Henry Schein’s knowledge, design expertise and business counsel. New patient traffic is already up 15 percent from last year.” Dr. Ron Holiman, Plaistow, New Hampshire 4 inside2012_13:Layout 1 4/3/13 11:53 AM Page 5 TO OUR SHAREHOLDERS (CONTINUED) In 2012, we were also named to business involves the value-added customers and the most valuable Ethisphere’s list of the World’s Most distribution of products and customer to our supplier partners. Ethical Companies for the first services, if you look a little deeper, time, which honors companies that you will see that we are providing raise the bar for ethical standards solutions to our customers’ through exemplary ethical clinical and business challenges. leadership, worldwide business Importantly, this solutions-based standards and commitment to approach extends to our corporate social responsibility. relationships with our supplier Our financial success, and the partners, as well. external recognition of that success, Providing solutions is a dynamic reinforces our dedication to our process that varies geographically corporate mission: improving and by customer type. In certain the efficiency of our health care markets and with certain customers so they can improve the customers, our work is focused lives of their patients. On a global on helping to navigate through basis, Henry Schein upholds an strong macroeconomic headwinds, unwavering commitment to the while elsewhere our focus is on success of our customers, which, in enhancing growth and profitability. turn, contributes to the health and Yet, regardless of the circumstances, well-being of their patients and, during the past 80 years, Henry ultimately, to the success of our Schein has built a reputation as a company. While on the surface our reliable and trusted advisor to our As we look forward to the future with confidence, we will continue to strive to provide our shareholders with an excellent return on investment and to ensure that Team Schein remains the most important asset in our values-based culture. On behalf of our Board of Directors and my Team Schein colleagues, thank you for your continued support. Sincerely, Stanley M. Bergman Chairman of the Board and Chief Executive Officer “ “ “The Carolina Center for Occupational Health provides occupational “Greencross Ltd. is the largest veterinary group in Australia, with over 86 and correctional medicine in South Carolina. We rely on Henry Schein veterinary hospitals including specialty, emergency and general practices, for its high-tech, enterprise-wide solutions for inventory and materials as well as two veterinary pathology laboratories. Team members from management. These tools help us track our medical inventory on a Henry Schein Provet’s (HSP) operational team help with inventory real-time basis and ensure that we have critical supplies at all times management in all our hospitals including assisting with stock takes, to meet the needs of our population. Equally as important, Henry barcoding stock on shelves in clinics, and providing scanners and an Schein’s tools and expertise have saved us time and money with a fully IT platform to help manage our stock more effectively and efficiently. automated system to ensure that our medical inventory practices are The HSP education unit personnel have been exceptional in providing held to the highest standard. At our last Immigration and Customs resources, content and administrative support for our Certificate II and IV inspection, the inspector said that our implementation of inventory Veterinary nursing participants, as well as workshops for our nurses and solutions should be held as the gold standard for other sites.” practice managers. The relationship between Greencross and HSP is Herbert Drayton III, Vice President & Health Services Administrator exceptionally strong and goes deeper than business synergies.” for the Carolina Center for Occupational Health Dr. Glen Richards, Managing Director, Greencross Ltd. HENRY SCHEIN ANNUAL REPORT 5 inside2012_13:Layout 1 4/3/13 11:53 AM Page 6 HENRY SCHEIN CARES Corporate Social Responsibility– Creating Shared Value As a company committed to “doing well by doing good,” Henry Schein strives to do its part to improve the world’s economic, social and environmental condition. Henry Schein’s commitment to its supplier partners, customers, Team Schein Members and investors enables the Company to effectively serve a fifth constituency – society – through Henry Schein Cares. In this way, we pursue the creation of shared value for the benefit of all. Henry Schein is a Fortune “World’s Most Admired Company” and ranks first in its industry for social responsibility. The Company is also one of Ethisphere’s “World’s Most Ethical Companies.” Access to Care – As a catalyst to create collaborative public-private materials used for packing, shipping and marketing. Corporate Governance – Henry Schein’s requirements for ethical behavior and strong corporate partnerships, Henry Schein is governance are driven from the most helping to increase access to health care among underserved populations senior executive levels and instilled throughout the organization. The around the world by advancing Company’s Worldwide Business prevention and wellness; building Standards emphasize the requirement health care capacity; and strengthening for uncompromising honesty, integrity emergency preparedness and relief. and ethical behavior globally. Environment – The Company continually seeks opportunities By engaging Team Schein Members to expand access to health care, to reduce its carbon footprint and promote environmental sustainability, minimize use of natural resources. and ensure accountability and best Henry Schein is implementing practices in dealing with customers, conservation efforts throughout the suppliers and investors, Henry organization, with a strong focus on Schein is serving society and minimizing energy consumption and “doing well by doing good.” Henry Schein Cares Foundation Health Kit Outreach Program Think Pink, Practice Pink Program Healthy Lifestyles, Healthy Communities Program Product Donations for Washoe County Sheriff’s Office Non-Profit K-9 Unit American Dental Association’s Give Kids A Smile Program Back To School Program Henry’s Angels Support EllenorLions Hospices Holiday Cheer for Children Program 6 inside2012_13:Layout 1 4/3/13 11:53 AM Page 7 EXECUTIVE OFFICERS AND BOARD OF DIRECTORS Stanley M. Bergman Chairman of the Board, Chief Executive Officer; Director Gerald A. Benjamin Executive Vice President, Chief Administrative Officer; Director James P. Breslawski President, Chief Operating Officer, Henry Schein, Inc.; Chief Executive Officer, Henry Schein Global Dental Group; Director Leonard A. David Senior Vice President, Chief Compliance Officer James Harding Senior Vice President, Chief Technology Officer Stanley Komaroff Senior Advisor Mark E. Mlotek Executive Vice President, Chief Strategic Officer; Director Steven Paladino Executive Vice President, Chief Financial Officer; Director Michael Racioppi Senior Vice President, Chief Merchandising Officer Lonnie Shoff President, Chief Executive Officer, Global Animal Health and Strategic Partnership Group Michael Zack President, International Group Barry J. Alperin Retired Vice Chairman, Hasbro, Inc.; Director - (1) (2) (3) Paul Brons Former Member, Board of Management, Akzo Nobel, N.V.; Director - (4) Donald J. Kabat Retired Partner, Accenture, Ltd.; Director - (1) (2) Philip Laskawy Retired Chairman, Ernst & Young LLP; Lead Director - (1) (3) (4) Karyn Mashima Private Consultant; Former Senior Vice President, Strategy and Technology, Avaya; Director - (4) Norman S. Matthews Former President, Federated Department Stores, Inc.; Director - (2) (4) Carol Raphael Former President and CEO, Visiting Nurse Service of New York; Director Bradley T. Sheares, Ph.D. Former CEO, Reliant Pharmaceuticals; Former President of U.S. Human Health, Merck & Co.; Director - (4) Louis W. Sullivan, M.D. Former U.S. Secretary of Health and Human Services; Founding Dean, Director and President Emeritus of the Morehouse School of Medicine; Director - (3) (4) (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Nominating and Governance Committee (4) Member of Strategic Advisory Committee HENRY SCHEIN ANNUAL REPORT 7 inside2012_13:Layout 1 4/3/13 11:53 AM Page 8 NON-GAAP DISCLOSURES The following table sets forth, for the applicable periods, a reconciliation of operating income attributable to Henry Schein, Inc. adjusted to reflect the effects of restructuring costs. Operating income, as reported Operating margin, as reported Adjustments: Restructuring costs (1) Adjusted operating income Adjusted operating margin Income attributable to Henry Schein, Inc.: As reported Adjustments, net of tax: Restructuring costs (1) D Years Ended December 29, 2012 December 25, 2010 December 27, 2008 (in thousands, except per share data) $ 618,961 $ 521,131 $ 419,286 6.9% 6.9% 6.6% $ 15,192 $ 12,285 23,240 $ 634,153 $ 533,416 $ 442,526 7.1% 7.1% 6.9% $ 388,076 $ 325,789 $ 247,347 $ 10,537 $ 8,260 15,991 Adjusted income attributable to Henry Schein, Inc.: $ 398,613 $ 334,049 $ 266,383 Diluted earnings per share attributable to Henry Schein, Inc.: As reported Adjusted $ $ 4.32 4.44 $ $ 3.49 3.58 $ $ 2.71 2.92 Diluted weighted-average common shares outstanding: 89,823 93,268 91,221 2 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 attributable to Henry Schein, Inc. and diluted earnings 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 restructuring costs. We eliminated the effect of restructuring costs to assist in evaluating the underlying operational performance of our business, excluding such costs, 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 2012 and 2010, we recorded restructuring costs of $15.2 million pre-tax ($10.5 million post-tax) and $12.3 million pre-tax ($8.3 million post-tax), respectively. The effect that these charges had on earnings per diluted share attributable to Henry Schein, Inc. was ($0.12) and ($0.09), respectively. 8 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 29, 2012 __ 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 Common Stock, par value $.01 per share Name of each exchange on which registered 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. __ 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 30, 2012, was approximately $6,978,125,000. As of February 4, 2013, there were 87,573,322 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 29, 2012) are incorporated by reference in Part III hereof. Documents Incorporated by Reference: TABLE OF CONTENTS Page Number PART I. ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. Business ............................................................................................................................................ Risk Factors ...................................................................................................................................... Unresolved Staff Comments ............................................................................................................. Properties .......................................................................................................................................... Legal Proceedings ............................................................................................................................. Mine Safety Disclosures ................................................................................................................... PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. 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 ............................................................................................................................. PART III ITEM 10. ITEM 11. ITEM 12. Directors, Executive Officers and Corporate Governance ................................................................ Executive Compensation .................................................................................................................. Security Ownership of Certain Beneficial Owners and Management ITEM 13. ITEM 14. and Related Stockholder Matters ................................................................................................. Certain Relationships and Related Transactions, and Director Independence .................................. Principal Accountant Fees and Services ........................................................................................... PART IV ITEM 15. Exhibits, Financial Statement Schedules .......................................................................................... Signatures ......................................................................................................................................... Exhibit Index .................................................................................................................................... 3 17 27 28 28 28 29 32 34 56 57 103 103 105 105 105 106 106 106 107 108 111 2 ITEM 1. Business General PART I We believe we are the world’s largest provider of health care products and services primarily to office-based dental, medical and animal health care practitioners. We serve over 775,000 customers worldwide, including dental practitioners and laboratories, physician practices and animal health clinics, as well as government, institutional health care clinics and other alternate care clinics. We believe that we have a strong brand identity due to our more than 80 years of experience distributing health care products. We are headquartered in Melville, New York, employ more than 15,000 people (of which nearly 7,000 are based outside the United States) and have operations or affiliates in 25 countries, including the United States, Australia, Austria, Belgium, Canada, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Luxembourg, Mauritius, the Netherlands, New Zealand, Portugal, Slovakia, Spain, Switzerland, Thailand, Turkey and the United Kingdom. We offer a comprehensive selection of products and services and value-added solutions for operating efficient practices and delivering high quality care. We operate through a centralized and automated distribution network with a selection of more than 96,000 branded products and Henry Schein private brand products in stock, as well as more than 110,000 additional products available as special order items. We also offer our customers exclusive, innovative technology solutions, including practice management software and e-commerce solutions, as well as a broad range of financial services. We have established approximately four million square feet of space in 67 strategically located distribution centers around the world 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: (i) health care distribution and (ii) technology and value-added services. These segments offer different products and services to the same customer base. The health care distribution reportable segment aggregates our global dental, medical and animal health 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 global dental group serves office-based dental practitioners, schools and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global animal health group serves animal health practices and clinics. Our global technology and value-added services group provides software, technology and other value-added services to health care practitioners. Our technology group offerings include practice management software systems for dental and medical practitioners and animal health clinics. Our value-added practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, plus continuing education services for practitioners. Industry The health care products distribution industry, as it relates to office-based health care practitioners, is highly fragmented and diverse. This industry, which encompasses the dental, medical and animal health markets, was estimated to produce revenues of approximately $30 billion in 2012 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. 3 Due in part to the inability of office-based health care practitioners to store and manage large quantities of supplies in their offices, the distribution of health care supplies and small equipment to office-based health care 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 health care practice are typically made by the practitioner or an administrative assistant. Supplies and small equipment are generally purchased from more than one distributor, with one generally serving as the primary supplier. The health care products distribution industry continues to experience growth due to the aging population, increased health care 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 health care 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 health care supplies and equipment is highly competitive. Many of the health care 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 Patterson Veterinary Supply 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 Carestream Health, Inc. and the Patterson Dental division of Patterson Companies, Inc. The medical practice management and electronic medical records market is very fragmented and 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 Patterson Veterinary Supply 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, Thailand, Turkey and the United Kingdom. Significant price reductions by our competitors could result in a similar reduction in our prices. Any of these competitive pressures may materially adversely affect our operating results. 4 Competitive Strengths We have more than 80 years of experience in distributing products to health care practitioners resulting in strong awareness of the “Henry Schein” brand. Our competitive strengths include: A focus on meeting our customers’ unique needs. We are committed to providing customized solutions to our customers that are driven by our understanding of the market and reflect the technology-driven products and services best suited for their practice needs. 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 3,300 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 2012, we distributed approximately 31.6 million pieces of direct marketing material, including catalogs, flyers, order stuffers and other promotional materials to existing and potential office-based health care customers. • Telesales. We support our direct marketing effort with approximately 1,650 inbound and outbound telesales representatives, who facilitate order processing and generate new sales through direct and frequent contact with customers. • Electronic commerce solutions. We provide our customers and sales teams with innovative and competitive Internet, PC and mobile e-commerce solutions. • Social media. Our operating entities and employees engage our customers and supplier partners through various social media platforms. 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 96,000 Stock Keeping Units, or SKUs, to our customers. Of the SKUs offered, approximately 51,000 are offered to our dental customers, approximately 39,000 to our medical customers and approximately 15,500 to our animal health customers. We offer over 110,000 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 solutions provide practitioners with electronic medical records, patient treatment history, billing, accounts receivable analyses and management, appointment calendars, electronic claims processing and word processing programs. As of December 29, 2012, we have an active user base of more than 75,000 practices, including Dentrix®, Easy Dental®, Oasis®, Evolution® and EXACT®, Power Practice Px, AxiUm, EndoVision, PerioVision, OMSVision and ViiveTM for dental practices, MicroMD® for physician practices and Advantage+, AVImark®, DVM Manager®, Infinity, Sunpoint, Triple Crown® and Vetech Advantage for animal health practices. • Repair services. We have 187 equipment sales and service centers worldwide that provide a variety of repair, installation and technical services for our health care 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 more efficiently 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 our customers 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. We ship an average of approximately 120,000 cartons daily. Approximately 99% of items ordered 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 health care products. We continuously evaluate our purchase requirements and suppliers’ offerings and prices in order to obtain products at the lowest possible cost. In 2012, our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 37% and 7%, 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 health care distribution and technology reportable segments. Certain prior period amounts have been reclassified to conform to the current period presentation: Health care distribution: Dental products (1) .......................................................................... Medical products (2) ....................................................................... Animal health products (3) ............................................................. 53.4 17.4 26.0 Total health care distribution ...................................................... 96.8 55.9 17.6 23.6 97.1 58.7 18.2 20.4 97.3 2012 2011 2010 Technology: Software and related products and other value-added products (4) ........................................... 3.2 2.9 2.7 Total ........................................................................................................ 100.0 % 100.0 % 100.0 % (1) Includes infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants, gypsum, acrylics, articulators, abrasives, dental chairs, delivery units and lights, X-ray supplies and equipment, equipment repair and high-tech equipment. (2) Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products, equipment and vitamins.  (3) Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment. (4) Includes software and related products and other value-added products, including financial products and other services, including e-services and continuing education services for practitioners. Business Strategy Our objective is to continue to expand as a global value-added provider of health care products and services to office-based dental, medical and animal health care 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 775,000 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 in all of our operating segments. In the dental business, we provide products and services to traditional dental practices as well as new emerging segments, such as dental support organizations and community health centers. Leveraging our unique assets and capabilities, we offer solutions to address these new markets. In the medical business, we have expanded to serve customers located in settings outside of the traditional office, such as urgent care clinics, retail and occupational health settings. As settings of health care shift, we remain committed to serving these practitioners and providing them with the products and services they need. 7 • Leverage our value-added products and services. We continue to increase cross-selling efforts for key product lines utilizing a consultative selling process. 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 health care practitioners, as well as cross-selling core products and electronic health record and practice management software. Our strategy extends to providing health systems, integrated delivery networks and other large group and multi-site health care organizations, that include physician clinics, these same value added products and services. As physicians and health systems closely align, we have increased access to opportunities for cross-marketing and selling our product and service portfolios. 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 health care services. Between 2012 and 2022, the 45 and older population is expected to grow by approximately 13%. Between 2012 and 2032, this age group is expected to grow by approximately 26%. This compares with expected total U.S. population growth rates of approximately 9% between 2012 and 2022 and approximately 18% between 2012 and 2032. In the dental industry, there is predicted to be a rise in oral health care expenditures as the 45 and older segment of the population increases. There is increasing demand for new technologies that allow dentists to increase productivity, and this is being driven in the U.S. by lower insurance reimbursement rates. 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. The animal health market, impacted by growing companion pet ownership and care, as well increased focus on safety and efficiency in livestock production, continues to provide additional growth opportunities for us. We support the animal health practitioners we serve through the distribution of biologicals, pharmaceuticals, supplies and equipment and by actively engaging in the development, sale and distribution of veterinary practice management software. Additionally, we are expanding our dental full-service model, our animal health presence and 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 190 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 health care 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: • 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; • timing of the release of upgrades and enhancements to our technology-related products and services; • 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; • costs of developing new applications and services; • exclusivity requirements with certain vendors may prohibit us from distributing competitive products manufactured by other vendors; • loss of sales representatives; • costs related to acquisitions and/or integrations of technologies or businesses; • costs associated with our self-insured medical and dental insurance programs; • general market and economic conditions, as well as those specific to the health care industry and related industries; • our success in establishing or maintaining business relationships; • 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; • increases in the cost of shipping or service issues with our third-party shippers; • restructuring costs; and • changes in accounting principles. 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 Operating, Security and Licensure Standards 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, and Section 361 of the Public Health Service Act. We are also subject to comparable foreign regulations. The Federal Food, Drug, and Cosmetic Act (“FDC 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 FDC Act also 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 and renew annually registrations from the United States Drug Enforcement Administration permitting us to handle controlled substances. We are also subject to other statutory and regulatory requirements relating to the sale, marketing, handling and distribution of such drugs, in accordance with specified rules and regulations, and these requirements have been subject to heightened enforcement activity in recent times. 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 comparable 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 inspection and 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. Furthermore, compliance with legal requirements has required and may in the future require us to institute voluntary recalls of products we sell, which could result in financial losses and potential reputational harm. Our customers are also subject to significant federal, state, local and foreign governmental regulation. 10 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, from distributors and potentially 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. The law will take effect on a staggered basis, commencing on 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 FDC Act requires certain wholesalers to provide a drug pedigree for each wholesale distribution of prescription drugs which includes an identifying statement that records the chain of ownership of a prescription drug. Currently, the United States Food and Drug Administration, in the exercise of its enforcement discretion, requires these wholesalers to maintain drug pedigrees that include transaction dates, names and addresses regarding transactions going back to either the manufacturer or the last authorized distributor of record that handled the drugs. The FDC Act also 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 continued to develop its policies in this area, such as issuing a Final Guidance in 2010 regarding standardized numerical identification for prescription drug packages, and issuing a proposed rule in July 2012 for a unique medical device identification system. Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory requirements specific to government contractors. Health Care Fraud Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations. Some of these laws-referred to as “false claims laws”- prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs. Other laws, referred to as “anti- kickback laws”, prohibit 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 federal, state and other health care payers and programs. The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “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 laws. Under the federal False Claims Act relators can be entitled to receive up to 30% of total recoveries. Also, violations of the federal False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim. The Health Care Reform Law significantly strengthened the federal False Claims Act and the anti-kickback law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal anti- kickback law violation can be a basis for federal False Claims Act liability. The government has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other. As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance. We are now engaged in discussions with the government that may lead to changes in certain of our marketing practices and, potentially, payments which we do not expect to be material. In addition, under the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the “Health Care Reform Law” (discussed in more detail in Health Care Reform, below), by the second quarter of 2014, the general public and government officials will be provided with new access to detailed information with regard to payments or other transfers of value to certain practitioners 11 (including physicians, dentists and teaching hospitals) by applicable drug and device manufacturers subject to such reporting and disclosure obligations, which is likely to include us. This information may lead to greater scrutiny, which may result in modifications to established practices and additional costs. 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, which have been the focus of increasing enforcement activity in recent years. Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse impact on our business. Also, these measures 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 or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance. While we believe that we are substantially compliant with fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response, could adversely affect our business. Health Care Reform The Health Care Reform Law also included other provisions to reduce fraud and abuse and Medicare expenditures and the cost of health care generally, to increase federal oversight of private health insurance plans and to increase access to health coverage, some of which impact and further regulate some of our businesses. In particular, a Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act, imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. Implementation had been delayed pending the issuance of applicable rules by the Centers for Medicare and Medicaid Services (“CMS”). On February 1, 2013, CMS released the final rule to implement the Physician Payment Sunshine Act. The final rule provides that data collection activities begin on August 1, 2013, and first disclosure reports are due by March 31, 2014 for the period August 1, 2013 through December 31, 2013. On or about June 1, 2014, CMS will publish information from these reports, including amounts transferred and physician, dentist and teaching hospital identities, in a national publicly available data bank. The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous, and broad in scope, and we are in the process of analyzing its application to our businesses. For example, the final rule is unclear as to whether the Physician Payment Sunshine Act requires that wholesale drug and device distributors that take title to the products they distribute, such as we generally do, are to be treated as “applicable manufacturers” subject to full reporting requirements. The CMS commentary on the final rule indicates that they are; however, this interpretation appears to be inconsistent with the language of the Physician Payment Sunshine Act itself. In addition, because certain of our subsidiaries manufacture drugs and devices, we will in any event likely be required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. The Physician Payment Sunshine Act preempts similar state reporting laws, although we or our subsidiaries may be required to continue to report under certain of such state laws. While we expect to have adequate compliance programs and controls in place to comply with the Physician Payment Sunshine Act requirements, our compliance with the new final rule is likely to pose additional costs on us. 12 On June 28, 2012, the United States Supreme Court overturned certain lower federal court decisions to uphold as constitutional a key provision in the Health Care Reform Law often referred to as the “individual mandate,” which requires individuals without health insurance to pay a penalty. However, the decision also invalidated a provision in the Health Care Reform Law requiring states to expand their Medicaid programs or risk the complete loss of all federal Medicaid funding. The Court held that the federal government may offer states the option of accepting the expansion requirement, but that it may not take away pre-existing Medicaid funds in order to coerce states into complying with the expansion. A number of states have indicated a reluctance to accept the Medicaid expansion, so the full extent of increased health care coverage under the Health Care Reform Law is uncertain. Regulated Software; Electronic Health Records The United States Food and Drug Administration, or FDA, has become increasingly active in addressing the regulation of computer software intended for use in health care settings, and has been developing policies on regulating clinical decision support tools as medical devices. Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products. 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. Failure to comply with these laws can result in substantial penalties and other liabilities. 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 Health Insurance Portability and Accountability Act of 1996 (“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. On January 17, 2013 the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements. Compliance with the rule is required by September 23, 2013, and will increase the requirements applicable to some of our businesses. In addition, federal initiatives, including in particular the HITECH Act, are providing a program of incentive payments available to certain health care providers involving the adoption and use of certain electronic health care records systems and processes. The HITECH initiative includes providing, among others, physicians and dentists, with financial incentives, if they meaningfully use certified electronic health record technology (“EHR”). Also, eligible providers that fail to adopt certified EHR systems may be subject to Medicare reimbursement reductions beginning in 2015. Qualification for the incentive payments requires the use of EHRs that are certified as having certain capabilities for meaningful use pursuant to standards adopted by the Department of Health and Human Services. Initial (“stage one”) standards addressed criteria for periods beginning in 2011. CMS has also issued a final rule with “stage two” criteria for periods beginning in 2014, which are more demanding, and new, incrementally more rigorous criteria are expected to be issued for stage “three” compliance, however, final standards have not yet been issued and so these criteria are not yet certain. Certain of our businesses involve the manufacture and sale of certified EHR systems and other products linked to incentive programs, and so must maintain compliance with these evolving governmental criteria. Also, HIPAA requires certain health care providers, such as physicians, to use certain transaction and code set rules for specified electronic transactions, such as transactions involving claims submissions. Commencing July 1, 2012, CMS required that, electronic claim submissions and related electronic transactions be conducted under a new HIPAA transaction standard, called Version 5010. CMS has required this upgrade in connection with another new requirement applicable to the industry, the implementation of new diagnostic code sets to be used in claims submission. The new diagnostic code sets are called the ICD-10-CM. They were originally to be implemented on October 1, 2013, but CMS recently issued a final rule that extended the implementation date until October 1, 2014. Certain of our businesses provide electronic practice management products that must meet those requirements, and while we believe we are prepared to timely adopt the new standards, it is possible that the transition to these new standards, particularly the transition to ICD-10-CM, may result in a degree of disruption and confusion, thus potentially increasing the costs associated with supporting this product. 13 International Transactions 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, as well as other types of requirements similar to those imposed in the United States. 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 health care 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 burdens, risks and 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 29, 2012, we employed more than 15,000 full-time employees, including approximately 1,650 telesales representatives, 3,300 field sales consultants, including equipment sales specialists, 2,925 warehouse employees, 725 computer programmers and technicians, 1,475 management employees and 5,550 office, clerical and administrative employees. Over 315 or 2.1% of our employees were subject to collective bargaining agreements. We believe that our relations with our employees are excellent. Available Information We make available free of charge through our Internet Web site, www.henryschein.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of beneficial ownership of securities on Forms 3, 4 and 5 and amendments to these reports and statements filed or furnished pursuant to Section 13(a) and Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the 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. 14       Executive Officers of the Registrant The following table sets forth certain information regarding our executive officers: Name Age Position Stanley M. Bergman ..................... 63 Gerald A. Benjamin ...................... 60 James P. Breslawski ...................... 59 Leonard A. David .......................... 64 James Harding ............................... 57 Stanley Komaroff .......................... 77 Mark E. Mlotek ............................. 57 Steven Paladino ............................. 55 Michael Racioppi .......................... 58 Lonnie Shoff ................................. 54 Michael Zack ................................ 60 Chairman, Chief Executive Officer, Director Executive Vice President, Chief Administrative Officer, Director President, Chief Operating Officer, Chief Executive Officer, Henry Schein Global Dental, Director Senior Vice President, Chief Compliance Officer Senior Vice President, Chief Technology Officer Senior Advisor Executive Vice President, Chief Strategic Officer, Director Executive Vice President, Chief Financial Officer, Director Senior Vice President, Chief Merchandising Officer President and Chief Executive Officer, Global Animal Health and Strategic Partnerships 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 is also the Chief Executive Officer of our Henry Schein Global Dental Group. 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. 15   Mark E. Mlotek has been Executive Vice President and Chief Strategic Officer since 2004. Mr. Mlotek 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 and Chief Executive Officer of the Global Animal Health and Strategic Partnerships Group since 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. 16 ITEM 1A. Risk Factors The risks described below could have a material adverse impact on our business, reputation, financial condition or the trading price of our common stock. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed below. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider not to be material to our operations. You should not consider this list to be a complete statement of all risks and uncertainties. The order in which these factors appear should not be construed to indicate their relative importance or priority. The health care 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 health care 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. 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 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. 17   We experience fluctuations in quarterly earnings. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline. Our business is subject to seasonal and other quarterly fluctuations. Net sales and operating profits generally have been higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine, equipment and software products), purchasing patterns of office-based health care 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: • 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; • timing of the release of upgrades and enhancements to our technology-related products and services; • 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; • costs of developing new applications and services; • exclusivity requirements with certain vendors may prohibit us from distributing competitive products manufactured by other vendors; • loss of sales representatives; • costs related to acquisitions and/or integrations of technologies or businesses; • costs associated with our self-insured medical and dental insurance programs; • general market and economic conditions, as well as those specific to the health care industry and related industries; • our success in establishing or maintaining business relationships; • 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; • increases in the cost of shipping or service issues with our third-party shippers; • restructuring costs; and • changes in accounting principles. 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. 18   Expansion of group purchasing organizations (“GPO”) or provider networks 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 health care providers and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Additionally, the formation of provider networks and GPOs may shift purchasing decisions to entities or persons with whom we do not have a historical relationship. 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 and seeking to develop relationships with provider networks and new GPOs, we cannot assure such terms will be obtained or contracts will be executed. 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. Uncertain global macro-economic conditions could adversely affect our results of operations and financial condition. Uncertain global macro-economic conditions that affect the economy and the economic outlook of the United States, Europe and other parts of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition. These uncertainties, including, among other things, sovereign debt levels, the inability of political institutions to effectively resolve actual or perceived economic, currency or budgetary crises or issues, consumer confidence, unemployment levels (and a corresponding increase in the uninsured and underinsured population), interest rates, availability of capital, fuel and energy costs, tax rates, health care costs and the threat or outbreak of terrorism or public unrest, could adversely impact our customers and vendors, which could adversely affect us. Government debt and/or budget crises may lead to reductions in government spending in certain countries, which could reduce overall health care spending, and/or higher income or corporate taxes, which could depress spending overall. Additionally, 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. 19   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. The health care industry is experiencing changes that could adversely affect our business. The health care industry is highly regulated and subject to changing political, economic and regulatory influences. In recent years, the health care industry has undergone significant change driven by various efforts to reduce costs, including: trends toward managed care; consolidation of health care distribution companies; consolidation of health care manufacturers; collective purchasing arrangements and consolidation among office- based health care practitioners; and changes in reimbursements to customers, as well as growing enforcement activities (and related monetary recoveries) by governmental officials. 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 health care industry, our operating results could be adversely affected. In addition, the enactment of significant health care reforms could have a material adverse effect on our businesses. The implementation of the Health Care Reform Law could adversely affect our business. The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, significantly expand health insurance coverage to uninsured Americans and changes the way health care is financed by both governmental and private payers. We expect expansion of access to health insurance to increase the demand for our products and services, but other provisions of the Health Care Reform Law could affect us adversely. Additionally, further federal and state proposals for health care reform are likely. 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. 20 The Health Care Reform Law contains many provisions designed to generate the revenues necessary to fund the coverage expansions and to reduce costs of Medicare and Medicaid, including imposing 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 that was implemented in 2011, both of which may adversely affect sales and cost of goods sold. For example, (i) where we purchase medical devices from third-party manufacturers, the manufacturers may increase their prices to cover their payment of the excise tax and our costs to purchase such medical devices may therefore increase and (ii) where we manufacture medical devices or are the importer of record, our cost of goods sold have increased because we are subject to paying the excise tax. The implementation of the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Health Care Reform Law could adversely affect our business. A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act, imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. Implementation had been delayed pending the issuance of applicable rules by the Centers for Medicare and Medicaid Services (“CMS”). On February 1, 2013, CMS released the final rule to implement the Physician Payment Sunshine Act. The final rule provides that data collection activities begin on August 1, 2013, and first disclosure reports are due by March 31, 2014 for the period August 1, 2013 through December 31, 2013. On or about June 1, 2014, CMS will publish information from these reports, including amounts transferred and physician, dentist and teaching hospital identities, in a national publicly available data bank. The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous, and broad in scope, and we are in the process of analyzing its application to our businesses. For example, the final rule is unclear as to whether the Physician Payment Sunshine Act requires that wholesale drug and device distributors that take title to the products they distribute, such as we generally do, are to be treated as “applicable manufacturers” subject to full reporting requirements. The CMS commentary on the final rule indicates that they are; however, this interpretation appears to be inconsistent with the language of the Physician Payment Sunshine Act. In addition, because certain of our subsidiaries manufacture drugs and devices, we will in any event likely be required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. The Physician Payment Sunshine Act preempts similar state reporting laws, although we or our subsidiaries may be required to continue to report under certain of such state laws. While we expect to have adequate compliance programs and controls in place to comply with the Physician Payment Sunshine Act requirements, our compliance with the new final rule is likely to pose additional costs on us. Failure to comply with existing and future regulatory requirements could adversely 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, 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 us to advertise and promote our drugs and devices in accordance with applicable United States Food and Drug Administration requirements; require registration with the United States Food and Drug Administration and the United States Drug Enforcement Administration and various state agencies; 21   • • • • 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 United States 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 health care programs, and damage our reputation. If we fail to comply with laws and regulations relating to health care fraud, we could suffer penalties or be required to make significant changes to our operations, which could adversely affect our business. We are subject to federal and state (and similar foreign) laws and regulations relating to health care fraud. Some of these laws, referred to as “false claims laws”, prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs. Other laws, referred to as “anti-kickback laws”, prohibit 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 federal, state and other health care payers and programs. Health care fraud measures may implicate, for example, our relationships with pharmaceutical manufacturers, our pricing and incentive programs for physician and dental practices, and our dental and physician practice management products that offer billing-related functionality. The government has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other. As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance. We are now engaged in discussions with the government that may lead to changes in certain of our marketing practices and, potentially, payments which we do not expect to be material. In addition, under the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Health Care Reform Law, by the second quarter of 2014, the general public and government officials will be provided with new access to detailed information with regard to payments or other transfers of value to certain practitioners (including physicians, dentists and teaching hospitals) by applicable drug and device manufacturers subject to such reporting and disclosure obligations, which is likely to include us. This information may lead to greater scrutiny, which may result in modifications to established practices and additional costs. 22   The applicable requirements have been subject to varying interpretations, as well as heightened enforcement activity, over the past few years. Also, 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 laws, and under the federal False Claims Act can be entitled to receive up to 30% of total recoveries. Violations of the federal False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim. The Health Care Reform Law significantly strengthened the federal False Claims Act and federal anti-kickback law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal anti-kickback law violation can be a basis for federal False Claims Act liability. 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, which have been the focus of increasing enforcement activity in recent years. Failure to comply with health care fraud laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse impact on our business. Also, these laws 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 or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial, regulatory authorities, increasing compliance risks. While we believe that we are substantially compliant with the foregoing laws and regulations promulgated thereunder, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response, could adversely affect our business. If we fail to comply with laws and regulations relating to the confidentiality of sensitive personal information or standards in electronic health data transmissions, we could be required to make significant changes to our products, or incur penalties or other liabilities. State, federal and foreign laws, such as the federal Health Insurance Portability and Accountability Act of 1996, regulate the confidentiality of sensitive personal information and the circumstances under which such information may be released. These measures may govern the disclosure and use of personal and patient medical record information and may require users of such information to implement specified security measures, and to notify individuals in the event of privacy and security breaches. Evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products in a timely manner to reflect these legal requirements, either of which could have an adverse impact on our results of operations. Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for specified electronic transactions, for example transactions involving claims submissions to third party payers. These also continue to evolve and are often unclear and difficult to apply. In addition, under 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 the businesses serve as “business associates” to our customers. On January 17, 2013, the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements. Compliance with the rule is required by September 23, 2013, and will increase the requirements applicable to some of our businesses. Failure to maintain the confidentiality of sensitive personal information in accordance with the applicable regulatory requirements, or to abide by electronic health data transmission standards, could expose us to breach of contract claims, fines and penalties, costs for remediation and harm to our reputation. Our global operations are subject to inherent risks that could adversely affect our operating results. Global operations are subject to risks that may materially adversely affect our business, results of operations and financial condition. The risks that our global operations are subject to include, among other things: • difficulties and costs relating to staffing and managing foreign operations; 23 • • • • • • • • • • • • • 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; anti-bribery, anti-corruption and laws pertaining to the accuracy of our internal books and records; unexpected difficulties in importing or exporting our products; imposition of import/export duties, quotas, sanctions or penalties; difficulties and delays inherent in sourcing products and contract manufacturing in foreign markets; limitations on our ability under local laws to protect our intellectual property; unexpected regulatory, legal, economic and political changes in foreign markets; civil disturbances, geopolitical turmoil, including terrorism, war or political or military coups; and public health emergencies. 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, and financial and operational controls. If we fail in any of these areas, our business could be adversely affected. 24   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 health care 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 and our reputation. 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 to satisfy customer requirements; 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. We may not be able to respond to technological change effectively. Traditional health care 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. Cyber-security risks generally associated with our information systems and our technology products and services could adversely affect our results of operations. We rely on information systems (IS) 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; 25 • receive, process and ship orders on a timely basis; • manage the accurate billing and collections for thousands of customers; • process payments to suppliers; and • maintain certain of our customers’ electronic medical records. A cyber-attack that bypasses our IS security systems causing an IS security breach may lead to a material disruption of our IS business systems and/or the loss of business information resulting in adverse business impact. Risks may include, among other things: • • • future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property; operational or business delays resulting from the disruption of IS systems and subsequent clean-up and mitigation activities; and negative publicity resulting in reputation or brand damage with our customers, partners or industry peers. Our results of operations could be adversely affected if our IS systems are interrupted, damaged by unforeseen events, cyber-attacks or fail for any extended period of time. We develop products and provide services to our customers that are technology-based. A cyber-attack that bypasses the security systems of our products or services causing a security breach and/or perceived security vulnerabilities in our products or services could cause significant reputational harm. Actual or perceived vulnerabilities may lead to claims against us by our customers and/or governmental agencies. Although our customer license agreements typically contain provisions that eliminate or limit our exposure to such liability, there is no assurance these provisions will withstand all legal challenges. Failure to maintain the confidentiality of sensitive customer data in accordance with applicable regulatory requirements, or to abide by electronic health data transmission standards, could also expose us to claims, fines and penalties and costs for remediation. Additionally, legislative or regulatory action related to cyber-security may increase our costs to develop or implement new technology products and services. We have various insurance policies, including cyber liability insurance, covering risks and in amounts that we consider adequate. 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. Successful claims for misappropriation or release of confidential or personal data brought against us in excess of available insurance or fines or other penalties assessed or any claim that results in significant adverse publicity against us, could have an adverse effect on our business and our reputation. 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 (i) remove a director; and (ii) to amend or repeal our by-laws, with certain limited exceptions. 26   In addition, our 1994 Stock Incentive Plan and 1996 Non-Employee Director Stock Incentive Plan provide for accelerated vesting of stock options upon a change in control. These incentive plans also authorize the committee under the plans to provide for accelerated vesting of other types of equity awards in connection with a change in control at grant or thereafter, and certain other awards made under these incentive plans (such as restricted stock and restricted stock unit awards) accelerate upon a change in control or upon certain termination events in connection with a change in control. Further, certain agreements between us and our executive officers provide for increased severance payments and certain benefits if those executive officers are terminated without cause by us 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 2012 fiscal year. 27   ITEM 2. Properties We own or lease the following properties with more than 100,000 square feet: Property Corporate Headquarters ........................................ Corporate Headquarters ........................................ Location Melville, NY Melville, NY Office and Distribution Center ............................. Lyssach, Switzerland Office and Distribution Center ............................. Tours, France Office and Distribution Center ............................. Niagara on the Lake, Canada Office and Distribution Center ............................. Bastian, VA Office and Distribution Center ............................. West Allis, WI Office and Distribution Center ............................. Gillingham, United Kingdom Office and Distribution Center ............................. Cuijk, Netherlands Distribution Center ............................................... Denver, PA Distribution Center ............................................... Indianapolis, IN Distribution Center ............................................... Sparks, NV Distribution Center ............................................... Indianapolis, IN Distribution Center ............................................... Grapevine, TX Distribution Center ............................................... Gallin, Germany Distribution Center ............................................... Jacksonville, FL Own or Lease Lease Own Lease Own Lease Own Lease Lease Lease Lease Lease Lease Own Lease Own Lease Approximate Square Footage Lease Expiration 185,000 105,000 180,000 161,000 Date July 2020 N/A July 2016 N/A 128,000 September 2021 108,000 N/A 106,000 October 2017 103,000 101,000 April 2020 May 2022 624,000 December 2021 380,000 February 2019 370,000 December 2016 287,000 242,000 215,000 N/A July 2018 N/A 212,000 February 2019 The properties listed in the table above are our principal properties primarily used by our health care 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, Mauritius, the Netherlands, New Zealand, Portugal, Slovakia, Spain, Switzerland, Thailand, 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, governmental inquiries and investigations 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. As of December 29, 2012, 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. Mine Safety Disclosures Not applicable. 28           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 2012 and 2011: Fiscal 2012: 1st Quarter ......................................................................................................... $ 2nd Quarter ........................................................................................................ 3rd Quarter ......................................................................................................... 4th Quarter ......................................................................................................... Fiscal 2011: 1st Quarter ......................................................................................................... $ 2nd Quarter ........................................................................................................ 3rd Quarter ......................................................................................................... 4th Quarter ......................................................................................................... High Low 77.05 $ 80.38 80.75 82.91 69.98 $ 74.48 74.98 71.13 64.74 71.97 72.84 73.35 61.26 67.21 58.50 58.56 On February 4, 2013, there were approximately 508 holders of record of our common stock and the last reported sales price was $87.14. 29   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 million of shares of our common stock, which represented approximately 3.5% of the shares outstanding at the commencement of the program. As summarized in the table below, subsequent additional increases totaling $1 billion, authorized by our Board of Directors, to the repurchase program provide for a total of $1.1 billion of shares of our common stock to be repurchased under this program. Date of Amount of Additional Authorization Repurchases Authorized October 31, 2005 $ March 28, 2007 November 16, 2010 August 18, 2011 April 18, 2012 November 12, 2012 100,000,000 100,000,000 100,000,000 200,000,000 200,000,000 300,000,000 As of December 29, 2012, we had repurchased $799.9 million of common stock (13,756,063 shares) under these initiatives, with $300.1 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 29, 2012: Total Number of Shares Fiscal Month Purchased (1) 09/30/12 through 11/03/12 11/04/12 through 12/01/12 12/02/12 through 12/29/12 281,428 230,700 546,899 1,059,027 Average Price Paid Per Share $ 77.50 78.00 81.16 Total Number  of Shares  Purchased as Part Maximum Number of Shares that May Yet of Our Publicly Be Purchased Under Announced Program 281,428   230,700   546,899   1,059,027   Our Program (2) 838,904 4,265,239 3,753,319 (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 or stock dividends on our common stock during fiscal years 2012 or 2011. We currently do not anticipate declaring any cash or stock 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. 30                                               Stock Performance Graph The graph below compares the cumulative total stockholder return on $100 invested, assuming the reinvestment of all dividends, on December 29, 2007, the last trading day before the beginning of our 2008 fiscal year, through the end of fiscal 2012 with the cumulative total return on $100 invested for the same period in the Dow Jones U.S. Health Care Index and the NASDAQ Stock Market Composite Index. COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN $135 $125 $115 $105 $95 $85 $75 $65 $55 December 2007 December 2008 December 2009 December 2010 December 2011 December 2012 Henry Schein, Inc. Dow Jones US Health Care Index NASDAQ Composite Index ASSUMES $100 INVESTED ON DECEMBER 29, 2007  ASSUMES DIVIDENDS REINVESTED December 29,  December 27, December 26, December 25,  December 31, December 29, 2007   2008 2009 2010 2011   2012 Henry Schein, Inc. .......................... $  100.00 $ 57.02 $ 85.43 $ 100.18 $ 103.84 $ 128.86 Dow Jones U.S. Health Care Index ................................... 100.00 74.56 94.05 98.01 108.79 128.17 NASDAQ Stock Market Composite Index ......................... 100.00 58.03 87.57 103.20 101.92 117.65 31                         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 29, 2012, 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 29, December 31, December 25, December 26,  December 27, Years ended 2012 2011 2010 (in thousands, except per share data)  2009   2008 Income Statement Data: Net sales ......................................................................... $ 8,939,967 $ 8,530,242 $ 7,526,790 $ 6,538,336 $ 6,380,413 Gross profit ..................................................................... Selling, general and administrative expenses ................ Restructuring costs (1) ................................................... Operating income ........................................................... Other expense, net .......................................................... Income from continuing operations before taxes and equity in earnings of affiliates ............................. Income taxes ................................................................... Equity in earnings of affiliates ....................................... Income from continuing operations ............................... Income (loss) from discontinued 2,507,513 1,873,360 15,192 618,961 (14,773) 604,188 (187,858) 7,058 423,388 2,418,055 1,835,906 - 582,149 (12,842) 569,307 (180,212) 15,561 404,656 2,170,876 1,637,460 12,285 521,131 (19,096) 502,035 (160,069) 10,165 352,131 operations, net of tax (2) ............................................ - - - Net income ..................................................................... 423,388 404,656 352,131 1,916,820 1,449,715 3,020 464,085 (11,365) 452,720 (127,521) 5,243 330,442 2,715 333,157 Less: Net income attributable to noncontrolling interests (35,312) (36,995) (26,342) (22,004) Net income attributable to Henry Schein, Inc. .............. $ 388,076 $ 367,661 $ 325,789 $ 311,153 $ 1,874,295 1,431,769 23,240 419,286 (23,837) 395,449 (131,210) 5,037 269,276 (7,902) 261,374 (21,917) 239,457 Amounts attributable to Henry Schein, Inc.: Income from continuing operations ............................. $ 388,076 $ 367,661 $ 325,789 $ 308,551 $ 247,347 Income (loss) from discontinued operations, net of tax ................................................. - - - 2,602 Net income ................................................................... $ 388,076 $ 367,661 $ 325,789 $ 311,153 $ 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: 4.44 $ 4.32 - $ - 4.44 $ 4.32 4.08 $ 3.97 - $ - 4.08 $ 3.97 3.62 $ 3.49 - $ - 3.62 $ 3.49 3.47 $ 3.41 0.03 $ 0.03 3.50 $ 3.44 (7,890) 239,457 2.78 2.71 (0.09) (0.08) 2.69 2.63 Basic ............................................................................ Diluted ......................................................................... 87,499 89,823 90,120 92,620 90,097 93,268 88,872 90,556 89,080 91,221 32                                                           December 29, December 31, December 25, 2012 2011 2010 December 26,  2009   December 27, 2008 Years ended (in thousands) Net Sales by Market Data: Health care distribution (3):  Dental ............................................................... .$ Medical ............................................................. . Animal health ................................................... . Total health care distribution ........................ . Technology and value-added services (4) .......... . 4,774,482 $ 1,560,921   2,321,151   8,656,554   283,413   4,764,898 $ 1,504,454   2,010,270   8,279,622   250,620   4,415,469 $ 1,373,999   1,537,370   7,326,838   199,952   4,177,101 $ 1,312,750   875,277   6,365,128   173,208   4,154,072 1,271,289 791,763 6,217,124 163,289 Total .............................................................. .$ 8,939,967 $ 8,530,242 $ 7,526,790 $ 6,538,336 $ 6,380,413   December 29, December 31, December 25, 2012 2011 2010 December 26,  2009   December 27, 2008 As of (in thousands) Balance Sheet data: Total assets .......................................................... .$ Long-term debt .................................................... . Redeemable noncontrolling interests .................. . Stockholders' equity ............................................ . 5,333,997 $ 488,121   435,175   2,615,864   4,740,144 $ 363,524   402,050   2,433,623   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 (1) Restructuring costs for the year ended December 29, 2012 consist primarily of severance costs, including severance pay and benefits of $12.8 million and facility closing costs of $2.4 million. Restructuring costs for the year ended December 25, 2010 consist primarily of severance costs, including severance pay and benefits of $8.9 million and facility closing costs of $3.4 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 $19.4 million and facility closing costs of $3.8 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 had 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. (3) 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. (4) Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and financial and other services, including e-services and continuing education services for practitioners. 33                                        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: effects of a highly competitive market; our dependence on third parties for the manufacture and supply of our products; our dependence upon sales personnel, customers, suppliers and manufacturers; our dependence on our senior management; fluctuations in quarterly earnings; risks from expansion of customer purchasing power and multi-tiered costing structures; possible increases in the cost of shipping our products or other service issues with our third-party shippers; general global macro-economic conditions; disruptions in financial markets; possible volatility of the market price of our common stock; changes in the health care industry; implementation of health care laws; failure to comply with regulatory requirements and data privacy laws; risks associated with our global operations; transitional challenges associated with acquisitions and joint ventures, including the failure to achieve anticipated synergies; financial risks associated with acquisitions and joint ventures; litigation risks; the dependence on our continued product development, technical support and successful marketing in the technology segment; risks from rapid technological change; risks from disruption to our information systems; 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 world’s largest provider of health care products and services primarily to office-based dental, medical and animal health care practitioners. We serve over 775,000 customers worldwide, including dental practitioners and laboratories, physician practices and animal health clinics, as well as government, institutional health care clinics and other alternate care clinics. We believe that we have a strong brand identity due to our more than 80 years of experience distributing health care products. We are headquartered in Melville, New York, employ more than 15,000 people (of which nearly 7,000 are based outside the United States) and have operations or affiliates in 25 countries, including the United States, Australia, Austria, Belgium, Canada, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Luxembourg, Mauritius, the Netherlands, New Zealand, Portugal, Slovakia, Spain, Switzerland, Thailand, Turkey and the United Kingdom. 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. 34 We conduct our business through two reportable segments: health care distribution and technology and value- added services. These segments offer different products and services to the same customer base. The health care distribution reportable segment aggregates our global dental, medical and animal health 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 global dental group serves office-based dental practitioners, schools and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global animal health group serves animal health practices and clinics. Our global technology and value-added services group provides software, technology and other value-added services to health care practitioners. Our technology group offerings include practice management software systems for dental and medical practitioners and animal health clinics. Our value-added practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, plus continuing education services for practitioners. Industry Overview In recent years, the health care 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 health care industry, including consolidation of health care distribution companies, health care 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 health care products distribution industry, as it relates to office-based health care practitioners, is highly fragmented and diverse. This industry, which encompasses the dental, medical and animal health markets, was estimated to produce revenues of approximately $30 billion in 2012 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 health care practitioners to store and manage large quantities of supplies in their offices, the distribution of health care supplies and small equipment to office-based health care 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 health care practice are typically made by the practitioner or an administrative assistant. Supplies and small equipment are generally purchased from more than one distributor, with one generally serving as the primary supplier. The trend of consolidation extends to our customer base. Health care practitioners are increasingly seeking to partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician hospital organizations. In many cases, purchasing decisions for consolidated groups are made at a centralized or professional staff level; however orders are delivered to the practitioners’ offices. 35 We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial, operating 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 health care industry. This trend has resulted in our 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. We also have invested in expanding our sales/marketing infrastructure to include a focus on building relationships with decision makers who do not reside in the office-based practitioner setting. As the health care industry continues to change, we continually evaluate possible candidates for merger and joint venture or acquisition and intend to continue to seek opportunities to expand our role as a provider of products and services to the health care 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 health care products distribution industry continues to experience growth due to the aging population, increased health care 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. According to the U.S. Census Bureau’s International Data Base, in 2012 there were more than five million Americans aged 85 years or older, the segment of the population most in need of long-term care and elder-care services. By the year 2050, that number is projected to more than triple to approximately 19 million. The population aged 65 to 84 years is projected to increase over 85% during the same time period. As a result of these market dynamics, annual expenditures for health care 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 2011-2021” indicating that total national health care spending reached approximately $2.7 trillion in 2011, or 17.9% of the nation’s gross domestic product, the benchmark measure for annual production of goods and services in the United States. Health care spending is projected to reach approximately $4.8 trillion in 2021, approximately 19.6% of the nation’s gross domestic product. 36 Government Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to extensive local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices. Additionally, government and private insurance programs fund a large portion of the total cost of medical care. Many of these laws and regulations are subject to change and may impact our financial performance. Health Care Reform For example, the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage. The Health Care Reform Law requirements include, for example 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 that was implemented in 2011, both of which may affect sales. On June 28, 2012, the United States Supreme Court upheld as constitutional a key provision in the Health Care Reform Law, often referred to as the “individual mandate,” which requires individuals without health insurance to pay a penalty. However, the decision also invalidated a provision in the Health Care Reform Law requiring states to expand their Medicaid programs or risk the complete loss of all federal Medicaid funding. The Court held that the federal government may offer states the option of accepting the expansion requirement, but that it may not take away pre- existing Medicaid funds in order to coerce states into complying with the expansion. A number of states have indicated a reluctance to accept the Medicaid expansion, so the full extent of increased health care coverage under the Health Care Reform Law is uncertain. A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act, imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. Implementation had been delayed pending the issuance of applicable rules by the Centers for Medicare and Medicaid Services (“CMS”). On February 1, 2013, CMS released the final rule to implement the Physician Payment Sunshine Act. The final rule provides that data collection activities begin on August 1, 2013, and first disclosure reports are due by March 31, 2014 for the period August 1, 2013 through December 31, 2013. On or about June 1, 2014, CMS will publish information from these reports, including amounts transferred and physician, dentist and teaching hospital identities, in a national publicly available data bank. The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous, and broad in scope, and we are in the process of analyzing its application to our businesses. For example, the final rule is unclear as to whether the Physician Payment Sunshine Act requires that wholesale drug and device distributors that take title to the products they distribute, such as we generally do, are to be treated as “applicable manufacturers” subject to full reporting requirements. The CMS commentary on the final rule indicates that they are; however, this interpretation appears to be inconsistent with the language of the Physician Payment Sunshine Act itself. In addition, because certain of our subsidiaries manufacture drugs and devices, we will in any event likely be required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. The Physician Payment Sunshine Act preempts similar state reporting laws, although we or our subsidiaries may be required to continue to report under certain of such state laws. While we expect to have adequate compliance programs and controls in place to comply with the Physician Payment Sunshine Act requirements, our compliance with the new final rule is likely to pose additional costs on us. 37 Health Care Fraud Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws, and regulations with respect to their operations. Some of these laws, referred to as “false claims laws” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs. Other laws, referred to as “anti- kickback laws”, prohibit 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 federal, state and other health care payers and programs. The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “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 laws. Under the federal False Claims Act relators can be entitled to receive up to 30% of total recoveries. Also, violations of the federal False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim. The Health Care Reform Law significantly strengthened the federal False Claims Act and the anti-kickback law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal anti- kickback law violation can be a basis for federal False Claims Act liability. The government has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other. As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance. In addition, under the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the “Health Care Reform Law,” discussed in more detail in Health Care Reform, above, by the second quarter of 2014, the general public and government officials will be provided with new access to detailed information with regard to payments or other transfers of value to certain practitioners (including physicians, dentists and teaching hospitals) by applicable drug and device manufacturers subject to such reporting and disclosure obligations, which is likely to include us. This information may lead to greater scrutiny, which may result in modifications to established practices and additional costs. 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, which have been the focus of increasing enforcement activity in recent years. Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse impact on our business. Also, these measures 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 or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance. While we believe that we are substantially compliant with fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response, could adversely affect our business. 38 Operating and Security Standards At the federal level, the Federal Food, Drug, and Cosmetic Act, or FDC Act, requires certain wholesalers to provide a drug pedigree for each wholesale distribution of prescription drugs, which includes an identifying statement that records the chain of ownership of a prescription drug. Currently, the United States Food and Drug Administration, in exercise of its enforcement discretion, requires these wholesalers to maintain drug pedigrees that include transaction dates, names and addresses regarding transactions going back to either the manufacturer or the last authorized distributor of record that handled the drugs. The United States Food and Drug Administration, or FDA, has continued to develop its policies regarding the integrity of the supply chain, such as by issuing a Final Guidance in 2010 regarding standardized numerical identification for prescription drug packages, and by issuing a proposed rule in 2012 for a unique medical device identification system. Many states have implemented or are considering similar drug pedigree laws and regulations. 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. A number of states, including Florida, have already implemented pedigree requirements, including drug tracking requirements, which are intended to protect the integrity of the pharmaceutical distribution system. California has enacted a statute that, beginning in 2015, will require manufacturers to identify each package of a prescription pharmaceutical with a standard, machine-readable unique 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. The law will take effect on a staggered basis, commencing on January 1, 2015 for pharmaceutical manufacturers, and July 1, 2016 for pharmaceutical wholesalers and repackagers. Other states have passed or are reviewing similar requirements. Bills have been proposed in Congress that would impose similar requirements at the federal level. The Combat Methamphetamine Enhancement Act of 2010, which became effective in April 2011, requires retail sellers of products containing certain chemicals, such as pseudoephedrine, to self-certify to the Drug Enforcement Administration (“DEA”) that they understand and agree to comply with the laws and regulations regarding such sales. The law also prohibits distributors from selling these products to retailers who are not registered with the DEA or who have not self-certified compliance with the laws and regulations. Various states also impose restrictions on the sale of certain products containing pseudoephedrine and other chemicals. The Secure and Responsible Drug Disposal Act of 2010, signed by President Obama in October 2010, is intended to allow patients to deliver unused controlled substances to designated entities to more easily and safely dispose of controlled substances while reducing the chance of diversion. The law authorizes the DEA to promulgate regulations to allow, but not require, designated entities to receive unused controlled substances. Regulated Software; Electronic Health Records The FDA has become increasingly active in addressing the regulation of computer software intended for use in health care settings, and has been developing policies on regulating clinical decision support tools as medical devices. Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products. 39 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, such as the privacy and security provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended, and implementing regulations (“HIPAA”). HIPAA requires, 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. Failure to comply with these laws and regulations can result in substantial penalties and other liabilities. As a result of the federal Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was enacted in 2009, some of our businesses that were previously only indirectly affected by 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. On January 17, 2013, the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements. Compliance with the rule is required by September 23, 2013, and will increase the requirements applicable to some of our businesses. In addition, federal initiatives, including in particular the HITECH Act, are providing a program of incentive payments available to certain health care providers involving the adoption and use of certain electronic health care records systems and processes. The HITECH initiative includes providing, among others, physicians and dentists, with financial incentives if they meaningfully use certified electronic health record technology (“EHR”). Also, eligible providers that fail to adopt certified EHR systems may be subject to Medicare reimbursement reductions beginning in 2015. Qualification for the incentive payments requires the use of EHRs that are certified as having certain capabilities for meaningful use pursuant to standards adopted by the Department of Health and Human Services. Initial (“stage one”) standards addressed criteria for periods beginning in 2011. CMS has also issued a final rule with “stage two” criteria for periods beginning in 2014, which are more demanding, and new, incrementally more rigorous criteria are expected to be issued for stage “three” compliance, however final standards have not yet been issued and so these criteria are not yet certain. Certain of our businesses involve the manufacture and sale of certified EHR systems, and other products linked to incentive programs, and so must maintain compliance with these evolving governmental criteria. Also, HIPAA requires certain health care providers, such as physicians, to use certain transaction and code set rules for specified electronic transactions, such as transactions involving claims submissions. Commencing July 1, 2012, CMS required that electronic claim submissions and related electronic transactions be conducted under a new HIPAA transaction standard, called Version 5010. CMS has required this upgrade in connection with another new requirement applicable to the industry, the implementation of new diagnostic code sets to be used in claims submission. The new diagnostic code sets are called the ICD-10-CM. They were originally to be implemented on October 1, 2013, but CMS recently issued a final rule that extended the implementation date until October 1, 2014. Certain of our businesses provide electronic practice management products that must meet those requirements, and while we believe that we are prepared to timely adopt the new standards, it is possible that the transition to these new standards, particularly the transition to ICD-10-CM, may result in a degree of disruption and confusion, thus potentially increasing the costs associated with supporting this product. There may be additional legislative initiatives in the future impacting health care. E-Commerce Electronic commerce solutions have become an integral part of traditional health care supply and distribution relationships. Our distribution business is characterized by rapid technological developments and intense competition. The continuing advancement of online commerce requires 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 significant aspect of the distribution business. We continue to explore ways and means to improve and expand our Internet presence and capabilities, including our online commerce offerings and our use of various social media outlets. 40 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 29, 2012, December 31, 2011 and December 25, 2010 (in thousands): Years Ended December 29, December 31, December 25, 2012 2011 2010 Operating results: Net sales .................................................................................................. $ Cost of sales ............................................................................................ Gross profit ......................................................................................... Operating expenses: Selling, general and administrative ..................................................... Restructuring costs .............................................................................. Operating income ........................................................................... $ 8,939,967 $ 6,432,454 2,507,513 8,530,242 $ 6,112,187 2,418,055 1,873,360 15,192 618,961 $ 1,835,906 - 582,149 $ 7,526,790 5,355,914 2,170,876 1,637,460 12,285 521,131 Other expense, net ................................................................................... $ Net income .............................................................................................. Net income attributable to Henry Schein, Inc. ........................................ (14,773) $ 423,388 388,076 (12,842) $ 404,656 367,661 (19,096) 352,131 325,789 Years Ended December 29, December 31, December 25, 2012 2011 2010 Cash flows: Net cash provided by operating activities ............................................... $ Net cash used in investing activities ........................................................ Net cash used in financing activities ....................................................... 408,099 $ (269,604) (170,601) 554,625 $ (193,222) (357,214) 395,480 (387,623) (330,643) Plans of Restructuring During the year ended December 29, 2012, we incurred restructuring costs of approximately $15.2 million (approximately $10.5 million after taxes) consisting of employee severance pay and benefits related to the elimination of approximately 200 positions, facility closing costs, representing primarily lease terminations and asset write-off costs, and outside professional and consulting fees directly related to the restructuring plan. This restructuring program is complete and we do not expect any additional costs from this program. We expect that the majority of these costs will be paid in 2013. During the year ended December 25, 2010, we recorded restructuring costs of approximately $12.3 million (approximately $8.3 million after taxes). 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. 41 2012 Compared to 2011 Net Sales Net sales for 2012 and 2011 were as follows (in thousands): Health care distribution (1): Dental ...................................................... $ Medical .................................................... Animal health .......................................... Total health care distribution ................ Technology and value-added services (2) ...... Total ..................................................... $ 2012 % of Total 2011 % of Total Increase $ % 4,774,482 1,560,921 2,321,151 8,656,554 283,413 8,939,967 53.4 % $ 17.4 26.0 96.8 3.2 100.0 % $ 4,764,898 1,504,454 2,010,270 8,279,622 250,620 8,530,242 55.9 % $ 17.6 23.6 97.1 2.9 100.0 % $ 9,584 56,467 310,881 376,932 32,793 409,725 0.2 % 3.8 15.5 4.6 13.1 4.8 (1) 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. (2) Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and financial services, including e-services and continuing education services for practitioners. The fiscal year ended December 29, 2012 consisted of 52 weeks as compared to the fiscal year ended December 31, 2011, which consisted of 53 weeks. Beginning with the first quarter of 2012, we have reported net sales and prior-year sales comparisons for each of our global dental, medical, animal health and global technology and value-added services business groups. This sales reporting is consistent with our global business groups as realigned in 2012. These groups were formed to provide distinct organizational focus for reaching and serving each practitioner segment with the benefits of a global perspective, as well as global product and service offerings and best practices. We will continue to report financial results for our health care distribution and technology and value-added services reportable segments. The health care distribution segment comprises three global operating segments (dental, medical and animal health) and the technology and value-added services segment remains unchanged. The $409.7 million, or 4.8%, increase in net sales for the year ended December 29, 2012 includes an increase of 6.7% local currency growth (5.1% increase in internally generated revenue, 1.5% decrease due to the impact from extra week and 3.1% growth from acquisitions) as well as a decrease of 1.9% related to foreign currency exchange. The $9.6 million, or 0.2%, increase in dental net sales for the year ended December 29, 2012 includes an increase of 2.5% in local currencies (2.8% increase in internally generated revenue, 1.5% decrease due to the impact from extra week and 1.2% growth from acquisitions) as well as a decrease of 2.3% related to foreign currency exchange. The 2.5% increase in local currency sales was due to increases in dental equipment sales and service revenues of 0.4% (3.1% decrease in internally generated revenue, 3.0% decrease due to the impact from extra week and 0.3% growth from acquisitions) and dental consumable merchandise sales growth of 3.3% (2.7% increase in internally generated revenue, 0.9% decrease due to the impact from extra week and 1.5% growth from acquisitions). The $56.5 million, or 3.8%, increase in medical net sales for the year ended December 29, 2012 includes an increase of 4.2% local currency growth (4.8% increase in internally generated revenue, 1.5% decrease due to the impact from extra week and 0.9% growth from acquisitions) as well as a decrease of 0.4% related to foreign currency exchange. The $310.9 million, or 15.5%, increase in animal health net sales for the year ended December 29, 2012 includes an increase of 17.7% local currency growth (10.2% increase in internally generated revenue, 1.6% decrease due to the impact from extra week and 9.1% growth from acquisitions) as well as a decrease of 2.2% related to foreign currency exchange. The $32.8 million, or 13.1%, increase in technology and value-added services net sales for the year ended December 29, 2012 includes an increase of 13.4% local currency growth (10.8% increase in internally generated revenue, 1.5% decrease due to the impact from extra week and 4.1% growth from acquisitions) as well as a decrease of 0.3% related to foreign currency exchange. 42 Gross Profit Gross profit and gross margins for 2012 and 2011 by segment and in total were as follows (in thousands): Health care distribution ............................. $ Technology and value-added services ....... Total ..................................................... $ Gross Margin % 2012 2,323,913 183,600 2,507,513 26.8 % $ 64.8 28.0 $ 2011 2,253,814 164,241 2,418,055 Gross Margin % 27.2 % $ 65.5 28.3 $ Increase $ 70,099 19,359 89,458 % 3.1 % 11.8 3.7 Gross profit increased $89.5 million, or 3.7%, for the year ended December 29, 2012 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 health care 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. The software industry typically realizes higher gross margins to recover investments in research and development. Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin. For example, sales of pharmaceutical products are generally at lower gross profit margins than other products. Conversely, sales of our private label products achieve gross profit margins that are higher than average. With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners who normally purchase lower volumes at greater frequencies. Health care distribution gross profit increased $70.1 million, or 3.1%, for the year ended December 29, 2012 compared to the prior year period. Health care distribution gross profit margin decreased to 26.8% for the year ended December 29, 2012 from 27.2% for the comparable prior year period. The decrease in our health care distribution gross profit margin is primarily due to growth in sales within our animal health businesses, which typically include a greater percentage of lower-margin pharmaceutical products than our other operating units. Technology and value-added services gross profit increased $19.4 million, or 11.8%, for the year ended December 29, 2012 compared to the prior year period. Technology and value-added services gross profit margin decreased to 64.8% for the year ended December 29, 2012 from 65.5% for the comparable prior year period, primarily due to changes in the product sales mix and from higher support costs associated with our growing number of software and eServices customers. Revenues generated from lower than average gross margins grew at a greater rate than traditional electronic services (e.g., claims processing) or software sales, which typically generate higher than average gross margins. Selling, General and Administrative Selling, general and administrative expenses by segment and in total for 2012 and 2011 were as follows (in thousands): Health care distribution ............................. $ Technology and value-added services ....... Total .................................................... $ % of Respective Net Sales 2012 1,767,265 106,095 1,873,360 20.4 % $ 37.4 21.0 $ 2011 1,741,720 94,186 1,835,906 % of Respective Net Sales 21.0 % $ 37.6 21.5 $ Increase $ 25,545 11,909 37,454 % 1.5 % 12.6 2.0 Selling, general and administrative expenses increased $37.5 million, or 2.0%, for the year ended December 29, 2012 from the comparable prior year period. As a percentage of net sales, selling, general and administrative expenses decreased to 21.0% from 21.5% for the comparable prior year period. 43 As a component of total selling, general and administrative expenses, selling expenses increased $6.2 million, or 0.5%, for the year ended December 29, 2012 from the comparable prior year period. As a percentage of net sales, selling expenses decreased to 13.3% from 13.8% for the comparable prior year period. As a component of total selling, general and administrative expenses, general and administrative expenses increased $31.3 million, or 4.8%, for the year ended December 29, 2012 from the comparable prior year period. As a percentage of net sales, general and administrative expenses remained constant at 7.7% when compared with the comparable prior year period. Other Expense, Net Other expense, net for the years ended 2012 and 2011 was as follows (in thousands): Interest income .................................................................... $ Interest expense ................................................................... Other, net ............................................................................. Other expense, net ....................................................... $ 13,394 $ (30,902) 2,735 (14,773) $ 15,593 $ (30,377) 1,942 (12,842) $ 2012 2011 $ Variance (2,199) (525) 793 (1,931) % (14.1)% (1.7) 40.8 (15.0) Other expense, net increased $1.9 million to $14.8 million for the year ended December 29, 2012 from the comparable prior year period. Interest income decreased $2.2 million primarily due to lower investment income. Interest expense increased $0.5 million primarily due to an increase in borrowings under our private placement facilities and our bank credit lines, partially offset by lower interest expense due to a reduction in borrowings under our Butler Animal Health Supply, LLC (“BAHS”) debt. Other, net increased by $0.8 million due primarily to a gain related to an increase in the fair value of an equity affiliate which is now being reported as a consolidated entity beginning in the third quarter of 2012. Income Taxes For the year ended December 29, 2012, our effective tax rate was 31.1% compared to 31.7% for the prior year period. The net reduction in our 2012 effective tax rate results from additional tax planning, settlements of tax audits and higher income from lower taxing countries. The difference between our effective tax rate and the federal statutory tax rate for both periods related primarily to state and foreign income taxes and interest expense. For 2013, we expect our effective tax rate to be in the range of 31.0% Net Income Net income increased $18.7 million, or 4.6%, for the year ended December 29, 2012, compared to the prior year period due to the factors noted above. 44   2011 Compared to 2010 Net Sales Net sales for 2011 and 2010 were as follows (in thousands): Health care distribution (1): Dental ...................................................... $ Medical .................................................... Animal health .......................................... Total health care distribution ................ Technology and value-added services(2) ....... Total ..................................................... $ 2011 % of Total 2010 % of Total Increase $ % 4,764,898 1,504,454 2,010,270 8,279,622 250,620 8,530,242 55.9 % $ 17.6 23.6 97.1 2.9 100.0 % $ 4,415,469 1,373,999 1,537,370 7,326,838 199,952 7,526,790 58.7 % $ 18.2 20.4 97.3 2.7 100.0 % $ 349,429 130,455 472,900 952,784 50,668 1,003,452 7.9 % 9.5 30.8 13.0 25.3 13.3 (1) 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. (2) Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and financial and other services, including e-services and continuing education services for practitioners. The fiscal year ended December 31, 2011 consisted of 53 weeks as compared to the fiscal year ended December 25, 2010, which consisted of 52 weeks. The $1,003.5 million, or 13.3%, increase in net sales for the year ended December 31, 2011 includes an increase of 10.9% local currency growth (4.5% increase in internally generated revenue, 1.5% impact from extra week and 4.9% growth from acquisitions) as well as an increase of 2.4% related to foreign currency exchange. The $349.4 million, or 7.9%, increase in dental net sales for the year ended December 31, 2011 includes an increase of 5.5% in local currencies (3.0% increase in internally generated revenue, 1.5% impact from extra week and 1.0% growth from acquisitions) as well as an increase of 2.4% related to foreign currency exchange. The 5.5% increase in local currency sales was due to increases in dental equipment sales and service revenues of 3.6% (0.1% decrease in internally generated revenue, 3.0% impact from extra week and 0.7% growth from acquisitions) and dental consumable merchandise sales growth of 6.2% (4.1% increase in internally generated revenue, 0.9% impact from extra week and 1.2% growth from acquisitions). The $130.5 million, or 9.5%, increase in medical net sales for the year ended December 31, 2011 includes an increase of 9.2% local currency growth (6.3% internally generated, 1.5% impact from extra week and 1.4% growth from acquisitions) as well as an increase of 0.3% related to foreign currency exchange. The $472.9 million, or 30.8%, increase in animal health net sales for the year ended December 31, 2011 includes an increase of 26.2% local currency growth (6.7% internally generated, 1.5% impact from extra week and 18.0% growth from acquisitions) as well as an increase of 4.6% related to foreign currency exchange. The $50.7 million, or 25.3%, increase in technology and value-added services net sales for the year ended December 31, 2011 includes an increase of 24.4% local currency growth (9.6% internally generated growth, 1.9% impact from extra week and 12.9% growth from acquisitions) as well as an increase of 0.9% related to foreign currency exchange. 45 Gross Profit Gross profit and gross margins for 2011 and 2010 by segment and in total were as follows (in thousands): Health care distribution ............................. $ Technology and value-added services ....... Total ..................................................... $ Gross Margin % 2011 2,253,814 164,241 2,418,055 27.2 % $ 65.5 28.3 $ 2010 2,033,860 137,016 2,170,876 Gross Margin % 27.8 % $ 68.5 28.8 $ Increase $ 219,954 27,225 247,179 % 10.8 % 19.9 11.4 Gross profit increased $247.2 million, or 11.4%, for the year ended December 31, 2011 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 health care 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. The software industry typically realizes higher gross margins to recover investments in research and development. Within our health care distribution segment, gross profit margins may vary from one period to the next. Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin. For example, sales of pharmaceutical products are generally at lower gross profit margins than other products. Conversely, sales of our private label products achieve gross profit margins that are higher than average. With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners who normally purchase lower volumes at greater frequencies. Health care distribution gross profit increased $220.0 million, or 10.8%, for the year ended December 31, 2011 compared to the prior year period. Health care distribution gross profit margin decreased to 27.2% for the year ended December 31, 2011 from 27.8% for the comparable prior year period. The decrease in our health care distribution gross profit margin is primarily due to growth in sales within our animal health businesses, which typically include a greater percentage of lower-margin pharmaceutical products than our other operating units. The increase in animal health sales results from internal growth in the United States and the acquisition of Provet Holdings Limited (see Note 9 “Business Acquisitions and Other Transactions” within our notes to our consolidated financial statements) at the beginning of our 2011 fiscal year. Technology and value-added services gross profit increased $27.2 million, or 19.9%, for the year ended December 31, 2011 compared to the prior year period. Technology and value-added services gross profit margin decreased to 65.5% for the year ended December 31, 2011 from 68.5% for the comparable prior year period, primarily due to changes in the product sales mix. Specifically, revenues generated from hardware sales and installations, which generally are completed at a lower than average gross margin, grew at a greater rate than electronic services (claims processing, statements generation, etc.) or software sales, which typically generate higher than average gross margins. Selling, General and Administrative Selling, general and administrative expenses by segment and in total for 2011 and 2010 were as follows (in thousands): Health care distribution ............................. $ Technology and value-added services ....... Total ..................................................... $ % of Respective Net Sales 2011 1,741,720 94,186 1,835,906 21.0 % $ 37.6 21.5 $ 2010 1,566,190 71,270 1,637,460 % of Respective Net Sales 21.4 % $ 35.6 21.8 $ Increase $ 175,530 22,916 198,446 % 11.2 % 32.2 12.1 Selling, general and administrative expenses increased $198.4 million, or 12.1%, for the year ended December 31, 2011 compared to the prior year period. As a percentage of net sales, selling, general and administrative expenses decreased to 21.5% from 21.8% for the comparable prior year period. 46 As a component of total selling, general and administrative expenses, selling expenses increased $101.4 million, or 9.4%, for the year ended December 31, 2011 from the comparable prior year period. As a percentage of net sales, selling expenses decreased to 13.8% from 14.3% for the comparable prior year period. As a component of total selling, general and administrative expenses, general and administrative expenses increased $97.0 million, or 17.4%, for the year ended December 31, 2011 from the comparable prior year period. As a percentage of net sales, general and administrative expenses increased to 7.7% from 7.4% for the comparable prior year period. Other Expense, Net Other expense, net for the years ended 2011 and 2010 was as follows (in thousands): Interest income .................................................................... $ Interest expense ................................................................... Other, net ............................................................................. Other expense, net ....................................................... $ 15,593 $ (30,377) 1,942 (12,842) $ 14,098 $ (33,641) 447 (19,096) $ 2011 2010 $ Variance 1,495 3,264 1,495 6,254 % 10.6 % 9.7 334.5 32.8 Other expense, net decreased $6.3 million to $12.8 million for the year ended December 31, 2011 from the comparable prior year period. Interest income increased $1.5 million primarily due to higher investment income partially offset by a decrease in late fee income. Interest expense decreased $3.3 million primarily due to reduced interest expense from the redemption of our 3% convertible contingent notes originally due in 2034 (the “Convertible Notes”) on September 3, 2010, partially offset by increased interest expense related to borrowings under our private placement facilities, as well as interest expense related to our credit lines. Other, net increased by $1.5 million due primarily to a gain associated with the acquisition of the remaining interest in an equity investment and proceeds received from a litigation settlement. Income Taxes For the year ended December 31, 2011, our effective tax was 31.7% compared to 31.9% for the prior year period. The net reduction in our 2011 effective tax rate results from additional tax planning, settlements of tax audits and higher income from lower taxing countries. The difference between our effective tax rate and the federal statutory tax rate for both periods related primarily to foreign and state income taxes. Net Income Net income increased $52.5 million, or 14.9%, for the year ended December 31, 2011 compared to the prior year period due to the factors noted above. 47   Liquidity and Capital Resources Our principal capital requirements include funding of acquisitions, purchases of additional noncontrolling interests, 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 $408.1 million for the year ended December 29, 2012, compared to $554.6 million for the comparable prior year period. The net change of $146.5 million was primarily attributable to inventory buy-ins during the fourth quarter of 2012 in advance of potential price increases related to the medical device excise tax. Net cash used in investing activities was $269.6 million for the year ended December 29, 2012, compared to $193.2 million for the comparable prior year period. The net change of $76.4 million was primarily due to increases in payments for equity investments and business acquisitions. Net cash used in financing activities was $170.6 million for the year ended December 29, 2012, compared to $357.2 million for the comparable prior year period. The net change of $186.6 million was primarily due to increased net proceeds from issuance of debt and decreased acquisitions of noncontrolling interests in subsidiaries, partially offset by increased repurchases of common stock. We expect to invest approximately $60 million to $65 million during 2013 in capital projects to modernize and expand our facilities and computer systems and to integrate certain operations into our existing structure. The following table summarizes selected measures of liquidity and capital resources (in thousands): Cash and cash equivalents ................................................................................................... $ Available-for-sale securities - long-term ............................................................................. Working capital ................................................................................................................... 2012 122,080 $ 2,816 1,231,668 2011 147,284 11,329 1,000,868 December 29, December 31, Debt: Bank credit lines ............................................................................................................. $ Current maturities of long-term debt .............................................................................. Long-term debt ............................................................................................................... Total debt ................................................................................................................... $ 27,166 $ 17,992 488,121 533,279 $ 55,014 22,819 363,524 441,357 Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity. 48 Available-for-sale securities As of December 29, 2012, we have approximately $3.3 million ($2.8 million net of temporary impairments) invested in auction-rate securities (“ARS”). These investments are backed by student loans (backed by the federal government) and investments in closed-end municipal bond funds. 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. Our ARS portfolio is comprised of investments that are rated investment grade 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 29, 2012, 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 operations decreased to 39.8 days as of December 29, 2012 from 40.6 days as of December 31, 2011. During the years ended December 29, 2012 and December 31, 2011, we wrote off approximately $8.3 million and $6.2 million, respectively, of fully reserved accounts receivable against our trade receivable reserve. Our inventory turns from operations decreased to 6.2 for the year ended December 29, 2012 from 6.6 for the year ended December 31, 2011, primarily due to inventory buy-ins in advance of potential price increases related to the medical device excise tax. Our working capital accounts may be impacted by current and future economic conditions. Contractual obligations The following table summarizes our contractual obligations related to fixed and variable rate long-term debt, including interest (assuming an average long-term rate of interest of 3.7%), as well as operating and capital lease obligations, capital expenditure obligations and inventory purchase commitments as of December 29, 2012: Payments due by period (in thousands) < 1 year 2 - 3 years 4 - 5 years > 5 years Total Contractual obligations: Long-term debt, including interest .......................$ 34,660 $ 130,290 $ 171,799 $ 273,569 $ Inventory purchase commitments ......................... Operating lease obligations .................................. Capital lease obligations, including interest ......... Fixed asset obligations .......................................... 67,245 75,901 1,739 1,311 50,329 104,972 1,485 - 48,139 61,488 207 - 78,053 65,718 - - 610,318 243,766 308,079 3,431 1,311 Total .....................................................................$ 180,856 $ 287,076 $ 281,633 $ 417,340 $ 1,166,905 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. During 2013, we intend to refinance the debt of approximately $220 million related to the Butler Schein Animal Health transaction. The refinancing is expected to reduce interest expense and to be accretive to earnings per share by $0.02 to $0.03 on an annualized basis. We expect the refinancing to occur at the end of the first quarter of 2013. As part of that refinancing, we expect to incur a one-time, non-cash charge of approximately $0.04 to $0.05 per diluted share. 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 million of Convertible Notes, which were issued in 2004. 49     Credit Facilities On September 12, 2012, we entered into a new $500 million revolving credit agreement (the “Credit Agreement”) with a $200 million expansion feature, which expires on September 12, 2017. This credit facility replaced our then existing $400 million revolving credit facility with a $100 million expansion feature, which would have expired on September 5, 2013. There were no borrowings outstanding under this revolving credit facility as of December 29, 2012. The interest rate, which was 0.82% during the year ended December 29, 2012, is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. The Credit Agreement provides, among other things, that we are required to maintain certain interest coverage and maximum leverage ratios, and contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As of December 29, 2012, we had various other short-term bank credit lines available, of which approximately $27.2 million was outstanding. At December 29, 2012, borrowings under all of our credit lines had a weighted average interest rate of 2.22%. As of December 29, 2012, there were $9.3 million of letters of credit provided to third parties under the credit facility. Private Placement Facilities On August 10, 2010, we entered into $400 million private placement facilities with two insurance companies. On April 30, 2012, we increased our available credit facilities by $375 million by entering into a new agreement with one insurance company and amending our existing agreements with two insurance companies. These facilities are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time during a three year issuance period, through April 26, 2015. 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, affiliate transactions, disposal of assets and certain changes in ownership. These facilities contain a make-whole provision in the event that we pay off the facility prior to the due date. The components of our private placement facility borrowings as of December 29, 2012 are presented in the following table: Date of  Borrowing September 2, 2010 January 20, 2012 January 20, 2012 (1) December 24, 2012 Amount of Borrowing Outstanding $    $  100,000 50,000 50,000 50,000 250,000   Borrowing Rate 3.79 % 3.45 3.09 3.00 Due Date September 2, 2020 January 20, 2024 January 20, 2022 December 24, 2024 (1) Annual repayments of approximately $7.1 million for this borrowing will commence on January 20, 2016. 50                                 Butler Animal Health Supply Effective December 31, 2009, BAHS, a majority-owned subsidiary whose financial information is consolidated with ours, had incurred approximately $320.0 million of debt (of which $37.5 million, which is eliminated in our consolidated financial statements, was provided by Henry Schein, Inc.) in connection with our acquisition of a majority interest in BAHS. On May 27, 2011, BAHS refinanced the terms and amount of its debt in an aggregate principal amount of $366.0 million (of which $55.0 million, which is eliminated in our consolidated financial statements, was provided by Henry Schein, Inc.). The refinanced debt consists of the following three components: Original amount of debt (includes $55.0 million of debt provided by Henry Schein, Inc.) ...................................... $ Number of remaining quarterly installments ......................... Quarterly payments from: December 31, 2012 through June 30, 2013 ...................... $ September 30, 2013 through June 30, 2014 ..................... July 1, 2014 through September 30, 2014 ........................ December 31, 2012 through September 30, 2015 ............ Final installment due on December 31, 2014 ........................ Final installment due on December 31, 2015 ........................ Balance outstanding as of December 29, 2012 ..................... Interest rate on debt ............................................................... Interest rate on debt - LIBOR floor ....................................... Term Loan A Term Loan B Revolver 100,000 $ 8 216,000 12 $ 50,000 4,931 8,766 2,739 $ 65,196 4,239 81,632 LIBOR plus a margin of 2.50% 135,287 138,807 LIBOR plus a margin of 3.25% - LIBOR plus a margin of 2.50% 1.25 % During 2011 and 2012, BAHS made prepayments on Term Loans A and B, which resulted in a reduction to the future quarterly and final installment amounts due. Future prepayments by BAHS, if any, will result in reductions to remaining quarterly and final installment amounts due. The outstanding balance of $220.4 million (net of unamortized debt discount and excluding amounts owed to Henry Schein, Inc.) is reflected in our consolidated balance sheet as of December 29, 2012. The debt agreement provides, among other things, that BAHS maintain certain interest coverage and maximum leverage ratios, and contains restrictions relating to subsidiary indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets 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. During 2013, we intend to refinance the debt of approximately $220 million related to the Butler Schein Animal Health transaction. The refinancing is expected to reduce interest expense and to be accretive to earnings per share by $0.02 to $0.03 on an annualized basis. We expect the refinancing to occur at the end of the first quarter of 2013. As part of that refinancing, we expect to incur a one-time, non-cash charge of approximately $0.04 to $0.05 per diluted share. Stock repurchases From June 21, 2004 through December 29, 2012, we repurchased $799.9 million, or 13,756,063 shares, under our common stock repurchase programs. On April 18, 2012 and November 12, 2012, our Board of Directors authorized an additional $200.0 million and $300.0 million, respectively, for additional repurchases of our common stock, $300.1 million of which is available as of December 29, 2012 for future common stock share repurchases. 51                     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. 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 29, 2012, December 31, 2011 and December 25, 2010 are presented in the following table: December 29, 2012 December 31, December 25, 2011 2010 Balance, beginning of period ................................................................. $ Decrease in redeemable noncontrolling interests due to 402,050 $ 304,140 $ 178,570 redemptions ....................................................................................... (23,637) (160,254) (141,415) Increase in redeemable noncontrolling interests due to business acquisitions ........................................................................... Net income attributable to redeemable noncontrolling interests ............ Dividends declared ................................................................................. Effect of foreign currency translation gain (loss) attributable to redeemable noncontrolling interests .................................................. Change in fair value of redeemable securities ....................................... Other adjustment to redeemable noncontrolling interests ...................... Balance, end of period ............................................................................ $ 30,935 34,803 (21,013) 904 53,769 (42,636) 435,175 $ 13,618 36,514 (15,212) (889) 224,133 - 402,050 $ 203,729 26,054 (12,360) (2,281) 51,843 - 304,140 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 are recorded in our consolidated statement of income. On December 30, 2011, we acquired all of Oak Hill Capital Partners’ (“OHCP”) remaining direct and indirect interests in BAHS (including its interest in W.A. Butler Company) for $155 million in cash. As a result of this transaction, our ownership in BAHS increased to approximately 71.7% at December 31, 2011. The amount paid to OHCP for their remaining interests in BAHS was in excess of the previously agreed upon annual limits (see Note 9. “Business Acquisitions and Other Transaction” within our notes to our consolidated financial statements), but such limits were waived by all parties involved. At December 29, 2012, our ownership in BAHS is approximately 73.7%. Unrecognized tax benefits As more fully disclosed in Note 12 of “Notes to Consolidated Financial Statements,” we cannot reasonably estimate the timing of future cash flows related to the unrecognized tax benefits, including accrued interest, of $40.7 million as of December 29, 2012. 52   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 multiple element arrangements, and the related deferral of such revenue (which is insignificant to our financial statements), is recognized as follows. When we sell software products together with related services (i.e., training and technical support) we allocate revenue to the delivered elements using the residual method, based upon vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered elements, or defer it until such time as vendor-specific evidence of fair value is obtained. Multiple element arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. Effective December 26, 2010 we allocate revenue for such arrangements based on the relative selling prices of the elements applying the following hierarchy: first VSOE, then third-party evidence (“TPE”) of selling price if VSOE is not available, and finally our estimate of the selling price if neither VSOE nor TPE is available. VSOE exists when we sell the deliverables separately and represents the actual price charged by us for each deliverable. Estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions. Each element that has standalone value is accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is provided or the product is delivered. 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. 53 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 may adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectability. Although we believe our judgments, estimates and/or assumptions related to accounts receivable and reserves are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results. Inventories and Reserves Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined by the first-in, first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with our policy for inventory valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory. 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 a comparison of the fair value to the carrying value of reporting units. We regard our reporting units to be our operating segments: health care distribution (global dental, medical and animal health) and technology and value-added services. During the fiscal year ended December 31, 2011, we adopted the provisions of Accounting Standards Update 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), which allows us to use qualitative factors to determine whether it is more likely than not that the fair values of our reporting units are less than their carrying values. The factors that we consider in developing our qualitative assessment included: • Macroeconomic conditions consisting of the overall sales growth of our business and the overall sales growth of each of our operating segments. We also consider our growth in market share in the markets in which we compete; • Credit markets and our ability to access debt facilities at favorable terms; • Key personnel and management expertise, as well as our growth strategies for the next several years; and • Our expectations of selling or disposing all, or a portion, of a reporting unit. Prior to the adoption of ASU 2011-08, measuring fair value of a reporting unit was generally based on valuation techniques using multiples of sales or earnings. 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 comparison of the fair value to the carrying value of the assets. This comparison is made based on 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. For certain indefinite-lived intangible assets, a present value technique, such as estimates of future cash flows, is utilized. We assessed the potential impairment of goodwill and other indefinite-lived intangible assets annually (at the beginning of our fourth quarter) and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. There were no events or circumstances from the date of that assessment through December 29, 2012 that impacted our analysis. 54 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. Beginning with the first quarter of 2012, we changed our reporting units from dental, medical, animal health, international and technology to global dental, global medical, global animal health and global technology and value-added services. These groups have been formed to provide distinct organizational focus for reaching and serving each practitioner segment with the benefits of a global perspective, as well as global product and service offerings and best practices. In connection with this change in business groups, goodwill was reallocated to the new reporting units. Based upon this change, we felt it was necessary to perform a quantitative assessment, in addition to a qualitative assessment, of goodwill impairment as of the first day of the fourth quarter for the year ended December 29, 2012 in order to establish a new baseline calculation. For the years ended December 29, 2012, December 31, 2011 and December 25, 2010, the results of our goodwill impairment analysis 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. 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). Since March 2009, equity-based awards have been 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. 55 We issue restricted stock that vests solely based on the recipient’s continued service over time (primarily four- year cliff vesting) and restricted stock that vests based on our achieving specified performance measurements and the recipient’s continued service over time (primarily 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. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks 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 foreign currency forward contracts and by maintaining counter-party credit limits. These hedging activities provide only limited protection against currency exchange and credit risks. Factors that could influence the effectiveness of our hedging programs include currency markets and availability of hedging instruments and liquidity of the credit markets. All 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 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. 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., 18 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 29, 2012, the net fair value of our foreign currency exchange agreements, which expire through June 26, 2013, was $0.4 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 $(0.6) 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. 56 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS  HENRY SCHEIN, INC. Page Report of Independent Registered Public Accounting Firm ........................................................................................ 58 Consolidated Financial Statements:  Balance Sheets as of December 29, 2012 and December 31, 2011 ...................................................................... 59 Statements of Income for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 .............................................................................................. 60 Statements of Comprehensive Income for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 .............................................................................................. 61 Statements of Changes in Stockholders’ Equity for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 ............................................................. 62 Statements of Cash Flows for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 .............................................................................................. Notes to Consolidated Financial Statements ........................................................................................................ 63 64 Report of Independent Registered Public Accounting Firm ........................................................................................ 109 Schedule II - Valuation and Qualifying Accounts for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 ....................................................................................................... 110 All other schedules are omitted because the required information is either inapplicable or is included in the consolidated financial statements or the notes thereto.   57                                                                   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 29, 2012 and December 31, 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 29, 2012. These financial statements and schedule 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 29, 2012 and December 31, 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2012, 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 29, 2012, 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 13, 2013 expressed an unqualified opinion thereon. /s/ BDO USA, LLP New York, New York February 13, 2013 58 HENRY SCHEIN, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 29, 2012 December 31, 2011 ASSETS Current assets: Cash and cash equivalents ................................................................................................... $ Accounts receivable, net of reserves of $75,240 and $65,853 ............................................. 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 ........................................................................................................... $ 122,080 1,015,194 1,203,507 64,049 299,547 2,704,377 273,458 1,601,046 462,182 292,934 5,333,997 $ $ 787,658 27,166 17,992 207,381 132,774 299,738 1,472,709 488,121 196,814 125,314 2,282,958 147,284 888,248 947,849 54,970 234,157 2,272,508 262,088 1,497,108 409,612 298,828 4,740,144 621,468 55,014 22,819 191,173 121,234 259,932 1,271,640 363,524 188,739 80,568 1,904,471 Redeemable noncontrolling interests ....................................................................................... Commitments and contingencies 435,175 402,050 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding ............................................................................................................. - - Common stock, $.01 par value, 240,000,000 shares authorized, 87,850,671 outstanding on December 29, 2012 and 89,928,082 outstanding on December 31, 2011 .............................................................. Additional paid-in capital .................................................................................................... Retained earnings ................................................................................................................ Accumulated other comprehensive income ......................................................................... Total Henry Schein, Inc. stockholders' equity ................................................................. Noncontrolling interests ...................................................................................................... Total stockholders' equity ........................................................................................... Total liabilities, redeemable noncontrolling interests and stockholders' equity .............. $ 879 375,946 2,183,905 52,855 2,613,585 2,279 2,615,864 5,333,997 $ 899 401,262 2,007,477 22,584 2,432,222 1,401 2,433,623 4,740,144 See accompanying notes. 59 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Years Ended December 29, December 31, December 25, 2011 2010 2012 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 before taxes and equity in earnings of affiliates Income taxes .......................................................................................................... Equity in earnings of affiliates .............................................................................. Net income ............................................................................................................ Less: Net income attributable to noncontrolling interests ................................... Net income attributable to Henry Schein, Inc. ...................................................... $ 8,939,967 $ 6,432,454 2,507,513 8,530,242 $ 6,112,187 2,418,055 1,873,360 15,192 618,961 1,835,906 - 582,149 13,394 (30,902) 2,735 604,188 (187,858) 7,058 423,388 (35,312) 388,076 $ 15,593 (30,377) 1,942 569,307 (180,212) 15,561 404,656 (36,995) 367,661 $ 7,526,790 5,355,914 2,170,876 1,637,460 12,285 521,131 14,098 (33,641) 447 502,035 (160,069) 10,165 352,131 (26,342) 325,789 Earnings per share attributable to Henry Schein, Inc.: Basic ................................................................................................................... $ Diluted ................................................................................................................ $ 4.44 $ 4.32 $ 4.08 $ 3.97 $ 3.62 3.49 Weighted-average common shares outstanding: Basic ................................................................................................................... Diluted ................................................................................................................ 87,499 89,823 90,120 92,620 90,097 93,268 See accompanying notes. 60 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) December 29, December 31, December 25, 2012 2011 2010 Net income .......................................................................................................... $ 423,388 $ 404,656 $ 352,131 Other comprehensive income, net of tax: Foreign currency translation gain (loss) ........................................................... 33,347 (2,310) (30,584)   Unrealized gain (loss) from foreign currency hedging activities .....................   Unrealized investment gain .............................................................................. 2,865 414 (618) 347 (885) 145 Pension adjustment loss ................................................................................... (5,451) (6,238) (4,637) Other comprehensive income (loss), net of tax .................................................. 31,175 Comprehensive income ....................................................................................... 454,563 Comprehensive income attributable to noncontrolling interests: Net income .................................................................................................... Foreign currency translation (gain) loss ........................................................ (35,312) (904) (8,819) 395,837 (36,995) 889 (35,961) 316,170 (26,342) 2,281 Comprehensive income attributable to noncontrolling interests ................ (36,216) (36,106) (24,061) Comprehensive income attributable to Henry Schein, Inc. ................................. $ 418,347 $ 359,731 $ 292,109 See accompanying notes. 61 HENRY SCHEIN, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share and per share data) Common Stock $.01 Par Value Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Total Comprehensive Noncontrolling Stockholders' Interests Income Equity 2,161,508 Balance, December 26, 2009 ........................................................... 90,630,889 $ Net income (excluding $26,054 attributable to Redeemable 906 $ 603,772 $ 1,492,607 $ 64,194 $ 29 $ 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 ..................... Dividends paid ................................................................................. Reclassification of noncontrolling interest no longer subject to redemption ................................................................. Initial noncontrolling interests and adjustments related to - - - - - - - business acquisitions ................................................................. Change in fair value of redeemable securities ................................. Stock issued upon conversion of convertible senior notes .............. Shares issued to 401(k) plan ............................................................ Repurchase and retirement of common stock .................................. Stock issued upon exercise of stock options, - - 732,422 107,662 (1,005,869) including tax benefit of $8,304 ................................................. Stock-based compensation expense ................................................. Shares withheld for payroll taxes .................................................... Liability for cash settlement stock-based compensation awards ..... 1,248,643 285,742 (60,012) - Balance, December 25, 2010 ........................................................... 91,939,477 $ Net income (excluding $36,514 attributable to Redeemable noncontrolling interests) ............................................................ Foreign currency translation loss (excluding $889 attributable to Redeemable noncontrolling interests) ............... Unrealized loss from foreign currency hedging activities, net of tax benefit of $94 ............................................................ Unrealized investment gain, net of tax of $215 ............................... Pension adjustment loss, net of tax benefit of $1,534 ..................... Dividends paid ................................................................................. Other adjustments ............................................................................. Initial noncontrolling interests and adjustments related to business acquisitions ................................................................. Change in fair value of redeemable securities ................................. Shares issued to 401(k) plan ............................................................ Repurchase and retirement of common stock .................................. Stock issued upon exercise of stock options, including tax benefit of $7,246 ................................................. Stock-based compensation expense ................................................. Shares withheld for payroll taxes .................................................... Liability for cash settlement stock-based compensation awards ..... - - - - - - - - - 93,204 (3,179,188) 941,701 175,980 (43,092) - Balance, December 31, 2011 ........................................................... 89,928,082 $ Net income (excluding $34,803 attributable to Redeemable noncontrolling interests) ............................................................ Foreign currency translation gain (excluding $904 attributable to Redeemable noncontrolling interests) ............... Unrealized gain from foreign currency hedging activities, net of tax of $654 ...................................................................... Unrealized investment gain, net of tax of $310 ............................... Pension adjustment loss, net of tax benefit of $2,187 ..................... Dividends paid ................................................................................. Initial noncontrolling interests and adjustments related to business acquisitions ................................................................. Change in fair value of redeemable securities ................................. Repurchase and retirement of common stock .................................. Stock issued upon exercise of stock options, - - - - - - - - (3,937,054) including tax benefit of $31,638 ............................................... Stock-based compensation expense ................................................. Shares withheld for payroll taxes .................................................... Liability for cash settlement stock-based compensation awards ..... 1,889,872 277,339 (307,568) - - - - - - - - - - 7 1 (10) 12 3 - - - - - - - - - (22,077) (51,843) 12,129 5,720 (18,507) 46,729 29,907 (4,260) (556) 325,789 - 288 326,077 - - - - - - - - - - (39,218) - - - - (28,303) - (28,303) (885) 145 (4,637) - - - - (501) (885) 145 (4,637) (501) - - - - - - - - - - 1,516 1,516 - - - - - - - - - (22,077) (51,843) 12,136 5,721 (57,735) 46,741 29,910 (4,260) (556) 919 $ 601,014 $ 1,779,178 $ 30,514 $ 1,332 $ 2,412,957 - - - - - - - - - 1 (31) 9 2 (1) - - - - - - - - 4,155 (224,133) 5,797 (60,609) 41,756 36,930 (2,989) (659) 367,661 - 481 368,142 - - - - - - - - - (139,362) - - - - (1,421) - (1,421) (618) 347 (6,238) - - - - - - - - - - - - - (457) 45 - - - - - - - - (618) 347 (6,238) (457) 45 4,155 (224,133) 5,798 (200,002) 41,765 36,932 (2,990) (659) 899 $ 401,262 $ 2,007,477 $ 22,584 $ 1,401 $ 2,433,623 - - - - - - - - (39) 19 3 (3) - - - - - - - (1,189) (53,769) (88,196) 104,103 37,310 (23,024) (551) 388,076 - 509 388,585 - - - - - - - (211,648) - - - - 32,443 - 32,443 2,865 414 (5,451) - - - - - - - - - - - (430) 799 - - - - - - 2,865 414 (5,451) (430) (390) (53,769) (299,883) 104,122 37,313 (23,027) (551) Balance, December 29, 2012 ........................................................... 87,850,671 $ 879 $ 375,946 $ 2,183,905 $ 52,855 $ 2,279 $ 2,615,864 See accompanying notes. 62 HENRY SCHEIN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 29, December 31, December 25, 2011 2012 2010 Cash flows from operating activities: Net income ....................................................................................................... $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................................ Amortization of bond discount ................................................................ Stock-based compensation expense ........................................................ Provision for losses on trade and other accounts receivable ................... Provision for (benefit from) deferred income taxes ................................ Stock issued to 401(k) plan ...................................................................... Equity in earnings of affiliates ................................................................ Distributions from equity 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 ................................................................ Purchases of available-for-sale securities ......................................................... Proceeds from sales of available-for-sale securities ......................................... Proceeds from maturities of available-for-sale securities ................................. 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 ........................................................ Debt issuance costs ............................................................................................ 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 ..................................................................... 423,388 $ 404,656 $ 352,131 125,322 - 37,313 4,407 10,072 - (7,058) 14,499 14,193 (73,925) (193,585) (62,390) 115,863 408,099 115,896 - 36,932 6,156 (19,319) 5,798 (15,561) 14,883 6,352 36,204 (44,155) (10,493) 17,276 554,625 101,214 4,007 29,910 5,564 (6,051) 5,721 (10,165) 6,606 3,702 (76,129) (21,307) (26,640) 26,917 395,480 (51,237) (45,176) (39,000) (220,238) - 9,225 - (7,354) (269,604) (32,185) 155,132 (1,482) (40,722) 72,485 (299,883) 17,819 (21,284) (20,481) - (170,601) (149,403) - 2,600 - (1,243) (193,222) 13,316 3,101 (2,847) (33,722) 34,519 (200,002) 8,765 (10,055) (170,199) (90) (357,214) (352,598) (26,984) 6,000 26,984 (2,025) (387,623) 40,500 110,000 (410) (313,028) 38,437 (57,735) 11,292 (12,531) (146,811) (357) (330,643) (322,786) 1,980 471,154 150,348 Net change in cash and cash equivalents ............................................................... Effect of exchange rate changes on cash and cash equivalents ............................. Cash and cash equivalents, beginning of period .................................................... Cash and cash equivalents, end of period .............................................................. $ (32,106) 6,902 147,284 122,080 $ 4,189 (7,253) 150,348 147,284 $ See accompanying notes. 63 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) Note 1 – Significant Accounting Policies Nature of Operations We distribute health care products and services primarily to office-based health care practitioners with operations or affiliates in the United States, Australia, Austria, Belgium, Canada, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Luxembourg, Mauritius, the Netherlands, New Zealand, Portugal, Slovakia, Spain, Switzerland, Thailand, Turkey and the United Kingdom. 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 year ended December 29, 2012 consisted of 52 weeks, the year ended December 31, 2011 consisted of 53 weeks and the year ended December 25, 2010 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. 64         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 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 multiple element arrangements, and the related deferral of such revenue (which is insignificant to our financial statements), is recognized as follows. When we sell software products together with related services (i.e., training and technical support) we allocate revenue to the delivered elements using the residual method, based upon vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered elements, or defer it until such time as vendor-specific evidence of fair value is obtained. Multiple element arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. Effective December 26, 2010 we allocate revenue for such arrangements based on the relative selling prices of the elements applying the following hierarchy: first VSOE, then third-party evidence (“TPE”) of selling price if VSOE is not available, and finally our estimate of the selling price if neither VSOE nor TPE is available. VSOE exists when we sell the deliverables separately and represents the actual price charged by us for each deliverable. Estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions. Each element that has standalone value is accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is provided or the product is delivered. 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. Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. Outstanding checks in excess of funds on deposit of $59.4 million and $49.1 million, primarily related to payments for inventory, were classified as accounts payable as of December 29, 2012 and December 31, 2011. Available-for-sale Securities As of December 29, 2012, we have approximately $3.3 million ($2.8 million net of temporary impairments) invested in auction-rate securities (“ARS”). These investments are backed by student loans (backed by the federal government) and investments in closed-end municipal bond funds, 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. We determine cost of investments in available-for-sale securities on a specific identification basis. As of December 29, 2012 and December 31, 2011, 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 $0.5 million and $1.2 million, respectively. Gross realized gains and losses were immaterial in all periods presented. 65   HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) 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 collectability. 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 were $63.8 million, $61.8 million and $57.0 million for the years ended December 29, 2012, December 31, 2011 and December 25, 2010. Advertising and Promotional Costs We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses were $10.4 million, $13.1 million and $12.7 million for the years ended December 29, 2012, December 31, 2011 and December 25, 2010. 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 29, 2012 and December 31, 2011, we had $3.5 million and $4.2 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. 66         HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is computed primarily under the straight-line method (see Note 2 - Property and Equipment, Net for estimated useful lives). 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. Capitalized software costs consist of costs to purchase and develop software. Costs incurred during the application development stage for software bought and further customized by outside suppliers for our use and software developed by a supplier for our proprietary use are capitalized. Costs incurred for our own personnel who are directly associated with software development are capitalized. Income Taxes We account for income taxes under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in tax laws or rates. The effect on deferred income tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date. We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries. Foreign Currency Translation and Transactions The financial position and results of operations of our foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated other comprehensive income in stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings. Risk Management and Derivative Financial Instruments We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates. Our objective is to manage the impact that 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 foreign currency forward agreements related to certain intercompany loans and certain forecasted inventory purchase commitments with foreign suppliers. 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. 67     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. The major classes of assets and liabilities that we generally allocate purchase price to, excluding goodwill, include identifiable intangible assets (i.e., trademarks and trade names, customer relationships and lists and non-compete agreements), property, plant and equipment, deferred taxes and other current and long-term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; customer retention rates; and estimated useful lives. 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, we accrue liabilities for the estimated fair value of additional purchase price adjustments at the time of acquisition. Any adjustments to these accruals are recorded in our consolidated statement of income. For the years ended December 29, 2012, December 31, 2011 and December 25, 2010, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities. 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. Their interests in these subsidiaries are classified outside permanent equity on our consolidated balance sheets and are carried at the estimated redemption amounts. The redemption amounts have been estimated based on expected future earnings and cash flow and, if such earnings and cash flow are not achieved, the value of the redeemable noncontrolling interests might be impacted. Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are reflected 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. 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. We regard our reporting units to be our operating segments: health care distribution (global dental, medical and animal health) and technology and value-added services. During the fiscal year ended December 31, 2011, we adopted the provisions of Accounting Standards Update 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), which allows us to use qualitative factors to determine whether it is more likely than not that the fair values of our reporting units are less than their carrying values. The factors that we consider in developing our qualitative assessment included: • Macroeconomic conditions consisting of the overall sales growth of our business and the overall sales growth of each of our operating segments. We also consider our growth in market share in the markets in which we compete; • Credit markets and our ability to access debt facilities at favorable terms; • Key personnel and management expertise, as well as our growth strategies for the next several years; and • Our expectations of selling or disposing all, or a portion, of a reporting unit. 68 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) Prior to the adoption of ASU 2011-08, measuring fair value of a reporting unit was generally based on valuation techniques using multiples of sales or earnings. 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 comparison of the fair value to the carrying value of the assets. This comparison is made based on 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. For certain indefinite-lived intangible assets, a present value technique, such as estimates of future cash flows, is utilized. We assessed the potential impairment of goodwill and other indefinite-lived intangible assets annually (at the beginning of our fourth quarter) and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. There were no events or circumstances from the date of that assessment through December 29, 2012 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. Beginning with the first quarter of 2012, we changed our reporting units from dental, medical, animal health, international and technology to global dental, global medical, global animal health and global technology and value-added services. These groups have been formed to provide distinct organizational focus for reaching and serving each practitioner segment with the benefits of a global perspective, as well as global product and service offerings and best practices. In connection with this change in business groups, goodwill was reallocated to the new reporting units. Based upon this change, we felt it was necessary to perform a quantitative assessment, in addition to a qualitative assessment, of goodwill impairment as of the first day of the fourth quarter for the year ended December 29, 2012 in order to establish a new baseline calculation. For the years ended December 29, 2012, December 31, 2011 and December 25, 2010, the results of our goodwill impairment analysis did not result in any impairments. 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. 69   HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 1 – Significant Accounting Policies – (Continued) 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 were $59.2 million, $58.8 million and $57.0 million for the years ended December 29, 2012, December 31, 2011 and December 25, 2010. 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. 70   HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 2 – Property and Equipment, Net Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed primarily under the straight-line method over the estimated useful life. Depreciation of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term. Property and equipment, including related estimated useful lives, consisted of the following:   December 29,  December 31, 2012   2011 Land ............................................................................................................................... $ Buildings and permanent improvements ........................................................................ Leasehold improvements ................................................................................................ Machinery and warehouse equipment ............................................................................ Furniture, fixtures and other ........................................................................................... Computer equipment and software ................................................................................. Less accumulated depreciation ....................................................................................... 13,531 $ 112,979 70,725 68,432 102,569 258,962 627,198 (353,740) Property and equipment, net ................................................................................... $ 273,458 $ 13,238 104,126 64,762 64,664 93,100 229,998 569,888 (307,800) 262,088 Estimated Useful Lives (in years) Buildings and permanent improvements ....................................... Machinery and warehouse equipment ........................................... Furniture, fixtures and other .......................................................... Computer equipment and software ................................................ 40 5-10 3-10 3-10 The net carrying value of equipment held under capital leases amounted to approximately $1.3 million and $2.7 million as of December 29, 2012 and December 31, 2011. Property and equipment related depreciation expense for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 was $52.2 million, $53.0 million and $47.9 million. 71                                             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 29, 2012 and December 31, 2011 were as follows: Health Care Distribution Technology and Value-Added Services Total 1,346,825 $ 77,969 $  1,424,794 Balance as of December 25, 2010 .................................................. $ Adjustments to goodwill:    Acquisitions ...........................................................................     Foreign currency translation ..................................................   Balance as of December 31, 2011 .................................................. Adjustments to goodwill:  52,613   (1,190)   1,398,248   Acquisitions ...........................................................................   Foreign currency translation .................................................. 30,765 9,909 20,630   261   98,860 61,788 1,476 73,243 (929) 1,497,108 92,553 11,385 Balance as of December 29, 2012 .................................................. $ 1,438,922 $ 162,124 $ 1,601,046 Other intangible assets consisted of the following: December 29, 2012 Accumulated December 31, 2011 Accumulated Cost Amortization Net Cost Amortization Net Non-compete agreements ................................$ 47,351 $ (7,949) $ 39,402 $ 46,327 $ (6,186) $ Trademarks / trade names - definite lived ....... 72,948 (18,474) 54,474 52,619 (18,770) Trademarks / trade names - indefinite lived .... 3,681 - 3,681 24,850 - 40,141 33,849 24,850 Customer relationships and lists ...................... 504,387 (179,566) 324,821 412,194 (135,723) 276,471 Other ............................................................... 57,397 (17,593) 39,804 48,005 (13,704) 34,301 Total ..........................................................$ 685,764 $ (223,582) $ 462,182 $ 583,995 $ (174,383) $ 409,612 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 five years as of December 29, 2012. 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 eight years as of December 29, 2012. The decrease in indefinite-lived trademarks during the year ended December 29, 2012 was the result of certain trademarks beginning to be amortized in 2012. 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 29, 2012. Amortization expense related to definite-lived intangible assets for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 was $68.6 million, $59.0 million and $48.4 million. The annual amortization expense expected for the years 2013 through 2017 is $66.3 million, $59.3 million, $54.2 million, $48.7 million and $45.9 million. 72                       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 29, December 31, 2012 2011 Investment in unconsolidated affiliates ............................................................................ $ Non-current deferred foreign, state and local income taxes ............................................. Notes receivable (1) ......................................................................................................... Auction rate securities, net of temporary impairment ...................................................... Distribution rights and exclusivity agreements, net of amortization ................................ Security deposits .............................................................................................................. Debt issuance costs, net of amortization .......................................................................... Acquisition related indemnification ................................................................................. Other long-term assets ...................................................................................................... Total ........................................................................................................................ $ 191,075 $ 37,737 9,851 2,816 4,030 3,291 7,207 14,168 22,759 292,934 $ 212,860 33,259 5,834 11,329 4,134 3,431 8,668 - 19,313 298,828 (1)  Long-term notes receivable carry interest rates ranging from 2.21% to 12.0% and are due in varying installments through December 31, 2020. Amortization of other long-term assets for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 was $4.5 million, $3.9 million and $4.9 million. Note 5 – Debt Credit Facilities On September 12, 2012, we entered into a new $500 million revolving credit agreement (the “Credit Agreement”) with a $200 million expansion feature, which expires on September 12, 2017. This credit facility replaced our then existing $400 million revolving credit facility with a $100 million expansion feature, which would have expired on September 5, 2013. There were no borrowings outstanding under this revolving credit facility as of December 29, 2012. The interest rate, which was 0.82% during the year ended December 29, 2012, is based on USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. The Credit Agreement provides, among other things, that we are required to maintain certain interest coverage and maximum leverage ratios, and contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As of December 29, 2012, there were $9.3 million of letters of credit provided to third parties under the credit facility. As of December 29, 2012, we had various other short-term bank credit lines available, of which approximately $27.2 million was outstanding. At December 29, 2012, borrowings under all of our credit lines had a weighted average interest rate of 2.22%. Certain of our subsidiaries, excluding Butler Animal Health Supply, LLC, or BAHS, maintain credit lines which are collateralized by assets of those subsidiaries with an aggregate net carrying value of $119.0 million. 73       HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 5 – Debt – (Continued) Private Placement Facilities On August 10, 2010, we entered into $400 million private placement facilities with two insurance companies. On April 30, 2012, we increased our available credit facilities by $375 million by entering into a new agreement with one insurance company and amending our existing agreements with two insurance companies. These facilities are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time during a three year issuance period, through April 26, 2015. 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, affiliate transactions, disposal of assets and certain changes in ownership. These facilities contain a make-whole provision in the event that we pay off the facility prior to the due date. The components of our private placement facility borrowings as of December 29, 2012 are presented in the following table: Date of Borrowing September 2, 2010 January 20, 2012 January 20, 2012 (1) December 24, 2012 Amount of Borrowing Outstanding $    $  100,000 50,000 50,000 50,000 250,000   Borrowing Rate 3.79 % 3.45 3.09 3.00 Due Date September 2, 2020 January 20, 2024 January 20, 2022 December 24, 2024 (1) Annual repayments of approximately $7.1 million for this borrowing will commence on January 20, 2016. 74                                                             HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 5 – Debt – (Continued) Butler Animal Health Supply Effective December 31, 2009, BAHS, a majority-owned subsidiary whose financial information is consolidated with ours, had incurred approximately $320.0 million of debt (of which $37.5 million, which is eliminated in our consolidated financial statements, was provided by Henry Schein, Inc.) in connection with our acquisition of a majority interest in BAHS. On May 27, 2011, BAHS refinanced the terms and amount of its debt in an aggregate principal amount of $366.0 million (of which $55.0 million, which is eliminated in our consolidated financial statements, was provided by Henry Schein, Inc.). The refinanced debt consists of the following three components: Original amount of debt (includes $55.0 million of debt provided by Henry Schein, Inc.) ...................................... $ Number of remaining quarterly installments ......................... Quarterly payments from: December 31, 2012 through June 30, 2013 ............................ $ September 30, 2013 through June 30, 2014 ........................... July 1, 2014 through September 30, 2014 .............................. December 31, 2012 through September 30, 2015 .................. Final installment due on December 31, 2014 ........................ Final installment due on December 31, 2015 ........................ Balance outstanding as of December 29, 2012 ..................... Interest rate on debt ............................................................... Interest rate on debt - LIBOR floor ....................................... Term Loan A Term Loan B Revolver 100,000 $ 8 216,000 12 $ 50,000 4,931 8,766 2,739 $ 65,196 4,239 81,632 LIBOR plus a margin of 2.50% 135,287 138,807 LIBOR plus a margin of 3.25% 1.25 % - LIBOR plus a margin of 2.50% During 2011 and 2012, BAHS made prepayments on Term Loans A and B, which resulted in a reduction to the future quarterly and final installment amounts due. Future prepayments by BAHS, if any, will result in reductions to remaining quarterly and final installment amounts due. The outstanding balance of $220.4 million (net of unamortized debt discount and excluding amounts owed to Henry Schein, Inc.) is reflected in our consolidated balance sheet as of December 29, 2012. Borrowings incurred as part of the acquisition of BAHS are collateralized by assets of BAHS with an aggregate net carrying value of $759.1 million. The debt agreement provides, among other things, that BAHS maintain certain interest coverage and maximum leverage ratios, and contains restrictions relating to subsidiary indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets 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. During 2013, we intend to refinance the debt of approximately $220 million related to the Butler Schein Animal Health transaction. The refinancing is expected to reduce interest expense and to be accretive to earnings per share by $0.02 to $0.03 on an annualized basis. We expect the refinancing to occur at the end of the first quarter of 2013. As part of that refinancing, we expect to incur a one-time, non-cash charge of approximately $0.04 to $0.05 per diluted share. 75                 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 5 – Debt – (Continued) Long-term debt Long-term debt consisted of the following:   December 29,  December 31, 2012   2011 Private placement debt ...................................................................................................... $ Notes payable to banks at a weighted-average interest rate of 6.82% ............................... Butler Schein Animal Health Supply notes payable to banks (net of discount of 250,000 $ 11,352 100,000 11,163 $0.7 million and $1.1 million) at a weighted-average interest rate of 3.84% ........... 220,439 251,662 Various collateralized and uncollateralized loans payable with interest, in varying installments through 2016 at interest rates ranging from 3.30% to 6.25% ............................................................................................... Capital lease obligations (see Note 17) ............................................................................. Total .................................................................................................................................. Less current maturities ...................................................................................................... 21,178 3,144 506,113 (17,992) Total long-term debt ................................................................................................. $ 488,121 $ 18,627 4,891 386,343 (22,819) 363,524 As of December 29, 2012, the aggregate amounts of long-term debt, including capital lease obligations, maturing in each of the next five years and thereafter are as follows: 2013 ...........................................................................$ 2014 ........................................................................... 2015 ........................................................................... 2016 ........................................................................... 2017 ........................................................................... Thereafter .................................................................. Total ..................................................................$ 17,992 16,111 81,375 145,560 7,599 237,476 506,113 76                             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 at fair value. Accounting Standards Codification (“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 29, 2012, December 31, 2011 and December 25, 2010 are presented in the following table: December 29, December 31, December 25, 2011 2012 2010 Balance, beginning of period ........................................................................ $ Decrease in redeemable noncontrolling interests due to 402,050 $ 304,140 $ 178,570 redemptions .............................................................................................. (23,637) (160,254) (141,415) Increase in redeemable noncontrolling interests due to business acquisitions .................................................................................. Net income attributable to redeemable noncontrolling interests ................... Dividends declared ........................................................................................ Effect of foreign currency translation gain (loss) attributable to redeemable noncontrolling interests ......................................................... Change in fair value of redeemable securities .............................................. Other adjustment to redeemable noncontrolling interests ............................. Balance, end of period ................................................................................... $ 30,935 34,803 (21,013) 904 53,769 (42,636) 435,175 $ 13,618 36,514 (15,212) (889) 224,133 - 402,050 $ 203,729 26,054 (12,360) (2,281) 51,843 - 304,140 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. 77 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 U.S. 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 gains (losses), unrealized gains (losses) on foreign currency hedging activities, unrealized investment gains (losses) and pension adjustment losses. The following table summarizes our Accumulated other comprehensive income, net of applicable taxes as of: December 29, December 31, December 25, 2011 2010 2012 Attributable to Redeemable noncontrolling interests: Foreign currency translation adjustment ................................................... $ (849) $ (1,753) $ (864) Attributable to Henry Schein, Inc.: Foreign currency translation gain .................................................................. $ Unrealized gain (loss) from foreign currency hedging activities .................. Unrealized investment loss ............................................................................ Pension adjustment loss ................................................................................ Accumulated other comprehensive income .............................................. $ 72,160 $ 1,187 (415) (20,077) 52,855 $ 39,717 $ (1,678) (829) (14,626) 22,584 $ 41,138 (1,060) (1,176) (8,388) 30,514 Total Accumulated other comprehensive income ......................................... $ 52,006 $ 20,831 $ 29,650 The following table summarizes the components of comprehensive income, net of applicable taxes as follows: December 29, December 31, December 25, 2011 2012 2010 Net income .................................................................................................... $ 423,388 $ 404,656 $ 352,131 Foreign currency translation gain (loss) ........................................................ Tax effect ...................................................................................................... Foreign currency translation gain (loss) ........................................................ Unrealized gain (loss) from foreign currency hedging activities .................. Tax effect ...................................................................................................... Unrealized gain (loss) from foreign currency hedging activities .................. Unrealized investment gain ........................................................................... Tax effect ...................................................................................................... Unrealized investment gain ........................................................................... 33,347 - 33,347 3,519 (654) 2,865 724 (310) 414 (2,310) - (2,310) (712) 94 (618) 562 (215) 347 Pension adjustment loss ................................................................................ Tax effect ...................................................................................................... Pension adjustment loss ................................................................................ Comprehensive income ................................................................................. $ (7,638) 2,187 (5,451) 454,563 $ (7,772) 1,534 (6,238) 395,837 $ (30,584) - (30,584) (1,140) 255 (885) 360 (215) 145 (6,347) 1,710 (4,637) 316,170 The following table summarizes our total comprehensive income, net of applicable taxes as follows: December 29, December 31, December 25, 2011 2010 2012 Comprehensive income attributable to   Henry Schein, Inc. ............................................................................... $ Comprehensive income attributable to noncontrolling interests ....................................................................... Comprehensive income attributable to Redeemable noncontrolling interests ................................................... Comprehensive income ............................................................................ $ 418,347 $ 359,731 $ 292,109 509 481 288 35,707 454,563 $ 35,625 395,837 $ 23,773 316,170 78       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”) provides a framework for measuring fair value in generally accepted accounting principles. 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. Investments and notes receivable There are no quoted market prices available for investments in unconsolidated affiliates and notes receivable; however, we believe the carrying amounts are a reasonable estimate of fair value. Auction-rate securities As of December 29, 2012, we have approximately $3.3 million ($2.8 million net of temporary impairments) invested in auction-rate securities (“ARS”). These investments are backed by student loans (backed by the federal government) and investments in closed-end municipal bond funds, 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. Our ARS portfolio is comprised of investments that are rated investment grade 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 the year ended December 29, 2012, we received approximately $9.2 million of redemptions of our ARS. As of December 29, 2012, we have continued to classify our ARS as Level 3 within the fair value hierarchy due to the lack of observable inputs and the absence of significant refinancing activity. 79 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 8 – Fair Value Measurements – (Continued) As of December 29, 2012, 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, including assumptions for estimated interest rates, timing and amount of cash flows and expected holding period for the ARS portfolio, in accordance with applicable authoritative guidance. The balance of our recorded cumulative temporary impairment related to our ARS as of December 29, 2012 and December 31, 2011 was $0.5 million and $1.2 million, respectively. The temporary impairment has been recorded as part of Accumulated other comprehensive income within the equity section of our consolidated balance sheet. Debt The fair value of our debt, which approximates the carrying value of our debt, as of December 29, 2012 and December 31, 2011 was estimated at $533.3 million and $441.4 million, respectively. Factors that we considered when estimating the fair value of our debt include market conditions, prepayment and make-whole provisions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt. 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 foreign currency exchange rates. Our derivative instruments primarily include 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 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 future value of redeemable noncontrolling interests is subject to expected earnings and, if such earnings are not achieved, the value of the redeemable noncontrolling interests might be impacted. 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 do not impact the calculation of earnings per share. The values for Redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy. The details of the changes in Redeemable noncontrolling interests are presented in Note 6. 80   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 29, 2012 and December 31, 2011: Level 1 December 29, 2012  Level 2 Level 3 Total Assets: Available-for-sale securities ....................................... $ Derivative contracts ................................................... Total assets ............................................................ $ Liabilities: Derivative contracts ................................................... $ Total liabilities ....................................................... $ Redeemable noncontrolling interests ............................... $ Level 1 Assets: Available-for-sale securities ....................................... $ Derivative contracts ................................................... Total assets ............................................................ $ Liabilities: Derivative contracts ................................................... $ Total liabilities ....................................................... $ Redeemable noncontrolling interests ............................... $ Note 9 – Business Acquisitions and Other Transaction Acquisitions - $ - - $ - $ - $ - $ - $ - - $ - $ - $ - $ - $ 710 710 $ 2,816 $ - 2,816 $ 1,159 $ 1,159 $ - $ - $ 2,816 710 3,526 1,159 1,159 - $ 435,175 $ 435,175 December 31, 2011  Level 2 Level 3 Total - $ 1,273 1,273 $ 11,329 $ - 11,329 $ 11,329 1,273 12,602 2,062 $ 2,062 $ - $ - $ 2,062 2,062 - $ 402,050 $ 402,050 The operating results of all acquisitions are reflected in our financial statements from their respective acquisition dates. We completed certain acquisitions during the year ended December 29, 2012, which were immaterial to our financial statements individually and in the aggregate and resulted in the recording of approximately $128.0 million of initial goodwill through preliminary purchase price allocations. Total acquisition transaction costs incurred in the year ended December 29, 2012 were immaterial to our financial results. On December 31, 2010, we acquired 100% of the outstanding shares of Provet Holdings Limited (ASX: PVT), an Australasian wholesale 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. As a result of the acquisition, we recorded $27.0 million of goodwill. In addition to the Provet Holdings Limited acquisition, we completed other acquisitions during the year ended December 31, 2011, the operating results of which are reflected in our financial statements from their respective acquisition dates. These other acquisitions individually and in the aggregate had an immaterial impact on our reported operating results and resulted in the recording of approximately $38.8 million of initial goodwill through preliminary purchase price allocations. 81         HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 9 – Business Acquisitions and Other Transaction – (Continued) 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. 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 was 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 incurred $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. See below for a discussion of the refinancing of debt incurred as part of the acquisition of BAHS. Total consideration for the acquisition of BAHS, including $96.1 million of value for noncontrolling interests, was $351.1 million, summarized as follows: Net cash consideration paid by Henry Schein, Inc. ............................................................................................ $ Net book value of the United States animal health operations' assets and liabilities contributed ...................... Fair value of noncontrolling interest in BAHS ................................................................................................... Incremental debt incurred ................................................................................................................................... Total consideration ........................................................................................................................................ $ 41,990 86,048 96,110 127,000 351,148 We estimated the $96.1 million fair value of noncontrolling interest in BAHS as of the acquisition date by applying an income approach as our valuation technique. Our income approach followed a discounted cash flow method, which applied our best estimates of future cash flows and an estimated terminal value discounted to present value at a rate of return taking into account the relative risk of the cash flows. To confirm the reasonableness of the value derived from the income approach, we also analyzed the values of comparable companies which are publicly traded. The total consideration of $351.1 million was allocated as follows: Net assets of BAHS at fair value: Current assets ..................................................................................................................................................... $ 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 ..................................................................................................................... $ 164,789 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, Inc. 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. 82   HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 9 – Business Acquisitions and Other Transaction – (Continued) 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 put 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. On December 30, 2011, we acquired all of OHCP’s remaining direct and indirect interests in BAHS (including its interest in W.A. Butler Company) for $155 million in cash. As a result of this transaction, our ownership in BAHS increased to approximately 71.7%. The amount paid to OHCP for their remaining interests in BAHS was in excess of the previously agreed upon annual limits, as discussed above, but such limits were waived by all parties involved. We have subsequently acquired additional shares from other minority shareholders increasing our ownership to approximately 73.7% at December 29, 2012. On May 27, 2011, BAHS refinanced the terms and amount of its debt in an aggregate principal amount of $366.0 million (of which $55.0 million, which is eliminated in our consolidated financial statements, was provided by Henry Schein, Inc.). The refinanced debt consists of the following three components: Original amount of debt (includes $55.0 million of debt provided by Henry Schein, Inc.) ...................................... $ Number of remaining quarterly installments ......................... Quarterly payments from: December 31, 2012 through June 30, 2013 ............................ $ September 30, 2013 through June 30, 2014 ........................... July 1, 2014 through September 30, 2014 .............................. December 31, 2012 through September 30, 2015 .................. Final installment due on December 31, 2014 ........................ Final installment due on December 31, 2015 ........................ Balance outstanding as of December 29, 2012 ..................... Interest rate on debt ............................................................... Interest rate on debt - LIBOR floor ....................................... Term Loan A Term Loan B Revolver 100,000 $ 8 216,000 12 $ 50,000 4,931 8,766 2,739 $ 65,196 4,239 81,632 LIBOR plus a margin of 2.50% 135,287 138,807 LIBOR plus a margin of 3.25% 1.25 % - LIBOR plus a margin of 2.50% The debt agreement provides, among other things, that BAHS maintain certain interest coverage and maximum leverage ratios, and contains restrictions relating to subsidiary indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets 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. 83                   HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 9 – Business Acquisitions and Other Transaction – (Continued) 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. 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 acquisitions completed in subsequent periods, we have accrued liabilities for the estimated fair value of additional purchase price consideration at the time of the acquisition. Any adjustments to these accrual amounts are recorded in our consolidated statements of income. For the years ended December 29, 2012, December 31, 2011 and December 25, 2010, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities. Loan and Investment Agreement On December 12, 2008, we converted $10.4 million of loan receivables and related accrued interest into an equity interest of 15.33% in D4D Technologies, LLC (“D4D”). Due to the conversion, we now account for our equity interest in D4D under the equity method of accounting prospectively from the date of conversion. In addition, under our previous agreement, if certain product specification and performance milestones occurred, we were required to pay additional amounts (as equity contributions) to 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, of which $1.3 million was paid in each of 2011 and 2012. 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. 84 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 10 – Plans of Restructuring During the years ended December 29, 2012 and December 25, 2010, we incurred restructuring costs of approximately $15.2 million (approximately $10.5 million after taxes) and approximately $12.3 million (approximately $8.3 million after taxes), respectively, consisting of employee severance pay and benefits related to the elimination of approximately 200 positions and 184 positions, respectively, facility closing costs, representing primarily lease terminations and property and equipment write-off costs, and outside professional and consulting fees directly related to the restructuring plan. This restructuring program is complete and we do not expect any additional costs from this program. The costs associated with these restructurings are included in a separate line item, “Restructuring costs” within our consolidated statements of income. We expect that the majority of these costs will be paid in 2013. The following table shows the amounts expensed and paid for restructuring costs that were incurred during our 2012, 2011 and 2010 fiscal years and the remaining accrued balance of restructuring costs as of December 29, 2012, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet: Severance Costs Facility Closing Costs Balance, December 26, 2009 .......................................................... Provision ........................................................................................ Payments and other adjustments .................................................... Balance, December 25, 2010 .......................................................... Provision ........................................................................................ Payments and other adjustments .................................................... Balance, December 31, 2011 .......................................................... Provision ........................................................................................ Payments and other adjustments .................................................... Balance, December 29, 2012 .......................................................... $ 2,267 8,930 (9,205) 1,992 - (1,423) 569 12,841 (11,584) 1,826 $ 2,030 3,355 (3,034) 2,351 - (1,800) 551 2,351 (1,671) 1,231 $ Total 4,297 12,285 (12,239) 4,343 - (3,223) 1,120 15,192 (13,255) 3,057 The following table shows, by reportable segment, the restructuring costs incurred during 2012, 2011 and 2010 and the remaining accrued balance of restructuring costs as of December 29, 2012, December 31, 2011 and December 25, 2010: Health Care Distribution Technology and Value-Added Services Total Balance, December 26, 2009 .......................................................... Provision ........................................................................................ Payments and other adjustments .................................................... Balance, December 25, 2010 .......................................................... Provision ........................................................................................ Payments and other adjustments .................................................... Balance, December 31, 2011 .......................................................... Provision ........................................................................................ Payments and other adjustments .................................................... Balance, December 29, 2012 .......................................................... $ 4,225 12,063 (11,945) 4,343 - (3,223) 1,120 14,981 (13,058) 3,043 $ 72 222 (294) - - - - 211 (197) 14 $ 4,297 12,285 (12,239) 4,343 - (3,223) 1,120 15,192 (13,255) 3,057 85 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 for presently unvested restricted stock and restricted stock units 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. For the year ended December 25, 2010, diluted earnings per share includes the effect of common shares issuable upon conversion of our Convertible Notes since during this period, the debt was convertible at a premium as a result of the conditions of the debt. As a result, the amount in excess of the principal was presumed to be settled in common shares and is reflected in our calculation of diluted earnings per share. 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. A reconciliation of shares used in calculating earnings per basic and diluted share follows: Years Ended December 29, December 31, December 25, 2011 2010 2012 Basic .............................................................................................................. Effect of dilutive securities: Stock options, restricted stock and restricted stock units .......................... Effect of assumed conversion of convertible debt ......................................... Diluted ...................................................................................................... 87,499 2,324 - 89,823 90,120 2,500 - 92,620 90,097 2,271 900 93,268 Weighted-average options to purchase 8 shares of common stock at an exercise price of $69.45 per share and 991 shares of common stock at exercise prices ranging from $59.89 to $62.05 per share that were outstanding during the years ended December 31, 2011 and December 25, 2010, respectively, were excluded from the computation of diluted earnings per share. In each of these years, such options’ exercise prices exceeded the average market price of our common stock, thereby causing the effect of such options to be anti-dilutive. 86 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 12 – Income Taxes Income before taxes and equity in earnings of affiliates was as follows: December 29, 2012 Years ended December 31, 2011 December 25, 2010 Domestic .................................................................................................$ Foreign .................................................................................................... Total ..................................................................................................$ 466,457 $ 137,731 604,188 $ 403,171 $ 166,136 569,307 $ 343,502 158,533 502,035 The provisions for income taxes were as follows: December 29, 2012 Years ended December 31, 2011 December 25, 2010 Current income tax expense: U.S. Federal .............................................................................. $ State and local .......................................................................... Foreign .....................................................................................   Total current ......................................................................... Deferred income tax expense (benefit): U.S. Federal .............................................................................. State and local .......................................................................... Foreign .....................................................................................   Total deferred .......................................................................   Total provision ................................................................ $ 121,591 $ 23,279 32,916 177,786 9,242 946 (116) 10,072 125,148 $ 30,423 43,960 199,531 (12,466) (1,782) (5,071) (19,319) 108,540 22,227 35,353 166,120 (9,096) (1,299) 4,344 (6,051) 187,858 $ 180,212 $ 160,069 87                             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: Years Ended December 29, December 31, 2012 2011 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) .................................................................... 27,820 $ 9,944 21,035 58,799 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) ............................................................... (5,661) 42,875 (215,562) 2,768 47,101 (128,479) (30,598) (159,077) Net deferred income tax liability .................................................................................... $ (100,278) $ 21,960 7,944 23,749 53,653 (12,312) 43,025 (213,459) 6,715 48,678 (127,353) (28,136) (155,489) (101,836) (1)  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. (2) 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 29, 2012, we have federal net operating loss carryforwards of $6.1 million relating to our domestic subsidiaries that can be utilized against future federal income from 2012 through 2026. 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 $11.8 million as of December 29, 2012 and can be utilized against future foreign income from 2013 through 2019. Additionally, as of December 29, 2012, there were foreign net operating loss carryforwards of $157.8 million that have an indefinite life. 88                       HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 12 – Income Taxes – (Continued) The tax provisions differ from the amount computed using the federal statutory income tax rate as follows: December 29, 2012 Years ended December 31, 2011 December 25, 2010 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 .................................................... $ 211,466 $ 21,665 (17,979) 1,502 (21,018) (7,778) 187,858 $ 199,256 $ 18,035 (20,169) 442 (14,394) (2,958) 180,212 $ 175,713 13,224 (17,109) (7,085) (9,714) 5,040 160,069 For the year ended December 29, 2012, our effective tax rate was 31.1% compared to 31.7% for the prior year period. The net reduction in our 2012 effective tax rate results from additional tax planning, settlements of tax audits and higher income from lower taxing countries. The difference between our effective tax rates and the federal statutory tax rates for both periods related primarily to state and foreign income taxes and interest expense. 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, transfer or dispose of 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 29, 2012, the cumulative amount of reinvested earnings was approximately $564.6 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. 89         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 29, 2012 was approximately $40.7 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, which are classified as a component of the provision for income taxes, were approximately $8.0 million and $0, respectively, as of December 29, 2012. The tax years subject to examination by major tax jurisdictions include the years 2009 and forward by the U.S. Internal Revenue Service, the years 1997 and forward for certain states and the years 2004 and forward for certain foreign jurisdictions. The following table provides a reconciliation of unrecognized tax benefits excluding the effects of deferred taxes, interest and penalties:   December 29,  December 31, 2012 2011 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 .................................................................................................... $ 19,200 $ 4,900 11,200 (600) (1,300) (700) 32,700 $ 21,800 2,200 1,900 (700) (5,900) (100) 19,200 90 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 health care professionals and geographic areas. No single customer accounted for more than 0.8% of our net sales in 2012. With respect to our sources of supply, our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 37% and 7%, respectively, of our aggregate purchases in 2012. Our long-term notes receivable primarily 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 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 foreign currency forward contracts and by maintaining counter-party credit limits. These hedging activities provide only limited protection against currency exchange and credit risks. Factors that could influence the effectiveness of our hedging programs include currency markets and availability of hedging instruments and liquidity of the credit markets. All 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 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 contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., 18 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 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. Our hedging activities have historically not had a material impact on our consolidated financial statements. Accordingly, additional disclosures related to derivatives and hedging activities required by ASC Topic 815 have been omitted. 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: health care distribution and technology and value- added services. These segments offer different products and services to the same customer base. The health care distribution reportable segment aggregates our global dental, medical and animal health 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 global dental group serves office-based dental practitioners, schools and other institutions. Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global animal health group serves animal health practices and clinics. Our global dental, medical and animal health groups serve practitioners in 25 countries worldwide. Our global technology and value-added services group provides software, technology and other value-added services to health care practitioners. Our technology group offerings include practice management software systems for dental and medical practitioners and animal health clinics. Our value-added practice solutions include financial services on a non-recourse basis, e-services and continuing education services for practitioners. Beginning with the first quarter of 2012, we have reported net sales and prior-year sales comparisons for each of our global dental, medical, animal health and global technology and value-added services business groups. This sales reporting is consistent with our global business groups as realigned in 2012. These groups have been formed to provide distinct organizational focus for reaching and serving each practitioner segment with the benefits of a global perspective, as well as global product and service offerings and best practices. We will continue to report financial results for our health care distribution and technology and value-added services reportable segments. The health care distribution segment comprises three global operating segments (dental, medical and animal health) and the technology and value-added services segment remains unchanged. In connection with this change in business groups, goodwill was reallocated to the new reporting units. We reviewed the newly allocated goodwill and determined that there was no impairment. The following tables present information about our reportable and operating segments: Years Ended December 29, 2012 December 31, December 25, 2011 2010 Net Sales: Health care distribution (1): Dental ....................................................................................... $ Medical ..................................................................................... Animal health ........................................................................... Total health care distribution ............................................... Technology and value-added services (2) ...................................... Total ......................................................................................... $ 4,774,482 $ 1,560,921 2,321,151 8,656,554 283,413 8,939,967 $ 4,764,898 $ 1,504,454 2,010,270 8,279,622 250,620 8,530,242 $ 4,415,469 1,373,999 1,537,370 7,326,838 199,952 7,526,790 (1) (2) 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. Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and financial and other services, including e-services and continuing education services for practitioners. 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 29, December 31, December 25, 2012 2011 2010 Operating Income: Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ Income before taxes and equity in earnings of affiliates Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ Depreciation and Amortization: Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ Income Tax Expense: Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ Interest Income: Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ Interest Expense: Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ Purchases of Fixed Assets: Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ 541,667 $ 77,294 618,961 $ 529,236 $ 74,952 604,188 $ 113,688 $ 11,634 125,322 $ 165,346 $ 22,512 187,858 $ 13,293 $ 101 13,394 $ 30,790 $ 112 30,902 $ 47,057 $ 4,180 51,237 $ 512,094 $ 70,055 582,149 $ 501,266 $ 68,041 569,307 $ 106,485 $ 9,411 115,896 $ 157,391 $ 22,821 180,212 $ 15,531 $ 62 15,593 $ 30,350 $ 27 30,377 $ 42,751 $ 2,425 45,176 $ 455,607 65,524 521,131 438,696 63,339 502,035 94,542 6,672 101,214 132,785 27,284 160,069 14,090 8 14,098 33,629 12 33,641 37,158 1,842 39,000 As of    December 29, December 31, December 25, 2012 2011 2010 Total Assets: Health care distribution ............................................................ $ Technology and value-added services ...................................... Total ................................................................................... $ 5,001,188 $ 332,809 5,333,997 $ 4,542,331 $ 197,813 4,740,144 $ 4,416,382 131,089 4,547,471 93                                               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 presents information about our operations by geographic area as of and for the three years ended December 29, 2012. Net sales by geographic area are based on the respective locations of our subsidiaries. No country, except for the United States, 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. 2012 2011 2010 Net Sales Long-Lived Assets Net Sales Long-Lived Assets Net Sales Long-Lived Assets United States ............................ $ 5,496,969 $ 3,442,998 Other ........................................ 1,313,866 $ 1,022,820 5,212,861 $ 3,317,381 1,279,913 $ 4,777,172 $ 2,749,618 888,895 1,248,837 833,998 Consolidated total ............... $ 8,939,967 $ 2,336,686 $ 8,530,242 $ 2,168,808 $ 7,526,790 $ 2,082,835 Note 16 – Employee Benefit Plans Stock-based Compensation Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $37.3 million ($25.7 million after-tax), $36.9 million ($25.2 million after-tax) and $29.9 million ($20.4 million after-tax) for the years ended December 29, 2012, December 31, 2011 and December 25, 2010. 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 $17.8 million, $8.8 million and $11.3 million of benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities for the years ended December 29, 2012, December 31, 2011 and December 25, 2010. 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 included a combination of at-the-money stock options and restricted stock (including restricted stock units). Since March 2009, equity-based awards have been 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 29, 2012, there were 27,079 shares authorized and 3,458 shares available to be granted under the 1994 Stock Incentive Plan and 800 shares authorized and 107 shares available to be granted under the 1996 Non-Employee Director Stock Incentive Plan. 94     HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 16 – Employee Benefit Plans – (Continued) 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 (primarily four-year cliff vesting) and restricted stock that vests based on our achieving specified performance measurements and the recipient’s continued service over time (primarily 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. Although 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 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 will result in future 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 three years ended December 29, 2012 primarily consisted of restricted stock and restricted stock unit grants. Certain stock-based compensation granted may require us to settle in the form of a cash payment. During the year ended December 29, 2012, we recorded a liability of $0.6 million relating to the grant date fair value of this stock-based compensation, as well as an expense of $0.4 million relating to the change in the fair value of these grants. The weighted-average grant date fair value of stock-based awards granted before forfeitures was $73.42, $68.25 and $55.59 per share during the years ended December 29, 2012, December 31, 2011 and December 25, 2010. Total unrecognized compensation cost related to non-vested awards as of December 29, 2012 was $72.0 million, which is expected to be recognized over a weighted-average period of approximately 2.2 years. 95 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 29, 2012 Weighted Average Exercise Price 44.53 - 40.06 36.02 48.61 Shares 4,059 $ - (1,890) (31) 2,138 $ Years Ended December 31, 2011 Weighted Average Exercise Price 43.05 69.45 36.84 48.35 44.53 Shares 5,012 $ 10 (942) (21) 4,059 $ December 25, 2010 Weighted Average Exercise Price 40.66 56.03 30.84 50.12 43.05 Shares 6,295 $ 10 (1,249) (44) 5,012 $ Outstanding at beginning of year ........... Granted ................................................... Exercised ................................................ Forfeited ................................................. Outstanding at end of year ..................... Options exercisable at end of year ......... 2,137 $ 48.62 3,778 $ 43.47 4,252 $ 40.58 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) ............................................................................................. - % 20 % 2.13 % 4.75 - % 20 % 2.37 % 4.5 2011 2010 During the year ended December 29, 2012, we did not grant any stock options. We have not declared cash or stock dividends on our stock in the past and we do not anticipate declaring cash or stock 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 29, 2012 As of  December 31, 2011   December 25, 2010 Stock options outstanding ................................................................ $ Stock options exercisable ................................................................. 67,044 $ 66,964 80,821 $ 79,202 95,777 91,741 The total cash received as a result of stock option exercises for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 was approximately $72.5 million, $34.5 million and $38.4 million. In connection with these exercises, the tax benefits that we realized for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 were $31.6 million, $7.2 million and $8.3 million. We settle employee stock option exercises with newly issued common shares. 96       HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 16 – Employee Benefit Plans – (Continued) The total intrinsic value per share of restricted stock (including restricted stock units) that vested was $75.98, $66.78 and $56.76 during the years ended December 29, 2012, December 31, 2011 and December 25, 2010. The following table summarizes the status of our non-vested restricted shares/units for the year ended December 29, 2012: Time-Based Restricted Stock/Units Weighted Average Grant Date Fair Value Per Share Intrinsic Value Per Share Shares/Units Outstanding at beginning of period ........................................... Granted ...................................................................................... Vested ........................................................................................ Forfeited .................................................................................... Outstanding at end of period ..................................................... 870 $ 263 (87) (28) 1,018 $ 52.43 72.30 59.71 54.44 56.87 $ 79.96 Performance-Based Restricted Stock/Units Shares/Units Weighted Average Grant Date Fair Value Per Share Intrinsic Value Per Share Outstanding at beginning of period ........................................... Granted ...................................................................................... Vested ........................................................................................ Forfeited .................................................................................... Outstanding at end of period ..................................................... 1,698 $ 371 (736) (18) 1,315 $ 40.05 70.82 35.27 63.10 53.27 $ 79.96 401(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 consist of cash and were allocated entirely to the participants’ investment elections on file, subject to a 20% allocation limit to the Henry Schein Stock Fund. Forfeitures attributable to participants whose employment terminates prior to becoming fully vested are used to reduce our matching contributions and offset administrative expenses of the 401(k) plans. 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 29, 2012, December 31, 2011 and December 25, 2010 amounted to $23.8 million, $23.0 million and $21.2 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 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 to operations during the years ended December 29, 2012, December 31, 2011 and December 25, 2010 amounted to $2.1 million, $0.7 million and $0.6 million. 97 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 16 – Employee Benefit Plans – (Continued) Deferred Compensation Plan During 2011, we began to offer a deferred compensation plan to a select group of management or highly compensated employees of the Company and certain associated companies. This plan allows for the elective deferral of base salary, bonus and/or commission compensation by eligible employees. The amounts charged to operations during the years ended December 29, 2012 and December 31, 2011 was approximately $0.3 million and $0, respectively. Note 17 – Commitments and Contingencies Operating Leases We lease facilities and equipment under non-cancelable operating leases expiring through 2025. We expect that in the normal course of business, leases will be renewed or replaced by other leases. Future minimum annual rental payments under our non-cancelable operating leases as of December 29, 2012 were: 2013 ...............................................................................$ 2014 ............................................................................... 2015 ............................................................................... 2016 ............................................................................... 2017 ............................................................................... Thereafter ......................................................................   Total minimum operating lease payments ...............$ 75,901 57,356 47,616 34,859 26,629 65,718 308,079 Total rental expense for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 was $68.2 million, $65.5 million and $62.6 million. Capital Leases We lease certain equipment under capital leases. Future minimum annual lease payments under our capital leases together with the present value of the minimum capital lease payments as of December 29, 2012 were: 2013 ..................................................................................................$ 2014 .................................................................................................. 2015 .................................................................................................. 2016 .................................................................................................. 2017 .................................................................................................. Thereafter .......................................................................................... Total minimum capital lease payments .............................................   Less: Amount representing interest at 2.00% to 16.44%   Total present value of minimum capital lease payments ..............$ 1,739 1,039 446 187 20 - 3,431 (287) 3,144 98                                 HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 17 – Commitments and Contingencies – (Continued) Capital Expenditures We sometimes enter into certain commitments regarding capital expenditures. As of December 29, 2012, we have capital expenditure commitments of $1.3 million due within one year. Purchase Commitments In our health care distribution business, we sometimes enter into long-term purchase commitments to ensure the availability of products for distribution. Future minimum annual payments for inventory purchase commitments as of December 29, 2012 were: 2013 .................................................................................................$ 2014 ................................................................................................. 2015 ................................................................................................. 2016 ................................................................................................. 2017 ................................................................................................. Thereafter ........................................................................................   Total minimum inventory purchase commitment payments .......$ 67,245 26,840 23,489 24,559 23,580 78,053 243,766 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, governmental inquiries and investigations 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. As of December 29, 2012, 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 that have varying base aggregate annual payments for the years 2013 through 2017 and thereafter of approximately $14.5 million, $4.9 million, $2.5 million, $1.7 million, $2.6 million and $2.3 million. We also have lifetime consulting agreements that provide for current compensation of $0.5 million per year, increasing $25 every fifth year with the next increase in 2017. In addition, some agreements have provisions for additional incentives and compensation. 99                   HENRY SCHEIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (in thousands, except per share data) Note 18 – Quarterly Information (Unaudited) The following tables present certain quarterly financial data: Quarters ended March 31, 2012 (1) June 30, 2012 September 29, 2012 December 29, 2012 Net sales ............................................................ $ Gross profit ....................................................... Operating income .............................................. Net income ........................................................ 2,099,019 $ 610,579 133,295 89,061 2,201,452 $ 624,395 154,702 107,302 2,231,058 $ 609,044 149,622 105,310 2,408,438 663,495 181,342 121,715 Amounts attributable to Henry Schein, Inc.:  Net income ........................................................ Earnings per share attributable to Henry Schein, Inc.:  80,752 98,086 96,771 112,467 Basic ............................................................ $ Diluted ......................................................... 0.92 $ 0.89 1.11 $ 1.08 1.11 $ 1.08 1.29 1.26 Quarters ended March 26, 2011 June 25, 2011 September 24, 2011 December 31, 2011 Net sales ............................................................ $ Gross profit ....................................................... Operating income .............................................. Net income ........................................................ 1,947,761 $ 565,822 124,300 82,971 2,130,640 $ 612,224 151,215 105,056 2,111,693 $ 587,420 143,261 100,808 2,340,148 652,589 163,373 115,821 Amounts attributable to Henry Schein, Inc.:  Net income ........................................................ Earnings per share attributable to Henry Schein, Inc.:  76,495 94,475 91,961 104,730 Basic ............................................................ $ Diluted ......................................................... 0.84 $ 0.82 1.04 $ 1.01 1.02 $ 0.99 1.18 1.15 (1) See Note 10 - "Plans of Restructuring" for details of the restructuring costs incurred during the first quarter of 2012. 100                                         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 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 health care 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: • 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; • timing of the release of upgrades and enhancements to our technology-related products and services; • 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; • costs of developing new applications and services; • exclusivity requirements with certain vendors may prohibit us from distributing competitive products manufactured by other vendors; • loss of sales representatives; • costs related to acquisitions and/or integrations of technologies or businesses; • costs associated with our self-insured medical and dental insurance programs; • general market and economic conditions, as well as those specific to the health care industry and related industries; • our success in establishing or maintaining business relationships; • 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; • increases in the cost of shipping or service issues with our third-party shippers; • restructuring costs; and • changes in accounting principles. 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. 101 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: Years ended December 29, 2012 December 31, December 25, 2011 2010 Interest ............................................................................................. $ Income taxes ................................................................................... 23,358 $ 196,765 30,847 $ 173,318 25,531 145,758 There was approximately $8.3 million, $16.7 million and $286.3 million of debt assumed as a part of the acquisitions for the years ended December 29, 2012, December 31, 2011 and December 25, 2010, respectively. Debt assumed during the years ended December 29, 2012, December 31, 2011 and December 25, 2010 primarily relates to the acquisitions of C&M Vetlink, Provet Holdings Limited and BAHS, respectively. On September 3, 2010, we redeemed all of our 3% Convertible Notes originally due in 2034 for approximately $240 million in cash and issued 732 shares of our common stock. For the year ended December 29, 2012, we had $3.5 million of non-cash net unrealized gains related to foreign currency hedging activities. For the years ended December 31, 2011 and December 25, 2010, we had $0.7 million and $1.1 million of non-cash net unrealized losses related to foreign currency hedging activities. 102 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report as such term is defined in Rules 13a-15(e) 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 29, 2012 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 and ongoing acquisition integrations 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 29, 2012, post-acquisition related activities continued for the global animal health, dental, medical and technology businesses acquired during 2012 and 2011, representing aggregate annual revenues of approximately $674.0 million. These acquisitions, the majority of which utilize separate information and financial accounting systems, have been included in our consolidated financial statements. In addition, we completed the acquisitions of global dental and animal health businesses with approximate aggregate annual revenues of $83.0 million and $57.0 million, respectively. All acquisitions and acquisition integrations 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. 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 29, 2012. The effectiveness of our internal control over financial reporting as of December 29, 2012 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. 103 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Henry Schein, Inc. Melville, New York We have audited Henry Schein, Inc.’s internal control over financial reporting as of December 29, 2012, 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 29, 2012, 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 29, 2012 and December 31, 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 29, 2012 and our report dated February 13, 2013 expressed an unqualified opinion thereon. /s/ BDO USA, LLP New York, New York February 13, 2013 104 ITEM 9B. Other Information. None. ITEM 10. Directors, Executive Officers and Corporate Governance PART III Information required by this item regarding our directors and executive officers and our corporate governance is hereby incorporated by reference to the Section entitled “Election of Directors”, with respect to directors, and the first paragraph of the Section entitled “Corporate Governance - Board of Directors Meetings and Committees - Audit Committee”, with respect to corporate governance, in each case in our definitive 2013 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 2012 Proxy Statement filed pursuant to Regulation 14A on April 2, 2012. 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 2013 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 2013 Proxy Statement to be filed pursuant to Regulation 14A. 105     ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters We maintain several stock incentive plans for the benefit of certain officers, directors and employees. Certain plans are subject to stockholder approval, while other plans have been authorized solely by the Board of Directors. Descriptions of these plans appear in the notes to our consolidated financial statements. The following table summarizes information relating to these plans as of December 29, 2012: Number of Common   Shares to be Issued Upon Weighted- Average    Exercise of Outstanding Exercise Price of  Outstanding Options Options and Rights Number of Common Shares Available for Future Issuances Plan Category Plans Approved by Stockholders .................... Plans Not Approved by Stockholders ............. Total .......................................................... 2,138,393 $ - 2,138,393 $ 48.61 - 48.61 3,565,012 - 3,565,012 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 2013 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 2013 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 2013 Proxy Statement to be filed pursuant to Regulation 14A. 106                         ITEM 15. Exhibits, 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 57. 2. Financial Statement Schedules: Schedule II No other schedules are required. 3. Exhibits: The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit List immediately preceding the exhibits. 107 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. SIGNATURES Henry Schein, Inc. By: /s/ STANLEY M. BERGMAN Stanley M. Bergman Chairman and Chief Executive Officer February 13, 2013 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 /s/ STANLEY M. BERGMAN  Stanley M. Bergman /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/ CAROL RAPHAEL  Carol Raphael /s/ BRADLEY T. SHEARES, PH. D.  Bradley T. Sheares, Ph. D. /s/ LOUIS W. SULLIVAN, MD  Louis W. Sullivan, MD Capacity Date Chairman, Chief Executive Officer February 13, 2013 and Director (principal executive officer) Executive Vice President, Chief Financial February 13, 2013 Officer and Director (principal financial and   accounting officer) Director Director Director Director Director Director Director Director Director Director Director Director 108 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013 February 13, 2013                                                       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 13, 2013 relating to the consolidated financial statements of Henry Schein, Inc. which is contained in Item 8 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 13, 2013 109 Schedule II Valuation and Qualifying Accounts Additions Balance at Charged to Charged to beginning of statement of other Description period income (1) accounts (2) Deductions (3) Balance at end of period Year ended December 29, 2012: Allowance for doubtful accounts,    sales returns and other ...................... $ Year ended December 31, 2011: Allowance for doubtful accounts,    sales returns and other ...................... $ Year ended December 25, 2010: Allowance for doubtful accounts,    sales returns and other ...................... $ (1)  Represents amounts charged to bad debt expense. 65,853 $ 4,407 $ 13,305 $ (8,325) $ 75,240 56,267 $ 6,156 $ 9,665 $ (6,235) $ 65,853 51,724 $ 5,564 $ 5,700 $ (6,721) $ 56,267 (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. 110                     Exhibits 3.1 Amended and Restated Certificate of Incorporation of Henry Schein, Inc. dated November 2, 1995. (Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 filed on February 28, 2007.) 3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Henry Schein, Inc. dated November 12, 1997. (Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 filed on February 28, 2007.) 3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Henry Schein, Inc. dated June 16, 1998. (Incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S- 3, Reg. No. 333-59793 filed on July 24, 1998.) 3.4 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Henry Schein, Inc. dated May 25, 2005. (Incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 25, 2005 filed on August 4, 2005.) 3.5 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Henry Schein, Inc. dated May 15, 2012. (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on May 16, 2012.) 3.6 Amended and Restated By-Laws. (Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1, Reg. No. 33-96528 filed on October 10, 1995.) 3.7 Amendments to the 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 filed on September 22, 1997.) 3.8 Amendment to the Amended and Restated By-Laws adopted on May 15, 2012. (Incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on May 16, 2012.) 4.1 Master Note Facility, dated as of April 27, 2012, by and among us, Metropolitan Life Insurance Company, Metlife Investment Advisors Company, LLC and each MetLife affiliate which becomes party thereto. (Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on April 30, 2012.) 4.2 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 Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 2011 filed on May 3, 2011.)* 4.3 Amendment No. 1 to Master Note Facility, dated as of February 14, 2012, 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 4.2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed on February 15, 2012.) 4.4 Second Amendment to Master Note Facility, dated as of August 9, 2010, by and among us, New York Life Investment Management LLC and each NY Life affiliate which becomes party thereto, as amended. (Incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed on April 30, 2012.) 4.5 Private Shelf Agreement, dated as of August 9, 2010, by and among us, Prudential Investment Management, Inc. and each Prudential affiliate which becomes party thereto. (Incorporated by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 2011 filed on May 3, 2011.)* 111 Exhibits 4.6 Amendment to the Private Shelf Agreement, dated as of August 9, 2010, by and among us, 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 April 30, 2012.) 10.1 Henry Schein, Inc. 1994 Stock Incentive Plan, as amended and restated effective as of March 27, 2007. (Incorporated by reference to Appendix A to our definitive 2007 Proxy Statement on Schedule 14A filed on April 10, 2007.)** 10.2 Amendment Number 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 filed on February 24, 2009.)** 10.3 Amendment Number 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 filed on August 4, 2009.)** 10.4 Amendment Number Three to the Henry Schein, Inc. 1994 Stock Incentive Plan, effective as of February 23, 2010. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 2010 filed on May 4, 2010.)** 10.5 Amendment Number Four to the Henry Schein, Inc. 1994 Stock Incentive Plan, effective as of May 18, 2011. (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 25, 2011 filed on August 2, 2011.)** 10.6 Amendment Number Five to the Henry Schein, Inc. 1994 Stock Incentive Plan, effective as of May 18, 2011. (Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 25, 2011 filed on August 2, 2011.)** 10.7 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 filed on May 4, 2010.)** 10.8 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 filed on May 4, 2010.)** 10.9 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 filed on May 4, 2010.)** 10.10 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 filed on May 4, 2010.)** 10.11 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 filed on May 4, 2010.)** 112 Exhibits 10.12 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 filed on February 24, 2009.)** 10.13 Amendment Number One to the 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 Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2009 filed on August 4, 2009.)** 10.14 Amendment Number Two to the Henry Schein, Inc. Supplemental Executive Retirement Plan, amended and restated effective as of January 1, 2008. (Incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the fiscal year ended December 25, 2010 filed on February 22, 2011.)** 10.15 Amendment Number Three to the Henry Schein, Inc. Supplemental Executive Retirement Plan, amended and restated effective as of January 1, 2008. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2012 filed on November 7, 2012.)** 10.16 Henry Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan, as amended by Amendment Number One, effective as of May 25, 2004. (Incorporated by reference to Exhibit C to our definitive 2004 Proxy Statement on Schedule 14A filed on April 27, 2004.)** 10.17 Amendment Number 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 filed on February 24, 2009.)** 10.18 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 filed on August 2, 2010.)** 10.19 2001 Henry Schein, Inc. Section 162(m) Cash Bonus Plan effective as of June 6, 2001. (Incorporated by reference to Appendix B to our definitive 2001 Proxy Statement on Schedule 14A filed on April 30, 2001.)** 10.20 Amendment Number One to the 2001 Henry Schein, Inc. Section 162(m) Cash Bonus Plan, effective as of May 24, 2005. (Incorporated by reference to Exhibit B to our definitive 2005 Proxy Statement on Schedule 14A, filed on April 22, 2005.)** 10.21 Amendment Number Two to the 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 filed on February 24, 2009.)** 10.22 Amendment Number Three to the 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 filed on August 4, 2009.)** 10.23 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 filed on March 24, 2003.)** 10.24 Henry Schein, Inc. 2004 Employee Stock Purchase Plan, effective as of May 25, 2004. (Incorporated by reference to Exhibit D to our definitive 2004 Proxy Statement on Schedule 14A, filed on April 27, 2004.)** 113 Exhibits 10.25 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 filed on February 24, 2009.)** 10.26 Henry Schein, Inc. Deferred Compensation Plan effective as of January 1, 2011. (Incorporated by reference to Exhibit 10.23 to our Annual Report on Form 10-K for the fiscal year ended December 25, 2010 filed on February 22, 2011.)** 10.27 Amendment to the Henry Schein, Inc. Deferred Compensation Plan effective as of January 1, 2011. (Incorporated by reference to Exhibit 10.26 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed on February 15, 2012.)** 10.28 Henry Schein Management Team Performance Incentive Plan and Plan Summary, effective as of January 1, 2012. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012 filed on May 8, 2012.)** 10.29 Amended and Restated Employment Agreement dated as of December 31, 2011 between us and Stanley M. Bergman. (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 11, 2011.)** 10.30 Restricted Stock Unit Agreement 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 Current Report on Form 8-K filed on October 11, 2011.)** 10.31 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 filed on February 24, 2009.)** 10.32 Form of Amended and Restated Change in Control Agreements dated December 12, 2008 between us and certain executive officers who are a party thereto (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 filed on February 24, 2009.)** 10.33 Form of Amendment to Amended and Restated Change in Control Agreements effective January 1, 2012 between us and certain executive officers who are a party thereto (Gerald Benjamin, James Breslawski, Leonard David, Stanley Komaroff, Mark Mlotek, Steven Paladino, Michael Racioppi and Michael Zack, respectively). (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 20, 2012.)** 10.34 Credit Agreement, dated as of September 12, 2012, among us, the several lenders parties thereto, JPMorgan Chase Bank, N.A., as administrative agent, HSBC Bank USA, National Association, as syndication agent, and U.S. Bank National Association, The Bank of Tokyo-Mitsubishi UFJ, Ltd., UniCredit Bank AG and The Bank of New York Mellon, as co-documentation agents. (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 13, 2012.) 10.35 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. (Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 26, 2011 filed on August 3, 2011.)* 114 Exhibits 10.36 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. (Incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 2011 filed on May 3, 2011.)* 10.37 Second Amendment dated May 27, 2011 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. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10- Q for the fiscal quarter ended June 25, 2011 filed on August 2, 2011.) 10.38 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.) 10.39 Amendment No. 1 to the Omnibus Agreement, dated December 31, 2009, 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.) 10.40 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.) 10.41 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. (Incorporated by reference to Exhibit 10.45 to our Annual Report on Form 10-K for the fiscal year ended December 25, 2010 filed on February 22, 2011.) 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.+ 115 Exhibits 101.INS XBRL Instance Document+ 101.SCH XBRL Taxonomy Extension Schema Document+ 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document+ 101.DEF XBRL Taxonomy Extension Definition Linkbase Document+ 101.LAB XBRL Taxonomy Extension Label Linkbase Document+ 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document+ _________  + 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. 116 inside2012_13:Layout 1 4/3/13 11:53 AM Page 9 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 14, 2013 at 12:30 p.m. EDT, at The Carlyle Hotel, 35 East 76th Street, New York, New York 10021. FOLLOW HENRY SCHEIN ON: Facebook: http://www.facebook.com/henryschein Twitter: http://twitter.com/henryschein You Tube: http://www.youtube.com/user/henryscheininc Google+: http://plus.google.com/+henryschein Instagram: http://instagram.com/henryschein SHAREHOLDER REPORTS AND INVESTOR INQUIRIES For shareholder inquiries, including requests for quarterly and annual reports, contact our Investor Relations department at (631) 843-5611, or e-mail your request to 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 29, 2012, is available without charge to shareholders upon request to the Company’s Investor Relations department. The report is also 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 December 30, 1995 $ $ (1,474) (1,474) - 19,323 3.1% (10,479) $ $ - 9,144 (0.39) 0.34 26,894 .......... Henry Schein, Inc. 135 Duryea Road Melville, New York 11747 U.S.A. (631) 843-5500 www.henryschein.com 

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