UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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X
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 26,
2009
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__
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission
file number 0-27078
HENRY SCHEIN,
INC.(Exact
name of registrant as specified in its charter)
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DELAWARE
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135
Duryea Road
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(State
or other jurisdiction of
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Melville,
New York
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incorporation
or organization)
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(Address
of principal executive offices)
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11-3136595
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11747
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(I.R.S.
Employer Identification No.)
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(Zip
Code)
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(631)
843-5500
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $.01 per share
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The
Nasdaq Stock Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES: X NO:
__
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES: __ NO:
X
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES: X NO:
__
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
YES: __ NO:
__
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer: X
Accelerated filer:
__
Non-accelerated filer:
__ Smaller
reporting company: __
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES: __ NO:
X
The
aggregate market value of the registrant’s voting stock held by non-affiliates
of the registrant, computed by reference to the closing sales price as quoted on
the NASDAQ National Market on June 27, 2009 was approximately
$4,283,865,000.
As of
February 12, 2010, there were 90,684,358 shares of registrant’s Common Stock,
par value $.01 per share, outstanding.
Documents
Incorporated by Reference:
Portions
of the Registrant’s definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 26, 2009) are incorporated by reference in Part III
hereof.
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Page
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Number
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PART
I
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3
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15
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22
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23
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23
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24
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PART
II
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24
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27
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29
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50
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51
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103
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103
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105
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PART
III
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105
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105
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106
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106
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106
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PART
IV
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107
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108
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111
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PART
I
General
We
believe we are the largest distributor of healthcare products and services
primarily to office-based healthcare practitioners. We serve more
than 600,000 customers worldwide, including dental practitioners and
laboratories, physician practices and animal health clinics, as well as
government and other institutions. We believe that we have a strong
brand identity due to our more than 77 years of experience distributing
healthcare products.
We are
headquartered in Melville, New York, employ more than 12,500 people (of which
over 5,500 are based outside the United States) and have operations in the
United States, Australia, Austria, Belgium, Canada, China, the Czech Republic,
France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the
Netherlands, New Zealand, Portugal, Spain, Switzerland and the United
Kingdom. We also have affiliates in Iceland, Saudi Arabia and the
United Arab Emirates.
We have
established strategically located distribution centers to enable us to better
serve our customers and increase our operating efficiency. This
infrastructure, together with broad product and service offerings at competitive
prices, and a strong commitment to customer service, enables us to be a single
source of supply for our customers’ needs. Our infrastructure also
allows us to provide convenient ordering and rapid, accurate and complete order
fulfillment.
We
conduct our business through two reportable segments: healthcare distribution
and technology. These segments offer different products and services
to the same customer base. The healthcare distribution reportable
segment aggregates our dental, medical (including animal health) and
international operating segments. This segment consists of consumable
products, small equipment, laboratory products, large dental and medical
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic tests, infection-control products and
vitamins.
Industry
The
healthcare products distribution industry, as it relates to office-based
healthcare practitioners, is highly fragmented and diverse. This
industry, which encompasses the dental, medical and animal health markets, was
estimated to produce revenues of approximately $27.5 billion in 2009 in the
combined North American and European markets. The industry ranges
from sole practitioners working out of relatively small offices to group
practices or service organizations ranging in size from a few practitioners to a
large number of practitioners who have combined or otherwise associated their
practices.
Due in
part to the inability of office-based healthcare practitioners to store and
manage large quantities of supplies in their offices, the distribution of
healthcare supplies and small equipment to office-based healthcare practitioners
has been characterized by frequent, small quantity orders, and a need for rapid,
reliable and substantially complete order fulfillment. The purchasing
decisions within an office-based healthcare practice are typically made by the
practitioner or an administrative assistant. Supplies and small
equipment are generally purchased from more than one distributor, with one
generally serving as the primary supplier.
The
healthcare products distribution industry continues to experience growth due to
the aging population, increased healthcare awareness, the proliferation of
medical technology and testing, new pharmacology treatments and expanded
third-party insurance coverage, partially offset by the effects of reduced
insurance coverage due to unemployment. In addition, the physician
market continues to benefit from the shift of procedures and diagnostic testing
from acute care settings to alternate-care sites, particularly physicians’
offices.
We
believe that consolidation within the industry will continue to result in a
number of distributors, particularly those with limited financial and marketing
resources, seeking to combine with larger companies that can provide growth
opportunities. This consolidation also may continue to result in
distributors seeking to acquire companies that can enhance their current product
and service offerings or provide opportunities to serve a broader customer
base.
In recent
years, the healthcare industry has increasingly focused on cost
containment. This trend has benefited distributors capable of
providing a broad array of products and services at low prices. It
also has accelerated the growth of HMOs, group practices, other managed care
accounts and collective buying groups, which, in addition to their emphasis on
obtaining products at competitive prices, tend to favor distributors capable of
providing specialized management information support. We believe that
the trend towards cost containment has the potential to favorably affect demand
for technology solutions, including software, which can enhance the efficiency
and facilitation of practice management.
Competition
The
distribution and manufacture of healthcare supplies and equipment is highly
competitive. Many of the healthcare distribution products we sell are
available to our customers from a number of suppliers. In addition,
our competitors could obtain exclusive rights from manufacturers to market
particular products. Manufacturers also could seek to sell directly
to end-users, and thereby eliminate or reduce our role and that of other
distributors.
In North
America, we compete with other distributors, as well as several manufacturers,
of dental, medical and animal health products, primarily on the basis of price,
breadth of product line, customer service and value-added products and
services. In the sale of our dental products, our primary competitors
are the Patterson Dental division of Patterson Companies, Inc. and Benco Dental
Supply Company. In addition, we compete against a number of other
distributors that operate on a national, regional and local
level. Our primary competitors in the sale of medical products are
the General Medical division of McKesson Corp., PSS World Medical, Inc. and the
Allegiance division of Cardinal Health, Inc., which are national
distributors. In the animal health market, our primary competitors
are MWI Veterinary Supply Inc. and the Webster Veterinary division of Patterson
Companies, Inc. We also compete against a number of regional and
local medical and animal health distributors, as well as a number of
manufacturers that sell directly to physicians and
veterinarians. With regard to our dental practice management
software, we compete against numerous companies, including PracticeWorks, Inc.
and Patterson Dental division. In the animal health practice
management market, our primary competitor is IDEXX Laboratories,
Inc. The medical practice management and electronic medical records
market is very fragmented and therefore we compete with numerous companies such
as NextGen Healthcare Information Systems, Inc., eClinicalWorks, Allscripts, LLC
and athenahealth, Inc.
We also
face significant competition internationally, where we compete on the basis of
price and customer service against several large competitors, including the GACD
Group, Pluradent AG & Co., Planmeca Oy, Omega Pharma NV, Billericay Dental
Supply Co. Ltd., National Veterinary Services and Alcyon SA, as well as a large
number of dental, medical and animal health product distributors and
manufacturers in Australia, Austria, Belgium, China, the Czech Republic, France,
Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the Netherlands, New
Zealand, Portugal, Spain, Switzerland and the United Kingdom.
Significant
price reductions by our competitors could result in a similar reduction in our
prices. Any of these competitive pressures may materially adversely
affect our operating results.
Competitive
Strengths
We have
more than 77 years of experience in distributing products to healthcare
practitioners resulting in strong awareness of the “Henry Schein”
brand. Our competitive strengths include:
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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:
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•
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Field sales
consultants. We have approximately 2,750 field sales
consultants, including equipment sales specialists, covering major North
American, European and other international markets. These
consultants complement our direct marketing and telesales efforts and
enable us to better market, service and support the sale of more
sophisticated products and
equipment.
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•
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Direct
marketing. During 2009, we distributed approximately
27.0 million pieces of direct marketing material, including catalogs,
flyers, order stuffers and other promotional materials to existing and
potential office-based healthcare
customers.
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•
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Telesales. We
support our direct marketing effort with approximately 1,400 inbound and
outbound telesales representatives, who facilitate order processing and
generate new sales through direct and frequent contact with
customers.
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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:
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•
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Consumable supplies and
equipment. We offer over 90,000 Stock Keeping Units, or
SKUs, to our customers. Of the SKUs offered, approximately
49,000 are offered to our dental customers, approximately 39,000 to our
medical customers and approximately 22,000 to our animal health
customers. We offer over 100,000 additional SKUs to our
customers in the form of special order
items.
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•
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Technology and other
value-added products and services. We sell practice
management software systems to our dental, medical and animal health
customers. Our practice management software solutions provide
practitioners with patient treatment history, billing, accounts receivable
analyses and management, appointment calendars, electronic claims
processing and word processing programs. As of December 26,
2009, we have an active user base of more than 65,000 practices, including
Dentrix®, Easy Dental®, Oasis® and EXACT® for dental practices, MicroMD®
for physician practices and AVImark® for animal health
clinics.
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•
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Repair
services. We have 192 equipment sales and service
centers worldwide that provide a variety of repair, installation and
technical services for our healthcare customers. Our ProRepair
technicians provide installation and repair services for dental
handpieces; dental, medical and animal health small equipment; table top
sterilizers; and large dental
equipment.
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•
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Financial
services. We offer our customers solutions in operating
their practices by providing access to a number of financial services and
products (including non-recourse financing for equipment, technology and
software products; non-recourse patient financing; collection services and
credit card processing) at rates that we believe are generally lower than
what they would be able to secure
independently.
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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:
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•
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Exceptional order
fulfillment. Approximately 99% of items ordered in the
United States and Canada are shipped without back ordering and are shipped
on the same business day the order is
received.
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•
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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.
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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.
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Cost-effective
purchasing. We believe that cost-effective purchasing is
a key element to maintaining and enhancing our position as a
competitive-pricing provider of healthcare products. We
continuously evaluate our purchase requirements and suppliers’ offerings
and prices in order to obtain products at the lowest possible
cost. In 2009, our top 10 healthcare distribution suppliers and
our single largest supplier accounted for approximately 31% and 8%,
respectively, of our aggregate
purchases.
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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.
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Products
The
following table sets forth the percentage of consolidated net sales by principal
categories of products offered through our healthcare distribution and
technology reportable segments:
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2009
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2008
(1)
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2007
(1)
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Healthcare
Distribution
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Dental:
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Consumable
dental products, dental laboratory products
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and
small equipment (2)
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45.9
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%
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46.4
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%
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46.0
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%
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Large
dental equipment (3)
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17.1
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17.9
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18.3
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Total
dental
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63.0
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64.3
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64.3
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Medical:
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Medical
products (4)
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23.4
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22.9
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27.0
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Animal
health products (5)
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11.0
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10.2
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6.5
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Total
medical
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34.4
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33.1
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33.5
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Total
Healthcare Distribution
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97.4
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97.4
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97.8
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Technology
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Software
and related products and
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other
value-added products (6)
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2.6
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2.6
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2.2
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|||||
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Total
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100.0
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%
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100.0
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%
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100.0
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%
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(1)
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Adjusted
to reflect the effects of discontinued
operations.
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(2)
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Includes
X-ray products, infection-control products, handpieces, preventatives,
impression materials, composites, anesthetics, teeth, dental implants,
gypsum, acrylics, articulators and
abrasives.
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(3)
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Includes
dental chairs, delivery units and lights, X-ray equipment, equipment
repair and high-tech equipment.
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(4)
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Includes
branded and generic pharmaceuticals, vaccines, surgical products,
diagnostic tests, infection-control products, X-ray products, equipment
and vitamins.
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(5)
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Includes
branded and generic pharmaceuticals, surgical and consumable products and
services and equipment.
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(6)
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Includes
software and related products and other value-added products, including
financial products and continuing
education.
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Business
Strategy
Our
objective is to continue to expand as a value-added distributor of healthcare
products and services to office-based healthcare practitioners. To
accomplish this, we will apply our competitive strengths in executing the
following strategies:
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•
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Increase penetration of our
existing customer base. We have over 600,000 customers
worldwide and we intend to increase sales to our existing customer base
and enhance our position as their primary
supplier.
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•
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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.
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•
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Leverage our value-added
products and services. We continue to increase
cross-selling efforts for key product lines. In the dental
business, we have significant cross-selling opportunities between our
dental practice management software users and our dental distribution
customers. In the medical business, we have opportunities to
expand our vaccine, injectables and other pharmaceuticals sales to medical
distribution customers, as well as cross-selling core products and
practice management software with these key products. In the
animal health business, we have opportunities to cross-sell practice
management software and other
products.
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•
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Pursue strategic acquisitions
and joint ventures. Our acquisition strategy includes
acquiring businesses complementary to ours that will provide, among other
things, additional sales to be channeled through our existing distribution
infrastructure, access to additional product lines and networks of field
sales consultants and an opportunity to further expand into new geographic
markets.
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Markets
Served
Demographic
trends indicate that our markets are growing, as an aging U.S. population is
increasingly using healthcare services. Between 2009 and 2019, the 45
and older population is expected to grow by approximately
16%. Between 2009 and 2029, this age group is expected to grow by
approximately 30%. This compares with expected total U.S. population
growth rates of approximately 10% between 2009 and 2019 and approximately 21%
between 2009 and 2029.
In the
dental industry, there is predicted to be a rise in oral healthcare expenditures
as the 45 and older segment of the population increases. Cosmetic
dentistry is another growing aspect of dental practices as new technologies
allow dentists to offer cosmetic solutions that patients seek. At the
same time, there is an increase in dental insurance
coverage. Approximately 56% of the U.S. population now has some form
of dental coverage, up from 49% in 1996.
We
support our dental professionals through the many SKUs that we offer, as well as
through important value-added services, including practice management software,
electronic claims processing, financial services and continuing education, all
designed to help maximize a practitioner’s efficiency.
There
continues to be a migration of procedures from acute-care settings to
physicians’ offices, a trend that we believe provides additional opportunities
for us. There also is the continuing use of vaccines, injectables and
other pharmaceuticals in alternate-care settings. We believe we have
established a leading position as a vaccine supplier to the office-based
physician practitioner.
We
believe our international group is a leading European healthcare supplier
servicing office-based dental, medical and animal health
practices. We are in the process of implementing SAP software across
continental Europe. Additionally, we are expanding our dental
full-service model and our animal health presence in Europe, as well as our
medical offerings in countries where opportunities exist. Through our
“Schein Direct” program, we also have the capability to provide door-to-door air
package delivery to practitioners in over 200 countries around the
world.
For
information on revenues and long-lived assets by geographic area, see Note 13 of
“Notes to Consolidated Financial Statements,” which is incorporated herein by
reference.
Seasonality
and Other Factors Affecting Our Business and Quarterly Results
We
experience fluctuations in quarterly earnings. As a result, we may
fail to meet or exceed the expectations of securities analysts and investors,
which could cause our stock price to decline.
Our
business is subject to seasonal and other quarterly fluctuations. Net
sales and operating profits generally have been higher in the third and fourth
quarters due to the timing of sales of seasonal products (including influenza
vaccine, equipment and software products), purchasing patterns of office-based
healthcare practitioners and year-end promotions. Net sales and
operating profits generally have been lower in the first quarter, primarily due
to increased sales in the prior two quarters. While recent history
has resulted in flat to declining sales, we expect our historical seasonality of
sales to continue in the foreseeable future. Quarterly results also
may be adversely affected by a variety of other factors, including:
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•
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costs
of developing new applications and services;
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•
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costs
related to acquisitions and/or integrations of technologies or
businesses;
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•
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timing
and amount of sales and marketing expenditures;
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|||
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•
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timing
of pricing changes offered by our vendors;
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•
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timing
of the introduction of new products and services by our
vendors;
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•
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changes
in or availability of vendor contracts or rebate programs;
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•
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vendor
rebates based upon attaining certain growth goals;
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•
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changes
in the way vendors introduce or deliver products to
market;
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•
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exclusivity
requirements with certain vendors may prohibit us from distributing
competitive products manufactured by other vendors;
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•
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loss
of sales representatives;
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•
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general
economic conditions, as well as those specific to the healthcare industry
and related industries;
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•
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timing
of the release of upgrades and enhancements to our technology-related
products and services;
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•
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our
success in establishing or maintaining business
relationships;
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•
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restructuring
charges;
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•
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changes
in accounting principles;
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•
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unexpected
difficulties in developing and manufacturing
products;
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•
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product
demand and availability or recalls by
manufacturers;
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•
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exposure
to product liability and other claims in the event that the use of the
products we sell results in injury;
and
|
|
•
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increases
in the cost of shipping or service issues with our third-party
shippers.
|
Any
change in one or more of these or other factors could cause our annual or
quarterly operating results to fluctuate. If our operating results do
not meet market expectations, our stock price may decline.
Governmental
Regulations
Certain
of our businesses involve the distribution of pharmaceuticals and medical
devices, and in this regard we are subject to various local, state, federal and
foreign governmental laws and regulations applicable to the distribution of
pharmaceuticals and medical devices. Among the federal laws
applicable to us are the Controlled Substances Act, the Federal Food, Drug, and
Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987, and
Section 361 of the Public Health Service Act. We are also subject to
comparable foreign regulations.
The
Federal Food, Drug, and Cosmetic Act generally regulates the introduction,
manufacture, advertising, labeling, packaging, storage, handling, reporting,
marketing and distribution of, and record keeping for, pharmaceuticals and
medical devices shipped in interstate commerce, and states may similarly
regulate such activities within the state. Section 361 of the Public
Health Service Act (“Regulations to Control Communicable Diseases”) serves as
the legal basis for such regulation of human cells, tissues, and cellular and
tissue-based products.
The
Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug,
and Cosmetic Act, establishes certain requirements applicable to the wholesale
distribution of prescription drugs, including the requirement that wholesale
drug distributors be licensed by each state in which they conduct business,
provide certain drug pedigree information on the distribution of prescription
drugs and act in accordance with federally established guidelines on storage,
handling and record maintenance.
Under the
Controlled Substances Act, as a distributor of controlled substances, we are
required to obtain a registration annually from the United States Drug
Enforcement Administration and are subject to other regulatory requirements
relating to the sale, marketing, handling and distribution of such drugs, in
accordance with specified rules and regulations. We are subject to
inspection by the United States Drug Enforcement Administration.
Certain
of our businesses are required to register for permits and/or licenses with, and
comply with operating and security standards of, the United States Drug
Enforcement Administration, the United States Food and Drug Administration, the
Department of Health and Human Services, and various state boards of pharmacy,
state health departments and/or comparable state agencies as well as foreign
agencies, and certain accrediting bodies depending on the type of operations and
location of product distribution, manufacturing or sale. These
businesses include those that distribute, manufacture and/or repackage
prescription pharmaceuticals and/or medical devices and/or human cells, tissues,
and cellular and tissue-based products, or own pharmacy operations, or install,
maintain or repair equipment. In addition, Section 301 of the
National Organ Transplant Act, and a number of comparable state laws, impose
civil and/or criminal penalties for the transfer of certain human tissue (for
example human bone products) for valuable consideration, while generally
permitting payments for the reasonable costs incurred in procuring, processing,
storing and distributing that tissue. The United States Drug Enforcement
Administration, the United States Food and Drug Administration and state
regulatory authorities have broad enforcement powers, including the ability to
suspend or limit the distribution of products by our distribution centers, seize
or order the recall of products and impose significant criminal, civil and
administrative sanctions for violations of these laws and
regulations. Our customers are also subject to significant federal,
state, local and foreign governmental regulation.
Certain
of our businesses are subject to federal and state (and similar foreign)
healthcare fraud and abuse, referral and reimbursement laws, and regulations
with respect to their operations. Such laws prohibit, among other
things, the submission or causing the submission of false or fraudulent claims
for reimbursement, and soliciting, offering, receiving or paying remuneration in
order to induce the referral of a patient or ordering, purchasing, leasing or
arranging for or recommending ordering, purchasing or leasing, of items or
services that are paid for by government health care programs. The
fraud and abuse laws and regulations have been subject to heightened enforcement
activity over the past few years, particularly through “relators,” who
file
complaints
in the name of the United States (and if applicable, particular states) under
federal and state False Claims Act statutes. These laws and
regulations are subject to frequent modification and varied interpretation, and
can have a material adverse impact on us if a violation is
found. Certain of our businesses also maintain contracts with the
governments and are subject to certain regulatory requirements relating to
government contractors.
Certain
of our businesses are subject to various additional federal, state, local and
foreign laws and regulations, including with respect to the sale,
transportation, storage, handling and disposal of hazardous or potentially
hazardous substances, and safe working conditions. In recent years,
some states have passed or proposed laws and regulations that are intended to
protect the integrity of the supply channel. For example, Florida and
certain other states have implemented or are implementing drug pedigree
requirements that require that prescription drugs be distributed with records or
information documenting the prior distribution of the drug, back to the
manufacturers. California has enacted a law requiring the
implementation of an electronic drug pedigree system that provides track and
trace chain of custody technologies, such as radio frequency identification, or
RFID, technologies, although the effective date has been postponed until January
1, 2015 for pharmaceutical manufacturers and repackagers, and July 1, 2016 for
pharmaceutical wholesalers. There have been increasing efforts by
various levels of government to regulate the pharmaceutical distribution system
in order to prevent the introduction of counterfeit, adulterated or misbranded
pharmaceuticals into the distribution system. At the federal level,
the United States Food and Drug Administration issued final regulations pursuant
to the Prescription Drug Marketing Act, or PDMA, that became effective in
December 2006. The regulations impose drug pedigree and other chain of custody
requirements that increase the costs and/or burden to us of selling our products
and handling product returns. In early December 2006, the federal
District Court for the Eastern District of New York issued a preliminary
injunction, enjoining the implementation of some of the federal drug pedigree
requirements, in response to a case initiated by secondary
distributors. On December 31, 2009, the U.S. District Court
granted a motion to extend the time for either party to re-open the matter
(which had been administratively closed in light of potential legislative action
by Congress), and the court in effect extended the injunction through September
30, 2010.
The
United States Food and Drug Administration Amendments Act of 2007, which went
into effect on September 27, 2007, requires the United States Food and Drug
Administration to establish standards and identify and validate effective
technologies for the purpose of securing the pharmaceutical supply chain against
counterfeit drugs. These standards include any track and trace or
authentication technologies, such as RFID and other technologies. The
United States Food and Drug Administration is currently conducting pilot
programs and seeking feedback from medical device manufacturers and distributors
who are willing to comment prior to unique device identifier (UDI) rulemaking
expected mid-2010.
Certain
of our businesses involve access to personal health, medical, financial and
other information of individuals, and are accordingly subject to numerous
federal, state, local and foreign laws and regulations that protect the privacy
and security of such information, and require, among other things, the
implementation of various recordkeeping, operational, notice and other practices
intended to safeguard that information, limit its use to allowed purposes, and
notify individuals in the event of privacy breaches.
In
addition, United States and international import and export laws and regulations
require us to abide by certain standards relating to the importation and
exportation of products. We also are subject to certain laws and
regulations concerning the conduct of our foreign operations, including the U.S.
Foreign Corrupt Practices Act and anti-bribery laws and laws pertaining to the
accuracy of our internal books and records.
While we
believe that we are substantially compliant with the foregoing laws and
regulations promulgated thereunder and possess all material permits and licenses
required for the conduct of our business, there can be no assurance that
regulations that impact our business or customers’ practices will not have a
material adverse impact on our business. As a result of political,
economic and regulatory influences, the healthcare distribution industry in the
United States is under intense scrutiny and subject to fundamental
changes. We cannot predict what reform proposals, if any, will be
adopted, when they may be adopted, or what impact they may have on
us.
See “ITEM
1A. Risk Factors” for a discussion of additional regulatory developments that
may affect our results of operations and financial condition.
Proprietary
Rights
We hold
trademarks relating to the “Henry Schein” name and logo, as well as certain
other trademarks. Pursuant to agreements executed in connection with
our reorganization in 1994, both Henry Schein, Inc. and Schein Pharmaceutical,
Inc. (which was acquired by Watson Pharmaceuticals, Inc. in 2000), a company
previously engaged in the manufacture and distribution of multi-source
pharmaceutical products, are entitled to use the “Schein” name in connection
with their respective businesses, but Schein Pharmaceutical, Inc. must always
use “Schein” in combination with the word “Pharmaceutical” and is not entitled
to use the name “Henry Schein” or to use “Schein” alone or with any other word
(other than “Pharmaceutical”). We intend to protect our trademarks to
the fullest extent practicable.
Employees
As of
December 26, 2009, we employed more than 12,500 full-time employees, including
approximately 1,400 telesales representatives, 2,750 field sales consultants,
including equipment sales specialists, 2,250 warehouse employees, 500
computer programmers and technicians, 1,150 management employees and 4,800
office, clerical and administrative employees. Approximately 279 or
2.2% of our employees were subject to collective bargaining
agreements. We believe that our relations with our employees are
excellent.
Available
Information
We make
available free of charge through our Internet Web site, www.henryschein.com,
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, statements of beneficial ownership of securities on Forms 3, 4 and
5 and amendments to these reports and statements filed or furnished pursuant to
Section 13(a) and Section 16 of the Securities Exchange Act of 1934 as soon as
reasonably practicable after such materials are electronically filed with, or
furnished to, the SEC.
The above
information is also available at the SEC’s Office of Investor Education and
Advocacy at United States Securities and Exchange Commission, 100 F Street,
N.E., Washington, D.C. 20549-0213 or obtainable by calling the SEC at (800)
732-0330. In addition, the SEC maintains an Internet Web site at
www.sec.gov,
where the above information can be viewed.
Our
principal executive offices are located at 135 Duryea Road, Melville, New York
11747, and our telephone number is (631) 843-5500. Unless the context
specifically requires otherwise, the terms the “Company,” “Henry Schein,” “we,”
“us” and “our” mean Henry Schein, Inc., a Delaware corporation, and its
consolidated subsidiaries.
Executive
Officers of the Registrant
The
following table sets forth certain information regarding our executive
officers:
|
Name
|
Age
|
Position
|
||
|
Stanley
M. Bergman
|
60
|
Chairman,
Chief Executive Officer, Director
|
||
|
Gerald
A. Benjamin
|
57
|
Executive
Vice President, Chief Administrative Officer, Director
|
||
|
James
P. Breslawski
|
56
|
President,
Chief Operating Officer, Director
|
||
|
Leonard
A. David
|
61
|
Senior
Vice President, Chief Compliance Officer
|
||
|
James
Harding
|
54
|
Senior
Vice President, Chief Technology Officer
|
||
|
Stanley
Komaroff
|
74
|
Senior
Advisor
|
||
|
Mark
E. Mlotek
|
54
|
Executive
Vice President, Corporate Business Development,
Director
|
||
|
Steven
Paladino
|
52
|
Executive
Vice President, Chief Financial Officer, Director
|
||
|
Michael
Racioppi
|
55
|
Senior
Vice President, Chief Merchandising Officer
|
||
|
Lonnie
Shoff
|
51
|
President,
Global Healthcare Specialties Group
|
||
|
Michael
Zack
|
57
|
President,
International Group
|
Stanley M. Bergman has been
our Chairman and Chief Executive Officer since 1989 and a director since
1982. Mr. Bergman held the position of President from 1989 to
2005. Mr. Bergman held the position of Executive Vice President from
1985 to 1989 and Vice President of Finance and Administration from 1980 to
1985.
Gerald A. Benjamin has been
our Executive Vice President and Chief Administrative Officer since 2000 and a
director since 1994. Prior to holding his current position, Mr.
Benjamin was Senior Vice President of Administration and Customer Satisfaction
since 1993. Mr. Benjamin was Vice President of Distribution
Operations from 1990 to 1992 and Director of Materials Management from 1988 to
1990. Before joining us in 1988, Mr. Benjamin was employed for 13
years in various management positions at Estée Lauder, Inc., where his last
position was Director of Materials Planning and Control.
James P. Breslawski has been
our President and Chief Operating Officer since 2005 and a director since
1992. Mr. Breslawski held the position of Executive Vice President
and President of U.S. Dental from 1990 to 2005, with primary responsibility for
the North American Dental Group. Between 1980 and 1990, Mr.
Breslawski held various positions with us, including Chief Financial Officer,
Vice President of Finance and Administration and Controller.
Leonard A. David has been our
Senior Vice President and Chief Compliance Officer since 2006. Mr.
David held the position of Vice President and Chief Compliance Officer from 2005
to 2006. Mr. David held the position of Vice President of Human
Resources and Special Counsel from 1995 to 2005. Mr. David held the
position of Vice President, General Counsel and Secretary from 1990 through 1994
and practiced corporate and business law for eight years prior to joining
us.
James Harding has been our
Chief Technology Officer since 2005 and Senior Vice President since
2001. Prior to holding his current position, Mr. Harding was Chief
Information Officer since 2001, with primary responsibility for worldwide
information technology.
Stanley Komaroff has been our
Senior Advisor since 2003. Prior to joining us, Mr. Komaroff was a
partner for 35 years in the law firm of Proskauer Rose LLP, counsel to
us. He served as Chairman of that firm from 1991 to
1999.
Mark E. Mlotek has been
Executive Vice President of our Corporate Business Development Group since 2004
and was Senior Vice President of Corporate Business Development from 2000 to
2004. Prior to that, Mr. Mlotek was Vice President, General Counsel
and Secretary from 1994 to 1999 and became a director in 1995. Prior
to joining us, Mr. Mlotek was a partner in the law firm of Proskauer Rose LLP,
counsel to us, specializing in mergers and acquisitions, corporate
reorganizations and tax law from 1989 to 1994.
Steven Paladino has been our
Executive Vice President and Chief Financial Officer since
2000. Prior to holding his current position, Mr. Paladino was Senior
Vice President and Chief Financial Officer from 1993 to 2000 and has been a
director since 1992. From 1990 to 1992, Mr. Paladino served as Vice
President and Treasurer and from 1987 to 1990 served as Corporate
Controller. Before joining us, Mr. Paladino was employed in public
accounting for seven years, most recently with the international accounting firm
of BDO Seidman, LLP. Mr. Paladino is a certified public
accountant.
Michael Racioppi has been our
Senior Vice President, Chief Merchandising Officer since 2008. Prior to holding
his current position, Mr. Racioppi was President of the Medical Division from
2000 to 2008 and Interim President from 1999 to 2000, and Corporate Vice
President from 1994 to 2008. Mr. Racioppi served as Senior Director,
Corporate Merchandising from 1992 to 1994. Before joining us in 1992,
Mr. Racioppi was employed by Ketchum Distributors, Inc. as the Vice President of
Purchasing and Marketing.
Lonnie Shoff has been
President of the Henry Schein Global Healthcare Specialties Group since
September 2009. Prior to joining us, Ms. Shoff was employed with
Roche Diagnostics, most recently as Senior Vice President General Manager,
Applied Science.
Michael Zack has been
President of our International Group since 2006. Mr. Zack held the
position of Senior Vice President of our International Group from 1989 to
2006. Mr. Zack was employed by Polymer Technology (a subsidiary of
Bausch & Lomb) as Vice President of International Operations from 1984 to
1989 and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975
to 1984.
Declining
economic conditions could adversely affect our results of operations and
financial condition.
Disruptions
in the financial markets and other macro-economic uncertainties that affect the
economy and the economic outlook of the United States and other parts of the
world could adversely impact our customers and vendors, which could adversely
affect us. Recessionary conditions and depressed levels of consumer
and commercial spending have caused and may continue to cause customers to
reduce, modify, delay or cancel plans to purchase our products and may cause
vendors to reduce their output or change their terms of sales. We
generally sell products to customers with payment terms. If
customers’ cash flow or operating and financial performance deteriorates, or if
they are unable to make scheduled payments or obtain credit, they may not be
able to pay, or may delay payment to us. Likewise, for similar
reasons vendors may restrict credit or impose different payment
terms. Any inability of current and/or potential customers to pay us
for our products and/or services or any demands by vendors for different payment
terms may adversely affect our results of operations and financial
condition.
Disruptions
in the financial market may adversely affect the availability and cost of credit
to us.
Our
ability to make scheduled payments or refinance our obligations with respect to
indebtedness will depend on our operating and financial performance, which in
turn is subject to prevailing economic conditions and financial, business and
other factors beyond our control. Disruptions in the financial
markets may adversely affect the availability and cost of credit to
us.
The healthcare products distribution
industry is highly competitive, and we may not be able to compete
successfully.
We
compete with numerous companies, including several major manufacturers and
distributors. Some of our competitors have greater financial and
other resources than we do, which could allow them to compete more
successfully. Most of our products are available from several sources
and our customers tend to have relationships with several
distributors. Competitors could obtain exclusive rights to market
particular products, which we would then be unable to
market. Manufacturers also could increase their efforts to sell
directly to end-users and thereby eliminate or reduce our role and that of other
distributors. Industry consolidation among healthcare products
distributors, price competition, the unavailability of products, whether due to
our inability to gain access to products or to interruptions in supply from
manufacturers, or the emergence of new competitors also could increase
competition. In the future, we may be unable to compete successfully
and competitive pressures may reduce our revenues.
The
healthcare industry is experiencing changes that could adversely affect our
business.
The
healthcare industry is highly regulated and subject to changing political,
economic and regulatory influences. In recent years, the healthcare
industry has undergone significant change driven by various efforts to reduce
costs, including the reduction of spending budgets by government and private
insurance programs, such as Medicare, Medicaid and corporate health insurance
plans; pressures relating to potential healthcare reform; trends toward managed
care; consolidation of healthcare distribution companies; consolidation of
healthcare manufacturers; collective purchasing arrangements and consolidation
among office-based healthcare practitioners; and changes in reimbursements to
customers. Both our own profit margins and the profit margins of our
customers may be adversely affected by laws and regulations reducing
reimbursement rates for pharmaceuticals and/or medical treatments or services or
changing the methodology by which reimbursement levels are
determined. If we are unable to react effectively to these and other
changes in the healthcare industry, our operating results could be adversely
affected. In addition, the enactment of any significant healthcare
reforms could have a material adverse effect on our business.
Failure
to comply with existing and future regulatory requirements could negatively
affect our business.
Our
business is subject to requirements under various local, state, federal and
international laws and regulations applicable to the distribution of
pharmaceuticals and medical devices, and human cells, tissue, and cellular and
tissue-based products (“HCT/P”). Among the federal laws with which we
must comply are the Controlled Substances Act, the Federal Food, Drug, and
Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987, and
Section 361 of the Public Health Services Act (“Regulations to Control
Communicable Diseases”). Among other things, such laws, and the
regulations promulgated thereunder:
|
·
|
regulate
the storage and distribution, labeling, packaging, handling, reporting,
record keeping, introduction, manufacturing and marketing of drugs, HCT/P
and medical devices;
|
|
·
|
subject
us to inspection by the United States Food and Drug Administration and the
United States Drug Enforcement
Administration;
|
|
·
|
regulate
the storage, transportation and disposal of certain of our products that
are considered hazardous materials;
|
|
·
|
require
registration with the United States Food and Drug Administration and the
United States Drug Enforcement Administration and various state
agencies;
|
|
·
|
require
record keeping and documentation of transactions involving drug
products;
|
|
·
|
require
us to design and operate a system to identify and report suspicious orders
of controlled substances to the United States Drug Enforcement
Agency;
|
|
·
|
require
us to manage returns of products that have been recalled and subject us to
inspection of our recall procedures and activities;
and
|
|
·
|
impose
reporting requirements if a pharmaceutical, HCT/P or medical device causes
serious illness, injury or death.
|
Applicable
federal, state and local laws and regulations also may require us to meet
various standards relating to, among other things, licensure or registration,
sales and marketing practices, product integrity and supply tracking to the
manufacturer of the product, personnel, privacy and security of health or other
personal information, installation, maintenance and repair of equipment, and the
importation and exportation of products. Our business also is subject
to requirements of similar and other foreign governmental laws and regulations
affecting our operations abroad. The United States Food and Drug
Administration and Drug Enforcement Administration have recently increased their
regulatory and enforcement activities.
The
failure to comply with any of these regulations, or new interpretations of
existing laws and regulations, or the imposition of any additional laws and
regulations, could negatively affect our business. There can be no
assurance that current government regulations will not adversely affect our
business. The costs to us associated with complying with the various
applicable statutes and regulations, as they now exist and as they may be
modified, could be material. Allegations by a governmental body that we have not
complied with these laws could have a material adverse impact on our
businesses. If it is determined that we have not complied with these
laws, we are potentially subject to penalties including warning letters, civil
and criminal penalties, mandatory recall of product, seizure of product and
injunction, and suspension or limitation of product sale and
distribution. If we enter into settlement agreements to resolve
allegations of non-compliance, we could be required to make settlement payments
or be subject to civil and criminal penalties, including fines and the loss of
licenses. Non-compliance with government requirements could adversely
affect our ability to participate in federal and state government healthcare
programs, and damage our reputation. Any of the foregoing could have
a material adverse impact on our businesses. We believe that the
healthcare services industry will continue to be subject to extensive domestic
and foreign government regulation and that we have adequate compliance programs
and controls in place to ensure substantial compliance with the laws and
regulations.
If
we fail to comply with laws and regulations relating to healthcare fraud, we
could suffer penalties or be required to make significant changes to our
operations.
We are
subject to extensive and frequently changing federal and state laws and
regulations relating to healthcare fraud. These measures, which focus
on our relationships with pharmaceutical manufacturers and healthcare providers,
have been subject to varying interpretations, as well as heightened enforcement
activity, over the past few years. Significant enforcement activity
has been the result of actions brought by “relators,” who file complaints in the
name of the United States (and if applicable, particular states) under federal
and state False Claims Act statutes. Damages can be catastrophic if a
violation is found. These healthcare fraud laws and regulations,
among other things, (i) prohibit persons from soliciting, offering, receiving or
paying any remuneration in order to induce the referral of a patient for
treatment or to induce the ordering, purchasing, leasing or arranging for or
recommending ordering, purchasing or leasing of items or services that are in
any way paid for by government-sponsored healthcare programs and (ii) impose a
number of restrictions upon referring physicians and providers of designated
health services under government healthcare programs. While we
believe that we are substantially compliant with all applicable laws, many of
the regulations applicable to us are vague or indefinite and have not been
interpreted by the courts. They may be interpreted or applied by a
prosecutorial, regulatory or judicial authority in a manner that could require
us to make changes in our operations. If we fail to comply with
applicable laws and regulations, we could suffer civil and criminal penalties,
including the loss of licenses or our ability to participate in federal and
state healthcare programs.
Expansion
of group purchasing organizations (“GPO”) or hospital purchasing power and the
multi-tiered costing structure may place us at a competitive
disadvantage.
The
medical-products industry is subject to a multi-tiered costing structure, which
can vary by manufacturer and/or product. Under this structure, certain
institutions can obtain more favorable prices for medical products than we are
able to obtain. The multi-tiered costing structure continues to expand as many
large integrated healthcare providers and others with significant purchasing
power, such as GPOs, demand more favorable pricing terms. This may threaten our
ability to compete effectively, which would in turn negatively impact our
results of operations. Although we are seeking to obtain similar terms from
manufacturers and obtain access to lower prices demanded by GPO contracts or
other contracts, we cannot assure such terms will be obtained or contracts will
be executed.
Our
international operations are subject to inherent risks that could adversely
affect our operating results.
International
operations are subject to risks that may materially adversely affect our
business, results of operations and financial condition. The risks
that our international operations are subject to include, among other
things:
|
·
|
difficulties
and costs relating to staffing and managing foreign
operations;
|
|
·
|
difficulties
in establishing channels of
distribution;
|
|
·
|
fluctuations
in the value of foreign currencies;
|
|
·
|
longer
payment cycles of foreign customers and difficulty of collecting
receivables in foreign
jurisdictions;
|
|
·
|
repatriation
of cash from our foreign operations to the United
States;
|
|
·
|
regulatory
requirements;
|
|
·
|
unexpected
difficulties in importing or exporting our
products;
|
|
·
|
imposition
of import/export duties, quotas, sanctions or penalties;
and
|
|
·
|
unexpected
regulatory, economic and political changes in foreign
markets.
|
We
experience fluctuations in quarterly earnings. As a result, we may
fail to meet or exceed the expectations of securities analysts and investors,
which could cause our stock price to decline.
Our
business is subject to seasonal and other quarterly fluctuations. Net
sales and operating profits generally have been higher in the third and fourth
quarters due to the timing of sales of seasonal products (including influenza
vaccine, equipment and software products), purchasing patterns of office-based
healthcare practitioners and year-end promotions. Net sales and
operating profits generally have been lower in the first quarter, primarily due
to increased sales in the prior two quarters. While recent history
has resulted in flat to declining sales, we expect our historical seasonality of
sales to continue in the foreseeable future. Quarterly results may
also be adversely affected by a variety of other factors,
including:
|
·
|
costs
of developing new applications and
services;
|
|
·
|
costs
related to acquisitions and/or integrations of technologies or
businesses;
|
|
·
|
timing
and amount of sales and marketing
expenditures;
|
|
·
|
timing
of pricing changes offered by our
vendors;
|
|
·
|
timing
of the introduction of new products and services by our
vendors;
|
|
·
|
changes
in or availability of vendor contracts or rebate
programs;
|
|
·
|
vendor
rebates based upon attaining certain growth
goals;
|
|
·
|
changes
in the way vendors introduce or deliver products to
market;
|
|
·
|
exclusivity
requirements with certain vendors may prohibit us from distributing
competitive products manufactured by other
vendors;
|
|
·
|
loss
of sales representatives;
|
|
·
|
general
economic conditions, as well as those specific to the healthcare industry
and related industries;
|
|
·
|
timing
of the release of upgrades and enhancements to our technology-related
products and services;
|
|
·
|
our
success in establishing or maintaining business
relationships;
|
|
·
|
restructuring
charges;
|
|
·
|
changes
in accounting principles;
|
|
·
|
unexpected
difficulties in developing and manufacturing
products;
|
|
·
|
product
demand and availability or recalls by
manufacturers;
|
|
·
|
exposure
to product liability and other claims in the event that the use of the
products we sell results in injury;
and
|
|
·
|
increases
in the cost of shipping or service issues with our third-party
shippers.
|
Any
change in one or more of these or other factors could cause our annual or
quarterly operating results to fluctuate. If our operating results do
not meet market expectations, our stock price may decline.
Because
substantially all of the products that we distribute are not manufactured by us,
we are dependent upon third parties for the manufacture and supply of
substantially all of our products.
We obtain
substantially all of our products from third-party suppliers. Generally, we do
not have long-term contracts with our suppliers committing them to supply
products to us. Therefore, suppliers may not provide the products we
need in the quantities we request. Because we generally do not
control the actual production of the products we sell, we may be subject to
delays caused by interruption in production based on conditions outside of our
control. In the event that any of our third-party suppliers were to
become unable or unwilling to continue to provide the products in required
volumes, we would need to identify and obtain
acceptable
replacement sources on a timely basis. There is no guarantee that we
would be able to obtain such alternative sources of supply on a timely basis, if
at all. An extended interruption in the supply of our products,
including the supply of our influenza vaccine and any other high sales volume
product, would have an adverse effect on our results of operations, which most
likely would adversely affect the value of our common stock.
Our
expansion through acquisitions and joint ventures involves risks.
We have
expanded our domestic and international markets in part through acquisitions and
joint ventures, and we expect to continue to make acquisitions and enter into
joint ventures in the future. Such transactions involve numerous
risks, including possible adverse effects on our operating results or the market
price of our common stock. Some of our acquisitions and future
acquisitions may also give rise to an obligation by us to make contingent
payments or to satisfy certain repurchase obligations, which payments could have
an adverse effect on our results of operations. In addition,
integrating acquired businesses and joint ventures:
|
·
|
may
result in a loss of customers or product lines of the acquired businesses
or joint ventures;
|
|
·
|
requires
significant management attention;
and
|
|
·
|
may
place significant demands on our operations, information systems and
financial resources.
|
There can
be no assurance that our future acquisitions or joint ventures will be
successful. Our ability to continue to successfully effect
acquisitions and joint ventures will depend upon the following:
|
·
|
the
availability of suitable acquisition or joint venture candidates at
acceptable prices;
|
|
·
|
our
ability to consummate such transactions, which could potentially be
prohibited due to U.S. or foreign antitrust
regulations;
|
|
·
|
the
availability of financing on acceptable terms, in the case of non-stock
transactions; and
|
|
·
|
the
liquidity of our investments and our ability to raise capital could be
affected by the financial credit
markets.
|
Our
acquisitions may not result in the benefits and revenue growth we
expect.
We are in
the process of integrating companies that we acquired and including the
operations, services, products and personnel of each company within our
management policies, procedures and strategies. We cannot be sure
that we will achieve the benefits of revenue growth that we expect from these
acquisitions or that we will not incur unforeseen additional costs or expenses
in connection with these acquisitions. To effectively manage our
expected future growth, we must continue to successfully manage our integration
of these companies and continue to improve our operational systems, internal
procedures, working capital management, financial and operational
controls. If we fail in any of these areas, our business could be
adversely affected.
We
face inherent risk of exposure to product liability and other claims in the
event that the use of the products we sell results in injury.
Our
business involves a risk of product liability and other claims in the ordinary
course of business, and from time to time we are named as a defendant in cases
as a result of our distribution of pharmaceutical products, medical devices,
bone regeneration and other healthcare products. Additionally, we own
a majority interest in companies that manufacture certain dental products. As a
result, we are subject to the potential risk of product liability or other
claims relating to the manufacture and distribution of products by those
entities. One of the potential risks we face in the distribution of
our products is liability resulting from counterfeit or tainted products
infiltrating the supply chain. In addition, some of the products that
we transport and sell are considered hazardous materials. The
improper handling of such materials or accidents involving the
transportation
of such materials could subject us to liability. We have various
insurance policies, including product liability insurance, covering risks and in
amounts that we consider adequate. In many cases in which we have
been sued in connection with products manufactured by others, the manufacturer
of the product provides us with indemnification. There can be no
assurance that the insurance coverage we maintain is sufficient or will be
available in adequate amounts or at a reasonable cost, or that indemnification
agreements will provide us with adequate protection. A successful
claim brought against us in excess of available insurance or not covered by
indemnification agreements, or any claim that results in significant adverse
publicity against us, could have an adverse effect on our business.
Our
technology segment depends upon continued software and e-services product
development, technical support and successful marketing.
Competition
among companies supplying practice management software and/or e-services is
intense and increasing. Our future sales of practice management
software and e-services will depend on, among other factors:
|
·
|
the
effectiveness of our sales and marketing
programs;
|
|
·
|
our
ability to enhance our products and services;
and
|
|
·
|
our
ability to provide ongoing technical
support.
|
We cannot
be sure that we will be successful in introducing and marketing new software,
software enhancements or e-services, or that such software, software
enhancements and e-services will be released on time or accepted by the
market. Our software and applicable e-services products, like
software products generally, may contain undetected errors or bugs when
introduced or as new versions are released. We cannot be sure that
future problems with post-release software errors or bugs will not
occur. Any such defective software may result in increased expenses
related to the software and could adversely affect our relationships with the
customers using such software. We do not have any patents on our
software or e-services, and rely upon copyright, trademark and trade secret
laws, as well as contractual and common law protections. We cannot
provide assurance that such legal protections will be available or enforceable
to protect our software or e-services products.
Risks
generally associated with our information systems could adversely affect our
results of operations.
We rely
on information systems in our business to obtain, rapidly process, analyze and
manage data to, among other things:
|
·
|
maintain
and manage worldwide systems to facilitate the purchase and distribution
of thousands of inventory items from numerous distribution
centers;
|
|
·
|
receive,
process and ship orders on a timely
basis;
|
|
·
|
manage
the accurate billing and collections for thousands of customers;
and
|
|
·
|
process
payments to suppliers.
|
Our
results of operations could be adversely affected if these systems are
interrupted, damaged by unforeseen events, or fail for any extended period of
time.
Our
revenues depend on our relationships with capable sales personnel as well as
customers, suppliers and manufacturers of the products that we
distribute.
Our
future operating results depend on our ability to maintain satisfactory
relationships with qualified sales personnel as well as customers, suppliers and
manufacturers. If we fail to maintain our existing relationships with
such persons or fail to acquire relationships with such key persons in the
future, our business may be adversely affected.
Our
future success is substantially dependent upon our senior
management.
Our
future success is substantially dependent upon the efforts and abilities of
members of our existing senior management, particularly Stanley M. Bergman,
Chairman and Chief Executive Officer, among others. The loss of the
services of Mr. Bergman could have a material adverse effect on our
business. We have an employment agreement with Mr.
Bergman. We do not currently have “key man” life insurance policies
on any of our employees. Competition for senior management is
intense, and we may not be successful in attracting and retaining key
personnel.
Increases
in the cost of shipping or service issues with our third-party shippers could
harm our business.
Shipping
is a significant expense in the operation of our business. We ship
almost all of our orders through third-party delivery services, and typically
bear the cost of shipment. Accordingly, any significant increase in
shipping rates could have an adverse effect on our operating
results. Similarly, strikes or other service interruptions by those
shippers could cause our operating expenses to rise and adversely affect our
ability to deliver products on a timely basis.
We
may not be able to respond to technological change effectively.
Traditional
healthcare supply and distribution relationships are being challenged by
electronic online commerce solutions. Our distribution business is
characterized by rapid technological developments and intense
competition. The continued advancement of online commerce will
require us to cost-effectively adapt to changing technologies, to enhance
existing services and to develop and introduce a variety of new services to
address changing demands of consumers and our clients on a timely basis,
particularly in response to competitive offerings. Our inability to
anticipate and effectively respond to changes on a timely basis could have an
adverse effect on our business.
The
market price for our common stock may be highly volatile.
The
market price for our common stock may be highly volatile. A variety
of factors may have a significant impact on the market price of our common
stock, including:
|
·
|
the
publication of earnings estimates or other research reports and
speculation in the press or investment
community;
|
|
·
|
changes
in our industry and competitors;
|
|
·
|
our
financial condition, results of operations and cash flows and
prospects;
|
|
·
|
stock
repurchases;
|
|
·
|
any
future issuances of our common stock, which may include primary offerings
for cash, stock splits, issuances in connection with business
acquisitions, restricted stock/units and the grant or exercise of stock
options from time to time;
|
|
·
|
the
dilutive impact of convertible debt on our earnings per
share;
|
|
·
|
general
market and economic conditions; and
|
|
·
|
any
outbreak or escalation of hostilities in areas where we do
business.
|
In
addition, the Nasdaq Stock Market can experience extreme price and volume
fluctuations that can be unrelated or disproportionate to the operating
performance of the companies listed on Nasdaq. Broad market and
industry factors may negatively affect the market price of our common stock,
regardless of actual operating performance. In the past, following
periods of volatility in the market price of a company’s securities, securities
class action litigation has often been instituted against
companies. This type of litigation, if instituted, could result in
substantial costs and a diversion of management’s attention and resources, which
would have an adverse effect on our business.
Certain
provisions in our governing documents and other documents to which we are a
party may discourage third-party offers to acquire us that might otherwise
result in our stockholders receiving a premium over the market price of their
shares.
The
provisions of our certificate of incorporation and by-laws may make it more
difficult for a third party to acquire us, may discourage acquisition bids and
may limit the price that certain investors might be willing to pay in the future
for shares of our common stock. These provisions, among other
things:
|
·
|
require
the affirmative vote of the holders of at least 60% of the shares of
common stock entitled to vote to approve a merger, consolidation, or a
sale, lease, transfer or exchange of all or substantially all of our
assets; and
|
|
·
|
require
the affirmative vote of the holders of at least 66 2/3% of our common
stock entitled to vote to:
|
|
·
|
remove
a director; and
|
|
·
|
to
amend or repeal our by-laws, with certain limited
exceptions.
|
In
addition, our 1994 Stock Incentive Plan, 1996 Non-Employee Director Stock
Incentive Plan and 2001 Non-Employee Director Incentive Plan provide for
accelerated vesting of stock options upon a change in control, and certain
agreements between us and our executive officers provide for increased severance
payments if those executive officers are terminated without cause by the Company
or if they terminate for good reason in each case, within two years after a
change in control or within ninety days prior to the effective date of the
change in control or after the first public announcement of the pendency of the
change in control.
Tax legislation initiatives could
adversely affect our net earnings and tax liabilities.
We are
subject to the tax laws and regulations of the United States federal, state and
local governments, as well as foreign jurisdictions. From time to
time, various legislative initiatives may be proposed that could adversely
affect our tax positions. There can be no assurance that our effective tax rate
will not be adversely affected by these initiatives. In addition, tax
laws and regulations are extremely complex and subject to varying
interpretations. Although we believe that our historical tax
positions are sound and consistent with applicable laws, regulations and
existing precedent, there can be no assurance that our tax positions will not be
challenged by relevant tax authorities or that we would be successful in any
such challenge.
We have
no unresolved comments from the staff of the United States Securities and
Exchange Commission that were issued 180 days or more preceding the end of our
2009 fiscal year.
We own or
lease the following properties:
|
Own
or
|
Approximate
|
Lease
Expiration
|
||||||
|
Property
|
Location
|
Lease
|
Square
Footage
|
Date
|
||||
|
Corporate
Headquarters
|
Melville,
NY
|
Own
|
105,000
|
N/A
|
||||
|
Corporate
Headquarters
|
Melville,
NY
|
Lease
|
185,000
|
July
2020
|
||||
|
Office
and Distribution Center
|
West
Allis, WI
|
Lease
|
106,000
|
October
2017
|
||||
|
Distribution
Center
|
Denver,
PA
|
Lease
|
613,000
|
February
2013
|
||||
|
Distribution
Center
|
Indianapolis,
IN
|
Own
|
287,000
|
N/A
|
||||
|
Distribution
Center
|
Indianapolis,
IN
|
Lease
|
144,000
|
June
2011
|
||||
|
Distribution
Center
|
Grapevine,
TX
|
Lease
|
242,000
|
July
2013
|
||||
|
Distribution
Center
|
Gallin,
Germany
|
Own
|
215,000
|
N/A
|
||||
|
Distribution
Center
|
Jacksonville,
FL
|
Lease
|
212,000
|
June
2013
|
||||
|
Distribution
Center
|
Niagara
on the Lake, Canada
|
Lease
|
94,000
|
September
2016
|
||||
|
Distribution
Center
|
Sparks,
NV
|
Lease
|
338,000
|
February
2011
|
||||
|
Office
and Distribution Center
|
Gillingham,
United Kingdom
|
Lease
|
103,000
|
April
2010
|
||||
|
Distribution
Center
|
Tours,
France
|
Own
|
133,000
|
N/A
|
||||
|
Distribution
Center
|
Lyssach,
Switzerland
|
Lease
|
180,000
|
July
2016
|
The
properties listed in the table above are our principal properties primarily used
by our healthcare distribution segment. In addition, we lease
numerous other distribution, office, showroom, manufacturing and sales space in
locations including the United States, Australia, Austria, Belgium, Canada,
China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel,
Italy, Luxembourg, the Netherlands, New Zealand, Portugal, Spain, Switzerland
and the United Kingdom.
We
believe that our properties are in good condition, are well maintained and are
suitable and adequate to carry on our business. We have additional
operating capacity at certain distribution center facilities.
Our
business involves a risk of product liability and other claims in the ordinary
course of business, and from time to time we are named as a defendant in cases
as a result of our distribution of pharmaceutical, medical devices and other
healthcare products. As a business practice, we generally obtain
product liability indemnification from our suppliers.
We have
various insurance policies, including product liability insurance, covering
risks in amounts that we consider adequate. In many cases in which we
have been sued in connection with products manufactured by others, the
manufacturer provides us with indemnification. There can be no
assurance that the insurance coverage we maintain is sufficient or will be
available in adequate amounts or at a reasonable cost, or that indemnification
agreements will provide us with adequate protection. In our opinion,
all pending matters are covered by insurance or will not otherwise have a
material adverse effect on our financial condition or results of
operations.
As of
December 26, 2009, we had accrued our best estimate of potential losses relating
to product liability and other claims that were probable to result in a
liability and for which we were able to reasonably estimate a
loss. This accrued amount, as well as related expenses, was not
material to our financial position, results of operations or cash
flows. Our method for determining estimated losses considers
currently available facts, presently enacted laws and regulations and other
external factors, including probable recoveries from third
parties.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of fiscal 2009.
PART
II
Our
common stock is traded on the NASDAQ Global Select Market tier of the Nasdaq
Stock Market, or NASDAQ, under the symbol HSIC. On October 2, 2007,
our common stock became a component of the NASDAQ-100 stock market
index. The following table sets forth, for the periods indicated, the
high and low reported sales prices of our common stock as reported on NASDAQ for
each quarterly period in fiscal 2009 and 2008:
|
High
|
Low
|
|||||||
|
Fiscal
2009:
|
||||||||
|
1st
Quarter
|
$ | 40.60 | $ | 33.55 | ||||
|
2nd
Quarter
|
47.70 | 38.77 | ||||||
|
3rd
Quarter
|
56.50 | 43.82 | ||||||
|
4th
Quarter
|
56.92 | 49.10 | ||||||
|
Fiscal
2008:
|
||||||||
|
1st
Quarter
|
$ | 63.62 | $ | 55.25 | ||||
|
2nd
Quarter
|
59.43 | 50.74 | ||||||
|
3rd
Quarter
|
60.42 | 48.93 | ||||||
|
4th
Quarter
|
55.66 | 32.08 | ||||||
On
February 12, 2010, there were approximately 1,040 holders of record of our
common stock and the last reported sales price was $56.17.
Purchases
of Equity Securities by the Issuer
Our
current share repurchase program, announced on June 21, 2004, originally allowed
us to repurchase up to $100.0 million of shares of our common stock, which
represented approximately 3.5% of the shares outstanding at the commencement of
the program. On both October 31, 2005 and March 28, 2007, our Board
of Directors authorized an additional $100.0 million, for a total of $300.0
million, of shares of our common stock to be repurchased under this
program. As of December 26, 2009, we had repurchased $242.3 million
of common stock (5,633,952 shares) under this initiative, with $57.7 million
available for future common stock share repurchases.
During
the fiscal quarter ended December 26, 2009, we did not repurchase any of our
common stock. The maximum number of shares that may yet be purchased
under this program, as shown below, is determined at the end of each month based
on the closing price of our common stock at that time.
|
Maximum
Number
|
||
|
of
Shares that May Yet
|
||
|
Fiscal
Month
|
Be
Purchased Under Our Program
|
|
|
09/27/09
through 10/31/09
|
1,092,852
|
|
|
11/01/09
through 11/28/09
|
1,146,226
|
|
|
11/29/09
through 12/26/09
|
1,089,142
|
Dividend
Policy
We have
not declared any cash dividends on our common stock during fiscal years 2009 or
2008. We currently do not anticipate declaring any cash dividends on
our common stock in the foreseeable future. We intend to retain
earnings to finance the expansion of our business and for general corporate
purposes, including our stock repurchase program. Any declaration of
dividends will be at the discretion of our Board of Directors and will depend
upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The agreements governing our senior notes limit the
distribution of dividends without the prior written consent of the lenders
(limited to $25.0 million, plus 80% of cumulative net income, plus net proceeds
from the issuance of additional capital stock). As of December 26,
2009, the amount of retained earnings free of restrictions was $962.6
million.
Stock
Performance Graph
The graph
below compares the cumulative total stockholder return on $100 invested,
assuming the reinvestment of all dividends, on December 25, 2004, the last
trading day before the beginning of our 2005 fiscal year, through the end of
fiscal 2009 with the cumulative total return on $100 invested for the same
period in the Dow Jones U.S. Health Care Index and the NASDAQ Stock Market (U.S.
companies) Composite Index.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
ASSUMES
$100 INVESTED ON DECEMBER 25, 2004
ASSUMES
DIVIDENDS REINVESTED
|
December
25,
|
December
31,
|
December
30,
|
December
29,
|
December
27,
|
December
26,
|
|||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
|
Henry
Schein, Inc.
|
$ | 100.00 | $ | 129.04 | $ | 144.83 | $ | 183.47 | $ | 104.61 | $ | 156.74 | ||||||||||||
|
Dow
Jones U.S. Health
|
||||||||||||||||||||||||
|
Care
Index
|
100.00 | 108.32 | 115.78 | 125.46 | 96.85 | 117.87 | ||||||||||||||||||
|
NASDAQ
Stock Market
|
||||||||||||||||||||||||
|
(U.S.
companies) Composite Index
|
100.00 | 101.33 | 114.01 | 123.71 | 73.11 | 105.61 | ||||||||||||||||||
The
following selected financial data, with respect to our financial position and
results of operations for each of the five fiscal years in the period ended
December 26, 2009, set forth below, has been derived from, should be read in
conjunction with and is qualified in its entirety by reference to, our
consolidated financial statements and notes thereto. The selected
financial data presented below should also be read in conjunction with ITEM 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and ITEM 8, “Financial Statements and Supplementary
Data.”
|
Years
ended
|
||||||||||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
December
30,
|
December
31,
|
||||||||||||||||
|
2009
|
2008
(1) (2)
|
2007
(1) (2)
|
2006
(1) (2)
|
2005
(1) (2)
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | $ | 5,021,523 | $ | 4,513,127 | ||||||||||
|
Gross
profit
|
1,916,820 | 1,874,295 | 1,706,092 | 1,459,330 | 1,299,562 | |||||||||||||||
|
Selling,
general and administrative
|
||||||||||||||||||||
|
expenses
|
1,449,715 | 1,431,769 | 1,319,153 | 1,155,215 | 1,037,445 | |||||||||||||||
|
Restructuring
costs (3)
|
3,020 | 23,240 | - | - | - | |||||||||||||||
|
Operating
income
|
464,085 | 419,286 | 386,939 | 304,115 | 262,117 | |||||||||||||||
|
Other
expense, net
|
(11,365 | ) | (23,837 | ) | (8,430 | ) | (13,529 | ) | (20,765 | ) | ||||||||||
|
Income
from continuing operations before taxes,
|
||||||||||||||||||||
|
equity
in earnings (losses) of affiliates and
|
||||||||||||||||||||
|
noncontrolling
interests
|
452,720 | 395,449 | 378,509 | 290,586 | 241,352 | |||||||||||||||
|
Income
taxes
|
(127,521 | ) | (131,210 | ) | (128,556 | ) | (103,440 | ) | (88,299 | ) | ||||||||||
|
Equity
in earnings (losses)
|
||||||||||||||||||||
|
of
affiliates
|
5,243 | 5,037 | (73 | ) | 835 | 827 | ||||||||||||||
|
Income
from continuing operations
|
330,442 | 269,276 | 249,880 | 187,981 | 153,880 | |||||||||||||||
|
Income
(loss) from discontinued
|
||||||||||||||||||||
|
operations,
net of tax (4)
|
2,715 | (7,902 | ) | (20,704 | ) | (19,304 | ) | (11,161 | ) | |||||||||||
|
Net
income
|
333,157 | 261,374 | 229,176 | 168,677 | 142,719 | |||||||||||||||
|
Less:
Net income attributable to
|
||||||||||||||||||||
|
noncontrolling
interests
|
(22,004 | ) | (21,917 | ) | (17,442 | ) | (8,090 | ) | (5,963 | ) | ||||||||||
|
Net
income attributable to
|
||||||||||||||||||||
|
Henry
Schein, Inc.
|
$ | 311,153 | $ | 239,457 | $ | 211,734 | $ | 160,587 | $ | 136,756 | ||||||||||
|
Amounts
attributable to
|
||||||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||||||
|
Income
from continuing operations
|
308,551 | 247,347 | 232,529 | 180,049 | 147,848 | |||||||||||||||
|
Income
(loss) from discontinued
|
||||||||||||||||||||
|
operations,
net of tax
|
2,602 | (7,890 | ) | (20,795 | ) | (19,462 | ) | (11,092 | ) | |||||||||||
|
Net
income
|
$ | 311,153 | $ | 239,457 | $ | 211,734 | $ | 160,587 | $ | 136,756 | ||||||||||
|
Earnings
(loss) per share attributable to
|
||||||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||||||
|
From
continuing operations:
|
||||||||||||||||||||
|
Basic
|
$ | 3.47 | $ | 2.78 | $ | 2.63 | $ | 2.05 | $ | 1.70 | ||||||||||
|
Diluted
|
3.41 | 2.71 | 2.55 | 2.00 | 1.67 | |||||||||||||||
|
From
discontinued operations:
|
||||||||||||||||||||
|
Basic
|
$ | 0.03 | $ | (0.09 | ) | $ | (0.24 | ) | $ | (0.22 | ) | $ | (0.13 | ) | ||||||
|
Diluted
|
0.03 | (0.08 | ) | (0.23 | ) | (0.21 | ) | (0.12 | ) | |||||||||||
|
From
net income:
|
||||||||||||||||||||
|
Basic
|
$ | 3.50 | $ | 2.69 | $ | 2.39 | $ | 1.83 | $ | 1.57 | ||||||||||
|
Diluted
|
3.44 | 2.63 | 2.32 | 1.79 | 1.55 | |||||||||||||||
|
Weighted-average
common
|
||||||||||||||||||||
|
shares
outstanding:
|
||||||||||||||||||||
|
Basic
|
88,872 | 89,080 | 88,559 | 87,952 | 87,006 | |||||||||||||||
|
Diluted
|
90,556 | 91,221 | 91,163 | 89,820 | 88,489 | |||||||||||||||
|
Years
ended
|
||||||||||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
December
30,
|
December
31,
|
||||||||||||||||
|
2009
|
2008
(1)
|
2007
(1)
|
2006
(1)
|
2005
(1)
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Net
Sales by Market Data:
|
||||||||||||||||||||
|
Healthcare
distribution (5):
|
||||||||||||||||||||
|
Dental
(6)
|
$ | 2,509,921 | $ | 2,567,064 | $ | 2,447,841 | $ | 2,122,415 | $ | 1,883,748 | ||||||||||
|
Medical
(7)
|
1,457,102 | 1,428,968 | 1,540,269 | 1,398,996 | 1,284,214 | |||||||||||||||
|
International
(8)
|
2,398,105 | 2,221,092 | 1,769,881 | 1,401,889 | 1,256,910 | |||||||||||||||
|
Total
healthcare distribution
|
6,365,128 | 6,217,124 | 5,757,991 | 4,923,300 | 4,424,872 | |||||||||||||||
|
Technology
(9)
|
173,208 | 163,289 | 131,893 | 98,223 | 88,255 | |||||||||||||||
|
Total
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | $ | 5,021,523 | $ | 4,513,127 | ||||||||||
|
As
of
|
||||||||||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
December
30,
|
December
31,
|
||||||||||||||||
| 2009 | 2008 (2) | 2007 (2) | 2006 (2) | 2005 (2) | ||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
Sheet data:
|
||||||||||||||||||||
|
Total
assets
|
$ | 3,835,985 | $ | 3,599,210 | $ | 3,313,472 | $ | 2,880,547 | $ | 2,582,436 | ||||||||||
|
Long-term
debt
|
243,373 | 256,648 | 407,627 | 434,804 | 463,455 | |||||||||||||||
|
Redeemable
noncontrolling interests
|
178,570 | 233,035 | 150,028 | 111,902 | 72,433 | |||||||||||||||
|
Stockholders'
equity
|
2,161,508 | 1,772,354 | 1,674,987 | 1,393,356 | 1,204,795 | |||||||||||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued operations as further described
below.
|
|
(2)
|
Adjusted
to reflect the effects of the 2009 adoption of provisions contained within
Accounting Standards Codification (“ASC”) Topic 470-20, “Debt with
Conversion and Other Options.” Also, reflects the adoption of ASC Topic
810-10-65, relating to consolidations, that requires a noncontrolling
interest in a subsidiary be reported as equity in our consolidated
financial statements. Consolidated net income includes the net
income for both the parent and the noncontrolling
interest. Additionally, reflects the adoption of provisions of
ASC Topic 480-10 related to noncontrolling interests, where we are or may
be required to purchase all or a portion of the outstanding interest in a
consolidated subsidiary from the noncontrolling interest holder under the
terms of a put option or other contractual
agreement.
|
|
(3)
|
Restructuring
costs for the year ended December 26, 2009 consist primarily of employee
severance costs, including severance pay and benefits of $1.5 million and
facility closing costs of $1.5 million. Restructuring costs for
the year ended December 27, 2008 consist primarily of employee severance
costs, including severance pay and benefits of $18.6 million, facility
closing costs of $3.8 million and other professional and consulting costs
of $0.8 million. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Plans of Restructuring”
herein and the consolidated financial statements and related notes
contained in ITEM 8.
|
|
(4)
|
On
August 5, 2009, we completed the sale of a wholesaler of dental
consumables for aggregate consideration of $14.2 million, of which $13.2
million has been received as of December 26, 2009. As a result
of this sale, included in operating results from discontinued operations
for 2009 is a net gain, net of tax, of $2.6 million or $0.03 per diluted
share.
|
During
the fourth quarter of 2008, we recorded an impairment charge of $11.2 million
($7.3 million, net of tax), or $0.08 per diluted share, related to the exit from
our wholesale ultrasound business.
During
2007, we sold substantially all of the assets of our oncology pharmaceutical and
specialty pharmacy businesses, previously reported as part of our healthcare
distribution reportable segment. The aggregate sales price was $14.3
million, which was received during the third and fourth quarters of
2007. As a result of these sales, included in the operating results
from discontinued operations for 2007 is a net gain, net of tax, of
approximately $0.7 million or $0.01 per diluted share. We recorded an impairment
charge to our related long-lived assets of approximately $20.6 million, net of
tax, or $(0.23) per diluted share in 2007.
On April
1, 2006, we sold substantially all of the assets of our Hospital Supply
Business, previously reported as part of our healthcare distribution reportable
segment. The sale price was $36.5 million, which was received during
the second quarter of 2006. As a result of this sale, included in the
operating results from discontinued operations for 2007 is a $0.3 million ($0.2
million after-tax) expense relating to contract
contingencies. Included in operating results from discontinued
operations for 2006 is a $32.3 million ($19.4 million after-tax) loss on the
sale, including $3.5 million ($2.1 million after-tax) of transitional service
obligations and selling costs. Also, because the decision to divest
this business was reached in 2005, we recorded an impairment charge to our
long-lived assets of approximately $7.0 million, net of tax, or $(0.08) per
diluted share in 2005.
|
(5)
|
Consists
of consumable products, small equipment, laboratory products, large dental
and medical equipment, equipment repair services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests,
infection-control products and
vitamins.
|
|
(6)
|
Consists
of products sold in the United States and
Canada.
|
|
(7)
|
Consists
of products sold in the United States’ medical and animal health
markets.
|
|
(8)
|
Consists
of products sold in the dental, medical and animal health markets,
primarily in Europe.
|
|
(9)
|
Consists
of practice management software and other value-added products and
services, which are sold primarily to healthcare providers in the United
States, Canada, the United Kingdom, Australia and New Zealand for the
years 2007 through 2009 and the United States and Canada for the years
2005 and 2006.
|
Cautionary
Note Regarding Forward-Looking Statements
In
accordance with the “Safe Harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we provide the following cautionary remarks
regarding important factors that, among others, could cause future results to
differ materially from the forward-looking statements, expectations and
assumptions expressed or implied herein. All forward-looking
statements made by us are subject to risks and uncertainties and are not
guarantees of future performance. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance and achievements or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These
statements are identified by the use of such terms as “may,” “could,” “expect,”
“intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or
other comparable terms.
Risk
factors and uncertainties that could cause actual results to differ materially
from current and historical results include, but are not limited to: decreased
customer demand and changes in vendor credit terms; disruptions in financial
markets; general economic conditions; effects of a highly competitive market;
changes in the healthcare industry; changes in regulatory requirements; risks
from expansion of customer purchasing power and multi-tiered costing structures;
risks associated with our international operations; fluctuations in quarterly
earnings; our dependence on third parties for the manufacture and supply of our
products; transitional challenges associated with acquisitions, including the
failure to achieve anticipated synergies; financial risks associated with
acquisitions; regulatory and litigation risks; the dependence on our continued
product development, technical support and successful marketing in the
technology segment; risks from disruption to our information systems; our
dependence upon sales personnel, manufacturers and customers; our dependence on
our senior management; possible increases in the cost of shipping our products
or other service issues with our third-party shippers; risks from rapid
technological change; possible volatility of the market price of our common
stock; certain provisions in our governing documents that may discourage
third-party acquisitions of us; and changes in tax legislation. The
order in which these factors appear should not be construed to indicate their
relative importance or priority.
We
caution that these factors may not be exhaustive and that many of these factors
are beyond our ability to control or predict. Accordingly, any
forward-looking statements contained herein should not be relied upon as a
prediction of actual results. We undertake no duty and have no
obligation to update forward-looking statements.
Executive
Level Overview
We
believe we are the largest distributor of healthcare products and services
primarily to office-based healthcare practitioners. We serve more
than 600,000 customers worldwide, including dental practitioners and
laboratories, physician practices and animal health clinics, as well as
government and other institutions. We believe that we have a strong
brand identity due to our more than 77 years of experience distributing
healthcare products.
We are
headquartered in Melville, New York, employ more than 12,500 people (of which
over 5,500 are based outside the United States) and have operations in the
United States, Australia, Austria, Belgium, Canada, China, the Czech Republic,
France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the
Netherlands, New Zealand, Portugal, Spain, Switzerland and the United
Kingdom. We also have affiliates in Iceland, Saudi Arabia and the
United Arab Emirates.
We have
established strategically located distribution centers to enable us to better
serve our customers and increase our operating efficiency. This
infrastructure, together with broad product and service offerings at competitive
prices, and a strong commitment to customer service, enables us to be a single
source of supply for our customers’ needs. Our infrastructure also
allows us to provide convenient ordering and rapid, accurate and complete order
fulfillment.
We
conduct our business through two reportable segments: healthcare distribution
and technology. These segments offer different products and services
to the same customer base. The healthcare distribution reportable
segment aggregates our dental, medical (including animal health) and
international operating segments. This segment consists of consumable
products, small equipment, laboratory products, large dental and medical
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic tests, infection-control products and
vitamins.
Our
dental group serves office-based dental practitioners, schools and other
institutions in the combined United States and Canadian dental
market. Our medical group serves office-based medical practitioners,
surgical centers, other alternate-care settings, animal health clinics and other
institutions throughout the United States. Our international group
serves 21 countries outside of North America and is what we believe to be a
leading European healthcare supplier serving office-based
practitioners.
Our
technology group provides software, technology and other value-added services to
healthcare practitioners, primarily in the United States, Canada, the United
Kingdom, Australia and New Zealand. Our value-added practice
solutions include practice management software systems for dental and medical
practitioners and animal health clinics. Our technology group
offerings also include financial services, on a non-recourse basis, e-services
and continuing education services for practitioners.
Industry
Overview
In recent
years, the healthcare industry has increasingly focused on cost
containment. This trend has benefited distributors capable of
providing a broad array of products and services at low prices. It
also has accelerated the growth of HMOs, group practices, other managed care
accounts and collective buying groups, which, in addition to their emphasis on
obtaining products at competitive prices, tend to favor distributors capable of
providing specialized management information support. We believe that
the trend towards cost containment has the potential to favorably affect demand
for technology solutions, including software, which can enhance the efficiency
and facilitation of practice management.
Our
operating results in recent years have been significantly affected by strategies
and transactions that we undertook to expand our business, domestically and
internationally, in part to address significant changes in the healthcare
industry, including consolidation of healthcare distribution companies,
potential healthcare reform, trends toward managed care, cuts in Medicare and
collective purchasing arrangements.
Our
current and future results have been and could be impacted by the current
economic environment and uncertainty, particularly impacting overall demand for
our products and services.
Industry
Consolidation
The
healthcare products distribution industry, as it relates to office-based
healthcare practitioners, is highly fragmented and diverse. This
industry, which encompasses the dental, medical and animal health markets, was
estimated to produce revenues of approximately $27.5 billion in 2009 in the
combined North American and European markets. The industry ranges
from sole practitioners working out of relatively small offices to group
practices or service organizations ranging in size from a few practitioners to a
large number of practitioners who have combined or otherwise associated their
practices.
Due in
part to the inability of office-based healthcare practitioners to store and
manage large quantities of supplies in their offices, the distribution of
healthcare supplies and small equipment to office-based healthcare practitioners
has been characterized by frequent, small quantity orders, and a need for rapid,
reliable and substantially complete order fulfillment. The purchasing
decisions within an office-based healthcare practice are typically made by the
practitioner or an administrative assistant. Supplies and small
equipment are generally purchased from more than one distributor, with one
generally serving as the primary supplier.
We
believe that consolidation within the industry will continue to result in a
number of distributors, particularly those with limited financial and marketing
resources, seeking to combine with larger companies that can provide growth
opportunities. This consolidation also may continue to result in
distributors seeking
to
acquire companies that can enhance their current product and service offerings
or provide opportunities to serve a broader customer base.
Our trend
with regard to acquisitions has been to expand our role as a provider of
products and services to the healthcare industry. This trend has
resulted in expansion into service areas that complement our existing operations
and provide opportunities for us to develop synergies with, and thus strengthen,
the acquired businesses.
As
industry consolidation continues, we believe that we are positioned to
capitalize on this trend, as we believe we have the ability to support increased
sales through our existing infrastructure.
As the
healthcare industry continues to change, we continually evaluate possible
candidates for merger or acquisition and intend to continue to seek
opportunities to expand our role as a provider of products and services to the
healthcare industry. There can be no assurance that we will be able
to successfully pursue any such opportunity or consummate any such transaction,
if pursued. If additional transactions are entered into or
consummated, we would incur merger and/or acquisition-related costs, and there
can be no assurance that the integration efforts associated with any such
transaction would be successful.
Aging
Population and Other Market Influences
The
healthcare products distribution industry continues to experience growth due to
the aging population, increased healthcare awareness, the proliferation of
medical technology and testing, new pharmacology treatments and expanded
third-party insurance coverage, partially offset by the affects of increased
unemployment on insurance coverage. In addition, the physician market
continues to benefit from the shift of procedures and diagnostic testing from
acute care settings to alternate-care sites, particularly physicians’
offices.
The
January 2000 U.S. Bureau of the Census estimated that the elderly population in
the United States will more than double by the year 2040. In 2000,
four million Americans were aged 85 or older, the segment of the population most
in need of long-term care and elder-care services. By the year 2040,
that number is projected to more than triple to more than 14
million. The population aged 65 to 84 years is projected to more than
double in the same time period.
As a
result of these market dynamics, annual expenditures for healthcare services
continue to increase in the United States. Given current operating,
economic and industry conditions, we believe that demand for our products and
services will grow at slower rates. The Centers for Medicare and
Medicaid Services, or CMS, published “National Health Expenditure
Projections 2008 – 2018” indicating that total national healthcare spending
reached $2.4 trillion in 2008, or 16.6% of the nation’s gross domestic product,
the benchmark measure for annual production of goods and services in the United
States. Healthcare spending is projected to reach $4.4 trillion in
2018, approximately 20.3% of the nation’s gross domestic product.
Government
Influences
The
healthcare industry is subject to extensive government regulation, licensure and
operating compliance procedures. National healthcare reform has been
the subject of a number of legislative initiatives by
Congress. Additionally, government and private insurance programs
fund a large portion of the total cost of medical care. The Balanced
Budget Act passed by Congress in 1997 significantly reduced reimbursement rates
for nursing homes and home healthcare providers, affecting spending levels and
the overall financial viability of these institutions.
The
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 is the
largest expansion of the Medicare program since its inception, and provides
participants with voluntary outpatient prescription drug
benefits. This Act also includes provisions relating to medication
management programs, generic substitution and provider
reimbursement.
There
have been increasing efforts by various levels of government, including state
departments of health, state boards of pharmacy and comparable agencies, to
regulate the pharmaceutical distribution system in order to prevent the
introduction of counterfeit, adulterated or mislabeled pharmaceuticals into the
distribution system. An increasing number of states, including
Florida, have already adopted laws and regulations, including drug pedigree
tracking requirements, that are intended to protect the integrity of the
pharmaceutical distribution system. Regulations adopted under the federal
Prescription Drug Marketing Act, or PDMA, effective December 2006, require the
identification and documentation of transactions involving the receipt and
distribution of prescription drugs, that is, drug pedigree
information. In early December 2006, the federal District Court for
the Eastern District of New York issued a preliminary injunction, enjoining the
implementation of some of the federal drug pedigree requirements, in response to
a case initiated by secondary distributors. On December 31, 2009, the
U.S. District Court granted a motion to extend the time for either party to
re-open the matter (which had been administratively closed in light of potential
legislative action by Congress), and the Court in effect extended the injunction
through September 30, 2010. Other states and government
agencies are currently considering similar laws and regulations. We continue to
work with our suppliers to help minimize the risks associated with counterfeit
products in the supply chain and potential litigation.
E-Commerce
Traditional
healthcare supply and distribution relationships are being challenged by
electronic online commerce solutions. Our distribution business is
characterized by rapid technological developments and intense
competition. The advancement of online commerce will require us to
cost-effectively adapt to changing technologies, to enhance existing services
and to develop and introduce a variety of new services to address the changing
demands of consumers and our customers on a timely basis, particularly in
response to competitive offerings.
Through
our proprietary, technologically-based suite of products, we offer customers a
variety of competitive alternatives. We believe that our tradition of
reliable service, our name recognition and large customer base built on solid
customer relationships position us well to participate in this growing aspect of
the distribution business. We continue to explore ways and means to
improve and expand our Internet presence and capabilities.
Results
of Operations
The
following table summarizes the significant components of our operating results
and cash flows for each of the three years ended December 26, 2009, December 27,
2008 and December 29, 2007 (in thousands):
|
Years
ended
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(1) (2)
|
2007
(1) (2)
|
||||||||||
|
Operating
Results:
|
||||||||||||
|
Net
sales
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | ||||||
|
Cost
of sales
|
4,621,516 | 4,506,118 | 4,183,792 | |||||||||
|
Gross
profit
|
1,916,820 | 1,874,295 | 1,706,092 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Selling,
general and administrative
|
1,449,715 | 1,431,769 | 1,319,153 | |||||||||
|
Restructuring
costs
|
3,020 | 23,240 | - | |||||||||
|
Operating
income
|
$ | 464,085 | $ | 419,286 | $ | 386,939 | ||||||
|
Other
expense, net
|
$ | (11,365 | ) | $ | (23,837 | ) | $ | (8,430 | ) | |||
|
Income
from continuing operations
|
330,442 | 269,276 | 249,880 | |||||||||
|
Income
from continuing operations attributable
|
||||||||||||
|
to
Henry Schein, Inc.
|
308,551 | 247,347 | 232,529 | |||||||||
|
Years
ended
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(2)
|
2007
(2)
|
||||||||||
|
Cash
Flows:
|
||||||||||||
|
Net
cash provided by operating activities
|
$ | 396,890 | $ | 384,782 | $ | 270,344 | ||||||
|
Net
cash used in investing activities
|
(97,448 | ) | (168,010 | ) | (235,292 | ) | ||||||
|
Net
cash used in financing activities
|
(197,675 | ) | (87,970 | ) | (38,008 | ) | ||||||
|
(1) Adjusted
to reflect the effects of discontinued
operations.
|
|
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
Plans
of Restructuring
On
November 5, 2008, we announced certain actions to reduce operating costs, which
included the elimination of 430 positions from our operations and the closing of
several smaller facilities. During the years ended December 26, 2009
and December 27, 2008, we recorded one-time restructuring costs of approximately
$3.0 million (approximately $2.1 million after taxes) and $23.2 million
(approximately $16.0 million after taxes), respectively. The costs
associated with the restructuring are included in a separate line item,
“Restructuring costs,” within our consolidated statements of income. The
majority of these costs have been paid as of December 26,
2009. Annual pretax cost savings from this initiative are expected to
be between $24.0 million and $27.0 million.
In
addition, during the first quarter of 2010, we expect to complete an additional
restructuring in order to further reduce operating expenses. This
restructuring includes headcount reductions, as well as the closing of
facilities. The restructure is primarily concentrated in our European
operations and is part of our overall plan to increase international operating
margins. These restructuring costs are expected to be in the $10
million to $12 million range ($7 million to $9 million after taxes) and are
expected to be reported in the first quarter of 2010. However, timing
of certain actions may cause some restructuring costs to be reported
later.
2009
Compared to 2008
Net
Sales
Net sales
for 2009 and 2008 were as follows (in thousands):
|
%
of
|
%
of
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2009
|
Total
|
2008
(1)
|
Total
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution (2):
|
||||||||||||||||||||||||
|
Dental
(3)
|
$ | 2,509,921 | 38.4 | % | $ | 2,567,064 | 40.2 | % | $ | (57,143 | ) | (2.2 | )% | |||||||||||
|
Medical
(4)
|
1,457,102 | 22.3 | 1,428,968 | 22.4 | 28,134 | 2.0 | ||||||||||||||||||
|
International
(5)
|
2,398,105 | 36.7 | 2,221,092 | 34.8 | 177,013 | 8.0 | ||||||||||||||||||
|
Total
healthcare distribution
|
6,365,128 | 97.4 | 6,217,124 | 97.4 | 148,004 | 2.4 | ||||||||||||||||||
|
Technology
(6)
|
173,208 | 2.6 | 163,289 | 2.6 | 9,919 | 6.1 | ||||||||||||||||||
|
Total
|
$ | 6,538,336 | 100.0 | % | $ | 6,380,413 | 100.0 | % | $ | 157,923 | 2.5 | |||||||||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
|
(2)
|
Consists
of consumable products, small equipment, laboratory products, large dental
and medical equipment, equipment repair services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests,
infection-control products and
vitamins.
|
|
(3)
|
Consists
of products sold in the United States and
Canada.
|
|
(4)
|
Consists
of products and equipment sold in the United States’ medical and animal
health markets.
|
|
(5)
|
Consists
of products sold in the dental, medical and animal health markets,
primarily in Europe.
|
|
(6)
|
Consists
of practice management software and other value-added products and
services, which are sold primarily to healthcare providers in the United
States, Canada, the United Kingdom, Australia and New
Zealand.
|
The
$157.9 million, or 2.5%, increase in net sales for the year ended December 26,
2009 includes an increase of 5.7% local currency growth (0.9% internally
generated revenue and 4.8% growth from acquisitions) offset by a decrease of
3.2% related to foreign currency exchange. Excluding sales of
influenza vaccines, sales increased 6.6%. Sales of influenza vaccines
declined in 2009 compared to 2008 due to manufacturers’ supply
shortage.
The $57.1
million, or 2.2%, decrease in dental net sales for the year ended December 26,
2009 includes a decrease of 1.6% in local currencies (4.0% decline in internally
generated revenue offset by 2.4% growth from acquisitions) and a decrease of
0.6% related to foreign currency exchange. The 1.6% decline in local
currency sales was due to a decline in dental equipment sales and service
revenues of 10.6% (11.3% decline in internally generated revenue reduced by 0.7%
growth from acquisitions) offset by dental consumable merchandise sales growth
of 1.9% (1.2% decrease in internally generated revenue reduced by 3.1% growth
from acquisitions).
The $28.1
million, or 2.0%, increase in medical net sales for the year ended December 26,
2009 includes an increase in internally generated revenue of 0.8% and
acquisition growth of 1.2%. Excluding sales of influenza vaccines,
which declined in 2009, medical sales increased 5.9%.
The
$177.0 million, or 8.0%, increase in international net sales for the year ended
December 26, 2009 includes sales growth of 16.4% in local currencies (6.2%
internally generated growth and 10.2% growth from acquisitions) offset by a
decrease of 8.4% related to foreign currency exchange.
The $9.9
million, or 6.1%, increase in technology net sales for the year ended December
26, 2009 includes an increase of 8.3% in local currency growth (6.7% internally
generated growth and 1.6% growth from acquisitions) offset by a decrease of 2.2%
related to foreign currency exchange. During the year, we experienced
continued growth in electronic services as well as solid sales of technology
products in our international markets.
Gross
Profit
Gross
profit and gross margins for 2009 and 2008 by segment and in total were as
follows (in thousands):
|
Gross
|
Gross
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2009
|
Margin
%
|
2008
(1)
|
Margin
%
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution
|
$ | 1,792,516 | 28.2 | % | $ | 1,753,655 | 28.2 | % | $ | 38,861 | 2.2 | % | ||||||||||||
|
Technology
|
124,304 | 71.8 | 120,640 | 73.9 | 3,664 | 3.0 | ||||||||||||||||||
|
Total
|
$ | 1,916,820 | 29.3 | $ | 1,874,295 | 29.4 | $ | 42,525 | 2.3 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Gross
profit increased $42.5 million, or 2.3%, for the year ended December 26, 2009
compared to the prior year period. As a result of different practices
of categorizing costs associated with distribution networks throughout our
industry, our gross margins may not necessarily be comparable to other
distribution companies. Additionally, we realize substantially higher
gross margin percentages in our technology segment than in our healthcare
distribution segment. These higher gross margins result from being
both the developer and seller of software products, as well as certain financial
services. For a number of reasons, the software industry typically realizes
higher gross margins to recover investments in research and
development.
Healthcare
distribution gross profit increased $38.9 million, or 2.2%, for the year ended
December 26, 2009 compared to the prior year period. Healthcare
distribution gross profit margin remained constant at 28.2% for the year ended
December 26, 2009 compared with the comparable prior year period.
Technology
gross profit increased $3.7 million, or 3.0%, for the year ended December 26,
2009 compared to the prior year period. Technology gross profit
margin decreased to 71.8% for the year ended December 26, 2009 from 73.9% for
the comparable prior year period, primarily due to changes in the product sales
mix.
Selling,
General and Administrative
Selling,
general and administrative expenses by segment and in total for 2009 and 2008
were as follows (in thousands):
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Respective
|
Respective
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2009
|
Net
Sales
|
2008
(1)
|
Net
Sales
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution
|
$ | 1,387,581 | 21.8 | % | $ | 1,368,108 | 22.0 | % | $ | 19,473 | 1.4 | % | ||||||||||||
|
Technology
|
62,134 | 35.9 | 63,661 | 39.0 | (1,527 | ) | (2.4 | ) | ||||||||||||||||
|
Total
|
$ | 1,449,715 | 22.2 | $ | 1,431,769 | 22.4 | $ | 17,946 | 1.3 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Selling,
general and administrative expenses increased by $17.9 million, or 1.3%, for the
year ended December 26, 2009 compared to the prior year period. This
increase results from $10.5 million in expense reductions and a $28.4 million
net increase from the effects of foreign exchange offset by the additional
selling, general and administrative costs from operations
acquired. As a percentage of net sales, selling, general and
administrative expenses decreased to 22.2% from 22.4% from the comparable year
period.
As a
component of total selling, general and administrative expenses, selling
expenses decreased $9.7 million, or 1.0%, for the year ended December 26, 2009
from the prior year period. As a percentage of net sales, selling
expenses decreased to 14.7% from 15.2% for the comparable prior year
period.
As a
component of total selling, general and administrative expenses, general and
administrative expenses increased $27.6 million, or 6.0%, for the year ended
December 26, 2009 from the prior year period. As a percentage of net
sales, general and administrative expenses increased to 7.5% from 7.2% for the
comparable prior year period.
Other
Expense, Net
Other
expense, net for the years ended 2009 and 2008 was as follows (in
thousands):
|
Increase
/ (Decrease)
|
||||||||||||||||
|
2009
|
2008
(1) (2)
|
$ | % | |||||||||||||
|
Interest
income
|
$ | 9,979 | $ | 16,355 | $ | (6,376 | ) | (39.0 | )% | |||||||
|
Interest
expense
|
(23,370 | ) | (34,605 | ) | 11,235 | 32.5 | ||||||||||
|
Other,
net
|
2,026 | (5,587 | ) | 7,613 | 136.3 | |||||||||||
|
Other
expense, net
|
$ | (11,365 | ) | $ | (23,837 | ) | $ | 12,472 | 52.3 | |||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
|
(2)
|
Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
Other
expense, net decreased $12.5 million to $11.4 million for the year ended
December 26, 2009 from the comparable prior year period. The decrease
was primarily the result of decreased interest expense of $11.2 million due to
repayment of our $130.0 million senior notes on June 30, 2009, as well as lower
interest rates on our floating debt, partially offset by a decrease in interest
income of $6.4 million resulting from lower interest rates on our invested
funds. In addition, Other, net increased by $7.6 million due
primarily to net proceeds received from litigation settlements in the third
quarter of 2009 and non-recurring charges incurred during the third quarter of
2008 relating to the bankruptcy of Lehman Brothers Holdings, Inc.
Income
Taxes
For the
year ended December 26, 2009, our effective tax rate from continuing operations
was 28.2% compared to 33.2% for the prior year period. The difference
is primarily related to a reduction in the valuation allowance on certain
foreign deferred tax assets related to net operating losses, as well as
additional tax planning, settlements of tax audits and higher income from lower
taxing countries. Absent the effects of the reversal of a portion of
the valuation allowance on certain foreign deferred tax assets in the third
quarter of 2009, our effective tax rate for the year ended December 26, 2009
would have been 32.8%. The remaining difference in our effective tax
rate between 2009 and 2008 is due to foreign and state income
taxes. For 2010, we expect our effective tax rate to be in the range
of 32.5% to 33.5%.
Loss
from Discontinued Operations
During
the years ended December 26, 2009 and December 27, 2008, respectively, we
recognized aggregate gains and (losses) of $2.6 million and $(7.9) million, net
of tax, respectively, related to discontinued operations (see Note 7 in the
accompanying annual consolidated financial statements for further
discussion).
Net
Income
Net
income increased $71.8 million, or 27.5%, for the year ended December 26, 2009
compared to the prior year period. The increase in net income is
primarily due to the factors noted above.
2008 Compared to
2007
Net
Sales
Net sales
for 2008 and 2007 were as follows (in thousands):
|
%
of
|
%
of
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2008
(1)
|
Total
|
2007
(1)
|
Total
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution (2):
|
||||||||||||||||||||||||
|
Dental
(3)
|
$ | 2,567,064 | 40.2 | % | $ | 2,447,841 | 41.6 | % | $ | 119,223 | 4.9 | % | ||||||||||||
|
Medical
(4)
|
1,428,968 | 22.4 | 1,540,269 | 26.2 | (111,301 | ) | (7.2 | ) | ||||||||||||||||
|
International
(5)
|
2,221,092 | 34.8 | 1,769,881 | 30.0 | 451,211 | 25.5 | ||||||||||||||||||
|
Total
healthcare distribution
|
6,217,124 | 97.4 | 5,757,991 | 97.8 | 459,133 | 8.0 | ||||||||||||||||||
|
Technology
(6)
|
163,289 | 2.6 | 131,893 | 2.2 | 31,396 | 23.8 | ||||||||||||||||||
|
Total
|
$ | 6,380,413 | 100.0 | % | $ | 5,889,884 | 100.0 | % | $ | 490,529 | 8.3 | |||||||||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
|
(2)
|
Consists
of consumable products, small equipment, laboratory products, large dental
and medical equipment, equipment repair services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests,
infection-control products and
vitamins.
|
|
(3)
|
Consists
of products sold in the United States and
Canada.
|
|
(4)
|
Consists
of products and equipment sold in the United States’ medical and animal
health markets.
|
|
(5)
|
Consists
of products sold in the dental, medical and animal health markets,
primarily in Europe.
|
|
(6)
|
Consists
of practice management software and other value-added products and
services, which are sold primarily to healthcare providers in the United
States, Canada, the United Kingdom, Australia and New
Zealand.
|
The
$490.5 million, or 8.3%, increase in net sales for the year ended December 27,
2008 includes an increase of 7.5% local currency growth (1.3% internally
generated revenue and 6.2% growth from acquisitions) and 0.8% related to foreign
currency exchange.
The
$119.2 million, or 4.9%, increase in dental net sales for the year ended
December 27, 2008 includes an increase of 4.8% in local currencies (4.0%
internally generated revenue and 0.8% growth from acquisitions) and 0.1% related
to foreign exchange. The 4.8% local currency growth was due to dental
consumable merchandise sales growth of 5.0% (4.2% internally generated revenue
and 0.8% growth from acquisitions) and dental equipment sales and service growth
of 4.2% (3.6% internally generated revenue and 0.6% growth from
acquisitions). The growth in equipment sales was primarily due to
gains in both traditional equipment and high-tech products.
The
$111.3 million, or 7.2%, decrease in medical net sales for the year ended
December 27, 2008 includes a decrease in internally generated revenue of 7.8%
offset by acquisition growth of 0.6%. During 2008, we stopped selling
certain low margin pharmaceutical products, which represented approximately
$153.0 million of net sales in 2007. Excluding sales of these
lower-margin pharmaceutical products, internal medical net sales increased by
0.9%.
The
$451.2 million, or 25.5%, increase in international net sales for the year ended
December 27, 2008 includes sales growth of 22.8% in local currencies (17.9%
growth from acquisitions and 4.9% internally generated growth) and 2.7% related
to foreign currency exchange.
The $31.4
million, or 23.8%, increase in technology net sales for the year ended December
27, 2008 includes sales growth of 25.3% in local currency growth (8.7%
internally generated growth and 16.6% growth from acquisitions) offset by a
decrease of 1.5% related to foreign currency exchange. The internal
net sales growth was driven by growth in electronic services, financial services
and support revenue.
Gross
Profit
Gross
profit and gross margins for 2008 and 2007 by segment and in total were as
follows (in thousands):
|
Gross
|
Gross
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2008
(1)
|
Margin
%
|
2007
(1)
|
Margin
%
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution
|
$ | 1,753,655 | 28.2 | % | $ | 1,607,967 | 27.9 | % | $ | 145,688 | 9.1 | % | ||||||||||||
|
Technology
|
120,640 | 73.9 | 98,125 | 74.4 | 22,515 | 22.9 | ||||||||||||||||||
|
Total
|
$ | 1,874,295 | 29.4 | $ | 1,706,092 | 29.0 | $ | 168,203 | 9.9 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Gross
profit increased $168.2 million, or 9.9%, for the year ended December 27, 2008
compared to the prior year period. As a result of different practices
of categorizing costs associated with distribution networks throughout our
industry, our gross margins may not necessarily be comparable to other
distribution companies. Additionally, we realize substantially higher
gross margin percentages in our technology segment than in our healthcare
distribution segment. These higher gross margins result from being
both the developer and seller of software products, as well as certain financial
services. For a number of reasons, the software industry typically realizes
higher gross margins to recover investments in research and
development.
Healthcare
distribution gross profit increased $145.7 million, or 9.1%, for the year ended
December 27, 2008 compared to the prior year period. Healthcare
distribution gross profit margin increased to 28.2% for the year ended December
27, 2008 from 27.9% for the comparable prior year period.
Technology
gross profit increased $22.5 million, or 22.9%, for the year ended December 27,
2008 compared to the prior year period. Technology gross profit
margin decreased to 73.9% for the year ended December 27, 2008 from 74.4% for
the comparable prior year period, primarily due to changes in the product sales
mix.
Selling,
General and Administrative
Selling,
general and administrative expenses by segment and in total for 2008 and 2007
were as follows (in thousands):
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Respective
|
Respective
|
Increase
/ (Decrease)
|
||||||||||||||||||||||
|
2008
(1)
|
Net
Sales
|
2007
(1)
|
Net
Sales
|
$ | % | |||||||||||||||||||
|
Healthcare
distribution
|
$ | 1,368,108 | 22.0 | % | $ | 1,268,030 | 22.0 | % | $ | 100,078 | 7.9 | % | ||||||||||||
|
Technology
|
63,661 | 39.0 | 51,123 | 38.8 | 12,538 | 24.5 | ||||||||||||||||||
|
Total
|
$ | 1,431,769 | 22.4 | $ | 1,319,153 | 22.4 | $ | 112,616 | 8.5 | |||||||||||||||
(1) Adjusted
to reflect the effects of discontinued operations.
Selling,
general and administrative expenses increased by $112.6 million, or 8.5%, for
the year ended December 27, 2008 compared to the prior year
period. As a percentage of net sales, selling, general and
administrative expenses remained constant at 22.4% compared with the comparable
prior year period.
As a
component of total selling, general and administrative expenses, selling
expenses increased $87.1 million, or 9.8%, for the year ended December 27, 2008
from the prior year period. This increase was primarily due to
payroll, as well as other expenses related to recent acquisitions. As
a percentage of net sales, selling expenses increased to 15.2% from 15.0% for
the comparable prior year period.
As a
component of total selling, general and administrative expenses, general and
administrative expenses increased $25.5 million, or 5.9%, for the year ended
December 27, 2008 from the prior year period. As a percentage of net
sales, general and administrative expenses decreased to 7.2% from 7.4% for the
comparable prior year period.
Other
Expense, Net
Other
expense, net for the years ended 2008 and 2007 was as follows (in
thousands):
|
Increase
/ (Decrease)
|
||||||||||||||||
|
2008
(1) (2)
|
2007
(1) (2)
|
$ | % | |||||||||||||
|
Interest
income
|
$ | 16,355 | $ | 16,531 | $ | (176 | ) | (1.1 | )% | |||||||
|
Interest
expense
|
(34,605 | ) | (29,607 | ) | (4,998 | ) | (16.9 | ) | ||||||||
|
Other,
net
|
(5,587 | ) | 4,646 | (10,233 | ) | (220.3 | ) | |||||||||
|
Other
expense, net
|
$ | (23,837 | ) | $ | (8,430 | ) | $ | (15,407 | ) | (182.8 | ) | |||||
|
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
|
(2)
|
Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
Other
expense, net increased $15.4 million to $23.8 million for the year ended
December 27, 2008 from the comparable prior year period. As a
component of Other expense, net, Interest income was substantially unchanged
from the prior year. Interest expense increased $5.0 million
primarily due to forward points related to foreign currency hedging transactions
and the impact of the adoption of provisions contained within ASC Topic 470-20,
“Debt with Conversion and Other Options,” partially offset by lower interest
rates on our floating rate debt. The change in Other, net resulted
from a reserve for losses of $3.7 million for foreign exchange contracts for
hedging intercompany loans with Lehman Brothers Special Financing, Inc., whose
parent, Lehman Brothers Holdings, Inc., filed for Chapter 11 bankruptcy on
September 15, 2008. An additional $0.8 million was attributable to a
reserve for losses in our investment in the Reserve Primary Fund, a money market
fund that decreased its net asset value from $1.00 to $0.97 due to investments
in Lehman Brothers debt. The impact of fluctuations in foreign
exchange rates also contributed to the increase in Other, net. The
prior period’s Other, net included a gain from the divestiture of certain
non-core businesses related to the acquisition of a dental supply company in
2007.
Income
Taxes
For the
year ended December 27, 2008, our effective tax rate from continuing operations
was 33.2% compared to 34.0% for the prior year period. The difference
was impacted by additional tax planning initiatives, settlements of tax audits
and higher income from lower taxing countries. The difference between our
effective tax rate and the federal statutory tax rate for both periods related
primarily to foreign and state income taxes.
Loss
from Discontinued Operations
During
the years ended December 27, 2008 and December 29, 2007, respectively, we
recognized aggregate losses of $7.9 million and $20.7 million, net of tax,
related to discontinued operations (see Note 7 in the accompanying annual
consolidated financial statements for further discussion).
Net
Income
Net
income increased $32.2 million, or 14.0%, for the year ended December 27, 2008
compared to the prior year period. The increase in net income is
primarily due to an increase in income from continuing operations. In
2007, net income included a gain on the sale of discontinued operations of $0.7
million, net of taxes.
Liquidity
and Capital Resources
Our
principal capital requirements include the funding of working capital needs,
repayments of debt principal, funding of acquisitions, purchases of securities
and fixed assets and repurchases of common stock. Working capital
requirements generally result from increased sales, special inventory forward
buy-in opportunities and payment terms for receivables and
payables. Historically, sales have tended to be stronger during the
third and fourth quarters and special inventory forward buy-in opportunities
have been most prevalent just before the end of the year, causing our working
capital requirements to have been higher from the end of the third quarter to
the end of the first quarter of the following year.
We
finance our business primarily through cash generated from our operations,
revolving credit facilities and debt placements. Our ability to
generate sufficient cash flows from operations is dependent on the continued
demand of our customers for our products and services, and access to products
and services from our suppliers.
Net cash
provided by operating activities was $396.9 million for the year ended December
26, 2009 compared to $384.8 million for the comparable prior year
period. The net change of $12.1 million results from net income
improvements, offset by decreases related to components of our working
capital.
Net cash
used in investing activities was $97.4 million for the year ended December 26,
2009 compared to $168.0 million for the comparable prior year
period. The net change of $70.6 million was primarily due to a
reduction in payments for business acquisitions, proceeds received from a
business divestiture and the absence of purchases of available-for-sale
securities in the current year, partially offset by a reduction in proceeds from
foreign exchange forward contract settlements.
Net cash
used in financing activities was $197.7 million for the year ended December 26,
2009 compared to $88.0 million for the comparable prior year
period. The net change of $109.7 million was primarily due to
increased payments for long-term debt, including repayment of $130.0 million of
our senior notes on June 30, 2009, as well as an increase in acquisitions of
noncontrolling interests of subsidiaries, partially offset by the absence of
stock repurchases in the current year.
We expect
to invest approximately $50 million to $55 million during 2010 in capital
projects to modernize and expand our facilities and computer systems and to
integrate certain operations into our core structure.
The
following table summarizes selected measures of liquidity and capital resources
(in thousands):
|
December
26,
|
December
27,
|
|||||||
|
2009
|
2008
(1)
|
|||||||
|
Cash
and cash equivalents
|
$ | 471,154 | $ | 369,570 | ||||
|
Available-for-sale
securities - long-term
|
18,848 | 29,028 | ||||||
|
Working
capital
|
1,127,279 | 882,401 | ||||||
|
Debt:
|
||||||||
|
Bank
credit lines
|
$ | 932 | $ | 4,936 | ||||
|
Current
maturities of long-term debt
|
23,560 | 156,405 | ||||||
|
Long-term
debt
|
243,373 | 256,648 | ||||||
|
Total
debt
|
$ | 267,865 | $ | 417,989 | ||||
|
|
|
(1) Adjusted
to reflect the adoption of provisions contained within ASC Topic 470-20,
“Debt with Conversion and Other
Options.”
|
Our cash
and cash equivalents consist of bank balances and investments in money market
funds representing overnight investments with a high degree of
liquidity.
As of
December 26, 2009, we have approximately $21.1 million ($18.9 million net of
temporary impairments) invested in auction-rate securities
(“ARS”). ARS are publicly issued securities that represent long-term
investments, typically 10-30 years, in which interest rates had reset
periodically (typically every 7, 28 or 35 days) through a “dutch auction”
process. Approximately $18.7 million ($16.5 million net of temporary
impairments) of our ARS are backed by student loans that are backed by the
federal government and the remaining $2.4 million are invested in closed-end
municipal bond funds. Our ARS portfolio is comprised of investments
that are rated AAA by major independent rating agencies. Since the
middle of February 2008, these auctions have failed to settle due to an excess
number of sellers compared to buyers. The failure of these auctions
has resulted in our inability to liquidate our ARS in the near
term. We are currently not aware of any defaults or financial
conditions that would negatively affect the issuers’ ability to continue to pay
interest and principal on our ARS. We continue to earn and receive
interest at contractually agreed upon rates. We believe that the
current lack of liquidity related to our ARS investments will have no impact on
our ability to fund our ongoing operations and growth
opportunities. As of December 26, 2009, we have classified ARS
holdings as long-term, available-for-sale and they are included in the
Investments and other line within our consolidated balance sheets.
Our
business requires a substantial investment in working capital, which is
susceptible to fluctuations during the year as a result of inventory purchase
patterns and seasonal demands. Inventory purchase activity is a
function of sales activity, special inventory forward buy-in opportunities and
our desired level of inventory. We anticipate future increases in our
working capital requirements.
Our
accounts receivable days sales outstanding from continuing operations decreased
to 40.4 days as of December 26, 2009 from 41.4 days as of December 27,
2008. During the years ended December 26, 2009 and December 27, 2008,
we wrote off approximately $6.1 million and $6.5 million, respectively, of fully
reserved accounts receivable against our trade receivable
reserve. Our inventory turns from continuing operations decreased to
6.2 for the year ended December 26, 2009 from 6.5 for the year ended December
27, 2008. Our working capital accounts may be impacted by current and
future economic conditions.
The
following table summarizes our contractual obligations related to fixed and
variable rate long-term debt, including interest (assuming an average long-term
rate of interest of 3.2%), as well as operating and capital lease obligations,
capital expenditure obligations and inventory purchase commitments as of
December 26, 2009:
|
Payments
due by period (in thousands)
|
||||||||||||||||||||
|
<
1 year
|
1
- 3 years
|
4
- 5 years
|
>
5 years
|
Total
|
||||||||||||||||
|
Contractual
obligations:
|
||||||||||||||||||||
|
Long-term
debt, including interest
|
$ | 29,402 | $ | 15,920 | $ | 17,106 | $ | 384,000 | $ | 446,428 | ||||||||||
|
Inventory
purchase commitments
|
162,505 | 273,282 | 78,634 | 145,479 | 659,900 | |||||||||||||||
|
Operating
lease obligations
|
59,611 | 77,453 | 33,259 | 41,355 | 211,678 | |||||||||||||||
|
Capital
lease obligations, including interest
|
2,320 | 2,683 | 1,115 | - | 6,118 | |||||||||||||||
|
Total
|
$ | 253,838 | $ | 369,338 | $ | 130,114 | $ | 570,834 | $ | 1,324,124 | ||||||||||
Inventory
purchase commitments include obligations to purchase influenza vaccine from a
manufacturer through 2012, which require us to pay an amount per dose based on
the prevailing market price or formula price in each respective
year. The amounts included in the above table related to these
purchase commitments were determined using current market
conditions. We also have obligations to purchase influenza vaccine
from another manufacturer. Actual amounts may differ.
In 2004,
we completed an issuance of $240.0 million of convertible debt. These
notes are senior unsecured obligations bearing a fixed annual interest rate of
3.0% and are due to mature on August 15, 2034. Interest on the notes
is payable on February 15 and August 15 of each year. The notes are
convertible into our common stock at a conversion ratio of 21.58 shares per one
thousand dollars of principal amount of notes, which is equivalent to a
conversion price of $46.34 per share, under the following
circumstances:
|
·
|
if
the price of our common stock is above 130% of the conversion price
measured over a specified number of trading
days;
|
|
·
|
during
the five-business-day period following any 10-consecutive-trading-day
period in which the average of the trading prices for the notes for that
10-trading-day period was less than 98% of the average conversion value
for the notes during that period;
|
|
·
|
if
the notes have been called for redemption;
or
|
|
·
|
upon
the occurrence of a fundamental change or specified corporate
transactions, as defined in the note
agreement.
|
Upon
conversion, we are required to satisfy our conversion obligation with respect to
the principal amount of the notes to be converted, in cash, with any remaining
amount to be satisfied in shares of our common stock. We currently
have sufficient availability of funds through our $400.0 million revolving
credit facility (discussed below) along with cash on hand to fully satisfy our
debt obligations, including the cash portion of our convertible
debt. We also will pay contingent interest during any
six-month-interest period beginning August 20, 2010, if the average trading
price of the notes is above specified levels. We may redeem some or
all of the notes on or after August 20, 2010. The note holders may
require us to purchase all or a portion of the notes on August 15, 2010, 2014,
2019, 2024 and 2029 or, subject to specified exceptions, upon a change of
control event. If we are required by the note holders to purchase all
or a portion of the notes, we will use our existing credit line to fund such
purchase; therefore, we have classified our convertible debt as long-term in our
consolidated balance sheet.
Our $20.0
million of remaining senior notes bear interest at a fixed rate of 6.7% per
annum and mature on September 27, 2010. Interest on our senior notes
is payable semi-annually.
On
September 5, 2008, we entered into a new $400.0 million revolving credit
facility with a $100.0 million expansion feature. The $400.0 million
credit line expires in September 2013. This credit line replaced our
then existing $300.0 million revolving credit line, which would have expired in
May 2010. As of December 26, 2009, there were no borrowings
outstanding under this revolving credit facility and there were $10.2 million of
letters of credit provided to third parties.
As
further discussed in Note 18 of “Notes to Consolidated Financial Statements,”
which is incorporated herein by reference, effective December 31, 2009 we
incurred approximately $320.0 million of debt in connection with the acquisition
of a majority interest in Butler Animal Health Supply, LLC.
Under our
common stock repurchase programs approved by our Board of Directors, we have
$57.7 million available for future common stock share
repurchases. During the year ended December 26, 2009, we did not
repurchase any of our common stock.
Some minority shareholders in certain of
our subsidiaries have the right, at certain times, to require us to acquire
their ownership interest in those entities at fair value based on third-party
valuations. Effective December 28, 2008, we have adopted the
provisions of ASC Topic 480-10. ASC Topic 480-10 is applicable for
noncontrolling interests where we are or may be required to purchase all or a
portion of the outstanding interest in a consolidated subsidiary from the
noncontrolling interest holder under the terms of a put option contained in
contractual agreements. As a result of the adoption of the
provisions of ASC Topic 480-10, we have recorded the estimated fair value of the
redeemable securities ($178.6 million, $233.0 million and $150.0 million at
December 26, 2009, December 27, 2008 and December 29, 2007, respectively) and
reduced Additional paid-in capital and Noncontrolling interests within the
Stockholders’ equity section of our consolidated balance sheets. The
components of the change in the fair value of the Redeemable noncontrolling
interests for the years ended December 26, 2009, December 27, 2008 and December
29, 2007 are presented in the following table:
|
December
26,
2009
|
December
27,
2008
|
December
29,
2007
|
||||||||||
|
Balance,
beginning of year
|
$ | 233,035 | $ | 150,028 | $ | 111,902 | ||||||
|
Acquisitions
of additional ownership from
|
||||||||||||
|
noncontrolling
interests
|
(69,157 | ) | - | - | ||||||||
|
Initial
noncontrolling interests and adjustments related to
|
||||||||||||
|
business
acquisitions
|
(3,270 | ) | 14,994 | 270 | ||||||||
|
Net
income attributable to noncontrolling interests
|
21,975 | 21,929 | 17,350 | |||||||||
|
Dividends
paid
|
(5,973 | ) | (2,994 | ) | (1,362 | ) | ||||||
|
Effect
of foreign currency translation attributable to
|
||||||||||||
|
noncontrolling
interests
|
2,541 | (2,060 | ) | 854 | ||||||||
|
Change
in fair value of redeemable securities
|
(581 | ) | 51,138 | 21,014 | ||||||||
|
Balance,
end of year
|
$ | 178,570 | $ | 233,035 | $ | 150,028 | ||||||
Changes
in the estimated redemption amounts of the noncontrolling interests subject to
put options are adjusted at each reporting period with a corresponding
adjustment to Additional paid-in capital. Future reductions in the
carrying amounts are subject to a “floor” amount that is equal to the fair value
of the redeemable noncontrolling interests at the time they were originally
recorded. The recorded value of the redeemable noncontrolling
interests cannot go below the floor level. These adjustments will not
impact the calculation of earnings per share.
Additionally,
some prior owners of such acquired subsidiaries are eligible to receive
additional purchase price cash consideration if certain profitability targets
are met. For acquisitions completed prior to 2009, we accrue
liabilities that may arise from these transactions when we believe that the
outcome of the contingency is determinable beyond a reasonable
doubt. For 2009 and future acquisitions, as required by ASC Topic
805, “Business Combinations,” we will accrue liabilities for the estimated fair
value of additional purchase price adjustments at the time of the
acquisition. Any adjustments to these accrual amounts will be
recorded in our consolidated statement of income.
As more
fully disclosed in Note 10 of “Notes to Consolidated Financial Statements,” we
adopted ASC Topic 740, “Income Taxes,” effective December 31,
2006. We cannot reasonably estimate the timing of future cash flows
related to the unrecognized tax benefits, including accrued interest, of $20.9
million as of December 26, 2009.
We
finance our business to provide adequate funding for at least 12
months. Funding requirements are based on forecasted profitability
and working capital needs, which, on occasion, may
change. Consequently, we may change our funding structure to reflect
any new requirements.
We
believe that our cash and cash equivalents, our ability to access private debt
markets and public equity markets, and our available funds under existing credit
facilities provide us with sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs. We have no
off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosures of contingent assets and
liabilities. We base our estimates on historical data, when
available, experience, industry and market trends, and on various other
assumptions that are believed to be reasonable under the circumstances, the
combined results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. However, by their nature, estimates are subject to various
assumptions and uncertainties. Reported results are therefore
sensitive to any changes in our assumptions, judgments and estimates, including
the possibility of obtaining materially different results if different
assumptions were to be applied.
We
believe that the following critical accounting policies, which have been
discussed with our audit committee, affect the significant estimates and
judgments used in the preparation of our financial statements:
Revenue
Recognition
We
generate revenue from the sale of dental, medical and animal health consumable
products, as well as equipment, software products and services and other
sources. Provisions for discounts, rebates to customers, customer
returns and other contra-revenue adjustments are recorded based upon historical
data and estimates and are provided for in the period in which the related sales
are recognized.
Revenue
derived from the sale of consumable products is recognized when products are
shipped to customers. Such sales typically entail high-volume,
low-dollar orders shipped using third-party common carriers. We
believe that the shipment date is the most appropriate point in time indicating
the completion of the earnings process because we have no post-shipment
obligations, the product price is fixed and determinable, collection of the
resulting receivable is probable and product returns are reasonably
estimable.
Revenue
derived from the sale of equipment is recognized when products are delivered to
customers. Such sales typically entail scheduled deliveries of large
equipment primarily by equipment service technicians. Some equipment
sales require minimal installation, which is typically completed at the time of
delivery.
Revenue
derived from the sale of software products is recognized when products are
shipped to customers. Such software is generally installed by
customers and does not require extensive training due to the nature of its
design. Revenue derived from post-contract customer support for
software, including annual support and/or training, is recognized over the
period in which the services are provided.
Revenue
derived from the sale of products consisting of multiple elements (i.e.,
hardware, software, installation, training and technical support) is allocated
to the various elements based upon vendor-specific objective evidence of fair
value.
Revenue
derived from other sources including freight charges, equipment repairs and
financial services, is recognized when the related product revenue is recognized
or when the services are provided.
Accounts Receivable and Reserves
The
carrying amount of accounts receivable reflects a reserve representing our best
estimate of the amounts that will not be collected. In addition to
reviewing delinquent accounts receivable, we consider many factors in estimating
our reserve, including historical data, experience, customer types, credit
worthiness and economic trends. From time to time, we may adjust our
assumptions for anticipated changes in any of these or other factors expected to
affect collectibility. Although we believe our judgments, estimates
and/or assumptions related to accounts receivable and reserves are reasonable,
making material changes to such judgments, estimates and/or assumptions could
materially affect our financial results.
Inventories
and Reserves
Inventories
consist primarily of finished goods and are valued at the lower of cost or
market. Cost is determined by the first-in, first-out method for
merchandise or actual cost for large equipment and high tech
equipment. In accordance with our policy for inventory valuation, we
consider many factors including the condition and salability of the inventory,
historical sales, forecasted sales and market and economic
trends.
From time
to time, we may adjust our assumptions for anticipated changes in any of these
or other factors expected to affect salability. Although we believe
our judgments, estimates and/or assumptions related to inventory and reserves
are reasonable, making material changes to such judgments, estimates and/or
assumptions could materially affect our financial results.
Goodwill
and Other Indefinite-Lived Intangible Assets
Goodwill
and other indefinite-lived intangible assets (primarily trademarks) are not
amortized, but are subject to at least an annual impairment
analysis. Such impairment analyses for goodwill require the
comparison of the fair value to the carrying value of reporting
units. Measuring fair value of a reporting unit is generally based on
valuation techniques using multiples of sales or earnings, unless supportable
information is available for using a present value technique, such as estimates
of future cash flows. Although we believe our judgments, estimates
and/or assumptions used in determining fair value are reasonable, making
material changes to such judgments, estimates and/or assumptions could
materially affect such impairment analyses and our financial
results.
We regard
our reporting units to be our operating segments (dental, medical (including
animal health), international and technology). Goodwill was allocated
to such reporting units, for the purposes of preparing our impairment analyses,
based on a specific identification basis. Our impairment analysis for
indefinite-lived intangibles consists of a review of historical, current and
forecasted sales and gross profit levels, as well as a review of any factors
that may indicate potential impairment. We assess the potential
impairment of goodwill and other indefinite-lived intangible assets annually (at
the end of our third quarter) and on an interim basis whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. There were no events or circumstances from the date of
that assessment through December 26, 2009 that impacted our
analysis. Some factors we consider important, which could trigger an
interim impairment review, include:
|
·
|
significant
underperformance relative to expected historical or projected future
operating results;
|
|
·
|
significant
changes in the manner of our use of acquired assets or the strategy for
our overall business (e.g., decision to divest a business);
or
|
|
·
|
significant
negative industry or economic
trends.
|
If we
determine through the impairment review process that goodwill or other
indefinite-lived intangible assets are impaired, we will record an impairment
charge in our consolidated statement of income.
Supplier
Rebates
Supplier
rebates are included as a reduction of cost of sales and are recognized over the
period they are earned. The factors we consider in estimating
supplier rebate accruals include forecasted inventory purchases and sales, in
conjunction with supplier rebate contract terms, which generally provide for
increasing rebates based on either increased purchase or sales
volume. Although we believe our judgments, estimates and/or
assumptions related to supplier rebates are reasonable, making material changes
to such judgments, estimates and/or assumptions could materially affect our
financial results.
Long-Lived
Assets
Long-lived
assets, other than goodwill and other indefinite-lived intangibles, are
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows derived from such
assets. Definite-lived intangible assets primarily consist of
non-compete agreements, trademarks, trade names, customer lists, customer
relationships and intellectual property. For long-lived assets
used in operations, impairment losses are only recorded if the asset’s carrying
amount is not recoverable through its undiscounted, probability-weighted future
cash flows. We measure the impairment loss based on the difference
between the carrying amount and the estimated fair value. When an
impairment exists, the related assets are written down to fair
value. Although we believe our judgments, estimates and/or
assumptions used in estimating cash flows and determining fair value are
reasonable, making material changes to such judgments, estimates and/or
assumptions could materially affect such impairment analyses and our financial
results.
Stock-Based
Compensation
We
measure stock-based compensation at the grant date, based on the estimated fair
value of the award. Prior to March 2009, awards principally included
a combination of at-the-money stock options and restricted stock (including
restricted stock units). In March 2009, equity-based awards were
granted solely in the form of restricted stock and restricted stock units, with
the exception of stock options for certain pre-existing contractual
obligations.
We
estimate the fair value of stock options using the Black-Scholes valuation model
which requires us to make assumptions about the expected life of options, stock
price volatility, risk-free interest rates and dividend yields.
We issue
restricted stock that vests based on the recipient’s continued service over time
(four-year cliff vesting) and restricted stock that vests based on our achieving
specified performance measurements (three-year cliff vesting).
With
respect to time-based restricted stock, we estimate the fair value on the date
of grant based on our closing stock price. With respect to
performance-based restricted stock, the number of shares that ultimately vest
and are received by the recipient is based upon our earnings per share
performance as measured against specified targets over a three-year period as
determined by the Compensation Committee of the Board of
Directors. Though there is no guarantee that performance targets will
be achieved, we estimate the fair value of performance-based restricted stock,
based on our closing stock price at time of grant. Adjustments to the
performance-based restricted stock targets are provided for significant events
such as acquisitions, divestitures, new business ventures and share
repurchases. Over the performance period, the number of shares of
common stock that will ultimately vest and be issued and the related
compensation expense is adjusted upward or downward based upon our estimation of
achieving such performance targets. The ultimate number of shares
delivered to recipients and the related compensation cost recognized as an
expense will be based on our actual performance metrics as defined.
Although
we believe our judgments, estimates and/or assumptions related to stock-based
compensation are reasonable, making material changes to such judgments,
estimates and/or assumptions could materially affect our financial
results.
Recently
Issued Accounting Standards
Accounting
Pronouncements Adopted
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC
Topic 105) which establishes the FASB Accounting Standards Codification (“the
Codification” or “ASC”) as the official single source of authoritative U.S.
generally accepted accounting principles (“GAAP”). All existing
accounting standards are superseded. All other accounting guidance
not included in the Codification will be considered
non-authoritative. The Codification also includes all relevant
Securities and Exchange Commission (“SEC”) guidance organized using the same
topical structure in separate sections within the
Codification. Following the Codification, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards
Updates (“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification was effective for our third
quarter 2009 financial statements and the principal impact on our financial
statements is limited to disclosures as all future references to authoritative
accounting literature will be referenced in accordance with the
Codification.
In May
2009, the FASB issued guidance within Topic 855-10 relating to subsequent
events. This guidance establishes principles and requirements for
subsequent events. This guidance defines the period after the balance
sheet date during which events or transactions that may occur would be required
to be disclosed in a company’s financial statements. Public entities
are required to evaluate subsequent events through the date that financial
statements are issued. This guidance also provides guidelines in
evaluating whether or not events or transactions occurring after the balance
sheet date should be recognized in the financial statements. This
guidance requires disclosure of the date through which subsequent events have
been evaluated. We have evaluated subsequent events through the date
of issuance of this report.
In April
2009, the FASB issued guidance within ASC Topic 825-10 concerning interim
disclosures about fair value instruments. This guidance requires that
disclosures about the fair value of a company’s financial instruments be made
whenever summarized financial information for interim reporting periods is
made. The provisions of this guidance are effective for interim
reporting periods ending after June 15, 2009. The adoption of this
guidance did not have a material impact on our consolidated financial
statements.
In April
2009, the FASB issued, within ASC 820, additional guidance for estimating fair
value in accordance with ASC 820 when the volume and level of activity for the
asset or liability have significantly decreased. The provisions of
this additional guidance are effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this additional guidance
did not have a material impact on our consolidated financial
statements.
In April
2009, the FASB amended previous guidance and issued additional guidance within
ASC 320 relating to the disclosure requirements for other-than-temporary
impairments for debt and equity securities. This guidance addresses
the determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment
loss. The provisions of this guidance are effective for interim and
annual reporting periods ending after June 15, 2009. The adoption of
this guidance did not have a material impact on our consolidated financial
statements.
In April
2009, the FASB issued guidance within ASC Topic 805, “Business
Combinations.” ASC Topic 805 amends the initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business
combination. This guidance is effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The adoption of this guidance did not
have a material impact on our consolidated financial
statements.
Effective
December 28, 2008, we have adopted the provisions of ASC Topic
480-10. ASC Topic 480-10 is applicable for noncontrolling interests
where we are or may be required to purchase (for a price equal to fair value
based on third-party valuations) all or a portion of the outstanding interest in
a consolidated subsidiary from the noncontrolling interest holder under the
terms of put options contained in contractual agreements. As a
result of the adoption of the provisions of ASC Topic 480-10, we have recorded
the maximum redemption amount which approximates fair value of the
noncontrolling interests subject to put options as redeemable noncontrolling
interests ($178.6 million, $233.0 million and $150.0 million at December 26,
2009, December 27, 2008 and December 29, 2007, respectively) and reduced
Additional paid-in capital and Noncontrolling interests within the Stockholders’
equity section of our consolidated balance sheets. The change in fair
value of the noncontrolling interests subject to put options at December 26,
2009 compared to December 27, 2008 was primarily due to purchases of additional
interests in consolidated subsidiaries and income attributable to noncontrolling
interests. Changes in the estimated redemption amounts of the
noncontrolling interests subject to put options are adjusted at each reporting
period with a corresponding adjustment to Additional paid-in
capital. These adjustments will not impact the calculation of
earnings per share.
In June
2008, the FASB issued guidance within ASC Topic 815-40, “Contracts in Entity’s
Own Equity.” This guidance provides that an entity should use a two
step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and the instrument’s settlement
provisions. ASC Topic 815-40 clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. This guidance is effective for fiscal
years beginning after December 15, 2008. The implementation of this
guidance did not have a material impact on our consolidated financial
statements.
In May
2008, the FASB issued guidance within ASC Topic 470-20, “Debt with Conversion
and Other Options.” This guidance requires us to allocate the
liability and equity components of our convertible debt and reflect our
non-convertible debt borrowing rate for the interest component of the
convertible debt. ASC Topic 470-20 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and is
applied retrospectively to all periods presented. Upon the
retrospective implementation of this guidance, we recorded a debt discount of
approximately $32.6 million as of August 9, 2004, which is being amortized over
a period of six years from the date our convertible debt was issued until August
9, 2010, the first date that the debt can be called. We also recorded
a related deferred tax liability of $12.1 million representing the tax impact of
recording the debt discount.
In March
2008, the FASB issued guidance within ASC Topic 815, “Derivatives and
Hedging.” ASC Topic 815 requires disclosures of the fair values of
derivative instruments and their gains and losses in a tabular
format. ASC Topic 815 also requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative
agreements. This guidance is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. The adoption of this guidance did not have a material impact on
our consolidated financial statements.
In
February 2008, the FASB issued guidance within ASC Topic 820, “Fair Value
Measurements and Disclosures.” This guidance within ASC Topic 820
delayed the effective date of certain provisions of ASC Topic 820 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) to fiscal years beginning after November 15,
2008. In October 2008, the FASB issued further guidance under ASC
Topic 820 specifically related to financial assets within the scope of
accounting pronouncements that require or permit fair value measurements in
accordance with ASC Topic 820. This guidance clarifies the
application of ASC Topic 820 in determining the fair values of assets or
liabilities in a market that is not active. ASC Topic 820 was effective upon
issuance, including prior periods for which financial statements have not been
issued. The adoption of this guidance did not have a material impact on our
consolidated financial statements.
In
January 2008, the FASB issued guidance within ASC Topic 260, “Earnings Per
Share.” ASC Topic 260 requires that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and should be included in
the two-class method of computing earnings per share. ASC Topic 260
is effective for fiscal years beginning after December 15, 2008. The
adoption of ASC Topic 260 did not have a material impact on our consolidated
financial statements.
In
December 2007, the FASB issued guidance within ASC Topic 805-20, “Identifiable
Assets and Liabilities, And Any Noncontrolling Interest,” and ASC Topic
810-10-65, relating to consolidations. ASC Topic 805-20 requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. This guidance also requires the fair value measurement of
certain other assets and liabilities related to the acquisition such as
contingencies. ASC Topic 805-20 applies prospectively to business
combinations and is effective for fiscal years beginning on or after December
15, 2008.
ASC Topic
810-10-65 requires that a noncontrolling interest in a subsidiary be reported as
equity in the consolidated financial statements. Consolidated net income
includes the net income for both the parent and the noncontrolling interest with
disclosure of both amounts on the consolidated statement of income. The
calculation of earnings per share continues to be based on income amounts
attributable to the parent. The presentation provisions of ASC Topic 810-10-65
are applied retrospectively, and ASC Topic 810-10-65 is effective for fiscal
years beginning on or after December 15, 2008. The adoption of ASC
Topic 805-20 did not have a material impact on our consolidated financial
statements. The cumulative impact of the adoption of ASC Topic
810-10-65 and ASC Topic 480-10 (discussed above) on our consolidated financial
statements was to decrease Additional paid-in capital by $93.4 million and
increase Noncontrolling interests by $3.2 million as of December 30,
2006.
New
Accounting Pronouncements Not Yet Adopted
During
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements.” ASU 2010-06 includes new disclosure requirements related to
fair value measurements, including transfers in and out of Levels 1 and 2 and
information about purchases, sales, issuances and settlements for Level 3 fair
value measurements. This update also clarifies existing disclosure
requirements relating to levels of disaggregation and disclosures of inputs and
valuation techniques. The new disclosures are required in interim and
annual reporting periods beginning after December 15, 2009, except the
disclosures relating to Level 3 activity are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. We are currently evaluating the
potential impact that these provisions within ASU 2010-06 will have on our
consolidated financial statements.
During
October 2009, the FASB issued ASU 2009-13 which amended guidance contained
within ASC Topic 605-25 related to revenue recognition for multiple-element
arrangements. The amendments in this update establish a selling
price hierarchy for determining the selling price of a
deliverable. These amendments also will replace the term fair value
in the revenue allocation guidance with selling price to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. The guidance in this update
will require that a vendor determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. The amendments in this update will
be effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. We
are currently
evaluating the potential impact that these provisions within ASU 2009-13 will
have on our consolidated financial statements.
We are
exposed to market risks, which include changes in interest rates, as well as
changes in foreign currency exchange rates as measured against the U.S. dollar
and each other, and changes to the credit markets. We attempt to
minimize these risks by using interest rate swap agreements and foreign currency
forward and swap contracts and through maintaining counter-party credit
limits. These hedging activities provide only limited protection
against interest rate and currency exchange and credit risks. Factors
that could influence the effectiveness of our programs include volatility of the
interest rate and currency markets and availability of hedging instruments and
liquidity of the credit markets. All interest rate swap and foreign
currency forward and swap contracts that we enter into are components of hedging
programs and are entered into for the sole purpose of hedging an existing or
anticipated interest rate and currency exposure. We do not enter into
such contracts for speculative purposes. We manage our credit risks
by diversifying our investments, maintaining a strong balance sheet and having
multiple sources of capital.
Interest
Rate Swap Agreements
We have
remaining fixed rate senior notes of $20.0 million at 6.7%. During
2003, we entered into interest rate swap agreements to exchange these fixed
interest rates for variable interest rates. The variable rates are
comprised of LIBOR plus spreads and reset on the interest due dates for the
senior notes. As a result of these interest rate swap agreements, as
well as our existing variable rate credit lines and loan agreements, we are
exposed to risk from changes in interest rates. A hypothetical 100
basis point increase in interest rates would increase our annual interest
expense by approximately $0.2 million.
As of
December 26, 2009, the fair value of our interest rate swap agreements recorded
in other current and non-current assets in our consolidated balance sheet was
$0.5 million, which represented the amount that would be received upon unwinding
the interest rate swap agreements based on market conditions at that
time. Changes in the fair value of these interest rate swap
agreements are reflected as an adjustment to current and non-current assets or
liabilities with an offsetting adjustment to the carrying value of the $20.0
million notes as such hedges are deemed fully effective.
Foreign
Currency Agreements
The value
of certain foreign currencies as compared to the U.S. dollar may affect our
financial results. Fluctuations in exchange rates may positively or
negatively affect our revenues, gross margins, operating expenses and retained
earnings, all of which are expressed in U.S. dollars. Where we deem
it prudent, we engage in hedging programs using primarily foreign currency
forward and swap contracts aimed at limiting the impact of foreign currency
exchange rate fluctuations on earnings. We purchase short-term (i.e.,
12 months or less) foreign currency forward and swap contracts to protect
against currency exchange risks associated with intercompany loans due from our
international subsidiaries and the payment of merchandise purchases to foreign
suppliers. We do not hedge the translation of foreign currency
profits into U.S. dollars, as we regard this as an accounting exposure, not an
economic exposure.
As of
December 26, 2009, the fair value of our foreign currency exchange agreements,
which expire through August 3, 2010, recorded in other current liabilities was
$1.9 million, as determined by quoted market prices. A hypothetical
5% change in the value of the U.S. dollar would change the fair value of our
foreign currency exchange agreements by $2.7 million. For the year
ended December 26, 2009, we had realized net gains of $1.2 million and
unrealized losses of $2.5 million relating to such agreements.
Short-Term
Investments
We limit
our credit risk with respect to our cash equivalents, available-for-sale
securities, short-term investments and derivative instruments, by monitoring the
credit worthiness of the financial institutions who are the counter-parties to
such financial instruments. As a risk management policy, we limit the
amount of credit exposure by diversifying and utilizing numerous investment
grade counter-parties.
INDEX
TO FINANCIAL STATEMENTS
HENRY
SCHEIN, INC.
|
Page
|
|
|
52
|
|
|
Consolidated
Financial Statements:
|
|
|
53
|
|
|
54
|
|
|
55
|
|
|
56
|
|
|
57
|
|
|
109
|
|
|
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.
|
|
Board of
Directors and Stockholders
Henry
Schein, Inc.
Melville,
New York
We have
audited the accompanying consolidated balance sheets of Henry Schein, Inc. as of
December 26, 2009 and December 27, 2008 and the related consolidated statements
of income, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 26, 2009. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Henry Schein, Inc. at
December 26, 2009 and December 27, 2008, and the results of its operations and
its cash flows for each of the three years in the period ended December 26,
2009, in conformity with accounting principles generally accepted in the United
States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Henry Schein, Inc.'s internal control over
financial reporting as of December 26, 2009, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated February
23, 2010 expressed an unqualified opinion thereon.
/s/ BDO
SEIDMAN, LLP
New York,
New York
February
23, 2010
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(In
thousands, except share and per share data)
|
||||||||
|
December
26,
|
December
27,
|
|||||||
|
2009
|
2008
|
|||||||
|
(Adjusted
- Notes 1 & 9)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 471,154 | $ | 369,570 | ||||
|
Accounts
receivable, net of reserves of $51,724 and $42,855
|
725,397 | 734,027 | ||||||
|
Inventories,
net
|
775,199 | 731,654 | ||||||
|
Deferred
income taxes
|
48,001 | 36,974 | ||||||
|
Prepaid
expenses and other
|
183,782 | 193,841 | ||||||
|
Total
current assets
|
2,203,533 | 2,066,066 | ||||||
|
Property
and equipment, net
|
259,576 | 247,835 | ||||||
|
Goodwill
|
986,395 | 922,952 | ||||||
|
Other
intangibles, net
|
204,445 | 214,093 | ||||||
|
Investments
and other
|
182,036 | 148,264 | ||||||
|
Total
assets
|
$ | 3,835,985 | $ | 3,599,210 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 521,079 | $ | 554,773 | ||||
|
Bank
credit lines
|
932 | 4,936 | ||||||
|
Current
maturities of long-term debt
|
23,560 | 156,405 | ||||||
|
Accrued
expenses:
|
||||||||
|
Payroll
and related
|
155,298 | 135,523 | ||||||
|
Taxes
|
86,034 | 69,792 | ||||||
|
Other
|
289,351 | 262,236 | ||||||
|
Total
current liabilities
|
1,076,254 | 1,183,665 | ||||||
|
Long-term
debt
|
243,373 | 256,648 | ||||||
|
Deferred
income taxes
|
100,976 | 95,399 | ||||||
|
Other
liabilities
|
75,304 | 58,109 | ||||||
|
Total
liabilities
|
1,495,907 | 1,593,821 | ||||||
|
Redeemable
noncontrolling interests
|
178,570 | 233,035 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, $.01 par value, 1,000,000 shares authorized,
|
||||||||
|
none
outstanding
|
- | - | ||||||
|
Common
stock, $.01 par value, 240,000,000 shares authorized,
|
||||||||
|
90,630,889
outstanding on December 26, 2009 and
|
||||||||
|
89,351,849
outstanding on December 27, 2008
|
906 | 894 | ||||||
|
Additional
paid-in capital
|
603,772 | 560,023 | ||||||
|
Retained
earnings
|
1,492,607 | 1,181,454 | ||||||
|
Accumulated
other comprehensive income
|
64,194 | 29,721 | ||||||
|
Total
Henry Schein, Inc. stockholders' equity
|
2,161,479 | 1,772,092 | ||||||
|
Noncontrolling
interest
|
29 | 262 | ||||||
|
Total
stockholders' equity
|
2,161,508 | 1,772,354 | ||||||
|
Total
liabilities, redeemable noncontrolling interests and stockholders'
equity
|
$ | 3,835,985 | $ | 3,599,210 | ||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||
|
Years
ended
|
||||||||||||
|
December
26,
2009
|
December
27,
2008
|
December
29,
2007
|
||||||||||
|
(Adjusted
- Notes 1, 7 & 9)
|
(Adjusted
- Notes 1, 7 & 9)
|
|||||||||||
|
Net
sales
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | ||||||
|
Cost
of sales
|
4,621,516 | 4,506,118 | 4,183,792 | |||||||||
|
Gross
profit
|
1,916,820 | 1,874,295 | 1,706,092 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Selling,
general and administrative
|
1,449,715 | 1,431,769 | 1,319,153 | |||||||||
|
Restructuring
costs
|
3,020 | 23,240 | - | |||||||||
|
Operating
income
|
464,085 | 419,286 | 386,939 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
9,979 | 16,355 | 16,531 | |||||||||
|
Interest
expense
|
(23,370 | ) | (34,605 | ) | (29,607 | ) | ||||||
|
Other,
net
|
2,026 | (5,587 | ) | 4,646 | ||||||||
|
Income
from continuing operations before taxes,
|
||||||||||||
|
equity
in earnings (losses) of affiliates and
|
||||||||||||
|
noncontrolling
interests
|
452,720 | 395,449 | 378,509 | |||||||||
|
Income
taxes
|
(127,521 | ) | (131,210 | ) | (128,556 | ) | ||||||
|
Equity
in earnings (losses) of affiliates
|
5,243 | 5,037 | (73 | ) | ||||||||
|
Income
from continuing operations
|
330,442 | 269,276 | 249,880 | |||||||||
|
Income
(loss) from discontinued operations, net of tax
|
2,715 | (7,902 | ) | (20,704 | ) | |||||||
|
Net
income
|
333,157 | 261,374 | 229,176 | |||||||||
|
Less:
Net income attributable to noncontrolling interests
|
(22,004 | ) | (21,917 | ) | (17,442 | ) | ||||||
|
Net
income attributable to Henry Schein, Inc.
|
$ | 311,153 | $ | 239,457 | $ | 211,734 | ||||||
|
Amounts
attributable to Henry Schein, Inc.:
|
||||||||||||
|
Income
from continuing operations
|
$ | 308,551 | $ | 247,347 | $ | 232,529 | ||||||
|
Income
(loss) from discontinued operations, net of tax
|
2,602 | (7,890 | ) | (20,795 | ) | |||||||
|
Net
income
|
$ | 311,153 | $ | 239,457 | $ | 211,734 | ||||||
|
Earnings
(loss) per share attributable to Henry Schein, Inc.:
|
||||||||||||
|
From
continuing operations:
|
||||||||||||
|
Basic
|
$ | 3.47 | $ | 2.78 | $ | 2.63 | ||||||
|
Diluted
|
$ | 3.41 | $ | 2.71 | $ | 2.55 | ||||||
|
From
discontinued operations:
|
||||||||||||
|
Basic
|
$ | 0.03 | $ | (0.09 | ) | $ | (0.24 | ) | ||||
|
Diluted
|
$ | 0.03 | $ | (0.08 | ) | $ | (0.23 | ) | ||||
|
From
net income:
|
||||||||||||
|
Basic
|
$ | 3.50 | $ | 2.69 | $ | 2.39 | ||||||
|
Diluted
|
$ | 3.44 | $ | 2.63 | $ | 2.32 | ||||||
|
Weighted-average
common shares outstanding:
|
||||||||||||
|
Basic
|
88,872 | 89,080 | 88,559 | |||||||||
|
Diluted
|
90,556 | 91,221 | 91,163 | |||||||||
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|||||||||||||||||||||||||||
|
(In
thousands, except share and per share data)
|
|||||||||||||||||||||||||||
|
Common
Stock
$.01
Par Value
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Noncontrolling
Interests
|
Total
Stockholders'
Equity
|
||||||||||||||||||||||
|
Shares
|
Amount
|
||||||||||||||||||||||||||
|
Balance,
December 30, 2006 - as previously reported
|
88,499,321 | $ | 885 | $ | 614,551 | $ | 808,164 | $ | 47,363 | $ | - | $ | 1,470,963 | ||||||||||||||
|
Cumulative
impact of adopting ASC Topic 470-20
|
- | - | 19,741 | (7,192 | ) | - | - | 12,549 | |||||||||||||||||||
|
Cumulative
impact of adopting ASC Topic 810-10-65
|
|||||||||||||||||||||||||||
|
and
ASC Topic 480-10
|
- | - | (93,365 | ) | - | - | 3,209 | (90,156 | ) | ||||||||||||||||||
|
Balance,
December 30, 2006 - as adjusted
|
88,499,321 | $ | 885 | $ | 540,927 | $ | 800,972 | $ | 47,363 | $ | 3,209 | $ | 1,393,356 | ||||||||||||||
|
Net
income (excluding $17,350 attributable to Redeemable
|
|||||||||||||||||||||||||||
|
noncontrolling
interests)
|
- | - | - | 211,734 | - | 92 | 211,826 | ||||||||||||||||||||
| Foreign currency translation gain (excluding $854 attributable to | |||||||||||||||||||||||||||
|
Redeemable
noncontrolling interests)
|
- | - | - | - | 48,039 | - | 48,039 | ||||||||||||||||||||
|
Unrealized
gain from foreign currency hedging activities,
|
|||||||||||||||||||||||||||
|
net
of tax of $603
|
- | - | - | - | 1,071 | - | 1,071 | ||||||||||||||||||||
|
Pension
adjustment gain, net of tax of $2,493
|
- | - | - | - | 3,795 | - | 3,795 | ||||||||||||||||||||
|
Total
comprehensive income
|
264,731 | ||||||||||||||||||||||||||
|
Dividends
paid
|
- | - | - | - | - | (100 | ) | (100 | ) | ||||||||||||||||||
|
Purchase
of noncontrolling interests
|
- | - | - | - | - | (2,927 | ) | (2,927 | ) | ||||||||||||||||||
|
Change
in fair value of redeemable securities
|
- | - | (21,014 | ) | - | - | - | (21,014 | ) | ||||||||||||||||||
|
Stock
issued to 401(k) plan
|
70,525 | 1 | 4,103 | - | - | - | 4,104 | ||||||||||||||||||||
|
Cumulative
adjustment for ASC Topic 740
|
- | - | - | (280 | ) | - | - | (280 | ) | ||||||||||||||||||
|
Repurchase
and retirement of common stock
|
(639,100 | ) | (6 | ) | (12,681 | ) | (18,002 | ) | - | - | (30,689 | ) | |||||||||||||||
|
Stock
issued upon exercise of stock options,
|
|||||||||||||||||||||||||||
|
including
tax benefit of $9,977
|
1,487,238 | 14 | 45,422 | - | - | - | 45,436 | ||||||||||||||||||||
|
Stock-based
compensation expense
|
185,676 | 2 | 22,368 | - | - | - | 22,370 | ||||||||||||||||||||
|
Balance,
December 29, 2007
|
89,603,660 | 896 | 579,125 | 994,424 | 100,268 | 274 | 1,674,987 | ||||||||||||||||||||
|
Net
income (loss) (excluding $21,929 attributable to
Redeemable
|
|||||||||||||||||||||||||||
|
noncontrolling
interests)
|
- | - | - | 239,457 | - | (12 | ) | 239,445 | |||||||||||||||||||
| Foreign currency translation loss (excluding $2,060 attributable to | |||||||||||||||||||||||||||
|
Redeemable
noncontrolling interests)
|
- | - | - | - | (69,420 | ) | - | (69,420 | ) | ||||||||||||||||||
|
Unrealized
gain from foreign currency hedging activities,
|
|||||||||||||||||||||||||||
|
net
of tax of $530
|
- | - | - | - | 86 | - | 86 | ||||||||||||||||||||
|
Unrealized
investment loss, net of tax of $821
|
- | - | - | - | (1,201 | ) | - | (1,201 | ) | ||||||||||||||||||
|
Pension
adjustment loss, net of tax of $438
|
- | - | - | - | (12 | ) | - | (12 | ) | ||||||||||||||||||
|
Total
comprehensive income
|
168,898 | ||||||||||||||||||||||||||
|
Change
in fair value of redeemable securities
|
- | - | (51,138 | ) | - | - | - | (51,138 | ) | ||||||||||||||||||
|
Stock
issued to 401(k) plan
|
79,723 | 1 | 4,661 | - | - | - | 4,662 | ||||||||||||||||||||
|
Repurchase
and retirement of common stock
|
(1,621,710 | ) | (16 | ) | (30,345 | ) | (52,427 | ) | - | - | (82,788 | ) | |||||||||||||||
|
Stock
issued upon exercise of stock options,
|
|||||||||||||||||||||||||||
|
including
tax benefit of $6,977
|
991,259 | 10 | 32,616 | - | - | - | 32,626 | ||||||||||||||||||||
|
Stock-based
compensation expense
|
298,917 | 3 | 25,104 | - | - | - | 25,107 | ||||||||||||||||||||
|
Balance,
December 27, 2008
|
89,351,849 | 894 | 560,023 | 1,181,454 | 29,721 | 262 | 1,772,354 | ||||||||||||||||||||
|
Net
income (excluding $21,975 attributable to Redeemable
|
|||||||||||||||||||||||||||
|
noncontrolling
interests)
|
- | - | - | 311,153 | - | 29 | 311,182 | ||||||||||||||||||||
|
Foreign
currency translation gain (excluding $2,541 attributable
to
|
|||||||||||||||||||||||||||
|
Redeemable
noncontrolling interests)
|
- | - | - | - | 25,406 | - | 25,406 | ||||||||||||||||||||
|
Unrealized
gain from foreign currency hedging activities,
|
|||||||||||||||||||||||||||
|
net
of tax of $8,184
|
- | - | - | - | 13,317 | - | 13,317 | ||||||||||||||||||||
|
Unrealized
investment loss, net of tax of $105
|
- | - | - | - | (120 | ) | - | (120 | ) | ||||||||||||||||||
|
Pension
adjustment loss, net of tax of $1,092
|
- | - | - | - | (4,130 | ) | - | (4,130 | ) | ||||||||||||||||||
|
Total
comprehensive income
|
345,655 | ||||||||||||||||||||||||||
|
Purchase of
noncontrolling interest
|
- | - | - | - | - | (262 | ) | (262 | ) | ||||||||||||||||||
|
Change
in fair value of redeemable securities
|
- | - | 581 | - | - | - | 581 | ||||||||||||||||||||
|
Stock
issued to 401(k) plan
|
100,778 | 1 | 5,300 | - | - | - | 5,301 | ||||||||||||||||||||
|
Stock
issued upon exercise of stock options,
|
|||||||||||||||||||||||||||
|
including
tax benefit of $2,642
|
445,916 | 4 | 14,508 | - | - | - | 14,512 | ||||||||||||||||||||
|
Stock-based
compensation expense
|
802,068 | 8 | 25,916 | - | - | - | 25,924 | ||||||||||||||||||||
|
Shares
withheld for payroll taxes
|
(69,722 | ) | (1 | ) | (2,149 | ) | - | - | - | (2,150 | ) | ||||||||||||||||
|
Liability
for cash settlement stock option awards
|
- | - | (407 | ) | - | - | - | (407 | ) | ||||||||||||||||||
|
Balance,
December 26, 2009
|
90,630,889 | $ | 906 | $ | 603,772 | $ | 1,492,607 | $ | 64,194 | $ | 29 | $ | 2,161,508 | ||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
(In
thousands)
|
||||||||||||
|
Years
ended
|
||||||||||||
|
December
26,
2009
|
December
27,
2008
|
December
29,
2007
|
||||||||||
|
(Adjusted
Notes 1, 7 & 9)
|
(Adjusted
Notes 1, 7 & 9)
|
|||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 333,157 | $ | 261,374 | $ | 229,176 | ||||||
|
Adjustments
to reconcile net income to net cash provided
|
||||||||||||
|
by
operating activities:
|
||||||||||||
|
Gain
on sale of discontinued operation, net of tax
|
(2,382 | ) | - | (673 | ) | |||||||
|
Impairment
from write-down of long-lived assets of
|
||||||||||||
|
discontinued
operation
|
- | 8,484 | 32,667 | |||||||||
|
Depreciation
and amortization
|
81,493 | 78,127 | 73,936 | |||||||||
|
Amortization
of bond discount
|
5,990 | 5,649 | 5,355 | |||||||||
|
Stock-based
compensation expense
|
25,924 | 25,429 | 22,553 | |||||||||
|
Provision
for losses on trade and other accounts receivable
|
4,747 | 6,255 | 1,384 | |||||||||
|
Benefit
from deferred income taxes
|
(26,214 | ) | (5,958 | ) | (9,233 | ) | ||||||
|
Stock
issued to 401(k) plan
|
5,301 | 4,662 | 4,104 | |||||||||
|
Undistributed
(earnings) losses of affiliates
|
(5,243 | ) | (5,037 | ) | 73 | |||||||
|
Other
|
2,373 | 150 | (6,512 | ) | ||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||||
|
Accounts
receivable
|
20,445 | (26,834 | ) | (21,964 | ) | |||||||
|
Inventories
|
(19,242 | ) | (68,360 | ) | (15,946 | ) | ||||||
|
Other
current assets
|
375 | 11,261 | (58,148 | ) | ||||||||
|
Accounts
payable and accrued expenses
|
(29,834 | ) | 89,580 | 13,572 | ||||||||
|
Net
cash provided by operating activities
|
396,890 | 384,782 | 270,344 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of fixed assets
|
(51,627 | ) | (50,870 | ) | (56,821 | ) | ||||||
|
Payments
for equity investment and business
|
||||||||||||
|
acquisitions,
net of cash acquired
|
(56,648 | ) | (128,470 | ) | (199,294 | ) | ||||||
|
Cash
received from business divestiture
|
12,716 | - | 15,827 | |||||||||
|
Purchases
of available-for-sale securities
|
- | (35,925 | ) | (115,066 | ) | |||||||
|
Proceeds
from sales of available-for-sale securities
|
9,955 | 5,722 | 163,065 | |||||||||
|
Net
proceeds from (payments for) foreign exchange
|
||||||||||||
|
forward
contract settlements
|
275 | 41,336 | (32,241 | ) | ||||||||
|
Other
|
(12,119 | ) | 197 | (10,762 | ) | |||||||
|
Net
cash used in investing activities
|
(97,448 | ) | (168,010 | ) | (235,292 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from (repayments of) bank borrowings
|
(4,481 | ) | (7,197 | ) | 1,212 | |||||||
|
Proceeds
from issuance of long-term debt
|
- | - | 483 | |||||||||
|
Principal
payments for long-term debt
|
(154,329 | ) | (33,721 | ) | (47,903 | ) | ||||||
|
Proceeds
from issuance of stock upon exercise of stock options
|
11,870 | 25,649 | 35,459 | |||||||||
|
Acquisitions
of noncontrolling interests in subsidiaries
|
(52,453 | ) | - | (6,888 | ) | |||||||
|
Payments
for repurchases of common stock
|
- | (82,788 | ) | (30,689 | ) | |||||||
|
Excess
tax benefits related to stock-based compensation
|
4,680 | 11,041 | 12,668 | |||||||||
|
Other
|
(2,962 | ) | (954 | ) | (2,350 | ) | ||||||
|
Net
cash used in financing activities
|
(197,675 | ) | (87,970 | ) | (38,008 | ) | ||||||
|
Net
change in cash and cash equivalents
|
101,767 | 128,802 | (2,956 | ) | ||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(183 | ) | (6,822 | ) | 1,899 | |||||||
|
Cash
and cash equivalents, beginning of year
|
369,570 | 247,590 | 248,647 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 471,154 | $ | 369,570 | $ | 247,590 | ||||||
See
accompanying notes.
56
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies
Nature
of Operations
We
distribute healthcare products and services primarily to office-based healthcare
practitioners in the combined North American and European markets, with
operations in the United States, Australia, Austria, Belgium, Canada, China, the
Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy,
Luxembourg, the Netherlands, New Zealand, Portugal, Spain, Switzerland and the
United Kingdom. We also have affiliates in Iceland, Saudi Arabia and
the United Arab Emirates.
Principles
of Consolidation
Our
consolidated financial statements include the accounts of Henry Schein, Inc. and
all of our controlled subsidiaries. All intercompany accounts and
transactions are eliminated in consolidation. Investments in
unconsolidated affiliates, which are greater than or equal to 20% and less than
or equal to 50% owned, are accounted for under the equity
method. Certain prior period amounts have been reclassified to
conform to the current period presentation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Fiscal
Year
We report
our results of operations and cash flows on a 52-53 week basis ending on the
last Saturday of December. The years ended December 26, 2009,
December 27, 2008 and December 29, 2007 consisted of 52 weeks.
Revenue
Recognition
We
generate revenue from the sale of dental, medical and animal health consumable
products, as well as equipment, software products and services and other
sources. Provisions for discounts, rebates to customers, customer
returns and other contra-revenue adjustments are recorded based upon historical
data and estimates and are provided for in the period in which the related sales
are recognized.
Revenue
derived from the sale of consumable products is recognized when products are
shipped to customers. Such sales typically entail high-volume,
low-dollar orders shipped using third-party common carriers. We
believe that the shipment date is the most appropriate point in time indicating
the completion of the earnings process because we have no post-shipment
obligations, the product price is fixed and determinable, collection of the
resulting receivable is probable and product returns are reasonably
estimable.
57
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
Revenue
derived from the sale of equipment is recognized when products are delivered to
customers. Such sales typically entail scheduled deliveries of large
equipment primarily by equipment service technicians. Some equipment
sales require minimal installation, which is completed at the time of
delivery.
Revenue
derived from the sale of software products is recognized when products are
shipped to customers. Such software is generally installed by
customers and does not require extensive training due to the nature of its
design. Revenue derived from post-contract customer support for
software, including annual support and/or training, is recognized over the
period in which the services are provided.
Revenue
derived from the sale of products consisting of multiple elements (i.e.,
hardware, software, installation, training and technical support) is allocated
to the various elements based upon vendor-specific objective evidence of fair
value.
Revenue
derived from other sources including freight charges, equipment repairs and
financial services, is recognized when the related product revenue is recognized
or when the services are provided.
Cash
and Cash Equivalents
We
consider all highly liquid short-term investments with an original maturity of
three months or less to be cash equivalents. Outstanding checks in
excess of funds on deposit of $48.3 million and $55.1 million, primarily related
to payments for inventory, were classified as accounts payable as of December
26, 2009 and December 27, 2008.
Available-for-sale
Securities
As of
December 26, 2009, we have approximately $21.1 million invested in auction-rate
securities (“ARS”). ARS are publicly issued securities that represent
long-term investments, typically 10-30 years, in which interest rates had reset
periodically (typically every 7, 28 or 35 days) through a “dutch auction”
process. Approximately $18.7 million of our ARS are backed by student
loans that are backed by the federal government and the remaining $2.4 million
are invested in closed-end municipal bond funds.
We
determine cost of investments in available-for-sale securities on a specific
identification basis. As of December 26, 2009 and December 27, 2008,
unrealized losses, which are recorded in Accumulated other comprehensive income
within the equity section of our consolidated balance sheets, on our
available-for-sale securities totaled $2.2 million and $2.0 million,
respectively. Gross realized gains and losses were immaterial in all
periods presented.
Accounts
Receivable and Reserves
The
carrying amount of accounts receivable is reduced by a valuation allowance that
reflects our best estimate of the amounts that will not be
collected. The reserve for accounts receivable is comprised of
allowance for doubtful accounts and sales returns. In addition to
reviewing delinquent accounts receivable, we consider many factors in estimating
our reserve, including historical data, experience, customer types, credit
worthiness and economic trends. From time to time, we adjust our
assumptions for anticipated changes in any of these or other factors expected to
affect collectibility.
58
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
Inventories
and Reserves
Inventories
consist primarily of finished goods and are valued at the lower of cost or
market. Cost is determined by the first-in, first-out method for
merchandise or actual cost for large equipment and high tech
equipment. In accordance with our policy for inventory valuation, we
consider many factors including the condition and salability of the inventory,
historical sales, forecasted sales and market and economic trends. From
time to time, we adjust our assumptions for anticipated changes in any of these
or other factors expected to affect the value of inventory.
Direct
Shipping and Handling Costs
Freight
and other direct shipping costs are included in cost of sales. Direct
handling costs, which represent primarily direct compensation costs of employees
who pick, pack and otherwise prepare, if necessary, merchandise for shipment to
our customers are reflected in selling, general and administrative
expenses. Direct shipping and handling costs from continuing
operations were $46.6 million, $49.6 million and $48.8 million for the years
ended December 26, 2009, December 27, 2008 and December 29, 2007.
Advertising
and Promotional Costs
We
generally expense advertising and promotional costs as
incurred. Total advertising and promotional expenses from continuing
operations were $12.4 million, $18.4 million and $19.0 million for the years
ended December 26, 2009, December 27, 2008 and December 29,
2007. Additionally, advertising and promotional costs incurred in
connection with direct marketing, including product catalogs and printed
material, are deferred and amortized on a straight-line basis over the period
which is benefited, generally not exceeding one year. As of December
26, 2009 and December 27, 2008, we had $3.4 million and $3.5 million of deferred
direct marketing expenses included in other current assets.
Supplier
Rebates
Supplier
rebates are included as a reduction of cost of sales and are recognized over the
period they are earned. The factors we consider in estimating
supplier rebate accruals include forecasted inventory purchases and sales, in
conjunction with supplier rebate contract terms, which generally provide for
increasing rebates based on either increased purchase or sales
volume.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation or
amortization. Amortization of leasehold improvements is computed
using the straight-line method over the lesser of the useful life of the assets
or the lease term. Depreciation is computed primarily under the
straight-line method over the following estimated useful lives:
|
Years
|
|
|
Buildings
and permanent improvements
|
40
|
|
Machinery
and warehouse equipment
|
5-10
|
|
Furniture,
fixtures and other
|
3-10
|
|
Computer
equipment and software
|
3-10
|
59
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
Capitalized
software costs consist of costs to purchase and develop
software. Costs incurred during the application development stage for
software bought and further customized by outside suppliers for our use and
software developed by a supplier for our proprietary use are
capitalized. Costs incurred for our own personnel who are directly
associated with software development are capitalized.
Income
Taxes
We
account for income taxes under an asset and liability approach that requires the
recognition of deferred income tax assets and liabilities for the expected
future tax consequences of events that have been recognized in our financial
statements or tax returns. In estimating future tax consequences, we
generally consider all expected future events other than enactments of changes
in tax laws or rates. The effect on deferred income tax assets and
liabilities of a change in tax rates will be recognized as income or expense in
the period that includes the enactment date. We file a consolidated
U.S. federal income tax return with our 80% or greater owned U.S.
subsidiaries.
Foreign
Currency Translation and Transactions
The
financial position and results of operations of our foreign subsidiaries are
determined using local currency as the functional currency. Assets
and liabilities of these subsidiaries are translated at the exchange rate in
effect at each year-end. Income statement accounts are translated at
the average rate of exchange prevailing during the year. Translation
adjustments arising from the use of differing exchange rates from period to
period are included in Accumulated other comprehensive income in stockholders’
equity. Gains and losses resulting from foreign currency transactions
are included in earnings.
Risk
Management and Derivative Financial Instruments
We use
derivative instruments to minimize our exposure to fluctuations in interest
rates and foreign currency exchange rates. Our objective is to manage
the impact that interest rate and foreign currency exchange rate fluctuations
could have on recognized asset and liability fair values, earnings and cash
flows. Our risk management policy requires that derivative contracts
used as hedges be effective at reducing the risks associated with the exposure
being hedged and be designated as a hedge at the inception of the
contract. We do not enter into derivative instruments for speculative
purposes. Our derivative instruments primarily include interest rate
swap agreements related to our long-term fixed rate debt and foreign currency
forward and swap agreements related to certain intercompany loans and certain
forecasted inventory purchase commitments with foreign suppliers.
Our
interest rate swap agreements are designated as fair value
hedges. The terms of our interest rate swap agreements are identical
to the senior notes and consequently qualify for an assumption of no
ineffectiveness under the provisions of ASC Topic 815, “Derivatives and
Hedging.” Both the interest rate swap agreements and the underlying
senior notes are marked-to-market through earnings at the end of each period;
however, since our interest rate swap agreements are deemed fully effective,
these mark-to-market adjustments have no net impact on earnings.
Our
foreign currency forward and swap agreements related to forecasted inventory
purchase commitments are designated as cash flow hedges. Our foreign
currency forward and swap agreements related to foreign currency balance sheet
exposure provide economic hedges but are not designated as hedges for accounting
purposes.
60
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
For
agreements not designated as hedges, changes in the value of the derivative,
along with the transaction gain or loss on the hedged item, are recorded in
earnings. For cash flow hedges, the effective portion of the changes
in the fair value of the derivative, along with any gain or loss on the hedged
item, is recorded as a component of Accumulated other comprehensive income in
stockholders’ equity and subsequently reclassified into earnings in the
period(s) during which the hedged transaction affects earnings.
We
classify the cash flows related to our hedging activities in the same category
on our consolidated statements of cash flows as the cash flows related to the
hedged item.
Acquisitions
The net
assets of businesses purchased are recorded at their fair value at the
acquisition date and our consolidated financial statements include their results
of operations from that date. Any excess of acquisition consideration
over the fair value of identifiable net assets acquired is recorded as
goodwill. Certain acquisitions provide for contingent consideration,
primarily cash, to be paid in the event certain financial performance targets
are satisfied over future periods. We have not accrued any
liabilities that may arise from these transactions because the outcome of the
contingencies is not determinable beyond a reasonable doubt. For 2009
and future acquisitions, as required by the provisions contained within ASC
Topic 805, “Business Combinations,” we will accrue a liability for additional
contingent purchase price based on the estimated fair value at the time of the
acquisition.
Goodwill
and Other Indefinite-Lived Intangible Assets
Goodwill
and other indefinite-lived intangible assets (primarily trademarks) are not
amortized, but are subject to at least an annual impairment
analysis. Such impairment analyses for goodwill require a comparison
of the fair value to the carrying value of reporting units. Measuring
fair value of a reporting unit is generally based on valuation techniques using
multiples of sales or earnings, unless supportable information is available for
using a present value technique, such as estimates of future cash
flows. We regard our reporting units to be our operating segments
(dental, medical (including animal health), international and
technology). Goodwill was allocated to such reporting units, for the
purposes of preparing our impairment analyses, based on a specific
identification basis. Our impairment analysis for indefinite-lived
intangibles consists of a review of historical, current and forecasted sales and
gross profit levels, as well as a review of any factors that may indicate
potential impairment. We assess the potential impairment of goodwill
and other indefinite-lived intangible assets annually (at the end of our third
quarter) and on an interim basis whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. There were
no events or circumstances from the date of that assessment through December 26,
2009 that impacted our analysis.
Some
factors we consider important that could trigger an interim impairment review
include:
|
·
|
significant
underperformance relative to expected historical or projected future
operating results;
|
|
·
|
significant
changes in the manner of our use of acquired assets or the strategy for
our overall business (e.g., decision to divest a business);
or
|
|
·
|
significant
negative industry or economic
trends.
|
If we
determine through the impairment review process that indefinite-lived intangible
assets are impaired, we record an impairment charge in our consolidated
statements of income.
61
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
Long-Lived
Assets
Long-lived
assets, other than goodwill and other indefinite-lived intangibles, are
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows derived from such
assets. Definite-lived intangible assets primarily consist of
non-compete agreements, trademarks, trade names, customer lists, customer
relationships and intellectual property. For long-lived assets
used in operations, impairment losses are only recorded if the asset’s carrying
amount is not recoverable through its undiscounted, probability-weighted future
cash flows. We measure the impairment loss based on the difference
between the carrying amount and the estimated fair value. When an
impairment exists, the related assets are written down to fair
value.
Cost
of Sales
The
primary components of cost of sales include the cost of the product (net of
purchase discounts, supplier chargebacks and rebates) and inbound and outbound
freight charges. Costs related to purchasing, receiving, inspections,
warehousing, internal inventory transfers and other costs of our distribution
network are included in selling, general and administrative expenses along with
other operating costs.
As a
result of different practices of categorizing costs associated with distribution
networks throughout our industry, our gross margins may not necessarily be
comparable to other distribution companies. Total distribution network
costs from continuing operations were $54.6 million, $56.4 million and $48.8
million for the years ended December 26, 2009, December 27, 2008 and December
29, 2007.
Comprehensive
Income
Comprehensive
income includes certain gains and losses that, under accounting principles
generally accepted in the United States, are excluded from net income as such
amounts are recorded directly as an adjustment to stockholders’
equity. Our comprehensive income is primarily comprised of net
income, foreign currency translation adjustments, unrealized gains (losses) on
hedging activity and investment and pension adjustments.
62
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
The
following table summarizes our Accumulated other comprehensive income, net of
applicable taxes as of:
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
| Attributable to Redeemable noncontrolling interests: | ||||||||||||
| Foreign currency translation adjustment | $ | 1,893 | $ | (648 | ) | $ | 1,412 | |||||
| Attributable to Henry Schein, Inc.: | ||||||||||||
|
Foreign
currency translation adjustment
|
$ | 54,729 | $ | 29,323 | $ | 98,743 | ||||||
|
Unrealized
gain from foreign currency hedging activities
|
14,537 | 1,220 | 1,134 | |||||||||
|
Unrealized
investment loss
|
(1,321 | ) | (1,201 | ) | - | |||||||
|
Pension
adjustment gain (loss)
|
(3,751 | ) | 379 | 391 | ||||||||
|
Accumulated
other comprehensive income
|
$ | 64,194 | $ | 29,721 | $ | 100,268 | ||||||
| Total Accumulated other comprehensive income | $ | 66,087 | $ | 29,073 | $ | 101,680 | ||||||
The
following table summarizes other comprehensive income attributable to our
Redeemable noncontrolling interests, net of applicable taxes for the years
ended:
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Foreign
currency translation adjustment
|
$ | 2,541 | $ | (2,060 | ) | $ | 854 | |||||
The following table summarizes our total comprehensive income, net of applicable
taxes for the years ended:
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(1) (2)
|
2007
(1) (2)
|
||||||||||
|
Comprehensive
income attributable to
|
||||||||||||
|
Henry
Schein, Inc.
|
$ | 345,626 | $ | 168,910 | $ | 264,639 | ||||||
|
Comprehensive
income (loss) attributable to
|
||||||||||||
|
noncontrolling
interests
|
29 | (12 | ) | 92 | ||||||||
|
Comprehensive
income attributable to redeemable
|
||||||||||||
|
noncontrolling
interests
|
24,516 | 19,869 | 18,204 | |||||||||
|
Comprehensive
income
|
$ | 370,171 | $ | 188,767 | $ | 282,935 | ||||||
(1) Adjusted
to reflect the effects of discontinued operations.
|
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
63
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
Accounting
Pronouncements Adopted
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC
Topic 105) which establishes the FASB Accounting Standards Codification (“the
Codification” or “ASC”) as the official single source of authoritative U.S.
generally accepted accounting principles (“GAAP”). All existing
accounting standards are superseded. All other accounting guidance
not included in the Codification will be considered
non-authoritative. The Codification also includes all relevant
Securities and Exchange Commission (“SEC”) guidance organized using the same
topical structure in separate sections within the
Codification. Following the Codification, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards
Updates (“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification was effective for our third
quarter 2009 financial statements and the principal impact on our financial
statements is limited to disclosures as all future references to authoritative
accounting literature will be referenced in accordance with the
Codification.
In May
2009, the FASB issued guidance within Topic 855-10 relating to subsequent
events. This guidance establishes principles and requirements for
subsequent events. This guidance defines the period after the balance
sheet date during which events or transactions that may occur would be required
to be disclosed in a company’s financial statements. Public entities
are required to evaluate subsequent events through the date that financial
statements are issued. This guidance also provides guidelines in
evaluating whether or not events or transactions occurring after the balance
sheet date should be recognized in the financial statements. This
guidance requires disclosure of the date through which subsequent events have
been evaluated.
In April
2009, the FASB issued guidance within ASC Topic 825-10 concerning interim
disclosures about fair value instruments. This guidance requires that
disclosures about the fair value of a company’s financial instruments be made
whenever summarized financial information for interim reporting periods is
made. The provisions of this guidance are effective for interim
reporting periods ending after June 15, 2009. The adoption of this
guidance did not have a material impact on our consolidated financial
statements.
In April
2009, the FASB issued, within ASC 820, additional guidance for estimating fair
value in accordance with ASC 820 when the volume and level of activity for the
asset or liability have significantly decreased. The provisions of
this additional guidance are effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this additional guidance
did not have a material impact on our consolidated financial
statements.
In April
2009, the FASB amended previous guidance and issued additional guidance within
ASC 320 relating to the disclosure requirements for other-than-temporary
impairments for debt and equity securities. This guidance addresses
the determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment
loss. The provisions of this guidance are effective for interim and
annual reporting periods ending after June 15, 2009. The adoption of
this guidance did not have a material impact on our consolidated financial
statements.
64
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
In April
2009, the FASB issued guidance within ASC Topic 805, “Business
Combinations.” ASC Topic 805 amends the initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business
combination. This guidance is effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The adoption of this guidance did not
have a material impact on our consolidated financial statements.
Effective
December 28, 2008, we have adopted the provisions of ASC Topic
480-10. ASC Topic 480-10 is applicable for noncontrolling interests
where we are or may be required to purchase (for a price equal to fair value
based on third-party valuations) all or a portion of the outstanding interest in
a consolidated subsidiary from the noncontrolling interest holder under the
terms of put options contained in contractual agreements. As a result
of the adoption of the provisions of ASC Topic 480-10, we have recorded the
maximum redemption amount, which approximates fair value of the noncontrolling
interests subject to put options as redeemable noncontrolling interests ($178.6
million, $233.0 million and $150.0 million at December 26, 2009, December 27,
2008 and December 29, 2007, respectively) and reduced Additional paid-in capital
and Noncontrolling interests within the Stockholders’ equity section of our
consolidated balance sheets. The components of the change in fair
value of put options at December 26, 2009, December 27, 2008 and December 29,
2007 are presented in the following table:
|
December
26,
2009
|
December
27,
2008
|
December
29,
2007
|
||||||||||
|
Balance,
beginning of year
|
$ | 233,035 | $ | 150,028 | $ | 111,902 | ||||||
|
Acquisitions
of additional ownership from
|
||||||||||||
|
noncontrolling
interests
|
(69,157 | ) | - | - | ||||||||
|
Initial
noncontrolling interests and adjustments related to
|
||||||||||||
|
business
acquisitions
|
(3,270 | ) | 14,994 | 270 | ||||||||
|
Net
income attributable to noncontrolling interests
|
21,975 | 21,929 | 17,350 | |||||||||
|
Dividends
paid
|
(5,973 | ) | (2,994 | ) | (1,362 | ) | ||||||
|
Effect
of foreign currency translation attributable to
|
||||||||||||
|
noncontrolling
interests
|
2,541 | (2,060 | ) | 854 | ||||||||
|
Change
in fair value of redeemable securities
|
(581 | ) | 51,138 | 21,014 | ||||||||
|
Balance,
end of year
|
$ | 178,570 | $ | 233,035 | $ | 150,028 | ||||||
Changes
in the estimated redemption amounts of the noncontrolling interests subject to
put options are adjusted at each reporting period with a corresponding
adjustment to Additional paid-in capital. Future changes to the
estimated redemption amounts are subject to a “floor” amount that is equal to
the fair value of the redeemable put option at the time it was originally
issued. The recorded value of the redeemable put option cannot go
below the floor level. These adjustments will not impact the
calculation of earnings per share.
In June
2008, the FASB issued guidance within ASC Topic 815-40, “Contracts in Entity’s
Own Equity.” This guidance provides that an entity should use a two
step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and the instruments settlement
provisions. ASC Topic 815-40 clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. This guidance is effective for fiscal
years beginning after
65
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
December
15, 2008. The implementation of this guidance did not have a material
impact on our consolidated financial statements.
In May
2008, the FASB issued guidance within ASC Topic 470-20, “Debt with Conversion
and Other Options.” This guidance requires us to allocate the
liability and equity components of our convertible debt and reflect our
non-convertible debt borrowing rate for the interest component of the
convertible debt. ASC Topic 470-20 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and is
applied retrospectively to all periods presented. Upon the
retrospective implementation of this guidance, we recorded a debt discount of
approximately $32.6 million as of August 9, 2004, which is being amortized over
a period of six years from the date our convertible debt was issued until August
9, 2010, the first date that the debt can be called. We also recorded
a related deferred tax liability of $12.1 million representing the tax impact of
recording the debt discount.
In March
2008, the FASB issued guidance within ASC Topic 815, “Derivatives and
Hedging.” ASC Topic 815 requires disclosures of the fair values of
derivative instruments and their gains and losses in a tabular
format. ASC Topic 815 also requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative
agreements. This guidance is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. The adoption of this guidance did not have a material impact on
our consolidated financial statements.
In
February 2008, the FASB issued guidance within ASC Topic 820, “Fair Value
Measurements and Disclosures.” This guidance within ASC Topic 820
delayed the effective date of certain provisions of ASC Topic 820 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) to fiscal years beginning after November 15,
2008. In October 2008, the FASB issued further guidance under ASC
Topic 820 specifically related to financial assets within the scope of
accounting pronouncements that require or permit fair value measurements in
accordance with ASC Topic 820. This guidance clarifies the
application of ASC Topic 820 in determining the fair values of assets or
liabilities in a market that is not active. ASC Topic 820 was effective upon
issuance, including prior periods for which financial statements have not been
issued. The adoption of this guidance did not have an impact on our consolidated
financial statements.
In
January 2008, the FASB issued guidance within ASC Topic 260, “Earnings Per
Share.” ASC Topic 260 requires that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and should be included in
the two-class method of computing earnings per share. ASC Topic 260
is effective for fiscal years beginning after December 15, 2008. The
adoption of ASC Topic 260 did not have a material impact on our consolidated
financial statements.
In
December 2007, the FASB issued guidance within ASC Topic 805-20, “Identifiable
Assets and Liabilities, And Any Noncontrolling Interest,” and ASC Topic
810-10-65, relating to consolidations. ASC Topic 805-20 requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. This guidance also requires the fair value measurement of
certain other assets and liabilities related to the acquisition such as
contingencies. ASC Topic 805-20 applies prospectively to business
combinations and is effective for fiscal years beginning on or after December
15, 2008.
66
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
1 – Significant Accounting Policies – (Continued)
ASC Topic
810-10-65 requires that a noncontrolling interest in a subsidiary be reported as
equity in the consolidated financial statements. Consolidated net income
includes the net income for both the parent and the noncontrolling interest with
disclosure of both amounts on the consolidated statement of income. The
calculation of earnings per share continues to be based on income amounts
attributable to the parent. The presentation provisions of ASC Topic 810-10-65
are applied retrospectively, and ASC Topic 810-10-65 is effective for fiscal
years beginning on or after December 15, 2008. The adoption of ASC
Topic 805-20 did not have a material impact on our consolidated financial
statements. The cumulative impact of the adoption of ASC Topic
810-10-65 and ASC Topic 480-10 (discussed above) on our consolidated financial
statements was to decrease Additional paid-in capital by $93.4 million and
increase Noncontrolling interests by $3.2 million as of December 30,
2006.
New
Accounting Pronouncements Not Yet Adopted
During
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements.” ASU 2010-06 includes new disclosure requirements related to
fair value measurements, including transfers in and out of Levels 1 and 2 and
information about purchases, sales, issuances and settlements for Level 3 fair
value measurements. This update also clarifies existing disclosure
requirements relating to levels of disaggregation and disclosures of inputs and
valuation techniques. The new disclosures are required in interim and
annual reporting periods beginning after December 15, 2009, except the
disclosures relating to Level 3 activity are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. We are currently evaluating the
potential impact that these provisions within ASU 2010-06 will have on our
consolidated financial statements.
During
October 2009, the FASB issued ASU 2009-13 which amended guidance contained
within ASC Topic 605-25 related to revenue recognition for multiple-element
arrangements. The amendments in this update establish a selling
price hierarchy for determining the selling price of a
deliverable. These amendments also will replace the term fair value
in the revenue allocation guidance with selling price to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. The guidance in this update
will require that a vendor determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. The amendments in this update will
be effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. We
are currently
evaluating the potential impact that these provisions within ASU 2009-13 will
have on our consolidated financial statements.
67
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
2 – Earnings Per Share
Basic
earnings per share is computed by dividing net income attributable to Henry
Schein, Inc. by the weighted-average number of common shares outstanding for the
period. Our diluted earnings per share is computed similarly to basic
earnings per share, except that it reflects the effect of common shares issuable
upon vesting of restricted stock and upon exercise of stock options using the
treasury stock method in periods in which they have a dilutive
effect.
For the
year ended December 26, 2009, our convertible debt was not convertible at a
premium and thus the impact of an assumed conversion was not
applicable.
For the
years ended December 27, 2008 and December 29, 2007, diluted earnings per share
includes the effect of common shares issuable upon conversion of our convertible
debt. During the period, the debt was convertible at a premium as a
result of the conditions of the debt. As a result, the amount in
excess of the principal is presumed to be settled in common shares and is
reflected in our calculation of diluted earnings per share.
A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:
|
Years
ended
|
|||||
|
December
26,
2009
|
December
27,
2008
|
December
29,
2007
|
|||
|
Basic
|
88,872,032
|
89,080,457
|
88,558,553
|
||
|
Effect
of dilutive securities:
|
|||||
|
Stock
options, restricted stock and restricted units
|
1,684,306
|
1,514,623
|
1,740,798
|
||
|
Effect
of assumed conversion of convertible debt
|
-
|
625,906
|
864,131
|
||
|
Diluted
|
90,556,338
|
91,220,986
|
91,163,482
|
||
Weighted-average
options to purchase 2,737,820 and 910,359 shares of common stock at prices
ranging from $47.31 to $62.05 and $53.43 to $62.05 per share that were
outstanding during the years ended December 26, 2009 and December 27, 2008 were
excluded from each respective year’s computation of diluted earnings per
share. In each of these years, such options’ exercise prices exceeded
the average market price of our common stock, thereby causing the effect of such
options to be anti-dilutive. During the year ended December 29, 2007,
the average market price of our common stock exceeded the exercise price of our
options outstanding, resulting in no options being anti-dilutive during
2007.
68
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
3 – Property and Equipment, Net
Property
and equipment consisted of the following:
|
December
26,
2009
|
December
27,
2008
|
|||||||
|
Land
|
$ | 12,644 | $ | 12,380 | ||||
|
Buildings
and permanent improvements
|
97,983 | 80,026 | ||||||
|
Leasehold
improvements
|
60,392 | 56,596 | ||||||
|
Machinery
and warehouse equipment
|
73,003 | 69,106 | ||||||
|
Furniture,
fixtures and other
|
73,069 | 62,894 | ||||||
|
Computer
equipment and software
|
239,543 | 217,276 | ||||||
| 556,634 | 498,278 | |||||||
|
Less
accumulated depreciation and amortization
|
(297,058 | ) | (250,443 | ) | ||||
|
Property
and equipment, net
|
$ | 259,576 | $ | 247,835 | ||||
The net
carrying value of equipment held under capital leases amounted to approximately
$5.5 million and $7.1 million as of December 26, 2009 and December 27,
2008. Property and equipment related depreciation expense, from
continuing operations, for the years ended December 26, 2009, December 27, 2008
and December 29, 2007 was $46.4 million, $45.1 million and $46.1
million.
Note
4 – Goodwill and Other Intangibles, Net
The
changes in the carrying amount of goodwill for the years ended December 26, 2009
and December 27, 2008 were as follows:
|
Healthcare
Distribution
|
Technology
|
Total
|
||||||||||
|
Balance
as of December 29, 2007
|
$ | 836,796 | $ | 80,398 | $ | 917,194 | ||||||
|
Adjustments
to goodwill:
|
||||||||||||
|
Acquisitions
|
67,446 | - | 67,446 | |||||||||
|
Discontinued
operation impairment
|
(6,706 | ) | - | (6,706 | ) | |||||||
|
Foreign
currency translation
|
(40,913 | ) | (14,069 | ) | (54,982 | ) | ||||||
|
Balance
as of December 27, 2008
|
856,623 | 66,329 | 922,952 | |||||||||
|
Adjustments
to goodwill:
|
||||||||||||
|
Acquisitions
|
40,817 | 4,383 | 45,200 | |||||||||
|
Discontinued
operation impairment
|
(444 | ) | - | (444 | ) | |||||||
|
Foreign
currency translation
|
15,674 | 3,013 | 18,687 | |||||||||
|
Balance
as of December 26, 2009
|
$ | 912,670 | $ | 73,725 | $ | 986,395 | ||||||
69
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
4 – Goodwill and Other Intangibles, Net – (Continued)
Other
intangible assets consisted of the following:
|
December
26, 2009
|
December
27, 2008
|
|||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
|
Cost
|
Amortization
|
Net
|
Cost
|
Amortization
|
Net
|
|||||||||||||||||||
|
Non-compete
agreements
|
$ | 27,800 | $ | (6,460 | ) | $ | 21,340 | $ | 23,874 | $ | (4,489 | ) | $ | 19,385 | ||||||||||
|
Trademarks
and trade names
|
45,612 | (11,026 | ) | 34,586 | 43,939 | (6,479 | ) | 37,460 | ||||||||||||||||
|
Customer
relationships and lists
|
192,004 | (69,235 | ) | 122,769 | 183,051 | (49,293 | ) | 133,758 | ||||||||||||||||
|
Other
|
36,728 | (10,978 | ) | 25,750 | 32,431 | (8,941 | ) | 23,490 | ||||||||||||||||
|
Total
|
$ | 302,144 | $ | (97,699 | ) | $ | 204,445 | $ | 283,295 | $ | (69,202 | ) | $ | 214,093 | ||||||||||
Non-compete
agreements represent amounts paid primarily to key employees and prior owners of
acquired businesses in exchange for placing restrictions on their ability to
pose a competitive risk to us. Such amounts are amortized, on a
straight-line basis over the respective non-compete period, which generally
commences upon termination of employment or separation from us. The
weighted-average non-compete period for agreements currently being amortized was
approximately six years as of December 26, 2009.
Trademarks,
trade names, customer lists and customer relationships were established through
business acquisitions. Certain trademarks and trade names, totaling
$26.7 million and $26.2 million as of December 26, 2009 and December 27, 2008,
are deemed indefinite-lived intangible assets and are not
amortized. The remainder are deemed definite-lived and are amortized
on a straight-line basis over a weighted-average period of
approximately six years as of December 26, 2009. Customer
relationships and customer lists are definite-lived intangible assets that are
amortized on a straight-line basis over a weighted-average period of
approximately 10 years as of December 26, 2009.
Amortization
expense, attributable to continuing operations, related to definite-lived
intangible assets for the years ended December 26, 2009, December 27, 2008 and
December 29, 2007 was $30.6 million, $27.9 million and $23.0
million. The annual amortization expense expected for the years 2010
through 2014 is $27.8 million, $26.1 million, $23.9 million, $20.0 million and
$14.8 million.
70
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
5 – Investments and Other
Investments
and other consisted of the following:
|
December
26,
|
December
27,
|
|||||||
|
2009
|
2008
(1)
|
|||||||
|
Investment
in unconsolidated affiliates
|
$ | 86,117 | $ | 60,439 | ||||
|
Non-current
deferred foreign, state and local income taxes
|
33,201 | 15,231 | ||||||
|
Notes
receivable (2)
|
23,437 | 18,613 | ||||||
|
Auction
rate securities, net of temporary impairment
|
18,848 | 29,028 | ||||||
|
Distribution
rights, net of amortization
|
5,311 | 5,898 | ||||||
|
Security
deposits
|
3,197 | 4,037 | ||||||
|
Debt
issuance costs, net of amortization
|
1,931 | 2,669 | ||||||
|
Other
long-term assets
|
9,994 | 12,349 | ||||||
|
Total
|
$ | 182,036 | $ | 148,264 | ||||
|
(1)
|
Adjusted
to reflect the effects of adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
|
(2)
|
Long-term
notes receivable carry interest rates ranging from 1.49% to 12.0% and are
due in varying installments through
2020.
|
Amortization
of other long-term assets, from continuing operations, for the years ended
December 26, 2009, December 27, 2008 and December 29, 2007 was $4.5 million,
$4.5 million and $3.5 million.
Note
6 – Fair Value Measurements
Effective
December 30, 2007, we adopted provisions of ASC Topic 820, “Fair Value
Measurements and Disclosures” (“ASC Topic 820”) as they relate to financial
assets and financial liabilities. ASC Topic 820 establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. ASC Topic 820
applies under other previously issued accounting pronouncements that require or
permit fair value measurements but does not require any new fair value
measurements. The adoption of ASC Topic 820 did not have a material
impact on our consolidated financial statements.
ASC Topic
820 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC Topic 820 establishes a
fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources
(observable inputs) and (2) an entity’s own assumptions about market
participant assumptions developed based on the best information available in the
circumstances (unobservable inputs).
71
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
6 – Fair Value Measurements –
(Continued)
The fair
value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under ASC Topic 820 are described
as follows:
|
•
|
Level
1— Unadjusted quoted prices in active markets for identical assets or
liabilities that are accessible at the measurement
date.
|
|
•
|
Level
2— Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are not active; inputs other
than quoted prices that are observable for the asset or liability; and
inputs that are derived principally from or corroborated by observable
market data by correlation or other
means.
|
|
•
|
Level
3— Inputs that are unobservable for the asset or
liability.
|
The
following section describes the valuation methodologies that we used to measure
different financial instruments at fair value.
Cash
equivalents and trade receivables
Due to
the short-term maturity of such investments, the carrying amounts are a
reasonable estimate of fair value.
Long-term
investments and notes receivable
There are
no quoted market prices available for investments in unconsolidated affiliates
and long-term notes receivable; however, we believe the carrying amounts are a
reasonable estimate of fair value.
Auction-rate
securities
As of
December 26, 2009, we have approximately $21.1 million ($18.9 million net of
temporary impairments) invested in auction-rate securities (“ARS”), which are
included as part of Investments and other within our consolidated balance
sheets. ARS are publicly issued securities that represent long-term
investments, typically 10-30 years, in which interest rates had reset
periodically (typically every 7, 28 or 35 days) through a “dutch auction”
process. Approximately $18.7 million ($16.5 million net of temporary
impairments) of our ARS are backed by student loans that are backed by the
federal government and the remaining $2.4 million are invested in closed-end
municipal bond funds. Our ARS portfolio is comprised of investments
that are rated AAA by major independent rating agencies. Since the
middle of February 2008, ARS auctions have failed to settle due to an excess
number of sellers compared to buyers. The failure of these auctions
has resulted in our inability to liquidate our ARS in the near
term. We are currently not aware of any defaults or financial
conditions that would negatively affect the issuers’ ability to continue to pay
interest and principal on our ARS. We continue to earn and receive
interest at contractually agreed upon rates.
During
2009, we have received approximately $4.8 million and $5.2 million of
redemptions, at par, for our closed-end municipal bond funds and our student
loan portfolios, respectively.
72
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
6 – Fair Value Measurements –
(Continued)
As of
December 26, 2009, we have classified our closed-end municipal bond funds, as
well as our student loan portfolios, as Level 3 within the fair value hierarchy
due to the lack of observable inputs and the absence of significant refinancing
activity.
Based
upon the information currently available and the use of a discounted cash flow
model in accordance with applicable authoritative guidance, our previously
recorded cumulative temporary impairment at December 27, 2008 of $2.0 million
related to our closed-end municipal bond funds and our student loan portfolios
was increased to $2.2 million during the year ended December 26,
2009. The temporary impairment has been recorded as part of
Accumulated other comprehensive income within the equity section of our
consolidated balance sheet.
Money
market fund
As of
December 26, 2009, we had an investment of approximately $2.0 million ($1.7
million net of reserves) invested in the Reserve Primary Fund. This
money market fund included in its holdings commercial paper of Lehman
Brothers. As a result of the Chapter 11 bankruptcy of Lehman Brothers
Holdings, Inc., the net asset value of the fund decreased below
$1.00. Currently, this fund is in the process of being
liquidated. During 2009, we have received approximately $3.3 million
of distributions from the Reserve Primary Fund. As of December 26,
2009, the value of our holdings in this fund are included within Prepaid
expenses and other in our consolidated balance sheets and as Level 3 within the
fair value hierarchy, due to the lack of observable inputs and the absence of
trading activity.
Accounts
payable and accrued expenses
Financial
liabilities with carrying values approximating fair value include accounts
payable and other accrued liabilities. The carrying value of these financial
instruments approximates fair value due to their short maturities or variable
interest rates that approximate current market rates.
Debt
The fair
value of our debt is estimated based on quoted market prices for our traded debt
and on market prices of similar issues for our private debt. The fair
value of our debt as of December 26, 2009 and December 27, 2008 was estimated at
$307.5 million and $426.8 million.
Derivative
contracts
Derivative
contracts are valued using quoted market prices and significant other observable
and unobservable inputs. We use derivative instruments to minimize
our exposure to fluctuations in interest rates and foreign currency exchange
rates. Our derivative instruments primarily include interest rate
swap agreements related to our long-term fixed rate debt and foreign currency
forward and swap agreements related to intercompany loans and certain forecasted
inventory purchase commitments with suppliers.
The fair
values for the majority of our foreign currency derivative contracts are
obtained by comparing our contract rate to a published forward price of the
underlying currency, which is based on market rates for comparable transactions
and are classified within Level 2 of the fair value hierarchy.
73
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
6 – Fair Value Measurements –
(Continued)
Redeemable
noncontrolling interests
Some
minority shareholders in certain of our subsidiaries have the right, at certain
times, to require us to acquire their ownership interest in those entities at
fair value based on third-party valuations. The noncontrolling
interests subject to put options are adjusted to their estimated redemption
amounts each reporting period with a corresponding adjustment to Additional
paid-in capital. In accordance with ASC Topic 480-10, future
reductions in the carrying amounts are subject to a “floor” amount that is equal
to the fair value of the redeemable noncontrolling interests at the time they
were originally recorded. The recorded value of the redeemable
noncontrolling interests cannot go below the floor level. These
adjustments will not impact the calculation of earnings per share.
The
following table presents our assets and liabilities that are measured and
recognized at fair value on a recurring basis classified under the appropriate
level of the fair value hierarchy as of December 26, 2009 and December 27,
2008:
|
December
26, 2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | - | $ | - | $ | 18,848 | $ | 18,848 | ||||||||
|
Money
market fund
|
- | - | 1,746 | 1,746 | ||||||||||||
|
Derivative
contracts
|
- | 6,177 | - | 6,177 | ||||||||||||
|
Total
assets
|
$ | - | $ | 6,177 | $ | 20,594 | $ | 26,771 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
contracts
|
$ | - | $ | 3,829 | $ | - | $ | 3,829 | ||||||||
|
Total
liabilities
|
$ | - | $ | 3,829 | $ | - | $ | 3,829 | ||||||||
|
Redeemable
noncontrolling interests
|
$ | - | $ | - | $ | 178,570 | $ | 178,570 | ||||||||
|
December
27, 2008
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | - | $ | - | $ | 29,028 | $ | 29,028 | ||||||||
|
Money
market fund
|
- | - | 4,518 | 4,518 | ||||||||||||
|
Derivative
contracts
|
- | 12,955 | - | 12,955 | ||||||||||||
|
Total
assets
|
$ | - | $ | 12,955 | $ | 33,546 | $ | 46,501 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
contracts
|
$ | - | $ | 6,580 | $ | - | $ | 6,580 | ||||||||
|
Total
liabilities
|
$ | - | $ | 6,580 | $ | - | $ | 6,580 | ||||||||
|
Redeemable
noncontrolling interests
|
$ | - | $ | - | $ | 233,035 | $ | 233,035 | ||||||||
74
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
6 – Fair Value Measurements –
(Continued)
As of
December 26, 2009, we have estimated the value of our closed-end municipal bond
fund ARS portfolio and our student loan backed ARS portfolio based upon a
discounted cash flow model. The assumptions used in our valuation
model include estimates for interest rates, timing and amount of cash flows and
expected holding periods for the ARS portfolio. As a result of these
analyses, our previously recorded cumulative temporary impairment at December
27, 2008 of $2.0 million was increased by $0.2 million to $2.2 million during
the year ended December 26, 2009.
We
estimated the value of our holdings within the Reserve Primary Fund based upon
the net asset value of the fund as of September 16, 2008, subsequent to the
declaration of bankruptcy by Lehman Brothers Holdings, Inc. The
reserve recorded in 2008 of $0.8 million related to our holdings within the
Reserve Primary Fund was reduced by $0.5 million during 2009, based upon
collections, and as of December 26, 2009 the reserve is $0.3
million. The following table presents a reconciliation of our assets
and Redeemable noncontrolling interests measured at fair value on a recurring
basis using unobservable inputs (Level 3). The details of the changes
in Redeemable noncontrolling interests are shown in Note 1:
|
Level
3 (Unobservable Inputs)
|
||||
|
Closed-End
Municipal Bond Funds,
|
||||
|
Student
Loan Backed Auction-Rate
|
||||
|
Securities,
Money Market Fund and
|
||||
|
Redeemable
Noncontrolling Interests
|
||||
|
Balance,
December 29, 2007
|
$ | 150,028 | ||
|
Transfers
to Level 3
|
36,318 | |||
|
Change
in redeemable noncontrolling interests
|
83,007 | |||
|
Gains
and (losses):
|
||||
|
Reported
in earnings - Reserve Primary Fund increase
|
(750 | ) | ||
|
Reported
in accumulated other comprehensive income
|
(2,022 | ) | ||
|
Balance,
December 27, 2008
|
266,581 | |||
|
Transfers
to Level 3
|
- | |||
|
Change
in redeemable noncontrolling interests
|
(54,465 | ) | ||
|
Redemptions
at par
|
(13,227 | ) | ||
|
Gains
and (losses):
|
||||
|
Reported
in earnings - Reserve Primary Fund reduction
|
500 | |||
|
Reported
in accumulated other comprehensive income
|
(225 | ) | ||
|
Balance,
December 26, 2009
|
$ | 199,164 | ||
Note
7 – Business Acquisitions, Discontinued Operations, Divestitures and Other
Transactions
Acquisitions
The
operating results of all acquisitions are reflected in our financial statements
from their respective acquisition dates.
We
completed certain acquisitions during the year ended December 26, 2009, which
were immaterial to our financial statements individually and in the
aggregate.
75
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
7 – Business Acquisitions, Discontinued Operations, Divestitures and Other
Transactions –
(Continued)
On
December 23, 2008, we acquired DNA Anthos Impianti (DNA), Medka and
Noviko. DNA is a distributor of the Anthos brand of dental equipment
in Italy. DNA also sells dental consumable merchandise and provides technical
services. Medka, headquartered in Berlin, is a full-service provider
of medical consumables, equipment and technical services primarily to
physicians. Noviko, headquartered in Brno, is a distributor of
veterinary supplies in the Czech Republic.
The
aggregate initial purchase price for the acquisitions of DNA, Medka and Noviko
was approximately $52.9 million. The aggregate 2008 sales for these
three companies were approximately $165.0 million. As of December 27,
2008, we recorded initial goodwill of approximately $34.8 million related to
these acquisitions.
In
addition to these acquisitions, we completed other acquisitions during the year
ended December 27, 2008 which resulted in the recording of approximately $28.9
million of initial goodwill through preliminary purchase price
allocations. These other acquisitions were immaterial to our
financial statements individually and in the aggregate.
Effective
September 29, 2007, we acquired Software of Excellence International Ltd., (NZX:
SOE), a provider of clinical and practice management solutions for dental
professionals, for NZ$2.90 per share. The total purchase price, including fees,
was approximately $62.2 million. We recorded approximately $56.5
million of goodwill related to this acquisition.
On August
29, 2007, we acquired W&J Dunlop, Ltd., a leading supplier of animal health
products and services to veterinary clinics in the United Kingdom, with annual
revenues of approximately $297.0 million, for a purchase price, including fees,
of approximately $68.4 million. We recorded approximately $33.1
million of goodwill related to this acquisition.
On July
2, 2007, we completed the acquisition of the 50% of Becker-Parkin Dental Supply
Co. (“Becker-Parkin”), with annual revenues of approximately $69.5 million,
which we did not own for a purchase price of approximately $22 million, less
Becker-Parkin debt and subject to an earnout and certain other
adjustments. We then integrated the full service and special markets
portions of this business into our existing dental operations. We
recorded a pretax gain of approximately $2.4 million relating to the
dispositions of certain non-core businesses of Becker-Parkin. These
dispositions included the contribution of certain non-core businesses of
Becker-Parkin into an unconsolidated entity.
In
addition to the foregoing acquisitions, we completed other acquisitions during
the year ended December 29, 2007. These other acquisitions were
immaterial to our financial statements individually and in the
aggregate.
See Note
18 – Subsequent Event for a discussion regarding Butler Animal Health Supply,
LLC.
Discontinued
Operations and Divestitures
On August
5, 2009, we completed the sale of a wholesaler of dental consumables for
aggregate consideration of $14.2 million. Prior results for this
business have been presented as discontinued operations in the accompanying
consolidated statements of income. The total pretax income from
discontinued operations for the year ended December 26, 2009 is $6.5 million
($2.6 million after taxes) consisting of a $6.0 million ($2.4 million after
taxes) gain on the sale and $0.5 million ($0.2 million after taxes) income from
operations. The total pretax income (loss) from discontinued
operations for this business for the years ended December 27, 2008 and December
29, 2007 was $(0.1) million (nil after taxes) and $0.5 million ($0.3 million
after taxes), respectively.
76
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
7 – Business Acquisitions, Discontinued Operations, Divestitures and Other
Transactions –
(Continued)
Net sales
generated by our wholesaler of dental consumables were $8.0 million, $14.5
million and $14.5 million for the years ended December 26, 2009, December 27,
2008 and December 29, 2007, respectively.
During
November 2008, we reached a decision to exit the wholesale ultrasound business
and dispose of such operations during the fourth quarter of
2008. This business was a component of our healthcare distribution
business.
In
connection with this decision, we assessed our long-lived assets for impairment,
which resulted in the recording of an impairment charge of approximately $11.2
million (approximately $7.3 million after-tax) for the write-down of all
long-lived assets, including goodwill of $6.7 million. The total
pretax loss from discontinued operations for this business for the years ended
December 27, 2008 and December 29, 2007 was $12.1 million ($7.9 million after
taxes) and $2.0 million ($1.2 million after taxes), respectively.
Net sales
generated by this business were $12.7 million and $15.8 million for the years
ended December 27, 2008 and December 29, 2007, respectively.
During
2007, we sold substantially all of the assets of our oncology pharmaceutical and
specialty pharmacy businesses, previously reported as part of our healthcare
distribution reportable segment. The aggregate sales price was $14.3
million, which was received in 2007. As a result of this sale,
included in the operating results from discontinued operations for 2007 is a
$1.1 million ($0.7 million after-tax) net gain on the sale of the
businesses. Also, because the decision to divest this business was
reached in 2007, we recorded an impairment charge to our long-lived assets of
approximately $20.6 million, net of tax, or $(0.23) per diluted share in
2007.
Net sales
generated by our oncology pharmaceutical and specialty pharmacy businesses were
$81.1 million for the year ended December 29, 2007.
We have
classified the operating results of these businesses as discontinued operations
in the accompanying consolidated statements of income for all periods
presented.
Loan
and Investment Agreement
On
December 12, 2008, we converted $10.4 million of loan receivables and related
accrued interest into an equity interest of 15.33% in D4D Technologies, LLC
(“D4D”). Due to the conversion, we now account for our equity
interest in D4D under the equity method of accounting prospectively from the
date of conversion.
In
addition, under our previous agreement, if certain product specification and
performance milestones occurred, we were required to pay additional amounts (as
equity contributions) to D4D and certain of its members equal to $16.0
million. On August 3, 2009, we entered into an amendment whereby we
paid D4D and certain of its members approximately $8.0 million and agreed to
make two contingent payments in each of 2010 and 2011 of up to $4.0 million each
based on D4D’s financial performance. The August 3, 2009 payment of
approximately $8.0 million is included in Investments and other in our
consolidated financial statements and is being amortized over a period of 15
years. Amounts due under the amended agreement are being accounted
for as increases in the carrying value of our investment in D4D when paid or at
such earlier time as the payment is determined to be probable. Any
underlying allocations to intangible assets will be determined at that
time.
77
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
8 – Plans of Restructuring
On
November 5, 2008, we announced certain actions to reduce operating
costs. These actions included the elimination of approximately 430
positions from our operations and the closing of several smaller
facilities.
For the
years ended December 26, 2009 and December 27, 2008, we incurred one-time
restructuring costs of approximately $3.0 million (approximately $2.1 million
after taxes) and $23.2 million (approximately $16.0 million after taxes),
respectively, consisting of employee severance pay and benefits, facility
closing costs, representing primarily lease termination and asset write-off
costs, and outside professional and consulting fees directly related to the
restructuring plan. The costs associated with the restructuring are
included in a separate line item, “Restructuring costs” within our consolidated
statements of income.
The following table shows the amounts
expensed and paid for restructuring costs that were incurred during 2009 and
2008 and the remaining accrued balance of restructuring costs as of December 26,
2009 and December 27, 2008, which is included in Accrued expenses: Other and
Other liabilities within our consolidated balance sheet:
|
Balance
at
December
29,
2007
|
Provision
|
Payments
and
Other Adjustments
|
Balance
at
December
27,
2008
|
Provision
|
Payments
and
Other Adjustments
|
Balance
at
December
26,
2009
|
||||||||||||||||||||||
|
Severance
costs (1)
|
$ | - | $ | 18,643 | $ | 4,313 | $ | 14,330 | $ | 1,532 | $ | 13,697 | $ | 2,165 | ||||||||||||||
|
Facility
closing costs (2)
|
- | 3,846 | 158 | 3,688 | 1,452 | 3,110 | 2,030 | |||||||||||||||||||||
|
Other
professional and
|
||||||||||||||||||||||||||||
|
consulting
costs
|
- | 751 | 232 | 519 | 36 | 453 | 102 | |||||||||||||||||||||
|
Total
|
$ | - | $ | 23,240 | $ | 4,703 | $ | 18,537 | $ | 3,020 | $ | 17,260 | $ | 4,297 | ||||||||||||||
|
(1)
|
Represents
salaries and related benefits for employees separated from the
Company.
|
|
(2)
|
Represents
costs associated with the closing of certain smaller facilities (primarily
lease termination costs) and property and equipment
write-offs.
|
The
majority of these costs have been paid as of December 26, 2009.
The
following table shows, by reportable segment, the restructuring costs incurred
during 2009 and 2008 and the remaining accrued balance of restructuring costs as
of December 26, 2009 and December 27, 2008:
|
Balance
at
December
29,
2007
|
Provision
|
Payments
and
Other Adjustments
|
Balance
at
December
27,
2008
|
Provision
|
Payments
and
Other Adjustments
|
Balance
at
December
26,
2009
|
||||||||||||||||||||||
|
Healthcare
distribution
|
$ | - | $ | 22,650 | $ | 4,193 | $ | 18,457 | $ | 3,020 | $ | 17,252 | $ | 4,225 | ||||||||||||||
|
Technology
|
- | 590 | 510 | 80 | - | 8 | 72 | |||||||||||||||||||||
|
Total
|
$ | - | $ | 23,240 | $ | 4,703 | $ | 18,537 | $ | 3,020 | $ | 17,260 | $ | 4,297 | ||||||||||||||
78
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
8 – Plans of Restructuring – (Continued)
In
addition, during the first quarter of 2010, we expect to complete an additional
restructuring in order to further reduce operating expenses. This
restructuring includes headcount reductions, as well as the closing of
facilities. The restructure is primarily concentrated in our European
operations and is part of our overall plan to increase international operating
margins. These restructuring costs are expected to be in the $10
million to $12 million range ($7 million to $9 million after taxes) and are
expected to be reported in the first quarter of 2010. However, timing
of certain actions may cause some restructuring costs to be reported
later.
Note
9 – Debt
Bank
Credit Lines
On
September 5, 2008, we entered into a new $400.0 million revolving credit
facility with a $100.0 million expansion feature. The $400.0 million
credit line expires in September 2013. This credit line replaced our
then existing $300.0 million revolving credit line, which would have expired in
May 2010. The interest rate is based on USD LIBOR plus a spread based
on our leverage ratio at the end of each financial reporting
quarter. The agreement provides, among other things, that we maintain
certain interest coverage and maximum leverage ratios, and contains restrictions
relating to subsidiary indebtedness, liens, employee and shareholder loans,
disposal of businesses and certain changes in ownership. As of
December 26, 2009, there were no borrowings outstanding under this revolving
credit facility and there were $10.2 million of letters of credit provided to
third parties.
As of
December 26, 2009, we had various short-term bank credit lines available, of
which approximately $0.9 million was outstanding. As of December 26,
2009, such credit lines, which are uncollateralized, had a weighted average
interest rate of 3.8%.
Long-term
debt
Long-term
debt consisted of the following:
|
December
26,
2009
|
December
27,
2008
(1)
|
|||||||
|
Senior
notes
|
$ | 20,453 | $ | 172,501 | ||||
|
Convertible
debt (net of discount of $4.0 million and $10.0 million)
|
235,993 | 230,002 | ||||||
|
Notes
payable to banks, at a weighted average interest rate of
4.8%
|
19 | 623 | ||||||
|
Various
uncollateralized loans payable with interest, in varying
|
||||||||
|
installments
through 2014
|
4,836 | 2,677 | ||||||
|
Capital
lease obligations (see Note 15)
|
5,632 | 7,250 | ||||||
|
Total
|
266,933 | 413,053 | ||||||
|
Less
current maturities
|
(23,560 | ) | (156,405 | ) | ||||
|
Total
long-term debt
|
$ | 243,373 | $ | 256,648 | ||||
|
(1) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
Our $20.0
million of remaining senior notes bear interest at a fixed rate of 6.7% per
annum and mature on September 27, 2010. Interest on our senior notes
is payable semi-annually.
79
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
9 – Debt – (Continued)
The
agreement governing our senior notes provides, among other things, that we will
maintain on a consolidated basis, certain leverage and priority debt ratios and
a minimum net worth. The agreement also contains restrictions
relating to transactions with affiliates, annual dividends, mergers and
acquisitions and liens. The agreements limit the distribution of
dividends without the prior written consent of the lenders (limited to $25.0
million, plus 80% of cumulative net income, plus net proceeds from the issuance
of additional capital stock). As of December 26, 2009, the amount of
retained earnings free of restrictions was $962.6 million.
In 2004,
we completed an issuance of $240.0 million of convertible debt. These
notes are senior unsecured obligations bearing a fixed annual interest rate of
3.0% and are due to mature on August 15, 2034. Interest on the notes
is payable on February 15 and August 15 of each year. The notes are
convertible into our common stock at a conversion ratio of 21.58 shares per one
thousand dollars of principal amount of notes, which is equivalent to a
conversion price of $46.34 per share, under the following
circumstances:
|
·
|
if
the price of our common stock is above 130% of the conversion price
measured over a specified number of trading
days;
|
|
·
|
during
the five-business-day period following any 10-consecutive-trading-day
period in which the average of the trading prices for the notes for that
10-trading-day period was less than 98% of the average conversion value
for the notes during that period;
|
|
·
|
if
the notes have been called for redemption;
or
|
|
·
|
upon
the occurrence of a fundamental change or specified corporate
transactions, as defined in the note
agreement.
|
Upon
conversion, we are required to satisfy our conversion obligation with respect to
the principal amount of the notes to be converted, in cash, with any remaining
amount to be satisfied in shares of our common stock. We currently
have sufficient availability of funds through our $400.0 million revolving
credit facility (discussed above) along with cash on hand to fully satisfy our
debt obligations, including the cash portion of our convertible
debt. We also will pay contingent interest during any
six-month-interest period beginning August 20, 2010, if the average trading
price of the notes is above specified levels. We may redeem some or
all of the notes on or after August 20, 2010. The note holders may
require us to purchase all or a portion of the notes on August 15, 2010, 2014,
2019, 2024 and 2029 or, subject to specified exceptions, upon a change of
control event. If we are required by the note holders to purchase all
or a portion of the notes, we will use our existing credit line to fund such
purchase; therefore, we have classified our convertible debt as long-term in our
consolidated balance sheet.
Effective
December 28, 2008, we adopted the provisions of ASC Topic 470-20, “Debt with
Conversion and Other Options,” as it relates to our convertible
debt. ASC Topic 470-20 requires that we allocate the liability and
equity components of the convertible debt and reflect our non-convertible debt
borrowing rate for the interest component of the convertible
debt.
80
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
9 – Debt – (Continued)
Upon the
retrospective implementation of ASC Topic 470-20, we recorded a debt discount of
$32.6 million, as of August 9, 2004, representing the difference between the
fair value of our $240.0 million 3% convertible debt at the time of issuance and
the face amount of the convertible debt. We also recorded a related
deferred tax liability of $12.1 million representing the tax impact of recording
the debt discount. This debt discount is being amortized over a
period of six years from the date our convertible debt was issued until August
9, 2010, the first date that the debt can be called. An offsetting
amount was recorded in Additional paid-in capital to reflect the impact of the
debt discount, net of the related deferred tax liability.
The
principal amounts of the outstanding notes, the unamortized discount and the net
carrying value at December 26, 2009 were $240.0 million, $4.0 million and $236.0
million and at December 27, 2008 they were $240.0 million, $10.0 million and
$230.0 million.
As of
December 28, 2008, retained earnings includes a cumulative adjustment to
interest expense of $22.0 million ($14.3 million, net of taxes) representing the
unamortized non-cash difference between the amount of our non-convertible debt,
which has a stated interest rate of 3%, and the fair value of our debt computed
using our non-convertible debt borrowing rate of 5.74% at the time of issuance
of our convertible debt. The cumulative adjustment to interest
expense from August 9, 2004 through December 30, 2006 was $11.3 million ($7.2
million, net of taxes). For the years ended December 27, 2008 and December
29, 2007, the adjustments to interest expense were $5.5 million ($3.7 million,
net of taxes) and $5.2 million ($3.4 million, net of taxes),
respectively.
For the
years ended December 26, 2009, December 27, 2008 and December 29, 2007, we
recorded additional non-cash interest expense of $6.0 million ($4.0 million, net
of taxes), $5.6 million ($3.8 million, net of taxes) and $5.4 million ($3.5
million, net of taxes), respectively, representing the difference between the
stated interest rate on our convertible debt and our non-convertible debt
borrowing rate at the time of issuance of our convertible debt.
For each
of the years ended December 26, 2009, December 27, 2008 and December 29, 2007,
contractual interest expense relating to our convertible debt was $7.2 million
($4.8 million, net of taxes).
As of
December 26, 2009, the aggregate amounts of long-term debt, including capital
leases, maturing in each of the next five years and thereafter are as
follows:
|
2010
|
$ | 23,560 | ||
|
2011
|
1,418 | |||
|
2012
|
2,295 | |||
|
2013
|
438 | |||
|
2014
|
3,229 | |||
|
Thereafter
|
235,993 | |||
|
Total
|
$ | 266,933 |
81
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
10 – Income Taxes
Income
from continuing operations before taxes, equity in earnings (losses) of
affiliates and noncontrolling interests was as follows:
|
Years
ended
|
||||||||||||
|
December
26,
2009
|
December
27,
2008
(1) (2)
|
December
29,
2007
(1) (2)
|
||||||||||
|
Domestic
|
$ | 308,238 | $ | 300,227 | $ | 293,851 | ||||||
|
Foreign
|
144,482 | 95,222 | 84,658 | |||||||||
|
Total
|
$ | 452,720 | $ | 395,449 | $ | 378,509 | ||||||
(1) Adjusted
to reflect the effects of discontinued operations.
|
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
The
provisions for income taxes attributable to continuing operations were as
follows:
|
Years
ended
|
||||||||||||
|
December
26,
2009
|
December
27,
2008
(1) (2)
|
December
29,
2007
(1) (2)
|
||||||||||
|
Current
income tax expense:
|
||||||||||||
|
U.S.
Federal
|
$ | 101,092 | $ | 94,215 | $ | 83,971 | ||||||
|
State
and local
|
16,649 | 14,310 | 22,907 | |||||||||
|
Foreign
|
35,965 | 22,741 | 22,478 | |||||||||
|
Total
current
|
153,706 | 131,266 | 129,356 | |||||||||
|
Deferred
income tax expense (benefit):
|
||||||||||||
|
U.S.
Federal
|
(5,059 | ) | 499 | (40 | ) | |||||||
|
State
and local
|
(722 | ) | 72 | (5 | ) | |||||||
|
Foreign
|
(20,404 | ) | (627 | ) | (755 | ) | ||||||
|
Total
deferred
|
(26,185 | ) | (56 | ) | (800 | ) | ||||||
|
Total
provision
|
$ | 127,521 | $ | 131,210 | $ | 128,556 | ||||||
(1) Adjusted
to reflect the effects of discontinued operations.
|
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
82
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
10 – Income Taxes – (Continued)
The tax
effects of temporary differences that give rise to our deferred income tax asset
(liability) were as follows:
|
Years
Ended
|
||||||||
|
December
26,
2009
|
December
27,
2008
(1)
|
|||||||
|
Current
deferred income tax assets:
|
||||||||
|
Inventory,
premium coupon redemptions and accounts receivable
|
||||||||
|
valuation
allowances
|
$ | 18,734 | $ | 12,348 | ||||
|
Uniform
capitalization adjustments to inventories
|
9,690 | 8,712 | ||||||
|
Other
current assets
|
6,742 | 2,497 | ||||||
|
Current
deferred income tax asset (3)
|
35,166 | 23,557 | ||||||
|
Non-current
deferred income tax asset (liability):
|
||||||||
|
Property
and equipment
|
(14,658 | ) | (14,321 | ) | ||||
|
Stock-based
compensation
|
35,312 | 28,275 | ||||||
|
Other
non-current liabilities
|
(120,737 | ) | (110,802 | ) | ||||
|
Net
operating losses of domestic subsidiaries
|
9,411 | 8,537 | ||||||
|
Net
operating losses of foreign subsidiaries
|
58,980 | 75,562 | ||||||
|
Total
non-current deferred tax liability
|
(31,692 | ) | (12,749 | ) | ||||
|
Valuation
allowance for non-current deferred tax
assets (2)
|
(36,083 | ) | (67,418 | ) | ||||
|
Net
non-current deferred tax liability (3)
|
(67,775 | ) | (80,167 | ) | ||||
|
Net
deferred income tax liability
|
$ | (32,609 | ) | $ | (56,610 | ) | ||
|
(1)
|
Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
|
(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.”
|
|
(3)
|
Certain
deferred tax amounts do not have a right of offset and are therefore
reflected on a gross basis in current assets and non-current liabilities
in our consolidated balance sheets.
|
The
deferred income tax asset is realizable as we have sufficient taxable income in
prior years and anticipate sufficient taxable income in future years to realize
the tax benefit for deductible temporary differences.
As of
December 26, 2009, we have net operating loss carryforwards of $25.1 million
relating to our domestic unconsolidated affiliates. Of such losses,
$16.2 million can be utilized against future federal income through 2026, and
$8.9 million can be utilized against future federal income through
2027. Foreign net operating loss carryforwards totaled $205.1 million
as of December 26, 2009. Of such losses, $0.8 million can be utilized
against future foreign income through 2012, $1.6 million can be utilized against
future foreign income through 2013, $2.6 million can be utilized against future
foreign income through 2014, $2.9 million can be utilized against future foreign
income through 2015, $1.7 million can be utilized against future foreign income
through 2016 and $195.5 million has an indefinite life.
83
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
10 – Income Taxes – (Continued)
The tax
provisions attributable to continuing operations differ from the amount computed
using the federal statutory income tax rate as follows:
|
Years
ended
|
||||||||||||
|
December
26,
2009
|
December
27,
2008
(1) (2)
|
December
29,
2007
(1)(2)
|
||||||||||
|
Income
tax provision at federal statutory rate
|
$ | 158,452 | $ | 138,407 | $ | 132,479 | ||||||
|
State
income tax provision, net of federal income tax effect
|
10,078 | 9,426 | 15,031 | |||||||||
|
Foreign
income tax benefit
|
(16,743 | ) | (11,902 | ) | (6,503 | ) | ||||||
|
Valuation
allowance
|
(19,467 | ) | 3,090 | (551 | ) | |||||||
|
Interest
expense related to loans
|
(7,014 | ) | (7,254 | ) | (8,855 | ) | ||||||
|
Other
|
2,215 | (557 | ) | (3,045 | ) | |||||||
|
Total
income tax provision
|
$ | 127,521 | $ | 131,210 | $ | 128,556 | ||||||
(1) Adjusted
to reflect the effects of discontinued operations.
|
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
For the
year ended December 26, 2009, our effective tax rate from continuing operations
was 28.2% compared to 33.2% for the prior year period. The difference
resulted primarily from the reduction of a valuation allowance which is
explained below, additional tax planning, settlements of tax audits and higher
income from lower taxing countries. In addition, the difference between
our effective tax rate and the federal statutory tax rate for both periods
related primarily to foreign and state income taxes. Without the
effect of the reduction of the valuation allowance described below, our
effective tax rate from continuing operations for the year ended December 26,
2009 would have been 32.8%.
During
the third quarter of 2009, we substantially completed a plan of reorganization
outside the United States that will allow us to utilize tax loss carryforwards
to offset taxable income beginning in 2010 in certain foreign tax
jurisdictions. As a result, we have determined that it is more likely
than not that a portion of deferred tax assets previously fully reserved will be
realized. Therefore, the provision for income taxes includes a $20.9
million reduction of the valuation allowance which is based on an estimate of
future taxable income available to be offset by the tax loss
carryforwards.
Provision
has not been made for U.S. or additional foreign taxes on undistributed earnings
of foreign subsidiaries, which have been, and will continue to be,
reinvested. These earnings could become subject to additional tax if
they were remitted as dividends, if foreign earnings were loaned to us or a U.S.
affiliate, or if we should sell our stock in the foreign
subsidiaries. It is not practicable to determine the amount of
additional tax, if any, that might be payable on such foreign
earnings. As of December 26, 2009, the cumulative amount of
reinvested earnings was approximately $243.0 million.
In July
2006, the FASB issued guidance within ASC Topic 740, “Income Taxes,” which we
adopted effective December 31, 2006. ASC Topic 740 clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with other provisions contained within this
guidance.
84
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
10 – Income Taxes – (Continued)
ASC Topic
740 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized,
a tax position must be more likely than not to be sustained upon examination by
the taxing authorities. The amount recognized is measured as the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate audit settlement.
The total
amount of unrecognized tax benefits, including accrued interest, as of December
26, 2009 was approximately $20.9 million, all of which would affect the
effective tax rate if recognized. It is expected that the amount of
unrecognized tax benefits will change in the next 12 months; however, we do
not expect the change to have a material impact on our consolidated financial
statements.
The total
amounts of interest and penalties accrued were approximately $3.9 million and
$0, respectively, as of December 26, 2009. It is expected that the
amount of interest will change in the next twelve months. However, we do not
expect the change to have a material impact on our consolidated financial
statements.
The tax
years subject to examination by major tax jurisdictions include the years 2006
and forward by the U.S. Internal Revenue Service, the years 1996 and forward for
certain states and the years 1998 and forward for certain foreign
jurisdictions.
The
following table provides a reconciliation of unrecognized tax benefits excluding
the effects of deferred taxes:
|
December
26,
2009
|
December
27,
2008
|
|||||||
|
Balance,
beginning of period
|
$ | 11,800 | $ | 12,100 | ||||
|
Additions
based on current year tax positions
|
1,600 | 800 | ||||||
|
Additions
based on prior year tax positions
|
6,700 | 3,300 | ||||||
|
Reductions
based on prior year tax positions
|
(100 | ) | (2,100 | ) | ||||
|
Reductions
resulting from settlements with taxing authorities
|
(2,000 | ) | (2,000 | ) | ||||
|
Reductions
resulting from lapse in statutes of limitations
|
(1,000 | ) | (300 | ) | ||||
|
Balance,
end of period
|
$ | 17,000 | $ | 11,800 | ||||
85
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
|
Note
11 – Concentrations
of Risk
|
Certain
financial instruments potentially subject us to concentrations of credit
risk. These financial instruments consist primarily of cash
equivalents, available-for-sale securities, trade receivables, long-term
investments, notes receivable and derivative instruments. In all
cases, our maximum exposure to loss from credit risk equals the gross fair value
of the financial instruments. We continuously assess the need for
reserves for such losses, which have been within our expectations. We
do not require collateral or other security to support financial instruments
subject to credit risk, except for long-term notes receivable.
We limit
our credit risk with respect to our cash equivalents, available-for-sale
securities, short-term and long-term investments and derivative instruments, by
monitoring the credit worthiness of the financial institutions who are the
counter-parties to such financial instruments. As a risk management
policy, we limit the amount of credit exposure by diversifying and utilizing
numerous investment grade counter-parties.
With
respect to our trade receivables, our credit risk is somewhat limited due to a
relatively large customer base and its dispersion across different types of
healthcare professionals and geographic areas. No single customer
accounted for more than 1.1% of our net sales in 2009. With respect
to our sources of supply, our top 10 healthcare distribution suppliers and our
single largest supplier accounted for approximately 31% and 8%, respectively, of
our aggregate purchases in 2009.
Our
long-term notes receivable represent strategic financing arrangements with
certain industry affiliates and amounts owed to us from sales of certain
businesses. Generally, these notes are secured by certain assets of
the counter-party; however, in most cases our security is subordinate to other
commercial financial institutions. While we have exposure to credit
loss in the event of non-performance by these counter-parties, we conduct
ongoing assessments of their financial and operational performance.
Note
12 – Derivatives and Hedging Activities
We are
exposed to market risks, which include changes in interest rates, as well as
changes in foreign currency exchange rates as measured against the U.S. dollar
and each other, and changes to the credit markets. We attempt to
minimize these risks by primarily using interest rate swap agreements, foreign
currency forward and swap contracts and by maintaining counter-party credit
limits. These hedging activities provide only limited protection
against interest rate, currency exchange and credit risks. Factors
that could influence the effectiveness of our hedging programs include interest
rate volatility, currency markets and availability of hedging instruments and
liquidity of the credit markets. All interest rate swap and foreign
currency forward and swap contracts that we enter into are components of hedging
programs and are entered into for the sole purpose of hedging an existing or
anticipated interest rate and currency exposure. We do not enter into
such contracts for speculative purposes and we manage our credit risks by
diversifying our investments, maintaining a strong balance sheet and having
multiple sources of capital.
86
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
12 – Derivatives and Hedging Activities – (Continued)
Fluctuations
in the value of certain foreign currencies as compared to the U.S. dollar may
positively or negatively affect our revenues, gross margins, operating expenses
and retained earnings, all of which are expressed in U.S.
dollars. Where we deem it prudent, we engage in hedging programs
using primarily foreign currency forward and swap contracts aimed at limiting
the impact of foreign currency exchange rate fluctuations on
earnings. We purchase short-term (i.e., 12 months or less) foreign
currency forward and swap contracts to protect against currency exchange risks
associated with intercompany loans due from our international subsidiaries and
the payment of merchandise purchases to our foreign suppliers. We do
not hedge the translation of foreign currency profits into U.S. dollars, as we
regard this as an accounting exposure, not an economic exposure.
The
following table presents the fair value of our derivative
instruments:
|
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||
|
December
26, 2009
|
December
26, 2009
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
Derivatives
designated as
|
||||||||||
|
hedging
instruments under
|
||||||||||
|
ASC
Topic 815-10:
|
||||||||||
|
Interest
rate contracts
|
Prepaid
expenses and other
|
$ | 453 |
Accrued
expenses other
|
$ | - | ||||
|
Foreign
exchange contracts
|
Prepaid
expenses and other
|
427 |
Accrued
expenses other
|
2,023 | ||||||
|
Total
|
880 | 2,023 | ||||||||
|
Derivatives
not designated as
|
||||||||||
|
hedging
instruments under
|
||||||||||
|
ASC
Topic 815-10:
|
||||||||||
|
Foreign
exchange contracts
|
Prepaid
expenses and other
|
5,297 |
Accrued
expenses other
|
1,806 | ||||||
|
Total
derivatives
|
$ | 6,177 | $ | 3,829 | ||||||
Fair
Value Hedges
Our fair
value hedges consist of interest rate swaps and foreign exchange
contracts. Gains associated with these interest rate swaps and
foreign exchange contracts are recorded in Other, net within our consolidated
statements of income and totaled $1.7 million and $7.5 million, respectively,
for the year ended December 26, 2009. Forward points related to these
foreign exchange contracts, recorded in Interest expense within our consolidated
statements of income, totaled $0.5 million for the year ended December 26,
2009.
Cash
Flow Hedges
Our cash
flow hedges consist of foreign exchange contracts. The amounts
recorded in Accumulated other comprehensive income (“AOCI”) primarily represent
the change in spot rates at the time of the initial hedge compared to the spot
rate when marked to market. The loss recognized in AOCI (effective
portion) for the year ended December 26, 2009 was $0.1 million.
87
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
12 – Derivatives and Hedging Activities – (Continued)
The
activity recorded within our consolidated statements of income relating to cash
flow hedges include amounts reclassified from AOCI (effective portion) and
forward points (ineffective portion). The following table presents
the effect of our cash flow hedges:
|
Gain
(Loss) Reclassified from
AOCI
into Income (Effective
Portion)
|
Amount
of Forward Points
Recognized
in Income on
Derivative
(Ineffective
Portion)
|
||||||||
|
Location
of Gain (Loss)
Reclassified
from AOCI
into
Income (Effective
Portion)
|
Year
Ended
December
26,
2009
|
Location
where Forward
Points
are Recognized in
Income
on Derivative
(Ineffective
Portion)
|
Year
Ended
December
26,
2009
|
||||||
|
Other,
net
|
$ | (1,081 | ) |
Interest
income
|
$ | 39 | |||
|
Cost
of sales
|
4,886 |
Other,
net
|
5 | ||||||
Economic
Hedges
We are
also a party to contracts that serve as economic hedges that we have not
designated as hedges for accounting purposes, which consist of foreign exchange
contracts. Losses associated with these foreign exchange contracts
are recorded in Other, net within our consolidated statements of income and
totaled $4.3 million for the year ended December 26, 2009. Forward
points related to these foreign exchange contracts, which are recorded in
Interest expense within our consolidated statements of income, totaled $0.2
million for the year ended December 26, 2009.
88
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
13 – Segment and Geographic Data
We
conduct our business through two reportable segments: healthcare distribution
and technology. These segments offer different products and services
to the same customer base. The healthcare distribution reportable
segment aggregates our dental, medical (including animal health) and
international operating segments. This segment consists of consumable
products, small equipment, laboratory products, large dental and medical
equipment, equipment repair services, branded and generic pharmaceuticals,
vaccines, surgical products, diagnostic tests, infection-control products and
vitamins.
Our
dental group serves office-based dental practitioners, schools and other
institutions in the combined United States and Canadian dental
market. Our medical group serves office-based medical practitioners,
surgical centers, other alternate-care settings, animal health clinics and other
institutions throughout the United States. Our international group
serves 21 countries outside of North America.
Our
technology group provides software, technology and other value-added services to
healthcare practitioners, primarily in the United States, Canada, the United
Kingdom, Australia and New Zealand. Our value-added practice
solutions include practice management software systems for dental and medical
practitioners and animal health clinics. Our technology group
offerings also include financial services, e-services and continuing education
services for practitioners.
The
following tables present information about our business segments:
|
Years
ended
|
||||||||||||
|
December
26,
2009
|
December
27,
2008
(1)
|
December
29,
2007
(1)
|
||||||||||
|
Net
Sales:
|
||||||||||||
|
Healthcare
distribution (2):
|
||||||||||||
|
Dental
(3)
|
$ | 2,509,921 | $ | 2,567,064 | $ | 2,447,841 | ||||||
|
Medical
(4)
|
1,457,102 | 1,428,968 | 1,540,269 | |||||||||
|
International
(5)
|
2,398,105 | 2,221,092 | 1,769,881 | |||||||||
|
Total
healthcare distribution
|
6,365,128 | 6,217,124 | 5,757,991 | |||||||||
|
Technology
(6)
|
173,208 | 163,289 | 131,893 | |||||||||
|
Total
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | ||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
|
(2)
|
Consists
of consumable products, small equipment, laboratory products, large dental
and medical equipment, equipment repair services, branded and generic
pharmaceuticals, vaccines, surgical products, diagnostic tests,
infection-control products and
vitamins.
|
|
(3)
|
Consists
of products sold in the United States and
Canada.
|
|
(4)
|
Consists
of products and equipment sold in the United States’ medical and animal
health markets.
|
|
(5)
|
Consists
of products sold in dental, medical and animal health markets, primarily
in Europe.
|
|
(6)
|
Consists
of practice management software and other value-added products and
services, which are distributed primarily to healthcare providers in the
United States, Canada, the United Kingdom, Australia and New
Zealand.
|
89
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
13 – Segment and Geographic Data – (Continued)
|
Years
ended
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(1) (2)
|
2007
(1) (2)
|
||||||||||
|
Operating
Income:
|
||||||||||||
|
Healthcare
distribution
|
$ | 401,915 | $ | 362,307 | $ | 339,937 | ||||||
|
Technology
|
62,170 | 56,979 | 47,002 | |||||||||
|
Total
|
$ | 464,085 | $ | 419,286 | $ | 386,939 | ||||||
|
Income
from continuing operations before taxes, equity in
earnings
(losses) of affiliates and noncontrolling interests :
|
||||||||||||
|
Healthcare
distribution
|
$ | 373,444 | $ | 320,167 | $ | 318,068 | ||||||
|
Technology
|
79,276 | 75,282 | 60,441 | |||||||||
|
Total
|
$ | 452,720 | $ | 395,449 | $ | 378,509 | ||||||
|
Depreciation
and Amortization:
|
||||||||||||
|
Healthcare
distribution
|
$ | 75,290 | $ | 71,731 | $ | 69,815 | ||||||
|
Technology
|
6,203 | 6,396 | 4,121 | |||||||||
|
Total
|
$ | 81,493 | $ | 78,127 | $ | 73,936 | ||||||
|
Income
Tax Expense Attributable to Continuing Operations:
|
||||||||||||
|
Healthcare
distribution
|
$ | 99,000 | $ | 103,344 | $ | 105,371 | ||||||
|
Technology
|
28,521 | 27,866 | 23,185 | |||||||||
|
Total
|
$ | 127,521 | $ | 131,210 | $ | 128,556 | ||||||
|
Interest
Income:
|
||||||||||||
|
Healthcare
distribution
|
$ | 9,929 | $ | 15,982 | $ | 16,467 | ||||||
|
Technology
|
50 | 373 | 64 | |||||||||
|
Total
|
$ | 9,979 | $ | 16,355 | $ | 16,531 | ||||||
|
Interest
Expense:
|
||||||||||||
|
Healthcare
distribution
|
$ | 23,362 | $ | 34,583 | $ | 29,601 | ||||||
|
Technology
|
8 | 22 | 6 | |||||||||
|
Total
|
$ | 23,370 | $ | 34,605 | $ | 29,607 | ||||||
|
Purchases
of Fixed Assets:
|
||||||||||||
|
Healthcare
distribution
|
$ | 49,282 | $ | 49,336 | $ | 54,683 | ||||||
|
Technology
|
2,345 | 1,534 | 2,138 | |||||||||
|
Total
|
$ | 51,627 | $ | 50,870 | $ | 56,821 | ||||||
|
As
of
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(2)
|
2007
(2)
|
||||||||||
|
Total
Assets:
|
||||||||||||
|
Healthcare
distribution
|
$ | 3,703,315 | $ | 3,457,391 | $ | 3,160,063 | ||||||
|
Technology
|
132,670 | 141,819 | 153,409 | |||||||||
|
Total
|
$ | 3,835,985 | $ | 3,599,210 | $ | 3,313,472 | ||||||
(1) Adjusted
to reflect the effects of discontinued operations, except depreciation and
amortization amounts.
(2) Adjusted
to reflect the effects of the adoption of provisions contained within ASC Topic
470-20, “Debt with Conversion and
Other
Options.”
90
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
13 – Segment and Geographic Data – (Continued)
The
following table sets forth our net sales by principal categories of products
offered through our healthcare distribution and technology reportable
segments:
|
Years
Ended
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
(1)
|
2007
(1)
|
||||||||||
|
Healthcare
Distribution
|
||||||||||||
|
Dental:
|
||||||||||||
|
Consumable
dental products, dental laboratory
|
||||||||||||
|
products
and small equipment (2)
|
$ | 2,994,714 | $ | 2,963,657 | $ | 2,711,714 | ||||||
|
Large
dental equipment (3)
|
1,118,500 | 1,142,948 | 1,076,084 | |||||||||
|
Total
dental
|
4,113,214 | 4,106,605 | 3,787,798 | |||||||||
|
Medical:
|
||||||||||||
|
Medical
products (4)
|
1,530,704 | 1,458,629 | 1,586,608 | |||||||||
|
Animal
health products (5)
|
721,210 | 651,890 | 383,585 | |||||||||
|
Total
medical
|
2,251,914 | 2,110,519 | 1,970,193 | |||||||||
|
Total
Healthcare distribution
|
6,365,128 | 6,217,124 | 5,757,991 | |||||||||
|
Technology
|
||||||||||||
|
Software
and related products and
|
||||||||||||
|
other
value-added products (6)
|
173,208 | 163,289 | 131,893 | |||||||||
|
Total
|
$ | 6,538,336 | $ | 6,380,413 | $ | 5,889,884 | ||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
|
(2)
|
Includes
X-ray products, infection-control products, handpieces, preventatives,
impression materials, composites, anesthetics, teeth, dental implants,
gypsum, acrylics, articulators and
abrasives.
|
|
(3)
|
Includes
dental chairs, delivery units and lights, X-ray equipment, equipment
repair and high-tech equipment.
|
|
(4)
|
Includes
branded and generic pharmaceuticals, vaccines, surgical products,
diagnostic tests, infection-control products, X-ray products, equipment
and vitamins.
|
|
(5)
|
Includes
branded and generic pharmaceuticals, surgical and consumable products and
services and equipment.
|
|
(6)
|
Includes
software and related products and other value-added products, including
financial products and continuing
education.
|
The
following table presents information about our operations by geographic area as
of and for the three years ended December 26, 2009. Net sales by
geographic area are based on the respective locations of our
subsidiaries. No country, except for the United States and Germany,
generated net sales greater than 10% of consolidated net sales. There
were no material amounts of sales or transfers among geographic areas and there
were no material amounts of export sales.
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Net
Sales
|
Long-Lived
Assets
|
Net
Sales (1)
|
Long-Lived
Assets
|
Net
Sales (1)
|
Long-Lived
Assets
|
|||||||||||||||||||
|
United
States
|
$ | 3,902,353 | $ | 590,917 | $ | 3,897,520 | $ | 588,308 | $ | 3,878,585 | $ | 551,840 | ||||||||||||
|
Germany
|
699,309 | 182,590 | 671,341 | 184,729 | 620,210 | 186,784 | ||||||||||||||||||
|
Other
|
1,936,674 | 676,909 | 1,811,552 | 611,843 | 1,391,089 | 618,661 | ||||||||||||||||||
|
Consolidated
total
|
$ | 6,538,336 | $ | 1,450,416 | $ | 6,380,413 | $ | 1,384,880 | $ | 5,889,884 | $ | 1,357,285 | ||||||||||||
(1) Adjusted to
reflect the effects of discontinued operations.
91
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
14 – Employee Benefit Plans
Stock-based
Compensation
Our
accompanying consolidated statements of income reflect pre-tax share-based
compensation expense, recorded in accordance with the provisions of ASC Topic
718, “Stock Compensation,” of $25.9 million ($17.5 million after-tax), $25.4
million ($17.0 million after-tax) and $22.6 million ($14.9 million after-tax)
for the years ended December 26, 2009, December 27, 2008 and December 29,
2007.
Our
accompanying consolidated statements of cash flows present our stock-based
compensation expense as an adjustment to reconcile net income to net cash
provided by operating activities for all periods
presented. Additionally, prior to adopting ASC Topic 718, benefits
associated with tax deductions in excess of recognized compensation expense were
presented as part of operating cash flows on our consolidated statements of cash
flows. However, ASC Topic 718 requires that such excess tax benefits
be presented as a cash inflow from financing activities. In the
accompanying consolidated statements of cash flows, we presented $4.7 million,
$11.0 million and $12.7 million of such excess tax benefits as a cash inflow
from financing activities for the years ended December 26, 2009, December 27,
2008 and December 29, 2007.
Stock-based
compensation represents the cost related to stock-based awards granted to
employees and non-employee directors. We measure stock-based
compensation at the grant date, based on the estimated fair value of the award,
and recognize the cost (net of estimated forfeitures) as compensation expense on
a straight-line basis over the requisite service period. Our
stock-based compensation expense is reflected in selling, general and
administrative expenses in our consolidated statements of income.
Stock-based
awards are provided to certain employees and non-employee directors under the
terms of our 1994 Stock Incentive Plan, as amended, and our 1996 Non-Employee
Director Stock Incentive Plan, as amended (together, the
“Plans”). The Plans are administered by the Compensation Committee of
the Board of Directors. Prior to March 2009, awards under the Plans
principally include a combination of at-the-money stock options and restricted
stock (including restricted stock units). In March 2009, equity-based
awards were granted solely in the form of restricted stock and restricted stock
units, with the exception of stock options for certain pre-existing contractual
obligations. As of December 26, 2009, there were 27,077,270 shares
authorized and 6,637,926 shares available to be granted under the 1994 Stock
Incentive Plan and 800,000 shares authorized and 173,789 shares available to be
granted under the 1996 Non-Employee Director Stock Incentive Plan.
Stock
options are awards that allow the recipient to purchase shares of our common
stock at a fixed price. Stock options are granted at an exercise
price equal to our closing stock price on the date of grant. These
awards, which generally vest 25% per year based on the recipient’s continued
service subject to the terms and conditions of the Plans, are fully vested four
years from the grant date and have a contractual term of ten years from the
grant date. Additionally, recipients may not sell any shares that
they acquire through exercising their stock options until the third anniversary
of the date of grant of such options. We estimate the fair value of
stock options using the Black-Scholes valuation model.
Grants of
restricted stock are common stock awards granted to recipients with specified
vesting provisions. We issue restricted stock that vests solely based
on the recipient’s continued service over time (four-year cliff vesting) and
restricted stock that vests based on our achieving specified performance
measurements and the recipient’s continued service over time (three-year cliff
vesting).
92
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
14 – Employee Benefit Plans – (Continued)
With
respect to time-based restricted stock, we estimate the fair value on the date
of grant based on our closing stock price. With respect to
performance-based restricted stock, the number of shares that ultimately vest
and are received by the recipient is based upon our earnings per share
performance as measured against specified targets over a three-year period as
determined by the Compensation Committee of the Board of
Directors. Though there is no guarantee that performance targets will
be achieved, we estimate the fair value of performance-based restricted stock,
based on our closing stock price at time of grant.
The Plans
provide for adjustments to the performance-based restricted stock targets for
significant events such as acquisitions, divestitures, new business ventures and
share repurchases. Over the performance period, the number of shares
of common stock that will ultimately vest and be issued and the related
compensation expense is adjusted upward or downward based upon our estimation of
achieving such performance targets. The ultimate number of shares
delivered to recipients and the related compensation cost recognized as an
expense will be based on our actual performance metrics as defined under the
Plans.
Restricted
stock units are unit awards that we grant to certain employees that entitle the
recipient to shares of common stock upon vesting. We grant restricted
stock units with the same time-based and performance-based vesting that we use
for restricted stock. The fair value of restricted stock units is
determined on the date of grant, based on our closing stock price.
We record
deferred income tax assets for awards that result in deductions on our income
tax returns based on the amount of compensation cost recognized and our
statutory tax rate in the jurisdiction in which we will receive a
deduction. Differences between the deferred income tax assets
recognized for financial reporting purposes and the actual tax deduction
reported on our income tax return are recorded in additional paid-in capital (if
the tax deduction exceeds the deferred income tax asset) or in earnings (if the
deferred income tax asset exceeds the tax deduction and no additional paid-in
capital exists from previous awards).
Stock-based
compensation grants for the year ended December 26, 2009 primarily consisted of
restricted stock and restricted stock unit grants. Stock-based
compensation grants for the years ended December 27, 2008 and December 29, 2007
consisted of stock options, restricted stock and restricted stock unit
grants. Certain options granted require us to settle the option in
the form of a cash payment. As of December 26, 2009, we have recorded
a liability of $0.4 million relating to fair value measurement of these
options. The weighted-average grant date fair value of stock-based
awards granted before forfeitures was $34.35, $18.44 and $21.61 per share during
the years ended December 26, 2009, December 27, 2008 and December 29,
2007. For the year ended December 26, 2009, the fair value of
stock-based awards issued consisted mainly of restricted stock (including
restricted stock units).
Total
unrecognized compensation cost related to non-vested awards as of December 26,
2009 was $49.1 million, which is expected to be recognized over a
weighted-average period of approximately two years.
93
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
14 – Employee Benefit Plans – (Continued)
A summary
of the stock option activity under the Plans is presented below:
|
Years
ended
|
||||||||||||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|||||||||||||||||
|
Outstanding
at beginning
|
||||||||||||||||||||||
|
of
year
|
6,791,828 | $ | 39.85 | 6,829,453 | $ | 34.67 | 7,477,321 | $ | 30.54 | |||||||||||||
|
Granted
|
42,206 | 38.33 | 1,124,795 | 59.78 | 930,112 | 51.26 | ||||||||||||||||
|
Exercised
|
(445,916 | ) | 26.62 | (991,259 | ) | 25.87 | (1,487,238 | ) | 23.85 | |||||||||||||
|
Forfeited
|
(93,376 | ) | 48.83 | (171,161 | ) | 45.29 | (90,742 | ) | 41.92 | |||||||||||||
|
Outstanding
at end of year
|
6,294,742 | 40.66 | 6,791,828 | 39.85 | 6,829,453 | 34.67 | ||||||||||||||||
|
Options
exercisable at end
|
||||||||||||||||||||||
|
of
year
|
4,835,120 | 36.31 | 5,141,140 | 35.11 | 5,138,783 | 30.80 | ||||||||||||||||
The
following weighted-average assumptions were used in determining the fair values
of stock options using the Black-Scholes valuation model:
|
2009
|
2008
|
2007
|
|||
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
||
|
Expected
stock price volatility
|
28%
|
20%
|
20%
|
||
|
Risk-free
interest rate
|
1.88%
|
2.75%
|
4.75%
|
||
|
Expected
life of options (years)
|
4.5
|
4.5
|
4.5
|
We have
not declared cash dividends on our stock in the past and we do not anticipate
declaring cash dividends in the foreseeable future. The expected
stock price volatility is based on the evaluation of implied volatilities from
traded call options on our stock and from call options embedded in our existing
convertible debt, historical volatility of our stock and other factors.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect
on the date of grant in conjunction with considering the expected life of
options. The expected life of options represents the approximate
period of time that granted options are expected to be outstanding and is based
on historical data, including, among other things, option exercises, forfeitures
and cancellations. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by recipients of
stock options, and subsequent events are not indicative of the reasonableness of
the original estimates of fair value made by us.
The
following table represents the intrinsic values of:
|
As
of
|
||||||||||||
|
December
26,
|
December
27,
|
December
29,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Stock
options outstanding
|
$ | 84,880 | $ | 24,928 | $ | 186,956 | ||||||
|
Stock
options exercisable
|
82,476 | 24,928 | 160,606 | |||||||||
94
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
14 – Employee Benefit Plans – (Continued)
The total
cash received as a result of stock option exercises for the years ended December
26, 2009, December 27, 2008 and December 29, 2007 was approximately $11.9
million, $25.6 million and $35.5 million. In connection with these
exercises, the tax benefits that we realized for the years ended December 26,
2009, December 27, 2008 and December 29, 2007 were $2.6 million, $7.0 million
and $10.0 million. We settle employee stock option exercises with
newly issued common shares.
The total
intrinsic value of restricted stock (including RSUs) that vested was $8.7
million, $1.4 million and $172 during the years ended December 26, 2009,
December 27, 2008 and December 29, 2007. The following table
summarizes the status of our non-vested restricted shares/units for the year
ended December 26, 2009:
|
Time-Based
Restricted Stock/Units
|
|||||||||
|
Shares/Units
|
Weighted
Average Grant Date Fair Value
|
Aggregate
Intrinsic Value
|
|||||||
|
Outstanding
at beginning of period
|
285,225 | $ | 14,771 | ||||||
|
Granted
|
341,931 | 11,913 | |||||||
|
Vested
|
(7,982 | ) | (333 | ) | |||||
|
Forfeited
|
(21,569 | ) | (689 | ) | |||||
|
Outstanding
at end of period
|
597,605 | $ | 25,662 |
$31,679
|
|||||
|
Performance-Based
Restricted Stock/Units
|
|||||||||
|
Shares/Units
|
Weighted
Average Grant Date Fair Value
|
Aggregate
Intrinsic Value
|
|||||||
|
Outstanding
at beginning of period
|
347,141 | $ | 17,704 | ||||||
|
Granted
|
852,211 | 13,495 | |||||||
|
Vested
|
(179,881 | ) | (8,512 | ) | |||||
|
Forfeited
|
(9,509 | ) | (416 | ) | |||||
|
Outstanding
at end of period
|
1,009,962 | $ | 22,271 |
$53,538
|
|||||
401(k) Plans
We offer
qualified 401(k) plans to substantially all our domestic full-time
employees. As determined by our Board of Directors, matching
contributions to these plans generally do not exceed 100% of the participants’
contributions up to 7% of their base compensation, subject to applicable legal
limits.
Matching
contributions include both cash and our common stock. Forfeitures
attributable to participants whose employment terminates prior to becoming fully
vested are used to reduce our matching contributions.
Assets of
the 401(k) and other defined contribution plans are held in self-directed
accounts enabling participants to choose from various investment fund
options. Matching contributions and administrative expenses related
to these plans charged to operations during the years ended December 26, 2009,
December 27, 2008 and December 29, 2007 amounted to $18.9 million, $17.3 million
and $17.4 million.
Supplemental
Executive Retirement Plan
We offer
an unfunded, non-qualified supplemental executive retirement plan to eligible
employees. This plan generally covers officers and certain
highly-compensated employees after they have reached the maximum IRS allowed
pre-tax 401(k) contribution limit. Our contributions to this plan are
equal to the
95
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
14 – Employee Benefit Plans – (Continued)
401(k)
employee-elected contribution percentage applied to base compensation for the
portion of the year in which such employees are not eligible to make pre-tax
contributions to the 401(k) plan. The amounts charged (credited) to
operations during the years ended December 26, 2009, December 27, 2008 and
December 29, 2007 amounted to $1.9 million, $(1.6) million and $1.7
million. The reduction in expense during the year ended December 27,
2008 was due to a decrease in the market value of the plan’s investments during
the period.
Note
15 – Commitments and
Contingencies
Operating
Leases
We lease
facilities and equipment under non-cancelable operating leases expiring through
2025. We expect that in the normal course of business, leases will be
renewed or replaced by other leases.
Future
minimum annual rental payments under our non-cancelable operating leases as of
December 26, 2009 were:
|
2010
|
$ | 59,611 | ||
|
2011
|
44,313 | |||
|
2012
|
33,140 | |||
|
2013
|
20,427 | |||
|
2014
|
12,832 | |||
|
Thereafter
|
41,355 | |||
|
Total
minimum operating lease payments
|
$ | 211,678 |
Total
rental expense attributable to continuing operations for the years ended
December 26, 2009, December 27, 2008 and December 29, 2007 was $56.1 million,
$59.0 million and $50.4 million.
Capital
Leases
We lease
certain equipment under capital leases. Future minimum annual lease
payments under our capital leases together with the present value of the minimum
capital lease payments as of December 26, 2009 were:
|
2010
|
$ | 2,320 | ||
|
2011
|
1,541 | |||
|
2012
|
1,142 | |||
|
2013
|
416 | |||
|
2014
|
699 | |||
|
Thereafter
|
- | |||
|
Total
minimum capital lease payments
|
6,118 | |||
|
Less:
Amount representing interest at 3.20% to 12.27%
|
(486 | ) | ||
|
Total
present value of minimum capital lease payments
|
$ | 5,632 |
96
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
15 – Commitments and
Contingencies –
(Continued)
Purchase
Commitments
In our
healthcare distribution business, we sometimes enter into long-term purchase
commitments to ensure the availability of products for
distribution. Future minimum annual payments for inventory purchase
commitments as of December 26, 2009 were:
|
2010
|
$ | 162,505 | ||
|
2011
|
134,323 | |||
|
2012
|
138,959 | |||
|
2013
|
55,697 | |||
|
2014
|
22,937 | |||
|
Thereafter
|
145,479 | |||
|
Total
minimum inventory purchase
|
||||
|
commitment
payments
|
$ | 659,900 |
We have
obligations to purchase influenza vaccine from a manufacturer through 2012,
which require us to pay an amount per dose based on the prevailing market price
or a formula price in each respective year. The amounts included in
the above table related to these purchase commitments were determined using
current market conditions. We also have obligations to purchase
influenza vaccine from another manufacturer. Actual amounts may
differ.
Litigation
Our
business involves a risk of product liability and other claims in the ordinary
course of business, and from time to time we are named as a defendant in cases
as a result of our distribution of pharmaceutical, medical devices and other
healthcare products. As a business practice, we generally obtain
product liability indemnification from our suppliers.
We have
various insurance policies, including product liability insurance, covering
risks in amounts that we consider adequate. In many cases in which we
have been sued in connection with products manufactured by others, the
manufacturer provides us with indemnification. There can be no
assurance that the insurance coverage we maintain is sufficient or will be
available in adequate amounts or at a reasonable cost, or that indemnification
agreements will provide us with adequate protection. In our opinion,
all pending matters are covered by insurance or will not otherwise have a
material adverse effect on our financial condition or results of
operations.
As of
December 26, 2009, we had accrued our best estimate of potential losses relating
to product liability and other claims that were probable to result in a
liability and for which we were able to reasonably estimate a
loss. This accrued amount, as well as related expenses, was not
material to our financial position, results of operations or cash
flows. Our method for determining estimated losses considers
currently available facts, presently enacted laws and regulations and other
external factors, including probable recoveries from third
parties.
97
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
15 – Commitments and
Contingencies –
(Continued)
Employment,
Consulting and Non-Compete Agreements
We have
definite-lived employment, consulting and non-compete agreements expiring
through 2013 that have varying base aggregate annual payments of approximately
$9.8 million in 2010, which decrease periodically to approximately $0.2 million
in 2013. We also have lifetime consulting agreements that provide for
current compensation of $0.4 million per year, increasing $25 every fifth year
with the next increase in 2012. In addition, some agreements have
provisions for additional incentives and compensation.
Note
16 – Supplemental Cash Flow Information
Cash paid
for interest and income taxes was:
|
Years
ended
|
||||||||||||
|
December
26,
2009
|
December
27,
2008
|
December
29,
2007
|
||||||||||
|
Interest
|
$ | 22,202 | $ | 30,249 | $ | 26,891 | ||||||
|
Income
taxes
|
170,024 | 109,103 | 100,476 | |||||||||
There was
approximately $3.7 million, $0.8 million and $2.0 million of debt assumed as a
part of the acquisitions for the years ended December 26, 2009, December 27,
2008 and December 29, 2007, respectively. During the years ended
December 26, 2009, December 27, 2008 and December 29, 2007, we had $21.5
million, $0.6 million and $1.7 million of non-cash net unrealized gains related
to foreign currency hedging activities. During the year ended
December 26, 2009, we exchanged a loan receivable from D4D in the amount of $7.6
million for equity securities in D4D.
98
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
17 – Quarterly Information (Unaudited)
The
following presents certain quarterly financial data:
|
Quarters
ended
|
||||||||||||||||
|
March
28,
2009
(1) (2)
|
June
27,
2009
(1) (2)
|
September
26,
2009
(2)
|
December
26,
2009
|
|||||||||||||
|
Net
sales
|
$ | 1,485,388 | $ | 1,607,434 | $ | 1,659,433 | $ | 1,786,081 | ||||||||
|
Gross
profit
|
438,363 | 475,918 | 476,267 | 526,272 | ||||||||||||
|
Operating
income
|
90,588 | 121,970 | 113,885 | 137,642 | ||||||||||||
|
Income
from continuing operations
|
59,183 | 80,200 | 98,375 | 92,684 | ||||||||||||
|
Net
income
|
59,300 | 80,425 | 100,748 | 92,684 | ||||||||||||
|
Amounts
attributable to
|
||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||
|
Income
from continuing operations
|
$ | 54,774 | $ | 73,324 | $ | 94,045 | $ | 86,408 | ||||||||
|
Income
from discontinued operations,
|
||||||||||||||||
|
net
of tax
|
77 | 149 | 2,376 | - | ||||||||||||
|
Net
income
|
54,851 | 73,473 | 96,421 | 86,408 | ||||||||||||
|
Earnings
per share attributable to
|
||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||
|
From
continuing operations
|
||||||||||||||||
|
per
share:
|
||||||||||||||||
|
Basic
|
$ | 0.62 | $ | 0.83 | $ | 1.06 | $ | 0.97 | ||||||||
|
Diluted
|
0.61 | 0.81 | 1.03 | 0.94 | ||||||||||||
|
From
net income:
|
||||||||||||||||
|
Basic
|
$ | 0.62 | $ | 0.83 | $ | 1.09 | $ | 0.97 | ||||||||
|
Diluted
|
0.61 | 0.81 | 1.05 | 0.94 | ||||||||||||
99
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note 17 – Quarterly Information
(Unaudited) – (Continued)
|
Quarters
ended
|
||||||||||||||||
|
March
29,
2008
(1) (2) (3)
|
June
28,
2008
(1) (2) (3)
|
September
27,
2008
(1) (2) (3)
|
December
27,
2008
(1) (2) (3)
|
|||||||||||||
|
Net
sales
|
$ | 1,518,243 | $ | 1,636,782 | $ | 1,644,209 | $ | 1,581,179 | ||||||||
|
Gross
profit
|
448,427 | 485,366 | 475,594 | 464,908 | ||||||||||||
|
Operating
income
|
85,665 | 113,796 | 115,414 | 104,411 | ||||||||||||
|
Income
from continuing operations
|
55,144 | 72,023 | 72,818 | 69,291 | ||||||||||||
|
Net
income
|
54,690 | 71,701 | 72,766 | 62,217 | ||||||||||||
|
Amounts
attributable to
|
||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||
|
Income
from continuing operations
|
$ | 51,767 | $ | 64,924 | $ | 67,548 | $ | 63,108 | ||||||||
|
Loss
from discontinued operations,
|
||||||||||||||||
|
net
of tax
|
(327 | ) | (354 | ) | (60 | ) | (7,149 | ) | ||||||||
|
Net
income
|
51,440 | 64,570 | 67,488 | 55,959 | ||||||||||||
|
Earnings
per share attributable to
|
||||||||||||||||
|
Henry
Schein, Inc.:
|
||||||||||||||||
|
From
continuing operations
|
||||||||||||||||
|
per
share:
|
||||||||||||||||
|
Basic
|
$ | 0.58 | $ | 0.72 | $ | 0.76 | $ | 0.71 | ||||||||
|
Diluted
|
0.56 | 0.70 | 0.74 | 0.71 | ||||||||||||
|
From
net income:
|
||||||||||||||||
|
Basic
|
$ | 0.58 | $ | 0.72 | $ | 0.76 | $ | 0.63 | ||||||||
|
Diluted
|
0.56 | 0.70 | 0.74 | 0.63 | ||||||||||||
|
(1)
|
Adjusted
to reflect the effects of discontinued
operations.
|
|
(2)
|
On
August 5, 2009, we completed the sale of a wholesaler of dental
consumables for aggregate consideration of $14.2 million, of which $13.2
million has been received as of December 26, 2009. As a result
of this sale, included in operating results from discontinued operations
for 2009 is a net gain, net of tax, of $2.6 million or $0.03 per diluted
share.
|
During
November 2008, we reached a decision to exit the wholesale ultrasound business
and dispose of such operations during the fourth quarter of
2008. This business was a component of our healthcare distribution
business. We have classified the operating results of this business as
discontinued operations in the accompanying consolidated statements of income
for all periods presented. In connection with this decision, we assessed our
long-lived assets for impairment, which resulted in the recording of an
impairment charge of $11.2 million ($7.3 million after-tax) for the
write-down of all long-lived assets, including goodwill of
$6.7 million.
On
November 5, 2008, we announced certain actions to reduce operating
costs. These actions included the elimination of approximately 300
positions from our global operations, or approximately 2.5% of our workforce at
that time, and the closing of several smaller facilities. During the
years ended December 26, 2009 and December 27, 2008, we incurred one-time
restructuring costs of approximately $3.0 million (approximately $2.1 million
after taxes) and $23.2 million (approximately $16.0 million after taxes),
respectively, consisting of employee severance pay and benefits, facility
closing costs, representing primarily lease termination and asset write-off
costs, and outside professional and consulting fees directly related to the
restructuring plan.
|
(3)
|
Adjusted
to reflect the effects of the adoption of provisions contained within ASC
Topic 470-20, “Debt with Conversion and Other
Options.”
|
We
experience fluctuations in quarterly earnings. As a result, we may
fail to meet or exceed the expectations of securities analysts and investors,
which could cause our stock price to decline.
100
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
17 – Quarterly Information (Unaudited) – (Continued)
Our
business has been subject to seasonal and other quarterly
fluctuations. Net sales and operating profits generally have been
higher in the third and fourth quarters due to the timing of sales of software,
equipment and seasonal products (including influenza vaccine, equipment and
software products), purchasing patterns of office-based healthcare practitioners
and year-end promotions. Net sales and operating profits generally
have been lower in the first quarter, primarily due to increased sales in the
prior two quarters. Quarterly results may also be adversely affected
by a variety of other factors, including:
|
•
|
costs
of developing new applications and services;
|
||||
|
•
|
costs
related to acquisitions and/or integrations of technologies or
businesses;
|
||||
|
•
|
the
timing and amount of sales and marketing expenditures;
|
||||
|
•
|
timing
or pricing changes offered by our vendors;
|
|
•
|
timing
of the introduction of new products and services by our
vendors;
|
|
•
|
changes
in or availability of vendor contracts or rebate programs;
|
|
•
|
vendor
rebates based upon attaining certain growth goals;
|
|
•
|
changes
in the way vendors introduce or deliver products to
market;
|
|||
|
•
|
exclusivity
requirements with certain vendors may prohibit us from distributing
competitive products manufactured by other vendors;
|
|
•
|
loss
of sales representatives;
|
|
•
|
general
economic conditions, as well as those specific to the healthcare industry
and related
industries;
|
|||||
|
•
|
the
timing of the release of upgrades and enhancements to our
technology-related products and services;
|
|||||
|
•
|
our
success in establishing or maintaining business
relationships;
|
|||||
|
•
|
restructuring
charges;
|
|||||
|
•
|
changes
in accounting principles;
|
||
|
•
|
unexpected
difficulties in developing and manufacturing
products;
|
|
•
|
product
availability or recalls by
manufacturers;
|
|
•
|
exposure
to product liability and other claims in the event that the use of the
products we sell results in injury;
and
|
|
•
|
increases
in the cost of shipping or service issues with our third party
shippers.
|
Any
change in one or more of these or other factors could cause our annual or
quarterly operating results to fluctuate. If our operating results do
not meet or exceed market expectations, our stock price may
decline.
101
HENRY
SCHEIN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In
thousands, except share and per share data)
Note
18 – Subsequent Events
We have
evaluated subsequent events through February 23, 2010, the date that we filed
our Annual Report on Form 10-K for the year ended December 26, 2009 with the
Securities and Exchange Commission. With the exception of the item
listed below, there have been no other subsequent
events after December 26, 2009 for
which disclosure is required.
Butler Animal
Health
Effective
December 31, 2009, we acquired a majority interest in Butler Animal Health
Supply, LLC (“BAHS”), a distributor of companion animal health supplies to
veterinarians. BAHS further complements our domestic and
international animal health operations. We and certain of our
subsidiaries contributed certain assets and liabilities with a net book value of
approximately $91.6 million, related to our United States animal health business
to BAHS and paid approximately $43.5 million in cash to acquire 50.1% of the
equity interests in Butler Animal Health Holding Company LLC (“Butler Holding”)
indirectly through W.A. Butler Company, a holding company that will be jointly
owned with Oak Hill Capital Partners (“OHCP”). As part of a
recapitalization at closing, BAHS incurred approximately $320.0 million in debt,
which will be reflected on our consolidated balance sheet. The owners
of BAHS received a total of approximately $170.5 million in cash from the
transaction with us and the recapitalization. As of February 23,
2010, the date of issuance of this report, we are in the process of calculating
the allocation of purchase price to assets acquired and liabilities assumed, as
well as valuations for goodwill and other intangible assets.
In
connection with the acquisition of a majority interest in BAHS, we entered into
(i) a Put Rights Agreement with OHCP and Butler Holding (the “Oak Hill Put
Rights Agreement”), and (ii) a Put Rights Agreement with Burns Veterinary
Supply, Inc. (“Burns”) and Butler Holding (the “Burns Put Rights Agreement” and
together with the Oak Hill Put Rights Agreement, the “Put Rights Agreements”),
which provide each of OHCP and Burns with certain rights to require us to
purchase their respective direct and indirect ownership interests in Butler
Holding at fair value based on third-party valuations (“Put
Rights”). Pursuant to the Oak Hill Put Rights Agreement, OHCP can
exercise its Put Rights from and after the earlier of (a) the first anniversary
of the closing, and (b) a change of control of us. Except in
connection with a change of control of us prior to the first anniversary of the
closing (in which case there will not be any maximum), our maximum annual
payment to OHCP under the Oak Hill Put Rights Agreement will not exceed $125.0
million for the first year during which OHCP can exercise its rights, $137.5
million for the second year and $150.0 million for the third year and for each
year thereafter. Pursuant to the Burns Put Rights Agreement, Burns
can exercise its Put Rights from and after the fifth anniversary of the closing
of the acquisition, at which time Burns will be permitted to sell to us up to
20%, based on fair value, of its ownership interest in Butler Holding, which
ownership interest will be measured as of the date of the closing of the
acquisition. If OHCP still owns ownership interests in Butler Holding
at the time the Burns Put Rights begin, then the put amounts payable by us to
OHCP and Burns in any year will not exceed $150.0 million in the
aggregate.
None.
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of management, including our principal
executive officer and principal financial officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report as such
term is defined in Rules 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation,
our management, including our principal executive officer and principal
financial officer, concluded that our disclosure controls and procedures were
effective as of December 26, 2009 to ensure that all material information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is accumulated and communicated to them as appropriate to allow
timely decisions regarding required disclosure and that all such information is
recorded, processed, summarized and reported as specified in the SEC’s rules and
forms.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended December 26, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Our internal control system is designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements. Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control-Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or the COSO
Framework. Based on our evaluation under the COSO Framework, our management
concluded that our internal control over financial reporting was effective at a
reasonable assurance level as of December 26, 2009.
The
effectiveness of our internal control over financial reporting as of
December 26, 2009 has been independently audited by BDO Seidman, LLP, an
independent registered public accounting firm, and their attestation is included
herein.
Limitations
of the Effectiveness of Internal Control
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the internal control system are
met. Because of the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.
Report
of Independent Registered Public Accounting Firm
Board of
Directors
Henry
Schein, Inc.
Melville,
New York
We have
audited Henry Schein, Inc.’s internal control over financial reporting as of
December 26, 2009, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Henry Schein, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, “Management’s Report on
Internal Control Over Financial Reporting.” Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Henry Schein, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 26, 2009, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Henry
Schein, Inc. as of December 26, 2009 and December 27, 2008, and the related
consolidated statements of income, changes in stockholders’ equity, and cash
flows for each of the three years in the period ended December 26, 2009 and our
report dated February 23, 2010 expressed an unqualified opinion
thereon.
/s/ BDO
Seidman, LLP
New York,
New York
February
23, 2010
None.
PART
III
Information
required by this item regarding our directors and executive officers and our
corporate governance is hereby incorporated by reference to the Section entitled
“Election of Directors”, with respect to directors, and the first paragraph of
the Section entitled “Corporate Governance - Board of Directors Meetings and
Committees - Audit Committee”, with respect to corporate governance, in each
case in our definitive 2010 Proxy Statement to be filed pursuant to Regulation
14A and to the Section entitled “Executive Officers of the Registrant” in Part I
of this report, with respect to executive officers.
There
have been no changes to the procedures by which stockholders may recommend
nominees to our Board of Directors since our last disclosure of such procedures,
which appeared in our definitive 2009 Proxy Statement filed pursuant to
Regulation 14A on April 16, 2009.
Information
required by this item concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is hereby incorporated by reference to the Section entitled
“Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive 2010
Proxy Statement.
We have
adopted a Code of Ethics that applies to our Chief Executive Officer, Chief
Financial Officer and Vice President of Corporate Finance. We make
available free of charge through our Internet Web site, www.henryschein.com,
under the “About Henry Schein—Corporate Governance” caption, our Code of
Ethics. We intend to disclose on our Web site any amendment to, or
waiver of, a provision of the Code of Ethics that applies to our Chief Executive
Officer, Chief Financial Officer or Vice President of Corporate
Finance.
The
information required by this item is hereby incorporated by reference to the
Section entitled “Compensation Discussion and Analysis”, “Compensation Committee
Report” (which information shall be deemed furnished in this Annual Report on
Form 10-K), “Executive and Director Compensation” and “Compensation Committee
Interlocks and Insider Participation” in our definitive 2010 Proxy Statement to
be filed pursuant to Regulation 14A.
We
maintain several stock incentive plans for the benefit of certain officers,
directors and employees. Certain plans are subject to stockholder
approval, while other plans have been authorized solely by the Board of
Directors. Descriptions of these plans appear in the notes to our
consolidated financial statements. The following table summarizes
information relating to these plans as of December 26, 2009:
|
Number
of Common Shares to be Issued Upon Exercise of Outstanding Options and
Rights
|
Weighted-Average
Exercise Price of Outstanding Options
|
Number
of Common Shares Available for Future Issuances
|
||||||||||
|
Plans
Approved by
|
||||||||||||
|
Stockholders
|
6,244,742 | $ | 40.82 | 6,811,715 | ||||||||
|
Plans
Not Approved by
|
||||||||||||
|
Stockholders
|
50,000 | 20.41 | - | |||||||||
|
Total
|
6,294,742 | $ | 40.66 | 6,811,715 | ||||||||
The other
information required by this item is hereby incorporated by reference to the
Section entitled “Security Ownership of Certain Beneficial Owners and
Management” in our definitive 2010 Proxy Statement to be filed pursuant to
Regulation 14A.
The
information required by this item is hereby incorporated by reference to the
Section entitled “Certain Relationships and Related Transactions” and “Corporate
Governance – Board of Directors Meetings and Committees – Independent Directors”
in our definitive 2010 Proxy Statement to be filed pursuant to Regulation
14A.
The
information required by this item is hereby incorporated by reference to the
Section entitled “Independent Registered Public Accounting Firm Fees and
Pre-Approval Policies and Procedures” in our definitive 2010 Proxy Statement to
be filed pursuant to Regulation 14A.
PART
IV
1. Financial
Statements:
Our
Consolidated Financial Statements filed as a part of this report are listed on
the index on page 51.
2. Financial Statement Schedules:
Schedule
II
No
other schedules are required.
3.
Exhibits:
The
exhibits required by Item 601 of Regulation S-K and filed herewith are listed in
the Exhibit List immediately preceding the exhibits.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Henry
Schein, Inc.
|
|
|
By:
/s/ STANLEY M. BERGMAN
|
|
|
Stanley
M. Bergman
|
|
|
Chairman
and Chief Executive Officer
|
|
|
February
23, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
||
|
/s/
STANLEY M. BERGMAN
|
Chairman,
Chief Executive Officer
|
February
23, 2010
|
||
|
Stanley
M. Bergman
|
and
Director (principal executive officer)
|
|||
|
/s/
STEVEN PALADINO
|
Executive
Vice President, Chief Financial
|
February
23, 2010
|
||
|
Steven
Paladino
|
Officer
and Director (principal financial and
|
|||
|
accounting
officer)
|
||||
|
/s/
JAMES P. BRESLAWSKI
|
Director
|
February
23, 2010
|
||
|
James
P. Breslawski
|
||||
|
/s/
GERALD A. BENJAMIN
|
Director
|
February
23, 2010
|
||
|
Gerald
A. Benjamin
|
||||
|
/s/
MARK E. MLOTEK
|
Director
|
February
23, 2010
|
||
|
Mark
E. Mlotek
|
||||
|
/s/
BARRY J. ALPERIN
|
Director
|
February
23, 2010
|
||
|
Barry
J. Alperin
|
||||
|
/s/
PAUL BRONS
|
Director
|
February
23, 2010
|
||
|
Paul
Brons
|
||||
|
/s/
DONALD J. KABAT
|
Director
|
February
23, 2010
|
||
|
Donald
J. Kabat
|
||||
|
/s/
PHILIP A. LASKAWY
|
Director
|
February
23, 2010
|
||
|
Philip
A. Laskawy
|
||||
|
/s/
KARYN MASHIMA
|
Director
|
February
23, 2010
|
||
|
Karyn
Mashima
|
||||
|
/s/
NORMAN S. MATTHEWS
|
Director
|
February
23, 2010
|
||
|
Norman
S. Matthews
|
||||
|
/s/
BRADLEY T. SHEARES, PH. D.
|
Director
|
February
23, 2010
|
||
|
Bradley
T. Sheares, Ph. D.
|
||||
|
/s/
LOUIS W. SULLIVAN, MD
|
Director
|
February
23, 2010
|
||
|
Louis
W. Sullivan, MD
|
Board of
Directors and Stockholders
Henry
Schein, Inc.
Melville,
New York
The
audits referred to in our report dated February 23, 2010 relating to the
consolidated financial statements of Henry Schein, Inc. which is contained in
Item 15 of this Form 10-K included the audits of the financial statement
schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based upon our audits.
In our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ BDO
SEIDMAN, LLP
New York,
New York
February
23, 2010
|
Valuation
and Qualifying Accounts
|
||||||||||||||||||||
|
Additions
|
||||||||||||||||||||
|
Description
|
Balance
at beginning of period
|
Charged
to statement of income
|
Charged
to other accounts
|
Deductions
|
Balance
at end of period
|
|||||||||||||||
|
Year
ended December 26, 2009:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts,
|
||||||||||||||||||||
|
sales
returns and other
|
$ | 42,855 | $ | 4,747 | $ | 10,269 | $ | (6,147 | ) | $ | 51,724 | |||||||||
|
Year
ended December 27, 2008:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts,
|
||||||||||||||||||||
|
sales
returns and other
|
41,315 | 6,255 | 1,959 | (6,674 | ) | 42,855 | ||||||||||||||
|
Year
ended December 29, 2007:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts,
|
||||||||||||||||||||
|
sales
returns and other
|
40,536 | 1,384 | 2,600 | (3,205 | ) | 41,315 | ||||||||||||||
|
3.1
|
Amended
and Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year
ended December 30, 2006.)
|
|
3.2
|
Amendment
dated November 12, 1997 to Amended and Restated Certificate of
Incorporation. (Incorporated by reference to Exhibit 3.2 to our Annual
Report on Form 10-K for the fiscal year ended December 30,
2006.)
|
|
3.3
|
Amendment
dated June 16, 1998 to Amended and Restated Certificate of
Incorporation. (Incorporated by reference to Exhibit 3.3 to our
Registration Statement on Form S-3, Reg. No.
333-59793.)
|
|
3.4
|
Amendment
dated May 25, 2005 to Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form
10-Q for the fiscal quarter ended June 25,
2005.)
|
|
3.5
|
Amended
and Restated By-Laws. (Incorporated by reference to Exhibit 3.2 to our
Registration Statement on Form S-1, Reg. No.
33-96528.)
|
|
3.6
|
Amendments
to Amended and Restated By-Laws adopted July 15, 1997. (Incorporated by
reference to Exhibit 3.3 to our Registration Statement on Form S-4,
Reg. No. 33-36081.)
|
|
4.1
|
Indenture
by and between us and The Bank of New York, as trustee, dated as of August
9, 2004, including form of Note. (Incorporated by reference to
Exhibit 4.1 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended September 25,
2004.)
|
|
4.2
|
Registration
Rights Agreement dated as of August 9, 2004 by and between us, Lehman
Brothers, Inc. and J.P. Morgan Securities Inc. as Initial Purchasers.
(Incorporated by reference to Exhibit 4.3 to our Quarterly Report of
Form 10-Q for the fiscal quarter ended September 25,
2004.)
|
|
10.1
|
Henry
Schein, Inc. 1994 Stock Incentive Plan, as amended and restated effective
as of March 27, 2007. (Incorporated by reference to our definitive 2007
Proxy Statement on Schedule 14A filed on April 10,
2007.)**
|
|
10.2
|
Amendment
No. One to the Henry Schein, Inc. 1994 Stock Incentive Plan, effective as
of January 1, 2005. (Incorporated by reference to Exhibit 10.2 to our
Annual Report on Form 10-K for the fiscal year ended December 27,
2008.)**
|
|
10.3
|
Amendment
No. Two to the Henry Schein, Inc. 1994 Stock Incentive Plan, effective as
of May 28, 2009. (Incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended June 27,
2009.)**
|
|
10.4
|
Henry
Schein, Inc. Supplemental Executive Retirement Plan, amended and restated
effective as of January 1, 2008. (Incorporated by reference to Exhibit
10.3 to our Annual Report on Form 10-K for the fiscal year ended
December 27, 2008.)**
|
|
10.5
|
Amendment
No. One to the Henry Schein, Inc. Supplemental Executive Retirement Plan,
effective as of January 1, 2008. (Incorporated by reference to Exhibit
10.3 to our Quarterly Report on Form 10-Q for the fiscal quarter
ended June 27, 2009.)**
|
|
|
Exhibits
|
|
10.6
|
Henry
Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan, as amended
by Amendment No. One, effective as of May 25, 2004. (Incorporated by
reference to our definitive 2004 Proxy Statement on Schedule 14A
filed on April 27, 2004.)**
|
|
10.7
|
Amendment
No. Two to the Henry Schein, Inc. 1996 Non-Employee Director Stock
Incentive Plan, effective as of January 1, 2005. (Incorporated by
reference to Exhibit 10.5 to our Annual Report on Form 10-K for the
fiscal year ended December 27,
2008.)**
|
|
10.8
|
2001
Henry Schein, Inc. Section 162(m) Cash Bonus Plan effective as of
June 6, 2001. (Incorporated by reference to our definitive 2001 Proxy
Statement on Schedule 14A, filed on April 30,
2001.)**
|
|
10.9
|
Amendment
No. One to 2001 Henry Schein, Inc. Section 162(m) Cash Bonus
Plan, effective as of May 24, 2005. (Incorporated by reference to our
definitive 2005 Proxy Statement on Schedule 14A, filed on April 22,
2005.)**
|
|
10.10
|
Amendment
No. Two to 2001 Henry Schein, Inc. Section 162(m) Cash Bonus
Plan, effective as of January 1, 2007. (Incorporated by reference to
Exhibit 10.8 to our Annual Report on Form 10-K for the fiscal year
ended December 27, 2008.)**
|
|
10.11
|
Amendment
No. Three to Henry Schein, Inc. Section 162(m) Cash Bonus Plan
effective as of December 31, 2009. (Incorporated by reference to Exhibit
10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter
ended June 27, 2009.)**
|
|
10.12
|
Henry
Schein, Inc. 2001 Non-Employee Director Incentive Plan. (Incorporated by
reference to Exhibit 10.14 to our Annual Report on Form 10-K for
the fiscal year ended December 28,
2002.)**
|
|
10.13
|
Henry
Schein, Inc. 2004 Employee Stock Purchase Plan, effective as of
May 25, 2004. (Incorporated by reference to our definitive 2004 Proxy
Statement on Schedule 14A, filed on April 27,
2004.)**
|
|
10.14
|
Henry
Schein, Inc. Non-Employee Director Deferred Compensation Plan, amended and
restated effective as of January 1, 2005. (Incorporated by reference to
Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year
ended December 27, 2008.)**
|
|
10.15
|
Henry
Schein Management Team Performance Incentive Plan and Plan Summary.
(Incorporated by reference to Exhibit 10.8 to our Annual Report on
Form 10-K for the fiscal year ended December 29,
2007.)**
|
|
10.16
|
Amended
and Restated Employment Agreement dated as of December 31, 2008 between us
and Stanley M. Bergman. (Incorporated by reference to Exhibit 10.13 to our
Annual Report on Form 10-K for the fiscal year ended December 27,
2008.)**
|
|
10.17
|
Amended
and Restated Letter Agreement effective as of December 11, 2008 between us
and Stanley Komaroff. (Incorporated by reference to Exhibit 10.14 to our
Annual Report on Form 10-K for the fiscal year ended December 27,
2008.)**
|
|
|
Exhibits
|
|
10.18
|
Amended
and Restated Change in Control Agreements dated December 12, 2008 between
us and Gerald Benjamin, James Breslawski, Leonard David, Stanley Komaroff,
Mark Mlotek, Steven Paladino, Michael Racioppi and Michael Zack,
respectively. (Incorporated by reference to Exhibit 10.15 to our Annual
Report on Form 10-K for the fiscal year ended December 27,
2008.)**
|
|
10.19
|
Form
of Note Purchase Agreements between us and the Purchasers listed on
Schedule A thereto relating to an aggregate of $100,000,000 in
principal amount of our 6.66% senior notes due July 15, 2010.
(Incorporated by reference to Exhibit 10.111 to our Quarterly Report
on Form 10-Q for the quarter ended September 26,
1998.)
|
|
10.20
|
Credit
Agreement among us, the several lenders parties thereto, JPMorgan Chase
Bank, N.A., as administrative agent and HSBC Bank USA, N.A., The Bank of
New York Mellon, and UniCredit Markets and Investment Banking, acting
through Bayerische Hypo- und Vereinsbank AG, New York Branch, as
co-syndication agents, dated as of September 5, 2008. (Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended September 27,
2008.)
|
|
10.21
|
Amendment
dated November 29, 2009 to the Credit Agreement among us, the several
lenders parties thereto, JPMorgan Chase Bank, N.A., as administrative
agent and HSBC Bank USA, N.A., The Bank of New York Mellon, and UniCredit
Markets and Investment Banking, acting through Bayerische Hypo- und
Vereinsbank AG, New York Branch, as co-syndication agents, dated as of
September 5, 2008.+
|
|
10.22
|
Distribution
Agreement entered into as of December 2, 2004, by and between us and
ID Biomedical Corporation. (Incorporated by reference to
Exhibit 10.31 to our Annual Report on form 10-K for the year ended
December 25, 2004.)*
|
|
10.23
|
Amendment
dated October 2, 2006 to Distribution Agreement, dated as of
December 2, 2004, by and between us and ID Biomedical Corporation.
(Incorporated by reference to Exhibit 10.20 to our Annual Report on
Form 10-K for the fiscal year ended December 27,
2008.)*
|
|
10.24
|
Second
Amendment dated October 5, 2006 to Distribution Agreement, dated as of
December 2, 2004, by and between us and ID Biomedical Corporation.
(Incorporated by reference to Exhibit 10.21 to our Annual Report on
Form 10-K for the fiscal year ended December 27,
2008.)
|
|
10.25
|
Amendment
dated December 20, 2007 to Distribution Agreement, dated as of
December 2, 2004, by and between us and ID Biomedical Corporation.
(Incorporated by reference to Exhibit 10.22 to our Annual Report on
Form 10-K for the fiscal year ended December 27,
2008.)
|
|
10.26
|
Amendment
dated October 15, 2008 to Distribution Agreement, dated as of
December 2, 2004, by and between us and ID Biomedical
Corporation. (Incorporated by reference to Exhibit 10.23 to our
Annual Report on Form 10-K for the fiscal year ended December 27,
2008.)*
|
|
10.27
|
Amendment
dated February 9, 2010 to Distribution Agreement, dated as of December 2,
2004, by and between us and ID Biomedical
Corporation.*+
|
|
|
Exhibits
|
|
10.28
|
Omnibus
Agreement, dated November 29, 2009, by and among Henry Schein, Inc.,
National Logistics Services, LLC, Winslow Acquisition Company, Butler
Animal Health Holding Company LLC, Butler Animal Health Supply, LLC, Oak
Hill Capital Partners II, L.P., Oak Hill Capital Management Partners II,
L.P., W.A. Butler Company, Burns Veterinary Supply, Inc., and certain
other persons party thereto. (Incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K filed on November 30,
2009.)
|
|
10.29
|
Amendment
No. 1 to Omnibus Agreement, dated December 31, 209, by and
between Henry Schein, Inc. and Butler Animal Health Holding Company LLC.
(Incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed on January 4, 2010.)
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10.30
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Put
Rights Agreement, dated December 31, 2009, by and among Henry Schein,
Inc., Oak Hill Capital Partners II, L.P., Oak Hill Capital Management
Partners II, L.P., and Butler Animal Health Holding Company LLC.
(Incorporated by reference to Exhibit 10.2 to our Current Report on Form
8-K filed on January 4, 2010.)
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10.31
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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.)
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21.1
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List
of our Subsidiaries.+
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23.1
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Consent
of BDO Seidman, LLP.+
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31.1
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Certification
of our Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.+
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31.2
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Certification
of our Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.+
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32.1
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Certification
of our Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.+
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_________
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+
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Filed
herewith
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*
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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.
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**
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Indicates
management contract or compensatory plan or
agreement
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114