Edgar Filing: HENRY SCHEIN INC

the10q_3q12.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2012

__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 0-27078

HENRY SCHEIN, INC.

(Exact name of registrant as specified in its charter)

Delaware	11-3136595
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

135 Duryea Road

Melville, New York

(Address of principal executive offices)

11747

(Zip Code)

(631) 843-5500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X

No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X

No __

Indicate by check mark 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 __	(Do not check if a smaller reporting company)	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

As of October 29, 2012, there were 87,994,041 shares of the registrant’s common stock outstanding.



HENRY SCHEIN, INC.
INDEX

				Page

PART I. FINANCIAL INFORMATION


ITEM 1.	Consolidated Financial Statements:

		Balance Sheets as of September 29, 2012 and December 31, 2011		3

		Statements of Income for the three and nine months ended
			September 29, 2012 and September 24, 2011	4

		Statements of Comprehensive Income for the three and nine months ended
			September 29, 2012 and September 24, 2011	5

		Statement of Changes in Stockholders' Equity for the nine months ended
			September 29, 2012	6

		Statements of Cash Flows for the nine months ended
			September 29, 2012 and September 24, 2011	7

		Notes to Consolidated Financial Statements		8

ITEM 2.	Management's Discussion and Analysis of
		Financial Condition and Results of Operations		24

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk			42

ITEM 4.	Controls and Procedures			42

PART II. OTHER INFORMATION



ITEM 1.	Legal Proceedings			43

ITEM 1A.	Risk Factors			43

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds			44

ITEM 6.	Exhibits			45

	Signature			45

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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

	September 29,		December 31,
	2012		2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	89,336	$	147,284
Accounts receivable, net of reserves of $65,679 and $65,853		1,035,529		888,248
Inventories, net		1,070,854		947,849
Deferred income taxes		59,429		54,970
Prepaid expenses and other		257,031		234,157
Total current assets		2,512,179		2,272,508
Property and equipment, net		258,683		262,088
Goodwill		1,591,482		1,497,108
Other intangibles, net		471,143		409,612
Investments and other		278,045		298,828
Total assets	$	5,111,532	$	4,740,144

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	707,641	$	621,468
Bank credit lines		155,219		55,014
Current maturities of long-term debt		17,739		22,819
Accrued expenses:
Payroll and related		175,089		191,173
Taxes		130,576		121,234
Other		262,694		259,932
Total current liabilities		1,448,958		1,271,640
Long-term debt		436,426		363,524
Deferred income taxes		180,977		188,739
Other liabilities		96,402		80,568
Total liabilities		2,162,763		1,904,471

Redeemable noncontrolling interests		375,661		402,050
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,
88,264,853 outstanding on September 29, 2012 and
89,928,082 outstanding on December 31, 2011		883		899
Additional paid-in capital		404,867		401,262
Retained earnings		2,130,476		2,007,477
Accumulated other comprehensive income		35,475		22,584
Total Henry Schein, Inc. stockholders' equity		2,571,701		2,432,222
Noncontrolling interests		1,407		1,401
Total stockholders' equity		2,573,108		2,433,623
Total liabilities, redeemable noncontrolling interests and stockholders' equity	$	5,111,532	$	4,740,144

See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

	Three Months Ended						Nine Months Ended
	September 29,			September 24,			September 29,			September 24,
	2012			2011			2012			2011

Net sales	$	2,231,058		$	2,111,693		$	6,531,529		$	6,190,094
Cost of sales		1,622,014			1,524,273			4,687,511			4,424,628
Gross profit		609,044			587,420			1,844,018			1,765,466
Operating expenses:
Selling, general and administrative		459,422			444,159			1,391,207			1,346,690
Restructuring costs		-			-			15,192			-
Operating income		149,622			143,261			437,619			418,776
Other income (expense):
Interest income		3,283			3,830			10,222			11,955
Interest expense		(7,308	)		(6,813	)		(22,659	)		(22,800	)
Other, net		988			232			2,343			1,313
Income before taxes and equity in earnings
of affiliates		146,585			140,510			427,525			409,244
Income taxes		(44,709	)		(44,261	)		(133,750	)		(130,754	)
Equity in earnings of affiliates		3,434			4,559			7,898			10,345
Net income		105,310			100,808			301,673			288,835
Less: Net income attributable to noncontrolling interests		(8,539	)		(8,847	)		(26,064	)		(25,904	)
Net income attributable to Henry Schein, Inc.	$	96,771		$	91,961		$	275,609		$	262,931

Earnings per share attributable to Henry Schein, Inc.:

Basic	$	1.11		$	1.02		$	3.14		$	2.90
Diluted	$	1.08		$	0.99		$	3.06		$	2.82

Weighted-average common shares outstanding:
Basic		87,465			90,251			87,802			90,582
Diluted		89,647			92,869			90,075			93,195

See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

	Three Months Ended						Nine Months Ended
	September 29,			September 24,			September 29,			September 24,
	2012			2011			2012			2011

Net income	$	105,310		$	100,808		$	301,673		$	288,835

Other comprehensive income, net of tax:
Foreign currency translation gain (loss)		22,606			(55,603	)		12,263			17,344

Unrealized gain (loss) from foreign currency hedging
activities		520			(171	)		413			1,639

Unrealized investment gain		120			74			208			271

Pension adjustment gain (loss)		(8	)		459			38			104

Other comprehensive income (loss), net of tax		23,238			(55,241	)		12,922			19,358
Comprehensive income		128,548			45,567			314,595			308,193
Comprehensive income attributable to noncontrolling
interests:
Net income		(8,539	)		(8,847	)		(26,064	)		(25,904	)
Foreign currency translation (gain) loss		(643	)		1,943			(31	)		(249	)
Comprehensive income attributable to noncontrolling
interests		(9,182	)		(6,904	)		(26,095	)		(26,153	)

Comprehensive income attributable to Henry Schein, Inc.	$	119,366		$	38,663		$	288,500		$	282,040

See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
													Accumulated
	Common Stock						Additional						Other					Total
	$.01 Par Value						Paid-in			Retained			Comprehensive		Noncontrolling			Stockholders'
	Shares			Amount			Capital			Earnings			Income		Interests			Equity
Balance, December 31, 2011		89,928,082		$	899		$	401,262		$	2,007,477		$	22,584	$	1,401		$	2,433,623
Net income (excluding $25,741 attributable to Redeemable
noncontrolling interests)		-			-			-			275,609			-		323			275,932
Foreign currency translation gain (excluding $31
attributable to Redeemable noncontrolling interests)		-			-			-			-			12,232		-			12,232
Unrealized gain from foreign currency hedging activities,
net of tax of $105		-			-			-			-			413		-			413
Unrealized investment gain, net of tax of $172		-			-			-			-			208		-			208
Pension adjustment gain, net of tax of $203		-			-			-			-			38		-			38
Dividends paid		-			-			-			-			-		(317	)		(317	)
Initial noncontrolling interests and adjustments related to
business acquisitions		-			-			(439	)		-			-		-			(439	)
Change in fair value of redeemable securities		-			-			5,908			-			-		-			5,908
Repurchase and retirement of common stock		(2,878,027	)		(28	)		(63,051	)		(152,610	)		-		-			(215,689	)
Stock issued upon exercise of stock options,
including tax benefit of $9,009		1,188,636			12			52,770			-			-		-			52,782
Stock-based compensation expense		338,075			3			31,864			-			-		-			31,867
Shares withheld for payroll taxes		(311,913	)		(3	)		(23,024	)		-			-		-			(23,027	)
Liability for cash settlement stock-based compensation awards		-			-			(423	)		-			-		-			(423	)

Balance, September 29, 2012		88,264,853		$	883		$	404,867		$	2,130,476		$	35,475	$	1,407		$	2,573,108

See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Nine Months Ended
	September 29,			September 24,
	2012			2011

Cash flows from operating activities:
Net income	$	301,673		$	288,835
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		91,989			86,040
Stock-based compensation expense		31,867			26,045
Provision for losses on trade and other accounts receivable		3,338			3,636
Benefit from deferred income taxes		(8,478	)		(12,828	)
Stock issued to 401(k) plan		-			5,798
Equity in earnings of affiliates		(7,898	)		(10,345	)
Distributions from equity affiliates		9,297			10,158
Other		10,488			3,028
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(105,961	)		(50,785	)
Inventories		(85,027	)		(14,657	)
Other current assets		(26,788	)		(18,537	)
Accounts payable and accrued expenses		(6,062	)		(39,589	)
Net cash provided by operating activities		208,438			276,799

Cash flows from investing activities:
Purchases of fixed assets		(32,934	)		(32,547	)
Payments for equity investments and business
acquisitions, net of cash acquired		(206,261	)		(143,636	)
Proceeds from sales of available-for-sale securities		6,025			2,450
Other		(4,130	)		1,020
Net cash used in investing activities		(237,300	)		(172,713	)

Cash flows from financing activities:
Proceeds from (repayments of) bank borrowings		98,061			(1,601	)
Proceeds from issuance of long-term debt		105,132			3,101
Debt issuance costs		(1,404	)		(2,847	)
Principal payments for long-term debt		(38,217	)		(24,656	)
Proceeds from issuance of stock upon exercise of stock options		43,773			30,250
Payments for repurchases of common stock		(215,689	)		(132,475	)
Excess tax benefits related to stock-based compensation		10,643			7,425
Distributions to noncontrolling shareholders		(11,581	)		(7,878	)
Acquisitions of noncontrolling interests in subsidiaries		(20,013	)		(15,199	)
Other		-			(90	)
Net cash used in financing activities		(29,295	)		(143,970	)

Net change in cash and cash equivalents		(58,157	)		(39,884	)
Effect of exchange rate changes on cash and cash equivalents		209			(3,592	)
Cash and cash equivalents, beginning of period		147,284			150,348
Cash and cash equivalents, end of period	$	89,336		$	106,872

See accompanying notes.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1 – Basis of Presentation

Our consolidated financial statements include our accounts, as well as those of our wholly-owned and majority-owned subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation.

Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements.

The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

The preparation of financial statements in conformity with U.S. GAAP 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. The results of operations for the nine months ended September 29, 2012 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 29, 2012.

Note 2 – Segment Data

We conduct our business through two reportable segments: health care distribution and technology and value-added services. These segments offer different products and services to the same customer base. The health care distribution reportable segment aggregates our global dental, medical and animal health operating segments. This segment consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

Our global dental group serves office-based dental practitioners, schools and other institutions. Our global medical group serves office-based medical practitioners, surgical centers, other alternate-care settings and other institutions. Our global animal health group serves animal health practices and clinics. Our global dental, medical and animal health groups serve practitioners in 23 countries outside of North America.

Our global technology and value-added services group provides software, technology and other value-added services to health care practitioners. Our technology group offerings include practice management software systems for dental and medical practitioners and animal health clinics. Our value-added practice solutions include financial services on a non-recourse basis, e-services and continuing education services for practitioners.

Beginning with the first quarter of 2012, we are reporting net sales and prior-year sales comparisons for each of our global dental, medical, animal health and global technology and value-added services business groups.

This sales reporting is consistent with our new global business groups. These groups have been formed to provide distinct organizational focus for reaching and serving each practitioner segment with the benefits of a global perspective, as well as global product and service offerings and best practices.

We will continue to report financial results for our health care distribution and technology and value-added services reportable segments. The health care distribution segment now comprises three global operating segments (dental, medical and animal health) and the technology and value-added services segment remains unchanged.

In connection with this change in business groups, goodwill was reallocated to the new reporting units. We reviewed the newly allocated goodwill and determined that there was no impairment.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 2 – Segment Data – (Continued)

The following tables present information about our reportable and operating segments:

		Three Months Ended				Nine Months Ended
		September 29,		September 24,		September 29,		September 24,
		2012		2011		2012		2011
Net Sales:
Health care distribution (1):
Dental		$	1,119,430	$	1,123,021	$	3,461,015	$	3,419,609
Medical			442,538		424,596		1,158,486		1,106,537
Animal health			598,124		501,884		1,709,972		1,484,053
Total health care distribution			2,160,092		2,049,501		6,329,473		6,010,199
Technology and value-added services (2)			70,966		62,192		202,056		179,895
Total		$	2,231,058	$	2,111,693	$	6,531,529	$	6,190,094


(1)	Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
	generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

(2)	Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
	and financial services, including e-services and continuing education services for practitioners.

	Three Months Ended				Nine Months Ended
	September 29,		September 24,		September 29,		September 24,
	2012		2011		2012		2011
Operating Income:
Health care distribution	$	129,932	$	125,618	$	383,200	$	369,562
Technology and value-added services		19,690		17,643		54,419		49,214
Total	$	149,622	$	143,261	$	437,619	$	418,776

Note 3 – Debt

Credit Facilities

On September 12, 2012, we entered into a new $500 million revolving credit agreement (the “Credit Agreement”) with a $200 million expansion feature, which expires in September 2017. This credit facility replaced our then existing $400 million revolving credit facility with a $100 million expansion feature, which would have expired in September 2013. The borrowings outstanding under this revolving credit facility were $125.0 million as of September 29, 2012. The interest rate, which was 0.78% during the nine months ended September 29, 2012, is based on USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. The Credit Agreement provides, among other things, that we are required to maintain certain interest coverage and maximum leverage ratios, and contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As of September 29, 2012, there were $10.1 million of letters of credit provided to third parties under the credit facility.

As of September 29, 2012, we had various other short-term bank credit lines available, of which approximately $30.2 million was outstanding. During the nine months ended September 29, 2012, borrowings under all of our credit lines had a weighted average interest rate of 1.02%.

Certain of our subsidiaries, excluding Butler Animal Health Supply, LLC, or BAHS, maintain credit lines which are collateralized by assets of those subsidiaries with an aggregate net carrying value of $89.3 million.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 3 – Debt – (Continued)

Private Placement Facilities

On August 10, 2010, we entered into $400 million private placement facilities with two insurance companies. On April 30, 2012, we increased our available credit facilities by $375 million by entering into a new agreement with one insurance company and amending our existing agreements with two insurance companies. These facilities are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time during a three year issuance period, through April 26, 2015. The facilities allow us to issue senior promissory notes to the lenders at a fixed rate based on an agreed upon spread over applicable treasury notes at the time of issuance. The term of each possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12 years). The proceeds of any issuances under the facilities will be used for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions. The agreement provides, among other things, that we maintain certain maximum leverage ratios, and contains restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership.

The components of our private placement facility borrowings as of September 29, 2012 are presented in the following table:

	Amount of
	Borrowing		Borrowing
Date of Borrowing	Outstanding		Rate		Due Date
September 2, 2010	$	100,000	3.79	%	September 2, 2020
January 20, 2012		50,000	3.45		January 20, 2024
January 20, 2012 (1)		50,000	3.09		January 20, 2022
	$	200,000


(1) Annual repayments of approximately $7.1 million for this borrowing will commence on January 20, 2016.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 3 – Debt – (Continued)

Butler Animal Health Supply

Effective December 31, 2009, BAHS, a majority-owned subsidiary whose financial information is consolidated with ours, had incurred approximately $320.0 million of debt (of which $37.5 million was provided by Henry Schein, Inc.) in connection with our acquisition of a majority interest in BAHS.

On May 27, 2011, BAHS refinanced the terms and amount of its debt in an aggregate principal amount of $366.0 million (of which $55.0 million was provided by Henry Schein, Inc.). The refinanced debt consists of the following three components:

	Term Loan A		Term Loan B			Revolver
Original amount of debt (includes $55.0 million of debt
provided by Henry Schein, Inc.)	$	100,000	$	216,000		$	50,000
Number of remaining quarterly installments		8		12
Quarterly payments from:
December 31, 2012 through June 30, 2013		4,930
September 30, 2013 through June 30, 2014		8,766
July 1, 2014 through September 30, 2014		2,739
December 31, 2012 through September 30, 2015				4,239
Final installment due on December 31, 2014		65,196
Final installment due on December 31, 2015				135,287
Balance outstanding as of September 29, 2012		81,631		138,750			-
Interest rate on debt	LIBOR plus a margin of 2.50%		LIBOR plus a margin of 3.25%			LIBOR plus a margin of 2.50%
Interest rate on debt - LIBOR floor				1.25	%

During 2011 and 2012, BAHS made prepayments on Term Loans A and B, which resulted in a reduction to the future quarterly and final installment amounts due. Future prepayments by BAHS, if any, will result in reductions to remaining quarterly and final installment amounts due.

The outstanding balance of $220.4 million (net of unamortized debt discount) is reflected in our consolidated balance sheet as of September 29, 2012. Borrowings incurred as part of the acquisition of BAHS are collateralized by assets of BAHS with an aggregate net carrying value of $743.8 million.

The debt agreement provides, among other things, that BAHS maintain certain interest coverage and maximum leverage ratios, and contains restrictions relating to subsidiary indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets and certain changes in ownership. In addition, the debt agreement contains provisions which, under certain circumstances, require BAHS to make prepayments based on excess cash flows of BAHS as defined in the debt agreement.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 4 – Redeemable Noncontrolling Interests

Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Accounting Standards Codification (“ASC”) Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the Redeemable noncontrolling interests for the nine months ended September 29, 2012 and the year ended December 31, 2011 are presented in the following table:

	September 29,			December 31,
	2012			2011
Balance, beginning of period	$	402,050		$	304,140
Decrease in redeemable noncontrolling interests due to
redemptions		(23,169	)		(160,254	)
Increase in redeemable noncontrolling interests due to business
acquisitions		30,515			13,618
Net income attributable to redeemable noncontrolling interests		25,741			36,514
Dividends declared		(10,963	)		(15,212	)
Effect of foreign currency translation gain (loss) attributable to
redeemable noncontrolling interests		31			(889	)
Change in fair value of redeemable securities		(5,908	)		224,133
Other adjustment to redeemable noncontrolling interests		(42,636	)		-
Balance, end of period	$	375,661		$	402,050

Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not impact the calculation of earnings per share.

Some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. For acquisitions completed prior to 2009, we accrue liabilities that may arise from these transactions when we believe that the outcome of the contingency is determinable beyond a reasonable doubt. Starting in our 2009 fiscal year, as required by ASC Topic 805, “Business Combinations,” we have accrued liabilities for the estimated fair value of additional purchase price adjustments at the time of the acquisition. Any adjustments to these accrual amounts will be recorded in our consolidated statement of income. For the nine months ended September 29, 2012 and September 24, 2011, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities.

Note 5 – Comprehensive Income

Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity. Our comprehensive income is primarily comprised of net income, foreign currency translation gains (losses), unrealized gains (losses) on hedging and investment activity and pension adjustment gains (losses).

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 5 – Comprehensive Income – (Continued)

The following table summarizes our Accumulated other comprehensive income, net of applicable taxes as of:

	September 29,			December 31,
	2012			2011
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment	$	(1,722	)	$	(1,753	)

Attributable to Henry Schein, Inc.:
Foreign currency translation gain	$	51,949		$	39,717
Unrealized loss from foreign currency hedging activities		(1,265	)		(1,678	)
Unrealized investment loss		(621	)		(829	)
Pension adjustment loss		(14,588	)		(14,626	)
Accumulated other comprehensive income	$	35,475		$	22,584

Total Accumulated other comprehensive income	$	33,753		$	20,831

The following table summarizes the components of comprehensive income, net of applicable taxes as follows:

	Three Months Ended						Nine Months Ended
	September 29,			September 24,			September 29,			September 24,
	2012			2011			2012			2011
Net income	$	105,310		$	100,808		$	301,673		$	288,835

Foreign currency translation gain (loss)		22,606			(55,603	)		12,263			17,344
Tax effect		-			-			-			-
Foreign currency translation gain (loss)		22,606			(55,603	)		12,263			17,344

Unrealized gain from foreign currency hedging
activities		608			16			518			2,124
Tax effect		(88	)		(187	)		(105	)		(485	)
Unrealized gain (loss) from foreign currency hedging
activities		520			(171	)		413			1,639

Unrealized investment gain		197			220			380			408
Tax effect		(77	)		(146	)		(172	)		(137	)
Unrealized investment gain		120			74			208			271

Pension adjustment gain (loss)		(91	)		593			241			209
Tax effect		83			(134	)		(203	)		(105	)
Pension adjustment gain (loss)		(8	)		459			38			104

Comprehensive income	$	128,548		$	45,567		$	314,595		$	308,193

The following table summarizes our total comprehensive income, net of applicable taxes as follows:

	Three Months Ended				Nine Months Ended
	September 29,		September 24,		September 29,		September 24,
	2012		2011		2012		2011
Comprehensive income attributable to
Henry Schein, Inc.	$	119,366	$	38,663	$	288,500	$	282,040
Comprehensive income attributable to
noncontrolling interests		109		108		323		346
Comprehensive income attributable to
Redeemable noncontrolling interests		9,073		6,796		25,772		25,807
Comprehensive income	$	128,548	$	45,567	$	314,595	$	308,193

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 6 – Fair Value Measurements

ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”) establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC Topic 820 applies under other previously issued accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements.

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:

•	Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

•

Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•	Level 3— Inputs that are unobservable for the asset or liability.

The following section describes the valuation methodologies that we used to measure different financial instruments at fair value.

Cash equivalents and trade receivables

Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value.

Long-term investments and notes receivable

There are no quoted market prices available for investments in unconsolidated affiliates and long-term notes receivable; however, we believe the carrying amounts are a reasonable estimate of fair value.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 6 – Fair Value Measurements – (Continued)

Auction-rate securities

As of September 29, 2012, we have approximately $6.5 million ($5.7 million net of temporary impairments) invested in auction-rate securities (“ARS”). These investments are backed by student loans (backed by the federal government) and investments in closed-end municipal bond funds, which are included as part of Investments and other within our consolidated balance sheets. ARS are publicly issued securities that represent long-term investments, typically 10-30 years, in which interest rates had reset periodically (typically every 7, 28 or 35 days) through a “dutch auction” process. Our ARS portfolio is comprised of investments that are rated investment grade by major independent rating agencies. Since the middle of February 2008, ARS auctions have failed to settle due to an excess number of sellers compared to buyers. The failure of these auctions has resulted in our inability to liquidate our ARS in the near term. We are currently not aware of any defaults or financial conditions that would negatively affect the issuers’ ability to continue to pay interest and principal on our ARS. We continue to earn and receive interest at contractually agreed upon rates.

During the nine months ended September 29, 2012, we received approximately $6.0 million of redemptions of our ARS. As of September 29, 2012, we have continued to classify our ARS as Level 3 within the fair value hierarchy due to the lack of observable inputs and the absence of significant refinancing activity.

As of September 29, 2012, we have estimated the value of our closed-end municipal bond fund ARS portfolio and our student loan backed ARS portfolio based upon a discounted cash flow model, including assumptions for estimated interest rates, timing and amount of cash flows and expected holding period for the ARS portfolio, in accordance with applicable authoritative guidance. The balance of our recorded cumulative temporary impairment related to our ARS as of September 29, 2012 and December 31, 2011 was $0.8 million and $1.2 million, respectively. The temporary impairment has been recorded as part of Accumulated other comprehensive income within the equity section of our consolidated balance sheet.

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.

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 September 29, 2012 and December 31, 2011 was estimated at $609.4 million and $441.4 million, respectively.

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 foreign currency forward agreements related to intercompany loans and certain forecasted inventory purchase commitments with suppliers.

The fair values for the majority of our foreign currency and interest rate derivative contracts are obtained by comparing our contract rate to a published forward price of the underlying market rates, which is based on market rates for comparable transactions and are classified within Level 2 of the fair value hierarchy.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

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. Factors considered in determining the fair value amounts include multiples of financial values, such as earnings. The noncontrolling interests subject to put options are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments will not impact the calculation of earnings per share. The values for Redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy. The details of the changes in Redeemable noncontrolling interests are presented in Note 4.

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 September 29, 2012 and December 31, 2011:

	September 29, 2012
		Level 1		Level 2		Level 3		Total

Assets:
Available-for-sale securities		$	-	$	-	$	5,671	$	5,671
Derivative contracts			-		522		-		522
Total assets		$	-	$	522	$	5,671	$	6,193

Liabilities:
Derivative contracts		$	-	$	2,620	$	-	$	2,620
Total liabilities		$	-	$	2,620	$	-	$	2,620

Redeemable noncontrolling interests		$	-	$	-	$	375,661	$	375,661


	December 31, 2011
		Level 1		Level 2		Level 3		Total

Assets:
Available-for-sale securities		$	-	$	-	$	11,329	$	11,329
Derivative contracts			-		1,273		-		1,273
Total assets		$	-	$	1,273	$	11,329	$	12,602

Liabilities:
Derivative contracts		$	-	$	2,062	$	-	$	2,062
Total liabilities		$	-	$	2,062	$	-	$	2,062

Redeemable noncontrolling interests		$	-	$	-	$	402,050	$	402,050

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 6 – Fair Value Measurements – (Continued)

The following table presents a reconciliation of our assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3):

		Level 3 (1)
Balance, December 31, 2011			$	413,379
Change in redeemable noncontrolling interests				(26,389	)
Redemptions at par of auction-rate securities				(6,025	)
Gain reported in accumulated other comprehensive income for auction-rate securities				367
Balance, September 29, 2012			$	381,332

		Level 3 (1)
Balance, December 25, 2010			$	317,507
Change in redeemable noncontrolling interests				112,920
Redemptions at par of auction-rate securities				(2,450	)
Gain reported in accumulated other comprehensive income for auction-rate securities				400
Balance, September 24, 2011			$	428,377


(1)	Level 3 amounts consist of ARS that are backed by student loans (backed by the federal government) and investments in closed-end municipal bond funds and redeemable noncontrolling interests. See Note 4 for the components of the changes in Redeemable noncontrolling interests.

Note 7 – Business Acquisitions

The operating results of all acquisitions are reflected in our financial statements from their respective acquisition dates.

We completed certain acquisitions during the nine months ended September 29, 2012. The operating results of our acquisitions are reflected in our financial statements from their respective acquisition dates. Such acquisitions were immaterial to our financial statements individually and in the aggregate.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 8 – Plans of Restructuring

During the nine months ended September 29, 2012, we incurred restructuring costs of approximately $15.2 million (approximately $10.5 million after taxes) consisting of employee severance pay and benefits related to the elimination of approximately 200 positions, facility closing costs, representing primarily lease terminations and property and equipment write-off costs, and outside professional and consulting fees directly related to the restructuring plan. This restructuring program is complete and we do not expect any additional costs from this program during the remainder of our 2012 fiscal year.

During the first quarter of 2010, we completed a restructuring in order to reduce operating expenses. This restructuring included headcount reductions of 184 positions, as well as the closing of a number of smaller locations.

For the year ended 2010, we recorded restructuring costs of approximately $12.3 million (approximately $8.3 million after taxes) consisting of employee severance pay and benefits, facility closing costs, representing primarily lease termination and asset write-off costs, and outside professional and consulting fees directly related to the restructuring plan.

The costs associated with these restructurings are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

The following table shows the amounts expensed and paid for restructuring costs that were incurred during the nine months ended September 29, 2012 and the fiscal years 2011, 2010 and 2009 and the remaining accrued balance of restructuring costs as of September 29, 2012, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:

				Facility
		Severance		Closing
		Costs (1)		Costs (2)		Total
Balance, December 27, 2008		$	14,849	$	3,688	$	18,537
Provision			1,568		1,452		3,020
Payments and other adjustments			14,150		3,110		17,260
Balance, December 26, 2009		$	2,267	$	2,030	$	4,297
Provision			8,930		3,355		12,285
Payments and other adjustments			9,205		3,034		12,239
Balance, December 25, 2010		$	1,992	$	2,351	$	4,343
Provision			-		-		-
Payments and other adjustments			1,423		1,800		3,223
Balance, December 31, 2011		$	569	$	551	$	1,120
Provision			12,841		2,351		15,192
Payments and other adjustments			9,195		1,123		10,318
Balance, September 29, 2012		$	4,215	$	1,779	$	5,994


(1)	Represents salaries and related benefits for employees separated from the Company and outside professional consulting fees.

(2)	Represents costs associated with the closing of certain smaller facilities (primarily lease termination costs) and property and equipment write-offs.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 8 – Plans of Restructuring – (Continued)

The following table shows, by reportable segment, the restructuring costs incurred during the nine months ended September 29, 2012 and the fiscal years 2011, 2010 and 2009 and the remaining accrued balance of restructuring costs as of September 29, 2012:

			Technology and
	Health Care		Value-Added
	Distribution		Services		Total
Balance, December 27, 2008	$	18,457	$	80	$	18,537
Provision		3,020		-		3,020
Payments and other adjustments		17,252		8		17,260
Balance, December 26, 2009	$	4,225	$	72	$	4,297
Provision		12,063		222		12,285
Payments and other adjustments		11,945		294		12,239
Balance, December 25, 2010	$	4,343	$	-	$	4,343
Provision		-		-		-
Payments and other adjustments		3,223		-		3,223
Balance, December 31, 2011	$	1,120	$	-	$	1,120
Provision		14,981		211		15,192
Payments and other adjustments		10,168		150		10,318
Balance, September 29, 2012	$	5,933	$	61	$	5,994

Note 9 – Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to Henry Schein, Inc. by the weighted-average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable for presently unvested restricted stock and restricted stock units and upon exercise of stock options, using the treasury stock method in periods in which they have a dilutive effect.

A reconciliation of shares used in calculating earnings per basic and diluted share follows:

		Three Months Ended		Nine Months Ended
		September 29,	September 24,	September 29,	September 24,
		2012	2011	2012	2011
Basic		87,465	90,251	87,802	90,582
Effect of dilutive securities:
	Stock options, restricted stock and restricted stock units	2,182	2,618	2,273	2,613
	Diluted	89,647	92,869	90,075	93,195

Weighted-average options to purchase 10 and 7 shares of common stock at an exercise price of $69.45 per share that were outstanding during the three and nine months ended September 24, 2011 were excluded from the computation of diluted earnings per share. In these periods, such options’ exercise price exceeded the average market price of our common stock, thereby causing the effect of such options to be anti-dilutive.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 10 – Income Taxes

For the nine months ended September 29, 2012, our effective tax rate from operations was 31.3% compared to 32.0% for the prior year period. The difference between our effective tax rates and the federal statutory tax rates for both periods primarily relates to state and foreign income taxes.

The total amount of unrecognized tax benefits as of September 29, 2012 was approximately $30.5 million, all of which would affect the effective tax rate if recognized. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a material impact on our consolidated financial statements.

The total amounts of interest and penalties, which are classified as a component of the provision for income taxes, were approximately $6.7 million and $0, respectively, for the nine months ended September 29, 2012.

The tax years subject to examination by major tax jurisdictions include the years 2009 and forward by the U.S. Internal Revenue Service, the years 1997 and forward for certain states and the years 2005 and forward for certain foreign jurisdictions.

Note 11 – Derivatives and Hedging Activities

We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other, and changes to the credit markets. We attempt to minimize these risks by primarily using foreign currency forward contracts and by maintaining counter-party credit limits. These hedging activities provide only limited protection against currency exchange and credit risks. Factors that could influence the effectiveness of our hedging programs include currency markets and availability of hedging instruments and liquidity of the credit markets. All foreign currency forward contracts that we enter into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. We do not enter into such contracts for speculative purposes and we manage our credit risks by diversifying our investments, maintaining a strong balance sheet and having multiple sources of capital.

Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., 18 months or less) foreign currency forward contracts to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the payment of merchandise purchases to our foreign suppliers. We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. The impact of our hedging activities has historically not had a material impact on our consolidated financial statements. Accordingly, additional disclosures related to derivatives and hedging activities required by ASC Topic 815 have been omitted.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 12 – Stock-Based Compensation

Our accompanying unaudited consolidated statements of income reflect share-based pretax compensation expense of $11.9 million ($8.2 million after-tax) and $31.9 million ($21.9 million after-tax) for the three and nine months ended September 29, 2012, respectively, and $8.1 million ($5.5 million after-tax) and $26.0 million ($17.7 million after-tax) for the three and nine months ended September 24, 2011, respectively.

Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. We measure stock-based compensation at the grant date, based on the estimated fair value of the award, and recognize the cost (net of estimated forfeitures) as compensation expense on a straight-line basis over the requisite service period. Our stock-based compensation expense is reflected in selling, general and administrative expenses in our consolidated statements of income.

Stock-based awards are provided to certain employees and non-employee directors under the terms of our 1994 Stock Incentive Plan, as amended, and our 1996 Non-Employee Director Stock Incentive Plan, as amended (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Prior to March 2009, awards under the Plans principally included a combination of at-the-money stock options and restricted stock (including restricted stock units). Since March 2009, equity-based awards have been granted solely in the form of restricted stock and restricted stock units, with the exception of stock options for certain pre-existing contractual obligations.

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).

With respect to time-based restricted stock, we estimate the fair value on the date of grant based on our closing stock price. With respect to performance-based restricted stock, the number of shares that ultimately vest and are received by the recipient is based upon our performance as measured against specified targets over a three-year period as determined by the Compensation Committee of the Board of Directors. Although there is no guarantee that performance targets will be achieved, we estimate the fair value of performance-based restricted stock based on our closing stock price at time of grant.

The Plans provide for adjustments to the performance-based restricted stock targets for significant events such as acquisitions, divestitures, new business ventures and share repurchases. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans.

Restricted stock units are awards that we grant to certain employees that entitle the recipient to shares of common stock upon vesting. We grant restricted stock units with the same time-based and performance-based vesting that we use for restricted stock. The fair value of restricted stock units is determined on the date of grant, based on our closing stock price.

Total unrecognized compensation cost related to non-vested awards as of September 29, 2012 was $87.8 million, which is expected to be recognized over a weighted-average period of approximately 2.3 years.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

Note 12 – Stock-Based Compensation – (Continued)

The following table summarizes stock option activity under the Plans during the nine months ended September 29, 2012:

				Weighted
				Average
		Weighted		Remaining
		Average		Contractual	Aggregate
		Exercise		Life in	Intrinsic
	Shares	Price		Years	Value
Outstanding at beginning of period	4,059	$	44.53
Granted	-		-
Exercised	(1,189)		38.49
Forfeited	(30)		36.02
Outstanding at end of period	2,840	$	47.15	3.5	$	91,068

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