the10k_2011.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-K

X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011

__ 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-27078
 
 HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
135 Duryea Road
(State or other jurisdiction of
Melville, New York
incorporation or organization)
(Address of principal executive offices)
11-3136595
11747
(I.R.S. Employer Identification No.)
(Zip Code)

 (631) 843-5500
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $.01 per share
The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES:  X     NO: __

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES:  __     NO: X

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES:  X     NO: __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES:  X     NO: __

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer:  X                                                                 Accelerated filer: __                                                                     Non-accelerated filer: __                                                                          Smaller reporting company: __
                                                                                                        (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES:  __     NO: X

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as quoted on the NASDAQ Global Select Market on June 25, 2011 was approximately $6,422,578,000.
 
As of February 6, 2012, there were 89,775,409 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 31, 2011) are incorporated by reference in Part III hereof.
 
 
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
Number
 
 
 
 
 
 
PART I.
 
 
 
3
 
 
16
 
 
25
 
 
26
 
 
26
 
 
26
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
27
 
 
30
 
 
 
 
 
 
 
32
 
 
53
 
 
54
 
 
 
 
 
 
 
103
 
 
103
 
 
105
 
 
 
 
 
 
PART III
 
 
 
105
 
 
105
 
 
 
 
 
 
 
106
 
 
106
 
 
106
 
 
 
 
 
 
PART IV
 
 
 
107
 
 
 
108
 
 
 
111


PART I

ITEM 1.  Business

General

We believe we are the largest distributor of healthcare products and services primarily to office-based healthcare practitioners.  We serve nearly 775,000 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 79 years of experience distributing healthcare products.

We are headquartered in Melville, New York, employ nearly 15,000 people (of which over 6,500 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, Slovakia, Spain, Switzerland and the United Kingdom.  We also have affiliates in Iceland, Saudi Arabia and Turkey.

We have established strategically located distribution centers to enable us to better serve our customers and increase our operating efficiency.  This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs.  Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.

We conduct our business through two reportable segments: healthcare distribution and technology.  These segments offer different products and services to the same customer base.  The healthcare distribution reportable segment aggregates our dental, medical, animal health and international operating segments.  This segment consists of consumable products, small equipment, laboratory products, large dental equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.  Our technology group provides software, technology and other value-added services to healthcare practitioners, primarily in the United States, Canada, the United Kingdom, Australia and New Zealand.  Our value-added practice solutions include practice management software systems for dental and medical practitioners and animal health clinics.  Our technology group offerings also include financial services on a non-recourse basis, e-services and continuing education services for practitioners.

Industry

The healthcare products distribution industry, as it relates to office-based healthcare practitioners, is highly fragmented and diverse.  This industry, which encompasses the dental, medical and animal health markets, was estimated to produce revenues of approximately $28 billion in 2011 in the combined North American, European and Australian/New Zealand markets.  The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.

Due in part to the inability of office-based healthcare practitioners to store and manage large quantities of supplies in their offices, the distribution of healthcare supplies and small equipment to office-based healthcare practitioners has been characterized by frequent, small quantity orders, and a need for rapid, reliable and substantially complete order fulfillment.  The purchasing decisions within an office-based healthcare practice are typically made by the practitioner or an administrative assistant.  Supplies and small equipment are generally purchased from more than one distributor, with one generally serving as the primary supplier.


The healthcare products distribution industry continues to experience growth due to the aging population, increased healthcare awareness, the proliferation of medical technology and testing, new pharmacology treatments and expanded third-party insurance coverage, partially offset by the affects of increased unemployment on insurance coverage.  In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing from acute care settings to alternate-care sites, particularly physicians’ offices.

We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial and marketing resources, seeking to combine with larger companies that can provide growth opportunities.  This consolidation also may continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.

In recent years, the healthcare industry has increasingly focused on cost containment.  This trend has benefited distributors capable of providing a broad array of products and services at low prices.  It also has accelerated the growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing specialized management information support.  We believe that the trend towards cost containment has the potential to favorably affect demand for technology solutions, including software, which can enhance the efficiency and facilitation of practice management.

Competition

The distribution and manufacture of healthcare supplies and equipment is highly competitive.  Many of the healthcare distribution products we sell are available to our customers from a number of suppliers.  In addition, our competitors could obtain exclusive rights from manufacturers to market particular products.  Manufacturers also could seek to sell directly to end-users, and thereby eliminate or reduce our role and that of other distributors.

In North America, we compete with other distributors, as well as several manufacturers, of dental, medical and animal health products, primarily on the basis of price, breadth of product line, customer service and value-added products and services.  In the sale of our dental products, our primary competitors are the Patterson Dental division of Patterson Companies, Inc. and Benco Dental Supply Company.  In addition, we compete against a number of other distributors that operate on a national, regional and local level.  Our primary competitors in the sale of medical products are McKesson Corp., PSS World Medical, Inc. and Cardinal Health, Inc., which are national distributors.  In the animal health market, our primary competitors are MWI Veterinary Supply Inc. and the Webster Veterinary division of Patterson Companies, Inc.  We also compete against a number of regional and local medical and animal health distributors, as well as a number of manufacturers that sell directly to physicians and veterinarians.  With regard to our dental practice management software, we compete against numerous companies, including Carestream Health, Inc. and the Patterson Dental division of Patterson Companies, Inc.  The medical practice management and electronic medical records market is very fragmented and therefore we compete with numerous companies such as NextGen Healthcare Information Systems, Inc., eClinicalWorks, Allscripts, LLC and athenahealth, Inc.  In the animal health practice management market, our primary competitors are IDEXX Laboratories, Inc. and the Webster Veterinary division of Patterson Companies, Inc.

We also face significant competition internationally, where we compete on the basis of price and customer service against several large competitors, including the GACD Group, Pluradent AG & Co., Planmeca Oy, Arseus NV, Billericay Dental Supply Co. Ltd., National Veterinary Services and Alcyon SA, as well as a large number of dental, medical and animal health product distributors and manufacturers in Australia, Austria, Belgium, China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the Netherlands, New Zealand, Portugal, Slovakia, Spain, Switzerland, Turkey and the United Kingdom.


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 79 years of experience in distributing products to healthcare practitioners resulting in strong awareness of the “Henry Schein” brand.  Our competitive strengths include:

Direct sales and marketing expertise.  Our sales and marketing efforts are designed to establish and solidify customer relationships through personal visits by field sales representatives, frequent direct marketing and telesales contact, emphasizing our broad product lines, including exclusive distribution agreements, competitive prices and ease of order placement.  The key elements of our direct sales and marketing efforts are:
 
 
Field sales consultants.  We have approximately 3,200 field sales consultants, including equipment sales specialists, covering major North American, European and other international markets.  These consultants complement our direct marketing and telesales efforts and enable us to better market, service and support the sale of more sophisticated products and equipment.

 
Direct marketing.  During 2011, we distributed approximately 28.1 million pieces of direct marketing material, including catalogs, flyers, order stuffers and other promotional materials to existing and potential office-based healthcare customers.

 
Telesales.  We support our direct marketing effort with approximately 1,625 inbound and outbound telesales representatives, who facilitate order processing and generate new sales through direct and frequent contact with customers.


Broad product and service offerings at competitive prices.  We offer a broad range of products and services to our customers, at competitive prices, in the following categories:

 
Consumable supplies and equipment.  We offer over 90,000 Stock Keeping Units, or SKUs, to our customers.  Of the SKUs offered, approximately 51,000 are offered to our dental customers, approximately 38,000 to our medical customers and approximately 19,000 to our animal health customers.  We offer over 100,000 additional SKUs to our customers in the form of special order items.

 
Technology and other value-added products and services.  We sell practice management software systems to our dental, medical and animal health customers.  Our practice management solutions provide practitioners with electronic medical records, patient treatment history, billing, accounts receivable analyses and management, appointment calendars, electronic claims processing and word processing programs.  As of December 31, 2011, we have an active user base of more than 70,000 practices, including Dentrix®, Easy Dental®, Oasis® and EXACT® for dental practices, MicroMD® for physician practices and Advantage+, AVImark®, DVM Manager®, Infinity, Sunpoint, Triple Crown ® and Vetech Advantage for animal health practices.

 
Repair services.  We have 194 equipment sales and service centers worldwide that provide a variety of repair, installation and technical services for our healthcare customers.  Our ProRepair technicians provide installation and repair services for: dental handpieces; dental, medical and animal health small equipment; table top sterilizers; and large dental equipment.

 
Financial services.  We offer our customers solutions in operating their practices more efficiently by providing access to a number of financial services and products (including non-recourse financing for equipment, technology and software products; non-recourse patient financing; collection services and credit card processing) at rates that we believe are generally lower than what they would be able to secure independently. We also provide dental practice valuation and brokerage services.


Commitment to superior customer service.  We maintain a strong commitment to providing superior customer service.  We frequently monitor our customer service through customer surveys, focus groups and statistical reports.  Our customer service policy primarily focuses on:

 
Exceptional order fulfillment.  Approximately 99% of items ordered are shipped without back ordering and are shipped on the same business day the order is received.

 
Streamlined ordering process.  Customers may place orders 24 hours a day, 7 days a week by mail, fax, telephone, e-mail, Internet and by using our computerized order entry systems.

Integrated management information systems.  Our information systems generally allow for centralized management of key functions, including accounts receivable, inventory, accounts payable, payroll, purchasing, sales and order fulfillment.  These systems allow us to manage our growth, deliver superior customer service, properly target customers, manage financial performance and monitor daily operational statistics.

Cost-effective purchasing.  We believe that cost-effective purchasing is a key element to maintaining and enhancing our position as a competitive-pricing provider of healthcare products.  We continuously evaluate our purchase requirements and suppliers’ offerings and prices in order to obtain products at the lowest possible cost.  In 2011, our top 10 healthcare distribution suppliers and our single largest supplier accounted for approximately 33% and 8%, respectively, of our aggregate purchases.

Efficient distribution.  We distribute our products from our strategically located distribution centers.  We strive to maintain optimal inventory levels in order to satisfy customer demand for prompt delivery and complete order fulfillment.  These inventory levels are managed on a daily basis with the aid of our management information systems.  Once an order is entered, it is electronically transmitted to the distribution center nearest the customer’s location and a packing slip for the entire order is printed for order fulfillment.


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:

 
 
 
 
 
2011 
 
2010 
 
2009 
Healthcare Distribution
 
 
 
 
 
 
 
 
 
 
Dental:
 
 
 
 
 
 
 
 
 
 
 
Consumable dental products, dental laboratory products
 
 
 
 
 
 
 
 
 
 
 
 
and small equipment (1)
 
40.5 
%
 
42.2 
%
 
45.9 
%
 
 
Large dental equipment (2)
 
14.7 
 
 
15.5 
 
 
17.1 
 
 
 
 
Total dental
 
55.2 
 
 
57.7 
 
 
63.0 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Medical products (3)
 
18.4 
 
 
19.2 
 
 
23.4 
 
 
Animal health products (4)
 
23.5 
 
 
20.4 
 
 
11.0 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Healthcare Distribution  
 
97.1 
 
 
97.3 
 
 
97.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
 
 
 
 
 
 
 
 
 
 
 
Software and related products and
 
 
 
 
 
 
 
 
 
 
 
 
other value-added products (5)
 
2.9 
 
 
2.7 
 
 
2.6 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total  
 
100.0 
%
 
100.0 
%
 
100.0 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
   Includes X-ray products, infection-control products, handpieces, preventatives, impression materials, composites, anesthetics,
 
   teeth, dental implants, gypsum, acrylics, articulators and abrasives.
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
   Includes dental chairs, delivery units and lights, X-ray equipment, equipment repair and high-tech equipment.
 
 
 
 
 
 
 
 
 
 
 
 
 
(3)
   Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products,
 
   equipment and vitamins.
 
 
 
 
 
 
 
 
 
 
 
 
 
(4)
   Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment.
 
 
 
 
 
 
 
 
 
 
 
 
 
(5)
   Includes software and related products and other value-added products, including financial products and continuing education.


Business Strategy

Our objective is to continue to expand as a value-added distributor of healthcare products and services to office-based healthcare practitioners.  To accomplish this, we will apply our competitive strengths in executing the following strategies:

 
Increase penetration of our existing customer base.  We have nearly 775,000 customers worldwide and we intend to increase sales to our existing customer base and enhance our position as their primary supplier.

 
Increase the number of customers we serve.  This strategy includes increasing the number and productivity of field sales consultants, as well as using our customer database to focus our marketing efforts.

 
Leverage our value-added products and services.  We continue to increase cross-selling efforts for key product lines.  In the dental business, we have significant cross-selling opportunities between our dental practice management software users and our dental distribution customers.  In the medical business, we have opportunities to expand our vaccine, injectables and other pharmaceuticals sales to medical distribution customers, as well as cross-selling core products and practice management software with these key products.  In the animal health business, we have opportunities to cross-sell practice management software and other products.

 
Pursue strategic acquisitions and joint ventures.  Our acquisition strategy includes acquiring businesses and entering into joint ventures complementary to ours that will provide, among other things, additional sales to be channeled through our existing distribution infrastructure, access to additional product lines and field sales consultants and an opportunity to further expand into new geographic markets.

Markets Served

Demographic trends indicate that our markets are growing, as an aging U.S. population is increasingly using healthcare services.  Between 2011 and 2021, the 45 and older population is expected to grow by approximately 14%.  Between 2011 and 2031, this age group is expected to grow by approximately 27%.  This compares with expected total U.S. population growth rates of approximately 9% between 2011 and 2021 and approximately 18% between 2011 and 2031.

In the dental industry, there is predicted to be a rise in oral healthcare expenditures as the 45 and older segment of the population increases.  Cosmetic dentistry is another growing aspect of dental practices as new technologies allow dentists to offer cosmetic solutions that patients seek.  At the same time, there is an expected increase in dental insurance coverage.

We support our dental professionals through the many SKUs that we offer, as well as through important value-added services, including practice management software, electronic claims processing, financial services and continuing education, all designed to help maximize a practitioner’s efficiency.

There continues to be a migration of procedures from acute-care settings to physicians’ offices, a trend that we believe provides additional opportunities for us.  There also is the continuing use of vaccines, injectables and other pharmaceuticals in alternate-care settings.  We believe we have established a leading position as a vaccine supplier to the office-based physician practitioner.

We believe our international group is a leading European healthcare supplier servicing office-based dental, medical and animal health practices.  We are in the process of implementing SAP software across continental Europe.  Additionally, we are expanding our dental full-service model and our animal health presence in Europe, as well as our medical offerings in countries where opportunities exist.  Through our “Schein Direct” program, we also have the capability to provide door-to-door air package delivery to practitioners in over 200 countries around the world.

For information on revenues and long-lived assets by geographic area, see Note 15 of “Notes to Consolidated Financial Statements,” which is incorporated herein by reference.


Seasonality and Other Factors Affecting Our Business and Quarterly Results

We experience fluctuations in quarterly earnings.  As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

Our business is subject to seasonal and other quarterly fluctuations.  Net sales and operating profits generally have been higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine, equipment and software products), purchasing patterns of office-based healthcare practitioners and year-end promotions.  Net sales and operating profits generally have been lower in the first quarter, primarily due to increased sales in the prior two quarters.  We expect our historical seasonality of sales to continue in the foreseeable future.  Quarterly results also may be adversely affected by a variety of other factors, including:

 
timing and amount of sales and marketing expenditures;

 
timing of pricing changes offered by our vendors;

 
timing of the introduction of new products and services by our vendors;

 
timing of the release of upgrades and enhancements to our technology-related products and services;

 
changes in or availability of vendor contracts or rebate programs;

 
vendor rebates based upon attaining certain growth goals;

 
changes in the way vendors introduce or deliver products to market;

 
costs of developing new applications and services;

 
exclusivity requirements with certain vendors may prohibit us from distributing competitive products manufactured by other vendors;

 
loss of sales representatives;

 
costs related to acquisitions and/or integrations of technologies or businesses;

 
costs associated with our self-insured medical insurance program;

 
general economic conditions, as well as those specific to the healthcare industry and related industries;

 
our success in establishing or maintaining business relationships;

 
unexpected difficulties in developing and manufacturing products;

 
product demand and availability or recalls by manufacturers;

 
exposure to product liability and other claims in the event that the use of the products we sell results in injury;

 
increases in the cost of shipping or service issues with our third-party shippers;

 
restructuring costs; and

 
changes in accounting principles.

Any change in one or more of these or other factors could cause our annual or quarterly operating results to fluctuate.  If our operating results do not meet market expectations, our stock price may decline.


Governmental Regulations

Operating, Security and Licensure Standards

Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to various local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices.  Among the federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987, and Section 361 of the Public Health Service Act.  We are also subject to comparable foreign regulations.

The Federal Food, Drug, and Cosmetic Act generally regulates the introduction, manufacture, advertising, labeling, packaging, storage, handling, reporting, marketing and distribution of, and record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states may similarly regulate such activities within the state.  Section 361 of the Public Health Service Act, which provides authority to prevent the spread of communicable diseases, serves as the legal basis for the United States Food and Drug Administration’s regulation of human cells, tissues, and cellular and tissue-based products, also known as HCT/P products.

The Prescription Drug Marketing Act of 1987 (“PDMA”), which amended the Federal Food, Drug, and Cosmetic Act, and its implementing regulations, establishes certain requirements applicable to the wholesale distribution of prescription drugs, including the requirement that wholesale drug distributors be licensed by each state in which they conduct business, provide certain drug pedigree information on the distribution of prescription drugs and act in accordance with federally established guidelines on storage, handling and record maintenance.

Under the Controlled Substances Act, as a distributor of controlled substances, we are required to obtain and renew annually registrations from the United States Drug Enforcement Administration permitting us to handle controlled substances.  We are also subject to other statutory and regulatory requirements relating to the sale, marketing, handling and distribution of such drugs, in accordance with specified rules and regulations, and these requirements have been subject to heightened enforcement activity in recent times.  We are subject to inspection by the United States Drug Enforcement Administration.

Certain of our businesses are required to register for permits and/or licenses with, and comply with operating and security standards of, the United States Drug Enforcement Administration, the United States Food and Drug Administration, the United States Department of Health and Human Services, and various state boards of pharmacy, state health departments and/or comparable state agencies as well as foreign agencies, and certain accrediting bodies depending on the type of operations and location of product distribution, manufacturing or sale.  These businesses include those that distribute, manufacture and/or repackage prescription pharmaceuticals and/or medical devices and/or HCT/P products, or own pharmacy operations, or install, maintain or repair equipment.  In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil and/or criminal penalties for the transfer of certain human tissue (for example human bone products) for valuable consideration, while generally permitting payments for the reasonable costs incurred in procuring, processing, storing and distributing that tissue. The United States Drug Enforcement Administration, the United States Food and Drug Administration and state regulatory authorities have broad enforcement powers, including the ability to suspend or limit the distribution of products by our distribution centers, seize or order the recall of products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations.  Our customers are also subject to significant federal, state, local and foreign governmental regulation.

Certain of our businesses are subject to various additional federal, state, local and foreign laws and regulations, including with respect to the sale, transportation, storage, handling and disposal of hazardous or potentially hazardous substances, and safe working conditions.  In recent years, some states have passed or proposed laws and regulations that are intended to protect the integrity of the medical supply channel.  For example, Florida and certain other states have implemented or are implementing drug pedigree requirements that require that prescription drugs be distributed with records or information documenting the prior distribution of the drug, from distributors and potentially back to the manufacturers.  California has enacted a law requiring the implementation of an electronic drug pedigree system that provides track and trace chain of custody technologies, such as radio frequency identification, or RFID, technologies, although the effective date has been postponed until January 1, 2015 for pharmaceutical manufacturers, and July 1, 2016 for pharmaceutical wholesalers and repackagers.  There have been increasing efforts by various levels of government to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or misbranded pharmaceuticals into the distribution system.
 
 
10

 
At the federal level, the United States Food and Drug Administration issued final regulations pursuant to PDMA that became effective in December 2006. The regulations impose drug pedigree and other chain of custody requirements that increase the costs and/or burden to us of selling our products and handling product returns.  In early December 2006, the federal District Court for the Eastern District of New York issued a preliminary injunction enjoining the implementation of certain of the federal drug pedigree requirements, including the requirement to identify transactions back to the manufacturer.  Nonetheless, prescription drug pedigrees are required under federal regulations and the PDMA, and the pedigree must track back to the last manufacturer or authorized distributor of record, or ADR, that handled the drug.

The United States Food and Drug Administration Amendments Act of 2007, which went into effect on September 27, 2007, requires the United States Food and Drug Administration to establish standards and identify and validate effective technologies for the purpose of securing the pharmaceutical supply chain against counterfeit drugs.  These standards include any track and trace or authentication technologies, such as RFID and other technologies.  The United States Food and Drug Administration has continued to develop its policies in this area, such as issuing a Final Guidance in 2010 regarding standardized numerical identification for prescription drug packages, and announcing its work on developing draft regulations for unique medical device identifiers.

Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory requirements specific to government contractors.

Healthcare Fraud

Certain of our businesses are subject to federal and state (and similar foreign) healthcare fraud and abuse, referral and reimbursement laws, and regulations with respect to their operations.  Such laws prohibit, among other things, the submission or causing the submission of false or fraudulent claims for reimbursement, and soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for or recommending ordering, purchasing or leasing, of items or services that are paid for by government health care programs (known as “anti-kickback” laws). Violations of these laws could result in civil and criminal penalties.  The fraud and abuse laws and regulations have been subject to heightened enforcement activity over the past few years, particularly through “relators,” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state False Claims Act statutes, and can be entitled to receive up to 30% of total recoveries.  Also, violations of the False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim.  These laws and regulations are subject to frequent modification and varied interpretation, and can have a material adverse impact on us if a violation is found.  The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, significantly strengthened the federal False Claims Act, and the anti-kickback provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that an anti-kickback law violation can be a basis for False Claims Act liability.

Healthcare Reform

The Health Care Reform Law also included other provisions to reduce fraud and abuse and Medicare expenditures and the cost of healthcare generally, to increase federal oversight of private health insurance plans and to provide access to health coverage for an additional 32 million people, some of which impact and further regulate some of our businesses. In addition to the foregoing, the Health Care Reform Law imposed new reporting and disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to certain practitioners, including physicians, dentists and teaching hospitals, and imposes new reporting and disclosure requirements for pharmaceutical and device manufacturers and group purchasing organizations with regard to certain ownership interests held by physicians in the reporting entity.  Data collection obligations were to commence in January 2012, and reporting requirements are to be implemented in 2013.  On December 14, 2011, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed regulations to implement these provisions and sought substantial comments, thus apparently delaying the January 1, 2012 start of information collection.  These proposed regulations are broadly drafted and still subject to change, and it is possible that when these regulations are finalized, they will treat us or one or more of our subsidiaries as an entity subject to these reporting and disclosure requirements.  In addition, through business arrangements we have with drug and device manufacturers, we may be required to collect and report detailed information in order for these manufacturers to comply with the new requirements.

 
11

 
A provision in the Health Care Reform Law often referred to as the “individual mandate,” which requires individuals without health insurance to pay a penalty, was recently declared unconstitutional by certain federal courts, while certain other federal courts have affirmed its constitutionality   Appeals are pending, and the United States Supreme Court will review this issue during its 2012 term.

Regulated Software; Electronic Health Records

The United States Food and Drug Administration has become increasingly active in addressing the regulation of computer software intended for use in healthcare settings, and has been developing policies on regulating clinical decision support tools as medical devices.  Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products.

Certain of our businesses involve access to personal health, medical, financial and other information of individuals, and are accordingly directly or indirectly subject to numerous federal, state, local and foreign laws and regulations that protect the privacy and security of such information, and require, among other things, the implementation of various recordkeeping, operational, notice and other practices intended to safeguard that information, limit its use to allowed purposes, and notify individuals in the event of privacy and security breaches.  Failure to comply with these laws can result in substantial penalties and other liabilities. As a result of the federal Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was passed in 2009, some of our businesses that were previously only indirectly subject to federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) privacy and security rules became directly subject to such rules because such businesses serve as “business associates” of HIPAA covered entities, such as health care providers. Additional rules under the HITECH Act are expected to be issued in early 2012, further expanding the privacy and security requirements applicable to some of our businesses.

In addition, the HITECH Act established a program of Medicare and Medicaid incentive payments available to certain health care providers including, among others, physicians and dentists, if they meaningfully use certified electronic health record technology (“EHR”).  Also, eligible providers that fail to adopt certified EHR systems may be subject to Medicare reimbursement reductions beginning in 2015.  Qualification for the incentive payments requires the use of EHRs that are certified as having certain capabilities for meaningful use pursuant to standards adopted by the Department of Health and Human Services.  While initial standards have been established, new versions are expected to be issued over the next several years, and the content of those standards is not certain.  Certain of our businesses involve the manufacture and sale of certified EHR systems, and so must maintain compliance with these evolving governmental criteria.

Also, HIPAA requires certain health care providers, such as physicians, to use certain transaction and code set rules for specified electronic transactions, such as transactions involving claims submissions.  As of January 1, 2012, subject to 90 days of CMS enforcement discretion, electronic claim submissions and related electronic transactions were required to be conducted under a new HIPAA transaction standard, called Version 5010.  CMS is requiring this upgrade in connection with another new requirement applicable to the industry, the implementation of new diagnostic code sets to be used in claims submission.  The new diagnostic code sets are called the ICD-10-CM, and are to be implemented on October 1, 2013.  Certain of our businesses provide electronic practice management products that must meet those requirements, and while we believe we are prepared to timely adopt the new standards, it is possible that the transition to these new standards, particularly the transition to ICD-10-CM, may result in a degree of disruption and confusion, thus potentially increasing the costs associated with supporting this product.

International Transactions

In addition, United States and international import and export laws and regulations require us to abide by certain standards relating to the importation and exportation of products.  We also are subject to certain laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act and anti-bribery laws and laws pertaining to the accuracy of our internal books and records, as well as other types of requirements similar to those imposed in the United States.

 
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While we believe that we are substantially compliant with the foregoing laws and regulations promulgated thereunder and possess all material permits and licenses required for the conduct of our business, there can be no assurance that regulations that impact our business or customers’ practices will not have a material adverse impact on our business.  As a result of political, economic and regulatory influences, the healthcare distribution industry in the United States is under intense scrutiny and subject to fundamental changes.  We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.

See “ITEM 1A. Risk Factors” for a discussion of additional regulatory developments that may affect our results of operations and financial condition.

Proprietary Rights

We hold trademarks relating to the “Henry Schein” name and logo, as well as certain other trademarks.  Pursuant to agreements executed in connection with our reorganization in 1994, both Henry Schein, Inc. and Schein Pharmaceutical, Inc. (which was acquired by Watson Pharmaceuticals, Inc. in 2000), a company previously engaged in the manufacture and distribution of multi-source pharmaceutical products, are entitled to use the “Schein” name in connection with their respective businesses, but Schein Pharmaceutical, Inc. must always use “Schein” in combination with the word “Pharmaceutical” and is not entitled to use the name “Henry Schein” or to use “Schein” alone or with any other word (other than “Pharmaceutical”).  We intend to protect our trademarks to the fullest extent practicable.

Employees

As of December 31, 2011, we employed nearly 15,000 full-time employees, including approximately 1,625 telesales representatives, 3,200 field sales consultants, including equipment sales specialists, 2,725 warehouse employees, 625 computer programmers and technicians, 1,375 management employees and 5,200 office, clerical and administrative employees.  Approximately 309 or 2.1% of our employees were subject to collective bargaining agreements.  We believe that our relations with our employees are excellent.

Available Information

We make available free of charge through our Internet Web site, www.henryschein.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of beneficial ownership of securities on Forms 3, 4 and 5 and amendments to these reports and statements filed or furnished pursuant to Section 13(a) and Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the United States Securities and Exchange Commission, or SEC.

The above information is also available at the SEC’s Office of Investor Education and Advocacy at United States Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-0213 or obtainable by calling the SEC at (800) 732-0330.  In addition, the SEC maintains an Internet Web site at www.sec.gov, where the above information can be viewed.

Our principal executive offices are located at 135 Duryea Road, Melville, New York 11747, and our telephone number is (631) 843-5500.  Unless the context specifically requires otherwise, the terms the “Company,” “Henry Schein,” “we,” “us” and “our” mean Henry Schein, Inc., a Delaware corporation, and its consolidated subsidiaries.


Executive Officers of the Registrant

The following table sets forth certain information regarding our executive officers:

Name
 
Age
 
Position
 
 
 
 
 
Stanley M. Bergman
 
62 
 
Chairman, Chief Executive Officer, Director
Gerald A. Benjamin
 
59 
 
Executive Vice President, Chief Administrative Officer, Director
James P. Breslawski
 
58 
 
President, Chief Operating Officer, Director
Leonard A. David
 
63 
 
Senior Vice President, Chief Compliance Officer
James Harding
 
56 
 
Senior Vice President, Chief Technology Officer
Stanley Komaroff
 
76 
 
Senior Advisor
Mark E. Mlotek
 
56 
 
Executive Vice President, Global Corporate Strategy, Director
Steven Paladino
 
54 
 
Executive Vice President, Chief Financial Officer, Director
Michael Racioppi
 
57 
 
Senior Vice President, Chief Merchandising Officer
Lonnie Shoff
 
53 
 
President, Global Healthcare Specialties Group
Michael Zack
 
59 
 
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 Global Corporate Strategy since 2004.  Mr. Mlotek was Senior Vice President of Corporate Business Development from 2000 to 2004.  Prior to that, Mr. Mlotek was Vice President, General Counsel and Secretary from 1994 to 1999 and became a director in 1995.  Prior to joining us, Mr. Mlotek was a partner in the law firm of Proskauer Rose LLP, counsel to us, specializing in mergers and acquisitions, corporate reorganizations and tax law from 1989 to 1994.

Steven Paladino has been our Executive Vice President and Chief Financial Officer since 2000.  Prior to holding his current position, Mr. Paladino was Senior Vice President and Chief Financial Officer from 1993 to 2000 and has been a director since 1992.  From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from 1987 to 1990 served as Corporate Controller.  Before joining us, Mr. Paladino was employed in public accounting for seven years, most recently with the international accounting firm of BDO USA, LLP.  Mr. Paladino is a certified public accountant.

Michael Racioppi has been our Senior Vice President, Chief Merchandising Officer since 2008. Prior to holding his current position, Mr. Racioppi was President of the Medical Division from 2000 to 2008 and Interim President from 1999 to 2000, and Corporate Vice President from 1994 to 2008.  Mr. Racioppi served as Senior Director, Corporate Merchandising from 1992 to 1994.  Before joining us in 1992, Mr. Racioppi was employed by Ketchum Distributors, Inc. as the Vice President of Purchasing and Marketing.

Lonnie Shoff has been President of the Global Healthcare Specialties Group since 2009.  Prior to joining us, Ms. Shoff was employed with Roche Diagnostics, where she held a series of positions of increasing responsibility in the United States and Switzerland over the past 20 years, most recently as Senior Vice President General Manager, Applied Science.

Michael Zack has been President of our International Group since 2006.  Mr. Zack held the position of Senior Vice President of our International Group from 1989 to 2006.  Mr. Zack was employed by Polymer Technology (a subsidiary of Bausch & Lomb) as Vice President of International Operations from 1984 to 1989 and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to 1984.


ITEM 1A. Risk Factors

The risks described below could have a material adverse impact on our business, reputation, financial condition or the trading price of our common stock.  Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed below.  Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider not to be material to our operations.  You should not consider this list to be a complete statement of all risks and uncertainties.  The order in which these factors appear should not be construed to indicate their relative importance or priority.

The 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.

Because substantially all of the products that we distribute are not manufactured by us, we are dependent upon third parties for the manufacture and supply of substantially all of our products.

We obtain substantially all of our products from third-party suppliers.  Generally, we do not have long-term contracts with our suppliers committing them to supply products to us.  Therefore, suppliers may not provide the products we need in the quantities we request.  Because we generally do not control the actual production of the products we sell, we may be subject to delays caused by interruption in production based on conditions outside of our control.  In the event that any of our third-party suppliers were to become unable or unwilling to continue to provide the products in required volumes, we would need to identify and obtain acceptable replacement sources on a timely basis.  There is no guarantee that we would be able to obtain such alternative sources of supply on a timely basis, if at all.  An extended interruption in the supply of our products, including the supply of our influenza vaccine and any other high sales volume product, would have an adverse effect on our results of operations, which most likely would adversely affect the value of our common stock.

Our revenues depend on our relationships with capable sales personnel as well as customers, suppliers and manufacturers of the products that we distribute.

Our future operating results depend on our ability to maintain satisfactory relationships with qualified sales personnel as well as customers, suppliers and manufacturers.  If we fail to maintain our existing relationships with such persons or fail to acquire relationships with such key persons in the future, our business may be adversely affected.

Our future success is substantially dependent upon our senior management.

Our future success is substantially dependent upon the efforts and abilities of members of our existing senior management, particularly Stanley M. Bergman, Chairman and Chief Executive Officer, among others.  The loss of the services of Mr. Bergman could have a material adverse effect on our business.  We have an employment agreement with Mr. Bergman.  We do not currently have “key man” life insurance policies on any of our employees.  Competition for senior management is intense and we may not be successful in attracting and retaining key personnel.


We experience fluctuations in quarterly earnings.  As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

Our business is subject to seasonal and other quarterly fluctuations.  Net sales and operating profits generally have been higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine, equipment and software products), purchasing patterns of office-based healthcare practitioners and year-end promotions.  Net sales and operating profits generally have been lower in the first quarter, primarily due to increased sales in the prior two quarters.  We expect our historical seasonality of sales to continue in the foreseeable future.  Quarterly results may also be adversely affected by a variety of other factors, including:

 
timing and amount of sales and marketing expenditures;

 
timing of pricing changes offered by our vendors;

 
timing of the introduction of new products and services by our vendors;

 
timing of the release of upgrades and enhancements to our technology-related products and services;

 
changes in or availability of vendor contracts or rebate programs;

 
vendor rebates based upon attaining certain growth goals;

 
changes in the way vendors introduce or deliver products to market;

 
costs of developing new applications and services;

 
exclusivity requirements with certain vendors may prohibit us from distributing competitive products manufactured by other vendors;

 
loss of sales representatives;

 
costs related to acquisitions and/or integrations of technologies or businesses;

 
costs associated with our self-insured medical insurance program;

 
general economic conditions, as well as those specific to the healthcare industry and related industries;

 
our success in establishing or maintaining business relationships;

 
unexpected difficulties in developing and manufacturing products;

 
product demand and availability or recalls by manufacturers;

 
exposure to product liability and other claims in the event that the use of the products we sell results in injury;

 
increases in the cost of shipping or service issues with our third-party shippers;

 
restructuring costs; and

 
changes in accounting principles.

Any change in one or more of these or other factors could cause our annual or quarterly operating results to fluctuate.  If our operating results do not meet market expectations, our stock price may decline.


Expansion of group purchasing organizations (“GPO”) or provider networks and the multi-tiered costing structure may place us at a competitive disadvantage.

The medical products industry is subject to a multi-tiered costing structure, which can vary by manufacturer and/or product. Under this structure, certain institutions can obtain more favorable prices for medical products than we are able to obtain. The multi-tiered costing structure continues to expand as many large integrated healthcare providers and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Additionally, the formation of provider networks and GPOs may shift purchasing decisions to entities or persons with whom we do not have a historical relationship. This may threaten our ability to compete effectively, which would in turn negatively impact our results of operations. Although we are seeking to obtain similar terms from manufacturers and obtain access to lower prices demanded by GPO contracts or other contracts and seeking to develop relationships with provider networks and new GPOs, we cannot assure such terms will be obtained or contracts will be executed.

Increases in the cost of shipping or service issues with our third-party shippers could harm our business.

Shipping is a significant expense in the operation of our business.  We ship almost all of our orders through third-party delivery services, and typically bear the cost of shipment.  Accordingly, any significant increase in shipping rates could have an adverse effect on our operating results.  Similarly, strikes or other service interruptions by those shippers could cause our operating expenses to rise and adversely affect our ability to deliver products on a timely basis.

Uncertain global macro-economic conditions could adversely affect our results of operations and financial condition.

Uncertain global macro-economic conditions that affect the economy and the economic outlook of the United States, Europe and other parts of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition. These uncertainties, including, among other things, sovereign debt levels, the inability of national or international political institutions to effectively resolve economic or budgetary crises or issues, consumer confidence, unemployment levels (and a corresponding increase in the uninsured and underinsured population), interest rates, availability of capital, fuel and energy costs, tax rates, healthcare costs and the threat or outbreak of terrorism or public unrest, could adversely impact our customers and vendors, which could adversely affect us.  Recessionary conditions and depressed levels of consumer and commercial spending may cause customers to reduce, modify, delay or cancel plans to purchase our products and may cause vendors to reduce their output or change their terms of sales.  We generally sell products to customers with payment terms.  If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, they may not be able to pay, or may delay payment to us.  Likewise, for similar reasons vendors may restrict credit or impose different payment terms.  Any inability of current and/or potential customers to pay us for our products and/or services or any demands by vendors for different payment terms may adversely affect our results of operations and financial condition.

Approximately 28% of our total consolidated net sales for the year ended December 31, 2011 were derived from Europe.  There have been continuing concerns and uncertainties about the state of the European economies and Europe’s political institutions.  Continued difficult, and/or declining, economic conditions in Europe may adversely affect our operations in Europe by adversely affecting our European customers and vendors in the ways described above.  Additionally, the inability of Europe’s political institutions to deal effectively with actual or perceived currency or budget crises could increase economic uncertainty in Europe, and globally, and may have an adverse effect on our customer’s cash flow or operating performance.  Further, debt and/or budget crises in the European countries may lead to reductions in government spending in certain countries, which could reduce overall healthcare spending, and/or higher income or corporate taxes, which could depress spending overall. In either event, our results of operations and financial condition could be adversely affected.


Disruptions in the financial markets may adversely affect the availability and cost of credit to us.

Our ability to make scheduled payments or refinance our obligations with respect to indebtedness will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and financial, business and other factors beyond our control.  Disruptions in the financial markets may adversely affect the availability and cost of credit to us.

The market price for our common stock may be highly volatile.

The market price for our common stock may be highly volatile.  A variety of factors may have a significant impact on the market price of our common stock, including:

the publication of earnings estimates or other research reports and speculation in the press or investment community;

changes in our industry and competitors;

our financial condition, results of operations and cash flows and prospects;

stock repurchases;

any future issuances of our common stock, which may include primary offerings for cash, stock splits, issuances in connection with business acquisitions, restricted stock/units and the grant or exercise of stock options from time to time;

general market and economic conditions; and

any outbreak or escalation of hostilities in areas where we do business.

In addition, the NASDAQ Stock Market can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on NASDAQ.  Broad market and industry factors may negatively affect the market price of our common stock, regardless of actual operating performance.  In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies.  This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would have an adverse effect on our business.

The 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: 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 significant healthcare reforms could have a material adverse effect on our businesses.

The implementation of the Health Care Reform Law may adversely impact us.

The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, significantly expands health insurance coverage to uninsured Americans and changes the way health care is financed by both governmental and private payers.  We expect expansion of access to health insurance to increase the demand for our products and services, but other provisions of the Health Care Reform Law could affect us adversely.  Additionally, further federal and state proposals for healthcare reform are likely.  We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.

 
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The Health Care Reform Law also imposes new reporting and disclosure requirements for pharmaceutical and medical device manufacturers with regard to payments or other transfers of value made to certain practitioners, including physicians, dentists and teaching hospitals, and imposes new reporting and disclosure requirements for pharmaceutical and device manufacturers and group purchasing organizations with regard to certain ownership interests held by physicians in the reporting entity.  Data collection obligations were to commence in January 2012, and reporting requirements are to be implemented in 2013.  On December 14, 2011, the Centers for Medicare and Medicaid Services issued proposed regulations to implement these provisions and sought substantial comments, thus apparently delaying the January 1, 2012 start of information collection.  These proposed regulations are broadly drafted and still subject to change, and it is possible that when these regulations are finalized, they will treat us or one or more of our subsidiaries as an entity subject to these reporting requirements.  In addition, through business arrangements we have with drug and device manufacturers, we may be required to collect and report detailed information to these manufacturers in order for these manufacturers to comply with the new requirements.  In addition, several states require pharmaceutical and/or device companies to report expenses relating to the marketing and promotion of products as well as gifts and payments to individual practitioners in the states, or prohibit certain marketing related activities.  Other states, such as California, Nevada, Massachusetts and Connecticut, require pharmaceutical and/or device companies to implement compliance programs or marketing codes.  Wholesale distributors are covered by the laws in certain of these states.  In others, it is possible that our activities or the activities of one or more of our subsidiaries will subject us to the state’s reporting requirements and prohibitions.  Compliance activities with respect to these measures could increase our costs and adversely affect business operations.

The Health Care Reform Law contains many provisions designed to generate the revenues necessary to fund the coverage expansions and to reduce costs of Medicare and Medicaid, including imposing a 2.3% excise tax on domestic sales of medical devices by manufacturers and importers beginning in 2013, and a fee on branded prescription drugs and biologics that was implemented in 2011, both of which may affect sales.  The Health Care Reform Law also mandates pharmacy benefit manager transparency regarding rebates, discounts and price concessions with respect to drug benefits under Medicare Part D, and in 2014 with respect to drug benefits offered through qualified health plans offered through state exchanges, which could affect pricing and competition.

Failure to comply with existing and future regulatory requirements could negatively affect our business.

Our business is subject to requirements under various local, state, federal and international laws and regulations applicable to the distribution of pharmaceuticals and medical devices, and human cells, tissue, and cellular and tissue-based products, also known as HCT/P products.  Among the federal laws with which we must comply are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987, and Section 361 of the Public Health Services Act.  Among other things, such laws, and the regulations promulgated thereunder:

regulate the storage and distribution, labeling, packaging, handling, reporting, record keeping, introduction, manufacturing and marketing of drugs, HCT/P products and medical devices;

subject us to inspection by the United States Food and Drug Administration and the United States Drug Enforcement Administration;

regulate the storage, transportation and disposal of certain of our products that are considered hazardous materials;

require registration with the United States Food and Drug Administration and the United States Drug Enforcement Administration and various state agencies;

require record keeping and documentation of transactions involving drug products;

require us to design and operate a system to identify and report suspicious orders of controlled substances to the United States Drug Enforcement Agency;

require us to manage returns of products that have been recalled and subject us to inspection of our recall procedures and activities; and

impose reporting requirements if a pharmaceutical, HCT/P products or medical device causes serious illness, injury or death.


Applicable federal, state and local laws and regulations also may require us to meet various standards relating to, among other things, licensure or registration, sales and marketing practices, product integrity and supply tracking to the manufacturer of the product, personnel, privacy and security of health or other personal information, installation, maintenance and repair of equipment, and the importation and exportation of products.  Our business also is subject to requirements of similar and other foreign governmental laws and regulations affecting our operations abroad.  The United States Food and Drug Administration and United States Drug Enforcement Administration have recently increased their regulatory and enforcement activities.

The failure to comply with any of these regulations, or new interpretations of existing laws and regulations, or the imposition of any additional laws and regulations, could negatively affect our business.  There can be no assurance that current government regulations will not adversely affect our business.  The costs to us associated with complying with the various applicable statutes and regulations, as they now exist and as they may be modified, could be material. Allegations by a governmental body that we have not complied with these laws could have a material adverse impact on our businesses.  If it is determined that we have not complied with these laws, we are potentially subject to penalties including warning letters, civil and criminal penalties, mandatory recall of product, seizure of product and injunction, and suspension or limitation of product sale and distribution.  If we enter into settlement agreements to resolve allegations of non-compliance, we could be required to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses.  Non-compliance with government requirements could adversely affect our ability to participate in federal and state government 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 and can be entitled to receive up to 30% of total recoveries.  Also, violations of the False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim.  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.


If we fail to comply with laws and regulations relating to the confidentiality of sensitive personal information or standards in electronic health data transmissions, we could be required to make significant changes to our products, or incur penalties or other liabilities.

State, federal and foreign laws, such as the federal Health Insurance Portability and Accountability Act of 1996, regulate the confidentiality of sensitive personal information and the circumstances under which such information may be released.  These measures may govern the disclosure and use of confidential personal and patient medical record information and may require the users of such information to implement specified security measures, and to notify individuals in the event of privacy and security breaches.  Evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products in a timely manner to reflect these legal requirements, either of which could have an adverse impact on our results of operations.  Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for specified electronic transactions, for example transactions involving claims submissions to third party payers.  These also continue to evolve and are often unclear and difficult to apply.  In addition, under the federal Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was passed in 2009, some of our businesses that were previously only indirectly subject to federal HIPAA privacy and security rules became directly subject to such rules because the businesses serve as “business associates” to our customers.  Additional rules under the HITECH Act are expected to be issued in early 2012, further expanding the privacy and security requirements applicable to some of our businesses.  Failure to maintain the confidentiality of sensitive personal information in accordance with the applicable regulatory requirements, or to abide by electronic health data transmission standards, could expose us to breach of contract claims, fines and penalties, costs for remediation and harm to our reputation.

Our 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;

difficulties and delays inherent in sourcing products and contract manufacturing in foreign markets;

limitations on our ability under local laws to protect our intellectual property;

unexpected regulatory, legal, economic and political changes in foreign markets;

civil disturbances, geopolitical turmoil, including terrorism, war or political or military coups; and

public health emergencies.


Our expansion through acquisitions and joint ventures involves risks.

We have expanded our domestic and international markets in part through acquisitions and joint ventures, and we expect to continue to make acquisitions and enter into joint ventures in the future.  Such transactions involve numerous risks, including possible adverse effects on our operating results or the market price of our common stock.  Some of our acquisitions and future acquisitions may also give rise to an obligation by us to make contingent payments or to satisfy certain repurchase obligations, which payments could have an adverse effect on our results of operations.  In addition, integrating acquired businesses and joint ventures:

may result in a loss of customers or product lines of the acquired businesses or joint ventures;

requires significant management attention;

may place significant demands on our operations, information systems and financial resources; and

results in additional acquisition and integration expenses.

There can be no assurance that our future acquisitions or joint ventures will be successful.  Our ability to continue to successfully effect acquisitions and joint ventures will depend upon the following:

the availability of suitable acquisition or joint venture candidates at acceptable prices;

our ability to consummate such transactions, which could potentially be prohibited due to U.S. or foreign antitrust regulations;

the availability of financing on acceptable terms, in the case of non-stock transactions; and

the liquidity of our investments and our ability to raise capital could be affected by the financial credit markets.

Our acquisitions may not result in the benefits and revenue growth we expect.

We are in the process of integrating companies that we acquired and including the operations, services, products and personnel of each company within our management policies, procedures and strategies.  We cannot be sure that we will achieve the benefits of revenue growth that we expect from these acquisitions or that we will not incur unforeseen additional costs or expenses in connection with these acquisitions.  To effectively manage our expected future growth, we must continue to successfully manage our integration of these companies and continue to improve our operational systems, internal procedures, working capital management, 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 interests in companies that manufacture certain dental products. As a result, we are subject to the potential risk of product liability or other claims relating to the manufacture and distribution of products by those entities.  One of the potential risks we face in the distribution of our products is liability resulting from counterfeit or tainted products infiltrating the supply chain.  In addition, some of the products that we transport and sell are considered hazardous materials.  The improper handling of such materials or accidents involving the transportation of such materials could subject us to liability.  We have various insurance policies, including product liability insurance, covering risks and in amounts that we consider adequate.  In many cases in which we have been sued in connection with products manufactured by others, the manufacturer of the product provides us with indemnification.  There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate protection.  A successful claim brought against us in excess of available insurance or not covered by indemnification agreements, or any claim that results in significant adverse publicity against us, could have an adverse effect on our business and our reputation.

 
23

 
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.

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.

Risks generally associated with our information systems could adversely affect our results of operations.

We rely on information systems (IS) in our business to obtain, rapidly process, analyze and manage data to, among other things:

maintain and manage worldwide systems to facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers;

receive, process and ship orders on a timely basis;

manage the accurate billing and collections for thousands of customers;

process payments to suppliers; and

maintain certain of our customers’ electronic medical records.
 
A cyber-attack that bypasses our IS security systems causing an IS security breach may lead to a material disruption of our IS business systems and/or the loss of business information resulting in adverse business impact.  Risks may include, among other things:

future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property;

operational or business delays resulting from the disruption of IS systems and subsequent clean-up and mitigation activities; and

negative publicity resulting in reputation or brand damage with our customers, partners or industry peers.

Our results of operations could be adversely affected if our IS systems are interrupted, damaged by unforeseen events, cyber-attacks or fail for any extended period of time.
 
 
We have various insurance policies, including cyber liability insurance, covering risks and in amounts that we consider adequate.  There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost.  Successful claims for misappropriation or release of confidential or personal data brought against us in excess of available insurance or fines or other penalties assessed or any claim that results in significant adverse publicity against us, could have an adverse effect on our business and our reputation.

Certain provisions in our governing documents and other documents to which we are a party may discourage third-party offers to acquire us that might otherwise result in our stockholders receiving a premium over the market price of their shares.
 
        The provisions of our certificate of incorporation and by-laws may make it more difficult for a third party to acquire us, may discourage acquisition bids and may limit the price that certain investors might be willing to pay in the future for shares of our common stock.  These provisions, among other things:

require the affirmative vote of the holders of at least 60% of the shares of common stock entitled to vote to approve a merger, consolidation, or a sale, lease, transfer or exchange of all or substantially all of our assets; and

require the affirmative vote of the holders of at least 66 2/3% of our common stock entitled to vote to (i) remove a director; and (ii) to amend or repeal our by-laws, with certain limited exceptions.
 
In addition, our 1994 Stock Incentive Plan and 1996 Non-Employee Director Stock Incentive Plan provide for accelerated vesting of stock options upon a change in control.  These incentive plans also authorize the committee under the plans to provide for accelerated vesting of other types of equity awards in connection with a change in control at grant or thereafter, and certain other awards made under these incentive plans (such as restricted stock and restricted stock unit awards) accelerate upon a change in control or upon certain termination events in connection with a change in control.  Further, certain agreements between us and our executive officers provide for increased severance payments and certain benefits if those executive officers are terminated without cause by the Company or if they terminate for good reason in each case, within two years after a change in control or within ninety days prior to the effective date of the change in control or after the first public announcement of the pendency of the change in control.
 
Tax legislation initiatives could adversely affect our net earnings and tax liabilities.

We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as foreign jurisdictions.  From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions. There can be no assurance that our effective tax rate will not be adversely affected by these initiatives.  In addition, tax laws and regulations are extremely complex and subject to varying interpretations.  Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.

Item 1B.  Unresolved Staff Comments

We have no unresolved comments from the staff of the SEC that were issued 180 days or more preceding the end of our 2011 fiscal year.


ITEM 2.  Properties

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
 
380,000 
 
February 2019
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
Office and Distribution Center
 
Niagara on the Lake, Canada
 
Lease
 
128,000 
 
September 2016
Distribution Center
 
Sparks, NV
 
Lease
 
338,000 
 
February 2013
Office and Distribution Center
 
Gillingham, United Kingdom
 
Lease
 
103,000 
 
April 2020
Office and Distribution Center
 
Tours, France
 
Own
 
161,000 
 
N/A
Office and 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, Slovakia, Spain, Switzerland, Turkey and the United Kingdom.

We believe that our properties are in good condition, are well maintained and are suitable and adequate to carry on our business.  We have additional operating capacity at certain distribution center facilities.

ITEM 3.  Legal Proceedings

From time to time, we may become a party to legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes and other matters arising out of the ordinary course of our business.  In our opinion, pending matters will not have a material adverse effect on our financial condition or results of operations.

We have various insurance policies, including product liability insurance, covering risks in amounts that we consider adequate.  In many cases in which we have been sued in connection with products manufactured by others, the manufacturer provides us with indemnification.  There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate protection.

As of December 31, 2011, we had accrued our best estimate of potential losses relating to product liability and other claims that were probable to result in a liability and for which we were able to reasonably estimate a loss.  This accrued amount, as well as related expenses, was not material to our financial position, results of operations or cash flows.  Our method for determining estimated losses considers currently available facts, presently enacted laws and regulations and other external factors, including probable recoveries from third parties.

ITEM 4.  Mine Safety Disclosures

Not applicable.


PART II

ITEM 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market tier of the NASDAQ Stock Market, or NASDAQ, under the symbol HSIC.  On October 2, 2007, our common stock became a component of the NASDAQ-100 stock market index.  The following table sets forth, for the periods indicated, the high and low reported sales prices of our common stock as reported on NASDAQ for each quarterly period in fiscal 2011 and 2010:

 
 
High
   
Low
 
Fiscal 2011:
 
 
   
 
 
1st Quarter
  $ 69.98     $ 61.26  
2nd Quarter
    74.48       67.21  
3rd Quarter
    74.98       58.50  
4th Quarter
    71.13       58.56  
 
               
Fiscal 2010:
               
1st Quarter
  $ 58.50     $ 51.49  
2nd Quarter
    62.63       53.41  
3rd Quarter
    57.60       50.96  
4th Quarter
    62.62       55.55  

On February 6, 2012, there were approximately 998 holders of record of our common stock and the last reported sales price was $72.99.


Purchases of Equity Securities by the Issuer

Our current share repurchase program, announced on June 21, 2004, originally allowed us to repurchase up to $100 million of shares of our common stock, which represented approximately 3.5% of the shares outstanding at the commencement of the program.  As summarized in the table below, subsequent additional increases totaling $500 million, authorized by our Board of Directors, to the repurchase program provide for a total of $600 million of shares of our common stock to be repurchased under this program.

Date of
 
Amount of Additional
 
Authorization
 
Repurchases Authorized
 
October 31, 2005
 
$
100,000,000 
 
March 28, 2007
 
 
100,000,000 
 
November 16, 2010
 
 
100,000,000 
 
August 18, 2011
 
 
200,000,000 
 

As of December 31, 2011, we had repurchased $500.0 million of common stock (9,819,009 shares) under these initiatives, with $100.0 million available for future common stock share repurchases.

The following table summarizes repurchases of our common stock under our stock repurchase program during the fiscal quarter ended December 31, 2011:

 
   
 
 
 
 
 
Total Number
 
Maximum Number
 
   
Total
 
 
 
 
of Shares
 
of Shares
 
   
Number
 
Average
 
Purchased as Part
 
that May Yet
 
   
of Shares
 
Price Paid
 
of Our Publicly
 
Be Purchased Under
Fiscal Month
 
Purchased (1)
 
Per Share
 
Announced Program
 
Our Program (2)
09/25/11 through 10/29/11
 
524,112 
 
$
61.82 
 
524,112 
 
1,903,694 
10/30/11 through 11/26/11
 
370,000 
 
 
62.91 
 
370,000 
 
1,864,434 
11/27/11 through 12/31/11
 
195,377 
 
 
60.65 
 
195,377 
 
1,552,044 
 
 
1,089,489 
 
 
 
 
1,089,489 
 
 
 
   
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
(1)   
All repurchases were executed in the open market under our existing publicly announced authorized program.
       
 
 
 
 
 
 
 
 
(2)   
The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
   
closing price of our common stock at that time.

Dividend Policy

We have not declared any cash dividends on our common stock during fiscal years 2011 or 2010.  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.


Stock Performance Graph

The graph below compares the cumulative total stockholder return on $100 invested, assuming the reinvestment of all dividends, on December 30, 2006, the last trading day before the beginning of our 2007 fiscal year, through the end of fiscal 2011 with the cumulative total return on $100 invested for the same period in the Dow Jones U.S. Health Care Index and the NASDAQ Stock Market Composite Index.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN

 
 
 
 
 
 
 
 
 
 
 
 
 
ASSUMES $100 INVESTED ON DECEMBER 30, 2006
ASSUMES DIVIDENDS REINVESTED
 
 
 
 
 
 
 
 
 
 
 
 
 
December 30,
 
December 29,
 
December 27,
 
December 26,
 
December 25,
 
December 31,
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
Henry Schein, Inc.
$ 100.00   $ 126.68   $ 72.23   $ 108.23   $ 126.91   $ 131.54
 
                                 
Dow Jones U.S. Health
                                 
   Care Index
  100.00     109.30     81.49     102.79     107.12     118.91
 
                                 
NASDAQ Stock Market
                                 
   Composite Index
  100.00     111.03     64.44     97.23     114.59     113.16


ITEM 6.  Selected Financial Data

The following selected financial data, with respect to our financial position and results of operations for each of the five fiscal years in the period ended December 31, 2011, 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 31,
   
December 25,
   
December 26,
   
December 27,
   
December 29,
 
 
 
2011
   
2010
   
2009
   
2008
   
2007
 
 
 
(in thousands, except per share data)
 
Income Statement Data:
 
 
   
 
   
 
   
 
   
 
 
Net sales
  $ 8,530,242     $ 7,526,790     $ 6,538,336     $ 6,380,413     $ 5,889,884  
Gross profit
    2,418,055       2,170,876       1,916,820       1,874,295       1,706,092  
Selling, general and administrative expenses
    1,835,906       1,637,460       1,449,715       1,431,769       1,319,153  
Restructuring costs (1)
    -       12,285       3,020       23,240       -  
Operating income
    582,149       521,131       464,085       419,286       386,939  
Other expense, net
    (12,842 )     (19,096 )     (11,365 )     (23,837 )     (8,430 )
Income from continuing operations before taxes,
                                       
    equity in earnings (losses) of affiliates and
                                       
    noncontrolling interests
    569,307       502,035       452,720       395,449       378,509  
Income taxes
    (180,212 )     (160,069 )     (127,521 )     (131,210 )     (128,556 )
Equity in earnings (losses) of affiliates
    15,561       10,165       5,243       5,037       (73 )
Income from continuing operations
    404,656       352,131       330,442       269,276       249,880  
Income (loss) from discontinued
                                       
    operations, net of tax (2)
    -       -       2,715       (7,902 )     (20,704 )
Net income
    404,656       352,131       333,157       261,374       229,176  
Less: Net income attributable to
                                       
    noncontrolling interests
    (36,995 )     (26,342 )     (22,004 )     (21,917 )     (17,442 )
Net income attributable to Henry Schein, Inc.
  $ 367,661     $ 325,789     $ 311,153     $ 239,457     $ 211,734  
 
                                       
Amounts attributable to Henry Schein, Inc.:
                                       
  Income from continuing operations
  $ 367,661     $ 325,789     $ 308,551     $ 247,347     $ 232,529  
  Income (loss) from discontinued
                                       
     operations, net of tax
    -       -       2,602       (7,890 )     (20,795 )
  Net income
  $ 367,661     $ 325,789     $ 311,153     $ 239,457     $ 211,734  
 
                                       
Earnings (loss) per share attributable to
                                       
    Henry Schein, Inc.:
                                       
 
                                       
From continuing operations:
                                       
    Basic
  $ 4.08     $ 3.62     $ 3.47     $ 2.78     $ 2.63  
    Diluted
    3.97       3.49       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
  $ 4.08     $ 3.62     $ 3.50     $ 2.69     $ 2.39  
    Diluted
    3.97       3.49       3.44       2.63       2.32  
 
                                       
Weighted-average common shares outstanding:
                                       
    Basic
    90,120       90,097       88,872       89,080       88,559  
    Diluted
    92,620       93,268       90,556       91,221       91,163  
 
 
30

 
 
 
Years ended
 
 
December 31,
   
December 25,
   
December 26,
   
December 27,
   
December 29,
 
 
2011
   
2010
   
2009
   
2008
   
2007
 
 
(in thousands)
Net Sales by Market Data:
 
 
   
 
   
 
   
 
   
 
Healthcare distribution (3):
                                     
    Dental (4)
  2,861,100     2,678,830     2,509,921     2,567,064     2,447,841
    Medical (5)
    1,412,470       1,290,428       1,217,020       1,210,875       1,340,146
    Animal health (6)
    993,183       889,303       240,082       218,093       200,123
    International (7)
    3,012,869       2,468,277       2,398,105       2,221,092       1,769,881
        Total healthcare distribution
    8,279,622       7,326,838       6,365,128       6,217,124       5,757,991
Technology (8)
     250,620        199,952        173,208        163,289        131,893
        Total
   8,530,242      7,526,790      6,538,336      6,380,413      5,889,884
 
 
 
As of
 
 
December 31,
   
December 25,
   
December 26,
   
December 27,
   
December 29,
 
 
2011
   
2010
   
2009
   
2008
   
2007
 
 
(in thousands)
Balance Sheet Data:
 
 
   
 
   
 
   
 
   
 
Total assets
  $ 4,740,144     $ 4,547,471     $ 3,835,985     $ 3,599,210     $ 3,313,472
Long-term debt
    363,524       395,309       243,373       256,648       407,627
Redeemable noncontrolling interests
    402,050       304,140       178,570       233,035       150,028
Stockholders' equity
    2,433,623       2,412,957       2,161,508       1,772,354       1,674,987
 
                                     
 
(1)  
Restructuring costs for the year ended December 25, 2010 consist primarily of severance costs, including severance pay and benefits of $8.8 million, facility closing costs of $3.4 million and other professional and consulting costs of $0.1 million.  Restructuring costs for the year ended December 26, 2009 consist primarily of employee severance costs, including severance pay and benefits of $1.5 million and facility closing costs of $1.5 million.  Restructuring costs for the year ended December 27, 2008 consist primarily of employee severance costs, including severance pay and benefits of $18.6 million, facility closing costs of $3.8 million and other professional and consulting costs of $0.8 million.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Plans of Restructuring” herein and the consolidated financial statements and related notes contained in ITEM 8.
 
(2)  
On August 5, 2009, we completed the sale of a wholesaler of dental consumables for aggregate consideration of $14.2 million, of which $13.2 million had been received as of December 26, 2009.  As a result of this sale, included in operating results from discontinued operations for 2009 is a net gain, net of tax, of $2.6 million or $0.03 per diluted share.
 
During the fourth quarter of 2008, included in operating results from discontinued operations, we recorded an impairment charge of $11.2 million ($7.3 million, net of tax), or $0.08 per diluted share, related to the exit from our wholesale ultrasound business.
 
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.  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.
 
(3)  
Consists of consumable products, small equipment, laboratory products, large dental and medical equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
 
(4)  
Consists of products sold in the United States and Canadian dental markets.
 
(5)  
Consists of products sold in the United States’ medical market.
 
(6)  
Consists of products sold in the United States’ animal health market.
 
(7)  
Consists of products sold in the dental, medical and animal health markets, primarily in Europe, Australia and New Zealand.
 
(8)  
Consists of practice management software, financial services and other value-added products and services, which are distributed primarily to healthcare providers in the United States, Canada, the United Kingdom, Australia and New Zealand.
 
 
31


ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein.  All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of future performance.  These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These statements are identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or other comparable terms.

Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: effects of a highly competitive market; our dependence on third parties for the manufacture and supply of our products; our dependence upon sales personnel, customers, suppliers and manufacturers; our dependence on our senior management; fluctuations in quarterly earnings; risks from expansion of customer purchasing power and multi-tiered costing structures; possible increases in the cost of shipping our products or other service issues with our third-party shippers; general global macro-economic conditions; disruptions in financial markets; possible volatility of the market price of our common stock; changes in the healthcare industry; implementation of healthcare laws; failure to comply with regulatory requirements and data privacy laws; risks associated with our international operations; transitional challenges associated with acquisitions and joint ventures, including the failure to achieve anticipated synergies; financial risks associated with acquisitions and joint ventures; litigation risks; the dependence on our continued product development, technical support and successful marketing in the technology segment; risks from rapid technological change; risks from disruption to our information systems; certain provisions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation. The order in which these factors appear should not be construed to indicate their relative importance or priority.

We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict.  Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.  We undertake no duty and have no obligation to update forward-looking statements.

Executive-Level Overview

We believe we are the largest distributor of healthcare products and services primarily to office-based healthcare practitioners.  We serve nearly 775,000 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 79 years of experience distributing healthcare products.

We are headquartered in Melville, New York, employ nearly 15,000 people (of which over 6,500 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, Slovakia, Spain, Switzerland and the United Kingdom.  We also have affiliates in Iceland, Saudi Arabia and Turkey.

We have established strategically located distribution centers to enable us to better serve our customers and increase our operating efficiency.  This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs.  Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.



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

Our dental group serves office-based dental practitioners, schools and other institutions in the combined United States and Canadian dental market.  Our medical group serves office-based medical practitioners, surgical centers, other alternate-care settings and other institutions throughout the United States.  Our animal health group serves animal health practices and clinics throughout the United States.  Our international group serves dental, medical and animal health practitioners in 22 countries outside of North America and is what we believe to be a leading European healthcare supplier serving office-based practitioners.

Our technology group provides software, technology and other value-added services to healthcare practitioners, primarily in the United States, Canada, the United Kingdom, Australia and New Zealand.  Our value-added practice solutions include practice management software systems for dental and medical practitioners and animal health clinics.  Our technology group offerings also include financial services on a non-recourse basis, e-services and continuing education services for practitioners.

Industry Overview

In recent years, the healthcare industry has increasingly focused on cost containment.  This trend has benefited distributors capable of providing a broad array of products and services at low prices.  It also has accelerated the growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing specialized management information support.  We believe that the trend towards cost containment has the potential to favorably affect demand for technology solutions, including software, which can enhance the efficiency and facilitation of practice management.

Our operating results in recent years have been significantly affected by strategies and transactions that we undertook to expand our business, domestically and internationally, in part to address significant changes in the healthcare industry, including consolidation of healthcare distribution companies, potential healthcare reform, trends toward managed care, cuts in Medicare and collective purchasing arrangements.

Our current and future results have been and could be impacted by the current economic environment and uncertainty, particularly impacting overall demand for our products and services.

Industry Consolidation

The healthcare products distribution industry, as it relates to office-based healthcare practitioners, is highly fragmented and diverse.  This industry, which encompasses the dental, medical and animal health markets, was estimated to produce revenues of approximately $28 billion in 2011 in the combined North American, European and Australian/New Zealand markets.  The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.

Due in part to the inability of office-based healthcare practitioners to store and manage large quantities of supplies in their offices, the distribution of healthcare supplies and small equipment to office-based healthcare practitioners has been characterized by frequent, small quantity orders, and a need for rapid, reliable and substantially complete order fulfillment.  The purchasing decisions within an office-based healthcare practice are typically made by the practitioner or an administrative assistant.  Supplies and small equipment are generally purchased from more than one distributor, with one generally serving as the primary supplier.



We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial and marketing resources, seeking to combine with larger companies that can provide growth opportunities.  This consolidation also may continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.

Our trend with regard to acquisitions and joint ventures has been to expand our role as a provider of products and services to the healthcare industry.  This trend has resulted in expansion into service areas that complement our existing operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired businesses.

As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we have the ability to support increased sales through our existing infrastructure.

As the healthcare industry continues to change, we continually evaluate possible candidates for merger or acquisition and intend to continue to seek opportunities to expand our role as a provider of products and services to the healthcare industry.  There can be no assurance that we will be able to successfully pursue any such opportunity or consummate any such transaction, if pursued.  If additional transactions are entered into or consummated, we would incur merger and/or acquisition-related costs, and there can be no assurance that the integration efforts associated with any such transaction would be successful.

Aging Population and Other Market Influences

The healthcare products distribution industry continues to experience growth due to the aging population, increased healthcare awareness, the proliferation of medical technology and testing, new pharmacology treatments and expanded third-party insurance coverage, partially offset by the affects of increased unemployment on insurance coverage.  In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing from acute care settings to alternate-care sites, particularly physicians’ offices.

The U.S. Census Bureau’s “Statistical Abstract of the United States: 2011,” reports that, in 2010, more than five 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 2050, that number is projected to more than triple to more than 19 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 2010 – 2020” indicating that total national healthcare spending reached approximately $2.6 trillion in 2010, or 17.6% 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 approximately $4.6 trillion in 2020, approximately 19.8% of the nation’s gross domestic product.



Government

Certain of our businesses involve the distribution of pharmaceuticals and medical devices, and in this regard we are subject to extensive local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices.  Additionally, government and private insurance programs fund a large portion of the total cost of medical care.  Many of these laws and regulations are subject to change and may impact our financial performance.
 
Healthcare Reform
 
For example, the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of healthcare generally, to reduce fraud and abuse, and to provide access to health coverage for an additional 32 million people.  The Health Care Reform Law requirements include, for example (i) a 2.3% excise tax on domestic sales of medical devices by manufacturers and importers beginning in 2013, and a fee on branded prescription drugs and biologics that was implemented in 2011, both of which may affect sales, and (ii) mandated pharmacy benefit manager transparency regarding rebates, discounts and price concessions with respect to drug benefits under Medicare Part D, and in 2014 with respect to drug benefits offered through qualified health plans offered through state exchanges, which could affect pricing and competition.  A provision in the Health Care Reform Law, often referred to as the “individual mandate,” which requires individuals without health insurance to pay a penalty, was recently declared unconstitutional by certain federal courts, while certain other federal courts have affirmed its constitutionality.  Appeals are pending, and the United States Supreme Court will review this issue during its 2012 term.

In addition to the foregoing, the Health Care Reform Law imposed new reporting and disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to certain practitioners, including physicians, dentists and teaching hospitals, and imposes new reporting and disclosure requirements for pharmaceutical and device manufacturers and group purchasing organizations with regard to certain ownership interests held by physicians in the reporting entity.  Data collection obligations were to commence in January 2012, and reporting requirements are to be implemented in 2013.  On December 14, 2011, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed regulations to implement these provisions and sought substantial comments, thus apparently delaying the January 1, 2012 start of information collection.   These proposed regulations are broadly drafted and still subject to change, and it is possible that when these regulations are finalized, they will treat us or one or more of our subsidiaries as an entity subject to these reporting and disclosure requirements.   In addition, through business arrangements we have with drug and device manufacturers, we may be required to collect and report detailed information to these manufactures in order for these manufacturers to comply with the new requirements.  In addition, several states require pharmaceutical and/or device companies to report expenses relating to the marketing and promotion of products as well as gifts and payments to individual practitioners in the states, or prohibit certain marketing related activities.  Other states, such as California, Nevada, Massachusetts and Connecticut, require pharmaceutical and/or device companies to implement compliance programs or marketing codes.  Wholesale distributors are covered by the laws in certain of these states.  In others, it is possible that our activities, including on behalf of manufacturers, or the activities of one or more of our subsidiaries, will subject us to the state’s reporting requirements and prohibitions.


Healthcare Fraud
 
Certain of our businesses are subject to federal and state (and similar foreign) healthcare fraud and abuse, referral and reimbursement laws, and regulations with respect to their operations.  Such laws prohibit, among other things, the submission or causing the submission of false or fraudulent claims for reimbursement, and soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for or recommending ordering, purchasing or leasing, of items or services that are paid for by government health care programs (known as “anti-kickback” laws). Violations of these laws could result in civil and criminal penalties.  The fraud and abuse laws and regulations have been subject to heightened enforcement activity over the past few years, particularly through “relators,” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state False Claims Act statutes, and can be entitled to receive up to 30% of total recoveries.  Also, violations of the False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim.  These laws and regulations are subject to frequent modification and varied interpretation, and can have a material adverse impact on us if a violation is found.  The Health Care Reform Law significantly strengthened the federal False Claims Act, and the anti-kickback provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that an Anti-Kickback Law violation can be a basis for False Claims Act liability.  We also are subject to certain laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act and anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity in recent years.

Operating and Security Standards
 
Regulations adopted under the federal Prescription Drug Marketing Act (“PDMA”), effective December 2006, require the identification and documentation of transactions involving the receipt and distribution of prescription drugs, that is, drug pedigree information.  These requirements include tracking sales and distribution of prescription drug products from distributors and potentially manufacturers.  In early December 2006, the federal District Court for the Eastern District of New York issued a preliminary injunction enjoining the implementation of certain parts of the federal drug pedigree requirements, including the requirement to identify transactions back to the manufacturer.  On July 14, 2011, the FDA published a proposed rulemaking that would remove the requirement that a pedigree track back to the manufacturer and that certain information be identified on the pedigree.  As a result of the FDA’s intent to resolve these issues, the case was voluntarily dismissed in August 2011.  FDA policies in this area are still evolving.

Many states have implemented or are considering similar drug pedigree laws and regulations.  There have been increasing efforts by various levels of government, including state departments of health, state boards of pharmacy and comparable agencies, to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or mislabeled pharmaceuticals into the distribution system.  A number of states, including Florida, have already implemented pedigree requirements, including drug tracking requirements, which are intended to protect the integrity of the pharmaceutical distribution system.  California has enacted a statute that, beginning in 2015, will require manufacturers to identify each package of a prescription pharmaceutical with a standard, machine-readable unique numerical identifier, and will require manufacturers and distributors to participate in an electronic track-and-trace system and provide or receive an electronic pedigree for each transaction in the drug distribution chain.  Other states have passed or are reviewing the same type of requirements.  Bills have been proposed in Congress that would impose similar requirements at the federal level.
 
The Combat Methamphetamine Enhancement Act of 2010, which became effective in April 2011, requires retail sellers of products containing certain chemicals, such as pseudoephedrine, to self certify to the Drug Enforcement Administration (“DEA”) that they are in compliance with the laws and regulations regarding such sales. The law also prohibits distributors from selling these products to retailers who are not registered with the DEA or who have not self-certified compliance with the laws and regulations.  Various states also impose restrictions on the sale of certain products containing pseudoephedrine and other chemicals.  The Secure and Responsible Drug Disposal Act of 2010, signed by President Obama in October 2010, is intended to allow patients to deliver unused controlled substances to designated entities to more easily and safely dispose of controlled substances while reducing the chance of diversion.  The law authorizes the DEA to promulgate regulations to allow, but not require, designated entities to receive unused controlled substances.
 
 
Regulated Software; Electronic Health Records
 
The United States Food and Drug Administration has become increasingly active in addressing the regulation of computer software intended for use in healthcare settings, and has been developing policies on regulating clinical decision support tools as medical devices.  Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that the FDA could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products.
 
Certain of our businesses involve access to personal health, medical, financial and other information of individuals, and are accordingly directly or indirectly subject to numerous federal, state, local and foreign laws and regulations that protect the privacy and security of such information, such as the privacy and security provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”), and require, among other things, the implementation of various recordkeeping, operational, notice and other practices intended to safeguard that information, limit its use to allowed purposes, and notify individuals in the event of privacy and security breaches.  Failure to comply with these laws can result in substantial penalties and other liabilities.  As a result of the federal Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was passed in 2009, some of our businesses that were previously only indirectly subject to federal HIPAA privacy and security rules became directly subject to such rules because such businesses serve as “business associates” of HIPAA covered entities, such as health care providers. Additional rules under the HITECH Act are expected to be issued in early 2012, further expanding the privacy and security requirements applicable to some of our businesses.

In addition, the HITECH Act established a program of Medicare and Medicaid incentive payments available to certain health care providers including, among others, physicians and dentists, if they meaningfully use certified electronic health record technology (“EHR”).  Also, eligible providers that fail to adopt certified EHR systems may be subject to Medicare reimbursement reductions beginning in 2015.  Qualification for the incentive payments requires the use of EHRs that are certified as having certain capabilities for meaningful use pursuant to standards adopted by the Department of Health and Human Services.  While initial standards have been established, new versions are expected to be issued over the next several years, and the content of those standards is not certain.  Certain of our businesses involve the manufacture and sale of certified EHR systems, and so must maintain compliance with these evolving governmental criteria.

Also, HIPAA requires certain health care providers, such as physicians, to use certain transaction and code set rules for specified electronic transactions, such as transactions involving claims submissions.   As of January 1, 2012, subject to 90 days of CMS enforcement discretion, electronic claim submissions and related electronic transactions were required to be conducted under a new HIPAA transaction standard, called Version 5010.  CMS is requiring this upgrade in connection with another new requirement applicable to the industry, the implementation of new diagnostic code sets to be used in claims submission.  The new diagnostic code sets are called the ICD-10-CM, and are to be implemented on October 1, 2013.  Certain of our businesses provide electronic practice management products that must meet those requirements, and while we believe we are prepared to timely adopt the new standards, it is possible that the transition to these new standards, particularly the transition to ICD-10-CM, may result in a degree of disruption and confusion, thus potentially increasing the costs associated with supporting this product.

There may be additional legislative initiatives in the future impacting healthcare.

E-Commerce

Traditional healthcare supply and distribution relationships are being challenged by electronic online commerce solutions.  Our distribution business is characterized by rapid technological developments and intense competition.  The advancement of online commerce will require us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings.

Through our proprietary, technologically-based suite of products, we offer customers a variety of competitive alternatives.  We believe that our tradition of reliable service, our name recognition and large customer base built on solid customer relationships position us well to participate in this growing aspect of the distribution business.  We continue to explore ways and means to improve and expand our Internet presence and capabilities.



Results of Operations

The following tables summarize the significant components of our operating results and cash flows for each of the three years ended December 31, 2011, December 25, 2010 and December 26, 2009 (in thousands):
 
 
 
Years Ended
 
 
 
December 31,
   
December 25,
   
December 26,
 
 
 
2011
   
2010
   
2009
 
 
     
Operating results:
 
 
   
 
   
 
 
Net sales
  $  8,530,242     $  7,526,790      6,538,336  
Cost of sales
    6,112,187       5,355,914       4,621,516  
    Gross profit
    2,418,055       2,170,876       1,916,820  
Operating expenses
                       
    Selling, general and administrative
    1,835,906       1,637,460       1,449,715  
    Restructuring costs
    -        12,285       3,020  
        Operating income
   582,149     521,131     464,085  
                         
Other expense, net     (12,842    (19,096    (11,365
Income from continuing operations       404,656        352,131        330,442  
Income from continuing operations attributable                         
    to Henry Schein, Inc.       367,661        325,789        308,551  
 
 
 
Years Ended
 
 
 
December 31,
   
December 25,
   
December 26,
 
 
 
2011
   
2010
   
2009
 
 
     
Cash flows:
 
 
   
 
   
 
 
Net cash provided by operating activities
  $ 554,625     $ 395,480     398,029  
Net cash used in investing activities
    (196,069     (388,033     (98,587
Net cash used in financing activities
    (354,367     (330,233     (197,675
 
Plans of Restructuring

On November 5, 2008, we announced certain actions to reduce operating costs.  These actions included the elimination of approximately 430 positions from our operations and the closing of several smaller facilities.  Also, during the first quarter of 2010, we completed an additional restructuring in order to further reduce operating expenses.  This restructuring included headcount reductions of 184 positions, as well as the closing of a number of smaller locations.

During the years ended December 25, 2010 and December 26, 2009, we recorded restructuring costs of approximately $12.3 million (approximately $8.3 million after taxes) and $3.0 million (approximately $2.1 million after taxes), respectively.  These costs primarily consisted of employee severance pay and benefits, facility closing costs, representing primarily lease termination and asset write-off costs, and outside professional and consulting fees directly related to the restructuring plans.  The costs associated with these restructurings are included in a separate line item, “Restructuring costs,” within our consolidated statements of income.
 
During 2012, we will be implementing a restructuring with the goal of improving profitability.  We expect to record restructuring charges of approximately $11 million to $13 million, or approximately $0.08 to $0.10 per diluted share, during the first half of 2012 as a result of this restructuring.

 
2011 Compared to 2010

Net Sales

Net sales for 2011 and 2010 were as follows (in thousands):

       
% of
       
% of
   
Increase
 
   
2011
 
Total
   
2010
 
Total
       %  
Healthcare distribution (1):
                             
Dental  (2)
  $ 2,861,100     33.6 %   $ 2,678,830     35.6 %   $ 182,270   6.8 %
Medical  (3)
    1,412,470     16.6       1,290,428     17.1       122,042   9.5  
Animal health  (4)
    993,183     11.6       889,303     11.8       103,880   11.7  
International  (5)
    3,012,869     35.3       2,468,277     32.8       544,592   22.1  
Total healthcare distribution
    8,279,622     97.1       7,326,838     97.3       952,784   13.0  
Technology  (6)
    250,620     2.9       199,952     2.7       50,668   25.3  
Total
  $ 8,530,242     100.0 %   $ 7,526,790     100.0 %   $ 1,003,452   13.3  
                                         

(1)
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
 
(2)
Consists of products sold in the United States and Canadian dental markets.
 
(3)
Consists of products sold in the United States’ medical market.
 
(4)
Consists of products sold in the United States’ animal health market.
 
(5)
Consists of products sold in the dental, medical and animal health markets, primarily in Europe, Australia and New Zealand.
 
(6)
Consists of practice management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States, Canada, the United Kingdom, Australia and New Zealand.

The fiscal year ended December 31, 2011 consisted of 53 weeks as compared to the fiscal year ended December 25, 2010, which consisted of 52 weeks.

The $1,003.5 million, or 13.3%, increase in net sales for the year ended December 31, 2011 includes an increase of 10.9% local currency growth (4.5% increase in internally generated revenue, 1.5% impact from extra week and 4.9% growth from acquisitions) as well as an increase of 2.4% related to foreign currency exchange.

The $182.3 million, or 6.8%, increase in dental net sales for the year ended December 31, 2011 includes an increase of 6.3% in local currencies (3.2% increase in internally generated revenue, 2.0%, impact from extra week and 1.1% growth from acquisitions) as well as an increase of 0.5% related to foreign currency exchange.  The 6.3% increase in local currency sales was due to increases in dental equipment sales and service revenues of 5.7% (1.3% increase in internally generated revenue and 4.4% impact from extra week) and dental consumable merchandise sales growth of 6.5% (3.8% increase in internally generated revenue, 1.2% impact from extra week and 1.5% growth from acquisitions).

The $122.0 million, or 9.5%, increase in medical net sales for the year ended December 31, 2011 includes an increase in internally generated revenue of 6.4%, 1.6% impact from extra week and acquisition growth of 1.5%.

The $103.9 million, or 11.7%, increase in animal health net sales for the year ended December 31, 2011 includes an increase in internally generated revenue of 8.8%, 1.9% impact from extra week and acquisition growth of 1.0%.

The $544.6 million, or 22.1%, increase in international net sales for the year ended December 31, 2011 includes sales growth of 15.2% in local currencies (3.0% internally generated revenue, 0.8% impact from extra week and 11.4% growth from acquisitions) as well as an increase of 6.9% related to foreign currency exchange.

The $50.7 million, or 25.3%, increase in technology net sales for the year ended December 31, 2011 includes an increase of 24.4% local currency growth (9.6% internally generated growth, 1.9% impact from extra week and 12.9% growth from acquisitions) as well as an increase of 0.9% related to foreign currency exchange.

 
Gross Profit

Gross profit and gross margins for 2011 and 2010 by segment and in total were as follows (in thousands):

     
Gross
     
Gross
 
Increase
 
2011
 
Margin %
 
2010
 
Margin %
     %  
Healthcare distribution
$ 2,253,814     27.2 %     $ 2,033,860     27.8 %   $ 219,954   10.8 %
Technology
  164,241     65.5         137,016     68.5       27,225   19.9  
Total
$ 2,418,055     28.3       $ 2,170,876     28.8     $ 247,179   11.4  

Gross profit increased $247.2 million, or 11.4%, for the year ended December 31, 2011 compared to the prior year period.  As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies.  Additionally, we realize substantially higher gross margin percentages in our technology segment than in our healthcare distribution segment.  These higher gross margins result from being both the developer and seller of software products and services, as well as certain financial services. The software industry typically realizes higher gross margins to recover investments in research and development.
 
Within our healthcare distribution segment, gross profit margins may vary from one period to the next.  Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin.  For example, sales of pharmaceutical products are generally at lower gross profit margins than other products.  Conversely, sales of our private label products achieve gross profit margins that are better than average.  With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners who normally purchase lower volumes at higher frequencies.

Healthcare distribution gross profit increased $220.0 million, or 10.8%, for the year ended December 31, 2011 compared to the prior year period.  Healthcare distribution gross profit margin decreased to 27.2% for the year ended December 31, 2011 from 27.8% for the comparable prior year period.  The decrease in our healthcare distribution gross profit margin is primarily due to growth in sales within our animal health businesses, which typically include a greater percentage of lower-margin pharmaceutical products than our other operating units.  The increase in animal health sales results from internal growth in the United States and the acquisition of Provet Holdings Limited (see Note 9 “Business Acquisitions, Discontinued Operation and Other Transactions” within our notes to our consolidated financial statements) at the beginning of our 2011 fiscal year.

Technology gross profit increased $27.2 million, or 19.9%, for the year ended December 31, 2011 compared to the prior year period.  Technology gross profit margin decreased to 65.5% for the year ended December 31, 2011 from 68.5% for the comparable prior year period, primarily due to changes in the product sales mix.  Specifically, revenues generated from hardware sales and installations, which generally are completed at a lower than average gross margin, grew at a greater rate than electronic services (claims processing, statements generation, etc.) or software sales, which typically generate higher than average gross margins.

Selling, General and Administrative

Selling, general and administrative expenses by segment and in total for 2011 and 2010 were as follows (in thousands):

     
% of
     
% of
         
     
Respective
     
Respective
 
Increase
 
2011
 
Net Sales
 
2010
 
Net Sales
     %  
Healthcare distribution
$ 1,742,519     21.0 %   $ 1,566,915     21.4 %   $ 175,604   11.2 %
Technology
  93,387     37.3       70,545     35.3       22,842   32.4  
Total
$ 1,835,906     21.5     $ 1,637,460     21.8     $ 198,446   12.1  

Selling, general and administrative expenses increased $198.4 million, or 12.1%, for the year ended December 31, 2011 from the comparable prior year period.  As a percentage of net sales, selling, general and administrative expenses decreased to 21.5% from 21.8% for the comparable prior year period.

 
As a component of total selling, general and administrative expenses, selling expenses increased $101.0 million, or 9.4%, for the year ended December 31, 2011 from the comparable prior year period.  As a percentage of net sales, selling expenses decreased to 13.8% from 14.3% for the comparable prior year period.

As a component of total selling, general and administrative expenses, general and administrative expenses increased $97.4 million, or 17.5%, for the year ended December 31, 2011 from the comparable prior year period.  As a percentage of net sales, general and administrative expenses increased to 7.7% from 7.4% for the comparable prior year period.

Other Expense, Net

Other expense, net for the years ended 2011 and 2010 was as follows (in thousands):

             
Variance
 
 
2011
   
2010
       %  
Interest income
$ 15,593     $ 14,098     $ 1,495   10.6 %
Interest expense
  (30,377 )     (33,641 )     3,264   9.7  
Other, net
  1,942       447       1,495   334.5  
Other expense, net
$ (12,842 )   $ (19,096 )   $ 6,254   32.8  

Other expense, net decreased $6.3 million to $12.8 million for the year ended December 31, 2011 from the comparable prior year period.  Interest income increased $1.5 million primarily due to higher investment income partially offset by a decrease in late fee income.  Interest expense decreased $3.3 million primarily due to reduced interest expense from the redemption of our 3% convertible contingent notes originally due in 2034 (the “Convertible Notes”) on September 3, 2010, partially offset by increased interest expense related to borrowings under our private placement shelf facilities, as well as interest expense related to our credit lines. Other, net increased by $1.5 million due primarily to a gain associated with the acquisition of the remaining interest in an equity investment and proceeds received from a litigation settlement.

Income Taxes

For the year ended December 31, 2011, our effective tax rate from continuing operations was 31.7% compared to 31.9% for the prior year period.  The net reduction in our 2011 effective tax rate results from additional tax planning, settlements of tax audits and higher income from lower taxing countries.  The difference between our effective tax rate and the federal statutory tax rate for both periods related primarily to foreign and state income taxes.  For 2012, we expect our effective tax rate to approximate 31.0%.

Net Income

Net income increased $52.5 million, or 14.9%, for the year ended December 31, 2011, compared to the prior year period due to the factors noted above.  Excluding sales of seasonal influenza vaccines from both periods, net income increased by approximately 16.9%.

 
2010 Compared to 2009

Net Sales

Net sales for 2010 and 2009 were as follows (in thousands):

       
% of
       
% of
   
Increase
 
   
2010
 
Total
   
2009
 
Total
       %  
Healthcare distribution (1):
                             
Dental  (2)
  $ 2,678,830     35.6 %   $ 2,509,921     38.4 %   $ 168,909   6.7 %
Medical  (3)
    1,290,428     17.1       1,217,020     18.6       73,408   6.0  
Animal health  (4)
    889,303     11.8       240,082     3.7       649,221   270.4  
International  (5)
    2,468,277     32.8       2,398,105     36.7       70,172   2.9  
Total healthcare distribution
    7,326,838     97.3       6,365,128     97.4       961,710   15.1  
Technology  (6)
    199,952     2.7       173,208     2.6       26,744   15.4  
Total
  $ 7,526,790     100.0 %   $ 6,538,336     100.0 %   $ 988,454   15.1  
                                         

(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 products sold in the United States and Canadian dental markets.
 
(3)
Consists of products sold in the United States’ medical market.
 
(4)
Consists of products sold in the United States’ animal health market.
 
(5)
Consists of products sold in the dental, medical and animal health markets, primarily in Europe, Australia and New Zealand.
 
(6)
Consists of practice management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States, Canada, the United Kingdom, Australia and New Zealand.

The $988.5 million, or 15.1%, increase in net sales for the year ended December 25, 2010 includes an increase of 15.4% local currency growth (3.1% increase in internally generated revenue and 12.3% growth from acquisitions) offset by a decrease of 0.3% related to foreign currency exchange.

The $168.9 million, or 6.7%, increase in dental net sales for the year ended December 25, 2010 includes an increase of 5.7% in local currencies (2.2% increase in internally generated revenue and 3.5% growth from acquisitions) as well as an increase of 1.0% related to foreign currency exchange.  The 5.7% increase in local currency sales was due to increases in dental equipment sales and service revenues of 2.5% (2.3% increase in internally generated revenue and 0.2% growth from acquisitions) and dental consumable merchandise sales growth of 6.7% (2.2% increase in internally generated revenue and 4.5% growth from acquisitions).

The $73.4 million, or 6.0%, increase in medical net sales for the year ended December 25, 2010 includes an increase in internally generated revenue of 2.3% and acquisition growth of 3.7%.

The $649.2 million, or 270.4%, increase in animal health net sales for the year ended December 25, 2010 includes acquisition growth of 269.8% due to the acquisition of a majority interest in Butler Animal Health Supply, LLC as of December 31, 2009, as well as internally generated revenue of 0.6%.

The $70.2 million, or 2.9%, increase in international net sales for the year ended December 25, 2010 includes sales growth of 4.9% in local currencies (4.2% internally generated revenue and 0.7% growth from acquisitions) offset by a decrease of 2.0% related to foreign currency exchange.

The $26.7 million, or 15.4%, increase in technology net sales for the year ended December 25, 2010 includes an increase of 14.8% local currency growth (10.4% internally generated growth and 4.4% growth from acquisitions) as well as an increase of 0.6% related to foreign currency exchange.

 
Gross Profit

Gross profit and gross margins for 2010 and 2009 by segment and in total were as follows (in thousands):

     
Gross
     
Gross
 
Increase
 
2010
 
Margin %
 
2009
 
Margin %
     %  
Healthcare distribution
$ 2,033,860     27.8 %   $ 1,792,516   28.2 %   $ 241,344   13.5 %
Technology
  137,016     68.5       124,304   71.8       12,712   10.2  
Total
$ 2,170,876     28.8     $ 1,916,820   29.3     $ 254,056   13.3  

Gross profit increased $254.1 million, or 13.3%, for the year ended December 25, 2010 compared to the prior year period.  As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies.  Additionally, we realize substantially higher gross margin percentages in our technology segment than in our healthcare distribution segment.  These higher gross margins result from being both the developer and seller of software products and services, as well as certain financial services. The software industry typically realizes higher gross margins to recover investments in research and development.
 
Within our healthcare distribution segment, gross profit margins may vary from one period to the next.  Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin.  For example, sales of pharmaceutical products are generally at lower gross profit margins than other products.  Conversely, sales of our private label products achieve gross profit margins that are better than average.  With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners who normally purchase lower volumes at higher frequencies.

Healthcare distribution gross profit increased $241.3 million, or 13.5%, for the year ended December 25, 2010 compared to the prior year period.  Healthcare distribution gross profit margin decreased to 27.8% for the year ended December 25, 2010 from 28.2% for the comparable prior year period.  The decrease in our healthcare distribution gross profit margin is primarily due to growth in sales within our animal health businesses, which typically include a greater percentage of lower-margin pharmaceutical products than our other operating units.

Technology gross profit increased $12.7 million, or 10.2%, for the year ended December 25, 2010 compared to the prior year period.  Technology gross profit margin decreased to 68.5% for the year ended December 25, 2010 from 71.8% for the comparable prior year period, primarily due to changes in the product sales mix.  Specifically, revenues generated from hardware sales and installations, which generally are completed at a lower than average gross margin, grew at a greater rate than electronic services (claims processing, statements generation, etc.) or software sales, which typically generate higher than average gross margins.

Selling, General and Administrative

Selling, general and administrative expenses by segment and in total for 2010 and 2009 were as follows (in thousands):

     
% of
     
% of
         
     
Respective
     
Respective
 
Increase
 
2010
 
Net Sales
 
2009
 
Net Sales
     %  
Healthcare distribution
$ 1,566,915     21.4 %   $ 1,387,581     21.8 %   $ 179,334   12.9