10-K 1 the10k_2014.htm THE 2014 ANNUAL 10-K REPORT the10k_2014.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 27, 2014

__   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 28, 2014, was approximately $10,105,730,000.
 
As of February 2, 2015, there were 83,801,860 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 27, 2014) are incorporated by reference in Part III hereof.
 
 
 

 

 
 
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
Number
 
 
 
 
 
 
 
 
 
3
 
 
19
 
 
30
 
 
30
 
 
31
 
 
31
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31
 
 
34
 
 
 
 
 
 
 
36
 
 
59
 
 
60
 
 
 
 
 
 
 
101
 
 
101
 
 
104
 
 
 
 
 
 
 
 
 
104
 
 
104
 
 
 
 
 
 
 
105
 
 
105
 
 
105
 
 
 
 
 
 
 
 
 
106
 
 
 
107
 
 
 
110




General

We believe we are the world’s largest provider of health care products and services primarily to office-based dental, animal health and medical practitioners.  We serve more than 1 million customers worldwide including dental practitioners and laboratories, animal health clinics and physician practices, as well as government, institutional health care clinics and other alternate care clinics.  We believe that we have a strong brand identity due to our more than 82 years of experience distributing health care products.

We are headquartered in Melville, New York, employ more than 17,500 people (of which approximately 8,000 are based outside the United States) and have operations or affiliates in 28 countries, including the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Poland, Portugal, Slovakia, South Africa, Spain, Switzerland, Thailand and the United Kingdom.

We offer a comprehensive selection of products and services and value-added solutions for operating efficient practices and delivering high quality care.  We operate through a centralized and automated distribution network with a selection of more than 100,000 branded products and Henry Schein private brand products in stock, as well as more than 150,000 additional products available as special order items.  We also offer our customers exclusive, innovative technology solutions, including practice management software and e-commerce solutions, as well as a broad range of financial services.

We have established over four million square feet of space in 65 strategically located distribution centers around the world to enable us to better serve our customers and increase our operating efficiency.  This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs.  Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.

We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and value-added services.  These segments offer different products and services to the same customer base.

The health care distribution reportable segment aggregates our global dental, animal health and medical operating segments.  This segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.  Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions.  Our global animal health group serves animal health practices and clinics.  Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.

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

Industry

The health care products distribution industry, as it relates to office-based health care practitioners, is highly fragmented and diverse.  This industry, which encompasses the dental, animal health and medical markets, was estimated to produce revenues of approximately $45 billion in 2014 in the global markets.  The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.


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

The health care products distribution industry continues to experience growth due to the aging population, increased health care awareness, the proliferation of medical technology and testing, new pharmacology treatments and expanded third-party insurance coverage, partially offset by the effects of 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, operating and marketing resources, seeking to combine with larger companies that can provide growth opportunities.  This consolidation also may continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.

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

Competition

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

In North America, we compete with other distributors, as well as several manufacturers, of dental, animal health and medical products, primarily on the basis of price, breadth of product line, customer service and value-added products and services.  In the dental market, 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.  In the animal health market, our primary competitors are MWI Veterinary Supply, Inc. and the Patterson Veterinary division of Patterson Companies, Inc.  Our primary competitor in the medical market is McKesson Corporation, which is a national distributor.  We also compete against a number of regional and local animal health and medical distributors, as well as a number of manufacturers that sell directly to veterinarians and physicians.  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.  In the animal health practice management market, our primary competitors are IDEXX Laboratories, Inc. and the Patterson Veterinary division of Patterson Companies, Inc.  The medical practice management and electronic medical records market is very fragmented and we compete with numerous companies such as the NextGen division of Quality Systems, Inc., eClinicalWorks and Allscripts Healthcare Solutions, 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., Lifco AB, Planmeca Oy, Billericay Dental Supply Co. Ltd., National Veterinary Services, Centaur Services Limited and Alcyon SA, as well as a large number of dental, animal health and medical product distributors and manufacturers in Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Poland, Portugal, Slovakia, South Africa, Spain, Switzerland, Thailand 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 82 years of experience in distributing products to health care practitioners resulting in strong awareness of the Henry Schein® brand.  Our competitive strengths include:

A focus on meeting our customers’ unique needs.  We are committed to providing customized solutions to our customers that are driven by our understanding of the market and reflect the technology-driven products and services best suited for their practice needs.

Direct sales and marketing expertise.  Our sales and marketing efforts are designed to establish and solidify customer relationships through personal visits by field sales representatives, frequent direct marketing and telesales contact, emphasizing our broad product lines, including exclusive distribution agreements, competitive prices and ease of order placement.  The key elements of our direct sales and marketing efforts are:
 
 
 
Field sales consultants.  We have approximately 3,650 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 2014, we distributed approximately 31.7 million pieces of direct marketing material, including catalogs, flyers, order stuffers and other promotional materials to existing and potential office-based health care customers.

 
 
Telesales.  We support our direct marketing effort with approximately 1,825 inbound and outbound telesales representatives, who facilitate order processing and generate new sales through direct and frequent contact with customers.

 
 
Electronic commerce solutions.  We provide our customers and sales teams with innovative and competitive Internet, PC and mobile e-commerce solutions.

 
 
Social media.  Our operating entities and employees engage our customers and supplier partners through various social media platforms.

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

 
 
Consumable supplies and equipment.  We offer over 100,000 Stock Keeping Units, or SKUs, to our customers.  Of the SKUs offered, approximately 50,000 are offered to our dental customers, approximately 13,000 to our animal health customers and approximately 41,000 to our medical customers.  We offer over 150,000 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, animal health and medical 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 27, 2014, we have an active user base of more than 90,000 practices, including users of Dentrix® Dental Systems, Dentrix® Enterprise, Dentrix® Dental Vision®, Dentrix Ascend®, Easy Dental®, OasisTM, Evolution® and EXACT®, Gesden®, Julie®Software, Power Practice® Px, AxiUmTM, EndoVision®, PerioVision®, OMSVision® and Viive® for dental practices, Advantage+TM, AVImark®, DVM Manager®, InfinityTM, SunpointTM, Triple CrownTM, Vetech AdvantageTM, VisionVPMTM and Robovet® for animal health practices and MicroMD® for physician practices.

 
 
Repair services.  We have 199 equipment sales and service centers worldwide that provide a variety of repair, installation and technical services for our health care customers.  Our technicians provide installation and repair services for: dental handpieces; dental, animal health and medical small equipment; table top sterilizers; and large dental equipment.
 

 
 
Financial services.  We offer our customers solutions in operating their practices more efficiently by providing access to a number of financial services and products (including non-recourse financing for equipment, technology and software products; non-recourse patient financing; collection services and credit card processing) at rates that we believe are generally lower than what our customers would be able to secure independently. We also provide consulting services, 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.  We ship an average of approximately 150,000 cartons daily.  Approximately 99% of items ordered are shipped without back ordering and are shipped on the same business day the order is received.

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

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

Cost-effective purchasing.  We believe that cost-effective purchasing is a key element to maintaining and enhancing our position as a competitive-pricing provider of health care products.  We continuously evaluate our purchase requirements and suppliers’ offerings and prices in order to obtain products at the lowest possible cost.  In 2014, our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 36% and 7%, respectively, of our aggregate purchases.

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


Products

The following table sets forth the percentage of consolidated net sales by principal categories of products offered through our health care distribution and technology reportable segments:

 
 
 
 
 
2014 
 
2013 
 
2012 
Health care distribution:
 
 
 
 
 
 
 
 
 
 
Dental products (1)
 
51.9 
%
 
52.3 
%
 
53.4 
%
 
Animal health products (2)
 
27.9 
 
 
27.2 
 
 
26.0 
 
 
Medical products (3)
 
16.8 
 
 
17.2 
 
 
17.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total health care distribution  
 
96.6 
 
 
96.7 
 
 
96.8 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology:
 
 
 
 
 
 
 
 
 
 
 
Software and related products and
 
 
 
 
 
 
 
 
 
 
 
 
other value-added products (4)
 
3.4 
 
 
3.3 
 
 
3.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total  
 
100.0 
%
 
100.0 
%
 
100.0 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Includes infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants,
 
gypsum, acrylics, articulators, abrasives, dental chairs, delivery units and lights, X-ray supplies and equipment, equipment
 
 repair and high-tech and digital restoration equipment.
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
Includes branded and generic pharmaceuticals, surgical and consumable products and services and equipment.
 
 
 
 
 
 
 
 
 
 
 
 
 
(3)
Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products,
 
equipment and vitamins.
 
 
 
 
 
 
 
 
 
 
 
 
 
(4)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
 
and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.

Business Strategy

Our objective is to continue to expand as a global value-added provider of health care products and services to office-based dental, animal health and medical practitioners.  To accomplish this, we will apply our competitive strengths in executing the following strategies:

 
Increase penetration of our existing customer base.  We have over 1 million customers worldwide and we intend to increase sales to our existing customer base and enhance our position as their primary supplier.

 
Increase the number of customers we serve.  This strategy includes increasing the number and productivity of field sales consultants, as well as using our customer database to focus our marketing efforts in all of our operating segments.  In the dental business, we provide products and services to traditional dental practices as well as new emerging segments, such as dental service organizations and community health centers.  Leveraging our unique assets and capabilities, we offer solutions to address these new markets.  In the medical business, we have expanded to serve customers located in settings outside of the traditional office, such as urgent care clinics, retail and occupational health settings.  As settings of health care shift, we remain committed to serving these practitioners and providing them with the products and services they need.
 

 
Leverage our value-added products and services.  We continue to increase cross-selling efforts for key product lines utilizing a consultative selling process.  In the dental business, we have significant cross-selling opportunities between our dental practice management software users and our dental distribution customers.  In the animal health business, we have opportunities to cross-sell practice management software and other products.  In the medical business, we have opportunities to expand our vaccine, injectables and other pharmaceuticals sales to health care practitioners, as well as cross-selling core products and electronic health record and practice management software.  Our strategy extends to providing health systems, integrated delivery networks and other large group and multi-site health care organizations, that include physician clinics, these same value added products and services.  As physicians and health systems closely align, we have increased access to opportunities for cross-marketing and selling our product and service portfolios.

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

Markets Served

Demographic trends indicate that our markets are growing, as an aging U.S. population is increasingly using health care services.  Between 2014 and 2024, the 45 and older population is expected to grow by approximately 12%.  Between 2014 and 2034, this age group is expected to grow by approximately 23%.  This compares with expected total U.S. population growth rates of approximately 8% between 2014 and 2024 and approximately 15% between 2014 and 2034.

In the dental industry, there is predicted to be a rise in oral health care expenditures as the 45 and older segment of the population increases.  There is increasing demand for new technologies that allow dentists to increase productivity, and this is being driven in the U.S. by lower insurance reimbursement rates.  At the same time, there is an expected increase in dental insurance coverage.

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

The animal health market, impacted by growing companion pet ownership and care, as well as increased focus on safety and efficiency in livestock production, continues to provide additional growth opportunities for us.  We support the animal health practitioners we serve through the distribution of biologicals, pharmaceuticals, supplies and equipment and by actively engaging in the development, sale and distribution of veterinary practice management software.

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.

Additionally, we are expanding our dental full-service model, our animal health presence and our medical offerings in countries where opportunities exist.  Through our “Schein Direct” program, we also have the capability to provide door-to-door air package delivery to practitioners in over 190 countries around the world.

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

 
Seasonality and Other Factors Affecting Our Business and Quarterly Results

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

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

 
 
our ability to correctly identify customer needs and preferences and predict future needs and preferences;

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

 
 
loss of sales representatives;

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

 
 
costs associated with our self-insured medical and dental insurance programs;

 
 
general market and economic conditions, as well as those specific to the health care industry and related industries;

 
 
our success in establishing or maintaining business relationships;

 
 
unexpected difficulties in developing and manufacturing products;

 
 
product demand and availability or recalls by manufacturers;

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

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

 
 
fluctuations in the value of foreign currencies;

 
 
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 United States federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended, and Section 361 of the Public Health Service Act.  We are also subject to comparable foreign regulations.

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

The FDC Act, as amended by the Drug Quality and Security Act of 2013, establishes certain requirements with respect to the pharmaceutical supply chain, including with respect to product tracing, the licensure and operations of prescription drug wholesale distributors and third party logistics providers (“3PLs”), and the pre-emption of state law.  At the federal level, pursuant to the FDC Act, the FDA has generally required wholesalers to provide a drug pedigree for each wholesale distribution of a prescription drug, which is the record that tracks the chain of ownership of a prescription drug as it is distributed through the United States pharmaceutical supply chain.  Over the last several years, many states have also implemented or proposed their own prescription drug pedigree laws and regulations which were intended to protect the integrity of the pharmaceutical supply chain.  This created a patchwork of state licensing and drug pedigree (i.e., track and trace) requirements.

The Drug Quality and Security Act of 2013 brings about significant changes with respect to pharmaceutical supply chain requirements and pre-empts state law.  Title II of this measure, known as the Drug Supply Chain Security Act (“DSCSA”), will be phased in over 10 years, and is intended to build a national electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the United States.  The law began to take effect in January 2015, and on that date specific product tracing requirements for manufacturers, wholesalers, repackagers and dispensers (e.g., pharmacies) of prescription drugs took effect, although the FDA, in a Final Guidance issued on December 23, 2014, stated that in order to minimize possible disruptions in the distribution of prescription drugs in the United States, it would not take action for noncompliance with these track and trace requirements prior to May 1, 2015.  These new product tracing requirements replace the former FDA drug pedigree requirements and pre-empt state requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements.  Also in January 2015, the DSCSA required manufacturers and wholesale distributors to have systems in place by which they can identify whether a product in their possession or control is a “suspect” or “illegitimate” product, and handle it accordingly.

The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers and 3PLs, and includes the creation of national wholesaler and 3PL licenses in cases where states do not license such entities.  The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs.  Wholesalers and 3PLs are also required to submit annual reports to the FDA beginning on January 1, 2015, which include information regarding each state where the wholesaler or 3PL is licensed, the name and address of each facility and contact information.  According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal law in this area.  Current state licensing requirements will likely remain in effect until the FDA issues new regulations as directed by the DSCSA.  In addition, the FDA is required to issue guidance and hold public meetings regarding the implementation of the DSCSA’s track and trace requirements over the course of the next few years.  The FDA has begun this process, including by holding a public workshop in May 2014 and issuing various guidance documents, including regarding suspect products, product tracing requirements, annual reporting to the FDA and the effect of the law’s pre-emption provisions.  We are in the process of analyzing the impact of the DSCSA on our business.


The FDC Act also requires the FDA 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 radio frequency identification, or RFID, and other technologies.  The FDA has also continued to develop its policies with respect to the integrity of the supply chain by issuing a Final Guidance in 2010 regarding standardized numerical identification for prescription drug packages, and a final rule in 2013 for a unique medical device identification system to be phased in over seven years that will require most medical devices distributed in the United States to carry a unique device identifier.  The DSCSA also addresses product tracing using unique product identifiers on packaging, and may affect previously issued FDA guidance regarding standardized numerical identifiers.  The DSCSA and its forthcoming implementing regulations may affect previously issued FDA guidance regarding standardized numerical identifiers.

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

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

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.  There have also been increasing efforts by various levels of government globally to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or misbranded pharmaceuticals into the distribution system. 

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

Health Care Fraud

Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations.  Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs.  Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for or recommending ordering, purchasing or leasing, of items or services that are paid for by federal, state and other health care payers and programs.

 
The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “relators,” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state false claims laws.  Under the federal False Claims Act relators can be entitled to receive up to 30% of total recoveries.  Also, violations of the federal False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim.  The Health Care Reform Law significantly strengthened the federal False Claims Act and the anti-kickback law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal anti-kickback law violation can be a basis for federal False Claims Act liability.

The United States government has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other.  As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance.  We had discussions with the government regarding certain of our marketing practices and have concluded such discussions in a manner that is not material to the Company.  In addition, under the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the “Health Care Reform Law” (discussed in more detail in Health Care Reform, below), on September 30, 2014 the general public and government officials were provided with access to detailed information with regard to payments or other transfers of value to certain practitioners (including physicians, dentists and teaching hospitals) by applicable drug and device manufacturers subject to such reporting and disclosure obligations, which includes us.  This information may lead to greater scrutiny, which may result in modifications to established practices and additional costs.  We also are subject to foreign regulations pertaining to financial relationships between suppliers and physicians, dentist and other customers.

We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years.

Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business.  Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses.  Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs.  In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance.

While we believe that we are substantially compliant with fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response to changes in applicable law or interpretation of laws, could adversely affect our business.

Health Care Reform

The United States Health Care Reform Law also included other provisions to reduce fraud and abuse and Medicare expenditures and the cost of health care generally, to increase federal oversight of private health insurance plans and to increase access to health coverage, some of which impact and further regulate some of our businesses.  In particular, a Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity.  On February 1, 2013, the Centers for Medicare and Medicaid Services (“CMS”) released the final rule to implement the Physician Payment Sunshine Act.  Under this rule, data collection activities began on August 1, 2013, and first disclosure reports were due by March 31, 2014 for the period August 1, 2013 through December 31, 2013.  As required under the Physician Payment Sunshine Act, CMS published information from these reports, on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities, on September 30, 2014.


The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous and broad in scope.  CMS commentary on the final rule and more recent CMS communications indicate that wholesale drug and device distributors that take title to such products are to be treated as “applicable manufacturers” subject to full reporting requirements.  In addition, certain of our subsidiaries manufacture drugs and devices.  Accordingly, we are required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals.  It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. The Physician Payment Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may be required to report under certain of such state laws in addition to Physician Payment Sunshine Act reporting, and some of these state laws are also ambiguous.  We completed the initial Physician Payment Sunshine Act submission to CMS due March 31, 2014, covering the period August 1 to December 31, 2013.  Beginning in 2014 and each year thereafter, data collection for each calendar year must be submitted by March 31 of the subsequent year.  We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers.  While we believe we have substantially compliant programs and controls in place to comply with the Physician Payment Sunshine Act requirements (and similar foreign requirements), our compliance with the new final rule (and similar foreign requirements) imposes additional costs on us.

On June 28, 2012, the United States Supreme Court upheld as constitutional a key provision in the Health Care Reform Law often referred to as the “individual mandate,” which will require most individuals to have health insurance in 2014, or to pay a penalty.  However, the decision also invalidated a provision in the Health Care Reform Law requiring states in 2014 to expand their Medicaid programs or risk the complete loss of all federal Medicaid funding. The Court held that the federal government may offer states the option of accepting the expansion requirement, but that it may not take away pre-existing Medicaid funds in order to coerce states into complying with the expansion.  Almost half the states have not yet accepted the Medicaid expansion, so the full extent of increased health care coverage under the Health Care Reform Law is uncertain.  Subsequent litigation has focused on whether the Health Care Reform Law permits the use of health insurance subsidies for low and moderate income individuals who purchase coverage through the health insurance exchanges established by the federal government.  In most states, the health insurance exchanges are established by the federal government, not the state itself, and federal courts have issued contradictory rulings on this matter.  The United States Supreme Court has agreed to hear a case in which a federal appeals court upheld the subsidies for federal health insurance exchanges.  The Supreme Court is expected to issue a ruling by the end of June 2015, and if the subsidies are held to be unavailable through federal health insurance exchanges, this might significantly limit the application of the Health Care Reform Law.  Adding to this uncertainty, in responding to difficulties encountered in implementing Health Care Reform, the White House and federal agencies have instituted various temporary implementation delays, such as regarding the “employer mandate.”  With respect to the employer mandate, starting in 2015 employers with 100 or more full-time employees must generally provide certain health insurance to their workforce or pay specified fines, while starting in 2016 the requirement will apply to employers with 50 or more full-time employees.

Regulated Software; Electronic Health Records

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

Certain of our businesses involve access to personal health, medical, financial and other information of individuals, and are accordingly directly or indirectly subject to numerous federal, state, local and foreign laws and regulations that protect the privacy and security of such information, and require, among other things, the implementation of various recordkeeping, operational, notice and other practices intended to safeguard that information, limit its use to allowed purposes and notify individuals in the event of privacy and security breaches.
 

Failure to comply with these laws can result in substantial penalties and other liabilities. As a result of the federal Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was passed in 2009, some of our businesses that were previously only indirectly subject to federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) privacy and security rules became directly subject to such rules because such businesses serve as “business associates” of HIPAA covered entities, such as health care providers. On January 17, 2013 the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements.  Compliance with the rule was required by September 23, 2013, and increases the requirements applicable to some of our businesses.

In addition, federal initiatives, including in particular the HITECH Act, are providing a program of incentive payments available to certain health care providers involving the adoption and use of certain electronic health care records systems and processes.  The HITECH initiative includes providing, among others, physicians and dentists, with financial incentives, if they meaningfully use certified electronic health record technology (“EHR”) in accordance with applicable requirements.  With respect to recognizing “certified” EHR technology, CMS regulations reference an older “2011 edition certified technology,” which is to be replaced by a newer “2014 edition certified technology.”  In addition, Medicare-eligible providers that fail to timely adopt certified EHR systems and meet “meaningful use” requirements for those systems in accordance with regulatory requirements are to be subject to cumulative Medicare reimbursement reductions, which reductions for eligible health professionals (including physicians and dentists) began on January 1, 2015.  This reduction is subject to a grant of a “hardship” exemption by CMS, which generally permits providers to avoid Medicare reimbursement reductions where they can show that demonstrating meaningful use of EHR would result in a significant hardship.  Qualification for the incentive payments requires the use of EHRs that have certain capabilities for meaningful use pursuant to standards adopted by the Department of Health and Human Services.  Initial (“Stage 1”) standards addressed criteria for periods beginning in 2011.  CMS has also issued a final rule with more demanding “Stage 2” criteria for periods beginning in 2014 for eligible health professionals (including physicians and dentists).

Recognizing difficulties encountered by some providers in acquiring and implementing 2014 edition-certified EHR technology, CMS published a final rule on September 4, 2014 that adds flexibility to the manner in which physicians, dentists and others may demonstrate meaningful use of EHR by extending through the 2014 reporting period the ability, in certain circumstances, to use 2011 edition-certified technology to attest to meaningful use, rather than requiring the use of 2014 edition-certified technology.  The rule also delays for one year implementation of more rigorous “Stage 3” measures, and under this rule eligible health professionals (including physicians and dentists) would begin Stage 3 in calendar year 2017.  In addition, also in recognition of difficulties encountered by some providers in acquiring and implementing 2014 edition-certified EHR technology, CMS has specifically recognized that a hardship exemption may be granted, among other reasons, where the provider’s failure to demonstrate meaningful use was caused by its EHR vendor’s failure to timely obtain 2014 certification for its EHR technology, and extended the deadline for health care professionals to file hardship exemption applications from July 1, 2014 to November 30, 2014.  On January 29, 2015, CMS announced an intent to engage in further rulemaking under the EHR incentive program to redress the Stage 2 reporting burden on providers. Among other things, the new rule, expected in the Spring of 2015, will tie EHR reporting to a calendar year, modify other aspects of the program and shorten the EHR reporting period in 2015 to 90 days.  Certain of our businesses involve the manufacture and sale of certified EHR systems and other products linked to incentive programs, and so must maintain compliance with, and are affected by, these evolving governmental criteria.

Also, HIPAA requires certain health care providers, such as physicians, to use certain transaction and code set rules for specified electronic transactions, such as transactions involving claims submissions.  Commencing July 1, 2012, CMS required that electronic claim submissions and related electronic transactions be conducted under a new HIPAA transaction standard called Version 5010.  CMS has required this upgrade in connection with another new requirement applicable to the industry, the implementation of new diagnostic code sets to be used in claims submission.  The new diagnostic code sets are called the ICD-10-CM. They were originally to be implemented on October 1, 2013 (and CMS delayed the implementation date until October 1, 2014), but as part of the Protecting Access to Medicare Act of 2014, enacted on April 1, 2014, Congress prohibited the Secretary of Health and Human Services from implementing ICD-10-CM any earlier than October 1, 2015.  CMS published a final rule on August 4, 2014 adopting the October 1, 2015 compliance date and requiring the use of ICD-9-CM code sets through September 30, 2015, and there is no suggestion that implementation will be further delayed.  Certain of our businesses provide electronic practice management products that must meet those requirements, and while we believe that we are prepared to timely adopt the new standards, it is possible that the transition to these new standards, particularly the transition to ICD-10-CM, may result in a degree of disruption and confusion, thus potentially increasing the costs associated with supporting this product.

International Transactions

In addition, United States and foreign 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, the U.K. Bribery Act and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, as well as other types of foreign requirements similar to those imposed in the United States.

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

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

Proprietary Rights

We hold trademarks relating to the “Henry Schein®” name and logo, as well as certain other trademarks.  We intend to protect our trademarks to the fullest extent practicable.

 
Employees

As of December 27, 2014, we employed more than 17,500 full-time employees, including approximately 1,825 telesales representatives, 3,650 field sales consultants, including equipment sales specialists, 3,400 warehouse employees, 550 computer programmers and technicians, 900 management employees and 7,475 office, clerical and administrative employees.  Over 310, or 1.8%, 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 website, 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 website 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
 
65 
 
Chairman, Chief Executive Officer, Director
Gerald A. Benjamin
 
62 
 
Executive Vice President, Chief Administrative Officer, Director
James P. Breslawski
 
60 
 
President, Henry Schein and CEO, Global Dental Group, Director
Leonard A. David
 
66 
 
Senior Vice President, Chief Compliance Officer
Michael S. Ettinger
 
53 
 
Senior Vice President, Corporate and Legal Affairs & Secretary
James A. Harding
 
59 
 
Senior Vice President, Chief Technology Officer
Stanley Komaroff
 
79 
 
Senior Advisor
Lorelei McGlynn
 
51 
 
Senior Vice President, Global Human Resources and Financial Operations
David C. McKinley
 
62 
 
President, Medical Group
Bob Minowitz
 
56 
 
President, International Dental Group
Mark E. Mlotek
 
59 
 
Executive Vice President, Chief Strategic Officer, Director
Steven Paladino
 
57 
 
Executive Vice President, Chief Financial Officer, Director
Michael Racioppi
 
60 
 
Senior Vice President, Chief Merchandising Officer
Paul Rose
 
57 
 
Senior Vice President, Global Supply Chain
Lonnie Shoff
 
56 
 
CEO, Global Animal Health and Strategic Partnership Group
Walter Siegel
 
55 
 
Senior Vice President and General Counsel

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 12 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 since 2005 and a director since 1992.  Mr. Breslawski is also the Chief Executive Officer of our Henry Schein Global Dental Group.  Mr. Breslawski held the position of Executive Vice President and President of U.S. Dental from 1990 to 2005, with primary responsibility for the North American Dental Group.  Between 1980 and 1990, Mr. Breslawski held various positions with us, including Chief Financial Officer, Vice President of Finance and Administration and Controller.

Leonard A. David has been our Senior Vice President and Chief Compliance Officer since 2006.  Mr. David held the position of Vice President and Chief Compliance Officer from 2005 to 2006.  Mr. David held the position of Vice President of Human Resources and Special Counsel from 1995 to 2005.  Mr. David held the position of Vice President, General Counsel and Secretary from 1990 through 1994 and practiced corporate and business law for eight years prior to joining us.

Michael S. Ettinger has been Senior Vice President, Corporate and Legal Affairs & Secretary since 2013.  Prior to holding his current position, Mr. Ettinger served as Corporate Senior Vice President, General Counsel & Secretary from 2006 to 2013, Vice President, General Counsel and Secretary from 2000 to 2006, Vice President and Associate General Counsel from 1998 to 2000 and Associate General Counsel from 1994 to 1998.  Before joining us, Mr. Ettinger served as a senior associate with Bower & Gardner and as a member of the Tax Department at Arthur Andersen.

James A. 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.

Lorelei McGlynn has served as Senior Vice President, Global Human Resources and Financial Operations since 2013.  Since joining us in 1999, Ms. McGlynn has served as Vice President, Global Human Resources and Financial Operations from 2008 to 2013, Chief Financial Officer, International Group and Vice President of Global Financial Operations from 2002 to 2008 and Vice President, Finance, North America from 1999 to 2002.  Prior to joining us, Ms. McGlynn served as Assistant Vice President of Finance at Adecco Corporation.

David C. McKinley has been President of Henry Schein’s Medical Group since 2008.  Before assuming his current position, Mr. McKinley was President of Henry Schein Practice Solutions from 2006 to 2008 and President of Dental Prosthetic Solutions from 2005 to 2006.  Prior to joining us, Mr. McKinley served as the Group Executive for Olympus Medical North America and as General Manager for the Bard Urology and Bard Germany businesses.  Mr. McKinley currently serves on the Health Industry Distributors Association (HIDA) Education Foundation.

Bob Minowitz has been President of Henry Schein’s International Dental Group since 2012.  Up until 2012, Mr. Minowitz held various roles throughout the Company, including President, Henry Schein European Dental Group from 2009 to 2012, President, Henry Schein Western Europe, Middle East and Pacific Regions from 2006 to 2009, Managing Director, Henry Schein U.K. Holdings from 2003 to 2006, President Henry Schein Western Europe from 2004 to 2006 and President Henry Schein Europe from 2001 to 2004.  Prior to joining us, Mr. Minowitz was employed by Bristol-Myers Company as a Senior Internal Auditor.
 
Mark E. Mlotek has been Executive Vice President and Chief Strategic Officer since 2012.  Mr. Mlotek was Senior Vice President and subsequently Executive Vice President of the Corporate Business Development Group between 2000 and 2012.  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.

Paul Rose has served as Senior Vice President, Global Supply Chain since 2013.  Prior to assuming his current position, Mr. Rose served as Vice President, Global Supply Chain from 2008 to 2013, Vice President, Global Inventory Management from 2004 to 2008 and Vice President, Inventory Management, North America from 2001 to 2004.  He also served on the HIDA Supply Chain Advisory Council and as NWDA Pharmaceutical Market Committee Chairman.

Lonnie Shoff has been Chief Executive Officer of the Global Animal Health and Strategic Partnerships Group since 2010.  Prior to joining us in 2009, 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 and General Manager, Applied Science.

Walter Siegel has been Senior Vice President and General Counsel since 2013.  Prior to joining us, Mr. Siegel was employed with Standard Microsystems Corporation, a publicly traded global semiconductor company from 2005 to 2012, holding positions of increasing responsibility, most recently as Senior Vice President, General Counsel and Secretary.

 
ITEM 1A. Risk Factors

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

The health care products distribution industry is highly competitive and we may not be able to compete successfully.

We compete with numerous companies, including several major manufacturers and distributors.  Some of our competitors have greater financial and other resources than we do, which could allow them to compete more successfully.  Most of our products are available from several sources and our customers tend to have relationships with several distributors.  Competitors could obtain exclusive rights to market particular products, which we would then be unable to market.  Manufacturers also could increase their efforts to sell directly to end-users and thereby eliminate or reduce our role and that of other distributors.  Industry consolidation among health care product 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.  While there is generally more than one source of supply for most of the categories of products we sell, some key suppliers, in the aggregate, supply a significant portion of the products we sell.  Additionally, 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, including the failure to comply with applicable government requirements.  The failure of manufacturers of products regulated by the FDA to meet these requirements could result in product recall, cessation of sales or other market disruptions.  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, especially any 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 health care practitioners and year-end promotions.  Net sales and operating profits generally have been lower in the first quarter, primarily due to increased sales in the prior two quarters.  We expect our historical seasonality of sales to continue in the foreseeable future.  Quarterly results may also be adversely affected by a variety of other factors, including:

 
timing and amount of sales and marketing expenditures;

 
timing of pricing changes offered by our vendors;

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

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

 
changes in or availability of vendor contracts or rebate programs;

 
vendor rebates based upon attaining certain growth goals;

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

 
costs of developing new applications and services;

 
our ability to correctly identify customer needs and preferences and predict future needs and preferences;

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

 
loss of sales representatives;

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

 
costs associated with our self-insured medical and dental insurance programs;

 
general market and economic conditions, as well as those specific to the health care industry and related industries;

 
our success in establishing or maintaining business relationships;

 
unexpected difficulties in developing and manufacturing products;

 
product demand and availability or recalls by manufacturers;

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

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

 
fluctuations in the value of foreign currencies;

 
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 health care providers and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Additionally, the formation of provider networks and GPOs may shift purchasing decisions to entities or persons with whom we do not have a historical relationship. This may threaten our ability to compete effectively, which would in turn negatively impact our results of operations. Although we are seeking to obtain similar terms from manufacturers, obtain access to lower prices demanded by GPO contracts or other contracts, and develop relationships with provider networks and new GPOs, we cannot assure that 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 and political conditions could adversely affect our results of operations and financial condition.

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

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

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

 
general market and economic conditions; and

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

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

The health care industry is experiencing changes that could adversely affect our business.

The health care industry is highly regulated and subject to changing political, economic and regulatory influences.  In recent years, the health care industry has undergone, and is in the process of undergoing, significant changes driven by various efforts to reduce costs, including: trends toward managed care; consolidation of health care distribution companies; consolidation of health care manufacturers; collective purchasing arrangements and consolidation among office-based health care practitioners; and changes in reimbursements to customers, as well as growing enforcement activities (and related monetary recoveries) by governmental officials.  Both our own profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals and/or medical treatments or services, changing the methodology by which reimbursement levels are determined and, in the case of animal health practitioners, changes in the use of feed additives (including, without limitation, antibiotics and growth promotants) used in the production of animal products due to trade restrictions, animal welfare and/or government regulations; and changes in customer buying habits (including customers purchasing animal health pharmaceuticals outside the veterinarians’ offices).  If we are unable to react effectively to these and other changes in the health care industry, our operating results could be adversely affected.  In addition, the enactment of significant health care reforms could have a material adverse effect on our businesses.

The implementation of the Health Care Reform Law could adversely affect our business.

The United States Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, significantly expand health insurance coverage to uninsured Americans and changes the way health care is financed by both governmental and private payers.  We expect expansion of access to health insurance to increase the demand for our products and services, but other provisions of the Health Care Reform Law could affect us adversely, and the Health Care Reform Law may be invalidated, in whole or in part, or it may be repealed.  Additionally, further federal and state proposals for health care reform in the United States are likely, and foreign government authorities may also adopt reforms of their health systems.  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.
 
 
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 many medical devices by manufacturers and importers that began in 2013, and a fee on branded prescription drugs and biologics that was implemented in 2011, both of which may adversely affect sales and cost of goods sold.

The implementation of the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Health Care Reform Law could adversely affect our business.

A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity.  On February 1, 2013, CMS released the final rule to implement the Physician Payment Sunshine Act.  Under this rule, data collection activities began on August 1, 2013, and we timely filed our first disclosure reports on June 30, 2014 for the period August 1, 2013 through December 31, 2013.  As required under the Physician Payment Sunshine Act, CMS published information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities on September 30, 2014.

The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous and broad in scope.  CMS commentary on the final rule and more recent CMS communications indicate that wholesale drug and device distributors which take title to such products are to be treated as “applicable manufacturers” subject to full reporting requirements.  In addition, certain of our subsidiaries manufacture drugs and devices.  Accordingly, we are required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals.  It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. The Physician Payment Sunshine Act preempts similar state reporting laws, although we or our subsidiaries may be required to continue to report under certain of such state laws in addition to Physician Payment Sunshine Act reporting, and some of these state laws are also ambiguous.  We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers.  While we believe we have substantially compliant programs and controls in place to comply with the Physician Payment Sunshine Act requirements (and similar foreign requirements), our compliance with the new final rule (and similar foreign requirements) imposes additional costs on us.

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

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

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

 
subject us to inspection by the FDA and the DEA;

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

 
require us to advertise and promote our drugs and devices in accordance with applicable FDA requirements;

 
require registration with the FDA and the DEA 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 DEA;
 
 
 
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 product or medical device causes serious illness, injury or death.

Applicable federal, state, local and foreign 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 FDA and DEA 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 effect on our businesses.  If it is determined that we have not complied with these laws, we are potentially subject to penalties including warning letters, civil and criminal penalties, mandatory recall of product, seizure of product and injunction, and suspension or limitation of product sale and distribution.  If we enter into settlement agreements to resolve allegations of non-compliance, we could be required to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses.  Non-compliance with government requirements could adversely affect our ability to participate in federal and state government health care programs, and damage our reputation.

If we fail to comply with laws and regulations relating to health care fraud or other laws and regulations, we could suffer penalties or be required to make significant changes to our operations, which could adversely affect our business.

We are subject to federal and state (and similar foreign) laws and regulations relating to health care fraud.  Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs.  Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for or recommending ordering, purchasing or leasing, of items or services that are paid for by federal, state and other health care payers and programs.  Health care fraud measures may implicate, for example, our relationships with pharmaceutical manufacturers, our pricing and incentive programs for physician and dental practices, and our dental and physician practice management products that offer billing-related functionality.

The government has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other.  As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance.  In addition, under the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Health Care Reform Law,  discussed in more detail under “Government Regulations - Health Care Reform” above, the general public and government officials are being provided with new access to detailed information with regard to payments or other transfers of value to certain practitioners (including physicians, dentists and teaching hospitals) by applicable drug and device manufacturers subject to such reporting and disclosure obligations, which includes us.  This information may lead to greater scrutiny, which may result in modifications to established practices and additional costs.

The applicable requirements have been subject to varying interpretations, as well as heightened enforcement activity, over the past few years.  Also, significant enforcement activity has been the result of actions brought by “relators,” who file complaints in the name of the United States (and if applicable, particular states) under federal and state false claims laws, and under the federal False Claims Act can be entitled to receive up to 30% of total recoveries.  Violations of the federal False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim.  The Health Care Reform Law significantly strengthened the federal False Claims Act and federal anti-kickback law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal anti-kickback law violation can be a basis for federal False Claims Act liability.
 
 
We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years.

Failure to comply with health care fraud laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business.  Also, these laws may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses.  Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs.  In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing compliance risks.

Our businesses are generally subject to numerous other laws and regulations that could impact our financial performance, including, without limitation, securities, antitrust and marketing laws and regulations.  Failure to comply with laws or regulations could have a material adverse effect on our business.

While we believe that we are substantially compliant with the foregoing laws and regulations promulgated thereunder, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business.

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

State, federal and foreign laws, such as HIPAA, regulate the confidentiality of sensitive personal information and the circumstances under which such information may be released.  These measures may govern the disclosure and use of personal and patient medical record information and may require users of such information to implement specified security measures, and to notify individuals in the event of privacy and security breaches.  Evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products in a timely manner to reflect these legal requirements, either of which could have an adverse effect 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 HITECH Act, which was passed in 2009, some of our businesses that were previously only indirectly subject to federal HIPAA privacy and security rules became directly subject to such rules because the businesses serve as “business associates” to our customers.  On January 17, 2013, the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements.  Compliance with the rule was required by September 23, 2013, and increased the requirements applicable to some of our businesses.  Failure to maintain the confidentiality of sensitive personal information in accordance with the applicable regulatory requirements, or to abide by electronic health data transmission standards, could expose us to breach of contract claims, fines and penalties, costs for remediation and harm to our reputation.

In addition, federal initiatives are providing a program of incentive payments available to certain health care providers involving the adoption and use of certain electronic health care records systems and processes.  The initiative includes providing, among others, physicians and dentists, with financial incentives if they meaningfully use EHR in accordance with applicable requirements.  In addition, Medicare-eligible providers that fail to timely adopt certified EHR systems and meet “meaningful use” requirements for those systems in accordance with regulatory requirements are to be subject to cumulative Medicare reimbursement reductions, which reductions for eligible health professionals (including physicians and dentists) began on January 1, 2015.  Qualification for the incentive payments requires the use of EHRs that have certain capabilities for meaningful use pursuant to standards adopted by the Department of Health and Human Services.  Initial (“Stage 1”) standards addressed criteria for periods beginning in 2011.  CMS has also issued a final rule with more demanding “Stage 2” criteria for periods beginning in 2014 for eligible health professionals (including physicians and dentists).
 

Recognizing difficulties encountered by some providers in acquiring and implementing 2014 edition-certified EHR technology, CMS published a final rule on September 4, 2014 that adds flexibility to the manner in which physicians, dentists and others may demonstrate meaningful use of EHR by extending through the 2014 reporting period the ability, in certain circumstances, to use 2011 edition-certified technology to attest to meaningful use, rather than requiring the use of 2014 edition-certified technology.  The rule also delays for one year implementation of more rigorous “Stage 3” measures, and under this rule eligible health professionals (including physicians and dentists) would begin Stage 3 in calendar year 2017, as to which regulations are to be proposed in Spring 2015.  In addition, also in recognition of difficulties encountered by some providers in acquiring and implementing 2014 edition-certified EHR technology, CMS has specifically recognized that a hardship exemption may be granted, among other reasons, where the provider’s failure to demonstrate meaningful use was caused by its EHR vendor’s failure to timely obtain 2014 certification for its EHR technology, and extended the deadline for health care professionals to file hardship exemption applications from July 1, 2014 to November 30, 2014.  On January 29, 2015, CMS announced an intent to engage in further rulemaking under the EHR incentive program to redress the Stage 2 reporting burden on providers.  Among other things, the new rule, expected in the Spring of 2015, will tie EHR reporting to a calendar year, modify other aspects of the program, and shorten the EHR reporting period in 2015 to 90 days.  Certain of our businesses involve the manufacture and sale of certified EHR systems and other products linked to incentive programs, and the failure to maintain compliance with these evolving governmental criteria could have a material adverse effect on our business.  In addition, the frequently changing requirements may increase our costs in these businesses.

Our global operations are subject to inherent risks that could adversely affect our operating results.

Global operations are subject to risks that may materially adversely affect our business, results of operations and financial condition.  The risks that our global operations are subject to include, among other things:

 
difficulties and costs relating to staffing and managing foreign operations;

 
difficulties in establishing channels of distribution;

 
fluctuations in the value of foreign currencies;

 
longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;

 
repatriation of cash from our foreign operations to the United States;

 
regulatory requirements;

 
anti-bribery, anti-corruption and laws pertaining to the accuracy of our internal books and records;

 
unexpected difficulties in importing or exporting our products;

 
imposition of import/export duties, quotas, sanctions or penalties;

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

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

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

 
changes in tax regulations that influence purchases of capital equipment;

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

 
public health emergencies.
 
 
Our expansion through acquisitions and joint ventures involves risks.

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

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

 
requires significant management attention;

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

 
results in additional acquisition and integration expenses.

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

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

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

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

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

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

We are in the process of integrating companies that we acquired and including the operations, services, products and personnel of each company within our management policies, procedures and strategies.  We cannot be sure that we will achieve the benefits of revenue growth that we expect from these acquisitions or that we will not incur unforeseen additional costs or expenses in connection with these acquisitions.  To effectively manage our expected future growth, we must continue to successfully manage our integration of these companies and continue to improve our operational systems, internal procedures, working capital management, and financial and operational controls.  If we fail in any of these areas, our business could be adversely affected.

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 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.  Additionally, as our private-label business continues to grow, purchasers of such products may increasingly seek recourse directly from us, rather than the ultimate product manufacturer, for product-related claims.  Another potential risk we face in the distribution of our products is liability resulting from counterfeit or tainted products infiltrating the supply chain.  In addition, some of the products that we transport and sell are considered hazardous materials.  The improper handling of such materials or accidents involving the transportation of such materials could subject us to liability.  We have various insurance policies, including product liability insurance, covering risks and in amounts that we consider adequate.  In many cases in which we have been sued in connection with products manufactured by others, the manufacturer of the product provides us with indemnification.  There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate protection.  A successful claim brought against us in excess of available insurance or not covered by indemnification agreements, or any claim that results in significant adverse publicity against us, could have an adverse effect on our business and our reputation.
 
 
Our technology segment depends upon continued software and e-services product development, technical support and successful marketing.

Competition among companies supplying practice management software and/or e-services is intense and increasing.  Our future sales of practice management software and e-services will depend on, among other factors:

 
the effectiveness of our sales and marketing programs;

 
our ability to enhance our products and services to satisfy customer requirements; and

 
our ability to provide ongoing technical support.

We cannot be sure that we will be successful in introducing and marketing new software, software enhancements or e-services, or that such software, software enhancements and e-services will be released on time or accepted by the market.  Our software and applicable e-services products, like software products generally, may contain undetected errors or bugs when introduced or as new versions are released.  We cannot be sure that future problems with post-release software errors or bugs will not occur.  Any such defective software may result in increased expenses related to the software and could adversely affect our relationships with the customers using such software as well as our reputation.  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 experience competition from third-party online commerce sites.

Traditional health care supply and distribution relationships are being challenged by electronic online commerce solutions.  The continued advancement of online commerce by third parties will require us to cost-effectively adapt to changing technologies, to enhance existing services and to differentiate our business (including with additional value-added services) to address changing demands of consumers and our customers on a timely basis.  The emergence of such potential competition and our inability to anticipate and effectively respond to changes on a timely basis could have an adverse effect on our business.

Cyber-security risks generally associated with our information systems and our technology products and services could adversely affect our business.

We rely on information systems (IS) in our business to obtain, rapidly process, analyze, manage and store 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 (including protected health information of their patients).

Information security risks have generally increased in recent years, and 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 an adverse effect on our business.  Our IS systems also utilize certain third party service organizations that manage a portion of our information systems, and our business may be adversely affected if these third party service organizations are subject to an IS security breach.  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;
 
 
 
procedures and safeguards must continually evolve to meet new IS challenges, and enhancing protections, and conducting investigations and remediation, may impose additional costs on us; 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 (or third-party systems we rely on) are interrupted, damaged by unforeseen events, cyber-attacks or fail for any extended period of time.

We develop products and provide services to our customers that are technology-based.  A cyber-attack that bypasses the security systems of our products or services causing a security breach and/or perceived security vulnerabilities in our products or services could cause significant reputational harm.  Actual or perceived vulnerabilities may lead to claims against us by our customers and/or governmental agencies.  Although our customer license agreements typically contain provisions that eliminate or limit our exposure to such liability, there is no assurance these provisions will withstand all legal challenges.

Failure to maintain the confidentiality of sensitive customer data in accordance with applicable regulatory requirements, or to abide by electronic health data transmission standards, could also expose us to claims, fines and penalties and costs for remediation.  Additionally, legislative or regulatory action related to cyber-security may increase our costs to develop or implement new technology products and services.

We also deliver Internet-based services and, accordingly, depend on our ability and the ability of our customers to access the Internet.  In the event of any difficulties, outages and delays by Internet service providers, we may be impeded from providing such services, which may have an adverse effect on our business and our reputation.

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 2013 Stock Incentive Plan and 1996 Non-Employee Director Stock Incentive Plan provide for accelerated vesting of stock options upon a change in control.  These incentive plans also authorize the committee under the plans to provide for accelerated vesting of other types of equity awards in connection with a change in control at grant or thereafter, and certain other awards made under these incentive plans (such as restricted stock and restricted stock unit awards) accelerate upon a change in control or upon certain termination events in connection with a change in control.  Further, certain agreements between us and our executive officers provide for increased severance payments and certain benefits if those executive officers are terminated without cause by us or if they terminate for good reason in each case, within two years after a change in control or within ninety days prior to the effective date of the change in control or after the first public announcement of the pendency of the change in control.
 

Tax legislation initiatives could adversely affect our net earnings and tax liabilities.

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

We have no unresolved comments from the staff of the SEC that were issued 180 days or more preceding the end of our 2014 fiscal year.
 

We own or lease the following properties with more than 100,000 square feet:

 
 
 
 
Own or
 
Approximate
 
Lease Expiration
Property
 
Location
 
Lease
 
Square Footage
 
Date
Corporate Headquarters
 
Melville, NY
 
Lease
 
185,000 
 
June 2020
Corporate Headquarters
 
Melville, NY
 
Own
 
105,000 
 
N/A
Office and Distribution Center
 
Lyssach, Switzerland
 
Lease
 
180,000 
 
July 2016
Office and Distribution Center  
Tours, France
 
Own
 
166,000 
   N/A
Office and Distribution Center
 
Plymouth, MA
 
Lease
 
165,000 
 
December 2015
Office and Distribution Center
 
Gillingham, United Kingdom
 
Lease/Own
 
165,000 
 
June 2033
Office and Distribution Center
 
Niagara on the Lake, Canada
 
Lease
 
128,000 
 
September 2021
Office and Distribution Center
 
Bastian, VA
 
Own
 
108,000 
 
N/A
Office and Distribution Center
 
West Allis, WI
 
Lease
 
106,000 
 
October 2027
Office and Distribution Center
 
Cuijk, Netherlands
 
Lease
 
101,000 
 
May 2022
Distribution Center
 
Denver, PA
 
Lease
 
624,000 
 
December 2021
Distribution Center
 
Indianapolis, IN
 
Lease
 
380,000 
 
February 2019
Distribution Center
 
Sparks, NV
 
Lease
 
370,000 
 
December 2016
Distribution Center
 
Indianapolis, IN
 
Own
 
287,000 
 
N/A
Distribution Center
 
Grapevine, TX
 
Lease
 
242,000 
 
July 2018
Distribution Center
 
Gallin, Germany
 
Own
 
215,000 
 
N/A
Distribution Center
 
Jacksonville, FL
 
Lease
 
212,000 
 
February 2019
Distribution Center
 
Fort Worth, TX
 
Lease
 
120,000 
 
May 2021

The properties listed in the table above are our principal properties primarily used by our health care distribution segment.  In addition, we lease numerous other distribution, office, showroom, manufacturing and sales space in locations including the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Poland, Portugal, Slovakia, South Africa, Spain, Switzerland, Thailand 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.



From time to time, we may become a party to legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes, governmental inquiries and investigations, and other matters arising out of the ordinary course of our business.  While the results of legal proceedings cannot be predicted with certainty, in our opinion pending matters are not currently anticipated to have a material adverse effect on our financial condition or results of operations.

As of December 27, 2014, we had accrued our best estimate of potential losses relating to claims that were probable to result in 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.


Not applicable.


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 2014 and 2013:

 
 
High
 
Low
Fiscal 2014:
 
 
 
 
 
 
1st Quarter
 
$
120.72 
 
$
109.68 
2nd Quarter
 
 
120.99 
 
 
110.99 
3rd Quarter
 
 
121.00 
 
 
114.54 
4th Quarter
 
 
139.15 
 
 
109.34 
 
 
 
 
 
 
 
Fiscal 2013:
 
 
 
 
 
 
1st Quarter
 
$
92.66 
 
$
79.57 
2nd Quarter
 
 
98.28 
 
 
88.90 
3rd Quarter
 
 
107.75 
 
 
95.94 
4th Quarter
 
 
116.07 
 
 
102.50 

On February 2, 2015, there were approximately 471 holders of record of our common stock and the last reported sales price was $138.75.


Purchases of Equity Securities by the Issuer

Our share repurchase program, announced on June 21, 2004, originally allowed us to repurchase up to $100 million of shares of our common stock, which represented approximately 3.5% of the shares outstanding at the commencement of the program.  As summarized in the table below, subsequent additional increases totaling $1.6 billion, authorized by our Board of Directors, to the repurchase program provide for a total of $1.7 billion 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 
April 18, 2012
 
 
200,000,000 
November 12, 2012
 
 
300,000,000 
December 9, 2013
 
 
300,000,000 
December 4, 2014
 
 
300,000,000 

As of December 27, 2014, we had repurchased approximately $1.4 billion of common stock (19,357,214 shares) under these initiatives, with $299.9 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 27, 2014:

 
 
 
 
 
 
 
 
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)
09/28/14 through 11/01/14
 
265,874 
 
$
115.19 
 
265,874 
 
357,889 
11/02/14 through 11/29/14
 
179,616 
 
 
127.25 
 
179,616 
 
146,516 
11/30/14 through 12/27/14
 
148,940 
 
 
135.80 
 
148,940 
 
2,182,657 
 
 
594,430 
 
 
 
 
594,430 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
All repurchases were executed in the open market under our existing publicly announced authorized program.
 
 
 
 
 
 
 
 
 
 
 
(2)
The maximum number of shares that may yet be purchased under this program is determined at the end of each month based on the
 
closing price of our common stock at that time.

Dividend Policy

We have not declared any cash or stock dividends on our common stock during fiscal years 2014 or 2013.  We currently do not anticipate declaring any cash or stock dividends on our common stock in the foreseeable future.  We intend to retain earnings to finance the expansion of our business and for general corporate purposes, including our share 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 26, 2009, the last trading day before the beginning of our 2010 fiscal year, through the end of our 2014 fiscal year 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 26, 2009
ASSUMES DIVIDENDS REINVESTED
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 26,
 
December 25,
 
December 31,
 
December 29,
 
December 28,
 
December 27,
 
 
2009 
 
2010 
 
2011 
 
2012 
 
2013 
 
2014 
Henry Schein, Inc.
 
$
100.00 
 
$
117.26 
 
$
121.54 
 
$
150.84 
 
$
215.86 
 
$
259.18 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dow Jones U.S. Health
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Care Index
 
 
100.00 
 
 
104.21 
 
 
115.67 
 
 
136.27 
 
 
195.44 
 
 
249.11 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NASDAQ Stock Market
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Composite Index
 
 
100.00 
 
 
117.73 
 
 
116.21 
 
 
133.81 
 
 
190.31 
 
 
222.69 



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 27, 2014, 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 27,
   
December 28,
   
December 29,
   
December 31,
   
December 25,
 
 
 
2014
   
2013
   
2012
   
2011
   
2010
 
 
 
(in thousands, except per share data)
 
Income Statement Data:
 
 
   
 
   
 
   
 
   
 
 
Net sales
  $ 10,371,390     $ 9,560,647     $ 8,939,967     $ 8,530,242     $ 7,526,790  
Gross profit
    2,911,315       2,656,014       2,507,513       2,418,055       2,170,876  
Selling, general and administrative expenses
    2,196,173       1,978,960       1,873,360       1,835,906       1,637,460  
Restructuring costs (1)
    -       -       15,192       -       12,285  
Operating income
    715,142       677,054       618,961       582,149       521,131  
Other expense, net (2)
    (5,830 )     (12,360 )     (14,773 )     (12,842 )     (19,096 )
Income before taxes and equity in earnings
                                       
     of affiliates
    709,312       664,694       604,188       569,307       502,035  
Income taxes (3)
    (215,610 )     (190,891 )     (187,858 )     (180,212 )     (160,069 )
Equity in earnings of affiliates
    11,734       10,194       7,058       15,561       10,165  
Loss on sale of equity investment (4)
    -       (12,535 )     -       -       -  
Net income
    505,436       471,462       423,388       404,656       352,131  
Less: Net income attributable to
                                       
    noncontrolling interests
    (39,359 )     (39,908 )     (35,312 )     (36,995 )     (26,342 )
Net income attributable to Henry Schein, Inc.
  $ 466,077     $ 431,554     $ 388,076     $ 367,661     $ 325,789  
 
                                       
 
                                       
Earnings per share attributable to
                                       
    Henry Schein, Inc.:
                                       
 
                                       
 
                                       
 
                                       
    Basic
  $ 5.53     $ 5.02     $ 4.44     $ 4.08     $ 3.62  
    Diluted
    5.44       4.93       4.32       3.97       3.49  
 
                                       
Weighted-average common shares outstanding:
                                       
    Basic
    84,265       85,926       87,499       90,120       90,097  
    Diluted
    85,740       87,622       89,823       92,620       93,268  

 
 
 
Years ended
 
 
December 27,
 
December 28,
 
December 29,
 
December 31,
 
December 25,
 
 
2014 
 
2013 
 
2012 
 
2011 
 
2010 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Sales by Market Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Health care distribution (5):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Dental
 
$
5,381,215 
 
$
4,997,972 
 
$
4,774,482 
 
$
4,764,898 
 
$
4,415,469 
   Animal health
 
 
2,898,612 
 
 
2,599,461 
 
 
2,321,151 
 
 
2,010,270 
 
 
1,537,370 
   Medical
 
 
1,742,685 
 
 
1,643,167 
 
 
1,560,921 
 
 
1,504,454 
 
 
1,373,999 
      Total health care distribution
 
 
10,022,512 
 
 
9,240,600 
 
 
8,656,554 
 
 
8,279,622 
 
 
7,326,838 
Technology and value-added services (6)
 
 
348,878 
 
 
320,047 
 
 
283,413 
 
 
250,620 
 
 
199,952 
      Total
 
$
10,371,390 
 
$
9,560,647 
 
$
8,939,967 
 
$
8,530,242 
 
$
7,526,790 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
December 27,
 
December 28,
 
December 29,
 
December 31,
 
December 25,
 
 
2014 
 
2013 
 
2012 
 
2011 
 
2010 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
6,138,807 
 
$
5,624,636 
 
$
5,333,997 
 
$
4,740,144 
 
$
4,547,471 
Long-term debt
 
 
542,776 
 
 
450,233 
 
 
488,121 
 
 
363,524 
 
 
395,309 
Redeemable noncontrolling interests
 
 
564,527 
 
 
497,539 
 
 
435,175 
 
 
402,050 
 
 
304,140 
Stockholders' equity
 
 
2,816,445 
 
 
2,788,001 
 
 
2,615,864 
 
 
2,433,623 
 
 
2,412,957 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
(1)
Restructuring costs for the year ended December 29, 2012 consist primarily of severance costs, including severance pay and benefits of $12.8 million and facility closing costs of $2.4 million. Restructuring costs for the year ended December 25, 2010 consist primarily of severance costs, including severance pay and benefits of $8.9 million and facility closing costs of $3.4 million.  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)
Includes approximately $6.2 million of one-time expenses related to the refinancing of Henry Schein Animal Health debt during the first quarter of 2013.  These expenses reflect non-cash deferred financing costs.
 
(3)
During the third quarter of 2013, there was a $13.4 million reduction of our valuation allowance related to certain deferred tax assets related to tax loss carryforwards originating outside the United States.
 
(4)
Represents a loss on divestiture of a noncontrolling interest in a dental wholesale distributor in the Middle East. 
 
(5)
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.
 
(6)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.



Cautionary Note Regarding Forward-Looking Statements

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

Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: effects of a highly competitive market; our dependence on third parties for the manufacture and supply of our products; our dependence upon sales personnel, customers, suppliers and manufacturers; our dependence on our senior management; fluctuations in quarterly earnings; risks from expansion of customer purchasing power and multi-tiered costing structures; possible increases in the cost of shipping our products or other service issues with our third-party shippers; general global macro-economic conditions; disruptions in financial markets; possible volatility of the market price of our common stock; changes in the health care industry; implementation of health care laws; failure to comply with regulatory requirements and data privacy laws; risks associated with our global operations; transitional challenges associated with acquisitions and joint ventures, including the failure to achieve anticipated synergies; financial risks associated with acquisitions and joint ventures; litigation risks; the dependence on our continued product development, technical support and successful marketing in the technology segment; risks from challenges associated with the emergence of potential increased competition by third-party online commerce sites; 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.

Where You Can Find Important Information

We may disclose important information through one or more of the following channels: SEC filings, public conference calls and webcasts, press releases, the investor relations page of our website (www.henryschein.com) and the social media channels identified on the investor relations page of our website.

Executive-Level Overview

We believe we are the world’s largest provider of health care products and services primarily to office-based dental, animal health and medical practitioners.  We serve more than 1 million customers worldwide including dental practitioners and laboratories, animal health clinics and physician practices, as well as government, institutional health care clinics and other alternate care clinics.  We believe that we have a strong brand identity due to our more than 82 years of experience distributing health care products.

We are headquartered in Melville, New York, employ more than 17,500 people (of which approximately 8,000 are based outside the United States) and have operations or affiliates in 28 countries, including the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Poland, Portugal, Slovakia, South Africa, Spain, Switzerland, Thailand and the United Kingdom.
 

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

We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and value-added services.  These segments offer different products and services to the same customer base.

The health care distribution reportable segment aggregates our global dental, animal health and medical operating segments.  This segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.  Our global dental group serves office-based dental practitioners, dental laboratories, schools and other institutions.  Our global animal health group serves animal health practices and clinics.  Our global medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions.

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

Industry Overview

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

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

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

Industry Consolidation

The health care products distribution industry, as it relates to office-based health care practitioners, is highly fragmented and diverse.  This industry, which encompasses the dental, animal health and medical markets, was estimated to produce revenues of approximately $45 billion in 2014 in the global markets.  The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.

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


The trend of consolidation extends to our customer base.  Health care practitioners are increasingly seeking to partner, affiliate or combine with larger entities such as hospitals, health systems, group practices or physician hospital organizations.  In many cases, purchasing decisions for consolidated groups are made at a centralized or professional staff level; however, orders are delivered to the practitioners’ offices.

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

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

As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we have the ability to support increased sales through our existing infrastructure.  We also have invested in expanding our sales/marketing infrastructure to include a focus on building relationships with decision makers who do not reside in the office-based practitioner setting.

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

Aging Population and Other Market Influences

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

According to the U.S. Census Bureau’s International Data Base, in 2014 there were more than six million Americans aged 85 years or older, the segment of the population most in need of long-term care and elder-care services.  By the year 2050, that number is projected to nearly triple to approximately 18 million.  The population aged 65 to 84 years is projected to increase over 60% during the same time period.

As a result of these market dynamics, annual expenditures for health care services continue to increase in the United States.  We believe that demand for our products and services will grow, while continuing to be impacted by current and future operating, economic and industry conditions.  The Centers for Medicare and Medicaid Services, or CMS,  published “National Health Expenditure Projections 2013-2023” indicating that total national health care spending reached approximately $2.9 trillion in 2013, or 17.2% of the nation’s gross domestic product, the benchmark measure for annual production of goods and services in the United States.  Health care spending is projected to reach approximately $5.2 trillion in 2023, approximately 19.3% 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, and there has been an emphasis on efforts to control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical devices, and/or medical treatments or services.  Also, many of these laws and regulations are subject to change and may impact our financial performance.  In addition, our businesses are generally subject to numerous other laws and regulations that could impact our financial performance, including securities, antitrust and other laws and regulations.  Failure to comply with law or regulations could have a material adverse effect on our business.

Health Care Reform

The United States Health Care Reform law adopted through the March 2010 enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage.

The Health Care Reform Law requirements include a 2.3% excise tax on domestic sales of many medical devices by manufacturers and importers that began in 2013 and a fee on branded prescription drugs and biologics that was implemented in 2011, both of which may affect sales.  The Healthcare Reform Law has also materially expanded the number of individuals in the United States with health insurance.  However, litigation is pending, including before the Supreme Court of the United States, which could result in the invalidation of some of or all of the law or the manner in which it has been interpreted, and the reduction in the expansion of health insurance coverage.  There has also been an effort by the party in control of Congress to repeal some or all of the law.  The uncertain status of the Healthcare Reform Law affects our ability to plan.

A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. On February 1, 2013, CMS released the final rule to implement the Physician Payment Sunshine Act.  Under this rule, data collection activities began on August 1, 2013, and first disclosure reports were due by March 31, 2014 for the period August 1, 2013 through December 31, 2013.  As required under the Physician Payment Sunshine Act, CMS published information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities, on September 30, 2014.

Under the Physician Payment Sunshine Act, we are required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals.  It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals.  The Physician Payment Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may be required to report under certain of such state laws in addition to Physician Payment Sunshine Act reporting, and some of these state laws are also ambiguous.  We completed the initial Physician Payment Sunshine Act submission to CMS due March 31, 2014, covering the period August 1 to December 31, 2013, which was released to the public September 1, 2014.  Beginning from 2014 and each year thereafter, data collection for each calendar year must be submitted by March 31 of the subsequent year.  We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers.  While we believe we have substantially compliant programs and controls in place to comply with the Physician Payment Sunshine Act requirements (and similar foreign requirements), our compliance with the new final rule (and similar foreign requirements) imposes additional costs on us.
 

Health Care Fraud

Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations.  Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs.  Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of, items or services that are paid for by federal, state and other health care payers and programs.

The fraud and abuse laws and regulations have been subject to varying interpretations, as well as heightened enforcement activity over the past few years, and significant enforcement activity has been the result of  “relators,” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under federal and state false claims laws.  Under the federal False Claims Act relators can be entitled to receive up to 30% of total recoveries.  Also, violations of the federal False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim.  The Health Care Reform Law significantly strengthened the federal False Claims Act and the federal Anti-Kickback Law provisions, which could lead to the possibility of increased whistleblower or relator suits, and among other things made clear that a federal Anti-Kickback Law violation can be a basis for federal False Claims Act liability.

The United States government (among others) has expressed concerns about financial relationships between suppliers on the one hand and physicians and dentists on the other.  As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance.

We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years.

Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business.  Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses.  Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs.  In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance.

While we believe that we are substantially compliant with applicable fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business.

Operating and Security Standards

The Federal Food, Drug, and Cosmetic Act (“FDC Act”) and similar foreign laws generally regulate 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.
 

The Federal Drug Quality and Security Act of 2013 brings about significant changes with respect to pharmaceutical supply chain requirements and pre-empts state law.  Title II of this measure, known as the Drug Supply Chain Security Act (“DSCSA”), will be phased in over 10 years, and is intended to build a national electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the United States.  The law began to take effect in January 2015, and on that date specific product tracing requirements for manufacturers, wholesalers, repackagers and dispensers (e.g., pharmacies) of prescription drugs took effect, although the FDA, in a Final Guidance issued on December 23, 2014, stated that in order to minimize possible disruptions in the distribution of prescription drugs in the United States, it would not take action for noncompliance with these track and trace requirements prior to May 1, 2015.  These new product tracing requirements replace the former FDA drug pedigree requirements and pre-empt state requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements.  Also in January 2015, the DSCSA required manufacturers and wholesale distributors to have systems in place by which they can identify whether a product in their possession or control is a “suspect” or “illegitimate” product, and handle it accordingly.

The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers and third party logistics providers (“3PLs”), and includes the creation of national wholesaler and 3PL licenses in cases where states do not license such entities.  The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs.  Wholesalers and 3PLs are also required to submit annual reports to the FDA beginning on January 1, 2015, which include information regarding each state where the wholesaler or 3PL is licensed, the name and address of each facility and contact information.  According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by Federal law in this area.  Current state licensing requirements will likely remain in effect until the FDA issues new regulations as directed by the DSCSA.

We are in the process of analyzing the impact of the DSCSA on our business.

Regulated Software; Electronic Health Records

The FDA has become increasingly active in addressing the regulation of computer software intended for use in health care settings, and has developed policies on regulating clinical decision support tools and other types of software 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 or foreign government authorities 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, and implementing regulations (“HIPAA”).  HIPAA requires, among other things, the implementation of various recordkeeping, operational, notice and other practices intended to safeguard that information, limit its use to allowed purposes and notify individuals in the event of privacy and security breaches.  Failure to comply with these laws and regulations can result in substantial penalties and other liabilities.

In addition, federal initiatives are providing a program of incentive payments available to certain health care providers involving the adoption and use of certain electronic health care records systems and processes.  The initiative includes providing, among others, physicians and dentists, with financial incentives if they meaningfully use certified electronic health record technology (“EHR”) in accordance with applicable requirements.  In addition, Medicare-eligible providers that fail to timely adopt certified EHR systems and meet “meaningful use” requirements for those systems in accordance with regulatory requirements are to be subject to cumulative Medicare reimbursement reductions, which reductions for eligible health professionals (including physicians and dentists) began on January 1, 2015.  Qualification for the incentive payments requires the use of EHRs that have certain capabilities for meaningful use pursuant to standards adopted by the Department of Health and Human Services.  Initial (“Stage 1”) standards addressed criteria for periods beginning in 2011.  CMS has also issued a final rule with more demanding “Stage 2” criteria for periods beginning in 2014 for eligible health professionals (including physicians and dentists).


Recognizing difficulties encountered by some providers in acquiring and implementing 2014 edition-certified EHR technology, CMS published a final rule on September 4, 2014 that adds flexibility to the manner in which physicians, dentists and others may demonstrate meaningful use of EHR by extending through the 2014 reporting period the ability, in certain circumstances, to use 2011 edition-certified technology to attest to meaningful use, rather than requiring the use of 2014 edition-certified technology.  The rule also delays for one year implementation of more rigorous “Stage 3” measures, and under this rule eligible health professionals (including physicians and dentists) would begin Stage 3 in calendar year 2017, as to which regulations are to be proposed in Spring 2015.  In addition, also in recognition of difficulties encountered by some providers in acquiring and implementing 2014 edition-certified EHR technology, CMS has specifically recognized that a hardship exemption may be granted, among other reasons, where the provider’s failure to demonstrate meaningful use was caused by its EHR vendor’s failure to timely obtain 2014 certification for its EHR technology, and extended the deadline for health care professionals to file hardship exemption applications from July 1, 2014 to November 30, 2014.  On January 29, 2015, CMS announced an intent to engage in further rulemaking under the EHR incentive program to redress the Stage 2 reporting burden on providers.  Among other things, the new rule, expected in the Spring of 2015, will tie EHR reporting to a calendar year, modify other aspects of the program and shorten the EHR reporting period in 2015 to 90 days.  Certain of our businesses involve the manufacture and sale of certified EHR systems and other products linked to incentive programs, and so must maintain compliance with, and are affected by, these evolving governmental criteria.

Also, HIPAA requires certain health care providers, such as physicians, to use certain transaction and code set rules for specified electronic transactions, such as transactions involving claims submissions.  Commencing July 1, 2012, CMS required that electronic claim submissions and related electronic transactions be conducted under a new HIPAA transaction standard, called Version 5010.  CMS has required this upgrade in connection with another new requirement applicable to the industry, the implementation of new diagnostic code sets to be used in claims submission.  The new diagnostic code sets are called the ICD-10-CM.  They were originally to be implemented on October 1, 2013 (and CMS delayed the implementation date until October 1, 2014), but as part of the Protecting Access to Medicare Act of 2014, enacted on April 1, 2014, Congress prohibited the Secretary of Health and Human Services from implementing ICD-10-CM any earlier than October 1, 2015.  CMS published a final rule on August 4, 2014 adopting the October 1, 2015 compliance date and requiring the use of ICD-9-CM code sets through September 30, 2015, and there is no suggestion that implementation will be further delayed.  Certain of our businesses provide electronic practice management products that must meet those requirements, and while we believe that we are prepared to timely adopt the new standards, it is possible that the transition to these new standards, particularly the transition to ICD-10-CM, may result in a degree of disruption and confusion, thus potentially increasing the costs associated with supporting this product.

There may be additional legislative initiatives in the future impacting health care.

E-Commerce

Electronic commerce solutions have become an integral part of traditional health care supply and distribution relationships.  Our distribution business is characterized by rapid technological developments and intense competition.  The continuing advancement of online commerce requires us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings.

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


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 27, 2014, December 28, 2013 and December 29, 2012 (in thousands):
 
 
Years Ended
 
 
December 27,
   
December 28,
   
December 29,
 
 
2014
   
2013
   
2012
 
Operating results:
               
Net sales
$ 10,371,390     $ 9,560,647     $ 8,939,967  
Cost of sales
  7,460,075       6,904,633       6,432,454  
Gross profit
  2,911,315       2,656,014       2,507,513  
Operating expenses:
                     
Selling, general and administrative
  2,196,173       1,978,960       1,873,360  
Restructuring costs
  -       -       15,192  
Operating income
$ 715,142     $ 677,054     $ 618,961  
                       
Other expense, net
$ (5,830 )   $ (12,360 )   $ (14,773 )
Net income
  505,436       471,462       423,388  
Net income attributable to Henry Schein, Inc.
  466,077       431,554       388,076  
                       
 
Years Ended
 
 
December 27,
   
December 28,
   
December 29,
 
  2014      2013      2012   
                       
Cash flows:
                     
Net cash provided by operating activities
$ 592,504     $ 664,175     $ 408,099  
Net cash used in investing activities
  (516,639 )     (266,605 )     (269,604 )
Net cash used in financing activities
  (154,647 )     (335,974 )     (170,601 )
 
Plans of Restructuring
 
On November 6, 2014, we announced a corporate initiative to rationalize our operations and provide expense efficiencies, which will occur throughout fiscal 2015.  This initiative is expected to include the elimination of approximately 2% to 3% of our workforce and the closing of certain facilities.  The costs associated with all actions to complete this restructuring are expected to be in the range of $35 million to $40 million pre-tax (approximately $0.29 to $0.33 per diluted share).  We plan to reduce our cost structure to fund new initiatives to drive future growth as our 2015 – 2017 strategic planning cycle begins.  At this time, we are unable to make a determination of the estimated amount or range of amounts to be included for each major type of cost associated with this restructuring (including associated cash expenditures).  We will provide further details in a future Securities and Exchange Commission filing at such time as we are able to determine the costs we expect to incur in connection with this restructuring.
 
The costs associated with this restructuring will be included in a separate line item, “Restructuring costs” within our consolidated statements of income.

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


2014 Compared to 2013

Net Sales

Net sales for 2014 and 2013 were as follows (in thousands):

           
% of
     
% of
 
Increase
       
2014 
 
Total
 
2013 
 
Total
 
$
 
%
Health care distribution (1):
                                   
 
Dental
 
$
5,381,215 
 
51.9 
%
 
$
4,997,972 
 
52.3 
%
 
$
383,243 
 
7.7 
%
 
Animal health
   
2,898,612 
 
27.9 
     
2,599,461 
 
27.2 
     
299,151 
 
11.5 
 
 
Medical
   
1,742,685 
 
16.8 
     
1,643,167 
 
17.2 
     
99,518 
 
6.1 
 
   
Total health care distribution
   
10,022,512 
 
96.6 
     
9,240,600 
 
96.7 
     
781,912 
 
8.5 
 
Technology and value-added services (2)
   
348,878 
 
3.4 
     
320,047 
 
3.3 
     
28,831 
 
9.0 
 
   
Total
 
$
10,371,390 
 
100.0 
%
 
$
9,560,647 
 
100.0 
%
 
$
810,743 
 
8.5 
 
                                         
                                         
(1)
 
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
   
generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
                                         
(2)
 
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
   
and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other
    services. 

The $810.7 million, or 8.5%, increase in net sales for the year ended December 27, 2014 includes an increase of 8.6% local currency growth (4.6% increase in internally generated revenue and 4.0% growth from acquisitions) as well as a decrease of 0.1% related to foreign currency exchange.

The $383.2 million, or 7.7%, increase in dental net sales for the year ended December 27, 2014 includes an increase of 8.2% in local currencies (3.3% increase in internally generated revenue and 4.9% growth from acquisitions) as well as a decrease of 0.5% related to foreign currency exchange.  The 8.2% increase in local currency sales was due to increases in dental equipment sales and service revenues of 6.8% (3.3% increase in internally generated revenue and 3.5% growth from acquisitions) and dental consumable merchandise sales growth of 8.7% (3.3% increase in internally generated revenue and 5.4% growth from acquisitions).

The $299.2 million, or 11.5%, increase in animal health net sales for the year ended December 27, 2014 includes an increase of 11.2% local currency growth (6.3% increase in internally generated revenue and 4.9% growth from acquisitions) as well as an increase of 0.3% related to foreign currency exchange.

The $99.5 million, or 6.1%, increase in medical net sales for the year ended December 27, 2014 includes an increase of 6.0% local currency growth (5.9% increase in internally generated revenue and 0.1% growth from acquisitions) as well as an increase of 0.1% related to foreign currency exchange.

The $28.8 million, or 9.0%, increase in technology and value-added services net sales for the year ended December 27, 2014 includes an increase of 8.8% local currency growth (5.7% increase in internally generated revenue and 3.1% growth from acquisitions) as well as an increase of 0.2% related to foreign currency exchange.


Gross Profit

Gross profit and gross margins for 2014 and 2013 by segment and in total were as follows (in thousands):

         
Gross
     
Gross
 
Increase
     
2014 
 
Margin %
 
2013 
 
Margin %
 
$
 
%
Health care distribution
 
$
2,680,190 
 
26.7 
%
 
$
2,451,334 
 
26.5 
%
 
$
228,856 
 
9.3 
%
Technology and value-added services
   
231,125 
 
66.2 
     
204,680 
 
64.0 
     
26,445 
 
12.9 
 
 
Total
 
$
2,911,315 
 
28.1 
   
$
2,656,014 
 
27.8 
   
$
255,301 
 
9.6 
 

Gross profit increased $255.3 million, or 9.6%, for the year ended December 27, 2014 compared to the prior year period.  As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies.  Additionally, we realize substantially higher gross margin percentages in our technology segment than in our health care distribution segment.  These higher gross margins result from being both the developer and seller of software products and services, as well as certain financial services. The software industry typically realizes higher gross margins to recover investments in research and development.
 
Within our health care distribution segment, gross profit margins may vary from one period to the next.  Changes in the mix of products sold as well as changes in our customer mix have been the most significant drivers affecting our gross profit margin.  For example, sales of pharmaceutical products are generally at lower gross profit margins than other products.  Conversely, sales of our private label products achieve gross profit margins that are higher than average.  With respect to customer mix, sales to our large-group customers are typically completed at lower gross margins due to the higher volumes sold as opposed to the gross margin on sales to office-based practitioners who normally purchase lower volumes at greater frequencies.

Health care distribution gross profit increased $228.9 million, or 9.3%, for the year ended December 27, 2014 compared to the prior year period.  Health care distribution gross profit margin increased to 26.7% for the year ended December 27, 2014 from 26.5% for the comparable prior year period.  The slight increase in our health care distribution gross profit margin reflects stable margins in each of the segment’s operating units.

Technology and value-added services gross profit increased $26.4 million, or 12.9%, for the year ended December 27, 2014 compared to the prior year period.  Technology and value-added services gross profit margin increased to 66.2% for the year ended December 27, 2014 from 64.0% for the comparable prior year period, primarily due to changes in the product sales mix.

Selling, General and Administrative

Selling, general and administrative expenses by segment and in total for 2014 and 2013 were as follows (in thousands):

           
% of
       
% of
           
         
Respective
     
Respective
 
Increase
     
2014 
 
Net Sales
 
2013 
 
Net Sales
 
$
 
%
Health care distribution
 
$
2,068,419 
 
20.6 
%
 
$
1,860,670 
 
20.1 
%
 
$
207,749 
 
11.2 
%
Technology and value-added services
   
127,754 
 
36.6 
     
118,290 
 
37.0 
     
9,464 
 
8.0 
 
 
Total
 
$
2,196,173 
 
21.2 
   
$
1,978,960 
 
20.7 
   
$
217,213 
 
11.0 
 

Selling, general and administrative expenses increased $217.2 million, or 11.0%, for the year ended December 27, 2014 from the comparable prior year period.  As a percentage of net sales, selling, general and administrative expenses increased to 21.2% from 20.7% for the comparable prior year period.

 
As a component of total selling, general and administrative expenses, selling expenses increased $118.6 million, or 9.3%, for the year ended December 27, 2014 from the comparable prior year period.  As a percentage of net sales, selling expenses increased to 13.4% from 13.3% for the comparable prior year period.

As a component of total selling, general and administrative expenses, general and administrative expenses increased $98.6 million, or 13.9%, for the year ended December 27, 2014 from the comparable prior year period.  As a percentage of net sales, general and administrative expenses increased to 7.8% from 7.4% for the comparable prior year period.

Other Expense, Net

Other expense, net for the years ended 2014 and 2013 was as follows (in thousands):

               
Variance
   
2014
   
2013
      %
Interest income
  $ 13,655     $ 12,853     $ 802   6.2 %
Interest expense
    (24,057 )     (27,538 )     3,481   12.6  
Other, net
    4,572       2,325       2,247   96.6  
Other expense, net
  $ (5,830 )   $ (12,360 )   $ 6,530   52.8  
 
Other expense, net decreased $6.5 million to $5.8 million for the year ended December 27, 2014 from the comparable prior year period.  Interest income increased $0.8 million.  Interest expense decreased $3.5 million primarily due to the $6.2 million accelerated amortization of deferred financing costs resulting from the early repayment of our Henry Schein Animal Health (“HSAH”) debt during February 2013, partially offset by an increase in borrowings under our bank credit lines and our private placement facilities.  Other, net increased by $2.2 million due primarily to a contractual payment from an animal health supplier in Europe related to a change to a non-exclusive sales model.

Income Taxes

For the year ended December 27, 2014, our effective tax rate was 30.4% compared to 28.7% for the prior year period.  During the third quarter of 2013, we concluded that it is more likely than not that certain deferred tax assets related to tax loss carryforwards originating outside the United States, which had been previously reserved, will be realized.  As a result, our provision for income taxes for the year ended December 28, 2013 included a $13.4 million reduction of the valuation allowance which was based on an estimate of future taxable income available to be offset by the tax loss carryforwards.

Absent the effects of the reduction of this valuation allowance in the third quarter of 2013, our effective tax rate for the year ended December 28, 2013 would have been 30.7% as compared to our actual effective tax rate of 28.7%.  The remaining difference between our effective tax rates and the federal statutory tax rates for both periods primarily relates to state and foreign income taxes and interest expense.  For 2015, we expect our effective tax rate to be in the range of 30%.

Loss on Sale of Equity Investment

On July 10, 2013, we divested our investment in a dental wholesale distributor in the Middle East that had primarily served as an importer that distributed products largely to other distributors.  The divestiture resulted in a one-time loss of $12.5 million, or $0.14 per diluted share, in the third quarter of 2013.  Pursuant to the terms of this divestiture, we made cash payments to this distributor in the aggregate amount of $13.4 million, which it was required to use to reduce its debt, pay certain trade payables and provide working capital.  The investment in this distributor had been fully impaired as of the end of 2012.  There was no tax benefit related to the loss on this divestiture.

Net Income

Net income increased $34.0 million, or 7.2%, for the year ended December 27, 2014, compared to the prior year period due to the factors noted above.


2013 Compared to 2012

Net Sales

Net sales for 2013 and 2012 were as follows (in thousands):

           
% of
     
% of
 
Increase
       
2013 
 
Total
 
2012 
 
Total
 
$
 
%
Health care distribution (1):
                                   
 
Dental
 
$
4,997,972 
 
52.3 
%
 
$
4,774,482 
 
53.4 
%
 
$
223,490 
 
4.7 
%
 
Animal health
   
2,599,461 
 
27.2 
     
2,321,151 
 
26.0 
     
278,310 
 
12.0 
 
 
Medical
   
1,643,167 
 
17.2 
     
1,560,921 
 
17.4 
     
82,246 
 
5.3 
 
   
Total health care distribution
   
9,240,600 
 
96.7 
     
8,656,554 
 
96.8 
     
584,046 
 
6.7 
 
Technology and value-added services (2)
   
320,047 
 
3.3 
     
283,413 
 
3.2 
     
36,634 
 
12.9 
 
   
Total
 
$
9,560,647 
 
100.0 
%
 
$
8,939,967 
 
100.0 
%
 
$
620,680 
 
6.9 
 
                                         
                                         
(1)
 
Consists of consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and
   
generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
                                         
(2)
 
Consists of practice management software and other value-added products, which are distributed primarily to health care providers,
   
and financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other
    services. 

The $620.7 million, or 6.9%, increase in net sales for the year ended December 28, 2013 includes an increase of 6.8% local currency growth (3.6% increase in internally generated revenue and 3.2% growth from acquisitions) as well as an increase of 0.1% related to foreign currency exchange.

The $223.5 million, or 4.7%, increase in dental net sales for the year ended December 28, 2013 includes an increase of 4.3% in local currencies (2.1% increase in internally generated revenue and 2.2% growth from acquisitions) as well as an increase of 0.4% related to foreign currency exchange.  The 4.3% increase in local currency sales was due to increases in dental equipment sales and service revenues of 3.6% (3.0% increase in internally generated revenue and 0.6% growth from acquisitions) and dental consumable merchandise sales growth of 4.5% (1.8% increase in internally generated revenue and 2.7% growth from acquisitions).

The $278.3 million, or 12.0%, increase in animal health net sales for the year ended December 28, 2013 includes an increase of 12.3% local currency growth (5.5% increase in internally generated revenue and 6.8% growth from acquisitions) as well as a decrease of 0.3% related to foreign currency exchange.

The $82.2 million, or 5.3%, increase in medical net sales for the year ended December 28, 2013 includes an increase of 5.1% local currency growth (4.6% increase in internally generated revenue and 0.5% growth from acquisitions) as well as an increase of 0.2% related to foreign currency exchange.
 
The $36.6 million, or 12.9%, increase in technology and value-added services net sales for the year ended December 28, 2013 includes an increase of 13.3% local currency growth (9.5% increase in internally generated revenue and 3.8% growth from acquisitions) as well as a decrease of 0.4% related to foreign currency exchange.


Gross Profit

Gross profit and gross margins for 2013 and 2012 by segment and in total were as follows (in thousands):

         
Gross
     
Gross
 
Increase
     
2013 
 
Margin %
 
2012 
 
Margin %
 
$
 
%
Health care distribution
 
$
2,451,334 
 
26.5