Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Agreements

The value of certain foreign currencies as compared to the U.S. dollar and the value of certain underlying functional currencies of the Company, including its foreign subsidiaries, may affect our financial results. Fluctuations in exchange rates may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., 18 months or less) foreign currency forward contracts to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the payment of merchandise purchases to foreign suppliers. We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. A hypothetical 5% change in the average value of the U.S. dollar in 2016 compared to foreign currencies would have changed our 2016 reported Net income attributable to Henry Schein, Inc. by approximately $6.3 million.

As of December 31, 2016, we had foreign currency exchange agreements, which expire through May 31, 2017, which include a mark-to-market gain of $0.3 million as determined by quoted market prices. A hypothetical 5% change in the value of the U.S. dollar would change the notional value of our foreign currency exchange agreements by $3.5 million.

Short-Term Investments

We limit our credit risk with respect to our cash equivalents, short-term investments and derivative instruments, by monitoring the credit worthiness of the financial institutions who are the counter-parties to such financial instruments. As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing numerous investment grade counter-parties.

Variable Interest Rate Debt

As of December 31, 2016, we had variable interest rate exposure for certain of our revolving credit facilities and our U.S. trade accounts receivable securitization.

Our revolving credit facility which we entered into on September 22, 2014 and expires on September 22, 2019, has an interest rate that is based on the U.S. Dollar LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. As of December 31, 2016, there was $65.0 million outstanding under this revolving credit facility. During the year ended December 31, 2016, the average outstanding balance under this revolving credit facility was approximately $214.0 million. Based upon our average outstanding balance for this revolving credit facility, for each hypothetical increase of 25 basis points, our interest expense thereunder would have increased by $0.5 million.

Our U.S trade accounts receivable securitization, which we entered into on April 17, 2013 and which expires on April 29, 2019, has an interest rate that is based upon the asset-backed commercial paper rate of 101 basis points plus 75 basis points. As of December 31, 2016, we had an outstanding balance of $350.0 million under this securitization facility. During the year ended December 31, 2016, the average outstanding balance under this securitization facility was approximately $322.0 million. Based upon our average outstanding balance for this securitization facility, for each hypothetical increase of 25 basis points, our interest expense thereunder would have increased by $0.8 million.

Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
Page
Report of Independent Registered Public Accounting Firm..........................................................................69
Consolidated Financial Statements:
Balance Sheets as of December 31, 2016 and December 26, 2015.........................................................70
Statements of Income for the years ended December 31, 2016,
December 26, 2015 and December 27, 2014..............................................................................71
Statements of Comprehensive Income for the years ended December 31, 2016,
December 26, 2015 and December 27, 2014..............................................................................72
Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2016, December 26, 2015 and December 27, 2014..................................................73
Statements of Cash Flows for the years ended December 31, 2016,
December 26, 2015 and December 27, 2014..............................................................................74
Notes to Consolidated Financial Statements......................................................................................75
Report of Independent Registered Public Accounting Firm..........................................................................119
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2016,
December 26, 2015 and December 27, 2014......................................................................................120
All other schedules are omitted because the required information is either inapplicable or is included in the consolidated financial statements or the notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Henry Schein, Inc.

Melville, NY

We have audited the accompanying consolidated balance sheets of Henry Schein, Inc. as of December 31, 2016 and December 26, 2015 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Henry Schein, Inc. at December 31, 2016 and December 26, 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 12 to the financial statements, in 2016 the Company changed its method of accounting related to the classification of deferred income taxes due to the adoption of Accounting Standards Update No. 2015-17 (Topic 740), Balance Sheet Classification of Deferred Taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Henry Schein, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 21, 2017 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

New York, NY

February 21, 2017

HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,December 26,
20162015
ASSETS
Current assets:
Cash and cash equivalents ..............................................................................................................................................................$62,381$72,086
Accounts receivable, net of reserves of $90,329 and $77,008 ................................................................................................................1,254,1391,229,816
Inventories, net .............................................................................................................................................................................1,635,7501,509,957
Deferred income taxes ...................................................................................................................................................................-58,159
Prepaid expenses and other .............................................................................................................................................................360,510361,082
Total current assets ................................................................................................................................................................3,312,7803,231,100
Property and equipment, net ...............................................................................................................................................................333,906318,476
Goodwill ..........................................................................................................................................................................................2,019,7401,907,593
Other intangibles, net .........................................................................................................................................................................621,180592,971
Investments and other .......................................................................................................................................................................442,790454,600
Total assets ..........................................................................................................................................................................$6,730,396$6,504,740
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .........................................................................................................................................................................$977,249$1,005,798
Bank credit lines ...........................................................................................................................................................................437,476328,631
Current maturities of long-term debt .................................................................................................................................................65,92317,331
Accrued expenses:
Payroll and related ....................................................................................................................................................................266,463258,416
Taxes ......................................................................................................................................................................................151,750161,760
Other ......................................................................................................................................................................................391,785375,061
Total current liabilities ............................................................................................................................................................2,290,6462,146,997
Long-term debt .................................................................................................................................................................................715,457463,752
Deferred income taxes .......................................................................................................................................................................51,589252,862
Other liabilities ..................................................................................................................................................................................264,264212,121
Total liabilities ......................................................................................................................................................................3,321,9563,075,732
Redeemable noncontrolling interests .....................................................................................................................................................607,636542,194
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none outstanding ......................................................................................................................................................................--
Common stock, $.01 par value, 240,000,000 shares authorized,
79,402,505 outstanding on December 31, 2016 and
82,415,320 outstanding on December 26, 2015 ..............................................................................................................................794824
Additional paid-in capital ...............................................................................................................................................................127,536207,374
Retained earnings ..........................................................................................................................................................................2,981,7772,895,997
Accumulated other comprehensive loss .............................................................................................................................................(317,041)(219,939)
Total Henry Schein, Inc. stockholders' equity .................................................................................................................................2,793,0662,884,256
Noncontrolling interests ..................................................................................................................................................................7,7382,558
Total stockholders' equity .......................................................................................................................................................2,800,8042,886,814
Total liabilities, redeemable noncontrolling interests and stockholders' equity .......................................................................................$6,730,396$6,504,740

See accompanying notes.

HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended
December 31,December 26,December 27,
201620152014
Net sales ......................................................................................................................................................................................$11,571,668$10,629,719$10,371,390
Cost of sales .................................................................................................................................................................................8,337,6997,617,4607,460,075
Gross profit .........................................................................................................................................................................3,233,9693,012,2592,911,315
Operating expenses:
Selling, general and administrative ................................................................................................................................................2,416,5042,243,3562,196,173
Restructuring costs ....................................................................................................................................................................45,89134,931-
Operating income .................................................................................................................................................................771,574733,972715,142
Other income (expense):
Interest income .........................................................................................................................................................................13,27512,93513,655
Interest expense ........................................................................................................................................................................(31,893)(26,008)(24,057)
Other, net .................................................................................................................................................................................2,879(141)4,572
Income before taxes and equity in earnings of affiliates ..............................................................................................................755,835720,758709,312
Income taxes ...............................................................................................................................................................................(217,958)(211,391)(215,610)
Equity in earnings of affiliates .........................................................................................................................................................18,51814,06011,734
Net income ..................................................................................................................................................................................556,395523,427505,436
Less: Net income attributable to noncontrolling interests ...................................................................................................................(49,617)(44,369)(39,359)
Net income attributable to Henry Schein, Inc. .....................................................................................................................................$506,778$479,058$466,077
Earnings per share attributable to Henry Schein, Inc.:
Basic ......................................................................................................................................................................................$6.27$5.78$5.53
Diluted ....................................................................................................................................................................................$6.19$5.69$5.44
Weighted-average common shares outstanding:
Basic ......................................................................................................................................................................................80,82082,84484,265
Diluted ....................................................................................................................................................................................81,86284,12585,740

See accompanying notes.

HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years Ended
December 31,December 26,December 27,
201620152014
Net income ...............................................................................................................................................................................$556,395$523,427$505,436
Other comprehensive loss, net of tax:
Foreign currency translation loss ..............................................................................................................................................(98,402)(134,035)(157,698)
Unrealized gain (loss) from foreign currency hedging activities .......................................................................................................(992)1,994(2,337)
Unrealized investment gain......................................................................................................................................................2134379
Pension adjustment gain (loss) .................................................................................................................................................(399)2,270(7,441)
Other comprehensive loss, net of tax ............................................................................................................................................(99,791)(129,637)(167,097)
Comprehensive income ..............................................................................................................................................................456,604393,790338,339
Comprehensive income attributable to noncontrolling interests:
Net income ......................................................................................................................................................................(49,617)(44,369)(39,359)
Foreign currency translation loss ..........................................................................................................................................2,6894,8304,116
Comprehensive income attributable to noncontrolling interests ..............................................................................................(46,928)(39,539)(35,243)
Comprehensive income attributable to Henry Schein, Inc. ................................................................................................................$409,676$354,251$303,096

See accompanying notes.

HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
Accumulated
Common StockAdditionalOtherTotal
$.01 Par ValuePaid-inRetainedComprehensiveNoncontrollingStockholders'
SharesAmountCapitalEarningsIncome (Loss)InterestsEquity
Balance, December 28, 2013 ..............................................................................................................................................................85,622,452$856$318,225$2,398,267$67,849$2,804$2,788,001
Net income (excluding $38,741 attributable to Redeemable
noncontrolling interests) .............................................................................................................................................................---466,077-618466,695
Foreign currency translation loss (excluding $4,080
attributable to Redeemable noncontrolling interests) ...................................................................................................................................----(153,582)(36)(153,618)
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $155 .............................................................................................................................................................----(2,337)-(2,337)
Unrealized investment gain, net of tax of $250..............................................................................................................................................----379-379
Pension adjustment loss, net of tax of $2,781...............................................................................................................................................----(7,441)-(7,441)
Dividends paid ..........................................................................................................................................................................-----(544)(544)
Initial noncontrolling interests and adjustments related to
business acquisitions ................................................................................................................................................................--744--9753
Change in fair value of redeemable securities ...............................................................................................................................................--(40,836)---(40,836)
Repurchase and retirement of common stock ...............................................................................................................................................(2,528,209)(25)(78,143)(221,821)--(299,989)
Stock issued upon exercise of stock options,
including tax benefit of $11,161 ......................................................................................................................................................637,014642,646---42,652
Stock-based compensation expense .......................................................................................................................................................464,124545,871---45,876
Shares withheld for payroll taxes ..........................................................................................................................................................(186,844)(2)(22,570)---(22,572)
Liability for cash settlement stock-based compensation awards .............................................................................................................................--(574)---(574)
Balance, December 27, 2014 ..............................................................................................................................................................84,008,537$840$265,363$2,642,523$(95,132)$2,851$2,816,445
Net income (excluding $43,588 attributable to Redeemable
noncontrolling interests) .............................................................................................................................................................---479,058-781479,839
Foreign currency translation loss (excluding $4,790
attributable to Redeemable noncontrolling interests) ...................................................................................................................................----(129,205)(40)(129,245)
Unrealized gain from foreign currency hedging activities,
net of tax of $153.....................................................................................................................................................................----1,994-1,994
Unrealized investment gain, net of tax of $0 ................................................................................................................................................----134-134
Pension adjustment gain, net of tax of $1,008..............................................................................................................................................----2,270-2,270
Dividends paid ..........................................................................................................................................................................-----(657)(657)
Other adjustments ........................................................................................................................................................................--222--(9)213
Initial noncontrolling interests and adjustments related to
business acquisitions ................................................................................................................................................................-----(368)(368)
Change in fair value of redeemable securities ...............................................................................................................................................--(35,202)---(35,202)
Repurchase and retirement of common stock ...............................................................................................................................................(2,084,297)(21)(74,247)(225,584)--(299,852)
Stock issued upon exercise of stock options,
including tax benefit of $20,802 ......................................................................................................................................................297,866335,669---35,672
Stock-based compensation expense .......................................................................................................................................................392,855444,610---44,614
Shares withheld for payroll taxes ..........................................................................................................................................................(199,641)(2)(28,312)---(28,314)
Liability for cash settlement stock-based compensation awards .............................................................................................................................--(729)---(729)
Balance, December 26, 2015 ..............................................................................................................................................................82,415,320$824$207,374$2,895,997$(219,939)$2,558$2,886,814
Net income (excluding $48,760 attributable to Redeemable
noncontrolling interests) .............................................................................................................................................................---506,778-857507,635
Foreign currency translation loss (excluding $2,652
attributable to Redeemable noncontrolling interests) ...................................................................................................................................----(95,713)(37)(95,750)
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $33...............................................................................................................................................................----(992)-(992)
Unrealized investment gain, net of tax of $0 ................................................................................................................................................----2-2
Pension adjustment loss, net of tax benefit of $548.........................................................................................................................................----(399)-(399)
Dividends paid ..........................................................................................................................................................................-----(593)(593)
Other adjustments ........................................................................................................................................................................--5--1015
Initial noncontrolling interests and adjustments related to
business acquisitions ................................................................................................................................................................-----4,9434,943
Change in fair value of redeemable securities ...............................................................................................................................................--(66,864)---(66,864)
Repurchase and retirement of common stock ...............................................................................................................................................(3,461,782)(35)(128,991)(420,998)--(550,024)
Stock issued upon exercise of stock options,
including tax benefit of $23,392 ......................................................................................................................................................207,916234,794---34,796
Stock-based compensation expense .......................................................................................................................................................377,552458,242---58,246
Shares withheld for payroll taxes ..........................................................................................................................................................(164,444)(1)(29,113)---(29,114)
Liability for cash settlement stock-based compensation awards .............................................................................................................................27,943-4,052---4,052
Deferred tax benefit arising from acquisition of.............................................................................................................................................
noncontrolling interest in partnership..................................................................................................................................................--48,037---48,037
Balance, December 31, 2016 ..............................................................................................................................................................79,402,505$794$127,536$2,981,777$(317,041)$7,738$2,800,804

See accompanying notes.

HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
December 31,December 26,December 27,
201620152014
Cash flows from operating activities:
Net income ......................................................................................................................................................................................$556,395$523,427$505,436
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................................................................................................................................................169,780159,127152,238
Stock-based compensation expense .............................................................................................................................................58,24644,61445,876
Provision for losses on trade and other accounts receivable ...............................................................................................................2,6473,1844,619
Benefit from deferred income taxes ..............................................................................................................................................(37,066)(6,241)(1,092)
Equity in earnings of affiliates .....................................................................................................................................................(18,518)(14,060)(11,734)
Distributions from equity affiliates ...............................................................................................................................................20,35118,02915,727
Changes in unrecognized tax benefits ...........................................................................................................................................6,99711,84722,597
Other ......................................................................................................................................................................................11,6117,5493,303
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ...............................................................................................................................................................(1,904)(120,001)(81,441)
Inventories ...........................................................................................................................................................................(104,787)(194,869)(71,899)
Other current assets ...............................................................................................................................................................(22,657)(58,376)(40,407)
Accounts payable and accrued expenses ...................................................................................................................................(25,634)212,61149,281
Net cash provided by operating activities ...............................................................................................................................................615,461586,841592,504
Cash flows from investing activities:
Purchases of fixed assets ....................................................................................................................................................................(70,179)(71,684)(82,116)
Payments related to equity investments and business
acquisitions, net of cash acquired .....................................................................................................................................................(228,575)(171,861)(424,283)
Proceeds from sales of available-for-sale securities ..................................................................................................................................-20-
Proceeds from maturities of available-for-sale securities ...........................................................................................................................--3,250
Other ..............................................................................................................................................................................................(17,668)(16,506)(13,490)
Net cash used in investing activities .......................................................................................................................................................(316,422)(260,031)(516,639)
Cash flows from financing activities:
Proceeds from bank borrowings ...........................................................................................................................................................98,748145,173152,641
Proceeds from issuance of long-term debt ..............................................................................................................................................260,799135,000314,787
Debt issuance costs ............................................................................................................................................................................(233)(150)(687)
Principal payments for long-term debt ...................................................................................................................................................(15,381)(201,203)(228,407)
Proceeds from issuance of stock upon exercise of stock options .................................................................................................................11,40414,87031,491
Payments for repurchases of common stock ..........................................................................................................................................(550,024)(299,852)(299,989)
Excess tax benefits related to stock-based compensation .........................................................................................................................(463)2,1995,886
Distributions to noncontrolling shareholders ...........................................................................................................................................(32,350)(33,301)(24,986)
Acquisitions of noncontrolling interests in subsidiaries ..............................................................................................................................(72,729)(82,107)(105,383)
Net cash used in financing activities ......................................................................................................................................................(300,229)(319,371)(154,647)
Effect of exchange rate changes on cash and cash equivalents ..................................................................................................................(8,515)(24,827)(20,360)
Net change in cash and cash equivalents ................................................................................................................................................(9,705)(17,388)(99,142)
Cash and cash equivalents, beginning of period .......................................................................................................................................72,08689,474188,616
Cash and cash equivalents, end of period ...............................................................................................................................................$62,381$72,086$89,474

See accompanying notes.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 1 – Significant Accounting Policies

Nature of Operations

We distribute health care products and services primarily to office-based health care practitioners with operations or affiliates in the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, Denmark, France, Germany, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Malaysia, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, South Africa, Spain, Sweden, Switzerland, Thailand and the United Kingdom.

Principles of Consolidation

Our consolidated financial statements include the accounts of Henry Schein, Inc. and all of our controlled subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. Investments in unconsolidated affiliates, which are greater than or equal to 20% and less than or equal to 50% owned or investments in unconsolidated affiliates of less than 20% in which we have the ability to influence the operating or financial decisions, are accounted for under the equity method. See Note 6 for accounting treatment of Redeemable noncontrolling interests. Certain prior period amounts have been reclassified to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year

We report our results of operations and cash flows on a 52‑53 week basis ending on the last Saturday of December. The year ended December 31, 2016 consisted of 53 weeks, and the years ended December 26, 2015 and December 27, 2014 consisted of 52 weeks.

Revenue Recognition

We generate revenue from the sale of dental, animal health and medical consumable products, as well as equipment, software products and services and other sources. Provisions for discounts, rebates to customers, customer returns and other contra-revenue adjustments are recorded based upon historical data and estimates and are provided for in the period in which the related sales are recognized.

Revenue derived from the sale of consumable products is recognized when products are shipped to customers. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating the completion of the earnings process because we have no post-shipment obligations, the product price is fixed and determinable, collection of the resulting receivable is reasonably assured and product returns are reasonably estimable.

Revenue derived from the sale of equipment is recognized when products are delivered to customers. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation, which is typically completed at the time of delivery.

Revenue derived from the sale of software products is recognized when products are shipped to customers. Such software is generally installed by customers and does not require extensive training due to the nature of its

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

design. Revenue derived from post-contract customer support for software, including annual support and/or training, is recognized over the period in which the services are provided.

Revenue derived from multiple element arrangements, and the related deferral of such revenue (which is insignificant to our financial statements), is recognized as follows. When we sell software products together with related services (i.e., training and technical support) we allocate revenue to the delivered elements using the residual method, based upon vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered elements, or defer it until such time as vendor-specific evidence of fair value is obtained. Multiple element arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. We allocate revenue for such arrangements based on the relative selling prices of the elements applying the following hierarchy: first VSOE, then third-party evidence (“TPE”) of selling price if VSOE is not available, and finally our estimate of the selling price if neither VSOE nor TPE is available. VSOE exists when we sell the deliverables separately and represents the actual price charged by us for each deliverable. Estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions. Each element that has standalone value is accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is provided or the product is delivered.

Revenue derived from other sources including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided.

Cash and Cash Equivalents

We consider all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. Outstanding checks in excess of funds on deposit of $98.5 million and $54.4 million, primarily related to payments for inventory, were classified as accounts payable as of December 31, 2016 and December 26, 2015.

Accounts Receivable and Reserves

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects our best estimate of the amounts that will not be collected. The reserve for accounts receivable is comprised of allowance for doubtful accounts and sales returns. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectability.

Inventories and Reserves

Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined by the first-in, first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with our policy for inventory valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory.

Direct Shipping and Handling Costs

Freight and other direct shipping costs are included in cost of sales. Direct handling costs, which represent primarily direct compensation costs of employees who pick, pack and otherwise prepare, if necessary, merchandise

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

for shipment to our customers are reflected in selling, general and administrative expenses. Direct shipping and handling costs were $86.2 million, $78.7 million and $78.4 million for the years ended December 31, 2016, December 26, 2015 and December 27, 2014.

Advertising and Promotional Costs

We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses were $18.4 million, $19.2 million and $18.4 million for the years ended December 31, 2016, December 26, 2015 and December 27, 2014. Additionally, advertising and promotional costs incurred in connection with direct marketing, including product catalogs and printed material, are deferred and amortized on a straight-line basis over the period which is benefited, generally not exceeding one year. As of December 31, 2016 and December 26, 2015, we had $3.5 million and $4.4 million of deferred direct marketing expenses included in other current assets.

Supplier Rebates

Supplier rebates are included as a reduction of cost of sales and are recognized over the period they are earned. The factors we consider in estimating supplier rebate accruals include forecasted inventory purchases and sales, in conjunction with supplier rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is computed primarily under the straight-line method (see Note 2 - Property and Equipment, Net for estimated useful lives). Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term.

Capitalized software costs consist of costs to purchase and develop software. Costs incurred during the application development stage for software bought and further customized by outside suppliers for our use and software developed by a supplier for our proprietary use are capitalized. Costs incurred for our own personnel who are directly associated with software development are capitalized.
Income Taxes

We account for income taxes under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in tax laws or rates. The effect on deferred income tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date. We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries.

Foreign Currency Translation and Transactions

The financial position and results of operations of our foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated other comprehensive income in stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Risk Management and Derivative Financial Instruments

We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates. Our objective is to manage the impact that foreign currency exchange rate fluctuations could have on recognized asset and liability fair values, earnings and cash flows. Our risk management policy requires that derivative contracts used as hedges be effective at reducing the risks associated with the exposure being hedged and be designated as a hedge at the inception of the contract. We do not enter into derivative instruments for speculative purposes. Our derivative instruments primarily include foreign currency forward agreements related to certain intercompany loans and certain forecasted inventory purchase commitments with foreign suppliers.

Our foreign currency forward agreements related to forecasted inventory purchase commitments are designated as cash flow hedges. Our foreign currency forward agreements related to foreign currency balance sheet exposure provide economic hedges but are not designated as hedges for accounting purposes.

For agreements not designated as hedges, changes in the value of the derivative, along with the transaction gain or loss on the hedged item, are recorded in earnings. For cash flow hedges, the effective portion of the changes in the fair value of the derivative, along with any gain or loss on the hedged item, is recorded as a component of Accumulated other comprehensive income in stockholders’ equity and subsequently reclassified into earnings in the period(s) during which the hedged transaction affects earnings.

We classify the cash flows related to our hedging activities in the same category on our consolidated statements of cash flows as the cash flows related to the hedged item.

Acquisitions

The net assets of businesses purchased are recorded at their fair value at the acquisition date and our consolidated financial statements include their results of operations from that date. Any excess of acquisition consideration over the fair value of identifiable net assets acquired is recorded as goodwill. The major classes of assets and liabilities that we generally allocate purchase price to, excluding goodwill, include identifiable intangible assets (i.e., trademarks and trade names, customer relationships and lists and non-compete agreements), property, plant and equipment, deferred taxes and other current and long-term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical estimates, judgments and assumptions derived from: analysis of market conditions; discount rate; discounted cash flows; customer retention rates; and estimated useful lives. Some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. For the years ended December 31, 2016, December 26, 2015 and December 27, 2014, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities.

Redeemable Noncontrolling Interests

Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Their interests in these subsidiaries are classified outside permanent equity on our consolidated balance sheets and are carried at the estimated redemption amounts. The redemption amounts have been estimated based on expected future earnings and cash flow and, if such earnings and cash flow are not achieved, the value of the redeemable noncontrolling interests might be impacted. Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are reflected at each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not impact the calculation of earnings per share.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill and other indefinite-lived intangible assets (primarily trademarks) are not amortized, but are subject to impairment analysis at least once annually. Such impairment analyses for goodwill require a comparison of the fair value to the carrying value of reporting units. We regard our reporting units to be our operating segments: health care distribution (global dental, animal health and medical) and technology and value-added services. Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis.

For the years ended December 31, 2016 and December 26, 2015, we tested goodwill for impairment using a quantitative analysis consisting of a two-step approach. The first step of our quantitative analysis consists of a comparison of the carrying value of our reporting units, including goodwill, to the estimated fair value of our reporting units using a discounted cash flow methodology. If step one results in the carrying value of the reporting unit exceeding the fair value of such reporting unit, we would then proceed to step two which would require us to calculate the amount of impairment loss, if any, that we would record for such reporting unit. The calculation of the impairment loss in step two would be equivalent to the reporting unit’s carrying value of goodwill less the implied fair value of such goodwill.

Our use of a discounted cash flow methodology includes estimates of future revenue based upon budget projections and growth rates which take into account estimated inflation rates. We also develop estimates for future levels of gross and operating profits and projected capital expenditures. Our methodology also includes the use of estimated discount rates based upon industry and competitor analysis as well as other factors. The estimates that we use in our discounted cash flow methodology involve many assumptions by management that are based upon future growth projections.

For the year ended December 27, 2014, we tested goodwill impairment under the provisions of Accounting Standards Update 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” which allowed us to use qualitative factors to determine whether it is more likely than not that the fair values of our reporting units are less than their carrying values. The factors that we considered in developing our qualitative assessment included:

  • Macroeconomic conditions consisting of the overall sales growth of our business and the overall sales growth of each of our operating segments. We also consider our growth in market share in the markets in which we compete;

  • Credit markets and our ability to access debt facilities at favorable terms;

  • Key personnel and management expertise, as well as our growth strategies for the next several years; and

  • Our expectations of selling or disposing all, or a portion, of a reporting unit.

Our impairment analysis for indefinite-lived intangibles consists of a comparison of the fair value to the carrying value of the assets. This comparison is made based on a review of historical, current and forecasted sales and gross profit levels, as well as a review of any factors that may indicate potential impairment. For indefinite-lived intangible assets, a present value technique, such as estimates of future cash flows, is utilized. We assessed the potential impairment of goodwill and other indefinite-lived intangible assets annually (at the beginning of our fourth quarter) and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Some factors we consider important that could trigger an interim impairment review include:

  • significant underperformance relative to expected historical or projected future operating results;

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

  • significant changes in the manner of our use of acquired assets or the strategy for our overall business (e.g., decision to divest a business); or

  • significant negative industry or economic trends.

If we determine through the impairment review process that goodwill or other indefinite-lived intangible assets are impaired, we record an impairment charge in our consolidated statements of income.

For the years ended December 31, 2016, December 26, 2015 and December 27, 2014, the results of our goodwill and intangible impairment analysis did not result in any impairments.

Long-Lived Assets

Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows to be derived from such assets.

Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer lists, customer relationships and intellectual property. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.

Cost of Sales

The primary components of cost of sales include the cost of the product (net of purchase discounts, supplier chargebacks and rebates) and inbound and outbound freight charges. Costs related to purchasing, receiving, inspections, warehousing, internal inventory transfers and other costs of our distribution network are included in selling, general and administrative expenses along with other operating costs.

As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies. Total distribution network costs were $84.4 million, $70.4 million and $64.5 million for the years ended December 31, 2016, December 26, 2015 and December 27, 2014.

Comprehensive Income

Comprehensive income includes certain gains and losses that, under accounting principles generally accepted in the United States, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity. Our comprehensive income is primarily comprised of net income, foreign currency translation gain (loss), unrealized gain (loss) on foreign currency hedging activities, unrealized investment gain (loss) and pension adjustment gain (loss).

Accounting Pronouncements Adopted

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Further, ASU 2015-03 requires the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. ASU 2015-03 is

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU 2015-03 must be applied retrospectively. Entities may choose to adopt the new requirements as of an earlier date for financial statements that have not been previously issued. The adoption of this ASU during 2016 did not have a material impact on our consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 removes the previous requirement for an acquiring company to restate prior period financial results due to measurement-period adjustments. ASU 2015-16 requires that an acquirer recognize provisional amounts that are identified during the measurement-period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 also requires presentation of the amount recorded in current period earnings by line item, either on the face of the income statement or within the notes to financial statements, which would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance. The adoption of this ASU during 2016 did not have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17 (Topic 740), “Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 requires deferred tax liabilities and assets to be classified as noncurrent in the Consolidated Balance Sheet. The standard will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been previously issued. The ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company elected to early adopt ASU 2015-17 prospectively in the third quarter of 2016. As a result, all deferred tax assets and liabilities have been presented as noncurrent on the consolidated balance sheet as of December 31, 2016. There was no impact on our results of operations as a result of the adoption of ASU 2015-17 and prior periods have not been adjusted.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in United States (“U.S. GAAP”). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers” (“ASU 2015-14”), which deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

When effective, ASU 2014-09 will use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).

Currently, we are reviewing our various revenue streams within our two reportable segments: (i) health care distribution and (ii) technology and value-added services. We are gathering data to quantify the amount of sales by type of revenue stream. Concurrently, through the use of various data gathering methods, we are categorizing the types of sales for our business units for the purpose of comparing how we currently recognize revenue for the purpose of quantifying the impact, if any, that this ASU will have on our consolidated financial statements.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”). ASU 2016-02 contains guidance on accounting for leases and requires that most lease assets and liabilities and the associated rights and obligations be recognized on the Company’s balance sheet. ASU 2016-02 focuses on lease assets and lease liabilities by lessees classified as operating leases under previous generally accepted accounting principles. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. ASU 2016-02 will require disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The standard which requires the use of a modified retrospective approach will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We are currently in the early stages of evaluating the impact of ASU 2016-02 on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation” (Topic 718) (“ASU 2016-09”). ASU 2016-09 contains amended guidance for share-based payment accounting. We will adopt the provisions of this standard during the first quarter of 2017.

The impact of ASU 2016-09 to our consolidated financial statements relating to our accounting for income taxes will require us to record all excess tax benefits and deficiencies as a component of income tax expense using the prospective method beginning as of January 1, 2017. Prior to the implementation of this ASU, excess tax benefits were recorded as a component of additional paid in capital and tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement.

In addition, the ASU clarifies the classification of certain share based payment activities within the statements of cash flow. We have elected to prospectively present the amount of excess tax benefits related to stock compensation as a component of cash flow from operating activities.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. This ASU is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance of this ASU is effective. Based upon the level and makeup of our financial asset portfolio, past loan loss activity and current known activity regarding our outstanding loans, we do not expect that this ASU will have a material impact on the results of our consolidated financial statements.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 2 – Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed primarily under the straight-line method over the estimated useful life. Depreciation of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term. Property and equipment, including related estimated useful lives, consisted of the following:

December 31,December 26,
20162015
Land .......................................................................................................................................................................................$19,438$18,762
Buildings and permanent improvements ........................................................................................................................................127,097117,674
Leasehold improvements ............................................................................................................................................................95,04889,766
Machinery and warehouse equipment ...........................................................................................................................................121,395117,068
Furniture, fixtures and other ........................................................................................................................................................129,444114,304
Computer equipment and software ...............................................................................................................................................372,322339,006
864,744796,580
Less accumulated depreciation ....................................................................................................................................................(530,838)(478,104)
Property and equipment, net .................................................................................................................................................$333,906$318,476
Estimated Useful
Lives (in years)
Buildings and permanent improvements ...........................................................................................................40
Machinery and warehouse equipment ..............................................................................................................5-10
Furniture, fixtures and other ............................................................................................................................3-10
Computer equipment and software ..................................................................................................................3-10

Property and equipment related depreciation expense for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 was $63.8 million, $60.2 million and $57.6 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 3 – Goodwill and Other Intangibles, Net

The changes in the carrying amount of goodwill for the years ended December 31, 2016 and December 26, 2015 were as follows:

Health Care DistributionTechnology and Value-Added ServicesTotal
Balance as of December 27, 2014 ...............................................................................................................................................$1,710,554$173,569$1,884,123
Adjustments to goodwill:
Acquisitions ....................................................................................................................................................................66,0705,46471,534
Foreign currency translation ...............................................................................................................................................(34,602)(13,462)(48,064)
Balance as of December 26, 2015 ...............................................................................................................................................1,742,022165,5711,907,593
Adjustments to goodwill:
Acquisitions ....................................................................................................................................................................116,64029,165145,805
Foreign currency translation ...............................................................................................................................................(27,127)(6,531)(33,658)
Balance as of December 31, 2016 ...............................................................................................................................................$1,831,535$188,205$2,019,740

Other intangible assets consisted of the following:

December 31, 2016December 26, 2015
AccumulatedAccumulated
CostAmortizationNetCostAmortizationNet
Non-compete agreements .................................................................................................................................................................$40,783$(6,927)$33,856$40,898$(10,131)$30,767
Trademarks / trade names - definite lived ...............................................................................................................................................136,211(55,124)81,087114,271(41,275)72,996
Trademarks / trade names - indefinite lived ............................................................................................................................................2,848-2,8482,963-2,963
Customer relationships and lists .........................................................................................................................................................713,437(288,417)425,020638,276(236,485)401,791
Other ........................................................................................................................................................................................134,254(55,885)78,369127,532(43,078)84,454
Total ....................................................................................................................................................................................$1,027,533$(406,353)$621,180$923,940$(330,969)$592,971

Non-compete agreements represent amounts paid primarily to key employees and prior owners of acquired businesses, as well as certain sales persons, in exchange for placing restrictions on their ability to pose a competitive risk to us. Such amounts are amortized, on a straight-line basis over the respective non-compete period, which generally commences upon termination of employment or separation from us. The weighted-average non-compete period for agreements currently being amortized was approximately 4.2 years as of December 31, 2016.

Trademarks, trade names, customer lists and customer relationships were established through business acquisitions. Definite-lived trademarks and trade names are amortized on a straight-line basis over a weighted-average period of approximately 7.8 years as of December 31, 2016. Customer relationships and customer lists are definite-lived intangible assets that are amortized on a straight-line basis over a weighted-average period of approximately 10.8 years as of December 31, 2016.

Amortization expense related to definite-lived intangible assets for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 was $97.2 million, $91.9 million and $89.6 million. The annual amortization expense expected to be recorded for existing intangibles assets for the years 2017 through 2021 is $104.9 million, $98.4 million, $91.1 million, $82.7 million and $71.2 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 4 – Investments and Other

Investments and other consisted of the following:

December 31,December 26,
20162015
Investment in unconsolidated affiliates .................................................................................................................................................$299,249$293,273
Non-current deferred foreign, state and local income taxes .......................................................................................................................16,68558,249
Notes receivable (1) ...........................................................................................................................................................................27,49227,509
Capitalized costs for internally generated software for resale .....................................................................................................................32,32127,851
Distribution rights and exclusivity agreements, net of amortization .............................................................................................................1,9372,514
Acquisition related indemnification ......................................................................................................................................................51,29432,828
Other long-term assets ........................................................................................................................................................................13,81212,376
Total .......................................................................................................................................................................................$442,790$454,600
(1)Long-term notes receivable carry interest rates ranging from 1.0% to 12.0% and are due in varying installments through
December 31, 2030.

Amortization expense related to other long-term assets for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 was $8.7 million, $7.0 million and $5.0 million.

Note 5 – Debt

Bank Credit Lines

On September 12, 2012, we entered into a new $500 million revolving credit agreement (the “Credit Agreement”) with a $200 million expansion feature, which was originally set to expire on September 12, 2017. On September 22, 2014, we extended the expiration date of the Credit Agreement to September 22, 2019. The interest rate is based on the USD LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. The Credit Agreement provides, among other things, that we are required to maintain maximum leverage ratios, and contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions on liens, indebtedness, significant corporate changes (including mergers), dispositions and certain restrictive agreements. As of December 31, 2016 and December 26, 2015, the borrowings outstanding on this revolving credit facility were $65.0 million and $40.0, respectively. As of December 31, 2016 and December 26, 2015, there were $13.0 million and $11.4 million of letters of credit, respectively, provided to third parties under the credit facility.

As of December 31, 2016 and December 26, 2015, we had various other short-term bank credit lines available, of which $372.5 million and $288.6 million, respectively, was outstanding. At December 31, 2016 and December 26, 2015, borrowings under all of our credit lines had a weighted average interest rate of 1.61% and 1.21%, respectively.

Private Placement Facilities

On August 10, 2010, we entered into $400 million private placement facilities with two insurance companies. On April 30, 2012, we increased our available credit facilities by $375 million by entering into an additional agreement with one insurance company and amending our existing agreements with two insurance companies. On September 22, 2014, we increased our available private placement facilities by $200 million to a total facility amount of $975 million, and extended the expiration date to September 22, 2017. These facilities are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

time to time through September 22, 2017. The facilities allow us to issue senior promissory notes to the lenders at a fixed rate based on an agreed upon spread over applicable treasury notes at the time of issuance. The term of each possible issuance will be selected by us and can range from five to 15 years (with an average life no longer than 12 years). The proceeds of any issuances under the facilities will be used for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions. The agreements provide, among other things, that we maintain certain maximum leverage ratios, and contain restrictions relating to subsidiary indebtedness, liens, affiliate transactions, disposal of assets and certain changes in ownership. These facilities contain make-whole provisions in the event that we pay off the facilities prior to the applicable due dates.

The components of our private placement facility borrowings as of December 31, 2016 are presented in the following table:

Amount of
BorrowingBorrowing
Date of BorrowingOutstandingRateDue Date
September 2, 2010$100,0003.79%September 2, 2020
January 20, 201250,0003.45January 20, 2024
January 20, 2012 (1)42,8573.09January 20, 2022
December 24, 201250,0003.00December 24, 2024
June 2, 2014100,0003.19June 2, 2021
$342,857
(1) Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

U.S. Trade Accounts Receivable Securitization

On April 17, 2013, we entered into a facility agreement of up to $300 million with a bank, as agent, based on the securitization of our U.S. trade accounts receivable. This facility allowed us to replace public debt (approximately $220 million), which had a higher interest rate at Henry Schein Animal Health (formerly Butler Schein Animal Health) (“HSAH”) during February 2013 and provided funding for working capital and general corporate purposes. The financing was structured as an asset-backed securitization program with pricing committed for up to three years. On April 17, 2015, we extended the expiration date of this facility agreement to April 15, 2018, and on June 1, 2016, we extended the expiration date of this facility agreement to April 29, 2019 and increased the purchase limit under the facility from $300 million to $350 million. The borrowings outstanding under this securitization facility were $350.0 million and $90.0 million as of December 31, 2016 and December 26, 2015, respectively. At December 31, 2016, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 101 basis points plus 75 basis points, for a combined rate of 1.76%. At December 26, 2015, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 40 basis points plus 75 basis points, for a combined rate of 1.15%.

We are required to pay a commitment fee of 30 basis points on the daily balance of the unused portion of the facility if our usage is greater than or equal to 50% of the facility limit or a commitment fee of 35 basis points on the daily balance of the unused portion of the facility if our usage is less than 50% of the facility limit.

Borrowings under this facility are presented as a component of Long-term debt within our consolidated balance sheet.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Long-term debt

Long-term debt consisted of the following:

December 31,December 26,
20162015
Private placement facilities ..........................................................................................................................................................$342,857$350,000
U.S. trade accounts receivable securitization ...................................................................................................................................350,00090,000
Notes payable to banks at a weighted-average interest rate of 21.37% and 8.83%47,9575
Various collateralized and uncollateralized loans payable with interest,
in varying installments through 2023 at interest rates ranging
from 2.56% to 12.9% .........................................................................................................................................................35,15038,215
Capital lease obligations (see Note 17) ...........................................................................................................................................5,4162,863
Total .......................................................................................................................................................................................781,380481,083
Less current maturities ................................................................................................................................................................(65,923)(17,331)
Total long-term debt ..........................................................................................................................................................$715,457$463,752

As of December 31, 2016, the aggregate amounts of long-term debt, including capital lease obligations, maturing in each of the next five years and thereafter are as follows:

2017 ..............................................................................................................................................................................................$65,923
2018 ..............................................................................................................................................................................................32,184
2019 ..............................................................................................................................................................................................358,568
2020 ..............................................................................................................................................................................................107,904
2021 ..............................................................................................................................................................................................107,867
Thereafter .......................................................................................................................................................................................108,934
Total .......................................................................................................................................................................................$781,380

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 6 – Redeemable Noncontrolling Interests

Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Accounting Standards Codification (“ASC”) Topic 480-10 is applicable for noncontrolling interests where we are or may be required to purchase all or a portion of the outstanding interest in a consolidated subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the Redeemable noncontrolling interests for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 are presented in the following table:

December 31,December 26,December 27,
201620152014
Balance, beginning of period ..................................................................................................................................................$542,194$564,527$497,539
Decrease in redeemable noncontrolling interests due to
redemptions ....................................................................................................................................................................(72,729)(82,563)(105,383)
Increase in redeemable noncontrolling interests due to
business acquisitions.........................................................................................................................................................58,17218,936120,220
Net income attributable to redeemable noncontrolling interests .....................................................................................................48,76043,58838,741
Dividends declared ...............................................................................................................................................................(32,973)(32,706)(23,346)
Effect of foreign currency translation loss attributable to
redeemable noncontrolling interests .....................................................................................................................................(2,652)(4,790)(4,080)
Change in fair value of redeemable securities ...........................................................................................................................66,86435,20240,836
Balance, end of period ..........................................................................................................................................................$607,636$542,194$564,527

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 7 – Comprehensive Income

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

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

December 31,December 26,December 27,
201620152014
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment ..........................................................................................................$(13,025)$(10,373)$(5,583)
Attributable to noncontrolling interests:
Foreign currency translation adjustment ..........................................................................................................$(113)$(76)$(36)
Attributable to Henry Schein, Inc.:
Foreign currency translation loss .........................................................................................................................$(296,212)$(200,499)$(71,294)
Unrealized gain (loss) from foreign currency hedging activities ..................................................................................(53)939(1,055)
Unrealized investment loss .................................................................................................................................-(2)(136)
Pension adjustment loss ....................................................................................................................................(20,776)(20,377)(22,647)
Accumulated other comprehensive loss ...........................................................................................................$(317,041)$(219,939)$(95,132)
Total Accumulated other comprehensive loss ............................................................................................................$(330,179)$(230,388)$(100,751)

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

December 31,December 26,December 27,
201620152014
Net income ........................................................................................................................................................................$556,395$523,427$505,436
Foreign currency translation loss............................................................................................................................................(98,402)(134,035)(157,698)
Tax effect .........................................................................................................................................................................---
Foreign currency translation loss ............................................................................................................................................(98,402)(134,035)(157,698)
Unrealized gain (loss) from foreign currency hedging activities ....................................................................................................(1,025)2,147(2,492)
Tax effect .........................................................................................................................................................................33(153)155
Unrealized gain (loss) from foreign currency hedging activities ....................................................................................................(992)1,994(2,337)
Unrealized investment gain ..................................................................................................................................................2134629
Tax effect .........................................................................................................................................................................--(250)
Unrealized investment gain ..................................................................................................................................................2134379
Pension adjustment gain (loss) ..............................................................................................................................................(947)3,278(10,222)
Tax effect .........................................................................................................................................................................548(1,008)2,781
Pension adjustment gain (loss) ..............................................................................................................................................(399)2,270(7,441)
Comprehensive income .......................................................................................................................................................$456,604$393,790$338,339

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

During the years ended December 31, 2016, December 26, 2015 and December 27, 2014, we recognized, as a component of our comprehensive income, a foreign currency translation loss of $(98.4) million, $(134.0) million and $(157.7) million, respectively, due to changes in foreign exchange rates from the beginning of the period to the end of the period. Our financial statements are denominated in the U.S. Dollar currency. Fluctuations in the value of foreign currencies as compared to the U.S. Dollar may have a significant impact on our comprehensive income. The foreign currency translation gain (loss) during the years ended December 31, 2016, December 26, 2015 and December 27, 2014 was impacted by changes in foreign currency exchange rates as follows:

Foreign Currency
Translation
Gain (Loss)
for the
Year EndedFX Rate in USD
December 31,December 31,December 26,
Currency201620162015
British Pound ................................................................................................................................................................................$(53,723)1.231.49
Euro ............................................................................................................................................................................................(41,245)1.051.10
Polish Zloty ..................................................................................................................................................................................(3,849)0.240.26
Canadian Dollar ............................................................................................................................................................................3,3450.740.72
Brazilian Real ...............................................................................................................................................................................2,8560.310.25
Swiss Franc ...................................................................................................................................................................................(2,365)0.981.01
Australian Dollar ...........................................................................................................................................................................(562)0.720.73
All other currencies .........................................................................................................................................................................(2,859)
Total .......................................................................................................................................................................................$(98,402)
Foreign Currency
Translation
Gain (Loss)
for the
Year EndedFX Rate in USD
December 26,December 26,December 27,
Currency201520152014
Euro ............................................................................................................................................................................................$(76,754)1.101.22
Australian Dollar ...........................................................................................................................................................................(19,864)0.730.81
British Pound ................................................................................................................................................................................(15,404)1.491.56
Canadian Dollar ............................................................................................................................................................................(10,071)0.720.86
Brazilian Real ...............................................................................................................................................................................(5,942)0.250.37
Polish Zloty ..................................................................................................................................................................................(3,281)0.260.28
Swiss Franc ...................................................................................................................................................................................9281.011.01
All other currencies .........................................................................................................................................................................(3,647)
Total .......................................................................................................................................................................................$(134,035)

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Foreign Currency
Translation
Loss
for the
Year EndedFX Rate in USD
December 27,December 27,December 28,
Currency201420142013
Euro ............................................................................................................................................................................................$(93,882)1.221.38
Australian Dollar ...........................................................................................................................................................................(15,710)0.810.89
British Pound ................................................................................................................................................................................(19,150)1.561.65
Canadian Dollar ............................................................................................................................................................................(6,891)0.860.94
Polish Zloty ..................................................................................................................................................................................(7,135)0.280.33
Swiss Franc ...................................................................................................................................................................................(7,154)1.011.12
All other currencies .........................................................................................................................................................................(7,776)
Total .......................................................................................................................................................................................$(157,698)

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

December 31,December 26,December 27,
201620152014
Comprehensive income attributable to
Henry Schein, Inc. ...................................................................................................................................................$409,676$354,251$303,096
Comprehensive income attributable to
noncontrolling interests .............................................................................................................................................820741582
Comprehensive income attributable to
Redeemable noncontrolling interests ...........................................................................................................................46,10838,79834,661
Comprehensive income .................................................................................................................................................$456,604$393,790$338,339

Note 8 – Fair Value Measurements

ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”) provides a framework for measuring fair value in generally accepted accounting principles.

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

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

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

  • Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

The following section describes the fair values of our financial instruments and the methodologies that we used to measure their fair values.

Investments and notes receivable

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

Debt

The fair value of our debt (including bank credit lines) as of December 31, 2016 and December 26, 2015 was estimated at $1,218.9million and $809.7million, respectively. Factors that we considered when estimating the fair value of our debt include market conditions, prepayment and make-whole provisions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt.

Derivative contracts

Derivative contracts are valued using quoted market prices and significant other observable and unobservable inputs. We use derivative instruments to minimize our exposure to fluctuations in foreign currency exchange rates. Our derivative instruments primarily include foreign currency forward agreements related to intercompany loans and certain forecasted inventory purchase commitments with suppliers.

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

Redeemable noncontrolling interests

Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value based on third-party valuations. The primary factor affecting the future value of redeemable noncontrolling interests is expected earnings and, if such earnings are not achieved, the value of the redeemable noncontrolling interests might be impacted. The noncontrolling interests subject to put options are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not impact the calculation of earnings per share. The values for Redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy. The details of the changes in Redeemable noncontrolling interests are presented in Note 6.

The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2016 and December 26, 2015:

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

December 31, 2016
Level 1Level 2Level 3Total
Assets:
Derivative contracts ..............................................................................................................................................................$-$1,240$-$1,240
Total assets .....................................................................................................................................................................$-$1,240$-$1,240
Liabilities:
Derivative contracts ..............................................................................................................................................................$-$931$-$931
Total liabilities ..................................................................................................................................................................$-$931$-$931
Redeemable noncontrolling interests ..............................................................................................................................................$-$-$607,636$607,636
December 26, 2015
Level 1Level 2Level 3Total
Assets:
Derivative contracts ..............................................................................................................................................................$-$4,289$-$4,289
Total assets .....................................................................................................................................................................$-$4,289$-$4,289
Liabilities:
Derivative contracts ..............................................................................................................................................................$-$2,477$-$2,477
Total liabilities ..................................................................................................................................................................$-$2,477$-$2,477
Redeemable noncontrolling interests ..............................................................................................................................................$-$-$542,194$542,194

Note 9 – Business Acquisitions and Divestiture

Acquisitions

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

On January 12, 2016, we announced that our U.S. animal health business, Henry Schein Animal Health, completed the purchase of an 80.1% interest in Vetstreet, Inc., a leading software as a service (SaaS) provider of marketing solutions and health information analytics to veterinary practices and animal health product manufacturers. Vetstreet had sales in 2015 of approximately $40 million. As a result of this acquisition, we recorded $17.9 million of initial goodwill.

On February 3, 2016, we announced the completion of the acquisition of RxWorks, Inc., a leading provider of veterinary practice management software primarily to customers in Australia, New Zealand, the United Kingdom, the Netherlands and other countries around the world. The company had sales for the 12 months ended June 30, 2015 of approximately $7 million. As a result of this acquisition, we recorded $4.2 million of initial goodwill.

On February 5, 2016, we announced that we have entered into an agreement to acquire a majority ownership interest in Dental Cremer S.A., a distributor of dental supplies and equipment in Brazil. Headquartered in Blumenau, Brazil, Dental Cremer, which is the dental distribution business of Cremer S.A., had 2015 sales of approximately $70 million. On December 28, 2016, we completed this transaction. As a result of this acquisition, we recorded $37.5 million of initial goodwill.

On March 23, 2016, we announced that we entered into a definitive agreement with J. Morita Corp. to expand our presence in Japan. This transaction was completed on June 20, 2016 and, as a result, we own a 50% interest in One Piece Corp., a subsidiary of J. Morita, one of the world's largest manufacturers and distributors of dental equipment and supplies. One Piece Corp. had aggregate sales in fiscal 2015 of approximately $125 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

We completed certain other acquisitions during the year ended December 31, 2016, which were immaterial to our financial statements individually and in the aggregate and resulted in the recording of approximately $69.9 million of initial goodwill through preliminary purchase price allocations. Total acquisition transaction costs incurred in the year ended December 31, 2016 were immaterial to our financial results.

On March 31, 2015, we completed the acquisition of scil animal care company GmbH (“scil”), a specialty distributor of animal health laboratory and imaging diagnostic products and services to veterinarians primarily in North America and Europe. scil had annual sales in 2014 of approximately $83 million. As a result of this acquisition, we recorded $3.5 million of initial goodwill.

On July 10, 2015, we announced that, during the second quarter ended June 27, 2015, we made a 50% non-consolidating ownership investment in Maravet S.A. (“Maravet”), an animal health distributor in Romania. Maravet is a privately held company with annual sales of approximately $23 million.

On September 1, 2015, we announced the completion of the acquisition of an 85% interest in Jorgen Kruuse A/S (“KRUUSE”), a leading distributor of veterinary supplies in Denmark, Norway and Sweden. KRUUSE had sales in 2014 of approximately $90 million. As a result of this acquisition, we recorded $20.7 million of initial goodwill.

On November 30, 2015, we completed the acquisition of Dental Trey (S.R.L.) (“Dental Trey”), a leading distributor of dental consumable merchandise and equipment in Italy. Dental Trey had sales for the 12 months ended June 30, 2015 of approximately $49 million. As a result of this acquisition, we recorded $8.5 million of initial goodwill.

We completed certain other acquisitions during the year ended December 26, 2015, which were immaterial to our financial statements individually and in the aggregate and resulted in the recording of approximately $27.1 million of initial goodwill through preliminary purchase price allocations. Total acquisition transaction costs incurred in the year ended December 26, 2015 were immaterial to our financial results.

On December 30, 2013, we completed the acquisition of approximately 60% of the equity interest in BioHorizons, Inc., a U.S.-based manufacturer of advanced dental implants with annual revenues of approximately $115 million. Prior to completion of the acquisition, we funded BioHorizons, Inc. $145 million, which was recorded as a long-term loan included in Investments and Other within our consolidated balance sheet at December 28, 2013. This long-term loan was subsequently recorded as an intercompany loan upon completion of the acquisition and has been eliminated from our consolidated balance sheet as of December 27, 2014. As a result of this acquisition, we recorded $143.7 million of initial goodwill.

On February 3, 2014, we completed the acquisition of 100% ownership of five businesses in three European countries from Arseus NV. The businesses combine for annual sales of approximately $97 million and include a dental practice management software company in France and distributors of dental products in France, the Netherlands and Belgium. As a result of this acquisition, we recorded $21.4 million of initial goodwill.

On April 2, 2014, we completed our previously announced acquisition of an 80% ownership position in Medivet S.A., a privately held distributor of animal health products and services in Poland. Medivet has annual sales of approximately $80 million. As a result of this acquisition, we recorded $18.7 million of initial goodwill.

On June 30, 2014, we completed our previously announced acquisition by our U.S. Animal Health business, Butler Animal Health Supply LLC, together with our wholly-owned subsidiary, W.A. Butler Company, of a 60% ownership position in SmartPak Equine, LLC (“SmartPak”), a privately held provider of equine supplements and horse supplies in the United States. SmartPak had sales of approximately $105 million in 2013. As a result of this acquisition, we recorded $59.7 million of initial goodwill.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

On November 20, 2014, we entered into a long-term strategic agreement with Cardinal Health, Inc. Under the terms of the agreement, the physician office-focused commercial organization of Cardinal Health’s Medical segment was acquired and has been consolidated into the commercial organization of our medical group. The physician office sales team and physician office distribution business of Cardinal Health’s medical segment, with annual sales of more than $230 million, will be integrated into our medical group. Additionally, we committed to purchase Cardinal Health™ Brand products and utilize Cardinal Health as a primary source for various medical products. There was no goodwill recorded on this transaction.

We completed certain other acquisitions during the year ended December 27, 2014, which were immaterial to our financial statements individually and in the aggregate and resulted in the recording of approximately $16.4 million of initial goodwill through preliminary purchase price allocations.

Note 10 – Plans of Restructuring

On November 6, 2014, we announced a corporate initiative to rationalize our operations and provide expense efficiencies, which was expected to be completed by the end of fiscal 2015. This initiative originally planned for the elimination of approximately 2% to 3% of our workforce and the closing of certain facilities. We subsequently announced our plan to extend these restructuring activities through the end of 2016 to further implement cost-savings initiatives, which ultimately resulted in the elimination of approximately 900 positions, representing slightly more than 4% of our workforce. The total costs associated with the actions to date for this restructuring include $34.9 million pre-tax, which was recorded in fiscal 2015 and $45.9 million pre-tax, which has been recorded in fiscal 2016. The costs associated with this restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

As of December 31, 2016 our restructuring activities are complete and we do not expect to incur any additional restructuring charges in fiscal 2017.

The following table shows the amounts expensed and paid for restructuring costs that were incurred during our 2016, 2015 and 2014 fiscal years and the remaining accrued balance of restructuring costs as of December 31, 2016, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:

Facility
SeveranceClosing
CostsCostsOtherTotal
Balance, December 28, 2013 ..................................................................................................................................................$227$484$-$711
Provision ............................................................................................................................................................................----
Payments and other adjustments ............................................................................................................................................(107)(183)-(290)
Balance, December 27, 2014 ..................................................................................................................................................$120$301$-$421
Provision ............................................................................................................................................................................26,7425,7062,48334,931
Payments and other adjustments ............................................................................................................................................(17,759)(3,856)(1,672)(23,287)
Balance, December 26, 2015 ..................................................................................................................................................$9,103$2,151$811$12,065
Provision ............................................................................................................................................................................40,7283,5871,57645,891
Payments and other adjustments ............................................................................................................................................(27,477)(3,284)(1,492)(32,253)
Balance, December 31, 2016 ..................................................................................................................................................$22,354$2,454$895$25,703

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The following table shows, by reportable segment, the amounts expensed and paid for restructuring costs that were incurred during our 2016, 2015 and 2014 fiscal years and the remaining accrued balance of restructuring costs as of December 31, 2016:

Technology and
Health CareValue-Added
DistributionServicesTotal
Balance, December 28, 2013 ..................................................................................................................................................$711$-$711
Provision ............................................................................................................................................................................---
Payments and other adjustments ............................................................................................................................................(290)-(290)
Balance, December 27, 2014 ..................................................................................................................................................$421$-$421
Provision ............................................................................................................................................................................33,8891,04234,931
Payments and other adjustments ............................................................................................................................................(22,248)(1,039)(23,287)
Balance, December 26, 2015 ..................................................................................................................................................$12,062$3$12,065
Provision ............................................................................................................................................................................44,0821,80945,891
Payments and other adjustments ............................................................................................................................................(30,906)(1,347)(32,253)
Balance, December 31, 2016 ..................................................................................................................................................$25,238$465$25,703

Note 11 – Earnings Per Share

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

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

Years Ended
December 31,December 26,December 27,
201620152014
Basic ........................................................................................................................................................................................80,82082,84484,265
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units .................................................................................................................1,0421,2811,475
Diluted ..................................................................................................................................................................................81,86284,12585,740

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 12 – Income Taxes

Income before taxes and equity in earnings of affiliates was as follows:

Years ended
December 31,December 26,December 27,
201620152014
Domestic .......................................................................................................................................................................................$625,792$591,320$543,433
Foreign .........................................................................................................................................................................................130,043129,438165,879
Total .......................................................................................................................................................................................$755,835$720,758$709,312

The provisions for income taxes were as follows:

Years ended
December 31,December 26,December 27,
201620152014
Current income tax expense:
U.S. Federal ...........................................................................................................................................................................$185,438$162,948$156,956
State and local .......................................................................................................................................................................28,22929,58028,708
Foreign .................................................................................................................................................................................41,35725,10431,038
Total current ......................................................................................................................................................................255,024217,632216,702
Deferred income tax expense (benefit):
U.S. Federal ...........................................................................................................................................................................(18,090)(3,381)(2,389)
State and local .......................................................................................................................................................................(4,809)992(2,682)
Foreign .................................................................................................................................................................................(14,167)(3,852)3,979
Total deferred ....................................................................................................................................................................(37,066)(6,241)(1,092)
Total provision ...............................................................................................................................................................$217,958$211,391$215,610

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The tax effects of temporary differences that give rise to our deferred income tax asset (liability) were as follows:

Years Ended
December 31,December 26,
20162015
Current deferred income tax asset (liability):
Inventory, premium coupon redemptions and accounts receivable
valuation allowances ............................................................................................................................................$-$25,403
Uniform capitalization adjustments to inventories .............................................................................................................-10,719
Other current assets .....................................................................................................................................................-15,645
Current deferred income tax asset (1) ..............................................................................................................................-51,767
Non-current deferred income tax asset (liability):
Inventory, premium coupon redemptions and accounts receivable
valuation allowances ............................................................................................................................................29,422-
Uniform capitalization adjustments to inventories .............................................................................................................10,632-
Property and equipment ...............................................................................................................................................(15,882)(10,035)
Stock-based compensation ...........................................................................................................................................41,67735,942
Intangibles amortization ...............................................................................................................................................(142,678)(218,097)
Other non-current asset (liability) ....................................................................................................................................23,836(19,377)
Net operating losses of foreign subsidiaries .......................................................................................................................44,49337,455
Total non-current deferred tax liability .....................................................................................................................(8,500)(174,112)
Valuation allowance for non-current deferred tax assets (2) ......................................................................................(26,403)(20,501)
Net non-current deferred tax liability (1) ..........................................................................................................................(34,903)(194,613)
Net deferred income tax liability ............................................................................................................................................$(34,903)$(142,846)
(1)Certain deferred tax amounts do not have a right of offset and are therefore reflected on a gross basis in
non-current assets and liabilities in our consolidated balance sheets.
(2)Primarily relates to operating losses of acquired subsidiaries, the benefits of which are uncertain. Any future reductions
of such valuation allowances will be reflected as a reduction of income tax expense in accordance with the provisions of
ASC Topic 805, “Business Combinations.”

The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting rules is judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is an element of judgment involved. Realization of our deferred tax assets is dependent on generating sufficient taxable income in future periods. We believe that it is more likely than not that future taxable income will be sufficient to allow us to recover substantially all of the value assigned to our deferred tax assets. However, if future events cause us to conclude that it is not more likely than not that we will be able to recover all of the value assigned to our deferred tax assets, we will be required to adjust our valuation allowance accordingly.

During the third quarter of 2016, the Company elected to early adopt ASU No. 2015-17 (Topic 740), “Balance Sheet Classification of Deferred Taxes”, prospectively. As a result, all deferred tax assets and liabilities are presented as noncurrent on the consolidated balance sheet as of December 31, 2016. There was no impact on our results of operations as a result of the adoption of ASU 2015-17 and prior periods have not been adjusted.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

In 2016, we utilized federal and state net operating loss carryforwards upon filing the 2015 federal and state tax returns. As of December 31, 2016, we had foreign net operating loss carryforwards of $8.0 million, which can be utilized against future foreign income through December 31, 2025. Additionally, as of December 31, 2016, there were foreign net operating loss carryforwards of $153.4 million that have an indefinite life.

The tax provisions differ from the amount computed using the federal statutory income tax rate as follows:

Years ended
December 31,December 26,December 27,
201620152014
Income tax provision at federal statutory rate ................................................................................................................................$264,542$252,265$248,260
State income tax provision, net of federal income tax effect .............................................................................................................11,23614,62711,381
Foreign income tax provision .......................................................................................................................................................(18,036)(25,942)(22,960)
Pass through noncontrolling interest ..............................................................................................................................................(13,083)(12,463)(11,431)
Valuation allowance ..................................................................................................................................................................1,472(5,006)(770)
Unrecognized tax benefits and audit settlements..............................................................................................................................3,06613,86711,501
Interest expense related to loans ..................................................................................................................................................(21,737)(22,415)(24,043)
Other ......................................................................................................................................................................................(9,502)(3,542)3,672
Total income tax provision .................................................................................................................................................$217,958$211,391$215,610

For the year ended December 31, 2016, our effective tax rate was 28.8% compared to 29.3% for the prior year period. The difference between our effective tax rates and the federal statutory tax rates for both periods primarily relates to state and foreign income taxes and interest expense. During the second quarter of 2016, the effective tax rate was affected by a federal tax audit settlement, which reduced our income tax expense by approximately $4.5 million which is included in the unrecognized tax benefits amount above.

During the third quarter of 2015, we received a favorable response to a tax petition, which allowed us to conclude that it was more likely than not that certain unrecognized tax benefits, which had been previously reserved, would be realized. As a result, our provision for income taxes in 2015 included a $6.3 million income tax benefit, which is included in the unrecognized tax benefits amount above.

Absent the effects of this income tax benefit in the third quarter of 2015, our effective tax rate for the year ended December 26, 2015 would have been 30.2% as compared to our actual effective tax rate of 29.3%. The remaining difference between our effective tax rate and the federal statutory tax rate for the period primarily relates to state and foreign income taxes and interest expense.

Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries, which have been, and will continue to be reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to us or a U.S. affiliate, or if we should sell, transfer or dispose of our stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on the foreign earnings because if we were to repatriate these earnings, we believe there would be various methods available to us, each with different U.S. tax consequences. As of December 31, 2016, the cumulative amount of reinvested earnings was approximately $937.0 million.

ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to certain tax matters.

The total amount of unrecognized tax benefits, which are included in “Other liabilities” within our consolidated balance sheets as of December 31, 2016 was approximately $107.4 million, of which $81.4 million would affect the effective tax rate if recognized. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a material impact on our consolidated financial statements.

The total amounts of interest and penalties, which are classified as a component of the provision for income taxes, were approximately $17.1 million and $0, respectively, as of December 31, 2016.

The tax years subject to examination by major tax jurisdictions include the years 2012 and forward by the U.S. Internal Revenue Service (“IRS”), as well as the years 2008 and forward for certain states and certain foreign jurisdictions. In December 2014, the IRS issued a Statutory Notice of Deficiency for 2009, 2010 and 2011. During the quarter ended March 28, 2015, we filed our petition to the U.S. Tax Court disputing the adjustments proposed by the IRS. During the quarter ended June 27, 2015, we were notified by the IRS that our protest was transferred to the Appellate Divisions (Appeals Section) of the IRS. During the quarter ended March 26, 2016, we filed our protest with the Appellate Division. The opening appeals conference was held on June 8, 2016 and a proposed settlement was reached. On July 13, 2016, a joint status report was filed with the Tax Court indicating a basis for settlement had been reached on all of the issues in this case. On October 7, 2016 an executed decision document was signed by the Internal Revenue Service’s Special Trial Attorney and submitted to the Tax Court finalizing the Appeals decision. During the quarter ended December 31, 2016, we filed a Mutual Agreement Procedure request with the IRS for assistance from the U.S. Competent Authority for an open Transfer Pricing issue. We do not expect this to have a significant effect on our consolidated financial position, liquidity or the results of operations.

The following table provides a reconciliation of unrecognized tax benefits excluding the effects of deferred taxes, interest and penalties:

December 31,December 26,
20162015
Balance, beginning of period ................................................................................................................................$77,600$65,800
Additions based on current year tax positions ..........................................................................................................7,30010,400
Additions based on prior year tax positions .............................................................................................................20,40019,600
Reductions based on prior year tax positions ...........................................................................................................(900)(10,500)
Reductions resulting from settlements with taxing authorities .....................................................................................(9,700)(7,600)
Reductions resulting from lapse in statutes of limitations ...........................................................................................(4,300)(100)
Balance, end of period ........................................................................................................................................$90,400$77,600

Note 13 – Concentrations of Risk

Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments consist primarily of cash equivalents, trade receivables, long-term investments, notes receivable and derivative instruments. In all cases, our maximum exposure to loss from credit risk equals the gross fair value of the financial instruments. We continuously assess the need for reserves for such losses, which have been within our expectations. We do not require collateral or other security to support financial instruments subject to credit risk, except for long-term notes receivable.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

We limit our credit risk with respect to our cash equivalents, short-term and long-term investments and derivative instruments, by monitoring the credit worthiness of the financial institutions who are the counter-parties to such financial instruments. As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing numerous investment grade counter-parties.

With respect to our trade receivables, our credit risk is somewhat limited due to a relatively large customer base and its dispersion across different types of health care professionals and geographic areas. No single customer accounted for more than 1% of our net sales in 2016 or 2015. With respect to our sources of supply, our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 34% and 6%, respectively, of our aggregate purchases in 2016 and approximately 34% and 7%, respectively, of our aggregate purchases in 2015.

Our long-term notes receivable primarily represent strategic financing arrangements with certain industry affiliates and amounts owed to us from sales of certain businesses. Generally, these notes are secured by certain assets of the counter-party; however, in most cases our security is subordinate to other commercial financial institutions. While we have exposure to credit loss in the event of non-performance by these counter-parties, we conduct ongoing assessments of their financial and operational performance.

Note 14 – Derivatives and Hedging Activities

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

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

Note 15 – Segment and Geographic Data

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

alternate-care settings and other institutions. Our global dental, animal health and medical groups serve practitioners in33 countries worldwide.

Our 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, continuing education services for practitioners, consulting and other services.

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

Years Ended
December 31,December 26,December 27,
201620152014
Net Sales:
Health care distribution (1):
Dental .....................................................................................................................................................................................$5,555,299$5,276,407$5,381,215
Animal health ...........................................................................................................................................................................3,253,0952,921,6242,898,612
Medical ...................................................................................................................................................................................2,337,6612,072,9151,742,685
Total health care distribution ..................................................................................................................................................11,146,05510,270,94610,022,512
Technology and value-added services (2)...........................................................................................................................................425,613358,773348,878
Total .......................................................................................................................................................................................$11,571,668$10,629,719$10,371,390
(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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Years ended
December 31,December 26,December 27,
201620152014
Operating Income:
Health care distribution ....................................................................................................................................................................$652,106$626,574$611,771
Technology and value-added services ................................................................................................................................................119,468107,398103,371
Total .......................................................................................................................................................................................$771,574$733,972$715,142
Income before taxes and equity in earnings of affiliates:
Health care distribution ....................................................................................................................................................................$640,184$617,582$609,619
Technology and value-added services ................................................................................................................................................115,651103,17699,693
Total .......................................................................................................................................................................................$755,835$720,758$709,312
Depreciation and Amortization:
Health care distribution ....................................................................................................................................................................$146,276$141,184$136,126
Technology and value-added services ................................................................................................................................................23,50417,94316,112
Total .......................................................................................................................................................................................$169,780$159,127$152,238
Income Tax Expense:
Health care distribution ....................................................................................................................................................................$185,571$180,133$185,649
Technology and value-added services ................................................................................................................................................32,38731,25829,961
Total .......................................................................................................................................................................................$217,958$211,391$215,610
Interest Income:
Health care distribution ....................................................................................................................................................................$13,086$12,833$13,585
Technology and value-added services ................................................................................................................................................18910270
Total .......................................................................................................................................................................................$13,275$12,935$13,655
Interest Expense:
Health care distribution ....................................................................................................................................................................$31,845$25,926$23,916
Technology and value-added services ................................................................................................................................................4882141
Total .......................................................................................................................................................................................$31,893$26,008$24,057
Purchases of Fixed Assets:
Health care distribution ....................................................................................................................................................................$66,943$68,235$74,955
Technology and value-added services ................................................................................................................................................3,2363,4497,161
Total .......................................................................................................................................................................................$70,179$71,684$82,116
As of
December 31,December 26,December 27,
201620152014
Total Assets:
Health care distribution ....................................................................................................................................................................$6,294,735$6,129,285$5,756,993
Technology and value-added services ................................................................................................................................................435,661375,455381,814
Total .......................................................................................................................................................................................$6,730,396$6,504,740$6,138,807

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The following table presents information about our operations by geographic area as of and for the three years ended December 31, 2016. Net sales by geographic area are based on the respective locations of our subsidiaries. No country, except for the United States, generated net sales greater than 10% of consolidated net sales. There were no material amounts of sales or transfers among geographic areas and there were no material amounts of export sales.

201620152014
Net SalesLong-Lived AssetsNet SalesLong-Lived AssetsNet SalesLong-Lived Assets
United States ............................................................................................................................................................................$7,536,897$1,803,689$6,798,847$1,739,546$6,247,056$1,771,719
Other ......................................................................................................................................................................................4,034,7711,171,1373,830,8721,079,4944,124,3341,067,636
Consolidated total ...............................................................................................................................................................$11,571,668$2,974,826$10,629,719$2,819,040$10,371,390$2,839,355

Note 16 – Employee Benefit Plans

Stock-based Compensation

Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $58.2 million ($41.4 million after-tax), $44.6 million ($31.5 million after-tax) and $45.9 million ($31.9 million after-tax) for the years ended December 31, 2016, December 26, 2015 and December 27, 2014.

Our accompanying consolidated statements of cash flows present our stock-based compensation expense as an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. In the accompanying consolidated statements of cash flows, we presented $(0.5) million, $2.2 million and $5.9 million of benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities for the years ended December 31, 2016, December 26, 2015 and December 27, 2014.

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

Stock-based awards are provided to certain employees and non-employee directors under the terms of our 2013 Stock Incentive Plan, as amended, and our 2015 Non-Employee Director Stock Incentive Plan (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Prior to March 2009, awards under the Plans principally included a combination of at-the-money stock options and restricted stock/units. Since March 2009, equity-based awards have been granted solely in the form of restricted stock/units, with the exception of providing stock options to employees pursuant to certain pre-existing contractual obligations. As of December 31, 2016, there were 31,229 shares authorized and 4,678 shares available to be granted under the 2013 Stock Incentive Plan and 900 shares authorized and 141 shares available to be granted under the 2015 Non-Employee Director Stock Incentive Plan.

Grants of restricted stock/units are stock-based awards granted to recipients with specified vesting provisions. In the case of restricted stock, common stock is delivered on the date of grant, subject to vesting conditions. In the case of restricted stock units, common stock is generally delivered on or following satisfaction of vesting conditions. We issue restricted stock/units that vest solely based on the recipient’s continued service over time (primarily four-year cliff vesting, except for grants made under the 2015 Non-Employee Director Stock Incentive Plan, which are primarily 12-month cliff vesting) and restricted stock/units that vest based on our achieving specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting).

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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

The Plans provide for adjustments to the performance-based restricted stock/units targets for significant events such as acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, changes in accounting principles or in applicable laws or regulations and certain foreign exchange fluctuations. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on our actual performance metrics as defined under the Plans.

We record deferred income tax assets for awards that will result in future deductions on our income tax returns based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the deferred income tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred income tax asset) or in earnings (if the deferred income tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).

Stock-based compensation grants for the three years ended December 31, 2016 primarily consisted of restricted stock/unit grants. Certain stock-based compensation granted may require us to settle in the form of a cash payment. During the year ended December 31, 2016, we recorded a liability of $0.8 million relating to the grant date fair value of stock-based compensation to be settled in cash, as well as an expense of $0.3 million relating to the change in the fair value of these grants. The weighted-average grant date fair value of stock-based awards granted before forfeitures was $167.80, $140.80 and $119.45 per share during the years ended December 31, 2016, December 26, 2015 and December 27, 2014.

Total unrecognized compensation cost related to non-vested awards as of December 31, 2016 was $85.9 million, which is expected to be recognized over a weighted-average period of approximately 2.0 years.

A summary of the stock option activity under the Plans is presented below:

Years Ended
December 31,December 26,December 27,
201620152014
WeightedWeightedWeighted
AverageAverageAverage
ExerciseExerciseExercise
SharesPriceSharesPriceSharesPrice
Outstanding at beginning of year ..............................................................................................................................................385$56.00684$53.411,323$51.53
Granted ...............................................................................................................................................................................------
Exercised .............................................................................................................................................................................(208)54.99(299)50.09(639)49.51
Forfeited ..............................................................................................................................................................................------
Outstanding at end of year ......................................................................................................................................................177$57.19385$56.00684$53.41
Options exercisable at end of year ............................................................................................................................................177$57.19385$56.00684$53.41

During the years ended December 31, 2016, December 26, 2015 and December 27, 2014, we did not grant any stock options.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The following table represents the intrinsic values of:

As of
December 31,December 26,December 27,
201620152014
Stock options outstanding ................................................................................................................................$16,681$38,882$57,421
Stock options exercisable .................................................................................................................................16,68138,88257,421

The total cash received as a result of stock option exercises for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 was approximately $11.4 million, $14.9 million and $31.5 million. In connection with these exercises, the tax benefits that we realized for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 were $23.4 million, $20.8 million and $11.2 million. We settle employee stock option exercises with newly issued common shares.

The total intrinsic value per share of restricted stock/units that vested was $163.71, $143.20 and $119.36 during the years ended December 31, 2016, December 26, 2015 and December 27, 2014. The following table summarizes the status of our non-vested restricted stock/units for the year ended December 31, 2016:

Time-Based Restricted Stock/Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period .......................................................................................................................................................775$99.29
Granted ...........................................................................................................................................................................................175155.06
Vested .............................................................................................................................................................................................(239)74.66
Forfeited ..........................................................................................................................................................................................(41)124.22
Outstanding at end of period ...............................................................................................................................................................670$121.08$151.71
Performance-Based Restricted Stock/Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period .......................................................................................................................................................930$91.33
Granted ...........................................................................................................................................................................................246159.78
Vested .............................................................................................................................................................................................(214)90.58
Forfeited ..........................................................................................................................................................................................(37)137.92
Outstanding at end of period ...............................................................................................................................................................925$108.09$151.71
.......................................................................................................................................................................................................

401(k) Plans

We offer qualified 401(k) plans to substantially all our domestic full-time employees. As determined by our Board of Directors, matching contributions to these plans generally do not exceed 100% of the participants’ contributions up to 7% of their base compensation, subject to applicable legal limits. Matching contributions consist of cash and were allocated entirely to the participants’ investment elections on file, subject to a 20% allocation limit to the Henry Schein Stock Fund. Forfeitures attributable to participants whose employment terminates prior to becoming fully vested are used to reduce our matching contributions and offset administrative expenses of the 401(k) plans.

Assets of the 401(k) and other defined contribution plans are held in self-directed accounts enabling participants to choose from various investment fund options. Matching contributions and administrative expenses related to these plans charged to operations during the years ended December 31, 2016, December 26, 2015 and December 27, 2014 amounted to $34.0 million, $31.5 million and $28.6 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Supplemental Executive Retirement Plan

We offer an unfunded, non-qualified supplemental executive retirement plan to eligible employees. This plan generally covers officers and certain highly-compensated employees after they have reached the maximum IRS allowed pre-tax 401(k) contribution limit. Our contributions to this plan are equal to the 401(k) employee-elected contribution percentage applied to base compensation for the portion of the year in which such employees are not eligible to make pre-tax contributions to the 401(k) plan. The amounts charged to operations during the years ended December 31, 2016, December 26, 2015 and December 27, 2014 amounted to $0.3 million, $1.5 million and $1.9 million.

Deferred Compensation Plan

During 2011, we began to offer a deferred compensation plan to a select group of management or highly compensated employees of the Company and certain associated companies. This plan allows for the elective deferral of base salary, bonus and/or commission compensation by eligible employees. The amounts charged to operations during the years ended December 31, 2016, December 26, 2015 and December 27, 2014 were approximately $1.7 million, $0.1 million and $0.7 million, respectively.

Note 17 – Commitments and Contingencies

Operating Leases

We lease facilities and equipment under non-cancelable operating leases expiring through 2033. We expect that in the normal course of business, leases will be renewed or replaced by other leases.

Future minimum annual rental payments under our non-cancelable operating leases as of December 31, 2016 were:

2017 .......................................................................................................................................................................................$84,010
2018 .......................................................................................................................................................................................67,633
2019 .......................................................................................................................................................................................52,382
2020 .......................................................................................................................................................................................40,749
2021 .......................................................................................................................................................................................29,374
Thereafter ................................................................................................................................................................................63,393
Total minimum operating lease payments ...............................................................................................................................$337,541

Total rental expense for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 was $79.6 million, $76.0 million and $76.1 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Capital Leases

We lease certain equipment under capital leases. Future minimum annual lease payments under our capital leases together with the present value of the minimum capital lease payments as of December 31, 2016 were:

2017 .......................................................................................................................................................................................$1,517
2018 .......................................................................................................................................................................................1,244
2019 .......................................................................................................................................................................................738
2020 .......................................................................................................................................................................................310
2021 .......................................................................................................................................................................................266
Thereafter ................................................................................................................................................................................1,834
Total minimum capital lease payments .........................................................................................................................................5,909
Less: Amount representing interest at 1.38% to 19.15%(493)
Total present value of minimum capital lease payments............................................................................................................$5,416

Purchase Commitments

In our health care distribution business, we sometimes enter into long-term purchase commitments to ensure the availability of products for distribution. Future minimum annual payments for inventory purchase commitments as of December 31, 2016 were:

2017 .......................................................................................................................................................................................$179,562
2018 .......................................................................................................................................................................................116,394
2019 .......................................................................................................................................................................................91,780
2020 .......................................................................................................................................................................................101,280
2021 .......................................................................................................................................................................................111,680
Thereafter ................................................................................................................................................................................116,200
Total minimum inventory purchase commitment payments.......................................................................................................$716,896

Litigation

In September 2015, Henry Schein, Inc. was served with a summons and complaint in an action commenced in the United States District Court for the Eastern District of New York, entitled SourceOne Dental, Inc. v. Patterson Companies, Inc., Henry Schein, Inc. and Benco Dental Supply Company, Civil Action No. 15-cv-05440-JMA-GRB. Plaintiff alleges that, through its website, it markets and sells dental supplies and equipment to dentists. Plaintiff alleges, among other things, that defendants conspired to eliminate plaintiff as a viable competitor and to exclude plaintiff from the market for the marketing, distribution and sale of dental supplies and equipment in the United States and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff. Plaintiff asserts the following claims: (i) unreasonable restraint of trade in violation of state and federal antitrust laws; (ii) tortious interference with prospective business relations; (iii) civil conspiracy; and (iv) aiding and abetting the other defendants’ ongoing tortious and anticompetitive conduct. Plaintiff seeks equitable relief, compensatory and treble damages, jointly and severally, punitive damages, interest and reasonable costs and expenses, including attorneys’ fees and expert fees. We intend to defend ourselves vigorously against the action.

Beginning in January 2016, class action complaints were filed against Patterson Companies, Inc., Benco Dental Supply Co. and Henry Schein, Inc. Each of these complaints allege, among other things, that defendants conspired to fix prices, allocate customers and foreclose competitors by boycotting manufacturers, state dental associations

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

and others that deal with defendants’ competitors. Subject to certain exclusions, these classes seek to represent all persons who purchased dental supplies or equipment in the United States directly from any of the defendants or Burkhart Dental Supply Co. since August 31, 2008. Each class action complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, compensatory and treble damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees. We intend to defend ourselves vigorously against these actions.

From time to time, we may become a party to other legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes, governmental inquiries and investigations (which may in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty, in our opinion none of these other pending matters are currently anticipated to have a material adverse effect on our financial condition or results of operations.

As of December 31, 2016, 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 factors, including probable recoveries from third parties.

Employment, Consulting and Non-Compete Agreements

We have definite-lived employment, consulting and non-compete agreements that have varying base aggregate annual payments for the years 2017 through 2021 and thereafter of approximately $16.3 million, $3.8 million, $2.3 million, $1.1 million and $1.0 million. We also have lifetime consulting agreements that provide for current compensation of $0.5 million per year, increasing $25 every fifth year with the next increase in 2017. In addition, some agreements have provisions for additional incentives and compensation.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 18 – Quarterly Information (Unaudited)

The following tables present certain quarterly financial data:

Quarters ended
March 26,June 25,September 24,December 31,
2016 (1)2016 (1)2016 (1)2016 (1)
Net sales .......................................................................................................................................................................................$2,712,956$2,872,630$2,865,148$3,120,934
Gross profit ...................................................................................................................................................................................779,305803,316789,491861,857
Restructuring costs ..........................................................................................................................................................................4,05820,3835,37016,080
Operating income ...........................................................................................................................................................................176,194180,677200,721213,982
Net income ....................................................................................................................................................................................124,533133,098145,291153,473
Amounts attributable to
Henry Schein, Inc.:
Net income ....................................................................................................................................................................................113,752120,097133,713139,216
Earnings per share attributable to
Henry Schein, Inc.:
Basic ......................................................................................................................................................................................$1.39$1.47$1.65$1.75
Diluted ....................................................................................................................................................................................1.371.461.631.73
Quarters ended
March 28,June 27,September 26,December 26,
2015 (1)2015 (1)2015 (1) (2)2015 (1)
Net sales .......................................................................................................................................................................................$2,463,646$2,629,320$2,685,835$2,850,918
Gross profit ...................................................................................................................................................................................713,395750,678748,908799,278
Restructuring costs ..........................................................................................................................................................................6,8627,2228,43812,409
Operating income ...........................................................................................................................................................................161,367183,030188,882200,693
Net income ....................................................................................................................................................................................111,580129,608141,396140,843
Amounts attributable to
Henry Schein, Inc.:
Net income ....................................................................................................................................................................................103,447117,928127,735129,948
Earnings per share attributable to
Henry Schein, Inc.:
Basic ......................................................................................................................................................................................$1.24$1.42$1.54$1.58
Diluted ....................................................................................................................................................................................1.221.401.521.56
(1)See Note 10 - "Plans of Restructuring" for details of the restructuring costs incurred during the fiscal years of 2016 and 2015.
(2)See Note 12 - "Incomes Taxes" for details of the income tax benefit from a favorable tax ruling received by a subsidiary, net of noncontrolling interest, during the third quarter of 2015.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

We experience fluctuations in quarterly financial results. 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. Revenues and profitability 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. Revenues and profitability 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 materially adversely affected by a variety of other factors, including:

  • timing and amount of sales and marketing expenditures;

  • timing of pricing changes offered by our suppliers;

  • timing of the introduction of new products and services by our suppliers;

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

  • changes in or availability of supplier contracts or rebate programs;

  • supplier rebates based upon attaining certain growth goals;

  • changes in the way suppliers 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;

  • uncertainties regarding potential significant breaches of data security or disruptions of our information technology systems;

  • unexpected regulatory actions, or government regulation generally;

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

  • 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 shipping costs or service issues with our third-party shippers;

  • fluctuations in the value of foreign currencies;

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

  • restructuring costs;

  • the adoption or repeal of legislation; and

  • changes in accounting principles.

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

Note 19 – Supplemental Cash Flow Information

Cash paid for interest and income taxes was:

Years ended
December 31,December 26,December 27,
201620152014
Interest .................................................................................................................................................................................$29,391$24,033$22,285
Income taxes .........................................................................................................................................................................205,196180,897208,272

There was approximately $63.8 million, $5.0 million and $3.3 million of debt assumed as a part of the acquisitions for the years ended December 31, 2016, December 26, 2015 and December 27, 2014, respectively. Debt assumed during the year ended December 31, 2016 primarily relates to the acquisitions of Dental Cremer S.A. and Dental Speed Graph. Debt assumed during the year ended December 26, 2015 relates to the acquisitions of scil animal care company GmbH, Jorgen Kruuse A/S and Dental Trey (S.R.L.). Debt assumed during the year ended December 27, 2014 relates to the acquisitions of BioHorizons, Inc. and Medivet S.A.

For the years ended December 31, 2016, December 26, 2015 and December 27, 2014, we had $(1.0) million, $2.1 million and $(2.5) million of non-cash net unrealized gains (losses) related to foreign currency hedging activities, respectively.

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