Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
Page
Report of Independent Registered Public Accounting Firm....................................................................................................78
Consolidated Financial Statements:
Balance Sheets as of December 30, 2017 and December 31, 2016........................................................................................79
Statements of Income for the years ended December 30, 2017,
December 31, 2016 and December 26, 2015...........................................................................................................80
Statements of Comprehensive Income for the years ended December 30, 2017,
December 31, 2016 and December 26, 2015...........................................................................................................81
Statements of Changes in Stockholders’ Equity for the years ended
December 30, 2017, December 31, 2016 and December 26, 2015.................................................................................82
Statements of Cash Flows for the years ended December 30, 2017,
December 31, 2016 and December 26, 2015...........................................................................................................83
Notes to Consolidated Financial Statements.................................................................................................................84
Note 1 - Significant Accounting Policies..............................................................................................................84
Note 2 - Property and Equipment, Net .................................................................................................................92
Note 3 - Goodwill and Other Intangibles, Net ........................................................................................................93
Note 4 - Investments and Other .........................................................................................................................94
Note 5 - Debt..................................................................................................................................................94
Note 6 - Redeemable Noncontrolling Interests.......................................................................................................97
Note 7 - Comprehensive Income ........................................................................................................................98
Note 8 - Fair Value Measurements.......................................................................................................................100
Note 9 - Business Acquisitions and Divestiture....................................................................................................102
Note 10 - Plans of Restructuring.........................................................................................................................104
Note 11 - Earnings Per Share..............................................................................................................................105
Note 12 - Income Taxes.....................................................................................................................................105
Note 13 - Concentrations of Risk .......................................................................................................................109
Note 14 - Derivatives and Hedging Activities........................................................................................................110
Note 15 - Segment and Geographic Data...............................................................................................................111
Note 16 - Employee Benefit Plans........................................................................................................................113
Note 17 - Commitments and Contingencies...........................................................................................................117
Note 18 - Quarterly Information (Unaudited).........................................................................................................121
Note 19 - Supplemental Cash Flow Information......................................................................................................123
Schedule II - Valuation and Qualifying Accounts for the years ended December 30, 2017,
December 31, 2016 and December 26, 2015....................................................................................................................138
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

Stockholders and Board of Directors

Henry Schein, Inc.

Melville, NY

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Henry Schein, Inc. (the “Company”) and subsidiaries as of December 30, 2017 and December 31, 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 30, 2017, and the related notes and schedule presented in Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 30, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017**,** in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 30, 2017, 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, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 1984.

New York, NY

February 21, 2018

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

December 30,December 31,
20172016
ASSETS
Current assets:
Cash and cash equivalents ..............................................................................................................................................................$174,658$62,381
Accounts receivable, net of reserves of $106,592 and $90,329 .................................................................................................................1,470,0471,254,139
Inventories, net .............................................................................................................................................................................1,933,8031,665,750
Prepaid expenses and other .............................................................................................................................................................454,752360,510
Total current assets ...............................................................................................................................................................4,033,2603,342,780
Property and equipment, net ................................................................................................................................................................375,001333,906
Goodwill ..........................................................................................................................................................................................2,301,3312,019,740
Other intangibles, net .........................................................................................................................................................................669,641621,180
Investments and other ........................................................................................................................................................................432,002442,790
Total assets ..........................................................................................................................................................................$7,811,235$6,760,396
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .........................................................................................................................................................................$1,153,012$1,007,249
Bank credit lines ............................................................................................................................................................................741,653437,476
Current maturities of long-term debt ..................................................................................................................................................16,65965,923
Accrued expenses:
Payroll and related .....................................................................................................................................................................272,998266,463
Taxes ......................................................................................................................................................................................188,873151,750
Other ......................................................................................................................................................................................403,020391,785
Total current liabilities ............................................................................................................................................................2,776,2152,320,646
Long-term debt, net ............................................................................................................................................................................907,756715,457
Deferred income taxes .........................................................................................................................................................................50,43151,589
Other liabilities ..................................................................................................................................................................................420,285264,264
Total liabilities ......................................................................................................................................................................4,154,6873,351,956
Redeemable noncontrolling interests .....................................................................................................................................................832,138607,636
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,
153,690,146 outstanding on December 30, 2017 and
158,805,010 outstanding on December 31, 2016 ................................................................................................................................1,5371,588
Additional paid-in capital ................................................................................................................................................................-126,742
Retained earnings ..........................................................................................................................................................................2,940,0292,981,777
Accumulated other comprehensive loss .............................................................................................................................................(130,067)(317,041)
Total Henry Schein, Inc. stockholders' equity ..................................................................................................................................2,811,4992,793,066
Noncontrolling interests .................................................................................................................................................................12,9117,738
Total stockholders' equity .......................................................................................................................................................2,824,4102,800,804
Total liabilities, redeemable noncontrolling interests and stockholders' equity ........................................................................................$7,811,235$6,760,396

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

Years Ended
December 30,December 31,December 26,
201720162015
Net sales ......................................................................................................................................................................................$12,461,543$11,571,668$10,629,719
Cost of sales .................................................................................................................................................................................9,062,4408,345,1957,622,765
Gross profit .........................................................................................................................................................................3,399,1033,226,4733,006,954
Operating expenses:
Selling, general and administrative .................................................................................................................................................2,539,7342,409,0082,238,051
Restructuring costs ....................................................................................................................................................................-45,89134,931
Operating income ..................................................................................................................................................................859,369771,574733,972
Other income (expense):
Interest income ..........................................................................................................................................................................17,55313,27512,935
Interest expense ........................................................................................................................................................................(53,654)(31,893)(26,008)
Other, net .................................................................................................................................................................................(420)2,879(141)
Income before taxes and equity in earnings of affiliates .................................................................................................................822,848755,835720,758
Income taxes .................................................................................................................................................................................(362,506)(217,958)(211,391)
Equity in earnings of affiliates ...........................................................................................................................................................16,58718,51814,060
Loss on sale of equity investment .....................................................................................................................................................(17,636)--
Net income ...................................................................................................................................................................................459,293556,395523,427
Less: Net income attributable to noncontrolling interests ...................................................................................................................(52,994)(49,617)(44,369)
Net income attributable to Henry Schein, Inc. .......................................................................................................................................$406,299$506,778$479,058
Earnings per share attributable to Henry Schein, Inc.:
Basic .......................................................................................................................................................................................$2.59$3.14$2.89
Diluted ....................................................................................................................................................................................$2.57$3.10$2.85
Weighted-average common shares outstanding:
Basic .......................................................................................................................................................................................156,787161,641165,687
Diluted ....................................................................................................................................................................................158,208163,723168,250

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Years Ended
December 30,December 31,December 26,
201720162015
Net income ................................................................................................................................................................................$459,293$556,395$523,427
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) ......................................................................................................................................191,886(98,402)(134,035)
Unrealized gain (loss) from foreign currency hedging activities ........................................................................................................(729)(992)1,994
Unrealized investment gain (loss)...............................................................................................................................................(3)2134
Pension adjustment gain (loss) .................................................................................................................................................3,933(399)2,270
Other comprehensive income (loss), net of tax .................................................................................................................................195,087(99,791)(129,637)
Comprehensive income ................................................................................................................................................................654,380456,604393,790
Comprehensive income attributable to noncontrolling interests:
Net income .......................................................................................................................................................................(52,994)(49,617)(44,369)
Foreign currency translation (gain) loss ..................................................................................................................................(8,113)2,6894,830
Comprehensive income attributable to noncontrolling interests ...............................................................................................(61,107)(46,928)(39,539)
Comprehensive income attributable to Henry Schein, Inc. ...................................................................................................................$593,273$409,676$354,251

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 27, 2014 ...............................................................................................................................................................168,017,074$1,680$264,523$2,642,523$(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 ................................................................................................................................................(4,168,594)(42)(74,226)(225,584)--(299,852)
Stock issued upon exercise of stock options,
including tax benefit of $20,802 .......................................................................................................................................................595,732635,666---35,672
Stock-based compensation expense ........................................................................................................................................................785,710844,606---44,614
Shares withheld for payroll taxes ..........................................................................................................................................................(399,282)(4)(28,310)---(28,314)
Liability for cash settlement stock-based compensation awards ..............................................................................................................................--(729)---(729)
Balance, December 26, 2015 ...............................................................................................................................................................164,830,640$1,648$206,550$2,895,997$(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 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 ................................................................................................................................................(6,923,564)(70)(128,956)(420,998)--(550,024)
Stock issued upon exercise of stock options,
including tax benefit of $23,392 .......................................................................................................................................................415,832434,792---34,796
Stock-based compensation expense ........................................................................................................................................................755,104858,238---58,246
Shares withheld for payroll taxes ..........................................................................................................................................................(328,888)(2)(29,112)---(29,114)
Liability for cash settlement stock-based compensation awards ..............................................................................................................................55,886-4,052---4,052
Deferred tax benefit arising from acquisition of
noncontrolling interest in partnership..................................................................................................................................................--48,037---48,037
Balance, December 31, 2016 ...............................................................................................................................................................158,805,010$1,588$126,742$2,981,777$(317,041)$7,738$2,800,804
Net income (excluding $52,203 attributable to Redeemable
noncontrolling interests) .............................................................................................................................................................---406,299-791407,090
Foreign currency translation gain (excluding $7,461
attributable to Redeemable noncontrolling interests) ...................................................................................................................................----183,773652184,425
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $786...............................................................................................................................................................----(729)-(729)
Unrealized investment loss, net of tax benefit of $1 ..........................................................................................................................................----(3)-(3)
Pension adjustment gain, net of tax of $314.................................................................................................................................................----3,933-3,933
Dividends paid ...........................................................................................................................................................................-----(546)(546)
Other adjustments ........................................................................................................................................................................--23--376399
Purchase of noncontrolling interests .......................................................................................................................................................-----(4,150)(4,150)
Change in fair value of redeemable securities ................................................................................................................................................--(162,729)---(162,729)
Initial noncontrolling interests and adjustments related to
business acquisitions .................................................................................................................................................................-----8,0508,050
Repurchase and retirement of common stock ................................................................................................................................................(5,864,404)(59)(97,205)(352,736)--(450,000)
Stock issued upon exercise of stock options................................................................................................................................................197,43425,264---5,266
Stock-based compensation expense ........................................................................................................................................................1,072,9221142,283---42,294
Shares withheld for payroll taxes ..........................................................................................................................................................(520,816)(5)(44,771)---(44,776)
Settlement of stock-based compensation awards ............................................................................................................................................--(599)---(599)
Deferred tax benefit arising from acquisition of
noncontrolling interest in partnership..................................................................................................................................................--35,681---35,681
Transfer of charges in excess of capital ......................................................................................................................................................--95,311(95,311)---
Balance, December 30, 2017 ...............................................................................................................................................................153,690,146$1,537$-$2,940,029$(130,067)$12,911$2,824,410

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended
December 30,December 31,December 26,
201720162015
Cash flows from operating activities:
Net income .......................................................................................................................................................................................$459,293$556,395$523,427
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................................................................................................................................193,072169,780159,127
Loss on sale of equity investment .................................................................................................................................................17,636--
Stock-based compensation expense ..............................................................................................................................................42,29458,24644,614
Provision for losses on trade and other accounts receivable ...............................................................................................................9,3702,6473,184
Provision for (Benefit from) deferred income taxes ............................................................................................................................485(37,066)(6,241)
Equity in earnings of affiliates ......................................................................................................................................................(16,587)(18,518)(14,060)
Distributions from equity affiliates ................................................................................................................................................23,15720,35118,029
Changes in unrecognized tax benefits ............................................................................................................................................(2,318)6,0136,494
Provision for transition tax ...........................................................................................................................................................140,000--
Other ......................................................................................................................................................................................10,92112,59512,902
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ..............................................................................................................................................................(159,876)(1,904)(120,001)
Inventories ...........................................................................................................................................................................(175,059)(104,787)(194,869)
Other current assets ...............................................................................................................................................................(85,759)(22,657)(58,376)
Accounts payable and accrued expenses ...................................................................................................................................88,8861,481241,270
Net cash provided by operating activities ...............................................................................................................................................545,515642,576615,500
Cash flows from investing activities:
Purchases of fixed assets ....................................................................................................................................................................(81,501)(70,179)(71,684)
Payments related to equity investments and business
acquisitions, net of cash acquired .....................................................................................................................................................(288,673)(228,575)(171,861)
Proceeds from sale of equity investment .................................................................................................................................................34,048--
Proceeds from sales of available-for-sale securities ...................................................................................................................................--20
Other ..............................................................................................................................................................................................(6,150)(17,668)(16,506)
Net cash used in investing activities ......................................................................................................................................................(342,276)(316,422)(260,031)
Cash flows from financing activities:
Proceeds from bank borrowings ............................................................................................................................................................302,94198,748145,173
Proceeds from issuance of long-term debt ...............................................................................................................................................200,440260,799135,000
Debt issuance costs ...........................................................................................................................................................................(1,990)(233)(150)
Principal payments for long-term debt ....................................................................................................................................................(60,050)(15,381)(201,203)
Proceeds from issuance of stock upon exercise of stock options .................................................................................................................5,26611,40414,870
Payments for repurchases of common stock ............................................................................................................................................(450,000)(550,024)(299,852)
Payments for taxes related to shares withheld for employee taxes.................................................................................................................(44,832)(27,115)(28,659)
Excess tax benefits related to stock-based compensation ...........................................................................................................................-(463)2,199
Distributions to noncontrolling stockholders ..........................................................................................................................................(29,134)(32,350)(33,301)
Acquisitions of noncontrolling interests in subsidiaries ............................................................................................................................(35,192)(72,729)(82,107)
Net cash used in financing activities ......................................................................................................................................................(112,551)(327,344)(348,030)
Effect of exchange rate changes on cash and cash equivalents ....................................................................................................................21,589(8,515)(24,827)
Net change in cash and cash equivalents ................................................................................................................................................112,277(9,705)(17,388)
Cash and cash equivalents, beginning of period .......................................................................................................................................62,38172,08689,474
Cash and cash equivalents, end of period ...............................................................................................................................................$174,658$62,381$72,086

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, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates 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 30, 2017 consisted of 52 weeks, the year ended December 31, 2016 consisted of 53 weeks and the year ended December 26, 2015 consisted of 52 weeks.

Stock Split

On August 16, 2017, we announced that our Board of Directors approved a two-for-one stock split of our common stock. Each Henry Schein, Inc. stockholder of record at the close of business on September 1, 2017 received a distribution of one additional share for every share held. Trading began on a split-adjusted basis on September 15, 2017. The effects of the stock split on share and per share amounts have been retroactively reflected for all periods presented in this Form 10-K.

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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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

Revenue derived from the sale of software products is recognized when products are shipped to customers. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is recognized over the period in which the services are provided.

Revenue derived from 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 $83.6 million and $98.5 million, primarily related to payments for inventory, were classified as accounts payable as of December 30, 2017 and December 31, 2016.

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 net realizable value. 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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory.

Direct Shipping and Handling Costs

Freight and other direct shipping costs are included in cost of sales. Direct handling costs, which represent primarily direct compensation costs of employees who pick, pack and otherwise prepare, if necessary, merchandise for shipment to our customers are reflected in selling, general and administrative expenses. Direct shipping and handling costs were $92.6 million, $84.1 million and $78.7 million for the years ended December 30, 2017, December 31, 2016 and December 26, 2015.

Advertising and Promotional Costs

We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses were $15.7 million, $18.4 million and $19.2 million for the years ended December 30, 2017, December 31, 2016 and December 26, 2015. 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 30, 2017 and December 31, 2016, we had $4.0 million and $3.5 million of deferred direct marketing expenses included in other current assets.

Supplier Rebates

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

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation or amortization. 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 is recognized as income or expense in the period that includes the enactment date. Our accounting for the Tax Cuts and Jobs Act, enacted on December 22, 2017, is further discussed in Note 12 of “Notes to Consolidated Financial Statements.” We file a consolidated U.S. federal income tax return with our 80% or greater owned U.S. subsidiaries.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Foreign Currency Translation and Transactions

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

Risk Management and Derivative Financial Instruments

We use derivative instruments to minimize our exposure to fluctuations in 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 30, 2017, December 31, 2016 and December 26, 2015, 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 stockholders 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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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.

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 30, 2017 and 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.

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 assess 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;

  • 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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

For the years ended December 30, 2017, December 31, 2016 and December 26, 2015, 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 $83.2 million, $79.4 million and $70.4 million for the years ended December 30, 2017, December 31, 2016 and December 26, 2015.

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) from foreign currency hedging activities, unrealized investment gain (loss) and pension adjustment gain (loss).

Accounting Pronouncements Adopted

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

Under ASU 2016-09, all excess tax benefits and tax deficiencies resulting from the difference between the deduction for tax purposes and the stock-based compensation cost recognized for financial reporting purposes are included as a component of income tax expense as of January 1, 2017. Prior to the implementation of ASU 2016-09, 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 or in the income statement if there were no accumulated excess tax benefits. The adoption of ASU 2016-09 reduced income tax expense by approximately $19.6 million for the year ended December 30, 2017.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The ASU clarifies the classification of certain share based payment activities within the statements of cash flows. We have elected to prospectively present the amount of excess tax benefits related to stock compensation as a component of cash flows from operating activities. Additionally, all cash payments made to taxing authorities on an employees’ behalf when directly withholding shares for tax-withholding purposes, which were previously included as cash flows from operating activities, are now presented retrospectively as cash flows from financing activities within the statement of cash flows.

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”, which deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date.

When effective, ASU 2014-09 will require us to 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 modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures to describe the nature, amount, timing and uncertainty of revenue, certain costs and cash flows arising from our contracts with customers).

We have finalized our review of our various revenue streams within our two reportable segments: (i) health care distribution and (ii) technology and value-added services. We have gathered data and quantified the amount of sales by type of revenue stream and categorized the types of sales for our business units for the purpose of comparing how we currently recognize revenue to the new standard in order to quantify the impact of this ASU. We generally anticipate having substantially similar performance obligations under the new guidance as compared with deliverables and units of account currently being recognized.

We do not anticipate any material changes to the timing or amount of revenues recognized for our health care distribution or our technology and value-added services reportable segments.

Due to the variety of our product offerings in our technology and value-added segment, the actual revenue recognition treatment required under the new standard will depend on contract-specific terms. There will be some impact on timing of revenue recognition, which will include the following:

· We currently defer license revenue in cases where we do not have VSOE of the fair value of an element in the arrangement that has not been delivered yet such as customer support. Under Accounting Standards Codification (“ASC”) 606, the concept of VSOE is eliminated and there are no cases where revenue is deferred due to a lack of standalone selling price. As such, we will recognize certain revenue related to the software license earlier than current practice.

· Certain upfront fees related to service arrangements are currently deferred and recognized over the estimated customer life. Under ASC 606, the period over which we will recognize these fees will be reduced.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

· Revenue related to term licenses is currently recognized over the license term. Under ASC 606, the license will be recognized upon delivery or license renewal.

· We currently expense contract acquisition costs. The new requirement to defer incremental contract acquisition costs and recognize them over the term of the initial contract and anticipated renewal contracts to which the costs relate will require us to capitalize additional costs. We will utilize the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less which will typically result in expensing commissions on all products or services except our software support contracts.

In these cases, we generally will recognize revenue related to technology and value-added contracts earlier than current practice, while certain contract acquisition costs will be recognized later than current practice. However, we do not believe the impact will be material to each of our segments or to our consolidated financial statements.

As of December 31, 2017, we expect to adopt the standard on a modified retrospective basis and recognize an immaterial adjustment to retained earnings reflecting the cumulative impact for the above described accounting changes.

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 exploring the methods we can use to gather and process our operating lease data at a worldwide consolidated level.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other” (Topic 350) (“ASU 2017-04”). ASU 2017-04 eliminates step two from the goodwill impairment test, thereby eliminating the requirement to calculate the implied fair value of a reporting unit. ASU 2017-04 will require us to perform our annual goodwill impairment test by comparing the fair value of our reporting units to the carrying value of those units. If the carrying value exceeds the fair value, we will be required to recognize an impairment charge; however, the impairment charge should not exceed the amount of goodwill allocated to such reporting unit. ASU 2017-04 is required to be implemented on a prospective basis for fiscal years beginning after December 15, 2019. We do not expect that the requirements of ASU 2017-04 will have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 clarifies guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. ASU 2017-09 requires modification accounting if the fair value, vesting conditions, or equity or liability classification of the award is not the same immediately before and after a change to the terms and conditions of the award. ASU 2017-09 is required to be implemented on a prospective basis for fiscal years beginning after December 15, 2017. We do not expect that the requirements of ASU 2017-09 will have a material impact on our consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815) (“ASU 2017-12”), which simplifies the requirements for hedge accounting, more closely aligns hedge accounting with risk management activities and increases transparency of the scope and results of hedging activities. This ASU amends the presentation and disclosure requirements and changes how we can assess the effectiveness of our hedging

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

relationships. This ASU will make more financial and nonfinancial hedging strategies eligible for hedge accounting. ASU 2017-12 is required to be implemented for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2017-12 is permitted in any interim period after the issuance of this ASU. We do not expect that the requirements of ASU 2017-12 will have a material impact on our consolidated financial statements.

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.

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 30,December 31,
20172016
Land ........................................................................................................................................................................................$21,019$19,438
Buildings and permanent improvements ..........................................................................................................................................143,250127,097
Leasehold improvements .............................................................................................................................................................106,23695,048
Machinery and warehouse equipment ............................................................................................................................................138,478121,395
Furniture, fixtures and other ..........................................................................................................................................................149,136129,444
Computer equipment and software .................................................................................................................................................432,379372,322
990,498864,744
Less accumulated depreciation ......................................................................................................................................................(615,497)(530,838)
Property and equipment, net ..................................................................................................................................................$375,001$333,906
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 30, 2017, December 31, 2016 and December 26, 2015 was $67.3 million, $63.8 million and $60.2 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 30, 2017 and December 31, 2016 were as follows:

Health Care DistributionTechnology and Value-Added ServicesTotal
Balance as of December 26, 2015 .................................................................................................................................................$1,742,022$165,571$1,907,593
Adjustments to goodwill:
Acquisitions ...................................................................................................................................................................116,64029,165145,805
Foreign currency translation ..............................................................................................................................................(27,127)(6,531)(33,658)
Balance as of December 31, 2016 .................................................................................................................................................1,831,535188,2052,019,740
Adjustments to goodwill:
Acquisitions ...................................................................................................................................................................216,1448,736224,880
Foreign currency translation ..............................................................................................................................................48,9157,79656,711
Balance as of December 30, 2017 .................................................................................................................................................$2,096,594$204,737$2,301,331

Other intangible assets consisted of the following:

December 30, 2017December 31, 2016
AccumulatedAccumulated
CostAmortizationNetCostAmortizationNet
Non-compete agreements ................................................................................................................................................................$41,758$(9,539)$32,219$40,783$(6,927)$33,856
Trademarks / trade names - definite lived ..............................................................................................................................................151,918(76,497)75,421136,211(55,124)81,087
Trademarks / trade names - indefinite lived ...........................................................................................................................................---2,848-2,848
Customer relationships and lists ........................................................................................................................................................851,339(355,327)496,012713,437(288,417)425,020
Other .......................................................................................................................................................................................136,540(70,551)65,989134,254(55,885)78,369
Total ...................................................................................................................................................................................$1,181,555$(511,914)$669,641$1,027,533$(406,353)$621,180

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 4.7 years as of December 30, 2017.

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 7.9 years as of December 30, 2017. 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 30, 2017.

Amortization expense related to definite-lived intangible assets for the years ended December 30, 2017, December 31, 2016 and December 26, 2015 was $116.5 million, $98.2 million and $92.9 million. The annual amortization expense expected to be recorded for existing intangibles assets for the years 2018 through 2022 is $119.5 million, $111.3 million, $102.4 million, $90.4 million and $65.2 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 30,December 31,
20172016
Investment in unconsolidated affiliates ..................................................................................................................................................$268,364$299,249
Non-current deferred foreign, state and local income taxes .........................................................................................................................10,96216,685
Notes receivable (1) ............................................................................................................................................................................35,01527,492
Capitalized costs for internally generated software for resale .......................................................................................................................35,35932,321
Distribution rights and exclusivity agreements, net of amortization ...............................................................................................................1,3781,937
Acquisition related indemnification .......................................................................................................................................................65,55851,294
Other long-term assets ........................................................................................................................................................................15,36613,812
Total .......................................................................................................................................................................................$432,002$442,790
(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 30, 2017, December 31, 2016 and December 26, 2015 was $9.3 million, $7.8 million and $6.1 million.

Note 5 – Debt

Bank Credit Lines

On April 18, 2017, we entered into a new $750 million revolving credit agreement (the “Credit Agreement”). This facility, which matures in April 2022, replaced our $500 million revolving credit facility, which was scheduled to mature in September 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 30, 2017 and December 31, 2016, the borrowings outstanding on this revolving credit facility and the prior credit facility were $320.0 million and $65.0 million, respectively. As of December 30, 2017 and December 31, 2016, there were $11.3 million and $13.0 million of letters of credit, respectively, provided to third parties under this credit facility and the prior credit facility.

As of December 30, 2017 and December 31, 2016, we had various other short-term bank credit lines available, of which $421.7 million and $372.5 million, respectively, were outstanding. At December 30, 2017 and December 31, 2016, borrowings under all of our credit lines had a weighted average interest rate of 2.27% and 1.61%, respectively.

Private Placement Facilities

On September 15, 2017, we increased our available private placement facilities with three insurance companies to a total facility amount of $1 billion, and extended the expiration date to September 15, 2020. These facilities are available on an uncommitted basis at fixed rate economic terms to be agreed upon at the time of issuance, from time to time through September 15, 2020. 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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 30, 2017 are presented in the following table:

Amount of
Date ofBorrowingBorrowing
BorrowingOutstandingRateDue Date
September 2, 2010$100,0003.79%September 2, 2020
January 20, 201250,0003.45January 20, 2024
January 20, 2012 (1)35,7143.09January 20, 2022
December 24, 201250,0003.00December 24, 2024
June 2, 2014100,0003.19June 2, 2021
June 16, 2017100,0003.42June 16, 2027
September 15, 2017100,0003.52September 15, 2029
Less: Deferred debt issuance costs(419)
$535,295
(1) Annual repayments of approximately $7.1 million for this borrowing commenced on January 20, 2016.

U.S. Trade Accounts Receivable Securitization

We have a facility agreement with a bank, as agent, based on the securitization of our U.S. trade accounts receivable that is structured as an asset-backed securitization program with pricing committed for up to three years. 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. On July 6, 2017, we extended the expiration date of this facility agreement to April 29, 2020. The borrowings outstanding under this securitization facility were $350.0 million and $350.0 million as of December 30, 2017 and December 31, 2016, respectively. At December 30, 2017, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 153 basis points plus 75 basis points, for a combined rate of 2.28%. 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%.

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 30,December 31,
20172016
Private placement facilities ...........................................................................................................................................................$535,295$342,857
U.S. trade accounts receivable securitization ....................................................................................................................................350,000350,000
Note payable to bank at a weighted-average interest rate of 21.37%
at December 31, 2016...........................................................................................................................................................-47,957
Various collateralized and uncollateralized loans payable with interest,
in varying installments through 2022 at interest rates
ranging from 2.56% to 12.90% at December 30, 2017 and
ranging from 2.56% to 12.90% at December 31, 2016...................................................................................................................34,02735,150
Capital lease obligations (see Note 17) ............................................................................................................................................5,0935,416
Total .......................................................................................................................................................................................924,415781,380
Less current maturities ................................................................................................................................................................(16,659)(65,923)
Total long-term debt ...........................................................................................................................................................$907,756$715,457

As of December 30, 2017, the aggregate amounts of long-term debt, including capital lease obligations and net of deferred debt issuance costs of $419, maturing in each of the next five years and thereafter are as follows:

2018 ...............................................................................................................................................................................................$16,659
2019 ...............................................................................................................................................................................................8,617
2020 ...............................................................................................................................................................................................457,519
2021 ...............................................................................................................................................................................................107,432
2022 ...............................................................................................................................................................................................32,906
Thereafter .......................................................................................................................................................................................301,282
Total .......................................................................................................................................................................................$924,415

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 6 – Redeemable Noncontrolling Interests

Some minority stockholders 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. 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 30, 2017, December 31, 2016 and December 26, 2015 are presented in the following table:

December 30,December 31,December 26,
201720162015
Balance, beginning of period ...................................................................................................................................................$607,636$542,194$564,527
Decrease in redeemable noncontrolling interests due to
redemptions ....................................................................................................................................................................(48,669)(72,729)(82,563)
Increase in redeemable noncontrolling interests due to
business acquisitions.........................................................................................................................................................78,93958,17218,936
Net income attributable to redeemable noncontrolling interests ......................................................................................................52,20348,76043,588
Dividends declared ...............................................................................................................................................................(28,161)(32,973)(32,706)
Effect of foreign currency translation gain (loss) attributable to
redeemable noncontrolling interests .....................................................................................................................................7,461(2,652)(4,790)
Change in fair value of redeemable securities .............................................................................................................................162,72966,86435,202
Balance, end of period ...........................................................................................................................................................$832,138$607,636$542,194

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 30,December 31,December 26,
201720162015
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment ...........................................................................................................$(5,564)$(13,025)$(10,373)
Attributable to noncontrolling interests:
Foreign currency translation adjustment ...........................................................................................................$539$(113)$(76)
Attributable to Henry Schein, Inc.:
Foreign currency translation loss .........................................................................................................................$(112,439)$(296,212)$(200,499)
Unrealized gain (loss) from foreign currency hedging activities ..................................................................................(782)(53)939
Unrealized investment loss .................................................................................................................................(3)-(2)
Pension adjustment loss ....................................................................................................................................(16,843)(20,776)(20,377)
Accumulated other comprehensive loss ............................................................................................................$(130,067)$(317,041)$(219,939)
Total Accumulated other comprehensive loss ............................................................................................................$(135,092)$(330,179)$(230,388)

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

December 30,December 31,December 26,
201720162015
Net income .........................................................................................................................................................................$459,293$556,395$523,427
Foreign currency translation gain (loss).....................................................................................................................................191,886(98,402)(134,035)
Tax effect ...........................................................................................................................................................................---
Foreign currency translation gain (loss).....................................................................................................................................191,886(98,402)(134,035)
Unrealized gain (loss) from foreign currency hedging activities ......................................................................................................(1,515)(1,025)2,147
Tax effect ...........................................................................................................................................................................78633(153)
Unrealized gain (loss) from foreign currency hedging activities ......................................................................................................(729)(992)1,994
Unrealized investment gain (loss).............................................................................................................................................(4)2134
Tax effect ...........................................................................................................................................................................1--
Unrealized investment gain (loss).............................................................................................................................................(3)2134
Pension adjustment gain (loss) ...............................................................................................................................................4,247(947)3,278
Tax effect ...........................................................................................................................................................................(314)548(1,008)
Pension adjustment gain (loss) ...............................................................................................................................................3,933(399)2,270
Comprehensive income .........................................................................................................................................................$654,380$456,604$393,790

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

During the years ended December 30, 2017, December 31, 2016 and December 26, 2015, we recognized, as a component of our comprehensive income, a foreign currency translation gain (loss) of $191.9 million, $(98.4) million and $(134.0) 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 30, 2017, December 31, 2016 and December 26, 2015 was impacted by changes in foreign currency exchange rates as follows:

Foreign Currency
Translation
Gain (Loss)
for the
Year EndedFX Rate in USD
December 30,December 30,December 31,
Currency201720172016
Euro ............................................................................................................................................................................................$113,2591.201.05
British Pound ................................................................................................................................................................................28,0011.351.23
Australian Dollar ............................................................................................................................................................................15,1240.780.72
Canadian Dollar .............................................................................................................................................................................9,4030.800.74
Polish Zloty...................................................................................................................................................................................11,0580.290.24
Swiss Franc ...................................................................................................................................................................................5,5441.030.98
Brazilian Real .................................................................................................................................................................................(2,411)0.300.31
All other currencies ........................................................................................................................................................................11,908
Total .......................................................................................................................................................................................$191,886
Foreign Currency
Translation
Gain (Loss)
for the
Year EndedFX Rate in USD
December 31,December 31,December 26,
Currency201620162015
British Pound ................................................................................................................................................................................$(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)

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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)

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

December 30,December 31,December 26,
201720162015
Comprehensive income attributable to
Henry Schein, Inc. ....................................................................................................................................................$593,273$409,676$354,251
Comprehensive income attributable to
noncontrolling interests .............................................................................................................................................1,443820741
Comprehensive income attributable to
Redeemable noncontrolling interests ............................................................................................................................59,66446,10838,798
Comprehensive income ..................................................................................................................................................$654,380$456,604$393,790

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 30, 2017 and December 31, 2016 was estimated at $1,666.1 million and $1,218.9 million, 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 stockholders 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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 30, 2017 and December 31, 2016:

December 30, 2017
Level 1Level 2Level 3Total
Assets:
Derivative contracts ..............................................................................................................................................................$-$11,799$-$11,799
Total assets .....................................................................................................................................................................$-$11,799$-$11,799
Liabilities:
Derivative contracts ..............................................................................................................................................................$-$2,089$-$2,089
Total liabilities ..................................................................................................................................................................$-$2,089$-$2,089
Redeemable noncontrolling interests ..............................................................................................................................................$-$-$832,138$832,138
December 31, 2016
Level 1Level 2Level 3Total
Assets:
Derivative contracts ..............................................................................................................................................................$-$1,240$-$1,240
Total assets .....................................................................................................................................................................$-$1,240$-$1,240
Liabilities:
Derivative contracts ..............................................................................................................................................................$-$931$-$931
Total liabilities ..................................................................................................................................................................$-$931$-$931
Redeemable noncontrolling interests ..............................................................................................................................................$-$-$607,636$607,636

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 May 2, 2017, we announced the acquisition of Southern Anesthesia and Surgical, Inc. (SAS), a leading U.S. distributor of anesthesia and surgical supplies to oral surgeons, dental anesthesiologists, and periodontists. SAS had sales in 2016 of approximately $72 million. As a result of this acquisition, we recorded $76.5 million of initial goodwill.

On August 28, 2017, we announced the acquisition of Merritt Veterinary Supplies, Inc. (Merritt), an independent supplier of animal health products. Merritt had sales in 2016 of approximately $115 million. As a result of this acquisition, we recorded $33.4 million of initial goodwill.

We completed acquisitions during the year ended December 30, 2017, which were immaterial to our financial statements individually and in the aggregate and resulted in the recording of approximately $43.9 million of initial goodwill through preliminary purchase price allocations. Total acquisition transaction costs incurred in the year ended December 30, 2017 were immaterial to our financial results.

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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% non-consolidating 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.

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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 for this restructuring included $34.9 million pre-tax, which was recorded in fiscal 2015, and $45.9 million pre-tax, which was 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 did not 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 2017, 2016 and 2015 fiscal years and the remaining accrued balance of restructuring costs as of December 30, 2017, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:

Facility
SeveranceClosing
CostsCostsOtherTotal
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
Provision ............................................................................................................................................................................----
Payments and other adjustments .............................................................................................................................................(19,136)(1,139)(871)(21,146)
Balance, December 30, 2017 ....................................................................................................................................................$3,218$1,315$24$4,557

The following table shows, by reportable segment, the amounts expensed and paid for restructuring costs that were incurred during our 2017, 2016 and 2015 fiscal years and the remaining accrued balance of restructuring costs as of December 30, 2017:

Technology and
Health CareValue-Added
DistributionServicesTotal
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
Provision ............................................................................................................................................................................---
Payments and other adjustments .............................................................................................................................................(20,681)(465)(21,146)
Balance, December 30, 2017 ....................................................................................................................................................$4,557$-$4,557

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 30,December 31,December 26,
201720162015
Basic ........................................................................................................................................................................................156,787161,641165,687
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units .................................................................................................................1,4212,0822,563
Diluted ..................................................................................................................................................................................158,208163,723168,250

Note 12 – Income Taxes

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

Years ended
December 30,December 31,December 26,
201720162015
Domestic .......................................................................................................................................................................................$649,657$625,792$591,320
Foreign .........................................................................................................................................................................................173,191130,043129,438
Total .......................................................................................................................................................................................$822,848$755,835$720,758

The provisions for income taxes were as follows:

Years ended
December 30,December 31,December 26,
201720162015
Current income tax expense:
U.S. Federal ...........................................................................................................................................................................$283,417$185,438$162,948
State and local ........................................................................................................................................................................28,52028,22929,580
Foreign .................................................................................................................................................................................50,08441,35725,104
Total current ......................................................................................................................................................................362,021255,024217,632
Deferred income tax expense (benefit):
U.S. Federal ...........................................................................................................................................................................13,686(18,090)(3,381)
State and local ........................................................................................................................................................................856(4,809)992
Foreign .................................................................................................................................................................................(14,057)(14,167)(3,852)
Total deferred ....................................................................................................................................................................485(37,066)(6,241)
Total provision ..............................................................................................................................................................$362,506$217,958$211,391

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 30,December 31,
20172016
Non-current deferred income tax asset (liability):
Inventory, premium coupon redemptions and accounts receivable
valuation allowances .............................................................................................................................................23,71529,422
Uniform capitalization adjustments to inventories ...............................................................................................................6,59110,632
Property and equipment .................................................................................................................................................(13,777)(15,882)
Stock-based compensation .............................................................................................................................................22,52541,677
Intangibles amortization .................................................................................................................................................(132,280)(142,678)
Other non-current asset (liability) ....................................................................................................................................36,26923,836
Net operating losses and other carryforwards ....................................................................................................................48,71144,493
Total non-current deferred tax liability .......................................................................................................................(8,246)(8,500)
Valuation allowance for non-current deferred tax assets (1) .........................................................................................(31,223)(26,403)
Net deferred income tax liability (2)...........................................................................................................................................$(39,469)$(34,903)
(1)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.”
(2)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.

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.

As of December 30, 2017, we had foreign net operating loss carryforwards of $9.1 million, which can be utilized against future foreign income through December 31, 2025. Additionally, as of December 30, 2017, there were foreign net operating loss carryforwards of $156.4 million that have an indefinite life.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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

Years ended
December 30,December 31,December 26,
201720162015
Income tax provision at federal statutory rate ..................................................................................................................................$287,996$264,542$252,265
State income tax provision, net of federal income tax effect .................................................................................................................12,45711,23614,627
Foreign income tax provision .......................................................................................................................................................(24,433)(18,036)(25,942)
Pass through noncontrolling interest .............................................................................................................................................(11,623)(13,083)(12,463)
Valuation allowance ...................................................................................................................................................................1,0081,472(5,006)
Unrecognized tax benefits and audit settlements...............................................................................................................................3,8993,06613,867
Interest expense related to loans ...................................................................................................................................................(18,717)(21,737)(22,415)
Excess tax benefits related to stock compensation ............................................................................................................................(17,387)--
Transition tax on deemed repatriation of foreign earnings ..................................................................................................................140,000--
Revaluation of deferred tax assets and liabilities ...............................................................................................................................2,953--
Other ......................................................................................................................................................................................(13,647)(9,502)(3,542)
Total income tax provision ..................................................................................................................................................$362,506$217,958$211,391

For the year ended December 30, 2017, our effective tax rate was 44.1% compared to 28.8% for the prior year period. Our effective tax rate was primarily impacted by the Tax Cuts and Jobs Act (“the Tax Act”). Our effective tax rate was favorably impacted by the adoption of ASU 2016-09, Accounting for Stock Compensation, as well as savings from implementation of tax planning initiatives and higher income from lower tax jurisdictions. 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.

On December 22, 2017, the U.S. government passed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act is comprehensive tax legislation that implements complex changes to the U.S. tax code including, but not limited to, the reduction of the corporate tax rate from 35% to 21%, modification of accelerated depreciation, the repeal of the domestic manufacturing deduction and changes to the limitations of the deductibility of interest. Additionally, the Tax Act moves from a global tax regime to a modified territorial regime, which requires U.S. companies to pay a mandatory one-time transition tax on historical offshore earnings that have not been repatriated to the U.S. The transition tax is payable over eight years.

Due to the complexities of the Tax Act, On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that allows the company to record a provisional amount for any income tax effects of the Tax Act in accordance with ASC 740, to the extent that a reasonable estimate can be made. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.

We have recorded provisional amounts for any items that could be reasonably estimated at this time. This includes the one-time transition tax that we have estimated to be $140.0 million. Within our consolidated balance sheets, $27.4 million is included in “Accrued taxes” and $112.6 million is included in “Other liabilities”. The U.S. deferred tax assets and liabilities were revalued due to the lower enacted federal income tax rate, of 21%, that was effective January 1, 2018. The Company accrued a net deferred tax expense of $3.0 million attributable to the revaluation. In the aggregate, for the quarter ended December 30, 2017, these Tax Act modifications resulted in a one-time tax expense of approximately $143.0 million. Absent the effects of the transition tax and the revaluation of deferred tax assets and liabilities, our effective tax rate for the year ended December 30, 2017 would have been 26.7% as compared to our actual effective tax rate of 44.1%.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The Tax Act also includes provisions to tax global intangible low-taxed income (“GILTI”) and a base erosion and anti-abuse tax (“BEAT”) that imposes tax on certain foreign related-party payments. The Company is subject to the GILTI and BEAT provisions which are effective January 1, 2018. The Company is in the process of assessing the effects of these provisions for 2018.

The ultimate impacts of the Tax Act may differ from the estimate above, possibly materially, due to additional guidance from the U.S. Department of Treasury, updates or changes in the Company’s assumptions, revision of accounting standards for income taxes or related interpretations and future information that may become available. We currently anticipate finalizing and recording any resulting adjustments by the quarter ended September 29, 2018. If the information necessary to finalize and record the related tax impacts are available prior to the quarter ended September 29, 2018, we will book these impacts accordingly.

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 28.8%. 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 foreign taxes on undistributed earnings of foreign subsidiaries, because we are permanently reinvested. As of December 30, 2017, the cumulative amount of reinvested earnings was approximately $1.4 billion. It is not practicable to determine the unrecognized deferred income tax liability related to investments in our foreign subsidiaries.

ASC Topic 740 prescribes 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 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 30, 2017 was approximately $105.2 million, of which $79.2 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 and included in “Other liabilities”, were approximately $14.2 million and $0, respectively, as of December 30, 2017.

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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. Additionally, 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 which resulted in a partial settlement during the quarter ended December 30, 2017. We do not expect this to have a material 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 30,December 31,December 26,
201720162015
Balance, beginning of period .................................................................................................................................$90,400$77,600$65,800
Additions based on current year tax positions ...........................................................................................................8,5007,30010,400
Additions based on prior year tax positions ..............................................................................................................6,10020,40019,600
Reductions based on prior year tax positions ............................................................................................................(800)(900)(10,500)
Reductions resulting from settlements with taxing authorities .......................................................................................(10,500)(9,700)(7,600)
Reductions resulting from lapse in statutes of limitations .............................................................................................(2,800)(4,300)(100)
Balance, end of period ..........................................................................................................................................$90,900$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.

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 1.2% of our net sales in 2017 or 2016. With respect to our sources of supply, our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 34% and 5%, respectively, of our aggregate purchases in 2017 and approximately 34% and 6%, respectively, of our aggregate purchases in 2016.

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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 credit risk. 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 counterparties, 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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 alternate-care settings and other institutions. Our global dental, animal health and medical groups serve practitioners in 34 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 30,December 31,December 26,
201720162015
Net Sales:
Health care distribution (1):
Dental ......................................................................................................................................................................................$6,048,813$5,555,299$5,276,407
Animal health ............................................................................................................................................................................3,476,6353,253,0952,921,624
Medical ....................................................................................................................................................................................2,497,9942,337,6612,072,915
Total health care distribution ...................................................................................................................................................12,023,44211,146,05510,270,946
Technology and value-added services (2)............................................................................................................................................438,101425,613358,773
Total .......................................................................................................................................................................................$12,461,543$11,571,668$10,629,719
(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 30,December 31,December 26,
201720162015
Operating Income:
Health care distribution ....................................................................................................................................................................$728,520$652,106$626,574
Technology and value-added services .................................................................................................................................................130,849119,468107,398
Total .......................................................................................................................................................................................$859,369$771,574$733,972
Income before taxes and equity in earnings of affiliates:
Health care distribution ....................................................................................................................................................................$696,453$640,184$617,582
Technology and value-added services .................................................................................................................................................126,395115,651103,176
Total .......................................................................................................................................................................................$822,848$755,835$720,758
Depreciation and Amortization:
Health care distribution ....................................................................................................................................................................$168,186$146,276$141,184
Technology and value-added services .................................................................................................................................................24,88623,50417,943
Total .......................................................................................................................................................................................$193,072$169,780$159,127
Income Tax Expense:
Health care distribution ....................................................................................................................................................................$325,302$185,571$180,133
Technology and value-added services .................................................................................................................................................37,20432,38731,258
Total .......................................................................................................................................................................................$362,506$217,958$211,391
Interest Income:
Health care distribution ....................................................................................................................................................................$17,318$13,086$12,833
Technology and value-added services .................................................................................................................................................235189102
Total .......................................................................................................................................................................................$17,553$13,275$12,935
Interest Expense:
Health care distribution ....................................................................................................................................................................$53,607$31,845$25,926
Technology and value-added services .................................................................................................................................................474882
Total .......................................................................................................................................................................................$53,654$31,893$26,008
Purchases of Fixed Assets:
Health care distribution ....................................................................................................................................................................$76,449$66,611$68,235
Technology and value-added services .................................................................................................................................................5,0523,5683,449
Total .......................................................................................................................................................................................$81,501$70,179$71,684
As of
December 30,December 31,December 26,
201720162015
Total Assets:
Health care distribution ....................................................................................................................................................................$7,345,418$6,324,735$6,159,285
Technology and value-added services .................................................................................................................................................465,817435,661375,455
Total .......................................................................................................................................................................................$7,811,235$6,760,396$6,534,740

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 30, 2017. 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.

201720162015
Net SalesLong-Lived AssetsNet SalesLong-Lived AssetsNet SalesLong-Lived Assets
United States ............................................................................................................................................................................$7,904,698$2,000,624$7,536,897$1,803,689$6,798,847$1,739,546
Other ......................................................................................................................................................................................4,556,8451,345,3494,034,7711,171,1373,830,8721,079,494
Consolidated total ................................................................................................................................................................$12,461,543$3,345,973$11,571,668$2,974,826$10,629,719$2,819,040

Note 16 – Employee Benefit Plans

Stock-based Compensation

Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $42.3 million ($23.7 million after-tax), $58.2 million ($41.4 million after-tax) and $44.6 million ($31.5 million after-tax) for the years ended December 30, 2017, December 31, 2016 and December 26, 2015.

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 $0.0 million, $(0.5) million and $2.2 million of benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities for the years ended December 30, 2017, December 31, 2016 and December 26, 2015.

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 30, 2017, there were 62,458 shares authorized and 7,426 shares available to be granted under the 2013 Stock Incentive Plan and 1,800 shares authorized and 270 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, including, without limitation, 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.

During the first quarter of 2017, we adopted the provisions of ASU 2016-09 which requires that all excess tax benefits and tax deficiencies resulting from the difference between the deduction for tax purposes and the stock-based compensation cost recognized for financial reporting purposes be included as a component of income tax expense as of January 1, 2017. Prior to the implementation of ASU 2016-09, 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 or in the income statement if there were no accumulated excess tax benefits.

Stock-based compensation grants for the three years ended December 30, 2017 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 30, 2017, 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 $0.0 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 $85.43, $83.90 and $70.40 per share during the years ended December 30, 2017, December 31, 2016 and December 26, 2015.

Total unrecognized compensation cost related to non-vested awards as of December 30, 2017 was $82.6 million, which is expected to be recognized over a weighted-average period of approximately 2.0 years.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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

Years Ended
December 30,December 31,December 26,
201720162015
WeightedWeightedWeighted
AverageAverageAverage
ExerciseExerciseExercise
SharesPriceSharesPriceSharesPrice
Outstanding at beginning of year ...............................................................................................................................................353$28.59769$28.001,367$26.71
Granted ................................................................................................................................................................................------
Exercised ..............................................................................................................................................................................(198)27.76(416)27.49(598)25.04
Forfeited ...............................................................................................................................................................................------
Outstanding at end of year .......................................................................................................................................................155$29.65353$28.59769$28.00
Options exercisable at end of year ..............................................................................................................................................155$29.65353$28.59769$28.00

During the years ended December 30, 2017, December 31, 2016 and December 26, 2015, we did not grant any stock options.

The following table represents the intrinsic values of:

As of
December 30,December 31,December 26,
201720162015
Stock options outstanding ................................................................................................................................$6,256$16,681$38,882
Stock options exercisable ..................................................................................................................................6,25616,68138,882

The total cash received as a result of stock option exercises for the years ended December 30, 2017, December 31, 2016 and December 26, 2015 was approximately $5.3 million, $11.4 million and $14.9 million. In connection with these exercises, the tax benefits that we realized for the years ended December 30, 2017, December 31, 2016 and December 26, 2015 were $0.0 million, $23.4 million and $20.8 million. We settle employee stock option exercises with newly issued common shares.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The total intrinsic value per share of restricted stock/units that vested was $83.16, $81.86 and $71.60 during the years ended December 30, 2017, December 31, 2016 and December 26, 2015. The following table summarizes the status of our non-vested restricted stock/units for the year ended December 30, 2017:

Time-Based Restricted Stock/Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period .......................................................................................................................................................1,339$60.54
Granted ............................................................................................................................................................................................29785.29
Vested .............................................................................................................................................................................................(376)47.19
Forfeited ..........................................................................................................................................................................................(27)74.47
Outstanding at end of period ................................................................................................................................................................1,233$70.28$69.88
Performance-Based Restricted Stock/Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period .......................................................................................................................................................1,849$54.05
Granted ............................................................................................................................................................................................25182.30
Vested .............................................................................................................................................................................................(852)54.91
Forfeited ..........................................................................................................................................................................................(22)78.89
Outstanding at end of period ................................................................................................................................................................1,226$60.81$69.88
.......................................................................................................................................................................................................

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 30, 2017, December 31, 2016 and December 26, 2015 amounted to $39.0 million, $33.9 million and $31.5 million.

Supplemental Executive Retirement Plan

We offer an unfunded, non-qualified supplemental executive retirement plan to eligible employees. This plan generally covers officers and certain highly-compensated employees after they have reached the maximum IRS allowed pre-tax 401(k) contribution limit. Our contributions to this plan are equal to the 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 30, 2017, December 31, 2016 and December 26, 2015 amounted to $0.6 million, $0.3 million and $1.5 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 30, 2017, December 31, 2016 and December 26, 2015 were approximately $5.0 million, $1.7 million and $0.1 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 30, 2017 were:

2018 .........................................................................................................................................................................................$94,038
2019 .........................................................................................................................................................................................75,235
2020 .........................................................................................................................................................................................56,226
2021 .........................................................................................................................................................................................41,751
2022 .........................................................................................................................................................................................26,695
Thereafter ..................................................................................................................................................................................64,674
Total minimum operating lease payments ...................................................................................................................................$358,619

Total rental expense for the years ended December 30, 2017, December 31, 2016 and December 26, 2015 was $84.8 million, $79.6 million and $76.0 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 30, 2017 were:

2018 .........................................................................................................................................................................................$1,678
2019 .........................................................................................................................................................................................1,000
2020 .........................................................................................................................................................................................426
2021 .........................................................................................................................................................................................331
2022 .........................................................................................................................................................................................297
Thereafter ..................................................................................................................................................................................1,799
Total minimum capital lease payments .............................................................................................................................................5,531
Less: Amount representing interest at 0.84% to 19.79%(438)
Total present value of minimum capital lease payments................................................................................................................$5,093

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 30, 2017 were:

2018 .........................................................................................................................................................................................$232,479
2019 .........................................................................................................................................................................................296,751
2020 .........................................................................................................................................................................................210,573
2021 .........................................................................................................................................................................................124,069
2022 .........................................................................................................................................................................................118,325
Thereafter ..................................................................................................................................................................................-
Total minimum inventory purchase commitment payments............................................................................................................$982,197

Litigation

Beginning in January 2016, class action complaints were filed against Patterson Companies, Inc. (“Patterson”), Benco Dental Supply Co. (“Benco”)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 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. (“Burkhart”) 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.

On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the United States District Court for the Eastern District of Texas, Civil Action No. 2:12-CV-00572-JRG, styled as an antitrust action under Section 1 of the Sherman Act, and the Texas Free Enterprise Antitrust Act. Archer alleges a conspiracy between Henry Schein, Inc., an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights. On October 1, 2012, Henry Schein filed a motion for an order: (i) compelling

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Archer to arbitrate its claims against Henry Schein; (2) staying all proceedings pending arbitration; and (3) joining the Danaher Defendants’ motion to arbitrate and stay. On May 28, 2013, the Magistrate Judge granted the motions to arbitrate and stayed proceedings pending arbitration. On June 10, 2013, Archer moved for reconsideration before the District Court judge. On December 7, 2016, the District Court Judge granted Archer’s motion for reconsideration and lifted the stay. Defendants appealed the District Court’s order. On December 21, 2017, the United States Court of Appeals for the Fifth Circuit affirmed the District Court’s order denying the motions to compel arbitration. On February 12, 2018, defendants filed an Application for Stay of Proceedings in the District Court in the Supreme Court of the United States, seeking to stay proceedings in the District Court pending a decision on defendants’ forthcoming petition for writ of certiorari.

On August 1, 2017, Archer filed an amended complaint, adding Patterson and Benco as defendants, and alleging that Henry Schein, Inc., Patterson, Benco and Burkhart conspired to fix prices and refused to compete with each other for sales of dental equipment to dental professionals and agreed to enlist their common suppliers, the Danaher Defendants, to join a price-fixing conspiracy and boycott by reducing the distribution territory of, and eventually terminating, their price-cutting competing distributor Archer. Archer seeks injunctive relief, and damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally.

On October 30, 2017, Archer filed a second amended complaint under seal, to add additional allegations that it believes support its claims. The named parties and causes of action are the same as the August 1, 2017 amended complaint. Trial is currently scheduled for May 2018. We intend to defend ourselves vigorously against this action.

On August 17, 2017, IQ Dental Supply, Inc. (“IQ Dental”) filed a complaint in the United States District Court for the Eastern District of New York, entitled IQ Dental Supply, Inc. v. Henry Schein, Inc., Patterson Companies, Inc. and Benco Dental Supply Company, Case No. 2:17-cv-4834. Plaintiff alleges that it is a distributor of dental supplies and equipment, and sells dental products through an online dental distribution platform operated by SourceOne Dental (“SourceOne”). SourceOne had previously brought an antitrust lawsuit against the Company, Patterson and Benco which the Company settled in the second quarter of 2017 and which is described in the Company’s prior filings with the SEC.

IQ Dental alleges, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne 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 and SourceOne. Plaintiff claims that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also makes pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and abetting. Plaintiff seeks injunctive relief, compensatory, treble and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees. On December 21, 2017, the District Court granted the defendants’ motion to dismiss. On January 19, 2018, IQ Dental appealed the District Court’s order. We intend to vigorously defend ourselves against this action.

On February 12, 2018, the United States Federal Trade Commission (“FTC”) filed a complaint against Benco Dental Supply Co., Henry Schein, Inc. and Patterson Companies, Inc. The FTC alleges, among other things, that defendants violated U.S. antitrust laws by conspiring, and entering into an agreement, to refuse to provide discounts to or otherwise serve buying groups representing dental practitioners. The FTC alleges that defendants conspired in violation of Section 5 of the FTC Act. The complaint seeks equitable relief only and does not seek monetary damages. We deny the allegation that we conspired to refuse to provide discounts to or otherwise serve dental buying groups and intend to defend ourselves vigorously against this action. The Company believes this matter will not have a material adverse effect on our financial condition or results of operations.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 30, 2017, 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 2018 through 2022 and thereafter of approximately $18.7 million, $4.5 million, $1.5 million, $1.3 million and $0.1 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 2022. 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
April 1,July 1,September 30,December 30,
2017 (2)2017 (2)2017 (2)2017
Net sales .......................................................................................................................................................................................$2,922,948$3,059,458$3,161,083$3,318,054
Gross profit ....................................................................................................................................................................................822,920839,173836,054900,956
Operating income ............................................................................................................................................................................193,968210,662213,548241,191
Net income ....................................................................................................................................................................................150,253149,582150,9488,510
Amounts attributable to
Henry Schein, Inc.:
Net income (loss).............................................................................................................................................................................140,748136,055138,031(8,535)
Earnings (loss) per share attributable to
Henry Schein, Inc.:
Basic .......................................................................................................................................................................................$0.89$0.86$0.88$(0.06)
Diluted ....................................................................................................................................................................................0.880.860.87(0.06)
Quarters ended
March 26,June 25,September 24,December 31,
2016 (1) (2)2016 (1) (2)2016 (1) (2)2016 (1) (2)
Net sales .......................................................................................................................................................................................$2,712,956$2,872,630$2,865,148$3,120,934
Gross profit ....................................................................................................................................................................................777,842801,469787,675859,487
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 .......................................................................................................................................................................................$0.70$0.74$0.83$0.88
Diluted ....................................................................................................................................................................................0.690.730.820.86
(1)See Note 10 - "Plans of Restructuring" for details of the restructuring costs incurred during the fiscal year of 2016.
(2)See Item 5 - "Purchases of Equity Securities by the Issuer" for details of the 2-for-1 split of our common stock, during the third quarter of 2017.

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;

  • changes in accounting principles; and

  • litigation or regulatory judgements, expenses or settlements

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 30,December 31,December 26,
201720162015
Interest .................................................................................................................................................................................$49,311$29,391$24,033
Income taxes ..........................................................................................................................................................................221,832205,196180,897

There was approximately $0.4 million, $63.8 million and $5.0 million of debt assumed as a part of the acquisitions for the years ended December 30, 2017, December 31, 2016 and December 26, 2015, 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, Kruuse and Dental Trey.

For the years ended December 30, 2017, December 31, 2016 and December 26, 2015, we had $(1.5) million, $(1.0) million and $2.1 million of non-cash net unrealized gains (losses) related to foreign currency hedging activities, respectively. During the year ended December 30, 2017, as part of business acquisitions, we increased our ownerships in subsidiaries through non-cash transactions of $17.6 million.

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