Item 8. Financial Statements and Supplementary Data

274K characters. Original on sec.gov · Markdown

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 29, 2018 and December 30, 2017 ...................................................................................79
Statements of Income for the years ended December 29, 2018,
December 30, 2017 and December 31, 2016 ......................................................................................................80
Statements of Comprehensive Income for the years ended December 29, 2018,
December 30, 2017 and December 31, 2016 ......................................................................................................81
Statements of Changes in Stockholders’ Equity for the years ended
December 29, 2018, December 30, 2017 and December 31, 2016 ..........................................................................82
Statements of Cash Flows for the years ended December 29, 2018,
December 30, 2017 and December 31, 2016 ......................................................................................................83
Notes to Consolidated Financial Statements ................................................................................................................84
Note 1 – Significant Accounting Policies ..............................................................................................................84
Note 2 - Property and Equipment, Net ................................................................................................................96
Note 3 - Goodwill and Other Intangibles, Net .......................................................................................................97
Note 4 - Investments and Other ........................................................................................................................98
Note 5 - Debt ..................................................................................................................................................98
Note 6 - Redeemable Noncontrolling Interests ......................................................................................................101
Note 7 - Comprehensive Income .......................................................................................................................102
Note 8 - Fair Value Measurements .....................................................................................................................104
Note 9 - Business Acquisitions ..........................................................................................................................106
Note 10 - Plans of Restructuring .........................................................................................................................109
Note 11 - Earnings Per Share .............................................................................................................................110
Note 12 - Income Taxes ...................................................................................................................................111
Note 13 - Concentrations of Risk ......................................................................................................................116
Note 14 - Derivatives and Hedging Activities ........................................................................................................116
Note 15 - Revenue from Contracts with Customers ...............................................................................................................................117
Note 16 - Segment and Geographic Data .............................................................................................................118
Note 17 - Employee Benefit Plans ......................................................................................................................120
Note 18 - Commitments and Contingencies .........................................................................................................124
Note 19 - Quarterly Information (Unaudited) .......................................................................................................130
Note 20 - Supplemental Cash Flow Information ...................................................................................................131
Note 21 – Subsequent Event........................................................................................................................................................................131
Schedule II - Valuation and Qualifying Accounts for the years ended December 29, 2018,
December 30, 2017 and December 31, 2016 ................................................................................................................147
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 29, 2018 and December 30, 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 29, 2018, 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 29, 2018 and December 30, 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2018**,** 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 29, 2018, 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 20, 2019 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 20, 2019

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

Table of ContentsDecember 29,December 30,
20182017
ASSETS
Current assets:
Cash and cash equivalents ..............................................................................................................................................................$80,209$174,658
Accounts receivable, net of reserves of $60,533 and $53,832 ................................................................................................................1,603,7111,522,807
Inventories, net .............................................................................................................................................................................1,970,7421,933,803
Prepaid expenses and other .............................................................................................................................................................520,558454,752
Total current assets ................................................................................................................................................................4,175,2204,086,020
Property and equipment, net ................................................................................................................................................................382,398375,001
Goodwill ..........................................................................................................................................................................................2,820,2952,301,331
Other intangibles, net ..........................................................................................................................................................................584,244669,641
Investments and other ........................................................................................................................................................................538,370432,002
Total assets ..........................................................................................................................................................................$8,500,527$7,863,995
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..........................................................................................................................................................................$1,227,209$1,153,012
Bank credit lines ............................................................................................................................................................................951,458741,653
Current maturities of long-term debt .................................................................................................................................................8,95516,659
Accrued expenses:
Payroll and related .....................................................................................................................................................................279,764272,998
Taxes ......................................................................................................................................................................................172,165188,873
Other .......................................................................................................................................................................................579,276455,780
Total current liabilities ............................................................................................................................................................3,218,8272,828,975
Long-term debt, net ...........................................................................................................................................................................1,003,873907,756
Deferred income taxes ........................................................................................................................................................................31,57050,431
Other liabilities ..................................................................................................................................................................................392,313420,285
Total liabilities ......................................................................................................................................................................4,646,5834,207,447
Redeemable noncontrolling interests .....................................................................................................................................................312,156832,138
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none outstanding .......................................................................................................................................................................--
Common stock, $.01 par value, 480,000,000 shares authorized,
151,401,668 outstanding on December 29, 2018 and 240,000,000 shares authorized,
153,690,146 outstanding on December 30, 2017 .............................................................................................................................1,5141,537
Retained earnings ..........................................................................................................................................................................3,208,5892,940,029
Accumulated other comprehensive loss .............................................................................................................................................(248,771)(130,067)
Total Henry Schein, Inc. stockholders' equity ..................................................................................................................................2,961,3322,811,499
Noncontrolling interests ..................................................................................................................................................................580,45612,911
Total stockholders' equity .......................................................................................................................................................3,541,7882,824,410
Total liabilities, redeemable noncontrolling interests and stockholders' equity ........................................................................................$8,500,527$7,863,995

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

Table of Contents
Years Ended
December 29,December 30,December 31,
201820172016
Net sales ......................................................................................................................................................................................$13,201,995$12,461,543$11,571,668
Cost of sales .................................................................................................................................................................................9,606,9119,062,4408,345,195
Gross profit .........................................................................................................................................................................3,595,0843,399,1033,226,473
Operating expenses:
Selling, general and administrative ................................................................................................................................................2,701,8762,534,4092,409,008
Litigation settlements..................................................................................................................................................................38,4885,325-
Transaction costs related to Animal Health spin-off.........................................................................................................................38,756--
Restructuring costs .....................................................................................................................................................................62,912-45,891
Operating income .................................................................................................................................................................753,052859,369771,574
Other income (expense):
Interest income .........................................................................................................................................................................21,23617,55313,275
Interest expense ........................................................................................................................................................................(78,786)(53,654)(31,893)
Other, net .................................................................................................................................................................................(154)(420)2,879
Income before taxes and equity in earnings of affiliates ..............................................................................................................695,348822,848755,835
Income taxes ................................................................................................................................................................................(155,492)(362,506)(217,958)
Equity in earnings of affiliates .........................................................................................................................................................22,27016,58718,518
Loss on sale of equity investment .....................................................................................................................................................-(17,636)-
Net income ...................................................................................................................................................................................562,126459,293556,395
Less: Net income attributable to noncontrolling interests ...................................................................................................................(26,245)(52,994)(49,617)
Net income attributable to Henry Schein, Inc. .....................................................................................................................................$535,881$406,299$506,778
Earnings per share attributable to Henry Schein, Inc.:
Basic .......................................................................................................................................................................................$3.51$2.59$3.14
Diluted ....................................................................................................................................................................................$3.49$2.57$3.10
Weighted-average common shares outstanding:
Basic .......................................................................................................................................................................................152,656156,787161,641
Diluted ....................................................................................................................................................................................153,707158,208163,723

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Table of Contents
Years Ended
December 29,December 30,December 31,
201820172016
Net income ...............................................................................................................................................................................$562,126$459,293$556,395
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) ......................................................................................................................................(136,356)191,886(98,402)
Unrealized gain (loss) from foreign currency hedging activities .......................................................................................................626(729)(992)
Unrealized investment gain (loss)..............................................................................................................................................(3)(3)2
Pension adjustment gain (loss) .................................................................................................................................................3,0333,933(399)
Other comprehensive income (loss), net of tax ................................................................................................................................(132,700)195,087(99,791)
Comprehensive income ..............................................................................................................................................................429,426654,380456,604
Comprehensive income attributable to noncontrolling interests:
Net income .......................................................................................................................................................................(26,245)(52,994)(49,617)
Foreign currency translation (gain) loss ..................................................................................................................................13,996(8,113)2,689
Comprehensive income attributable to noncontrolling interests ..............................................................................................(12,249)(61,107)(46,928)
Comprehensive income attributable to Henry Schein, Inc. .................................................................................................................$417,177$593,273$409,676

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands, except share and per share data)

Table of ContentsAccumulated
Common StockAdditionalOtherTotal
$.01 Par ValuePaid-inRetainedComprehensiveNoncontrollingStockholders'
SharesAmountCapitalEarningsIncome (Loss)InterestsEquity
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 $23,392415,832434,792---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 partnership................................................................................................................................
noncontrolling interests 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
Cumulative impact of adopting new accounting standards---2,594--2,594
Net income (excluding $21,848 attributable to Redeemable
noncontrolling interests) ..............................................................................................................................................................---535,881-4,397540,278
Foreign currency translation loss (excluding $13,031
attributable to Redeemable noncontrolling interests) ...................................................................................................................................----(122,360)(965)(123,325)
Unrealized gain from foreign currency hedging activities,
net of tax of $396.....................................................................................................................................................................----626-626
Unrealized investment loss, net of tax of $0...............................................................................................................................................----(3)-(3)
Pension adjustment gain, net of tax of $1,179..............................................................................................................................................----3,033-3,033
Dividends paid .........................................................................................................................................................................-----(656)(656)
Other adjustments .......................................................................................................................................................................--(19)--713694
Purchase of noncontrolling interests ......................................................................................................................................................-----(214)(214)
Change in fair value of redeemable securities ..............................................................................................................................................--(148,919)---(148,919)
Initial noncontrolling interests and adjustments related to
business acquisitions .................................................................................................................................................................-----564,270564,270
Repurchase and retirement of common stock ..............................................................................................................................................(2,518,387)(25)(36,206)(163,769)--(200,000)
Stock issued upon exercise of stock options...............................................................................................................................................153,51613,075---3,076
Stock-based compensation expense ......................................................................................................................................................340,794436,236---36,240
Shares withheld for payroll taxes .........................................................................................................................................................(267,772)(3)(18,140)---(18,143)
Settlement of stock-based compensation awards ..........................................................................................................................................3,371-(727)---(727)
Deferred tax benefit arising from acquisition of
noncontrolling interest in partnership..................................................................................................................................................--58,554---58,554
Transfer of charges in excess of capital ....................................................................................................................................................--106,146(106,146)---
Balance, December 29, 2018 .............................................................................................................................................................151,401,668$1,514$-$3,208,589$(248,771)$580,456$3,541,788

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Table of ContentsYears Ended
December 29,December 30,December 31,
201820172016
Cash flows from operating activities:
Net income .......................................................................................................................................................................................$562,126$459,293$556,395
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .....................................................................................................................................................207,560193,072169,780
Loss on sale of equity investment .................................................................................................................................................-17,636-
Stock-based compensation expense ..............................................................................................................................................36,24042,29458,246
Provision for losses on trade and other accounts receivable ...............................................................................................................15,1059,3702,647
Provision for (benefit from) deferred income taxes ..........................................................................................................................(41,213)485(37,066)
Equity in earnings of affiliates .....................................................................................................................................................(22,270)(16,587)(18,518)
Distributions from equity affiliates ................................................................................................................................................21,31123,15720,351
Changes in unrecognized tax benefits ............................................................................................................................................(650)(2,318)6,013
Provision for (benefit from) transition tax ......................................................................................................................................(10,000)140,000-
Other .......................................................................................................................................................................................(807)10,92112,595
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ...............................................................................................................................................................(147,499)(160,266)(7,655)
Inventories ...........................................................................................................................................................................(84,784)(175,059)(104,787)
Other current assets ................................................................................................................................................................(92,059)(85,759)(22,657)
Accounts payable and accrued expenses ...................................................................................................................................241,64689,2767,232
Net cash provided by operating activities ...............................................................................................................................................684,706545,515642,576
Cash flows from investing activities:
Purchases of fixed assets ....................................................................................................................................................................(90,637)(81,501)(70,179)
Payments related to equity investments and business
acquisitions, net of cash acquired .....................................................................................................................................................(61,570)(288,673)(228,575)
Proceeds from sale of equity investment ................................................................................................................................................1,00034,048-
Repayments from (borrowings for) loan to affiliate .................................................................................................................................(25,700)6,700(4,500)
Other ...............................................................................................................................................................................................(16,047)(12,850)(13,168)
Net cash used in investing activities .......................................................................................................................................................(192,954)(342,276)(316,422)
Cash flows from financing activities:
Proceeds from bank borrowings ...........................................................................................................................................................210,741302,94198,748
Proceeds from issuance of long-term debt ..............................................................................................................................................115,000200,440260,799
Debt issuance costs ............................................................................................................................................................................(501)(1,990)(233)
Principal payments for long-term debt ...................................................................................................................................................(28,042)(60,050)(15,381)
Proceeds from issuance of stock upon exercise of stock options .................................................................................................................3,0765,26611,404
Payments for repurchases of common stock ..........................................................................................................................................(200,000)(450,000)(550,024)
Payments for taxes related to shares withheld for employee taxes...............................................................................................................(18,023)(44,832)(27,115)
Excess tax benefits related to stock-based compensation ..........................................................................................................................--(463)
Distributions to noncontrolling stockholders ............................................................................................................................................(17,515)(29,134)(32,350)
Acquisitions of noncontrolling interests in subsidiaries ..............................................................................................................................(668,512)(35,192)(72,729)
Net cash used in financing activities ......................................................................................................................................................(603,776)(112,551)(327,344)
Effect of exchange rate changes on cash and cash equivalents ..................................................................................................................17,57521,589(8,515)
Net change in cash and cash equivalents ................................................................................................................................................(94,449)112,277(9,705)
Cash and cash equivalents, beginning of period .......................................................................................................................................174,65862,38172,086
Cash and cash equivalents, end of period ...............................................................................................................................................$80,209$174,658$62,381

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, Singapore, 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.

We consolidate a Variable Interest Entity (“VIE”) where we hold a variable interest and are the primary beneficiary. The VIE is a trade accounts receivable securitization. We are the primary beneficiary because we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits. The results of operations and financial position of this VIE are included in our consolidated financial statements.

For the consolidated VIE, the trade accounts receivable transferred to the VIE are pledged as collateral to the related debt. The creditors have recourse to us for losses on these trade accounts receivable. For the years ended December 29, 2018 and December 30, 2017, trade accounts receivable that can only be used to settle obligations of this VIE were $422 million and $422 million, respectively, and the liabilities of the VIE where the creditors have recourse to us were $350 million and $350 million, respectively.

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 years ended December 29, 2018 and December 30, 2017 consisted of 52 weeks, and the year ended December 31, 2016 consisted of 53 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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Revenue Recognition

On December 31, 2017, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of the adoption date. Results for reporting periods beginning after December 30, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods. Our revenue recognition accounting policies applied prior to adoption of Topic 606 are outlined in the financial statements in our Annual Report on Form 10-K for the year ended December 30, 2017. The disclosures included herein reflect our accounting policies under Topic 606.

Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we do the following:

· identify the contract(s) with a customer;

· identify the performance obligations in the contract;

· determine the transaction price;

· allocate the transaction price to the performance obligations in the contract; and

· recognize revenue when, or as, the entity satisfies a performance obligation.

We generate revenue from the sale of dental, animal health and medical consumable products, equipment (Healthcare distribution revenues), software products and services and other sources (Technology and value-added services revenues). Provisions for discounts, rebates to customers, customer returns and other contra revenue adjustments are included in the transaction price at contract inception by estimating the most likely amount 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 at a point in time when control transfers to the customer. 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 control has transferred to the customer because we have no post-shipment obligations and this is when legal title and risks and rewards of ownership transfer to the customer and the point at which we have an enforceable right to payment.

Revenue derived from the sale of equipment is recognized when control transfers to the customer. This occurs when the equipment is delivered. 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. Our product generally carries standard warranty terms provided by the manufacturer, however, in instances where we provide warranty labor services, the warranty costs are accrued in accordance with ASC 460 “Guarantees”.

Revenue derived from the sale of software products is recognized when products are shipped to customers or made available electronically. 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 generally recognized over time using time elapsed as the input method that best depicts the transfer of control to the customer.

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. We apply the practical expedient to treat shipping and handling activities performed after the customer obtains control as fulfillment activities, rather than a separate performance obligation in the contract.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Sales, value-add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

Certain of our revenue is derived from bundled arrangements that include multiple distinct performance obligations which are accounted for separately. When we sell software products together with related services (i.e., training and technical support), we allocate revenue to software using the residual method, using an estimate of the standalone selling price to estimate the fair value of the undelivered elements. There are no cases where revenue is deferred due to a lack of a standalone selling price. Bundled 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 goods or services. If an observable selling price is not available (i.e., we do not sell the goods or services separately), we use one of the following techniques to estimate the standalone selling price: adjusted market approach; cost-plus approach; or the residual method. There is no specific hierarchy for the use of these methods, but the 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

See Note 15 for additional disclosures of disaggregated net sales and Note 16 for disclosures of net sales by segment and geographic data.

Contract Balances

Contract balances represent amounts presented in our consolidated balance sheet when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.

Accounts Receivable

Accounts receivable are generally recognized when heath care distribution and technology and value-added services revenues are recognized. 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. 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.

Contract Assets

Contract assets include amounts related to any conditional right to consideration for work completed but not billed as of the reporting date and generally represent amounts owed to us by customers, but not yet billed. Contract assets are transferred to accounts receivable when the right becomes unconditional. The contract assets primarily relate to our bundled arrangements for the sale of equipment and consumables and sales of term software licenses. Current contract assets are included in Prepaid expenses and other and the non-current contract assets are included in Investments and other within our consolidated balance sheet. Current and non-current contract asset balances as of December 29, 2018 and December 31, 2017 were not material.

Contract Liabilities

Contract liabilities are comprised of advance payments and upfront payments for service arrangements provided over time that are accounted for as deferred revenue amounts. Contract liabilities are transferred to revenue once the performance obligation has been satisfied. Current contract liabilities are included in Accrued expenses: Other and the non-current contract liabilities are included in Other liabilities within our consolidated

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

balance sheet. At December 31, 2017, the current portion of contract liabilities of $85.7 million was reported in Accrued expenses: Other, and $5.2 million related to non-current contract liabilities were reported in Other liabilities. During the year ended December 29, 2018, we recognized substantially all of the current contract liability amounts that were previously deferred at December 31, 2017. At December 29, 2018, the current and non-current portion of contract liabilities were $83.6 million and $5.3 million, respectively.

Deferred Commissions

Sales commissions earned by our sales force that relate to long term arrangements are capitalized as costs to obtain a contract when the costs incurred are incremental and are expected to be recovered. Deferred sales commissions are amortized over the estimated customer relationship period. We apply the practical expedient related to the capitalization of incremental costs of obtaining a contract, and recognize such costs as an expense when incurred if the amortization period of the assets that we would have recognized is one year or less.

Sales Returns

Sales returns are recognized as a reduction of revenue by the amount of expected returns and are recorded as refund liability within current liabilities. We estimate the amount of revenue expected to be reversed to calculate the sales return liability based on historical data for specific products, adjusted as necessary for new products. The allowance for returns is presented gross as a refund liability and we record an inventory asset (and a corresponding adjustment to cost of sales) for any goods or services that we expect to be returned.

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 $72.0 million and $83.6 million, primarily related to payments for inventory, were classified as accounts payable as of December 29, 2018 and December 30, 2017.

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 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 $102.1 million, $93.3 million and $84.0 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Advertising and Promotional Costs

We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses were $28.9 million, $15.7 million and $18.4 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016.

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.

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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. 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.

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.

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 rates; 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 29, 2018, December 30, 2017 and December 31, 2016, 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 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.

Noncontrolling Interests

Noncontrolling interests represent our less than 50% ownership interest in an acquired subsidiary. Our net income is reduced by the portion of the subsidiaries net income that is attributable to noncontrolling interests.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Goodwill and Other Indefinite-Lived Intangible Assets

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

For the years ended December 29, 2018 and December 30, 2017, and December 31, 2016 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 profits 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.

For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, the results of our goodwill and intangible impairment analysis did not result in any impairments.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 $87.3 million, $83.2 million and $79.4 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016.

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

InMay 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, Accounting Standards Codification (“ASC”) 606 (“Topic 606”). We adopted the provisions of this standard as of December 31, 2017, on a modified retrospective basis. We applied the requirements of the new standard only to contracts that were not completed as of the adoption date. We recorded an immaterial adjustment to the opening balance of retained earnings for the adoption of Topic 606. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The impact of the new standard on our consolidated statements of income, which we expect to be immaterial on an ongoing basis, is primarily related to software sales and sales commissions and is described as follows:

Software Sales

For software licenses sold together with post contract support (PCS), we previously deferred software revenue if it did not have vendor-specific evidence of fair value of the PCS. Under Topic 606, the concept of

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

vendor-specific objective evidence is eliminated and there are no cases where revenue is deferred due to a lack of standalone selling price. In addition, we previously recognized revenue from term licenses ratably over the contract term. Under Topic 606, such licenses represent a right to use intellectual property and therefore require upfront recognition. Furthermore, certain upfront fees related to service arrangements were previously deferred and recognized over the estimated customer life. Under Topic 606, the period over which we will recognize these fees is reduced, as the upfront fee represents additional contract price which will be allocated to the performance obligations in the contract and recognized as those performance obligations are satisfied, rather than being amortized over the estimated customer life. Based on the aforementioned changes, such software revenue will be recognized sooner than under the previous revenue recognition standard.

Sales Commissions

We previously recognized sales commissions as an expense when incurred. Under Topic 606, we defer such sales commissions as costs to obtain a contract when the costs are incremental and expected to be recovered. Deferred sales commissions are amortized over the estimated customer relationship period. We apply the practical expedient to expense, as incurred, commissions with an expected amortization period of one year or less.

The impact of adoption on our consolidated balance sheet and income statement was as follows:

As of
December 29, 2018
BalancesEffect of
AsWithout AdoptionChange
Balance SheetReportedof Topic 606Increase/(Decrease)
Assets:
Prepaid expenses and other ........................................................................................................................................$520,558$520,778$(220)
Investments and other ...............................................................................................................................................538,370535,8792,491
Liabilities:
Accrued expenses -Taxes............................................................................................................................................$172,165$171,809$356
Accrued expenses - Other ...........................................................................................................................................579,276581,138(1,862)
Deferred income taxes ...............................................................................................................................................31,57030,979591
Other liabilities (long-term) ..........................................................................................................................................392,313393,024(711)
Stockholders' equity:
Retained earnings .....................................................................................................................................................$3,208,589$3,204,548$4,041
Accumulated other comprehensive loss ........................................................................................................................$(248,771)$(248,627)$(144)

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Table of ContentsYear Ended
December 29, 2018
Balances WithoutEffect of
AdoptionChange
Statement of IncomeAs Reportedof Topic 606Increase/ (Decrease)
Net sales:
Dental .........................................................................................................................................................................................$6,348,945$6,348,945$-
Animal Health ..............................................................................................................................................................................3,682,6393,682,639-
Medical .......................................................................................................................................................................................2,661,1662,661,166-
Total healthcare distribution ........................................................................................................................................................$12,692,750$12,692,750$-
Technology and value-added services ...............................................................................................................................................509,245508,939306
Total .......................................................................................................................................................................................$13,201,995$13,201,689$306
Costs and expenses:
Cost of sales .................................................................................................................................................................................9,606,9119,606,911-
Selling, general and administrative ....................................................................................................................................................2,701,8762,702,552(676)
Income taxes.................................................................................................................................................................................(155,492)(155,347)145
Net income ...................................................................................................................................................................................$562,126$561,289$837

Additional information related to Topic 606 can be found below in “Critical Accounting Policies and Estimates” as well as in Note 15.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory” (“Topic 740”). Topic 740 requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period which the transfer occurs. Previously, companies were required to defer the income tax effects on intercompany transfer of assets until the asset has been sold to an outside party. On December 31, 2017, we adopted the guidance, which is effective for annual periods and related interim periods beginning after December 15, 2017 on a modified retrospective basis. As a result of the adoption of Topic 740, we have recorded an immaterial adjustment to the opening balance of retained earnings and a reduction to prepaid assets.

The cumulative effect of the changes made to our consolidated balance sheet as of December 31, 2017 related to Topic 606 and Topic 740 were as follows:

Balance at
December 30,AdjustmentsAdjustmentsBalance at
2017Due ToDue ToDecember 31,
(As Reported)Topic 606Topic 7402017
Assets:
Prepaid expenses and other ........................................................................................................................................$454,752$119$(610)$454,261
Investments and other ...............................................................................................................................................432,0021,133-433,135
Liabilities:
Accrued expenses - Taxes...........................................................................................................................................$188,873$437$-$189,310
Accrued expenses - Other ...........................................................................................................................................455,780(2,614)-453,166
Deferred income taxes ...............................................................................................................................................50,431471-50,902
Other liabilities (long-term) ..........................................................................................................................................420,285(246)-420,039
Stockholders' equity:
Retained earnings .....................................................................................................................................................$2,940,029$3,204$(610)$2,942,623

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current accounting principles generally accepted in the United States (“U.S. GAAP”), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. In August 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” which permits adoption of the guidance in ASU 2016-02 using either a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented or a transition method whereby companies could continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption rather than in the earliest period presented without adjusting historical financial statements.

We will use the modified retrospective transition approach in ASU No. 2018-11 and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption. We are currently finalizing the effects that the adoption of ASU 2016-02 will have on our consolidated financial statements, but anticipate that the new guidance will significantly impact our consolidated balance sheet as we will recognize right of use assets and lease liabilities for our operating leases. The new standard provides a number of optional practical expedients in transition. We expect to elect the package of practical expedients, which permits us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We do not expect that this accounting standard will have a material impact on our debt covenants. We also do not expect that the implementation of this standard will have a material impact on our results of operations. We are implementing a new lease accounting system and updating our processes in preparation for the adoption of the new standard.

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. 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 receivables loss activity and current known activity regarding our outstanding receivables, we do not expect that this ASU will have a material impact on our consolidated financial statements.

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 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. We do not expect that the requirements of ASU 2017-12 will have a material impact on our consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, "Treatment of Stranded Tax Effects in Accumulated Other Comprehensive Income Resulting From the Tax Cuts and Jobs Act of 2017 " which allows the reclassification from accumulated comprehensive income to retained earnings the income tax effects resulting from the Tax Act. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. We do not expect that the requirements of ASU 2018-02 will have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We do not expect that the requirements of ASU-2018-07 will have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We do not expect that the requirements of this ASU will have a material impact on our consolidated financial statements.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 2 – Property and Equipment, Net

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

December 29,December 30,
20182017
Land .......................................................................................................................................................................................$20,400$21,019
Buildings and permanent improvements ........................................................................................................................................144,407143,250
Leasehold improvements ............................................................................................................................................................115,993106,236
Machinery and warehouse equipment ...........................................................................................................................................150,672138,478
Furniture, fixtures and other .........................................................................................................................................................151,999149,136
Computer equipment and software ...............................................................................................................................................463,240432,379
1,046,711990,498
Less accumulated depreciation ....................................................................................................................................................(664,313)(615,497)
Property and equipment, net .................................................................................................................................................$382,398$375,001
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 29, 2018, December 30, 2017 and December 31, 2016 was $73.5 million, $67.3 million and $63.8 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 29, 2018 and December 30, 2017 were as follows:

Health Care DistributionTechnology and Value-Added ServicesTotal
Balance as of December 31, 2016 ...............................................................................................................................................$1,831,535$188,205$2,019,740
Adjustments to goodwill:
Acquisitions .....................................................................................................................................................................216,1448,736224,880
Foreign currency translation ...............................................................................................................................................48,9157,79656,711
Balance as of December 30, 2017 ...............................................................................................................................................2,096,594204,7372,301,331
Adjustments to goodwill:
Acquisitions .....................................................................................................................................................................40,437530,012570,449
Foreign currency translation ...............................................................................................................................................(46,590)(4,895)(51,485)
Balance as of December 29, 2018 ...............................................................................................................................................$2,090,441$729,854$2,820,295

Other intangible assets consisted of the following:

December 29, 2018December 30, 2017
AccumulatedAccumulated
CostAmortizationNetCostAmortizationNet
Non-compete agreements .................................................................................................................................................................$38,384$(9,224)$29,160$41,758$(9,539)$32,219
Trademarks / trade names - definite lived ...............................................................................................................................................113,286(59,038)54,248151,918(76,497)75,421
Customer relationships and lists .........................................................................................................................................................847,561(409,301)438,260851,339(355,327)496,012
Product Development......................................................................................................................................................................79,363(37,373)41,99077,958(37,105)40,853
Other ........................................................................................................................................................................................64,913(44,327)20,58658,582(33,446)25,136
Total ....................................................................................................................................................................................$1,143,507$(559,263)$584,244$1,181,555$(511,914)$669,641

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 5.2 years as of December 29, 2018.

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 8.2 years as of December 29, 2018. 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 29, 2018. Product development is a definite-lived intangible asset that is amortized on a straight-line basis over a weighted-average period of approximately 10.1 years as of December 29, 2018.

Amortization expense related to definite-lived intangible assets for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 was $123.3 million, $116.5 million and $98.2 million. The annual

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

amortization expense expected to be recorded for existing intangibles assets for the years 2019 through 2023 is $115.7 million, $106.5 million, $93.7 million, $69.2 million and $59.6 million.

Note 4 – Investments and Other

Investments and other consisted of the following:

December 29,December 30,
20182017
Investment in unconsolidated affiliates .................................................................................................................................................$283,091$268,364
Non-current deferred foreign, state and local income taxes ........................................................................................................................83,24210,962
Notes receivable (1) ...........................................................................................................................................................................66,65235,015
Capitalized costs for internally generated software for resale .....................................................................................................................40,07035,359
Distribution rights and exclusivity agreements, net of amortization .............................................................................................................5821,378
Acquisition related indemnification .......................................................................................................................................................47,82865,558
Other long-term assets ........................................................................................................................................................................16,90515,366
Total .......................................................................................................................................................................................$538,370$432,002
(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 29, 2018, December 30, 2017 and December 31, 2016 was $10.7 million, $9.3 million and $7.8 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. On June 29, 2018, we amended the Credit Agreement to, among other things, (i) permit the consummation of the Animal Health Spin-off (See Note 21), (ii) provide for swing-line commitments in the amount of $75 million, and (iii) provide for the designation of subsidiary borrowers under the facility. 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 29, 2018 and December 30, 2017, the borrowings outstanding on this revolving credit facility were $175.0 million and $320.0 million, respectively. As of December 29, 2018 and December 30, 2017, there were $11.2 million and $11.3 million of letters of credit, respectively, provided to third parties under this credit facility.

As of December 29, 2018 and December 30, 2017, we had various other short-term bank credit lines available, of which $376.5 million and $421.7 million, respectively, were outstanding. At December 29, 2018 and December 30, 2017, borrowings under all of our credit lines had a weighted average interest rate of 3.30% and 2.27%, respectively.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Committed Loan Associated with Animal Health Spin-off

On May 21, 2018, we obtained a $400 million committed loan which matured on the earlier of (i) March 31, 2019 and (ii) the consummation of the Animal Health Spin-off. The proceeds of this loan were used, among other things, to fund our purchase of all of the equity interests in Butler Animal Health Holding Company, LLC (“BAHHC”) directly or indirectly owned by Darby Group Companies, Inc. (“Darby”) and certain other sellers pursuant to the terms of that certain Amendment to Put Rights Agreements, dated as of April 20, 2018, by and among us, Darby, BAHHC and the individual sellers party thereto for an aggregate purchase price of $365 million. As of December 29, 2018, the balance outstanding on this loan was $400 million and is included within the “Bank credit lines” caption within our consolidated balance sheet. At December 29, 2018, the interest rate on this loan was 3.38%. Concurrent with the completion of the Animal Health Spin-off on February 7, 2019, we re-paid the balance of this loan.

Long-term debt

Long-term debt consisted of the following:

December 29,December 30,
20182017
Private placement facilities ..........................................................................................................................................................$628,189$535,295
U.S. trade accounts receivable securitization ...................................................................................................................................350,000350,000
Various collateralized and uncollateralized loans payable with interest,
in varying installments through 2023 at interest rates
ranging from 2.61% to 5.01% at December 29, 2018 and
ranging from 2.56% to 12.90% at December 30, 2017..............................................................................................................29,49134,027
Capital lease obligations (see Note 18) ...........................................................................................................................................5,1485,093
Total .......................................................................................................................................................................................1,012,828924,415
Less current maturities ................................................................................................................................................................(8,955)(16,659)
Total long-term debt ..........................................................................................................................................................$1,003,873$907,756

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 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. On June 29, 2018, we amended and restated the above private placement facilities to, among other things, (i) permit the consummation of the Animal Health Spin-off and (ii) provide for the issuance of notes in Euros, British Pounds and Australian Dollars, in addition to U.S. Dollars. 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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The components of our private placement facility borrowings as of December 29, 2018 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)28,5713.09January 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
January 2, 2018100,0003.32January 2, 2028
Less: Deferred debt issuance costs(382)
$628,189
(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 29, 2018 and December 30, 2017, respectively. At December 29, 2018, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 2.66% plus 0.75%, for a combined rate of 3.41%. At December 30, 2017, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 1.53% plus 0.75%, for a combined rate of 2.28%.

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)

As of December 29, 2018, the aggregate amounts of long-term debt, including capital lease obligations and net of deferred debt issuance costs of $382, maturing in each of the next five years and thereafter are as follows:

2019 ..............................................................................................................................................................................................$8,955
2020 ..............................................................................................................................................................................................458,445
2021 ..............................................................................................................................................................................................108,050
2022 ..............................................................................................................................................................................................30,421
2023 ..............................................................................................................................................................................................3,671
Thereafter .......................................................................................................................................................................................403,286
Total .......................................................................................................................................................................................$1,012,828

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 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 29, 2018, December 30, 2017 and December 31, 2016 are presented in the following table:

December 29,December 30,December 31,
201820172016
Balance, beginning of period ..................................................................................................................................................$832,138$607,636$542,194
Decrease in redeemable noncontrolling interests due to
redemptions ....................................................................................................................................................................(669,947)(48,669)(72,729)
Increase in redeemable noncontrolling interests due to
business acquisitions..........................................................................................................................................................10,29478,93958,172
Net income attributable to redeemable noncontrolling interests .....................................................................................................21,84852,20348,760
Dividends declared ...............................................................................................................................................................(18,065)(28,161)(32,973)
Effect of foreign currency translation gain (loss) attributable to
redeemable noncontrolling interests .....................................................................................................................................(13,031)7,461(2,652)
Change in fair value of redeemable securities ...........................................................................................................................148,919162,72966,864
Balance, end of period ..........................................................................................................................................................$312,156$832,138$607,636

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.

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

December 29,December 30,December 31,
201820172016
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment ...........................................................................................................$(18,595)$(5,564)$(13,025)
Attributable to noncontrolling interests:
Foreign currency translation adjustment ...........................................................................................................$(426)$539$(113)
Attributable to Henry Schein, Inc.:
Foreign currency translation loss ..........................................................................................................................$(234,799)$(112,439)$(296,212)
Unrealized loss from foreign currency hedging activities ...........................................................................................(156)(782)(53)
Unrealized investment loss .................................................................................................................................(6)(3)-
Pension adjustment loss .....................................................................................................................................(13,810)(16,843)(20,776)
Accumulated other comprehensive loss ............................................................................................................$(248,771)$(130,067)$(317,041)
Total Accumulated other comprehensive loss ............................................................................................................$(267,792)$(135,092)$(330,179)

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

December 29,December 30,December 31,
201820172016
Net income ........................................................................................................................................................................$562,126$459,293$556,395
Foreign currency translation gain (loss)....................................................................................................................................(136,356)191,886(98,402)
Tax effect .........................................................................................................................................................................---
Foreign currency translation gain (loss)....................................................................................................................................(136,356)191,886(98,402)
Unrealized gain (loss) from foreign currency hedging activities ....................................................................................................1,022(1,515)(1,025)
Tax effect .........................................................................................................................................................................(396)78633
Unrealized gain (loss) from foreign currency hedging activities ....................................................................................................626(729)(992)
Unrealized investment gain (loss)............................................................................................................................................(3)(4)2
Tax effect .........................................................................................................................................................................-1-
Unrealized investment gain (loss)............................................................................................................................................(3)(3)2
Pension adjustment gain (loss) ..............................................................................................................................................4,2124,247(947)
Tax effect .........................................................................................................................................................................(1,179)(314)548
Pension adjustment gain (loss) ..............................................................................................................................................3,0333,933(399)
Comprehensive income .......................................................................................................................................................$429,426$654,380$456,604

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 29, 2018, December 30, 2017 and December 31, 2016 was impacted by changes in foreign currency exchange rates as follows:

Foreign Currency
Translation
Gain (Loss)
for the
Year EndedFX Rate in USD
December 29,December 29,December 30,
Currency201820182017
Euro ............................................................................................................................................................................................$(40,681)1.141.20
Brazilian Real ...............................................................................................................................................................................(27,313)0.260.30
Australian Dollar ............................................................................................................................................................................(25,639)0.700.78
British Pound ................................................................................................................................................................................(21,329)1.261.35
Canadian Dollar ............................................................................................................................................................................(9,111)0.730.80
Polish Zloty...................................................................................................................................................................................(5,025)0.270.29
Swiss Franc ...................................................................................................................................................................................(2,442)1.011.03
All other currencies .........................................................................................................................................................................(4,816)
Total .......................................................................................................................................................................................$(136,356)
Foreign Currency
Translation
Gain (Loss)
for the
Year EndedFX Rate in USD
December 30,December 30,December 31,
Currency201720172016
Euro.............................................................................................................................................................................................$113,2591.201.05
Brazilian Real................................................................................................................................................................................(2,411)0.300.31
Australian Dollar ............................................................................................................................................................................15,1240.780.72
British Pound.................................................................................................................................................................................28,0011.351.23
Canadian Dollar ............................................................................................................................................................................9,4030.800.74
Polish Zloty...................................................................................................................................................................................11,0580.290.24
Swiss Franc ...................................................................................................................................................................................5,5441.030.98
All other currencies .........................................................................................................................................................................11,908
Total .......................................................................................................................................................................................$191,886

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Table of ContentsForeign Currency
Translation
Gain (Loss)
for the
Year EndedFX Rate in USD
December 31,December 31,December 26,
Currency201620162015
Euro ............................................................................................................................................................................................$(41,245)1.051.10
Brazilian Real................................................................................................................................................................................2,8560.310.25
Australian Dollar............................................................................................................................................................................(562)0.720.73
British Pound ................................................................................................................................................................................(53,723)1.231.49
Canadian Dollar ............................................................................................................................................................................3,3450.740.72
Polish Zloty ...................................................................................................................................................................................(3,849)0.240.26
Swiss Franc....................................................................................................................................................................................(2,365)0.981.01
All other currencies .........................................................................................................................................................................(2,859)
Total .......................................................................................................................................................................................$(98,402)

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

December 29,December 30,December 31,
201820172016
Comprehensive income attributable to
Henry Schein, Inc. ....................................................................................................................................................$417,177$593,273$409,676
Comprehensive income attributable to
noncontrolling interests .............................................................................................................................................3,4321,443820
Comprehensive income attributable to
Redeemable noncontrolling interests ............................................................................................................................8,81759,66446,108
Comprehensive income .................................................................................................................................................$429,426$654,380$456,604

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

The following section describes the 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 29, 2018 and December 30, 2017 was estimated at $1,964.3 million and $1,666.1 million, respectively. Factors that we considered when estimating the fair value of our debt include market conditions, such as interest rates and credit spreads.

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 29, 2018 and December 30, 2017:

December 29, 2018
Level 1Level 2Level 3Total
Assets:
Derivative contracts ..............................................................................................................................................................$-$12,533$-$12,533
Total assets ......................................................................................................................................................................$-$12,533$-$12,533
Liabilities:
Derivative contracts ..............................................................................................................................................................$-$1,708$-$1,708
Total liabilities ..................................................................................................................................................................$-$1,708$-$1,708
Redeemable noncontrolling interests ..............................................................................................................................................$-$-$312,156$312,156
December 30, 2017
Level 1Level 2Level 3Total
Assets:
Derivative contracts ..............................................................................................................................................................$-$11,799$-$11,799
Total assets ......................................................................................................................................................................$-$11,799$-$11,799
Liabilities:
Derivative contracts ..............................................................................................................................................................$-$2,089$-$2,089
Total liabilities ..................................................................................................................................................................$-$2,089$-$2,089
Redeemable noncontrolling interests ..............................................................................................................................................$-$-$832,138$832,138

Note 9 – Business Acquisitions

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

On July 1, 2018, we closed on a joint venture with Internet Brands, a provider of web presence and online marketing software, to create a newly formed entity, Henry Schein One, LLC. The joint venture includes Henry Schein Practice Solutions products and services, as well as Henry Schein’s international dental practice management systems and the dental businesses of Internet Brands. We own 74% of the joint venture and Internet Brands owns the remaining 26% noncontrolling interest, which is accounted for within stockholders’ equity. In addition, Internet Brands received a freestanding and separately exercisable right to put their noncontrolling interest to Henry Schein, Inc. for fair value following the fifth anniversary of the effective date of the formation of the joint venture. Beginning with the second anniversary of the effective date of the formation of the joint venture, Henry Schein One will issue a fixed number of additional interests to Internet Brands through the fifth anniversary of the effective date, thereby increasing Internet Brands’ ownership by approximately 7.6%. Internet Brands will also be entitled to receive a fixed number of additional interests, in the aggregate up to approximately 1.6% of the joint venture’s ownership, if certain operating targets are met by the joint venture in its fourth, fifth and sixth operating years. These additional shares are considered contingent consideration that are accounted for within stockholders’ equity; however these shares will not be allocated any net income of Henry Schein One until the shares vest or are earned by Internet Brands. As a result of the transaction with Internet Brands, we recorded $567.6 million of noncontrolling interest within stockholders’ equity reflecting certain fair value methodology.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Senior management from Henry Schein and Internet Brands serve on the board of Henry Schein One. The goodwill recorded as part of the acquisition primarily reflects the value of future synergies. We allocated all of the goodwill to our Technology and value-added services reporting segment. As of December 29, 2018, the goodwill associated with this transaction is $551.7 million. None of the goodwill recognized is deductible for income tax purposes, and as such, no deferred taxes have been recorded related to goodwill.

Concurrent with the formation of Henry Schein One, LLC, we entered into a separate agreement with Internet Brands whereby (1) beginning July 1, 2023, Internet Brands will have the right to require Henry Schein to purchase all or a portion of Internet Brands ownership interests in Henry Schein One, LLC for fair market value, and (2) beginning July 1, 2028, or earlier if certain events occur, Henry Schein will have the right to require Internet Brands to sell all or a portion of its ownership interests in Henry Schein One, LLC to Henry Schein for fair market value.

We completed certain other acquisitions during the year ended December 29, 2018, which were immaterial to our financial statements individually and in the aggregate. As of December 29, 2018, we recorded approximately $15.2 million of goodwill through preliminary purchase price allocations for these acquisitions. Total acquisition transaction costs incurred in the year ended December 29, 2018 were immaterial to our financial results.

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 of December 29, 2018, we have recorded $74.2 million of goodwill related to this acquisition.

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 of December 29, 2018, we have recorded $34.4 million of goodwill related to this acquisition.

We completed certain other acquisitions during the year ended December 30, 2017, which were immaterial to our financial statements individually and in the aggregate. As of December 29, 2018, we recorded approximately $43.2 million of goodwill through preliminary purchase price allocations for these acquisitions. 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 manufacturers. Vetstreet had sales in 2015 of approximately $40 million. As of December 29, 2018, we have recorded $21.4 million of goodwill related to this acquisition.

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 of December 29, 2018, we have recorded $8.1 million of goodwill related to this acquisition.

On February 5, 2016, we announced that we 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 of December 29, 2018, we have recorded $63.2 million of goodwill related to this acquisition.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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. As of December 29, 2018, we recorded approximately $101.3 million of goodwill through preliminary purchase price allocations for these acquisitions. Total acquisition transaction costs incurred in the year ended December 31, 2016 were immaterial to our financial results.

Some prior owners of acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain financial targets are met. We have accrued liabilities for the estimated fair value of additional purchase price consideration at the time of the acquisition. Any adjustments to these accrual amounts are recorded in our consolidated statements of income. For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 10 – Plans of Restructuring

On July 9, 2018, we committed to an initiative to rationalize our operations and provide expense efficiencies. These actions will allow us to execute on our plan to reduce our cost structure and fund new initiatives that are expected to drive future growth under our 2018 to 2020 strategic plan. This initiative is expected to include the elimination of approximately 2% to 3% of our workforce and the closing of certain facilities. The total 2018 costs associated with the actions to complete this restructuring were previously expected to be in the range of $45 million to $55 million, however, additional cost savings opportunities were identified in the fourth quarter of 2018 resulting in a charge of $35.4 million, which increased our full year 2018 restructuring charges to $62.9 million, consisting primarily of severance costs.

We plan to continue restructuring activities in the first half of 2019 and expect to incur additional restructuring costs related to these activities during Q1 and Q2 2019. At this time we are identifying specific opportunities and cannot reasonably estimate the amount of additional restructuring costs in 2019.

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

The following table shows the amounts expensed and paid for restructuring costs that were incurred during our 2018, 2017 and 2016 fiscal years and the remaining accrued balance of restructuring costs as of December 29, 2018, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:

Facility
SeveranceClosing
CostsCostsOtherTotal
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
Provision .............................................................................................................................................................................58,1543,6071,15162,912
Payments and other adjustments ............................................................................................................................................(30,649)(3,167)(1,017)(34,833)
Balance, December 29, 2018 ..................................................................................................................................................$30,723$1,755$158$32,636

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The following table shows, by reportable segment, the amounts expensed and paid for restructuring costs that were incurred during our 2018, 2017 and 2016 fiscal years and the remaining accrued balance of restructuring costs as of December 29, 2018:

Technology and
Health CareValue-Added
DistributionServicesTotal
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
Provision .............................................................................................................................................................................59,1263,78662,912
Payments and other adjustments ............................................................................................................................................(32,483)(2,350)(34,833)
Balance, December 29, 2018 ..................................................................................................................................................$31,200$1,436$32,636

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 29,December 30,December 31,
201820172016
Basic ........................................................................................................................................................................................152,656156,787161,641
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units .................................................................................................................1,0511,4212,082
Diluted ..................................................................................................................................................................................153,707158,208163,723

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 12 – Income Taxes

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

Years ended
December 29,December 30,December 31,
201820172016
Domestic .......................................................................................................................................................................................$505,877$649,657$625,792
Foreign ..........................................................................................................................................................................................189,471173,191130,043
Total .......................................................................................................................................................................................$695,348$822,848$755,835

The provisions for income taxes were as follows:

Years ended
December 29,December 30,December 31,
201820172016
Current income tax expense:
U.S. Federal ...........................................................................................................................................................................$93,209$283,417$185,438
State and local .......................................................................................................................................................................35,19728,52028,229
Foreign ..................................................................................................................................................................................68,29950,08441,357
Total current ......................................................................................................................................................................196,705362,021255,024
Deferred income tax expense (benefit):
U.S. Federal ...........................................................................................................................................................................(9,331)13,686(18,090)
State and local .......................................................................................................................................................................(4,625)856(4,809)
Foreign ..................................................................................................................................................................................(27,257)(14,057)(14,167)
Total deferred ....................................................................................................................................................................(41,213)485(37,066)
Total provision ...............................................................................................................................................................$155,492$362,506$217,958

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 29,December 30,
20182017
Deferred income tax asset:
Investment in partnerships...................................................................................................................................................$76,232$22,600
Net operating losses and other carryforwards...........................................................................................................................44,63048,711
Inventory, premium coupon redemptions and accounts receivable
valuation allowances ..................................................................................................................................................25,27023,715
Stock-based compensation ..................................................................................................................................................18,47322,525
Uniform capitalization adjustment to inventories.....................................................................................................................8,1896,591
Other asset ........................................................................................................................................................................38,51413,669
Total deferred income tax asset ............................................................................................................................................211,308137,811
Valuation allowance for deferred tax assets (1) ...................................................................................................................(23,535)(31,223)
Net deferred income tax asset...............................................................................................................................................187,773106,588
Deferred income tax liability
Intangibles amortization......................................................................................................................................................(122,805)(132,280)
Property and equipment.......................................................................................................................................................(13,296)(13,777)
Total deferred tax liability....................................................................................................................................................(136,101)(146,057)
Net deferred income tax asset (liability) (2).....................................................................................................................................$51,672$(39,469)
(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 table above has been revised for presentational purposes to separately present total deferred tax assets and total deferred tax liabilities.

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 29, 2018, we had foreign net operating loss carryforwards of $2.4 million, which can be utilized against future foreign income through December 31, 2026. Additionally, as of December 29, 2018, there were foreign net operating loss carryforwards of $135.9 million that have an indefinite life. As of December 29, 2018, the company had post-apportionment state net operating loss carryforwards of $16.9 million, which can be

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

utilized against future state income through December 31, 2038. Additionally, as of December 29, 2018, there were post-apportionment state operating loss carryforwards of $12.5 million that have an indefinite life.

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

Years ended
December 29,December 30,December 31,
201820172016
Income tax provision at federal statutory rate ................................................................................................................................$146,023$287,996$264,542
State income tax provision, net of federal income tax effect .............................................................................................................16,27112,45711,236
Foreign income tax provision .......................................................................................................................................................(420)(24,433)(18,036)
Pass through noncontrolling interest ..............................................................................................................................................(4,595)(11,623)(13,083)
Valuation allowance ..................................................................................................................................................................2,0371,0081,472
Unrecognized tax benefits and audit settlements..............................................................................................................................4,1663,8993,066
Interest expense related to loans ...................................................................................................................................................(11,925)(18,717)(21,737)
Excess tax benefits related to stock compensation ...........................................................................................................................(837)(17,387)-
Transition tax on deemed repatriation of foreign earnings .................................................................................................................(10,000)140,000-
Revaluation of deferred tax assets and liabilities .............................................................................................................................(1,676)2,953-
Tax on global intangible low-taxed income ("GILTI").......................................................................................................................7,455--
Transaction costs related to Animal Health spin-off.........................................................................................................................7,325--
Tax benefit related to legal entity reorganization outside the U.S.........................................................................................................(13,852)--
Tax charge related to reorganization of legal entities related ..............................................................................................................
to forming Henry Schein One ..................................................................................................................................................3,914--
Tax charge related to reorganization of legal entities completed..........................................................................................................
in preparation for the Animal Health spin-off.............................................................................................................................3,135--
Other .......................................................................................................................................................................................8,471(13,647)(9,502)
Total income tax provision .................................................................................................................................................$155,492$362,506$217,958

For the year ended December 29, 2018, our effective tax rate was 22.4% compared to 44.1% for the prior year period. In 2018, our effective tax rate was primarily impacted by a reduction in the estimate of our transition tax associated with the Tax Cuts and Jobs Act (“the Tax Act”), tax charges and credits associated with legal entity reorganizations outside the U.S., and state and foreign income taxes and interest expense. In 2017, our effective tax rate was primarily impacted by the Tax Act, the adoption of ASU 2016-09, as well as state and foreign income taxes and interest expense.

On December 22, 2017, the U.S. government passed the Tax Act. The Tax Act is comprehensive tax legislation that implemented 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 moved 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. The Tax Act also included provisions to tax global intangible low-taxed income (“GILTI”), a beneficial tax rate foreign Derived Intangible Income (“FDII”), a base erosion and anti-abuse tax (“BEAT”) that imposes tax on certain foreign related-party payments, and IRC Section 163(j) interest limitation (Interest Limitation). We became subject to the GILTI, FDII, BEAT and Interest Limitation provisions effective January 1, 2018.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. Under Topic 740, we estimated the impact of each provision of the Tax Act on our effective tax and recorded a current tax expense for the GILTI provision of $7.5 million in our effective tax rate for the year ended December 29, 2018. For the BEAT, FDII and Interest Limitation computations, we have not recorded an estimate in our effective tax rate for the year ended December 29, 2018 because we have concluded that these provisions of the Tax Act will not apply to us in 2018.

Due to the complexities of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that allowed 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, in its 2017 financial statements. SAB 118 allowed 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. In the fourth quarter of 2017, we recorded provisional amounts for any items that could be reasonably estimated at the time. This included the one-time transition tax that we estimated to be $140.0 million and a net deferred tax expense of $3.0 million attributable to the revaluation of deferred tax assets and liabilities due to the lower enacted federal income tax rate of 21%. Within our consolidated balance sheets, $27.4 million was included in “Accrued taxes” and $112.6 million was included in “Other liabilities”. In the aggregate, for the quarter ended December 30, 2017, these Tax Act modifications resulted in a one-time tax expense of approximately $143.0million. 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%.

For the year ended December 29, 2018 we have recorded a net $10.0 million reduction to the one-time transition tax and an additional $1.7 million net deferred tax benefit from the revaluation of deferred tax assets and liabilities to reflect the new tax rate. Within our consolidated balance sheets, $9.9 million is included in “Accrued taxes” and $104.2 million is included in “Other liabilities” for the transition tax. The changes were a result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance that was issued. As of December 22, 2018, the Company has completed its analysis of the impact of the Tax Act in accordance with SAB 118 and the amounts are now considered final.

During 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.

Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings will no longer be subject to U.S. federal income tax; however, there could be U.S. state and/or foreign

withholding taxes upon distribution of such unremitted earnings. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not practicable.

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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

The total amount of unrecognized tax benefits, which are included in “Other liabilities” within our consolidated balance sheets as of December 29, 2018 was approximately $100.0 million, of which $86.1 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 $16.4 million and $0, respectively, as of December 29, 2018.

The tax years subject to examination by major tax jurisdictions include the years 2012 and forward by the U.S. Internal Revenue Service (“IRS”), as well as the years 2008 and forward for certain states and certain foreign jurisdictions. In December 2014, the IRS issued a Statutory Notice of Deficiency for 2009, 2010 and 2011. During the quarter ended March 28, 2015, we filed our petition to the U.S. Tax Court disputing the adjustments proposed by the IRS. During the quarter ended June 27, 2015, we were notified by the IRS that our protest was transferred to the Appellate Divisions (Appeals Section) of the IRS. During the quarter ended March 26, 2016, we filed our protest with the Appellate Division. The opening appeals conference was held on June 8, 2016 and a proposed settlement was reached. On July 13, 2016, a joint status report was filed with the Tax Court indicating a basis for settlement had been reached on all of the issues in this case. On October 7, 2016 an executed decision document was signed by the Internal Revenue Service’s Special Trial Attorney and submitted to the Tax Court finalizing the Appeals decision. 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 received a 30 Day Letter from the IRS during the quarter ended April 1, 2017 for the remaining open audit issues for the years 2012 and 2013. We filed a Protest with the Appellate Division regarding these issues during the second quarter of 2017. We had an initial Appeals Conference during the third quarter of 2018, of which we are awaiting a final settlement. During the quarter ended December 29, 2018, we submitted the first draft of our proposed Advanced Pricing Agreement covering tax years 2014-2024 to the IRS in which Henry Schein, Inc. and the IRS would agree on an appropriate transfer pricing methodology. 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 29,December 30,December 31,
201820172016
Balance, beginning of period ................................................................................................................................$90,900$90,400$77,600
Additions based on current year tax positions ..........................................................................................................5,0008,5007,300
Additions based on prior year tax positions .............................................................................................................11,6006,10020,400
Reductions based on prior year tax positions ...........................................................................................................(1,700)(800)(900)
Reductions resulting from settlements with taxing authorities .....................................................................................(1,900)(10,500)(9,700)
Reductions resulting from lapse in statutes of limitations ...........................................................................................(20,400)(2,800)(4,300)
Balance, end of period ........................................................................................................................................$83,500$90,900$90,400

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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% of our net sales in 2018 or 2017. With respect to our sources of supply, our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 32% and 6%, respectively, of our aggregate purchases in 2018 and approximately 34% and 5%, respectively, of our aggregate purchases in 2017.

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

Note 14 – Derivatives and Hedging Activities

We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other, and changes to credit risk of the derivative counterparties. 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 – Revenue from Contracts with Customers

Revenue (Net sales) is recognized in accordance with the policies discussed in Note 1 – Significant Accounting Policies.

Disaggregation of Net sales

The following table disaggregates our Net sales by reportable segment and geographic area:

Year Ended
December 29, 2018
North AmericaInternationalGlobal
Net sales:
Health care distribution.................................................................................................................................................................
Dental .....................................................................................................................................................................................$3,867,118$2,481,827$6,348,945
Animal health ...........................................................................................................................................................................1,865,3161,817,3233,682,639
Medical ...................................................................................................................................................................................2,581,69679,4702,661,166
Total health care distribution.....................................................................................................................................................8,314,1304,378,62012,692,750
Technology and value-added services..............................................................................................................................................426,65382,592509,245
Total .......................................................................................................................................................................................$8,740,783$4,461,212$13,201,995

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 16 – 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 31 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 29,December 30,December 31,
201820172016
Net Sales:
Health care distribution (1):
Dental .....................................................................................................................................................................................$6,348,945$6,048,813$5,555,299
Animal health ...........................................................................................................................................................................3,682,6393,476,6353,253,095
Medical ...................................................................................................................................................................................2,661,1662,497,9942,337,661
Total health care distribution ...................................................................................................................................................12,692,75012,023,44211,146,055
Technology and value-added services (2)............................................................................................................................................509,245438,101425,613
Total .......................................................................................................................................................................................$13,201,995$12,461,543$11,571,668
(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)

Table of ContentsYears ended
December 29,December 30,December 31,
201820172016
Operating Income:
Health care distribution ....................................................................................................................................................................$618,788$728,520$652,106
Technology and value-added services .................................................................................................................................................134,264130,849119,468
Total .......................................................................................................................................................................................$753,052$859,369$771,574
Income before taxes and equity in earnings of affiliates:
Health care distribution ....................................................................................................................................................................$563,006$696,453$640,184
Technology and value-added services .................................................................................................................................................132,342126,395115,651
Total .......................................................................................................................................................................................$695,348$822,848$755,835
Depreciation and Amortization:
Health care distribution ....................................................................................................................................................................$179,760$168,186$146,276
Technology and value-added services .................................................................................................................................................27,80024,88623,504
Total .......................................................................................................................................................................................$207,560$193,072$169,780
Income Tax Expense:
Health care distribution ....................................................................................................................................................................$101,179$325,302$185,571
Technology and value-added services .................................................................................................................................................54,31337,20432,387
Total .......................................................................................................................................................................................$155,492$362,506$217,958
Interest Income:
Health care distribution ....................................................................................................................................................................$20,849$17,318$13,086
Technology and value-added services .................................................................................................................................................387235189
Total .......................................................................................................................................................................................$21,236$17,553$13,275
Interest Expense:
Health care distribution ....................................................................................................................................................................$78,769$53,607$31,845
Technology and value-added services .................................................................................................................................................174748
Total .......................................................................................................................................................................................$78,786$53,654$31,893
Purchases of Fixed Assets:
Health care distribution ....................................................................................................................................................................$87,131$76,449$66,611
Technology and value-added services .................................................................................................................................................3,5065,0523,568
Total .......................................................................................................................................................................................$90,637$81,501$70,179
As of
December 29,December 30,December 31,
201820172016
Total Assets:
Health care distribution ....................................................................................................................................................................$7,375,723$7,399,718$6,377,253
Technology and value-added services .................................................................................................................................................1,124,804464,277434,510
Total .......................................................................................................................................................................................$8,500,527$7,863,995$6,811,763

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 29, 2018. 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.

201820172016
Net SalesLong-Lived AssetsNet SalesLong-Lived AssetsNet SalesLong-Lived Assets
United States ............................................................................................................................................................................$8,348,398$2,522,477$7,904,698$2,000,624$7,536,897$1,803,689
Other .......................................................................................................................................................................................4,853,5971,264,4594,556,8451,345,3494,034,7711,171,137
Consolidated total ................................................................................................................................................................$13,201,995$3,786,936$12,461,543$3,345,973$11,571,668$2,974,826

Note 17 – Employee Benefit Plans

Stock-based Compensation

Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $36.2 million ($28.1 million after-tax), $42.3 million ($23.7 million after-tax) and $58.2 million ($41.4 million after-tax) for the years ended December 29, 2018, December 30, 2017 and December 31, 2016.

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, there were no benefits associated with tax deductions in excess of recognized compensation as a cash inflow from financing activities for the years ended December 29, 2018 and December 30, 2017 and $0.5 million of such benefits for the year ended December 31, 2016.

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 29, 2018, there were 62,459 shares authorized and 6,262 shares available to be granted under the 2013 Stock Incentive Plan and 1,800 shares authorized and 256 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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

achieving specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting).

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 29, 2018 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 29, 2018, we recorded a liability of $0.8 million relating to the grant date fair value of stock-based compensation to be settled in cash. The weighted-average grant date fair value of stock-based awards granted before forfeitures was $71.38, $85.43 and $83.90 per share during the years ended December 29, 2018, December 30, 2017 and December 31, 2016.

Total unrecognized compensation cost related to non-vested awards as of December 29, 2018 was $77.9 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 29,December 30,December 31,
201820172016
WeightedWeightedWeighted
AverageAverageAverage
ExerciseExerciseExercise
SharesPriceSharesPriceSharesPrice
Outstanding at beginning of year ..............................................................................................................................................155$29.65353$28.59769$28.00
Granted ................................................................................................................................................................................------
Exercised ..............................................................................................................................................................................(153)29.81(198)27.76(416)27.49
Forfeited ..............................................................................................................................................................................------
Outstanding at end of year ......................................................................................................................................................2$17.22155$29.65353$28.59
Options exercisable at end of year .............................................................................................................................................2$17.22155$29.65353$28.59

During the years ended December 29, 2018, December 30, 2017 and December 31, 2016, we did not grant any stock options.

The following table represents the intrinsic values of:

As of
December 29,December 30,December 31,
201820172016
Stock options outstanding ................................................................................................................................$121$6,256$16,681
Stock options exercisable .................................................................................................................................1216,25616,681

The total cash received as a result of stock option exercises for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 was approximately $3.1 million, $5.3 million and $11.4 million. In connection with these exercises, we did not realize any tax benefits for the years ended December 29, 2018 and December 30, 2017. During the year ended December 31, 2016 the tax benefit that we realized was $23.4 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 $76.48, $83.16 and $81.86 during the years ended December 29, 2018, December 30, 2017 and December 31, 2016. The following table summarizes the status of our non-vested restricted stock/units for the year ended December 29, 2018:

Time-Based Restricted Stock/Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period ........................................................................................................................................................1,233$70.28
Granted ...........................................................................................................................................................................................36766.00
Vested .............................................................................................................................................................................................(312)62.98
Forfeited ..........................................................................................................................................................................................(88)77.67
Outstanding at end of period ................................................................................................................................................................1,200$70.33$77.92
Performance-Based Restricted Stock/Units
Weighted Average
Grant Date FairIntrinsic Value
Shares/UnitsValue Per SharePer Share
Outstanding at beginning of period ........................................................................................................................................................1,226$60.81
Granted ...........................................................................................................................................................................................20072.16
Vested .............................................................................................................................................................................................(426)71.33
Forfeited ..........................................................................................................................................................................................(80)77.27
Outstanding at end of period ................................................................................................................................................................920$50.86$77.92
.......................................................................................................................................................................................................

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 29, 2018, December 30, 2017 and December 31, 2016 amounted to $35.0 million, $39.0 million and $33.9 million, respectively.

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 (credited) to operations during the years ended December 29, 2018, December 30, 2017 and December 31, 2016 amounted to $(0.4) million, $0.6 million and $0.3 million, respectively.

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 subsidiaries. This plan allows for the elective deferral of base salary, bonus and/or commission compensation by eligible employees. The amounts charged to operations during

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

the years ended December 29, 2018, December 30, 2017 and December 31, 2016 were approximately $2.3 million, $5.0 million and $1.7 million, respectively.

Note 18 – 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 29, 2018 were:

2019 ........................................................................................................................................................................................$78,940
2020 ........................................................................................................................................................................................61,605
2021 ........................................................................................................................................................................................44,574
2022 ........................................................................................................................................................................................31,501
2023 ........................................................................................................................................................................................23,365
Thereafter ................................................................................................................................................................................68,373
Total minimum operating lease payments ................................................................................................................................$308,358

Total rental expense for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 was $91.1 million, $84.8 million and $79.6 million, respectively.

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 29, 2018 were:

2019 ........................................................................................................................................................................................$1,695
2020 ........................................................................................................................................................................................1,134
2021 ........................................................................................................................................................................................710
2022 ........................................................................................................................................................................................313
2023 ........................................................................................................................................................................................291
Thereafter ................................................................................................................................................................................1,430
Total minimum capital lease payments ..........................................................................................................................................5,573
Less: Amount representing interest at 0.07% to 19.79%(425)
Total present value of minimum capital lease payments............................................................................................................$5,148

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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 29, 2018 were:

2019 ........................................................................................................................................................................................$499,346
2020 ........................................................................................................................................................................................215,445
2021 ........................................................................................................................................................................................230,967
2022 ........................................................................................................................................................................................124,465
2023 ........................................................................................................................................................................................446
Thereafter ................................................................................................................................................................................-
Total minimum inventory purchase commitment payments.......................................................................................................$1,070,669

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 2019 through 2023 and thereafter of approximately $16.6 million, $1.8 million, $0.8 million, $0.1 million and $0.0 million. We also have lifetime consulting agreements that provide for current compensation of $0.5 million per year, increasing $25 every fifth year with the next increase in 2022. In addition, some agreements have provisions for additional incentives and compensation.

Litigation

Beginning in January 2016, purported class action complaints were filed against Patterson Companies, Inc. (“Patterson”), Benco Dental Supply Co. (“Benco”) and Henry Schein, Inc. Although there were factual and legal variations among these complaints, each of these complaints alleges, 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. On February 9, 2016, the U.S. District Court for the Eastern District of New York ordered all of these actions, and all other actions filed thereafter asserting substantially similar claims against defendants, consolidated for pre-trial purposes. On February 26, 2016, a consolidated class action complaint was filed by Arnell Prato, D.D.S., P.L.L.C., d/b/a Down to Earth Dental, Evolution Dental Sciences, LLC, Howard M. May, DDS, P.C., Casey Nelson, D.D.S., Jim Peck, D.D.S., Bernard W. Kurek, D.M.D., Larchmont Dental Associates, P.C., and Keith Schwartz, D.M.D., P.A. (collectively, “putative class representatives”) in the U.S. District Court for the Eastern District of New York, entitled In re Dental Supplies Antitrust Litigation, Civil Action No. 1:16-CV-00696-BMC-GRB. In the consolidated class action complaint, putative class representatives allege a nationwide agreement among Henry Schein, Benco, Patterson and non-party Burkhart Dental Supply Company, Inc. (“Burkhart”) not to compete on price. The consolidated 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. On September 28, 2018, the parties executed a settlement agreement that proposes, subject to court approval, a full and final settlement of the lawsuit on a classwide basis. Subject to certain exceptions, the settlement class consists of all persons or entities that purchased dental products directly from Henry Schein, Patterson, Benco, Burkhart, or any combination thereof, during the period August 31, 2008 through and including March 31, 2016. As a result, we recorded a charge of $38.5 million in our third quarter 2018 results.

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”)

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

in the U.S. 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, an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights. On August 1, 2017, Archer filed an amended complaint, adding Patterson and Benco as defendants, and alleging that Henry Schein, 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 damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally, as well as injunctive relief. On October 30, 2017, Archer filed a second amended complaint, 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.

On October 1, 2012, we filed a motion for an order: (i) compelling Archer to arbitrate its claims against us; (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 U.S. 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 June 25, 2018, the Supreme Court of the United States granted defendants’ petition for writ of certiorari. On October 29, 2018, the Supreme Court heard oral arguments. On January 8, 2019, the Supreme Court issued its published decision vacating the judgment of the Fifth Circuit and remanding the case to the Fifth Circuit for further proceedings consistent with the Supreme Court’s opinion. We intend to defend ourselves vigorously against this action.

On August 17, 2017, IQ Dental Supply, Inc. (“IQ Dental”) filed a complaint in the U.S. 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 Henry Schein, Patterson and Benco, which Henry Schein settled in the second quarter of 2017 and which is described in our 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. The U.S. Court of Appeals for the Second Circuit heard oral argument on the appeal on September 13, 2018. The court’s decision is pending. We intend to defend ourselves vigorously 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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

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. A hearing before an administrative law judge began on October 16, 2018 and is ongoing. We believe this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

On March 7, 2018, Joseph Salkowitz, individually and on behalf of all others similarly situated, filed a putative class action complaint for violation of the federal securities laws against Henry Schein, Inc., Stanley M. Bergman and Steven Paladino in the U.S. District Court for the Eastern District of New York, Case No. 1:18-cv-01428. The complaint sought to certify a class consisting of all persons and entities who, subject to certain exclusions, purchased Henry Schein securities from March 7, 2013 through February 12, 2018 (the “Class Period”). The complaint alleged, among other things, that the defendants had made materially false and misleading statements about Henry Schein’s business, operations and prospects during the Class Period, including matters relating to the issues in the antitrust class action and the FTC action described above, thereby causing the plaintiff and members of the purported class to pay artificially inflated prices for Henry Schein securities. The complaint sought unspecified monetary damages and a jury trial. Pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), the court appointed lead plaintiff and lead counsel on June 22, 2018 and recaptioned the putative class action as In re Henry Schein, Inc. Securities Litigation, under the same case number. Lead plaintiff filed a consolidated class action complaint on September 14, 2018. The consolidated class action complaint asserts similar claims against the same defendants (plus Timothy Sullivan) on behalf of the same putative class of purchasers during the Class Period. It alleges that Henry Schein’s stock price was inflated during that period because Henry Schein had misleadingly portrayed its dental-distribution business “as successfully producing excellent profits while operating in a highly competitive environment” even though, “in reality, [Henry Schein] had engaged for years in collusive and anticompetitive practices in order to maintain Schein’s margins, profits, and market share.” The complaint alleges that the stock price started to fall from August 8, 2017, when the company announced below-expected financial performance that allegedly “revealed that Schein’s poor results were a product of abandoning prior attempts to inflate sales volume and margins through anticompetitive collusion,” through February 13, 2018, after the FTC filed a complaint against Benco, Henry Schein and Patterson alleging that they violated U.S. antitrust laws. The complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 and Section 20(a) of the Exchange Act. We intend to defend ourselves vigorously against this action. Henry Schein has also received a request under 8 Del. C. § 220 to inspect corporate books and records relating to the issues raised in the securities class action and the antitrust matters discussed above.

On May 3, 2018, a purported class action complaint, Marion Diagnostic Center, LLC, et al. v. Becton, Dickinson, and Co., et al., Case No. 3:18-cv-010509, was filed in the U.S. District Court for the Southern District of Illinois against Becton, Dickinson, and Co. (“Becton”); Premier, Inc. (“Premier”), Vizient, Inc. (“Vizient”), Cardinal Health, Inc. (“Cardinal”), Owens & Minor Inc. (“O&M”), Henry Schein, Inc., and Unnamed Becton Distributor Co-Conspirators. The complaint alleges that the defendants entered into a vertical conspiracy to force healthcare providers into long-term exclusionary contracts that restrain trade in the nationwide markets for conventional and safety syringes and safety IV catheters and inflate the prices of certain Becton products to above-competitive levels. The named plaintiffs seek to represent three separate classes consisting of all healthcare providers that purchased (i) Becton’s conventional syringes, (ii) Becton’s safety syringes, or (iii) Becton’s safety catheters directly from Becton, Premier, Vizient, Cardinal, O&M or Henry Schein on or after May 3, 2014. The complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, treble damages, reasonable attorneys’ fees and costs and expenses, and pre-judgment and post-judgment interest. On June 15, 2018, an amended complaint was filed asserting the same allegations against the same parties and adding McKesson Medical-Surgical, Inc. as an additional defendant. On November 30, 2018, the District Court granted defendants’ motion to dismiss and entered a final judgment, dismissing plaintiffs’ complaint with prejudice. On December 27,

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

2018, plaintiffs appealed the District Court’s decision to the Seventh Circuit Court of Appeals. We intend to defend ourselves vigorously against this action.

On May 29, 2018, an amended complaint was filed in the MultiDistrict Litigation (“MDL”) proceeding In Re National Prescription Opiate Litigation (MDL No. 2804; Case No. 17-md-2804) in an action entitled The County of Summit, Ohio et al. v. Purdue Pharma, L.P., et al., Civil Action No. 1:18-op-45090-DAP (“County of Summit Action”), in the U.S. District Court for the Northern District of Ohio, adding Henry Schein, Inc., Henry Schein Medical Systems, Inc. and others as defendants. Plaintiffs allege that manufacturers of prescription opioid drugs engaged in a false advertising campaign to expand the market for such drugs and their own market share and that the entities in the supply chain (including Henry Schein, Inc. and Henry Schein Medical Systems, Inc.) reaped financial rewards by refusing or otherwise failing to monitor appropriately and restrict the improper distribution of those drugs. Plaintiffs assert the following claims for relief against Henry Schein, Inc. and Henry Schein Medical Systems, Inc.: statutory public nuisance; common law absolute public nuisance; negligence; injury through criminal acts (R.C. 2307.60); unjust enrichment; and civil conspiracy. This case has been designated “Track 1” and is currently set for trial on October 21, 2019. We intend to defend ourselves vigorously against this action.

In addition to the Summit County Action, Henry Schein and/or one or more of its affiliated companies have currently been named as a defendant in twenty-one (21) additional lawsuits, which allege claims similar to those alleged in the Summit County Action. None of these other cases have been set for trial. These actions consist of some that have been consolidated within the MDL and are currently abated for discovery purposes, and others which remain pending in state courts and are proceeding independently and outside of the MDL. Sales of opioids in North America from October 2017 through October 2018 were less than 1% of all North American sales. We intend to defend ourselves vigorously against these actions.

On October 9, 2018, a purported class action complaint entitled Kramer v. Henry Schein, Inc., Patterson Co., Inc., Benco Dental Supply Co., and Unnamed Co-Conspirators, was filed in the U.S. District Court for the Northern District of California. The complaint alleges that members of the proposed class, comprised of purchasers of dental services from dental practices in California, suffered antitrust injury due to an unlawful boycott, price-fixing or otherwise anticompetitive conspiracy among Henry Schein, Patterson and Benco. The complaint alleges that the alleged conspiracy overcharged California dental practices, orthodontic practices and dental laboratories on their purchase of dental supplies, which in turn passed on some or all of such overcharges to members of the California class purchasing dental services. Subject to certain exclusions, the complaint defines the class as “all persons residing in California purchasing and/or reimbursing for dental services from California dental practices on or after August 31, 2012.” The complaint alleges violations of California antitrust laws, including the Cartwright Act (Cal. Bus. and Prof. Code § 16720) and the Unfair Competition Act (Cal. Bus. and Prof. Code § 17200), and seeks a permanent injunction, actual damages to be determined at trial, trebled, reasonable attorneys’ fees and costs, and pre- and post-judgment interest. On December 7, 2018, an amended complaint was filed asserting the same claims against the same parties. We intend to defend ourselves vigorously against this action.

On January 29, 2019, a purported class action complaint was filed by R. Lawrence Hatchett, M.D. against Henry Schein, Inc., Patterson Co., Inc., Benco Dental Supply Co., and unnamed co-conspirators in the U.S. District Court for the Southern District of Illinois. The complaint alleges that members of the proposed class suffered antitrust injury due to an unlawful boycott, price-fixing or otherwise anticompetitive conspiracy among Henry Schein, Patterson and Benco. The complaint alleges that the alleged conspiracy overcharged Illinois dental practices, orthodontic practices and dental laboratories on their purchase of dental supplies, which in turn passed on some or all of such overcharges to members of the class. Subject to certain exclusions, the complaint defines the class as “all persons residing in Illinois purchasing and/or reimbursing for dental care provided by independent Illinois dental practices purchasing dental supplies from the defendants, or purchasing from buying groups purchasing these supplies from the defendants, on or after January 29, 2015.” The complaint alleges violations of the Illinois Antitrust Act, 740 Ill. Comp. Stat. §§ 10/3(2), 10/7(2), and seeks a permanent injunction, actual

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

damages to be determined at trial, trebled, reasonable attorneys’ fees and costs, and pre- and post-judgment interest. We intend to defend ourselves vigorously against this action.

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 consolidated financial position, liquidity or results of operations.

As of December 29, 2018, 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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

Note 19 – Quarterly Information (Unaudited)

The following tables present certain quarterly financial data:

Quarters ended
March 31,June 30,September 29,December 29,
2018 (1)2018 (1)2018 (1)2018 (1)
Net sales .......................................................................................................................................................................................$3,220,439$3,326,676$3,279,678$3,375,202
Gross profit ....................................................................................................................................................................................895,592901,072888,560909,860
Litigation settlements.......................................................................................................................................................................--38,488-
Transaction costs related to Animal Health spin-off...............................................................................................................................3,7777,6117,28220,086
Restructuring costs ..........................................................................................................................................................................3,76214,8968,85335,401
Operating income ...........................................................................................................................................................................206,142201,349165,926179,635
Net income ....................................................................................................................................................................................148,631147,509126,976139,010
Amounts attributable to
Henry Schein, Inc.:
Net income.....................................................................................................................................................................................140,218141,212121,478132,973
Earnings per share attributable to
Henry Schein, Inc.:
Basic .......................................................................................................................................................................................$0.92$0.92$0.80$0.88
Diluted ....................................................................................................................................................................................0.910.920.790.87
Quarters ended
April 1,July 1,September 30,December 30,
2017 (2)2017 (2)2017 (2)2017 (2)
Net sales .......................................................................................................................................................................................$2,922,948$3,059,458$3,161,083$3,318,054
Gross profit ....................................................................................................................................................................................822,920839,173836,054900,956
Litigation settlement........................................................................................................................................................................-5,325--
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)
(1)See Note 10 - "Plans of Restructuring" for details of the restructuring costs incurred during the fiscal year of 2018.
(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)

Note 20 – Supplemental Cash Flow Information

Cash paid for interest and income taxes was:

Years ended
December 29,December 30,December 31,
201820172016
Interest .................................................................................................................................................................................$72,310$49,311$29,391
Income taxes .........................................................................................................................................................................248,245221,832205,196

There was approximately $0.0 million, $0.4 million and $63.8 million of debt assumed as a part of the acquisitions for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively. Debt assumed during the year ended December 31, 2016 primarily relates to the acquisitions of Dental Cremer S.A. and Dental Speed Graph.

For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, we had $1.0 million, $(1.5) million and $(1.0) million of non-cash net unrealized gains (losses) related to foreign currency hedging activities, respectively. During the years ended December 29, 2018 and December 30, 2017, as part of business acquisitions, we increased our ownerships in subsidiaries through non-cash transactions of $1.4 million and $17.6 million, respectively.

During the third quarter of 2018, we closed on a joint venture with Internet Brands to create a newly formed entity, Henry Schein One, LLC, through a non-cash transaction resulting in an initial estimate of approximately $385 million of noncontrolling interest representing Internet Brands’ current 26% minority interest and an initial estimate of $182.6 million of deferred additional ownership interests of Internet Brands in Henry Schein One, representing up to an additional 9.2% ownership interests, a portion of which is contingent upon the achievement of certain operating targets (See Note 9).

Note 21 – Subsequent Event

On February 7, 2019 (the “Distribution Date”), we completed the previously announced separation (the “Separation”) and subsequent merger of our animal health business (the “Henry Schein Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”) (the “Merger”). This was accomplished by a series of transactions among us, Vets First Choice, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of ours prior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus (“Merger Sub”). In connection with the Separation, we contributed, assigned and transferred to Covetrus certain applicable assets, liabilities and capital stock or other ownership interests relating to the Henry Schein Animal Health Business. On the Distribution Date, we received a tax-free distribution of $1,120.0 million from Covetrus pursuant to certain debt financing incurred by Covetrus. On the Distribution Date and prior to the Distribution, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the “Share Sale Investors”) for $361.1 million (the “Share Sale”). The proceeds of the Share Sale were paid to Covetrus and distributed to us. Subsequent to the Share Sale, we distributed, on a pro rata basis, all of the shares of the common stock of Covetrus held by us to our stockholders of record as of the close of business on January 17, 2019 (the “Animal Health Spin-off”). After the Share Sale and Animal Health Spin-off, Merger Sub consummated the Merger whereby it merged with and into Vets First Choice, with Vets First Choice surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately following the consummation of the Merger, on a fully diluted basis, (i) approximately 63% of the shares of Covetrus common stock were (a) owned by our stockholders and the Share Sale Investors, and (b) in respect of certain equity awards held by certain employees of the Henry Schein Animal Health Business, and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned by stockholders of Vets First Choice immediately prior to the Merger, and (b) in respect of certain

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands, except per share data)

equity awards held by certain employees of Vets First Choice. After the Separation and the Merger, we no longer beneficially owned any shares of Covetrus common stock and, following the Distribution Date, will not consolidate the financial results of Covetrus for the purpose of our financial reporting. Following the Separation and the Merger, Covetrus was an independent, publicly traded company on the Nasdaq Global Select Market.

Effective first quarter 2019, we will report the historical earnings of the Henry Schein Animal Health Business as a discontinued operation. The Company estimates that on a continuing operations basis, its 2018 revenues were $9.4 billion and its 2018 net income was $430.7 million.

Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk · Next: Item 9. . Changes in and Disagreements With Accountants on Accounting and Financial Disclosure