Item 7A. Quantitative and Qualitative Disclosures About Market Risk

214K characters. Original on sec.gov · Markdown

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Agreements

The value of certain foreign currencies as compared to the U.S. dollar and the value of certain underlying functional currencies of the Company, including its foreign subsidiaries, may affect our financial results. Fluctuations in exchange rates may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., generally 18 months or less) foreign currency forward contracts to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the payment of merchandise purchases to foreign suppliers. We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. A hypothetical 5% change in the average value of the U.S. dollar in 2019 compared to foreign currencies would have changed our 2019 reported Net income attributable to Henry Schein, Inc. by approximately $6.0 million.

As of December 28, 2019, we had forward foreign currency exchange agreements, which expire through November 16, 2023, which include a mark-to-market loss of $3.9 million as determined by quoted market prices. Included in the forward foreign currency exchange agreements, Henry Schein, Inc. had EUR/USD forward contracts notionally totaling an amount of €200 million, with a reported fair value of these contracts as a net liability of $0.3 million. A 5% increase in the value of the Euro to the USD from December 28, 2019, with all other variables held constant, would have had an unfavorable effect on the fair value of these forward contracts by decreasing the value of these instruments by $12.0 million. As of December 28, 2019, Henry Schein, Inc. had Euro to Brazilian Real (BRL) cross currency swap contracts notionally totaling an amount of €83.6 million, with a reported fair value of these contracts as a net liability of $1.4 million. A 5% increase in the value of the Euro to the BRL from December 28, 2019, with all other variables held constant, would have had a favorable effect on the fair value of these swap contracts by increasing the value of these instruments by $4.6 million.

Short-Term Investments

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

Variable Interest Rate Debt

As of December 28, 2019, we had variable interest rate exposure for certain of our revolving credit facilities and our U.S. trade accounts receivable securitization.

Our revolving credit facility which we entered into on April 18, 2017 and expires on April 18, 2022, has an interest rate that is based on the U.S. Dollar LIBOR plus a spread based on our leverage ratio at the end of each financial reporting quarter. As of December 28, 2019, there was $0.0 million outstanding under this revolving credit

facility. During the year ended December 28, 2019, the average outstanding balance under this revolving credit facility was approximately $147.5 million. Based upon our average outstanding balance for this revolving credit facility, for each hypothetical increase of 25 basis points, our interest expense thereunder would have increased by $0.4 million.

Our U.S trade accounts receivable securitization, which we entered into on April 17, 2013 and which expires on April 29, 2022, has an interest rate that is based upon the asset-backed commercial paper rate. As of December 28, 2019, the commercial paper rate was 1.90% plus 0.75%, for a combined rate of 2.65%. At December 28, 2019 the outstanding balance was $100.0 million under this securitization facility. During the year ended December 28, 2019, the average outstanding balance under this securitization facility was approximately $274.8 million. Based upon our average outstanding balance for this securitization facility, for each hypothetical increase of 25 basis points, our interest expense thereunder would have increased by $0.7 million.

ITEM 8. Financial Statements and Supplementary Data


		INDEX TO FINANCIAL STATEMENTS
		HENRY SCHEIN, INC.
			Page

Report of Independent Registered Public Accounting Firm			85

Consolidated Financial Statements:

	Balance Sheets as of December 28, 2019 and December 29, 2018		88

	Statements of Income for the years ended December 28, 2019,
		December 29, 2018 and December 30, 2017	89

	Statements of Comprehensive Income for the years ended December 28, 2019,
		December 29, 2018 and December 30, 2017	90

	Statements of Changes in Stockholders’ Equity for the years ended
		December 28, 2019, December 29, 2018 and December 30, 2017	91

	Statements of Cash Flows for the years ended December 28, 2019,
		December 29, 2018 and December 30, 2017	92

	Notes to Consolidated Financial Statements		93
	Note 1 – Significant Accounting Policies		93
	Note 2 – Discontinued Operations		103
	Note 3 – Property and Equipment, Net		106
	Note 4 – Goodwill and Other Intangibles, Net		107
	Note 5 – Investments and Other		108
	Note 6 – Debt		109
	Note 7 – Leases		113
	Note 8 – Redeemable Noncontrolling Interests		115
	Note 9 – Comprehensive Income		116
	Note 10 – Fair Value Measurements		117
	Note 11 – Business Acquisitions Divestitures		120
	Note 12 – Plans of Restructuring		122
	Note 13 – Earnings Per Share		124
	Note 14 – Income Taxes		125
	Note 15 – Concentrations of Risk		129
	Note 16 – Derivatives and Hedging Activities		130
	Note 17 – Revenue from Contracts with Customers		131
	Note 18 – Segment and Geographic Data		132
	Note 19 – Employee Benefit Plans		134
	Note 20 – Commitments and Contingencies		138
	Note 21 – Quarterly Information (Unaudited)		143
	Note 22 – Supplemental Cash Flow Information		144
	Note 23 – Related Party Transactions		144

Schedule II - Valuation and Qualifying Accounts for the years ended December 28, 2019,
	December 29, 2018 and December 30, 2017		161
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”) as of December 28, 2019 and December 29, 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 28, 2019, the related notes and schedule (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 at December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019, 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 28, 2019, 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, 2020 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, effective on December 30, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic 842, Leases.

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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee of the Board of Directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit

matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Business Combinations

As described in Note 11 of the consolidated financial statements, the Company acquired several companies in the current year. As a result of the acquisitions, management was required to determine estimated fair values of the assets acquired and liabilities assumed, including certain identifiable intangible assets. In some instances, management utilized third-party valuation specialists to assist in the preparation of the valuation of certain identifiable intangible assets.

We identified the determination of fair values of certain identifiable intangible assets, which primarily included customer relationships, as a critical audit matter. Management exercised significant judgment to develop and select assumptions in the measurement of the fair value of the identifiable intangible assets. Significant assumptions included discount rates, customer attrition, and projected revenue growth rates. These assumptions are forward-looking and could be affected by future economic and market conditions. The principal considerations for our determination included the following: (i) changes in the significant assumptions could have a significant impact on the fair value of the assets acquired, (ii) significant unobservable inputs and assumptions utilized by management in determining the fair value of the identifiable intangible assets acquired, and (iii) appropriateness of use of various valuation models to determine the fair value of the identifiable intangible assets acquired. Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

Assessing the design and testing operating effectiveness of certain controls over the development of significant assumptions used to determine the fair values of certain identifiable intangible assets, and controls over the selection of the valuation models used by management.
Assessing the reasonableness of significant underlying assumptions through: (i) evaluating historical performance of target entities, (ii) assessing financial projections against industry metrics and peer-group companies, and (iii) performing sensitivity analyses and evaluating the potential effect of changes in the significant assumptions.
Utilizing personnel with specialized knowledge and skill with valuation to assist in: (i) assessing the reasonableness of certain significant assumptions incorporated into the various valuation models, and (ii) assessing the appropriateness of various valuation models utilized by management to determine the fair values of the assets acquired.

Uncertain Tax Position

As described in Note 14 of the consolidated financial statements the Company operates in multiple jurisdictions and is subject to transfer pricing compliance for intercompany transactions that are subject to audit by taxing authorities. The resolution of these audits may span multiple years.

We identified the determination of uncertain tax positions related to transfer pricing from intercompany transactions as a critical audit matter. The principal considerations for our determination included complex judgments related to: (i) auditing the measurement of the liability for unrecognized tax benefits related to certain intercompany transactions because of assumptions applied to the interpretation of tax laws and legal rulings in multiple tax paying jurisdictions, (ii) determining whether a transfer pricing tax position’s technical merits are more-likely-than-not to be sustained when measuring the amount of tax benefits that qualifies for recognition, and (iii) assessing whether intercompany transactions are based on the arm’s length standard that may produce a range of arm’s length outcomes. Auditing these elements involved subjective auditor judgment, including involvement of

our tax professionals with specialized skills and knowledge.

The primary procedures we performed to address this critical audit matter included:

Assessing the design and testing operating effectiveness of certain controls over the recognition and measurement of uncertain tax positions.
Evaluating the appropriateness of management’s methods and assumptions used to estimate uncertain transfer pricing positions related to: (i) evaluating the ranges of arm’s length outcomes and pricing conclusions reached within management’s transfer pricing studies, (ii) verifying our understanding of the relevant facts by reading the Company’s correspondence with the relevant tax authorities and third-party advice obtained by the Company, and (iii) reviewing historical settlement activity from income tax authorities.
Utilizing personnel with specialized knowledge and skill in taxation to assist in evaluating the reasonableness of technical merits, management’s judgments and assumptions used in uncertain tax position calculations related to transfer pricing, and assessing the overall reasonableness of conclusions reached.

/s/ BDO USA, LLP

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

New York, NY

February 20, 2020

HENRY SCHEIN, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

				December 28,		December 29,
				2019		2018

ASSETS
Current assets:
	Cash and cash equivalents			$	106,097	$	56,885
	Accounts receivable, net of reserves of $60,002 and $53,121				1,246,246		1,168,776
	Inventories, net				1,428,799		1,415,512
	Prepaid expenses and other				445,360		451,033
	Assets of discontinued operations				-		1,083,014
			Total current assets		3,226,502		4,175,220
Property and equipment, net					329,645		314,221
Operating lease right-of-use assets, net					231,662		-
Goodwill					2,462,495		2,081,029
Other intangibles, net					572,878		376,031
Investments and other					327,919		420,367
Assets of discontinued operations					-		1,133,659
			Total assets	$	7,151,101	$	8,500,527

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	880,266	$	785,756
	Bank credit lines				23,975		951,458
	Current maturities of long-term debt				109,849		8,280
	Operating lease liabilities				65,349		-
	Liabilities of discontinued operations				-		577,607
	Accrued expenses:
		Payroll and related			265,206		242,876
		Taxes			165,171		154,613
		Other			528,553		498,237
			Total current liabilities		2,038,369		3,218,827
Long-term debt					622,908		980,344
Deferred income taxes					64,989		27,218
Operating lease liabilities					176,267		-
Other liabilities					331,173		357,741
Liabilities of discontinued operations					-		62,453
			Total liabilities		3,233,706		4,646,583

Redeemable noncontrolling interests					287,258		219,724
Redeemable noncontrolling interests from discontinued operations					-		92,432
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,
		143,353,459 outstanding on December 28, 2019 and
		151,401,668 outstanding on December 29, 2018			1,434		1,514
	Additional paid-in capital				47,768		-
	Retained earnings				3,116,215		3,208,589
	Accumulated other comprehensive loss				(167,373)		(248,771)
		Total Henry Schein, Inc. stockholders' equity			2,998,044		2,961,332
	Noncontrolling interests				632,093		580,456
			Total stockholders' equity		3,630,137		3,541,788
		Total liabilities, redeemable noncontrolling interests and stockholders' equity		$	7,151,101	$	8,500,527

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

				Years Ended
				December 28,		December 29,		December 30,
				2019		2018		2017

Net sales				$	9,985,803	$	9,417,603	$	8,883,438
Cost of sales					6,894,917		6,506,856		6,136,776
		Gross profit			3,090,886		2,910,747		2,746,662
Operating expenses:
	Selling, general and administrative				2,357,920		2,217,273		2,071,576
	Litigation settlements				-		38,488		5,325
	Restructuring costs				14,705		54,367		-
		Operating income			718,261		600,619		669,761
Other income (expense):
	Interest income				15,757		15,491		12,438
	Interest expense				(50,792)		(76,016)		(51,066)
	Other, net				(2,919)		(3,258)		(1,339)
		Income from continuing operations before taxes, equity in
			earnings of affiliates and noncontrolling interests		680,307		536,836		629,794
Income taxes					(159,515)		(107,432)		(308,975)
Equity in earnings of affiliates					17,900		21,037		15,293
Net gain (loss) on sale of equity investments					186,769		-		(17,636)
Net income from continuing operations					725,461		450,441		318,476
Income (loss) from discontinued operations					(6,323)		111,685		140,817
Net Income					719,138		562,126		459,293
	Less: Net income attributable to noncontrolling interests				(24,770)		(19,724)		(25,304)
	Less: Net (income) loss attributable to noncontrolling interests
			from discontinued operations		366		(6,521)		(27,690)
Net income attributable to Henry Schein, Inc.				$	694,734	$	535,881	$	406,299
Amounts attributable to Henry Schein Inc.:
Continuing operations				$	700,691	$	430,717	$	293,172
Discontinued operations					(5,957)		105,164		113,127
Net income attributable to Henry Schein, Inc.				$	694,734	$	535,881	$	406,299

Earnings per share from continuing operations attributable to
Henry Schein, Inc.:
	Basic			$	4.74	$	2.82	$	1.87
	Diluted			$	4.69	$	2.80	$	1.85

Earnings (loss) per share from discontinued operations
attributable to Henry Schein, Inc.:
	Basic			$	(0.04)	$	0.69	$	0.72
	Diluted			$	(0.04)	$	0.68	$	0.72

Earnings per share attributable to Henry Schein, Inc.:
	Basic			$	4.70	$	3.51	$	2.59
	Diluted			$	4.65	$	3.49	$	2.57

Weighted-average common shares outstanding:
	Basic				147,817		152,656		156,787
	Diluted				149,257		153,707		158,208

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



				Years Ended
				December 28,		December 29,		December 30,
				2019		2018		2017

Net income				$	719,138	$	562,126	$	459,293

Other comprehensive income (loss), net of tax:
	Foreign currency translation gain (loss)				(4,070)		(136,356)		191,886

	Unrealized gain (loss) from foreign currency hedging activities				(3,876)		626		(729)

	Unrealized investment gain (loss)				12		(3)		(3)

	Pension adjustment gain (loss)				(5,924)		3,033		3,933

Other comprehensive income (loss), net of tax					(13,858)		(132,700)		195,087
Comprehensive income					705,280		429,426		654,380
	Comprehensive income attributable to noncontrolling interests:
		Net income			(24,404)		(26,245)		(52,994)
		Foreign currency translation (gain) loss			1,848		13,996		(8,113)

			Comprehensive income attributable to noncontrolling interests		(22,556)		(12,249)		(61,107)

Comprehensive income attributable to Henry Schein, Inc.				$	682,724	$	417,177	$	593,273

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands, except share and per share data)

								Accumulated
		Common Stock		Additional				Other				Total
		$.01 Par Value		Paid-in		Retained		Comprehensive		Noncontrolling		Stockholders'
		Shares	Amount	Capital		Earnings		Income (Loss)		Interests		Equity
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		-		791		407,090
Foreign currency translation gain (excluding gain of $7,461
	attributable to Redeemable noncontrolling interests)	-	-		-				183,773		652		184,425
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		-		-		376		399
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	-	-		-		-		-		8,050		8,050
Repurchase and retirement of common stock		(5,864,404)	(59)		(97,205)		(352,736)		-		-		(450,000)
Stock issued upon exercise of stock options		197,434	2		5,264		-		-		-		5,266
Stock-based compensation expense		1,072,922	11		42,283		-		-		-		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		-		4,397		540,278
Foreign currency translation loss (excluding loss of $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 benefit of $0		-	-		-		-		(3)		-		(3)
Pension adjustment gain, net of tax of $1,179		-	-		-		-		3,033		-		3,033
Dividends paid		-	-		-		-		-		(656)		(656)
Other adjustments		-	-		(19)		-		-		713		694
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	-	-		-		-		-		564,270		564,270
Repurchase and retirement of common stock		(2,518,387)	(25)		(36,206)		(163,769)		-		-		(200,000)
Stock issued upon exercise of stock options		153,516	1		3,075		-		-		-		3,076
Stock-based compensation expense		340,794	4		36,236		-		-		-		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
Cumulative impact of adopting new accounting standards		-	-		-		(274)		-		-		(274)
Net income (excluding $14,838 attributable to Redeemable
	noncontrolling interests from continuing operations
	and ($366) from discontinued operations)	-	-		-		694,734		-		9,932		704,666
Foreign currency translation loss (excluding loss of $2,335
	attributable to Redeemable noncontrolling interests
	and ($592) gain from discontinued operations)	-	-		-		-		(2,222)		(105)		(2,327)
Unrealized loss from foreign currency hedging activities,
	net of tax benefit of $1,035	-	-		-		-		(3,876)		-		(3,876)
Unrealized investment gain, net of tax of $2		-	-		-		-		12		-		12
Pension adjustment loss, net of tax benefit of $1,806		-	-		-		-		(5,924)		-		(5,924)
Dividends paid		-	-		-		-		-		(535)		(535)
Other adjustments		-	-		(3)		-		-		-		(3)
Change in fair value of redeemable securities		-	-		7,300		-		-		-		7,300
Initial noncontrolling interests and adjustments related to
	business acquisitions	-	-		-		-		-		42,345		42,345
Adjustment for Animal Health Spin-off		87,629	1		-		-		-		-		1
Repurchase and retirement of common stock		(8,173,912)	(82)		(79,785)		(445,133)		-		-		(525,000)
Stock issued upon exercise of stock options		2,526	-		34		-		-		-		34
Stock-based compensation expense		215,408	2		45,243		-		-		-		45,245
Shares withheld for payroll taxes		(179,860)	(1)		(10,844)		-		-		-		(10,845)
Settlement of stock-based compensation awards		-	-		160		-		-		-		160
Share Sale related to Animal Health business		-	-		361,090		-		-		-		361,090
Separation of Animal Health business		-	-		(73,970)		(543,158)		93,408		-		(523,720)
Transfer of charges in excess of capital		-	-		(201,457)		201,457		-		-		-
Balance, December 28, 2019		143,353,459	1,434		47,768		3,116,215		(167,373)		632,093		3,630,137

See accompanying notes.

HENRY SCHEIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

					Years Ended
					December 28,		December 29,		December 30,
					2019		2018		2017
Cash flows from operating activities:
	Net income				$	719,138	$	562,126	$	459,293
	Income (loss) from discontinued operations					(6,323)		111,685		140,817
	Income from continuing operations					725,461		450,441		318,476
	Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization			184,942		143,630		133,855
			Net (gain) loss on sale of equity investments			(250,167)		-		17,636
			Stock-based compensation expense			44,920		32,621		36,845
			Provision for losses on trade and other accounts receivable			12,612		14,384		7,915
			Benefit from deferred income taxes			(4,057)		(36,007)		(1,773)
			Equity in earnings of affiliates			(17,900)		(21,037)		(15,293)
			Distributions from equity affiliates			71,469		20,386		20,895
			Changes in unrecognized tax benefits			1,941		(1,169)		(2,208)
			Provision for (benefit from) transition tax			-		(10,000)		140,000
			Other			5,684		369		9,850
			Changes in operating assets and liabilities, net of acquisitions:
				Accounts receivable		(72,689)		(127,201)		(128,498)
				Inventories		14,702		(41,042)		(143,155)
				Other current assets		(57,291)		(165,645)		(101,024)
				Accounts payable and accrued expenses		160,851		191,225		81,514
Net cash provided by operating activities from continuing operations						820,478		450,955		375,035
Net cash provided by (used in) operating activities from discontinued operations						(166,391)		233,751		170,480
Net cash provided by operating activities						654,087		684,706		545,515
Cash flows from investing activities:
	Purchases of fixed assets					(76,219)		(71,283)		(62,404)
	Payments related to equity investments and business
		acquisitions, net of cash acquired				(655,879)		(53,240)		(181,415)
	Proceeds from sale of equity investment					307,251		1,000		34,048
	Repayments from (borrowings for) loan to affiliate					16,713		(25,700)		6,700
	Other					(14,175)		(15,101)		(9,670)
Net cash used in investing activities from continuing operations						(422,309)		(164,324)		(212,741)
Net cash used in investing activities from discontinued operations						(2,064)		(28,630)		(129,535)
Net cash used in investing activities						(424,373)		(192,954)		(342,276)
Cash flows from financing activities:
	Net change in bank borrowings					(927,912)		210,741		302,941
	Proceeds from issuance of long-term debt					741		115,000		200,440
	Principal payments for long-term debt					(260,944)		(24,735)		(59,288)
	Debt issuance costs					(391)		(501)		(1,892)
	Proceeds from issuance of stock upon exercise of stock options					34		3,076		5,266
	Payments for repurchases of common stock					(525,000)		(200,000)		(450,000)
	Payments for taxes related to shares withheld for employee taxes					(10,814)		(18,023)		(44,832)
	Distribution received related to Animal Health Spin-off					1,120,000		-		-
	Proceeds related to Animal Health Share Sale					361,090		-		-
	Proceeds from (distributions to) noncontrolling shareholders					51,498		(7,351)		(8,673)
	Acquisitions of noncontrolling interests in subsidiaries					(2,358)		(287,635)		(11,532)
	Payments to Henry Schein Animal Health Business					(169,295)		(192,745)		(6,374)
Net cash used in financing activities from continuing operations						(363,351)		(402,173)		(73,944)
Net cash provided by (used in) financing activities from discontinued operations						147,371		(201,603)		(38,607)
Net cash used in financing activities						(215,980)		(603,776)		(112,551)
Effect of exchange rate changes on cash and cash equivalents from continuing operations						14,394		14,425		26,985
Effect of exchange rate changes on cash and cash equivalents from discontinued operations						(2,240)		3,150		(5,396)
Net change in cash and cash equivalents from continuing operations						49,212		(101,117)		115,335
Net change in cash and cash equivalents from discontinued operations						(23,324)		6,668		(3,058)
Cash and cash equivalents, beginning of period						56,885		158,002		42,667
Cash and cash equivalents, end of period					$	106,097	$	56,885	$	158,002

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, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, the Netherlands, New Zealand, Poland, Portugal, Singapore, 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 8 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 28, 2019 and December 29, 2018, trade accounts receivable that can only be used to settle obligations of this VIE were $127 million and $422 million, respectively, and the liabilities of the VIE where the creditors have recourse to us were $100 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 28, 2019, December 29, 2018 and December 30, 2017 consisted of 52 weeks.

Revenue Recognition

On December 31, 2017, we adopted Accounting Standards Codification (“ASC”) 606 (“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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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 and medical consumable products, equipment (Health care 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.

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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 17 for additional disclosures of disaggregated net sales and Note 18 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 28, 2019 and December 29, 2018 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 balance sheet. At December 29, 2018, the current portion of contract liabilities of $65.3 million was reported in Accrued expenses: Other, and $5.0 million related to non-current contract liabilities were reported in Other liabilities. During the year ended December 28, 2019, we recognized substantially all of the current contract liability amounts that were

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

previously deferred at December 29, 2018. At December 28, 2019, the current and non-current portion of contract liabilities were $70.8 million and $6.2 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. Our deferred commission balances as of December 28, 2019 and December 29, 2018 were not material.

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 $29.5 million and $41.1 million, primarily related to payments for inventory, were classified as accounts payable as of December 28, 2019 and December 29, 2018.

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 $73.8 million, $70.6 million and $65.0 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

Advertising and Promotional Costs

We generally expense advertising and promotional costs as incurred. Total advertising and promotional expenses were $25.2 million, $12.9 million and $0.8 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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 3 - 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 14–Income Taxes. 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, as well as our net investments in foreign subsidiaries. Our risk management policy requires that derivative contracts used as hedges be effective at reducing the risks associated with the exposure being hedged and be designated as a hedge at the inception of the contract. We do not enter into derivative instruments for speculative purposes. Our derivative instruments primarily include foreign currency forward agreements related to certain intercompany loans, certain forecasted inventory purchase commitments with foreign suppliers and foreign currency forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net investment hedges.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Foreign currency forward agreements related to forecasted inventory purchase commitments with foreign suppliers and foreign currency swaps related to foreign currency denominated debt are designated as cash flow hedges. For derivatives that are designated and qualify as cash flow hedges, the changes in the fair value of the derivative 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.

Foreign currency forward contracts related to our euro-denominated foreign operations are designated as net investment hedges. For derivatives that are designated and qualify as net investment hedges, the changes in the fair value of the derivative is recorded in the foreign currency translation gain (loss) component of Accumulated other comprehensive income in stockholders’ equity until the net investment is sold or substantially liquidated.

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

We account for business acquisitions and combinations under the acquisition method of accounting, where 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, non-compete agreements and product development), 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. While we use our best estimates and assumptions to accurately value those assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill within our consolidated balance sheets. At the end of the measurement period or final determination of the values of such assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations. For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, there were no material adjustments recorded in our consolidated statement of income relating to changes in subsequent adjustments or 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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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.

Goodwill

Goodwill is 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 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 28, 2019, December 29, 2018 and December 30, 2017 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.

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 is impaired, we record an impairment charge in our consolidated statements of income.

For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, the results of our goodwill analysis did not result in any impairments.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 $72.3 million, $69.6 million and $67.5 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

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).

Leases

We determine if an arrangement contains a lease at inception. An arrangement contains a lease if it implicitly or explicitly identifies an asset to be used and conveys the right to control the use of the identified asset in exchange for consideration. As a lessee, we include operating leases in Operating lease right-of-use (“ROU”) assets, Operating lease liabilities, and Non-current operating lease liabilities in our consolidated balance sheet. Finance leases are included in Property and equipment, Current maturities of long-term debt, and Long-term debt in our consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized upon commencement of the lease based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate based on the estimated rate of interest for fully amortizing borrowings over a similar term of the lease payments at commencement date to determine the present value of lease payments. When readily determinable, we use the implicit rate. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Expenses associated with operating leases finance leases are included in “Selling, general and

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

administrative” and “Interest expense”, respectively within our Consolidated Statement of Income. Leases with a lease term of 12 months or less are not capitalized.

We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component, except non-lease components for leases of vehicles which are accounted for separately. When a vehicle lease contains both lease and non-lease components, we allocate the transaction price based on the relative standalone selling price.

Accounting Pronouncements Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842)” related to leases requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessors for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

We adopted the standard on December 30, 2018 using a modified retrospective approach utilizing a transition relief expedient method whereby we 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 elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease classification. Information related to leases as of December 28, 2019 is presented under Topic 842, while prior period amounts are not adjusted and continue to be reported under legacy guidance in Topic 840.

The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.

Adoption of the new standard resulted in the recording of additional net operating lease assets of $259.9 million and operating lease liabilities of $267.3 million, and a decrease of $1.1 million and $8.5 million in prepaid rent and deferred rent liabilities, respectively. The standard did not materially impact our consolidated net income and had no impact on cash flows.

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 Cuts and Jobs Act of 2017 (the “Tax Act”). The adoption of this ASU did not have a material impact on our consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815), which simplified the requirements for hedge accounting, more closely aligns hedge accounting risk 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 relationships. This ASU will make more financial and nonfinancial hedging strategies eligible for hedge accounting. The adoption of this ASU did not have a material impact on our consolidated financial statements.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Recently Issued Accounting Standards

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 loan loss activity and current known activity regarding our outstanding loans, 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 December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We do not expect that the requirements of ASU 2017-04 will have a material impact on our consolidated financial statements.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 2 – Discontinued Operations

Animal Health Spin-off

On February 7, 2019 (the “Distribution Date”), we completed the separation (the “Separation”) and subsequent merger (“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”). 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 million from Covetrus pursuant to certain debt financing incurred by Covetrus. On the Distribution Date and prior to the Animal Health Spin-off, 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) held by certain employees of the Henry Schein Animal Health Business (in the form of certain equity awards), 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) held by certain employees of Vets First Choice (in the form of certain equity awards). 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.

In connection with the completion of the Animal Health Spin-off, we entered into a transition services agreement with Covetrus under which we have agreed to provide certain transition services for up to twenty-four months in areas such as information technology, finance and accounting, human resources, supply chain, and real estate and facility services.

As a result of the Separation, the financial position and results of operations of the Henry Schein Animal Health Business are presented as discontinued operations and have been excluded from continuing operations and segment results for all periods presented. The accompanying Notes to the Consolidated Financial Statements have been revised to reflect the effect of the Separation and all prior year balances have been revised accordingly to reflect continuing operations only. The historical statements of Comprehensive Income (Loss) and Shareholders' Equity have not been revised to reflect the Separation and instead reflect the Separation as an adjustment to the balances at December 28, 2019.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Summarized financial information for our discontinued operations is as follows:

	Year Ended
	December 28,		December 29,			December 30,
	2019		2018			2017

Net sales	$	319,522	$	3,784,392	$	3,578,105
Cost of goods sold		260,097		3,100,055		2,925,664
Gross profit		59,425		684,337		652,441
Selling, general and administrative		68,919		531,905		462,835
Operating income (loss)		(9,494)		152,432		189,606
Income tax expense (benefit)		(2,181)		48,060		53,532
Income (loss) from discontinued operations		(6,323)		111,685		140,817
Net (income) loss attributable to noncontrolling interests		366		(6,521)		(27,690)
Net income (loss) from discontinued operations
attributable to Henry Schein, Inc.		(5,957)		105,164		113,127

The financial information above represents activity of the discontinued operations during the year through the Distribution Date. The loss from discontinued operations for the year ended December 28, 2019 was primarily attributable to the inclusion of the transaction costs directly related to the Animal Health Spin-off. See Note 23-Related Party Transactions for additional information.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following are the amounts of assets and liabilities that were transferred to Covetrus as of February 7, 2019 and December 29, 2018.

			February 7,		December 29,
			2019		2018


Cash and cash equivalents			$	6,815	$	23,324
Accounts receivable, net				432,812		434,935
Inventories, net				536,637		555,230
Prepaid expenses and other				120,546		69,525
		Total current assets of discontinued operations		1,096,810		1,083,014
Property and equipment, net				69,790		68,177
Operating lease right-of-use asset, net				57,012		-
Goodwill				742,931		739,266
Other intangibles, net				205,793		208,213
Investments and other				120,518		118,003
		Total long-term assets of discontinued operations		1,196,044		1,133,659
Total assets of discontinued operations			$	2,292,854	$	2,216,673

Accounts payable			$	316,162	$	441,453
Current maturities of long-term debt				657		675
Operating lease liabilities				18,951		-
Accrued expenses:
	Payroll and related			36,847		36,888
	Taxes			24,060		17,552
	Other			80,400		81,039
		Total current liabilities of discontinued operations		477,077		577,607
Long-term debt				1,176,105		23,529
Deferred income taxes				17,019		4,352
Operating lease liabilities				38,668		-
Other liabilities				29,209		34,572
		Total long-term liabilities of discontinued operations		1,261,001		62,453
Total liabilities of discontinued operations			$	1,738,078	$	640,060
Redeemable noncontrolling interests			$	28,270	$	92,432

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 3 – 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 28,		December 29,
		2019		2018
Land		$	18,030	$	17,985
Buildings and permanent improvements			121,823		127,012
Leasehold improvements			104,089		103,929
Machinery and warehouse equipment			124,640		108,249
Furniture, fixtures and other			99,083		120,693
Computer equipment and software			330,926		427,237
			798,591		905,105
Less accumulated depreciation			(468,946)		(590,884)
	Property and equipment, net	$	329,645	$	314,221

		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 28, 2019, December 29, 2018 and December 30, 2017 was $64.4 million, $58.1 million and $54.7 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 4 – Goodwill and Other Intangibles, Net

The changes in the carrying amount of goodwill for the years ended December 28, 2019 and December 29, 2018 were as follows:

			Health Care Distribution		Technology and Value-Added Services		Total
Balance as of December 30, 2017			$	1,431,680	$	121,902	$	1,553,582
	Adjustments to goodwill:
		Acquisitions		38,848		530,064		568,912
		Foreign currency translation		(37,116)		(4,349)		(41,465)
Balance as of December 29, 2018				1,433,412		647,617		2,081,029
	Adjustments to goodwill:
		Acquisitions		50,276		338,352		388,628
		Foreign currency translation		(6,969)		(193)		(7,162)
Balance as of December 28, 2019			$	1,476,719	$	985,776	$	2,462,495

Other intangible assets consisted of the following:

	December 28, 2019						December 29, 2018
			Accumulated						Accumulated
	Cost		Amortization		Net		Cost		Amortization		Net
Non-compete agreements	$	34,553	$	(9,327)	$	25,226	$	34,667	$	(6,834)	$	27,833
Trademarks / trade names - definite lived		99,314		(44,134)		55,180		72,462		(36,165)		36,297
Customer relationships and lists		715,630		(274,330)		441,300		479,542		(216,007)		263,535
Product Development		85,211		(42,326)		42,885		73,294		(34,689)		38,605
Other		26,237		(17,950)		8,287		34,620		(24,859)		9,761
Total	$	960,945	$	(388,067)	$	572,878	$	694,585	$	(318,554)	$	376,031

Non-compete agreements represent amounts paid primarily to key employees and prior owners of acquired businesses, as well as certain sales persons, in exchange for placing restrictions on their ability to pose a competitive risk to us. Such amounts are amortized, on a straight-line basis over the respective non-compete period, which generally commences upon termination of employment or separation from us. The weighted-average non-compete period for agreements currently being amortized was approximately 4.9 years as of December 28, 2019.

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 8.0 years as of December 28, 2019. 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 10.0 years as of December 28, 2019. Product development is a definite-lived intangible asset that is amortized on a straight-line basis over a weighted-average period of approximately 8.6 years as of December 28, 2019.

Amortization expense related to definite-lived intangible assets for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 was $108.3 million, $75.3 million and $70.3 million. The annual amortization expense expected to be recorded for existing intangibles assets for the years 2020 through 2024 is $102.7 million, $95.6 million, $81.4 million, $73.7 million and $59.3 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 5 – Investments and Other

Investments and other consisted of the following:

		December 28,		December 29,
		2019		2018
Investment in unconsolidated affiliates		$	164,659	$	260,954
Non-current deferred foreign, state and local income taxes			23,625		12,196
Notes receivable (1)			43,544		66,047
Capitalized costs for internally generated software for resale			42,445		37,659
Distribution rights and exclusivity agreements, net of amortization			4		582
Security deposits			534		-
Acquisition-related indemnification			38,464		28,283
Other long-term assets			14,644		14,646
	Total	$	327,919	$	420,367

(1)	Long-term notes receivable carry interest rates ranging from 1.0% to 11.5% and are due in varying installments through
	February 01, 2025.

Amortization expense related to other long-term assets for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 was $12.3 million, $10.2 million and $8.8 million.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 6 – Debt

Bank Credit Lines

Bank credit lines consisted of the following:

	December 28,		December 29,
	2019		2018
Revolving credit agreement	$	-	$	175,000
Other short-term bank credit lines		23,975		376,458
Committed loan associated with Animal Health spin-off		-		400,000
Total	$	23,975	$	951,458

Revolving Credit Agreement

On April 18, 2017, we entered into a $750 million revolving credit agreement (the “Credit Agreement”), which matures in April 2022. 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. We expect that the LIBOR rate will be discontinued at some point during 2021. We expect to work with our lenders to identify a suitable replacement rate and amend our debt agreements to reflect this new reference rate accordingly. We do not believe that the discontinuation of LIBOR as a reference rate in our debt agreements will have a material adverse effect on our financial position or materially affect our interest expense. Additionally, 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 28, 2019 and December 29, 2018, the borrowings on this revolving credit facility were $0.0 million and $175.0 million, respectively. As of December 28, 2019 and December 29, 2018, there were $9.6 million and $11.2 million of letters of credit, respectively, provided to third parties under the credit facility.

Other Short-Term Credit Lines

As of December 28, 2019 and December 29, 2018, we had various other short-term bank credit lines available, of which $24.0 million and $376.5 million, respectively, were outstanding. At December 28, 2019 and December 29, 2018, borrowings under all of our credit lines had a weighted average interest rate of 3.45% and 3.30%, respectively.

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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Long-term debt

Long-term debt consisted of the following:

		December 28,		December 29,
		2019		2018
Private placement facilities		$	621,274	$	628,189
U.S. trade accounts receivable securitization			100,000		350,000
Various collateralized and uncollateralized loans payable with interest,
	in varying installments through 2024 at interest rates
	ranging from 2.56% to 10.5% at December 28, 2019 and
	ranging from 2.61% to 4.17% at December 29, 2018		6,089		6,491
Finance lease obligations (see Note 7)			5,394		3,944
Total			732,757		988,624
Less current maturities			(109,849)		(8,280)
	Total long-term debt	$	622,908	$	980,344

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

(in thousands, except per share data)

The components of our private placement facility borrowings as of December 28, 2019 are presented in the following table (in thousands):


	Amount of
Date of	Borrowing		Borrowing
Borrowing	Outstanding		Rate		Due Date
September 2, 2010	$	100,000	3.79	%	September 2, 2020
January 20, 2012		50,000	3.45		January 20, 2024
January 20, 2012 (1)		21,429	3.09		January 20, 2022
December 24, 2012		50,000	3.00		December 24, 2024
June 2, 2014		100,000	3.19		June 2, 2021
June 16, 2017		100,000	3.42		June 16, 2027
September 15, 2017		100,000	3.52		September 15, 2029
January 2, 2018		100,000	3.32		January 2, 2028
Less: Deferred debt issuance costs		(155)
	$	621,274

(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. Our current facility, which has a purchase limit of $350 million, and was previously scheduled to expire on April 29, 2020, has been extended to April 29, 2022. As of December 28, 2019 and December 29, 2018, the borrowings outstanding under this securitization facility were $100 million and $350 million, respectively. At December 28, 2019, the interest rate on borrowings under this facility was based on the asset-backed commercial paper rate of 1.90% plus 0.75%, for a combined rate of 2.65%. 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%.

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

(in thousands, except per share data)

As of December 28, 2019, the aggregate amounts of long-term debt, including finance lease obligations and net of deferred debt issuance costs of $155, maturing in each of the next five years and thereafter are as follows:

2020		$	109,849
2021			108,842
2022			110,504
2023			1,529
2024			101,112
Thereafter			300,921
	Total	$	732,757

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 7 – Leases

Leases

We have operating and finance leases for corporate offices, office space, distribution and other facilities, vehicles and certain equipment. Our leases have remaining terms of less than one year to 16 years, some of which may include options to extend the leases for up to 10 years. The components of lease expense were as follows:

		Year Ended
		December 28,
		2019
Operating lease cost (1)		$	88,246
Finance lease cost:
	Amortization of right-of-use assets	$	1,154
	Interest on lease liabilities		131
Total finance lease cost		$	1,285

(1)	Includes variable lease expenses.

Supplemental balance sheet information related to leases is as follows:
		December 28,
		2019
Operating Leases:
Operating lease right-of-use assets		$	231,662

Current operating lease liabilities			65,349
Non-current operating lease liabilities			176,267
	Total operating lease liabilities	$	241,616

Finance Leases:
Property and equipment, at cost		$	10,268
Accumulated depreciation			(4,581)
Property and equipment, net of accumulated depreciation		$	5,687

Current maturities of long-term debt		$	1,736
Long-term debt			3,658
	Total finance lease liabilities	$	5,394

Weighted Average Remaining Lease Term in Years:
	Operating leases		5.5
	Finance leases		5.0

Weighted Average Discount Rate:
	Operating leases		3.4	%
	Finance leases		2.2	%

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Supplemental cash flow information related to leases is as follows:
		December 28,
		2019
Cash paid for amounts included in the measurement of lease liabilities:
	Operating cash flows for operating leases	$	79,699
	Operating cash flows for finance leases		99
	Financing cash flows for finance leases		1,413
Right-of-use assets obtained in exchange for lease obligations:
	Operating leases (1)	$	297,800
	Finance leases		2,940

(1)	Includes leases that commenced during the year ended December 28, 2019, as well as balances related to leases in existence as of the date of the adoption of Topic 842.

Maturities of lease liabilities are as follows:
		December 28,
		2019
		Operating		Finance
		Leases		Leases
2020	$	70,986	$	1,853
2021		56,557		1,529
2022		40,601		646
2023		27,021		304
2024		18,944		283
Thereafter		51,762		1,117
Total future lease payments		265,871		5,732
Less: imputed interest		(24,255)		(338)
Total	$	241,616	$	5,394

As of December 28, 2019 we have additional operating leases with total lease payments of $9.0 million for buildings and vehicles that have not yet commenced. These operating leases will commence during 2020 with lease terms of two to 10 years.

As previously disclosed in our December 29, 2018 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable operating leases and capital leases as of December 29, 2018 were as follows (in thousands):

		Operating		Capital
		Leases		Leases
2019	$	62,535	$	976
2020		47,686		801
2021		34,633		501
2022		25,626		305
2023		19,560		283
Thereafter		62,918		1,430
Total minimum lease payments	$	252,958		4,296
Less: imputed interest (Capital leases only)				(352)
Total present value of minimum lease payments			$	3,944

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 8 – 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 28, 2019, December 29, 2018 and December 30, 2017 are presented in the following table:

		December 28,		December 29,		December 30,
		2019		2018		2017
Balance, beginning of period		$	219,724	$	465,585	$	285,567
Decrease in redeemable noncontrolling interests due to
	redemptions		(2,270)		(287,767)		(22,294)
Increase in redeemable noncontrolling interests due to
	business acquisitions		74,865		4,655		72,291
Net income attributable to redeemable noncontrolling interests			14,838		15,327		24,513
Dividends declared			(10,264)		(8,206)		(7,680)
Effect of foreign currency translation gain (loss) attributable to
	redeemable noncontrolling interests		(2,335)		(11,330)		4,530
Change in fair value of redeemable securities			(7,300)		41,460		108,658
Balance, end of period		$	287,258	$	219,724	$	465,585

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 9 – 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 28,		December 29,		December 30,
			2019		2018		2017
Attributable to Redeemable noncontrolling interests:
		Foreign currency translation adjustment	$	(20,338)	$	(18,595)	$	(5,564)

Attributable to noncontrolling interests:
		Foreign currency translation adjustment	$	(531)	$	(426)	$	539

Attributable to Henry Schein, Inc.:
	Foreign currency translation adjustment		$	(143,172)	$	(234,799)	$	(112,439)
	Unrealized loss from foreign currency hedging activities			(4,032)		(156)		(782)
	Unrealized investment gain (loss )			6		(6)		(3)
	Pension adjustment loss			(20,175)		(13,810)		(16,843)
		Accumulated other comprehensive loss	$	(167,373)	$	(248,771)	$	(130,067)

Total Accumulated other comprehensive loss			$	(188,242)	$	(267,792)	$	(135,092)

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

	December 28,		December 29,		December 30,
	2019		2018		2017
Net income	$	719,138	$	562,126	$	459,293

Foreign currency translation gain (loss)		(4,070)		(136,356)		191,886
Tax effect		-		-		-
Foreign currency translation gain (loss)		(4,070)		(136,356)		191,886

Unrealized gain (loss) from foreign currency hedging activities		(4,911)		1,022		(1,515)
Tax effect		1,035		(396)		786
Unrealized gain (loss) from foreign currency hedging activities		(3,876)		626		(729)

Unrealized investment gain (loss)		14		(3)		(4)
Tax effect		(2)		-		1
Unrealized investment gain (loss)		12		(3)		(3)

Pension adjustment gain (loss)		(7,730)		4,212		4,247
Tax effect		1,806		(1,179)		(314)
Pension adjustment gain (loss)		(5,924)		3,033		3,933

Comprehensive income	$	705,280	$	429,426	$	654,380

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 28, 2019, December 29, 2018 and December 30, 2017 was impacted by changes in foreign currency exchange rates of the Euro, Brazilian Real, British Pound and Australian Dollar.

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

		December 28,		December 29,		December 30,
		2019		2018		2017
Comprehensive income attributable to
	Henry Schein, Inc.	$	682,724	$	417,177	$	593,273
Comprehensive income attributable to
	noncontrolling interests		9,827		3,432		1,443
Comprehensive income attributable to
	Redeemable noncontrolling interests		12,729		8,817		59,664
Comprehensive income		$	705,280	$	429,426	$	654,380

Note 10 – Fair Value Measurements

Fair value is defined 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. The hierarchy for determining 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 are described as follows:

Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted 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 based on the interest rates in the applicable markets.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Debt

The fair value of our debt (including bank credit lines) is classified as Level 3 within the fair value hierarchy as of December 28, 2019 and December 29, 2018 was estimated at $756.7 million and $1,940.1 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 certain intercompany loans, certain forecasted inventory purchase commitments with foreign suppliers and foreign currency forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net investment hedges.

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

The values for Redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy and are based on recent transactions and/or implied multiples of earnings. The details of the changes in Redeemable noncontrolling interests are presented in Note 8.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 28, 2019 and December 29, 2018:

			December 28, 2019
				Level 1		Level 2		Level 3		Total

Assets:
	Derivative contracts		$	-	$	567	$	-	$	567
		Total assets	$	-	$	567	$	-	$	567

Liabilities:
	Derivative contracts		$	-	$	5,795	$	-	$	5,795
		Total liabilities	$	-	$	5,795	$	-	$	5,795

Redeemable noncontrolling interests			$	-	$	-	$	287,258	$	287,258

			December 29, 2018
				Level 1		Level 2		Level 3		Total

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			$	-	$	-	$	219,724	$	219,724

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 11 – Business Acquisitions and Divestitures

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

We completed acquisitions during the year ended December 28, 2019, which were immaterial to our financial statements individually. In the aggregate, these transactions resulted in consideration of $652.9 million in 2019 related to business combinations, for net assets amounting to $19.7 million. As of December 28, 2019, we had recorded $310.4 million identifiable intangibles, $395.3 million of goodwill and $72.5 million of non-controlling interest, related to these acquisitions.

Henry Schein One, LLC

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. A Monte Carlo simulation was utilized to value the additional contingent interests that are subject to operating targets. Key assumptions that were applied to derive the fair value of the contingent interests include an assumed equity value of Henry Schein One, LLC at its inception date, a risk-free interest rate based on U.S. treasury yields, an assumed future dividend yield, a risk-adjusted discount rate applied to projected future cash flows, an assumed equity volatility based on historical stock price returns of a group of guideline companies, and an estimated correlation of annual cash flow returns to equity returns. As a result of the transaction with Internet Brands, we recorded $550.9 million of noncontrolling interest within stockholders’ equity as of December 28, 2019.

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 28, 2019, the goodwill associated with this transaction is $533.9 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.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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 28, 2019, December 29, 2018 and December 30, 2017, there were no material adjustments recorded in our consolidated statement of income relating to changes in estimated contingent purchase price liabilities.

Divestitures of Investments

During the fourth quarter of 2019, we sold an equity investment in Hu-Friedy Mfg. Co., LLC, a manufacturer of dental instruments and infection prevention solutions. Our investment was non-controlling, we were not involved in running the business and had no representation on the board of directors. During the fourth quarter of 2019, we also sold certain other equity investments. In the aggregate, the sales of these investments resulted in a pre-tax gain of approximately $250.2 million, net of taxes of approximately $63.4 million. For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, we recognized approximately $6.0 million, $10.4 million and $6.4 million of equity in earnings from these affiliates.

During 2017 we sold our equity ownership in E4D Technologies resulting in a loss of approximately $17.6 million. There was no tax benefit recognized related to this loss.

Acquisition Costs

During the years ended December 28, 2019, December 29, 2018 and December 30, 2017 we incurred $4.5 million, $7.3 million and $5.3 million in acquisition costs from continuing operations.

In February 2019, we completed the Animal Health Spin-off. During the years ended December 28, 2019 and December 29, 2018, we incurred $23.6 million and $38.9 million in transaction costs associated with this transaction. We expect to incur additional spin-off related transaction costs during 2020 related to required tax and other matters. All transaction costs related to the Animal Health Spin-off have been included in results from discontinued operations.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 12 – Plans of Restructuring

On July 9, 2018, we committed to an initiative to rationalize our operations and provide expense efficiencies. These actions allowed us to execute on our plan to reduce our cost structure and fund new initiatives that drive growth under our 2018 to 2020 strategic plan. This initiative has resulted in the elimination of approximately 4% of our workforce and the closing of certain facilities.

During the years ended December 28, 2019 and December 29, 2018, we recorded restructuring charges of $14.7 million and $54.4 million, respectively. The costs associated with these restructurings are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

On November 20, 2019, we committed to the contemplated initiative, intended to mitigate stranded costs associated with the Animal Health Spin-off as well as to rationalize operations and provide expense efficiencies. These activities are expected to be completed by the end of 2020. We are currently unable in good faith to make a determination of an estimate of the amount or range of amounts expected to be incurred in connection with these activities, both with respect to each major type of cost associated therewith and with respect to the total cost, or an estimate of the amount or range of amounts that will result in future cash expenditures. We will disclose this information after we determine such estimates or range of estimates.

The following table shows the amounts expensed and paid for restructuring costs that were incurred during our 2019, 2018 and 2017 fiscal years and the remaining accrued balance of restructuring costs as of December 28, 2019, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:


			Facility
	Severance		Closing
	Costs		Costs		Other		Total
Balance, December 31, 2016	$	20,447	$	2,130	$	73	$	22,650
Provision		-		-		-		-
Payments and other adjustments		(17,360)		(815)		(49)		(18,224)
Balance, December 30, 2017	$	3,087	$	1,315	$	24	$	4,426
Provision		50,197		3,153		1,017		54,367
Payments and other adjustments		(23,320)		(2,865)		(883)		(27,068)
Balance, December 29, 2018	$	29,964	$	1,603	$	158	$	31,725
Provision		13,741		937		27		14,705
Payments and other adjustments		(30,794)		(1,714)		(112)		(32,620)
Balance, December 28, 2019	$	12,911	$	826	$	73	$	13,810

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 2019, 2018 and 2017 fiscal years and the remaining accrued balance of restructuring costs as of December 28, 2019:

			Technology and
	Health Care		Value-Added
	Distribution		Services		Total
Balance, December 31, 2016	$	22,505	$	145	$	22,650
Provision		-		-		-
Payments and other adjustments		(18,079)		(145)		(18,224)
Balance, December 30, 2017	$	4,426	$	-	$	4,426
Provision		50,824		3,543		54,367
Payments and other adjustments		(24,959)		(2,109)		(27,068)
Balance, December 29, 2018	$	30,291	$	1,434	$	31,725
Provision		13,935		770		14,705
Payments and other adjustments		(30,853)		(1,767)		(32,620)
Balance, December 28, 2019	$	13,373	$	437	$	13,810

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 13 – 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 28,	December 29,	December 30,
		2019	2018	2017
Basic		147,817	152,656	156,787
Effect of dilutive securities:
	Stock options, restricted stock and restricted stock units	1,440	1,051	1,421
	Diluted	149,257	153,707	158,208

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 14 – Income Taxes

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

		Years ended
		December 28,		December 29,		December 30,
		2019		2018		2017
Domestic		$	507,003	$	405,289	$	526,586
Foreign			173,304		131,547		103,208
	Total	$	680,307	$	536,836	$	629,794

The provisions for income taxes were as follows:

				Years ended
				December 28,		December 29,		December 30,
				2019		2018		2017
Current income tax expense:
	U.S. Federal			$	93,418	$	71,854	$	247,254
	State and local				28,150		22,533		19,489
	Foreign				42,004		38,433		41,043
		Total current			163,572		132,820		307,786

Deferred income tax expense (benefit):
	U.S. Federal				5,633		206		12,927
	State and local				1,597		(1,622)		1,621
	Foreign				(11,287)		(23,972)		(13,359)
		Total deferred			(4,057)		(25,388)		1,189
			Total provision	$	159,515	$	107,432	$	308,975

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 28,		December 29,
			2019		2018

Deferred income tax asset:
	Investment in partnerships		$	1,420	$	4,150
	Net operating losses and other carryforwards			43,663		43,754
	Inventory, premium coupon redemptions and accounts receivable
		valuation allowances		23,808		25,008
	Stock-based compensation			14,075		14,880
	Uniform capitalization adjustment to inventories			7,259		8,189
	Other asset			35,419		38,806
	Total deferred income tax asset			125,644		134,787
	Valuation allowance for deferred tax assets (1)			(20,699)		(22,403)
	Net deferred income tax asset			104,945		112,384
Deferred income tax liability
	Intangibles amortization			(135,754)		(103,309)
	Property and equipment			(10,555)		(13,075)
	Total deferred tax liability			(146,309)		(116,384)
Net deferred income tax asset (liability)			$	(41,364)	$	(4,000)


(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.”

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 28, 2019, we had foreign net operating loss carryforwards of $2.0 million, which can be utilized against future foreign income through December 31, 2026. Additionally, as of December 28, 2019, there were foreign net operating loss carryforwards of $144.9 million that have an indefinite life. As of December 28, 2019, the company had post-apportionment state net operating loss carryforwards of $14.3 million, which can be utilized against future state income through December 31, 2039. Additionally, as of December 28, 2019, there were post-apportionment state operating loss carryforwards of $21.1 million that have an indefinite life.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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

		Years ended
		December 28,		December 29,		December 30,
		2019		2018		2017
Income tax provision at federal statutory rate		$	142,865	$	112,735	$	220,427
State income tax provision, net of federal income tax effect			16,539		15,872		10,320
Foreign income tax benefit			(4,580)		(2,558)		(19,486)
Pass-through noncontrolling interest			(3,931)		(2,700)		(1,465)
Valuation allowance			(79)		2,017		1,629
Unrecognized tax benefits and audit settlements			3,671		2,126		4,196
Interest expense related to loans			(5,498)		(11,700)		(18,492)
Excess tax benefits related to stock compensation			(86)		(1,008)		(16,964)
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")			3,917		7,599		-
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 (credit) related to reorganization of legal entities
completed in preparation for the Animal Health spin-off			(1,333)		3,135		-
Other			8,030		3,528		(14,143)
	Total income tax provision	$	159,515	$	107,432	$	308,975

For the year ended December 28, 2019, our effective tax rate was 23.4% compared to 20.0% for the prior year period. In 2019, our effective tax rate was primarily impacted by state and foreign income taxes and interest expense. In 2018, our effective tax rate was primarily impacted by a reduction in the estimate of our transition tax associated with 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. 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 taxes due to the lower enacted federal income tax rate of 21%. We completed our analysis in the year ended December 29, 2018 and 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 taxes to reflect the new tax rate. 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 26.4% as compared to our actual effective tax rate of 49.1%.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Within our consolidated balance sheets, transition tax of $9.9 million was included in “Accrued taxes” for 2019 and 2018, and $94.9 million and $104.2 million were included in “Other liabilities” for 2019 and 2018, respectively.

The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), 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. We recorded a current tax expense for the GILTI provision of $7.6 million and $3.9 million for 2018 and 2019, respectively.

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 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to certain tax matters.

The total amount of unrecognized tax benefits, which are included in “Other liabilities” within our consolidated balance sheets as of December 28, 2019 was approximately $109.1 million, of which $91.2 million would affect the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may change in the next 12 months, which may result in a material impact on our consolidated statement of income.

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. All tax returns audited by the IRS are officially closed through 2011. We are currently under audit for the years 2012 and 2013. In the quarter ended December 28, 2019, we reached a settlement with the U.S. Competent Authority to resolve certain transfer pricing issues related to 2012 and 2013. For all remaining outstanding issues for 2012 and 2013, we have provided all necessary documentation to the Appellate Division to date and are waiting for responses. We are also in negotiations with the Advanced Pricing Division to reach an agreement on an appropriate transfer pricing methodology. As part of this process, we have submitted documentation with the objective to reach a resolution for 2014-2021 in order to mitigate future transfer pricing audit adjustments. It is possible that the resolution with the IRS may have a material impact on our consolidated financial statements.

The total amounts of interest and penalties are classified as a component of the provision for income taxes. The amount of tax interest expense (credits) was approximately $2.2 million, $3.6 and $(2.9) in 2019, 2018 and 2017, respectively. The total amount of accrued interest is included in “Other liabilities”, and was approximately $18.0 million as of December 28, 2019 and $15.6 million as of December 29, 2018. No penalties were accrued for the periods presented.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following table provides a reconciliation of unrecognized tax benefits:

	December 28,		December 29,		December 30,
	2019		2018		2017
Balance, beginning of period	$	77,800	$	83,200	$	82,200
Additions based on current year tax positions		4,900		5,000		8,500
Additions based on prior year tax positions		17,300		9,400		5,400
Reductions based on prior year tax positions		(1,000)		(1,600)		(800)
Reductions resulting from settlements with taxing authorities		(4,200)		(1,600)		(10,500)
Reductions resulting from lapse in statutes of limitations		(3,700)		(16,600)		(1,600)
Balance, end of period	$	91,100	$	77,800	$	83,200

Note 15 – 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. For the years ended December 28, 2019 and December 29, 2018 one customer accounted for slightly more than 1% of our net sales from continuing operations. With respect to our sources of supply, our top 10 health care distribution suppliers from continuing operations and our single largest supplier from continuing operations accounted for approximately 31% and 6%, respectively, of our aggregate purchases in 2019 and approximately 31% and 6%, respectively, of our aggregate purchases in 2018.

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 16 – Derivatives and Hedging Activities

We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other, and changes to the credit 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.

During 2019 we entered into foreign currency forward contracts to hedge a portion of our euro-denominated foreign operations which are designated as net investment hedges. These net investment hedges offset the change in the U.S dollar value of our investment in certain euro-functional currency subsidiaries due to fluctuating foreign exchange rates. Gains and losses related to these net investment hedges are recorded in Accumulated other comprehensive loss within our Consolidated Balance Sheet. Amounts excluded from the assessment of hedge effectiveness are included in interest expense within our Consolidated Statement of Income. The aggregate notional value of this net investment hedge, which matures on November 16, 2023, is €200 million. During December 28, 2019 we recognized approximately $0.6 million of interest savings as a result of this net investment hedge.

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., generally 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 815 have been omitted.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 17 – 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 28, 2019
	North America		International		Global
Revenues:
	Health care distribution
		Dental		$	3,911,746		2,504,119		6,415,865
		Medical			2,894,137		79,449		2,973,586
			Total health care distribution		6,805,883		2,583,568		9,389,451
	Technology and value-added services				445,317		69,768		515,085
	Total excluding Corporate TSA revenues (1)				7,251,200		2,653,336		9,904,536
	Corporate TSA revenues (1)				4,098		77,169		81,267
		Total revenues		$	7,255,298	$	2,730,505	$	9,985,803

				Year Ended
	December 29, 2018
	North America		International		Global
Revenues:
	Health care distribution
		Dental		$	3,866,171		2,481,827		6,347,998
		Medical			2,581,696		79,470		2,661,166
			Total health care distribution		6,447,867		2,561,297		9,009,164
	Technology and value-added services				344,168		64,271		408,439
	Total excluding Corporate TSA revenues (1)				6,792,035		2,625,568		9,417,603
	Corporate TSA revenues (1)				-		-		-
		Total revenues		$	6,792,035	$	2,625,568	$	9,417,603

(1)	Corporate TSA revenues represents sales of certain animal health products to Covetrus under the transition services agreement
	entered into in connection with the Animal Health Spin-off, which we expect to continue through August 2020.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 18 – 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 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 medical group serves office-based medical practitioners, ambulatory surgery centers, other alternate-care settings and other institutions. Our global dental and medical groups serve practitioners in 31 countries worldwide.

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

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


			Years Ended
			December 28,		December 29,		December 30,
			2019		2018		2017
Net Sales:
	Health care distribution (1)
		Dental	$	6,415,865	$	6,347,998	$	6,047,811
		Medical		2,973,586		2,661,166		2,497,994
		Total health care distribution		9,389,451		9,009,164		8,545,805
	Technology and value-added services (2)			515,085		408,439		337,633
		Total excluding Corporate TSA revenues		9,904,536		9,417,603		8,883,438
	Corporate TSA revenues (3)			81,267		-		-
		Total	$	9,985,803	$	9,417,603	$	8,883,438

(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.

(3)	Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in connection
	with the Animal Health Spin-off, which we expect to continue through August 2020.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

			Years ended
			December 28,		December 29,		December 30,
			2019		2018		2017
Operating Income:
	Health care distribution		$	591,404	$	490,988	$	561,888
	Technology and value-added services			126,857		109,631		107,873
		Total	$	718,261	$	600,619	$	669,761

Income before taxes and equity in earnings of affiliates:
	Health care distribution		$	553,181	$	429,429	$	526,255
	Technology and value-added services			127,126		107,407		103,539
		Total	$	680,307	$	536,836	$	629,794

Depreciation and Amortization:
	Health care distribution		$	146,960	$	122,767	$	116,260
	Technology and value-added services			37,982		20,863		17,595
		Total	$	184,942	$	143,630	$	133,855

Income Tax Expense:
	Health care distribution		$	129,381	$	53,660	$	271,920
	Technology and value-added services			30,134		53,772		37,055
		Total	$	159,515	$	107,432	$	308,975

Interest Income:
	Health care distribution		$	15,352	$	15,106	$	12,236
	Technology and value-added services			405		385		202
		Total	$	15,757	$	15,491	$	12,438

Interest Expense:
	Health care distribution		$	50,666	$	76,006	$	51,039
	Technology and value-added services			126		10		27
		Total	$	50,792	$	76,016	$	51,066

Purchases of Fixed Assets:
	Health care distribution		$	69,095	$	68,577	$	59,865
	Technology and value-added services			7,124		2,706		2,539
		Total	$	76,219	$	71,283	$	62,404

			As of
			December 28,		December 29,		December 30,
			2019		2018		2017
Total Assets:
	Health care distribution		$	5,822,057	$	5,289,348	$	5,336,320
	Technology and value-added services			1,329,044		994,506		334,977
	Discontinued operations			-		2,216,673		2,192,698
		Total	$	7,151,101	$	8,500,527	$	7,863,995

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 28, 2019. 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.

		2019				2018				2017
		Net Sales		Long-Lived Assets		Net Sales		Long-Lived Assets		Net Sales		Long-Lived Assets
United States		$	6,876,194	$	2,400,733	$	6,411,558	$	1,855,788	$	6,039,613	$	1,208,351
Other			3,109,609		1,195,947		3,006,045		915,493		2,843,825		1,072,849
	Consolidated total	$	9,985,803	$	3,596,680	$	9,417,603	$	2,771,281	$	8,883,438	$	2,281,200

Note 19 – Employee Benefit Plans

Stock-based Compensation

Our accompanying consolidated statements of income reflect pre-tax share-based compensation expense of $44.9 million ($34.4 million after-tax), $32.6 million ($25.3 million after-tax) and $36.8 million ($20.6 million after-tax) for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

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 28, 2019, December 29, 2018 and December 30, 2017.

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 28, 2019, there were 65,242 shares authorized and 6,113 shares available to be granted under the 2013 Stock Incentive Plan and 1,892 shares authorized and 294 shares available to be granted under the 2015 Non-Employee Director Stock Incentive Plan.

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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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, certain foreign exchange fluctuations, certain litigation related costs, and material changes in income tax rates. 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.

As a result of the Separation, the number of our unvested equity-based awards from previous grants to our remaining employees under our Long-term Incentive Program was increased in accordance with the provisions in the Plans. This was based on a factor of approximately 1.2633, corresponding with a decrease in our price per share.

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 28, 2019 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 28, 2019, we recorded a liability of $0.6 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 $56.83, $71.38 and $85.43 per share during the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

Total unrecognized compensation cost related to non-vested awards as of December 28, 2019 was $84.8 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

(in thousands, except per share data)

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

	Years Ended
	December 28,			December 29,			December 30,
	2019			2018			2017

		Weighted			Weighted			Weighted
		Average			Average			Average
		Exercise			Exercise			Exercise
	Shares	Price		Shares	Price		Shares	Price
Outstanding at beginning of year	3	$	13.63	155	$	29.65	353	$	28.59
Granted	-		-	-		-	-		-
Exercised	(3)		13.63	(152)		29.81	(198)		27.76
Forfeited	-		-	-		-	-		-
Outstanding at end of year	-	$	-	3	$	17.22	155	$	29.65

Options exercisable at end of year	-	$	-	3	$	17.22	155	$	29.65

The following table represents the intrinsic values of:

	As of
	December 28,		December 29,		December 30,
	2019		2018		2017
Stock options outstanding	$	-	$	121	$	6,256
Stock options exercisable		-		121		6,256

The total cash received as a result of stock option exercises for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 was approximately $0.0 million, $3.1 million and $5.3 million. In connection with these exercises, we did not realize any tax benefits for the years ended December 28, 2019, December 29, 2018 and December 30, 2017. We settle employee stock option exercises with newly issued common shares.

The total intrinsic value per share of restricted stock/units that vested was $64.31, $76.48 and $83.16 during the years ended December 28, 2019, December 29, 2018 and December 30, 2017. The following table summarizes the status of our non-vested restricted stock/units for the year ended December 28, 2019:


	Time-Based Restricted Stock/Units
		Weighted Average
		Grant Date Fair		Intrinsic Value
	Shares/Units	Value Per Share		Per Share
Outstanding at beginning of period	1,513	$	57.94
Granted	452		59.56
Vested	(339)		55.62
Forfeited	(208)		60.35
Outstanding at end of period	1,418	$	58.72	$	66.58
	Performance-Based Restricted Stock/Units
		Weighted Average
		Grant Date Fair		Intrinsic Value
	Shares/Units	Value Per Share		Per Share
Outstanding at beginning of period	1,163	$	40.26
Granted	642		59.72
Vested	(189)		66.41
Forfeited	(157)		61.33
Outstanding at end of period	1,459	$	61.41	$	66.58

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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 28, 2019, December 29, 2018 and December 30, 2017 amounted to $36.8 million, $35.8 million and $33.5 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 28, 2019, December 29, 2018 and December 30, 2017 amounted to $2.1 million, $(0.4 )million and $0.6 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 (credited) to operations during the years ended December 28, 2019, December 29, 2018 and December 30, 2017 were approximately $8.3 million, $(2.3) million and $5.0 million, respectively.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 20 – Commitments and Contingencies

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 28, 2019 were:

2020		$	403,241
2021			208,200
2022			110,800
2023			-
2024			-
Thereafter			-
	Total minimum inventory purchase commitment payments	$	722,241

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 2020 through 2024 and thereafter of approximately $16.8 million, $6.3 million, $4.5 million, $0.9 million, $0.9 million, and $1.7 million, respectively. We also have lifetime consulting agreements that provide for current compensation of $0.4 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

On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the 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 Companies, Inc. (“Patterson”) and Benco Dental Supply Co. (“Benco”) as defendants, and alleging that Henry Schein, Patterson, Benco and Burkhart Dental Supply 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 June 25, 2018, the Supreme

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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. On April 2, 2019, the District Court stayed the proceeding in the trial court pending resolution by the Fifth Circuit. The Fifth Circuit heard oral argument on May 1, 2019 on whether the case should be arbitrated. The Fifth Circuit issued its opinion on August 14, 2019 affirming the District Court’s order denying defendants’ motions to compel arbitration. Defendants filed a petition for rehearing en banc before the Fifth Circuit. The Fifth Circuit denied that petition. On October 1, 2019, the District Court set the case for trial on February 3, 2020, which was subsequently moved to January 29, 2020. On January 24, 2020 the Supreme Court granted our motion to stay the District Court proceedings, pending the disposition of our petition for writ of certiorari, which was filed on January 31, 2020. 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. On May 10, 2019, the U.S. Court of Appeals for the Second Circuit affirmed in part and reversed in part the District Court’s dismissal of the complaint, holding that IQ Dental lacks antitrust standing to challenge the alleged boycott of SourceOne and state dental associations, but that it has standing to challenge injury related to the alleged direct boycott of its business. On June 29, 2019, the Second Circuit denied IQ Dental’s petition for rehearing or rehearing en banc. On January 8, 2020, Henry Schein and IQ Dental entered into a settlement agreement, pursuant to which Henry Schein paid an amount which is not material. Henry Schein was dismissed from the case on January 16, 2020.

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 alleged, among other things, that defendants violated U.S. antitrust laws by conspiring, and entering into an agreement, to refuse to provide discounts to or otherwise serve buying groups representing dental practitioners. The FTC alleged that defendants conspired in violation of Section 5 of the FTC Act. The complaint sought equitable relief only and does not seek monetary damages. We denied the allegation that we conspired to refuse to provide discounts to or otherwise serve dental buying groups. A hearing before an administrative law judge began on October 16, 2018 and the hearing record was closed on February 21, 2019. On October 7, 2019, the administrative law judge issued his Initial Decision, finding in relevant part that the “evidence fails to prove a conspiracy involving Schein,” and dismissing the complaint as to Henry Schein. The Initial Decision became the decision of the FTC on November 7, 2019 and is not subject to further appeal.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

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 In re Dental Supplies Antitrust Litigation which Henry Schein settled and which the court dismissed in June 2019, as described in our prior filings with the SEC, 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. On September 27, 2019, the court issued a decision partially granting and partially denying defendants’ motion to dismiss the securities action. The court dismissed all claims against Messrs. Bergman and Paladino as well as the Section 10(b) claim against Henry Schein to the extent that that claim relied on the Company’s financial results and margins to allege a material misstatement or omission. The court also dismissed the Section 10(b) claim against Henry Schein to the extent that it relied on the Company’s August 8, 2017 disclosure to allege loss causation. The court otherwise denied the motion as to Henry Schein and Mr. Sullivan. Henry Schein and Mr. Sullivan moved for partial reconsideration of the court’s decision. Pursuant to all parties’ request, the court temporarily took the motion off the calendar after it was fully briefed. The parties have agreed to a resolution of this matter, subject to various conditions, including the drafting and execution of a definitive settlement agreement and court approval. The contemplated settlement, if finally approved, would have no earnings impact to the Company as all payments would be covered by insurance. Henry Schein had previously 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 health care 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 health care 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

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

complaint was filed asserting the same allegations against the same parties and adding McKesson Medical-Surgical, Inc. as a 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, 2018, plaintiffs appealed the District Court’s decision to the Seventh Circuit Court of Appeals. The parties argued the appeal on September 27, 2019 and are currently awaiting the Seventh Circuit’s ruling.

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. Summit County alleges 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. On October 29, 2019, the Company was dismissed with prejudice from this lawsuit. Henry Schein, working with Summit County, donated $1 million to a foundation dedicated to making grants to programs within Summit County focused on (i) educating the community on alternative pain management treatment techniques and/or avoiding addiction; ‎(ii) supporting research into alternative pain management techniques and protocols; (iii) enabling professionals to obtain the necessary certification for a Medication Assisted Treatment (MAT) Waiver; and (iv) advancing programs and services to Summit County to deliver results and solutions to the opiate and addiction crises. Henry Schein paid $250,000 of Summit County’s expenses.

In addition to the County of Summit Action, Henry Schein and/or one or more of its affiliated companies have currently been named as a defendant in multiple lawsuits (currently less than one-hundred and twenty-five (125)), which allege claims similar to those alleged in the County of Summit Action. At this time, the only case set for trial is the action filed by Tuscon Medical Center, which is currently scheduled for a 30-day trial beginning on March 16, 2021. 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. Of Henry Schein’s 2018 revenue of $9.4 billion from continuing operations, sales of opioids represented less than one-tenth of 1 percent. Opioids represent a negligible part of our business. We intend to defend ourselves vigorously against these actions.

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 damages to be determined at trial, trebled, reasonable attorneys’ fees and costs, and pre- and post-judgment interest. On February 13, 2020, the court granted our motion to dismiss for lack of standing, and dismissed the action with prejudice.

On September 30, 2019, City of Hollywood Police Officers Retirement System, 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., Covetrus, Inc., and Benjamin Shaw and Christine Komola (Covetrus’s then Chief Executive Officer and Chief Financial Officer, respectively) in the U.S. District Court for the Eastern District of New York,

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Case No. 2:19-cv-05530-FB-RLM. The complaint seeks to certify a class consisting of all persons and entities who, subject to certain exclusions, purchased or otherwise acquired Covetrus common stock from February 8, 2019 through August 12, 2019. The case relates to the Animal Health Spin-off and Merger of the Henry Schein Animal Health Business with Vets First Choice in February 2019. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 and asserts that defendants’ statements in the offering documents and after the transaction were materially false and misleading because they purportedly overstated Covetrus’s capabilities as to inventory management and supply-chain services, understated the costs of integrating the Henry Schein Animal Health Business and Vets First Choice, understated Covetrus’s separation costs from Henry Schein, and understated the impact on earnings from online competition and alternative distribution channels and from the loss of an allegedly large customer in North America just before the Separation and Merger. The complaint seeks unspecified monetary damages and a jury trial. Pursuant to the provisions of the PSLRA, the court appointed lead plaintiff and lead counsel on December 23, 2019. We intend to defend ourselves vigorously against this action.

On November 15, 2019, Frank Finazzo filed a putative shareholder derivative action on behalf of Henry Schein, Inc. against various present and former directors and officers of Henry Schein in the U.S. District Court for the Eastern District of New York, Case No. 1:19-cv-6485-LDH-JO. The named defendants in the action are Stanley M. Bergman, Steven Paladino, Timothy J. Sullivan, Barry J. Alperin, Lawrence S. Bacow, Gerald A. Benjamin, James P. Breslawski, Paul Brons, Shira Goodman, Joseph L. Herring, Donald J. Kabat, Kurt Kuehn, Philip A. Laskawy, Anne H. Margulies, Karyn Mashima, Norman S. Matthews, Mark E. Mlotek, Carol Raphael, E. Dianne Rekow, Bradley T. Sheares, and Louis W. Sullivan, with Henry Schein named as a nominal defendant. The Complaint asserts claims under the federal securities laws and state law relating to the allegations in the antitrust actions, the In re Henry Schein, Inc. Securities Litigation, and the City of Hollywood securities class action described above. The complaint seeks declaratory, injunctive, and monetary relief on behalf of Henry Schein. On January 6, 2020, counsel who filed the Finazzo case filed another, virtually identical putative shareholder derivative action on behalf of Henry Schein against the same defendants, asserting the same claims and seeking the same relief. That case, captioned Mark Sloan v. Stanley M. Bergman, et al., is also pending in the U.S. District Court for the Eastern District of New York, Case No. 1:20-cv-0076. On January 24, 2020, the court consolidated the Finazzo and Sloan cases under the new caption In re Henry Schein, Inc. Derivative Litigation, No. 1:19-cv-06485-LDH-JO, and appointed the counsel in these cases as co-lead counsel for the consolidated action. The parties have agreed to a resolution of this matter subject to various conditions, including the drafting and execution of a definitive settlement agreement and court approval. The contemplated settlement, if finally approved, would involve the adoption of certain procedures but would not involve the payment of any money except a fee to the plaintiffs’ attorneys that is immaterial.

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 28, 2019, 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

(in thousands, except per share data)

Note 21 – Quarterly Information (Unaudited)

The following tables present certain quarterly financial data:

		Quarters ended
		March 30,		June 29,		September 28,		December 28,
		2019		2019		2019		2019
Net sales		$	2,360,268	$	2,447,827	$	2,508,767	$	2,668,941
Gross profit			751,690		767,431		761,167		810,598
Restructuring costs (credits) (1)			4,641		11,925		(802)		(1,059)
Operating income			172,441		162,288		187,198		196,334
Net gain on sale of equity investments (2)			-		-		-		186,769
Net income from continuing operations			123,640		121,417		143,212		337,192
Amounts attributable to
	Henry Schein, Inc. from continuing operations:
Net income			118,413		116,753		134,916		330,609

Earnings per share attributable to
	Henry Schein, Inc. from continuing operations:

	Basic	$	0.79	$	0.79	$	0.92	$	2.27
	Diluted		0.78		0.78		0.91		2.25
		Quarters ended
		March 31,		June 30,		September 29,		December 29,
		2018		2018		2018		2018
Net sales		$	2,273,450	$	2,316,032	$	2,355,565	$	2,472,556
Gross profit			719,129		718,328		722,359		750,931
Litigation settlements			-		-		38,488		-
Restructuring costs (1)			2,675		8,497		8,551		34,644
Operating income			162,240		157,108		123,269		158,002
Net income from continuing operations			114,717		114,591		96,247		124,886
Amounts attributable to Henry Schein, Inc.
	from continuing operations:
Net income			111,534		110,636		90,770		117,777

Earnings per share attributable to Henry Schein, Inc.
	from continuing operations:

	Basic	$	0.73	$	0.72	$	0.60	$	0.78
	Diluted		0.72		0.72		0.59		0.77

(1)	See Note 12 - "Plans of Restructuring" for details of the restructuring costs incurred during our 2019 and 2018 fiscal years.
(2)	See Note 11 - "Business Acquisitions and Divestitures" for details of the net gain on sale of equity investments.

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 22 – Supplemental Cash Flow Information

Cash paid for interest and income taxes was:

	Years ended
	December 28,		December 29,		December 30,
	2019		2018		2017
Interest	$	54,685	$	69,371	$	46,985
Income taxes		177,277		236,479		214,135

There was approximately $0.0 million, $0.0 million and $0.3 million of debt assumed as a part of the acquisitions for the years ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively.

For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, we had $(4.9) million, $1.0 million and $(1.5) million of non-cash net unrealized gains (losses) related to foreign currency hedging activities, respectively. During the year ended December 30, 2017, as part of business acquisitions, we increased our ownership interests in subsidiaries through non-cash transactions of $16.8 million.

During the third quarter of 2018, we formed Henry Schein One, LLC with Internet Brands through a non-cash transaction resulting in approximately $390.3 million of noncontrolling interest representing Internet Brands’ current 26% minority interest and $160.6 million of deferred additional ownership interests of Internet Brands in Henry Schein One, representing up to an additional 9.2% ownership interests at December 28, 2019, a portion of which is contingent upon the achievement of certain operating targets (See Note 11).

Note 23 – Related Party Transactions

In connection with the completion of the Animal Health Spin-off during our fiscal year 2019, we entered into a transition services agreement with Covetrus under which we have agreed to provide certain transition services for up to twenty-four months in areas such as information technology, finance and accounting, human resources, supply chain, and real estate and facility services. During 2019, we recorded approximately $17.5 million of fees for these services. In connection with the completion of the Animal Health Spin-off (see Note 2 for additional details), we entered into a transition services agreement with Covetrus, pursuant to which Covetrus purchases certain products from us. During the year ended December 28, 2019, net sales to Covetrus were approximately $81.3 million. Sales to Covetrus under the transition services agreement are expected to continue through August 2020. At December 28, 2019 we had $4.5 million of receivables due from Covetrus and $0.1 million payable to Covetrus under this transition services agreement.

In connection with the formation of Henry Schein One, LLC, our joint venture with Internet Brands, which was formed on July 1, 2018, we entered into a ten-year royalty agreement with Internet Brands whereby we will pay Internet Brands approximately $31.0 million annually for the use of their intellectual property. During 2019 and 2018, we recorded $31 million and $15.5 million, respectively in connection with costs related to this royalty agreement. As of December 28, 2019 and December 29, 2018, Henry Schein One, LLC had a net receivable balance due from Internet Brands of $9.4 million and $2.4 million, respectively, comprised of amounts related to the royalty agreement and other management fees.

During our normal course of business, we have interests in entities that we account for under the equity accounting method. During our fiscal years ended 2019, 2018 and 2017, we recorded net sales of $87.7 million, $27.0 million, and $23.4 million, respectively, to such entities. During our fiscal years ended 2019, 2018 and 2017, we purchased $18.1 million, $10.8 million, and $8.8 million, respectively, from such entities. At December 28, 2019 and

HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

December 29, 2018, we had in aggregate $60.7 million and $61.4 million, due from our equity affiliates, and $5.3 million and $1.0 million due to our equity affiliates, respectively.

Previous: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations · Next: Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure