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HENRY SCHEIN INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

Cautionary Note Regarding Forward-Looking Statements


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

Risk factors and uncertainties that could cause actual results to differ
materially from current and historical results include, but are not limited to:
effects of a highly competitive market; our dependence on third parties for the
manufacture and supply of our products; our dependence upon sales personnel,
customers, suppliers and manufacturers; our dependence on our senior management;
fluctuations in quarterly earnings; risks from expansion of customer purchasing
power and multi-tiered costing structures; possible increases in the cost of
shipping our products or other service issues with our third-party shippers;
general global macro-economic conditions; disruptions in financial markets;
possible volatility of the market price of our common stock; changes in the
health care industry; implementation of health care laws; failure to comply with
regulatory requirements and data privacy laws; risks associated with our global
operations; transitional challenges associated with acquisitions and joint
ventures, including the failure to achieve anticipated synergies; financial
risks associated with acquisitions and joint ventures; litigation risks; the
dependence on our continued product development, technical support and
successful marketing in the technology segment; risks from rapid technological
change; risks from disruption to our information systems; certain provisions in
our governing documents that may discourage third-party acquisitions of us; and
changes in tax legislation. The order in which these factors appear should not
be construed to indicate their relative importance or priority.

We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict. Accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results. We undertake no duty and have no obligation to update forward-looking statements.

Executive-Level Overview


We believe we are the world's largest provider of health care products and
services primarily to office-based dental, medical and animal health care
practitioners. We serve over 775,000 customers worldwide, including dental
practitioners and laboratories, physician practices and animal health clinics,
as well as government, institutional health care clinics and other alternate
care clinics. We believe that we have a strong brand identity due to our more
than 80 years of experience distributing health care products.

We are headquartered in Melville, New York, employ more than 15,000 people (of
which nearly 7,000 are based outside the United States) and have operations or
affiliates in 25 countries, including the United States, Australia, Austria,
Belgium, Canada, China, the Czech Republic, France, Germany, Hong Kong SAR,
Iceland, Ireland, Israel, Italy, Luxembourg, Mauritius, the Netherlands, New
Zealand, Portugal, Slovakia, Spain, Switzerland, Thailand, Turkey and the United
Kingdom.

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


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We conduct our business through two reportable segments: health care
distribution and 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, medical and animal
health operating segments. This segment 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.

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

Industry Overview


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

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

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

Industry Consolidation

The health care products distribution industry, as it relates to office-based
health care practitioners, is highly fragmented and diverse. This industry,
which encompasses the dental, medical and animal health markets, was estimated
to produce revenues of approximately $30 billion in 2012 in the combined North
American, European and Australian/New Zealand markets. The industry ranges from
sole practitioners working out of relatively small offices to group practices or
service organizations ranging in size from a few practitioners to a large number
of practitioners who have combined or otherwise associated their practices.

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

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


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

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

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

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

Aging Population and Other Market Influences


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

According to the U.S. Census Bureau's International Data Base, in 2012 there
were more than five million Americans aged 85 years or older, the segment of the
population most in need of long-term care and elder-care services. By the year
2050, that number is projected to more than triple to approximately 19
million. The population aged 65 to 84 years is projected to increase over 85%
during the same time period.

As a result of these market dynamics, annual expenditures for health care
services continue to increase in the United States. Given current operating,
economic and industry conditions, we believe that demand for our products and
services will grow at slower rates. The Centers for Medicare and Medicaid
Services, or CMS, published "National Health Expenditure Projections 2011-2021"
indicating that total national health care spending reached approximately $2.7
trillion in 2011, or 17.9% of the nation's gross domestic product, the benchmark
measure for annual production of goods and services in the United States. Health
care spending is projected to reach approximately $4.8 trillion in 2021,
approximately 19.6% of the nation's gross domestic product.


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Government


Certain of our businesses involve the distribution of pharmaceuticals and
medical devices, and in this regard we are subject to extensive local, state,
federal and foreign governmental laws and regulations applicable to the
distribution of pharmaceuticals and medical devices. Additionally, government
and private insurance programs fund a large portion of the total cost of medical
care.  Many of these laws and regulations are subject to change and may impact
our financial performance.

Health Care Reform

For example, the Patient Protection and Affordable Care Act as amended by the
Health Care and Education Reconciliation Act, each enacted in March 2010,
generally known as the Health Care Reform Law, increased federal oversight of
private health insurance plans and included a number of provisions designed to
reduce Medicare expenditures and the cost of health care generally, to reduce
fraud and abuse, and to provide access to increased health coverage. The Health
Care Reform Law requirements include, for example a 2.3% excise tax on domestic
sales of medical devices by manufacturers and importers beginning in 2013, and a
fee on branded prescription drugs and biologics that was implemented in 2011,
both of which may affect sales. On June 28, 2012, the United States Supreme
Court upheld as constitutional a key provision in the Health Care Reform Law,
often referred to as the "individual mandate," which requires individuals
without health insurance to pay a penalty. However, the decision also
invalidated a provision in the Health Care Reform Law requiring states to expand
their Medicaid programs or risk the complete loss of all federal Medicaid
funding. The Court held that the federal government may offer states the option
of accepting the expansion requirement, but that it may not take away
pre-existing Medicaid funds in order to coerce states into complying with the
expansion. A number of states have indicated a reluctance to accept the Medicaid
expansion, so the full extent of increased health care coverage under the Health
Care Reform Law is uncertain.

A Health Care Reform Law provision, generally referred to as the Physician
Payment Sunshine Act, imposed new reporting and disclosure requirements for drug
and device manufacturers with regard to payments or other transfers of value
made to certain practitioners (including physicians, dentists and teaching
hospitals), and for such manufacturers and group purchasing organizations, with
regard to certain ownership interests held by physicians in the reporting
entity. Implementation had been delayed pending the issuance of applicable rules
by the Centers for Medicare and Medicaid Services ("CMS"). On February 1, 2013,
CMS released the final rule to implement the Physician Payment Sunshine Act. The
final rule provides that data collection activities begin on August 1, 2013, and
first disclosure reports are due by March 31, 2014 for the period August 1, 2013
through December 31, 2013. On or about June 1, 2014, CMS will publish
information from these reports, including amounts transferred and physician,
dentist and teaching hospital identities, in a national publicly available data
bank.

The final rule implementing the Physician Payment Sunshine Act is complex,
ambiguous, and broad in scope, and we are in the process of analyzing its
application to our businesses. For example, the final rule is unclear as to
whether the Physician Payment Sunshine Act requires that wholesale drug and
device distributors that take title to the products they distribute, such as we
generally do, are to be treated as "applicable manufacturers" subject to full
reporting requirements. The CMS commentary on the final rule indicates that they
are; however, this interpretation appears to be inconsistent with the language
of the Physician Payment Sunshine Act itself. In addition, because certain of
our subsidiaries manufacture drugs and devices, we will in any event likely be
required to collect and report detailed information regarding certain financial
relationships we have with physicians, dentists and teaching hospitals. It is
difficult to predict how the new requirements may impact existing relationships
among manufacturers, distributors, physicians, dentists and teaching hospitals.
The Physician Payment Sunshine Act preempts similar state reporting laws,
although we or our subsidiaries may be required to continue to report under
certain of such state laws. While we expect to have adequate compliance programs
and controls in place to comply with the Physician Payment Sunshine Act
requirements, our compliance with the new final rule is likely to pose
additional costs on us.


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Health Care Fraud


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

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

The government has expressed concerns about financial relationships between
suppliers on the one hand and physicians and dentists on the other. As a result,
we regularly review and revise our marketing practices as necessary to
facilitate compliance. In addition, under the reporting and disclosure
obligations of the Physician Payment Sunshine Act provisions of the Patient
Protection and Affordable Care Act as amended by the Health Care and Education
Reconciliation Act, each enacted in March 2010, generally known as the "Health
Care Reform Law," discussed in more detail in Health Care Reform, above, by the
second quarter of 2014, the general public and government officials will be
provided with new access to detailed information with regard to payments or
other transfers of value to certain practitioners (including physicians,
dentists and teaching hospitals) by applicable drug and device manufacturers
subject to such reporting and disclosure obligations, which is likely to include
us. This information may lead to greater scrutiny, which may result in
modifications to established practices and additional costs.

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

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

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


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Operating and Security Standards


At the federal level, the Federal Food, Drug, and Cosmetic Act, or FDC Act,
requires certain wholesalers to provide a drug pedigree for each wholesale
distribution of prescription drugs, which includes an identifying statement that
records the chain of ownership of a prescription drug. Currently, the United
States Food and Drug Administration, in exercise of its enforcement discretion,
requires these wholesalers to maintain drug pedigrees that include transaction
dates, names and addresses regarding transactions going back to either the
manufacturer or the last authorized distributor of record that handled the
drugs. The United States Food and Drug Administration, or FDA, has continued to
develop its policies regarding the integrity of the supply chain, such as by
issuing a Final Guidance in 2010 regarding standardized numerical identification
for prescription drug packages, and by issuing a proposed rule in 2012 for a
unique medical device identification system.

Many states have implemented or are considering similar drug pedigree laws and
regulations.  There have been increasing efforts by various levels of
government, including state departments of health, state boards of pharmacy and
comparable agencies, to regulate the pharmaceutical distribution system in order
to prevent the introduction of counterfeit, adulterated or mislabeled
pharmaceuticals into the distribution system.  A number of states, including
Florida, have already implemented pedigree requirements, including drug tracking
requirements, which are intended to protect the integrity of the pharmaceutical
distribution system.  California has enacted a statute that, beginning in 2015,
will require manufacturers to identify each package of a prescription
pharmaceutical with a standard, machine-readable unique numerical identifier,
and will require manufacturers and distributors to participate in an electronic
track-and-trace system and provide or receive an electronic pedigree for each
transaction in the drug distribution chain.  The law will take effect on a
staggered basis, commencing on January 1, 2015 for pharmaceutical manufacturers,
and July 1, 2016 for pharmaceutical wholesalers and repackagers. Other states
have passed or are reviewing similar requirements.  Bills have been proposed in
Congress that would impose similar requirements at the federal level.

The Combat Methamphetamine Enhancement Act of 2010, which became effective in
April 2011, requires retail sellers of products containing certain chemicals,
such as pseudoephedrine, to self-certify to the Drug Enforcement Administration
("DEA") that they understand and agree to comply with the laws and regulations
regarding such sales. The law also prohibits distributors from selling these
products to retailers who are not registered with the DEA or who have not
self-certified compliance with the laws and regulations. Various states also
impose restrictions on the sale of certain products containing pseudoephedrine
and other chemicals. The Secure and Responsible Drug Disposal Act of 2010,
signed by President Obama in October 2010, is intended to allow patients to
deliver unused controlled substances to designated entities to more easily and
safely dispose of controlled substances while reducing the chance of diversion.
The law authorizes the DEA to promulgate regulations to allow, but not require,
designated entities to receive unused controlled substances.

Regulated Software; Electronic Health Records


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


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Certain of our businesses involve access to personal health, medical, financial
and other information of individuals, and are accordingly directly or indirectly
subject to numerous federal, state, local and foreign laws and regulations that
protect the privacy and security of such information, such as the privacy and
security provisions of the federal Health Insurance Portability and
Accountability Act of 1996, as amended, and implementing regulations
("HIPAA"). HIPAA requires, among other things, the implementation of various
recordkeeping, operational, notice and other practices intended to safeguard
that information, limit its use to allowed purposes, and notify individuals in
the event of privacy and security breaches. Failure to comply with these laws
and regulations can result in substantial penalties and other liabilities. As a
result of the federal Health Information Technology for Economic and Clinical
Health Act ("HITECH Act"), which was enacted in 2009, some of our businesses
that were previously only indirectly affected by federal HIPAA privacy and
security rules became directly subject to such rules because such businesses
serve as "business associates" of HIPAA covered entities, such as health care
providers. On January 17, 2013, the Office for Civil Rights of the Department of
Health and Human Services released a final rule implementing the HITECH Act and
making certain other changes to HIPAA privacy and security
requirements. Compliance with the rule is required by September 23, 2013, and
will increase the requirements applicable to some of our businesses.

In addition, federal initiatives, including in particular the HITECH Act, are
providing a program of incentive payments available to certain health care
providers involving the adoption and use of certain electronic health care
records systems and processes. The HITECH initiative includes providing, among
others, physicians and dentists, with financial incentives if they meaningfully
use certified electronic health record technology ("EHR"). Also, eligible
providers that fail to adopt certified EHR systems may be subject to Medicare
reimbursement reductions beginning in 2015. Qualification for the incentive
payments requires the use of EHRs that are certified as having certain
capabilities for meaningful use pursuant to standards adopted by the Department
of Health and Human Services. Initial ("stage one") standards addressed criteria
for periods beginning in 2011. CMS has also issued a final rule with "stage two"
criteria for periods beginning in 2014, which are more demanding, and new,
incrementally more rigorous criteria are expected to be issued for stage "three"
compliance, however final standards have not yet been issued and so these
criteria are not yet certain. Certain of our businesses involve the manufacture
and sale of certified EHR systems, and other products linked to incentive
programs, and so must maintain compliance with these evolving governmental
criteria.

Also, HIPAA requires certain health care providers, such as physicians, to use
certain transaction and code set rules for specified electronic transactions,
such as transactions involving claims submissions. Commencing July 1, 2012, CMS
required that electronic claim submissions and related electronic transactions
be conducted under a new HIPAA transaction standard, called Version 5010. CMS
has required this upgrade in connection with another new requirement applicable
to the industry, the implementation of new diagnostic code sets to be used in
claims submission. The new diagnostic code sets are called the ICD-10-CM. They
were originally to be implemented on October 1, 2013, but CMS recently issued a
final rule that extended the implementation date until October 1, 2014. Certain
of our businesses provide electronic practice management products that must meet
those requirements, and while we believe that we are prepared to timely adopt
the new standards, it is possible that the transition to these new standards,
particularly the transition to ICD-10-CM, may result in a degree of disruption
and confusion, thus potentially increasing the costs associated with supporting
this product.

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


E-Commerce

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

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


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Results of Operations

The following tables summarize the significant components of our operating results and cash flows for each of the three years ended December 29, 2012, December 31, 2011 and December 25, 2010 (in thousands):


                                                                         Years Ended
                                                      December 29,       December 31,       December 25,
                                                          2012               2011               2010
Operating results:
Net sales                                            $    8,939,967     $    8,530,242     $    7,526,790
Cost of sales                                             6,432,454          6,112,187          5,355,914
Gross profit                                              2,507,513          2,418,055          2,170,876
Operating expenses:
Selling, general and administrative                       1,873,360          1,835,906          1,637,460
Restructuring costs                                          15,192                  -             12,285
Operating income                                     $      618,961     $      582,149     $      521,131

Other expense, net                                   $      (14,773 )   $      (12,842 )   $      (19,096 )
Net income                                                  423,388            404,656            352,131
Net income attributable to Henry Schein, Inc.               388,076            367,661            325,789


                                                                         Years Ended
                                                      December 29,      December 31,       December 25,
                                                          2012              2011                2010
Cash flows:
Net cash provided by operating activities            $      408,099     $      554,625     $      395,480
Net cash used in investing activities                      (269,604 )         (193,222 )         (387,623 )
Net cash used in financing activities                      (170,601 )       

(357,214 ) (330,643 )

Plans of Restructuring


During the year ended December 29, 2012, we incurred restructuring costs of
approximately $15.2 million (approximately $10.5 million after taxes) consisting
of employee severance pay and benefits related to the elimination of
approximately 200 positions, facility closing costs, representing primarily
lease terminations and asset write-off costs, and outside professional and
consulting fees directly related to the restructuring plan. This restructuring
program is complete and we do not expect any additional costs from this
program.  We expect that the majority of these costs will be paid in 2013.

During the year ended December 25, 2010, we recorded restructuring costs of approximately $12.3 million (approximately $8.3 million after taxes). These costs primarily consisted of employee severance pay and benefits, facility closing costs, representing primarily lease termination and asset write-off costs, and outside professional and consulting fees directly related to the restructuring plans. The costs associated with these restructurings are included in a separate line item, "Restructuring costs," within our consolidated statements of income.

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2012 Compared to 2011

Net Sales

Net sales for 2012 and 2011 were as follows (in thousands):


                                                                             % of                                % of             Increase
                                                           2012              Total             2011              Total           $        %

Health care distribution (1):

         Dental                                      $       4,774,482        53.4 %     $       4,764,898        55.9 %     $   9,584    0.2 %
         Medical                                             1,560,921        17.4               1,504,454        17.6          56,467    3.8
         Animal health                                       2,321,151        26.0               2,010,270        23.6         310,881   15.5
               Total health care distribution                8,656,554        96.8               8,279,622        97.1         376,932    4.6
Technology and value-added services (2)                        283,413         3.2                 250,620         2.9          32,793   13.1
               Total                                 $       8,939,967       100.0 %     $       8,530,242       100.0 %     $ 409,725    4.8

(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, including e-services and continuing education services for practitioners.

The fiscal year ended December 29, 2012 consisted of 52 weeks as compared to the fiscal year ended December 31, 2011, which consisted of 53 weeks.

Beginning with the first quarter of 2012, we have reported net sales and prior-year sales comparisons for each of our global dental, medical, animal health and global technology and value-added services business groups.


This sales reporting is consistent with our global business groups as realigned
in 2012.  These groups were formed to provide distinct organizational focus for
reaching and serving each practitioner segment with the benefits of a global
perspective, as well as global product and service offerings and best
practices.

We will continue to report financial results for our health care distribution
and technology and value-added services reportable segments. The health care
distribution segment comprises three global operating segments (dental, medical
and animal health) and the technology and value-added services segment remains
unchanged.

The $409.7 million, or 4.8%, increase in net sales for the year ended December
29, 2012 includes an increase of 6.7% local currency growth (5.1% increase in
internally generated revenue, 1.5% decrease due to the impact from extra week
and 3.1% growth from acquisitions) as well as a decrease of 1.9% related to
foreign currency exchange.

The $9.6 million, or 0.2%, increase in dental net sales for the year ended
December 29, 2012 includes an increase of 2.5% in local currencies (2.8%
increase in internally generated revenue, 1.5%decrease due to the impact from
extra week and 1.2% growth from acquisitions) as well as a decrease of 2.3%
related to foreign currency exchange. The 2.5% increase in local currency sales
was due to increases in dental equipment sales and service revenues of 0.4%
(3.1% decrease in internally generated revenue, 3.0% decrease due to the impact
from extra week and 0.3% growth from acquisitions) and dental consumable
merchandise sales growth of 3.3% (2.7% increase in internally generated revenue,
0.9% decrease due to the impact from extra week and 1.5% growth from
acquisitions).

The $56.5 million, or 3.8%, increase in medical net sales for the year ended
December 29, 2012 includes an increase of 4.2% local currency growth (4.8%
increase in internally generated revenue, 1.5% decrease due to the impact from
extra week and 0.9% growth from acquisitions) as well as a decrease of 0.4%
related to foreign currency exchange.

The $310.9 million, or 15.5%, increase in animal health net sales for the year
ended December 29, 2012 includes an increase of 17.7% local currency growth
(10.2% increase in internally generated revenue, 1.6% decrease due to the impact
from extra week and 9.1% growth from acquisitions) as well as a decrease of 2.2%
related to foreign currency exchange.

The $32.8 million, or 13.1%, increase in technology and value-added services net
sales for the year ended December 29, 2012 includes an increase of 13.4% local
currency growth (10.8% increase in internally generated revenue, 1.5% decrease
due to the impact from extra week and 4.1% growth from acquisitions) as well as
a decrease of 0.3% related to foreign currency exchange.


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Gross Profit


Gross profit and gross margins for 2012 and 2011 by segment and in total were as
follows (in thousands):

                                                      Gross                     Gross          Increase
                                         2012       Margin %       2011       Margin %        $        %
Health care distribution              $ 2,323,913      26.8 %   $ 2,253,814      27.2 %   $  70,099    3.1 %
Technology and value-added services       183,600      64.8         164,241      65.5        19,359   11.8
Total                                 $ 2,507,513      28.0     $ 2,418,055      28.3     $  89,458    3.7



Gross profit increased $89.5 million, or 3.7%, for the year ended December 29,
2012 compared to the prior year period. As a result of different practices of
categorizing costs associated with distribution networks throughout our
industry, our gross margins may not necessarily be comparable to other
distribution companies. Additionally, we realize substantially higher gross
margin percentages in our technology segment than in our health care
distribution segment. These higher gross margins result from being both the
developer and seller of software products and services, as well as certain
financial services. The software industry typically realizes higher gross
margins to recover investments in research and development.

Within our health care distribution segment, gross profit margins may vary from
one period to the next. Changes in the mix of products sold as well as changes
in our customer mix have been the most significant drivers affecting our gross
profit margin. For example, sales of pharmaceutical products are generally at
lower gross profit margins than other products. Conversely, sales of our private
label products achieve gross profit margins that are higher than average. With
respect to customer mix, sales to our large-group customers are typically
completed at lower gross margins due to the higher volumes sold as opposed to
the gross margin on sales to office-based practitioners who normally purchase
lower volumes at greater frequencies.

Health care distribution gross profit increased $70.1 million, or 3.1%, for the
year ended December 29, 2012 compared to the prior year period. Health care
distribution gross profit margin decreased to 26.8% for the year ended December
29, 2012 from 27.2% for the comparable prior year period. The decrease in our
health care distribution gross profit margin is primarily due to growth in sales
within our animal health businesses, which typically include a greater
percentage of lower-margin pharmaceutical products than our other operating
units.

Technology and value-added services gross profit increased $19.4 million, or
11.8%, for the year ended December 29, 2012 compared to the prior year
period. Technology and value-added services gross profit margin decreased to
64.8% for the year ended December 29, 2012 from 65.5% for the comparable prior
year period, primarily due to changes in the product sales mix and from higher
support costs associated with our growing number of software and eServices
customers.  Revenues generated from lower than average gross margins grew at a
greater rate than traditional electronic services (e.g., claims processing) or
software sales, which typically generate higher than average gross margins.

Selling, General and Administrative

Selling, general and administrative expenses by segment and in total for 2012 and 2011 were as follows (in thousands):

                                                       % of                        % of
                                                    Respective                  Respective         Increase
                                         2012        Net Sales       2011        Net Sales        $        %
Health care distribution              $ 1,767,265       20.4 %    $ 1,741,720       21.0 %    $  25,545    1.5 %
Technology and value-added services       106,095       37.4           94,186       37.6         11,909   12.6
Total                                 $ 1,873,360       21.0      $ 1,835,906       21.5      $  37,454    2.0



Selling, general and administrative expenses increased $37.5 million, or 2.0%,
for the year ended December 29, 2012 from the comparable prior year period. As a
percentage of net sales, selling, general and administrative expenses decreased
to 21.0% from 21.5% for the comparable prior year period.


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As a component of total selling, general and administrative expenses, selling
expenses increased $6.2 million, or 0.5%, for the year ended December 29, 2012
from the comparable prior year period. As a percentage of net sales, selling
expenses decreased to 13.3% from 13.8% for the comparable prior year period.

As a component of total selling, general and administrative expenses, general
and administrative expenses increased $31.3 million, or 4.8%, for the year ended
December 29, 2012 from the comparable prior year period. As a percentage of net
sales, general and administrative expenses remained constant at 7.7% when
compared with the comparable prior year period.

Other Expense, Net


Other expense, net for the years ended 2012 and 2011 was as follows (in
thousands):

                                                     Variance
                     2012          2011           $           %
Interest income    $  13,394     $  15,593     $ (2,199 )   (14.1 )%
Interest expense     (30,902 )     (30,377 )       (525 )    (1.7 )
Other, net             2,735         1,942          793      40.8

Other expense, net $ (14,773 ) $ (12,842 ) $ (1,931 ) (15.0 )




Other expense, net increased $1.9 million to $14.8 million for the year ended
December 29, 2012 from the comparable prior year period. Interest income
decreased $2.2 million primarily due to lower investment income. Interest
expense increased $0.5 million primarily due to an increase in borrowings under
our private placement facilities and our bank credit lines, partially offset by
lower interest expense due to a reduction in borrowings under our Butler Animal
Health Supply, LLC ("BAHS") debt. Other, net increased by $0.8 million due
primarily to a gain related to an increase in the fair value of an equity
affiliate which is now being reported as a consolidated entity beginning in the
third quarter of 2012.

Income Taxes

For the year ended December 29, 2012, our effective tax rate was 31.1% compared
to 31.7% for the prior year period. The net reduction in our 2012 effective tax
rate results from additional tax planning, settlements of tax audits and higher
income from lower taxing countries.  The difference between our effective tax
rate and the federal statutory tax rate for both periods related primarily to
state and foreign income taxes and interest expense.  For 2013, we expect our
effective tax rate to be in the range of 31.0%

Net Income

Net income increased $18.7 million, or 4.6%, for the year ended December 29, 2012, compared to the prior year period due to the factors noted above.

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2011 Compared to 2010

Net Sales

Net sales for 2011 and 2010 were as follows (in thousands):

                                                                            % of                                % of              Increase
                                                          2011              Total             2010              Total            $         %
Health care distribution (1):
         Dental                                     $       4,764,898        55.9 %     $       4,415,469        58.7 %     $   349,429    7.9 %
         Medical                                            1,504,454        17.6               1,373,999        18.2           130,455    9.5
         Animal health                                      2,010,270        23.6               1,537,370        20.4           472,900   30.8
              Total health care distribution                8,279,622        97.1               7,326,838        97.3           952,784   13.0
Technology and value-added services (2)                       250,620         2.9                 199,952         2.7            50,668   25.3
              Total                                 $       8,530,242       100.0 %     $       7,526,790       100.0 %     $ 1,003,452   13.3

(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 and other services, including e-services and continuing education services for practitioners.

The fiscal year ended December 31, 2011 consisted of 53 weeks as compared to the fiscal year ended December 25, 2010, which consisted of 52 weeks.

The $1,003.5 million, or 13.3%, increase in net sales for the year ended December 31, 2011 includes an increase of 10.9% local currency growth (4.5% increase in internally generated revenue, 1.5% impact from extra week and 4.9% growth from acquisitions) as well as an increase of 2.4% related to foreign currency exchange.


The $349.4 million, or 7.9%, increase in dental net sales for the year ended
December 31, 2011 includes an increase of 5.5% in local currencies (3.0%
increase in internally generated revenue, 1.5% impact from extra week and 1.0%
growth from acquisitions) as well as an increase of 2.4% related to foreign
currency exchange. The 5.5% increase in local currency sales was due to
increases in dental equipment sales and service revenues of 3.6% (0.1% decrease
in internally generated revenue, 3.0% impact from extra week and 0.7% growth
from acquisitions) and dental consumable merchandise sales growth of 6.2% (4.1%
increase in internally generated revenue, 0.9% impact from extra week and 1.2%
growth from acquisitions).

The $130.5 million, or 9.5%, increase in medical net sales for the year ended December 31, 2011 includes an increase of 9.2% local currency growth (6.3% internally generated, 1.5% impact from extra week and 1.4% growth from acquisitions) as well as an increase of 0.3% related to foreign currency exchange.


The $472.9 million, or 30.8%, increase in animal health net sales for the year
ended December 31, 2011 includes an increase of 26.2% local currency growth
(6.7% internally generated, 1.5% impact from extra week and 18.0% growth from
acquisitions) as well as an increase of 4.6% related to foreign currency
exchange.

The $50.7 million, or 25.3%, increase in technology and value-added services net
sales for the year ended December 31, 2011 includes an increase of 24.4% local
currency growth (9.6% internally generated growth, 1.9% impact from extra week
and 12.9% growth from acquisitions) as well as an increase of 0.9% related to
foreign currency exchange.


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Gross Profit


Gross profit and gross margins for 2011 and 2010 by segment and in total were as
follows (in thousands):

                                                      Gross                     Gross          Increase
                                         2011       Margin %       2010       Margin %        $        %
Health care distribution              $ 2,253,814      27.2 %   $ 2,033,860      27.8 %   $ 219,954   10.8 %
Technology and value-added services       164,241      65.5         137,016      68.5        27,225   19.9
Total                                 $ 2,418,055      28.3     $ 2,170,876      28.8     $ 247,179   11.4



Gross profit increased $247.2 million, or 11.4%, for the year ended December 31,
2011 compared to the prior year period. As a result of different practices of
categorizing costs associated with distribution networks throughout our
industry, our gross margins may not necessarily be comparable to other
distribution companies. Additionally, we realize substantially higher gross
margin percentages in our technology segment than in our health care
distribution segment. These higher gross margins result from being both the
developer and seller of software products and services, as well as certain
financial services. The software industry typically realizes higher gross
margins to recover investments in research and development.

Within our health care distribution segment, gross profit margins may vary from
one period to the next. Changes in the mix of products sold as well as changes
in our customer mix have been the most significant drivers affecting our gross
profit margin. For example, sales of pharmaceutical products are generally at
lower gross profit margins than other products. Conversely, sales of our private
label products achieve gross profit margins that are higher than average. With
respect to customer mix, sales to our large-group customers are typically
completed at lower gross margins due to the higher volumes sold as opposed to
the gross margin on sales to office-based practitioners who normally purchase
lower volumes at greater frequencies.

Health care distribution gross profit increased $220.0 million, or 10.8%, for
the year ended December 31, 2011 compared to the prior year period. Health care
distribution gross profit margin decreased to 27.2% for the year ended December
31, 2011 from 27.8% for the comparable prior year period. The decrease in our
health care distribution gross profit margin is primarily due to growth in sales
within our animal health businesses, which typically include a greater
percentage of lower-margin pharmaceutical products than our other operating
units. The increase in animal health sales results from internal growth in the
United States and the acquisition of Provet Holdings Limited (see Note 9
"Business Acquisitions and Other Transactions" within our notes to our
consolidated financial statements) at the beginning of our 2011 fiscal year.

Technology and value-added services gross profit increased $27.2 million, or
19.9%, for the year ended December 31, 2011 compared to the prior year
period. Technology and value-added services gross profit margin decreased to
65.5% for the year ended December 31, 2011 from 68.5% for the comparable prior
year period, primarily due to changes in the product sales mix. Specifically,
revenues generated from hardware sales and installations, which generally are
completed at a lower than average gross margin, grew at a greater rate than
electronic services (claims processing, statements generation, etc.) or software
sales, which typically generate higher than average gross margins.

Selling, General and Administrative

Selling, general and administrative expenses by segment and in total for 2011 and 2010 were as follows (in thousands):

                                                       % of                        % of
                                                    Respective                  Respective         Increase
                                         2011        Net Sales       2010        Net Sales        $        %
Health care distribution              $ 1,741,720       21.0 %    $ 1,566,190       21.4 %    $ 175,530   11.2 %
Technology and value-added services        94,186       37.6           71,270       35.6         22,916   32.2
Total                                 $ 1,835,906       21.5      $ 1,637,460       21.8      $ 198,446   12.1



Selling, general and administrative expenses increased $198.4 million, or 12.1%,
for the year ended December 31, 2011 compared to the prior year period. As a
percentage of net sales, selling, general and administrative expenses decreased
to 21.5% from 21.8% for the comparable prior year period.


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As a component of total selling, general and administrative expenses, selling
expenses increased $101.4 million, or 9.4%, for the year ended December 31, 2011
from the comparable prior year period. As a percentage of net sales, selling
expenses decreased to 13.8% from 14.3% for the comparable prior year period.

As a component of total selling, general and administrative expenses, general
and administrative expenses increased $97.0 million, or 17.4%, for the year
ended December 31, 2011 from the comparable prior year period. As a percentage
of net sales, general and administrative expenses increased to 7.7% from 7.4%
for the comparable prior year period.

Other Expense, Net


Other expense, net for the years ended 2011 and 2010 was as follows (in
thousands):

                                                   Variance
                     2011          2010           $        %
Interest income    $  15,593     $  14,098     $ 1,495    10.6 %
Interest expense     (30,377 )     (33,641 )     3,264     9.7
Other, net             1,942           447       1,495   334.5

Other expense, net $ (12,842 ) $ (19,096 ) $ 6,254 32.8




Other expense, net decreased $6.3 million to $12.8 million for the year ended
December 31, 2011 from the comparable prior year period. Interest income
increased $1.5 million primarily due to higher investment income partially
offset by a decrease in late fee income. Interest expense decreased $3.3 million
primarily due to reduced interest expense from the redemption of our 3%
convertible contingent notes originally due in 2034 (the "Convertible Notes") on
September 3, 2010, partially offset by increased interest expense related to
borrowings under our private placement facilities, as well as interest expense
related to our credit lines. Other, net increased by $1.5 million due primarily
to a gain associated with the acquisition of the remaining interest in an equity
investment and proceeds received from a litigation settlement.

Income Taxes


For the year ended December 31, 2011, our effective tax was 31.7% compared to
31.9% for the prior year period. The net reduction in our 2011 effective tax
rate results from additional tax planning, settlements of tax audits and higher
income from lower taxing countries. The difference between our effective tax
rate and the federal statutory tax rate for both periods related primarily to
foreign and state income taxes.

Net Income

Net income increased $52.5 million, or 14.9%, for the year ended December 31, 2011 compared to the prior year period due to the factors noted above.

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Liquidity and Capital Resources


Our principal capital requirements include funding of acquisitions, purchases of
additional noncontrolling interests, repayments of debt principal, the funding
of working capital needs, purchases of securities and fixed assets and
repurchases of common stock. Working capital requirements generally result from
increased sales, special inventory forward buy-in opportunities and payment
terms for receivables and payables. Historically, sales have tended to be
stronger during the third and fourth quarters and special inventory forward
buy-in opportunities have been most prevalent just before the end of the year,
causing our working capital requirements to have been higher from the end of the
third quarter to the end of the first quarter of the following year.

We finance our business primarily through cash generated from our operations,
revolving credit facilities and debt placements. Our ability to generate
sufficient cash flows from operations is dependent on the continued demand of
our customers for our products and services, and access to products and services
from our suppliers.

Our business requires a substantial investment in working capital, which is
susceptible to fluctuations during the year as a result of inventory purchase
patterns and seasonal demands. Inventory purchase activity is a function of
sales activity, special inventory forward buy-in opportunities and our desired
level of inventory. We anticipate future increases in our working capital
requirements.

We finance our business to provide adequate funding for at least 12
months. Funding requirements are based on forecasted profitability and working
capital needs, which, on occasion, may change. Consequently, we may change our
funding structure to reflect any new requirements.

We believe that our cash and cash equivalents, our ability to access private
debt markets and public equity markets, and our available funds under existing
credit facilities provide us with sufficient liquidity to meet our currently
foreseeable short-term and long-term capital needs. We have no off-balance sheet
arrangements.

Net cash provided by operating activities was $408.1 million for the year ended
December 29, 2012, compared to $554.6 million for the comparable prior year
period. The net change of $146.5 million was primarily attributable to inventory
buy-ins during the fourth quarter of 2012 in advance of potential price
increases related to the medical device excise tax.

Net cash used in investing activities was $269.6 million for the year ended December 29, 2012, compared to $193.2 million for the comparable prior year period. The net change of $76.4 million was primarily due to increases in payments for equity investments and business acquisitions.

Net cash used in financing activities was $170.6 million for the year ended December 29, 2012, compared to $357.2 million for the comparable prior year period. The net change of $186.6 million was primarily due to increased net proceeds from issuance of debt and decreased acquisitions of noncontrolling interests in subsidiaries, partially offset by increased repurchases of common stock.

We expect to invest approximately $60 million to $65 million during 2013 in capital projects to modernize and expand our facilities and computer systems and to integrate certain operations into our existing structure.


The following table summarizes selected measures of liquidity and capital
resources (in thousands):

                                             December 29,       December 31,
                                                 2012               2011
Cash and cash equivalents                   $      122,080     $      147,284
Available-for-sale securities - long-term            2,816             11,329
Working capital                                  1,231,668          1,000,868

Debt:
Bank credit lines                           $       27,166     $       55,014
Current maturities of long-term debt                17,992             22,819
Long-term debt                                     488,121            363,524
Total debt                                  $      533,279     $      441,357


Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity.

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Available-for-sale securities


As of December 29, 2012, we have approximately $3.3 million ($2.8 million net of
temporary impairments) invested in auction-rate securities ("ARS"). These
investments are backed by student loans (backed by the federal government) and
investments in closed-end municipal bond funds. ARS are publicly issued
securities that represent long-term investments, typically 10-30 years, in which
interest rates had reset periodically (typically every 7, 28 or 35 days) through
a "dutch auction" process. Our ARS portfolio is comprised of investments that
are rated investment grade by major independent rating agencies. Since the
middle of February 2008, these auctions have failed to settle due to an excess
number of sellers compared to buyers. The failure of these auctions has resulted
in our inability to liquidate our ARS in the near term. We are currently not
aware of any defaults or financial conditions that would negatively affect the
issuers' ability to continue to pay interest and principal on our ARS. We
continue to earn and receive interest at contractually agreed upon rates. We
believe that the current lack of liquidity related to our ARS investments will
have no impact on our ability to fund our ongoing operations and growth
opportunities. As of December 29, 2012, we have classified ARS holdings as
long-term, available-for-sale and they are included in the Investments and other
line within our consolidated balance sheets.

Accounts receivable days sales outstanding and inventory turns


Our accounts receivable days sales outstanding from operations decreased to 39.8
days as of December 29, 2012 from 40.6 days as of December 31, 2011. During the
years ended December 29, 2012 and December 31, 2011, we wrote off approximately
$8.3 million and $6.2 million, respectively, of fully reserved accounts
receivable against our trade receivable reserve. Our inventory turns from
operations decreased to 6.2 for the year ended December 29, 2012 from 6.6 for
the year ended December 31, 2011, primarily due to inventory buy-ins in advance
of potential price increases related to the medical device excise tax. Our
working capital accounts may be impacted by current and future economic
conditions.

Contractual obligations


The following table summarizes our contractual obligations related to fixed and
variable rate long-term debt, including interest (assuming an average long-term
rate of interest of 3.7%), as well as operating and capital lease obligations,
capital expenditure obligations and inventory purchase commitments as of
December 29, 2012:

                                                     Payments due by period (in thousands)
                                  < 1 year       2 - 3 years       4 - 5 years      > 5 years         Total
Contractual obligations:
Long-term debt, including
interest                          $  34,660     $     130,290     $     171,799     $  273,569     $   610,318
Inventory purchase commitments       67,245            50,329            48,139         78,053         243,766
Operating lease obligations          75,901           104,972            61,488         65,718         308,079
Capital lease obligations,
including interest                    1,739             1,485               207              -           3,431
Fixed asset obligations               1,311                 -                 -              -           1,311
Total                             $ 180,856     $     287,076     $     281,633     $  417,340     $ 1,166,905



Inventory purchase commitments include obligations to purchase certain
pharmaceutical products from a manufacturer through 2013, which require us to
pay a price based on the prevailing market price or formula price in each
respective year. The amounts included in the above table related to these
purchase commitments were determined using current market conditions. We also
have obligations to purchase certain pharmaceutical products from another
manufacturer. Actual amounts may differ.

During 2013, we intend to refinance the debt of approximately $220 million
related to the Butler Schein Animal Health transaction. The refinancing is
expected to reduce interest expense and to be accretive to earnings per share by
$0.02 to $0.03 on an annualized basis. We expect the refinancing to occur at the
end of the first quarter of 2013. As part of that refinancing, we expect to
incur a one-time, non-cash charge of approximately $0.04 to $0.05 per diluted
share.

Redemption of convertible debt

On September 3, 2010, we paid approximately $240 million in cash and issued 732,422 shares of our common stock in connection with the redemption of our $240 million of Convertible Notes, which were issued in 2004.

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Credit Facilities


On September 12, 2012, we entered into a new $500 million revolving credit
agreement (the "Credit Agreement") with a $200 million expansion feature, which
expires on September 12, 2017. This credit facility replaced our then existing
$400 million revolving credit facility with a $100 million expansion feature,
which would have expired on September 5, 2013. There were no borrowings
outstanding under this revolving credit facility as of December 29, 2012. The
interest rate, which was 0.82% during the year ended December 29, 2012, is based
on the USD LIBOR plus a spread based on our leverage ratio at the end of each
financial reporting quarter. The Credit Agreement provides, among other things,
that we are required to maintain certain interest coverage and maximum leverage
ratios, and contains customary representations, warranties and affirmative
covenants. The Credit Agreement also contains customary negative covenants,
subject to negotiated exceptions on liens, indebtedness, significant corporate
changes (including mergers), dispositions and certain restrictive agreements.

As of December 29, 2012, we had various other short-term bank credit lines
available, of which approximately $27.2 million was outstanding. At December 29,
2012, borrowings under all of our credit lines had a weighted average interest
rate of 2.22%. As of December 29, 2012, there were $9.3 million of letters of
credit provided to third parties under the credit facility.

Private Placement Facilities


On August 10, 2010, we entered into $400 million private placement facilities
with two insurance companies. On April 30, 2012, we increased our available
credit facilities by $375 million by entering into a new agreement with one
insurance company and amending our existing agreements with two insurance
companies. 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
during a three year issuance period, through April 26, 2015. The facilities
allow us to issue senior promissory notes to the lenders at a fixed rate based
on an agreed upon spread over applicable treasury notes at the time of
issuance. The term of each possible issuance will be selected by us and can
range from five to 15 years (with an average life no longer than 12 years). The
proceeds of any issuances under the facilities will be used for general
corporate purposes, including working capital and capital expenditures, to
refinance existing indebtedness and/or to fund potential acquisitions. The
agreement provides, among other things, that we maintain certain maximum
leverage ratios, and contains restrictions relating to subsidiary indebtedness,
liens, affiliate transactions, disposal of assets and certain changes in
ownership.  These facilities contain a make-whole provision in the event that we
pay off the facility prior to the due date.

The components of our private placement facility borrowings as of December 29, 2012 are presented in the following table:

                                          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)                             50,000        3.09              January 20, 2022
December 24, 2012                                50,000        3.00             December 24, 2024
                                       $        250,000

(1) Annual repayments of approximately $7.1 million for this borrowing will commence on January 20, 2016.





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Butler Animal Health Supply


Effective December 31, 2009, BAHS, a majority-owned subsidiary whose financial
information is consolidated with ours, had incurred approximately $320.0 million
of debt (of which $37.5 million, which is eliminated in our consolidated
financial statements, was provided by Henry Schein, Inc.) in connection with our
acquisition of a majority interest in BAHS.

On May 27, 2011, BAHS refinanced the terms and amount of its debt in an aggregate principal amount of $366.0 million (of which $55.0 million, which is eliminated in our consolidated financial statements, was provided by Henry Schein, Inc.). The refinanced debt consists of the following three components:


                                                           Term Loan A   Term Loan B      Revolver
Original amount of debt (includes $55.0 million of debt
   provided by Henry Schein, Inc.)                         $   100,000   $   216,000     $    50,000
Number of remaining quarterly installments                           8      

12

Quarterly payments from:

   December 31, 2012 through June 30, 2013                 $     4,931
   September 30, 2013 through June 30, 2014                      8,766
   July 1, 2014 through September 30, 2014                       2,739
   December 31, 2012 through September 30, 2015                          $     4,239
Final installment due on December 31, 2014                      65,196
Final installment due on December 31, 2015

135,287

Balance outstanding as of December 29, 2012                     81,632       138,807               -
                                                            LIBOR plus    LIBOR plus      LIBOR plus
                                                                     a             a               a
                                                             margin of     margin of       margin of
Interest rate on debt                                            2.50%         3.25%           2.50%
Interest rate on debt - LIBOR floor                                         

1.25 %




During 2011 and 2012, BAHS made prepayments on Term Loans A and B, which
resulted in a reduction to the future quarterly and final installment amounts
due. Future prepayments by BAHS, if any, will result in reductions to remaining
quarterly and final installment amounts due.

The outstanding balance of $220.4 million (net of unamortized debt discount and
excluding amounts owed to Henry Schein, Inc.) is reflected in our consolidated
balance sheet as of December 29, 2012.

The debt agreement provides, among other things, that BAHS maintain certain
interest coverage and maximum leverage ratios, and contains restrictions
relating to subsidiary indebtedness, capital expenditures, liens, affiliate
transactions, disposal of assets and certain changes in ownership. In addition,
the debt agreement contains provisions which, under certain circumstances,
require BAHS to make prepayments based on excess cash flows of BAHS as defined
in the debt agreement.

During 2013, we intend to refinance the debt of approximately $220 million
related to the Butler Schein Animal Health transaction. The refinancing is
expected to reduce interest expense and to be accretive to earnings per share by
$0.02 to $0.03 on an annualized basis. We expect the refinancing to occur at the
end of the first quarter of 2013. As part of that refinancing, we expect to
incur a one-time, non-cash charge of approximately $0.04 to $0.05 per diluted
share.

Stock repurchases

From June 21, 2004 through December 29, 2012, we repurchased $799.9 million, or
13,756,063 shares, under our common stock repurchase programs. On April 18, 2012
and November 12, 2012, our Board of Directors authorized an additional $200.0
million and $300.0 million, respectively, for additional repurchases of our
common stock, $300.1 million of which is available as of December 29, 2012 for
future common stock share repurchases.


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Redeemable noncontrolling interests


Some minority shareholders in certain of our subsidiaries have the right, at
certain times, to require us to acquire their ownership interest in those
entities at fair value. ASC Topic 480-10 is applicable for noncontrolling
interests where we are or may be required to purchase all or a portion of the
outstanding interest in a consolidated subsidiary from the noncontrolling
interest holder under the terms of a put option contained in contractual
agreements. The components of the change in the Redeemable noncontrolling
interests for the years ended December 29, 2012, December 31, 2011 and December
25, 2010 are presented in the following table:

                                                      December 29,       

December 31, December 25,

                                                          2012               2011               2010
Balance, beginning of period                         $      402,050     $      304,140     $      178,570
Decrease in redeemable noncontrolling interests
due to
redemptions                                                 (23,637 )         (160,254 )         (141,415 )
Increase in redeemable noncontrolling interests
due to
business acquisitions                                        30,935             13,618            203,729
Net income attributable to redeemable
noncontrolling interests                                     34,803             36,514             26,054
Dividends declared                                          (21,013 )          (15,212 )          (12,360 )
Effect of foreign currency translation gain (loss)
attributable to
redeemable noncontrolling interests                             904               (889 )           (2,281 )
Change in fair value of redeemable securities                53,769            224,133             51,843
Other adjustment to redeemable noncontrolling
interests                                                   (42,636 )                -                  -
Balance, end of period                               $      435,175     $   

402,050 $ 304,140




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

Additionally, some prior owners of such acquired subsidiaries are eligible to
receive additional purchase price cash consideration if certain financial
targets are met. For acquisitions completed prior to 2009, we accrue liabilities
that may arise from these transactions when we believe that the outcome of the
contingency is determinable beyond a reasonable doubt. For 2009 and future
acquisitions, as required by ASC Topic 805, "Business Combinations," we have and
will accrue liabilities for the estimated fair value of additional purchase
price adjustments at the time of the acquisition. Any adjustments to these
accrual amounts are recorded in our consolidated statement of income.

On December 30, 2011, we acquired all of Oak Hill Capital Partners' ("OHCP")
remaining direct and indirect interests in BAHS (including its interest in W.A.
Butler Company) for $155 million in cash. As a result of this transaction, our
ownership in BAHS increased to approximately 71.7% at December 31, 2011. The
amount paid to OHCP for their remaining interests in BAHS was in excess of the
previously agreed upon annual limits (see Note 9. "Business Acquisitions and
Other Transaction" within our notes to our consolidated financial statements),
but such limits were waived by all parties involved. At December 29, 2012, our
ownership in BAHS is approximately 73.7%.

Unrecognized tax benefits

As more fully disclosed in Note 12 of "Notes to Consolidated Financial Statements," we cannot reasonably estimate the timing of future cash flows related to the unrecognized tax benefits, including accrued interest, of $40.7 million as of December 29, 2012.

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Critical Accounting Policies and Estimates


The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities. We base our estimates on historical data, when available,
experience, industry and market trends, and on various other assumptions that
are believed to be reasonable under the circumstances, the combined results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. However, by
their nature, estimates are subject to various assumptions and
uncertainties. Reported results are therefore sensitive to any changes in our
assumptions, judgments and estimates, including the possibility of obtaining
materially different results if different assumptions were to be applied.

We believe that the following critical accounting policies, which have been discussed with our audit committee, affect the significant estimates and judgments used in the preparation of our financial statements:

Revenue Recognition


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

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

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


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

Revenue derived from multiple element arrangements, and the related deferral of
such revenue (which is insignificant to our financial statements), is recognized
as follows. When we sell software products together with related services (i.e.,
training and technical support) we allocate revenue to the delivered elements
using the residual method, based upon vendor-specific objective evidence
("VSOE") of the fair value of the undelivered elements, or defer it until such
time as vendor-specific evidence of fair value is obtained. Multiple element
arrangements that include elements that are not considered software consist
primarily of equipment and the related installation service. Effective
December 26, 2010 we allocate revenue for such arrangements based on the
relative selling prices of the elements applying the following hierarchy: first
VSOE, then third-party evidence ("TPE") of selling price if VSOE is not
available, and finally our estimate of the selling price if neither VSOE nor TPE
is available. VSOE exists when we sell the deliverables separately and
represents the actual price charged by us for each deliverable. Estimated
selling price reflects our best estimate of what the selling prices of each
deliverable would be if it were sold regularly on a standalone basis taking into
consideration the cost structure of our business, technical skill required,
customer location and other market conditions. Each element that has standalone
value is accounted for as a separate unit of accounting. Revenue allocated to
each unit of accounting is recognized when the service is provided or the
product is delivered.

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

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Accounts Receivable and Reserves


The carrying amount of accounts receivable is reduced by a valuation allowance
that reflects our best estimate of the amounts that will not be collected. The
reserve for accounts receivable is comprised of allowance for doubtful accounts
and sales returns. In addition to reviewing delinquent accounts receivable, we
consider many factors in estimating our reserve, including historical data,
experience, customer types, credit worthiness and economic trends. From time to
time, we may adjust our assumptions for anticipated changes in any of these or
other factors expected to affect collectability. Although we believe our
judgments, estimates and/or assumptions related to accounts receivable and
reserves are reasonable, making material changes to such judgments, estimates
and/or assumptions could materially affect our financial results.

Inventories and Reserves


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

From time to time, we may adjust our assumptions for anticipated changes in any
of these or other factors expected to affect the value of inventory. Although we
believe our judgments, estimates and/or assumptions related to inventory and
reserves are reasonable, making material changes to such judgments, estimates
and/or assumptions could materially affect our financial results.

Goodwill and Other Indefinite-Lived Intangible Assets


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

During the fiscal year ended December 31, 2011, we adopted the provisions of
Accounting Standards Update 2011-08, "Intangibles-Goodwill and Other (Topic
350): Testing Goodwill for Impairment" ("ASU 2011-08"), which allows us to use
qualitative factors to determine whether it is more likely than not that the
fair values of our reporting units are less than their carrying values. The
factors that we consider in developing our qualitative assessment included:

• Macroeconomic conditions consisting of the overall sales growth of our

business and the overall sales growth of each of our operating segments. We

also consider our growth in market share in the markets in which we compete;

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

• Key personnel and management expertise, as well as our growth strategies for

the next several years; and

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

   unit.



Prior to the adoption of ASU 2011-08, measuring fair value of a reporting unit
was generally based on valuation techniques using multiples of sales or
earnings. Goodwill was allocated to such reporting units, for the purposes of
preparing our impairment analyses, based on a specific identification basis. Our
impairment analysis for indefinite-lived intangibles consists of a comparison of
the fair value to the carrying value of the assets. This comparison is made
based on a review of historical, current and forecasted sales and gross profit
levels, as well as a review of any factors that may indicate potential
impairment. For certain indefinite-lived intangible assets, a present value
technique, such as estimates of future cash flows, is utilized. We assessed the
potential impairment of goodwill and other indefinite-lived intangible assets
annually (at the beginning of our fourth quarter) and on an interim basis
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. There were no events or circumstances from the date of that
assessment through December 29, 2012 that impacted our analysis.


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

• significant underperformance relative to expected historical or projected

   future operating results;



• significant changes in the manner of our use of acquired assets or the

strategy for our overall business (e.g., decision to divest a business); or




•  significant negative industry or economic trends.



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

Beginning with the first quarter of 2012, we changed our reporting units from
dental, medical, animal health, international and technology to global dental,
global medical, global animal health and global technology and value-added
services.

These groups have been formed to provide distinct organizational focus for reaching and serving each practitioner segment with the benefits of a global perspective, as well as global product and service offerings and best practices.


In connection with this change in business groups, goodwill was reallocated to
the new reporting units. Based upon this change, we felt it was necessary to
perform a quantitative assessment, in addition to a qualitative assessment, of
goodwill impairment as of the first day of the fourth quarter for the year ended
December 29, 2012 in order to establish a new baseline calculation.

For the years ended December 29, 2012, December 31, 2011 and December 25, 2010, the results of our goodwill impairment analysis did not result in any impairments.

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. Although we believe
our judgments, estimates and/or assumptions related to supplier rebates are
reasonable, making material changes to such judgments, estimates and/or
assumptions could materially affect our financial results.

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 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. Although we believe our judgments, estimates and/or assumptions used in
estimating cash flows and determining fair value are reasonable, making material
changes to such judgments, estimates and/or assumptions could materially affect
such impairment analyses and our financial results.

Stock-Based Compensation


We measure stock-based compensation at the grant date, based on the estimated
fair value of the award. Prior to March 2009, awards principally included a
combination of at-the-money stock options and restricted stock (including
restricted stock units). Since March 2009, equity-based awards have been granted
solely in the form of restricted stock and restricted stock units, with the
exception of stock options for certain pre-existing contractual obligations.

We estimate the fair value of stock options using the Black-Scholes valuation
model which requires us to make assumptions about the expected life of options,
stock price volatility, risk-free interest rates and dividend yields.


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We issue restricted stock that vests solely based on the recipient's continued
service over time (primarily four-year cliff vesting) and restricted stock that
vests based on our achieving specified performance measurements and the
recipient's continued service over time (primarily three-year cliff vesting).

With respect to time-based restricted stock, we estimate the fair value on the
date of grant based on our closing stock price. With respect to
performance-based restricted stock, 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 three-year period as determined by the
Compensation Committee of the Board of Directors. Though there is no guarantee
that performance targets will be achieved, we estimate the fair value of
performance-based restricted stock, based on our closing stock price at time of
grant. Adjustments to the performance-based restricted stock targets are
provided for significant events such as acquisitions, divestitures, new business
ventures and share repurchases. 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.

Although we believe our judgments, estimates and/or assumptions related to stock-based compensation are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.

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