Edgar Filing: HENRY SCHEIN INC

the2q10_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 26, 2010

__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 0-27078

HENRY SCHEIN, INC.

(Exact name of registrant as specified in its charter)

Delaware	11-3136595
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

135 Duryea Road

Melville, New York

(Address of principal executive offices)

11747

(Zip Code)

(631) 843-5500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X

No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X

No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer X		Accelerated filer __
Non-accelerated filer __	(Do not check if a smaller reporting company)	Smaller reporting company __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes __

No X

As of July 23, 2010, there were 91,516,274 shares of the registrant’s common stock outstanding.

HENRY SCHEIN, INC.

INDEX



		Page

	PART I. FINANCIAL INFORMATION


ITEM 1.	Consolidated Financial Statements:
	Balance Sheets as of June 26, 2010 and December 26, 2009	3

	Statements of Income for the three and six months ended
	June 26, 2010 and June 27, 2009	4

	Statement of Changes in Stockholders' Equity for the six months ended
	June 26, 2010	5

	Statements of Cash Flows for the six months ended
	June 26, 2010 and June 27, 2009	6

	Notes to Consolidated Financial Statements	7

ITEM 2.	Management's Discussion and Analysis of
	Financial Condition and Results of Operations	26

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	41

ITEM 4.	Controls and Procedures	41


	PART II. OTHER INFORMATION


ITEM 1.	Legal Proceedings	42

ITEM 1A.	Risk Factors	42

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

ITEM 6.	Exhibits	43

	Signature	43

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

	June 26,			December 26,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	321,116		$	471,154
Available-for-sale securities		14,989			-
Accounts receivable, net of reserves of $48,706 and $51,724		829,917			725,397
Inventories, net		797,603			775,199
Deferred income taxes		42,934			48,001
Prepaid expenses and other		205,986			183,782
Total current assets		2,212,545			2,203,533
Property and equipment, net		248,233			259,576
Goodwill		1,368,106			986,395
Other intangibles, net		406,828			204,445
Investments and other		181,953			182,036
Total assets	$	4,417,665		$	3,835,985

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	504,248		$	521,079
Bank credit lines		255			932
Current maturities of long-term debt		25,215			23,560
Accrued expenses:
Payroll and related		139,290			155,298
Taxes		91,721			86,034
Other		265,468			289,351
Total current liabilities		1,026,197			1,076,254
Long-term debt		523,421			243,373
Deferred income taxes		187,602			100,976
Other liabilities		72,348			75,304
Total liabilities		1,809,568			1,495,907

Redeemable noncontrolling interests		341,099			178,570
Commitments and contingencies

Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none outstanding		-			-
Common stock, $.01 par value, 240,000,000 shares authorized,
91,514,440 outstanding on June 26, 2010 and
90,630,889 outstanding on December 26, 2009		915			906
Additional paid-in capital		632,240			603,772
Retained earnings		1,637,508			1,492,607
Accumulated other comprehensive income (loss)		(3,849	)		64,194
Total Henry Schein, Inc. stockholders' equity		2,266,814			2,161,479
Noncontrolling interest		184			29
Total stockholders' equity		2,266,998			2,161,508
Total liabilities, redeemable noncontrolling interests and stockholders' equity	$	4,417,665		$	3,835,985

See accompanying notes.

Table of Contents

HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

	Three Months Ended						Six Months Ended
	June 26,			June 27,			June 26,			June 27,
	2010			2009			2010			2009

Net sales	$	1,849,401		$	1,607,434		$	3,609,711		$	3,092,822
Cost of sales		1,303,757			1,131,516			2,551,034			2,178,541
Gross profit		545,644			475,918			1,058,677			914,281
Operating expenses:
Selling, general and administrative		407,638			353,948			804,627			697,680
Restructuring costs		-			-			12,285			4,043
Operating income		138,006			121,970			241,765			212,558
Other income (expense):
Interest income		3,508			2,486			6,896			5,287
Interest expense		(9,185	)		(6,406	)		(18,272	)		(13,158	)
Other, net		474			(373	)		359			(343	)
Income from continuing operations before taxes, equity in
earnings of affiliates and noncontrolling interests		132,803			117,677			230,748			204,344
Income taxes		(41,435	)		(38,689	)		(73,659	)		(67,538	)
Equity in earnings of affiliates		1,795			1,212			3,326			2,577
Income from continuing operations		93,163			80,200			160,415			139,383
Income from discontinued operation, net of tax		-			225			-			342
Net income		93,163			80,425			160,415			139,725
Less: Net income attributable to noncontrolling interests		(9,162	)		(6,952	)		(15,514	)		(11,401	)
Net income attributable to Henry Schein, Inc.	$	84,001		$	73,473		$	144,901		$	128,324

Amounts attributable to Henry Schein, Inc.:
Income from continuing operations	$	84,001		$	73,324		$	144,901		$	128,098
Income from discontinued operation, net of tax		-			149			-			226
Net income	$	84,001		$	73,473		$	144,901		$	128,324

Earnings per share attributable to Henry Schein, Inc.:

From continuing operations:
Basic	$	0.93		$	0.83		$	1.61		$	1.44
Diluted	$	0.90		$	0.81		$	1.56		$	1.42

From discontinued operation:
Basic	$	-		$	-		$	-		$	-
Diluted	$	-		$	-		$	-		$	0.01

From net income:
Basic	$	0.93		$	0.83		$	1.61		$	1.44
Diluted	$	0.90		$	0.81		$	1.56		$	1.43

Weighted-average common shares outstanding:
Basic		90,021			88,815			89,733			88,838
Diluted		93,352			90,534			92,984			90,021

See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)

	Common Stock $.01 Par Value					Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest		Total Stockholders' Equity
	Shares			Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest		Total Stockholders' Equity
Balance, December 26, 2009		90,630,889		$	906	$	603,772		$	1,492,607	$	64,194		$	29	$	2,161,508

Net income (excluding $15,481 attributable to Redeemable
noncontrolling interests)		-			-		-			144,901		-			33		144,934
Foreign currency translation loss (excluding $7,696
attributable to Redeemable noncontrolling interests)		-			-		-			-		(52,534	)		-		(52,534	)
Unrealized loss from foreign currency hedging activities,
net of tax benefit of $7,512		-			-		-			-		(15,478	)		-		(15,478	)
Unrealized investment loss, net of tax benefit of $88		-			-		-			-		(323	)		-		(323	)
Pension adjustment gain, net of tax of $27		-			-		-			-		292			-		292
Total comprehensive income																	76,891

Other adjustments		-			-		-			-		-			122		122
Change in fair value of redeemable securities		-			-		18,292			-		-			-		18,292
Initial noncontrolling interests and adjustments related to
business acquisitions		-			-		(23,482	)		-		-			-		(23,482	)
Stock issued upon exercise of stock options,
including tax benefit of $4,138		706,077			7		25,167			-		-			-		25,174
Stock-based compensation expense		237,233			2		12,997			-		-			-		12,999
Shares withheld for payroll taxes		(59,759	)		-		(4,245	)		-		-			-		(4,245	)
Liability for cash settlement stock option awards		-			-		(261	)		-		-			-		(261	)

Balance, June 26, 2010		91,514,440		$	915	$	632,240		$	1,637,508	$	(3,849	)	$	184	$	2,266,998

See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Six Months Ended
	June 26,			June 27,
	2010			2009

Cash flows from operating activities:
Net income	$	160,415		$	139,725
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		50,344			40,734
Amortization of bond discount		3,135			2,964
Stock-based compensation expense		12,999			12,303
Provision for losses on trade and other accounts receivable		2,322			1,712
Benefit from deferred income taxes		(5,831	)		(5,921	)
Undistributed earnings of affiliates		(3,326	)		(2,577	)
Other		2,649			1,491
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(33,854	)		14,443
Inventories		32,264			13,248
Other current assets		(18,411	)		2,470
Accounts payable and accrued expenses		(73,718	)		(141,017	)
Net cash provided by operating activities		128,988			79,575

Cash flows from investing activities:
Purchases of fixed assets		(17,542	)		(28,403	)
Payments for equity investment and business
acquisitions, net of cash acquired		(251,575	)		(26,489	)
Purchases of available-for-sale securities		(26,984	)		-
Proceeds from sales of available-for-sale securities		1,400			4,040
Proceeds from maturities of available-for-sale securities		11,996			-
Net proceeds from foreign exchange forward contract settlements		-			275
Other		307			(2,680	)
Net cash used in investing activities		(282,398	)		(53,257	)

Cash flows from financing activities:
Repayments of bank borrowings		(668	)		(3,393	)
Principal payments for long-term debt		(3,198	)		(2,612	)
Proceeds from issuance of stock upon exercise of stock options		21,036			3,928
Excess tax benefits related to stock-based compensation		6,351			683
Distributions to noncontrolling shareholders		(7,736	)		(1,569	)
Acquisitions of noncontrolling interests in subsidiaries		(10,000	)		-
Other		(180	)		(179	)
Net cash provided by (used in) financing activities		5,605			(3,142	)

Net change in cash and cash equivalents		(147,805	)		23,176
Effect of exchange rate changes on cash and cash equivalents		(2,233	)		1,127
Cash and cash equivalents, beginning of period		471,154			369,570
Cash and cash equivalents, end of period	$	321,116		$	393,873

See accompanying notes.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

(unaudited)

Note 1. Basis of Presentation

Our consolidated financial statements include our accounts, as well as those of our wholly-owned and majority-owned subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation.

Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements.

The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 26, 2009.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the six months ended June 26, 2010 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 25, 2010.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 2. Segment Data

We conduct our business through two reportable segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution reportable segment aggregates our dental, medical, animal health and international operating segments. This segment consists of consumable products, small equipment, laboratory products, large dental and medical equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

Our dental group serves office-based dental practitioners, schools and other institutions in the combined United States and Canadian dental market. Our medical group serves office-based medical practitioners, surgical centers, other alternate-care settings and other institutions throughout the United States. Our animal health group serves animal health practices and clinics throughout the United States. Our international group serves dental, medical and animal health practitioners in 21 countries outside of North America.

Our technology group provides software, technology and other value-added services to healthcare practitioners, primarily in the United States, Canada, the United Kingdom, Australia and New Zealand. Our value-added practice solutions include practice management software systems for dental and medical practitioners and animal health clinics. Our technology group offerings also include financial services, on a non-recourse basis, e-services and continuing education services for practitioners.

The following tables present information about our reportable segments:

	Three Months Ended				Six Months Ended
	June 26,		June 27,		June 26,		June 27,
	2010		2009 (1)		2010		2009 (1)
Net Sales:
Healthcare distribution (2):
Dental (3)	$	677,560	$	622,219	$	1,292,209	$	1,216,175
Medical (4)		286,291		287,382		570,880		559,144
Animal health (5)		234,734		63,488		441,380		119,114
International (6)		602,435		591,794		1,211,888		1,115,513
Total healthcare distribution		1,801,020		1,564,883		3,516,357		3,009,946
Technology (7)		48,381		42,551		93,354		82,876
Total	$	1,849,401	$	1,607,434	$	3,609,711	$	3,092,822

(1)	Adjusted to reflect the effects of a discontinued operation.

(2)	Consists of consumable products, small equipment, laboratory products, large dental and medical equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

(3)	Consists of products sold in the United States and Canada.

(4)	Consists of products sold in the United States’ medical market.

(5)	Consists of products sold in the United States’ animal health market.

(6)	Consists of products sold in the dental, medical and animal health markets, primarily in Europe.

(7)	Consists of practice management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States, Canada, the United Kingdom, Australia and New Zealand.

	Three Months Ended				Six Months Ended
	June 26,		June 27,		June 26,		June 27,
	2010		2009 (1)		2010		2009 (1)
Operating Income:
Healthcare distribution	$	121,134	$	106,660	$	209,972	$	182,368
Technology		16,872		15,310		31,793		30,190
Total	$	138,006	$	121,970	$	241,765	$	212,558

(1)	Adjusted to reflect the effects of a discontinued operation.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 3. Stock-Based Compensation

Our accompanying unaudited consolidated statements of income reflect share-based pretax compensation expense of $6.9 million ($4.8 million after-tax) and $13.0 million ($8.9 million after-tax) for the three and six months ended June 26, 2010, respectively, and $6.2 million ($4.2 million after-tax) and $12.3 million ($8.2 million after-tax) for the three and six months ended June 27, 2009, respectively.

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

Stock-based awards are provided to certain employees and non-employee directors under the terms of our 1994 Stock Incentive Plan, as amended, and our 1996 Non-Employee Director Stock Incentive Plan, as amended (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Prior to March 2009, awards under the Plans principally included a combination of at-the-money stock options and restricted stock (including restricted stock units). In March 2009 and March 2010, equity-based awards were granted solely in the form of restricted stock and restricted stock units, with the exception of stock options for certain pre-existing contractual obligations.

Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. We issue restricted stock that vests solely based on the recipient’s continued service over time (four-year cliff vesting) and restricted stock that vests based on our achieving specified performance measurements and the recipient’s continued service over time (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 earnings per share 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.

The Plans provide for adjustments to the performance-based restricted stock targets 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 under the Plans.

Restricted stock units are unit awards that we grant to certain employees that entitle the recipient to shares of common stock upon vesting. We grant restricted stock units with the same time-based and performance-based vesting that we use for restricted stock. The fair value of restricted stock units is determined on the date of grant, based on our closing stock price.

Total unrecognized compensation cost related to non-vested awards as of June 26, 2010 was $68.9 million, which is expected to be recognized over a weighted-average period of approximately 2.4 years.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 3. Stock-Based Compensation (Continued)

The following weighted-average assumptions were used in determining the fair values of stock options using the Black-Scholes valuation model:

	2010	2009
Expected dividend yield	0%	0%
Expected stock price volatility	20%	28%
Risk-free interest rate	2.37%	1.88%
Expected life of options (years)	4.5	4.5

The following table summarizes stock option activity under the Plans during the six months ended June 26, 2010:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Outstanding at beginning of period		6,294,742		$	40.66
Granted		10,000			56.03
Exercised		(706,077	)		29.86
Forfeited		(38,210	)		48.82
Outstanding at end of period		5,560,455		$	42.00	5.1	$	80,521

Options exercisable at end of period		4,786,504		$	39.61	4.7	$	79,207

The following tables summarize the status of our non-vested restricted stock/units for the six months ended June 26, 2010:

	Time-Based Restricted Stock/Units
	Shares/Units			Weighted Average Grant Date Fair Value				Aggregate Intrinsic Value
Outstanding at beginning of period		597,605		$	25,662
Granted		221,422			12,405
Vested		(86,138	)		(4,076	)
Forfeited		(11,452	)		(501	)
Outstanding at end of period		721,437		$	33,490		$	40,198

	Performance-Based Restricted Stock/Units
	Shares/Units			Weighted Average Grant Date Fair Value				Aggregate Intrinsic Value
Outstanding at beginning of period		1,009,962		$	22,271
Granted		391,204			22,741
Vested		(128,674	)		(6,598	)
Forfeited		(10,052	)		(431	)
Outstanding at end of period		1,262,440		$	37,983		$	70,343

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 4. Business Acquisitions and Other Transactions

Acquisitions

Effective December 31, 2009, we acquired a majority interest in Butler Animal Health Holding Company, LLC (“Butler Holding”), the holding company of Butler Animal Health Supply, LLC (“BAHS”), a distributor of companion animal health supplies to veterinarians. BAHS further complements our domestic and international animal health operations and accordingly has been included in our Animal health business unit, which is reported as part of Healthcare distribution. We and certain of our subsidiaries contributed certain assets and liabilities with a net book value of approximately $86.0 million related to our United States animal health business to BAHS and paid approximately $42.0 million in cash to acquire 50.1% of the equity interests in Butler Holding indirectly through W.A. Butler Company, a holding company that is partially owned by Oak Hill Capital Partners (“OHCP”). As part of a recapitalization at closing, BAHS combined with our animal health business to form Butler Schein Animal Health (“BSAH”), while incurring approximately $127.0 million in incremental debt used primarily to finance Butler Holding stock redemptions. As a result, BSAH had $320.0 million of debt at closing, $37.5 million of which was provided by Henry Schein, Inc. and is eliminated in the accompanying consolidated financial statements. Total consideration for the acquisition of BAHS, including $96.1 million of value for noncontrolling interests, was $351.1 million and was allocated as follows:

Net assets of BAHS at fair value:
Current assets	$	164,789
Intangible assets:
Trade name (useful life 3 years)		10,000
Customer relationships (useful life 12 years)		140,000
Non-compete agreements (useful life 2 years)		2,600
Goodwill		270,714
Other assets		14,138
Current liabilities		(62,770	)
Bank indebtedness		(200,100	)
Deferred income tax liabilities		(74,271	)
Net book value of our assets and liabilities contributed		86,048
Total allocation of consideration	$	351,148

The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of BAHS. The goodwill is not expected to be tax deductible for income tax purposes. As a result of our contributed business being under the control of Henry Schein before and after the transaction, the assets and liabilities of this business remain at their original historical accounting basis in the accompanying consolidated financial statements.

The debt incurred as part of the acquisition of BAHS is repayable in 23 quarterly installments of $0.8 million through September 30, 2015, and a final installment of $301.6 million on December 31, 2015. Interest on the BAHS debt is charged at LIBOR plus a margin of 3.5% with a LIBOR floor of 2% for a current effective rate of 5.5% as of June 26, 2010. The debt agreement contains provisions which, under certain circumstances, require BAHS to make prepayments of the loan commitment based on excess cash flows of BAHS as defined in the debt agreement. The debt agreement also contains provisions that require BAHS to hedge risks related to potential rising interest rates. As a result, BAHS entered into a series of interest rate caps protecting against LIBOR interest rates rising above 3.0% through March 30, 2012.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 4. Business Acquisitions and Other Transactions (Continued)

In connection with the acquisition of a majority interest in BAHS, we entered into (i) a Put Rights Agreement with OHCP and Butler Holding (the “Oak Hill Put Rights Agreement”), and (ii) a Put Rights Agreement with Burns Veterinary Supply, Inc. (“Burns”) and Butler Holding (the “Burns Put Rights Agreement” and together with the Oak Hill Put Rights Agreement, the “Put Rights Agreements”), which provide each of OHCP and Burns with certain rights to require us to purchase their respective direct and indirect ownership interests in Butler Holding at fair value based on third-party valuations (“Put Rights”). Pursuant to the Oak Hill Put Rights Agreement, OHCP can exercise its Put Rights from and after the earlier of (a) December 31, 2010, and (b) a change of control of Henry Schein, Inc. Except in connection with a change of control of us prior to the first anniversary of the closing (in which case there will not be any maximum), our maximum annual payment to OHCP under the Oak Hill Put Rights Agreement will not exceed $125.0 million for the first year during which OHCP can exercise its rights, $137.5 million for the second year and $150.0 million for the third year and for each year thereafter. Pursuant to the Burns Put Rights Agreement, Burns can exercise its Put Rights from and after December 31, 2014, at which time Burns will be permitted to sell to us up to 20% of its closing date ownership interest in Butler Holding each year. If OHCP still holds ownership interests in Butler Holding at the time the Burns Put Rights begin, then the put amounts payable by us to OHCP and Burns in any year will not exceed $150.0 million in the aggregate. As a result of the Put Right Agreements, the noncontrolling interest in BAHS has been reflected as part of Redeemable noncontrolling interests in the accompanying consolidated balance sheet.

In addition to the BAHS acquisition, we completed certain other acquisitions during the six months ended June 26, 2010. The operating results of all acquisitions are reflected in our financial statements from their respective acquisition dates. All acquisitions individually and in the aggregate had an immaterial impact on our reported operating results. Total acquisition costs incurred in the three and six months ended June 26, 2010 were immaterial to our financial results.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 5. Earnings Per Share

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

For the three and six months ended June 26, 2010, diluted earnings per share includes the effect of common shares issuable upon conversion of our convertible debt. During the period, the debt was convertible at a premium as a result of the conditions of the debt. As a result, the amount in excess of the principal is presumed to be settled in common shares and is reflected in our calculation of diluted earnings per share.

For the three and six months ended June 27, 2009, our convertible debt was not convertible at a premium and thus the impact of an assumed conversion was not applicable.

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

	Three Months Ended		Six Months Ended
	June 26,	June 27,	June 26,	June 27,
	2010	2009	2010	2009
Basic	90,021,051	88,814,906	89,733,189	88,837,941
Effect of dilutive securities:
Stock options, restricted stock and restricted units	2,285,918	1,719,040	2,289,266	1,183,555
Effect of assumed conversion of convertible debt	1,044,762	-	961,942	-
Diluted	93,351,731	90,533,946	92,984,397	90,021,496

Weighted-average options to purchase 989,548 shares of common stock at exercise prices ranging from $59.89 to $62.05 per share and 2,741,364 shares of common stock at exercise prices ranging from $45.85 to $62.05 per share that were outstanding during the three months ended June 26, 2010 and June 27, 2009, respectively, were excluded from the computation of diluted earnings per share. Weighted-average options to purchase 989,548 shares of common stock at exercise prices ranging from $59.89 to $62.05 per share and 2,856,864 shares of common stock at exercise prices ranging from $40.40 to $62.05 per share that were outstanding during the six months ended June 26, 2010 and June 27, 2009, respectively, were excluded from the computation of diluted earnings per share. In each of these periods, such options’ exercise prices exceeded the average market price of our common stock, thereby causing the effect of such options to be anti-dilutive.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 6. Comprehensive Income

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

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

	June 26,			December 26,
	2010			2009
Attributable to Redeemable noncontrolling interests:
Foreign currency translation adjustment	$	(5,803	)	$	1,893

Attributable to Henry Schein, Inc.:
Foreign currency translation adjustment	$	2,195		$	54,729
Unrealized gain (loss) from foreign currency hedging activities		(941	)		14,537
Unrealized investment loss		(1,644	)		(1,321	)
Pension adjustment loss		(3,459	)		(3,751	)
Accumulated other comprehensive income (loss)	$	(3,849	)	$	64,194

Total Accumulated other comprehensive income (loss)	$	(9,652	)	$	66,087

The following table summarizes other comprehensive income attributable to our Redeemable noncontrolling interests, net of applicable taxes as follows:

	Three Months Ended					Six Months Ended
	June 26,			June 27,		June 26,			June 27,
	2010			2009		2010			2009

Foreign currency translation adjustment	$	(4,209	)	$	4,322	$	(7,696	)	$	1,174

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

	Three Months Ended				Six Months Ended
	June 26,		June 27,		June 26,		June 27,
	2010		2009		2010		2009
Comprehensive income attributable to
Henry Schein, Inc.	$	50,845	$	131,811	$	76,858	$	144,122
Comprehensive income attributable to
noncontrolling interests		20		20		33		26
Comprehensive income attributable to
Redeemable noncontrolling interests		4,933		11,254		7,785		12,549
Comprehensive income	$	55,798	$	143,085	$	84,676	$	156,697

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 7. Fair Value Measurements

ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”) establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC Topic 820 applies under other previously issued accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements.

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

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

•

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

•

Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

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

The following section describes the valuation methodologies that we used to measure different financial instruments at fair value.

Cash equivalents and trade receivables

Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value.

Long-term investments and notes receivable

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

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 7. Fair Value Measurements (Continued)

Available-for-sale securities

As of June 26, 2010, we have approximately $19.7 million ($17.6 million net of temporary impairments) invested in auction-rate securities (“ARS”), which are included as part of Investments and other within our consolidated balance sheets. 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. Approximately $17.7 million ($15.5 million net of temporary impairments) of our ARS are backed by student loans that are backed by the federal government and the remaining $2.0 million are invested in closed-end municipal bond funds. Our ARS portfolio is comprised of investments that are rated AAA by major independent rating agencies. Since the middle of February 2008, ARS 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.

During 2010, we have received approximately $0.4 million and $1.0 million of redemptions, at par, for our closed-end municipal bond funds and our student loan portfolios, respectively.

As of June 26, 2010, we have continued to classify our closed-end municipal bond funds, as well as our student loan portfolios, as Level 3 within the fair value hierarchy due to the lack of observable inputs and the absence of significant refinancing activity.

Based upon the information currently available and the use of a discounted cash flow model in accordance with applicable authoritative guidance, our previously recorded cumulative temporary impairment at December 26, 2009 of $2.2 million related to our closed-end municipal bond funds and our student loan portfolios was decreased to $2.1 million during the six months ended June 26, 2010. The temporary impairment has been recorded as part of Accumulated other comprehensive income (loss) within the equity section of our consolidated balance sheet.

As of June 26, 2010, we have approximately $15.0 million invested in treasury securities and agency securities. These securities, which we intend to hold to maturity, have a maturity period of six months or less. As of June 26, 2010, we have classified our investments in treasury securities and agency securities as Level 1 within the fair value hierarchy.

Money market fund

As of June 26, 2010, we had approximately $0.3 million invested in the Reserve Primary Fund. This money market fund included in its holdings commercial paper of Lehman Brothers. As a result of the Chapter 11 bankruptcy of Lehman Brothers Holdings, Inc., the net asset value of the fund decreased below $1.00. Currently, this fund is in the process of being liquidated. During the six months ended June 26, 2010, we have received approximately $1.7 million of distributions from the Reserve Primary Fund. As of June 26, 2010, the value of our holdings in this fund are included within Prepaid expenses and other in our consolidated balance sheets and as Level 3 within the fair value hierarchy, due to the lack of observable inputs and the absence of trading activity.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 7. Fair Value Measurements (Continued)

Accounts payable and accrued expenses

Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities. The carrying value of these financial instruments approximates fair value due to their short maturities or variable interest rates that approximate current market rates.

Debt

The fair value of our debt is estimated based on quoted market prices for our traded debt and on market prices of similar issues for our private debt. The fair value of our debt as of June 26, 2010 and December 26, 2009 was estimated at $596.7 million and $307.5 million.

Derivative contracts

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

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

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 7. Fair Value Measurements (Continued)

Redeemable noncontrolling interests

Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value based on third-party valuations. The noncontrolling interests subject to put options are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to Additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments will not impact the calculation of earnings per share. The details of the changes in Redeemable noncontrolling interests are shown in Note 12.

The following table presents our assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of June 26, 2010 and December 26, 2009:

	June 26, 2010
	Level 1		Level 2		Level 3		Total

Assets:
Available-for-sale securities	$	14,989	$	-	$	17,551	$	32,540
Money market fund		-		-		65		65
Derivative contracts		-		2,336		-		2,336
Total assets	$	14,989	$	2,336	$	17,616	$	34,941


Liabilities:
Derivative contracts	$	-	$	4,504	$	-	$	4,504
Total liabilities	$	-	$	4,504	$	-	$	4,504

Redeemable noncontrolling interests	$	-	$	-	$	341,099	$	341,099

	December 26, 2009
	Level 1		Level 2		Level 3		Total

Assets:
Available-for-sale securities	$	-	$	-	$	18,848	$	18,848
Money market fund		-		-		1,746		1,746
Derivative contracts		-		6,177		-		6,177
Total assets	$	-	$	6,177	$	20,594	$	26,771


Liabilities:
Derivative contracts	$	-	$	3,829	$	-	$	3,829
Total liabilities	$	-	$	3,829	$	-	$	3,829

Redeemable noncontrolling interests	$	-	$	-	$	178,570	$	178,570

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 7. Fair Value Measurements (Continued)

As of June 26, 2010, we have estimated the value of our closed-end municipal bond fund ARS portfolio and our student loan backed ARS portfolio based upon a discounted cash flow model. The assumptions used in our valuation model include estimates for interest rates, timing and amount of cash flows and expected holding periods for the ARS portfolio. As a result of these analyses, our previously recorded cumulative temporary impairment at December 26, 2009 of $2.2 million was decreased by $0.1 million to $2.1 million during the six months ended June 26, 2010.

We estimated the value of our holdings within the Reserve Primary Fund based upon the net asset value of the fund as of September 16, 2008, subsequent to the declaration of bankruptcy by Lehman Brothers Holdings, Inc. During the six months ended June 26, 2010, we received approximately $1.7 million of distributions from The Reserve Primary Fund, leaving a remaining balance of approximately $0.3 million as of June 26, 2010. The following table presents a reconciliation of our assets measured at fair value on a recurring basis using unobservable inputs (Level 3):

	Level 3 (1)
Balance, December 27, 2008	$	266,581
Transfers to Level 3		-
Change in redeemable noncontrolling interests		(54,465	)
Redemptions at par		(13,227	)
Gains and (losses):
Reported in earnings - Reserve Primary Fund reduction		500
Reported in accumulated other comprehensive income		(225	)
Balance, December 26, 2009	$	199,164
Transfers in (out)		-
Change in redeemable noncontrolling interests		162,529
Redemptions at par		(3,080	)
Gain reported in accumulated other comprehensive income (loss)		102
Balance, June 26, 2010	$	358,715

(1) Level 3 amounts consist of closed-end municipal bond funds, student loan backed auction-rate securities, money market fund and redeemable noncontrolling interests.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 8. Income Taxes

For the six months ended June 26, 2010, our effective tax rate from continuing operations was 31.9% compared to 33.1% for the prior year period. The difference between our effective tax rates and the federal statutory tax rates for both periods primarily relates to state and foreign income taxes.

The total amount of unrecognized tax benefits as of June 26, 2010 was approximately $22.8 million, all of which would affect the effective tax rate if recognized. It is expected that the amount of unrecognized tax benefits will change in the next 12 months. However, we do not expect the change to have a material impact on our consolidated financial statements.

The total amounts of interest and penalties resulting from unrecognized tax benefits were approximately $4.1 million and $0, respectively, for the six months ended June 26, 2010. It is expected that the amount of interest will change in the next twelve months. However, we do not expect the change to have a material impact on our consolidated financial statements.

The tax years subject to examination by major tax jurisdictions include the years 2006 and forward by the U.S. Internal Revenue Service, the years 1997 and forward for certain states and the years 1998 and forward for certain foreign jurisdictions.

Note 9. Supplemental Cash Flow Information

Cash paid for interest and income taxes was:

	Six Months Ended
	June 26, 2010		June 27, 2009
Interest	$	9,824	$	13,254
Income taxes		62,642		60,202

During the six months ended June 26, 2010, we had a $23.0 million non-cash net unrealized loss related to hedging activities. During the six months ended June 27, 2009, we had a $9.9 million non-cash net unrealized gain related to hedging activities.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 10. Plans of Restructuring

On November 5, 2008, we announced certain actions to reduce operating costs. These actions included the elimination of approximately 430 positions from our operations and the closing of several smaller facilities.

During the first quarter of 2010, we completed an additional restructuring in order to further reduce operating expenses. This restructuring included headcount reductions of 184 positions, as well as the closing of a number of smaller locations.

For the six months ended June 26, 2010, we recorded restructuring costs of approximately $12.3 million (approximately $8.3 million after taxes) consisting 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 plan. The costs associated with the restructuring are included in a separate line item, “Restructuring costs” within our consolidated statements of income.

The following table shows the amounts expensed and paid for restructuring costs that were incurred during the six months ended June 26, 2010 and the remaining accrued balance of restructuring costs as of June 26, 2010, which is included in Accrued expenses: Other and Other liabilities within our consolidated balance sheet:

	Balance at December 26, 2009		Provision		Payments and Other Adjustments		Balance at June 26, 2010
Severance costs (1)	$	2,165	$	8,800	$	4,837	$	6,128
Facility closing costs (2)		2,030		3,355		1,647		3,738
Other professional and
consulting costs		102		130		101		131
Total	$	4,297	$	12,285	$	6,585	$	9,997

(1)	Represents salaries and related benefits for employees separated from the Company.

(2)	Represents costs associated with the closing of certain smaller facilities (primarily lease termination costs) and property and equipment write-offs.

We expect that the majority of these costs will be paid in 2010.

The following table shows, by reportable segment, the restructuring costs incurred during our 2010 fiscal year and the remaining accrued balance of restructuring costs as of June 26, 2010:

	Balance at December 26, 2009		Provision		Payments and Other Adjustments		Balance at June 26, 2010
Healthcare distribution	$	4,225	$	12,063	$	6,419	$	9,869
Technology		72		222		166		128
Total	$	4,297	$	12,285	$	6,585	$	9,997

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 11. Derivatives and Hedging Activities

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

Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency forward and swap contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., 12 months or less) foreign currency forward and swap contracts to protect against currency exchange risks associated with intercompany loans due from our international subsidiaries and the payment of merchandise purchases to our foreign suppliers. We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 11. Derivatives and Hedging Activities (Continued)

The following tables present the fair value of our derivative instruments:

	Asset Derivatives			Liability Derivatives
	June 26, 2010			June 26, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Derivatives designated as
hedging instruments:
Interest rate contracts	Prepaid expenses and other	$	230	Accrued expenses other	$	-
Foreign exchange contracts	Prepaid expenses and other		448	Accrued expenses other		2,678
Total			678			2,678

Derivatives not designated as
hedging instruments:
Foreign exchange contracts	Prepaid expenses and other		1,658	Accrued expenses other		1,826
Total derivatives		$	2,336		$	4,504

	Asset Derivatives			Liability Derivatives
	June 27, 2009			June 27, 2009
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Derivatives designated as
hedging instruments:
Interest rate contracts	Prepaid expenses and other	$	708	Accrued expenses other	$	-
Foreign exchange contracts	Prepaid expenses and other		1,487	Accrued expenses other		6,460
Total			2,195			6,460

Derivatives not designated as
hedging instruments:
Foreign exchange contracts	Prepaid expenses and other		372	Accrued expenses other		2,427
Total derivatives		$	2,567		$	8,887

Fair Value Hedges

Our fair value hedges consist primarily of interest rate swaps. Gains associated with these interest rate swaps are recorded in Other, net within our consolidated statements of income and totaled $0.2 million and for the three months ended June 26, 2010. Gains associated with these interest rate swaps totaled $0.3 million for the six months ended June 26, 2010.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 11. Derivatives and Hedging Activities (Continued)

Cash Flow Hedges

Our cash flow hedges consist of foreign exchange contracts. The amounts recorded in Accumulated other comprehensive income (loss) (“AOCI”) primarily represent the change in spot rates at the time of the initial hedge compared to the spot rate when marked to market. The loss recognized in AOCI (effective portion) for the three and six months ended June 26, 2010 was $1.7 million and $2.3 million, respectively. The gain (loss) recognized in AOCI (effective portion) for the three and six months ended June 27, 2009 was $(5.7) million and $0.5 million, respectively.

The activity recorded within our consolidated statements of income relating to cash flow hedges include amounts reclassified from AOCI (effective portion) and forward points (ineffective portion). The following table presents the effect of our cash flow hedges:

Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassified from AOCI into Income (Effective Portion)						Location where Forward Points are Recognized in Income on Derivative (Ineffective Portion)	Amount of Forward Points Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended June 26, 2010			Six Months Ended June 26, 2010				Three Months Ended June 26, 2010		Six Months Ended June 26, 2010
Other, net	$	81		$	(70	)	Interest income	$	3	$	12
Cost of sales		(183	)		(272	)	Other, net		2		4

Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassified from AOCI into Income (Effective Portion)					Location where Forward Points are Recognized in Income on Derivative (Ineffective Portion)	Amount of Forward Points Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended June 27, 2009			Six Months Ended June 27, 2009			Three Months Ended June 27, 2009		Six Months Ended June 27, 2009
Other, net	$	231		$	1,892	Interest expense	$	125	$	17
Cost of sales		(66	)		210	Other, net		16		(14	)

Economic Hedges

We are also a party to contracts that serve as economic hedges that we have not designated as hedges for accounting purposes, which consist of foreign exchange contracts. Losses associated with these foreign exchange contracts are recorded in Other, net within our consolidated statements of income and totaled $0.2 million and $0.3 million for the three and six months ended June 26, 2010, respectively. Gains (losses) associated with these foreign exchange contracts totaled $(2.2) million and $2.3 million for the three and six months ended June 27, 2009, respectively. Forward points related to these foreign exchange contracts, which are recorded in Interest expense within our consolidated statements of income, totaled $29 and $71 for the three and six months ended June 26, 2010, respectively. Forward points related to these foreign exchange contracts totaled $0.2 million and $0.5 million for the three and six months ended June 27, 2009, respectively.

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HENRY SCHEIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data)

(unaudited)

Note 12. Redeemable Noncontrolling Interests

Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value based on third-party valuations. 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 six months ended June 26, 2010 and the year ended December 26, 2009 are presented in the following table:

	June 26, 2010			December 26, 2009
Balance, beginning of period	$	178,570		$	233,035
Net increase (decrease) in noncontrolling interests due to
business acquisitions or redemptions		180,996			(72,427	)
Net income attributable to noncontrolling interests		15,481			21,975
Dividends paid		(7,960	)		(5,973	)
Effect of foreign currency translation attributable to
noncontrolling interests		(7,696	)		2,541
Change in fair value of redeemable securities		(18,292	)		(581	)
Balance, end of period	$	341,099		$	178,570

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 will 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 profitability 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. Starting in our 2009 fiscal year, as required by ASC Topic 805, “Business Combinations,” we have accrued liabilities for the estimated fair value of additional purchase price adjustments at the time of the acquisition. Any adjustments to these accrual amounts will be recorded in our consolidated statement of income.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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: decreased customer demand and changes in vendor credit terms; disruptions in financial markets; general economic conditions; effects of a highly competitive market; changes in the healthcare industry; changes in regulatory requirements; risks from expansion of customer purchasing power and multi-tiered costing structures; risks associated with our international operations; fluctuations in quarterly earnings; our dependence on third parties for the manufacture and supply of our products; transitional challenges associated with acquisitions, including the failure to achieve anticipated synergies; financial risks associated with acquisitions; regulatory and litigation risks; the dependence on our continued product development, technical support and successful marketing in the technology segment; risks from disruption to our information systems; our dependence upon sales personnel, manufacturers and customers; our dependence on our senior management; possible increases in the cost of shipping our products or other service issues with our third-party shippers; risks from rapid technological change; possible volatility of the market price of our common stock; 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 largest distributor of healthcare products and services primarily to office-based healthcare practitioners. We serve more than 600,000 customers worldwide, including dental practitioners and laboratories, physician practices and animal health clinics, as well as government and other institutions. We believe that we have a strong brand identity due to our more than 77 years of experience distributing healthcare products.

We are headquartered in Melville, New York, employ more than 13,500 people (of which over 5,500 are based outside the United States) and have operations in the United States, Australia, Austria, Belgium, Canada, China, the Czech Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Luxembourg, the Netherlands, New Zealand, Portugal, Spain, Switzerland and the United Kingdom. We also have affiliates in Iceland, Saudi Arabia and the United Arab Emirates.

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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Our technology group provides software, technology and other value-added services to healthcare practitioners, primarily in the United States, Canada, the United Kingdom, Australia and New Zealand. Our value-added practice solutions include practice management software systems for dental and medical practitioners and animal health clinics. Our technology group offerings also include financial services on a non-recourse basis, e-services and continuing education services for practitioners.

Industry Overview

In recent years, the healthcare 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 healthcare industry, including consolidation of healthcare distribution companies, potential healthcare 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 healthcare products distribution industry, as it relates to office-based healthcare practitioners, is highly fragmented and diverse. This industry, which encompasses the dental, medical and animal health markets, was estimated to produce revenues of approximately $29.0 billion in 2009 in the combined North American and European 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 healthcare practitioners to store and manage large quantities of supplies in their offices, the distribution of healthcare supplies and small equipment to office-based healthcare 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 healthcare 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.

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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 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 has been to expand our role as a provider of products and services to the healthcare industry. This trend has resulted in 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.

As the healthcare industry continues to change, we continually evaluate possible candidates for merger or acquisition and intend to continue to seek opportunities to expand our role as a provider of products and services to the healthcare 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 healthcare products distribution industry continues to experience growth due to the aging population, increased healthcare 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.

The January 2000 U.S. Bureau of the Census estimated that the elderly population in the United States will more than double by the year 2040. In 2000, four million Americans were aged 85 or older, the segment of the population most in need of long-term care and elder-care services. By the year 2040, that number is projected to more than triple to more than 14 million. The population aged 65 to 84 years is projected to more than double in the same time period.

As a result of these market dynamics, annual expenditures for healthcare 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 2008 – 2018” indicating that total national healthcare spending reached $2.4 trillion in 2008, or 16.6% of the nation’s gross domestic product, the benchmark measure for annual production of goods and services in the United States. Healthcare spending is projected to reach $4.4 trillion in 2018, approximately 20.3% of the nation’s gross domestic product.

Government Influences

The healthcare industry is subject to extensive government regulation, licensure and operating compliance procedures. Additionally, government and private insurance programs fund a large portion of the total cost of medical care. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was the largest expansion of the Medicare program since its inception, and provided participants with voluntary outpatient prescription drug benefits beginning in 2006. This Act also included provisions relating to medication management programs, generic substitution and provider reimbursement. The Patient Protection and Affordable Care Act, enacted in March 2010, generally known as The Health Care Reform Bill, increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of healthcare generally, to reduce fraud and abuse, and to provide access to health coverage for an additional 32 million people. The Patient

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Protection and Affordable Care Act also imposes (i) a 2.3% excise tax on domestic sales of medical devices by manufacturers and importers beginning in 2013, which we may need to assist implementing and which may affect sales, and (ii) mandates pharmacy benefit manager transparency regarding rebates, discounts and price concessions, which could affect pricing and competition.

In addition to the foregoing, the Patient Protection and Affordable Care Act imposes new reporting and disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to certain practitioners, including physicians and dentists, and teaching hospitals beginning in January 2012. Implementing regulations have not yet been issued, but it is possible that such regulations, when issued, will treat us or one or more of our subsidiaries as a “manufacturer” subject to these reporting requirements. In addition, several states require pharmaceutical and/or device companies to report expenses relating to the marketing and promotion of products as well as gifts and payments to individual practitioners in the states, or prohibit certain marketing related activities. Other states, such as California, Nevada, and Massachusetts, require pharmaceutical and/or device companies to implement compliance programs or marketing codes. Wholesale distributors are covered by the laws in certain of these states. In others, it is possible that our activities or the activities of one or more of our subsidiaries will subject us to the state’s reporting requirements and prohibitions.

Regulations adopted under the federal Prescription Drug Marketing Act, effective December 2006, require the identification and documentation of transactions involving the receipt and distribution of prescription drugs, that is, drug pedigree information. In early December 2006, the federal District Court for the Eastern District of New York issued a preliminary injunction, enjoining the implementation of some of the federal drug pedigree requirements, in response to a case initiated by secondary distributors. On December 31, 2009, the U.S. District Court granted a motion to extend the time for either party to re-open the matter (which had been administratively closed in light of potential legislative action by Congress), and the Court in effect extended the injunction through September 30, 2010. Other states and government agencies are currently considering similar laws and regulations. We continue to work with our suppliers to help minimize the risks associated with counterfeit products in the supply chain and potential litigation.

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. An increasing number of states, including Florida, have already adopted laws and regulations, including drug pedigree tracking requirements, that 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 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. Other states have passed or are reviewing the same type of requirements. Bills have been introduced in Congress that would impose similar requirements at the federal level.

There may be additional legislative initiatives in the future impacting healthcare.

E-Commerce

Traditional healthcare supply and distribution relationships are being challenged by electronic online commerce solutions. Our distribution business is characterized by rapid technological developments and intense competition. The advancement of online commerce will require 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 growing aspect of the distribution business. We continue to explore ways and means to improve and expand our Internet presence and capabilities.

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Results of Operations

The following table summarizes the significant components of our operating results from continuing operations for the three and six months ended June 26, 2010 and June 27, 2009 and cash flows for the six months ended June 26, 2010 and June 27, 2009 (in thousands):

	Three Months Ended						Six Months Ended
	June 26,			June 27,			June 26,			June 27,
	2010			2009 (1)			2010			2009 (1)
Operating results:
Net sales	$	1,849,401		$	1,607,434		$	3,609,711		$	3,092,822
Cost of sales		1,303,757			1,131,516			2,551,034			2,178,541
Gross profit		545,644			475,918			1,058,677			914,281
Operating expenses:
Selling, general and administrative		407,638			353,948			804,627			697,680
Restructuring costs		-			-			12,285			4,043
Operating income	$	138,006		$	121,970		$	241,765		$	212,558

Other expense, net	$	(5,203	)	$	(4,293	)	$	(11,017	)	$	(8,214	)
Income from continuing operations		93,163			80,200			160,415			139,383
Income from continuing operations attributable
to Henry Schein, Inc.		84,001			73,324			144,901			128,098

Cash flows:
Net cash provided by operating activities							$	128,988		$	79,575
Net cash used in investing activities								(282,398	)		(53,257	)
Net cash provided by (used in) financing activities								5,605			(3,142	)

(1)	Adjusted to reflect the effects of a discontinued operation.

Plans of Restructuring

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Three Months Ended June 26, 2010 Compared to Three Months Ended June 27, 2009

Net Sales

Net sales from continuing operations for the three months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

	June 26,		% of			June 27,		% of			Increase / (Decrease)
	2010		Total			2009 (1)		Total			$			%
Healthcare distribution (2):
Dental (3)	$	677,560		36.6	%	$	622,219		38.7	%	$	55,341			8.9	%
Medical (4)		286,291		15.5			287,382		17.9			(1,091	)		(0.4	)
Animal health (5)		234,734		12.7			63,488		4.0			171,246			269.7
International (6)		602,435		32.6			591,794		36.8			10,641			1.8
Total healthcare distribution		1,801,020		97.4			1,564,883		97.4			236,137			15.1
Technology (7)		48,381		2.6			42,551		2.6			5,830			13.7
Total	$	1,849,401		100.0	%	$	1,607,434		100.0	%	$	241,967			15.1

(1)	Adjusted to reflect the effects of a discontinued operation.

(2)	Consists of consumable products, small equipment, laboratory products, large dental and medical equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

(3)	Consists of products sold in the United States and Canada.

(4)	Consists of products and equipment sold in the United States’ medical markets.

(5)	Consists of products sold in the United States’ animal health market.

(6)	Consists of products sold in the dental, medical and animal health markets, primarily in Europe.

(7)	Consists of practice management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States, Canada, the United Kingdom, Australia and New Zealand.

The $242.0 million, or 15.1%, increase in net sales for the three months ended June 26, 2010 includes an increase of 15.6% local currency growth (2.1% increase in internally generated revenue and 13.5% growth from acquisitions) as well as a decrease of 0.5% related to foreign currency exchange.

The $55.3 million, or 8.9%, increase in dental net sales for the three months ended June 26, 2010 includes an increase of 7.5% in local currencies (2.8% increase in internally generated revenue and 4.7% growth from acquisitions) as well as an increase of 1.4% related to foreign currency exchange. The 7.5% increase in local currency sales was due to increases in dental equipment sales and service revenues of 8.6% (8.0% increase in internally generated revenue and 0.6% growth from acquisitions) and dental consumable merchandise sales growth of 7.1% (1.3% increase in internally generated revenue and 5.8% growth from acquisitions).

The $1.1 million, or 0.4%, decrease in medical net sales for the three months ended June 26, 2010 includes a decrease in internally generated revenue of 4.2% offset by acquisition growth of 3.8%. Medical sales for the three months ended June 26, 2010 were negatively impacted by reduced sales of products related to the H1N1 virus, which were significant in the comparable prior year period.

The $171.2 million, or 269.7%, increase in animal health sales for the three months ended June 26, 2010 was due to the acquisition of a majority interest in Butler Animal Health Supply, LLC as of December 31, 2009.

The $10.6 million, or 1.8%, increase in international net sales for the three months ended June 26, 2010 includes sales growth of 4.7% in local currencies (4.1% internally generated growth and 0.6% growth from acquisitions) offset by a decrease of 2.9% related to foreign currency exchange.

The $5.8 million, or 13.7%, increase in technology net sales for the three months ended June 26, 2010 includes an increase of 13.2% local currency growth (8.0% internally generated growth and 5.2% growth from acquisitions) as well as an increase of 0.5% related to foreign currency exchange.

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Gross Profit

Gross profit and gross margin percentages from continuing operations by segment and in total for the three months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

	June 26,		Gross			June 27,		Gross			Increase / (Decrease)
	2010		Margin %			2009 (1)		Margin %			$		%

Healthcare distribution	$	512,147		28.4	%	$	445,135		28.4	%	$	67,012		15.1	%
Technology		33,497		69.2			30,783		72.3			2,714		8.8
Total	$	545,644		29.5		$	475,918		29.6		$	69,726		14.7

(1)	Adjusted to reflect the effects of a discontinued operation.

For the three months ended June 26, 2010, gross profit increased $69.7 million, or 14.7%, from the comparable 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 healthcare distribution segment. These higher gross margins result from being both the developer and seller of software products, as well as certain financial services. For a number of reasons, the software industry typically realizes higher gross margins to recover investments in research and development.

Healthcare distribution gross profit increased $67.0 million, or 15.1%, for the three months ended June 26, 2010 from the comparable prior year period. Healthcare distribution gross profit margin remained constant at 28.4% compared with the comparable prior year period.

Technology gross profit increased $2.7 million, or 8.8%, for the three months ended June 26, 2010 from the comparable prior year period. Technology gross profit margin decreased to 69.2% for the three months ended June 26, 2010 from 72.3% for the comparable prior year period primarily due to changes in the product sales mix.

Selling, General and Administrative

Selling, general and administrative expenses from continuing operations by segment and in total for the three months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

			% of					% of
	June 26,		Respective			June 27,		Respective			Increase / (Decrease)
	2010		Net Sales			2009 (1)		Net Sales			$		%

Healthcare distribution	$	391,012		21.7	%	$	338,475		21.6	%	$	52,537		15.5	%
Technology		16,626		34.4			15,473		36.4			1,153		7.5
Total	$	407,638		22.0		$	353,948		22.0		$	53,690		15.2

(1)	Adjusted to reflect the effects of a discontinued operation.

Selling, general and administrative expenses increased $53.7 million, or 15.2%, to $407.6 million for the three months ended June 26, 2010 from the comparable prior year period. As a percentage of net sales, selling, general and administrative expenses remained constant at 22.0% compared with the comparable prior year period.

As a component of selling, general and administrative expenses, selling expenses increased $32.2 million, or 13.7%, to $268.0 million for the three months ended June 26, 2010 from the comparable prior year period. As a percentage of net sales, selling expenses decreased to 14.5% from 14.7% for the comparable prior year period.

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As a component of selling, general and administrative expenses, general and administrative expenses increased $21.5 million, or 18.2%, to $139.6 million for the three months ended June 26, 2010 from the comparable prior year period. As a percentage of net sales, general and administrative expenses increased to 7.5% from 7.3% for the comparable prior year period.

Other Expense, Net

Other expense, net, from continuing operations for the three months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

	June 26,			June 27,			Increase / (Decrease)
	2010			2009 (1)			$			%

Interest income	$	3,508		$	2,486		$	1,022			41.1	%
Interest expense		(9,185	)		(6,406	)		(2,779	)		(43.4	)
Other, net		474			(373	)		847			227.1
Other expense, net	$	(5,203	)	$	(4,293	)	$	(910	)		(21.2	)

(1)	Adjusted to reflect the effects of a discontinued operation.

Other expense, net increased $0.9 million for the three months ended June 26, 2010 from the comparable prior year period. Interest expense increased $2.8 million due to interest associated with the acquisition of a majority interest in Butler Animal Health Supply, LLC partially offset by reduced interest expense resulting from repayment of our $130.0 million senior notes on June 30, 2009. Interest income increased $1.0 million as a result of increased late fee income partially offset by lower interest income on our invested funds.

Income Taxes

For the three months ended June 26, 2010, our effective tax rate from continuing operations was 31.2% compared to 32.9% for the prior year period. The difference between our effective tax rates and the federal statutory tax rate for both periods primarily relates to state and foreign income taxes.

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Six Months Ended June 26, 2010 Compared to Six Months Ended June 27, 2009

Net Sales

Net sales from continuing operations for the six months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

	June 26,		% of			June 27,		% of			Increase / (Decrease)
	2010		Total			2009 (1)		Total			$		%
Healthcare distribution (2):
Dental (3)	$	1,292,209		35.8	%	$	1,216,175		39.3	%	$	76,034		6.3	%
Medical (4)		570,880		15.8			559,144		18.1			11,736		2.1
Animal health (5)		441,380		12.2			119,114		3.8			322,266		270.6
International (6)		1,211,888		33.6			1,115,513		36.1			96,375		8.6
Total healthcare distribution		3,516,357		97.4			3,009,946		97.3			506,411		16.8
Technology (7)		93,354		2.6			82,876		2.7			10,478		12.6
Total	$	3,609,711		100.0	%	$	3,092,822		100.0	%	$	516,889		16.7

(1)	Adjusted to reflect the effects of a discontinued operation.

(2)	Consists of consumable products, small equipment, laboratory products, large dental and medical equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

(3)	Consists of products sold in the United States and Canada.

(4)	Consists of products and equipment sold in the United States’ medical markets.

(5)	Consists of products sold in the United States’ animal health market.

(6)	Consists of products sold in the dental, medical and animal health markets, primarily in Europe.

(7)	Consists of practice management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States, Canada, the United Kingdom, Australia and New Zealand.

The $516.9 million, or 16.7%, increase in net sales for the six months ended June 26, 2010 includes an increase of 15.1% local currency growth (2.6% increase in internally generated revenue and 12.5% growth from acquisitions) as well as an increase of 1.6% related to foreign currency exchange.

The $76.0 million, or 6.3%, increase in dental net sales for the six months ended June 26, 2010 includes an increase of 4.7% in local currencies (2.0% increase in internally generated revenue and 2.7% growth from acquisitions) as well as an increase of 1.6% related to foreign currency exchange. The 4.7% increase in local currency sales was due to increases in dental equipment sales and service revenues of 4.8% (4.4% increase in internally generated revenue and 0.4% growth from acquisitions) and dental consumable merchandise sales growth of 4.6% (1.3% increase in internally generated revenue and 3.3% growth from acquisitions).

The $11.7 million, or 2.1%, increase in medical net sales for the six months ended June 26, 2010 includes a decrease in internally generated revenue of 1.0% offset by acquisition growth of 3.1%.

The $322.3 million, or 270.6%, increase in animal health sales for the six months ended June 26, 2010 includes acquisition growth of 269.4%, due to the acquisition of a majority interest in Butler Animal Health Supply, LLC as of December 31, 2009, as well as internally generated revenue of 1.2%.

The $96.4 million, or 8.6%, increase in international net sales for the six months ended June 26, 2010 includes sales growth of 6.0% in local currencies (5.1% internally generated growth and 0.9% growth from acquisitions) as well as an increase of 2.6% related to foreign currency exchange.

The $10.5 million, or 12.6%, increase in technology net sales for the six months ended June 26, 2010 includes an increase of 11.2% local currency growth (6.3% internally generated growth and 4.9% growth from acquisitions) as well as an increase of 1.4% related to foreign currency exchange.

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Gross Profit

Gross profit and gross margin percentages from continuing operations by segment and in total for the six months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

	June 26,		Gross			June 27,		Gross			Increase / (Decrease)
	2010		Margin %			2009 (1)		Margin %			$		%

Healthcare distribution	$	994,157		28.3	%	$	854,337		28.4	%	$	139,820		16.4	%
Technology		64,520		69.1			59,944		72.3			4,576		7.6
Total	$	1,058,677		29.3		$	914,281		29.6		$	144,396		15.8

(1)	Adjusted to reflect the effects of a discontinued operation.

For the six months ended June 26, 2010, gross profit increased $144.4 million, or 15.8%, from the comparable prior year period.

Healthcare distribution gross profit increased $139.8 million, or 16.4%, for the six months ended June 26, 2010 from the comparable prior year period. Healthcare distribution gross profit margin decreased to 28.3% for the six months ended June 26, 2010 from 28.4% for the comparable prior year period primarily due to changes in the product sales mix.

Technology gross profit increased $4.6 million, or 7.6%, for the six months ended June 26, 2010 from the comparable prior year period. Technology gross profit margin decreased to 69.1% for the six months ended June 26, 2010 from 72.3% for the comparable prior year period primarily due to changes in the product sales mix.

Selling, General and Administrative

Selling, general and administrative expenses from continuing operations by segment and in total for the six months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

			% of					% of
	June 26,		Respective			June 27,		Respective			Increase / (Decrease)
	2010		Net Sales			2009 (1)		Net Sales			$		%

Healthcare distribution	$	772,122		22.0	%	$	667,926		22.2	%	$	104,196		15.6	%
Technology		32,505		34.8			29,754		35.9			2,751		9.2
Total	$	804,627		22.3		$	697,680		22.6		$	106,947		15.3

(1)	Adjusted to reflect the effects of a discontinued operation.

Selling, general and administrative expenses increased $106.9 million, or 15.3%, to $804.6 million for the six months ended June 26, 2010 from the comparable prior year period. As a percentage of net sales, selling, general and administrative expenses decreased to 22.3% from 22.6% for the comparable prior year period.

As a component of selling, general and administrative expenses, selling expenses increased $66.7 million, or 14.4%, to $529.1 million for the six months ended June 26, 2010 from the comparable prior year period. As a percentage of net sales, selling expenses decreased to 14.7% from 15.0% for the comparable prior year period.

As a component of selling, general and administrative expenses, general and administrative expenses increased $40.2 million, or 17.1%, to $275.5 million for the six months ended June 26, 2010 from the comparable prior year period. As a percentage of net sales, general and administrative expenses remained constant at 7.6% compared with the comparable prior year period.

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Other Expense, Net

Other expense, net, from continuing operations for the six months ended June 26, 2010 and June 27, 2009 were as follows (in thousands):

	June 26,			June 27,			Increase / (Decrease)
	2010			2009 (1)			$			%

Interest income	$	6,896		$	5,287		$	1,609			30.4	%
Interest expense		(18,272	)		(13,158	)		(5,114	)		(38.9	)
Other, net		359			(343	)		702			204.7
Other expense, net	$	(11,017	)	$	(8,214	)	$	(2,803	)		(34.1	)

(1)	Adjusted to reflect the effects of a discontinued operation.

Other expense, net increased $2.8 million for the six months ended June 26, 2010 from the comparable prior year period. Interest expense increased $5.1 million due to interest associated with the acquisition of a majority interest in Butler Animal Health Supply, LLC partially offset by reduced interest expense resulting from repayment of our $130.0 million senior notes on June 30, 2009. Interest income increased $1.6 million as a result of increased late fee income partially offset by lower interest income on our invested funds.

Income Taxes

For the six months ended June 26, 2010, our effective tax rate from continuing operations was 31.9% compared to 33.1% for the prior year period. The difference between our effective tax rates and the federal statutory tax rate for both periods primarily relates to state and foreign income taxes.

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Liquidity and Capital Resources

Our principal capital requirements include the funding of working capital needs, repayments of debt principal, funding of acquisitions, 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.

Net cash flow provided by operating activities was $129.0 million for the six months ended June 26, 2010, compared to $79.6 million for the comparable prior year period. This net change of $49.4 million was primarily attributable to favorable working capital changes and net income improvements.

Net cash used in investing activities was $282.4 million for the six months ended June 26, 2010, compared to $53.3 million for the comparable prior year period. The net change of $229.1 million was primarily due to an increase in payments for business acquisitions and purchases of marketable securities, partially offset by a maturation of marketable securities and a decrease in capital expenditures. We expect to invest approximately $25 million to $35 million during the remainder of the fiscal year in capital projects to modernize and expand our facilities and computer systems and to integrate certain operations into our existing structure.

Net cash provided by financing activities was $5.6 million for the six months ended June 26, 2010, compared to net cash used in financing activities of $3.1 million for the comparable prior year period. The net change of $8.7 million was primarily due to an increase in proceeds received from the exercise of stock options and increased tax benefits related to stock-based compensation, partially offset by an increase in acquisitions of noncontrolling interests in subsidiaries and increased distributions to noncontrolling shareholders.

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


	June 26,		December 26,
	2010		2009

Cash and cash equivalents	$	321,116	$	471,154
Available-for-sale securities - short-term		14,989		-
Available-for-sale securities - long-term		17,551		18,848
Working capital		1,186,348		1,127,279

Debt:
Bank credit lines	$	255	$	932
Current maturities of long-term debt		25,215		23,560
Long-term debt		523,421		243,373
Total debt	$	548,891	$	267,865

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

As of June 26, 2010, we have approximately $19.7 million ($17.6 million net of temporary impairments) invested in auction-rate securities (“ARS”). 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. Approximately $17.7 million ($15.5 million net of temporary impairments) of our ARS are backed by student loans that are backed by the federal government and the remaining $2.0 million are invested in closed-end municipal bond funds. Our ARS portfolio is comprised of investments that are rated AAA 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 June 26, 2010, 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.

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.

Our accounts receivable days sales outstanding from continuing operations decreased to 39.7 days as of June 26, 2010 from 41.9 days as of June 27, 2009. Our inventory turns from continuing operations increased to 6.4 as of June 26, 2010 from 6.0 as of June 27, 2009. Our working capital accounts may be impacted by current and future economic conditions.

In 2004, we completed an issuance of $240.0 million of convertible debt. These notes are senior unsecured obligations bearing a fixed annual interest rate of 3.0% and are due to mature on August 15, 2034. Interest on the notes is payable on February 15 and August 15 of each year. The notes are convertible into our common stock at a conversion ratio of 21.58 shares per one thousand dollars of principal amount of notes, which is equivalent to a conversion price of $46.34 per share, under the following circumstances:

·	if the price of our common stock is above 130% of the conversion price measured over a specified number of trading days;

·	during the five-business-day period following any 10-consecutive-trading-day period in which the average of the trading prices for the notes for that 10-trading-day period was less than 98% of the average conversion value for the notes during that period;

·	if the notes have been called for redemption; or

·	upon the occurrence of a fundamental change or specified corporate transactions, as defined in the note agreement.

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Upon conversion, we are required to satisfy our conversion obligation with respect to the principal amount of the notes to be converted, in cash, with any remaining amount to be satisfied in shares of our common stock. We currently have sufficient availability of funds through our $400.0 million revolving credit facility (discussed below) along with cash on hand to fully satisfy our debt obligations, including the cash portion of our convertible debt. We also will pay contingent interest during any six-month-interest period beginning August 20, 2010, if the average trading price of the notes is above specified levels. We may redeem some or all of the notes on or after August 20, 2010. The note holders may require us to purchase all or a portion of the notes on August 15, 2010, 2014, 2019, 2024 and 2029 or, subject to specified exceptions, upon a change of control event. If we are required by the note holders to purchase all or a portion of the notes, we expect to use our existing credit line to fund such purchase; therefore, we have classified our convertible debt as long-term in our consolidated balance sheet. We plan to call the notes for redemption before the end of the third quarter 2010.

Our $20.0 million of remaining senior notes bear interest at a fixed rate of 6.7% per annum and mature on September 27, 2010. Interest on our senior notes is payable semi-annually.

On September 5, 2008, we entered into a new $400.0 million revolving credit facility with a $100.0 million expansion feature. The $400.0 million credit line expires in September 2013. This credit line replaced our then existing $300.0 million revolving credit line, which would have expired in May 2010. As of June 26, 2010, there were no borrowings outstanding under this revolving credit facility and there were $9.1 million of letters of credit provided to third parties.

Effective December 31, 2009, Butler Animal Health Supply, LLC, a majority-owned subsidiary whose financials are consolidated with ours, incurred approximately $320.0 million of debt (of which $37.5 million was provided by Henry Schein, Inc.) in connection with our acquisition of a majority interest in Butler Animal Health Supply, LLC. The resulting consolidated balance of $280.3 million is reflected in our consolidated balance sheet as of June 26, 2010.

Under our common stock repurchase programs approved by our Board of Directors, we have $57.7 million available for future common stock share repurchases. During the quarter ended June 26, 2010, we did not repurchase any of our common stock.

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Some minority shareholders in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value based on third-party valuations. 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 fair value of the Redeemable noncontrolling interests for the six months ended June 26, 2010 and the year ended December 26, 2009 are presented in the following table:

	June 26, 2010			December 26, 2009
Balance, beginning of period	$	178,570		$	233,035
Net increase (decrease) in noncontrolling interests due to
business acquisitions or redemptions		180,996			(72,427	)
Net income attributable to noncontrolling interests		15,481			21,975
Dividends paid		(7,960	)		(5,973	)
Effect of foreign currency translation attributable to
noncontrolling interests		(7,696	)		2,541
Change in fair value of redeemable securities		(18,292	)		(581	)
Balance, end of period	$	341,099		$	178,570

Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain profitability 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 will be recorded in our consolidated statement of income.

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.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 26, 2009.

Recently Issued Accounting Standards

During our fiscal quarter ended June 26, 2010, there were no recently issued accounting standards that are expected to have a material impact on our consolidated financial statements.

Accounting Pronouncements Adopted

During our fiscal quarter ended June 26, 2010, we did not adopt any accounting pronouncements that had a material impact on our consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposure to market risk from that disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 26, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of June 26, 2010 to ensure that all material information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported as specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

The combination of continued acquisition activity, ongoing acquisition integrations and systems integrations undertaken during the quarter and carried over from prior quarters, when considered in the aggregate, represents a material change in our internal control over financial reporting.

During the quarter ended June 26, 2010, we completed the acquisition of a North American dental business with approximate aggregate annual revenues of $121.0 million. In addition, post acquisition integration related activities continued for the North American animal health business that we acquired on December 31, 2009 representing aggregate annual revenues of approximately $840.0 million. These acquired businesses utilize separate information and financial accounting systems, and have been included in our consolidated financial statements. Finally, integration activities were completed during the quarter ended June 26, 2010 for North American dental and medical businesses with approximate aggregate annual revenues of $33.0 million.

All acquisitions and integrations involve necessary and appropriate change-management controls that are considered in our annual assessment of the design and operating effectiveness of our internal control over financial reporting.

Limitations of the Effectiveness of Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Our business involves a risk of product liability and other claims in the ordinary course of business, and from time to time we are named as a defendant in cases as a result of our distribution of pharmaceutical, medical devices and other healthcare products. As a business practice, we generally obtain product liability indemnification from our suppliers.

We have various insurance policies, including product liability insurance, covering risks in amounts that we consider adequate. In many cases in which we have been sued in connection with products manufactured by others, the manufacturer provides us with indemnification. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate protection. In our opinion, all pending matters are covered by insurance or will not have a material adverse effect on our financial condition or results of operations.

As of June 26, 2010, we had accrued our best estimate of potential losses relating to product liability and other claims that were probable to result in a liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as related expenses, was not material to our financial position, results of operations or cash flows. Our method for determining estimated losses considers currently available facts, presently enacted laws and regulations and other external factors, including probable recoveries from third parties.

ITEM 1A. RISK FACTORS

Except as previously disclosed in Item 1A on Form 10-Q for our first fiscal quarter ended March 27, 2010, there have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our 2009 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of equity securities by the issuer

Our current share repurchase program, announced on June 21, 2004, originally allowed us to repurchase up to $100.0 million of shares of our common stock, which represented approximately 3.5% of the shares outstanding at the commencement of the program. On both October 31, 2005 and March 28, 2007, our Board of Directors authorized an additional $100.0 million, for a total of $300.0 million, of shares of our common stock to be repurchased under this program. As of June 26, 2010, we had repurchased $242.3 million of common stock (5,633,952 shares) under this initiative, with $57.7 million available for future common stock share repurchases.

During the fiscal quarter ended June 26, 2010, we did not repurchase any of our common stock. The maximum number of shares that may yet be purchased under this program, as shown below, is determined at the end of each month based on the closing price of our common stock at that time.

		Maximum Number
		of Shares that May Yet
Fiscal Month		Be Purchased Under Our Program

03/28/10 through 04/24/10		925,395
04/25/10 through 05/29/10		1,023,496
05/30/10 through 06/26/10		1,036,170

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ITEM 6. EXHIBITS

Exhibits.

10.1 Amendment Number Three to the Henry Schein, Inc. 1996 Non-Employee Director Stock Incentive Plan, effective as of May 10, 2010.*

31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

_____________

* Indicates management contract or compensatory plan or agreement

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	Henry Schein, Inc.
	(Registrant)

	By: /s/ Steven Paladino
	Steven Paladino
	Executive Vice President and
	Chief Financial Officer
	(Authorized Signatory and Principal Financial
	and Accounting Officer)

Dated: August 2, 2010