Henry Schein 2013 Annual Report Download - page 65

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56
With respect to time-based restricted stock, we estimate the fair value on the date of grant based on our closing
stock price. With respect to performance-based restricted stock, the number of shares that ultimately vest and are
received by the recipient is based upon our performance as measured against specified targets over a three-year
period as determined by the Compensation Committee of the Board of Directors. Although there is no guarantee
that performance targets will be achieved, we estimate the fair value of performance-based restricted stock, based
on our closing stock price at time of grant. Adjustments to the performance-based restricted stock targets are
provided for significant events such as acquisitions, divestitures, new business ventures and share repurchases.
Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the
related compensation expense is adjusted upward or downward based upon our estimation of achieving such
performance targets. The ultimate number of shares delivered to recipients and the related compensation cost
recognized as an expense will be based on our actual performance metrics as defined.
Although we believe our judgments, estimates and/or assumptions related to stock-based compensation are
reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our
financial results.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the
U.S. dollar and each other, and changes to the credit markets. We attempt to minimize these risks by primarily
using foreign currency forward contracts and by maintaining counter-party credit limits. These hedging activities
provide only limited protection against currency exchange and credit risks. Factors that could influence the
effectiveness of our hedging programs include currency markets and availability of hedging instruments and
liquidity of the credit markets. All foreign currency forward contracts that we enter into are components of hedging
programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. We do
not enter into such contracts for speculative purposes and we manage our credit risks by diversifying our
investments, maintaining a strong balance sheet and having multiple sources of capital.
Foreign Currency Agreements
The value of certain foreign currencies as compared to the U.S. dollar may affect our financial results.
Fluctuations in exchange rates may positively or negatively affect our revenues, gross margins, operating expenses
and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging
programs using primarily foreign currency forward contracts aimed at limiting the impact of foreign currency
exchange rate fluctuations on earnings. We purchase short-term (i.e., 18 months or less) foreign currency forward
contracts to protect against currency exchange risks associated with intercompany loans due from our international
subsidiaries and the payment of merchandise purchases to foreign suppliers. We do not hedge the translation of
foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure.
As of December 28, 2013, the net notional value of our foreign currency exchange agreements, which expire
through July 30, 2014, was $9.3 million, which includes a mark-to-market gain of $0.1 million as determined by
quoted market prices. A hypothetical 5% change in the value of the U.S. dollar would change the notional value of
our foreign currency exchange agreements by an additional $0.1 million.
Short-Term Investments
We limit our credit risk with respect to our cash equivalents, short-term investments and derivative instruments,
by monitoring the credit worthiness of the financial institutions who are the counter-parties to such financial
instruments. As a risk management policy, we limit the amount of credit exposure by diversifying and utilizing
numerous investment grade counter-parties.