Henry Schein 2014 Annual Report Download - page 103

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(in thousands, except per share data)
89
Note 13 – Concentrations of Risk
Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments
consist primarily of cash equivalents, trade receivables, long-term investments, notes receivable and derivative
instruments. In all cases, our maximum exposure to loss from credit risk equals the gross fair value of the financial
instruments. We continuously assess the need for reserves for such losses, which have been within our
expectations. We do not require collateral or other security to support financial instruments subject to credit risk,
except for long-term notes receivable.
We limit our credit risk with respect to our cash equivalents, short-term and long-term investments and
derivative instruments, by monitoring the credit worthiness of the financial institutions who are the counter-parties
to such financial instruments. As a risk management policy, we limit the amount of credit exposure by diversifying
and utilizing numerous investment grade counter-parties.
With respect to our trade receivables, our credit risk is somewhat limited due to a relatively large customer base
and its dispersion across different types of health care professionals and geographic areas. No single customer
accounted for more than 0.8% of our net sales in 2014. With respect to our sources of supply, our top 10 health
care distribution suppliers and our single largest supplier accounted for approximately 36% and 7%, respectively, of
our aggregate purchases in 2014.
Our long-term notes receivable primarily represent strategic financing arrangements with certain industry
affiliates and amounts owed to us from sales of certain businesses. Generally, these notes are secured by certain
assets of the counter-party; however, in most cases our security is subordinate to other commercial financial
institutions. While we have exposure to credit loss in the event of non-performance by these counter-parties, we
conduct ongoing assessments of their financial and operational performance.
Note 14 – Derivatives and Hedging Activities
We are exposed to market risks as well as changes in foreign currency exchange rates as measured against the
U.S. dollar and each other, and changes to 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.
Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar may positively or
negatively affect our revenues, gross margins, operating expenses and retained earnings, all of which are expressed
in U.S. dollars. Where we deem it prudent, we engage in hedging programs using primarily foreign currency
forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We
purchase short-term (i.e., 18 months or less) foreign currency forward contracts to protect against currency
exchange risks associated with intercompany loans due from our international subsidiaries and the payment of
merchandise purchases to our foreign suppliers. We do not hedge the translation of foreign currency profits into
U.S. dollars, as we regard this as an accounting exposure, not an economic exposure. Our hedging activities have
historically not had a material impact on our consolidated financial statements. Accordingly, additional disclosures
related to derivatives and hedging activities required by ASC Topic 815 have been omitted.