Henry Schein Beats, Narrows Guidance - Analyst Blog

Henry Schein (HSIC) reported an EPS of 94 cents in the third quarter of fiscal 2010, surpassing the Zacks Consensus Estimate of 87 cents. The EPS was also 17.5% higher than the year-ago period's adjusted EPS of 80 cents. Without considering a one-time benefit of 23 cents, EPS for the third quarter of 2009 was $1.03. The company reported a 14.1% rise in net sales to reach $1.9 billion, consisting of a 16.4% growth in local currency offset by a 2.3% decline associated with foreign currency.

Henry Schein derives revenues from two segments – Healthcare distribution and Technology. Through the first segment, the company caters to the dental, medical, animal health and international markets. These four divisions and the Technology segment accounted for 34% ($665.9 million), 21% ($391.9 million), 12% ($225.2 million), 30% ($561.4 million) and 3% ($49.1 million), respectively, of total revenues during the quarter. The portfolio 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.

The robust 12.6% growth in medical sales was primarily due to strong sales of seasonal influenza vaccines. Excluding the impact from both the periods, medical sales increased 0.5%. In addition, the 259.2% increase in animal health sales reflects the combined effect of Butler Schein animal health business.

Revenues derived from the international market declined 3.8% from the year-ago period including a 3.4% growth in local currency, partially offset by a negative impact of 7.2% from foreign currency. We note that Henry Schein has witnessed a strong growth in its dental business, especially dental equipment sales in Spain, Italy, France, Germany and the UK.

This segment is expected to witness further growth following the recent decision to acquire Australia based Provet Holdings for approximately $91 million. Provet, the largest veterinary products distributor in Australia, earned $278 million in revenues for the fiscal year ended in June 2010. While the deal is expected to be neutral to 2011 EPS, it is expected to have a positive impact of 2−3 cents in 2012. In addition, the company acquired a 50% stake in Guney, the largest full-service dental distribution business in Turkey, with annual sales of approximately €17 million.

While gross margin declined 30 basis points to 28.4% due to a 14.6% rise in cost of sales, a 10.4% growth in operating expenses (compared to a 14.1% rise in revenues) led to higher operating margin (35 basis points to 7.25%). Henry Schein exited the quarter with cash and cash equivalents of $203.7 million, a 56.8% decline from $471.15 million at the end of December 2009. During August 2010, the company redeemed its $240 million of convertible contingent notes by paying $240 million in cash and issuing approximately 780,000 shares of common stock.

Outlook

Based on a strong third quarter, Henry Schein raised the low end of its fiscal 2010 earnings guidance by 4 cents to $3.50−$3.56. The company also provided its guidance for fiscal 2011. It expects EPS of $3.88−$3.98, reflecting an annualized growth of 10%−13% from the midpoint of 2010 guidance. The Zacks Consensus Estimate for 2011 is $3.92.