Henry Schein Beats, Ups Guidance - Analyst Blog

Henry Schein Inc. (HSIC) reported an increase of 11.1% in EPS to 90 cents in the second quarter of 2010, surpassing the Zacks Consensus Estimate of 86 cents and the year-ago quarter’s earnings of 81 cents.

 

Henry Schein reported a 15.1% year-over-year increase in revenues to $1.85 billion from $1.61 billion in the year-ago quarter, which beats the Zacks Consensus Estimate of $1.82 million for the second quarter of 2010. The revenue growth included a 15.6% growth in local currencies and a decline of 0.5% related to foreign currency exchange rates. Internal growth was 2.1% in local currency.

 

Henry Schein witnessed positive market trends across all its other four segments except in the North American Medical segment, where sales declined 0.4% year over year to $286.3 million. Sale decline was due to decrease in the sales of products associated with the H1N1 virus as well as decline in overall patient visits to physician offices as compared with the prior year quarter.

 

In other segments, North American Dental sales were $677.6 million, an increase of 8.9% year over year (including 7.5% in local currency and 1% related to foreign exchange). North American Dental sales growth reflected a 7.1% escalation in Dental consumable merchandise sales and 8.6% in Dental equipment sales and service revenues. The robust internal growth in Dental equipment sales reflects heightened demand for basic and high-tech equipments, which could serve as a catalyst for further growth in the second half of fiscal 2010.

 

North American Veterinary or Animal Health sales saw a whopping 269.7% rise year over year to $234.7 million, primarily attributed to the integration of the Butler Schein Animal Health business into the segment.

 

International segment sales increased 1.8% year over year to $602.4 million in the quarter including a 4.7% growth in local currencies and a 2.9% negative impact from foreign currency. Sales were favorably influenced by constant growth in the Dental (70% of total international business) and Animal Health businesses (27% of total international business), with particular strength in Spain, France, Holland and the U.K. The International comparisons for the reported quarter, particularly in Germany, were negatively affected by the timing of the biennial IDS (International Dental Show) Trade Show in Europe, which took place in fiscal 2009.

 

Finally, Technology and Value-Added Services segment sales increased 13.7% (8.0% in local currency) to $48.4 million due to growth in electronic services and software businesses. The 5.2% growth in this segment was due to the acquisition of the European Veterinary Software and Practice Management business.

 

Henry Schein reported operating margin of 7.5%, a decline of 13 bps from the second quarter of 2009. However, operating margin increased 6 bps after excluding the impact of integration and acquisition-related costs. Selling, general and administrative expenses (representing 22% of sales) remained flat with the year-ago quarter at $407.6 million. These include integration expenses related to the Butler Schein integration, as well as acquisition-related costs. Excluding those expenses, SG&A as a percentage of sales improved 17 bps from the prior-year second quarter.

 

Henry Schein exited the quarter with operating cash flow of $107.3 million as compared with $106.7 million at the end of second quarter 2009. As at the end of June 2010, cash and cash equivalents were $321.2 million as compared with $471.2 million at the end of December 2009.

 

 

Henry Schein increased the low end of its EPS guidance range for 2010 to $3.46–$3.56 as compared with the previous guidance of $3.44–$3.56. The guidance range includes the negative impact of currency exchange of 5 to 6 cents but does not include the impact of potential future acquisitions, if any.

 

The company continues to execute in driving strong top-line growth and establish its broad domestic and international footprint in dental, vet, and medical supply distribution. Further, the company is executing well in a slowly improving economic market. The improved internal growth prospects of Henry Schein along with operating margin expansion opportunities emanating from international growth, headcount reduction, and general cost cutting, help to boost its revenue growth.

 

However, competition remains tough. While Henry Schein's primary competitor in the Dental market is Patterson Companies Inc. (PDCO), it also competes with McKesson Corporation (MCK).