Henry Schein, Inc. (HSIC Quick QuoteHSIC - Free Report) reported adjusted earnings per share (EPS) of $1.64 in the second quarter of 2016, up 12.3% year over year.

Adjusted EPS also surpassed the Zacks Consensus Estimate by a couple of cents. The year-over-year earnings improvement was driven by strong revenue growth in the quarter.

Including one-time adjustments, Henry Schein’s reported net income in the second quarter was $120.1 million or $1.46 per share, reflecting a year-over-year improvement of 1.8% and 4.3%, respectively.

Revenues in Detail

Henry Schein reported revenues of $2.873 billion in the second quarter, up 9.3% year over year. The top line also comfortably beat the Zacks Consensus Estimate of $2.840 billion. The year-over-year improvement came on the back of 9.7% growth in local currencies with a 7.6% and a 2.1% rise in internal sales and acquisitions, respectively. However, unfavorable foreign currency exchange accounted for a decline of 0.4% in overall revenue growth.

Region-wise, Henry Schein experienced 9.8% year-over-year sales growth in the North American market, while sales in the international market improved 8.1%.

Segment Analysis    

Henry Schein derives revenues from four operating segments: Dental, Medical, Animal Health, and Technology and Value-added services.

In the second quarter, the company derived $1.4 billion in revenues from global Dental sales, up 4% year over year (including local currency growth of 4.1% and a 0.1% decline owing to unfavorable foreign exchange). Local currency growth comprised acquisition growth of 1.3% and internal sales rise of 2.8%. The Dental franchise witnessed an improvement of 2.1% in North America while international sales grew 7.2%.

The company's global Animal Health segment witnessed a 14% improvement in revenues of $853.6 million (including local currency growth of 15.2% and a 1.2% decline related to foreign exchange headwind). The local currency growth included 11.8% growth in internal sales and 3.4% acquisition growth. Franchise revenues grew 18.7% in North America while overseas revenues improved 9.3%.

Worldwide Medical sales scaled up 14.5% year over year to $538.8 million based on local currency growth of 14.5%. Foreign currency exchange had no impact on this segment’s revenue growth in the second quarter. The local currency growth was solely driven by 14.5% growth in internal sales.

Revenues from global Technology and Value-added Services grew 19.6% to $107 million. This included a 20.4% rise in local currencies, with acquisition growth of 12.3% and internal sales improvement of 8.1%. However, revenues at this segment declined 0.8% due to unfavorable foreign currency.

Margin Trends

Gross profit increased 7% to $803.3 million in the reported quarter. However, gross margin dropped 60 basis points (bps) from the year-ago quarter to 28%, due to a 10.1% rise in cost of sales, higher than the revenue growth rate.  

Backed by a 7.5% rise in selling, general & administrative expenses to $602.million, adjusted operating income improved 5.7% year over year to $201.1 million on account of higher gross profit. However, adjusted operating margin declined 20 bps to 7% in the reported quarter as the rise in operating expense was more than gross profit growth.

Financial Position

Henry Schein exited the quarter with cash and cash equivalents of $63.6 million, compared with $71.6 million at the end of first quarter of 2016. In the second quarter, net cash flow from operating activities was $274.4 million, compared to the year-ago equivalent of $207.8 million. 

During the quarter under review, the company bought back approximately 0.3 million shares for $57 million and was left with $243 million worth of repurchase authorization.

Guidance

Henry Schein lowered its adjusted EPS guidance for 2016. The company currently expects to deliver adjusted EPS in the range of $6.55–$6.60, reflecting 10–11% year over year growth, compared to earlier guidance of $6.55–$6.65, reflecting 10%–12% year-over-year growth. The Zacks Consensus Estimate for 2016 is $6.64, above the company's guided range.

Our Take

Henry Schein ended second quarter of 2016 on an impressive note, squarely beating the Zacks Consensus Estimate. The company’s strong share gains in both North American and overseas markets along with the strong revenues raise optimism. This in turn drove the double-digit growth in the company’s adjusted EPS figure.

However, we are disappointed with respect to the company’s updated EPS guidance for 2016, wherein management has lowered the upper end of the previously provided guidance range; despite each segments posting strong sales growth. The year-over-year deterioration in Henry Schein’s gross margin figure on the back of higher cost of sales also depresses us. Meanwhile, foreign currency fluctuations continued to hamper the company’s business.

Although the company’s weakness in North American Dental sales was less than company’s expectation, its recent investment in Custom Automated Prosthetics – a U.S. digital laboratory supply company offering CAD/CAM equipment and zirconia materials, buoys optimism .

Zacks Rank & Key Picks

Henry Schein currently has a Zacks Rank #3 (Hold). Some better-ranked medical stocks worth a look are Cepheid , Masimo Corp. (MASI Quick QuoteMASI - Free Report) and Natus Medical Inc. . All these stocks sport a Zacks Rank #1 (Strong Buy).

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