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Henry Schein Inc. (HSIC - Analyst Report) reported earnings per share (EPS) of $1.26 in the fourth quarter of 2012, reflecting a beat of 5% over the Zacks Consensus Estimate. The result also underlines year-over-year growth of 9.6%.

Full year 2012 adjusted EPS (excluding restructuring costs) came in at $4.44, sailing past the prior-year result as well as the Zacks Consensus Estimate by 11.8%.

Henry Schein reported revenues of $2.41 billion in the quarter, up 2.9% year over year. However, the quarterly revenues were marginally ahead of the Zacks Consensus Estimate of $2.40 billion. The surge in revenues was led by 3.5% growth in local currencies with a 6% and 5% rise in internal sales and acquisition, respectively, partially offset by the impact of one extra week in 2011 (7.5%). Unfavorable foreign currency exchange muted the local currency growth by (0.6%).

Annual revenues increased 4.8% year over year to $8.94 billion in 2012, edging past the Zacks Consensus Estimate of $8.93 billion. This annual growth comprised of 6.7% climb in local currencies with a 5.1% increase in local internal sales and acquisition growth of 3.1%, partially offset by the impact of one extra week in 2011 (1.5%). Unfavorable foreign currency movement dragged the local currency sales growth by (1.9%).

Quarter in Detail

Henry Schein derives revenues from dental, medical, animal health and technology and value-added services. In the reported quarter, the company derived $1.3 billion in revenues from global dental sales, down 2.4% year over year. This includes an adverse impact of 1.5% from local currencies and 0.9% related to foreign exchange headwind. The franchise witnessed 7% growth in North America on the back of 21.9% surge in North America Dental equipment sales. International sales declined 1.5% due to weak capital spending environment across Europe, especially in Germany and the Netherlands as well as Australia.

Worldwide medical sales inched up 1.1% year over year to $402.4 million reflecting 1.4% growth in local currencies and decline of 0.3% due to unfavorable foreign exchange. Henry Schein recorded sequential growth in the North American medical business with growth in the international market as well.

The company’s global animal health segment witnessed 16.1% growth in revenues to $611.2 million in the quarter, including 16.4% surge in local currencies and a negative impact of 0.3% related to foreign currency exchange. The franchise recorded accelerated growth in North America on the back of rising market share. However, international market was somewhat sluggish due to macroeconomic uncertainties.

Revenues from technology and value-added services climbed 15% to $81.4 million. This included 14.8% growth in local currencies offset by a 0.8% dip from foreign exchange headwinds. While macroeconomic factors dragged the results in the international market, sales accelerated in North America.

Gross margin in the quarter was 27.5%, down 40 basis points (bps) year over year. This was primarily due to unfavorable product mix. Operating margin was 7.5%, up 50 bps.

Henry Schein exited 2012 with cash and cash equivalents of $122.1 million, down 17.1% from 2011. During the reported quarter, the company repurchased 1.1 million shares for $84.2 million and was left with $300 million of authorization for future repurchases.

Debt Refinancing

In a bid to reduce its interest expense, Henry Schein plans to refinance the debt of roughly $220 million associated with Butler Schein Animal Health transaction. The move is expected to be accretive to annual EPS by 2-3 cents. The refinancing is expected to close by the end of the first quarter of 2013.  

Outlook

Henry Schein issued guidance for 2013. The company envisages adjusted EPS in the range of $4.81−$4.91, representing growth of 8%−11% year over year. The current Zacks Consensus Estimate of $4.84 lies within the guided range.

Our Take

We are encouraged by Henry Schein’s results which beat the Zacks Consensus Estimate. The company continues to drive strong top-line growth and establish domestic and international footprints in dental, animal health and medical supply distribution. However, unfavorable foreign exchange headwinds and a contagion of economic problems across Europe are likely to undermine its operating results. Further, softness in the core franchise is a matter of concern.

Nevertheless, we believe that Henry Schein is well poised to drive growth as its diversified business offers resilience against macroeconomic problems. The company’s performance should improve with the gradual recovery in the economy. The EPS guidance for 2013 also encourages bullish sentiments.

As a result, the stock carries a Zacks Rank #2 (Buy). Other industry stocks carrying Zacks Rank #2 are Patterson Companies (PDCO - Analyst Report), MWI Veterinary Supply (MWIV - Analyst Report) and The Copper Companies (COO - Analyst Report).
 

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