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Balanced 2Q for Henry Schein

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Henry Schein Inc. (HSIC - Free Report) reported EPS of $1.08 in the second quarter of 2012. However, after taking into account restructuring costs of $3.4 million or 3 cents per share, adjusted EPS came in at $1.11, up 9.9% year over year and a penny ahead of the Zacks Consensus Estimate.

Henry Schein reported a 3.3% year-over-year increase in revenues to $2.2 billion. The revenue growth included 6.5% growth in local currencies (internal growth of 4.6% and acquisition growth of 1.9%), partially offset by unfavorable foreign currency of 3.2%.

Henry Schein primarily derives revenues from dental, medical, animal health and technology and value-added services. In the reported quarter, the company derived $1.2 billion in revenues from global dental sales, down 1.3% year over year.

This includes a 2.6% increase in local currencies (internally generated sales of 2.1% and acquisition growth of 0.5%) but a 3.9% decline related to foreign exchange. The domestic sales growth in this segment was the strongest in last eight quarters. 

In the quarter, the company strengthened its global orthodontics business with the acquisition of Ortho Technology and Accord. That latter is expected to establish Henry Schein’s presence in Thailand, thereby strengthening the company’s foothold in Southeast Asia.

Worldwide medical sales increased 5.9% year over year to $361.1 million (6.6% growth in local currencies but 0.7% dip related to foreign exchange) on the back of increased penetration of larger group practices and improved sales of pharmaceutical products in North America (consisting of over 90% of global medical sales). Moreover, the company’s acquisition of Modern Laboratory Services in July 2012 is expected to strengthen its position in the clinical laboratory market in Western U.S.

The company’s global animal health segment witnessed an 11.4% surge in revenues to $586.3 million, including 14.9% growth in local currencies and a 3.5% decline related to foreign currency exchange. This resulted from the company’s increased product offerings to its customers.

During the quarter, Henry Schein completed the acquisition of AUV Veterinary Services B.V, the veterinary products distribution arm of Netherlands-based AUV Group. The acquisition enabled the company to expand in the Dutch and Belgian animal health markets.

Revenues from technology and value-added services climbed 9.8% year over year to $68.2 million. This included a 10.6% growth in local currencies offset by a 0.8% decline related to foreign exchange.

Gross margin during the quarter was 28.4%, down 30 basis points year over year. Operating margin was 7.1%, unchanged year over year.

Henry Schein exited the quarter with cash and cash equivalents of $87.9 million compared with $147.3 million at the end of fiscal 2011. During the reported quarter, the company repurchased 1.6 million shares for $118.3 million and was left with $143.1 million of authorization for future repurchases.


Henry Schein reiterated its fiscal 2012 EPS guidance of $4.30−$4.40, representing growth of 8%−11%. The current Zacks Consensus Estimate of $4.36 remains within the guided range. Guidance for 2012 excludes restructuring costs.

We are encouraged with the company’s balanced revenue growth across all the four segments leading to long-term growth sustainability even amid slow economic growth. The company continues to drive strong top-line growth and establish domestic and international footprints in dental, animal health and medical supply distribution.

 However, this was to some extent counter-weighed by unfavorable foreign exchange headwinds. Despite the global macroeconomic headwinds; aging population, growing demand in dental and animal health market and improved health insurance coverage are working in favor of the company.

However, competition in the Dental market from the likes of Patterson Companies Inc. (PDCO - Free Report) and McKesson Corporation (MCK - Free Report) remains tough. Currently, Henry Schein retains a short-term Zacks #3 Rank (Hold).

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