Henry Schein, Inc. (HSIC - Free Report) reported adjusted earnings per share (EPS) from continuing operations of 94 cents in the first quarter of 2020, up 17.5% year over year. Adjusted EPS also beat the Zacks Consensus Estimate by 28.8%. The quarter’s adjustments exclude the impact of certain restructuring charges among others.
The solid year-over-year earnings improvement came on the back of solid revenue growth across two of its operating segments as well as a decline in operating expenses.
Revenues in Detail
Henry Schein reported net sales of $2.43 billion in the first quarter, up 2.9% year over year. The metric beat the Zacks Consensus Estimate by 4.9%. The year-over-year improvement came on the back of 4% growth in local currencies. In local currencies, internally generated sales increased 2.1% and acquisition growth was 1.9%. However, unfavorable foreign currency exchange made a 1.1% impact on the top line.
Excluding product sales to Covetrus under the transition services agreement related to Henry Schein’s Animal Health spin-off, internal sales growth in local currencies was 1.8%.
In the quarter under review, the company recorded sales of $1.78 billion in the North American market, up 5.6% year over year. Sales totaled $648.9 million in the international market, down 3.7% year over year.
Henry Schein derives revenues from three operating segments — Dental, Medical, and Technology and Value-added Services.
In the first quarter, the company derived $1.48 billion of global Dental sales, down 4.6% year over year. This includes 3% decline in local currencies and 1.6% adverse impact of foreign currency exchange. At local currencies, internally-generated sales declined 3.7% and acquisition growth was 0.7%. The 3.7% internal decline in local currencies included a decrease of 3.9% in North America and a drop of 3.4% internationally.
North America dental sales were in line with the company’s expectations for the first two months of the quarter. However, since March dental consumable merchandise and equipment internal sales were adversely impacted by suspension of non-emergency procedures in response to the coronavirus outbreak. Internationally also, the revenue picture remains the same, with significant impacts in Europe and China.
Global Medical revenues, however, climbed 17.1% year over year to $800.7 million resulting from 17.2% growth in local currencies. In local currencies, internally-generated sales grew 13.4% and acquisition growth was 3.8%. Unfavorable foreign currency exchange made a 0.1% impact.
The business registered strong organic growth as well as an increase of personal protective equipment (PPE) sales in March.
Revenues from global Technology and Value-added Services grew 14.2% to $131.9 million. This included 14.5% growth in local currencies and a 0.3% drop owing to adverse currency translation. At local currencies, internally-generated sales grew 6.4% and acquisition growth was 8.1%.
The revenue uptick resulted from positive trends in recurring revenue associated with the company’s practice management, patient engagement and patient demand creation software solutions. However, the segment was negatively impacted since mid-March due to material impacts on sales in these categories, new system installations, DentalPlans.com and financial services businesses.
In the reported quarter, gross profit totaled $746 million. Gross margin contracted 113 basis points (bps) to 30.7% on a 0.8% fall in gross profit.
Selling, general and administrative expenses reduced 1.3% to $567.4 million in the quarter under review.
Overall adjusted operating profit was $178.7 million, up 0.9% year over year. However, adjusted operating margin contracted 15 bps year over year to 7.4%.
The company exited the first quarter of 2020 with cash and cash equivalents of $617.4 million compared with $106.1 million at the end of 2019.
The company temporarily suspended its acquisition activity and share repurchase program in March. However, prior to this, the company repurchased 1.2 million shares of its common stock during the first quarter. Per Henry Schein, as of today, it has $201.2 million authorized and available for stock repurchases.
At the end of the first quarter, net cash flow from continuing operations was $90.8 million compared with $133.3 million in the year-ago period.
2020 Guidance Withdrawn
The company had initially provided its financial guidance for 2020 during its fourth-quarter earnings release on Feb 20, where it specifically noted that guidance did not assume any significant supply chain disruption related to COVID-19.
However, on Apr 6, Henry Schein announced the withdrawal of the previously-announced guidance given the growing impact of COVID-19 on its business and customers. As the uncertainty of the pandemic and its impact on business operations cannot be ascertained at present, the company is not issuing any new financial guidance for the year at present.
Henry Schein exited the first quarter of 2020 with better-than-expected results despite the adversities posed by the coronavirus outbreak. Barring dental, the company saw a solid performance by the rest of the operating businesses. Strong revenue uptick in the North American market was encouraging.
However, a dismal performance by the company's biggest operating segment Dental is concerning. We are also disappointed with the contraction in both its margins. Its decision to refrain from providing a guidance is concerning as well.
Meanwhile, the company’s response to combat the pandemic is commendable. It continuously worked with suppliers to expand the availability and prioritize the delivery of critical PPE.
Henry Schein recently launched two rapid point-of-care test kits which can detect antibodies associated with COVID-19 without the need for machine equipment in a lesser time. The company is working to bring additional tests as well as more PPE to the market.
Zacks Rank and Stocks to Consider
Henry Schein currently has a Zacks Rank #4 (Sell).
Some better-ranked stocks in the broader medical space are Aphria Inc. (APHA - Free Report) , Biogen Inc. (BIIB - Free Report) and Eli Lilly and Company (LLY - Free Report) .
Aphria reported third-quarter fiscal 2020 adjusted EPS of 2 cents, comparing favorably with the Zacks Consensus Estimate of a loss of 4 cents. Its net revenues of $64.4 million outpaced the consensus estimate by 14.6%. The company carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Biogen currently carries a Zacks Rank #2. It reported first-quarter 2020 adjusted EPS of $9.14, surpassing the Zacks Consensus Estimate by 18.1%. Its revenues of $3.53 billion outpaced the consensus mark by 3.2%.
Eli Lilly delivered first-quarter 2020 EPS of $1.75, outpacing the Zacks Consensus Estimate by 12.9%. Its first-quarter revenues of $145.3 million surpassed the consensus estimate by 6.3%. The company currently sports a Zacks Rank #1.
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