Henry Schein, Inc. (HSIC) reported adjusted earnings per share (EPS) of $1.43 in the fourth-quarter of 2013, up 13.5% year over year. Moreover, the results beat the Zacks Consensus Estimate of $1.39 by 2.9%.
For the full year 2013, the company reported adjusted earnings of $4.95 per share, up 11.5% from the previous year. The reported EPS also surpassed the company’s guidance range of $4.86 – $4.91 as well as the Zacks Consensus Estimate of $4.90.
Revenues in Detail
Henry Schein reported revenues of $2.53 billion in the fourth quarter, increasing 4.9% year over year. The top line edged past the Zacks Consensus Estimate of $2.52 billion. The year-over-year improvement was led by 4.4% growth in local currencies with 3.7% and 0.7% rise in internal sales and acquisitions, respectively. Favorable foreign exchange accounted for nominal 0.5% growth.
Reported revenues for the full year amounted to $9.56 billion, up 6.9% year over year. The figure was at par with the Zacks Consensus Estimate.
Segments in Detail
Henry Schein derives revenues from four operating segments, viz Dental, Medical, Animal Health, and Technology and Value-added services.
In the fourth quarter, the company derived $1.36 billion in revenues from global Dental sales, up 3.9% year over year. Segment revenues include local currency growth of 3.1%, which comprises acquisition growth of 0.5% combined with internal sales rise of 2.6%. Revenue performance was also supported by growth of 0.8% related to favorable foreign exchange. The franchise witnessed an improvement of 2.1% in North America while international sales increased 3.5%.
Worldwide Medical sales scaled up 4.8% year over year to $421.9 million based on local currency growth of 4.6%. Foreign exchange movement aided a rise of 0.2% in segment results. Overseas business revenues increased allowing the company to perform well globally.
The company’s global Animal Health segment witnessed 6.6% improvement in revenues to $651.7 million. This was owing to internal sales rise of 4.8%, along with acquisition growth of 1.8%. Franchise revenues rose 7% in North America while overseas revenues scaled up 2.9%.
Revenues from global Technology and Value-added Services climbed 8.6% to $88.4 million. This included 8.9% rise in local currencies with acquisition growth of 0.3% and internal sales improvement of 8.6%. At the same time, the positives were offset by a 0.3% dip from foreign exchange headwinds. While the segment revenues in North America shot up 6.9%, international revenues grew 21% in the quarter. Growth in the segment can be attributed to electronic services recurring revenue, software sales and value-added services.
Margin Trends
Gross profit increased 4.5% to $0.69 million in the fourth quarter of 2013. The gross margin was up 20 basis points (bps) to 27.7% compared with the year-ago quarter equivalent.
With selling, general & administrative expenses rising 6.3% to $0.51 million, operating margin decreased approximately 13 bps year over year to 7.4%. According to Henry Schein, after excluding the impact of acquisition-related expenses in the year, the fall in operating margin was a mere 5 bps.
Financial Update
Exiting 2013, Henry Schein had cash and cash equivalents of $188.6 million, up from $122.1 million at the end of 2012. In the reported quarter, operating cash flow was $274.6 million, up 37.5% year over year. The company also reported total long-term debt of $450.2 million as of Dec 28, 2013.
During the reported quarter, the company bought back 664,000 shares for $73.8 million and was left with $300 million of authorization for future repurchases.
Guidance
Henry Schein reaffirmed its EPS guidance for 2014. The company still expects EPS in the range of $5.29 – $5.39 (or annualized growth of 7%-9%). Notably, last month, the guidance was trimmed from the earlier provided range of $5.37-$5.47 (annualized growth rate of 10%–12%) as Henry Schein expected the impending acquisition of 5 companies from Arseus to have a dilutive impact of 3 cents to 2014 EPS. The Zacks Consensus Estimate for 2014 is pegged at $5.39 per share, which matches the higher end of the guided range.
Our Take
Henry Schein beat the Zacks Consensus Estimate on both the top and bottom lines. Year-over-year growth at both fronts is also indicative of the company’s consistent growth via organic and inorganic means across all its segments. We are, at the same time, encouraged by the global performance of the company during the fourth quarter.
We believe that the stabilization of the European market and the acquisition of BioHorizons, Camlog, Arseus and Lincoln Dental Supply will enhance performance at the company’s dental segment. With the acquisition of Logiciel Julie, (one of the five businesses acquired from Arseus), we expect revenues to gain traction in the Global Technology and Value-Added Services businesses.
However, these positive factors are not without the threat of the current economic scenario that can pose difficulties for Henry Schein in the near term. A tough competitive landscape and currency headwinds are also likely to weigh heavily on the company’s operational and stock performance. Lowering of 2014 guidance, although because of amortization related expense to certain acquisitions was another downside.
Currently the stock carries a Zacks Rank #3 (Hold). Other stocks such as Align Technology Inc. (ALGN), Cardinal Health, Inc. (CAH) and CR Bard Inc. (BCR) also appear impressive. All these stocks also carry a Zacks Rank #2.
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