Henry Schein (HSIC) Q3 Earnings Top Estimates, Revenues Lag

Henry Schein, Inc. (NASDAQ:HSIC) reported adjusted earnings per share (EPS) from continuing operations of 90 cents in the third quarter of 2019, up 15.4% year over year. Adjusted EPS beat the Zacks Consensus Estimate by 4.7% on revenue growth across each of its operating segments.

On a reported basis, EPS from continuing operations was 91 cents, showing a 54.2% improvement on a year-over-year basis.

Revenues in Detail

Henry Schein reported net sales of $2.51 billion in the third quarter, up 6.4% year over year. The metric missed the Zacks Consensus Estimate by 0.4%. The year-over-year improvement came on the back of 3.9% internal sales growth in local currencies along with acquisition growth of 3.7%. Unfavorable foreign currency exchange made a 1.1% impact on the top line.

Excluding $21.7 million in corporate revenues from product sales to Covetrus under the transition services agreement related to Henry Schein’s Animal Health spin-off, normalized internal sales growth in local currencies was 3%.

In the quarter under review, the company recorded sales of $1.86 billion in the North American market, up 5.7% year over year. Sales totaled $651.4 million in the international market, up 9%.

Segment Analysis

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

In the third quarter, the company derived $1.55 billion of global Dental sales, up 2.1% year over year. This includes 3.6% growth in local currencies and 1.5% adverse impact from foreign currency exchange. At local currencies, internally-generated sales increased 1.7% and acquisition growth was 1.9%.

Worldwide Medical revenues climbed 11.3% year over year to $803.7 million. Growth in local currencies was 11.4%, while there was a 0.1% decline owing to adverse foreign exchange.

Revenues from global Technology and Value-added Services grew 15.1% to $137.3 million. This included 15.8% growth in local currencies and 0.7% drop owing to adverse currency translation.

Margin Trend

Gross profit increased 5.4% to $761.2 million in the reported quarter. Gross margin, however, contracted 33 basis points (bps) from the year-ago quarter to 30.3%. Adjusted operating income improved 9.4% year over year to $186.4 million. Adjusted operating margin expanded 20 bps to 7.4%.

Financial Position

The company exited third-quarter 2019 with cash and cash equivalents of $75.3 million compared with $84.9 million at the end of the second quarter. Year-to-date net cash provided by operating activities from continuing operations was $525.2 million compared with $269.4 million in the year-ago period.

During the quarter under review, Henry Schein repurchased 1.6 million shares of its common stock for approximately $98 million. At the end of the third quarter, the company had $75 million authorized for repurchase of common stock.

Guidance

The company tightened its EPS guidance for 2019. It expects adjusted EPS in the range of $3.41 to $3.47(compared to earlier-provided range of $3.38-$3.50), reflecting 8-9% growth from 2018. The Zacks Consensus Estimate for 2019 adjusted EPS of $3.46 is within the guided range.

The company has also initiated its 2020 adjusted EPS guidance. It expects adjusted EPS from continuing operations within $3.65 to $3.75, reflecting growth of 6% to 9%. The Zacks Consensus Estimate for 2020 adjusted EPS of $3.75 is at the high end of the guided range.

Our Take

Henry Schein exited the third quarter of 2019 on a mixed note. The company saw solid performance by each of its key operating businesses. Henry Schein's strong share gains in the North American market raise optimism. Strong international performance by the company also instills optimism. Overall, year-over-year revenue growth is encouraging. Nonetheless, we are disappointed with the contraction in gross margin.

Earnings of Other MedTech Majors at a Glance

Henry Schein carries a Zacks Rank #3 (Hold).

Some better-ranked companies, which posted solid results this earnings season, are Edwards Lifesciences (NYSE:EW) , Thermo Fisher Scientific (NYSE:TMO) and ResMed (NYSE:RMD) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Edwards Lifesciences delivered third-quarter 2019 adjusted EPS of $1.41, outpacing the Zacks Consensus Estimate by 15.6%. Net sales of $1.09 billion surpassed the Zacks Consensus Estimate by 5.5%.

Thermo Fisher delivered third-quarter 2019 adjusted EPS of $2.94, which surpassed the Zacks Consensus Estimate by 2.1%. Revenues of $6.27 billion outpaced the consensus estimate by 1.3%.

ResMed reported first-quarter fiscal 2020 adjusted EPS of 93 cents, which beat the Zacks Consensus Estimate of 87 cents by 6.9%. Revenues were $681.1 million, surpassing the Zacks Consensus Estimate by 3.6%.

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