Henry Schein's (HSIC) Q4 Earnings Top, Revenues Lag Estimates

Henry Schein, Inc. (NASDAQ:HSIC) reported adjusted earnings per share (EPS) of $1.12 in the fourth quarter of 2018, up 15.5% year over year. Adjusted EPS beat the Zacks Consensus Estimate of $1.11 by 0.9% on revenue growth across global Medical and Technology and Value-added Services businesses.

On a reported basis, EPS came in at 87 cents against net loss of 6 cents in the year-ago quarter.

Adjusted EPS in 2018 was $4.13, up 14.7% year over year. The figure surpassed the Zacks Consensus Estimate of $4.12 by 0.2%.

Revenues in Detail

Henry Schein reported net sales of $3.38 billion in the fourth quarter, up 1.8% year over year. However, the metric missed the Zacks Consensus Estimate by 2.9%. The year-over-year improvement came on the back of 2.1% internal sales growth in local currencies along with acquisition growth of 1.2%. The top line was adversely impacted by 1.6% from unfavorable foreign currency exchange.

Henry Schein, Inc. Price, Consensus and EPS Surprise

Revenues in 2018 came in at $13.20 billion, up 5.9% year over year. However, the figure missed the Zacks Consensus Estimate of $13.30 billion.

In the quarter under review, the company recorded sales of $2.26 billion in the North American market, up 3.2% year over year. Sales totaled $1.11 billion in the international market, down 1.1% year over year.

Segment Analysis

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

In the fourth quarter, the company derived $1.67 billion of global Dental sales, down 0.2% year over year. This includes 1.8% growth in local currencies and 2% adverse impact from foreign currency exchange. At local currencies, internally-generated sales increased 1.5% and acquisition growth was 0.3%. Internal growth at local currencies included 0.6% improvement in North America and 2.8% growth internationally.

The company's global Animal Health segment witnessed a 1.4% decline in revenues to $877.6 million. This includes 0.7% growth in local currencies and 2.1% adverse impact from foreign currency exchange. At local currencies, internally-generated sales declined 0.6% and acquisition growth was 1.3%. The internal growth in local currencies included 1.9% decline in North America and 0.8% improvement internationally.

Worldwide Medical revenues climbed 7.5% year over year to $684.8 million. Growth in local currencies was 7.6%.

Revenues from global Technology and Value-added Services grew 21.4% to $139.1 million. This included 22.1% growth in local currencies and 0.7% decrease owing to adverse currency movements.

Margin Trend

Gross profit increased 1% to $909.9 million in the reported quarter. However, gross margin contracted 20 basis points (bps) from the year-ago quarter to 26.9% on a 2.1% escalation in cost of sales.

Owing to a 2.3% rise in selling, general & administrative expenses to $674.7 million, adjusted operating income declined 2.5% year over year to $235.2 million. Also, adjusted operating margin shrunk 30 bps year over year to 7% in the reported quarter.

Financial Position

The company exited 2018 with cash and cash equivalents of $80.2 million, compared with $1.75 billion in 2017. Net cash provided by operating activities was $684.7 million compared with $545.5 million a year ago.

During the quarter under review, Henry Schein repurchased 997,000 shares of its common stock for approximately $86 million. At the end of the fourth quarter, the company had $400 million authorized for repurchase of common stock.

2019 Guidance

The company has provided its 2019 EPS guidance. It expects EPS in the range of $3.38-$3.46, reflecting 7-9% growth from the 2018 figure of $3.17. The Zacks Consensus Estimate for 2019 adjusted EPS of $4.32 is above the guided range.

Our Take

Henry Schein exited the fourth quarter of 2018 on a mixed note. The company saw solid performance by the global Medical and Technology and Value-added Services businesses. Henry Schein's strong share gains in the North American market raise optimism.

Nonetheless, we are disappointed with the year-over-year deterioration in gross and operating margin due to higher expenses.

Meanwhile, management seems to be upbeat about the creation of the Henry Schein One dental technology business and the spin-off of its animal health business into Covetrus.

Zacks Rank & Key Picks

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

Some better-ranked MedTech stocks that posted solid quarterly results are Varian Medical Systems (NYSE:VAR) , AngioDynamics (NASDAQ:ANGO) and CONMED Corporation (NASDAQ:CNMD) .

Varian reported fiscal first-quarter adjusted EPS of $1.06, in line with the Zacks Consensus Estimate. Revenues of $741 million outpaced the consensus mark of $717.9 million. The stock has a Zacks Rank #2 (Buy).

AngioDynamics’ fiscal second-quarter adjusted EPS of 22 cents exceeded the Zacks Consensus Estimate by a penny. Revenues totaled $91.5 million, which surpassed the consensus estimate by 2.9%. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

CONMED delivered fourth-quarter adjusted EPS of 73 cents, in line with the Zacks Consensus Estimate. Revenues of $242.4 million beat the Zacks Consensus Estimate of $229.2 million. The stock carries a Zacks Rank of 2.

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