Henry Schein Tops Q2 Earnings, Revenue on Solid Segment Show

Henry Schein, Inc. (HSIC) reported earnings per share (EPS) of $1.35 in the second-quarter of 2014, up 9.8% from the year-ago adjusted number of $1.23. Results also beat the Zacks Consensus Estimate of $1.33 by 1.5%. The earnings improvement came on the back of solid revenue growth and lower year-over-year effective tax rate.

However, the positive earnings surprise failed to boost investors' confidence. Share price declined 1.8% since the earnings release to eventually close at $115.31 yesterday.

Henry Schein's net income was $116.2 million or $1.35 per share, up 7.2% or 9.8% year over year in the reported quarter.

Henry Schein reported revenues of $2.62 billion in the second quarter, increasing 9.3% year over year. The top line also beat the Zacks Consensus Estimate by 1.8%. The year-over-year improvement was led by 7.9% growth in local currencies with 4.3% and 3.6% rise in internal sales and acquisitions, respectively. Favorable foreign exchange accounted for a strong 1.4% growth.

Region-wise, Henry Schein experienced solid 13.2% and 7.2% year-over-year growth in the international and North American markets, respectively.

Segment Analysis

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

In the second quarter, the company derived $1.4 billion in revenues from global Dental sales, up 8.6% year over year. The segment's revenues included local currency growth of 7.5% and 1.1% related to favorable foreign exchange. Local currency growth comprised acquisition growth of 4.9% combined with internal sales rise of 2.6%. The 2.6% internal growth in local currencies included 4.3% growth in North America and flat International sales growth. The dental franchise witnessed an improvement of 8.4% in North America while international sales increased 9.1%.

The company's global Animal Health segment witnessed 13.2% improvement in revenues to $754.5 million. This was owing to local currency growth of 10.7%, along with 2.5% growth related to foreign currency exchange. The local currency growth included 7.3% growth in internal sales and 3.4% acquisition growth. The 7.3% internal growth in local currencies included 7.9% growth in North America and 6.8% growth internationally. Franchise revenues increased 7.9% in North America while overseas revenues jumped 18.4%.

Worldwide Medical sales scaled up 4.0% year over year to $403.3 million based on local currency growth of 3.7%. Revenues from global Technology and Value-added Services climbed 14.2% to $89.1 million. This included a 13.2% rise in local currencies, with acquisition growth of 3.9% and internal sales improvement of 9.3%.

Margin Trends

Gross profit increased 8.8% to $728.5 million in the second quarter of 2014. Gross margin slightly dropped 10 basis points (bps) to 27.9% from the year-ago quarter equivalent, primarily driven by changes in sales mix in Henry Schein's businesses across all of its four groups of businesses.

Although selling, general & administrative expenses spiked 10.9% to $547.6 million, operating income increased 2.7% year over year to $180.8 million. However, operating margin declined roughly 50 bps to 6.9% in the reported quarter.

Financial Position

Henry Schein exited the second quarter with cash and cash equivalents of $89.7 million, down from $188.6 million at the end of 2013. In the reported quarter, net cash flow from operating activities was $199.2 million, down 27.5% year over year.

During the quarter under review, the company repurchased approximately 654,000 shares for $76.1 million and was left with $148 million of future authorization. repurchases.

Guidance

Henry Schein has narrowed its EPS guidance for 2014. The company now expects EPS in the range of $5.33–$5.39 representing annualized growth of 8%–9% (previous guidance: $5.29-$5.39 representing annualized growth of 7%-9%). The Zacks Consensus Estimate for 2014 is pegged at $5.37, which lies within the company's guided range.

Our Take

We are impressed with Henry Schein's second-quarter 2014 financial results which modestly beat the Zacks Consensus Estimate on both top and bottom-line fronts. Year-over-year growth on both fronts is also indicative of the company's consistent growth via organic and inorganic means across all its segments.

With the flu season knocking on the door, the company is already receiving an impressive number of pre booking of seasonal influenza vaccines, in line with the previous year. Additionally, as a result of the recent strategic agreement signed with athenahealth, Inc. (ATHN), more advanced technology-driven solutions will now be available to Henry Schein's customers.

However, these positive factors are not without the threat of the current economic scenario along with a tough competitive landscape and currency headwinds, that might hamper the company's operational and stock performance.

Zacks Rank

Currently, both Henry Schein and athenahealth carry a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical/dental supplies industry include McKesson Corporation (MCK) and Align Technology Inc. (ALGN). Both these stocks carry a Zacks Rank #2 (Buy).