Henry Schein, Inc. HSIC reported adjusted earnings per share (EPS) of $1.28 in the first quarter of 2015, up 8.5% year over year. Results also beat the Zacks Consensus Estimate by a penny. The earnings improvement came on the back of solid revenue growth.
Including the one-time adjustment of restructuring costs, Henry Schein’s reported net income in the first quarter of 2015 was $103.4 million or $1.22 per share, reflecting a year-over-year improvement of 1.3% or 3.4%, respectively.
Revenues in Detail
Henry Schein reported revenues of $2.463 billion in the first quarter, up 1.4% year over year. The top line however missed the Zacks Consensus Estimate of $2.540 billion. The year-over-year improvement was led by 7.4% growth in local currencies with a 4.8% and a 2.6% rise in internal sales and acquisitions, respectively. However, unfavorable foreign currency exchange accounted for a decline of 6% in overall revenue growth.
Region-wise, Henry Schein experienced solid 7.4% year-over-year sales growth in the North American market, while sales in the international market dropped 8.6%.
Segment Analysis
Henry Schein derives revenues from four operating segments, viz Dental, Medical, Animal Health, and Technology and Value-added services.
In the first quarter, the company derived $1.250 billion in revenues from global Dental sales, down 3.6% year over year (local currency growth of 3.3% and a 6.9% decline owing to unfavorable foreign exchange). Local currency growth comprised acquisition growth of 0.6% combined with internal sales rise of 2.7%. The dental franchise witnessed an improvement of 3.4% in North America while international sales declined 13.8%.
The company's global Animal Health segment witnessed a 4.6% improvement in revenues to $684.3 million (local currency growth of 12.4%, along with a 7.8% decline related to foreign exchange headwind). The local currency growth included 4.5% growth in internal sales and 7.9% acquisition growth. Franchise revenues increased 10.7% in North America while overseas revenues dropped 0.8%.
Worldwide Medical sales scaled up 11.6% year over year to $443.5 million based on local currency growth of 12.5%. However, revenues slipped 0.9% owing to unfavorable foreign currency exchange. The local currency growth included 11.6% growth in internal sales and 0.9% acquisition growth.
Revenues from global Technology and Value-added Services climbed 5.4% to $85.7 million. This included an 8% rise in local currencies, with acquisition growth of 0.1% and internal sales improvement of 7.9%. However, revenues in this segment declined 2.6% due to unfavorable foreign currency.
Margin Trends
Gross profit increased 2.4% to $713.4 million in the first quarter of 2015. Gross margin improved 30 basis points (bps) from the year-ago quarter to 29%, primarily driven by positive revenue growth in three of the four operating segments.
Although selling, general & administrative expenses rose 1.1% to $545.2 million, adjusted operating income increased 7% year over year to $168.2 million. Consequently, adjusted operating margin improved 30 bps to 6.8% in the reported quarter.
Financial Position
Henry Schein exited the quarter with cash and cash equivalents of $59.2 million, compared to $89.5 million at the end of 2014. In the first quarter, net cash outflow from operating activities was $26.7 million, down 51.8% year over year.
During the quarter under review, the company bought back approximately 542,000 shares for $75.7 million and was left with $224 million of future repurchase authorization.
Guidance
Henry Schein has reaffirmed its EPS guidance for 2015. The company continues to expect EPS in the range of $5.90–$6.00 representing annualized growth of 8–10%. The Zacks Consensus Estimate for 2015 is pegged at $5.94, which lies within the company's guided range.
Our Take
Henry Schein posted mixed first-quarter 2015 financial results which modestly beat the Zacks Consensus Estimate for EPS, but missed the same for revenues. However, the year-over-year improvement on both fronts is indicative of the company's consistent growth via organic and inorganic means across most of its segments.
Per management, the company delivered solid financial results in the first quarter, accompanied with strong internal growth in local currencies as Henry Schein continued to gain market share in each of its four business groups.
On the animal health front, the company completed the acquisition of scil animal care, just after the close of the first quarter. We believe such strategic investments, apart from enhancing Henry Schein’s global footprint, will add to its profit numbers in the coming quarters.
However, these positive factors are not without the threat of the current economic scenario, a tough competitive landscape and particularly, currency headwind, which has already modestly hampered revenue growth in each segment during the reported quarter.
Zacks Rank
Currently, the stock carries a Zacks Rank #3 (Hold). Better-ranked stocks in the med/dental-supply industry include Merit Medical Systems, Inc. MMSI, Becton, Dickinson and Company BDX and The Cooper Companies Inc. COO. While Merit Medical sports a Zacks Rank #1 (Strong Buy), Becton, Dickinson and The Cooper Companies carry a Zacks Rank #2 (Buy).
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