Henry Schein, Inc.(HSIC) reported earnings per share (EPS) of $1.56 in the fourth quarter of 2014, up 9.1% year over year. Results also beat the Zacks Consensus Estimate by a nickel. The earnings improvement came on the back of solid revenue growth and slightly lower year-over-year effective tax rate.
Henry Schein's net income was $133 million in the reported quarter, up 7% year over year.
For full year 2014, the company reported net income of $5.44 per share, reflecting year-over-year improvement of 10.3%. Full year bottom line results also beat the Zacks Consensus Estimate by 6 cents.
Revenues in Detail
Henry Schein reported revenues of $2.70 billion in the fourth quarter, up 7% year over year. The top line was approximately in line with the Zacks Consensus Estimate. The year-over-year improvement was led by 9.9% growth in local currencies with 4.9% and 5% rise in internal sales and acquisitions, respectively. However, unfavorable foreign currency exchange accounted for a decline of 2.9% in overall revenue growth.
Region-wise, Henry Schein experienced solid 3.6% and 8.9% year-over-year growth in the international and North American markets, respectively.
For full year 2014, Henry Schein reported revenues of $10.4 billion, up 8.5% from 2013. The top line for the full year was also on par with the Zacks Consensus Estimate.
Segment Analysis
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 $1.4 billion in revenues from global Dental sales, up 3.9% year over year (local currency growth of 7.5% and a 3.6% decline owing to unfavorable foreign exchange). Local currency growth comprised acquisition growth of 5.2% combined with internal sales rise of 2.3%. The dental franchise witnessed an improvement of 6% in North America while international sales rose 0.7%.
The company's global Animal Health segment witnessed 12.3% improvement in revenues to $731.6 million (local currency growth of 15.9%, along with 3.6% decline related to foreign exchange headwind). The local currency growth included 7.8% growth in internal sales and 8.1% acquisition growth. Franchise revenues increased 18.1% in North America while overseas revenues climbed 7.3%.
Worldwide Medical sales scaled up 9.4% year over year to $461.7 million based on local currency growth of 9.9%. However, revenues slipped 0.5% owing to unfavorable foreign currency exchange. The local currency growth included 9.4% growth in internal sales and 0.5% acquisition growth.
Revenues from global Technology and Value-added Services climbed 3.3% to $91.3 million. This included a 4.4% rise in local currencies, with acquisition growth of 2.9% and internal sales improvement of 1.5%. However, revenues in this segment declined 1.1% due to unfavorable foreign currency.
Margin Trends
Gross profit increased 9.3% to $764.5 million in the fourth quarter of 2014. Gross margin improved 60 basis points (bps) to 28.3% from the year-ago quarter equivalent, primarily driven by positive revenue growth in all four operating segments.
Although selling, general & administrative expenses spiked 9.5% to $561.5 million, operating income increased 8.6% year over year to $202.9 million. Consequently, operating margin improved 10 bps to 7.5% in the reported quarter.
Financial Position
Henry Schein exited 2014 with cash and cash equivalents of $89.5 million, significantly down from $188.6 million at the end of 2013. In 2014, net cash flow from operating activities was $592.5 million, down 10.8% year over year.
During the quarter under review, the company bought back approximately 595,000 shares for $73.7 million and was left with $300 million of future repurchase authorization.
Guidance
Henry Schein has provided its EPS guidance for 2015. The company expects EPS in the range of $5.90–$6.00 representing annualized growth of 8–10%. The Zacks Consensus Estimate for 2015 is pegged at $5.96, which lies within the company's guided range.
Our Take
We are impressed with Henry Schein's fourth-quarter 2014 financial results which modestly beat the Zacks Consensus Estimate for EPS, while being in line with the same for revenues. The year-over-year improvement on both fronts is also indicative of the company's consistent growth via organic and inorganic means across all its segments.
During the fourth quarter, Henry Schein experienced broader global expansion of its businesses, particularly the dental and animal health segments. The company acquired ADS Florida – one of the largest dental practice transition and brokerage companies serving the State of Florida. This buyout is expected to expand Henry Schein's global practice transitions footprint – a large market wherein the dental industry is currently flourishing.
On the animal health front, the company has expanded its equipment capabilities with additional capacities, particularly through the recently announced acquisition of scil animal care. We believe such strategic investments, apart from enhancing Henry Schein's global footprint, will also 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 Bio-Reference Laboratories Inc. (BRLI), Halyard Health, Inc. (HYH) and AmerisourceBergen Corporation (ABC). While Bio-Reference Laboratories and Halyard Health sport a Zacks Rank #1 (Strong Buy), AmerisourceBergen carries a Zacks Rank #2 (Buy).
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