Leading dental products maker DENTSPLY International (XRAY) posted second-quarter fiscal 2011 adjusted (excluding one-time items such as acquisitions and tax related adjustments) earnings per share of 55 cents, topping the Zacks Consensus Estimate of 51 cents and surpassing the year-ago adjusted earnings of 50 cents.
Profit (attributable to the company), as reported, rose 2.6% year over year to $74.2 million (or 52 cents a share), helped by internal growth, favorable foreign exchange swings and lower tax. However, supply chain disruption (for orthodontic products) resulting from the March 2011 Japan quake weighed on the bottom line. The Pennsylvania-based company beefed up its earnings per share target for the full year.
Revenues
Net sales climbed 7.8% year over year to $609.4 million, well ahead of the Zacks Consensus Estimate of $575 million. Excluding the precious metal content, net sales jumped 8.7% to $564 million, driven by organic growth, foreign exchange tailwind and acquisitions. However, the company registered lower sales from Japan in the quarter hit by the beleaguered scenario in that country.
Margins & Expenses
Gross margin improved to 51.7% from 50.9% a year-ago on the back of higher revenues. However, operating margin fell to 15.9% from 18.6% a year-ago hit by hefty acquisition and restructuring costs (of roughly $6.9 million).
Financial Health
DENTSPLY ended the quarter with cash and cash equivalents of roughly $671.7 million, nearly double year over year. However, long-term debt increased 41% year over year to roughly $654.9 million.
Outlook and Recommendation
Based on its first half results and expectations for a stable-to-improving market conditions for the remainder of fiscal 2011, DENTSPLY raised its adjusted earnings per share target for the year to a band of $1.92 to $2.00 from its earlier expectation of $1.86 and $1.98. The current Zacks Consensus Estimate of $1.93 is within this forecast range.
DENTSPLY has taken appropriate actions in response to the supply chain disruption in Japan. The company envisions a negative impact of the supply outage to increase in second-half 2011 with some recovery expected in early 2012.
DENTSPLY’s products are used in over 120 countries enabling it to leverage the changing dental practice across North America and Western Europe, which emphasizes preventive care and cosmetic dentistry. One of the company’s major customers is Henry Schein Inc (HSIC), a dental products distributor.
DENTSPLY's diverse product range, significant international presence, new product introductions and acquisition initiatives are expected to boost operating metrics over the forthcoming quarters. The company’s recent move to buy AstraZeneca’s (AZN) dental implant unit Astra Tech for $1.8 billion represents a healthy prospect.
Besides reinforcing its leadership in the global dental market and broadening its product range, the acquisition (expected to close by end-2011) will unlock opportunities for DENTSPLY to tap new markets for growth.
On the flip side, DENTSPLY’s domestic market still remains challenged due to a slow economic recovery and competitive pressure. Moreover, the Japan headwinds remain a concern. We are currently Neutral on the stock.
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