Sirona Dental Systems Inc. (SIRO) posted a 12.1% rise in adjusted earnings of $1.02 per share for the third quarter of fiscal 2014 ended Jun 30, 2014, from 91 cents in the year-ago quarter. With this, adjusted earnings per share surpassed the Zacks Consensus Estimate by 5 cents. Apart from higher sales, solid margin expansion contributed to this earnings growth.
On a reported basis, net earnings per share came in at 92 cents, up 27.8% from 72 cents in the third quarter of fiscal 2013.
Revenues
Revenues in the quarter grew 5.8% (or 2.5% on a constant currency basis) to $299.7 million, exceeding the Zacks Consensus Estimate of $296 million.
Revenues in the U.S. improved 8.2% driven by continued demand for the company's Imaging and CAD/CAM products. Meanwhile, revenues in international markets rose 4.7% (but deteriorated 0.3% in constant currency) on the back of growth in the Asia Pacific region, primarily China and Japan.
Segment Results
Revenues in SIRO’s CAD/CAM Systems segment rose 6.2% (up 3.5% on a constant currency basis) to $109.3 million. The upside was driven by new user demand in the international markets.
Imaging Systems segment revenues went up 8.9% (up 6.1% on a constant currency basis) to $109.1 million owing to increased demand for the company’s intraoral and ORTHOPOS product lines, particularly in the U.S.
Instruments segment sales stood at $30.1 million, up 14% (up 8.9% on a constant currency basis). Revenue growth was supported by international markets with strong demand for SIRO’s high-end handpieces and hygiene products.
However, Treatment Centers segment revenues declined 4.7% (down 9.3% on a constant currency basis) to $51.2 million in the quarter. The segment faced a challenging year-over-year comparison due to strong revenues in the prior year quarter.
Margins
Gross profit improved 10.6% to $167.6 million while gross margin expanded 240 basis points (bps) to 55.9% in the quarter. The increase in gross margin was driven by improvement in product and regional sales mix and cost reductions which more than offset foreign exchange rate headwinds.
Selling, general and administrative expenses (SG&A) increased 10.4% to $88.1 million on the back of continued planned investments in sales and service infrastructure and marketing activities associated with the launch of new products. As a percentage of sales, SG&A expenses increased 120 bps to 29.4% from 28.2% a year ago.
Research and development (R&D) expenses stood at $16.6 million, up 5.7% year over year. As a percentage of sales, R&D expenses remained flat at 5.5%.
Adjusted operating earnings improved 12.3% to $62.9 million while adjusted operating margin expanded 120 bps to 21.0% from 19.8% in the third quarter of fiscal 2013.
Financial Position
SIRO exited the quarter with cash and cash equivalents of $297.0 million, up 22.9% from $241.7 million as of Sep 30, 2013. Total debt increased 5.4% to $79.5 million as of Jun 30, 2014, from $75.4 million as of Sep 30, 2013. However, the debt-to-capitalization ratio fell 30 bps to 5.8% as of Jun 30, 2014 from 6.1% as of Sep 30, 2013.
For the first nine months of fiscal 2014 ended Jun 30, 2014, SIRO had cash flow from operations of $130.5 million, down 18.5% from $160.1 million in the same period last year. Capital expenditures surged a significant 108.2% to $73.9 million from $35.5 million in the first nine months of fiscal 2013.
Guidance Reiterated
For fiscal 2014, SIRO retained its revenues and earnings guidance. The company anticipates adjusted earnings in the range of $3.60 to $3.70 per share, implying a year-over-year growth of 6–9%. The Zacks Consensus Estimate of $3.66 lies within the guided range.
Meanwhile, SIRO continues to expect revenue growth in the range of 4–6% in constant currency. The Zacks Consensus Estimate for the same is currently pegged at $1,170 million.
For fiscal 2014, reported gross margin is expected to be higher than the prior year owing to decreased amortization expenses. SG&A expenses, as a percentage of revenues, are anticipated between 29 and 30% for fiscal 2014. Meanwhile, R&D expenses are anticipated between 5 and 6% of revenues.
The estimated effective tax rate for fiscal 2014 is projected in the band of 23–24%.
Our Take
SIRO’s earnings and revenue beat in the third quarter of fiscal 2014 is encouraging. The company continues to witness robust demand for its CAD/CAM products as well as persistent growth in its Imaging and Instruments segments.
International markets, particularly Asia-Pacific, also drove revenues during the quarter. Though growth in international markets was strong, SIRO faced several challenges in Germany.
Nevertheless, SIRO is slated to launch a number of products in the coming months with the anticipation to garner significant interest in the markets. With its broad product portfolio, well-placed sales and service infrastructure and commitment to continuous innovation, SIRO has an upside potential going forward.
Currently, SIRO carries a Zacks Rank #2 (Buy). Other well-placed stocks in the medical instruments industry include Alphatec Holdings, Inc. (ATEC), RTI Surgical Inc. (RTIX) and Accuray Incorporated (ARAY). While Alphatec Holdings and RTI Surgical sport a Zacks Rank #1 (Strong Buy), Accuray carries the same rank as SIRO.
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