Sirona Dental Systems Inc. SIRO outperformed the third-quarter fiscal 2015 estimates but saw paltry, if not unfavorable, movement in its stock. The primary reason for the 0.6% decline in the last session can be traced back to Sirona’s refrainment from increasing its fiscal 2015 guidance.
After delivering in-line earnings last quarter, Sirona’s third quarter adjusted earnings of $1.16 per share managed to beat the Zacks Consensus Estimate by a penny. Adjusted earnings also surged 17.2% on a year-over-year basis. The upside may be attributed to higher revenues.
Sirona’s revenues in the recently reported quarter increased 2.1% (up 15.2% in local currency) year over year to $306.1 million and steered past the Zacks Consensus Estimate of $297 million. Foreign exchange fluctuations had a negative impact of about 13.1% on revenues in the recently reported quarter.
U.S. revenues declined 0.2% on a year-over-year basis. Lower imaging Systems revenues offset higher CAD/CAM revenues. International revenues increased 3.3% on a year-over-year basis (up 23.4% in local currency) primarily owing to impressive growth in Europe.
CAD/CAM revenues increased 11.4% (up 24.5% on a local currency basis) to $121.8 million. The demand for Sirona’s chair side and lab-side products was impressive in the reported quarter. Growth in CAD/CAM sales was remarkable in Europe, especially Germany.
Imaging Systems revenues declined 4.9% (up 3% on a local currency basis) to $103.7 million. During the quarter, Sirona began delivering the Orthophos SL 2D-3D product line to the European market. However, revenues from Orthophos XG line declined, especially in the domestic market. This had an unfavorable impact on overall segment revenues.
Instruments revenues decreased 11% (up 7.2% in local currency) to $26.8 million. The year-over-year growth on a local currency basis was mainly driven by strong demand for the company’s handpieces and hygiene products in international markets, especially Germany.
Treatment Centers’ revenues stood at $53.8 million, up 5.1% year over year (up 26.2% in local currency). Treatment Centers benefited from strong sales growth in the Comfort and Standard segments in the European market. Sirona’s new product in the Economy segment, INTEGO, continued to gain market traction.
Gross margin expanded 110 basis points (bps) on a year-over-year basis to 57%. The upside was mainly led by the favorable impact of foreign exchange fluctuations and declining amortization and depreciation expenses.
Selling, general and administrative (SG&A) expenses declined 5% on a year-over-year basis to $84 million, driven by a weakening euro and other currencies. Research and development (R&D) expenses decreased 22% to $12.9 million.
Operating margin expanded 380 bps on a year-over-year basis to 26.3% on the back of gross margin expansion and lower operating expenses.
Financial Position
Sirona exited the quarter with cash and cash equivalents of $422.6 million and total debt of $80.4 million, and shareholder’s equity of $1.29 billion. Free cash flow in the third quarter of 2015 was $26 million.
Guidance
Sirona reiterated its fiscal 2015 revenue growth projection at 6%–8%, on a local currency basis. On June 30, Sirona acquired a dental company and expects this transaction to add about $10 million to revenues in the fourth quarter of fiscal 2015. However, taking this acquisition into consideration, local currency growth is expected to be in the range of 7%–9%.
Adjusted EPS for fiscal 2015 continues to be expected in the range of $3.95–$4.05, reflecting growth of 8%–10%. The Zacks Consensus Estimate is currently pegged at $4.00.
Segmental gross margin is forecasted to increase 50 bps on a year-over-year basis.
For fiscal 2015, SG&A expenses, as a percentage of sales, are projected between 28.5% and 29.5%. R&D expenses, as a percentage of sales, are forecasted between 4.5% and 5.5%.
Our Take
Sirona reported better-than-expected fiscal third quarter results. We are impressed with growth in international markets. Europe, especially Germany, experienced a strong quarter with respect to sales growth. However, Russia and Brazil were the weak spots. In spite of growth, China is expected to provide challenges in the near-term. Moreover, the company has significant exposure to foreign currencies, particularly the euro, which is a potential headwind.
Stocks to Consider
Sirona has a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical sector are Masimo Corp MASI, Globus Medical GMED and Nevro Corp NVRO. While Globus Medical carries a Zacks Rank #2 (Buy), both Masimo and Nevro sport a Zacks Rank #1 (Strong Buy).
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