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DENTSPLY International Inc. (XRAY - Analyst Report) reported second-quarter 2013 earnings per share of 66 cents (excluding one-time items), beating the Zacks Consensus Estimate by a penny and the year-ago earnings by 4 cents.

Reported net income attributable to DENTSPLY jumped 34.5% year over year to $87.2 million (or 60 cents a share) from $80.8 million (or 56 cents a share) in the year-ago quarter.

Revenues

Revenues were roughly flat year over year at $761.0 million, missing the Zacks Consensus Estimate of $786 million. However, excluding precious metal content, revenues grew 2.5% (up 2.7% at constant exchange rate) to $716.0 million, driven by solid internal sales in the U.S. and decent growth across all other regions.

Margins

On a positive note, gross margin in the reported quarter increased 110 basis points (bps) to 54.5%. However, gross margin, excluding precious metal content, was down 30 bps to 58.0% versus 58.3% a year ago. Selling, general and administrative expenses declined 2.1% to $289.9 million in the quarter.

Operating margin surged 180 bps to 16.1% on the back of lower expenses from 14.3% a year ago. Adjusted operating margin, excluding precious metal content, expanded 60 bps to 17.2% in the quarter.

Balance Sheet and Cash Flow

DENTSPLY ended the second quarter with cash and cash equivalents of $57.0 million compared with $80.1 million at the end of 2012. Long-term debt decreased to $1,123.8 million as of Jun 30, 2013 from $1,222.0 million at the end of 2012.

Cash flow from operations was $131.9 million in the first six months of 2013, up 27.6% from the year-ago level of $103.4 million. Capital expenditure for the same period went up 7.4% to $46.2 million.

Guidance

Based on the current global dental market trends (particularly Europe) along with the impact of currency rates, DENTSPLY lowered its 2013 adjusted-earnings per share expectation to the band of $2.33 to $2.38 from the earlier guidance of $2.33 to $2.43. The Zacks Consensus Estimate for 2013 earnings of $2.37 lies toward the top end of the guided range.

Our Take

Although the bottom line beat estimates, we remain unimpressed by DENTSPLY’s flat top line and lower 2013 guidance in the second quarter. This is mainly due to ongoing difficult dental market trends in Europe.  However, we note that the company performed well in the U.S. Moreover, improving margins represent a potential upside for XRAY.

DENTSPLY currently has a Zacks Rank #4 (Sell). Medical stocks that warrant a look are Align Technology (ALGN - Analyst Report), The Cooper Companies Inc. (COO - Analyst Report) and Henry Schien (HSIC - Analyst Report). Align has a Zacks Rank #1 (Strong Buy), while the other two have a Zacks Rank #2 (Buy).

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