Smith & Nephew
) reported adjusted earnings per share (EPS) of 19.5 cents (EPADS
of 975 cents) during the first quarter of fiscal 2012, ahead of
both the year-ago quarter's EPS of 18.4 cents (EPADS of 92 cents)
and the Zacks Consensus Estimate (EPADS) of 96 cents.
Revenues were $1,079 million in the quarter, up 3% (underlying,
after considering currency translation) year over year, but behind
the Zacks Consensus Estimate of $1,088 million. Among the different
regions, revenues from the US, Other Established Markets and
Emerging and International Markets recorded an underlying growth of
2% ($445 million), 3% ($521 million) and 12% ($113 million),
As announced in the previous quarter, Smith & Nephew
reported under two segments - Advanced Surgical Devices ("ASD") and
Advanced Wound Management ("AWM"). The former encompasses knee and
hip implants, sports medicine joint repair, arthroscopic enabling
technologies, trauma and clinical therapies.The two units recorded
corresponding revenues of $839 million (underlying growth of 3%)
and $240 million (up 5%).
Within the ASD business, Smith & Nephew experienced a flat
performance in the US, though both Established and Emerging and
International markets recorded growth of 4% and 13%,
While the knee implant business recorded a 6% rise globally,
exceeding the 3% market growth, the hip implant franchise dropped
2% due to persistent headwinds in the metal-on-metal total hip
replacement sector. Pricing pressure across these segments remained
unchanged compared to previous quarters, partially offset by mix
The company recorded 7% growth in its sports medicine joint
repair franchise with 1% increase in revenues in arthroscopic
enabling technologies. The Trauma business recorded a 1% decline in
sales as mild US winter contributed to reduced procedures. However,
after taking into account the loss of US royalties, this unit
recorded 2% growth. Revenues from clinical therapies grew 6% year
over year to $58 million in the quarter.
Advanced Wound Management revenues increased in the US (14%
underlying growth) with robust growth in the Negative Pressure
Wound Therapy ("NPWT") portfolio. While Emerging and International
markets recorded 12% growth, non-US Established Markets grew 1%,
reflecting the reversal of wholesaler stocking last quarter. Smith
& Nephew recorded 6% growth in Infection Management while
Exudate Management remained flat.
Gross margin expanded 110 basis points (bps) year over year to
74.9% during the quarter. Despite a 4.1% rise in selling, general
and administrative expenses and a 7.5% increase in research and
development expenses, operating margin remained static at 21.9%.
Overall, trading margin (operating margin after taking into account
one-time transactions) increased 50 bps to 23.3%.
Among the segments, ASD and AWM recorded improved trading
margins of 50 bps and 70 bps, respectively. The company is working
to control the cost structure and expects margins to improve in the
We are encouraged by a strong first quarter from Smith &
Nephew. Higher margins were reflected in an improved bottom line.
Apart from expansion of its portfolio, the company is also working
on cost-saving initiatives that are yielding results. We are also
encouraged by the company's focus on emerging markets. However,
pricing pressure continues to remain a major headwind. Besides, the
competitive landscape is tough with the presence of players such as
The stock retains a Zacks #3 Rank ("Hold") in the short term. We
have a Neutral recommendation over the long term.
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