Smith & Nephew plc
) reported adjusted earnings per share (EPS) of 18 cents or EPADS
of 90 cents in the second quarter of 2013, slightly better than
the year-ago EPADS of 89.5 cents. However, the adjusted result
missed the Zacks Consensus Estimate (EPADS) by a penny.
On a reported basis, EPS of 14.3 cents or EPADS of 71.5 cents in
the second quarter significantly lagged the year-ago EPS or EPADS
Revenues were $1,074 million in the quarter, up 3% (underlying,
after considering currency translation, inclusion of Healthpoint
growth and exclusion of Bioventus transaction) year over year as
well as ahead of the Zacks Consensus Estimate of $1,085 million.
On a reported basis, revenues improved 4% from the prior-year
Currency translation had an adverse effect of 1% on revenue
growth. One lesser sales-day in the last quarter led to revenue
increase of approximately 1%.
On a regional basis, revenues from the U.S. and Emerging and
International Markets recorded underlying growth of 3% ($455
million) and 18% ($143 million), respectively. The Healthpoint
acquisition led the growth in the U.S. market. Growth in Emerging
and International Markets was led by robust sales in most of the
On the other hand, the macroeconomic environment in Europe
affected the company's performance in Other Established Markets
as revenues in the region remained flat on an underlying basis
Smith & Nephew's business framework comprises two divisions -
Advanced Surgical Devices ("ASD") and Advanced Wound Management
ASD recorded revenues of $741 million in the quarter, up 1% on an
underlying basis. Within this business, Smith & Nephew
experienced 1% decline in the U.S. Segment revenues in other
Established markets decreased 2% on a year-over-year basis as the
situation in Europe continues to remain an overhang.
Maintaining the momentum, the company recorded 16% growth in
the Emerging and International markets. Also, pricing pressure
for the ASD segment remained unchanged in the quarter.
While the knee implant business reported 1% decline in revenues
globally, against the market growth rate of 2%, revenues from the
hip implant franchise decreased 1% against market growth rate of
Smith & Nephew continued to battle headwinds such as timing
of the product cycle against other players, sluggish European
market and softness in the company's largest market in Europe
besides ongoing softness for metal-on-metal franchise for its
orthopaedic reconstruction business. However, the company expects
the situation to improve in the second half of 2013.
Smith & Nephew recorded 6% growth in its sports medicine
joint repair franchise, while arthroscopic enabling technologies
remained flat on a year-over-year basis. The company plans to
launch several new offerings under sports medicine joint repair
business in the second half of 2013.
The performance of arthroscopic enabling technologies was
affected by pressure on hospital budgets in end-markets.
Nonetheless, Smith & Nephew improved its franchise
performance in Other Established Markets. It also commercialized
a value camera system in the Emerging Markets in the quarter.
The trauma business failed to maintain its positive momentum and
recorded 2% growth, below the market growth rate of 5%-6%. This
was on account of lower benefits from a competitor's product
recall and no major tender wins in the reported quarter.
AWM recorded strong underlying growth of 10% year over year to
$333 million in the quarter against 2% market growth rate. Growth
was led by the NPWT portfolio and strong contribution from
Healthpoint products. Excluding the impact of the Healthpoint
acquisition, AWM revenues inched up 5%. Revenues in the U.S.
surged 16% on a year-over-year basis.
The company witnessed 4% growth in the Other Established
Markets with balanced growth across all regions. The Emerging and
International Markets recorded a robust hike of 25%, reflecting
another quarter of solid growth.
Under AWM, advanced wound care revenues increased 1% to $211
million on the back of improved performance in Europe and
significant contributions from emerging countries. Revenues of
advanced wound devices shot up 27% to $52 million as Smith &
Nephew continued to gain market share in NPWT and sustained
momentum in the Japanese market.
Advanced wound bioactives revenues were $70 million, up 35%
from the prior-year quarter on the back of inclusion of
Healthpoint's portfolio and promotional activity for Santyl in
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Although gross profit improved 4.2% year over year to $796
million, gross margin contracted 10 basis points (bps) to 74.1%
in the quarter. The company witnessed a 7.4% increase in selling,
general and administrative (SG&A) expenses to $550 million
and a 38.1% rise in research and development (R&D) expenses
to $58 million. As a result, operating profit declined 10.5% to
$188 million in the quarter. Consequently, margin contracted 290
bps to 17.5%.
Overall, trading profit margin (operating margin after taking
into account one-time transactions) contracted 110 bps to 21.6%
in the quarter. Among the segments, ASD trading profit margin
expanded 10 bps to 22.9% on the back of structural efficiency.
However, the trading profit margin at the AWM division recorded a
contraction of 370 bps to 18.7% due to the Healthpoint
acquisition and higher SG&A and R&D expenditure.
Cash and cash equivalents were $101 million, down 45.7% year over
year. Net debt was $281 million in the reported quarter compared
with $137 million in the sequentially prior quarter.
Trading cash flow was $187 million in the quarter. Smith &
Nephew purchased 6.4 million shares worth $75 million
Smith & Nephew reported a dull second-quarter that missed the
Zacks Consensus Estimate on both fronts. As expected, the
company's weak orthopaedic reconstruction performance continued.
Despite improvement in end markets, Smith & Nephew faced
lower revenues for hip and knee franchise. The lower revenue
growth for trauma business was another downside in the quarter.
Nonetheless, we are encouraged to note the gradual stability in
the U.S. market and modest improvement across Europe. Notably,
the company's increasing focus on AWM franchise is paying off. We
are also encouraged by the company's focus on the lucrative
emerging markets such as Turkey, China, India and Mexico. We
believe that expansion of portfolio in these fast growing markets
should catalyze growth for Smith & Nephew.
Currently, the stock carries a Zacks Rank #3 (Hold). While we
remain on the sidelines for Smith & Nephew, we are positive
), carrying a Zacks Rank #1 (Strong Buy). Other industry stocks
Boston Scientific Corp.
), carrying a Zacks Rank #2 (Buy) are also worth considering.