Smith & Nephew
) reported adjusted EPS of 18.1 cents (EPADS of 90.5 cents) during
the second quarter of fiscal 2012, at par with the year-ago quarter
and ahead of the Zacks Consensus Estimate (EPADS) of 80 cents.
Revenues were $1,029 million in the quarter, up 2% (underlying,
after considering currency translation) year over year, but behind
the Zacks Consensus Estimate of $1,048 million. Revenues on a
reported basis dropped 4% due to currency headwinds (3%) and the
Bioventus transaction. During the reported quarter, Smith &
Nephew transferred its Biologics and Clinical Therapies units to
Bioventus (with 49% shareholding), resulting in a $251 million
gain. Among the different regions, revenues from the US, Other
Established Markets and Emerging and International Markets recorded
an underlying growth of 2% ($413 million), 1% ($493 million) and
10% ($123 million), respectively.
Smith & Nephew's two segments - Advanced Surgical Devices
("ASD") and Advanced Wound Management ("AWM") recorded
corresponding revenues of $774 million (underlying growth of 2%)
and $255 million (up 4%).
Within the ASD business, Smith & Nephew experienced a 2%
growth in US, though performance in other Established markets
remained flat. Maintaining the momentum, the company recorded 10%
growth in Emerging and International markets. While the US market
is on the path to stability, European situation continues to remain
While the knee implant business recorded a 3% rise globally, in
line with the market growth, the hip implant franchise dropped 5%
due to persistent headwinds in the metal-on-metal total hip
replacement sector. Pricing pressure across these segments remained
unchanged compared to previous quarters at -2% (including the
effects of the biennial price reduction in Japan), partially offset
by mix gains.
The company recorded 10% growth in its sports medicine joint
repair franchise, but a 4% drop was recorded in arthroscopic
enabling technologies due to customer's spending cut on
visualization equipment. The Trauma business recorded a 3% growth,
an improvement from the last quarter. However, after taking into
account the loss of US royalties, this unit recorded 5% growth.
AWM recorded growth of 4% (underlying) to $255 million amidst
weaker markets in both the US and Europe that grew almost 2%.
Revenues from US increased 6%, driven by strong performance of the
Negative Pressure Wound Therapy ("NPWT") portfolio.
While Emerging and International markets recorded 9% growth,
non-US Established Markets grew 3%, reflecting strong performance
in France, Germany, the Nordics and Australia. Smith & Nephew
recorded 4% growth in Exudate Management while Infection Management
Gross margin expanded 90 basis points (bps) year over year to
74.2% during the quarter. Despite a 1.7% drop in selling, general
and administrative expenses and a 2.3% decline in research and
development expenses, operating margin contracted 60 bps to 20.4%.
Overall, trading margin (operating margin after taking into account
one-time transactions) increased 80 bps to 22.7% reflecting
positive impact of restructuring undertaken at the ASD unit in the
Among the segments, ASD recorded improved trading margins of 120
bps while the AWM unit recorded a contraction of 60 bps. The
company is working to control the cost structure, the benefits of
which should be realized in the forthcoming quarters.
Smith & Nephew hiked its interim dividend payment by 50% to
9.9 cents per share (49.5 cents per ADS), to be paid on October 30,
2012, to shareholders of record date as of October 12.
We are encouraged to note the gradual stability in the US market
though the challenging scenario in Europe continues to be an
overhang. 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
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