Smith & Nephew (SNN) reported an adjusted EPS of 16.2 cents (EPADS of 81 cents) during the third quarter of fiscal 2011, almost unchanged from the year-ago quarter. However, earnings missed the Zacks Consensus Estimate (ADS) of 86 cents.
The company reported revenues of $1,032 million in the quarter, up 5% (underlying, after considering currency translation) year over year and higher than the Zacks Consensus Estimate of $1,028 million. Among the different regions, revenues from the US, Europe and Rest of the World recorded an underlying growth (after considering currency translation) of 2% ($421 million), 3% ($327 million) and 11% ($284 million), respectively.
Segments
Smith & Nephew derives revenues from three business units – Orthopedics (consisting of Reconstruction, Trauma and Clinical Therapies), Endoscopy and Advanced Wound Management – with the first contributing the maximum (53%). The three units recorded corresponding revenues of $548 million (underlying growth of 3%), $226 million (up 7%) and $258 million (up 5%).
The Orthopedics business recorded growth across all regions – 1% in the US and 6% outside the US. However, the 3% pricing pressure during the reported quarter deteriorated from the last quarter. The price decline was largely offset by revenue mix benefits from new and premium products.
Under this segment, revenues from all the businesses recorded robust growth – Reconstruction (up 2% year over year), Trauma (up 4%) and Clinical Therapies (up 7% to $60 million). While the global Knee franchise grew by 6%, Hips declined by 2%.
Within the Endoscopy unit, revenues from the US and outside the US increased (on an underlying basis) by 3% and 10%, respectively. Smith & Nephew witnessed improvement in Europe along with strong growth in Rest of the World.
A 7% growth in Arthroscopy (sports medicine) was experienced with strong contribution from new products such as the Bioraptor curved suture anchors for shoulder repair and Dyonics Platinum range of specialty blades. Visualisation revenues declined marginally, a marked improvement nonetheless from the last quarter, representing 10% of Endoscopy revenues.
Advanced Wound Management revenues increased in the US (7% underlying growth) with robust growth in Negative Pressure Wound Therapy (NPWT). Europe remained weak while Rest of the World witnessed robust growth. Smith & Nephew recorded a 2% growth in Exudate Management products with Infection Management growing at 5%.
Expenses
Gross margin declined 110 basis points (bps) to 72.8% during the quarter. Besides, a 14.4% rise in selling, general and administrative expenses coupled with a 13.2% increase in research and development expenses led to a 340 bps drop in operating margin to 18.5%. Overall, trading margin (operating margin after taking into account one-time transactions) declined 310 bps to 19.8%.
Among the segments, Endoscopy and Advanced Wound Management recorded improved trading margins of 90 bps and 80 bps, respectively. However, trading margin at the Orthopedics business declined 660 bps due to an unfavorable sales mix and a higher cost structure. The company is working to control the cost structure and expects margins to improve in the fourth quarter.
Outlook
Smith & Nephew reiterated its outlook for 2011. The company expects its Orthopedic Reconstruction segment to grow at above-market rates based on the strength of its knee franchise. The company also expects to achieve above-market growth in both Endoscopy and Advanced Wound Management.
We are currently Neutral on Smith & Nephew, in line with its peers Zimmer Holdings (ZMH) and Stryker Corporation (SYK).
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