Smith & Nephew (SNN - Free Report) 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), respectively.
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%, respectively.
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 gains.
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 forthcoming period.
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 Zimmer Holdings and Stryker Corporation (SYK - Free Report) .
The stock retains a Zacks #3 Rank (“Hold”) in the short term. We have a Neutral recommendation over the long term.