Smith & Nephew plc (SNN - Snapshot Report) reported earnings per share (EPS) of 15.8 cents or EPADS of 79 cents in the fourth quarter of 2012 compared with EPS of 15.6 cents or EPADS of 78 cents in the prior-year quarter. However, after adjusting for one-time expenses, the company recorded adjusted EPS of 21.6 cents or EPADS of $1.08 in the fourth quarter, missing the year-ago EPADS by a penny. However, the adjusted results were ahead of the Zacks Consensus Estimate (EPADS) of $1.05.
Full-year 2012 adjusted EPS inched up 2% from the prior year to 75.7 cents or EPADS of $3.79, at par with the corresponding Zacks Consensus Estimate.
Revenues were $1,077 million in the quarter, up 3% (underlying, after considering currency translation) year over year, and surpassing the Zacks Consensus Estimate of $1,069 million. On a reported basis, revenues dropped 3% due to the Bioventus transaction (5%) and currency headwinds (1%).
Annual revenues improved 2% on an underlying basis to $4,137 million in 2012, edging past the Zacks Consensus Estimate of $4,134 million. On a reported basis, revenues declined 3% due to currency headwinds (2%) and the impact of the Bioventus transaction (3%).
On a regional basis, during the reported quarter, revenues from the U.S., Other Established Markets and Emerging and International Markets recorded underlying growth of 1% ($415 million), 2% ($529 million) and 14% ($133 million), respectively. Although the macroeconomic environment in Europe dragged the company’s performance in Established Markets, impressive growth in Emerging and International Markets was led by robust sales in the Chinese market (up 30% year over year).
Smith & Nephew’s business framework comprises two divisions – Advanced Surgical Devices (“ASD”) and Advanced Wound Management (“AWM”).
ASD recorded revenues of $797 million with underlying growth of 3%. Within this business, Smith & Nephew experienced 1% growth in the U.S. Despite healthy growth in Japan and Australia, performance in other Established markets remained flat 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.
While the knee implant business reported 2% rise globally, against the market growth rate of 3%, revenues from the hip implant franchise increased 3% (down 2% including the BIRMINGHAM HIP Resurfacing system) against market growth rate of 2%. Pricing pressure across these segments remained unchanged compared with the previous quarters at (2%) (including the effects of the biennial price reduction in Japan), partially offset by mix gains.
Smith & Nephew recorded 7% growth in its sports medicine joint repair franchise, while arthroscopic enabling technologies remained flat on a year-over-year basis. The Trauma business recorded 7% growth, ahead of the market growth rate of 3%.
AWM recorded growth of 4% (underlying) year over year to $280 million in the quarter against an estimated flat market. Revenues in the U.S. remained flat on a year-over-year basis. The company witnessed 4% growth in the Established Markets despite softness across Europe. The Emerging and International Markets recorded 10% growth.
Smith & Nephew recorded 1% growth in Exudate Management, while Infection Management revenues declined 6% year over year. The Negative Pressure Wound Therapy (“NPWT”) portfolio continued to perform well as the company increased investment in the franchise.
Gross margin contracted 10 basis points (bps) year over year to 73.1% in the quarter. The company witnessed a 4.9% drop in selling, general and administrative expenses to $528 million and a 12.2% rise in research and development expenses to $46 million. However, operating margin expanded 50 bps to 19.8% in the quarter. Overall, trading margin (operating margin after taking into account one-time transactions) increased marginally by 10 bps to 25.3%.
Among the segments, ASD trading margins improved 70 bps on the back of restructuring efforts. However, the trading margin at AWM unit recorded a contraction of 210 bps due to higher investment to support portfolio expansion and unfavorable product mix.
Smith & Nephew hiked its interim dividend payment by 50% to 16.2 cents per share (81 cents per ADS). This increases the annual dividend to 26.1 cents per share in 2012, reflecting the company’s commitment to return value to shareholders with strong cash generation capabilities.
Notably, the company’s increasing focus on AWM franchise is paying off. We are encouraged to note the gradual stability in the U.S. 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.
Accordingly, the stock carries a Zacks Rank #3 (Hold). While we prefer to remain on the sidelines for Smith & Nephew, other medical stocks such as Cyberonics , ResMed (RMD - Analyst Report) and Hanger Orthopedic , carrying a Zacks Rank #1 (Strong Buy) are expected to do well.