Smith & Nephew falls on softer orthopedic margins

Smith & Nephew

Lower margins for Smith & Nephew’s (NYSE:SNN) bread-and-butter orthopedics division drove the British company’s third-quarter profits down nearly 3 percent for the three months ended Oct. 1.

Smith & Nephew posted profits of $133 million, or 14.9 cents per share, on sales of $1.03 billion for the quarter – a top-line increase of 9.7 percent when compared with the $941 million in revenues reported for the same period last year. But Q3 2010 profits were $137 million, or 15.4 cents per share.

The rub came from a profit margin of 15.6 percent for the workhorse ortho division, compared with a 22.2 percent margin for Q3 2010. Smith & Nephew chalked the decline up to three factors:

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"First, we continued to experience pressure on the gross margin from the sales mix, a trend seen in the first half of the year. Top line growth was driven by products and geographies where we achieved lower margins, reducing the gross profit margin by about 200 basis points," according to a press release. "Second, orthopaedics experienced an unusually high level of periodic costs – legal, inventory and receivables – in the quarter, totaling about $10 million.

"Finally, it is clear that the modest growth and continuing pricing pressures in established markets necessitate a lower orthopaedics cost base. Actions were underway to address this, but these have not been adequate, resulting in a cost base which was $10 million too high in the quarter. The new combined orthopaedics and endoscopy management team has instigated much tighter controls over spending and we are confident that the orthopaedics margin will improve materially from Q4 onwards."

The margin slide prompted CEO Olivier Bohuon to say he’s "disappointed with our margin performance, with orthopaedics overshadowing excellent performances in endoscopy and advanced wound management. We are taking the steps necessary to reduce a cost base in orthopaedics that is too high for ongoing market conditions. I expect to see material improvements from Q4 onwards and am confident that the group will deliver a Q4 trading profit margin above 24 percent," according to a press release.

Smith & Nephew left its revenue guidance unchanged for the rest of year.

SNN shares were trading at $44.02 as of about 1 p.m. today, down roughly 2.8 percent.

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