Hospira (NYSE:HSP) shares took a beating yesterday; the stock plunged 15.6% in heavy trading, following the medical products and services outfit's release of fourth-quarter and full-year 2005 results. Investors evidently were expressing their displeasure at lower-than-anticipated fourth-quarter earnings and revenue. There's no denying that these figures were lower, but the picture at Hospira isn't as glum as it might seem.
For the full year, Hospira reported that net sales were down 0.7% to $2.63 billion. Excluding a currency benefit, sales actually declined somewhat more, by 1%. Per-share earnings, meanwhile, sank to $1.46 versus $1.92 in 2004. Adjusting for a variety of items -- such as costs associated with the company's becoming independent of former parent Abbott Laboratories (NYSE:ABT) and charges for plant closings -- EPS rose to $1.91 from $1.82.
Hospira's fourth-quarter sales dropped 7.7% to $646.2 million, while EPS declined 48% to $0.16 from $0.31. With adjustments, earnings performance looked a little better but still wasn't pretty -- $0.32 a share versus $0.40 in 2004. Part of the drop was attributable to an expected slowdown in the top line -- Hospira had previously disclosed plans to exit several low-margin contracts in its One 2 One contract manufacturing business, a move that sliced fourth-quarter sales by $11 million.
Unfortunately, costs also took off in the quarter, particularly in research and development and selling general and administrative expenses. More R&D is not necessarily bad as long as it leads to future products. As for SG&A, the company cited new information technology as a major unexpected culprit. Unfortunately, things are going to get worse before they get better -- Hospira expects higher IT support costs throughout 2006 as it installs SAP (NYSE:SAP) companywide.
However, there were other numbers that should please investors. Free cash flow for 2005 was $315 million, up from $158.1 million in 2004. That figure is expected to decline somewhat in 2006, but still is projected to be pretty robust at between $290 million and $310 million. Furthermore, Hospira is likely to put that cash to good use, as it recently authorized a $400 million share repurchase program.
Hospira is obviously far from perfect. SG&A and R&D spending should be closely monitored going forward. Despite this stumble, though, the medical products and services company remains a solid long-term business.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
