Orthopedic devices maker Wright Medical Group (WMGI) reported third quarter adjusted (excluding one-time items other than stock-based compensation expense) loss per share of 2 cents. It is better than the Zacks Consensus Estimate of loss of 6 cents.
The company witnessed net loss of $5.3 million (or 14 cents per share) in the quarter versus net loss of $16 million (or 42 cents per share) in the prior year quarter.
Revenues
Net sales in the quarter were $110.4 million, down 7% year over year in reported terms (down 5% on a constant currency basis), trailing the Zacks Consensus Estimate of $111 million. The company’s growth in worldwide ankle and foot franchise was negated by loss of client base in OrthoRecon segments in the domestic market and pricing pressure in the high focus Japanese market.
Geographically, revenues from the domestic market came in at $65.8 million (59.6% of total sales), down 5.2% year over year while revenues from the overseas market declined 8.6% in reported terms (down 5% on a constant currency basis) on a year-over-year basis to $44.6 million (40.4% of total revenues) in the third quarter.
Segment-wise Results
Wright Medical earlier restated its segments to broadly comprise Extremities and OrthoRecon segments. OrthoRecon comprises Hips, Knees and Other. The Extremities segment is composed of Foot and Ankle, Upper Extremity, Biologics and Other sub segments.
OrthoRecon comprised 54% of sales in the reported quarter with Hips contributing 30%, Knees 23% and Other 1%. Extremities constituted 46% of revenues with Foot and Ankle contributing 26%, Upper Extremity 6%, Biologics 13% and Other 1%.
In terms of constant currency, OrthoRecon sales declined 10% year over year in the third quarter. Among its components, Hips fell 13% while Knees and Other decreased 4% and 46% respectively.
Sales of Extremities segment clambered 2% year over year in constant currency in the reported quarter. Among its constituents, Foot and Ankle improved 14%, Upper Extremity was down 7% while Biologics and Other dipped 12% and 27%, respectively.
Margins
Gross margin in the quarter came in at 68% compared to 67.8% in the year-ago quarter. Adjusted operating margin declined to 1.8% in the quarter versus 11.3% a year ago. Operating margin for OrthoRecon segment was 6.9% in the reported quarter versus 20.4% in the prior year quarter. Operating margin for Extremities segment was 19.6% versus 19.8% in the year-ago quarter.
Selling, general and administrative expenses decreased 15.2% year over year to $70.9 million in the quarter while research and development expenditure declined 2.3% year over year to $6.6 million.
Balance Sheet
Wright Medical exited the third quarter with cash, cash equivalents and marketable securities of a total of $317.6 million, up 84.8% on a year-over-year basis. Long-term obligations shot up 51.8% year over year to $256.5 million in the quarter. Free cash flow increased more than six-fold from the year ago period to $11.9 million in the quarter.
Outlook
For 2012, Wright Medical forecast net sales in a band of $476 million to $485 million. The company revised its expected adjusted earnings per share for 2012 in the range of 34 cents to 40 cents compared with the earlier range of 32 cents to 36 cents per share.
Adjusted earnings for 2012 exclude expenses associated with restructuring costs, and transition costs with regard to converting a substantial part of foot and ankle business interests to direct and potential acquisitions. It also excludes restructuring of costs emanating from the deferred prosecution agreement, stock-based compensation and certain other contingencies.
Wright Medical forecasts non-cash, stock-based compensation charge of about 18 cents per share for 2012. As a result, adjusted earnings per share, including stock-based compensation, is estimated in a band of 16 cents and 22 cents compared with the prior band of 14 cents and 18 cents.
The company also updated its expected free cash flow for 2012 in the band of $45 million and $50 million compared with the earlier guidance of $40 million and $45 million. The revised guidance reflects an annual growth rate in the range of 211% to 245%.
Orthopedics is one of the largest medical device market segments worldwide. Lukewarm demand is exacerbated by sustained pricing pressure. In particular, the reconstructive market fundamentals (pricing and volume) have languished in the recent past with little sign of stability. The joint replacement market has been hit by patient deferral of elective procedures, leading to weak demand for hip and knee implants.
Pricing compressions on hips, knees and spine products, which have impaired the performances of several orthopedic companies, remain a key concern at the macro level. We note Wright Medical’s inadequacy to post sales growth in recent times.
Our views on the company are moderated by intense competition from larger players and pricing pressure. Wright Medical competes with much bigger names such as Zimmer Holdings (ZMH), Stryker (SYK) and Smith & Nephew (SNN). We currently have a long-term Neutral on the Wright Medical which carries a short-term Zacks #3 Rank (Hold).
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