Wright Medical Group Inc. (WMGI) reported a loss of 35 cents per share in the third-quarter of 2014, wider than the Zacks Consensus Estimate of a loss of 33 cents. Losses during the quarter shot up nearly 94.4% on a year-over-year basis.
Wright Medical’s third-quarter results were impacted by weaker-than-anticipated results in the core U.S. foot and ankle products, excluding total ankle, and in certain geographies of the international business. The results were also affected by a combination of sales execution issues in the U.S. and an inability to fill some international distributor orders late in the quarter.
Following the earnings release, shares of Wright Medical dropped nearly 5.7% to close at $28.44 yesterday.
Quarter Details
Revenues increased 23.7% year over year to $71.3 million on the back of strong growth in the total ankle products line. Revenues, however, missed the Zacks Consensus Estimate of $73 million.
On a geographic basis, international revenues grew 36.7% year over year to $20 million, on the back of continued strong demand for the company’s products. However, the product mix has varied, which has made supply planning challenging.
Revenues from the domestic market grew 19.3% to $51.3 million in the quarter owing to a healthy total ankle growth of 22%, partly offset by a weak upper extremity and biologics business.
Globally, revenues from the Foot and Ankle business surged 29.5% to $45.6 million, driven by strength in the core business as well as synergies from the Solana Surgical and OrthoPro acquisitions completed in the first quarter. International growth at this segment was positively impacted by the Biotech acquisition completed in November last year.
Global revenues from the Upper Extremity business scaled 7.3% year over year to $6.4 million while the same from the Biologics business increased 12.2% to $17 million.
Global revenues from Other businesses escalated 77.4% to $2.3 million.
Gross margin expanded 100 basis points (bps) from the year-ago quarter to 76.6%.
Adjusted operating loss shot up nearly 31% year over year to $15 million, due to higher operating expenses, particularly escalating amortization expenses.
Adjusted EBITDA loss increased 23.1% to $5.9 million on a year-over-year basis.
Wright Medical had cash, cash equivalents and marketable securities of $276.2 million as of Sep 30, 2014, lower than $315.1 million as of Jun 30, 2014. Long-term obligations (including current portion) rose to $282.9 million from $280.3 million as of Jun 30, 2014.
Cash outflow from operating activities increased to $34.6 million from an outflow of $24.4 million at the end of the previous quarter. In the first nine months of 2014, cash outflow from operations totaled $86.2 million, in contrast to an inflow of $5.7 million in the year-ago period.
The declining cash balance can be attributed to lower levels of EBITDA and unfavorable timing of stock exercised for MicroPort employees and insurance reimbursements.
2014 Guidance
Wright Medical anticipates lower net revenue of approximately $298–$302 million, compared to previous guidance of $308–$312 million, representing growth of 23% to 25% from 2013. The current Zacks Consensus Estimate of $305 million lies above the revised guidance range.
Wright Medical projects adjusted EBITDA (loss) guidance in the range of $23 to $26 million.
Adjusted loss per share, including stock-based compensation, is anticipated in the range of $1.40–$1.46 as against the previous guidance of $1.28-$1.38. The current Zacks Consensus Estimate of a loss of $1.36 lies below the guided range.
Our Take
We believe that Wright Medical’s wider year-over-year losses, declining cash balance, higher levels of debt and slashed revenue and earnings guidance for 2014 will remain an overhang. However, the company’s Foot and Ankle business continues to be a core sales driver which should accelerate growth going forward.
Currently, Wright Medical carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical products industry include GW Pharmaceuticals (GWPH), Abaxis (ABAX) and Boston Scientific (BSX). While GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), both Abaxis and Boston Scientific carry a Zacks Rank #2 (Buy).
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