Orthopedic devices maker
Wright Medical Group
) 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
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.
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
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
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%,
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
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.
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
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
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 (
Smith & Nephew
). We currently have a long-term Neutral on the Wright Medical
which carries a short-term Zacks #3 Rank (Hold).
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