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Orthopedic devices maker Wright Medical Group (WMGI - Analyst Report) reported second quarter 2013 adjusted loss per share from continuing operations of 13 cents, which was in line with the Zacks Consensus Estimate. The loss was wider than the year-ago level of 2 cents per share. The company has considered its OrthoRecon unit as a part of its discontinued operations due to its recent agreement to divest the latter.

WMGI witnessed reported net loss from continuing operations of $15.5 million or 34 cents per share in the quarter versus $1.4 million or 4 cents per share in the prior-year quarter.

Revenues

Net revenues from continuing operations in the quarter were $60.6 million, up 17% year over year. However, it significantly missed the Zacks Consensus Estimate of $123 million. Revenues were mainly driven by 30% growth in the worldwide ankle and foot franchise.

Geographically, revenues from the domestic market rose 4.7% to $42.6 million (70% of total sales). On a reported basis, revenues from the overseas market jumped 59.5% to $17.9 million (30% of total revenues) in the first quarter.

Product Line Results

Wright Medical has provided the details of its revenues from continuing operations in 4 separate businesses viz. Foot and Ankle, Upper Extremity, Biologics and Others. Revenues from Foot and Ankle (62% of total sales) increased 29.2% (30% at constant exchange rate or CER) to $37.3 million. U.S. sales climbed 15% in the quarter, while international sales surged 94% at CER, primarily driven by an initial stocking order from a new China-based distribution partner.

Revenues from Upper Extremity (10% of total sales) dropped 4.1% (down 2% at CER) to $6.1 million. Revenues from Biologics (25% of total sales) dropped 2.3% (down 2% at CER) to $15.1 million. On the other hand, revenues from Other (3% of total sales) jumped 62.2% (62% at CER) to $2.1 million.

Margins

Gross margin declined 110 basis points (bps) to 76.3% in the quarter due to adverse geographic mix. Selling, general and administrative expenses rose 40.7% to $50.5 million and research and development expenditure surged 68.6% to $5.9 million. Adjusted operating loss was $7.9 million in the quarter versus adjusted operating income of $454 million in the year-ago period.

Balance Sheet and Cash Flow

Wright Medical exited the second quarter with combined cash and marketable securities of $304.6 million compared with $333.0 million at the end of 2012. Long-term obligations rose to $262.7 million from $258.5 million at the end of 2012.

Cash flow from operations declined significantly to $5.8 million in the first six months of 2013 from the year-ago level of $41.1 million. Free cash flow use in the period was $4 million compared with a free cash flow $32.5 million in the year-ago level.

Outlook

WMGI revised its outlook for 2013 following the OrthoRecon divestment agreement with MicroPort. Sales from continuing operations (Extremity and Biologics) are expected in the range of $235 million–$240 million, assuming some minor short-term dis-synergies due to the MicroPort transaction.

Further, adjusted loss per share from continuing operations (including stock-based compensation) are projected between 55 cents and 59 cents. Although the amount of non-cash stock-based compensation charges is expected to vary, the company currently estimates that the after-tax impact of those expenses will be roughly 14 cents per share for the year.

Our Take

We remain on the sidelines regarding WMGI due to multiple internal changes in the company. Although the divestment of the OrthoRecon business bodes well for the company, we remain skeptical regarding associated risks. However, we are impressed with the worldwide growth in the Foot and Ankle business and expect the BioMimetic acquisition to boost revenues going forward.

WMGI carries a Zacks Rank #3 (Hold). Other medical stocks such as Alere (ALR - Snapshot Report) and Hanger (HGR - Analyst Report) carry a Zacks Rank #1 (Strong Buy). Boston Scientific (BSX - Analyst Report) with a Zacks Rank #2 (Buy) is also worth considering.

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