Wright Slips to Loss, Lowers View

Orthopedic devices maker, Wright Medical Group (WMGI - Analyst Report) reported third-quarter fiscal 2011 adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 16 cents, meeting the Zacks Consensus Estimate while exceeding the year-ago earnings of 14 cents per share. The stock dipped 12.6% to $14.50 in after-hours trading on November 1.

The company slipped to a net loss of $16 million (or 42 cents per share) in the reported quarter versus a net profit of $4.7 million (or 12 cent per share) a year ago. Net income for the third-quarter 2011 included about $36.4 million in charges for assumed liability for device claims, restructuring plans, deferred prosecution agreement and other items.   

Revenues

Net sales for the quarter were $118.2 million, down 3% year over year in reported terms (down 6% on a constant currency basis), missing the Zacks Consensus Estimate of $126 million. 

Revenues from the U.S. market totaled $69.4 million (58.7% of total sales), down 7% year over year.  Domestic sales were adversely impacted by distributor transition and other issues which impeded medical education and research projects. International revenues increased 3.6% (down 3% in constant currency) to $48.8 million (41.3% of sales).

Segment-wise Results

Wright Medical reports sales in four major segments, namely Hip, Knee, Extremity and Biologics, which accounted for 33%, 23%, 27% and 14%, respectively, of net revenues for the quarter.

Hip product revenues dropped 7% year over year in constant currency while Knee sales shrunk 10% in the quarter. Extremity bucked the declining trend and recorded an increase of 6%. Biologics sales slipped 16% in constant currency.

Margins

Adjusted operating income was $13.3 million in the reported quarter, approximately flat year over year. Adjusted operating margin was 11.3%, higher than 11% in the year-ago quarter.

Balance Sheet

Cash, cash equivalents and marketable securities totaled $171.9 million, up 9.7% year over year. Long-term obligations stood at $169 million, as of September 30, 2011, down 15.6% year over year.  

Outlook

Wright Medical reduced its sales forecast to $505 million to $509 million for fiscal 2011 (from a band of $517 million to $535 million earlier), down 3% to down 2% year over year. The company adjusted its earnings per share target, after stock based compensation, to a range of 63 cents to 67 cents (from 70 cents to 78 cents earlier), down 10% to down 4% year over year.

Our views are moderated by intense competition from larger players and pricing pressure.  Wright Medical competes with much bigger names such as Zimmer Holdings (ZMH - Analyst Report), Stryker (SYK - Analyst Report) and Smith & Nephew (SNN - Snapshot Report). We are currently Neutral on the stock, backed by a short-term Zacks #3 Rank (Hold).

Read the full analyst report on SYK

Read the full analyst report on ZMH

Read the full analyst report on SNN

Read the full analyst report on WMGI