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Orthopedic devices maker Wright Medical Group (WMGI - Analyst Report) reported second quarter and adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 8 cents, easily beating the Zacks Consensus Estimate of 3 cents but trailing the year ago earnings per share of 19 cents.

The company reported net income of $0.7 million (or 2 cents per share) in the quarter, compared with $6.1 million (or 16 cents per share) in the prior year quarter. Net income includes after tax impact of $3.4 million associated with non-cash stock based compensation, $2.1 million related to deferred prosecution agreement (DPA), distributor conversion charges of $0.8 million as well as restructuring charges of $0.7 within the company.      

Revenues

Net sales for the quarter were $123.3 million, down 7% year over year in reported terms (down 5% on a constant currency basis), surpassing the Zacks Consensus Estimate of $122 million.

Revenues from the domestic market totaled $69.2 million (56.1% of total sales), down 8.1% year over year. Domestic sales were negatively impacted by earlier announced distributor transformation, which occurred in the third quarter of 2011 and issues connected with the enhancement of Wright Medical’s compliance systems. International revenues declined 5.4% to $54.1 million (43.9% of sales).

Segment-wise Results

The company 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 58% of sales in the reported quarter with Hips contributing 33%, Knees 24% and Other 1%. Extremities constituted 42% of revenues with Foot and Ankle contributing 23%, Upper Extremity 5%, Biologics 13% and Other 1%.   

OrthoRecon sales dipped 9% year over year in constant currency in the second quarter. Among its components, Hips fell 10% while Knees and Other declined 8% and 18% respectively.

Sales of Extremities segment clambered 1% year over year in constant currency in the second quarter. Among its constituents, Foot and Ankle rose 13%, Upper Extremity was down 8% while Biologics and Other decreased 13% and 14%, respectively.   

Margins

Gross margin for the quarter came in at 68.8% compared to 68.7% in the year-ago quarter. Adjusted operating margin declined to 8.3% in the quarter versus 11.8% a year ago.

Selling, general and administrative expenses increased 2.9% year over year to $72.9 million in the quarter while research and development expenditure declined 13.6% year over year to $6.7 million.

Balance Sheet

Wright Medical ended second quarter with cash, cash equivalents and marketable securities with a total of $192.9 million, up 10.6% on a year over year basis. Long-term obligations were $150.7 million in the quarter, down 11.9% year over year.  Free cash flow more than doubled from the year ago period to almost $18 million in the quarter.

Outlook

For 2012, Wright Medical forecast net sales in a band of $476 million to $485 million compared to the prior guidance in the band of $472 million and $ 489 million. The company also revised its expected adjusted earnings per share for 2012 in the range of 32 cents to 36 cents per share, compared to the earlier range of 26 cents to 36 cents per share.

Adjusted earnings for 2012 exclude expenses associated with restructuring of costs, 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. Consequently, adjusted earnings per share, including stock-based compensation, is estimated in a band of 14 cents and 18 cents.

The company also updated its expected free cash flow for 2012 in the band of $40 million and $45 million. The revised guidance reflects an annual growth rate in the range of 176% to 211%.

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 - 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).

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