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Orthopedic devices maker Wright Medical Group (WMGI - Analyst Report) reported fourth-quarter adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 1 cent, which was better than the Zacks Consensus Estimate of loss of 1 cent per share. For 2012, adjusted earnings per share of 24 cents beat the Zacks Consensus Estimate of 20 cents per share.

The company witnessed net profit of $5.4 million (or 14 cents per share) in the quarter versus net income of $1.2 million (or 3 cents per share) in the prior-year quarter.

Revenues

Net sales in the quarter were $123.5 million, down 3% year over year in reported terms (down 2% on a constant currency basis), beating the Zacks Consensus Estimate of $121 million. For 2012, net sales were down 5.7% to $483.8 million, ahead of the Zacks Consensus Estimate of $481 million.

During the reported quarter, 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 market.

Geographically, revenues from the domestic market came in at $70.7 million (57.2% of total sales), down 3.6% year over year, while revenues from the overseas market declined 1.5% in reported terms (flat on a constant currency basis) on a year-over-year basis to $52.8 million (42.8% of total revenues) in the fourth quarter.

Segment-wise Results

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 53% of sales in the reported quarter with Hips contributing 29%, Knees 23% and Other 1%. Extremities constituted 47% of revenues with Foot and Ankle contributing 29%, Upper Extremity 5%, Biologics 12% and Other 1%.  

In terms of constant currency, OrthoRecon sales declined 11% year over year in the fourth quarter. Among its components, Hips fell 14%, while Knees dropped 8% and Other increased 30%.

Sales of Extremities segment clambered 11% year over year in constant currency in the reported quarter. Among its constituents, Foot and Ankle improved 20%, Upper Extremity was down 10% while Biologics dipped 2% and Other rose 84%.  

Margins

Gross margin in the quarter came in at 67.9% compared with 67.7% in the year-ago quarter. Adjusted operating margin declined to 3% in the quarter versus 10.1% a year ago. Operating margin for OrthoRecon segment was 6.4% in the reported quarter versus 17.9% in the prior year quarter. Operating margin for Extremities segment was 23.5% versus 22.8% in the year-ago quarter.

Selling, general and administrative expenses increased 2.5% year over year to $74.2 million in the quarter, while research and development expenditure rose 17.8% year over year to $7.5 million.

Balance Sheet

Wright Medical exited the fourth quarter with cash, cash equivalents and marketable securities of a total of $333.1 million, almost double the earlier total on a year-over-year basis. Long-term obligations shot up 55% year over year to $258.5 million in the quarter. Free cash flow increased more than five-fold from the year-ago period to $5 million.

Outlook

Excluding the effect of the acquisition of BioMimetic Therapeutics, for 2013, Wright Medical forecast net sales in a band of $485 million to $495 million (including an adverse currency impact of about 2%). The company issued its expected adjusted earnings per share (including stock-based compensation expenses) for 2013 in the range of 0 cent to 6 cents.

Adjusted earnings for 2012 exclude expenses associated with restructuring of 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 costs concerning government investigation related to Profemur hip offerings, non cash interest charges related to convertible notes and certain other contingencies. Wright Medical forecasts non-cash, stock-based compensation charge of about 19 cents per share for 2013. The company expects free cash flow for 2013 in the band of $35 million and $40 million.

Including the effect of BioMimetic, there is no alteration of the sales band of $485 million to $495 million for 2013. The deal adversely affects earnings per share by about 32 cents to 34 cents resulting in adjusted loss per share in the range of 26 cents to 34 cents (including stock based compensation expense) for 2013. Free cash flow is expected in the range of nil to $5 million.  

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 but are showing signs of recovery. 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, remains a key concern at the macro level. We note that 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 (ZMH - Analyst Report), Stryker (SYK - Analyst Report) and Smith & Nephew (SNN - Snapshot Report). The stock carries a Zacks Rank #3 (Hold).
 

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