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Orthopedic devices maker Wright Medical Group Inc. (WMGI - Analyst Report) reported first quarter 2013 adjusted (excluding one-time items other than stock-based compensation expense) loss per share of 2 cents, which was narrower than the Zacks Consensus Estimate of loss of 6 cents per share. The year ago earnings per share was 17 cents.

The company witnessed net income of $8.4 million (or 20 cents per share) in the quarter versus net income of $4.6 million (or 12 cents per share) in the prior year quarter. Reported net income includes several extraordinary and one-time items in both periods.  

Revenues

Net sales in the quarter were $120.4 million, down 5% year over year in reported terms (down 3% on a constant currency basis), missing the Zacks Consensus Estimate of $123 million.

During the reported quarter, the company’s growth in worldwide ankle and foot franchise was negated by loss of client base in OrthoRecon segment in the domestic market and pricing pressure in the high focus Japanese market.

Geographically, revenues from the domestic market came in at $67.8 million (56% of total sales), down 3.2% year over year. Revenues from the overseas market declined 7.1% in reported terms (down 3% on a constant currency basis) on a year-over-year basis to $52.6 million (44% of total revenues) in the first 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 11% and Other 1%.  

In terms of constant currency, OrthoRecon sales declined 11% year over year in the first quarter. Among its components, Hips fell 11% while Knees dropped 9% and Other decreased 35%.

Sales of Extremities segment increased 7% year over year in constant currency in the reported quarter. Among its constituents, Foot and Ankle improved 19%, Upper Extremity was down 6% while Biologics dipped 10% and Other slid 1%.  

Margins

Adjusted operating margin declined to (0.7)% in the quarter versus 10.6% a year ago. Operating margin for OrthoRecon segment was down to 11.7% in the reported quarter from 19.4% in the prior year quarter. Operating margin for Extremities segment slid to 15.2% from 25.9% in the year-ago quarter.

Selling, general and administrative expenses dropped 10.2% year over year to $65 million in the quarter while research and development expenditure rose 8.6% year over year to $6.8 million.

Balance Sheet and Cash Flow

Wright Medical exited the first quarter with cash, cash equivalents and current marketable securities of a total of $279.5 million, down 16.1% on a sequential basis. Long-term obligations rose 0.8% year over year to $260.6 million in the quarter. Free cash flow declined to (8.9) million from $14.5 million in the year-ago quarter. 

Outlook

There is no alteration of the sales band of $485 million to $495 million for 2013. The company continues to estimate adjusted loss per share in the range of 26 cents to 34 cents (including stock based compensation expense of about 19 cents and the effect of BioMimetic acquisition) for 2013. Adjusted earnings per share exclude several one-time expenses. Free cash flow is expected in the range of nil to $5 million for 2013.

Orthopedics is one of the largest medical device market segments worldwide. Lukewarm demand was exacerbated by pricing pressure. The joint replacement market was hit by patient deferral of elective procedures, leading to weak demand for hip and knee implants. In particular, the reconstructive market fundamentals (pricing and volume) have languished in the recent past but are showing signs of recovery. 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, Inc. (ZMH - Analyst Report) and Stryker Corporation (SYK - Analyst Report).

The stock carries a Zacks Rank #3 (Hold). Conceptus, Inc. carries a Zacks Rank #1 (Strong Buy) and is expected to do well.
 

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