Zacks_Analysts' Blog : Wright Beats, Swings to Black - Analyst Blog

Orthopedic devices maker, Wright Medical Group (WMGI) reported first-quarter fiscal 2011 (excluding one-time items other than stock-based compensation expense) earnings per share of 19 cents, narrowly beating the Zacks Consensus Estimate of 18 cents while exceeding the year-ago earnings of 16 cents.

The company swung to profit in the quarter owing to higher sales and lower costs. It has posted a net income of $3.6 million (or 9 cents per share) in the reported quarter versus a net loss of $0.5 million (or 1 cent per share) a year-ago. Net loss for the first quarter of 2010 included the after-tax effect of about $8.1 million of expenses related to U.S. government inquiries.

Revenues

Net sales for the quarter were $135.4 million, up 3% year over year in reported terms (2% on a constant currency basis), beating the Zacks Consensus Estimate of $134 million. 

Revenues from the domestic market totaled $77.9 million (57.5% of total sales), up 0.3% year over year.  Overseas sales increased 7% in reported and 4% in constant currency, respectively, to $57.4 million (42.5% of revenue).

Segment-wise Results

Wright Medical reports revenues in four key segments, namely Hip, Knee, Extremity and Biologics, which constituted 34%, 24%, 25% and 14%, respectively, of net sales for the quarter.

Hip product revenues declined 3% year over year in constant currency while Knees sales remained flat in the quarter. As in the past, Extremity did well and posted a sharp increase of 13%. Biologics sales dipped 3% in constant currency.

Margins

Wright Medical had gross margin of 71.4% in the quarter, up from 69.4% in the year-ago quarter. Operating margin was 8.8%, substantially higher than 2.8% in the year-ago quarter.

Balance Sheet

Cash, cash equivalents and marketable securities totaled $169.7 million, down 9.2% year over year. Long-term obligations stood at $173.3 million, as of March 31, 2011, down 14.1% year over year.  

Other

In March 2011, Wright Medical announced the commercial launch of the PRO-TOE VO Hammertoe Fixation System. This system, designed with assistance from extremity specialists, offers a relatively easy mechanism for surgically repairing the lesser toes after correction of a hammer toe deformity.

Outlook

Wright Medical reiterated its sales forecast for fiscal 2011 in a band of $517 million to $535 million, flat to up 3% year over year. Excluding the negative impact (of 1% to 2%) from its agreement with Kinetic Concepts (KCI), revenues are expected to grow in a range of 1% to 5%. The company now expects adjusted earnings per share (including stock based compensation) in a band of 70 to 78 cents (earlier 88 to 95 cents), flat to up 11% year over year.

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