Zacks_Analysts' Blog : Wright Slips to Loss, Lowers View - Analyst Blog

Orthopedic devices maker, Wright Medical Group (WMGI) 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), Stryker (SYK) and Smith & Nephew (SNN). We are currently Neutral on the stock, backed by a short-term Zacks #3 Rank (Hold).