Wright Medical Q4 Income Takes a Hit

Wright Medical Group Inc.’s fourth quarter 2011 results were a mixed bag for the Arlington, Tenn.-based firm. The company posted slower sales, but beat analyst estimates.

For Q4 (ended Dec. 31), net sales were $126.9 million, an 8 percent decrease from net sales of $138.3 million during the fourth quarter of 2010. The company reported that during the quarter of 2011, U.S. sales were negatively affected by distributor transitions that occurred in the third quarter of 2011 and challenges associated with implementing enhancements to the company’s compliance processes.

Net income for the fourth quarter of 2011 totaled $1.2 million or $0.03 per diluted share, compared to net income of $8.9 million or 22 cents per diluted share in the fourth quarter of 2010.

Special charges hit the company’s bottom line hard. Net income included the after-tax effects of $2.8 million of charges associated with the previously announced cost restructuring plan, $3.4 million of expenses associated with the deferred prosecution agreement (DPA), and $2.4 million of non-cash stock-based compensation expense, as well as a $1 million income tax provision for an estimated IRS audit liability. Net income for the fourth quarter of 2010 included the after-tax effects of approximately $3 million of non-cash stock-based compensation expense and $1.3 million of expenses related to the U.S. governmental inquiry.

Wright’s adjusted earnings per share for the quarter of 17 cents beat Wall Street’s expectations on by 6 cents. That wasn’t enough, however, to satisfy the company’s new CEO.

“Although our fourth quarter results were stronger than anticipated, we are not satisfied with our 2011 financial performance relative to the market opportunities, and we have much work ahead of us to improve our execution, efficiency and return to a high growth company,” said Robert Palmisano, president and CEO. “My top priorities will be to grow our foot and ankle business above market rates, run a much more focused and efficient ortho-recon business, and increase cash generation. I believe these initiatives will in turn drive growth and shareholder value.”

Palmisano said the company would make “a number of important changes” in the next several months that he said would “transform” the business.
Among the items he noted were:

Investments to “aggressively convert” a large portion of the company’s U.S. independent distributor foot and ankle territories to direct sales representation in order to increase sales productivity and maximize the growth opportunities.

“Second,” Palmisano said, “we will focus on driving significant improvements in customer satisfaction in our ortho-recon business while vigorously protecting our position.”

The company also will reduce inventories to improve cash flow and operational efficiency; increasing investment in medical education and foot and ankle product development to drive market adoption of new products and technologies; and will pursue internal and external development opportunities to expand extremities and biologic product portfolio.

“As our guidance implies, these transformational changes for our business will require significant investment in 2012, which will negatively impact our full-year 2012 results,” he added. “However, we believe these investments will generate significant future returns, including accelerating foot and ankle sales growth rates and improving inventory management and cash generation. We are enthusiastic about our plan and look forward to executing our current strategies and improving our performance.”

Despite posting losses of $5.1 million (13 cents per share) on sales of $512.9 million in 2011 compared with profits of $17.8 million, or 47 cents per share, on sales of $519 million in 2010. Adjusted for one-time charges, the company reported 84 cents earning per share for 2011, 18 cents higher than analyst estimates of 66 cents. The company lowered sales expectations for the next year, setting 2012 revenue guidance in the range of $472 million to $489 million and earnings in between 26 cents and 36 cents.

The company’s earnings target excludes non-compete and transition costs associated with converting a major portion of independent foot and ankle territories to direct, costs associated with the previously announced cost restructuring, possible future acquisitions, other material future business developments, non-cash stock-based compensation expense, and costs associated with the DPA.