Wright Medical Group, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-32883
WRIGHT MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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13-4088127
(IRS Employer
Identification Number) |
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5677 Airline Road
Arlington, Tennessee
(Address of Principal Executive Offices)
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38002
(Zip Code) |
(901) 867-9971
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). o Yes þ No
As of April 21, 2008, there were 37,164,683 shares of common stock outstanding.
WRIGHT MEDICAL GROUP, INC.
TABLE OF CONTENTS
SAFE-HARBOR STATEMENT
This quarterly report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements reflect managements current knowledge, assumptions,
beliefs, estimates, and expectations and express managements current views of future performance,
results, and trends and may be identified by their use of terms such as anticipate, believe,
could, estimate, expect, intend, may, plan, predict, project, will, and other
similar terms. Forward-looking statements are contained in the section entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations and other sections of
this quarterly report. Actual results might differ materially from those described in the
forward-looking statements. Forward-looking statements are subject to a number of risks and
uncertainties, including the factors discussed in our filings with the Securities and Exchange
Commission (including those described in Item 1A of our Annual Report on Form 10-K for the year
ended December 31, 2007, and elsewhere in this report), which could cause our actual results to
materially differ from those described in the forward-looking statements. Although we believe that
the forward-looking statements are accurate, there can be no assurance that any forward-looking
statement will prove to be accurate. A forward-looking statement should not be regarded as a
representation by us that the results described therein will be achieved. Readers should not place
undue reliance on any forward-looking statement. The forward-looking statements are made as of the
date of this quarterly report, and we assume no obligation to update any forward-looking statement
after this date.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited).
WRIGHT MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
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March 31, |
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December 31, |
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2008 |
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2007 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
235,151 |
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$ |
229,026 |
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Marketable securities |
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15,535 |
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Accounts receivable, net |
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98,577 |
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83,801 |
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Inventories |
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129,305 |
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115,290 |
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Prepaid expenses |
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11,357 |
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13,757 |
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Deferred income taxes |
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27,176 |
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24,015 |
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Assets held for sale |
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2,933 |
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2,207 |
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Other current assets |
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8,806 |
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7,570 |
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Total current assets |
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513,305 |
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491,201 |
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Property, plant and equipment, net |
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104,497 |
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99,037 |
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Goodwill |
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28,852 |
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28,233 |
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Intangible assets, net |
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10,745 |
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11,187 |
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Deferred income taxes |
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30,768 |
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30,556 |
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Other assets |
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9,222 |
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9,771 |
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Total assets |
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$ |
697,389 |
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$ |
669,985 |
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Liabilities and Stockholders Equity: |
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Current liabilities: |
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Accounts payable |
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$ |
22,542 |
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$ |
19,764 |
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Accrued expenses and other current liabilities |
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62,030 |
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53,069 |
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Current portion of long-term obligations |
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512 |
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551 |
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Total current liabilities |
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85,084 |
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73,384 |
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Long-term debt and capital lease obligations |
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200,436 |
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200,455 |
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Deferred income taxes |
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191 |
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159 |
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Other liabilities |
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7,800 |
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7,206 |
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Total liabilities |
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293,511 |
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281,204 |
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Commitments and contingencies (Note 12) |
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Stockholders equity: |
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Common stock, $.01 par value,
authorized: 100,000,000 shares; issued and
outstanding: 37,158,463 shares at March
31, 2008 and 36,493,183 shares at
December 31, 2007 |
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366 |
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365 |
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Additional paid-in capital |
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345,545 |
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338,640 |
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Accumulated other comprehensive income |
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28,756 |
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24,623 |
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Retained earnings |
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29,211 |
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25,153 |
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Total stockholders equity |
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403,878 |
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388,781 |
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$ |
697,389 |
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$ |
669,985 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
WRIGHT MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Net sales |
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$ |
115,865 |
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$ |
94,287 |
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Cost of sales1 |
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32,438 |
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26,965 |
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Gross profit |
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83,427 |
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67,322 |
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Operating expenses: |
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Selling, general and administrative1 |
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66,589 |
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53,926 |
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Research and development1 |
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7,999 |
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8,102 |
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Amortization of intangible assets |
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1,041 |
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855 |
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Restructuring charges (Note 11) |
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1,815 |
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Total operating expenses |
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77,444 |
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62,883 |
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Operating income |
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5,983 |
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4,439 |
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Interest income, net |
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(363 |
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(604 |
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Other (income) expense, net |
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(1,026 |
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4 |
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Income before income taxes |
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7,372 |
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5,039 |
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Provision for income taxes |
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3,314 |
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1,850 |
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Net income |
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$ |
4,058 |
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$ |
3,189 |
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Net income per share (Note 9): |
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Basic |
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$ |
0.11 |
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$ |
0.09 |
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Diluted |
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$ |
0.11 |
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$ |
0.09 |
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Weighted-average number of shares outstanding-basic |
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36,605 |
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35,279 |
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Weighted-average number of shares outstanding-diluted |
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37,214 |
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35,953 |
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1 |
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These line items include the following amounts of non-cash, stock-based compensation
expense for the periods indicated: |
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
Cost of sales |
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$ |
344 |
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$ |
491 |
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Selling, general and administrative |
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2,971 |
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2,960 |
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Research and development |
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249 |
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1,281 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
WRIGHT MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Operating activities: |
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Net income |
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$ |
4,058 |
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$ |
3,189 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation |
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6,154 |
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5,607 |
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Stock-based compensation expense |
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3,564 |
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4,732 |
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Amortization of intangible assets |
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1,041 |
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855 |
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Amortization of deferred financing costs |
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251 |
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Deferred income taxes |
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(1,512 |
) |
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(1,270 |
) |
Excess tax benefit from stock-based compensation
arrangements |
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(111 |
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(732 |
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Other |
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(64 |
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36 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(11,896 |
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(7,385 |
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Inventories |
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(13,244 |
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(6,361 |
) |
Marketable securities |
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15,535 |
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(300 |
) |
Prepaid expenses and other current assets |
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(1,310 |
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1,512 |
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Accounts payable |
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2,472 |
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3,778 |
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Accrued expenses and other liabilities |
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7,827 |
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4,017 |
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Net cash provided by operating activities |
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12,765 |
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7,678 |
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Investing activities: |
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Capital expenditures |
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(9,858 |
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(6,661 |
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Purchase of intangible assets |
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(265 |
) |
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(341 |
) |
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Net cash used in investing activities |
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(10,123 |
) |
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(7,002 |
) |
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Financing activities: |
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Issuance of common stock |
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3,421 |
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1,598 |
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Principal payments of bank and other financing |
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(189 |
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(313 |
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Financing under factoring agreements, net |
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(614 |
) |
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(656 |
) |
Excess tax benefit from stock-based compensation arrangements |
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111 |
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732 |
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Net cash provided by financing activities |
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2,729 |
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1,361 |
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Effect of exchange rates on cash and cash equivalents |
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754 |
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87 |
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Net increase in cash and cash equivalents |
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6,125 |
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2,124 |
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Cash and cash equivalents, beginning of period |
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229,026 |
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57,939 |
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Cash and cash equivalents, end of period |
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$ |
235,151 |
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$ |
60,063 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation. The unaudited condensed consolidated interim financial statements of Wright
Medical Group, Inc. have been prepared in accordance with accounting principles generally accepted
in the United States (U.S.) for interim financial information and the instructions to Quarterly
Report on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the U.S. have been condensed or omitted pursuant to these rules and
regulations. Accordingly, these unaudited condensed consolidated interim financial statements
should be read in conjunction with our consolidated financial statements and related notes included
in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the
Securities and Exchange Commission (SEC).
In the opinion of management, these unaudited condensed consolidated interim financial statements
reflect all adjustments necessary for a fair presentation of our interim financial results. All
such adjustments are of a normal and recurring nature. The results of operations for any interim
period are not indicative of results for the full fiscal year.
The accompanying unaudited condensed consolidated interim financial statements include our accounts
and those of our wholly-owned domestic and international subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, marketable
securities, accounts receivable, and accounts payable approximates the fair value of these
financial instruments at March 31, 2008 and December 31, 2007 due to their short maturities or
variable rates.
The fair value of our convertible senior notes was $191 million and $216 million as of March 31,
2008, and December 31, 2007, respectively.
Impact of Recently Issued Accounting Pronouncements. In March 2008, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 161,
Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities by requiring
enhanced disclosures regarding how an entity uses derivative instruments, how the derivative
instruments and related hedge items are accounted for under SFAS 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), and how the derivatives affect an entitys financial
position, financial performance, and cash flows. The provisions of SFAS 161 are effective for the
year ending December 31, 2009. We are currently evaluating the impact of the provisions of SFAS
161.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, and in February 2008, the
FASB amended SFAS 157 by issuing FASB Staff Position FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13, and FSP FAS
157-2, Effective Date of FASB Statement No. 157 (collectively SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair
value measurements, except those relating to lease classification, and accordingly does not require
any new fair value measurements. SFAS 157 is effective for financial assets and liabilities in
fiscal years beginning after November 15, 2007, and for non-financial assets and liabilities in
fiscal years beginning after November 15, 2008. We adopted SFAS 157 for financial assets and
liabilities in the first quarter of fiscal 2008 with no material impact to our consolidated
financial statements. We are currently evaluating the impact the application of SFAS 157 will have
on our consolidated financial statements as it relates to our non-financial assets and liabilities.
2. Inventories
Inventories consist of the following (in thousands):
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March 31, |
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December 31, |
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2008 |
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2007 |
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Raw materials |
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$ |
9,157 |
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$ |
7,020 |
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Work-in-process |
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27,421 |
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21,482 |
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Finished goods |
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92,727 |
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86,788 |
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$ |
129,305 |
|
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$ |
115,290 |
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4
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. Assets Held for Sale
Assets held for sale consist of the following (in thousands):
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March 31, |
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December 31, |
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2008 |
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2007 |
|
Land and buildings |
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$ |
1,894 |
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$ |
1,766 |
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Machinery and equipment |
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|
1,039 |
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|
441 |
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$ |
2,933 |
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$ |
2,207 |
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These assets held for sale are related to the closing of our Toulon, France facility. During the
first three months of 2008, we finalized negotiations with regard to the sale of these assets. The
sale of these assets was completed in April 2008 for approximately $2.4 million, less costs to
sell, plus the assumption of capital lease obligations totaling approximately $700,000.
4. Property, Plant and Equipment, Net
Property, plant and equipment consists of the following (in thousands):
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March 31, |
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December 31, |
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2008 |
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2007 |
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Property, plant and equipment, at cost |
|
$ |
211,996 |
|
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$ |
199,910 |
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Less: Accumulated depreciation |
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(107,499 |
) |
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(100,873 |
) |
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|
|
|
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|
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$ |
104,497 |
|
|
$ |
99,037 |
|
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|
|
|
|
|
|
5. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following (in thousands):
|
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|
|
|
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|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Capital lease obligations |
|
$ |
948 |
|
|
$ |
1,006 |
|
Convertible senior notes |
|
|
200,000 |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
200,948 |
|
|
|
201,006 |
|
Less: current portion |
|
|
(512 |
) |
|
|
(551 |
) |
|
|
|
|
|
|
|
|
|
$ |
200,436 |
|
|
$ |
200,455 |
|
|
|
|
|
|
|
|
In November 2007, we issued $200 million of Convertible Senior Notes due 2014. The notes will
mature on December 1, 2014. The notes pay interest semiannually at an annual rate of 2.625% and are
convertible into shares of our common stock at an initial conversion rate of 30.6279 shares per
$1,000 principal amount of the notes, which represents a conversion price of $32.65 per share. The
notes are unsecured obligations and are subordinated to all existing and future secured debt, our
revolving credit facility, and all liabilities of our subsidiaries.
On March 31, 2008, after considering outstanding letters of credit, our revolving credit facility
had availability of $97.1 million, which can be increased by up to an additional $50 million at our
request and subject to the agreement of the lenders. We currently have no borrowings outstanding
under the credit facility. Borrowings under the credit facility will bear interest at the sum of a
base annual rate plus an applicable annual rate that ranges from 0% to 1.75% depending on the type
of loan and our consolidated leverage ratio, with a current annual base rate of 5.25%. The term of
the credit facility extends through June 30, 2011.
5
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill occurring during the three months ended March 31, 2008,
are as follows (in thousands):
|
|
|
|
|
Goodwill at December 31, 2007 |
|
$ |
28,233 |
|
Foreign currency translation |
|
|
619 |
|
|
|
|
|
Goodwill at March 31, 2008 |
|
$ |
28,852 |
|
|
|
|
|
The components of our identifiable intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Distribution channels |
|
$ |
24,420 |
|
|
$ |
19,999 |
|
|
$ |
22,793 |
|
|
$ |
18,082 |
|
Completed technology |
|
|
5,245 |
|
|
|
3,105 |
|
|
|
5,180 |
|
|
|
2,896 |
|
Licenses |
|
|
3,801 |
|
|
|
2,814 |
|
|
|
3,598 |
|
|
|
2,561 |
|
Trademarks |
|
|
863 |
|
|
|
212 |
|
|
|
862 |
|
|
|
164 |
|
Other |
|
|
3,632 |
|
|
|
1,086 |
|
|
|
3,814 |
|
|
|
1,357 |
|
|
|
|
|
|
|
|
|
37,961 |
|
|
$ |
27,216 |
|
|
|
36,247 |
|
|
$ |
25,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization |
|
|
(27,216 |
) |
|
|
|
|
|
|
(25,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
10,745 |
|
|
|
|
|
|
$ |
11,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the intangible assets held at March 31, 2008, we expect to recognize amortization expense
of approximately $4.1 million for the full year of 2008, $3.6 million in 2009, $740,000 in 2010,
$710,000 in 2011, and $580,000 in 2012. These amounts do not include incremental amortization
expense that will be recorded as a result of our recently announced acquisition (see Note 13).
7. Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R),
which replaced SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires recognition of the fair value
of an award of equity instruments granted in exchange for employee services as a cost of those
services.
Amounts recognized within the condensed consolidated financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Total cost of share-based payment plans |
|
$ |
3,573 |
|
|
$ |
5,412 |
|
Amounts capitalized as inventory and intangible assets |
|
|
(484 |
) |
|
|
(1,251 |
) |
Amortization of capitalized amounts |
|
|
475 |
|
|
|
571 |
|
|
|
|
|
|
|
|
Charged against income before income taxes |
|
|
3,564 |
|
|
|
4,732 |
|
Amount of related income tax benefit |
|
|
(917 |
) |
|
|
(1,266 |
) |
|
|
|
|
|
|
|
Impact to net income |
|
$ |
2,647 |
|
|
$ |
3,466 |
|
|
|
|
|
|
|
|
Impact to basic earnings per share |
|
$ |
0.07 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
Impact to diluted earnings per share |
|
$ |
0.07 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
In the three-month period ended March 31, 2008, we granted approximately 67,000 non-vested shares
of common stock at a weighted-average fair value of $27.57, which will be recognized on a straight
line basis over the requisite service period that, for the substantial majority of these grants, is
four years. As of March 31, 2008, we had 4.2 million stock options outstanding, of which 2.6
million were exercisable, and 482,000 non-vested shares of common stock outstanding.
6
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
We had $21.8 million of total unrecognized compensation cost related to unvested stock-based
compensation arrangements granted to employees as of March 31, 2008. That cost is expected to be
recognized over a weighted-average period of 2.5 years.
8. Income Taxes and Change in Accounting Principle
As of March 31, 2008, our liability for unrecognized tax benefits totaled $6.6 million, which is
included within Other liabilities on our condensed consolidated balance sheets.
During the three-month period ended March 31, 2008, $4.8 million of previously accrued liabilities
for unrecognized tax benefits were recognized as a benefit upon the effective settlement of a tax
examination of one of our subsidiaries in France. We remain under audit in other subsidiaries in
France and Belgium, and based upon initial audit assessments and in accordance with the recognition
and measurement considerations in FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, during the first quarter of 2008, we increased
our liability for unrecognized tax benefits for these jurisdictions to $5.0 million. Management
believes that it is reasonably possible that this liability for unrecognized tax benefits may
significantly change within the next twelve months.
9. Earnings Per Share
SFAS No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings per
share. Basic earnings per share is calculated based on the weighted-average shares of common stock
outstanding during the period. Diluted earnings per share is calculated to include any dilutive
effect of our common stock equivalents. Our common stock equivalents consist of stock options,
non-vested shares of common stock, and convertible debt. The dilutive effect of the stock options
and non-vested shares of common stock is calculated using the treasury-stock method. The dilutive
effect of convertible debt is calculated by applying the if-converted method. This assumes an
add-back of interest, net of income taxes, to net income as if the securities were converted at the
beginning of the period. During the three month period ended March 31, 2008, the convertible debt
had an antidilutive effect on earnings per share and we therefore excluded them from the dilutive
shares calculation.
The weighted-average number of shares outstanding for basic and diluted earnings per share is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Weighted-average number of shares outstanding,
basic |
|
|
36,605 |
|
|
|
35,279 |
|
Common stock equivalents |
|
|
609 |
|
|
|
674 |
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding,
diluted |
|
|
37,214 |
|
|
|
35,953 |
|
|
|
|
|
|
|
|
The following potential common shares were excluded from the computation of diluted earnings per
share as their effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Stock options |
|
|
2,476 |
|
|
|
3,902 |
|
Non-vested shares |
|
|
86 |
|
|
|
18 |
|
Convertible debt |
|
|
6,126 |
|
|
|
|
|
7
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. Other Comprehensive Income
The difference between our net income and our comprehensive income is attributable to foreign
currency translation and adjustments related to our minimum pension liability. The following table
provides a reconciliation of net income to comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
4,058 |
|
|
$ |
3,189 |
|
Changes in foreign currency translation |
|
|
4,129 |
|
|
|
681 |
|
Minimum pension liability adjustment |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
8,191 |
|
|
$ |
3,870 |
|
|
|
|
|
|
|
|
11. Restructuring
In June 2007, we announced plans to close our manufacturing, distribution, and administrative
facility located in Toulon, France. The facilitys closure affected approximately 130 Toulon-based
employees. The majority of our restructuring activities were complete by the end of 2007, with
Toulons production being transferred to our existing manufacturing facility in Arlington,
Tennessee and its distribution activities being transferred to our European headquarters in
Amsterdam, the Netherlands.
Management estimates that the pre-tax restructuring charges will total approximately $23 million to
$25 million. These charges consist of the following estimates:
|
|
|
$13 million for severance and other termination benefits; |
|
|
|
|
$3 million of non-cash asset impairments of property, plant and equipment; |
|
|
|
|
$2 million of inventory write-offs and manufacturing period costs; |
|
|
|
|
$2 million to $3 million of external legal and professional fees; and |
|
|
|
|
$3 million to $4 million of other cash and non-cash charges. |
Charges associated with the restructuring are presented in the following table. All of the
following amounts were recognized within Restructuring charges in our consolidated statement of
operations, with the exception of the inventory write-offs and manufacturing period costs, which
were recognized with Cost of sales restructuring.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Cumulative Charges as of |
(in thousands) |
|
March 31, 2008 |
|
March 31, 2008 |
|
|
|
Severance and other termination benefits |
|
$ |
880 |
|
|
$ |
12,555 |
|
Asset impairment charges |
|
|
(63 |
) |
|
|
3,093 |
|
Inventory write-offs and manufacturing period costs |
|
|
|
|
|
|
2,139 |
|
Legal/professional fees |
|
|
329 |
|
|
|
1,876 |
|
Other |
|
|
669 |
|
|
|
1,025 |
|
|
|
|
Total restructuring charges |
|
$ |
1,815 |
|
|
$ |
20,688 |
|
|
|
|
As a result of the plans to close the facilities, we performed an evaluation of the undiscounted
future cash flows of the related asset group and recorded an impairment charge for the difference
between the net book value of the assets and their estimated fair values for those assets we
intended to sell. As of March 31, 2008, we have recorded these assets as assets held for sale on
our condensed consolidated balance sheet at their estimated selling price less costs to sell.
Additionally, we recorded an impairment charge for assets to be abandoned.
8
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Activity in the restructuring liability for the three months ended March 31, 2008, is
presented in the following table (in thousands):
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
6,966 |
|
Charges: |
|
|
|
|
Severance and other termination benefits |
|
|
941 |
|
Legal/professional fees |
|
|
329 |
|
Other |
|
|
669 |
|
|
|
|
|
Total accruals |
|
$ |
1,939 |
|
Payments: |
|
|
|
|
Severance and other termination benefits |
|
|
(2,064 |
) |
Legal/professional fees |
|
|
(371 |
) |
Other |
|
|
(28 |
) |
|
|
|
|
|
|
$ |
(2,463 |
) |
Changes in foreign currency translation |
|
|
421 |
|
|
|
|
|
Restructuring liability at March 31, 2008 |
|
$ |
6,863 |
|
|
|
|
|
Under French law, our terminated employees have the right to pursue additional compensation through
litigation. While significant litigation has not commenced as of March 31, 2008, management has
determined that there is a probable liability in the range of $1.0 million to $1.8 million.
Therefore, we have recorded a liability of $1.0 million within Accrued expenses and other current
liabilities in our condensed consolidated balance sheet as of March 31, 2008.
12. Commitments and Contingencies
In 2000, Howmedica Osteonics Corp. (Howmedica), a subsidiary of Stryker Corporation, filed a
lawsuit against us in the United States District Court for the District of New Jersey alleging that
we infringed Howmedicas U.S. Patent No. 5,824,100 related to our ADVANCE® knee product
line. The lawsuit seeks an order of infringement, injunctive relief, unspecified damages and
various other costs and relief and could impact a substantial portion of our knee product line. We
believe, however, that we have strong defenses against Howmedicas claims and are vigorously
defending this lawsuit. In November 2005, the court issued a Markman ruling on claim construction.
Howmedica has conceded to the court that, if the claim construction as issued was applied to our
knee product line, our products do not infringe their patent. Howmedica has appealed the Markman
ruling, and this matter is now on appeal to the U.S. Federal Circuit Court of Appeals. Oral
arguments have been set for May 2008. Management is unable to estimate the potential liability, if
any, with respect to the claims and accordingly, no provision has been made for this contingency as
of March 31, 2008. These claims are covered in part by our patent infringement insurance.
Management does not believe that the outcome of this lawsuit will have a material adverse effect on
our consolidated financial position or results of operations.
We are involved in separate disputes in Italy with a former agent and two former employees.
Management believes that it has meritorious defenses to the claims related to these disputes. The
payment of any amount related to these disputes is not probable and cannot be estimated at this
time. Accordingly, no provisions have been made for these matters as of March 31, 2008.
We are involved in a dispute with a former consultant who is demanding payment of royalties on the
sales of certain knee products. We contend that the plaintiff breached his agreement, and therefore
we owe no royalties to the plaintiff. In April 2006, the U.S. District Court for the Eastern
District of Massachusetts granted partial summary judgment in favor of the plaintiff, ruling that
the plaintiff did not breach his contract. A damages hearing was held in March 2007 and damages
were set at $2.5 million plus interest of approximately $140,000. Both parties have the right to
appeal this ruling, and we have appealed the portion of the judgment issued in favor of the
plaintiff. We believe that we will prevail upon appeal and that an ultimate unfavorable resolution
of this matter is not probable; therefore, we have not accrued any amounts related to this matter
as of March 31, 2008.
In December 2007, we received a subpoena from the U.S. Department of Justice (DOJ) through the U.S.
Attorney for the District of New Jersey requesting documents for the period January 1998 through
the present related to any
9
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
consulting and professional service agreements with orthopaedic surgeons
in connection with hip or knee joint replacement procedures or products. We are cooperating fully
with the DOJ request. We cannot estimate what, if any, impact any results from this inquiry could
have on our consolidated results of operations or financial position.
In addition to those noted above, we are subject to various other legal proceedings, product
liability claims and other matters which arise in the ordinary course of business. In the opinion
of management, the amount of liability, if any, with respect to these matters, will not materially
affect our consolidated results of operations or financial position.
13. Subsequent Events
In April 2008, we announced the completion of the acquisition of INBONE Technologies, Inc.,
manufacturer of the INBONETM Total Ankle System and the INBONETM
Intra-osseous Fusion Rod and Plate System. The acquisition consists of an initial cash payment of
$24 million, guaranteed future payments of $3.7 million, and potential additional cash payments
based upon future performance.
10
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The following managements discussion and analysis of financial condition and results of operations
describes the principal factors affecting the results of our operations, financial condition and
changes in financial condition for the three months ended March 31, 2008. This discussion should be
read in conjunction with the accompanying unaudited financial statements and our Annual Report on
Form 10-K for the year ended December 31, 2007, which includes additional information about our
critical accounting policies and practices and risk factors.
Executive Overview
Company Description. We are a global orthopaedic medical device company specializing in the design,
manufacture, and marketing of reconstructive joint devices and biologics products. Reconstructive
joint devices are used to replace knee, hip, and other joints that have deteriorated through
disease or injury. Biologics are used to replace damaged or diseased bone, to stimulate bone
growth, to repair damaged or diseased soft tissue, and to provide other biological solutions for
surgeons and their patients. We have been in business for over 50 years and have built a well-known
and respected brand name and strong relationships with orthopaedic surgeons.
Principal Products. We primarily sell reconstructive joint devices and biologics products. Our
reconstructive joint device sales are derived from three primary product lines: knees, hips, and
extremities. Our biologics sales encompass a broad portfolio of products designed to stimulate and
augment the natural regenerative capabilities of the human body. We also sell various orthopaedic
products not considered to be part of our knee, hip, extremity, or biologics product lines.
Significant Quarterly Business Developments. Net sales increased 23% in the first quarter of 2008
to $115.9 million, as compared to net sales of $94.3 million in the first quarter of 2007. Our net
income increased to $4.1 million in the first quarter of 2008 from $3.2 million in the first
quarter of 2007, as profitability from higher levels of sales was partially offset by restructuring
charges of $1.8 million ($1.2 million net of taxes), and $1.7 million ($1.0 million net of taxes)
of costs associated with the U.S. Department of Justice (DOJ) inquiry.
Our first quarter domestic sales increased 20% in 2008, primarily as a result of growth within our
knee, biologics and extremity product lines, which increased 15%, 17% and 55%, respectively, as
compared to prior year. Our domestic biologics growth is attributable to sales of our
PRO-DENSE® injectable regenerative graft, which was launched during the third quarter of
2007, as well as the continued success of our GRAFTJACKET® tissue repair and containment
membranes. Our domestic extremity business benefited from the continued success of our
CHARLOTTE Foot and Ankle System, as well as product sales resulting from our prior year
Darco International, Inc. and R&R Medical, Inc. acquisitions.
Our international sales increased 27% to $48.6 million in the first quarter of 2008, compared to
$38.2 million in the first quarter of 2007. This increase was driven by growth in all of our
international markets, with the exception of France and Italy. In addition, international sales in
the first quarter of 2008 included a favorable currency impact of approximately $4.1 million.
In April 2008, we announced the completion of the acquisition of INBONE Technologies, Inc.
(INBONE), manufacturer of the INBONETM Total Ankle System and the INBONETM
Intra-osseous Fusion Rod and Plate System. This acquisition adds key products to our extremities
business.
Significant Industry Factors. Our industry is impacted by numerous competitive, regulatory, and
other significant factors. The growth of our business relies on our ability to continue to develop
new products and innovative technologies, obtain regulatory clearance and compliance for our
products, protect the proprietary technology of our products and our manufacturing processes,
manufacture our products cost-effectively, respond to competitive pressures specific to each of our
geographic markets, including our ability to enforce non-compete agreements, and successfully
market and distribute our products in a profitable manner. We, and the entire industry, are subject
to extensive governmental regulation, primarily by the United States Food and Drug Administration.
Failure to comply with regulatory requirements could have a material adverse effect on our
business. Additionally, our industry is highly competitive and has recently experienced increased
pricing pressures, specifically in the areas of reconstructive joint devices. We devote significant
resources to assessing and analyzing competitive, regulatory and economic risks and opportunities.
A detailed discussion of these risks and other factors is provided in Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2007.
11
In December 2007, we received a subpoena from the DOJ requesting certain documents related to
consulting agreements with orthopaedic surgeons. This subpoena was served shortly after several of
our knee and hip competitors agreed to resolutions with the DOJ after being subjects of
investigation involving the same subject matter. We intend to continue to cooperate fully with the
investigation of the DOJ, and we anticipate that we may continue to incur significant expenses
related to this inquiry.
Results of Operations
Comparison of three months ended March 31, 2008 to three months ended March 31, 2007
The following table sets forth, for the periods indicated, our results of operations expressed as
dollar amounts (in thousands) and as percentages of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
(unaudited) |
|
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
% of Sales |
|
|
Amount |
|
|
% of Sales |
|
Net sales |
|
$ |
115,865 |
|
|
|
100.0 |
% |
|
$ |
94,287 |
|
|
|
100.0 |
% |
Cost of sales1 |
|
|
32,438 |
|
|
|
28.0 |
% |
|
|
26,965 |
|
|
|
28.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
83,427 |
|
|
|
72.0 |
% |
|
|
67,322 |
|
|
|
71.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative1 |
|
|
66,589 |
|
|
|
57.5 |
% |
|
|
53,926 |
|
|
|
57.2 |
% |
Research and development1 |
|
|
7,999 |
|
|
|
6.9 |
% |
|
|
8,102 |
|
|
|
8.6 |
% |
Amortization of intangible assets |
|
|
1,041 |
|
|
|
0.9 |
% |
|
|
855 |
|
|
|
0.9 |
% |
Restructuring charges |
|
|
1,815 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
77,444 |
|
|
|
66.8 |
% |
|
|
62,883 |
|
|
|
66.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5,983 |
|
|
|
5.2 |
% |
|
|
4,439 |
|
|
|
4.7 |
% |
Interest income, net |
|
|
(363 |
) |
|
|
(0.3 |
%) |
|
|
(604 |
) |
|
|
(0.6 |
%) |
Other (income) expense, net |
|
|
(1,026 |
) |
|
|
(0.9 |
%) |
|
|
4 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7,372 |
|
|
|
6.4 |
% |
|
|
5,039 |
|
|
|
5.3 |
% |
Provision for income taxes |
|
|
3,314 |
|
|
|
2.9 |
% |
|
|
1,850 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,058 |
|
|
|
3.5 |
% |
|
$ |
3,189 |
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
These line items include the following amounts of non-cash, stock-based compensation
expense, expressed in dollar amounts (in thousands) and as percentages of net sales, for the
periods indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
Amount |
|
% of Sales |
|
Amount |
|
% of Sales |
Cost of sales |
|
$ |
344 |
|
|
|
0.3 |
% |
|
$ |
491 |
|
|
|
0.5 |
% |
Selling, general and administrative |
|
|
2,971 |
|
|
|
2.6 |
% |
|
|
2,960 |
|
|
|
3.1 |
% |
Research and development |
|
|
249 |
|
|
|
0.2 |
% |
|
|
1,281 |
|
|
|
1.4 |
% |
The following table sets forth our net sales by product line for the periods indicated (in
thousands) and the percentage of year-over-year change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
% change |
|
Hip products |
|
$ |
39,900 |
|
|
$ |
34,406 |
|
|
|
16.0 |
% |
Knee products |
|
|
30,176 |
|
|
|
25,532 |
|
|
|
18.2 |
% |
Biologics products |
|
|
20,678 |
|
|
|
18,222 |
|
|
|
13.5 |
% |
Extremity products |
|
|
20,461 |
|
|
|
13,002 |
|
|
|
57.4 |
% |
Other |
|
|
4,650 |
|
|
|
3,125 |
|
|
|
48.8 |
% |
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
115,865 |
|
|
$ |
94,287 |
|
|
|
22.9 |
% |
|
|
|
|
|
|
|
|
|
|
12
The following graphs illustrate our product line net sales as a percentage of total net sales for
the three months ended March 31, 2008 and 2007:
Product Line Sales as a Percentage of Total Net Sales
Net Sales. Our overall net sales growth of 23% in the first quarter of 2008 was attributable to our
continued success in our extremity product line, which increased 57% over prior year, as well as
expansion in our knee, hip, and biologics product lines, which increased 18%, 16% and 14%,
respectively, over prior year. Geographically, our domestic net sales totaled $67.2 million in the
first quarter of 2008 and $56.1 million in the first quarter of 2007, representing 58% and 60% of
total net sales, respectively, and growth of 20% in 2008 compared to 2007. Our international net
sales totaled $48.6 million in the first quarter of 2008, compared to $38.2 million in the first
quarter of 2007. International sales in 2008 include a favorable currency impact of $4.1 million,
principally resulting from the performance of the euro against the U.S. dollar in the first quarter
of 2008 as compared to the same period of 2007. Our international net sales in the first quarter of
2008 were favorably impacted by our performance in almost all of our international markets.
Our hip product net sales totaled $39.9 million during the first quarter of 2008, representing an
increase of 16% over the prior year. Our domestic hip sales increased 4% over prior year; however,
the majority of the worldwide growth was driven by our international business, which increased by
28% over prior year. Growth in our international markets was primarily due to continued success in
recently entered European markets, as well as the continued growth in Japan. Our international hip
sales include a $2.1 million favorable currency impact in 2008.
Our knee product net sales totaled $30.2 million in the first quarter of 2008, representing growth
of 18% over the prior year. Year-over-year knee sales increased 15% domestically and 22%
internationally, as a result of the success in our ADVANCE® knee systems, primarily due
to increased unit sales. Our international knee sales include a $1.0 million favorable currency
impact in 2008.
Net sales of our biologics products totaled $20.7 million in the first quarter of 2008,
representing year-over-year growth of 14%. In the U.S., biologics sales increased 17% due to the
sales of our PRO-DENSE® injectable regenerative graft launched in the third quarter of
2007 as well as the continued acceleration of sales of our GRAFTJACKET® tissue repair
and containment membranes. In our international markets, biologics sales remained relatively
constant.
Our extremity product net sales increased to $20.5 million in the first quarter of 2008,
representing growth of 57% over the first quarter of 2007. This year-over-year growth was driven by
the continued success of our CHARLOTTETM Foot and Ankle system and sales of our
DARCO® plating systems, the latter of which we acquired in the second quarter of 2007.
Our domestic extremity product sales increased 55%, of which our 2007 acquisitions contributed
approximately 32 percentage points of growth. Our international extremity product sales growth was
attributable to product sales from our 2007 acquisitions and a favorable currency impact.
Cost of Sales. Our cost of sales as a percentage of net sales decreased from 28.6% in the first
quarter of 2007 to 28.0% in the first quarter of 2008. This decrease is primarily attributable to
manufacturing efficiencies partially offset by
13
unfavorable shifts in our geographic sales mix. Our cost of sales included 0.3 percentage points
and 0.5 percentage points of non-cash, stock-based compensation expense in 2008 and 2007,
respectively. Our cost of sales and corresponding gross profit percentages can be expected to
fluctuate in future periods depending upon changes in our product sales mix and prices,
distribution channels and geographies, manufacturing yields, excess and obsolete inventory
provisions, and other expenses and levels of production volume.
Selling, General and Administrative. Our selling, general, and administrative expenses as a
percentage of net sales totaled 57.5% in the first quarter 2008, a 0.3 percentage point increase
from 57.2% in the first quarter of 2007. Our 2008 selling, general, and administrative expenses
include approximately $1.7 million (1.5% of net sales) of costs, primarily legal fees, associated
with the DOJ inquiry. In addition approximately $3.0 million of non-cash, stock-based compensation
expense was recognized in the first quarter of 2008 and 2007, respectively, representing 2.6% and
3.1% of net sales in each of the years, respectively.
We anticipate that our selling, general, and administrative expenses will increase in absolute
dollars to the extent that any additional growth in net sales results in increases in sales
commissions and royalty expense associated with those sales and requires us to expand our
infrastructure. Further, in the near term, we anticipate that these expenses may increase as a
percentage of net sales as we make strategic investments in order to grow our business, as we
integrate the INBONE acquisition into our business, and as we continue to incur expenses associated
with the DOJ inquiry, which we believe may continue to be significant.
Research and Development. Our investment in research and development activities represented
approximately 6.9% of net sales in the first quarter of 2008, as compared to 8.6% of net sales in
the first quarter of 2007. Our research and development expenses include approximately $0.2 million
(0.2% of net sales) and $1.3 million (1.4% of net sales) of non-cash, stock-based compensation
expense in the first quarter of 2008 and 2007, respectively. Although our investment in product
development increased in absolute dollars, our sales expanded at a higher rate.
We anticipate that our research and development expenditures may increase as a percentage of net
sales and will increase in absolute dollars as we continue to increase our investment in product
development initiatives and clinical studies to support regulatory approvals and provide expanded
proof of the efficacy of our products.
Amortization of Intangible Assets. Charges associated with the amortization of intangible assets in
the first quarter of 2008 increased to $1.0 million from $0.9 million in the first quarter of 2007.
Based on the intangible assets held at March 31, 2008, we expect to recognize amortization expense
of approximately $4.1 million for the full year of 2008, $3.6 million in 2009, $740,000 in 2010,
$710,000 in 2011, and $580,000 in 2012. These amounts do not include incremental amortization
expense that will be recorded as a result of our recently announced acquisition (see Note 13 to our
condensed consolidated financial statements).
Restructuring. During the first quarter of 2008, our restructuring expenses as a percentage of net
sales totaled 1.6%. These charges are a result of the closure of our Toulon, France facilities,
which was announced in the second quarter of 2007. These charges included severance and termination
benefits, asset impairment charges, and legal and professional fees.
Interest Income, Net. Interest income, net, consists of interest expense of $1.7 million and
$191,000 during the first quarter of 2008 and 2007, respectively, primarily from borrowings under
our capital lease agreements, certain of our factoring agreements, and, in 2008, our convertible
debt, offset by interest income of $2.1 million and $795,000 during the first quarter of 2008 and
2007, respectively, generated by our invested cash balances and investments in marketable
securities.
We anticipate increased interest expense in 2008 due to our November 2007 issuance of $200 million
of convertible senior notes, which may be offset by additional interest income from the portion of
net proceeds which are currently invested in interest-bearing accounts. The amounts of interest
income we realize in 2008 and beyond are subject to variability, dependent upon both the rate of
invested returns we realize and the amount of excess cash balances on hand.
Provision for Income Taxes. We recorded tax provisions of $3.3 million and $1.9 million in the
first quarter of 2008 and 2007, respectively. During the first quarter of 2008, our effective tax
rate was approximately 45.0%, as compared to 36.7% in the first quarter of 2007. This increase is
attributable to the expiration of the U.S. Federal Research and Development tax credit effective
January 1, 2008, as well as a decrease in tax exempt interest income during the first quarter of
2008. Our provision during the first quarter of 2007 included the recognition of a benefit upon the
effective settlement of a tax examination.
14
Seasonal Nature of Business
We traditionally experience lower sales volumes in the third quarter than throughout the rest of
the year as many of our products are used in elective procedures, which generally decline during
the summer months, typically resulting in selling, general, and administrative expenses and
research and development expenses as a percentage of sales that are higher than throughout the rest
of the year. In addition, our first quarter selling, general, and administrative expenses include
additional expenses that we incur in connection with the annual meeting held by the American
Academy of Orthopaedic Surgeons. This meeting, which is the largest orthopaedic meeting in the
world, features the presentation of scientific papers and instructional courses for orthopaedic
surgeons. During this 3-day event, we display our most recent and innovative products to these
surgeons.
Restructuring
In June 2007, we announced our plans to close our facilities in Toulon, France. This announcement
came after a thorough evaluation in which it was determined that we had excess manufacturing
capacity and redundant distribution and administrative resources that would be best eliminated
through the closure of this facility. The majority of our restructuring activities were complete by
the end of 2007, with Toulons production being transferred to our existing manufacturing facility
in Arlington, Tennessee and its distribution activities being transferred to our European
headquarters in Amsterdam, the Netherlands. We have estimated that total pre-tax restructuring
charges will be approximately $23 million to $25 million, of which we have recognized $20.7 million
through March 31, 2008. We believe that we will see the benefits from this restructuring within
selling, general and administrative expenses in 2008 and within cost of sales beginning in 2009.
See Note 11 to our condensed consolidated financial statements for further discussion of our
restructuring charges.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, certain liquidity measures (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
March 31, |
|
December 31, 2007 |
|
|
2008 |
|
|
|
|
Cash and cash equivalents |
|
$ |
235,151 |
|
|
$ |
229,026 |
|
Short-term marketable securities |
|
|
|
|
|
|
15,535 |
|
Working capital |
|
|
428,221 |
|
|
|
417,817 |
|
Line of credit availability |
|
|
97,100 |
|
|
|
97,100 |
|
During the first quarter of 2008, we liquidated all of our short-term marketable debt securities
into cash equivalents.
Operating Activities. Cash provided by operating activities was $12.8 million for the first quarter
of 2008, as compared to $7.7 million for the first quarter of 2007. The increase in operating cash
flow is primarily attributable to the $15.5 million decrease in marketable securities, as well as
improved profitability in 2008. These amounts were partially offset by increased accounts
receivable attributable to increased sales, as well as inventory built in preparation for product
launches and to support higher levels of sales.
Investing Activities. Our capital expenditures totaled approximately $9.9 million and $6.7 million
in the first quarter of 2008 and 2007, respectively. The increase is attributable to expenditures
related to the expansion of our Arlington, Tennessee facilities as well as increased investments in
surgical instrumentation. Our industry is capital intensive, particularly as it relates to surgical
instrumentation. Historically, our capital expenditures have consisted of purchased manufacturing
equipment, research and testing equipment, computer systems, office furniture and equipment, and
surgical instruments. We expect to incur capital expenditures of approximately $40 million for 2008
for routine capital expenditures, as well as approximately $18 million for the expansion of
facilities in Arlington, Tennessee.
Financing Activities. During the first three months of 2008, cash provided from stock issuances
totaled $3.4 million. These proceeds were offset by $189,000 in payments related to long-term
capital leases. In addition, our operating subsidiary in Italy continues to factor portions of its
accounts receivable balances under factoring agreements, which are considered financing
transactions for financial reporting. The cash proceeds received from these factoring agreements,
net of the amount of factored receivables collected, are reflected as cash flows from financing
activities in our condensed consolidated statements of cash flows. The proceeds received under
these agreements during the first three months of 2008 and 2007 totaled approximately $2.6 million
and $1.4 million,
15
respectively. These proceeds were offset by payments for factored receivables collected of
approximately $3.2 million and $2.0 million in the first three months of 2008 and 2007,
respectively. We recorded obligations of $67,000 and $674,000 for the amount of receivables
factored under these agreements within Accrued expenses and other liabilities in our condensed
consolidated balance sheets as of March 31, 2008 and December 31, 2007, respectively.
On March 31, 2008, our revolving credit facility had availability of $97.1 million, which can be
increased by up to an additional $50 million at our request and subject to the agreement of the
lenders. We currently have no borrowings outstanding under the credit facility. Borrowings under
the credit facility will bear interest at the sum of a base annual rate plus an applicable annual
rate that ranges from 0% to 1.75% depending on the type of loan and our consolidated leverage
ratio, with a current annual base rate of 5.25%.
During 2007, we issued $200 million of Convertible Senior Notes due 2014, which generated net
proceeds of $193.5 million. The notes pay interest semiannually at an annual rate of 2.625%. The
notes are convertible into shares of our common stock at an initial conversion rate of 30.6279
shares per $1,000 principal amount of the notes, which represents a conversion price of $32.65 per
share. We will make scheduled interest payments in 2008 related to the notes totaling $5.3 million.
Other Liquidity Information
We have funded our cash needs since 2000 through various equity and debt issuances and through cash
flow from operations. In 2007, we issued $200 million of Convertible Senior Notes due 2014, which
generated net proceeds totaling $193.5 million.
Although it is difficult for us to predict our future liquidity requirements, we believe that our
current cash balance of $235.2 million, our existing available credit line of $97.1 million, and
our expected cash flow from our 2008 operations will be sufficient for the foreseeable future to
fund our working capital requirements and operations, permit anticipated capital expenditures in
2008 of $58 million, and meet our contractual cash obligations in 2008, which includes the $24
million paid in April 2008 related to the INBONE acquisition.
Critical Accounting Policies and Estimates
Information on judgments related to our most critical accounting policies and estimates is
discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007. Certain
of our more critical accounting estimates require the application of significant judgment by
management in selecting the appropriate assumptions in determining the estimate. By their nature,
these judgments are subject to an inherent degree of uncertainty. We develop these judgments based
on our historical experience, terms of existing contracts, our observance of trends in the
industry, information provided by our customers, and information available from other outside
sources, as appropriate. Actual results may differ from these judgments under different assumptions
or conditions. Different, reasonable estimates could have been used for the current period.
Additionally, changes in accounting estimates are reasonably likely to occur from period to period.
Both of these factors could have a material impact on the presentation of our financial condition,
changes in financial condition or results of operations. All of our significant accounting policies
are more fully described in Note 2 to our consolidated financial statements set forth in our Annual
Report on Form 10-K for the year ended December 31, 2007. There have been no significant
modifications to the policies related to our critical accounting estimates since December 31, 2007.
Impact of Recently Issued Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161,
Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities by requiring
enhanced disclosures regarding how an entity uses derivative instruments, how the derivative
instruments and related hedge items are accounted for under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), and how the derivatives affect an entitys financial
position, financial performance, and cash flows. The provisions of SFAS 161 are effective for the
year ending December 31, 2009. We are currently evaluating the impact of the provisions of SFAS
161.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, and in February 2008, the
FASB amended SFAS 157 by issuing FASB Staff Position FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13, and FSP FAS
157-2, Effective Date of FASB Statement
16
No. 157 (collectively SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosure of fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements, except those relating to
lease classification, and accordingly does not require any new fair value measurements. SFAS 157 is
effective for financial assets and liabilities in fiscal years beginning after November 15, 2007,
and for non-financial assets and liabilities in fiscal years beginning after November 15, 2008. We
adopted SFAS 157 for financial assets and liabilities in the first quarter of fiscal 2008 with no
material impact to the consolidated financial statements. We are currently evaluating the potential
impact the application of SFAS 157 to our non-financial assets and liabilities will have on our
consolidated financial statements.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
Our exposure to interest rate risk arises principally from the interest rates associated with our
invested cash balances. On March 31, 2008, we had short term cash investments totaling
approximately $217 million. Based on this level of investment, a change of 0.25% in interest rates
would have an impact of $543,000 on our interest income. We currently do not hedge our exposure to
interest rate fluctuations, but may do so in the future.
Foreign Currency Exchange Rate Risk
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely
affect our financial results. Approximately 30% and 28% of our total net sales were denominated in
foreign currencies during the three months ended March 31, 2008, and for the year ended December
31, 2007, respectively, and we expect that foreign currencies will continue to represent a
similarly significant percentage of our net sales in the future. Cost of sales related to these
sales are primarily denominated in U.S. dollars; however, operating costs related to these sales
are largely denominated in the same respective currencies, thereby partially limiting our
transaction risk exposure. However, for sales not denominated in U.S. dollars, an increase in the
rate at which a foreign currency is exchanged for U.S. dollars will require more of the foreign
currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases,
if we price our products in the foreign currency, we will receive less in U.S. dollars than we did
before the rate increase went into effect. If we price our products in U.S. dollars and our
competitors price their products in local currency, an increase in the relative strength of the
U.S. dollar could result in our prices not being competitive in a market where business is
transacted in the local currency.
A substantial majority of our sales denominated in foreign currencies are derived from European
Union countries and are denominated in the euro. Additionally, we have significant intercompany
receivables from our foreign subsidiaries that are denominated in foreign currencies, principally
the euro and the Japanese yen. Our principal exchange rate risk therefore exists between the U.S.
dollar and the euro and between the U.S. dollar and the yen. Fluctuations from the beginning to the
end of any given reporting period result in the revaluation of our foreign currency-denominated
intercompany receivables and payables, generating currency translation gains or losses that impact
our non-operating income/expense levels in the respective period.
As discussed in Note 2 to our consolidated financial statements set forth in our Annual Report on
Form 10-K for the year ended December 31, 2007, we enter into certain short-term derivative
financial instruments in the form of foreign currency forward contracts. These forward contracts
are designed to mitigate our exposure to currency fluctuations in our intercompany balances
denominated in euros, Japanese yen, British pounds and Canadian dollars. Any change in the fair
value of these forward contracts as a result of a fluctuation in a currency exchange rate is
expected to be offset by a change in the value of the intercompany balance.
18
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934. Our disclosure controls and procedures are designed to
ensure that material information relating to us, including our consolidated subsidiaries, is made
known to our principal executive officer and principal financial officer by others within our
organization. Under the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures as of March 31, 2008. Based on this
evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of March 31, 2008, to ensure that the
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms.
Change in Internal Control Over Financial Reporting
During the three months ended March 31, 2008, there were no significant changes in our internal
control over financial reporting that materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.
19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 1A. RISK FACTORS.
There have been no material changes with regard to the risk factors previously disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table represents shares surrendered by employees to satisfy tax withholding
obligations on vested restricted stock. There were no shares repurchased by us in the open
market to satisfy employee stock option exercises and restricted stock grants during the first
quarter of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Shares that May Yet |
|
|
Total Number of |
|
Average Price Paid |
|
Shares Purchased as |
|
Be Purchased Under |
|
|
Shares Purchased |
|
per Share |
|
Part of Publicly |
|
the Plans or |
|
|
(1) |
|
(1) |
|
Announced Plans |
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1, 2008 March 31, 2008 |
|
|
1,435 |
|
|
$ |
26.67 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares reported above as purchased are attributable to shares
surrendered to us by employees in payment of minimum tax obligations related to vesting of
restricted shares. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
20
ITEM 6. EXHIBITS.
(a) Exhibits
The following exhibits are filed as a part of this quarterly report on Form 10-Q or are
incorporated herein by reference:
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
3.1
|
|
Fourth Amended and Restated Certificate of Incorporation of Wright Medical Group, Inc., (1) as amended by Certificate of
Amendment of Fourth Amended and Restated Certificate of Incorporation of Wright Medical Group, Inc. (2) |
|
|
|
3.2
|
|
Second Amended and Restated By-laws of Wright Medical Group, Inc. (3) |
|
|
|
4.1
|
|
Form of Common Stock certificate. (1) |
|
|
|
4.2
|
|
Indenture, dated as of November 26, 2007, between Wright Medical Group, Inc. and The Bank of
New York, as trustee (including form of 2.625% Convertible Senior Notes due 2014).
(4) |
|
|
|
4.3
|
|
Underwriting Agreement, dated as of November 19, 2007, among Wright Medical Group, Inc. and
J.P. Morgan Securities Inc., Piper Jaffray & Co., and Wachovia Capital Markets, LLC.
(4) |
|
|
|
10.1
|
|
Credit Agreement dated as of June 30, 2006, among Wright Medical Group, Inc., its domestic
subsidiaries, the lenders named therein, Bank of America, N.A., and SunTrust Bank.(5)
as amended by First Amendment to Credit Agreement dated as of November 16, 2007.
(6) |
|
|
|
10.2
|
|
Fourth Amended and Restated 1999 Equity Incentive Plan (the 1999 Plan). (7) |
|
|
|
10.3
|
|
Form of Incentive Stock Option Agreement, as amended by form of Amendment No. 1 to Incentive
Stock Option Agreement, pursuant to the 1999 Plan. (1) |
|
|
|
10.4
|
|
Form of Non-Qualified Stock Option Agreement pursuant to the 1999 Plan. (1) |
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10.5
|
|
Form of Executive Stock Option Agreement pursuant to the 1999 Plan. (8) |
|
|
|
10.6
|
|
Form of Non-Employee Director Stock Option Agreement pursuant to the 1999 Plan. (8) |
|
|
|
10.7
|
|
Wright Medical Group, Inc. Executive Performance Incentive Plan. (9) |
|
|
|
10.8
|
|
Form of Indemnification Agreement between Wright Medical Group, Inc. and its directors and
executive officers. (1) |
|
|
|
10.9
|
|
Employment Agreement dated as of November 22, 2005, between Wright Medical Technology, Inc.
and F. Barry Bays,(10) as amended by Employment Agreement Amendment dated as of
March 31, 2008.(11) |
|
|
|
10.10
|
|
Employment Agreement dated as of November 22, 2005, between Wright Medical Technology, Inc.
and John K. Bakewell,(10) as amended by Employment Agreement Amendment dated as of
March 31, 2008.(11) |
|
|
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10.11
|
|
Employment Agreement dated as of April 4, 2006, between Wright Medical Technology, Inc. and
Gary D. Henley. (12) |
|
|
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10.12
|
|
Employment Agreement dated as of March 1, 2007, between Wright Medical Netherlands B.V. and
Paul R. Kosters. |
21
|
|
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Exhibit |
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|
No. |
|
Description |
|
|
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11
|
|
Computation of earnings per share (included in Note 9 of the
Notes to Condensed Consolidated Financial Statements in
Financial Statements and Supplementary Data). |
|
|
|
12
|
|
Ratio of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) Under the Securities Exchange Act of 1934. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) Under the Securities Exchange Act of 1934. |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Rule 13a-14(b) Under the Securities Exchange
Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the
United States Code. |
|
|
|
99
|
|
Acquisition Agreement dated as of April 3, 2008, between Wright
Medical Group, Inc. and INBONE Technologies, Inc. |
|
|
|
(1) |
|
Incorporated by reference to our Registration Statement on Form S-1 (Registration No.
333-59732), as amended. |
|
(2) |
|
Incorporated by reference to our Registration Statement on Form S-8 filed on May 14, 2004. |
|
(3) |
|
Incorporated by reference to our current report on Form 8-K filed on February 19, 2008. |
|
(4) |
|
Incorporated by reference to our current report on Form 8-K filed on November 26, 2007. |
|
(5) |
|
Incorporated by reference to our current report on Form 8-K filed on July 7, 2006. |
|
(6) |
|
Incorporated by reference to our current report on Form 8-K filed on November 21, 2007. |
|
(7) |
|
Incorporated by reference to our definitive Proxy Statement filed on April 13, 2005. |
|
(8) |
|
Incorporated by reference to our current report on Form 8-K filed on April 27, 2005. |
|
(9) |
|
Incorporated by reference to our current report on Form 8-K filed on February 10, 2005. |
|
(10) |
|
Incorporated by reference to our current report on Form 8-K filed on November 22, 2005. |
|
(11) |
|
Incorporated by reference to our current report on Form 8-K filed on April 3, 2008. |
|
(12) |
|
Incorporated by reference to our current report on Form 8-K filed on March 22, 2006. |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 24, 2008
|
|
|
|
|
|
WRIGHT MEDICAL GROUP, INC.
|
|
|
By: |
/s/ Gary D. Henley
|
|
|
|
Gary D. Henley |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
By: |
/s/ John. K. Bakewell
|
|
|
|
John K. Bakewell |
|
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer and Chief Accounting Officer) |
|
|
23