Wright Medical Group, Inc. Reports Results for the Fourth Quarter Ended December 31, 2010

Company Exceeds Guidance in Both Top- and Bottom-Line Results

ARLINGTON, Tenn.--()--Wright Medical Group, Inc. (NASDAQ: WMGI), a global orthopaedic medical device company and a leading provider of surgical solutions for the foot and ankle market, today reported financial results for its fourth quarter ended December 31, 2010.

Net sales totaled $138.3 million during the fourth quarter ended December 31, 2010, representing a 6% increase over net sales of $129.9 million during the fourth quarter of 2009. Excluding the impact of foreign currency, net sales increased 7% during the fourth quarter.

Net income for the fourth quarter of 2010 totaled $8.9 million or $0.22 per diluted share, compared to net income of $2.2 million or $0.06 per diluted share in the fourth quarter of 2009.

Net income for the fourth quarter of 2010 included the after-tax effects of approximately $3.0 million of non-cash stock-based compensation expense and $1.3 million of expenses associated with our deferred prosecution agreement (DPA). Net income for the fourth quarter of 2009 included the after-tax effects of approximately $5.6 million of charges to write down a significant international receivable, $3.0 million of non-cash stock-based compensation expense, $2.6 million of non-cash charges to write-off cumulative translation adjustment (CTA) balances associated with the substantially complete liquidation of certain foreign subsidiaries, and $2.6 million of restructuring charges.

Fourth quarter net income, as adjusted, totaled $11.8 million, or $0.29 per diluted share, in 2010 compared to net income, as adjusted, of $10.8 million, or $0.27 per diluted share for the fourth quarter of 2009. A reconciliation of U.S. GAAP to “as adjusted” results is included in the attached financial tables.

Gary D. Henley, President and Chief Executive Officer commented, “We are pleased with our ability to deliver fourth quarter revenue and earnings results above our communicated guidance ranges. Our U.S. business benefited from an accelerating extremities growth rate and favorable early results from the launch of our EVOLUTION™ Medial-Pivot knee system, and our international business continued to deliver the strong revenue results that we have seen throughout 2010. In addition to the better than expected revenue and earnings results, we also finished the year strong from a cash flow perspective, resulting in full year 2010 free cash flow of $24 million.”

Mr. Henley continued, “2010 was a challenging year for the orthopaedic industry. Despite the industry wide challenges, we were able to deliver revenue and earnings results in line with our original guidance for the year and produce free cash flow in excess of our original expectations. This 2010 performance highlights the flexibility of our business model and the advantages of our business profile, which is unique within the orthopaedic industry.”

Outlook

The Company’s earnings target, as communicated in the guidance range stated below, excludes the effect of the new Senior Credit facility and tender offer for the Company’s convertible notes that were announced today, possible future acquisitions, other material future business developments, non-cash stock-based compensation expense, and costs associated with the Company’s DPA (including the associated independent monitor).

The Company anticipates full year 2011 net sales to be in the range of $517 million to $535 million. As previously announced, our license agreement with KCI has a negative impact of approximately 1% to 2% to our 2011 revenue growth rate. Excluding this negative impact, our annualized growth expectations are approximately 1% to 5%. The Company anticipates full year 2011 as-adjusted earnings per share to be in the range of $0.88 to $0.95 per diluted share, which represents annualized growth expectations of -2% to 6%.

As noted above, the Company’s earnings target excludes the impact of non-cash stock-based compensation charges. While the amount of the non-cash stock-based compensation charges will vary depending upon a number of factors, the Company currently estimates that the after-tax impact of those expenses will be approximately $0.19 per diluted share for the full year 2011. Therefore, the Company anticipates full year 2011 as-adjusted earnings per share including stock-based compensation to be in the range of $0.69 to $0.76 per diluted share, which represents annualized growth expectations of -1% to 9%.

The Company’s anticipated ranges for net sales, adjusted earnings per share, and non-cash stock-based compensation charges are forward-looking statements. They are subject to various risks and uncertainties that could cause the Company’s actual results to differ materially from the anticipated targets. The anticipated targets are not predictions of the Company’s actual performance. See the cautionary information about forward-looking statements in the “Safe-Harbor Statement” section of this press release.

Conference Call

As previously announced, the Company will host a conference call starting at 3:30 p.m. (Central Time) today. The live dial-in number for the call is 866-383-8008 (domestic) or 617-597-5341 (international). The participant passcode for the call is “wright.” To access a simultaneous webcast of the conference call via the internet, go to the “Corporate – Investor Info” section of the Company’s website located at www.wmt.com. A replay of the conference call by telephone will be available starting at 6:30 p.m. (Central Time) today and continuing until February 17, 2011. To hear this replay, dial 888-286-8010 (domestic) or 617-801-6888 (international) and enter the passcode 12255148. A replay of the conference call will also be available via the internet starting today and continuing for at least 12 months. To access a replay of the conference call via the internet, go to the “Corporate – Investor Info – Audio Archives” section of the Company’s website located at www.wmt.com.

The conference call may include a discussion of non-GAAP financial measures. Reference is made to the most directly comparable GAAP financial measures, the reconciliation of the differences between the two financial measures, and the other information included in this press release, our Form 8-K filed with the SEC today, or otherwise available in the “Corporate – Investor Info – Supplemental Financial Information” section of the Company's website located at www.wmt.com.

The conference call may include forward-looking statements. See the cautionary information about forward-looking statements in the “Safe-Harbor Statement” section of this press release.

Non-GAAP Financial Measures

The Company uses non-GAAP financial measures, such as net sales, excluding the impact of foreign currency, operating income, as adjusted, net income, as adjusted, net income, as adjusted, per diluted share, effective tax rate, as adjusted, and free cash flow. The Company’s management believes that the presentation of these measures provides useful information to investors. These measures may assist investors in evaluating the Company’s operations, period over period. The measures exclude such items as business development activities, including purchased in-process research and development, the financial impact of significant litigation, costs related to the U.S. governmental inquiries and DPA, restructuring charges and non-cash stock-based expense, all of which may be highly variable, difficult to predict and of a size that could have substantial impact on the Company’s reported results of operations for a period. Management uses these measures internally for evaluation of the performance of the business, including the allocation of resources and the evaluation of results relative to employee performance compensation targets. Investors should consider these non-GAAP measures only as a supplement to, not as a substitute for or as superior to, measures of financial performance prepared in accordance with GAAP.

Safe-Harbor Statement

This press release contains “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s 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 subject to a number of risks and uncertainties that could cause our actual results to materially differ from those described in the forward-looking statements. Risks and uncertainties that could cause our actual results to materially differ from those described in forward-looking statements include those 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, 2010 to be filed with the SEC today, under the heading “Risk Factors” ), and the following: the impact of our settlement of the federal investigation into our consulting arrangements with orthopaedic surgeons relating to our hip and knee products in the United States, including our compliance with the Deferred Prosecution Agreement through September 2011 and the Corporate Integrity Agreement through September 2015; demand for and market acceptance of our new and existing products; recently enacted healthcare reform legislation and its future implementation, possible additional legislation, regulation and other governmental pressures in the United States or globally, which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payers or other elements of our business; tax reform measures, tax authority examinations and associated tax risks and potential obligations; our ability to identify business development and growth opportunities for existing or future products; product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, sanctions, seizures, litigation, or declining sales; individual, group or class action alleging products liability claims, including an increase in the number of claims during any period; future actions of the FDA or any other regulatory body or government authority that could delay, limit or suspend product development, manufacturing or sale or result in seizures, injunctions, monetary sanctions or criminal or civil liabilities; our ability to enforce our patent rights or patents of third parties preventing or restricting the manufacture, sale or use of affected products or technology; the impact of geographic and product mix on our sales; retention of our sales representatives and independent distributors; inventory reductions or fluctuations in buying patterns by wholesalers or distributors; and any impact of the commercial and credit environment on us and our customers and suppliers. Readers should not place undue reliance on forward-looking statements. Such statements are made as of the date of this press release, and we undertake no obligation to update such statements after this date.

Wright Medical Group, Inc. is a global orthopaedic medical device company and a leading provider of surgical solutions for the foot and ankle market. The Company specializes in the design, manufacture and marketing of devices and biologic products for extremity, hip and knee repair and reconstruction. The Company has been in business for more than 60 years and markets its products in over 60 countries worldwide. For more information about Wright Medical, visit the Company’s website at www.wmt.com.

--Tables Follow--

   

Wright Medical Group, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data--unaudited)

 
Three Months Ended Twelve Months Ended

December 31,
2010

 

December 31,
2009

December 31,
2010

 

December 31,
2009

 
Net sales $ 138,287 $ 129,928 $ 518,973 $ 487,508
Cost of sales 40,392   38,069   158,456 148,715
Gross profit 97,895 91,859 360,517 338,793
 
Operating expenses:
Selling, general and administrative 73,324 74,323 282,413 270,456
Research and development 8,902 9,231 37,300 35,691
Amortization of intangible assets 720 1,252 2,711 5,151
Restructuring charges (220 ) 2,553   919 3,544
Total operating expenses 82,726 87,359 323,343 314,842
 
Operating income 15,169 4,500 37,174 23,951
Interest expense, net 1,573 1,492 6,123 5,466
Other (income) expense, net (140 ) 3,231   130 2,873
Income before income taxes 13,736 (223 ) 30,921 15,612
Provision for income taxes 4,867   (2,458 ) 13,080 3,481
Net income $ 8,869   $ 2,235   $ 17,841 $ 12,131
 
Net income per share, basic $ 0.23   $ 0.06   $ 0.47 $ 0.32
Net income per share, diluted $ 0.22   $ 0.06   $ 0.47 $ 0.32
Weighted-average number of common shares outstanding, basic 37,962   37,470   37,802 37,366
Weighted-average number of common shares outstanding, diluted 44,235   37,718   37,961 37,443
   

Wright Medical Group, Inc.

Consolidated Sales Analysis

(dollars in thousands--unaudited)

 
Three Months Ended Twelve Months Ended

December 31,
2010

 

December 31,
2009

  %

change

December 31,
2010

 

December 31,
2009

  %

change

Geographic
Domestic $ 81,180 $ 78,307 3.7 % $ 309,983 $ 299,587 3.5 %
International 57,107 51,621 10.6 % 208,990 187,921 11.2 %
Total net sales $ 138,287 $ 129,928 6.4 % $ 518,973 $ 487,508 6.5 %
 
Product Line
Hip products $ 46,269 $ 44,839 3.2 % $ 176,687 $ 167,869 5.3 %
Knee products 35,112 31,451 11.6 % 128,854 122,178 5.5 %
Extremity products 34,752 30,259 14.8 % 124,490 107,375 15.9 %
Biologics products 19,935 20,448 (2.5 %) 79,231 79,120 0.1 %
Other 2,219 2,931 (24.3 %) 9,711 10,966 (11.4 %)
Total net sales $ 138,287 $ 129,928 6.4 % $ 518,973 $ 487,508 6.5 %
 

Wright Medical Group, Inc.

Supplemental Sales Information

(unaudited)

 
Fourth Quarter 2010 Sales Growth
Domestic
As
Reported
  Int'l
Constant
Currency
  Int'l
As
Reported
  Total
Constant
Currency
  Total

As

Reported

Hips (9%) 12% 12% 3% 3%
Knees 6% 20% 19% 12% 12%
Extremities 14% 18% 16% 15% 15%
Biologics (1%) (10%) (10%) (3%) (3%)
Total 4% 11% 11% 7% 6%
  2010 Sales Growth
Domestic
As
Reported
  Int'l
Constant
Currency
  Int'l
As
Reported
  Total
Constant
Currency
  Total

As

Reported

Hips (3%) 11% 12% 5% 5%
Knees 2% 10% 10% 5% 5%
Extremities 14% 26% 27% 16% 16%
Biologics 0% 1% 3% 0% 0%
Total 3% 10% 11% 6% 6%
  Sales as a % of Total Sales
Three Months Ended

December 31, 2010

  Twelve Months Ended

December 31, 2010

Domestic   International   Total Domestic   International   Total
Hips 12% 21% 33% 14% 20% 34%
Knees 14% 12% 25% 13% 11% 25%
Extremities 20% 5% 25% 19% 5% 24%
Biologics 12% 2% 14% 13% 3% 15%
Total 59% 41% 100% 60% 40% 100%
   

Wright Medical Group, Inc.

Reconciliation of Net Sales to Net Sales Excluding the Impact of Foreign Currency

(dollars in thousands--unaudited)

 
Three Months Ended Twelve Months Ended
December 31, 2010 December 31, 2010

International
Net Sales

  Total

Net Sales

International
Net Sales

  Total

Net Sales

Net sales, as reported $ 57,107 $ 138,287 $ 208,990 $ 518,973
Currency impact as compared to prior period 344 344 (1,496 ) (1,496 )

Net sales, excluding the impact of foreign currency

$ 57,451 $ 138,631 $ 207,494   $ 517,477  
     

Wright Medical Group, Inc.

Reconciliation of As Reported Results to Non-GAAP Financial Measures

(in thousands, except per share data--unaudited)

 
Three Months Ended Twelve Months Ended

December 31,
2010

December 31,
2009

December 31,
2010

 

December 31,
2009

Operating Income
Operating income, as reported $ 15,169 $ 4,500 $ 37,174

$

23,951

Reconciling items impacting Gross Profit:
Inventory step-up amortization - - - 70
Non-cash, stock-based compensation 321   347   1,301     1,285  
Total 321 347 1,301 1,355
Reconciling items impacting Selling, General and Administrative expenses:
Non-cash, stock-based compensation 2,224 2,255 9,924 10,077
U.S. governmental inquiries/DPA related 1,283 186 10,902 7,845
Write-down of international receivable -   5,579   -     5,579  
Total 3,507 8,020 20,826 23,501
Reconciling items impacting Research and Development expenses:
Non-cash, stock-based compensation 452 389 1,952 1,829
Other Reconciling Items:
Restructuring charges (220 ) 2,553   919     3,544  
Operating income, as adjusted $ 19,229   $ 15,809   $ 62,172  

$

54,180

 

Operating income, as adjusted, as a percentage of net sales

 

13.9

%

  12.2 %  

12.0

%

  11.1 %
 
Three Months Ended Twelve Months Ended

December 31,
2010

December 31,
2009

December 31,
2010

December 31,
2009

Net Income
Income before taxes, as reported $ 13,736 $ (223 ) $ 30,921 $ 15,612
Pre-tax impact of reconciling items:
Non-cash, stock-based compensation 2,997 2,991 13,177 13,191
Restructuring charges (220 ) 2,553 919 3,544
Inventory step-up amortization - - - 70
U.S. governmental inquiries/DPA related 1,283 186 10,902 7,845
Write-down of international receivable - 5,579 - 5,579
CTA write-off -   2,643   -     2,643  
Income before taxes, as adjusted 17,796   13,729   55,919     48,484  
 
Provision for income taxes, as reported 4,867 (2,458 ) 13,080 3,481
Non-cash, stock-based compensation 1,144 896 4,410 3,901
Restructuring charges (67 ) 2,882 376 3,269
Inventory step-up amortization - - - 27
U.S. governmental inquiries/DPA related 81 (208 ) 2,266 2,789
Write-down of international receivable -   1,817   -     1,817  
Provision for income taxes, as adjusted   6,025     2,929     20,132     15,284  
Effective tax rate, as adjusted   33.9 %   21.3 %   36.0 %   31.5 %
Net income, as adjusted $ 11,771   $ 10,800   $ 35,787   $ 33,200  
   

Wright Medical Group, Inc.

Reconciliation of As Reported Results to Non-GAAP Financial Measures

(continued)

 
Three Months Ended Three Months Ended
December 31, 2010 December 31, 2009
As Reported   As Adjusted As Reported   As Adjusted
Basic net income $ 8,869 $ 11,771 $ 2,235 $ 10,800
Interest expense on convertible notes   935   935     N/A     935  
Diluted net income $ 9,804 $ 12,706 $ 2,235 $ 11,735
 
Basic shares 37,962 37,962 37,470 37,470
Dilutive effect of stock options and

restricted shares

147

147

248

248

Dilutive effect of convertible notes   6,126   6,126     N/A     6,126  
Diluted shares 44,235 44,235 37,718 43,844
 
Net income per share, diluted $ 0.22 $ 0.29   $ 0.06   $ 0.27  
 
Twelve Months Ended Twelve Months Ended
December 31, 2010 December 31, 2009
As Reported As Adjusted As Reported As Adjusted
Basic net income $ 17,841 $ 35,787 $ 12,131 $ 33,200
Interest expense on convertible notes   N/A   3,740     N/A     3,740  
Diluted net income $ 17,841 $ 39,527 $ 12,131 $ 36,940
 
Basic shares 37,802 37,802 37,366 37,366
Dilutive effect of stock options and

restricted shares

159

159

77

77

Dilutive effect of convertible notes   N/A   6,126     N/A     6,126  
Diluted shares 37,961 44,087 37,443 43,569
 
Net income per share, diluted $ 0.47 $ 0.90   $ 0.32   $ 0.85  
 
Three Months Ended Twelve Months Ended
December 31,

2010

December 31,

2009

December 31,

2010

December 31,

2009

Net Income per Diluted Share

Net income, as reported, per diluted share

$

0.22

$ 0.06 $ 0.47 $ 0.32
Interest expense on convertible notes N/A 0.02 0.08 0.09
Dilutive effect of convertible notes N/A (0.01 ) (0.07 ) (0.05 )
Non-cash, stock-based compensation 0.04 0.05 0.20 0.21
Restructuring charges 0.00 (0.01 ) 0.01 0.01
Inventory step-up amortization - - - 0.00
U.S. governmental inquiries/DPA related 0.03 0.01 0.20 0.12
Write-down of international receivable - 0.09 - 0.09
CTA write-off   -   0.06     -     0.06  

Net income, as adjusted, per diluted share

$ 0.29 $ 0.27   $ 0.90   $ 0.85  
   

Wright Medical Group, Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands--unaudited)

 

December 31,
2010

December 31,
2009

 
Assets
Current assets:
Cash and cash equivalents $ 153,261 $ 84,409
Marketable securities 19,152 86,819
Accounts receivable, net 105,336 101,720
Inventories 166,339 163,535
Prepaid expenses and other current assets   53,502   54,121
Total current assets   497,590   490,604
 
Property, plant and equipment, net 158,247 139,708
Goodwill and intangible assets, net 70,673 71,587
Marketable securities 17,193 -
Other assets   11,536   12,385
Total assets $ 755,239 $ 714,284
 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 15,862 $ 13,978
Accrued expenses and other current liabilities 54,409 54,643
Current portion of long-term obligations   1,033   336
Total current liabilities   71,304   68,957
Long-term obligations 201,766 200,326
Other liabilities   11,197   4,593
Total liabilities   284,267   273,876
 
Stockholders’ equity   470,972   440,408
Total liabilities and stockholders’ equity $ 755,239 $ 714,284

Contacts

Wright Medical Group, Inc.
Lance Berry, 901-867-4607

Contacts

Wright Medical Group, Inc.
Lance Berry, 901-867-4607