Wright Medical Group, Inc. Reports Results for Second Quarter Ended June 30, 2011

US Knee Sales Grow Above Market Rates Driven By EVOLUTIONTM Knee System;

Company Delivers Double-Digit Year-over-Year Adjusted Earnings Per Share Growth and Reiterates 2011 Guidance

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 second quarter ended June 30, 2011.

Net sales totaled $132.5 million during the second quarter ended June 30, 2011, representing a 4% increase over net sales of $127.7 million during the second quarter of 2010. Excluding the impact of foreign currency, net sales were flat in the second quarter of 2011, as compared to the same period last year.

Net income for the second quarter of 2011 totaled $6.1 million or $0.16 per diluted share, compared to net income of $4.8 million or $0.13 per diluted share in the second quarter of 2010.

Net income for the second quarter of 2011 included the after-tax effects of approximately $2.4 million of expenses associated with the Company’s deferred prosecution agreement (DPA) and $1.6 million of non-cash stock-based compensation expense. Net income for the second quarter of 2010 included the after-tax effects of approximately $4.1 million of non-cash stock-based compensation expense, $606,000 of expenses related to U.S. governmental inquiries, and $461,000 of restructuring charges.

Second quarter net income, as adjusted, increased to $9.0 million in 2011 from $8.3 million in 2010. Diluted earnings per share, as adjusted, increased 10% to $0.23 in the second quarter of 2011 from $0.21 in the second quarter of 2010. A reconciliation of U.S. GAAP to “as adjusted” results is included in the attached financial tables.

David D. Stevens, Interim Chief Executive Officer commented, “We continue to deliver double-digit year-over-year adjusted earnings per share growth as we execute on our strategic plan. Wright Medical remains committed to the highest standards of ethical conduct at every level of the business and having a robust compliance program.”

Mr. Stevens continued, “During the second quarter we continued to launch new products for the foot and ankle market including FUSIONFLEX Demineralized Moldable Scaffold and our INBONE® II Total Ankle Replacement System, the only ankle replacement on the market in the United States that offers multiple implant options with different articular geometry, and we are pleased with the interest expressed by both existing and prospective customers. We are delivering results that are in line with our expectations. Our outlook remains positive and we are confident that we will achieve results in line with our previously announced 2011 guidance.”

Outlook

The Company is reiterating its previously announced 2011 net sales outlook of $517 million to $535 million, representing sales that are in a range that is relatively flat to 3% growth as compared to 2010. This range includes the previously announced license agreement with KCI that is expected to have a negative impact on the Company’s 2011 revenue growth rate of approximately 1% to 2%. Excluding this negative impact, Wright Medical expects to achieve annualized revenue growth of approximately 1% to 5%. The Company is also reiterating its 2011 as-adjusted earnings per share outlook to a target range for the full year 2011 of $0.89 to $0.97 per diluted share, which was previously communicated on May 5, 2011. The Company’s current outlook for adjusted earnings per share represents annualized growth expectations of -1% to 8%.

The Company’s earnings target excludes the transaction costs and non-cash deferred financing fees associated with the Convertible Notes tendered, 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).

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 $0.70 to $0.78 per diluted share, which represents relatively flat earnings to growth of 11%.

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.

Update on Status of Investigation

As previously announced on May 5, 2011, the Company received a letter from the United States Attorney's Office for the District of New Jersey (USAO) pursuant to Paragraph 50 of the Deferred Prosecution Agreement (DPA) stating that the USAO believes that the Company has knowingly and willfully breached material provisions of the DPA. As permitted under the terms of the DPA, the Company made a presentation to the USAO within three weeks of receipt of the letter. Since that presentation, there have been further communications, as well as confidential discussions with the USAO and the Office of the Inspector General of the United States Department of Health and Human Services (OIG) regarding the potential resolution of certain issues relating to the DPA and the Company’s Corporate Integrity Agreement (CIA) with the OIG. There can be no assurances about whether there will be consensual resolution, the terms or timing.

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 866-713-8307 (domestic) or 617-597-5307 (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 Information” 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 August 4, 2011. To hear this replay, dial 888-286-8010 (domestic) or 617-801-6888 (international) and enter the passcode 90077199. 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 Information – 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 Information – 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 costs related to the U.S. governmental inquiries and the DPA, restructuring charges, transaction costs and non-cash deferred financing fees associated with the Convertible Notes tendered 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.

Cautionary Note Regarding Forward-Looking Statements

This press release contains “forward-looking statements” as defined under U.S. federal securities laws. These statements, including statements regarding potential actions by the USAO, independent monitor, OIG and other agencies or their potential impact, and statements about financial results for the quarter ended June 30, 2011, 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. 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. 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, and our subsequently filed quarterly reports, under the heading “Risk Factors” and elsewhere), and 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 DPA through September 2011 (which could be extended) and the CIA through September 2015. Our failure to comply with the DPA or the CIA could expose us to significant liability including, but not limited to, extension of the term of the DPA, exclusion from federal healthcare program participation, including Medicaid and Medicare, which would have a material adverse effect on our financial condition, results of operations and cash flows, potential prosecution, including under the previously-filed criminal complaint, civil and criminal fines and penalties, and additional litigation cost and expense. A breach of the DPA or the CIA could result in an event of default under the Senior Credit Facility, which in turn could result in an event of default under the Indenture.

Additional risks and uncertainties that could cause our actual results to materially differ from those described in forward-looking statements include the possibility of litigation brought by shareholders, including private securities litigation and shareholder derivative suits, which if initiated, could divert management’s attention, harm our business and/or reputation and result in significant liabilities; demand for and market acceptance of our new and existing products; future actions of governmental authorities and other third parties; tax measures; business development and growth opportunities; product quality or patient safety issues; products liability claims; enforcement of our intellectual property rights; the geographic and product mix impact on our sales; retention of sales representatives and independent distributors; inventory reductions or fluctuations in buying patterns by wholesalers or distributors; ability to realize the anticipated benefits of restructuring initiatives; and impact of the commercial and credit environment on us and our customers and suppliers.

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 Six Months Ended

June 30,

2011

 

June 30,

2010

June 30,

2011

 

June 30,

2010

 
Net sales $ 132,505 $ 127,734 $ 267,891 $ 258,978
Cost of sales 41,504 39,934   80,272 80,075  
Gross profit 91,001 87,800 187,619 178,903
 
Operating expenses:
Selling, general and administrative 70,821 67,774 145,646 144,212
Research and development 7,807 9,784 17,014 19,619
Amortization of intangible assets 677 634 1,367 1,283
Restructuring charges - 461   - 1,005  
Total operating expenses 79,305 78,653 164,027 166,119
 
Operating income 11,696 9,147 23,592 12,784
Interest expense, net 1,475 1,510 3,310 3,018
Other expense (income), net 257 (175 ) 4,716 (43 )
Income before income taxes 9,964 7,812 15,566 9,809
Provision for income taxes 3,817 2,965   5,827 5,487  
Net income $ 6,147 $ 4,847   $ 9,739 $ 4,322  
 
Net income per share, basic $ 0.16 $ 0.13   $ 0.26 $ 0.11  
Net income per share, diluted $ 0.16 $ 0.13   $ 0.25 $ 0.11  
Weighted-average number of common shares outstanding, basic 38,240 37,764   38,137 37,652  
Weighted-average number of common shares outstanding, diluted 39,261 37,960   38,347 37,884  
 
   
Wright Medical Group, Inc.
Consolidated Sales Analysis

(dollars in thousands--unaudited)

 
Three Months Ended Six Months Ended
June 30,

2011

  June 30,

2010

  %

change

June 30,

2011

  June 30,

2010

  %

change

Geographic
Domestic $ 75,354 $ 76,484 (1.5%) $ 153,296 $ 154,209 (0.6%)
International 57,151 51,250 11.5% 114,595 104,769 9.4%
Total net sales $ 132,505 $ 127,734 3.7% $ 267,891 $ 258,978 3.4%
 
Product Line
Hip products $ 45,544 $ 44,177 3.1% $ 91,441 $ 90,462 1.1%
Knee products 33,392 31,775 5.1% 66,225 64,193 3.2%
Extremity products 32,753 29,509 11.0% 67,026 59,613 12.4%
Biologics products 17,929 19,838 (9.6%) 37,236 39,630 (6.0%)
Other 2,887 2,435 18.6% 5,963 5,080 17.4%
Total net sales $ 132,505 $ 127,734 3.7% $ 267,891 $ 258,978 3.4%
 
 
Wright Medical Group, Inc.
Supplemental Sales Information

(unaudited)

 
Second Quarter 2011 Sales Growth

Domestic

As

Reported

 

Int'l

Constant

Currency

 

Int'l

As

Reported

 

Total

Constant

Currency

  Total

As

Reported

Hips (13%) 4% 15% (3%) 3%
Knees 7% (3%) 3% 2% 5%
Extremities 8% 10% 22% 9% 11%
Biologics (11%) (9%) (3%) (11%) (10%)
Total (1%) 2% 12% 0% 4%
 
 
Sales as a % of Total Sales
Three Months Ended

June 30, 2011

  Six Months Ended

June 30, 2011

Domestic   International   Total Domestic   International   Total
Hips 12% 22% 34% 12% 22% 34%
Knees 13% 12% 25% 13% 11% 25%
Extremities 20% 5% 25% 20% 5% 25%
Biologics 11% 2% 14% 11% 2% 14%
Total 57% 43% 100% 57% 43% 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 Six Months Ended
June 30, 2011 June 30, 2011

International

Net Sales

  Total

Net Sales

International

Net Sales

 

Total

Net Sales

Net sales, as reported $ 57,151 $ 132,505 $ 114,595 $ 267,891
Currency impact as compared to prior period (4,824 ) (4,824 ) (6,566 ) (6,566 )

Net sales, excluding the impact of foreign currency

$ 52,327   $ 127,681   $ 108,029   $ 261,325  
 
   
Wright Medical Group, Inc.
Reconciliation of As Reported Results to Non-GAAP Financial Measures

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

 
Three Months Ended Six Months Ended

June 30,

2011

 

June 30,

2010

June 30,

2011

 

June 30,

2010

Operating Income
Operating income, as reported $ 11,696 $ 9,147 $ 23,592 $ 12,784
Reconciling items impacting Gross Profit:
Non-cash, stock-based compensation 360   326   707   666  
Total 360 326 707 666
Reconciling items impacting Selling, General and Administrative expenses:
Non-cash, stock-based compensation 1,300 3,172 3,368 5,439
U.S. governmental inquiries/DPA related 2,385   606   4,567   8,677  
Total 3,685 3,778 7,935 14,116
Reconciling items impacting Research and Development expenses:
Non-cash, stock-based compensation (53 ) 610 392 1,008
Other Reconciling Items:
Restructuring charges -   461   -   1,005  
Operating income, as adjusted $ 15,688   $ 14,322   $ 32,626   $ 29,579  

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

 

11.8

%

  11.2 %  

12.2

%

  11.4 %
 
   
Three Months Ended Six Months Ended
June 30,

2011

 

June 30,

2010

June 30,

2011

 

June 30,

2010

Net Income
Income before taxes, as reported $ 9,964 $ 7,812 $ 15,566 $ 9,809
Pre-tax impact of reconciling items:
Non-cash, stock-based compensation 1,607 4,108 4,467 7,113
Restructuring charges - 461 - 1,005

Deferred financing fees and transaction costs associated with Convertible Notes Tender Offer

- - 4,099 -
U.S. governmental inquiries/DPA related 2,385 606 4,567 8,677
Income before taxes, as adjusted 13,956 12,987 28,699 26,604
 
Provision for income taxes, as reported 3,817 2,965 5,827 5,487

Non-cash, stock-based compensation

219 1,314 1,066 2,150
Restructuring charges - 180 - 391

Deferred financing fees and transaction costs associated with Convertible Notes Tender Offer

- - 1,599 -
U.S. governmental inquiries/DPA related 930 236 1,782 1,816
Provision for income taxes, as adjusted   4,966   4,695   10,274   9,844
Effective tax rate, as adjusted   35.6%   36.2%   35.8%   37.0%
Net income, as adjusted $ 8,990 $ 8,292 $ 18,425 $ 16,760
 
   
Wright Medical Group, Inc.
Reconciliation of As Reported Results to Non-GAAP Financial Measures
(continued)
 
Three Months Ended Three Months Ended
June 30, 2011 June 30, 2010
As Reported   As Adjusted As Reported   As Adjusted
Basic net income $ 6,147 $ 8,990 $ 4,847 $ 8,292
Interest expense on convertible notes   137   137     N/A     935  
Diluted net income $ 6,284 $ 9,127 $ 4,847 $ 9,227
 
Basic shares 38,240 38,240 37,764 37,764

Dilutive effect of stock options and restricted shares

130

130

196

196

Dilutive effect of convertible notes   891   891     N/A     6,126  
Diluted shares 39,261 39,261 37,960 44,086
 
Net income per share, diluted $ 0.16 $ 0.23   $ 0.13   $ 0.21  
 
 
Six Months Ended Six Months Ended
June 30, 2011 June 30, 2010
As Reported As Adjusted As Reported As Adjusted
Basic net income $ 9,739 $ 18,425 $ 4,322 $ 16,760
Interest expense on convertible notes   N/A   929     N/A     1,870  
Diluted net income $ 9,739 $ 19,354 $ 4,322 $ 18,630
 
Basic shares 38,137 38,137 37,652 37,652
Dilutive effect of stock options and restricted shares

210

210

232

232

Dilutive effect of convertible notes   N/A   2,927     N/A     6,126  
Diluted shares 38,347 41,274 37,884 44,010
 
Net income per share, diluted $ 0.25 $ 0.47   $ 0.11   $ 0.42  
 
 
Three Months Ended Six Months Ended
June 30,

2011

June 30,

2010

June 30,

2011

June 30,

2010

Net Income per Diluted Share

Net income, as reported, per diluted share

$

0.16

$ 0.13 $ 0.25 $ 0.11
Interest expense on convertible notes N/A 0.02 0.02 0.04
Dilutive effect of convertible notes N/A (0.02 ) (0.02 ) (0.02 )
Non-cash, stock-based compensation 0.04 0.06 0.08 0.11
Restructuring charges - 0.01 - 0.01

Deferred financing fees and transaction costs associated with Convertible Notes Tender Offer

- - 0.06 -
U.S. governmental inquiries/DPA related   0.04   0.01     0.07     0.16  

Net income, as adjusted, per diluted share

$ 0.23 $ 0.21   $ 0.47   $ 0.42  
 
   
Wright Medical Group, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands--unaudited)

 
June 30,

2011

December 31,

2010

 
Assets
Current assets:
Cash and cash equivalents $ 159,427 $ 153,261
Marketable securities 14,997 19,152
Accounts receivable, net 107,125 105,336
Inventories 171,544 166,339
Prepaid expenses and other current assets   51,307   53,502
Total current assets   504,400   497,590
 
Property, plant and equipment, net 164,709 158,247
Goodwill and intangible assets, net 70,273 70,673
Marketable securities 10,838 17,193
Other assets   10,649   11,536
Total assets $ 760,869 $ 755,239
 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 18,173 $ 15,862
Accrued expenses and other current liabilities 55,314 54,409
Current portion of long-term obligations   8,627   1,033
Total current liabilities   82,114   71,304
Long-term obligations 171,104 201,766
Other liabilities   18,662   11,197
Total liabilities   271,880   284,267
 
Stockholders’ equity   488,989   470,972
Total liabilities and stockholders’ equity $ 760,869 $ 755,239

Contacts

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

Contacts

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