2008 Annual Report Wright Medical Group, Inc.
(1) 2004 adjusted results presented above exclude $2.4 million ($1.6 million after tax eff ect) of costs incurred to write down certain foot and ankle inventory to its net realizable value and
$510,000 ($338,000 after tax eff ect) of accelerated depreciation on surgical instrumentation related to this inventory as a result of the transition of this product line to our CHARLOTTE™ Foot
and Ankle System, and $791,000 ($511,000 after tax eff ect) of costs associated with the voluntary market withdrawal of certain CONSERVE® hip components.
(2) 2005 adjusted results presented above exclude $1.7 million ($1.2 million after tax eff ect) of severance costs associated with management changes in our U.S. and European operations,
$1.5 million ($1.0 million after tax eff ect) of costs incurred to write down inventory to its net realizable value and $139,000 ($96,000 after tax eff ect) of costs incurred to write down to net
realizable value surgical instrumentation related to this inventory due to the termination of an agreement to distribute certain third party spinal products in Europe, $694,000 ($476,000 after
tax eff ect) to write down a long-lived asset to its fair value following its reclassifi cation to assets held-for-sale, and $467,000 ($287,000 after tax eff ect) of non-cash, stock-based compensation.
(3) 2006 adjusted results presented above exclude $13.8 million ($10.9 million after tax eff ect) of non-cash, stock-based compensation expense recorded pursuant to [Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment] (SFAS No. 123R), which was implemented on January 1, 2006, a $1.5 million ($1.4 million after tax eff ect) gain on the sale
of an investment, and a $1.1 million income tax benefi t.
(4) 2007 adjusted results presented above exclude $18.9 million ($12.5 million after tax eff ect) of restructuring charges associated with the closure of our Toulon, France operations, $16.5
million ($12.9 million after tax eff ect) of non-cash, stock-based compensation expense recorded pursuant to SFAS No. 123R, $3.9 million ($2.4 million after tax eff ect) of charges related to an
unfavorable arbitration ruling (including interest), and $418,000 ($253,000 after tax eff ect) of acquisition-related inventory step-up amortization.
(5) 2008 adjusted results presented above exclude $13.5 million ($9.8 million after tax eff ect) of non-cash, stock-based compensation expense recorded pursuant to SFAS No. 123R, $11.2
million tax provision associated with the write-off of net operating losses in France, $7.6 million ($4.7 million after tax eff ect) of charges related to the ongoing U.S. governmental inquiries,
$6.7 million ($3.3 million after tax eff ect) of restructuring charges associated with the closure of our Toulon, France operations, $2.6 million ($1.6 million after tax eff ect) for charges relating to
an unfavorable appellate court decision (including interest), $2.5 million of acquired in-process research and development costs, and $113,000 ($69,000 after tax eff ect) of acquisition-related
inventory step-up amortization.
1
2 2008 Annual Report Wright Medical Group, Inc.
Gary D. Henley
President and Chief Executive Offi cer
Letter To Our Stockholders
2008: A Year of Growth and Investment
It is a pleasure to report the results that Wright Medical Group, Inc. achieved in 2008. It truly was a great year for us. We achieved an
outstanding global revenue growth of 20%, placing us among the best performing medical device companies in the world. Even
as we continued substantial investments in our infrastructure to execute our strategy, we were able to deliver bottom line growth
that nearly doubled our top line growth. It is clear that we are now in the execution phase of our growth strategy and that gives
us great confi dence in our ability to deliver solid results — even in the face of turbulent fi nancial times — as we move into 2009
and beyond.
Continued Innovation in Large Joints
In 2008, we were able to sustain our momentum that began in 2007 and continue to deliver growth rates well in excess of the market.
Our global growth rate in hip sales of 20% and knees of 17% is a result of having one of the most innovative and comprehensive
large joint product off erings in the industry, and also is due to strong execution by our sales, marketing, and medical educational
teams.
Both the domestic and international performance was impressive and balanced in 2008. Specifi cally, we achieved strong
penetration of our ADVANCE® Medial-Pivot Knee System due, in part, to the outstanding clinical results we and our clinicians are able
to document and demonstrate. This product line growth was further strengthened by the continued acceptance of our ADVANCE
STATURE® Knee implants and our BIOFOAM™ Tibial Base, which off ers surgeons reliable and eff ective cementless fi xation.
Our hip performance was driven by an industry-leading product line that includes a complete line of stem designs, modular necks,
and versatile cup designs that complement the broad off ering of head styles, sizes and bearing surfaces. During 2008, we continued
our portfolio expansion with the introduction of a number of new products like the DYNASTY® Acetabular Cup System and the
GLADIATOR® Bipolar Hip System. We also increased our innovative PROFEMUR® stem line with the addition of the PROFEMUR®-HA,
PROFEMUR®-TL, PROFEMUR®-Z and PROFEMUR®-LX revision stems.
In addition to these internally developed product launches, in September 2008 we licensed the rights to distribute the LINK® MP
Revision Hip System in North America. This addition to our hip product line has made our revision off ering among the best in
our industry. Furthermore, the adoption of our CONSERVE® BFH® and A-CLASS® technologies in Japan, following our regulatory
approval in late 2007, has been excellent. We believe these products will continue to provide a signifi cant opportunity for our
Japanese subsidiary for some time to come.
Our work with the Food and Drug Administration to gain premarket approval for our CONSERVE® PLUS Hip Resurfacing System
3
continues to progress and we look forward to joining the other manufacturers in this growing market segment with what we
believe is the most competitive technology available today.
A Growing Biologics Portfolio
Our overall global biologics business continued to grow at an acceptable pace. Despite the divestiture of ADCON® products, this
area achieved a solid performance of 8% growth. That growth was led by our PRO-DENSE® synthetic bone repair product line,
which is providing outstanding clinical results. Within the bone repair off ering our MIIG® injectable graft, ALLOMATRIX® line and
OSTEOSET® products have continued to perform well globally. We have also been very pleased with the market acceptance of
our CANCELLO-PURE® xenograft wedges, which are the positive result of a partnership with RTI Biologics, Inc.
On the tissue side of our biologics portfolio, we continue to be pleased with both the outstanding clinical performance and
the market acceptance of our GRAFTJACKET® Regenerative Tissue Matrix. To support further clinical acceptance and expand
coverage for use of GRAFTJACKET® matrix in the treatment of chronic diabetic foot ulcers, we completed a prospective,
randomized, controlled study. The manuscript detailing the outstanding results of this study has been accepted to be published
in the International Wound Journal in mid 2009. In late 2008, we further expanded our tissue-based biologics off ering with the
introduction of the BIOTAPE XM™ xenograft soft tissue patch for tendon and ligament reinforcement. This product will not only
help us be competitive in the domestic xenograft market, but it will allow us entry into many foreign markets where human
tissue-based products are not permitted.
Strengthening Upper Extremity Solutions
The upper extremity market remains of strong strategic interest to us. We currently have a competitive portfolio of products and
are continually looking to strengthen it. We recently launched the very innovative EVOLVE® Elbow Plating System to complement
our EVOLVE® Radial Head System. We also enhanced our innovative minimally-invasive wrist fracture solution by introducing the
MICRONAIL® II Radiolucent Intramedullary Radius Fixation System. In addition to these product developments, we also acquired
the RAYHACK® Osteotomy System for treatment of challenging wrist fractures and disorders. As evidenced by our eff orts in 2008,
the upper extremity arena continues to be an important market for us. To grow our position in this market segment, we intend
to further strengthen our portfolio through both internal development and external acquisition, as well as increased distribution
focus.
Leading the Foot & Ankle Market
As previously detailed, we are certainly moving in an overall positive direction. However, the specialty that has exhibited truly
phenomenal growth is our foot and ankle business. In 2008, this franchise grew 44% internationally, 82% domestically, and 74%
4 2008 Annual Report Wright Medical Group, Inc.
globally, following an outstanding 2007 annual sales growth of 96%. Over the past two years, we have evolved from a minor
player in the foot and ankle market to a recognized leader in this specialty segment of orthopaedics. This growth, success, and
recognition has been the result of creating the most robust and comprehensive portfolio of products — both hardware and
biologics — for this market sector. In 2008, we launched two new, internally-developed products for foot and ankle, including
the CHARLOTTE™ CLAW® plates and the SIDEKICK™ Coretrak mini fi xator. To augment our internal development process, we also
made several strategic acquisitions leading to launches of a line of AAP screws, the INBONE™ Total Ankle System and Fusion Rod
System, as well as the BIOARCH® Subtalar System. When you couple our foot and ankle hardware and implant portfolio with
our market-leading biologics solutions, the result is the best product off ering for this industry segment. Add to that what we
believe to be the largest and best trained sales force focused on this subspecialty, and you have a successful and sustainable
business model. In two recent independent surveys, Wright was deemed the market leader in the foot and ankle market sector.
We certainly have a good start and appreciate the recognition; but we have a long way to go to secure our place as the dominate
player in this market.
Executing Strategies for Sales Success
Throughout 2008, we continued to increase, separate, and focus our domestic direct and distributor sales channels. At the same
time we strengthened, reorganized, and redirected our sales management team. This has resulted in a distribution network that
is highly motivated, highly skilled and trained, well supported by internal staff , and eager for the challenges of 2009.
Driving International Growth
On the international front we continued to gain strength and momentum. Our performance in Japan, Asia Pacifi c, and Latin
and South America was impressive. During 2008, our Japanese business was not only our largest, but also our fastest growing
subsidiary in the world. We have developed a strong distribution presence in the rest of Asia, as well, and are getting good
traction in the Latin and South American markets.
In the Europe, Middle East and Africa (EMEA) market, we continue to enjoy success and growth. We are beginning to see positive
results from our strategies of geographic expansion for new markets, product portfolio penetration in existing markets, and sales
force specialization. While we still view France as a work in progress, we have expectations that 2009 will be a year of signifi cant
improvement. We have assembled a very capable management team in Europe and expect they will deliver results in 2009.
Healthy Business Development
Our business development team continued to be very active in 2008 with the completion of six licensing or acquisition
transactions, four of which were in the foot and ankle or biologics arena. The team has demonstrated it can identify, diligence,
5
and consummate deals in an effi cient and successful manner. We expect that 2009 will provide many acquisition opportunities
for the team to evaluate.
Implementing Operations Enhancements
On the operational side, we completed the closure of our Toulon, France manufacturing and logistics facility and successfully
transitioned those functions to our Arlington, Tennessee and Amsterdam operations. We also completed the fi rst phase of our
facility expansion at our Arlington headquarters. We now occupy the new 50,000 square foot manufacturing building and the
17,500 square foot offi ce tower and campus cafeteria. The second phase of this project will include renovation of some existing
facilities and will be complete by mid-year 2009. We also acquired another 29,000 square foot manufacturing facility in late
2008, which is located less than a half-mile from our main campus. Plans call for us to have that new facility on line in the second
quarter of 2009. In addition to facilities expansion and improvement, we have worked to make signifi cant improvements to
our operations, logistics, process, and forecasting systems. The team we have in charge of global manufacturing and logistics is
dedicated to continued improvement and effi ciency gains for these areas.
Global Corporate Compliance
In keeping with our goal to be the most compliant company possible, we have strengthened our eff orts during 2008. We have
taken any information available from public statements of the other orthopaedic companies that have entered into Non or
Deferred Prosecution Agreements with the Department of Justice and incorporated that guidance into our compliance policies.
We have hired a new Chief Compliance Offi cer, added staff and engaged consultants to help us achieve our compliance
objectives. We will continue, throughout 2009 and beyond, to focus and invest in our global compliance eff orts to assure we
reach our goals.
Ready for the Challenge
As we look back at 2008, it was a year of signifi cant growth for us, but more importantly it was a year of continued investment
and refi nement of our infrastructure, processes, and people. This enhancement of our vital systems and assets strengthens
the foundation of our company and prepares us for the challenges we will surely face in 2009 and beyond. I believe we have a
management team that is focused on our strategy and committed to delivering industry-leading performance for our customers,
employees and shareholders. As always, it is a pleasure and an honor to be a part of this wonderful team and great company. I
invite you to watch us grow…
Sincerely,
Gary D. Henley
President, CEO and Director
6 2008 Annual Report Wright Medical Group, Inc.
7
8 2008 Annual Report Wright Medical Group, Inc.
9
11
12 2008 Annual Report Wright Medical Group, Inc.
13
INBONE™
Total Ankle Replacement
For years, patients with debilitating ankle pain due to arthritis or injury
had little hope for a surgical treatment that could both relieve their
discomfort and restore mobility.
But Wright’s INBONE™ Total Ankle System does both.
By combining proven design elements of large joint implants with
those tailored to the smaller anatomy of the ankle, the INBONE™ system
provides a reliable and innovative ankle replacement option. A key
feature of the system is the modular design of its tibial stem, which
gives the surgeon the fl exibility to choose the appropriate stem length
for a patient during surgery.
This “customizing” feature can help ensure a better implant fi t and a less
invasive procedure for the patient. The INBONE™ Total Ankle System
exemplifi es the type of product innovation that has brought Wright to a
leadership position in the foot and ankle specialty.
14 2008 Annual Report Wright Medical Group, Inc.
15
16 2008 Annual Report Wright Medical Group, Inc.
18 2008 Annual Report Wright Medical Group, Inc.
19
PROPHECY™
Pre-Operative Navigation Guides
Proper implant placement, alignment and sizing are critical to achieving
optimal outcomes in total knee arthroplasty. That is why Wright’s new
PROPHECY™ Pre-Operative Navigation Guides are a key addition to our
family of knee solutions.
The PROPHECY™ process uses advanced imaging technology to help
surgeons plan precise implant sizing and alignment before they enter
the operating room. Based on the pre-operative imaging of the patient’s
knee joint, custom surgical guides are produced for the procedure to
help the surgeon place and align the knee implant with accuracy and
confi dence.
A better-aligned implant can reduce the incidence of later complications
like implant loosening or increased wear. And because the PROPHECY™
process allows a surgeon to determine the appropriate implant size well
in advance of a procedure, surgical steps and additional products related
to sizing are eliminated from the surgery, leading to a more effi cient use
of time in the O.R.
20 2008 Annual Report Wright Medical Group, Inc.
21
22 2008 Annual Report Wright Medical Group, Inc.
23
Senior Management
Gary D. Henley
President & CEO
John K. Bakewell
EVP & CFO
Paul A. Arrendell
VP, Global Quality Systems
Lance A. Berry
VP & Corporate Controller
Frank S. Bono
SVP, Research & Development
Timothy E. Davis
VP, Business Development
Rhonda L. Fellows
SVP, Gvt Aff airs & Reimbursement
William J. Flannery
VP, Logistics & Materials
William L. Griffi n, Jr.
SVP, Global Operations
Cary P. Hagan
VP, OrthoRecon Marketing
Karen L. Harris
VP, Int’l Sales & Distribution
Jason P. Hood, JD
VP, General Counsel & Secretary
Kyle M. Joines
VP, Manufacturing
Joyce B. Jones
VP & Treasurer
Paul R. Kosters
President,
Europe, Middle East & Africa
Lisa L. Michels
VP & Chief Compliance
Offi cer
Alicia M. Napoli
VP, Clinical & Regulatory
William F. Scott
VP, Sales & Marketing Srvcs
Edward A. Steiger
VP, Human Resources
Eric A. Stookey
VP, North American Sales
John T. Treace
VP, Bio & Extremity Marketing
Gary D. Henley
John K. Bakewell
Paul A. Arrendell
Lance A. Berry
Frank S. Bono
Timothy E. Davis
Rhonda L. Fellows
William J. Flannery
William L. Griffi n, Jr.
Cary P. Hagan
Karen L. Harris
Jason P. Hood, JD
Kyle M. Joines
Joyce B. Jones
Paul R. Kosters
Lisa L. Michels
Alicia M. Napoli
William F. Scott
Edward A. Steiger
Eric A. Stookey
John T. Treace
24 2008 Annual Report Wright Medical Group, Inc.
table of contents
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following management’s discussion and analysis of financial
condition and results of operations (MD&A) describes the principal
factors affecting the results of our operations, financial condition,
and changes in financial condition, as well as our critical
accounting estimates. MD&A is organized as follows:
Executive overview. This section provides a general description
of our business, a brief discussion of our principal product lines,
significant developments in our business, and the opportunities,
challenges and risks we focus on in the operation of our business.
Net sales and expense components. This section provides a
description of the significant line items on our consolidated
statement of operations.
Results of operations. This section provides our analysis of and
outlook for the significant line items on our consolidated
statement of operations.
Seasonal Nature of Business. This section describes the effects
of seasonal fluctuations in our business.
Restructuring Liquidity and capital resources. This section
provides an analysis of our liquidity and cash flow and a
discussion of our outstanding debt and commitments.
Critical accounting estimates. This section discusses the
accounting estimates that are considered important to our
financial condition and results of operations and require us to
exercise subjective or complex judgments in their application. All
of our significant accounting policies, including our critical
accounting estimates, are summarized in Note 2 to our
consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’
Equity and Comprehensive Income
Notes to Consolidated Financial Statements
Management’s Annual Report on Internal Control Over
Financial Reporting
Corporate Information
26
27
28
33
33
35
40
41
43
44
45
46
47
68
69
This annual 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
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 contained in the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and other sections of this annual 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 our Annual Report on Form 10-K for the year-ended December 31, 2008
within Item 1A), 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 annual report, and we
assume no obligation to update any forward-looking statement after this date.
25
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 or have been damaged through disease or injury. Biologics are used to replace damaged or diseased bone, to stimulate bone
growth and to provide other biological solutions for surgeons and their patients. Within these markets, we focus on the higher-growth sectors
of the orthopaedic industry, such as advanced bearing surfaces, modular necks and bone conserving implants within the hip market, as well
as on the integration of our biologics products into reconstructive joint procedures and other orthopaedic applications. 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.
Our corporate headquarters and U.S. operations are located in Arlington, Tennessee, where we conduct research and development,
manufacturing, warehousing and administrative activities. Outside the U.S., we have research, distribution and administrative facilities in
Milan, Italy; distribution and administrative facilities in Amsterdam, the Netherlands; and sales and distribution offices in Canada, Japan and
throughout Europe. We market our products in over 60 countries through a global distribution system that consists of a sales force of
approximately 1,050 individuals who promote our products to orthopaedic surgeons and hospitals. At the end of 2008, we had approximately
380 sales associates and independent sales distributors in the U.S., and approximately 670 sales representatives internationally, who were
employed through a combination of our stocking distribution partners and direct sales offices.
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 orthopaedic products not considered to be part of our
knee, hip, extremity or biologics product lines.
Our knee reconstruction products position us well in the areas of total knee reconstruction, revision replacement implants and limb
preservation products. Our principal knee product is the ADVANCE® knee system.
Our hip joint reconstruction product portfolio provides offerings in the areas of bone-conserving implants, total hip reconstruction, revision
replacement implants and limb preservation. Our hip joint products include the CONSERVE® family of products, the PROFEMUR® family of hip
stems, the LINEAGE® acetabular system, the ANCA-FIT™ hip system, the PERFECTA® hip system and the DYNASTY™ acetabular cup system.
Our extremities product line includes products for both the foot and ankle and the upper extremity markets. Our principal foot and ankle
portfolio includes the CHARLOTTE™ foot and ankle system, the DARCO® MFS, DARCO® MRS, and DARCO® FRS locked plating systems, the
INBONE™ Total Ankle System, the INBONE™ Intra-osseous Fusion Rod and Plate System, and the SIDEKICK™ external fixation systems. Our
upper extremity portfolio includes the MICRONAIL® intramedullary wrist fracture repair system, as well as the SWANSON line of finger and the
ORTHOSPHERE® carpometacarpal implant for repair of the basal thumb joint.
Our biologics products focus on biological musculoskeletal repair and include synthetic and human tissue-based materials. Our principal
biologics products include the GRAFTJACKET® line of soft tissue repair and containment membranes, the ALLOMATRIX® line of injectable
tissue-based bone graft substitutes, the PRO-DENSE® injectable regenerative graft, the OSTEOSET® synthetic bone graft substitute, the MIIG®
family of minimally invasive, injectable, synthetic bone grafts, and the CANCELLO-PURE™ wedge products.
Significant Business Developments. Net sales grew 20% in 2008, totaling $465.5 million, compared to $386.9 million in 2007. Our knee, hip,
biologics and extremity product lines each contributed significantly to our performance in 2008, achieving 17%, 20%, 8% and 43% growth
rates, respectively. Our net income increased to $3.2 million in 2008 from $1.0 million in 2007, as increased profitability from higher levels of
sales and decreased restructuring charges were mostly offset by $7.6 million ($4.7 million net of taxes) of costs associated with the ongoing
U.S. governmental inquiries, the write-off of $2.5 million of acquired in-process research and development charges and a tax provision of $12.8
million to adjust our valuation allowance, primarily for deferred tax assets associated with net operating losses in France.
In April 2008, we announced the acquisition of INBONE Technologies, Inc. (Inbone). Assets acquired include the INBONE™ Total Ankle System
and the INBONE™ Intra-osseous Fusion Rod and Plate System. In June 2008, we announced the acquisition of the endoscopic soft tissue
release products for the foot and ankle market of A.M. Surgical, Inc. In September 2008, we completed the acquisition of all assets associated
with the RAYHACK® Osteotomy Systems for complex wrist reconstruction. Each of these acquisitions adds key products to our extremities
business. See Note 3 to our consolidated financial statements contained in “Financial Statements and Supplementary Data” for further
discussion of our acquisitions.
During 2008, we grew in all of our domestic product lines. Most significantly, our domestic extremity business experienced year-over-year
growth totaling 47%, as a result of the continued success of our CHARLOTTE™ foot and ankle system and our DARCO® plating systems, as well
26
as the product sales from our acquisitions noted above. We anticipate that growth within our domestic extremities business will continue
to increase, as sales of our CHARLOTTE™, DARCO®, and INBONE™ products continue to increase and as we continue to expand our extremity
product offerings.
Our international sales increased by 21% during 2008 as compared to 2007. This increase was driven by growth in substantially all of our major
international markets. In addition, our 2008 international sales included a $7.9 million favorable currency impact compared to 2007.
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 (FDA). 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 joints. We devote significant resources to assessing and analyzing competitive,
regulatory and economic risks and opportunities.
In December 2007, we received a subpoena from the U.S. Attorney's Office for the District of New Jersey 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 U.S. Department of Justice (DOJ) after being subjects of investigation involving the same subject matter. We continue
to cooperate fully with the investigation by the DOJ, and we anticipate that we may continue to incur significant expenses related to this
inquiry.
In June 2008, we received a letter from the U.S. Securities and Exchange Commission (SEC) informing us that it is conducting an informal
investigation regarding potential violations of the Foreign Corrupt Practices Act in the sale of medical devices in a number of foreign countries
by companies in the medical device industry. We understand that several other medical device companies have received similar letters. We
are cooperating fully with the SEC inquiry.
A detailed discussion of these and other factors is provided in our Annual Report on Form 10-K for the year ended December 31, 2008, within
Item 1A.
Net Sales and Expense Components
Net sales. We derive our net sales primarily from the sale of reconstructive joint devices and biologics products. An overview of our principal
product lines is provided in “MD&A - Executive Overview.”
Cost of sales. Our cost of sales consists primarily of direct labor, allocated manufacturing overhead, raw materials and components, non-cash
stock-based compensation, charges incurred for excess and obsolete inventories, royalty expenses associated with licensing technologies
used in our products or processes and certain other period expenses.
Cost of sales - restructuring. These expenses primarily consist of in-process inventories in our Toulon, France, manufacturing facility that were
written off, as well as other unfavorable manufacturing expenses in the Toulon facility that were expensed as period costs in accordance with
Financial Accounting Standards Board (FASB) Statement No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4 (SFAS 151).
Selling, general and administrative. Our selling, general and administrative expenses consist primarily of salaries, sales commissions, royalty
and consulting expenses associated with our medical advisors, marketing costs, facility costs, legal settlements and judgments and the related
costs, non-cash stock-based compensation, other general business and administrative expenses and depreciation expense associated with
reusable surgical instruments that are used to implant our products.
Research and development. Research and development expense includes costs associated with the design, development, testing,
deployment, enhancement and regulatory approval of our products.
Amortization of intangible assets. Our intangible assets consist of purchased intangibles related to completed technology, distribution
channels, trademarks, product licenses, customer relationships and non-compete agreements. We amortize intangible assets over periods
ranging from one to 15 years.
Acquired in-process research and development. Acquired in-process research and development represents the fair value of acquired
in-process research and development (IPRD) that had not yet reache
d technological feasibility and had no alternative future use.
Interest expense (income), net.
Interest expense (income), net, consists primarily of
income generated by our invested cash balances and
27
investments in marketable securities, offset by interest expense on our convertible senior notes, borrowings outstanding under our previous
senior credit facility, capital lease agreements and certain of our factoring agreements, as well as non-cash expenses associated with the
amortization of deferred financing costs resulting from the origination of our current and previous senior credit facilities and the issuance of
our convertible debt.
Provision for income taxes. We record provisions for income taxes on earnings generated by both our domestic and international operations.
Historically, our effective tax rates have varied from our statutory tax rates primarily due to research and development credits, changes in
estimates related to our valuation allowances recorded against our net deferred tax assets, and the recognition of non-cash, stock-based
compensation expense, a significant portion of which may not be deductible under U.S. and foreign tax regulations.
Results of Operations
Comparison of the year ended December 31, 2008 to the year ended December 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:
$
Net sales
Cost of sales
Cost of sales - restructuring
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges
Acquired in-process research and
development
Total operating expenses
Operating income
Interest expense (income), net
Other (income) expense, net
Income before income taxes
Provision for income taxes
Net income
$
Year Ended December 31,
2008
2007
Amount
465,547
134,377
-
331,170
261,396
33,292
4,874
6,705
2,490
308,757
22,413
2,181
(1,338)
21,570
18,373
3,197
$
% of Sales
100.0 %
28.9 %
-
71.1 %
56.1 %
7.2 %
1.0 %
1.4 %
0.5 %
66.3 %
4.8 %
0.5 %
(0.3)%
4.6 %
3.9 %
0.7 %
$
Amount
386,850
108,407
2,139
276,304
225,929
28,405
3,782
16,734
-
274,850
1,454
(1,252)
375
2,331
1,370
961
% of Sales
100.0 %
28.0 %
0.6 %
71.4 %
58.4 %
7.3 %
1.0 %
4.3 %
-
71.0 %
0.4 %
(0.3)%
0.1 %
0.6 %
0.4 %
0.2 %
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:
Year Ended
December 31,
2008
Year Ended
December 31,
2007
%
Change
Hip products
Knee products
Extremity products
Biologics products
Other
Total net sales
$
$
160,788
119,895
88,890
82,399
13,575
465,547
$
$
134,251
102,334
62,302
76,029
11,934
386,850
19.8 %
17.2 %
42.7 %
8.4 %
13.8 %
20.3 %
28
The following graphs illustrate our product line sales as a percentage of total net sales for the years ended December 31, 2008 and 2007:
2008
2007
E xt re m it y
pro duc t s
19 .1%
H ip
pro duc t s
3 4 .5 %
E xt re m it y
pro duc t s
16 .1%
H ip
pro duc t s
3 4 .7 %
B io lo gic s
pro duc t s
17 .7 %
B io lo gic s
pro duc t s
19 .7 %
O t he r
2 .9 %
Kne e
pro duc t s
2 5 .8 %
O t he r
3 .0 %
Kne e
pro duc t s
2 6 .5 %
Net sales. Our net sales growth in 2008 was attributable to the growth in each of our primary product lines, led by our extremities product
line, which increased by 43% over 2007. Geographically, our domestic net sales totaled $282.1 million in 2008 and $235.7 million in 2007,
representing approximately 61% of total net sales in each year and a 20% increase over 2007. Our international net sales totaled $183.5
million in 2008, a 21% increase as compared to net sales of $151.1 million in 2007. Our 2008 international net sales included a favorable
foreign currency impact of approximately $7.9 million when compared to 2007 net sales, principally resulting from the 2008 performance of
the Japanese yen and the euro against the U.S. dollar. The remaining increase in international sales is attributable to continued growth in Asia
and our European markets, primarily within our hip and knee product lines.
Our hip product sales totaled $160.8 million in 2008, representing a 20% increase over 2007, driven by increased sales of our PROFEMUR® hip
system, our CONSERVE® family of products, our DYNASTY® acetabular cup system and sales of revision hip stems introduced in the second
quarter of 2008. Domestic hip sales increased 9% over 2007 due to increased unit sales, which were partially offset by declines in average
selling price. Our international hip business increased by 21% over 2007 due to growth in almost all international markets, most notably in
Japan where hip sales increased 50%. Our international hip sales include a $5.1 million favorable currency impact compared to 2007.
Sales of our knee products totaled $119.9 million in 2008, representing growth of 17% over 2007. Year-over-year growth in our ADVANCE®
knee systems in both our international and domestic markets, which totaled 23% and 15%, respectively, was partially offset by declines across
our other, more mature knee product offerings. Our domestic sales increase was driven primarily by increased unit sales. Our international
knee sales include a $2.0 million favorable currency impact compared to 2007.
Our extremity product sales increased to $88.9 million in 2008, representing growth of 43% over 2007. Our domestic extremity product sales
increased 47%, primarily resulting from the continued success of our CHARLOTTE™ foot and ankle system and sales of our DARCO® plating
systems, as well as sales of our INBONE™ products acquired during the second quarter 2008. Our international extremity product sales growth
of 29% was primarily attributable to increased sales of our DARCO® plating systems.
Net sales of our biologics products totaled $82.4 million in 2008, which represents an 8% increase over 2007. In the U.S., biologics sales
increased by 16% due to increased sales of our PRO-DENSE® injectable regenerative graft, our GRAFTJACKET® tissue repair and containment
membranes and our CANCELLO-PURE™ wedge products. In our international markets, we noted a decline in biologics sales, primarily due to
the August 2007 disposition of our Adcon®-Gel related assets and decreased biologics sales to our stocking distributor in Turkey.
Cost of sales. In 2008, our cost of sales as a percentage of net sales increased from 28.0% in 2007 to 28.9 % in 2008. This increase is primarily
attributable to unfavorable shifts in our geographic and product line sales mix and increased raw material and other manufacturing costs,
which were partially offset by lower levels of non-cash, stock-based compensation expense. 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, period expenses and levels of production volume.
Cost of sales - restructuring In 2007, we recorded $2.1 million, 0.6% of net sales, of charges associated with the closure of our manufacturing
facility in Toulon, France for inventory write-offs and manufacturing costs incurred during a period of abnormal production capacity which
were expensed as period costs in accordance with SFAS 151.
29
Selling, general and administrative. Our selling, general and administrative expenses as a percentage of net sales totaled 56.1% in 2008, a 2.3
percentage point decrease from 58.4% in 2007. Approximately $10.6 million and $12.1 million of non-cash, stock-based compensation
expense was recognized in 2008 and 2007, respectively, representing 2.3% and 3.1% of net sales in each of the years, respectively.
Additionally, our 2008 selling, general and administrative expenses include approximately $7.6 million (1.6% of net sales) of costs, primarily
legal fees, associated with the U.S. government inquiries. The decrease in selling, general and administrative expenses as a percentage of sales
was driven by lower levels of expenses due to our restructuring efforts in Toulon, France, lower levels of professional fees, and decreased
stock-based compensation, as well as the leveraging of fixed administrative expenses, all of which were partially offset by costs associated
with the U.S. government inquiries.
We anticipate that our selling, general and administrative expenses will increase in absolute dollars to the extent that 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 and as we continue to incur expenses associated with the U.S. government inquiries, which we believe will
continue to be significant.
Research and development. Our investment in research and development activities represented 7.2% of net sales in 2008, as compared to
7.3% in 2007. Non-cash, stock-based compensation expense of $1.6 million, 0.3% of net sales, was recorded in 2008 compared to $2.4 million,
0.6% of net sales, recorded in 2007. This decrease in stock-based compensation was mostly offset by increased investments in product
development.
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 amortization of intangible assets totaled $4.9 million in 2008, as compared to $3.8
million in 2007. The increase is attributable to amortization for intangible assets associated with our 2008 and 2007 acquisitions. Based on the
intangible assets held at December 31, 2008, we expect to amortize approximately $4.8 million in 2009, $2.3 million in 2010, $2.2 million in
2011, $2.1 million in 2012 and $1.8 million in 2013.
Acquired In-Process Research and Development. Upon consummation of our Inbone acquisition, we immediately recognized as expense
$2.5 million in costs representing the estimated fair value of acquired IPRD that had not yet reached technological feasibility and had no
alternative future use.
The fair value was determined by estimating the costs to develop the acquired IPRD into commercially viable products, estimating the
resulting net cash flows from this project and discounting the net cash flows back to their present values. The resulting net cash flows from
the project were based on our management’s best estimates of revenue, cost of sales, research and development costs, selling, general and
administrative costs and income taxes from the project. A summary of the estimates used to calculate the net cash flows for the project is as
follows:
Project
Year net cash
in-flows expected to
begin
Discount rate including factor
to account for uncertainty of
success
Acquired IPRD
INBONE™ Calcaneal Stem Implant
2009
18%
$
2,490,000
The INBONE™ Calcaneal Stem implant (Calcaneal Stem) is an implant device designed to attach on the INBONE™ Talar Dome and achieve
bone implant stability by engaging the inside of the talar bone spanning into the calcaneal bone after the two bones have been stabilized
together. We expect this device to bring increased sales to the existing INBONE™ Total Ankle System. The product is complete, but it has not
yet received all the necessary FDA clearances to bring the product into a commercially viable product. Prior to the acquisition, Inbone filed a
510(k) premarket notification for the Calcaneal Stem and had received questions from the FDA. Subsequent to the acquisition, we received
additional questions. We are currently working on a new submission that will address these questions and anticipate that we will obtain FDA
clearance no sooner than the end of 2009. We currently do not expect to be required to provide additional testing to support this strategy, but
do expect to pay an immaterial amount of review fees.
We are continuously monitoring our research and development projects. We believe that the assumptions used in the valuation of acquired
IPRD represent a reasonably reliable estimate of the future benefits attributable to the acquired IPRD. No assurance can be given that actual
results will not deviate from those assumptions in future periods.
Interest expense (income), net. Interest expense (income), net, consists of interest expense of $7.0 million and $1.8 million in 2008 and 2007,
respectively, primarily from borrowings under our convertible debt issued in November 2007, our capital lease agreements, and
30
certain of our factoring agreements. This was partially offset by interest income of $4.8 million and $3.1 million during 2008 and 2007,
respectively, generated by our invested cash balances and investments in marketable securities.
The amounts of interest income we realize in 2009 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.
Other expense (income), net. Other (income) expense, net, totaled $1.3 million of income during 2008 compared to $375,000 of expense
during 2007. In 2008, $900,000 of a deferred gain associated with the 2007 disposition of our Adcon®-Gel assets was recognized and included in
other income.
Provision for income taxes. We recorded tax provisions of $18.4 million and $1.4 million in 2008 and 2007, respectively. Our effective tax rate
for 2008 and 2007 was 85.2% and 58.8%, respectively. In 2008, we recognized a tax provision of $12.8 million to adjust our valuation allowance,
primarily to record a valuation allowance against all of our remaining deferred tax assets associated with net operating losses in France, which
increased our effective tax rate by 59 percentage points.
Comparison of the year ended December 31, 2007 to the year ended December 31, 2006
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:
Net sales
Cost of sales
Cost of sales - restructuring
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges
Total operating expenses
Operating income
Interest income, net
Other expense (income), net
Income before income taxes
Provision for income taxes
Net income
$
Year Ended December 31,
2007
2006
Amount
$
386,850
% of Sales
100.0 %
Amount
$
338,938
% of Sales
100.0 %
108,407
2,139
276,304
225,929
28,405
3,782
16,734
274,850
1,454
(1,252)
375
2,331
1,370
961
28.0 %
0.6 %
71.4 %
58.4 %
7.3 %
1.0 %
4.3 %
71.0 %
0.4 %
(0.3)%
0.1 %
0.6 %
0.4 %
0.2 %
97,234
-
241,704
192,573
25,551
4,149
-
222,273
19,431
(1,127)
(1,643)
22,201
7,790
$
14,411
28.7 %
-
71.3 %
56.8 %
7.5 %
1.2 %
-
65.6 %
5.7 %
(0.3)%
(0.5)%
6.6 %
2.3 %
4.3 %
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:
Year Ended
December 31,
2007
Year Ended
December 31,
2006
%
Change
Hip products
Knee products
Extremity products
Biologics products
Other
Total net sales
$
$
134,251
102,334
62,302
76,029
11,934
386,850
31
$
$
122,073
94,079
45,044
65,455
12,287
338,938
10.0 %
8.8 %
38.3 %
16.2 %
(2.9)%
14.1 %
The following graphs illustrate our product line sales as a percentage of total net sales for the years ended December 31, 2007 and 2006:
2007
2006
E xt re m it y
pro duc t s
16 .1%
B io lo gic s
pro duc t s
19 .7 %
H ip
pro duc t s
3 4 .7 %
E xt re m it y
pro duc t s
13 .3 %
B io lo gic s
pro duc t s
19 .3 %
H ip
pro duc t s
3 6 .0 %
O t he r
3 .0 %
Kne e
pro duc t s
2 6 .5 %
O t he r
3 .6 %
Kne e
pro duc t s
2 7 .8 %
Net sales. Our net sales growth in 2007 was primarily attributable to growth in each of our primary product lines, led by our extremities
product line, which increased by 38% over 2006. Geographically, our domestic net sales totaled $235.7 million in 2007 and $211.0 million in
2006, representing approximately 61% and 62% of total net sales in each year, respectively, and an increase of 12% over 2006. Our
international net sales totaled $151.1 million in 2007, an 18% increase as compared to net sales of $127.9 million in 2006. Our 2007
international net sales included a favorable foreign currency impact of approximately $6.1 million when compared to 2006 net sales,
principally resulting from the 2007 performance of the euro against the U.S. dollar. The remaining increase in international sales is attributable
to continued growth in Asia and certain European markets, which were partially offset by declines in France and Italy.
From a product line perspective, our net sales growth for 2007 was attributable to increases in sales across all four of our principal product
lines. For 2007, we experienced growth of 38%, 16%, 10% and 9% in our extremity, biologics, hip and knee product lines, respectively. During
2007, our extremity sales growth was attributable primarily to the continued success of our CHARLOTTE™ foot and ankle system and sales of
our DARCO® plating systems, which were acquired in April 2007. The growth of our biologics business in 2007 was primarily attributable to our
GRAFTJACKET® tissue repair and containment membranes and sales of our PRO-DENSE® injectable regenerative graft launched during the
third quarter of 2007. The increase in our hip product sales is primarily the result of international growth of 18%, led by sales in our Asian
markets. Sales of our knee products increased in 2007 compared to the prior year as a result of growth in our ADVANCE® knee systems in both
our international and domestic markets.
Cost of sales. Our cost of sales as a percentage of net sales decreased from 28.7% in 2006 to 28.0% in 2007. This decrease was attributable to
manufacturing efficiencies in 2007, which were partially offset by unfavorable shifts in our sales mix. Cost of sales in 2007 and 2006 included
approximately 0.5 and 0.3 percentage points of non-cash, stock-based compensation expense, respectively. Additionally, our 2007 cost of
sales included 0.1 percentage points of non-cash inventory step-up amortization associated with our 2007 acquisitions.
Cost of sales - restructuring. In 2007, we recorded $2.1 million, 0.6% of net sales, of charges associated with the closure of our manufacturing
facility in Toulon, France for inventory write-offs and manufacturing costs incurred during a period of abnormal production capacity which
were expensed as period costs in accordance with SFAS 151.
Operating expenses. Our total operating expenses increased, as a percentage of net sales, by 5.4 percentage points to 71.0% in 2007.
Operating expenses include selling, general and administrative expenses, research and development expenses, amortization of intangibles
and restructuring charges. The increase in operating expenses was attributed primarily to the recognition of $16.7 million of restructuring
charges and charges associated with an unfavorable arbitration ruling related to a dispute with a former consultant. Further contributing to
this increase was increased investments in sales and marketing activities, higher levels of cash incentive compensation, expenses associated
with our 2007 acquisitions and increased depreciation expense.
Provision for income taxes. Our effective tax rate for 2007 and 2006 was 58.8% and 35.1%, respectively. Our 2006 effective tax rate includes a
$1.1 million benefit that was realized upon the resolution of certain foreign tax matters.
32
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 three-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
we 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, resulting in
production now being conducted solely in our existing manufacturing facility in Arlington, Tennessee and the distribution activities being
carried out from Arlington, Tennessee and from our European headquarters in Amsterdam, the Netherlands. We have estimated that total
pre-tax restructuring charges will be approximately $28 million to $32 million, of which we have recognized $25.6 million through December
31, 2008. We have realized, and we believe that we will continue to see, the benefits from this restructuring within selling, general and
administrative expenses and within cost of sales in 2009. See Note 16 to our consolidated financial statements in “Financial Statements and
Supplementary Data” 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):
Cash and cash equivalents
Short-term marketable securities
Working capital
Line of credit availability
As of December 31,
$
2008
87,865
57,614
401,406
100,000
$
2007
229,026
15,535
417,817
97,100
During the first quarter of 2008, we liquidated our investments in auction rate securities into cash equivalents. During the remainder of the
2008, we invested approximately $57 million into treasury bills, government bonds, agency bonds and certificates of deposit with maturities
of less than 12 months. We have classified these marketable securities as available-for-sale.
Operating Activities. Cash used in operating activities totaled $3.6 million in 2008, as compared to cash provided by operating activities of
$24.4 million in 2007 and $30.0 million in 2006. In 2008 compared to 2007, increased profitability was offset by changes in working capital.
Accounts receivable increased due to higher levels of sales in international markets that typically have longer collection terms. Inventories
increased due to recent acquisitions and distribution agreements, and to support higher levels of sales. Finally, in 2007, our accrued expenses
increased significantly, primarily associated with restructuring charges.
The decrease in cash provided by operating activities in 2007, compared to 2006, is primarily attributable to lower levels of profitability in the
year due to restructuring charges, which was partially offset by changes in working capital.
Investing Activities. Our capital expenditures totaled $61.9 million in 2008, $35.0 million in 2007 and $29.6 million in 2006. The increase in
2008 compared to 2007 is attributable to $16.9 million of 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 principally 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 $42
million in 2009 for routine capital expenditures, as well as approximately $3 million for the planned expansion of facilities in Arlington,
Tennessee.
We invested $32.3 million in acquisitions of businesses and intellectual property during 2008. We are continuously evaluating opportunities
to purchase technology and other forms of intellectual property and are, therefore, unable to predict the likelihood or timing of future
purchases, if any.
33
Financing Activities. During 2008, proceeds of $12.0 million were generated from the issuance of common stock upon exercise of stock
options granted under our stock-based compensation plans. These proceeds were offset by $285,000 in principal payments related to our
long-term capital lease obligations. 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
consolidated statements of cash flows. The proceeds received under these agreements in 2008, 2007 and 2006 totaled $6.6 million, $3.6
million and $5.6 million, respectively. These proceeds were offset by payments for factored receivables collected of $7.0 million, $7.1 million
and $5.7 million in 2008, 2007 and 2006, respectively. We recorded obligations of $54,000 and $674,000 for the amount of receivables factored
under these agreements as of December 31, 2008 and 2007, respectively, which are included within “Accrued expenses and other current
liabilities” in our consolidated balance sheet.
In 2009, we will make continued payments under our long-term capital leases, including interest, of $136,000 and we will make scheduled
interest payments under our convertible senior notes of $5.3 million.
On December 31, 2008, our revolving credit facility had availability of $100 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 an annual base 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 3.25%. The term of the credit facility
extends through June 30, 2011.
During 2007, we issued $200 million of Convertible Senior Notes due 2014, which generated net proceeds of $193.5 million. The notes require
us to 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 2009 related to the notes totaling $5.3 million.
Contractual Cash Obligations. At December 31, 2008, we had contractual cash obligations and commercial commitments as follows (in
thousands):
Total
2009
2010 - 2011
2012 - 2013
After 2013
Payments Due by Periods
Amounts reflected in balance sheet:
Capital lease obligations(1)
Convertible senior notes(2)
Contingent consideration
Amounts not reflected in balance sheet:
Operating leases
Interest on convertible senior notes(3)
Purchase obligations
Royalty and consulting agreements
Total contractual cash obligations
____________________
$ 277
200,000
3,675
18,254
31,063
7,629
4,396
$ 136
-
2,000
$ 132
-
1,675
$ 9
-
-
$ -
200,000
-
8,377
5,250
2,543
815
8,418
10,500
5,086
1,146
26,957
1,012
10,500
-
1,091
447
4,813
-
1,344
$
12,612
$
206,604
$
265,294
$
19,121
$
(1)
(2)
(3)
(4)
Payments include amounts representing interest.
Represents long–term debt payment provided holders of the Convertible Senior Notes due 2014 do not exercise the option to convert each
$1,000 note into 30.6279 shares of our common stock. Our convertible senior notes are discussed further in Note 9 to our consolidated financial
statements contained in the “Financial Statements and Supplementary Data.”
Represents interest on Convertible Senior Notes due 2014 payable semiannually with an annual interest rate of 2.625%.
The amounts reflected in the table above for capital lease obligations represent future minimum lease payments under our capital lease
agreements, which are primarily for certain property and equipment. The present value of the minimum lease payments are recorded in our
balance sheet at December 31, 2008. The minimum lease payments related to these leases are discussed further in Note 9 to our consolidated
financial statements contained in “Financial Statements and Supplementary Data.”
The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating
leases primarily for certain equipment and office space. Portions of these payments are denominated in foreign currencies and were
translated in the table above based on their respective U.S. dollar exchange rates at December 31, 2008. These future payments are subject to
foreign currency exchange rate risk. In accordance with accounting principles generally accepted in the U.S., our operating leases are not
recognized in our consolidated balance sheet; however, the minimum lease payments related to these agreements are disclosed in Note 17 to
our consolidated financial statements contained in “Financial Statements and Supplementary Data.”
34
Our purchase obligations reflected in the table above consist of minimum purchase obligations related to certain supply agreements. The
royalty and consulting agreements in the above table represent minimum payments under non-cancelable contracts with consultants that
are contingent upon future services. Portions of these payments are denominated in foreign currencies and were translated in the table above
based on their respective U.S. dollar exchange rates at December 31, 2008. These future payments are subject to foreign currency exchange
rate risk. Our purchase obligations and royalty and consulting agreements are disclosed in Note 17 to our consolidated financial statements
contained in “Financial Statements and Supplementary Data.”
Our contingent consideration obligations reflected in the table above consist of minimum guaranteed payments related to our Inbone
acquisition. Additionally, cash payments of up to $15 million may be made related to this and certain other of our acquisitions based upon
future financial and operational performance of the acquired assets.
In addition to the contractual cash obligations discussed above, all of our domestic sales and a portion of our international sales are subject to
commissions based on net sales. A substantial portion of our global sales are subject to other royalties earned based on product sales.
Additionally, as of December 31, 2008, we had $1.8 million of unrecognized tax benefits recorded within “Other liabilities” on our consolidated
balance sheet. This represents the tax benefits associated with various tax positions taken, or expected to be taken, on domestic and
international tax returns that have not been recognized in our financial statements due to uncertainty regarding their resolution. We are
unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters. In addition, certain of
these matters may not require cash settlement due to the existence of net operating loss carryforwards. Therefore, our unrecognized tax
benefits are not included in the table above. See Note 11 to our consolidated financial statements contained in “Financial Statements and
Supplementary Data.”
Other Liquidity Information. We have funded our cash needs since 2000 through various equity and debt issuances and through cash flow
from operations. In 2001, we completed our IPO of 7,500,000 shares of common stock, which generated $84.8 million in net proceeds. In 2002,
we completed a secondary offering of 3,450,000 shares of common stock, which generated $49.5 million in net proceeds. 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 approximately $87.9
million, our marketable securities balance of $57.6 million and our existing available credit line of $100.0 million will be sufficient for the
foreseeable future to fund our working capital requirements and operations, permit anticipated capital expenditures in 2009 of approximately
$45 million and meet our contractual cash obligations in 2009.
Critical Accounting Estimates
All of our significant accounting policies and estimates are described in Note 2 to our consolidated financial statements contained in “Financial
Statements and Supplementary Data.” However, 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. Different, reasonable estimates could have been used in 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.
We believe that the following financial estimates are both important to the portrayal of our financial condition and results of operations and
require subjective or complex judgments. Further, we believe that the items discussed below are properly recorded in the financial statements
for all periods presented. Our management has discussed the development, selection and disclosure of our most critical financial estimates
with the audit committee of our board of directors and with our independent auditors. The judgments about those financial estimates are
based on information available as of the date of the financial statements. Those financial estimates include:
Revenue recognition. Our revenues are primarily generated through two types of customers, hospitals and surgery centers, and stocking
distributors, with the majority of our revenue derived from sales to hospitals. Our products are sold through a network of employee and
independent sales representatives in the U.S. and by a combination of employee sales representatives, independent sales representatives and
stocking distributors outside the U.S. We record revenues from sales to hospitals and surgery centers when they take title to the product,
which is generally when the product is surgically implanted in a patient.
We record revenues from sales to our stocking distributors at the time the product is shipped to the distributor. Our stocking distributors,
who sell the products to their customers, take title to the products and assume all risks of ownership. Our distributors are obligated to pay us
within specified terms regardless of when, if ever, they sell the products. In general, our distributors do not have any rights of return or
exchange; however, in limited situations we have repurchase agreements with certain stocking distributors. Those certain agreements
35
require us to repurchase a specified percentage of the inventory purchased by the distributor within a specified period of time prior to the
expiration of the contract. During those specified periods, we defer the applicable percentage of the sales. Approximately $172,000 and
$252,000 of sales related to these types of agreements were deferred and not yet recognized as revenue as of December 31, 2008 and 2007,
respectively.
We must make estimates of potential future product returns related to current period product revenue. To do so, we analyze our historical
experience related to product returns when evaluating the adequacy of the allowance for sales returns. Judgment must be used and
estimates made in connection with establishing the allowance for product returns in any accounting period. Our allowances for product
returns of approximately $490,000 and $560,000 are included as a reduction of accounts receivable at December 31, 2008 and 2007,
respectively. Should actual future returns vary significantly from our historical averages, our operating results could be affected.
Allowances for doubtful accounts. We experience credit losses on our accounts receivable and accordingly, we must make estimates related
to the ultimate collection of our accounts receivable. Specifically, we analyze our accounts receivable, historical bad debt experience,
customer concentrations, customer creditworthiness and current economic trends when evaluating the adequacy of our allowance for
doubtful accounts.
The majority of our accounts receivable are from hospitals, many of which are government funded. Accordingly, our collection history with
this class of customer has been favorable. Historically, we have experienced minimal bad debts from our hospital customers and more
significant bad debts from certain international stocking distributors, typically as a result of specific financial difficulty or geo-political factors.
We write off accounts receivable when we determine that the accounts receivable are uncollectible, typically upon customer bankruptcy or
the customer’s non-response to continuous collection efforts.
We believe that the amount included in our allowance for doubtful accounts has been a historically accurate estimate of the amount of
accounts receivable that are ultimately not collected. While we believe that our allowance for doubtful accounts is adequate, the financial
condition of our customers and the geo-political factors that impact reimbursement under individual countries’ healthcare systems can
change rapidly and as such, additional allowances may be required in future periods. Our accounts receivable balance was $102.0 million and
$83.8 million, net of allowances for doubtful accounts of $4.0 million and $5.2 million, at December 31, 2008 and 2007, respectively.
Excess and obsolete inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory on a
first-in, first-out (FIFO) basis or its net realizable value. We regularly review inventory quantities on hand for excess and obsolete inventory and,
when circumstances indicate, we incur charges to write down inventories to their net realizable value. Our review of inventory for excess and
obsolete quantities is based primarily on our forecast of product demand and production requirements for the next twenty-four months. A
significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, our industry is
characterized by regular new product development that could result in an increase in the amount of obsolete inventory quantities on hand
due to cannibalization of existing products. Also, our estimates of future product demand may prove to be inaccurate in which case we may
be required to incur charges for excess and obsolete inventory. In the future, if additional inventory write-downs are required, we would
recognize additional cost of goods sold at the time of such determination. Regardless of changes in our estimates of future product demand,
we do not increase the value of our inventory above its adjusted cost basis. Therefore, although we make every effort to ensure the accuracy
of our forecasts of future product demand, significant unanticipated decreases in demand or technological developments could have a
significant impact on the value of our inventory and our reported operating results.
Charges incurred for excess and obsolete inventory were $8.7 million, $6.6 million and $6.5 million for the years ended December 31, 2008,
2007 and 2006, respectively. Additionally, in 2007, we recorded charges of $2.1 million associated with the closure of our manufacturing
facility in Toulon, France, for inventory write-offs and manufacturing costs incurred during a period of abnormal production capacity.
Goodwill and long-lived assets. We have approximately $49.7 million of goodwill recorded as a result of the acquisition of businesses.
Goodwill is tested for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest that
impairment exists. Based on our single business approach to decision-making, planning and resource allocation, we have determined that we
have only one reporting unit for purposes of evaluating goodwill for impairment. The annual evaluation of goodwill impairment may require
the use of estimates and assumptions to determine the fair value of our reporting unit using projections of future cash flows. We performed
our annual impairment test during the fourth quarter of 2008 and determined that the fair value of our reporting unit exceeded its carrying
value and, therefore, no impairment charge was necessary.
Our business is capital intensive, particularly as it relates to surgical instrumentation. We depreciate our property, plant and equipment and
amortize our intangible assets based upon our estimate of the respective asset's useful life. Our estimate of the useful life of an asset
requires us to make judgments about future events, such as product life cycles, new product development, product cannibalization and
36
technological obsolescence, as well as other competitive factors beyond our control. We account for the impairment of long-lived assets in
accordance with the Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, we evaluate impairments of our property, plant and equipment based upon an analysis of estimated undiscounted future
cash flows. If we determine that a change is required in the useful life of an asset, future depreciation and amortization is adjusted accordingly.
Alternatively, should we determine that an asset has been impaired, an adjustment would be charged to income based on the asset’s fair
market value, or discounted cash flows if the fair market value is not readily determinable, reducing income in that period.
In 2007, we recognized an impairment charge of $3.2 million for our property, plant and equipment at our Toulon, France facilities. This
impairment charge consisted of the write-down of assets held for sale to their estimated selling price less costs to sell, as well as the
abandonment of the remaining assets that are no longer in use.
Product liability claims and other litigation. Periodically, claims arise involving the use of our products. We make provisions for claims
specifically identified for which we believe the likelihood of an unfavorable outcome is probable and an estimate of the amount of loss has
been developed. We have recorded at least the minimum estimated liability related to those claims where a range of loss has been
established. As additional information becomes available, we reassess the estimated liability related to our pending claims and make revisions
as necessary. Future revisions in our estimates of the liability could materially impact our results of operation and financial position. We
maintain insurance coverage that limits the severity of any single claim as well as total amounts incurred per policy year, and we believe our
insurance coverage is adequate. We use the best information available to us in determining the level of accrued product liabilities and we
believe our accruals are adequate. Our accrual for product liability claims was approximately $310,000 and $610,000 at December 31, 2008
and 2007, respectively.
We are also involved in legal proceedings involving contract, patent protection and other matters. We make provisions for claims specifically
identified for which we believe the likelihood of an unfavorable outcome is probable and an estimate of the amount of loss can be developed.
Accounting for income taxes. Our effective tax rate is based on income by tax jurisdiction, statutory rates and tax saving initiatives available
to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and evaluating our
tax positions. This process includes assessing temporary differences resulting from differing recognition of items for income tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.
Realization of deferred tax assets in each taxable jurisdiction is dependent on our ability to generate future taxable income sufficient to realize
the benefits. Management evaluates deferred tax assets on an ongoing basis and provides valuation allowances to reduce net deferred tax
assets to the amount that is more likely than not to be realized.
Our valuation allowance balances totaled $18.5 million and $6.0 million as of December 31, 2008 and 2007, respectively, due to uncertainties
related to our ability to realize, before expiration, some of our deferred tax assets for both U.S. and foreign income tax purposes. These
deferred tax assets primarily consist of the carryforward of certain tax basis net operating losses and general business tax credits. During the
year ended December 31, 2008, we recognized a tax provision of $12.8 million to adjust our valuation allowance, primarily to record a
valuation allowance against all of our remaining deferred tax assets associated with net operating losses in France.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective January 1, 2007, which
requires that the tax effects of an income tax position to be recognized only if it is “more-likely-than-not” to be sustained based solely on the
technical merits as of the reporting date. As a multinational corporation, we are subject to taxation in many jurisdictions and the calculation of
our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we
ultimately determine that the payment of these liabilities will be unnecessary, we will reverse the liability and recognize a tax benefit in the
period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine
that a recorded tax liability is less than we expect the ultimate assessment to be. Our liability for unrecognized tax benefits totaled $1.8 million
and $6.2 million as of December 31, 2008 and 2007, respectively. See Note 11 to our consolidated financial statements contained in “Financial
Statements and Supplementary Data” for further discussion of our unrecognized tax benefits.
We operate within numerous taxing jurisdictions. We are subject to regulatory review or audit in virtually all of those jurisdictions and those
reviews and audits may require extended periods of time to resolve. Management makes use of all available information and makes reasoned
judgments regarding matters requiring interpretation in establishing tax expense, liabilities and reserves. We believe adequate provisions
exist for income taxes for all periods and jurisdictions subject to review or audit.
Stock-Based Compensation. We calculate the grant date fair value of non-vested shares as the closing sales price on the trading day
immediately prior to the grant date. We use the Black-Scholes option pricing model to determine the fair value of stock options and employee
stock purchase plan shares. The determination of the fair value of these stock-based payment awards on the date of grant using an option-
pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, which include the
expected life of the award, the expected stock price volatility over the expected life of the awards, expected dividend yield and risk-free
interest rate.
37
We estimate the expected life of options by calculating the average of the vesting period and the contractual term of the option, as allowed
by SEC Staff Accounting Bulletin No. 107. We estimate the expected stock price volatility based upon historical volatility of our common stock.
The risk-free interest rate is determined using U.S. Treasury rates where the term is consistent with the expected life of the stock options.
Expected dividend yield is not considered as we have never paid dividends and have no plans of doing so in the future.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing valuation models,
including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based
compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates
may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based
payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero
intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively,
value may be realized from these instruments that is significantly higher than the fair values originally estimated on the grant date and
reported in our financial statements. There is not currently a market-based mechanism or other practical application to verify the reliability
and accuracy of the estimates stemming from these valuation models.
We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those
awards that are expected to vest. All stock-based awards are amortized on a straight-line basis over their respective requisite service periods,
which are generally the vesting periods.
If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods, the future
periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net
income and net income per share. It may also result in a lack of comparability with other companies that use different models, methods and
assumptions.
See Note 14 to our consolidated financial statements contained in “Financial Statements and Supplementary Data” for further information
regarding our stock-based compensation disclosures.
Purchase Accounting. We account for acquired businesses using the purchase method of accounting which requires that the assets acquired
and liabilities assumed be recorded at the date of acquisition at their respective fair values. Our consolidated financial statements and results
of operations reflect an acquired business after the completion of the acquisition. The cost to acquire a business, including transaction costs, is
allocated to the underlying net assets of the acquired business in proportion to their respective fair values. Any excess of the purchase price
over the estimated fair values of the net assets acquired is recorded as goodwill.
The amount of the purchase price allocated to intangible assets is determined by estimating the future cash flows associated with the asset
and discounting the net cash flows back to their present values. The discount rate used is determined at the time of the acquisition in
accordance with standard valuation methods. The estimates of future cash flows include forecasted revenues, which are inherently difficult to
predict. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the
estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our
percentage of that market, discount rates and terminal growth rates.
Effective January 1, 2009, we adopted the provisions of SFAS No. 141R, Business Combinations (SFAS 141R), which significantly changes the
accounting for acquired businesses. More assets and liabilities will be measured at their acquisition date fair values. Legal fees and other
transaction-related costs will be expensed as incurred and are no longer included in goodwill as a cost of acquiring the business. SFAS 141R
also requires, among other things, acquirers to estimate the acquisition-date fair value of any contingent consideration and to recognize any
subsequent changes in the fair value of contingent consideration in earnings. In addition, restructuring costs the acquirer expected, but was
not obligated to incur, will be recognized separately from the business acquisition.
Restructuring Charges. We evaluate impairment issues for long-lived assets under the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. We record severance-related expenses once they are both probable and estimable in accordance
with the provisions of SFAS No. 112, Employer’s Accounting for Post-Employment Benefits, for severance provided under an ongoing benefit
arrangement. One-time termination benefit arrangements and other costs associated with exit activities are accounted for under the
provisions of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. We have estimated the expense for our
restructuring initiative by accumulating detailed estimates of costs, including the estimated costs of employee severance and related
termination benefits, impairment of property, plant and equipment, contract termination payments for leases and any other qualifying exit
costs. Such costs represent management’s best estimates, which are evaluated periodically to determine if an adjustment is required.
38
Impact of Recently Issued Accounting Pronouncements
In March 2008, the FASB issued 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 No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), as amended, and how the derivatives affect an entity’s 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 May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). This standard identifies a
consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for non-governmental entities. SFAS 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles. The adoption of SFAS 162 is not expected to have a material impact on our consolidated
financial position, results of operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, and in February 2008, the FASB amended SFAS No. 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 FASB Staff Position
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.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R) and SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (SFAS 160). SFAS 141R and SFAS 160 significantly change the
accounting for and reporting of business combination transactions and noncontrolling (minority) interests. Under SFAS 141R, an acquiring
entity will be required to recognize all the assets and liabilities assumed in a transaction at the acquisition date fair value. In addition, SFAS
141R includes a substantial number of additional disclosure requirements. SFAS 160 changes the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. We will apply the provisions of
SFAS 141R and SFAS 160 prospectively effective January 1, 2009.
39
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 December 31, 2008,
we had short term cash investments and marketable securities totaling approximately $112 million. Based on this level of investment, a
decrease of 0.25% in interest rates would have a negative annual impact of $281,000 to 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 Fluctuations
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our financial results. Approximately
28% of our total net sales were denominated in foreign currencies during each of the years ended December 31, 2008 and 2007, 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, if there is an
increase in the rate at which a foreign currency is exchanged for U.S. dollars, it 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 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 EU countries, which are denominated in the euro, from
Japan, which are denominated in the Japanese yen and from the United Kingdom, which are denominated in the British pound. Additionally,
we have significant intercompany receivables from our foreign subsidiaries which are denominated in foreign currencies, principally the euro,
the yen and the British pound. Our principal exchange rate risk, therefore, exists between the U.S. dollar and the euro, the U.S. dollar and the
yen and the U.S. dollar and the British pound. 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 and expense levels in the respective period.
As discussed in Note 2 to our consolidated financial statements in “Financial Statements and Supplementary Data,” 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. These contracts are effectively closed at the end of each reporting period.
40
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
We have audited the accompanying consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive
income, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 2 and 11 to the consolidated financial statements, effective January 1, 2007, the Company changed its method of
accounting for uncertainty in income taxes as required by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Also as
discussed in Note 2 to the consolidated financial statements, the Company changed its method of quantifying errors in 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2009
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Memphis, Tennessee
February 23, 2009
41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
We have audited the effectiveness of internal control over financial reporting of Wright Medical Group, Inc. and subsidiaries (the Company) as
of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express
an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of the Company as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008, and
our report dated February 23, 2009 expressed an unqualified opinion on those consolidated financial statements.
Memphis, Tennessee
February 23, 2009
42
Wright Medical Group, Inc.
Consolidated Balance Sheets (In thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventories
Prepaid expenses
Deferred income taxes
Assets held for sale
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term obligations
Total current liabilities
Long-term debt and capital lease obligations
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common stock, voting, $.01 par value, shares
authorized - 100,000,000; shares issued and
outstanding - 38,021,961 in 2008 and 36,493,183 in 2007
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders’ equity
December 31,
2008
2007
87,865
57,614
102,046
176,059
14,263
29,874
-
8,934
476,655
133,651
49,682
21,090
3,034
8,018
692,130
15,877
59,247
125
75,249
200,136
166
4,951
280,502
372
364,594
18,312
28,350
411,628
692,130
$
$
$
$
229,026
15,535
83,801
115,290
13,757
24,015
2,207
7,570
491,201
99,037
28,233
11,187
30,556
9,771
669,985
19,764
53,069
551
73,384
200,455
159
7,206
281,204
365
338,640
24,623
25,153
388,781
669,985
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
43
Wright Medical Group, Inc.
Consolidated Statements of Operations (In thousands, except per share data)
Net sales
Cost of sales1
Cost of sales – restructuring
Gross profit
Operating expenses:
Selling, general and administrative1
Research and development1
Amortization of intangible assets
Restructuring charges (Note 16)
Acquired in-process research and development costs (Note 3)
Total operating expenses
Operating income
Interest expense (income), net
Other (income) expense, net
Income before income taxes
Provision for income taxes
Net income
Net income per share (Note 12):
Basic
Diluted
Weighted-average number of shares outstanding – basic
Weighted-average number of shares outstanding – diluted
Year Ended December 31,
2008
2007
2006
$
$
$
$
465,547
134,377
-
331,170
261,396
33,292
4,874
6,705
2,490
308,757
22,413
2,181
(1,338)
21,570
18,373
3,197
0.09
0.09
36,933
37,401
$
386,850
$
338,938
108,407
2,139
276,304
225,929
28,405
3,782
16,734
-
274,850
1,454
(1,252)
375
2,331
1,370
961
0.03
0.03
35,812
36,483
$
$
$
97,234
-
241,704
192,573
25,551
4,149
-
-
222,273
19,431
(1,127)
(1,643)
22,201
7,790
$
14,411
$
$
0.42
0.41
34,434
35,439
1 These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated:
Cost of sales
Selling, general and administrative
Research and development
2008
Year Ended December 31,
2007
2006
$
$
1,244
10,644
1,613
$
2,046
12,061
2,425
854
10,766
2,220
The accompanying notes are an integral part of these consolidated financial statements.
44
Wright Medical Group, Inc.
Consolidated Statements of Cash Flows (In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation
Stock-based compensation expense
Acquired in-process research and development costs
Amortization of intangible assets
Deferred income taxes
Gain on sale of investment
Excess tax benefits from stock-based compensation
arrangements
Non-cash restructuring charges
Other
Changes in assets and liabilities:
Accounts receivable
Inventories
Marketable securities
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other liabilities
Net cash (used in) provided by operating activities
Investing activities:
Capital expenditures
Acquisition of businesses
Purchase of intangible assets
Proceeds from sale of investment
Investment in available-for-sale marketable securities
Other
Net cash used in investing activities
Financing activities:
Issuance of common stock
Proceeds from issuance of convertible senior notes
Financing under factoring agreements, net
Principal payments of bank and other financing
Excess tax benefits from stock-based compensation
arrangements
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Year Ended December 31,
2008
2007
2006
$
3,197
$
961
$
14,411
26,462
13,501
2,490
4,874
18,325
-
(1,278)
(63)
1,233
(18,729)
(57,797)
15,535
(6,666)
(5,009)
315
(3,610)
(61,936)
(28,914)
(3,418)
-
(57,037)
2,363
(148,942)
12,018
-
(605)
(285)
1,278
12,406
(1,015)
(141,161)
229,026
23,522
16,532
-
3,782
(8,708)
-
(3,633)
5,295
111
(9,831)
(27,077)
14,790
(6,103)
1,889
12,894
24,424
(35,042)
(27,758)
(1,041)
-
-
-
(63,841)
17,292
193,492
(3,457)
(1,063)
3,633
209,897
607
171,087
57,939
21,361
13,840
-
4,149
(8,852)
(1,499)
(4,908)
-
1,340
(8,555)
(867)
(5,325)
4,600
2,504
(2,224)
29,975
(29,643)
-
(705)
1,499
-
500
(28,349)
5,915
-
(54)
(6,123)
4,908
4,646
390
6,662
51,277
Cash and cash equivalents, end of period
$
87,865
$
229,026
$
57,939
The accompanying notes are an integral part of these consolidated financial statements.
45
Wright Medical Group, Inc.
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
For the Years Ended December 31, 2006, 2007 and 2008 (In thousands, except share data)
Common Stock, Voting
Number of
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
Balance at December 31, 2005
34,175,696 $
342
$
274,312 $
5,397 $
11,957 $
292,008
2006 Activity:
Net income
Foreign currency translation
Total comprehensive income
SAB 108 adjustment to opening
balance (Note 2)
Issuances of common stock
Tax benefit of employee stock
option exercises
Stock-based compensation
Balance at December 31, 2006
2007 Activity:
Net income
Foreign currency translation
Minimum pension liability
adjustment
Total comprehensive income
FIN 48 adjustment to opening
balance (Note 11)
Issuances of common stock
Tax benefit of employee stock
option exercises
Stock-based compensation
Balance at December 31, 2007
2008 Activity:
Net income
Foreign currency translation
Unrealized gain on marketable
securities
Minimum pension liability
adjustment
Total comprehensive loss
Issuances of common stock
Issuance of previously granted
restricted stock
Grant of restricted stock
Cancellation of restricted stock
Tax benefit of employee stock
option exercises
Stock-based compensation
Balance at December 31, 2008
-
-
-
968,104
-
-
-
-
-
9
-
-
-
-
-
-
5,906
5,585
14,845
14,411
-
-
(2,861)
-
-
-
-
5,921
-
-
-
-
-
14,411
5,921
20,332
(2,861)
5,915
5,585
14,845
35,143,800 $
351
$
300,648 $
16,947 $
17,878 $
335,824
-
-
-
-
1,349,383
-
-
-
-
-
-
14
-
-
-
-
-
-
-
17,278
4,289
16,425
961
-
-
-
7,245
-
-
-
-
6,970
(225)
-
-
-
-
-
961
6,970
(225)
7,706
7,245
17,292
4,289
16,425
36,493,183 $
365
$
338,640 $
25,153 $
24,623 $
388,781
-
-
-
-
616,836
434,005
558,184
(80,247)
-
-
-
-
-
-
7
-
-
-
-
-
-
-
-
-
-
12,011
-
-
-
720
13,223
3,197
-
-
-
-
-
-
-
-
-
-
-
(6,781)
399
71
-
-
-
-
-
-
-
38,021,961 $
372
$
364,594 $
28,350 $
18,312 $
3,197
(6,781)
399
71
(3,114)
12,018
-
-
-
720
13,223
411,628
The accompanying notes are an integral part of these consolidated financial statements.
46
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
1. Organization and Description of Business:
Wright Medical Group, Inc., through Wright Medical Technology, Inc. and other operating subsidiaries (Wright), is a global orthopaedic medical
device company specializing in the design, manufacture and marketing of reconstructive joint devices and biologics products. Our products are
sold primarily through a network of employee sales representatives and independent sales representatives in the United States (U.S.) and by a
combination of employee sales representatives, independent sales representatives and stocking distributors outside the U.S. We promote our
products in over 60 countries with principal markets in the U.S., Europe and Japan. We are headquartered in Arlington, TN.
2. Summary of Significant Accounting Policies:
Principles of Consolidation. The accompanying consolidated financial statements include our accounts and those of our wholly owned domestic
and international subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates. The most significant areas requiring the use of management estimates relate to revenue recognition, the
determination of allowances for doubtful accounts and excess and obsolete inventories, the evaluation of goodwill and long-lived assets, product
liability claims and other litigation, income taxes, stock-based compensation, purchase accounting for business combinations, and accounting for
restructuring charges.
Cash and Cash Equivalents. Cash and cash equivalents include all cash balances and short-term investments with original maturities of three
months or less.
Marketable Securities. Our 2007 investment in marketable securities represented debt securities, which were classified as trading securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities
(SFAS 115). For the years ended December 31, 2007 and 2006, we did not incur any realized or unrealized gains or losses related to these
securities. During the first quarter of 2008, we liquidated all those investments into cash equivalents. During the remainder of 2008, we invested
in treasury bills, government and agency bonds, and certificates of deposit with maturity dates of less than 12 months and certificates of deposit
with maturity dates of six months or less. Our investments in these marketable securities are classified as available-for-sale securities in
accordance with SFAS 115. These securities are carried at their fair value, and all unrealized gains and losses are recorded within other
comprehensive income.
Inventories. Our inventories are valued at the lower of cost or market on a first-in, first-out (FIFO) basis. Inventory costs include material, labor
costs and manufacturing overhead. We regularly review inventory quantities on hand for excess and obsolete inventory and, when circumstances
indicate, we incur charges to write down inventories to their net realizable value. Our review of inventory for excess and obsolete quantities is
based primarily on our estimated forecast of product demand and production requirements for the next twenty-four months. Charges incurred
for excess and obsolete inventory were $8.7 million, $6.6 million and $6.5 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
Additionally, in 2007, we recorded charges of $2.1 million associated with the closure of our manufacturing facility in Toulon, France for inventory
write-offs and manufacturing costs incurred during a period of abnormal production capacity, which were expensed as period costs in
accordance with Financial Accounting Standards Board (FASB) Statement No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4.
Product Liability Claims and Other Litigation. We make provisions for claims specifically identified for which we believe the likelihood of an
unfavorable outcome is probable and an estimate of the amount of loss has been developed. We have recorded at least the minimum estimated
liability related to those claims where a range of loss has been established. Our accrual for product liability claims was $310,000 and $610,000 at
December 31, 2008 and 2007, respectively.
Property, Plant and Equipment. Our property, plant and equipment is stated at cost. Depreciation, which includes amortization of assets under
capital lease, is generally provided on a straight-line basis over the estimated useful lives generally based on the following categories:
Land improvements
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Surgical instruments
15 to 25 years
10 to 45 years
3 to 12 years
1 to 14 years
6 years
Expenditures for major renewals and betterments, including leasehold improvements, that extend the useful life of the assets are capitalized and
depreciated over the remaining life of the asset or lease term, if shorter. Maintenance and repair costs are charged to expense as incurred. Upon
sale or retirement, the asset cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss
is included in income.
47
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Intangible Assets and Goodwill. Goodwill is recognized for the excess of the purchase price over the fair value of net assets of businesses
acquired. Goodwill is required to be tested for impairment at least annually. Unless circumstances otherwise dictate, the annual impairment test
is performed in the fourth quarter. Accordingly, during the fourth quarter of 2008, we evaluated goodwill for impairment and determined that
the fair value of our reporting unit exceeded its carrying value, indicating that goodwill was not impaired. Based on our single business approach
to decision-making, planning and resource allocation, management has determined that we have only one reporting unit for purposes of
evaluating goodwill for impairment.
Our intangible assets with estimable useful lives are amortized on a straight line basis over their respective estimated useful lives to their
estimated residual values, and are reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-
Lived Assets (SFAS 144). The weighted average amortization periods for completed technology, distribution channels, trademarks, licenses,
customer relationships and other are 9 years, 10 years, 7 years, 7 years, 11 years and 5 years, respectively. The weighted average amortization
period of our intangible assets on a combined basis is 9 years. Additionally, we have one trademark intangible asset that has an indefinite life.
Valuation of Long-Lived Assets. Management periodically evaluates carrying values of long-lived assets, including property, plant and
equipment and intangible assets, when events and circumstances indicate that these assets may have been impaired. We account for the
impairment of long-lived assets in accordance SFAS 144. Accordingly, we evaluate impairment of our property, plant and equipment based upon
an analysis of estimated undiscounted future cash flows. If it is determined that a change is required in the useful life of an asset, future
depreciation and amortization is adjusted accordingly. Alternatively, should we determine that an asset is impaired, an adjustment would be
charged to income based on the asset’s fair market value or discounted cash flows if the fair market value is not readily determinable, reducing
income in that period.
In 2007, we recognized an impairment charge of $3.2 million for our property, plant and equipment at our Toulon, France facilities. This
impairment charge consisted of the write-down of assets held for sale to their estimated selling price less costs to sell, as well as the
abandonment of the remaining assets that are no longer in use. See Note 16 for further discussion of our restructuring charges.
Allowances for Doubtful Accounts. We experience credit losses on our accounts receivable and, accordingly, we must make estimates related to
the ultimate collection of our accounts receivable. Specifically, management analyzes our accounts receivable, historical bad debt experience,
customer concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of our allowance for doubtful
accounts.
The majority of our accounts receivable are from hospitals, many of which are government funded. Accordingly, our collection history with this
class of customer has been favorable. Historically, we have experienced minimal bad debts from our hospital customers and more significant bad
debts from certain international stocking distributors, typically as a result of specific financial difficulty or geo-political factors. We write off
accounts receivable when we determine that the accounts receivable are uncollectible, typically upon customer bankruptcy or the customer’s
non-response to continued collection efforts. Our allowance for doubtful accounts totaled $4.0 million and $5.2 million at December 31, 2008 and
2007, respectively.
Concentration of Credit Risk. Financial instruments which potentially subject us to concentrations of credit risk consist principally of accounts
receivable. Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring
credit exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding the
credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts
receivable. As of December 31, 2008, one customer, our stocking distributor in Turkey, accounted for more than 10% of our accounts receivable
balance. As of December 31, 2008 and 2007, the balance due from this customer was $10.6 million or 10.4% of our accounts receivable balance,
and $8.0 million or 9.5% of our accounts receivable balance, respectively. There were no customers that accounted for more than 10% of
accounts receivable as of December 31, 2007.
Concentrations of Supply of Raw Material. We rely on a limited number of suppliers for the components used in our products. Our
reconstructive joint devices are produced from various surgical grades of titanium, cobalt chrome, stainless steel, various grades of high density
polyethylenes, and ceramics. We rely on one source to supply us with a certain grade of cobalt chrome alloy and one supplier for the silicone
elastomer used in some of our extremity products. We are aware of only two suppliers of silicone elastomer to the medical device industry for
permanent implant usage. Additionally, we rely on one supplier of ceramics for use in our hip products. For certain biologics products, we depend
on one supplier of demineralized bone matrix (DBM) and cancellous bone matrix (CBM). We rely on one supplier for our GRAFTJACKET® family of
soft tissue repair and graft containment products, and one supplier for our xenograph bone wedge product. We maintain adequate stock from
these suppliers in order to meet market demand.
Income Taxes. Income taxes are accounted for pursuant to the provisions of SFAS No. 109, Accounting for Income Taxes, and FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (FIN 48). Our effective tax rate is based on
income by tax jurisdiction, statutory rates, and tax saving initiatives available to u s in the various jurisdictions in which we operate.
48
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Significant judgment is required in determining our effective tax rate and evaluating our tax positions. This process includes assessing temporary
differences resulting from differing recognition of items for income tax and financial accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our consolidated balance sheet. The measurement of deferred tax assets is reduced by a valuation
allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We provide for unrecognized tax benefits based upon our assessment of whether a tax position is “more-likely-than-not” to be sustained upon
examination by the tax authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on a
cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the
underlying tax position.
Other Taxes. Taxes assessed by a governmental authority that are imposed concurrent with our revenue transactions with customers are
presented on a net basis in our consolidated statement of operations.
Revenue Recognition. Our revenues are primarily generated through two types of customers, hospitals and surgery centers, and stocking
distributors, with the majority of our revenue derived from sales to hospitals. Our products are primarily sold through a network of employee
sales representatives and independent sales representatives in the U.S. and by a combination of employee sales representatives, independent
sales representatives, and stocking distributors outside the U.S. Revenues from sales to hospitals are recorded when the hospital takes title to the
product, which is generally when the product is surgically implanted in a patient.
We record revenues from sales to our stocking distributors outside the U.S. at the time the product is shipped to the distributor. Stocking
distributors, who sell the products to their customers, take title to the products and assume all risks of ownership. Our distributors are obligated
to pay within specified terms regardless of when, if ever, they sell the products. In general, the distributors do not have any rights of return or
exchange; however, in limited situations we have repurchase agreements with certain stocking distributors. Those certain agreements require us
to repurchase a specified percentage of the inventory purchased by the distributor within a specified period of time prior to the expiration of the
contract. During those specified periods, we defer the applicable percentage of the sales. Approximately $172,000 and $252,000 of deferred
revenue related to these types of agreements was recorded at December 31, 2008 and 2007, respectively.
We must make estimates of potential future product returns related to current period product revenue. We develop these estimates by analyzing
historical experience related to product returns. Judgment must be used and estimates made in connection with establishing the allowance for
sales returns in any accounting period. An allowance for sales returns of $490,000 and $560,000 is included as a reduction of accounts receivable
at December 31, 2008 and 2007, respectively.
Shipping and Handling Costs. We incur shipping and handling costs associated with the shipment of goods to customers, independent
distributors and our subsidiaries. All shipping and handling amounts billed to customers are included in net sales. All shipping and handling costs
associated with the shipment of goods to customers are included in cost of sales. All other shipping and handling costs are included in selling,
general and administrative expenses.
Research and Development Costs. Research and development costs are charged to expense as incurred.
Foreign Currency Translation. The financial statements of our international subsidiaries are translated into U.S. dollars using the exchange rate at
the balance sheet date for assets and liabilities and the weighted average exchange rate for the applicable period for revenues, expenses, gains
and losses. Translation adjustments are recorded as a separate component of comprehensive income. Gains and losses resulting from
transactions denominated in a currency other than the local functional currency are included in “Other expense (income), net” on our
consolidated statement of operations.
Pension Benefits. Our subsidiary in Japan provides benefits to employees under a plan that we account for as a defined benefit plan in
accordance with SFAS No. 87, Employers' Accounting for Pensions, and SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R). This plan is unfunded, and determining the minimum
pension liability requires the use of assumptions and estimates, including discount rates and mortality rates, and actuarial methods. Our
minimum pension liability totaled $1.4 million and $970,000 as of December 31, 2008 and 2007, respectively.
Comprehensive Income. Comprehensive income is defined as the change in equity during a period related to transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and
distributions to owners. The difference between our net income and our comprehensive income is attributable to foreign currency translation,
adjustments to our minimum pension liability, and unrealized gains and losses on our available-for-sale securities.
Stock-Based Compensation. We account for stock-based compensation in accordance with SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS 123R). Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting
49
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
period. The determination of the fair value of stock-based payment awards, such as options, on the date of grant using an option-pricing model is
affected by our stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected life of the
award, the expected stock price volatility over the expected life of the awards, expected dividend yield and risk-free interest rate.
We recorded $13.5 million, $16.5 million and $13.8 million of stock-based compensation expense during the years ended December 31, 2008,
2007 and 2006, respectively. See Note 14 for further information regarding our stock-based compensation assumptions and expenses.
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 December 31, 2008 and 2007 due to their short maturities or variable rates.
The fair value of our convertible senior notes was approximately $155 million and $216 million as of December 31, 2008 and 2007, respectively.
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, Fair Value Measurements (SFAS 157), for financial assets and liabilities
measured at fair value on a recurring basis. SFAS 157 applies to all financial assets and liabilities that are being measured and reported on a fair
value basis, and establishes a framework for measuring the fair value of assets and liabilities and expands disclosures about fair value
measurements. The adoption of SFAS 157 had no impact to our consolidated financial statements. SFAS 157 requires fair value measurements be
classified and disclosed in one of the following three categories:
Level 1:
Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2:
Financial instruments determined using prices for recently traded financial instruments with similar underlying terms as well as
directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3:
Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if
any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation
techniques.
As of December 31, 2008, we have available-for-sale marketable securities totaling $57.6 million, consisting of investments in treasury bills,
government and agency bonds and certificates of deposits, all of which are valued at fair value using a market approach. A total of $56.5 million
of our available-for-sale securities is valued based on quoted prices in active exchange markets (Level 1). The remaining $1.2 million is valued at
fair value using other observable inputs (Level 2).
Derivative Instruments. We account for derivative instruments and hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), as amended. Accordingly, all of our derivative instruments are recorded in the accompanying consolidated
balance sheet as either an asset or liability and measured at fair value. The changes in the derivative's fair value are recognized currently in
earnings unless specific hedge accounting criteria are met.
We employ a derivative program using 30-day foreign currency forward contracts to mitigate the risk of currency fluctuations on our
intercompany receivable and payable balances that are denominated in foreign currencies. These forward contracts are expected to offset the
transactional gains and losses on the related intercompany balances. These forward contracts are not designated as hedging instruments under
SFAS No. 133. Accordingly, the changes in the fair value and the settlement of the contracts are recognized in the period incurred in the
accompanying consolidated statements of operations.
We recorded net losses of $1.5 million, $2.8 million and $1.9 million, for the years ended December 31, 2008, 2007 and 2006, respectively, on
foreign currency contracts, which are included in “Other (income) expense, net” in our consolidated statements of operations. These losses
substantially offset translation gains recorded on our intercompany receivable and payable balances, also included in “Other (income) expense,
net.” At December 31, 2008 and 2007, we had no foreign currency contracts outstanding.
Supplemental Cash Flow Information. Cash paid for interest and income taxes was as follows (in thousands):
Year Ended December 31,
2008
2007
2006
Interest
Income taxes
$
$
5,963
4,960
$
$
1,898
10,408
$
$
1,298
9,663
During 2008, we sold certain assets of our Toulon, France facility. As part of that sale, the buyer assumed our capital lease obligations of
approximately $700,000 for certain machinery and equipment located in that facility. During 2006, we favorably resolved certain income tax
contingencies associated with a prior acquisition, resulting in a decrease in goodwill of $140,000. We entered into insignificant amounts of capital
leases during 2006, 2007 and 2008.
50
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Adoption of SAB 108. In September 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), to address
diversity in practice in quantifying financial statement misstatements. SAB 108 requires registrants to consider both the “rollover” method which
focuses on the income statement impact of misstatements and the “iron curtain” method which focuses on the balance sheet impact of
misstatements to define materiality. The transition provisions of SAB 108 allow a registrant to adjust opening retained earnings for the
cumulative effect of immaterial errors relating to prior years. We adopted SAB 108 during the year ended December 31, 2006.
During 2006, we concluded there was an error in our method of calculating depreciation expense for our surgical instruments, resulting in an
understatement of depreciation expense for the years 2000 through 2005. Under SAB 108, we assessed materiality of errors originating in prior
years using both the rollover method and the iron-curtain method. Management concluded that the impact of this error was immaterial for each
of the prior years under the rollover method, which was the method we used prior to the adoption of SAB 108. However, under the iron-curtain
method, the cumulative effect of the balance sheet adjustment was material to our 2006 statement of operations. Therefore, an adjustment was
recorded to 2006 opening retained earnings in accordance with the implementation guidance in SAB 108. The total cumulative impact was as
follows (in thousands):
Accumulated depreciation
Deferred tax asset
Retained earnings
Increase / (Decrease)
$ 4,721
1,860
(2,861)
Recently Issued Accounting Pronouncements. In March 2008, the FASB issued 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 No. 133, as amended, and how the derivatives affect an entity’s 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 May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). This standard identifies a
consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for nongovernmental entities. SFAS 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to Audit Standard (AU) Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. The adoption of SFAS 162 is not expected to have a material impact on our
consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS 157 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 FASB Staff Position 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.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R) and SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements, an Amendment of ARB No. 51 (SFAS 160). SFAS 141R and SFAS 160 significantly change the accounting for
and reporting of business combination transactions and noncontrolling (minority) interests. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets and liabilities assumed in a transaction at the acquisition date fair value. In addition, SFAS 141R includes a substantial
number of additional disclosure requirements. SFAS 160 changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of equity. We will apply the provisions of SFAS 141R and SFAS 160
prospectively effective January 1, 2009.
3. Acquisitions :
INBONE Technologies, Inc. On April 3, 2008, we completed the acquisition of Inbone Technologies, Inc. (Inbone), a privately held company
focused on the field of ankle arthroplasty and small bone fusion. The purchase consisted of an initial cash
51
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
payment of $23.2 million, guaranteed future minimum payments of $3.7 million and potential additional cash payments based upon future
operational and financial performance of the company. Assets acquired include the INBONE™ Total Ankle System and the INBONE™ Intra-
osseous Fusion Rod and Plate System.
The operating results from this acquisition are included in the consolidated financial statements from the acquisition date.
The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess
of the cost of the acquisition over the net of amounts assigned to the fair value of the assets acquired is recorded as goodwill. The following is a
summary of the estimated fair values of the net assets acquired, which includes transaction costs and the guaranteed future minimum payments
(in thousands):
Cash
Accounts receivable
Inventories
Deferred income tax assets
Property, plant and equipment
Other assets
In-process research and development
Intangible assets
Goodwill
Total assets
Current liabilities
Deferred income tax liabilities
Debt assumed
Total liabilities
Net assets acquired
Less cash acquired
Plus debt assumed and paid at closing
Total purchase price
$
$
$
$
$
$
745
708
1,047
384
810
159
2,490
9,480
19,081
34,904
1,814
3,739
1,727
7,280
27,624
(745)
1,727
28,606
Of the $9.5 million of acquired intangible assets, $5.2 million was assigned to completed technology (ten year useful life), $1.5 million was
assigned to registered trademarks (indefinite useful life), $1.4 million was assigned to customer relationships (twelve year useful life), and $1.4
million was assigned to other assets (five year useful life).
As part of the purchase price allocation, we recorded accrued expenses of $561,000 to involuntarily terminate or relocate employees of the
acquired entity. These exit activities were completed during the second quarter of 2008.
In connection with this acquisition, we immediately recognized as expense approximately $2.5 million in costs representing the estimated fair
value of acquired in-process research and development (IPRD) that had not yet reached technological feasibility and had no alternative future
use. The value assigned to IPRD was determined by estimating the costs to develop the acquired IPRD into commercially viable products,
estimating the resulting net cash flows from this project, and discounting the net cash flows back to their present values using an 18% risk
adjusted discount rate. This discount rate reflected uncertainties surrounding the successful development of IPRD.
A.M. Surgical, Inc. On June 9, 2008, we acquired certain assets of A.M. Surgical, Inc. (A.M. Surgical), a New York-based company focused on
providing endoscopic soft tissue release products for foot and ankle surgeons. Prior to the acquisition, we had marketed A.M. Surgical’s foot and
ankle products pursuant to a distribution agreement signed in October 2007. The purchase consisted of an initial cash payment of $2.1 million
and potential additional cash payments based upon future financial performance of the acquired assets, not to exceed $700,000. Assets acquired
include all of the A.M. Surgical endoscopic soft tissue release products for the foot and ankle market, which consists of the AM™ EPF (plantar fascia
release), AM™ UDIN (interdigital nerve decompression) and AM™ EGR (gastrocnemius release) Systems. These three systems address the
decompression and soft tissue release procedures most commonly performed by foot and ankle surgeons. The A.M. Surgical product line is highly
complementary to our line of reconstructive and biologic products for flatfoot corrective surgery.
The operating results from this acquisition are included in the consolidated financial statements from the acquisition date.
52
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess
of the cost of the acquisition over the net of amounts assigned to the fair value of the assets acquired is recorded as goodwill. The following is a
summary of the estimated fair values of the assets acquired, which includes transaction costs (in thousands):
Intangible assets
Goodwill
Total assets acquired
420
1,740
$
2,160
Creative Medical Designs, Inc. and Rayhack LLC. On September 4, 2008, we completed the acquisition of all assets associated with the
RAYHACK® Osteotomy Systems (Rayhack) for complex wrist reconstruction. The purchase consists of an initial cash payment of $1.4 million and
potential additional cash payments based on the future financial performance of the purchased assets, not to exceed $1.6 million.
The operating results from this acquisition are included in the consolidated financial statements from the acquisition date.
The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The fair
value of the net assets acquired exceeded the initial consideration for the acquisition by approximately $438,000. The excess was recorded as a
liability for contingent consideration. The following is a summary of the estimated fair values of the assets acquired, which includes transaction
costs (in thousands):
Inventory
Property, plant and equipment
Intangible assets
Current liabilities
Total assets acquired
$
264
104
1,460
(438)
$
1,390
Of the $1.5 million of acquired intangible assets, $790,000 was assigned to customer relationships (ten year useful life), $360,000 was assigned to
registered trademarks (ten year useful life), $280,000 was assigned to completed technology (ten year useful life), and $30,000 assigned to other
assets (five year useful life).
Our consolidated results of operations would not have been materially different than reported results had the Inbone, A.M. Surgical and Rayhack
acquisitions occurred at the beginning of 2008 or 2007.
4. Inventories:
Inventories consist of the following (in thousands):
Raw materials
Work-in-process
Finished goods
5. Assets Held for Sale:
Assets held for sale consists of the following (in thousands):
Land and buildings
Machinery and equipment
December 31,
2008
2007
$
$
9,502
34,811
131,746
7,020
21,482
86,788
$
176,059
$
115,290
December 31,
2008
2007
$
$
-
-
-
$
$
1,766
441
2,207
In April 2008, we completed the sale of assets held for sale from our Toulon, France facility for approximately $2.4 million, less costs to sell, plus
the assumption of capital lease obligations totaling approximately $700,000. See Note 16 for further discussion of our restructuring activities
associated with our Toulon, France facility.
53
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
6. Property, Plant and Equipment:
Property, plant and equipment consists of the following (in thousands):
Land and land improvements
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Construction in progress
Surgical instruments
Less: Accumulated depreciation
$
December 31,
2008
2007
$
4,073
22,709
42,675
31,620
9,963
143,503
254,543
4,050
7,272
35,534
30,424
5,931
116,699
199,910
(120,892)
(100,873)
$
133,651
$
99,037
The components of property, plant and equipment recorded under capital leases consist of the following (in thousands):
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Less: Accumulated depreciation
December 31,
2008
2007
$
$
1,448
357
13
1,818
(655)
1,448
197
834
2,479
(1,374)
$
1,163
$
1,105
Depreciation expense approximated $26.5 million, $23.5 million and $21.4 million for the years ended December 31, 2008, 2007, and 2006,
respectively, and included amortization of assets under capital leases.
7. Goodwill and Intangibles:
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2008, are as follows (in thousands):
Goodwill, at December 31, 2007
Goodwill from acquisitions during 2008 (see Note 3)
Goodwill from contingent consideration associated with acquisitions prior to 2008
Foreign currency translation
Goodwill, at December 31, 2008
$
$
28,233
20,821
1,078
(450)
49,682
During 2008, we made a payment totaling $57,000 as contingent consideration for the R&R Medical, Inc. (R&R) acquisition completed in 2007,
and a payment totaling $394,000 as contingent consideration for the acquisition of the subtalar implant assets of Koby Ventures Ltd., d/b/a
Metasurg (Metasurg), which was completed in 2007. In addition, we recorded a liability for contingent consideration to be paid in 2009 of
$138,000 associated with the R&R acquisition and $489,000 associated with the Metasurg acquisition.
54
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
The components of our identifiable intangible assets are as follows (in thousands):
Distribution channels
Completed technology
Licenses
Customer relationships
Trademarks
Other
Less: Accumulated amortization
December 31, 2008
December 31, 2007
Accumulated
Amortization
19,316
4,006
3,504
371
373
1,172
28,742
Cost
$
21,625
$
12,163
6,301
3,650
2,733
3,360
49,832
$
(28,742)
Accumulated
Amortization
18,082
2,896
2,561
110
164
1,247
25,060
Cost
$
22,793
$
5,180
3,598
1,490
862
2,324
36,247
$
(25,060)
Intangible assets, net
$
21,090
$
11,187
Based on the intangible assets held at December 31, 2008, we expect to amortize approximately $4.8 million in 2009, $2.3 million in 2010,
$2.2 million in 2011, $2.1 million in 2012, and $1.8 million in 2013.
8. Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following (in thousands):
Employee benefits
Royalties
Taxes other than income
Commissions
Professional and legal fees
Contingent consideration
Restructuring liability (see Note 16)
Other
9. Long-Term Debt and Capital Lease Obligations:
Long-term debt and capital lease obligations consist of the following (in thousands):
Capital lease obligations
Convertible senior notes
Less: current portion
December 31,
2008
2007
$
13,324
$
10,994
6,336
6,154
6,092
7,155
3,065
4,950
12,171
5,930
5,320
5,628
6,239
-
6,966
11,992
$
59,247
$
53,069
December 31,
2008
2007
$
261
$
200,000
200,261
(125)
1,006
200,000
201,006
(551)
$
200,136
$
200,455
In April 2008, we sold certain assets of our Toulon, France facility. As part of that sale, the buyer assumed our capital lease obligations
of approximately $700,000 for certain machinery and equipment located in that facility.
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
55
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
shares per $1,000 principal amount of the notes, which represents a conversion price of $32.65 per share. The holder of the notes may convert at
any time on or prior to the close of business on the business day immediately preceding the maturity date of notes. Beginning on December 6,
2011, we may redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the notes, plus accrued and
unpaid interest, if the closing price of our common stock has exceeded 140% of the conversion price for at least 20 days during any consecutive
30-day trading period. Additionally, if we experience a fundamental change event, as defined in the note agreement, the holders may require us
to purchase for cash all or a portion of the notes, for 100% of the principal amount of the notes, plus accrued and unpaid interest. If upon a
fundamental change event, a holder elects to convert its notes, we may, under certain circumstances, increase the conversion rate for the notes
surrendered. 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 December 31, 2008, our revolving credit facility had availability of $100 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 an annual base 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 3.25%. The term of the credit facility
extends through June 30, 2011.
As discussed in Note 6, we have acquired certain property and equipment pursuant to capital leases. At December 31, 2008, future minimum
lease payments under capital lease obligations, together with the present value of the net minimum lease payments, are as follows (in
thousands):
2009
2010
2011
2012
2013
Total minimum payments
Less amount representing interest
Present value of minimum lease payments
Current portion
Long-term portion
10. Other Long-Term Liabilities:
Other long-term liabilities consist of the following (in thousands):
Unrecognized tax benefits (see Note 11)
Other
$
$
136
104
28
6
3
277
(16)
261
(125)
136
December 31,
2008
2007
$
$
1,814
3,137
4,951
$
$
6,154
1,052
7,206
11. Income Taxes:
The components of our income before income taxes are as follows (in thousands):
Domestic
Foreign
Income before income taxes
Year Ended December 31,
2008
2007
2006
$
$
3,036
18,534
21,570
$
$
10,981
(8,650)
2,331
$
$
34,624
(12,423)
22,201
56
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
The components of our provision for income taxes are as follows (in thousands):
Current provision:
Domestic:
Federal
State
Foreign
Deferred (benefit) provision:
Domestic:
Federal
State
Foreign
Total provision for income taxes
Year Ended December 31,
2008
2007
2006
$
$
3,192
(720)
(2,880)
(2,812)
(105)
21,698
18,373
$
$
7,590
660
1,397
(4,333)
(329)
(3,615)
1,370
$
13,257
1,841
2,234
(2,915)
(361)
(6,266)
$
7,790
A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate is as follows:
Year Ended December 31,
2008
2007
2006
Income tax provision at statutory rate
State income taxes
Stock-based compensation expense
Change in valuation allowance
Research and development credit
Foreign income tax rate differences
Non-taxable differences and other, net
Total
35.0 %
(4.4)%
6.6 %
59.1 %
(8.5)%
(5.6)%
3.0 %
85.2 %
35.0 %
12.2 %
132.9 %
(3.6)%
(51.2)%
(70.0)%
3.5 %
58.8 %
The significant components of our deferred income taxes as of December 31, 2008 and 2007 are as follows (in thousands):
December 31,
2008
2007
Deferred tax assets:
Net operating loss carryforwards
General business credit carryforward
Reserves and allowances
Stock-based compensation expense
Amortization
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Intangible assets
Other
Total deferred tax liabilities
Net deferred tax assets
$
$
22,667
1,854
23,640
7,464
2,056
13,699
(18,512)
52,868
9,121
4,237
6,794
20,152
$
32,716
$
57
35.0 %
5.3 %
11.3 %
(2.8)%
(4.2)%
(4.5)%
(5.0)%
35.1 %
32,255
2,262
20,537
5,907
3,956
14,116
(6,026)
73,007
6,140
1,715
10,778
18,633
54,374
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Outside basis differences that have not been tax-effected in accordance with the provisions of Accounting Principles Board Opinion No. 23,
Accounting for Income Taxes – Special Areas, as amended by SFAS No. 109, are primarily related to undistributed earnings of certain of our foreign
subsidiaries. Deferred tax liabilities for U.S. federal income taxes are not provided on the undistributed earnings of our foreign subsidiaries that
are considered permanently reinvested. The determination of the amount of unrecognized deferred tax liability is not practicable.
At December 31, 2008, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately $12.2 million, which begin
to expire in 2017. Additionally, we had general business credit carryforwards of approximately $1.9 million, which expire beginning in 2009 and
extend through 2016. At December 31, 2008, we had foreign net operating loss carryforwards of approximately $55.8 million, of which
approximately $5.2 million expires beginning in 2009 and extending through 2015.
Certain of our U.S. and foreign net operating losses and general business credit carryforwards are subject to various limitations. We maintain
valuation allowances for those net operating losses and tax credit carryforwards that we do not expect to utilize due to these limitations. During
the year ended December 31, 2008, we recognized a tax provision of $12.8 million to record a valuation allowance, primarily for deferred tax
assets associated with net operating losses in France.
Effective January 1, 2007, we adopted FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with SFAS No. 109 by defining the criterion that an individual tax position must meet in order to be recognized in the
financial statements. FIN 48 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely
on the technical merits as of the reporting date.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1, 2008
Additions for tax positions related to current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Foreign currency translation
Balance at December 31, 2008
$
$
6,154
361
58
(106)
(4,336)
(317)
1,814
As of December 31, 2008, our liability for unrecognized tax benefits totaled $1.8 million and is recorded in our consolidated balance sheet within
“Other liabilities,” all of which, if recognized, would affect our effective tax rate. In December 2008, we effectively settled a tax audit of certain of
our French subsidiaries, resulting in a reduction of our unrecognized tax benefit in the amount of $4.3 million. Management does not believe that
it is reasonably possible that our unrecognized tax benefits will significantly change within the next twelve months.
FIN 48 further requires that interest required to be paid by the tax law on the underpayment of taxes should be accrued on the difference
between the amount claimed or expected to be claimed on the tax return and the tax benefit recognized in the financial statements.
Management has made the policy election to record this interest as interest expense. As of December 31, 2008, accrued interest related to our
unrecognized tax benefits totaled approximately $60,000, which is recorded in our consolidated balance sheet within “Other liabilities.”
We file numerous consolidated and separate company income tax returns in the U.S. and in many foreign jurisdictions, with the most significant
foreign jurisdiction being France. We are no longer subject to foreign income tax examinations by tax authorities for years before 2000. With few
exceptions, we are subject to U.S. federal, state and local income tax examinations for years 2005 through 2007. However, tax authorities have the
ability to review years prior to these to the extent that we utilize tax attributes carried forward from those prior years.
12. 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 method 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. We determined that for the year ended December
31, 2008, the convertible debt had an anti-dilutive effect on earnings per share and therefore excluded it from the dilutive shares calculation.
58
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Wright Medical Group, Inc.
Wright Medical Group, Inc.
Wright Medical Group, Inc.
Wright Medical Group, Inc.
Wright Medical Group, Inc.
2006
2006
2006
2006
2006
2006
34,434
34,434
34,434
34,434
34,434
1,005
34,434
1,005
1,005
1,005
1,005
1,005
35,439
35,439
35,439
35,439
35,439
35,439
2006
2006
2006
2006
2006
2006
4,446
4,446
4,446
4,446
4,446
-
4,446
-
-
-
-
-
-
-
-
-
-
-
The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
outstanding – basic
outstanding – basic
outstanding – basic
outstanding – basic
outstanding – basic
outstanding – basic
Weighted-average number of common shares
Weighted-average number of common shares
Weighted-average number of common shares
Weighted-average number of common shares
Weighted-average number of common shares
Weighted-average number of common shares
Common stock equivalents
Common stock equivalents
Common stock equivalents
Common stock equivalents
Common stock equivalents
Weighted-average number of common shares
Common stock equivalents
Weighted-average number of common shares
Weighted-average number of common shares
Weighted-average number of common shares
Weighted-average number of common shares
outstanding – diluted
Weighted-average number of common shares
outstanding – diluted
outstanding – diluted
outstanding – diluted
outstanding – diluted
outstanding – diluted
2008
2008
2008
2008
2008
2008
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
2007
Year Ended December 31,
2007
2007
2007
2007
2007
36,933
36,933
36,933
36,933
36,933
468
36,933
468
468
468
468
468
37,401
37,401
37,401
37,401
37,401
37,401
35,812
35,812
35,812
35,812
35,812
671
35,812
671
671
671
671
671
36,483
36,483
36,483
36,483
36,483
36,483
The following potential common shares were excluded from the computation of diluted earnings per share as their effect would have been anti-
The following potential common shares were excluded from the computation of diluted earnings per share as their effect would have been anti-
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):
The following potential common shares were excluded from the computation of diluted earnings per share as their effect would have been anti-
The following potential common shares were excluded from the computation of diluted earnings per share as their effect would have been anti-
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):
dilutive (in thousands):
dilutive (in thousands):
dilutive (in thousands):
dilutive (in thousands):
Stock options
Stock options
Stock options
Stock options
Stock options
Non-vested shares
Stock options
Non-vested shares
Non-vested shares
Non-vested shares
Non-vested shares
Convertible debt
Non-vested shares
Convertible debt
Convertible debt
Convertible debt
Convertible debt
Convertible debt
2008
2008
2008
2008
2008
2008
2,604
2,604
2,604
2,604
2,604
502
2,604
502
502
502
502
6,126
502
6,126
6,126
6,126
6,126
6,126
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
2007
Year Ended December 31,
2007
2007
2007
2007
2007
3,328
3,328
3,328
3,328
3,328
43
3,328
43
43
43
43
6,126
43
6,126
6,126
6,126
6,126
6,126
13. Capital Stock:
13. Capital Stock:
13. Capital Stock:
13. Capital Stock:
13. Capital Stock:
13. Capital Stock:
We are authorized to issue up to 100,000,000 shares of voting common stock. We have 61,978,039 shares of voting common stock available for
We are authorized to issue up to 100,000,000 shares of voting common stock. We have 61,978,039 shares of voting common stock available for
We are authorized to issue up to 100,000,000 shares of voting common stock. We have 61,978,039 shares of voting common stock available for
future issuance at December 31, 2008.
We are authorized to issue up to 100,000,000 shares of voting common stock. We have 61,978,039 shares of voting common stock available for
We are authorized to issue up to 100,000,000 shares of voting common stock. We have 61,978,039 shares of voting common stock available for
We are authorized to issue up to 100,000,000 shares of voting common stock. We have 61,978,039 shares of voting common stock available for
future issuance at December 31, 2008.
future issuance at December 31, 2008.
future issuance at December 31, 2008.
future issuance at December 31, 2008.
future issuance at December 31, 2008.
14. Stock-Based Compensation Plans:
14. Stock-Based Compensation Plans:
14. Stock-Based Compensation Plans:
14. Stock-Based Compensation Plans:
14. Stock-Based Compensation Plans:
14. Stock-Based Compensation Plans:
We have two stock-based compensation plans which are described below. Amounts recognized in the financial statements with respect to these
We have two stock-based compensation plans which are described below. Amounts recognized in the financial statements with respect to these
We have two stock-based compensation plans which are described below. Amounts recognized in the financial statements with respect to these
plans are as follows:
We have two stock-based compensation plans which are described below. Amounts recognized in the financial statements with respect to these
We have two stock-based compensation plans which are described below. Amounts recognized in the financial statements with respect to these
We have two stock-based compensation plans which are described below. Amounts recognized in the financial statements with respect to these
plans are as follows:
plans are as follows:
plans are as follows:
plans are as follows:
plans are as follows:
$
$
$
$
$
$
2008
2008
2008
2008
2008
13,223
2008
13,223
13,223
13,223
13,223
(1,492)
13,223
(1,492)
(1,492)
(1,492)
(1,492)
1,770
(1,492)
1,770
1,770
1,770
1,770
13,501
1,770
13,501
13,501
13,501
13,501
(3,674)
13,501
(3,674)
(3,674)
(3,674)
(3,674)
9,827
(3,674)
9,827
9,827
9,827
9,827
0.27
9,827
0.27
0.27
0.27
0.27
0.26
0.27
0.26
0.26
0.26
0.26
0.26
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
Year Ended December 31,
2007
Year Ended December 31,
2007
2007
2007
2007
2007
$
$
$
$
$
$
2006
2006
2006
2006
2006
2006
$
$
$
$
$
$
16,425
16,425
16,425
16,425
16,425
(2,262)
16,425
(2,262)
(2,262)
(2,262)
(2,262)
2,369
(2,262)
2,369
2,369
2,369
2,369
16,532
2,369
16,532
16,532
16,532
16,532
(3,665)
16,532
(3,665)
(3,665)
(3,665)
(3,665)
12,867
(3,665)
12,867
12,867
12,867
12,867
0.36
12,867
0.36
0.36
0.36
0.36
0.35
0.36
0.35
0.35
0.35
0.35
0.35
14,845
14,845
14,845
14,845
14,845
(1,918)
14,845
(1,918)
(1,918)
(1,918)
(1,918)
913
(1,918)
913
913
913
913
13,840
913
13,840
13,840
13,840
13,840
(2,957)
13,840
(2,957)
(2,957)
(2,957)
(2,957)
10,883
(2,957)
10,883
10,883
10,883
10,883
0.32
10,883
0.32
0.32
0.32
0.32
0.31
0.32
0.31
0.31
0.31
0.31
0.31
Total cost of share-based payment plans
Total cost of share-based payment plans
Total cost of share-based payment plans
Total cost of share-based payment plans
Total cost of share-based payment plans
Amounts capitalized as inventory and intangible assets
Total cost of share-based payment plans
Amounts capitalized as inventory and intangible assets
Amounts capitalized as inventory and intangible assets
Amounts capitalized as inventory and intangible assets
Amounts capitalized as inventory and intangible assets
Amortization of capitalized amounts
Amounts capitalized as inventory and intangible assets
Amortization of capitalized amounts
Amortization of capitalized amounts
Amortization of capitalized amounts
Amortization of capitalized amounts
Charged against income before income taxes
Amortization of capitalized amounts
Charged against income before income taxes
Charged against income before income taxes
Charged against income before income taxes
Charged against income before income taxes
Amount of related income tax benefit recognized income
Charged against income before income taxes
Amount of related income tax benefit recognized income
Amount of related income tax benefit recognized income
Amount of related income tax benefit recognized income
Amount of related income tax benefit recognized income
Impact to net income
Amount of related income tax benefit recognized income
Impact to net income
Impact to net income
Impact to net income
Impact to net income
Impact to basic earnings per share
Impact to net income
Impact to basic earnings per share
Impact to basic earnings per share
Impact to basic earnings per share
Impact to basic earnings per share
Impact to diluted earnings per share
Impact to basic earnings per share
Impact to diluted earnings per share
Impact to diluted earnings per share
Impact to diluted earnings per share
Impact to diluted earnings per share
Impact to diluted earnings per share
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
In the year ended December 31, 2008, we granted approximately 553,000 non-vested shares of common stock and 559,000 options to purchase
In the year ended December 31, 2008, we granted approximately 553,000 non-vested shares of common stock and 559,000 options to purchase
In the year ended December 31, 2008, we granted approximately 553,000 non-vested shares of common stock and 559,000 options to purchase
In the year ended December 31, 2008, we granted approximately 553,000 non-vested shares of common stock and 559,000 options to purchase
In the year ended December 31, 2008, we granted approximately 553,000 non-vested shares of common stock and 559,000 options to purchase
common stock at a weighted-average fair value of $28.07 and $11.17, respectively, which will be recognized on a straight line basis over the
In the year ended December 31, 2008, we granted approximately 553,000 non-vested shares of common stock and 559,000 options to purchase
common stock at a weighted-average fair value of $28.07 and $11.17, respectively, which will be recognized on a straight line basis over the
common stock at a weighted-average fair value of $28.07 and $11.17, respectively, 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 December 31, 2008, we had approximately 4.0 million
common stock at a weighted-average fair value of $28.07 and $11.17, respectively, which will be recognized on a straight line basis over the
common stock at a weighted-average fair value of $28.07 and $11.17, respectively, which will be recognized on a straight line basis over the
common stock at a weighted-average fair value of $28.07 and $11.17, respectively, 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 December 31, 2008, we had approximately 4.0 million
requisite service period that, for the substantial majority of these grants, is four years. As of December 31, 2008, we had approximately 4.0 million
stock options outstanding, of which approximately 2.6 million were exercisable and 796,000 non-vested shares of common stock outstanding.
requisite service period that, for the substantial majority of these grants, is four years. As of December 31, 2008, we had approximately 4.0 million
requisite service period that, for the substantial majority of these grants, is four years. As of December 31, 2008, we had approximately 4.0 million
requisite service period that, for the substantial majority of these grants, is four years. As of December 31, 2008, we had approximately 4.0 million
stock options outstanding, of which approximately 2.6 million were exercisable and 796,000 non-vested shares of common stock outstanding.
stock options outstanding, of which approximately 2.6 million were exercisable and 796,000 non-vested shares of common stock outstanding.
stock options outstanding, of which approximately 2.6 million were exercisable and 796,000 non-vested shares of common stock outstanding.
stock options outstanding, of which approximately 2.6 million were exercisable and 796,000 non-vested shares of common stock outstanding.
stock options outstanding, of which approximately 2.6 million were exercisable and 796,000 non-vested shares of common stock outstanding.
As of December 31, 2008, we had $25.2 million of total unrecognized compensation cost related to unvested stock-based compensation
As of December 31, 2008, we had $25.2 million of total unrecognized compensation cost related to unvested stock-based compensation
As of December 31, 2008, we had $25.2 million of total unrecognized compensation cost related to unvested stock-based compensation
arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.8 years.
As of December 31, 2008, we had $25.2 million of total unrecognized compensation cost related to unvested stock-based compensation
As of December 31, 2008, we had $25.2 million of total unrecognized compensation cost related to unvested stock-based compensation
As of December 31, 2008, we had $25.2 million of total unrecognized compensation cost related to unvested stock-based compensation
arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.8 years.
arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.8 years.
arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.8 years.
arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.8 years.
arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.8 years.
Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan (the Plan), which was subsequently amended and
Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan (the Plan), which was subsequently amended and
Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan (the Plan), which was subsequently amended and
restated on July 6, 2001, May 13, 2003, May 13, 2004, May 12, 2005 and May 14, 2008 and amended on October 23, 2008. The Plan authorizes us
Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan (the Plan), which was subsequently amended and
Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan (the Plan), which was subsequently amended and
Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan (the Plan), which was subsequently amended and
restated on July 6, 2001, May 13, 2003, May 13, 2004, May 12, 2005 and May 14, 2008 and amended on October 23, 2008. The Plan authorizes us
restated on July 6, 2001, May 13, 2003, May 13, 2004, May 12, 2005 and May 14, 2008 and amended on October 23, 2008. The Plan authorizes us
to grant stock options and other stock-based awards, such as non-vested shares of common stock, with respect to up to 10,467,051 shares of
restated on July 6, 2001, May 13, 2003, May 13, 2004, May 12, 2005 and May 14, 2008 and amended on October 23, 2008. The Plan authorizes us
restated on July 6, 2001, May 13, 2003, May 13, 2004, May 12, 2005 and May 14, 2008 and amended on October 23, 2008. The Plan authorizes us
restated on July 6, 2001, May 13, 2003, May 13, 2004, May 12, 2005 and May 14, 2008 and amended on October 23, 2008. The Plan authorizes us
to grant stock options and other stock-based awards, such as non-vested shares of common stock, with respect to up to 10,467,051 shares of
to grant stock options and other stock-based awards, such as non-vested shares of common stock, with respect to up to 10,467,051 shares of
common stock, of which full value awards (such as non-vested shares) are limited to 1,279,555 shares. Under the Plan, options to purchase
to grant stock options and other stock-based awards, such as non-vested shares of common stock, with respect to up to 10,467,051 shares of
to grant stock options and other stock-based awards, such as non-vested shares of common stock, with respect to up to 10,467,051 shares of
to grant stock options and other stock-based awards, such as non-vested shares of common stock, with respect to up to 10,467,051 shares of
common stock, of which full value awards (such as non-vested shares) are limited to 1,279,555 shares. Under the Plan, options to purchase
common stock, of which full value awards (such as non-vested shares) are limited to 1,279,555 shares. Under the Plan, options to purchase
common stock, of which full value awards (such as non-vested shares) are limited to 1,279,555 shares. Under the Plan, options to purchase
common stock, of which full value awards (such as non-vested shares) are limited to 1,279,555 shares. Under the Plan, options to purchase
common stock, of which full value awards (such as non-vested shares) are limited to 1,279,555 shares. Under the Plan, options to purchase
59
59
59
59
59
59
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
common stock generally are exercisable in increments of 25% annually on each of the first through fourth anniversaries of the date of grant.
Options to purchase Series A Preferred Stock that were outstanding at the time we completed our IPO in July 2001 became options to purchase
our common stock. Those options were immediately exercisable upon their issuance. All of the options issued under the Plan expire after ten
years. Non-vested shares of common stock are generally vested in increments of 25% annually on each of the first through fourth anniversaries of
the date of grant. As of December 31, 2008, there were 933,911 shares available for future issuance under the Plan, of which full value awards are
limited to 367,017 shares.
Stock options
We estimate the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes option-pricing model requires the input of
estimates, including the expected life of stock options, expected stock price volatility, the risk-free interest rate and the expected dividend yield.
The expected life of options is estimated by calculating the average of the vesting term and the contractual term of the option, as allowed in SEC
Staff Accounting Bulletin No. 107. The expected stock price volatility assumption was estimated based upon historical volatility of our common
stock. The risk-free interest rate was determined using U.S. Treasury rates where the term is consistent with the expected life of the stock options.
Expected dividend yield is not considered as we have never paid dividends and have no plans of doing so in the future. We are required to
estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use
historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
The fair value of stock options is amortized on a straight-line basis over the respective requisite service period, which is generally the vesting
period.
The weighted-average grant date fair value of stock options granted to employees in 2008, 2007 and 2006 was $11.17 per share, $11.30 per share
and $9.97 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation
model using the following assumptions:
Risk-free interest rate
Expected option life
Expected price volatility
Year Ended December 31,
2008
2007
2006
2.0% - 3.4%
3.9% - 4.8%
4.3% - 5.1%
6 years
36%
6 years
39%
6 years
40%
During 2006, we granted certain independent distributors stock options totaling 66,700 shares under the Plan. These options are exercisable in
25% increments on the first through fourth anniversaries of the date of grant at a weighted-average exercise price of $22.43 per share. The
options expire after ten years.
A summary of our stock option activity during 2008 is as follows:
Shares
(000’s)
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value*
($000’s)
4,428
559
(602)
(339)
4,046
2,595
$
$
23.51
27.13
19.47
27.06
24.32
6.6 years
$
2,790
24.30
5.7 years
$
2,329
Outstanding at December 31, 2007
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2008
Exercisable at December 31, 2008
_________________________
*
The aggregate intrinsic value is calculated as the difference between the market value of our common stock as of December 31, 2008, and the exercise price of
the shares. The market value as of December 31, 2008 is $20.43 per share, which is the closing sale price of our common stock reported for transactions
effected on the Nasdaq Global Select Market on December 31, 2008.
The total intrinsic value of options exercised during 2008, 2007 and 2006 was $5.9 million, $17.3 million and $15.2 million, respectively.
60
Weighted-
Average
Exercise
Price
$
5.11
15.05
20.85
27.59
34.25
24.30
90
30
969
1,446
60
2,595
$
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
A summary of our stock options outstanding and exercisable at December 31, 2008, is as follows (shares in thousands):
Options Outstanding
Options Exercisable
Range of Exercise Prices
Number
Outstanding
Weighted-Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
Number
Exercisable
$0.00 – $8.50
$8.51 – $16.00
$16.01 – $24.00
$24.01 – $32.00
$32.01 – $35.87
Non-vested shares
90
30
1,683
2,183
60
4,046
1.5 years
$
5.11
3.9 years
6.8 years
6.7 years
5.3 years
6.6 years
15.05
20.93
27.57
34.25
24.32
$
We calculate the grant date fair value of non-vested shares of common stock as the average of the highest and lowest reported sale prices on the
trading day immediately prior to the grant date. We are required to estimate forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-
based compensation expense only for those awards that are expected to vest.
We granted 526,000, 409,000 and 7,000 non-vested shares of common stock to employees with weighted-average fair values of $28.15 per share,
$24.32 per share, and $23.37 per share during 2008, 2007 and 2006, respectively. The fair value of these shares will be recognized on a straight-
line basis over the respective requisite service period, which is generally the vesting period.
During both 2008 and 2007, we granted certain independent distributors and other non-employees non-vested shares of common stock of
27,000 shares under the Plan at a weighted-average grant date fair values of $26.49 per share and $22.83 per share, respectively.
During 2006, we issued 50,000 non-vested shares of common stock with a grant date fair value of $22.44 per share to a third party in exchange for
certain rights and services. The expense related to those shares was recognized over 28 months, the life of the contract. The forfeiture restrictions
lapsed on 16,667 of these shares on the grant date, on 16,667 of these shares on January 1, 2007 and the remaining shares lapsed on January 1,
2008.
A summary of our non-vested shares of common stock activity during 2008 is as follows:
Non-vested at December 31, 2007
Granted
Vested
Forfeited
Non-vested at December 31, 2008
_________________________
Shares
(000’s)
Weighted-
Average
Grant Date
Fair Value
449
553
(126)
(80)
796
$
23.91
28.07
24.40
25.78
26.75
Aggregate Intrinsic Value*
($000’s)
$
16,254
*
The aggregate intrinsic value is calculated as the market value of our common stock as of December 31, 2008. The market value as of December 31, 2008 is
$20.43 per share, which is the closing sale price of our common stock reported for transactions effected on the Nasdaq Global Select Market on December 31,
2008.
The total fair value of shares vested during 2008 and 2007 was $2.6 million and $436,000, respectively.
Employee Stock Purchase Plan. On May 30, 2002, our shareholders approved and adopted the 2002 Employee Stock Purchase Plan (the ESPP).
The ESPP authorizes us to issue up to 200,000 shares of common stock to our employees who work at least 20 hours per week. Under the ESPP,
there are two six-month plan periods during each calendar year, one beginning January 1 and ending on June 30, and the other beginning July 1
and ending on December 31. Under the terms of the ESPP, employees can choose each plan period to have up to 5% of their annual base
earnings, limited to $5,000, withheld to purchase our common stock. The purchase price of the stock is 85 percent of the lower of its beginning-
of-period or end-of-period market price. Under the ESPP, we sold to employees 14,690, 11,032 and 11,465 shares in 2008, 2007 and 2006,
respectively, with weighted-average fair values of $9.09, $7.73 and $6.88 per share, respectively. As of December 31, 2008, there were 124,032
61
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
shares available for future issuance under the ESPP. During 2008, 2007 and 2006, we recorded nominal amounts of non-cash, stock-based
compensation expense related to the ESPP.
In applying the Black-Scholes methodology to the purchase rights granted under the ESPP, we used the following assumptions:
Risk-free interest rate
Expected option life
Expected price volatility
15. Employee Benefit Plans:
Year Ended December 31,
2008
2.9% - 3.3%
6 months
36%
2007
4.6% - 4.8%
6 months
39%
2006
4.6% - 4.8%
6 months
40%
We sponsor a defined contribution plan under Section 401(k) of the Internal Revenue Code, which covers U.S. employees who are 21 years of age
and over. Under this plan, we match voluntary employee contributions at a rate of 100% for the first 2% of an employee's annual compensation
and at a rate of 50% for the next 2% of an employee's annual compensation. Employees vest in our contributions after three years of service. Our
expense related to the plan was $1.4 million, $1.2 million and $1.0 million in 2008, 2007 and 2006, respectively.
16. Restructuring
In June 2007, we announced plans to close our manufacturing, distribution and administrative facility located in Toulon, France. The facility’s
closure affected approximately 130 Toulon-based employees. The majority of our restructuring activities were complete by the end of 2007, with
production now conducted solely in our existing manufacturing facility in Arlington, Tennessee and the distribution activities being carried out
from our European headquarters in Amsterdam, the Netherlands.
Management estimates that the pre-tax restructuring charges will total approximately $28 million to $32 million. These charges consist of the
following estimates:
•
•
•
•
•
$14 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;
$3 million to $4 million of external legal and professional fees; and
$6 million to $9 million of other cash and non-cash charges (including employee litigation).
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.”
(in thousands)
Severance and other termination benefits
Employee litigation accrual
Asset impairment charges
Inventory write-offs and manufacturing period costs
Legal/professional fees
Other
Total restructuring charges
Year Ended
December 31, 2008
Cumulative Charges as
of
December 31, 2008
$
$
1,918
3,841
(63)
-
822
187
6,705
$
$
13,593
4,161
3,093
2,139
2,369
223
25,578
As a result of the plans to close the facilities in 2007, we performed an evaluation of the undiscounted future cash flows of the related asset group
and recorded an impairment charge in 2007 for the difference between the net book value of the assets and their estimated fair values for those
assets we intended to sell. In April 2008, these assets were sold. We also recorded an impairment charge in 2007 for assets to be abandoned.
62
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Activity in the restructuring liability for the year ended December 31, 2008 is presented in the following table (in thousands):
Beginning balance as of December 31, 2007
$ 6,966
Charges:
Severance and other termination benefits
Litigation accrual
Legal/professional fees
Other
Total accruals
Payments:
Severance and other termination benefits
Legal/professional fees
Other
Changes in foreign currency translation
2,125
3,841
822
187
$ 6,975
(7,394)
(976)
(117)
$ (8,487)
(504)
Restructuring liability at December 31, 2008
$ 4,950
In connection with the closure of our Toulon, France facility, a majority of our former employees have filed claims to challenge the economic
justification for their dismissal. Management has accrued $3.8 million associated with these claims as of December 31, 2008. This liability is
recorded within “Accrued expenses and other current liabilities” in our consolidated balance sheet as of December 31, 2008.
17. Commitments and Contingencies:
Operating Leases. We lease certain equipment and office space under non-cancelable operating leases. Rental expense under operating leases
approximated $10.1 million, $9.7 million and $8.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Future minimum
payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining lease terms of one year or more, are as
follows at December 31, 2008 (in thousands):
2009
2010
2011
2012
2013
Thereafter
$
$
8,377
5,693
2,725
621
391
447
18,254
Royalty and Consulting Agreements. We have entered into various royalty and other consulting agreements with third party consultants. We
incurred royalty and consulting expenses of $875,000, $855,000 and $1.0 million during the years ended December 31, 2008, 2007 and 2006,
respectively, under non-cancelable contracts with minimum obligations that were contingent upon services. The amounts in the table below
represent minimum payments to consultants that are contingent upon future services. These fees are accrued when it is deemed probable that
the performance thresholds are met. Future minimum payments under these agreements for which we have not recorded a liability are as
follows at December 31, 2008 (in thousands):
2009
2010
2011
2012
2013
Thereafter
$
$
815
573
573
573
518
1,344
4,396
63
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Purchase Obligations. We have entered into certain supply agreements for our products, which include minimum purchase obligations. During
the years ended December 31, 2008, 2007 and 2006, we paid approximately $4.5 million, $2.3 million and $3.8 million, respectively, under those
supply agreements. Our remaining purchase obligations under those supply agreements are as follows at December 31, 2008 (in thousands):
2009
2010
2011
$
$
2,543
2,543
2,543
7,629
Portions of our payments for operating leases, royalty and consulting agreements, and purchase obligations are denominated in foreign
currencies and were translated in the tables above based on their respective U.S. dollar exchange rates at December 31, 2008. These future
payments are subject to foreign currency exchange rate risk.
Legal Proceedings. 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 Howmedica’s 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 Howmedica’s claims and are
vigorously defending this lawsuit. In November 2005, the District Court issued a Markman ruling on claim construction. Howmedica conceded to
the District Court that, if the claim construction as issued was applied to our knee product line, our products do not infringe their patent.
Howmedica appealed the Markman ruling. In September 2008, the U.S. Court of Appeals for the Federal Circuit overturned the District Court’s
Markman ruling on claim construction. The case was remanded to the District Court for further proceedings on alleged infringement and on our
affirmative defenses, which include patent invalidity and unenforceability. 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 December 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 we have 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 December 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 consulting and professional service agreements with
orthopaedic surgeons in connection with hip or knee joint replacement procedures or products. 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 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 June 2008, we received a letter from the SEC informing us that it is conducting an informal investigation regarding potential violations of the
Foreign Corrupt Practices Act in the sale of medical devices in a number of foreign countries by companies in the medical device industry. We
understand that several other medical device companies have received similar letters. We are cooperating fully with the SEC 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 late 2004 and early 2005, approximately 120 plaintiffs sued Dr. John King in the Circuit Court of Putnam County, West Virginia. Plaintiffs allege
that Dr. King was professionally negligent when he performed surgery on the plaintiffs at Putnam General Hospital in Putnam County, West
Virginia between November 2002 and June 2003. In 33 of the lawsuits, plaintiffs alleged that Dr. King inappropriately used a biologic product sold
by us. In these lawsuits, plaintiffs named Wright as a defendant and allege that our products had not been properly cleared by the United States
Food and Drug Administration, that we failed to warn that our products were not safe for their intended use, and that we knew that Dr. King was
not properly trained or was performing the surgeries inappropriately. Plaintiffs also allege that we and two other co-defendants entered into a
joint venture with Dr. King and/or his physician assistant, David McNair, such that we could be held liable for his/their conduct. Plaintiffs further
assert claims based on strict liability, express and implied breach of warranty, civil conspiracy and negligence. They seek damages related to
alleged lost income, medical expenses, future medical and life care expenses, damages relating to pain and suffering and punitive and other
damages.
In July 2007, a Putnam County jury found that Putnam General Hospital had negligently credentialed Dr. King and that the hospital’s conduct in
credentialing Dr. King was motivated by fraud, ill will, wantonness, oppressiveness or by reckless or gross negligence, which allowed the
64
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
plaintiffs to seek punitive damages against the hospital. In the second quarter of 2008, the hospital, its affiliates and David McNair entered into
confidential settlements of all claims with all but one of the plaintiffs. EBI, LLC (a subsidiary of Biomet, Inc.), Wright, an independent contractor of
one of our distributors, and Dr. King remain as defendants in the litigation.
The first consolidated trial of six plaintiffs is scheduled to begin in the Putnam County Circuit Court in June 2009. We have product liability
insurance which may or may not cover some or all of the ultimate resolution of this litigation. While we believe our legal and factual defenses to
these claims are strong, and will continue to vigorously defend against these claims, it is possible that the outcome of these cases will have a
material adverse effect on our consolidated financial position or results of operations however an amount cannot be estimated.
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.
18. Segment Data:
We have one reportable segment, orthopaedic products, which includes the design, manufacture and marketing of reconstructive joint devices
and biologics products. Our geographic regions consist of the United States, Europe (which includes the Middle East and Africa) and Other (which
principally represents Asia and Canada). Long-lived assets are those assets located in each region. Revenues attributed to each region are based
on the location in which the products were sold.
Net sales of orthopaedic products by product line and information by geographic region are as follows (in thousands):
Net sales by product line:
Hip products
Knee products
Biologics products
Extremity products
Other
Total
Net sales by geographic region:
United States
Europe
Other
Total
Operating income (loss) by geographic region:
United States
Europe
Other
Total
Long-lived assets:
United States
Europe
Other
Total
2008
Year Ended December 31,
2007
2006
$
160,788
119,895
82,399
88,890
13,575
$
134,251
102,334
76,029
62,302
11,934
$
122,073
94,079
65,455
45,044
12,287
$
465,547
$
386,850
$
338,938
$
$
$
$
282,081
112,771
70,695
465,547
21,546
(14,909)
15,776
22,413
$
$
$
$
235,748
96,336
54,766
386,850
13,911
(22,835)
10,378
1,454
$
$
$
$
211,015
82,197
45,726
338,938
18,752
(7,563)
8,242
19,431
December 31,
2008
2007
$
$
104,058
18,192
11,401
133,651
$
$
71,764
18,605
8,668
99,037
No single foreign country accounted for more than 10% of our total net sales during 2008, 2007 or 2006; however, the largest single foreign
country represented approximately 8%, 7% and 7% of our total net sales in 2008, 2007 and 2006, respectively.
During 2008 and 2007, our operating income included restructuring charges associated with the closure of our facility in Toulon, France. Our U.S.
region recognized $1.6 million and $2.5 million of restructuring charges in 2008 and 2007, respectively, and our European region recognized $5.1
65
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
million and $16.4 million of restructuring charges in 2008 and 2007, respectively. Additionally, in 2008, our U.S. region recognized $7.6 million of
charges related to the ongoing U.S. government inquiries, $2.6 million related to an unfavorable appellate court decision and $2.5 million of
acquired in-process research and development costs related to our Inbone acquisition. In 2007, our U.S. region recognized a $3.3 million charge in
2007 as a result of an unfavorable ruling under binding arbitration.
19. Quarterly Results of Operations (unaudited):
The following table presents a summary of our unaudited quarterly operating results for each of the four quarters in 2008 and 2007, respectively
(in thousands). This information was derived from unaudited interim financial statements that, in the opinion of management, have been
prepared on a basis consistent with the financial statements contained elsewhere in this filing and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of such information when read in conjunction with our audited financial statements
and related notes. The operating results for any quarter are not necessarily indicative of results for any future period.
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges
Acquired in-process research and development
Total operating expenses
Operating income (loss)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
Net sales
Cost of sales
Cost of sales - restructuring
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges
Total operating expenses
Operating income (loss)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2008
$
115,865
32,438
83,427
$
118,477
34,811
83,666
$
111,096
32,038
79,058
$
120,109
35,090
85,019
66,589
7,999
1,041
1,815
-
77,444
5,983
4,058
0.11
0.11
$
$
$
$
68,875
8,378
1,276
3,095
2,490
84,114
$
$
$
$
$
$
$
$
(448)
(2,357)
(0.06)
(0.06)
2007
61,897
8,338
1,287
685
-
72,207
64,035
8,577
1,270
1,110
-
74,992
6,851
$
10,027
4,187
$
(2,691)
0.11
$
0.11
$
(0.07)
(0.07)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
98,008
28,770
-
69,238
56,307
6,853
970
7,539
71,669
$
91,399
$
103,156
24,268
-
67,131
54,573
7,151
968
6,966
69,658
28,404
2,139
72,613
61,123
6,299
989
2,229
70,640
(2,431)
$
(2,527)
$
1,973
(2,090)
(0.06)
(0.06)
$
$
$
(1,522)
$
1,384
(0.04)
$
(0.04)
$
0.04
0.04
$
$
$
$
$
94,287
26,965
-
67,322
53,926
8,102
855
-
62,883
4,439
3,189
0.09
0.09
66
Notes to Consolidated Financial Statements
Wright Medical Group, Inc.
Our operating income included charges related to the ongoing U.S. government inquiries, for which we recognized $1.7, $1.5 million, $1.5 million
and $2.9 million during the first, second, third and fourth quarters of 2008, respectively. In addition, our operating income during the second
quarter of 2008 included charges of $2.6 million related to an unfavorable appellate court decision and $2.5 million of acquired in-process
research and development costs related to our Inbone acquisition. Net income in the first, second, third and fourth quarters of 2008 included the
after-tax effect of these amounts. Additionally, our fourth quarter net income included a $12.8 million charge for our valuation allowance,
primarily for deferred tax assets associated with French net operating losses.
Our operating income for the fourth quarter of 2007 included a $3.3 million charge resulting from an unfavorable ruling under binding
arbitration. Our net income for the fourth quarter of 2007 included the after-tax effect of this amount plus $665,000 of interest.
67
Management’s Annual Report on Internal Control Over Financial Reporting
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures that 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 to
allow timely decisions regarding required disclosure. 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 December 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 December 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 SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. 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 internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our
management concluded that our internal control over financial reporting was effective as of December 31, 2008. Our internal control over
financial reporting as of December 31, 2008, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
Changes in Internal Control Over Financial Reporting
During the three months ended December 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.
68
Index), and an
Comparison of Total Stockholder Returns
The graph below compares the cumulative total stockholder returns
for the period from December 31, 2003 to December 31, 2008, for our
common stock, an index composed of U.S. companies whose stock is
listed on the Nasdaq Global Select Market (the Nasdaq U.S.
Companies
index consisting of Nasdaq-listed
companies in the surgical, medical, and dental instruments and
supplies industry (the Nasdaq Medical Equipment Companies Index).
The graph assumes that $100.00 was invested on December 31,
2003, in our common stock, the Nasdaq U.S. Companies Index, and
the Nasdaq Medical Equipment Companies Index, and that all
dividends were reinvested. Total returns for the two Nasdaq indices
are weighted based on the market capitalization of the companies
included therein. Historic stock price performance is not indicative of
future stock price performance. We do not make or endorse any
prediction as to future stock price performance.
Cumulative Total Stockholder Returns
Based on Reinvestment of $100.00 Beginning on December 31, 2003
corporate information
Transfer Agent and Registrar
American Stock Transfer & Trust Company, Inc. acts as our
transfer agent and registrar and maintains all stockholder
records. Communications concerning stock holdings, lost
certificates, transfer of shares, duplicate mailings, or changes
of address should be directed to:
Wright Medical Group, Inc.
c/o American Stock Transfer & Trust Company
6201 15th Avenue, Brooklyn, NY 11219
800.937.5449 info@amstock.com
Cash Dividend Policy
We have never declared or paid cash dividends on common
stock and do not anticipate a change in this policy in the
foreseeable future. We currently intend to retain any future
earnings for the operation and expansion of our business.
Stock Prices and Trading Data
Our common stock is traded on the Nasdaq Global Select
Market under the symbol “WMGI.” Stock price quotations are
available in the investor relations section of our website at
www.wmt.com and are printed daily in major newspapers,
including The Wall Street Journal.
The ranges of high and low sale prices per share for our
common stock for 2008 and 2007 are set forth below. Price
data reflect actual transactions. In all cases, the prices shown
are
inter-dealer prices and do not reflect markups,
markdowns, or commissions.
Stockholders
As of February 13, 2009, there were 561 stockholders of record
and an estimated 10,473 beneficial owners of our common
stock.
Independent Auditors
KPMG LLP
Memphis, Tennessee
Wright Medical Group, Inc.
Nasdaq U.S. Companies Index
Nasdaq Medical Equipment
Companies Index
12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008
$67.20
63.80
92.84
$100.00
100.00
100.00
$67.11
111.16
128.63
$95.94
132.42
172.38
$93.76
108.84
117.16
$76.57
122.11
135.58
Copyright 2009: CRSP Center for Research in Security Prices, University of Chicago, Booth School of Business. Zacks
Investment Research, Inc. Used with permission. All rights reserved.
2008 High*
Low*
2007 High*
Low*
First Quarter
$29.98
$21.06
Second Quarter
$31.49
$23.53
Third Quarter
$33.26
$28.00
Fourth Quarter
$30.71
$15.18
*denotes high & low sale prices
$23.49
$20.97
$25.79
$21.82
$28.51
$23.50
$31.80
$24.80
Non-GAAP Financial Measures
We use non-GAAP financial measures, such as net sales, excluding the impact of foreign currency, gross profit, as adjusted, operating income, as adjusted, net income, as
adjusted, and net income, as adjusted, per diluted share. Our management believes that the presentation of these measures provides useful information to investors. These
measures may assist investors in evaluating our 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 on-going U.S. governmental inquiries, 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 our 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. This annual report includes discussion of non-GAAP financial measures. Reference is made to the most directly
comparable GAAP financial measures and the reconciliation of the differences between the two financial measures, which is found on page 1 of this annual report and is
otherwise available in the “Corporate - Investor Information - Supplemental Financial Information” section of our website located at www.wmt.com.
69
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72
Investor Relations Information
Stockholders, securities analysts, and investors
seeking more information can access the
following information via the internet at
www.wmt.com:
• News releases describing our signifi cant
events and sales and earnings results for
each quarter and the fi scal year.
• Annual, Quarterly, and Current Reports
fi led with the Securities and Exchange
Commission describing our business and
fi nancial condition.
• Corporate governance information such as
committee charters, code of business
conduct, etc.
In addition, investors are welcome to call,
write, or fax us to request the information
above – including a copy of our Annual Report
or Form 10-K, free of charge. Inquires should
be directed to:
Wright Medical Group, Inc.
Attn: Investor Relations
5677 Airline Road, Arlington, TN 38002
901.867.4113
901.867.4390 Fax
Annual Meeting
The annual meeting of our stockholders will
be held on May 13, 2009 beginning at 9:00 am
CDT at the:
Embassy Suites Hotels – Memphis
Ambassador Room
1022 South Shady Grove Road
Memphis, TN 38120
901.684.1777
The Notice of Annual Meeting and Proxy
Statement are being mailed to stockholders
with this annual report.
Directors
Gary D. Blackford 1
President & CEO
Universal Hospital Services, Inc.
Director since 2008
Martin J. Emerson 1, 2
President and CEO
Galil Medical, Inc.
Director since 2006
Gary D. Henley
President & CEO
Wright Medical Group, Inc.
Director since 2006
John L. Miclot 3*
President and CEO
CCS Medical, Inc.
Director since 2007
Robert J. Quillinan1*
Formerly - CFO
Coherent, Inc.
Director since 2006
David D. Stevens 2*
Formerly – CEO
Accredo Health, Inc.
Chairman of the Board
Director since 2004
Lawrence W. Hamilton 2, 3
Formerly – SVP, HR
Tech Data Corporation
Director since 2007
Amy S. Paul 3
Formerly – Group VP,
International
C.R. Bard, Inc.
Director since 2008
Gary D. Blackford
Martin J. Emerson
Lawrence W. Hamilton
Gary D. Henley
John L. Miclot
Amy S. Paul
Robert J. Quillinan
David D. Stevens
committees of the Board of Directors
1 – audit committee
2 – compensation committee
3 – nominating, compliance and governance committee
* denotes chairman