2017 annual report
execute and deliver
Corporate Overview
Wright Medical Group N.V. is a global medical device company
focused on Extremities and Biologics. The company is committed
to delivering innovative, value-added solutions improving the quality
of life for patients worldwide. We are a recognized leader of surgical
solutions for the upper extremities (shoulder, elbow, wrist and hand),
lower extremities (foot and ankle) and biologics markets, three of
the fastest growing segments in orthopaedics.
Our ordinary shares are traded on the NASDAQ Global
Select Market under the symbol “WMGI”.
Our Vision
Your First Choice in Extremities and Biologics
Our Mission
We focus on Extremities and Biologics.
Through our team of passionate and dedicated
people, we deliver innovative, value-added solutions
improving quality of life for patients worldwide.
We are committed to compliance and the highest
standards of ethical conduct.
Our Values
• Think Customer
• Embrace Change
• Alignment
• eMpowerment
• Sustainability
em power ment “Wright is currently a leader in three of the
fastest-growing orthopaedic markets.
We’re #1 in lower extremities, #2 in upper
extremities and a leader in biologics. “
Robert J. Palmisano, President and Chief Executive Officer
To our fellow shareholders, customers,
and employees:
In 2017, we delivered strong performance in multiple areas.
to focus on our comprehensive upper and lower extremities
Our upper extremities business launched a market-leading
product line. In a key accomplishment, we finalized metal-on-
reversed shoulder product driving sales more than two
metal master settlement agreements, which resolve significant
times market growth. We had double-digit growth in our
metal-on-metal hip litigation in the U.S. And to finish the year,
technologically advanced lower extremity products.
we announced we had acquired IMASCAP SAS, the company
We expanded our market share lead in total ankle
behind our BLUEPRINT™ software technology, and we
replacement to approximately 70%. And we leveraged
welcomed the talented IMASCAP team to the Wright family.
a strong sales focus and top talent to grow AUGMENT®
Overall, a pretty successful year.
to a roughly $40 million global product line
We also continued to achieve excellent gross margins, which
Well-positioned for growth
increased to approximately 79%, on a non-GAAP adjusted
Wright is currently a leader in three of the fastest-growing
basis, in 2017. And, despite lower than expected sales levels,
orthopaedic markets. We’re #1 in lower extremities, #2 in
we continue to make significant progress on our non-GAAP
upper extremities and a leader in biologics. All told, the global
adjusted EBITDA margins, and delivered approximately
extremities/biologics market is worth some $8 billion, so it’s a
four points of non-GAAP adjusted EBITDA margin
good place to be a leader. We have strong franchises in this
expansion in the last year alone.
market all over the world, and we are very well positioned to
Throughout 2017, our International team focused on
maximize their potential.
improving our customer engagement—and recent survey
So how do we turn these leadership positions into additional
results have shown a marked improvement in customer
growth? Let’s start with upper extremities, where we are
engagement scores. The team also further advanced its
#2 and gaining. Two years ago, we were #3, so we’re headed
pioneering market development in minimally invasive foot
in the right direction. We expect that growth in upper
and ankle, which we are now introducing to the U.S. market.
extremities will continue to be driven by new products,
There are also areas of the business that performed below
our expectations, in particular our core foot and ankle
business, where we did not get the anticipated contribution
specifically the PERFORM™ Reversed Shoulder, SIMPLICITI™
Shoulder, and the adoption of our BLUEPRINT™ 3D Planning
Software. More on these products shortly.
from our expanded sales force. We look forward to improving
In lower extremities—a high-growth business in which we
that part of the business in 2018 and getting it back to the type
are the clear leader—job #1 in 2018 is returning our U.S.
of performance we have come to expect.
Through financial discipline, we delivered $45 million in cost
synergies since the close of our merger with Tornier. Over the
past two years, we have completed more than 300 merger
integration milestones with minimal disruption. We’ve driven
our strategy by divesting the European hip and knee business
lower extremities business to growth. Challenges in our core
U.S. lower extremities business have muted the benefits of
double-digit sales growth from our technologically advanced
products, which include total ankle replacement, limb salvage
and AUGMENT®. I believe the investments we have made,
including the addition of 100 sales representatives and
2017 Annual Report Wright Medical Group N.V. 1
several important new product launches—such as PROstep™
A robust product line – today and tomorrow
Minimally Invasive Surgery, ORTHOLOC™ 3Di ankle fracture and
INVISION™ revision ankle—are the right things to do for this
business and will bear fruit in the long term. I can tell you that
our team is aligned, and that executing on these initiatives is
our highest priority.
In the U.S., we expect lower extremities sales to grow in
the mid-single-digits for the full year, driven by total ankle
growth in the mid-teens and core foot and ankle growth
in the low- to mid-single-digits. As mentioned earlier, the
expected contribution to core foot and ankle from new
products is meaningfully more than we have had in the past
several years. The new product impact alone could drive most
of the expected improvement in growth rates. In addition
to the benefit from new products, we will be focusing on
As I have discussed, much of our growth in 2018 and beyond
will depend upon our product pipeline. Here are the products
that are poised to help drive our business in 2018.
Upper Extremities
PERFORM™ REVERSED Glenoid. This product, which we
launched in 2016, was the key to our success in our upper
extremities and shoulder business in 2017. We are in a good
supply position for the full year, and expect this product to
be a real growth driver as we continue its rollout.
REVIVE™ Revision Shoulder System. This system has a
convertible, fully adjustable revision stem to address complex
revisions. We expect it to have a pre-market limited launch
improving the contribution of our expanded sales force
in the fourth quarter.
and implementing initiatives to make us an even stronger
competitor in the ambulatory surgical center market.
SIMPLICITI™ Shoulder. Our stemless shoulder system provides
maximal bone preservation and early intervention options.
The total biologics market is growing in the 5% to 6% range,
We’ve been in the market with this product for about
and AUGMENT®, our premarket-approved product, is a market
18 months and have converted a lot of doctors with whom
leader. We intend to leverage opportunities for selling our
we’ve previously not done business.
biologics products in approved indications across our upper
and lower extremities portfolios.
“...we will be focusing
on improving the
contribution of our
expanded sales force and
implementing initiatives
to make us an even
stronger competitor in
the ambulatory surgical
center market.”
BLUEPRINT™ 3D Planning Software. In December 2017,
we announced we had acquired IMASCAP SAS, the company
that develops our BLUEPRINT™ software technology and is
a leader in software-based solutions for preoperative
planning of shoulder replacement surgery. This breakthrough
technology represents the future, and offers significant
pipeline opportunities to fuel organic growth. We believe
BLUEPRINT™ will enable us to take a significant lead in
software-enabled surgery, and we will be scaling the adoption
of the existing platform while launching new software
modules throughout 2018.
PyroCarbon Humeral Head Clinical Study. We’re excited
about the potential of this proprietary pyrocarbon material,
which provides a low-friction, wear-resistant articulating
surface to extend implant life. It is currently being studied
in a US investigational device exemption clinical trial.
2 2017 Annual Report Wright Medical Group N.V.
Lower Extremities
PROstep™ Minimally Invasive Surgery (MIS). Our most
important 2018 product launch for the core foot and
ankle business is our PROstep™ MIS system. This is a small
will help us grow our core lower extremities business.
The product has been so well received that we rolled out
additional instrument sets in late 2017 and early 2018 to
meet demand.
incision that goes to the exact spot that the surgeon needs.
We put small instruments and implants into this incision.
SALVATION™ Limb Salvage. We have continued to advance
our product offerings for the SALVATION™ system, which is
The procedure takes less time than previous methods, healing
our comprehensive solution to treat Charcot arthropathy and
is faster and the cosmetic results are dramatic. PROstep™ MIS,
for advanced midfoot reconstruction. Throughout the year,
which we expect to launch in the U.S. in the third quarter,
we plan to launch a number of line extensions to the
has been on the market internationally for several years and
SALVATION™ system, which are expected to help us further
has been extremely successful. Initially, the system will be
penetrate this market.
focused on a small number of forefoot procedures and will be
expanded to additional procedures over time.
Biologics
AUGMENT®. Now in its third year on the market,
AUGMENT® has been our fastest growing product.
Although we still anticipate strong market growth from this
excellent product, we do not expect the supercharged growth
we have seen since it was launched. Excluding AUGMENT®,
we expect our core biologics products to grow in the low
single digits as we improve our underlying core foot and
ankle business. Additionally, we have introduced some core
biologics products into the upper extremities sales force and
expect some incremental benefit year-over-year from this
expanded distribution. We are also pursuing FDA approval
for AUGMENT® Injectable, which we believe will support
expanded penetration into existing and new accounts,
when approved.
INFINITY™ BIOFOAM™. Continuing to build on our market
lead in total ankle replacement, we plan to launch this product
late in the year after we receive FDA clearance. BIOFOAM™
is a titanium coating that is 3D-printed on parts of the implant
to make integration into the bone better and more stable.
This will continue our advancement toward being the only
company to have a full suite of products—not first generation,
not second generation, not third generation, but fourth
generation—in our total ankle portfolio.
INVISION™ Revision Ankle. Launched in 2017, INVISION™
is the first and only system developed specifically for total
ankle revision and designed to provide a unique solution
for even the most difficult revision procedures. It’s in big
demand and we have had great success with it. We have
also recently launched PROPHECY™ INVISION™ to make the
procedure easier for physicians by providing an extra level of
confidence that the implants will be positioned in the optimal
alignment. We expect the launch of both of these products
to expand our leadership in total ankle technology and
highlight our ability to address the total ankle replacement
continuum of care.
ORTHOLOC™ 3Di Ankle Fracture. We believe this new ankle
fracture system, which we launched in early Q3 of 2017,
2017 Annual Report Wright Medical Group N.V. 3
Strategic priorities for growth in 2018
Execute and deliver
We have two key priorities for growth during 2018: revenue
Execute and deliver is our mantra in 2018, and we have
and cash. Both are guided by our vision to be the first choice
many reasons to be optimistic as we look forward.
in extremities and biologics.
Revenue. Our revenue priorities are led by continued strong
shoulder growth, driven by our PERFORM™ REVERSED Glenoid.
We also aspire to “Restore the Core” in U.S. Lower Extremities
sales force performance. Finally, we seek to improve
international growth and drive enabling technologies,
such as BLUEPRINT™. Again, new product launches are
a key component to achieving double-digit revenue growth.
Cash. Our key cash priorities are to enhance inventory
and instruments efficiency, improve days sales outstanding
and leverage SG&A. We expect to be cash flow positive in
2018 and will opportunistically evaluate enhancing liquidity.
“Execute and deliver is our
mantra in 2018, and we
have many reasons to
be optimistic as we look
forward.”
We are on a very fast growth path to profitability and
a stronger financial profile. We are positioned well for the
future success of our upper extremities, lower extremities
and biologics businesses. And we have focused sales
organizations, highly differentiated products and a
product pipeline that I believe will continue to fuel our
growth in 2018 and beyond.
In addition, we have best-in-class gross margins that
we have continued to drive incrementally higher.
We have made tremendous progress on our non-GAAP
EBITDA margin expansion efforts over the past two years,
and we have ongoing opportunities to significantly improve
in this area.
In 2018, we intend to execute well and deliver the results
that are expected of us. I want to express my appreciation
to our entire Wright team for its efforts in 2017. I look
forward to updating you on our progress as the year goes on.
Until then, we sincerely appreciate your interest and
your continued support.
Sincerely yours,
Robert J. Palmisano
President and Chief Executive Officer
4 2017 Annual Report Wright Medical Group N.V.
We use certain non-GAAP financial measures, including adjusted gross margins and adjusted EBITDA from continuing operations. These non-GAAP financial mea-
sures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial measures used by other companies. In addi-
tion, these non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our
non-GAAP financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such
measures for comparison purposes. We believe that non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our
results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with
the corresponding GAAP measures.
Wright Medical Group N.V.
Reconciliation of Non-GAAP Adjusted Gross Margins to Gross Margins from Continuing Operations
(dollars in thousands - unaudited)
Gross profit from continuing operations, as reported
Gross margins from continuing operations, as reported
Reconciling items impacting gross profit:
Inventory step-up amortization
Transaction and transition costs
Fiscal year ended
December 31, 2017
December 25, 2016
$ 584,042
$ 497,955
78.4 %
__
3,095
72.1%
37,689
4,198
Non-GAAP gross profit from continuing operations, as adjusted
$ 587,137
$ 539,842
Net sales from continuing operations
Non-GAAP adjusted gross margins from continuing operations
744,989
78.8%
690,362
78.2%
Reconciliation of Non-GAAP Adjusted EBITDA to Net Loss from Continuing Operations
(dollars in thousands - unaudited)
Fiscal year ended
December 31, 2017
December 25, 2016
Net loss from continuing operations
$ (64,937)
$ (164,934)
Interest expense, net
Benefit for income taxes
Depreciation
Amortization
Non-GAAP EBITDA
Reconciling items impacting EBITDA:
Non-cash share-based compensation expense
Other expense (income), net
Inventory step-up amortization
Transaction and transition costs
Incentive and indirect tax projects
Management changes
Legal settlement
Costs associated with 2021 Notes issuance
Non-GAAP adjusted EBITDA
Net sales from continuing operations
Non-GAAP adjusted EBITDA margin
74,644
(34,968)
56,832
28,396
58,530
(13,406)
55,830
28,841
$ 59,967
$ (35,139)
19,393
5,570
—
12,400
(8,965)
—
—
—
14,416
(3,148)
37,689
36,374
—
1,348
1,800
234
$ 88,365
$ 53,574
744,989
11.9%
690,362
7.8%
2017 Annual Report Wright Medical Group N.V. 5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(cid:59)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
(cid:134)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-35065
WRIGHT MEDICAL GROUP N.V.
(Exact name of registrant as specified in its charter)
The Netherlands
(State or other jurisdiction
of incorporation or organization)
Prins Bernhardplein 200
1097 JB Amsterdam, The Netherlands
(Address of Principal Executive Offices)
98-0509600
(I.R.S. Employer
Identification No.)
None
(Zip code)
Registrant’s telephone number, including area code: (+31) 20 521 4777
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary shares, par value €0.03 per share
Contingent Value Rights
Nasdaq Global Select Market
Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:59) Yes (cid:134) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:134) Yes (cid:59) No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
(cid:59) Yes (cid:134) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). (cid:59) Yes (cid:134) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. (cid:59)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer (cid:59)
Non-accelerated filer (cid:134)
(Do not check if a smaller reporting company)
Accelerated filer (cid:134)
Smaller reporting company (cid:134)
Emerging growth company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:134) Yes (cid:59) No
The aggregate market value of the ordinary shares held by non-affiliates of the registrant on June 25, 2017 was $2.8 billion based on the closing sale price of the ordinary
shares on that date, as reported by the Nasdaq Global Select Market. For purposes of the foregoing calculation only, the registrant has assumed that all executive officers and
directors of the registrant, and their affiliated entities, are affiliates.
As of February 23, 2018, there were 105,906,409 ordinary shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
6
WRIGHT MEDICAL GROUP N.V.
ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business. ....................................................................................................................................................... 10
Risk Factors. .................................................................................................................................................. 23
Unresolved Staff Comments. ........................................................................................................................ 46
Properties. ..................................................................................................................................................... 46
Legal Proceedings. ........................................................................................................................................ 47
Mine Safety Disclosures................................................................................................................................ 51
PART II
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities. ...................................................................................................................................................... 52
Selected Financial Data. ................................................................................................................................ 54
Management’s Discussion and Analysis of Financial Condition and Results of Operations. ....................... 56
Quantitative and Qualitative Disclosures About Market Risk. ...................................................................... 82
Financial Statements and Supplementary Data. ............................................................................................ 85
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ..................... 139
Controls and Procedures.............................................................................................................................. 139
Other Information. ....................................................................................................................................... 140
PART III
Directors, Executive Officers and Corporate Governance. ......................................................................... 141
Executive Compensation. ............................................................................................................................ 148
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. ... 178
Certain Relationships and Related Transactions, and Director Independence. ........................................... 180
Principal Accounting Fees and Services. .................................................................................................... 181
Item 15.
Item 16.
Exhibits, Financial Statement Schedules. .................................................................................................... 182
Form 10-K Summary. .................................................................................................................................. 190
SIGNATURES ......................................................................................................................................................................... 191
PART IV
7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act
of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and
that are subject to the safe harbor created by those sections. These statements reflect management's current knowledge,
assumptions, beliefs, estimates, and expectations and express management's current view of future performance, results, and
trends. Forward looking statements may be identified by their use of terms such as anticipate, believe, could, estimate, expect,
intend, may, plan, predict, project, will, and other similar terms. Forward-looking statements are subject to a number of risks and
uncertainties that could cause actual results to materially differ from those described in the forward-looking statements. The
reader should not place undue reliance on forward-looking statements. Such statements are made as of the date of this report, and
we undertake no obligation to update such statements after this date. Risks and uncertainties that could cause our actual results to
materially differ from those described in forward-looking statements are discussed in our filings with the U.S. Securities and
Exchange Commission (SEC) (including those described in “Part I. Item 1A. Risk Factors” of this report). By way of example
and without implied limitation, such risks and uncertainties include:
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inability to achieve or sustain profitability;
failure to realize the anticipated benefits from previous acquisitions and dispositions;
failure to obtain anticipated commercial sales of our AUGMENT® Bone Graft products in the United States;
failure to realize the anticipated benefits of the 2017 additions to our direct U.S. lower extremities and biologics
sales force;
liability for product liability claims on hip/knee (OrthoRecon) products sold by Wright Medical Technology, Inc.
(WMT) prior to the divestiture of the OrthoRecon business;
risks and uncertainties associated with the recent metal-on-metal master settlement agreement and the settlement
agreement with the three insurance companies, including without limitation, the final settlement amount and the
final number of claims settled under the master settlement agreement, the resolution of the remaining unresolved
claims, the effect of the broad release of certain insurance coverage for present and future claims, and the resolution
of WMT’s dispute with the remaining carriers;
adverse outcomes in existing product liability litigation;
copycat claims against our modular hip systems resulting from a competitor’s recall of its modular hip product;
the ability of a creditor of any one particular entity within our corporate structure to reach the assets of the other
entities within our corporate structure not liable for the underlying claims of the one particular entity, despite our
corporate structure which is intended to ring-fence liabilities;
new product liability claims;
pending and future other litigation, which could have an adverse effect on our business, financial condition, or
operating results;
challenges to our intellectual property rights or inability to defend our products against the intellectual property
rights of others;
the possibility of private securities litigation or shareholder derivative suits;
inadequate insurance coverage;
inability to generate sufficient cash flow to satisfy our capital requirements, including future milestone payments,
and existing debt, including the conversion features of our convertible senior notes, or refinance our existing debt as
it matures;
risks associated with our credit, security and guaranty agreement for our senior secured asset based line of credit;
inability to raise additional financing when needed and on favorable terms;
the loss of key suppliers, which may result in our inability to meet customer orders for our products in a timely
manner or within our budget;
the incurrence of significant expenditures of resources to maintain relatively high levels of inventory, which could
reduce our cash flows and increase the risk of inventory obsolescence, which could harm our operating results;
our inability to timely manufacture products or instrument sets to meet demand;
our private label manufacturers failing to provide us with sufficient supply of their products, or failing to meet
appropriate quality requirements;
our plans to bring the manufacturing of certain of our products in-house and possible disruptions we may experience
in connection with such transition;
our plans to increase our gross margins by taking certain actions designed to do so;
inventory reductions or fluctuations in buying patterns by wholesalers or distributors;
not successfully competing against our existing or potential competitors and the effect of significant recent
consolidations amongst our competitors;
not successfully developing and marketing new products and technologies and implementing our business strategy;
insufficient demand for and market acceptance of our new and existing products;
the reliance of our business plan on certain market assumptions;
lack of suitable business development opportunities;
inability to capitalize on business development opportunities;
future actions of the SEC, the United States Attorney’s office, the U.S. Food and Drug Administration (FDA), the
Department of Health and Human Services, or other U.S. or foreign government authorities, including those
resulting from increased scrutiny under the U.S. Foreign Corrupt Practices Act and similar laws, that could delay,
limit, or suspend our development, manufacturing, commercialization, and sale of products, or result in seizures,
injunctions, monetary sanctions, or criminal or civil liabilities;
failure or delay in obtaining FDA or other regulatory approvals for our products;
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the compliance of our products and activities with the laws and regulations of the countries in which they are
marketed, which compliance may be costly and time-consuming;
the use, misuse or off-label use of our products that may harm our image in the marketplace or result in injuries that
may lead to product liability suits, which could be costly to our business or result in governmental sanctions;
recently enacted healthcare laws and changes in product reimbursements, which could generate downward pressure
on our product pricing;
the potentially negative effect of our ongoing compliance efforts on our relationships with customers and on our
ability to deliver timely and effective medical education, clinical studies, and new products;
failures of, interruptions to, or unauthorized tampering with, our information technology systems;
our inability to maintain effective internal controls;
product quality or patient safety issues;
geographic and product mix impact on our sales;
deriving a significant portion of our revenues from operations in certain geographic markets that are subject to
political, economic, and social instability, including in particular France, and risks and uncertainties involved in
launching our products in certain new geographic markets;
the negative impact of the commercial and credit environment on us, our customers, and our suppliers;
inability to retain key sales representatives, independent distributors, and other personnel or to attract new talent;
consolidation in the healthcare industry that could lead to demands for price concessions or the exclusion of some
suppliers from certain of our markets, which could have an adverse effect on our business, financial condition, or
operating results;
our clinical trials and their results and our reliance on third parties to conduct them;
risks associated with the merger between Tornier N.V. (Tornier or legacy Tornier) and Wright Medical Group, Inc.
(WMG or legacy Wright), including the failure to realize intended benefits and anticipated synergies and cost-
savings from the transaction or delay in realization thereof; our businesses may not be combined successfully, or
such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; and
business disruption after the transaction, including adverse effects on employee retention, our sales and distribution
channel, especially in light of territory transitions, and business relationships with third parties;
risks associated with the divestiture of the U.S. rights to certain of legacy Tornier's ankle and silastic toe replacement
products;
adverse effects of diverting resources and attention to transition services provided to the purchaser of our Large
Joints business;
potentially burdensome tax measures; and
fluctuations in foreign currency exchange rates.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially
from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business,
financial condition, or operating results, see “Part I. Item 1A. Risk Factors” of this report. The risks and uncertainties described
above and in “Part I. Item 1A. Risk Factors” of this report are not exclusive and further information concerning us and our
business, including factors that potentially could materially affect our financial results or condition, may emerge from time to
time. We assume no obligation to update, amend, or clarify forward-looking statements to reflect actual results or changes in
factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we
make on related subjects in our future Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K we file with or furnish to the SEC.
9
Item 1.
Business.
Overview
PART I
Wright Medical Group N.V. (Wright or we) is a global medical device company focused on extremities and biologics products.
We are committed to delivering innovative, value-added solutions improving quality of life for patients worldwide and are a
recognized leader of surgical solutions for the upper extremities (shoulder, elbow, wrist and hand), lower extremities (foot and
ankle) and biologics markets, three of the fastest growing segments in orthopaedics. We market our products in approximately
50 countries worldwide. We believe we are differentiated in the marketplace by our strategic focus on extremities and biologics,
our full portfolio of upper and lower extremities and biologics products, and our specialized and focused sales organization.
Our product portfolio consists of the following product categories:
(cid:120) Upper extremities, which include joint implants and bone fixation devices for the shoulder, elbow, wrist, and hand;
(cid:120) Lower extremities, which include joint implants and bone fixation devices for the foot and ankle;
(cid:120) Biologics, which include products used to support treatment of damaged or diseased bone, tendons, and soft tissues
or to stimulate bone growth; and
(cid:120) Sports medicine and other, which include products used across several anatomic sites to mechanically repair tissue-
to-tissue or tissue-to-bone injuries and other ancillary products.
Our global corporate headquarters are located in Amsterdam, the Netherlands. We also have significant operations located in
Memphis, Tennessee (U.S. headquarters, research and development, sales and marketing administration, and administrative
activities); Bloomington, Minnesota (upper extremities sales and marketing and warehousing operations); Arlington, Tennessee
(manufacturing and warehousing operations); Franklin, Tennessee (manufacturing and warehousing operations); Montbonnot,
France (manufacturing and warehousing operations); Plouzané, France (research and development); and Macroom, Ireland
(manufacturing). In addition, we have local sales and distribution offices in Canada, Australia, Asia, Latin America, and
throughout Europe. For purposes of this report, references to “international” or “foreign” relate to non-U.S. matters while
references to “domestic” relate to U.S. matters.
On October 1, 2015, we became Wright Medical Group N.V. following the merger (the Wright/Tornier merger or the merger) of
legacy Wright with legacy Tornier. Because of the structure of the merger and the governance of the combined company
immediately post-merger, the merger was accounted for as a “reverse acquisition” under U.S. generally accepted accounting
principles (US GAAP), and as such, legacy Wright was considered the acquiring entity for accounting purposes. Therefore,
legacy Wright’s historical results of operations replaced legacy Tornier’s historical results of operations for all periods prior to the
merger. References in this section and certain other sections of Part I of this report to “we,” “our” and “us” refer to Wright
Medical Group N.V. and its subsidiaries after the Wright/Tornier merger and Wright Medical Group, Inc. and its subsidiaries
before the merger.
On October 21, 2016, we sold legacy Tornier’s Large Joints business to Corin Orthopaedics Holdings Limited (Corin) allowing us
to devote our full resources and attention on accelerating growth opportunities in the high-growth extremities and biologics
markets. Legacy Wright sold its OrthoRecon business to MicroPort Scientific Corporation (MicroPort) on January 9, 2014. The
financial results of legacy Tornier’s Large Joints business and the OrthoRecon business are reflected within discontinued
operations for all periods presented.
On December 14, 2017, we completed the acquisition of IMASCAP SAS (IMASCAP), a leader in the development of software-
based solutions for preoperative planning of shoulder replacement surgery. The intent of this transaction is to ensure exclusive
access to breakthrough software enabling technology and patents to further differentiate our product portfolio and to further
accelerate growth opportunities in our global extremities business. Under the terms of the agreement with IMASCAP, we
acquired 100% of IMASCAP’s outstanding equity on a fully diluted basis for an initial payment of €52.9 million, or
approximately $62.3 million, consisting of approximately €39.7 million, or approximately $46.7 million, in cash and
approximately €13.2 million, or approximately $15.6 million, representing 661,753 Wright ordinary shares, payable at closing.
Additionally the purchase price includes an estimated €15.1 million, or approximately $17.8 million, of contingent consideration
related to the achievement of certain technical milestones and sales earnouts. The technical milestones involve the development
and approval of a patient specific implant system and new software modules. The sales earnouts relate to patient specific guides
and the future patient specific implant system.
For the fiscal year ended December 31, 2017, we had net sales of $745.0 million and a net loss from continuing operations of
$64.9 million. As of December 31, 2017, we had total assets of $2.1 billion. Detailed information on our net sales by product
category and operating business segment and our net sales and long-lived assets by segment and geographic region can be found
in Note 20 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”
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Orthopaedic Industry
The total worldwide orthopaedic industry is estimated at approximately $48.1 billion in 2017. Five multinational companies
currently dominate the orthopaedic industry, each with approximately $2 billion or more in annual sales. The size of these
companies often allows them to concentrate their marketing and research and development efforts on products they believe will
have a relatively high minimum threshold level of sales. As a result, there is an opportunity for a mid-sized orthopaedic company,
such as us, to focus on less contested, higher-growth sectors of the orthopaedic market.
We have focused our efforts into growing our position in the high-growth extremities and biologics markets. We believe a more
active and aging patient population with higher expectations regarding “quality of life,” an increasing global awareness of
extremities and biologics solutions, improved clinical outcomes as a result of the use of such products, and technological advances
resulting in specific designs for such products that simplify procedures and address unmet needs for early interventions, and the
growing need for revisions and revision-related solutions will drive the market for extremities and biologics products.
The extremities market is one of the fastest growing market segments within orthopaedics, with annual growth rates of 7-10%.
We believe the extremities market will continue to grow by approximately 7-10% annually. We currently estimate the market for
all surgical products used by extremities-focused surgeons to be approximately $3 billion in the United States. We believe major
trends in the extremities market include procedure-specific and anatomy-specific devices, locking plates, and an increase in total
ankle replacement or arthroplasty procedures.
Upper extremities reconstruction involves implanting devices to replace, reconstruct, or fixate injured or diseased joints and bones
in the shoulder, elbow, wrist, and hand. It is estimated that approximately 60% of the upper extremities market is in total shoulder
replacement or arthroplasty implants. We believe major trends in the upper extremities market include next-generation joint
arthroplasty systems, bone preserving solutions, virtual planning systems, and revision of failed previous shoulder replacements in
older patients.
Lower extremities reconstruction involves implanting devices to replace, reconstruct, or fixate injured or diseased joints and bones
in the foot and ankle. A large segment of the lower extremities market is comprised of plating and screw systems for
reconstructing and fusing joints or repairing bones after traumatic injury. We believe major trends in the lower extremities market
include the use of external fixation devices in diabetic patients, total ankle arthroplasty, advanced tissue fixation devices, virtual
planning systems, and biologics. According to various customer and market surveys, we are a market leader in foot and ankle
surgical products. New technologies have been introduced into the lower extremities market in recent years, including next-
generation total ankle replacement systems. Many of these technologies currently have low levels of market penetration. We
believe that market adoption of total ankle replacement, which currently represents approximately 8% of the U.S. foot and ankle
device market, will result in significant future growth in the lower extremities market.
The field of biologics employs tissue engineering and regenerative medicine technologies focused on remodeling and regeneration
of tendons, ligaments, bone, and cartilage. Biologic products use both biological tissue-based and synthetic materials to allow the
body to regenerate damaged or diseased bone and to repair damaged or diseased soft tissue. These products aid the body’s natural
regenerative capabilities to heal itself. Biologic products provide a lower morbidity solution to “autografting,” a procedure that
involves harvesting a patient’s own bone or soft tissue and transplanting it to a different site. Following an autografting
procedure, the patient typically has pain, and at times, complications result at the harvest site after surgery. Biologically or
synthetically derived soft tissue grafts and scaffolds are used to treat soft tissue injuries and are complementary to many sports
medicine applications, including rotator cuff tendon repair and Achilles tendon repair. Hard tissue biologics products are used in
many bone fusion or trauma cases where healing potential may be compromised and additional biologic factors are desired to
enhance healing, where the surgeon needs additional bone, or in cases where the surgeon wishes to use materials that are naturally
incorporated by the body over time. We estimate that the worldwide orthobiologics market to be over $3.5 billion, and with
annual growth rates of 3-5%. Three multinational companies currently dominate the orthobiologics industry.
The newest addition to our biologics product portfolio is AUGMENT® Bone Graft, which is based on recombinant human
platelet-derived growth factor (rhPDGF-BB), a synthetic copy of one of the body’s principal healing agents. We obtained FDA
approval of AUGMENT® Bone Graft in the United States for ankle and/or hindfoot fusion indications during the third quarter of
2015. We estimate the U.S. market opportunity for AUGMENT® Bone Graft for ankle and/or hindfoot fusion indications to be
approximately $300 million. The main competitors for AUGMENT® Bone Graft are autologous bone grafts, allograft, and
synthetic bone growth substitutes. Autologous bone grafts, which account for a significant portion of total graft volume, are taken
directly from the patient. This generally necessitates an additional procedure to obtain the graft, which in turn creates added
expense, and increased pain and recovery time. Allografts, which are currently the second most commonly used bone grafts, are
taken from human cadavers and processed by either bone banks or commercial firms. Although an obvious advantage to
allografts is the fact that a second-site harvesting operation is not required, they carry a slight risk of transmitting pathogens and
can also cause immune system reactions. Synthetic grafts are derived from numerous materials, including polymers, calcium
sulfate, calcium phosphate, bovine collagen, and coral. We are currently pursuing FDA approval of AUGMENT® Injectable Bone
Graft with a Pre-Market Application (PMA) Panel Track Supplement.
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Product Portfolio
We offer a broad product portfolio of approximately 150 extremities products and over 20 biologics products that are designed to
provide solutions to our surgeon customers, with the goal of improving clinical outcomes and the “quality of life” for their
patients. Our product portfolio consists of the following product categories:
(cid:120) Upper extremities, which include joint implants and bone fixation devices for the shoulder, elbow, wrist, and hand;
(cid:120) Lower extremities, which include joint implants and bone fixation devices for the foot and ankle;
(cid:120) Biologics, which include products used to support treatment of damaged or diseased bone, tendons, and soft tissues
or to stimulate bone growth; and
(cid:120) Sports medicine and other, which include products used across several anatomic sites to mechanically repair tissue-
to-tissue or tissue-to-bone injuries and other ancillary products.
Upper Extremities
The upper extremities product category includes joint implants and bone fixation devices for the shoulder, elbow, wrist, and hand.
Our global net sales from this product category was $334.7 million, or 44.9% of total net sales, for the fiscal year ended
December 31, 2017, as compared to $288.1 million, or 41.7% of total net sales, for the fiscal year ended December 25, 2016.
Our shoulder products are used to treat painful shoulder conditions due to arthritis, irreparable rotator cuff tendon tears, bone
disease, fractured humeral heads, or failed previous shoulder replacement surgery. Our shoulder products include the following:
(cid:120) Total Shoulder Joint Replacement. Our total shoulder joint replacement products have two components-a humeral
implant consisting of a metal stem or base attached to a metal head, and a plastic implant for the glenoid (shoulder
socket). Together, these two components mimic the function of a natural shoulder joint. Our total shoulder joint
replacement products include the AEQUALIS ASCEND®, AEQUALIS® PRIMARY™, AEQUALIS® PERFORM™
and SIMPLICITI® shoulder systems. Our BLUEPRINT™ 3D Planning Software can be used with our AEQUALIS®
PERFORM™ Glenoid System to assist surgeons in accurately positioning the glenoid implant and replicating the
pre-operative surgical plan. In addition, we received FDA 510(k) clearance in June 2016 of our AEQUALIS®
PERFORM™+ Glenoid System, the first anatomic augmented glenoid. This system was designed to specifically
address posterior glenoid deficiencies and deliver bone preservation. SIMPLICITI® is the first minimally invasive,
ultra-short stem total shoulder available in the Unites States.
(cid:120) Hemi Shoulder Joint Replacement. Our hemi shoulder joint replacement products replace only the humeral head
and allow it to articulate against the native glenoid. These products include our PYC HUMERAL HEAD™ and
INSPYRE™. PYC stands for pyrocarbon, which is a biocompatible material that has low joint surface friction and a
high resistance to wear. The PYC HUMERAL HEAD™ is currently available in certain international markets. The
product received FDA approval in 2015 for its investigational device exemption to conduct a clinical trial in the
United States. We anticipate that this single arm study will enroll and implant 157 patients from up to 20 centers
across the United States and will evaluate the safety and effectiveness of the device in patients with a primary
diagnosis of partial shoulder replacement or hemi-arthroplasty. The study design uses a primary endpoint that is
measured at two years.
(cid:120) Reversed Shoulder Joint Replacement. Our reversed shoulder joint replacement products are used in arthritic
patients lacking rotator cuff function. The components are different from a traditional “total” shoulder in that the
humeral implant has the plastic socket and the glenoid has the metal head. This design has the biomechanical
impact of shifting the pivot point of the joint away from the body centerline and recruiting the deltoid muscles to
enable the patient to elevate the arm. Our reversed joint replacement products include the AEQUALIS®
REVERSED II™ shoulder. We received FDA 510(k) clearance in December 2016 of our AEQUALIS®
PERFORM™ REVERSED Glenoid System, our first reverse augmented glenoid, and we commercially launched it
during first quarter of 2017. This system was designed to specifically address posterior glenoid deficiencies and
deliver bone preservation. We continue to release new options for our BLUEPRINT™ 3D Planning Software,
which can be used with our AEQUALIS® PERFORM™ REVERSED Glenoid System to assist surgeons in
accurately positioning the glenoid implant and replicating the pre-operative surgical plan.
(cid:120)
(cid:120) Convertible Shoulder Joint Replacement. Our convertible shoulder joint replacement products are modular implants
that can be converted from a total or hemi shoulder implant to a reversed implant at a later date if the patient
requires it. Our convertible joint replacement products include the AEQUALIS ASCEND® FLEX™ convertible
shoulder system, which provides anatomic and reversed options within a single system and is designed to offer
precise intra-operative implant-to-patient fit and easy conversion to reversed if necessary.
Shoulder Resurfacing Implants. An option for some patients is shoulder resurfacing where the damaged humeral
head is sculpted to receive a metal “cap” that fits onto the bone, functioning as a new, smooth humeral head. This
procedure can be less invasive than a total shoulder replacement. Our shoulder resurfacing implants are designed to
preserve bone, which may benefit more active or younger patients with shoulder arthritis. Our resurfacing implants
include the AEQUALIS® RESURFACING HEAD™.
Shoulder Trauma Devices. Our shoulder trauma devices, such as plates, pins, screws, and nails, are non-articulating
implants used to help stabilize fractures of the humerus. Our shoulder trauma products include the AEQUALIS® IM
NAIL™, AEQUALIS® PROXMILA HUMERAL PLATE™, AEQUALIS® FRACTURE™ shoulder and
AEQUALIS® REVERSED FRACTURE™ shoulder.
(cid:120)
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In addition to our shoulder products, our upper extremities product portfolio consist of implants, plates, pins, screws, and nails that
are used to treat the elbow, wrist, and hand, and include the following:
(cid:120) Total Elbow and Radial Head Replacement. Our total elbow and radial head replacement products address the need
for modularity in the anatomically highly-variable joint of the elbow and give surgeons the ability to reproduce the
natural flexion/extension axis and restore natural kinematics of the elbow. Our total elbow replacement products
include our LATITUDE® EV™ total elbow prosthesis. Our radial head replacement products include our
EVOLVE® modular radial head device, which is a market leading radial head prosthesis that provides different
combinations of heads and stems allowing the surgeon to choose implant heads and stems to accommodate the
unpredictable anatomy of each patient.
(cid:120) Elbow Fracture Repair. We have several plating and screw products designed to repair a fractured elbow. Our
radial head plating systems and screws are for surgeons who wish to repair rather than replace a damaged radial
head and include our EVOLVE® TRIAD™ fixation system. Our EVOLVE® Elbow Plating System addresses
fractures of the distal humerus and proximal ulna. Composed of polished stainless steel, this system was designed to
accurately match the patient anatomy to reduce the need for intra-operative bending while providing a low profile
design to minimize post-operative irritation. Both of these products and several of our other products incorporate
our ORTHOLOC® 3Di Polyaxial Locking Technology to enable optimal screw placement and stability.
(cid:120) Wrist Fracture Repair. We have several plating and screw products designed to repair a fractured wrist. Our
MICRONAIL® II Intramedullary Distal Radius System is a next-generation minimally invasive treatment for distal
radius fractures that is designed to provide immediate fracture stabilization with minimal soft tissue disruption.
Also, as the nail is implanted within the bone, it has no external profile on top of the bone, thereby reducing the
potential for tendon irritation or rupture, which is an appreciable problem with conventional plates designed to lie on
top of the bone. In addition, our RAYHACK® system is comprised of a series of precision cutting guides and
procedure-specific plates for ulnar and radial shortening procedures and the surgical treatment of radial malunions
and Keinbock’s Disease.
(cid:120) Hand Fixation. Our hand fixation products include our FUSEFORCE® Hand Fixation System, which is a shape-
memory compression-ready fixation system that can be used in fixation for fractures, fusions, or osteotomies of the
bones in the hand.
(cid:120) Thumb and Finger Joint Replacement. Our Swanson finger joints are used in finger joint replacement for patients
suffering from rheumatoid arthritis of the hand. With nearly 45 years of clinical success, Swanson digit implants are
a foundation in our upper extremities business and are used by a loyal base of hand surgeons worldwide. Our
ORTHOSPHERE® implants are used in thumb joint replacement procedures.
Lower Extremities
The lower extremities product category includes joint implants and bone fusion and fixation devices, including plates, pins,
screws, and nails, for the foot and ankle. Our global net sales from this product category for the fiscal year ended December 31,
2017 was $286.5 million, or 38.5% of total net sales, as compared to $285.6 million, or 41.4% of total net sales, for the fiscal year
ended December 25, 2016.
We are a recognized leader in the United States for foot and ankle surgical products. Our lower extremities product portfolio
includes:
(cid:120) Total Ankle Joint Replacement. Total ankle joint replacement, also known as total ankle arthroplasty, is a surgical
procedure that orthopaedic surgeons use to treat ankle arthritis. Our total ankle joint replacement products include
implants for the ankle that involve replacing the joint with an articulating multi-component implant. These joint
implants may be mobile bearing, in which the plastic component is free to slide relative to the metal bearing
surfaces, or fixed bearing, in which this component is constrained. Our INBONE® Total Ankle Systems, including
our third-generation INBONE® II Total Ankle System, are modular prostheses that are designed to allow the surgeon
to tailor the fixation stems for the tibial and talar components in order to maximize stability of the implant. The
INBONE® II Total Ankle System is the only ankle replacement that offers surgeons multiple implant options with
different articular geometry. Our INFINITY® Total Ankle System features a distinctive talar resurfacing option for
preservation of talar bone. The combination and interchangeability of both the INBONE® and INFINITY® systems
provide the surgeon with an implant continuum of care concept, allowing the surgeon to address a more bone
conserving implant option with INFINITY® all the way to addressing a more complex ankle deformity with
INBONE®. Our INBONE® and INFINITY® Total Ankle Systems can be used with our PROPHECY® Preoperative
Navigation Guides, which combine computer imaging with a patient’s CT scan, and are designed to provide
alignment accuracy while reducing surgical steps. The most recent addition to our Total Ankle System,
INVISIONTM Total Ankle Revision System is the first and only system developed specifically for total ankle
revision arthroplasty. The INVISION Total Ankle Revision System provides a unique solution for even the most
difficult revision procedures. Whether leveraged as a standalone construct or in conjunction with INFINITY® and
INBONE® components, the INVISIONTM Total Ankle Revision System is an important addition to the continuum of
care from total ankle replacement through any necessary revisions. The INVISIONTM Total Ankle Revision System
is designed to help surgeons re-build bone lost through previous surgeries and provide modularity to help restore
natural joint height.
(cid:120) Ankle Fusion. We have several products used in ankle fusion procedures, which fuse together the tibia, fibula, and
talus bones into one bone, and are intended to treat painful, end-stage arthritis in the ankle joint. These products
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include our ORTHOLOC® 3Di Ankle Fusion System, VALOR® TTC fusion nail, and the legacy Tornier Maxlock
ExtremeTM Plate and Screws System.
(cid:120) Ankle Fixation and Fracture Repair. We sell a broad range of anatomically designed plates, screws, and nails used
to stabilize and heal fractured ankle bones, including our ORTHOLOCTM 3Di Ankle Fracture Low Profile System
features a complete range of ankle fracture plates designed specifically for the foot and ankle surgeon. The system
features low-profile, anatomic plate designs and ORTHOLOC 3Di polyaxial locking screw technology, providing an
innovative fracture solution that is intended to address a primary need for one of the foot and ankle’s largest market
segments.
(cid:120) Foot Fusion. We have several products used in foot fusion procedures, which fuse together three bones in the back
of the foot into one bone and are used to treat a wide range of conditions, including arthritis, flat feet, rheumatoid
arthritis, and previous injuries, such as fractures caused by wear and tear to bones and cartilage. Our foot fusion
products include our ORTHOLOC® 3Di Midfoot Plating System, VALOR® TTC fusion nail and the legacy Tornier
Maxlock ExtremeTM Plate and Screws System.
(cid:120) Foot Fixation and Fracture Repair. Our foot fixation and fracture repair products include plates, screws, and nails
used to stabilize and heal foot deformities and fractures. Our CHARLOTTE® CLAW® Compression Plate is the first
ever locking compression plate designed for corrective foot surgeries. Our next-generation CLAW® II Compression
Plating System expands our plate and screw offering by introducing anatomic plates specifically designed for
fusions of the midfoot, and the CLAW® II Polyaxial Compression Plating System incorporates variable-angle
locking screw technology and our ORTHOLOC® 3Di Reconstruction Plating System utilizes our 3Di polyaxial
locking technology. In April 2016, we further expanded the ORTHOLOC® 3Di portfolio with the launch of the
ORTHOLOC® 3Di CROSSCHECK® Plating System. This modular addition is comprised of five uniquely designed
plates which offer an inter-fragmentary solution. Our SALVATION™ limb salvage portfolio, which is designed to
address the unique demands of advanced midfoot reconstruction, was commercially launched in the first half of
2016 and in the third quarter of 2017, we launched line extensions to the system. We will roll out additional sets
throughout the first half of 2018. Other foot products include the MAXLOCK®, MINIMAX LOCK™ and
MINIMAX LOCK EXTREME™ plate and screw systems, BIOFOAM® Wedge System, BIOARCH® Subtalar
Arthroereisis Implant, MDI Metatarsal Resurfacing Implant, and TENFUSE® Nail Allograft.
(cid:120) Hammertoe Correction. Hammertoe is a contracture (bending) of one or both joints of the second, third, fourth, or
fifth (little) toes. Our hammertoe correction products include the PRO-TOE® VO Hammertoe Fixation System,
PRO-TOE® C2 Hammertoe Implant, PHALINX® Hammertoe Fixation System, Cannulink Intraosseous Fixation
System (IFS), and TENFUSE® PIP Hammertoe Allograft.
(cid:120) Toe Joint Replacement. We also sell our Swanson line of toe joint replacement products.
(cid:120) Minimally-Invasive Foot and Ankle Surgery. The MICA™ Minimally-Invasive Foot and Ankle system was
launched to limited users in the third quarter of 2017. It is designed on the premise that all “current” procedures can
be performed through a smaller, minimally invasive, incision, with a focus on preserving the soft tissues. We have
MICA™ Screws, MICA™ Machine and MICA™ instruments to perform minimal invasive procedures such as
MICA™ Chevron, Akin, Calcaneal Osteotomies, Hammer toe/Claw toe, Cheilectomy, Bunionectomy, Bunionette &
DMMO. Full commercial launch of MICA™ is planned for the second half of 2018.
Biologics
The biologics product category includes a broad line of biologic products that are used to support treatment of damaged or
diseased bone, tendons, and soft tissues and other biological solutions for surgeons and their patients or to stimulate bone growth.
These products focus on supporting biological musculoskeletal repair by utilizing synthetic and human tissue-based materials.
Our biologic products are primarily used in extremities-related procedures as well as in trauma-induced voids of the long bones
and some spine procedures. Internationally, we offer a bone graft product incorporating antibiotic delivery. Our global net sales
from this product category for the fiscal year ended December 31, 2017 was $100.6 million, or 13.5% of total net sales, compared
to $93.5 million, or 13.5% of total net sales, for the fiscal year ended December 25, 2016.
Our biologics products include the following:
(cid:120) AUGMENT® Bone Graft. The newest addition to our biologics product portfolio is AUGMENT® Bone Graft. Our
AUGMENT® Bone Graft product line is based on recombinant human platelet-derived growth factor (rhPDGF-BB),
a synthetic copy of one of the body’s principal healing agents. We obtained FDA approval of AUGMENT® Bone
Graft for ankle and/or hindfoot fusion indications in the United States during third quarter of 2015. Prior to FDA
approval, this product was available for sale in Canada for foot and ankle fusion indications and in Australia and
New Zealand for hindfoot and ankle fusion indications. We acquired the AUGMENT® Bone Graft product line
from BioMimetic Therapeutics, Inc. (BioMimetic) in March 2013. We are currently pursuing FDA approval of
AUGMENT® Injectable Bone Graft with a PMA Panel Track Supplement.
(cid:120) Hard Tissue Repair. Our other bone or hard tissue repair products include our PRO-DENSE® Injectable
Regenerative Graft. PRO-DENSE® is a composite graft composed of surgical grade calcium sulfate and calcium
phosphate, and in animal studies, has demonstrated excellent bone regenerative characteristics, forming new bone
that is over three times stronger than the natural surrounding bone at the 13-week time point. Beyond 13 weeks, the
regenerated bone gradually remodels to natural bone strength. Our PRO-STIM® Injectable Inductive Graft is built
on the PRO-DENSE® material platform, but adds demineralized bone matrix (DBM), and has demonstrated
accelerated healing compared to autograft in pre-clinical testing. Our other hard tissue repair products, including
our IGNITE® Power Mix Injectable Stimulus, FUSIONFLEX™ Demineralized Moldable Scaffold,
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(cid:120)
ALLOMATRIX® Injectable Putty, OSTEOSET® Resorbable Bead Kit, MIIG® Injectable Graft, CANCELLO-
PURE® bone wedge line, and ALLOPURE® Allograft Bone Wedges.
Soft Tissue Repair. Our soft tissue repair products include our GRAFTJACKET® Regenerative Tissue Matrix,
which is a human-derived soft tissue graft designed for augmentation of tendon and ligament repairs, such as those
of the rotator cuff in the shoulder and Achilles tendon in the foot and ankle. GRAFTJACKET® Maxforce Extreme
is our thickest GRAFTJACKET® matrix, which provides excellent suture holding power for augmenting
challenging tendon and ligament repairs. We procure our GRAFTJACKET® product through an exclusive
distribution agreement that expires December 31, 2018. Other soft tissue repair products include our CONEXA™
Reconstructive Tissue Matrix, ACTISHIELD™ and ACTISHIELD™ CF Amniotic Barrier Membranes,
VIAFLOW™ and VIAFLOW™ C Flowable Placental Tissue Matrices, BIOFIBER® biologic absorbable scaffold
products, and PHANTOM FIBER™ high strength, resorbable suture products.
Sports Medicine and Other
The sports medicine and other product category includes products used across several anatomic sites to mechanically repair tissue-
to-tissue or tissue-to-bone injuries and other ancillary products. Because of its close relationship to extremities joint replacement
and bone fixation, our sports medicine portfolio is comprised of products used to complement our upper and lower extremities
product portfolios, providing surgeons a variety of products that may be used in upper and lower extremities surgical procedures.
Our global net sales from this product category for the fiscal year ended December 31, 2017 was $23.2 million, or 3.1% of total
net sales, compared to $23.2 million, or 3.4% of total net sales, for the fiscal year ended December 25, 2016.
Sales, Marketing, and Medical Education
Our sales and marketing efforts are focused primarily on orthopaedic, trauma, and podiatric surgeons. Orthopaedic surgeons
focused on the extremities in many instances have completed upper or lower extremities fellowship programs. We offer surgeon-
to-surgeon education on our products using surgeon advisors in an instructional capacity. We have contractual relationships with
these surgeon advisors, who help us train other surgeons in the safe and effective use of our products and help other surgeons
perfect new surgical techniques. Together with these surgeon advisors, we provide surgeons extensive “hands on” orthopaedic
training and education, including upper and lower extremities fellowships and masters courses that are not easily accessible
through traditional medical training programs. We also offer clinical symposia and seminars, and publish advertisements and the
results of clinical studies in industry publications. We believe that our history of innovation and focus on quality and improving
clinical outcomes and “quality of life” for patients, along with our training programs, allow us to reach surgeons early in their
careers and provide on-going value, which includes experiencing the clinical benefits of our products.
Due to the nature of specialized training surrounding podiatric and orthopaedic surgeons focused on extremities and biologics, our
target market is well defined. Historically, surgeons are the primary decision-makers in orthopaedic device purchases. While we
market our broad portfolio of products to surgeons, our revenue is generated from sales of our products to healthcare institutions
and stocking distributors.
United States
As of December 31, 2017, our sales and distribution system in the United States consisted of 82 geographic sales territories that
are staffed by over 500 direct sales representatives and 27 independent sales agencies or distributors. These sales representatives
and independent sales agencies and distributors are generally aligned to selling either our upper extremities products or lower
extremities products, but, in some cases, certain agencies or direct sales representatives sell products from both our upper and
lower extremities product portfolios in their territories. Our direct sales representatives and independent sales agencies and
distributors are provided opportunities for product training throughout the year. We also have working relationships with
healthcare dealers, including group purchasing organizations, healthcare organizations, and integrated distribution networks. We
believe our success in every market sector is dependent upon having a robust and compelling product offering, and equally as
important, a dedicated, highly trained, focused sales organization to service our customers. We plan to continue to strategically
focus on and invest in building a competitively superior U.S. sales organization by training and certifying our sales representatives
on our innovative product portfolio, continuing to develop and implement strong performance management practices, and
enhancing sales productivity.
International
Internationally, we utilize several distribution approaches that are tailored to the needs and requirements of each individual
market. Our international sales and distribution system currently consists of 15 direct sales offices and approximately 90
distributors that sell our products in approximately 50 countries. We have subsidiaries with direct sales offices in the United
Kingdom, France, Germany, Italy, Denmark, Netherlands, Canada, Japan, Australia, Switzerland, and Norway that employ direct
sales employees, and in some cases, use independent sales representatives to sell our products in their respective markets. Our
products are sold in other countries in Europe, Asia, Africa, and Latin America using stocking distribution partners. Stocking
distributors purchase products directly from us for resale to their local customers, with product ownership generally passing to the
distributor upon shipment.
15
Manufacturing, Facilities, and Quality
We utilize a combination of internal manufacturing and a network of qualified outsourced manufacturing partners to produce our
products and surgical instrumentation. We manufacture our internally-sourced products in six locations: Arlington, Tennessee;
Franklin, Tennessee; Montbonnot, France; Grenoble, France; Nogent, France; and Macroom, Ireland. We lease the manufacturing
facility in Arlington, Tennessee from the Industrial Development Board of the Town of Arlington. Our internal manufacturing
operations are focused on product quality, continuous improvement, and efficient production. Our internal manufacturing
operations have been practicing lean manufacturing concepts for many years with a philosophy focused on high productivity,
flexibility, and capacity optimization. Our operations in France have a long history and deep experience with orthopaedic
manufacturing and process innovation. Additionally, we believe we are the only company to have vertically integrated operations
for the manufacturing of pyrocarbon orthopaedic products. We believe that this capability gives us a competitive advantage in
design for manufacturing and prototyping of this innovative material.
We outsource products to our manufacturing partners when it provides us with cost efficiency, expertise, flexibility, and instances
where we need additional capacity. A significant portion of our lower extremities products and surgical instrumentation is
produced to our specifications by qualified subcontractors who serve medical device companies. We continuously look for
opportunities to optimize our internal manufacturing capacity and insource manufacturing where we believe it makes sense to do
so.
We maintain a comprehensive quality system that is certified to the European standards ISO 9001 and ISO 13485 and to the
Canadian Medical Devices Conformity Assessment System (CMDCAS). We are accredited by the American Association of
Tissue Banks (AATB) and have registrations with the FDA as a medical device establishment and as a tissue establishment. These
certifications and registrations require periodic audits and inspections by various global regulatory entities to determine if we have
systems in place to ensure our products are safe and effective for their intended use and that we are compliant with applicable
regulatory requirements. Our quality system exists so that management has the proper oversight, designs are evaluated and tested,
production processes are established and maintained, and monitoring activities are in place to ensure products are safe, effective,
and manufactured according to our specifications. Consequently, our quality system provides the way for us to ensure we design
and build quality into our products while meeting global requirements. We are committed to meet or exceed customer needs as we
strive to improve patient outcomes.
Supply
We use a diverse and broad range of raw materials in the manufacturing of our products. We purchase all of our raw materials and
select components used in the manufacturing of our products from external suppliers. In addition, we purchase some supplies
from single or limited number of sources for reasons of proprietary know-how, quality assurance, sole source, cost-effectiveness,
or constraints resulting from regulatory requirements. We work closely with our suppliers to ensure continuity of supply while
maintaining high quality and reliability.
We rely on one supplier for the silicone elastomer used in certain number of our extremities products. We are aware of only two
suppliers of silicone elastomer to the medical device industry for permanent implant usage. For certain biologic products, we
depend on one supplier of demineralized bone matrix and cancellous bone matrix. We rely on one supplier for our
GRAFTJACKET® family of soft tissue repair and graft containment products. We believe we maintain adequate stock from these
suppliers to meet market demand. We rely on one supplier for a key component of our AUGMENT® Bone Graft. In December
2013, our supplier notified us of its intent to terminate the supply agreement in December 2015. This supplier was contractually
required to meet our supply requirements until the termination date, and to use commercially reasonable efforts to assist us in
identifying a new supplier and support the transfer of technology and supporting documentation to produce this component. In
April 2016, we entered into a commercial supply agreement with FUJIFILM Diosynth Biotechnologies U.S.A., Inc. pursuant to
which Fujifilm agreed to manufacture and sell to us and we agreed to purchase the key component of our AUGMENT ® Bone
Graft. Pursuant to our supply agreement with Fujifilm, commercial production of the key component is expected to begin in 2019.
Although we believe that our current supply of the key component from our former supplier should be sufficient to last until after
the component becomes available under the new agreement, no assurance can be provided that it will be sufficient.
Some of our products are provided by suppliers under private-label distribution agreements. Under these agreements, the supplier
generally retains the intellectual property and exclusive manufacturing rights. The supplier private labels the products under our
brands for sale in certain fields of use and geographic territories. These agreements may be subject to minimum purchase or sales
obligations and are terminable by either party upon notice. Our private-label distribution agreements do not, individually or in the
aggregate, represent a material portion of our business and we are not substantially dependent on them.
Our business, and the orthopaedic industry in general, is capital intensive, particularly as it relates to inventory levels and surgical
instrumentation. Our business requires a significant level of inventory driven by our global footprint, the requirement to provide
products within a short period of time, and the number of different sizes of many of our products. In addition, we must maintain a
significant investment in surgical instrumentation as we provide these instruments to healthcare facilities and surgeons for their
use to facilitate the implantation of our products.
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Competition
Competition in the orthopaedic device industry is intense and is characterized by extensive research efforts and rapid
technological progress. Competitors include major and mid-sized companies in the orthopaedic and biologics industries, as well
as academic institutions and other public and private research organizations that continue to conduct research, seek patent
protection, and establish arrangements for commercializing products that will compete with our products.
The primary competitive factors facing us include price, quality, innovative design and technical capability, clinical results,
breadth of product line, scale of operations, distribution capabilities, brand reputation, and strong customer service. Our ability to
compete is affected by our ability to accomplish the following:
(cid:120) Develop new products and innovative technologies;
(cid:120) Obtain and maintain regulatory clearances or approvals and reimbursement for our products;
(cid:120) Manufacture and sell our products cost-effectively;
(cid:120) Meet all relevant quality standards for our products and their markets;
(cid:120) Respond to competitive pressures specific to each of our geographic markets, including our ability to enforce non-
compete agreements;
(cid:120) Protect the proprietary technology of our products and manufacturing processes;
(cid:120) Market and promote our products;
(cid:120) Continue to maintain a high level of medical education for our surgeons on our products;
(cid:120) Attract and retain qualified scientific, management and sales employees and focused sales representatives; and
(cid:120) Support our technology with clinically relevant studies.
Research and Development
Realizing that new product offerings are a key to our future success, we are committed to a strong research and development
program. The intent of our program is to develop new extremities and biologics products and expand our current product
offerings and the markets in which they are offered. Our research and development teams are organized and aligned with our
product marketing teams and are focused on improving clinical outcomes by designing innovative, clinically differentiated
products with improved ease-of-use and by developing new product features and enhanced surgical techniques that can be
leveraged across a broader base of surgeon customers. Our internal research and development teams work closely with external
research and development consultants and a global network of physicians and medical personnel in hospitals and universities to
ensure we have broad access to best-in-class ideas and technologies to drive our product development pipeline. We also have an
active business development team that actively evaluates novel technologies and development stage products. In addition, our
clinical and regulatory departments are devoted to verifying the safety and efficacy of our products according to regulatory
standards enforced by the FDA and other international regulatory bodies. Our research and development expenses totaled
$50.1 million, $50.5 million and $39.3 million in 2017, 2016, and 2015, respectively. Our research and development activities are
principally located in Memphis, Tennessee; Montbonnot, France; Plouzané, France; and Warsaw, Indiana, with additional staff in
Grenoble, France; and Bloomington, Minnesota.
In the extremities area, our research and development activities focus on building upon our already comprehensive portfolio of
surgical solutions for extremities focused surgeons, including procedure and anatomy specific products. With the ultimate goal of
addressing unmet clinical needs, we often pursue multiple product solutions for a particular application in order to offer surgeons
the ability either to use their preferred procedural technique or to provide options and flexibility in the surgical setting with the
understanding that one solution does not work for every case. Additionally, with the acquisition of IMASCAP, whose Glenosys
technology is the preoperative planning software behind our BLUEPRINT™ 3D planning software, we have a rich pipeline of
potential breakthrough technologies under development. We believe the future of orthopaedic implant surgery will include
advanced elements of artificial intelligence and augmented reality.
In the biologics area, we have research and development projects underway that are designed to provide differentiation of our
advanced materials in the marketplace. We are particularly focused on the integration of our biologic product platforms into
extremities procedures and potential new applications for our AUGMENT® Bone Graft.
Intellectual Property
Patents, trade secrets, know-how, and other proprietary rights are important to the continued success of our business. We currently
own more than 1,500 patents and pending patents throughout the world. We currently have licenses to use approximately 800
patents. We seek to aggressively protect technology, inventions, and improvements that we consider important through the use of
patents and trade secrets in the United States and significant foreign markets. We manufacture and market products under both
patents and license agreements with other parties. These patents and license agreements have a defined life and expire from time
to time. We are not materially dependent on any one or more of our patents. In addition to patents, our knowledge and
experience, creative product development, marketing staff and trade secret information, with respect to manufacturing processes,
materials and product design, are as important as our patents in maintaining our proprietary product lines.
Although we believe that, in the aggregate, our patents are valuable, and patent protection is beneficial to our business and
competitive positioning, our patent protection will not necessarily deter or prevent competitors from attempting to develop similar
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products. There can be no assurances that our patents will provide competitive advantages for our products or that competitors
will not challenge or circumvent these rights. In addition, there can be no assurances that the United States Patent and Trademark
Office (USPTO) or foreign patent offices will issue any of our pending patent applications. The USPTO and foreign patent offices
may deny or require a significant narrowing of the claims in our pending patent applications and the patents issuing from such
applications. Any patents issuing from the pending patent applications may not provide us with significant commercial protection.
We could incur substantial costs in proceedings before the USPTO or foreign patent offices, including opposition and other post-
grant proceedings. These proceedings could result in adverse decisions as to the patentability, priority of our inventions, and the
narrowing or invalidation of claims in issued patents. Additionally, the laws of some of the countries in which our products are or
may be sold may not protect our intellectual property to the same extent as the laws in the United States or at all.
While we do not believe that any of our products infringe any valid claims of patents or other proprietary rights held by others, we
are currently subject to patent infringement litigation and there can be no assurances that we do not infringe any patents or other
proprietary rights. If our products were found to infringe any proprietary right of another party, we could be required to pay
significant damages or license fees to such party and/or cease production, marketing, and distribution of those products. Litigation
also may be necessary to defend infringement claims of third parties or to enforce patent rights we hold or to protect trade secrets
or techniques we own.
We rely on trade secrets and other unpatented proprietary technology. There can be no assurances that we can meaningfully
protect our rights in our unpatented proprietary technology or that others will not independently develop substantially equivalent
proprietary products or processes or otherwise gain access to our proprietary technology.
We protect our proprietary rights through a variety of methods. As a condition of employment, we generally require employees to
execute an agreement relating to the confidential nature of and company ownership of proprietary information and assigning
intellectual property rights to us. We generally require confidentiality agreements with vendors, consultants, and others who may
have access to proprietary information. We generally limit access to our facilities and review the release of company information
in advance of public disclosure. There can be no assurances, however, that confidentiality agreements with employees, vendors,
and consultants will not be breached, adequate remedies for any breach would be available, or competitors will not discover or
independently develop our trade secrets. Litigation also may be necessary to protect trade secrets or techniques we own.
Government Regulation
We are subject to varying degrees of government regulation in the countries in which we conduct business. In some countries,
such as the United States, Europe, Canada, and Japan, government regulation is significant and, we believe there is a general trend
toward increased and more stringent regulation throughout the world. As a manufacturer and marketer of medical devices, we are
subject to extensive regulation by the U.S. Food and Drug Administration, other federal governmental agencies, and state agencies
in the United States and similar foreign governmental authorities in countries located outside the United States. These regulations
generally govern the introduction of new medical devices; the observance of certain standards with respect to the design,
manufacture, testing, labeling, promotion, and sales of the devices; the maintenance of certain records; the ability to track devices;
the reporting of potential product defects; the import and export of devices; as well as other matters. In addition, as a participant
in the healthcare industry, we are also subject to various other U.S. federal, state, and foreign laws.
On September 29, 2010, WMT entered into a five-year Corporate Integrity Agreement (CIA) with the Office of the Inspector
General of the United States Department of Health and Human Services (OIG-HHS). The CIA expired on September 29, 2015
and on January 27, 2016, we received notification from the OIG-HHS that the term of the CIA has concluded. While the term of
the CIA has concluded, our failure to continue to maintain compliance with U.S. healthcare laws, regulations and other
requirements in the future could expose us to significant liability, including, but not limited to, exclusion from federal healthcare
program participation, including Medicaid and Medicare, potential prosecution, civil and criminal fines or penalties, as well as
additional litigation cost and expense.
We strive to comply with regulatory requirements governing our products and operations and to conduct our affairs in an ethical
manner. This practice is reflected in our Code of Business Conduct, various other compliance policies and through the
responsibility of the nominating, corporate governance and compliance committee of our board of directors, which oversees our
corporate compliance program and compliance with legal and regulatory requirements as well as our ethical standards and
policies. We devote significant time, effort, and expense to addressing the extensive government and regulatory requirements
applicable to our business. Such regulatory requirements are subject to change and we cannot predict the effect, if any, that these
changes might have on our business, financial condition, and results of operations. Governmental regulatory actions against us
could result in warning letters, delays in approving or refusal to approve a product, the recall or seizure of our products,
suspension or revocation of the authority necessary for the production or sale of our products, litigation expense, and civil and
criminal penalties against us and our officers and employees. If we fail to comply with these regulatory requirements, our
business, financial condition, and results of operations could be harmed.
United States
In the United States, our products are strictly regulated by the FDA under the U.S. Food, Drug and Cosmetic Act (FDC Act).
Some of our products are also regulated by state agencies. FDA regulations and the requirements of the FDC Act affect the pre-
clinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage, recordkeeping, advertising, and promotion of
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our medical device products. Our tissue-based products are subject to FDA regulations, the National Organ Transplant Act
(NOTA), and various state agency regulations. We are an accredited member of the American Association of Tissue Banks and an
FDA-registered tissue establishment, which includes the packaging, processing, storage, labeling, and distribution of tissue
products regulated as medical devices and the storage and distribution of tissue products regulated solely as human cell and tissue
products. In addition, we maintain the appropriate tissue bank licenses based on state requirements.
Generally, before we can market a new medical device, marketing clearance from the FDA must be obtained through either a
premarket notification under Section 510(k) of the FDC Act or the approval of a de novo or PMA application. Most of our
products are FDA cleared through the 510(k) premarket notification process. The FDA typically grants a 510(k) clearance if the
applicant can establish that the device is substantially equivalent to a predicate device. It usually takes about three months from
the date of a 510(k) submission to obtain clearance, but it may take longer, particularly if a clinical trial is required. The FDA may
find that a 510(k) is not appropriate or that substantial equivalence has not been shown and, as a result, require a de novo or PMA
application.
PMA applications must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device,
typically including the results of human clinical trials, bench tests, and laboratory and animal studies. The PMA application must
also contain a complete description of the device and its components, and a detailed description of the methods, facilities, and
controls used to manufacture the device. In addition, the submission must include the proposed labeling and any training
materials. The PMA application process is expensive and generally takes significantly longer than the 510(k) process.
Additionally, the FDA may never approve the PMA application. As part of the PMA application review process, the FDA
generally will conduct an inspection of the manufacturer’s facilities to ensure compliance with applicable quality system
regulatory requirements, which include quality control testing, documentation control, and other quality assurance procedures. A
PMA can include post-approval conditions including, among other things, restrictions on labeling, promotion, sale and
distribution, data reporting (surveillance), or requirements to do additional clinical studies post-approval. Even after approval of a
PMA, the FDA must grant subsequent approvals for a new PMA or a PMA supplement to authorize certain modifications to the
device, its labeling, or its manufacturing process.
One or more clinical trials may be required to support a 510(k) application or a de novo submission and almost always are
required to support a PMA application. Clinical trials of unapproved or uncleared medical devices or devices being studied for
uses for which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA
requirements. If human clinical trials of a medical device are required and the device presents a significant risk, the sponsor of the
trial must file an investigational device exemption (IDE) application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal and/or laboratory testing. If the IDE application is
approved by the FDA and one or more institutional review boards (IRBs), human clinical trials may begin at a specific number of
institutional investigational sites with the specific number of patients approved by the FDA. If the device presents a non-
significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs
without separate approval from the FDA. Submission of an IDE does not give assurance that the FDA will approve the IDE. If an
IDE is approved, there can be no assurance the FDA will determine that the data derived from the trials support the safety and
effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved
by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its
scientific soundness, study indication, or the rights, safety or welfare of human subjects. During the trial, the sponsor must
comply with the FDA’s IDE requirements including, for example, investigator selection, trial monitoring, adverse event reporting,
and recordkeeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and trial
protocol, control the disposition of investigational devices, and comply with reporting and recordkeeping requirements. We, the
FDA and the IRB at each institution at which a clinical trial is being conducted may suspend a clinical trial at any time for various
reasons, including a belief that the subjects are being exposed to an unacceptable risk. We are currently conducting a few clinical
trials.
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply and we
continue to be subject to inspection by the FDA to determine our compliance with these requirements, as do our suppliers, contract
manufacturers, and contract testing laboratories. These requirements include, among others, the following:
(cid:120) Quality System regulations, which govern, among other things, how manufacturers design, test, manufacture,
(cid:120)
modify, label, exercise quality control over and document manufacturing of their products;
labeling and claims regulations, which require that promotion is truthful, not misleading, fairly balanced and provide
adequate directions for use and that all claims are substantiated, and also prohibit the promotion of products for
unapproved or “off-label” uses and impose other restrictions on labeling;
(cid:120) FDA guidance of off-label dissemination of information and responding to unsolicited requests for information;
(cid:120) Medical Device Reporting (MDR) regulation, which requires reporting to the FDA certain adverse experiences
associated with use of our products;
complaint handling regulations designed to track, monitor, and resolve complaints related to our products;
(cid:120)
(cid:120) Part 806 reporting of certain corrections, removals, enhancements, and recalls of products;
(cid:120)
complying with federal law and regulations requiring Unique Device Identifiers (UDI) on devices and also requiring
the submission of certain information about each device to FDA’s Global Unique Device Identification Database
(GUDID); and
in some cases, ongoing monitoring and tracking of our products’ performance and periodic reporting to the FDA of
such performance results.
(cid:120)
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The FDA has statutory authority to regulate allograft-based products, processing, and materials. The FDA and other international
regulatory agencies have been working to establish more comprehensive regulatory frameworks for allograft-based tissue-
containing products, which are principally derived from human cadaveric tissue. The framework developed by the FDA
establishes risk-based criteria for determining whether a particular human tissue-based product will be classified as human tissue,
a medical device, or a biologic drug requiring premarket clearance or approval. All tissue-based products are subject to extensive
FDA regulation, including establishment registration requirements, product listing requirements, good tissue practice requirements
for manufacturing, and screening requirements that ensure that diseases are not transmitted to tissue recipients. The FDA has also
proposed extensive additional requirements that address sub-contracted tissue services, tracking to the recipient/patient, and donor
records review. If a tissue-based product is considered human tissue, the FDA requirements focus on preventing the introduction,
transmission, and spread of communicable diseases to recipients. Neither clinical data nor review of safety and efficacy is
required before the tissue can be marketed. However, if the tissue is considered a medical device or a biologic drug, then FDA
clearance or approval is required.
The FDA and international regulatory authorities periodically inspect us and our third-party manufacturers for compliance with
applicable regulatory requirements. These requirements include labeling regulations, manufacturing regulations, quality system
regulations, regulations governing unapproved or off-label uses, and medical device regulations. Medical device regulations
require a manufacturer to report to the FDA serious adverse events or certain types of malfunctions involving its products.
We are subject to various U.S. federal and state laws concerning healthcare fraud and abuse, including anti-kickback and false
claims laws, and other matters. The U.S. federal Anti-Kickback Statute (and similar state laws) prohibits certain illegal
remuneration to physicians and other health care providers that may financially bias prescription decisions and result in an over-
utilization of goods and services reimbursed by the federal government. The U.S. federal False Claims Act (and similar state
laws) prohibits conduct on the part of a manufacturer which may cause or induce an inappropriate reimbursement for devices
reimbursed by the federal government. We are also subject to the U.S. federal Physician Payments Sunshine Act and various state
laws on reporting remunerative relationships with healthcare providers. These laws impact the kinds of financial arrangements we
may have with hospitals, surgeons or other potential purchasers of our products. They particularly impact how we structure our
sales offerings, including discount practices, customer support, education and training programs, physician consulting, research
grants and other arrangements. These laws are administered by, among others, the U.S. Department of Justice, the Office of
Inspector General of the Department of Health and Human Services and state attorneys general. Many of these agencies have
increased their enforcement activities with respect to medical device manufacturers in recent years. If our operations are found to
be in violation of these laws, we may be subject to penalties, including potentially significant criminal, civil and/or administrative
penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, contractual damages,
reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our
operations.
We are also subject to data privacy and security regulation by both the U.S. federal government and the states in which we conduct
our business. Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information
Technology for Economic and Clinical Health Act (HITECH), and their respective implementing regulations, imposes specified
requirements relating to the privacy, security and transmission of individually identifiable health information. Among other
things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as service providers of
covered entities that create, receive, maintain, or transmit protected health information in connection with providing a service for
or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties and gave state attorneys general
new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek
attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and
security of health information in certain circumstances, many of which differ from HIPAA and each other in significant ways and
may not have the same effect.
The FDA, in cooperation with U.S. Customs and Border Protection, administers controls over the import of medical devices into
the United States. The U.S. Customs and Border Protection imposes its own regulatory requirements on the import of our
products, including inspection and possible sanctions for noncompliance. We are also subject to foreign trade controls
administered by certain U.S. government agencies, including the Bureau of Industry and Security within the Commerce
Department and the Office of Foreign Assets Control within the Treasury Department.
International
Outside the United States, we are subject to government regulation in the countries in which we operate and sell our products. We
must comply with extensive regulations governing product approvals, product safety, quality, manufacturing, and reimbursement
processes in order to market our products in all major foreign markets. Although many of the regulations applicable to our
products in these countries are similar to those of the FDA, these regulations vary significantly from country to country and with
respect to the nature of the particular medical device. The time required to obtain foreign approvals to market our products may
be longer or shorter than the time required in the United States, and requirements for such approvals may differ from FDA
requirements.
To market our product devices in the member countries of the European Union, we are required to comply with the European
Medical Device Directives and to obtain CE mark certification. CE mark certification is the European symbol of adherence to
quality assurance standards and compliance with applicable European Medical Device Directives. Under the European Medical
Device Directives, all medical devices must qualify for CE marking. To obtain authorization to affix the CE mark to one of our
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products, a recognized European Notified Body must assess our quality systems and the product’s conformity to the requirements
of the European Medical Device Directives. We are subject to inspection by the Notified Bodies for compliance with these
requirements. We also are required to comply with regulations of other countries in which our products are sold, such as obtaining
Ministry of Health Labor and Welfare approval in Japan, Health Protection Branch approval in Canada and Therapeutic Goods
Administration approval in Australia. The new European MDR intended to replace the current Medical Device Directives came
into force May 2017. Manufacturers of approved medical devices will have until May 2020 to transition their devices to meet the
requirements of the MDR. After May 2020, manufacturers are offered a grace period which further extends the transition time for
some medical devices. We are currently reviewing our product portfolios, quality system and processes in an effort to meet the
new regulations within the timeframes we are afforded.
Our manufacturing facilities are subject to environmental health and safety laws and regulations, including those relating to the
use, registration, handling, storage, disposal, recycling and human exposure to hazardous materials and discharges of substances in
the air, water and land. For example, in France, requirements known as the Installations Classées pour la Protection de
l’Environnement regime provide for specific environmental standards related to industrial operations such as noise, water
treatment, air quality, and energy consumption. In Ireland, our manufacturing facilities are likewise subject to local environmental
regulations, such as related to water pollution and water quality, which are administered by the Environmental Protection Agency.
Our operations in countries outside the United States are subject to various other laws such as those regarding recordkeeping and
privacy; laws regarding sanctioned countries, entities and persons; customs and import-export, and laws regarding transactions in
foreign countries. We are also subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits covered entities and
their intermediaries from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining
or retaining business or other benefits, as well as similar anti-corruption laws of other countries, such as the UK Bribery Act.
Third-Party Reimbursement
Sales of our products depend in part on the availability of coverage and reimbursement from insurers/third-party payors. Third-
party payors may include governmental programs such as the U.S. Medicare and Medicaid programs, private insurance plans, and
workers’ compensation plans. These third-party payors may deny coverage or reimbursement for a product or procedure if they
determine that the product or procedure is investigational or is not medically necessary. Third-party payors also may place
limitations on coverage of products or procedures, such as the types of conditions for which a procedure will be covered, the types
of physicians who can perform specific types of procedures, or the care setting in which the procedure may be performed,
e.g., outpatient or in a hospital. Also, third-party payors are increasingly auditing and challenging the charges submitted for
medical products and services and are raising concerns related to upcoding, miscoding, and using inappropriate modifiers. Some
third-party payors may require prior-authorization, pre-determination, and/or prior approval to determine coverage for innovative
devices or procedures before they will reimburse healthcare providers for associated claims. Even though a new product may
have been approved or cleared for commercial sale by the FDA, demand may be limited if any reimbursement barriers are
imposed by governmental and/or private third-party payors. In the United States, there is no uniform coverage and payment
policy across all third-party payors; instead, coverage and payment can be quite different from payor to payor, and from one
region of the country to another. Outside of the US, coverage and payment also varies from country to country. Coverage also
depends on our ability to demonstrate the short-term and long-term clinical effectiveness, and in some cases the cost-effectiveness,
of our products. These supportive data are obtained from clinical trials and published literature. We conduct research and present
results at major scientific and medical meetings, and publish them in respected, peer-reviewed medical journals because we
believe data and evidence that can support coverage and payment are important to the successful commercialization of and market
access for our products.
The Centers for Medicare & Medicaid Services (CMS), the U.S. agency responsible for administering the Medicare program, sets
coverage and reimbursement policies for the Medicare program. CMS may adopt changes to Medicare coverage and payment
policies related to our products in the future through national coverage determinations and through annual regulations updating
Medicare payment policies. Local coverage determinations also can be adopted by CMS contractors. Congress also periodically
adopts legislation that impacts reimbursement under federal health programs.
Medicaid programs are funded by both U.S. federal and state governments. Specific reimbursement policies vary from state to
state and are subject to change from year to year. Medicaid enrollment and spending has increased in under the Affordable Care
Act.
Payment to physicians for procedures using our products also can be impacted by changes to Current Procedural Terminology
(CPT) codes, which are used to submit claims to payers for medical services. CPT codes are assigned, maintained and annually
updated by the American Medical Association and its CPT Editorial Board. The relative values assigned to CPT codes, which
represent resources used to perform a procedure, also can be revised. If the CPT codes that apply to procedures performed using
our products are changed, or the relative values are decreased, reimbursement for performances of these procedures may be
adversely affected.
We believe that the overall escalating cost of medical products and services for governments and private health insurers has led to,
and will continue to lead to, increased pressures on the healthcare and medical device industry to reduce the costs of products and
services. Third-party payors are developing increasingly-sophisticated methods of controlling healthcare costs through measures
including, but not limited to, bundled payments, episode- of-care risk-sharing methodologies, health technology assessments,
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coverage with evidence development requirements, payment linked to quality, pay-for-performance, comparative effectiveness
reviews, prospective reimbursement, capitation programs, group purchasing, redesign of benefit offerings, pre-approvals and
second opinion requirements, careful review of bills, encouragement of healthier lifestyles and other preventative services, and
exploration of more cost-effective methods of delivering healthcare. Adoption of these or other types of cost control measures
could potentially impact market access and pricing structures for our products, which in turn could impact our future sales. There
can be no assurance that third-party reimbursement will be available or adequate, or that current and future legislation, regulation
or reimbursement policies of third-party payors will not adversely affect the demand for our products or our ability to sell our
products on a profitable basis. If third-party payor reimbursement is unavailable or inadequate, it could have a material adverse
effect on our business, operating results, and financial condition.
Outside the United States, reimbursement and healthcare payment systems vary significantly by country, and many countries have
instituted price ceilings on specific product lines and procedures. We have received increased requests for clinical data to support
registration and reimbursement outside the United States. We have increasingly experienced local, product-specific
reimbursement law being applied as an overlay to medical device regulation, which has provided an additional level of clearance
requirement. Specifically, Australia requires that clinical data for clearance and reimbursement be in the form of prospective,
multi-center studies, a high bar not previously applied. In addition, in France, certain innovative devices (such as some of our
products made from pyrolytic carbon) have been identified as needing to provide clinical evidence to support a “mark-specific”
reimbursement. There can be no assurances that procedures using our products will be considered medically reasonable and
necessary for a specific indication, that our products will be considered cost-effective by third-party payors, that an adequate level
of reimbursement will be available, or that the third-party payors’ reimbursement policies will not adversely affect our ability to
sell our products profitably.
Environmental
Our operations and properties are subject to extensive U.S. federal, state, local, and foreign environmental protection and health
and safety laws and regulations. These laws and regulations govern, among other things, the generation, storage, handling, use,
and transportation of hazardous materials and the handling and disposal of hazardous waste generated at our facilities. Under such
laws and regulations, we are required to obtain permits from governmental authorities for some of our operations. If we violate or
fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. Under some
environmental laws and regulations, we could also be held responsible for all of the costs relating to any contamination at our past
or present facilities and at third-party waste disposal sites. We believe our costs of complying with current and future
environmental laws, regulations and permits and our liabilities arising from past or future releases of, or exposure to, hazardous
substances will not materially adversely affect our business, results of operations, or financial condition, although there can be no
assurances of this.
Seasonality
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 June, July, and August. This typically results in our selling,
general and administrative expenses and research and development expenses as a percentage of our net sales that are higher during
third quarter 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 College of Foot and Ankle
Surgeons (ACFAS) and the American Academy of Orthopaedic Surgeons (AAOS). During these three-day events, we display our
most recent and innovative products.
Backlog
The time period between the placement of an order for our products and shipment is generally short. As such, we do not consider
our backlog of firm orders to be material to an understanding of our business.
Employees
As of December 31, 2017, we had 2,675 employees. We believe that we have a good relationship with our employees.
Available Information
We are a public company with limited liability (naamloze vennootschap) organized under the laws of the Netherlands. We were
initially formed as a private company with limited liability (besloten vennootschap) in June 2006. Our principal executive offices
are located at Prins Bernhardplein 200, 1097 JB Amsterdam, the Netherlands. Our telephone number at this address is (+31) 20
521 4777. Our corporate website is located at www.wright.com. The information contained on our website or connected to our
website is not incorporated by reference into and should not be considered part of this report.
We make available, free of charge and through our Internet corporate website, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to any such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange Commission.
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Item 1A. Risk Factors.
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. In addition to the
other information set forth in this report, careful consideration should be taken of the factors described below, which could
materially adversely affect our business, financial condition or operating results. The risk factors described below may relate
solely to one or more of the legal entities contained in our corporate structure and may not necessarily apply to Wright Medical
Group N.V. or one or more of the other legal entities contained in our corporate structure.
Risks Related to Our Business
We have a history of operating losses and may never achieve or sustain profitability.
We have a history of operating losses and at December 31, 2017, we had an accumulated deficit of $1.4 billion. Our ability to
achieve profitability will be influenced by many factors, including, among others, the success of the Wright/Tornier merger; the
level and timing of future net sales and expenditures; development, commercialization and market acceptance of new products;
the results and scope of ongoing research and development projects; competing technologies and market developments; regulatory
requirements and delays; and pending litigation. As a result, we may continue to incur operating losses for the foreseeable future.
These losses will continue to have an adverse impact on our shareholders’ equity, and we may never achieve or sustain
profitability.
We may never realize the expected benefits from the Wright/Tornier merger, the divestiture of the OrthoRecon business, and our
strategy to become a profitable, high-growth, pure-play medical technology company, and command the market valuation
typically accorded such companies.
The Wright/Tornier merger and the divestiture of the OrthoRecon business are part of our strategy to transform ourselves into a
profitable, high-growth, pure-play medical technology company, and command the market valuation typically accorded such
companies. If we are unable to achieve our growth and profitability objectives due to competition, lack of acceptance of our
products, failure to gain regulatory approvals, or other risks as described in this section or other sections of this report, or due to
other events, we will not be successful in transforming our business and will not be accorded the market valuation we seek.
Moreover, the OrthoRecon business generated substantial revenue and cash flow, which we have not replaced. While over time
we expect to replace the OrthoRecon revenue and cash flow by accelerating higher margin revenue streams from extremities and
biologic products, especially in light of the Wright/Tornier merger, there is still a risk we will be unable to replace the revenue and
cash flow that the OrthoRecon business generated, or that the cost of such will be higher than expected. If we are unable to
achieve our profit and growth objectives, such failure will be exacerbated by the loss of revenue and cash flow generated by the
OrthoRecon business, and could result in a decline in our stock price.
We may never realize the expected benefits of our strategic business combinations or acquisition transactions.
In addition to developing new products and growing our business internally, we have sought to grow through business
combinations and acquisitions of complementary businesses, technologies and products. Examples include, our recent acquisition
of IMASCAP in December 2017, the Wright/Tornier merger in October 2015, legacy Wright’s acquisition of BioMimetic in early
2013, as well as its acquisitions of Biotech International in November 2013, Solana Surgical, LLC (Solana) in January 2014, and
OrthoPro, L.L.C. (OrthoPro) in February 2014, and legacy Tornier’s acquisition of OrthoHelix Surgical Designs, Inc. in 2012.
Future acquisitions may require equity or debt financing, the dilutive or other effects of which could negatively impact the
anticipated benefits of the transaction. Business combinations and acquiring new businesses involve a myriad of risks. Whenever
new businesses are combined or acquired, there is a risk we may fail to realize some or all of the anticipated benefits of the
transaction. This can occur if integration of the businesses proves to be more complicated than planned, resulting in failure to
realize operational synergies and/or failure to mitigate operational dis-synergies, diversion of management attention, and loss of
key personnel. It can also occur if the combined or acquired business fails to meet our net sales projections, exposes us to
unexpected liabilities, or if our pre-acquisition due diligence fails to uncover issues that negatively affect the value or cost
structure of the acquired enterprise. Although we carefully plan our business combinations and acquisitions, there can be no
assurances that these and other risks will not prevent us from realizing the expected benefits of these transactions. If we do not
achieve the anticipated benefits of an acquisition as rapidly as expected, or at all, investors or analysts may not perceive the same
benefits of the acquisition as we do. If these risks materialize, our ordinary share price could be materially adversely affected.
Any difficulties in the integration of acquired businesses or unexpected penalties or liabilities in connection with such businesses
could have a material adverse effect on our business, operating results and financial condition.
We anticipate significant future sales from our AUGMENT® Bone Graft products. If we are wrong, our future operating results,
cash flows, and prospects could be adversely affected.
We obtained FDA approval of AUGMENT® Bone Graft in the United States for ankle and/or hindfoot fusion indications during
the third quarter of 2015 and expect significant future sales from this product. AUGMENT ® Bone Graft, which is based on
recombinant human platelet-derived growth factor (rhPDGF-BB), a synthetic copy of one of the body’s principal healing agents,
is currently available for sale as an alternative to autograft in the United States for ankle and/or hindfoot fusion indications, in
Canada for foot and ankle fusion indications and in Australia and New Zealand for hindfoot and ankle fusion indications. We
anticipate significant sales of AUGMENT® Bone Graft. If these sales expectations are not met, our future operating results, cash
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flows and prospects could be adversely affected. We are currently pursuing FDA approval of AUGMENT® Injectable Bone Graft
(AUGMENT® Injectable), which combines rhPDGF-BB with an injectable bone matrix. We expect FDA approval of
AUGMENT® Injectable in 2018 and, if and when approved, anticipate significant sales of AUGMENT® Injectable. However,
there can be no assurance that AUGMENT® Injectable will receive FDA approval in 2018, if ever. Failure to obtain FDA approval
of AUGMENT® Injectable could adversely affect our future operating results, cash flows and prospects.
We acquired the AUGMENT® Bone Graft product line from BioMimetic in March 2013 and are subject to future milestone
payments to the holders of the contingent value rights issued in connection with that transaction. If, prior to March 1, 2019, sales
of AUGMENT® Bone Graft reach $40 million over 12 consecutive months, a cash payment would be required at $1.50 per share,
or $42 million. Further, if, prior to March 1, 2019, sales of AUGMENT® Bone Graft reach $70 million over 12 consecutive
months, an additional cash payment would be required at $1.50 per share, or $42 million. Therefore, even if we achieve
significant sales of AUGMENT® Bone Graft, cash proceeds from these sales will be offset in part by these milestone payment
obligations.
We may not realize the anticipated benefits of the 2017 additions to our direct U.S. lower extremities and biologics sales force
within the time frame we expect, or ever, which could harm our business and operating results.
During the first half of 2017, we added new U.S. lower extremities and biologics sales representatives to our core U.S. lower
extremities and core biologics businesses. Recruiting and training qualified personnel requires significant time, expense and
attention. While we continue to believe these additions will help grow our U.S. lower extremities and biologics sales, there are no
assurances that this initiative will ultimately yield favorable results for us in the near future or at all. Our business may be
adversely affected if our new U.S. lower extremities and biologics sales representatives are unable to achieve desired productivity
levels in a reasonable period.
We may not achieve our financial guidance or projected goals and objectives in the time periods that we anticipate or announce
publicly, which could have an adverse effect on our business and could cause the market price of our ordinary shares to decline.
We typically provide projected financial information, such as our anticipated annual net sales, adjusted earnings and adjusted
earnings before interest, taxes, depreciation, and amortization. These financial projections are based on management’s then
current expectations and typically do not contain any significant margin of error or cushion for any specific uncertainties or for the
uncertainties inherent in all financial forecasting. The failure to achieve our financial projections or the projections of analysts and
investors could have an adverse effect on our business, disappoint analysts and investors, and cause the market price of our
ordinary shares to decline. Our net sales performance has been outside of our guidance range in certain quarters, which negatively
impacted the market price of our ordinary shares, and could do so in the future should our results fall below our guidance range
and the expectations of analysts and investors.
We also set goals and objectives for, and make public statements regarding, the timing of certain accomplishments and milestones
regarding our business or operating results, such as the timing of financial objectives, new products, regulatory actions, pending
litigation, and anticipated distributor and sales representative transitions. The actual timing of these events can vary dramatically
due to a number of factors, including the risk factors described in this report. As a result, there can be no assurance that we will
succeed in achieving our projected goals and objectives in the time periods that we anticipate or announce publicly. The failure to
achieve such projected goals and objectives in the time periods that we anticipate or announce publicly could have an adverse
effect on our business, disappoint investors and analysts, and cause the market price of our ordinary shares to decline.
Our quarterly operating results are subject to substantial fluctuations, and you should not rely on them as an indication of our
future results.
Our quarterly operating results may vary significantly due to a combination of factors, many of which are beyond our control.
These factors include:
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demand for products, which historically has been lowest in the third quarter;
our ability to meet the demand for our products;
the level of competition;
the number, timing, and significance of new products and product introductions and enhancements by us and our
competitors;
our ability to develop, introduce, and market new and enhanced versions of our products on a timely basis;
the timing of or failure to obtain regulatory clearances or approvals for products;
changes in pricing policies by us and our competitors;
changes in the treatment practices of orthopaedic surgeons;
changes in distributor relationships and sales force size and composition;
the timing of material expense- or income-generating events and the related recognition of their associated financial
impact;
the number and mix of products sold in the quarter and the geographies in which they are sold;
the number of selling days;
the availability and cost of components and materials;
prevailing interest rates on our excess cash investments;
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fluctuations in foreign currency exchange rates;
the timing of significant orders and shipments;
ability to obtain reimbursement for our products and the timing of patients’ use of their calendar year medical
insurance deductibles;
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changes in FDA and foreign governmental regulatory policies, requirements, and enforcement practices;
changes in accounting standards, policies, estimates, and treatments;
restructuring, impairment, and other special charges, costs associated with our pending litigation and U.S.
governmental inquiries, and other charges;
variations in cost of sales due to the amount and timing of excess and obsolete inventory charges, commodity prices,
and manufacturing variances;
income tax fluctuations and changes in tax rules;
general economic factors; and
increases of interest rates, which can increase the cost of borrowings under our ABL Credit Agreement, and
generally affect the level of economic activity.
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We believe our quarterly sales and operating results may vary significantly in the future and period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. We
cannot assure you that our sales will increase or be sustained in future periods or that we will be profitable in any future period.
Any shortfalls in sales or earnings from levels expected by securities or orthopaedic industry analysts could have an immediate
and significant adverse effect on the trading price of our ordinary shares in any given period.
Although legacy Wright divested the OrthoRecon business, legacy Wright remains responsible, as between it and MicroPort, for
liability claims on OrthoRecon products sold prior to closing, and might still be sued on products sold after closing.
Although OrthoRecon product liability expenses are accounted for under our discontinued operations, the agreement between
WMG and MicroPort requires that legacy Wright, as between it and MicroPort, retain responsibility for product liability claims on
OrthoRecon products sold prior to closing, and for any resulting settlements, judgments, or other costs. Moreover, even though
MicroPort, as between it and legacy Wright, is responsible for liability claims on post-closing sales, there can be no assurance we
will not be named as a defendant in a lawsuit relating to such post-closing sales, or that MicroPort will have adequate resources to
exonerate legacy Wright from any resulting expenses or liabilities.
Product liability lawsuits could harm our business and adversely affect our operating results or results from discontinued
operations and financial condition if adverse outcomes exceed our product liability insurance coverage.
The manufacture and sale of medical devices expose us to significant risk of product liability claims. We are currently defendants
in a number of product liability matters, including those relating to the OrthoRecon business, which legacy Wright divested to
MicroPort in 2014. Legacy Wright remains responsible, as between it and MicroPort, for claims associated with products sold
before divesting the OrthoRecon business to MicroPort.
We have been named as a defendant, in some cases with multiple other defendants, in lawsuits in which it is alleged that as yet
unspecified defects in the design, manufacture, or labeling of certain metal-on-metal hip replacement products rendered the
products defective. The pre-trial management of certain of these claims has been consolidated in the federal court system, in the
United States District Court for the Northern District of Georgia under multi-district litigation and certain other claims by the
Judicial Counsel Coordinated Proceedings in state court in Los Angeles County, California. As of December 31, 2017, there were
approximately 800 lawsuits pending in the multi-district federal court proceeding and consolidated California state court
proceeding, and an additional 50 cases pending in various state courts. As of that date, we have also entered into approximately
700 so called “tolling agreements” with potential claimants who have not yet filed suit. As of December 31, 2017, there were also
approximately 50 non-U.S. lawsuits presently pending. We believe we have data that supports the efficacy and safety of the
metal-on-metal hip replacement systems, and have been vigorously defending these cases.
While continuing to dispute liability, on November 1, 2016, WMT entered into a Master Settlement Agreement (MSA) with
Court-appointed attorneys representing plaintiffs in the MDL and JCCP. Under the terms of the MSA, the parties agreed to settle
1,292 specifically identified claims associated with CONSERVE®, DYNASTY® and LINEAGE® products that meet the
eligibility requirements of the MSA and are either pending in the MDL or JCCP, or subject to court-approved tolling agreements
in the MDL or JCCP, for a settlement amount of $240 million. Due to apparent demand from additional claimants excluded from
settlement because of the 1,292 claim ceiling, but otherwise eligible for participation, on May 15, 2017, WMT agreed to settle an
additional 53 such claims, on terms substantially identical to the MSA settlement terms, for a maximum additional settlement
amount of $9.4 million.
On October 3, 2017, WMT entered into two settlement agreements (collectively, the Second Settlement Agreements) with the
Court-appointed attorneys representing plaintiffs in the MDL and JCCP. Under the terms of the Second Settlement Agreements,
the parties agreed to settle 629 specifically identified CONSERVE®, DYNASTY® and LINEAGE® claims that meet the
eligibility requirements of the Second Settlement Agreements and are either pending in the MDL or JCCP, or subject to court-
approved tolling agreements in the MDL or JCCP, for a maximum settlement amount of $89.75 million. The comprehensive
settlement amount is contingent on WMT’s recovery of new insurance proceeds totaling at least $35 million from applicable
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insurance carriers by March 30, 2018. To date, certain of the insurance carriers have contributed or agreed to contribute
$20 million of funds applicable against the contingency.
Claims for personal injury have also been made against us associated with fractures of legacy Wright's PROFEMUR® long
titanium modular neck product. We believe that the overall fracture rate for the product is low and the fractures appear, at least in
part, to relate to patient demographics, and have been vigorously defending these matters. While continuing to dispute liability,
we have been open to settling these claims in circumstances where we believe the settlement amount is reasonable relative to the
risk and expense of litigation.
Our material product liability litigation is discussed in Note 16 to our consolidated financial statements. These matters are subject
to many uncertainties and outcomes are not predictable. Regardless of the outcome of these matters, legal defenses are costly. We
have incurred and expect to continue to incur substantial legal expenses in connection with the defense of these matters. We could
incur significant liabilities associated with adverse outcomes that exceed our products liability insurance coverage, which could
adversely affect our operating results or results from discontinued operations and financial condition. The ultimate cost to us with
respect to product liability claims could be materially different than the amount of the current estimates and accruals and could
have a material adverse effect on our financial position, operating results or results from discontinued operations, and cash flows.
In the future, we may be subject to additional product liability claims. We also could experience a material design or
manufacturing failure in our products, a quality system failure, other safety issues, or heightened regulatory scrutiny that would
warrant a recall of some of our products. Product liability lawsuits and claims, safety alerts and product recalls, regardless of their
ultimate outcome, could result in decreased demand for our products, injury to our reputation, significant litigation and other
costs, substantial monetary awards to or costly settlements with patients, product recalls, loss of revenue, and the inability to
commercialize new products or product candidates, and otherwise have a material adverse effect on our business and reputation
and on our ability to attract and retain customers.
Our obligation to settle substantially all the remaining outstanding metal-on-metal hip claims may be cancelled if an insufficient
number of eligible claimants choose to participate, which would leave a substantial number of metal-on-metal hip claims
unresolved.
Each of the Second Settlement Agreements contains a 95% opt-in requirement meaning WMT may terminate either Settlement
Agreement prior to any settlement disbursement if claimants holding greater than 5% of eligible claims in Tranches 1 and 2,
collectively, or claimants holding greater than 5% of eligible claims in Tranche 3, elect to “opt-out” of the settlement. We believe
a participation rate of at least 95% is necessary in order to realize the benefits of the Second Settlement Agreements. On January
2, 2018, we received notification that 100% of the claimants in Tranches 1 and 2 opted in. We are currently reviewing proof of
claim documentation for these claimants and have until March 2, 2018 to confirm that the 95% opt-in requirement has been met.
Claimants in Tranche 3 have until April 2, 2018 to opt into the Second Settlement Agreements. If a 95% participation rate is not
achieved with respect to both Settlement Agreements there is a significant risk the Second Settlement Agreements will be
cancelled. If the Second Settlement Agreements are cancelled we will be required to continue defending the 629 claims that
would otherwise be settled, and the previously disclosed risks, uncertainties and contingencies associated with these claims will
remain unresolved.
Our obligation to settle substantially all the remaining outstanding metal-on-metal hip claims may be cancelled if the insurance
recovery contingency contained in the Second Settlement Agreements is not satisfied, which would leave a substantial number of
metal-on-metal hip claims unresolved.
Under the terms of the Second Settlement Agreements, the parties agreed to settle 629 specifically identified CONSERVE®,
DYNASTY® and LINEAGE® claims that meet the eligibility requirements of the Second Settlement Agreements and are either
pending in the MDL or JCCP, or subject to court-approved tolling agreements in the MDL or JCCP, for a maximum settlement
amount of $89.75 million. The comprehensive settlement amount is contingent on WMT’s receiving new insurance proceeds
totaling at least $35 million from applicable insurance carriers by March 30, 2018 and may be cancelled by us if this does not
occur. To date, certain of the insurance carriers have contributed or agreed to contribute $20 million of funds applicable against
the contingency. WMT may cancel its obligation to settle 541 claims included in Tranche 3 of the Second Settlement Agreements
if the foregoing insurance recovery contingency is not satisfied in its entirety. If the obligation to settle these Tranche 3 claims is
cancelled, we will be required to continue defending the Tranche 3 claims that would otherwise be settled in which case the
previously disclosed risks, uncertainties and contingencies associated with these claims will remain unresolved.
Our agreement with the first three insurance carriers to settle pending coverage litigation includes broad releases of coverage for
present and future claims of personal injury alleged to be caused by metal-on-metal hip components or the release of metal ions,
which could result in inadequate insurance coverage to defend and resolve these claims. In addition, our settlement with the three
carriers does not resolve previously disclosed disputes with the remaining carriers concerning the extent of coverage available for
metal-on-metal hip claims.
On October 28, 2016, our WMT and WMG subsidiaries entered into a Settlement Agreement with a subgroup of three insurance
carriers, Columbia Casualty Company (Columbia), St. Paul Surplus Lines Insurance Company and AXIS Surplus Lines Insurance
Company (Three Settling Insurers), pursuant to which the Three Settling Insurers paid $60 million (in addition to $10 million
previously paid) in full settlement of all potential liability of the Three Settling Insurers for metal ion and metal-on-metal hip
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claims, including but not limited to all claims in the MDL and the JCCP. As part of the settlement, the Three Settling Insurers
repurchased their policies in the five policy years beginning with the 2007-2008 policy year. Consequently, we have no further
coverage from the Three Settling Insurers for present or future metal-on-metal or metal ion claims falling in these five policy
periods, or any other period in which a specifically released claim is asserted.
Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur.
If the product liability claims brought against us involve uninsured liabilities or result in liabilities that exceed our insurance
coverage, our business, financial condition, and operating results could be materially and adversely affected. Further, such
product liability matters may negatively impact our ability to obtain insurance coverage or cost-effective insurance coverage in
future periods. We remain in litigation with certain insurance carriers other than the Three Settling Insurers, concerning the
amount of coverage available to satisfy potential liabilities associated with the metal-on-metal hip claims against us. An
unfavorable outcome in this litigation could have an adverse effect on our financial condition and results from discontinued
operations if we ultimately are subject to liabilities associated with these claims that exceed coverage amounts not in dispute.
In addition, on September 29, 2015, we received notice that the third insurance carrier in the tower for product liability insurance
coverage relating to personal injury claims associated with fractures of legacy Wright’s PROFEMUR® long titanium modular
neck product (Modular Neck Claims) has asserted that the terms and conditions identified in its reservation of rights will preclude
coverage for the Modular Neck Claims. We strongly dispute the carrier’s position and, in accordance with the dispute resolution
provisions of the policy, have initiated an arbitration proceeding in London, England seeking payment of these funds. We
continue to believe our contracts with our insurance carriers are enforceable for these claims; however, we would be responsible
for any amounts that our insurance carriers do not cover or for the amount by which ultimate losses exceed the amount of our
third-party insurance coverage. An unfavorable outcome in this matter could have an adverse effect on our financial condition and
results from discontinued operations if we ultimately are subject to liabilities associated with these claims that exceed coverage
amounts not in dispute.
MicroPort’s recall of certain sizes of its cobalt chrome modular neck devices due to alleged fractures could result in additional
product liability claims against us. Although we have contested these claims, adverse outcomes could harm our business and
adversely affect our results from discontinued operations and financial condition.
In August 2015, MicroPort announced the voluntary recall of certain sizes of its PROFEMUR® Long Cobalt Chrome Modular
Neck devices manufactured from June 15, 2009 to July 22, 2015. Because MicroPort did not acquire the OrthoRecon business
until January 2014, many of the recalled devices were sold by legacy Wright prior to the acquisition by MicroPort. Under the
asset purchase agreement with MicroPort, legacy Wright retained responsibility, as between it and MicroPort, for claims for
personal injury relating to sales of these products prior to the acquisition. We were not consulted by MicroPort in connection with
its recall, and we were aware of only twelve lawsuits alleging personal injury related to cobalt chrome neck fractures (four in the
United States and eight outside the United States) as of December 31, 2017. However, if the number of product liability claims
alleging personal injury from fractures of cobalt chrome modular necks we sold prior to the MicroPort transaction were to become
significant, this could have an adverse effect on our results from discontinued operations and financial condition.
A competitor’s recall of its modular hip systems, and the liability claims and adverse publicity which ensued, could generate
copycat claims against modular hip systems legacy Wright sold.
On July 6, 2012, Stryker Corporation announced the voluntary recall of its Rejuvenate Modular and ABG II modular neck hip
stems citing risks including the potential for fretting and/or corrosion at or about the modular neck junction. Although Stryker’s
recalled modular neck hip stems differ in design and material from the PROFEMUR® modular neck systems legacy Wright sold
before divestiture of the OrthoRecon business, we have previously noted the risk that Stryker’s recall and the resultant publicity
could negatively impact sales of modular neck systems of other manufacturers, including the PROFEMUR® system, and that
Stryker’s action has increased industry focus on the safety of cobalt chrome modular neck products. We have carefully monitored
the clinical performance of the PROFEMUR® modular neck hip system, which combine a cobalt chrome modular neck and a
titanium stem. With over 33,000 units sold since this version was introduced in 2009, and an extremely low complaint rate, we
remain confident in the safety and efficacy of this product. Nevertheless, in light of Stryker’s recall, the resulting product liability
claims to which it has been subject, and the general negative publicity surrounding “metal-on-metal” articulating surfaces (which
do not involve modular hip stems), there remains a risk that, even in the absence of clinical evidence, claims for personal injury
relating to sales of these products before divestiture of the OrthoRecon business could increase, which could have an adverse
effect on our financial condition and results from discontinued operations since legacy Wright retained responsibility, as between
it and MicroPort, for these claims.
Although we believe the use of corporate entities in our corporate structure will preclude creditors of any one particular entity
within our corporate structure from reaching the assets of the other entities within our corporate structure not liable for the
underlying claims of the one particular entity, there is a risk that, despite our corporate structure, creditors could be successful in
piercing the corporate veil and reaching the assets of such other entities, which could have an adverse effect on us and our
operating results, results from discontinued operations, and financial condition.
We maintain separate legal entities within our overall corporate structure. We believe our ring-fenced structure with separate legal
entities should preclude any corporate veil-piercing, alter ego, control person, or other similar claims by creditors of any one
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particular entity within our corporate structure from reaching the assets of the other entities within our corporate structure to
satisfy claims of the one particular entity. However, if a court were to disagree and allow a creditor to pierce the corporate veil
and reach the assets of such other entities within our corporate structure, despite such entities not being liable for the underlying
claims, it could have a material adverse effect on us and our operating results, results from discontinued operations, and financial
condition.
If we lose any existing or future intellectual property lawsuits, a court could require us to pay significant damages or prevent us
from selling our products.
The medical device industry is litigious with respect to patents and other intellectual property rights. Companies in the medical
device industry have used intellectual property litigation to gain a competitive advantage.
We are party to claims and lawsuits involving patents or other intellectual property. Legal proceedings, regardless of the outcome,
could drain our financial resources and divert the time and effort of our management. If we lose one of these proceedings, a court,
or a similar foreign governing body, could require us to pay significant damages to third parties, indemnify third parties from loss,
require us to seek licenses from third parties, pay ongoing royalties, redesign our products, or prevent us from manufacturing,
using or selling our products. In addition to being costly, protracted litigation to defend or prosecute our intellectual property
rights could result in our customers or potential customers deferring or limiting their purchase or use of the affected products until
resolution of the litigation.
If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our
competitors and be unable to operate our business profitably.
We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements, and contractual provisions to establish
our intellectual property rights and protect our products. These legal means, however, afford only limited protection and may not
completely protect our rights. In addition, we cannot be assured that any of our pending patent applications will issue. The U.S.
Patent and Trademark Office may deny or require a significant narrowing of the claims in its pending patent applications and the
patents issuing from such applications. Any patents issuing from the pending patent applications may not provide us with
significant commercial protection. We could incur substantial costs in proceedings before the U.S. Patent and Trademark Office.
These proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims
in issued patents. In addition, the laws of some of the countries in which our products are or may be sold may not protect our
intellectual property to the same extent as U.S. laws or at all. We also may be unable to protect our rights in trade secrets and
unpatented proprietary technology in these countries.
In addition, we hold licenses from third parties that are necessary to utilize certain technologies used in the design and
manufacturing of some of our products. The loss of such licenses would prevent us from manufacturing, marketing, and selling
these products, which could harm our business. If we, or the other parties from whom we would license intellectual property, fail
to obtain and maintain adequate patent or other intellectual property protection for intellectual property used in our products, or if
any protection is reduced or eliminated, others could use the intellectual property used in our products, resulting in harm to our
competitive business position.
We seek to protect our trade secrets, know-how, and other unpatented proprietary technology, in part, with confidentiality
agreements with our employees, independent distributors, and consultants. We cannot be assured, however, that the agreements
will not be breached, adequate remedies for any breach would be available, or our trade secrets, know-how, and other unpatented
proprietary technology will not otherwise become known to or independently developed by our competitors.
We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service
our indebtedness, and we may incur additional indebtedness in the future, which could adversely affect our business, financial
condition, and operating results.
We have a significant amount of indebtedness, including $395.0 million in aggregate principal with additional accrued interest
under our 2.25% cash convertible senior notes due 2021 (2021 Notes) and $587.5 million in aggregate principal with additional
accrued interest under WMG’s 2.00% cash convertible senior notes due 2020, which Wright Medical Group N.V. has guaranteed
(2020 Notes, together with the 2021 Notes, the Notes) as of December 31, 2017. In addition, in December 2016, we entered into a
credit, security and guaranty agreement (ABL Credit Agreement) with Midcap Financial Trust and the additional lenders from
time to time party thereto (ABL Lenders) which provides WMG and certain of our other wholly-owned U.S. subsidiaries with a
$150.0 million senior secured asset based line of credit, subject to the satisfaction of a borrowing base requirement, and which
may be increased by up to $100.0 million upon our request, subject to the consent of the ABL Lenders (ABL Facility). As of
December 31, 2017, $53.6 million in aggregate principal plus additional accrued interest was outstanding under the ABL Facility.
Our ability to make payments on, and to refinance, our indebtedness, including the Notes and amounts borrowed under the ABL
Facility, and our ability to fund planned capital expenditures, contractual cash obligations, research and development efforts,
working capital, acquisitions, and other general corporate purposes depends on our ability to generate cash in the future. This, to a
certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors, some of which are
beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an
amount sufficient to pay our indebtedness, including payments of principal upon conversion of outstanding Notes or on their
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respective maturity dates or in connection with a transaction involving us that constitutes a fundamental change under the
respective indenture governing the Notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our
indebtedness on or before the maturity dates thereof, sell assets, reduce or delay capital expenditures, seek to raise additional
capital, or take other similar actions. We may not be able to execute any of these actions on commercially reasonable terms or at
all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments
governing our indebtedness, and other factors, including market conditions. In addition, in the event of a default under the Notes
or under the ABL Facility, the holders and/or the trustee under the indentures governing the Notes or the lenders under the ABL
Facility may accelerate payment obligations under the Notes and/or the amounts borrowed under the ABL Facility, respectfully,
which could have a material adverse effect on our business, financial condition, and operating results. In addition, the Notes and
ABL Facility contain cross default provisions. Our inability to generate sufficient cash flow to satisfy our debt service obligations,
or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect,
which could be material, on our business, financial condition, and operating results.
In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have
other important consequences. For example, it could:
(cid:120) make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive
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conditions and adverse changes in government regulation;
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;
place us at a competitive disadvantage compared to our competitors who have less debt; and
limit our ability to borrow additional amounts for working capital, capital expenditures, contractual obligations,
research and development efforts, acquisitions, debt service requirements, execution of our business strategy, or
other purposes.
Any of these factors could materially and adversely affect our business, financial condition, and operating results. In addition, we
may incur additional indebtedness, and if we do, the risks related to our business and our ability to service our indebtedness would
increase.
In addition, under our Notes, we are required to offer to repurchase the Notes upon the occurrence of a fundamental change, which
could include, among other things, any acquisition of ours for consideration other than publicly traded securities. The repurchase
price must be paid in cash, and this obligation may have the effect of discouraging, delaying, or preventing an acquisition of ours
that would otherwise be beneficial to our security holders.
With respect to the 2021 Notes which have been issued by Wright Medical Group N.V., we are dependent on the cash flow of, and
dividends and distributions to us from, our subsidiaries in order to service our indebtedness under these Notes. Our subsidiaries
are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to any
indebtedness of ours or to make any funds available therefor, except for those subsidiaries that have guaranteed our obligations
under our outstanding indebtedness. The ability of our subsidiaries to pay any dividends and distributions will be subject to,
among other things, the terms of any debt instruments of our subsidiaries then in effect as well as among other things, the
availability of profits or funds and requirements of applicable laws, including surplus, solvency and other limits imposed on the
ability of companies to pay dividends. There can be no assurance that our subsidiaries will generate cash flow sufficient to pay
dividends or distributions to us that enable us to pay interest or principal on our existing indebtedness.
A failure to comply with the covenants and other provisions of the indentures governing the Notes or the ABL Credit Agreement
could result in events of default under such indentures or ABL Credit Agreement, especially in light of the cross default
provisions, which could require the immediate repayment of our outstanding indebtedness. If we are at any time unable to
generate sufficient cash flows from operations to service our indebtedness when payment is due, we may be required to attempt to
renegotiate the terms of the indentures, the ABL Credit Agreement and other agreements relating to the indebtedness, seek to
refinance all or a portion of the indebtedness, or obtain additional financing. There can be no assurance that we will be able to
successfully renegotiate such terms, that any such refinancing would be possible, or that any additional financing could be
obtained on terms that are favorable or acceptable to us.
The terms of the ABL Credit Agreement could limit our ability to conduct our business, take advantage of business opportunities
and respond to changing business, market, and economic conditions.
Our ABL Credit Agreement includes a number of significant financial and operating restrictions. For example, the ABL Credit
Agreement contains financial covenants that, among other things, require us to maintain minimum liquidity and achieve certain
revenue thresholds and contains provisions that restrict our ability, subject to specified exceptions, to, among other things:
(cid:120) make loans and investments, including acquisitions and transactions with affiliates;
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create liens or other encumbrances on our assets;
dispose of assets;
enter into contingent obligations;
engage in mergers or consolidations; and
pay dividends.
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Due to the terms of the ABL Credit Agreement, we may be unable to comply with these covenants, which could result in a default
under the ABL Facility. In addition, these provisions may limit our ability to conduct our business, take advantage of business
opportunities, and respond to changing business, market, and economic conditions. In addition, they may place us at a
competitive disadvantage relative to other companies that may be subject to fewer, if any, restrictions or may otherwise adversely
affect our business. Transactions that we may view as important opportunities, such as significant acquisitions, may be subject to
the consent of the ABL Lenders, which consent may be withheld or granted subject to conditions specified at the time that may
affect the attractiveness or viability of the transaction.
The ABL Facility involves additional risks that may adversely affect our liquidity, results of operations, and financial condition.
Availability under the ABL Credit Agreement is based on the amount of certain eligible receivables, eligible equipment, eligible
inventory and eligible surgical instrumentation less specified reserves as described in Note 9 to our consolidated financial
statements. As a result, our access to credit under the ABL Facility is potentially subject to fluctuations depending on the value of
the eligible assets in the borrowing base as of any valuation date. Our inability to borrow additional amounts under the ABL
Facility may adversely affect our liquidity, results of operations, and financial condition. In addition, all payments on our
accounts receivable are required under the ABL Credit Agreement to be directed to deposit accounts under the control of the ABL
Facility lenders for application to amounts outstanding under the ABL Facility. The lenders may exercise control over such
amounts when they are entitled to exercise default remedies, which may adversely affect our ability to fund our operations.
Our outstanding indebtedness under the ABL Facility bears interest at variable rates, which subjects us to interest rate risk and
could increase the cost of servicing our indebtedness. The impact of increases in interest rates could be more significant for us
than it would be for some other companies because of our indebtedness, thereby affecting our profitability. In the event of a
default under any of our debt instruments, the lenders under the ABL Facility may terminate their commitments to lend additional
money and declare all amounts outstanding thereunder to be immediately due and payable. Additionally, a default under the ABL
Facility could result in a cross-default under the Notes. While an event of default is continuing under the ABL Credit Agreement
the lenders thereunder may elect to increase the rates at which interest accrues. Subject to certain exceptions, amounts outstanding
under the ABL Facility are secured by a senior first priority security interest in substantially all existing and after-acquired assets
of our company and each borrower. Accordingly, under certain circumstances, the lenders under the ABL Facility could seek to
enforce security interests in our assets securing our indebtedness under the ABL Facility, including restricting our access to
collections on our accounts receivable. Any acceleration of amounts due under our ABL Credit Agreement or the exercise by the
lenders thereto of their rights under the security documents, would have a material adverse effect on us. In addition, the ABL
Facility is subject to market deterioration or other factors that could jeopardize the counterparty obligations of one or more of the
ABL Lenders, which could have an adverse effect on our business if we are not able to replace such ABL Facility or find other
sources of liquidity on acceptable terms.
Hedge and warrant transactions entered into in connection with the issuance of our Notes may affect the value of our ordinary
shares.
In connection with the issuance of the Notes, we entered into hedge transactions with various financial institutions with the
objective of reducing the potential dilutive effect of issuing our ordinary shares upon conversion of the Notes and the potential
cash outlay from the cash conversion of the Notes. We also entered into separate warrant transactions with the same financial
institutions.
In connection with the hedge and warrant transactions associated with the Notes, these financial institutions purchased our
ordinary shares in secondary market transactions and entered into various over-the-counter derivative transactions with respect to
our ordinary shares. These entities or their affiliates are likely to modify their hedge positions from time to time prior to
conversion or maturity of the Notes by purchasing and selling our ordinary shares, other of our securities, or other instruments
they may wish to use in connection with such hedging. Any of these transactions and activities could adversely affect the value of
our ordinary shares and, as a result, the number and value of the ordinary shares holders will receive upon conversion of the
Notes. In addition, subject to movement in the price of our ordinary shares, if the hedge transactions settle in our favor, we could
be exposed to credit risk related to the other party with respect to the payment we are owed from such other party. If any of the
participants in the hedge transactions is unwilling or unable to perform its obligations for any reason, we would not be able to
receive the benefit of such transaction. We cannot provide any assurances as to the financial stability or viability of any of the
participants in the hedge transactions.
Rating agencies may provide unsolicited ratings on the Notes or the ABL Credit Agreement that could reduce the market value or
liquidity of our ordinary shares.
We have not requested a rating of the Notes or the ABL Credit Agreement from any rating agency and we do not anticipate that
the Notes or the ABL Credit Agreement will be rated. However, if one or more rating agencies independently elects to rate the
Notes or the ABL Credit Agreement and assigns the Notes or the ABL Credit Agreement a rating lower than the rating expected by
investors, or reduces such rating in the future, the market price or liquidity of the Notes or the ABL Credit Agreement and our
ordinary shares could be harmed. Should a decline in the market price of the Notes, as compared to the price of our ordinary
shares occur, this may trigger the right of the holders of the Notes to convert such notes into cash and our ordinary shares, as
applicable.
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We likely will need additional financing to satisfy our anticipated future liquidity requirements or to make opportunistic
acquisitions, which financing may not be available on favorable terms at the time it is needed and which could reduce our
operational and strategic flexibility.
Although it is difficult for us to predict our future liquidity requirements, we believe that our cash and cash equivalents balance of
approximately $167.7 million, together with $96.4 million in availability under our ABL Facility as of December 31, 2017, will be
sufficient for the next 12 months to fund our working capital requirements and operations, permit anticipated capital expenditures
in 2018 of approximately $55 million, pay retained metal-on-metal product and other liabilities of the OrthoRecon business,
including without limitation amounts under the MSA and Second Settlement Agreements, net of insurance recoveries, fund
contingent consideration including without limitation the up to $42 million CVR milestone payment, and meet our other
anticipated contractual cash obligations in 2018. We may face liquidity challenges during the next few years in light of anticipated
significant contingent liabilities and financial obligations and commitments, including among others, acquisition-related
contingent consideration payments, payments related to our outstanding indebtedness, and costs and payments related to pending
litigation.
In the event that we would require additional working capital to fund future operations, we could seek to acquire that through
borrowings under the additional $100.0 million that may be available under the ABL Facility or additional equity or debt financing
arrangements which may or may not be available on favorable terms at such time. If we raise additional funds by issuing equity
securities, our shareholders may experience dilution. Additional debt financing, if available, may involve additional covenants
restricting our operations or our ability to incur additional debt, in addition to those under our existing indentures and the ABL
Credit Agreement. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us
or our shareholders. If we do not have, or are not able to obtain, sufficient funds, we may not be able to develop or enhance our
products, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated
customer requirements or we may have to delay development or commercialization of our products or scale back our operations.
If we lose one of our key suppliers, we may be unable to meet customer orders for our products in a timely manner or within our
budget, which could adversely affect our sales and operating results.
We rely on a limited number of suppliers for certain of the components and materials 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, one supplier for the
silicone elastomer used in some of our extremities products, and one supplier for our pyrocarbon products, and one supplier to
provide a key ingredient of AUGMENT® Bone Graft. The manufacture of our products is highly exacting and complex, and our
business could suffer if a sole source supply arrangement is unexpectedly terminated or interrupted, and we are unable to obtain an
acceptable new source of supply in a timely fashion.
In April 2016, we entered into a commercial supply agreement with FUJIFILM Diosynth Biotechnologies U.S.A., Inc. pursuant to
which Fujifilm agreed to manufacture and sell to us and we agreed to purchase recombinant human platelet-derived growth factor
(rhPDGF-BB) for use in AUGMENT® Bone Graft. The agreement reflects the culmination of a technology transfer from our
former supplier to Fujifilm which began in December 2013 when we were notified that our former supplier was exiting the
rhPDGF-BB business. Pursuant to our supply agreement with Fujifilm, commercial production of rhPDGF-BB is expected to
begin in 2019. Although we believe that our current supply of rhPDGF-BB from our former supplier should be sufficient to last
until after rhPDGF-BB becomes available under the new agreement, no assurance can be provided that it will be sufficient. In
addition, since Fujifilm has not previously manufactured rhPDGF-BB, its ability to do so and perform its obligations under the
agreement are not yet fully proven.
Our biologic product line includes a single sourced supplier for our GRAFTJACKET® family of soft tissue repair and graft
containment products. In addition, certain biologic products depend upon a single supplier as our source for DBM and cancellous
bone matrix (CBM), and any failure to obtain DBM and CBM from this source in a timely manner will deplete levels of on-hand
raw materials inventory and could interfere with our ability to process and distribute allograft products. We rely on a single not-
for-profit tissue bank to meet all of our DBM and CBM order requirements, a key component in the allograft products we
currently produce, market, and distribute. In addition, we rely on a single supplier of soft tissue graft for BIOTAPE® XM.
We cannot be sure that our supply of DBM, CBM and soft tissue graft for BIOTAPE® XM will continue to be available at current
levels or will be sufficient to meet our needs, or that future suppliers of DBM, CBM, and soft tissue graft for BIOTAPE® XM will
be free from FDA regulatory action impacting their sale of DBM, CBM and soft tissue graft for BIOTAPE® XM. As there are a
small number of suppliers, if we cannot continue to obtain DBM, CBM, and soft tissue graft for BIOTAPE® XM from our current
sources in volumes sufficient to meet our needs, we may not be able to locate replacement sources of DBM, CBM, and soft tissue
graft for BIOTAPE® XM on commercially reasonable terms, if at all. This could interrupt our business, which could adversely
affect our sales.
Suppliers of raw materials and components may decide, or be required, for reasons beyond our control to cease supplying raw
materials and components to us. FDA regulations may require additional testing of any raw materials or components from new
suppliers prior to our use of these materials or components, and in the case of a device with a PMA application, we may be
required to obtain prior FDA permission, either of which could delay or prevent our access to or use of such raw materials or
components.
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We incur significant expenditures of resources to maintain relatively high levels of instruments and we historically have had a high
level of inventory, which can adversely affect our operating results and reduce our cash flows.
The nature of our business requires us to maintain a certain level of instruments since in order to market effectively we often must
maintain and bring our customers instrument kits. In addition, we historically have maintained extra inventory in the form of
back-up products and products of different size in order to ensure that our customers have the right products when they need them.
This practice has resulted in us maintaining a relatively high level of inventory, which can adversely affect our operating results
and reduce our cash flows. In addition, to the extent that a substantial portion of our inventory becomes obsolete, it could have a
material adverse effect on our earnings and cash flows due to the resulting costs associated with inventory impairment charges and
costs required to replace such inventory.
From time to time, we may experience inventory shortages of some of our higher demand products, which could adversely affect
our net sales and operating results.
From time to time, internal or external supply constraints may create temporary shortages of certain of our higher demand
products. While these shortages are likely to be temporary and are usually resolved, no assurance can be provided that such
inventory shortages will not occur in the future, and if they occur, would not adversely affect our future net sales and operating
results.
If we fail to compete successfully in the future against our existing or potential competitors, our sales and operating results may
be negatively affected, and we may not achieve future growth.
The markets for our products are highly competitive and subject to rapid and profound technological change. Our success
depends, in part, on our ability to maintain a competitive position in the development of technologies and products for use by our
customers. Many of the companies developing or marketing competitive products enjoy several competitive advantages over us,
including greater financial and human resources for product development and sales and marketing; greater name recognition;
established relationships with surgeons, hospitals and third-party payors; broader product lines and the ability to offer rebates or
bundle products to offer greater discounts or incentives to gain a competitive advantage; and established sales and marketing and
distribution networks. Some of our competitors have indicated an increased focus on the extremities and biologics markets, which
are our primary strategic focus. Our competitors may develop and patent processes or products earlier than us, obtain regulatory
clearances or approvals for competing products more rapidly than us, develop more effective or less expensive products or
technologies that render our technology or products obsolete or non-competitive or acquire technologies and technology licenses
complementary to our products or advantageous to our business, which could adversely affect our business and operating results.
Not all of our sales and other personnel have non-compete agreements. We also compete with other organizations in recruiting
and retaining qualified scientific, sales, and management personnel. If our competitors are more successful than us in these
matters, we may be unable to compete successfully against our existing or future competitors. In addition, the orthopaedic
industry has been subject to increasing consolidation recently and over the last few years. Consolidation in our industry not
involving our company could result in existing competitors increasing their market share through business combinations and result
in stronger competitors, which could have a material adverse effect on our business, financial condition, and operating results. We
may be unable to compete successfully in an increasingly consolidated industry and cannot predict with certainty how industry
consolidation will affect our competitors or us.
If we are unable to continue to develop and market new products and technologies, we may experience a decrease in demand for
our products, or our products could become obsolete, and our business would suffer.
We are continually engaged in product development and improvement programs, and new products represent a significant
component of our sales growth rate. We may be unable to compete effectively with our competitors unless we can keep up with
existing or new products and technologies in the orthopaedic market. If we do not continue to introduce new products and
technologies, or if those products and technologies are not accepted, we may not be successful. Moreover, research and
development efforts may require a substantial investment of time and resources before we are adequately able to determine the
commercial viability of a new product, technology, material, or innovation. Demand for our products also could change in ways
we may not anticipate due to evolving customer needs, changing demographics, slow industry growth rates, declines in the
extremities and biologics market, the introduction of new products and technologies, evolving surgical philosophies, and evolving
industry standards, among others. Additionally, our competitors’ new products and technologies may beat our products to market,
may be more effective or less expensive than our products, or may render our products obsolete. Our new products and
technologies also could render our existing products obsolete and thus adversely affect sales of our existing products and lead to
increased expense for excess and obsolete inventory.
Our business plan relies on certain assumptions about the markets for our products, which, if incorrect, may adversely affect our
business and operating results.
We believe that the aging of the general population and increasingly active lifestyles will continue and that these trends will
increase the need for our extremities and biologics products. The projected demand for our products could materially differ from
actual demand if our assumptions regarding these trends and acceptance of our products by the medical community prove to be
incorrect or do not materialize, or if non-surgical treatments gain more widespread acceptance as a viable alternative to
orthopaedic implants.
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We are subject to substantial government regulation that could have a material adverse effect on our business.
The production and marketing of our products and our ongoing research and development, pre-clinical testing, and clinical trial
activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and
abroad. U.S. and foreign regulations govern the testing, marketing, registration and sale of medical devices, in addition to
regulating manufacturing practices, reporting, labeling, relationships with healthcare professionals, and recordkeeping procedures.
The regulatory process requires significant time, effort, and expense to bring our products to market, and we cannot be assured
that any of our products will be approved. Our failure to comply with applicable regulatory requirements could result in
governmental authorities:
imposing fines and penalties on us;
preventing us from manufacturing or selling our products;
bringing civil or criminal charges against us and our officers and employees;
delaying the introduction of our new products into the market;
recalling or seizing our products; or
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(cid:120) withdrawing or denying approvals or clearances for our products.
Even if regulatory approval or clearance of a product is granted, this could result in limitations on the uses for which the product
may be labeled and promoted. Further, for a marketed product, its manufacturer, such manufacturer’s suppliers, and
manufacturing facilities are subject to periodic review and inspection. Subsequent discovery of problems with a product,
manufacturer, or facility may result in restrictions on the product, manufacturer or facility, including withdrawal of the product
from the market or other enforcement actions. Our products can only be marketed in accordance with their approved labeling. If
we were to promote the use of our products in an “off-label” manner, we and our directors, officers and employees, would be
subject to civil and criminal sanctions.
We are subject to various U.S. federal and state and foreign laws concerning healthcare fraud and abuse, including false claims
laws, anti-kickback laws and physician self-referral laws. Violations of these laws can result in criminal and/or civil punishment,
including fines, imprisonment and, in the United States, exclusion from participation in government healthcare programs. Greater
scrutiny of marketing practices in our industry has resulted in numerous government investigations by various government
authorities and this industry-wide enforcement activity is expected to continue. If a governmental authority were to determine that
we do not comply with these laws and regulations, then we and our directors, officers and employees could be subject to criminal
and civil penalties, including exclusion from participation in U.S. federal healthcare reimbursement programs.
In order to market our devices in the member countries of the European Union, we are required to comply with the European
Medical Devices Directive and obtain CE mark certification. CE mark certification is the European symbol of adherence to
quality assurance standards and compliance with applicable European Medical Device Directives. Under the European Medical
Devices Directive, all medical devices including active implants must qualify for CE marking. Our failure to comply with the
European Medical Devices Directive could result in our loss of CE mark certification which would harm our business. In 2017,
the European Commission adopted the Medical Devices Regulation, which will replace the European Medical Devices Directive
and will be implemented starting in 2020. The Medical Devices Regulation will impose additional and/or more stringent approval
requirements on medical device manufacturers. These new rules and procedures may result in increased regulatory oversight of
any future devices that we may develop and may increase the costs, time and requirements that need to be met in order to maintain
or place devices in the member countries of the European Union. In addition, we anticipate having to expend significant time,
costs and resources to comply with the new European Medical Devices Directive.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other anticorruption laws could subject us to, among other
things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, operating
results and financial condition.
Our international operations expose us to legal and regulatory risks. These risks include the risk that our international distributors
could engage in conduct violative of U.S. or local laws, including the U.S. Foreign Corrupt Practices Act (FCPA). Our U.S.
operations, including those of our U.S. operating subsidiaries, are subject to the FCPA, which generally prohibits covered entities
and their intermediaries from engaging in bribery or making other prohibited payments to foreign officials for the purpose of
obtaining or retaining business or other benefits. In addition, the FCPA imposes accounting standards and requirements on
publicly-traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the
payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such
improper payments can be made. We also are subject to similar anti-corruption legislation implemented in Europe under the
Organization for Economic Co-operation and Development’s Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions. We either operate or plan to operate in a number of jurisdictions that pose a high risk of
potential violations of the FCPA and other anti-corruption laws, and we utilize a number of third-party sales representatives for
whose actions we could be held liable under the FCPA. We inform our personnel and third-party sales representatives of the
requirements of the FCPA and other anti-corruption laws, including, but not limited to their reporting requirements. We also have
developed and will continue to develop and implement systems for formalizing contracting processes, performing due diligence
on agents, and improving our recordkeeping and auditing practices regarding these regulations. However, there is no guarantee
that our employees, third-party sales representatives, or other agents have not or will not engage in conduct undetected by our
processes and for which we might be held responsible under the FCPA or other anti-corruption laws. Failure to comply with the
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FCPA or other anti-corruption laws could subject us to, among other things, penalties and legal expenses that could harm our
reputation and have a material adverse effect on our business, financial condition, and operating results.
If our employees, third-party sales representatives, or other agents are found to have engaged in such practices, we could suffer
severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures, including further changes or
enhancements to our procedures, policies and controls, as well as potential personnel changes and disciplinary actions. Recent
investigations of companies in our industry by the SEC and the U.S. Department of Justice have focused on potential FCPA
violations in connection with the sale of medical devices in foreign countries. We believe we have compliance systems, which
enable us to prevent these behaviors. However, if despite our efforts we are not successful in mitigating these risks, we could
become the target of enforcement actions by U.S. or local authorities. Any investigation of any potential violations of the FCPA or
other anti-corruption laws by U.S. or foreign authorities could have a material adverse effect on our business, operating results,
and financial condition.
Certain foreign companies, including some of our competitors, are not subject to prohibitions as strict as those under the FCPA or,
even if subjected to strict prohibitions, such prohibitions may be laxly enforced in practice. If our competitors engage in
corruption, extortion, bribery, pay-offs, theft, or other fraudulent practices, they may receive preferential treatment from personnel
of some companies, giving our competitors an advantage in securing business, or from government officials, who might give them
priority in obtaining new licenses, which would put us at a disadvantage.
Although our Corporate Integrity Agreement expired, if we were found to have breached it, we may be subject to criminal
prosecution and/or exclusion from U.S. federal healthcare programs.
On September 29, 2010, Wright Medical Technology, Inc. entered into a 12-month Deferred Prosecution Agreement with the
United States Attorney’s Office for the District of New Jersey (USAO). On September 15, 2011, WMT reached an agreement
with the USAO and the OIG-HHS under which WMT voluntarily agreed to extend the term of its the Deferred Prosecution
Agreement for 12 months. On October 4, 2012, the USAO issued a press release announcing that the amended Deferred
Prosecution Agreement expired on September 29, 2012, that the USAO had moved to dismiss the criminal complaint against
WMT because WMT had fully complied with the terms of the Deferred Prosecution Agreement, and that the court had ordered
dismissal of the complaint on October 4, 2012. On September 29, 2010, WMT also entered into a five-year Corporate Integrity
Agreement with the Office of the Inspector General of the United States Department of Health and Human Services. The CIA was
filed as Exhibit 10.2 to legacy Wright’s Current Report on Form 8-K filed on September 30, 2010. The CIA expired on September
29, 2015 and on January 27, 2016, we received notification from the OIG-HHS that the term of the CIA has concluded. While the
term of the CIA has concluded, our failure to continue to maintain compliance with U.S. healthcare laws, regulations and other
requirements in the future could expose us to significant liability, including, but not limited to, exclusion from federal healthcare
program participation, including Medicaid and Medicare, potential prosecution, civil and criminal fines or penalties, as well as
additional litigation cost and expense, which would have a material adverse effect on our financial condition, operating results and
cash flows.
Allegations of wrongdoing by the United States Department of Justice and Office of the Inspector General of the United States
Department of Health and Human Services and related publicity could lead to further governmental investigations or actions by
other third parties.
As a result of the allegations of wrongdoing made by the United States Attorney’s Office for the District of New Jersey and the
publicity surrounding legacy Wright’s settlement with the United States Department of Justice and OIG-HHS, and amendments to
the Deferred Prosecution Agreement and Corporate Integrity Agreement, other governmental agencies, including state authorities,
could conduct investigations or institute proceedings that are not precluded by the terms of settlements reflected in the Deferred
Prosecution Agreement and the CIA. In August 2012, legacy Wright received a subpoena from the United States Attorney’s
Office for the Western District of Tennessee requesting records and documentation relating to the PROFEMUR® series of hip
replacement devices for the period from January 1, 2000 to August 2, 2012. These interactions with the authorities could increase
our exposure to lawsuits by potential whistleblowers, including under the U.S. Federal False Claims Act, based on new theories or
allegations arising from the allegations made by the United States Attorney’s Office for the District of New Jersey. The costs of
defending or resolving any such investigations or proceedings could have a material adverse effect on our financial condition,
operating results and cash flows.
Modifications to our marketed devices may require FDA regulatory clearances or approvals or require us to cease marketing or
recall the modified devices until such additional clearances or approvals are obtained.
The FDA requires device manufacturers to make a determination of whether or not a modification to a cleared and
commercialized medical device requires a new approval or clearance. However, the FDA can review a manufacturer’s decision
not to submit for additional approvals or clearances. Any modification to an FDA approved or cleared device that would
significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new PMA or
510(k) clearance and could be considered misbranded if the modified device is commercialized and such additional approval or
clearance was not obtained. We cannot assure you that the FDA will agree with our decisions not to seek approvals or clearances
for particular device modifications or that we will be successful in obtaining additional approvals or 510(k) clearances for
modifications.
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We obtained 510(k) premarket clearance for certain devices we market or marketed in the United States. We have subsequently
modified some of those devices or device labeling since obtaining 510(k) clearance under the view that these modifications did
not significantly affect the safety or efficacy of the device, and did not require new approvals or clearances. If the FDA disagrees
with our decisions and requires us to obtain additional premarket approvals or 510(k) clearances for any modifications to our
products and we fail to obtain such approvals or clearances or fail to secure approvals or clearances in a timely manner, we may be
required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA
approval or clearance and we may be subject to significant regulatory fines or penalties.
The European Union and many of its world markets rely on the CE Mark as the path to market our products. Our loss of the CE
Mark would adversely affect our business and operating results.
In order to market our devices in the member countries of the European Union (EU), we are required to comply with the European
Medical Devices Directive, which requires our devices to meet specific quality program criteria and technical documentation
standards, before obtaining the CE Mark certification that is required to market our products in the EU. Additionally, the
European Medical Device Directive requires that many of our products that bear the CE-Mark be supported by post-market
clinical data. We are in the process of implementing systems and procedures to control this activity in order to comply with these
requirements, including establishing contractual relationships with the healthcare provider clinical study sites in accordance with
our internal compliance requirements. We intend to obtain the needed clinical data to support our marketed products, but there
can be no assurance that European regulators will accept the results. Our failure to comply with the European Medical Devices
Directive could result in our failure to obtain CE Mark certification for new devices or our loss of existing device CE mark
certification, either of which could have a material adverse effect on us and our business.
In March 2017, the European Commission adopted the Medical Devices Regulation, which will replace the European Medical
Devices Directive and will be implemented starting in 2020. The Medical Devices Regulation will impose additional and/or more
stringent approval requirements on medical device manufacturers. These new rules and procedures may result in increased
regulatory oversight of any future devices that we may develop and may increase the costs, time and requirements that need to be
met in order to maintain or place devices in the member countries of the European Union. Additionally, we anticipate having to
expend significant time, costs and resources to comply with the Medical Devices Regulation.
Our biologics business is subject to emerging governmental regulations that can significantly impact our business.
The FDA has statutory authority to regulate allograft-based products, processing, and materials. The FDA, European Union and
Health Canada have been working to establish more comprehensive regulatory frameworks for allograft-based, tissue-containing
products, which are principally derived from cadaveric tissue. The framework developed by the FDA establishes risk-based
criteria for determining whether a particular human tissue-based product will be classified as human tissue, a medical device, or
biologic drug requiring 510(k) clearance or PMA approval. All tissue-based products are subject to extensive FDA regulation,
including establishment of registration requirements, product listing requirements, good tissue practice requirements for
manufacturing, and screening requirements that ensure that diseases are not transmitted to tissue recipients. The FDA has also
proposed extensive additional requirements addressing sub-contracted tissue services, traceability to the recipient/patient, and
donor records review. If a tissue-based product is considered human tissue, FDA requirements focus on preventing the
introduction, transmission, and spread of communicable diseases to recipients. Clinical data or review of safety and efficacy is not
required before the tissue can be marketed. However, if tissue is considered a medical device or biologic drug, then FDA
clearance or approval is required.
Additionally, our biologics business involves the procurement and transplantation of allograft tissue, which is subject to federal
regulation under the NOTA. NOTA prohibits the sale of human organs, including bone and other human tissue, for valuable
consideration within the meaning of NOTA. NOTA permits the payment of reasonable expenses associated with the
transportation, processing, preservation, quality control, and storage of human tissue. We currently charge our customers for these
expenses. In the future, if NOTA is amended or reinterpreted, we may not be able to charge these expenses to our customers, and,
as a result, our business could be adversely affected.
Our principal allograft-based biologics offerings include ALLOMATRIX®, GRAFTJACKET® and IGNITE® products.
Our business could suffer if the medical community does not continue to accept allograft technology.
New allograft products, technologies, and enhancements may never achieve broad market acceptance due to numerous factors,
including:
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lack of clinical acceptance of allograft products and related technologies;
the introduction of competitive tissue repair treatment options that render allograft products and technologies too
expensive and obsolete;
lack of available third-party reimbursement;
the inability to train surgeons in the use of allograft products and technologies;
the risk of disease transmission; and
ethical concerns about the commercial aspects of harvesting cadaveric tissue.
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Market acceptance also will depend on the ability to demonstrate that existing and new allograft products and technologies are
attractive alternatives to existing tissue repair treatment options. To demonstrate this, we rely upon surgeon evaluations of the
clinical safety, efficacy, ease of use, reliability, and cost effectiveness of our tissue repair options and technologies.
Recommendations and endorsements by influential surgeons are important to the commercial success of allograft products and
technologies. In addition, several countries, notably Japan, prohibit the use of allografts. If allograft products and technologies
are not broadly accepted in the marketplace, we may not achieve a competitive position in the market.
We are dependent on various information technology systems, and failures of, interruptions to, or unauthorized tampering of those
systems could have a material adverse effect on our business.
We rely extensively on information technology systems to conduct business. These systems include, but are not limited to,
ordering and managing materials from suppliers, converting materials to finished products, shipping products to customers,
processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements,
and providing data security and other processes necessary to manage our business. Since the Wright/Tornier merger and through
the end of 2016, we have consolidated into one enterprise resource planning (ERP) system in three of our top five international
markets, and we plan to continue our ERP system roll-outs in the future. We may experience difficulties in our business
operations, or difficulties in operating our business under the ERP, either of which could disrupt our operations, including our
ability to timely ship and track product orders, project inventory requirements, manage our supply chain, and otherwise adequately
service our customers, and lead to increased costs and other difficulties. In the event we experience significant disruptions as a
result of the ERP implementation or otherwise, we may not be able to fix our systems in an efficient and timely manner.
Accordingly, such events may disrupt or reduce the efficiency of our entire operations and have a material adverse effect on our
operating results and cash flows.
In addition, if our systems are damaged or cease to function properly due to any number of causes, ranging from catastrophic
events to power outages to security breaches, and our business continuity plans do not effectively compensate timely, we may
suffer interruptions in our ability to manage operations. Increased global cybersecurity vulnerabilities, threats and more
sophisticated and targeted cybersecurity attacks pose a risk to the security of our systems and networks and those of our
customers, suppliers and third-party service providers, and the confidentiality, availability and integrity of any underlying
information and data. There can be no assurance that our protective measures will prevent or detect security breaches that could
have a significant impact on our business, reputation, operating results and financial condition. The failure of these systems to
operate or integrate effectively with other internal, customer, supplier or third-party service provider systems and to protect the
underlying information technology system and data integrity, including from cyber-attacks, intrusions or other breaches or
unauthorized access of these systems, or any failure by us to remediate any such attacks or breaches, may also result in damage to
our reputation or competitiveness, delays in product fulfillment and reduced efficiency of our operations, and could require
significant capital investments to remediate any such failure, problem or breach, all of which could adversely affect our business,
operating results and financial condition.
Our inability to maintain effective internal controls could cause investors to lose confidence in our reported financial information.
Effective internal controls are necessary for us to provide reliable and accurate financial reports and to effectively prevent fraud.
The integration of combined or acquired businesses is likely to result in our systems and controls becoming increasingly complex
and more difficult to manage. We devote significant resources and time to comply with the internal control over financial
reporting requirements of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that these measures will ensure that we
design, implement, and maintain adequate control over our financial processes and reporting in the future, especially in light of
anticipated changes in accounting standards and in the context of acquisitions of other businesses.
In the fourth quarter of 2016, we identified a material weakness in our internal control over financial reporting related to
information technology general controls. Although we remediated this material weakness during the third quarter of 2017 and
concluded that our internal control over financial reporting is effective and have taken additional measures to improve our control
environment, we cannot be certain that these measures will ensure that we continue to maintain adequate control over our
financial processes and reporting in the future. If we fail to maintain the adequacy of our internal control over financial reporting
or our disclosure controls and procedures, we could be subjected to regulatory scrutiny, civil or criminal penalties or shareholder
litigation, the defense of any of which could cause the diversion of management’s attention and resources, we could incur
significant legal and other expenses, and we could be required to pay damages to settle such actions if any such actions were not
resolved in our favor. Continued or future failure to maintain adequate internal control over financial reporting could also result in
financial statements that do not accurately reflect our financial condition or results of operations. There can be no assurance that
we will not identify any significant deficiencies or material weaknesses that will impair our ability to report our financial
condition and results of operations accurately or on a timely basis. Inferior internal controls could also cause investors to lose
confidence in our reported financial information, which could have a negative effect on the trading price of our ordinary shares
and our access to capital.
We operate in markets outside the United States that are subject to political, economic, and social instability and expose us to
additional risks.
Operations in countries outside of the United States accounted for approximately 26% of our net sales for our fiscal year ended
December 31, 2017. Our operations outside of the United States are accompanied by certain financial and other risks. We intend
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to continue to pursue growth opportunities in sales outside the United States, especially in emerging markets, which could expose
us to greater risks associated with international sales operations. Our international sales operations expose us and our
representatives, agents, and distributors to risks inherent in operating in foreign jurisdictions. These risks include:
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the imposition of additional U.S. and foreign governmental controls or regulations on orthopaedic implants and
biologic products;
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(cid:120) withdrawal from or revision to international trade agreements and the imposition or increases in import and export
licensing and other compliance requirements, customs duties and tariffs, import and export quotas and other trade
restrictions, license obligations, and other non-tariff barriers to trade;
unexpected changes in tariffs, trade barriers and regulatory requirements;
the imposition of U.S. or international sanctions against a country, company, person, or entity with whom we do
business that would restrict or prohibit continued business with that country, company, person, or entity;
economic instability, including currency risk between the U.S. dollar and foreign currencies, in our target markets;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
the imposition of restrictions on the activities of foreign agents, representatives, and distributors;
scrutiny of foreign tax authorities, which could result in significant fines, penalties, and additional taxes being
imposed upon us;
a shortage of high-quality international salespeople and distributors;
loss of any key personnel who possess proprietary knowledge or are otherwise important to our success in
international markets;
changes in third-party reimbursement policy that may require some of the patients who receive our products to
directly absorb medical costs or that may necessitate our reducing selling prices for our products;
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unexpected changes in foreign regulatory requirements;
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differing local product preferences and product requirements;
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changes in tariffs and other trade restrictions, particularly related to the exportation of our biologic products;
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Canada, South Korea, and Finland in the past;
difficulties in enforcing and defending intellectual property rights;
foreign currency exchange controls that might prevent us from repatriating cash earned in countries outside the
Netherlands;
complex data privacy requirements and labor relations laws; and
exposure to different legal and political standards due to our conducting business in approximately 50 countries.
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In addition, on June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union,
commonly referred to as “Brexit.” As a result of the referendum, negotiations will determine the future terms of the United
Kingdom’s relationship with the European Union, including the terms of trade between the United Kingdom and the European
Union. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on the movement of
goods and people between the United Kingdom and European Union countries and increased regulatory complexities, which could
affect our ability to sell our products in certain European Union countries. Brexit could adversely affect European and worldwide
economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including
volatility in the value of the British pound and Euro. In addition, other European countries may seek to conduct referenda with
respect to continuing membership with the European Union. We do not know to what extent these changes will impact our
business. Any of these effects of Brexit, and others that we cannot anticipate, could adversely affect our business, operations and
financial results.
Since we conduct operations through U.S. operating subsidiaries, not only are we subject to the laws of non-U.S. jurisdictions, but
we also are subject to U.S. laws governing our activities in foreign countries, such as the FCPA, as well as various import-export
laws, regulations, and embargoes. If our business activities were determined to violate these laws, regulations, or rules, we could
suffer serious consequences.
Healthcare regulation and reimbursement for medical devices vary significantly from country to country. This changing
environment could adversely affect our ability to sell our products in some jurisdictions.
The costs of complying with the requirements of the new EU-wide General Data Protection Regulation and the potential liability
associated with failure to do so could materially adversely affect our business and results of operations.
In May 2018, the new EU-wide General Data Protection Regulation (GDPR) will become effective, replacing the current data
protection laws of each EU member state. The GDPR will implement more stringent operational requirements for personal data,
including, for example, expanded disclosures about how personal information is to be used, limitations on retention of
information, increased requirements pertaining to health data and pseudonymised (i.e., key-coded) data, mandatory data breach
notification requirements and higher standards for data controllers to demonstrate that they have obtained valid consent for certain
data processing activities. Any failure or perceived failure by us to comply with privacy or security laws, policies, legal
obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally
identifiable information may result in governmental enforcement actions and investigations including by European Data
Protection Authorities, fines and penalties, litigation and/or adverse publicity, and could cause our customers to lose trust in us,
which could have an adverse effect on our reputation and business. Such failures could have a material adverse effect on our
operating results and financial condition. If the third parties we work with violate applicable laws, contractual obligations or
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suffer a security breach, such violations may also put us in breach of our obligations under privacy laws and regulations and/or
could in turn have a material adverse effect on our business. In addition, we anticipate having to expend significant time, costs
and resources to comply with the GDPR.
Worldwide economic instability could adversely affect our net sales, financial condition, or results of operations.
The health of the global economy, and the credit markets and the financial services industry in particular, affects our business and
operating results. While the health of the credit markets and the financial services industry appears to have stabilized, there is no
assurance that it will remain stable and there can be no assurance that there will not be deterioration in the global economy. If the
credit markets are not favorable, we may be unable to raise additional financing when needed or on favorable terms. Our
customers may experience financial difficulties or be unable to borrow money to fund their operations which may adversely
impact their ability to purchase our products or to pay for our products on a timely basis, if at all. In addition, any economic crisis
could also adversely impact our suppliers’ ability to provide us with materials and components, either of which may negatively
impact our business. As with our customers and vendors, these economic conditions make it more difficult for us to accurately
forecast and plan our future business activities. Further, there are concerns for the overall stability and suitability of the Euro as a
single currency, given the economic and political challenges facing individual Eurozone countries and Brexit. Continuing
deterioration in the creditworthiness of the Eurozone countries, the withdrawal of one or more member countries from the
European Union, or the failure of the Euro as a common European currency could adversely affect our sales, financial condition,
or operating results.
The collectability of our accounts receivable may be affected by general economic conditions.
Our liquidity is dependent on, among other things, the collection of our accounts receivable. Collections of our receivables may
be affected by general economic conditions. Although current economic conditions have not had a material adverse effect on our
ability to collect such receivables, we can make no assurances regarding future economic conditions or their effect on our ability
to collect our receivables, particularly from our international stocking distributors. In addition, some of our trade receivables are
with national health care systems in many countries (including, but not limited to, Greece, Ireland, Portugal, and Spain).
Repayment of these receivables is dependent upon the financial stability of the economies of those countries. In light of these
global economic fluctuations, we continue to monitor the creditworthiness of customers located outside of the United States.
Failure to receive payment of all or a significant portion of these receivables could adversely affect our operating results.
A significant portion of our product sales are made through independent distributors and sales agents who we do not control.
A significant portion of our product sales are made through independent sales representatives and distributors. Because the
independent distributor often controls the customer relationships within its territory (and, in certain countries outside the United
States, the regulatory relationship), there is a risk that if our relationship with the distributor ends, our relationship with the
customer will be lost (and, in certain countries outside the United States, that we could experience delays in amending or
transferring our product registrations). Also, because we do not control a distributor’s field sales agents, there is a risk we will be
unable to ensure that our sales processes, compliance, and other priorities will be consistently communicated and executed by the
distributor. If we fail to maintain relationships with our key distributors, or fail to ensure that our distributors adhere to our sales
processes, compliance, and other priorities, this could have an adverse effect on our operations. In the past, we have experienced
turnover within our independent distributor organization. This adversely affected our short-term financial results as we
transitioned to direct sales employees or new independent representatives. In addition, prior to the merger, legacy Tornier
transitioned to direct selling models in certain geographies and transitioned its U.S. sales channel towards focusing separately on
upper and lower extremities products. While we believe these transitions were managed effectively and position us to leverage
our sales force and broad product portfolio, there is a risk that these or future transitions could have a greater adverse effect on our
operations than we have previously experienced or anticipate. Further, the legacy independent distributors and sales agents of
Wright and Tornier may decide not to renew or may decide to seek to terminate, change and/or renegotiate their relationships with
us. A loss of a significant number of our distributors or agents could have a material adverse effect on our business and results of
operations.
In addition, our success is partially dependent upon our ability to retain and motivate our distributors, independent sales agencies,
and their representatives to sell our products in certain territories. They may not be successful in implementing our marketing
plans. Some of our distributors and independent sales agencies do not sell our products exclusively and may offer similar
products from other orthopaedic companies. Our distributors and independent sales agencies may terminate their contracts with
us, may devote insufficient sales efforts to our products, or may focus their sales efforts on other products that produce greater
commissions for them, which could have an adverse effect on our operations and operating results.
The results of our clinical trials may not support our product claims or may result in the discovery of adverse side effects.
Our ongoing research and development, pre-clinical testing, and clinical trial activities are subject to extensive regulation and
review by numerous governmental authorities both in the United States and abroad. We are currently conducting post-market
clinical studies of some of our products to gather additional information about these products’ safety, efficacy, or optimal use. In
the future we may conduct additional clinical trials to support approval of new products. Clinical studies must be conducted in
compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical trials may
ultimately be used to support market approval or clearance for these products or gather additional information about approved or
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cleared products. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our
product claims or that the FDA or foreign authorities will agree with our conclusions regarding them. Success in pre-clinical
testing and early clinical trials does not always ensure that later clinical trials will be successful, and we cannot be sure that the
later trials will replicate the results of prior trials and studies. The clinical trial process may fail to demonstrate that our products
are safe and effective for the proposed indicated uses, which could cause us to abandon a product and may delay development of
others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability
to commercialize our products and generate revenue. It is also possible that patients enrolled in clinical trials will experience
adverse side effects that are not currently part of the product’s profile.
If the third parties on which we rely to conduct our clinical trials and to assist us with clinical development do not perform as
contractually required or expected, we may not be able to obtain, or in some cases, maintain regulatory clearance or approval for
or commercialize our products.
We often must rely on third parties, such as contract research organizations, medical institutions, clinical investigators, and
contract laboratories to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or
regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the
data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements, or for other
reasons, our pre-clinical and clinical development activities or clinical trials may be extended, delayed, suspended, or terminated,
and we may not be able to obtain or, in some cases maintain, regulatory clearance or approval for, or successfully commercialize,
our products on a timely basis, if at all, and our business, operating results, and prospects may be adversely affected. Furthermore,
our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, property
insurance, and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage should increase
significantly in the future, our operating results could be materially adversely impacted. Likewise, if any of our current insurance
coverage should become unavailable to us or become economically impractical, we would be required to operate our business
without indemnity from commercial insurance providers.
Our inability to maintain contractual relationships with healthcare professionals could have a negative impact on our research
and development and medical education programs.
We maintain contractual relationships with respected surgeons and medical personnel in hospitals and universities who assist in
product research and development and in the training of surgeons on the safe and effective use of our products. We continue to
place emphasis on the development of proprietary products and product improvements to complement and expand our existing
product lines as well as providing high quality training on those products. If we are unable to maintain these relationships, our
ability to develop and market new and improved products and train on the use of those products could decrease, and our future
operating results could be unfavorably affected. In addition, it is possible that U.S. federal and state and international laws
requiring us to disclose payments or other transfers of value, such as free gifts or meals, to surgeons and other healthcare providers
could have a chilling effect on these relationships with individuals or entities that may, among other things, want to avoid public
scrutiny of their financial relationships with us.
If adequate levels of reimbursement from third-party payors for our products are not obtained, surgeons and patients may be
reluctant to use our products and our sales may decline.
In the United States, healthcare providers who purchase our products generally rely on third-party payors, principally U.S.
federally-funded Medicare, state-funded Medicaid, and private health insurance plans, to pay for all or a portion of the cost of
joint reconstructive procedures and products utilized in those procedures. We may be unable to sell our products on a profitable
basis if third-party payors deny coverage or reduce their current levels of reimbursement. Our sales depend largely on
governmental healthcare programs and private health insurers reimbursing patients’ medical expenses. Surgeons, hospitals, and
other healthcare providers may not purchase our products if they do not receive appropriate reimbursement from third-party
payors for procedures using our products. In light of healthcare reform measures, payors continue to review their coverage
policies for existing and new therapies and may deny coverage for treatments that include the use of our products.
In addition, some healthcare providers in the United States have adopted or are considering bundled payment methodologies
and/or managed care systems in which the providers contract to provide comprehensive healthcare for a fixed cost per person.
Healthcare providers may attempt to control costs by authorizing fewer elective surgical procedures, including joint reconstructive
surgeries, or by requiring the use of the least expensive implant available. Changes in reimbursement policies or healthcare cost
containment initiatives that limit or restrict reimbursement for our products may cause our sales to decline.
If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of
our products may decline. Outside of the United States, reimbursement systems vary significantly by country. Many foreign
markets have government-managed healthcare systems that govern reimbursement for medical devices and procedures. Canada,
and some European and Asian countries, in particular France, Japan, Taiwan, and South Korea, have tightened reimbursement
rates. Additionally, Brazil, China, Russia, and the United Kingdom have recently begun landmark reforms that will significantly
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alter their healthcare systems. Finally, some foreign reimbursement systems provide for limited payments in a given period and
therefore result in extended payment periods.
Our business could be significantly and adversely impacted by healthcare reform legislation.
Comprehensive healthcare reform legislation has significantly and adversely impacted our business. For example, the Affordable
Care Act imposed a 2.3% excise tax on U.S. sales of medical devices. Although the medical device excise tax is currently
suspended until December 31, 2019, it is possible that the suspension may be lifted or expire. The Affordable Care Act also
includes numerous provisions to limit Medicare spending through reductions in various fee schedule payments and by instituting
more sweeping payment reforms, such as bundled payments for episodes of care and the establishment of “accountable care
organizations” under which hospitals and physicians will be able to share savings that result from cost control efforts. Many of
these provisions will be implemented through the regulatory process, and policy details have not yet been finalized. In addition,
efforts to repeal and replace and/or modify all or parts of the Affordable Care Act continue. Any such repeal, replacement or
material modification of the Affordable Care Act could cause significant uncertainty in the U.S. healthcare market, could increase
our costs, decrease our sales or inhibit our ability to sell our products. Various healthcare reform proposals have also emerged at
the state level. We cannot predict with certainty the impact that these U.S. federal and state health reforms will have on us.
However, an expansion in government’s role in the U.S. healthcare industry may lower reimbursements for products, reduce
medical procedure volumes, and adversely affect our business and operating results, possibly materially.
There is an increasing trend for more criminal prosecutions and compliance enforcement activities for noncompliance with the
HIPAA as well as for data breaches involving protected health information (PHI). In the ordinary course of our business, we may
receive PHI. If we are unable to comply with HIPAA or experiences a data breach involving PHI, we could be subject to criminal
and civil sanctions.
If we cannot retain our key personnel, we may be unable to manage and operate our business successfully and meet our strategic
objectives.
Our future success depends, in part, upon our ability to retain and motivate key managerial, scientific, sales, and technical
personnel, as well as our ability to continue to attract and retain additional highly qualified personnel. We compete for such
personnel with other companies, academic institutions, governmental entities, and other organizations. There can be no assurance
that we will be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future. Key
personnel may depart because of difficulties with change or a desire not to remain with our company, especially in light of the
Wright/Tornier merger. Any unanticipated loss or interruption of services of our management team and our key personnel could
significantly reduce our ability to meet our strategic objectives because it may not be possible for us to find appropriate
replacement personnel should the need arise. Loss of key personnel or the inability to hire or retain qualified personnel in the
future could have a material adverse effect on our ability to operate successfully. Further, any inability on our part to enforce non-
compete or non-solicitation arrangements related to key personnel who have left the business could have a material adverse effect
on our business.
If a natural or man-made disaster adversely affects our manufacturing facilities or distribution channels, we could be unable to
manufacture or distribute our products for a substantial amount of time, and our sales could be disrupted.
We principally rely on four manufacturing facilities, two of which are in France, one of which is in Ireland and one of which is in
Arlington, Tennessee. The facilities and the manufacturing equipment we use to produce our products would be difficult to
replace and could require substantial lead-time to repair or replace. For example, the machinery associated with our
manufacturing of pyrocarbon in one of our French facilities is highly specialized and would take substantial lead-time and
resources to replace. We also maintain a facility in Bloomington, Minnesota, a facility in Arlington, Tennessee, and a warehouse
in Montbonnot, France, which contain large amounts of our inventory. Our facilities, warehouses, or distribution channels may be
affected by natural or man-made disasters. For example, in the event of a natural or man-made disaster at one of our warehouses,
we may lose substantial amounts of inventory that would be difficult to replace. Our manufacturing facility in Arlington,
Tennessee is located near the New Madrid fault line. In the event our facilities, warehouses, or distribution channels are affected
by a disaster, we would be forced to rely on, among others, third-party manufacturers and alternative warehouse space and
distribution channels, which may or may not be available, and our sales could decline. Although we believe we have adequate
disaster recovery plans in place and possess adequate insurance for damage to our property and the disruption of our business
from casualties, such plans and insurance may not cover such disasters or be sufficient to cover all of our potential losses and may
not continue to be available to us on acceptable terms or at all.
To the extent transition activities related to the sale of our Large Joints business divert management attention or manufacturing
resources from our ongoing operations, or add additional costs to these operations, this could have an adverse effect on our
business.
On October 21, 2016, we sold our Large Joints business to Corin. In connection with the transaction, we entered into a
transitional services agreement pursuant to which we agreed to provide Corin certain support services and a supply agreement
pursuant to which we agreed to manufacture certain of the large joints products for Corin, in each case for a transitional period of
time. Our post-closing obligations under the transitional services agreement and supply agreement require us to dedicate
substantial resources, personnel and manufacturing capacity that may add costs to our ongoing business, cause us to incur
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unanticipated costs and liabilities or result in manufacturing delays with respect to the production and delivery of our own
products.
Fluctuations in foreign currency exchange rates could result in declines in our reported net sales and earnings.
Because a majority of our international sales are denominated in local currencies and not in U.S. dollars, our reported net sales and
earnings are subject to fluctuations in foreign currency exchange rates. Foreign currency exchange rate fluctuations favorably
impacted our net sales by $0.9 million during 2017. Operating costs related to these sales are largely denominated in the same
respective currencies, thereby partially limiting our transaction risk exposure. However, cost of sales related to these sales are
primarily denominated in U.S. dollars; therefore, as the U.S. dollar strengthens, the gross margin associated with our sales
denominated in foreign currencies experience declines.
We have employed a derivative program using 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 Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC)
Section 815, Derivatives and Hedging Activities. Accordingly, the changes in the fair value and the settlement of the contracts are
recognized in the period incurred. Although we address currency risk management through regular operating and financing
activities, and more recently through hedging activities, these actions may not prove to be fully effective, and hedging activities
involve additional risks. We plan to discontinue our foreign currency forward contracts derivative program in 2018.
We may be unable to maintain competitive global cash management and a competitive effective corporate tax rate.
We cannot give any assurance as to our future effective tax rate because of, among other things, uncertainty regarding the tax
policies of the jurisdictions where we operate and uncertainty regarding the level of net income that we will earn in those
jurisdictions in the future. Our actual effective tax rate may vary from this expectation and that variance may be material.
Additionally, the tax laws of the Netherlands and other jurisdictions in which we operate could change in the future, and such
changes could cause a material change in our effective tax rate.
Our provision for income taxes will be based on certain estimates and assumptions made by management in consultation with our
tax and other advisors. Our group income tax rate will be affected by, among other factors, the amount of net income earned in
our various operating jurisdictions, the availability of benefits under tax treaties, the rates of taxes payable in respect of that
income, and withholding taxes on dividends paid from one jurisdiction to the next. We will enter into many transactions and
arrangements in the ordinary course of business in respect of which the tax treatment is not entirely certain. We will, therefore,
make estimates and judgments based on our knowledge and understanding of applicable tax laws and tax treaties, and the
application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. For example, certain
countries could seek to tax a greater share of income than will be provided for by us. The final outcome of any audits by taxation
authorities may differ from the estimates and assumptions we may use in determining our consolidated tax provisions and
accruals. This could result in a material adverse effect on our consolidated income tax provision, financial condition, and the net
income for the period in which such determinations are made.
In particular, dividends, distributions, and other intra-group payments from our U.S. affiliates to certain of our non-U.S.
subsidiaries may be subject to U.S. withholding tax at a rate of 30% unless the entity receiving such payments can demonstrate
that it qualifies for reduction or elimination of the U.S. withholding tax under the income tax treaty (if any) between the United
States and the jurisdiction in which the entity is organized or is a tax resident. In certain cases, treaty qualification may depend on
whether at least 50% of our ultimate beneficial owners are qualified residents of the United States or the treaty jurisdiction within
the meaning of the applicable treaty. There can be no assurance that we will satisfy this beneficial ownership requirement at the
time when such dividends, distributions, or other payments are made. Moreover, the U.S. Internal Revenue Service (IRS) may
challenge our determination that the beneficial ownership requirement is satisfied. If we do not satisfy the beneficial ownership
requirement, such dividends, distributions, or other payments may be subject to 30% U.S. withholding tax.
We may face potential limitations on the utilization of our U.S. tax attributes.
Following the acquisition of a U.S. corporation by a non-U.S. corporation, Section 7874 of the Internal Revenue Code of 1986, as
amended (Code) can limit the ability of the acquired U.S. corporation and its U.S. affiliates to utilize U.S. tax attributes such as net
operating losses and certain tax credits to offset U.S. taxable income resulting from certain transactions. Based on the limited
guidance available, we currently expect that this limitation likely will not apply to us and as a result, our U.S. affiliates likely will
not be limited by Section 7874 of the Code in their ability to utilize their U.S. tax attributes to offset their U.S. taxable income, if
any, resulting from certain specified taxable transactions. However, no assurances can be given in this regard. If, however,
Section 7874 of the Code were to apply to the Wright/Tornier merger and if our U.S. affiliates engage in transactions that would
generate U.S. taxable income subject to this limitation in the future, it could take us longer to use our net operating losses and tax
credits and, thus, we could pay U.S. federal income tax sooner than we otherwise would have. Additionally, if the limitation were
to apply and if we do not generate taxable income consistent with our expectations, it is possible that the limitation under
Section 7874 on the utilization of U.S. tax attributes could prevent our U.S. affiliates from fully utilizing their U.S. tax attributes
prior to their expiration.
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Future changes to U.S. tax laws could materially affect us, including our status as a non-U.S. corporation.
Under current U.S. federal income tax law, a corporation generally will be considered to be resident for U.S. federal income tax
purposes in its place of organization or incorporation. Accordingly, under the generally applicable U.S. federal income tax rules,
we, as a Netherlands incorporated entity, would be classified as a non-U.S. corporation (and, therefore, not a U.S. tax resident).
Section 7874 of Code, however, contains specific rules (more fully discussed below) that can cause a non-U.S. corporation to be
treated as a U.S. corporation for U.S. federal income tax purposes. These rules are complex and there is little or no guidance as to
their application.
We currently expect we should continue to be treated as a foreign corporation for U.S. federal tax purposes, however, it is possible
that the IRS could disagree with that position and assert that Section 7874 applies to treat us as a U.S. corporation. In addition,
new statutory or regulatory provisions under Section 7874 or otherwise could be enacted or promulgated that adversely affect our
status as a foreign corporation for U.S. federal tax purposes, and any such provisions could have retroactive application. If we
were to be treated as a U.S. corporation for federal tax purposes, we would be subject to U.S. corporate income tax on our
worldwide income, and the income of our foreign subsidiaries would be subject to U.S. tax when repatriated or when deemed
recognized under the U.S. tax rules for controlled foreign subsidiaries. In such a case, we would be subject to substantially greater
U.S. tax liability than currently contemplated. Moreover, in such a case, a non-U.S. shareholder of our company would be subject
to U.S. withholding tax on the gross amount of any dividends paid by us to such shareholder.
Any such U.S. corporate income or withholding tax could be imposed in addition to, rather than in lieu of, any Dutch corporate
income tax or withholding tax that may apply.
Our tax position may be adversely affected by changes in tax law relating to multinational corporations, or by increased scrutiny
by tax authorities.
Recent legislative proposals have aimed to expand the scope of U.S. corporate tax residence, limit the ability of foreign-owned
corporations to deduct interest expense, and make other changes in the taxation of multinational corporations.
On December 22, 2017, the United States enacted the statute commonly called the “Tax Cuts and Jobs Act” (the 2017 Tax Act)
which enacts a broad range of changes to the Code. The 2017 Tax Act, among other things, includes changes to U.S. federal tax
rates, imposes significant additional limitations on the deductibility of U.S. interest and U.S. net operating losses, allows for the
expensing of certain U.S. capital expenditures, and puts into effect a number of changes impacting applicable operations outside
of the United States including, but not limited to, the imposition of a onetime tax on accumulated post-1986 deferred foreign
income that has not previously been subject to tax, and modifications to the treatment of certain intercompany transactions. Our
net deferred tax assets and liabilities were revalued to the extent applicable at the newly enacted U.S. corporate rate, and the
impact was recognized as a tax benefit in 2017, the year of enactment. We are continuing to evaluate the overall impact of this tax
legislation on our U.S. and non-U.S. operations. There can be no assurance that changes in tax laws or regulations, both within
the U.S. and the other jurisdictions in which we operate, will not materially and adversely affect our effective tax rate, tax
payments, financial condition and results of operations. Similarly, changes in tax laws and regulations that impact our customers
and counterparties or the economy generally may also impact our financial condition and results of operations.
Additionally, the U.S. Congress, government agencies in jurisdictions where we and our affiliates do business, and the
Organization for Economic Co-operation and Development have focused on issues related to the taxation of multinational
corporations. One example is in the area of “base erosion and profit shifting,” where payments are made between affiliates from a
jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the United States, the Netherlands
and other countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such
changes could impact the expected tax treatment for us and adversely affect our financial results.
Moreover, U.S. and non-U.S. tax authorities may carefully scrutinize companies involved or recently involved in cross-border
business combinations, such as us, which may lead such authorities to assert that we owe additional taxes.
Our exposure to several tax jurisdictions may have an adverse effect on us and this may increase the aggregate tax burden on us
and our shareholders.
We are subject to a large number of different tax laws and regulations in the various jurisdictions in which we operate. These laws
and regulations are often complex and are subject to varying interpretations. The combined effect of the application of tax laws,
including the application or disapplication of tax treaties of one or more of these jurisdictions and their interpretation by the
relevant tax authorities could, under certain circumstances, produce contradictory results. We often rely on generally available
interpretations of tax laws and regulations to determine the existence, scope, and level of our liability to tax in the jurisdictions in
which we operate. In addition, we take positions in the course of our business with respect to various tax matters, including the
compliance with the arm’s length principles in respect of transactions with related parties, the tax deductibility of interest and
other costs, and the amount of depreciation or write-down of our assets that we can recognize for tax purposes. There is no
assurance that the tax authorities in the relevant jurisdictions will agree with such interpretation of these laws and regulations or
with the positions taken by us. If such tax positions are challenged by relevant tax authorities, the imposition of additional taxes
could increase our effective tax rate and cost of operations.
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Furthermore, because we are incorporated under Dutch law, we are treated for Dutch corporate income tax purposes as a resident
of the Netherlands. Based on our management structure and the current tax laws of the United States and the Netherlands, as well
as applicable income tax treaties and current interpretations thereof, we expect to remain a tax resident solely of the Netherlands.
If we were to be treated as a tax resident of a jurisdiction other than or in addition to the Netherlands, we could be subject to
corporate income tax in that other jurisdiction, and could be required to withhold tax on any dividends paid by us to our
shareholders under the applicable laws of that jurisdiction.
Risks Related to the Wright/Tornier Merger
We may be unable to continue to successfully integrate our operations or realize the anticipated cost savings, net sales and other
potential benefits of the Wright/Tornier merger in a timely manner or at all. As a result, the value of our ordinary shares may be
adversely affected.
The ultimate future success of the merger will depend, in part, on our ability to achieve the anticipated cost savings, net sales, and
other potential benefits of the merger. Achieving the anticipated potential benefits of the merger will depend in part upon whether
we are able to complete the integration of our operations in an efficient and effective manner and whether we are able to
effectively coordinate sales and marketing efforts to communicate our capabilities and coordinate our sales organizations to sell
our combined products. While we have successfully completed a substantial number of integration activities since the merger, the
remainder of our integration activities may not be completed smoothly or successfully. The necessity of coordinating
geographically separated organizations, systems, and facilities and addressing possible differences in business backgrounds,
corporate cultures, and management philosophies may increase the difficulties of integration. We operate numerous systems,
including those involving management information, purchasing, accounting and finance, sales, billing, payroll, employee benefits,
and regulatory compliance. We still have numerous systems which remain to be integrated, including those involving
management information, purchasing, accounting and finance, sales, billing, payroll, employee benefits, and regulatory
compliance. We may still have inconsistencies in standards, controls, procedures or policies that could affect our ability to
maintain relationships with customers and employees or to achieve the anticipated benefits of the merger. We may also have
difficulty in completing the integration of our commercial organizations, including in particular distribution and sales
representative arrangements. The integration of certain operations requires the dedication of significant management resources,
which may temporarily distract management’s attention from our day-to-day business. Employee uncertainty and lack of focus
during the integration process may also disrupt our business. Any inability of our management to integrate successfully our
operations or to do so within a longer time frame than expected could have a material adverse effect on our business and operating
results. The integration also may result in material unanticipated problems, expenses, liabilities, competitive responses, and loss
of customer relationships. Even if the operations of our businesses are integrated successfully, we may not be able to realize the
full benefits of the merger, including the anticipated operating and cost synergies, sales and growth opportunities or long-term
strategic benefits of the merger, within the expected timeframe or at all. In addition, we expect to continue to incur significant
integration and restructuring expenses to realize synergies. However, many of the expenses that remain to be incurred are, by their
nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to
achieve from elimination of duplicative expenses and the realization of economies of scale and cost savings. Although we expect
that the realization of efficiencies related to the integration of the businesses may offset incremental transaction, merger-related,
and restructuring costs over time, we cannot give any assurance that this net benefit will be achieved in the near term, or at all. An
inability to realize the full extent of, or any of, the anticipated benefits of the merger, as well as any delays encountered in the
integration process, could have an adverse effect on our business and operating results, which may affect the value of our ordinary
shares.
Our future success also will depend in part upon our ability to retain key employees. Competition for qualified personnel can be
very intense. In addition, key employees may depart because of issues relating to the uncertainty or difficulty of integration or a
desire not to remain with our company. Accordingly, no assurances can be given that we will retain key employees.
Our future results will suffer if we do not effectively manage our expanded operations as a result of the merger.
As a result of the merger, the size of our business has increased significantly. Our future success depends, in part, upon our ability
to manage this expanded business, which may pose substantial challenges for our management, including challenges related to the
management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that
we will be successful or that we will realize the expected operating efficiencies, cost savings, and other benefits currently
anticipated from the merger.
Our Corporate Compliance Program requires the cooperation of many individuals, involves substantial investment and diverts a
significant amount of time and resources from our other business activities. Our failure to maintain an effective Corporate
Compliance Program could adversely affect our business, reputation and financial results.
We are committed to a robust Corporate Compliance Program. Accordingly, we have devoted and continue to devote a significant
amount of time and resources from our financial, human resources, and compliance personnel, as well as all of our employees in
furtherance of this strategic objective. Since the completion of the Wright/Tornier merger, we have spent considerable resources
integrating the Corporate Compliance Programs of legacy Wright and legacy Tornier and believe we have substantially completed
this integration. No assurance can be provided, however, that we have successfully completed this process. Our failure to
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maintain an effective Corporate Compliance Program could result in significant legal and regulatory problems and could adversely
affect our business, reputation and financial results.
We have a significant amount of goodwill and other intangible assets on our consolidated balance sheet as a result of the
Wright/Tornier merger and our other acquisitions, which if these acquired businesses do not perform as anticipated, may be
subject to future impairment, which would harm our operating results.
In connection with the accounting for the merger, we recorded a significant amount of goodwill and other intangible assets within
each of our reporting units. As of December 31, 2017, we had $933.7 million in goodwill and $231.0 million in intangible assets.
Under US GAAP, we must assess, at least annually and potentially more frequently, whether the value of our goodwill and other
indefinite-lived intangible assets have been impaired. Amortizing intangible assets will be assessed for impairment in the event of
an impairment indicator. A decrease in the long-term economic outlook and future cash flows of the legacy Tornier business, our
recently acquired IMASCAP business or other businesses and technologies that we have acquired could significantly impact asset
values and potentially result in the impairment of intangible assets, including goodwill. If the operating performance of the legacy
Tornier business, IMASCAP business or other businesses and technologies that we have acquired significantly decreases,
competing or alternative technologies emerge, or if market conditions or future cash flow estimates decline, we could be required,
under current US GAAP, to record a non-cash charge to operating earnings for the amount of the impairment. Any write-off of a
material portion of our unamortized intangible assets would negatively affect our results of operations.
Risks Relating to Our Ordinary Shares and Jurisdiction of Incorporation
The trading volume and prices of our ordinary shares have been and may continue to be volatile, which could result in substantial
losses to our shareholders.
The trading volume and prices of our ordinary shares have been and may continue to be volatile and could fluctuate widely due to
factors beyond our control. During 2017, the sale price of our ordinary shares ranged from $22.14 to $31.53. Such volatility may
be the result of broad market and industry factors. In addition to market and industry factors, the price and trading volume for our
ordinary shares may be highly volatile for factors specific to our own operations, including the following:
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variations in our net sales, earnings, and cash flow, and in particular variations that deviate from our projected
financial information;
announcements of new investments, acquisitions, strategic partnerships, or joint ventures;
announcements of new products by us or our competitors;
announcements of divestitures or discontinuance of products or assets;
changes in financial estimates by securities analysts;
additions or departures of key personnel;
sales of our equity securities by our significant shareholders or management or sales of additional equity securities
by our company;
pending and potential litigation or regulatory investigations; and
fluctuations in market prices for our products.
Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares trade.
Shareholders of a public company sometimes bring securities class action suits against the company following periods of
instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant
amount of our management’s attention and other resources from our business and operations, which could harm our operating
results and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could
harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we
may be required to pay significant damages, which could have a material adverse effect on our financial condition and operating
results.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their
recommendations regarding our ordinary shares, the market price for our ordinary shares and trading volume could decline.
The trading market for our ordinary shares is influenced by research or reports that industry or securities analysts publish about us
or our business. If one or more analysts who cover us downgrade our ordinary shares, the market price for our ordinary shares
likely would decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ordinary shares to
decline.
The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.
Sales of substantial amounts of our ordinary shares in the public market, or the perception that these sales could occur, could
adversely affect the market price of our ordinary shares and could materially impair our ability to raise capital through equity
offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any
other shareholder or the availability of these securities for future sale will have on the market price of our ordinary shares.
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Rights of a holder of ordinary shares are governed by Dutch law and differ from the rights of shareholders under U.S. law.
We are a Dutch public company with limited liability (naamloze vennootschap). Our corporate affairs and the rights of holders of
our ordinary shares are governed by Dutch law and our articles of association. The rights of our shareholders and the
responsibilities of members of our board of directors may be different from those in companies governed by the laws of U.S.
jurisdictions. For example, Dutch law does not provide for a shareholder derivative action. In addition, in the performance of its
duties, our board of directors is required by Dutch law to act in the interest of our company and our affiliated business, and to
consider the interests of our company, our shareholders, our employees, and other stakeholders, in all cases with reasonableness
and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, interests of our
shareholders.
As a result of different shareholder voting requirements in the Netherlands relative to laws in effect in certain states in the United
States, we may have less flexibility with respect to the issuance of our ordinary shares than companies organized in the United
States.
Currently, our articles of association provide for an authorized share capital consisting of one class of shares, being 320,000,000
ordinary shares, each with a nominal value of €0.03. Under Dutch law, our authorized share capital can be increased by an
amendment to our articles of association. Our articles of association can be amended upon a proposal of our board of directors by
the general meeting of shareholders, which resolution can be adopted with a simple majority in a meeting where at least one-third
of the outstanding shares are represented. New ordinary shares may be issued pursuant to a resolution of shareholders, or pursuant
to such resolution of the board of directors if designated thereto by shareholders. Additionally, subject to specified exceptions,
Dutch law grants statutory preemption rights to existing shareholders where shares are being issued for cash consideration. The
right of our shareholders to subscribe for ordinary shares pursuant to preemptive rights may be limited or restricted by our
shareholders and our shareholders may delegate such authority to the board of directors. Such designations of authority to our
board of directors may remain in effect for up to five years and may be renewed for additional periods of up to five years.
Currently our board of directors is authorized to issue shares up to a maximum amount equal to the authorized but unissued share
capital and to limit or exclude pre-emptive rights in respect of such issue of shares until June 18, 2020, without further shareholder
approval. We intend to submit these authorizations to a vote of our shareholders at the annual general meeting that will take place
in June 2018. We cannot provide any assurance that these authorizations will always be approved on a timely basis, especially
since our shareholders did not approve these two authorizations the last time we submitted them to a vote of our shareholders at
our annual general meeting in June 2016. The failure to renew these authorizations on a timely basis could limit our ability to
issue equity and thereby adversely affect our ability to run our business and the holders of our securities.
U.S. investors may not be able to enforce judgments obtained in U.S. courts in civil and commercial matters against us or
members of our board of directors or officers.
We are organized under the laws of the Netherlands, and, as such, the rights of holders of our ordinary shares and the civil liability
of our directors are governed by the laws of the Netherlands and our articles of association. The rights of shareholders under the
laws of the Netherlands may differ from the rights of shareholders of companies incorporated in other jurisdictions. A substantial
portion of our assets are located outside of the United States. As a result, it may be difficult for investors to effect service of
process within the United States on us, or to enforce outside the United States any judgments obtained against us in U.S. courts in
any action, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. In addition, it may
be difficult for investors to enforce rights predicated upon the U.S. federal securities laws in original actions brought in courts in
jurisdictions located outside the United States (including the Netherlands) or enforce claims for punitive damages.
The United States and the Netherlands currently do not have a treaty providing for the reciprocal recognition and enforcement of
judgments in civil and commercial matters (other than arbitral awards). A final judgment for the payment of money rendered by
any federal or state court in the United States which is enforceable in the United States, whether or not predicated solely upon U.S.
federal securities laws, would not automatically be recognized or enforceable in the Netherlands. In order to obtain a judgment
which is enforceable in the Netherlands, the party in whose favor a final and conclusive judgment of the U.S. court has been
rendered will be required to file its claim with a court of competent jurisdiction in the Netherlands. Such party may submit to a
Dutch court the final judgment rendered by the U.S. court. If and to the extent that the Dutch court finds that the jurisdiction of
the U.S. court has been based on grounds which are internationally acceptable and that proper legal procedures have been
observed, the Dutch court will generally tend to give binding effect to the judgment of the court of the United States without
substantive re-examination or re-litigation on the merits of the subject matter, unless the judgment contravenes principles of public
policy of the Netherlands.
There can be no assurance that U.S. investors will be able to enforce against us or members of our board of directors or officers
who are residents of the Netherlands or countries other than the United States any judgments obtained in U.S. courts in civil and
commercial matters, including judgments under the U.S. federal securities laws.
We do not anticipate paying dividends on our ordinary shares.
Our articles of association prescribe that profits or reserves appearing from our annual accounts adopted by the general meeting
shall be at the disposal of the general meeting. We have power to make distributions to shareholders and other persons entitled to
45
distributable profits only to the extent that our equity exceeds the sum of the paid and called-up portion of the ordinary share
capital and the reserves that must be maintained in accordance with provisions of Dutch law or our articles of association. The
profits must first be used to set up and maintain reserves required by law and must then be set off against certain financial losses.
We may not make any distribution of profits on ordinary shares that we hold. The general meeting, whether or not upon the
proposal of our board of directors, determines whether and how much of the remaining profit they will reserve and the manner and
date of such distribution. All calculations to determine the amounts available for dividends will be based on our Dutch annual
accounts, which may be different from our consolidated financial statements prepared in accordance with US GAAP. Beginning
with our fiscal year 2015, our statutory accounts have been prepared and we expect will continue to be prepared under
International Financial Reporting Standards and are deposited with the Trade Register in Amsterdam, the Netherlands. We have
not previously declared or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our
ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and
expand our business.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Our global corporate headquarters are located in Amsterdam, the Netherlands.
Our U.S. headquarters are located in Memphis, Tennessee, where we conduct our principal executive, research and development,
sales and marketing, and administrative activities. We lease 121,000 square feet of office space with research and development
facilities under a lease agreement that is renewable through 2034. Our upper extremities sales and marketing, U.S. distribution
and customer service operations are located in a 54,000 square foot facility in Bloomington, Minnesota that we lease through
2022. Our U.S. manufacturing operations consist of a 100,000 square foot state of the art manufacturing facility in Arlington,
Tennessee. We lease the manufacturing facility from the Industrial Development Board of the Town of Arlington. At this facility,
we produce primarily orthopaedic implants and some related surgical instrumentation while utilizing lean manufacturing
philosophies. We also lease a 31,000 square foot manufacturing and warehousing facility in Franklin, Tennessee and conduct
research and development operations in an 11,000 square foot leased facility in Warsaw, Indiana.
Outside the United States, our primary manufacturing facilities are located in Montbonnot and Grenoble, France; and Macroom,
Ireland. In the 92,000 square foot Montbonnot campus, we conduct manufacturing and manufacturing support activities, sales and
marketing, research and development, quality and regulatory assurance, distribution and administrative functions. In our 73,000
square foot Macroom facility, we conduct manufacturing operations and manufacturing support, such as purchasing, engineering,
and quality assurance functions. Our pyrocarbon manufacturing is performed at our 9,900 square foot facility in Grenoble,
France. In addition, we maintain subsidiary sales offices and distribution warehouses in various countries, including France,
Germany, Italy, the Netherlands, Denmark, Switzerland, United Kingdom, Belgium, Japan, Canada, and Australia. We have
international research and development facilities in Costa Rica and Plouzané, France.
We believe that our facilities are adequate and suitable for their use.
Below is a summary of our material facilities. All of our reportable segments use the facilities described below except as
otherwise indicated:
City
Memphis
Arlington
Bloomington
Warsaw
Franklin
Montbonnot
Montbonnot
Grenoble
Plouzané
Macroom
State/Country
Tennessee,
United States
Tennessee,
United States
Minnesota,
United States
Indiana,
United States
Tennessee,
United States
France
France
France
France
Ireland
Owned or
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned 51%
Leased
Leased
Leased
46
Occupancy
Offices/R&D
U.S. Lower Extremities & Biologics
Manufacturing/Warehouse/Distribution
U.S. Upper Extremities
Offices/Warehouse/Distribution
Offices/R&D
U.S. Lower Extremities & Biologics
Offices/Manufacturing/Warehouse
International Extremities & Biologics;
U.S. Upper Extremities
Warehouse/Distribution/Offices/R&D
International Extremities & Biologics;
U.S. Upper Extremities
Manufacturing/Offices
International Extremities & Biologics
Manufacturing/Offices/R&D
Upper Extremities
R&D
International Extremities & Biologics
Manufacturing/Offices
Item 3.
Legal Proceedings.
From time to time, we or our subsidiaries are subject to various pending or threatened legal actions and proceedings, including
those that arise in the ordinary course of our business and some of which involve claims for damages that are substantial in
amount. These actions and proceedings may relate to, among other things, product liability, intellectual property, distributor,
commercial, and other matters. These actions and proceedings could result in losses, including damages, fines, or penalties, any
of which could be substantial, as well as criminal charges. Although such matters are inherently unpredictable, and negative
outcomes or verdicts can occur, we believe we have significant defenses in all of them, are vigorously defending all of them, and
do not believe any of them will have a material adverse effect on our financial position. However, we could incur judgments, pay
settlements, or revise our expectations regarding the outcome of any matter. Such developments, if any, could have a material
adverse effect on our results of operations in the period in which applicable amounts are accrued, or on our cash flows in the
period in which amounts are paid.
The actions and proceedings described in this section relate primarily to WMT, an indirect subsidiary of Wright Medical Group
N.V., and are not necessarily applicable to Wright Medical Group N.V. or other affiliated entities. Maintaining separate legal
entities within our corporate structure is intended to ring-fence liabilities. We believe our ring-fenced structure should preclude
corporate veil-piercing efforts against entities whose assets are not associated with particular claims.
Governmental Inquiries
On August 3, 2012, we received a subpoena from the United States Attorney's Office for the Western District of Tennessee
requesting records and documentation relating to our PROFEMUR® series of hip replacement devices. The subpoena covers the
period from January 1, 2000 to August 2, 2012. We will continue to cooperate as required.
Patent Litigation
On September 23, 2014, Spineology filed a patent infringement lawsuit, Case No. 0:14-cv-03767, in the U.S. District Court in
Minnesota, alleging that our X-REAM® bone reamer infringes U.S. Patent No. RE42,757 entitled “EXPANDABLE REAMER.”
In January 2015, on the deadline for service of its complaint, Spineology dismissed its complaint without prejudice and filed a
new, identical complaint. We filed an answer to the new complaint with the Court on April 27, 2015. The Court conducted a
Markman hearing on March 23, 2016. Mediation was held on August 11, 2016, but no agreement could be reached. The Court
issued a Markman decision on August 30, 2016, in which it found all asserted product claims invalid as indefinite under applicable
patent laws and construed several additional claim terms. The parties completed fact and expert discovery with respect to the
remaining asserted method claims. We filed a motion for summary judgment of non-infringement of the remaining asserted patent
claims and motions to exclude testimony from Spineology’s technical and damages experts. Spineology filed a motion for
summary judgment of infringement. On July 25, 2017, the Court granted our motion for summary judgment of non-infringement;
denied Spineology’s motion for summary judgment of infringement; and denied all remaining motions as moot. The Court also
entered judgment in our favor and against Spineology on all issues. Spineology has appealed the judgment to the U.S. Court of
Appeals for the Federal Circuit and we are awaiting oral argument.
On September 13, 2016, we filed a civil action, Case No. 2:16-cv-02737-JPM, against Spineology in the U.S. District Court for
the Western District of Tennessee alleging breach of contract, breach of implied warranty against infringement, and seeking a
judicial declaration of indemnification from Spineology for patent infringement claims brought against us stemming from our sale
and/or use of certain expandable reamers purchased from Spineology. Spineology filed a motion to dismiss on October 17, 2016,
but withdrew the motion on November 28, 2016. On December 7, 2016, Spineology filed an answer to our complaint and
counterclaims, including counterclaims relating to a 2004 non-disclosure agreement between Spineology and WMT. On
December 28, 2016, we filed a motion to dismiss the counterclaims relating to that 2004 agreement. On January 4, 2017,
Spineology filed a motion for summary judgment on certain claims set forth in our complaint. We opposed that motion. On
January 27, 2017, we filed a motion for summary judgment on certain issues pertaining to our indemnification claims. Spineology
opposed that motion. On July 7, 2017, the Court extended the deadlines for completing discovery until after it ruled on those
pending motions. On August 29, 2017, the Court ruled on the motions to dismiss and for summary judgment. In view of that
decision, on September 22, 2017, the parties stipulated, and the Court entered, a judgment that effectively ended the case in a
draw. We have appealed the judgment as to our claims against Spineology to the U.S. Court of Appeals for the Sixth Circuit.
Spineology did not appeal the District Court’s dismissal of its contract counterclaim.
In August 2016, we received a letter from KFx Medical Corporation (KFx) alleging that a legacy Tornier product (the Piton Suture
Anchor) infringes one of KFx’s patents when used in knotless double row tissue fixation techniques. On April 6, 2017, we filed a
declaratory judgment action in the United States District Court for the District of Delaware, Case No. 1:17-cv-00384, seeking
declaratory judgment of non-infringement and invalidity of United States Patent Nos. 7,585,311; 8,100,942; and 8,109,969. On
April 20, 2017, KFx filed an answer and counterclaim alleging we indirectly infringe, and induce infringement of, these patents.
In February 2018, the parties reached a settlement in principle intended to fully resolve the matter and end the litigation. Under
the settlement in principle, we will pay KFx a one-time lump sum license fee in an immaterial amount in exchange for a fully paid
global license to the relevant KFx patents. The settlement is presently being documented.
47
Product Liability
We have been named as a defendant, in some cases with multiple other defendants, in lawsuits in which it is alleged that as yet
unspecified defects in the design, manufacture, or labeling of certain metal-on-metal hip replacement products rendered the
products defective. The lawsuits generally employ similar allegations that use of the products resulted in excessive metal ions and
particulate in the patients into whom the devices were implanted, in most cases resulting in revision surgery (collectively, the
CONSERVE® Claims) and generally seek monetary damages. We anticipate that additional lawsuits relating to metal-on-metal
hip replacement products may be brought.
Because of the similar nature of the allegations made by several plaintiffs whose cases were pending in federal courts, upon
motion of one plaintiff, Danny L. James, Sr., the United States Judicial Panel on Multidistrict Litigation on February 8, 2012
transferred certain actions pending in the federal court system related to metal-on-metal hip replacement products to the United
States District Court for the Northern District of Georgia, for consolidated pre-trial management of the cases before a single
United States District Court Judge (the MDL). The consolidated matter is known as In re: Wright Medical Technology, Inc.
Conserve Hip Implant Products Liability Litigation.
Certain plaintiffs have elected to file their lawsuits in state courts in California. In doing so, most of those plaintiffs have named a
surgeon involved in the design of the allegedly defective products as a defendant in the actions, along with his personal
corporation. Pursuant to contractual obligations, we have agreed to indemnify and defend the surgeon in those actions. Similar to
the MDL proceeding in federal court, because the lawsuits generally employ similar allegations, certain of those pending lawsuits
in California were consolidated for pre-trial handling on May 14, 2012 pursuant to procedures of California State Judicial Counsel
Coordinated Proceedings (the JCCP). The consolidated matter is known as In re: Wright Hip Systems Cases, Judicial Counsel
Coordination Proceeding No. 4710.
Every metal-on-metal hip case involves fundamental issues of law, science and medicine that often are uncertain, that continue to
evolve, and which present contested facts and issues that can differ significantly from case to case. Such contested facts and
issues include medical causation, individual patient characteristics, surgery specific factors, statutes of limitation, and the
existence of actual, provable injury.
The first bellwether trial in the MDL commenced on November 9, 2015 in Atlanta, Georgia. On November 24, 2015, the jury
returned a verdict in favor of the plaintiff and awarded the plaintiff $1 million in compensatory damages and $10 million in
punitive damages. We believe there were significant trial irregularities and vigorously contested the trial result. On December 28,
2015, we filed a post-trial motion for judgment as a matter of law or, in the alternative, for a new trial or a reduction of damages
awarded. On April 5, 2016, the trial judge issued an order reducing the punitive damage award from $10 million to $1.1 million,
but otherwise denied our motion. On May 4, 2016, we filed a notice of appeal with the United States Court of Appeals for the
Eleventh Circuit. The United States Court of Appeals for the Eleventh Circuit heard oral arguments on January 26, 2017 and on
March 20, 2017, the Eleventh Circuit Court of Appeals upheld the lower court’s verdict. On April 10, 2017, we filed a petition for
rehearing en banc or for panel rehearing, which was denied. In light of this denial, we elected to forego a further appeal and paid
the judgment in July 2017.
The first bellwether trial in the JCCP, which was scheduled to commence on October 31, 2016, and subsequently rescheduled to
January 9, 2017, was settled for an immaterial amount.
The first state court metal-on-metal hip trial not part of the MDL or JCCP, Donald Deline v. Wright Medical Technology, Inc., et
al, commenced on October 24, 2016 in the Circuit Court of St. Louis County, Missouri. On November 3, 2016, the jury returned a
verdict in our favor. The plaintiff has appealed and the appellate court heard oral argument on November 8, 2017. On February
20, 2018, the Missouri Court of Appeals, Eastern District, denied the plaintiff’s appeal and upheld the verdict of the trial court.
As of December 31, 2017, there were approximately 800 lawsuits pending in the MDL and JCCP, and an additional 50 cases
pending in various U.S. state courts. As of that date, we have also entered into approximately 700 so called “tolling agreements”
with potential claimants who have not yet filed suit. The number of lawsuits pending in the MDL and JCCP and tolling
agreements disclosed above includes the claims that have been resolved pursuant to the Master Settlement Agreement and Second
Settlement Agreements discussed below. Based on presently available information, we believe approximately 300 of these matters
allege claims involving bilateral implants. As of December 31, 2017, there were also approximately 50 non-U.S. lawsuits
pending. We believe we have data that supports the efficacy and safety of our metal-on-metal hip products. While continuing to
dispute liability, the parties continue to mediate unresolved claims.
On November 1, 2016, WMT entered into the MSA with Court-appointed attorneys representing plaintiffs in the MDL and JCCP.
Under the terms of the MSA, the parties agreed to settle 1,292 specifically identified CONSERVE®, DYNASTY® and LINEAGE®
claims that meet the eligibility requirements of the MSA and are either pending in the MDL or JCCP, or subject to court-approved
tolling agreements in the MDL or JCCP, for a settlement amount of $240 million. Due to apparent demand from additional
claimants excluded from settlement because of the 1,292 claims ceiling, but otherwise eligible for participation, on May 15, 2017,
WMT agreed to settle an additional 53 such claims, on terms substantially identical to the MSA settlement terms, for a maximum
additional settlement amount of $9.4 million.
48
On October 3, 2017, WMT entered into the Second Settlement Agreements with the Court-appointed attorneys representing
plaintiffs in the MDL and JCCP. Under the terms of the Second Settlement Agreements, the parties agreed to settle 629
specifically identified CONSERVE®, DYNASTY® and LINEAGE® claims that meet the eligibility requirements of the Second
Settlement Agreements and are either pending in the MDL or JCCP, or subject to court-approved tolling agreements in the MDL
or JCCP, for a maximum settlement amount of $89.75 million. The comprehensive settlement amount was contingent on WMT’s
recovery of new insurance proceeds totaling at least $35 million from applicable insurance carriers by December 31, 2017. On
December 29, 2017, WMT entered into a First Amendment to the Third Settlement Agreement pursuant to which the deadline for
the recovery of new insurance proceeds totaling at least $35 million from applicable insurance carriers was extended through
February 28, 2018 and, on February 23, 2018, WMT entered into a Second Amendment to the Third Settlement Agreement
pursuant to which the deadline was extended through March 30, 2018.
We have received claims for personal injury against us associated with fractures of our PROFEMUR® long titanium modular neck
product (Titanium Modular Neck Claims). As of December 31, 2017, there were approximately 30 pending U.S. lawsuits and
approximately 60 pending non-U.S. lawsuits alleging such claims. These lawsuits generally seek monetary damages.
We are aware that MicroPort has recalled certain sizes of its cobalt chrome modular neck products as a result of alleged fractures.
As of December 31, 2017, there were four pending U.S. lawsuits and eight pending non-U.S. lawsuits against us alleging personal
injury resulting from the fracture of a cobalt chrome modular neck. These lawsuits generally seek monetary damages. On
October 27, 2017, our primary insurance carrier agreed to defend us in connection with these lawsuits under a reservation of
rights.
In June 2015, a jury returned a $4.4 million verdict against us in a case involving a fractured hip implant stem sold prior to the
MicroPort closing. This was a one-of-a-kind case unrelated to the modular neck fracture cases we have previously reported.
There are no other cases pending related to this component, nor are we aware of other instances where this component has
fractured. The case, Alan Warner et al. vs. Wright Medical Technology, Inc. et al., case no. BC 475958, which was filed on
December 27, 2011, was tried in the Superior Court of the State of California for the County of Los Angeles, Central District. In
September 2015, the trial judge reduced the jury verdict to $1.025 million and indicated that if the plaintiff did not accept the
reduced award he would schedule a new trial solely on the issue of damages. The plaintiff elected not to accept the reduced
damage award, and both parties have appealed. The Court has not set a date for a new trial on the issue of damages and we do not
expect it will do so until the appeals are adjudicated. On November 14, 2017, our primary insurance carrier agreed to defend and
indemnify us in connection with this lawsuit under a reservation of rights. On January 9, 2018, the California appellate court
heard oral argument on the parties’ cross-appeals.
Insurance Litigation
On June 10, 2014, St. Paul Surplus Lines Insurance Company (Travelers), which was an excess carrier in our coverage towers
across multiple policy years, filed a declaratory judgment action in the Chancery Court of Shelby County, Tennessee naming us
and certain of our other insurance carriers as defendants and asking the Court to rule on the rights and responsibilities of the
parties with regard to the CONSERVE® Claims. This case is known as St. Paul Surplus Lines Insurance Company v. Wright
Medical Group, Inc., et al. Among other things, Travelers appeared to dispute our contention that the CONSERVE® Claims arise
out of more than a single occurrence thereby triggering multiple policy periods of coverage. Travelers further sought a
determination as to the applicable policy period triggered by the alleged single occurrence. On June 17, 2014, we filed a separate
lawsuit in the Superior Court of the State of California, County of San Francisco for declaratory judgment against certain carriers
and breach of contract against the primary carrier, and moved to dismiss or stay the Tennessee action on a number of grounds,
including that California is the most appropriate jurisdiction. This case is known as Wright Medical Group, Inc. et al. v. Federal
Insurance Company, et al. On September 9, 2014, the California Court granted Travelers' motion to stay our California action.
On April 29, 2016, we filed a dispositive motion seeking partial judgment in our favor in the Tennessee action, which motion is
pending and has been referred to a Special Master to consider the parties’ arguments. On June 10, 2016, Travelers withdrew its
motion for summary judgment in the Tennessee action. One of the other insurance companies in the Tennessee action has stated
that it will re-file a similar motion in the future.
In March 2017, Lexington Insurance Company (Lexington), which had been dismissed from the Tennessee action, requested
arbitration under five Lexington insurance policies in connection with the CONSERVE® Claims. We subsequently engaged in
discussions and correspondence with Lexington about the scope of the requested arbitration(s). On or about October 27, 2017,
Lexington filed an Application for Order to Compel Arbitration in the Commonwealth of Massachusetts, Suffolk County Superior
Court, naming WMT, Wright Medical Group, Inc., and Wright Medical Group N.V. We opposed the Application, which remains
pending.
On October 28, 2016, WMT and WMG entered into a Settlement Agreement, Indemnity and Hold Harmless Agreement and
Policy Buyback Agreement (Insurance Settlement Agreement) with a subgroup of three insurance carriers, namely Columbia,
Travelers and AXIS Surplus Lines Insurance Company (collectively, the Three Settling Insurers), pursuant to which the Three
Settling Insurers paid WMT an aggregate of $60 million (in addition to $10 million previously paid by Columbia) in a lump sum.
This amount is in full satisfaction of all potential liability of the Three Settling Insurers relating to metal-on-metal hip and similar
metal ion release claims, including but not limited to all claims in the MDL and the JCCP, and all claims asserted by WMT against
the Three Settling Insurers in the Tennessee action described above. The amount due under the Insurance Settlement Agreement
was paid in the fourth quarter of 2016 and the Three Settling Insurers have been dismissed from the Tennessee action.
49
On December 13, 2016, we filed a motion in the Tennessee action described above to include allegations of bad faith against the
primary insurance carrier. The motion was subsequently amended on February 8, 2017 to add similar bad faith claims against the
remaining excess carriers. On April 13, 2017, the Court denied our motion, without prejudice to our right to re-assert the motion
at a later time. On August 29, 2017, we refiled the motion to add a bad faith claim against the primary and excess insurance
carriers. The Court granted our motion on October 19, 2017 and, on October 23, 2017, we filed amended cross-claims alleging
bad faith against all of the insurance carriers. On November 9, 2017, our primary insurance carrier brought a motion to dismiss
and strike our bad faith claim. The remaining excess carriers either joined the primary insurer’s motion or brought their own
separate motions. On December 22, 2017 and December 29, 2017, we opposed the insurers’ motions to dismiss and strike our
claim for bad faith. The motions remain pending. Two of the remaining insurers in the Tennessee action take the position that
certain prior payments made by them totaling $10 million were purportedly made under reservations of rights and they claim the
right to seek recoupment of those prior payments.
On February 22, 2018, we and certain of our subsidiaries entered into a Settlement and Release Agreement (Second Insurance
Settlement Agreement) with Federal Insurance Company (a subsidiary of Chubb Insurance) (Federal), pursuant to which Federal
agreed to pay us an aggregate of $15 million (in addition to $5 million previously paid by Federal) in a lump sum on or before the
10th business day after execution of the Second Insurance Settlement Agreement. This amount will be in full satisfaction of all
potential liability of Federal relating to designated metal-on-metal hip claims, including but not limited to all claims asserted by
our subsidiary WMT against Federal in the previously disclosed insurance coverage litigation. On February 9, 2018, the
Tennessee action was stayed for 60 days to allow Wright and Federal to finalize and document their settlement and for the
remaining parties to negotiate potential settlement of all remaining claims.
On September 29, 2015, Markel International Insurance Company Ltd., as successor to Max Insurance Europe Ltd. (Max
Insurance), which is the third insurance carrier in our coverage towers across multiple policy years, asserted that the terms and
conditions identified in its reservation of rights will preclude coverage for the Titanium Modular Neck Claims. We strongly
dispute the carrier's position, and in accordance with the dispute resolution provisions of the policy, on January 18, 2016, we filed
a Notice of Arbitration against Max Insurance in London, England pursuant to the provisions of the Arbitration Act of 1996. We
are seeking reimbursement, up to the policy limits of $25 million, of costs incurred in the defense and settlement of the Titanium
Modular Neck Claims. The parties have conducted two rounds of arbitration with the most recent round concluding on February
15, 2018. The parties await the decision of the arbitration tribunal.
Wright/Tornier Merger Related Litigation
On November 26, 2014, a class action complaint was filed in the Circuit Court of Tennessee, for the Thirtieth Judicial District, at
Memphis (Tennessee Circuit Court), by a purported shareholder of WMG under the caption City of Warwick Retirement System v.
Gary D. Blackford et al., CT-005015-14. An amended complaint in the action was filed on January 5, 2015. The amended
complaint names as defendants WMG, Tornier, Trooper Holdings Inc. (Holdco), Trooper Merger Sub Inc. (Merger Sub), and the
members of the WMG board of directors. The amended complaint asserts various causes of action, including, among other things,
that the members of the WMG board of directors breached their fiduciary duties owed to the WMG shareholders in connection
with entering into the merger agreement, approving the merger, and causing WMG to issue a preliminary Form S-4 that allegedly
fails to disclose material information about the merger. The amended complaint further alleges that Tornier, Holdco, and Merger
Sub aided and abetted the alleged breaches of fiduciary duties by the WMG board of directors. The plaintiff is seeking, among
other things, injunctive relief enjoining or rescinding the merger and an award of attorneys’ fees and costs.
On December 2, 2014, a separate class action complaint was filed in the Tennessee Chancery Court by a purported shareholder of
WMG under the caption Paulette Jacques v. Wright Medical Group, Inc., et al., CH-14-1736-1. An amended complaint in the
action was filed on January 27, 2015. The amended complaint names as defendants WMG, Tornier, Holdco, Merger Sub, Warburg
Pincus LLC and the members of the WMG board of directors. The amended complaint asserts various causes of action, including,
among other things, that the members of the WMG board of directors breached their fiduciary duties owed to the WMG
shareholders in connection with entering into the merger agreement, approving the merger, and causing WMG to issue a
preliminary Form S-4 that allegedly fails to disclose material information about the merger. The amended complaint further
alleges that WMG, Tornier, Warburg Pincus LLC, Holdco and Merger Sub aided and abetted the alleged breaches of fiduciary
duties by the WMG board of directors. The plaintiff is seeking, among other things, injunctive relief enjoining or rescinding the
merger and an award of attorneys’ fees and costs.
In an order dated March 31, 2015, the Tennessee Circuit Court transferred City of Warwick Retirement System v. Gary D.
Blackford et al., CT-005015-14 to the Tennessee Chancery Court for consolidation with Paulette Jacques v. Wright Medical
Group, Inc., et al., CH-14-1736-1 (Consolidated Tennessee Action). In an order dated April 9, 2015, the Tennessee Chancery
Court stayed the Consolidated Tennessee Action; that stay expired upon completion of the Wright/Tornier merger. On September
19, 2016, the Tennessee Chancery Court entered an agreed order, dismissing the Jacques case without prejudice.
Other
In addition to those noted above, we are subject to various other legal proceedings, product liability claims, corporate governance,
and other matters which arise in the ordinary course of business.
50
Item 4.
Mine Safety Disclosures.
Not applicable.
51
PART II
Item 5.
Securities.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Market Information
Our ordinary shares are traded on the Nasdaq Global Select Market under the symbol “WMGI.” Prior to the completion of the
Wright/Tornier merger on October 1, 2015, legacy Tornier ordinary shares traded under the symbol “TRNX” while legacy Wright
ordinary shares traded under the symbol “WMGI.” Due to the “reverse acquisition” nature of the Wright/Tornier merger,
historical information below reflects the high and low sales prices of legacy Tornier.
The following table sets forth, for the periods indicated, the high and low per share sales prices for our ordinary shares as reported
by the Nasdaq Global Select Market.
Fiscal Year 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
31.31 $
31.53 $
29.89 $
27.62 $
24.43 $
20.75 $
25.50 $
25.15 $
22.14
25.49
24.30
22.18
15.02
15.52
15.85
20.50
$
$
$
$
$
$
$
$
As of February 23, 2018, there were 347 holders of record of our ordinary shares.
Dividends
We have not previously declared or paid cash dividends on our ordinary shares. We currently intend to retain all future earnings
for the operation and expansion of our business. We do not anticipate declaring or paying cash dividends on our ordinary shares in
the foreseeable future. Any payment of cash dividends on our ordinary shares will be at the discretion of our board of directors
and will depend upon our results of operations, earnings, capital requirements, contractual restrictions, and other factors deemed
relevant by our board of directors. Additionally, our ABL Credit Agreement restricts our ability to pay dividends.
Purchases of Equity Securities by the Company
We did not purchase any ordinary shares or other equity securities of our company during the fourth fiscal quarter ended
December 31, 2017.
Recent Sales of Unregistered Securities
We did not issue any ordinary shares or other equity securities of our company that were not registered under the Securities Act of
1933, as amended, during the fourth fiscal quarter ended December 31, 2017, other than the issuance of 661,753 ordinary shares in
connection with our acquisition of IMASCAP as described in Note 3 to our consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary Data.”
Comparison of Total Shareholder Returns
The graph below compares the cumulative total shareholder returns for legacy Tornier ordinary shares from the period from
December 31, 2012 to October 1, 2015, the date of the Wright/Tornier merger, and our combined company ordinary shares from
October 1, 2015 to December 31, 2017 (our fiscal year-end). The graph also reflects cumulative total shareholder returns from an
index composed of U.S. companies whose stock is listed on the Nasdaq Global Select Market (Nasdaq U.S. Composite Index) and
an index consisting of Nasdaq-listed companies in the surgical, medical and dental instruments and supplies industry (Nasdaq
Medical Equipment Subsector), as well as an index of companies with the SIC Code 384 - Surgical, Medical, and Dental
Instruments Supplies (Surgical, Medical, and Dental Instruments Index). Total returns for the indices are weighted based on the
market capitalization of the companies included therein. In addition, due to the “reverse acquisition” nature of the Wright/Tornier
merger and the fact that the historical financial statements of legacy Wright have replaced the historical financial statements of
legacy Tornier, the graph below also includes the cumulative total shareholder returns for WMG common stock from December
31, 2012 to October 1, 2015, the date of the Wright/Tornier merger.
52
The graph assumes that $100.00 was invested on December 31, 2012, in legacy Tornier/Wright Medical Group N.V. ordinary
shares, legacy Wright common stock, the Nasdaq U.S. Composite Index, the Nasdaq Medical Equipment Subsector, and the
Surgical, Medical, and Dental Instruments Supplies Index, and that all dividends were reinvested. Total returns for the Nasdaq
indices are weighted based on the market capitalization of the companies included therein.
Historical price performance of our ordinary shares is not indicative of future share price performance. We do not make or
endorse any prediction as to future share price performance.
Legacy Tornier / Wright Medical Group N.V.
Legacy Wright
Nasdaq Stock Market (US Companies)
Nasdaq Medical Equipment Index
SIC Code 384 - Surgical, Medical, and Dental
Instruments and Supplies
$
2012
100.00 $
100.00
100.00
100.00
2013
112.28 $
148.74
141.46
118.85
2014
156.29 $
131.21
166.31
139.53
2015
144.63 $
103.80
177.88
163.77
2016
143.09 $
—
196.62
180.90
2017
136.28
—
207.11
257.33
100.00
134.79
166.25
177.22
194.79
250.79
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2018
53
Item 6.
Selected Financial Data.
The following tables set forth certain of our selected consolidated financial data as of the dates and for the years indicated. Due to
the “reverse acquisition” nature of the Wright/Tornier merger, the historical financial statements of legacy Wright replaced the
historical financial statements of legacy Tornier. Historical results are not necessarily indicative of the results to be expected for
any future period. These tables are presented in thousands, except per share data.
Consolidated Statement of Operations:
Net sales
Cost of sales 2
Gross profit
Operating expenses:
Selling, general and administrative 2
Research and development 2
Amortization of intangible assets
BioMimetic impairment charges
Total operating expenses
Operating loss 3
Interest expense, net 4
Other expense (income), net 5
Loss before income taxes
(Benefit) provision for income taxes 6
Net loss from continuing operations
(Loss) income from discontinued operations, net of tax 2
Net loss
Net loss from continuing operations per share — basic
and diluted:
Weighted-average number of ordinary shares outstanding —
basic and diluted
$
$
December
31, 2017
December
25, 2016
Fiscal year ended
December
27, 2015 1
December
31, 2014
December
31, 2013
$
744,989 $
160,947
584,042
690,362 $
192,407
497,955
405,326 $
113,622
291,704
298,027 $
73,223
224,804
242,330
59,721
182,609
525,222
50,115
28,396
—
603,733
(19,691 )
74,644
5,570
(99,905 )
(34,968 )
(64,937 )
(137,661 )
(202,598 ) $
541,558
50,514
28,841
—
620,913
(122,958 )
58,530
(3,148 )
(178,340 )
(13,406 )
(164,934 )
(267,439 )
(432,373 ) $
424,377
39,339
16,754
—
480,470
(188,766 )
41,358
10,884
(241,008 )
(3,652 )
(237,356 )
(61,345 )
(298,701 ) $
289,620
24,963
10,027
—
324,610
(99,806 )
17,398
129,626
(246,830 )
(6,334 )
(240,496 )
(19,187 )
(259,683) $
230,785
20,305
7,476
206,249
464,815
(282,206 )
16,040
(67,843 )
(230,403 )
49,765
(280,168 )
6,223
(273,945 )
(0.62 ) $
(1.60 ) $
(3.66 ) $
(4.69) $
(5.82 )
104,531
102,968
64,808
51,293
48,103
Consolidated Balance Sheet Data:
Cash and cash equivalents
Restricted cash
Marketable securities
Working capital
Total assets
Long-term liabilities
Shareholders’ equity
December 31,
2017
December 25,
2016
December 27,
2015
December 31,
2014
December 31,
2013
$ 167,740 $ 262,265 $ 139,804 $ 227,326 $ 168,534
—
14,548
375,901
990,090
411,711
459,714
—
—
352,946
2,073,494
811,530
1,055,026
—
—
151,599
2,128,724
1,124,733
588,696
150,000
—
285,107
2,290,586
1,129,204
686,864
—
2,575
249,958
885,068
419,204
278,803
December 31,
2017
December 25,
2016
Fiscal year ended
December 27,
2015
December 31,
2014
December 31,
2013
Other Data:
Cash flow (used in) provided by operating activities
Cash flow (used in) provided by investing activities
Cash flow provided by financing activities
Depreciation 1
Share-based compensation expense
Capital expenditures
______________________________________
$ (184,810 ) $
(109,421 )
46,816
56,832
19,393
63,474
37,824 $ (195,870 ) $ (116,002 ) $
(34,241 )
270,417
55,830
14,416
50,099
(15,970 )
126,862
28,390
24,964
43,666
145,630
33,051
18,582
11,487
48,603
(36,601 )
(121,317 )
6,257
26,296
15,368
37,530
1 The 2015 results were restated for the divestiture of our Large Joints business. (See Note 4).
2 These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated:
Cost of sales
Selling, general and administrative
Research and development
Discontinued operations
December 31,
2017
December 25,
2016
Fiscal year ended
December 27,
2015
December 31,
2014
December 31,
2013
$
565 $
414 $
287 $
254 $
17,705
1,123
—
13,216
786
—
22,777
1,900
—
10,149
1,084
—
503
10,675
780
3,410
54
3 During the fiscal year ended December 31, 2017, we recognized: (a) $12.4 million of transaction and transition costs related
to the Wright/Tornier merger and (b) a benefit of $9.0 million from incentive and indirect tax projects. During the fiscal year
ended December 25, 2016, we recognized: (a) $37.7 million of inventory step-up amortization; (b) $36.4 million of
transaction and transition costs related to the Wright/Tornier merger; (c) $1.8 million of costs related to a legal settlement;
(d) $1.3 million of costs associated with executive management changes; and (e) $0.2 million of costs associated with debt
refinancing. During the fiscal year ended December 27, 2015, we recognized: (a) $82.2 million of due diligence, transaction,
and transition costs related to the Wright/Tornier merger; (b) $14.2 million of share-based compensation acceleration; and
(c) $10.3 million of inventory step-up amortization. During the fiscal year ended December 31, 2014, we recognized:
(a) $14.1 million of due diligence, transaction, and transition costs related to the Biotech, Solana, and OrthoPro acquisitions;
(b) $11.9 million of charges related to the Wright/Tornier merger; (c) $5.9 million of transition costs related to the
OrthoRecon divestiture; (d) $2.1 million of costs associated with distributor conversions and non-competes; (e) $1.2 million
of costs associated with management changes; and (f) $0.9 million of costs associated with a patent dispute settlement.
During the fiscal year ended December 31, 2013, we recognized: (a) $206.2 million of BioMimetic impairment charges;
(b) $21.6 million in transaction costs for the OrthoRecon divestiture; (c) $12.9 million of due diligence and transaction costs
related to the BioMimetic and Biotech acquisitions; and (d) $3.7 million of costs associated with distributor conversions and
non-competes.
4 During the fiscal year ended December 31, 2017, we recognized: (a) $45.5 million of non-cash interest expense related to the
amortization of the debt discount on our 2017, 2020 and 2021 convertible notes and (b) $0.2 million of interest income from
incentive and indirect tax projects. During the fiscal year ended December 25, 2016, we recognized: (a) $36.6 million of non-
cash interest expense related to the amortization of the debt discount on our 2017, 2020 and 2021 convertible notes and (b) a
$0.8 million of interest income related to the settlement of an IRS audit.
5 During the fiscal year ended December 31, 2017, we recognized: (a) a $5.3 million loss from mark-to-market adjustments on
the CVRs issued in connection with the BioMimetic acquisition; (b) $4.8 million gain for the mark-to-market adjustment of
our derivative instruments; (c) a benefit of $0.6 million from incentive and indirect tax projects; and (d) $0.1 million of
charges due to the fair value adjustment to contingent consideration. During the fiscal year ended December 25, 2016, we
recognized: (a) $28.3 million gain for the mark-to-market adjustment of our derivative instruments; (b) a $12.3 million non-
cash loss on extinguishment of debt to write-off unamortized debt discount and deferred financing fees associated with the
partial settlement of 2017 and 2020 convertible notes; (c) a $8.7 million loss from mark-to-market adjustments on the
Contingent Value Rights (CVRs) issued in connection with the BioMimetic acquisition; and (d) $0.5 million of charges due to
the fair value adjustment to contingent consideration. During the fiscal year ended December 27, 2015, we recognized:
(a) $9.8 million gain for the mark-to-market adjustment of our derivative instruments and (b) a $7.6 million gain from mark-
to-market adjustments on the CVRs issued in connection with the BioMimetic acquisition. During the fiscal year ended
December 31, 2014, we recognized: (a) approximately $125 million from mark-to-market adjustments on the CVRs issued in
connection with the BioMimetic acquisition; (b) $2.0 million of charges for the mark-to-market adjustment of our derivative
instruments; and (c) $1.8 million of charges due to the fair value adjustment to contingent consideration associated with our
acquisition of WG Healthcare. During the fiscal year ended December 31, 2013, we recognized a $7.8 million gain related to
the previously held investment in BioMimetic.
6 During the fiscal year ended December 31, 2017, we recognized: (a) a $25.0 million tax benefit related to the realizability of
net operating losses and (b) tax law reform changes in the U.S. and France resulting in an $8.3 million tax benefit. During the
fiscal year ended December 25, 2016, we recognized a $2.3 million income tax benefit related to the settlement of an IRS
audit. During the fiscal year ended December 31, 2013, we recognized a $119.6 million tax valuation allowance recorded
against deferred tax assets in our U.S. jurisdiction due to recent operating losses.
55
Item 7.
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 describes the principal factors
affecting the results of our operations, financial condition, and changes in financial condition, as well as our critical accounting
estimates.
On October 1, 2015, we became Wright Medical Group N.V. following the merger of Wright Medical Group, Inc. with Tornier
N.V. Because of the structure of the merger and the governance of the combined company immediately post-merger, the merger
was accounted for as a “reverse acquisition” under US GAAP, and as such, legacy Wright was considered the acquiring entity for
accounting purposes. Therefore, legacy Wright’s historical results of operations replaced legacy Tornier’s historical results of
operations for all periods prior to the merger. More specifically, the accompanying consolidated financial statements for periods
prior to the merger are those of legacy Wright and its subsidiaries, and for periods subsequent to the merger also include legacy
Tornier and its subsidiaries.
On October 21, 2016, pursuant to a binding offer letter dated as of July 8, 2016, we, Corin, and certain other entities related to us
entered into a business sale agreement and simultaneously completed and closed the sale of our Large Joints business. The
financial results of our Large Joints business, including costs associated with corporate employees and infrastructure transferred as
a part of the sale and services we are providing Corin under a transitional services agreement and supply agreement, are reflected
within discontinued operations for all periods presented, unless otherwise noted. Further, all assets and associated liabilities
transferred to Corin were classified as assets and liabilities held for sale in our consolidated balance sheet as of December 27,
2015.
On January 9, 2014, legacy Wright completed the sale of its OrthoRecon business to MicroPort. The financial results of the
OrthoRecon business are reflected within discontinued operations for all periods presented, unless otherwise noted.
All current and historical operating results for the Large Joints and OrthoRecon businesses are reflected within discontinued
operations in the consolidated financial statements.
Other than the discontinued operations discussed in Note 4 to our consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary Data”, unless otherwise stated, all discussion of assets and liabilities in the notes to the
consolidated financial statements and in this section reflects the assets and liabilities held and used in our continuing operations,
and all discussion of revenues and expenses reflects those associated with our continuing operations.
References in this section to “we,” “our” and “us” refer to Wright Medical Group N.V. and its subsidiaries after the Wright/Tornier
merger and Wright Medical Group, Inc. and its subsidiaries before the merger. Our fiscal year-end is generally determined on a
52-week basis and runs from the Monday nearest to the 31st of December of a year, and ends on the Sunday nearest to the 31st of
December of the following year. Every few years, it is necessary to add an extra week to the year making it a 53-week period.
The fiscal year ended December 31, 2017 was a 53-week period. References in this report to a particular year generally refer to
the applicable fiscal year. Accordingly, references to “2017” or “the year ended December 31, 2017” mean the fiscal year ended
December 31, 2017.
Executive Overview
Company Description. We are a global medical device company focused on extremities and biologics products. We are
committed to delivering innovative, value-added solutions improving quality of life for patients worldwide and are a recognized
leader of surgical solutions for the upper extremities (shoulder, elbow, wrist and hand), lower extremities (foot and ankle) and
biologics markets, three of the fastest growing segments in orthopaedics.
Our global corporate headquarters are located in Amsterdam, the Netherlands. We also have significant operations located in
Memphis, Tennessee (U.S. headquarters, research and development, sales and marketing administration, and administrative
activities); Bloomington, Minnesota (upper extremities sales and marketing and warehousing operations); Arlington, Tennessee
(manufacturing and warehousing operations); Franklin, Tennessee (manufacturing and warehousing operations); Montbonnot,
France (manufacturing and warehousing operations); Plouzané, France (research and development); and Macroom, Ireland
(manufacturing). In addition, we have local sales and distribution offices in Canada, Australia, Asia, Latin America, and
throughout Europe.
We offer a broad product portfolio of approximately 150 extremities products and over 20 biologics products that are designed to
provide solutions to our surgeon customers, with the goal of improving clinical outcomes and the “quality of life” for their
patients. Our product portfolio consists of the following product categories:
(cid:120) Upper extremities, which include joint implants and bone fixation devices for the shoulder, elbow, wrist, and hand;
(cid:120) Lower extremities, which include joint implants and bone fixation devices for the foot and ankle;
(cid:120) Biologics, which include products used to support treatment of damaged or diseased bone, tendons, and soft tissues
or to stimulate bone growth; and
(cid:120) Sports medicine and other, which include products used across several anatomic sites to mechanically repair tissue-
to-tissue or tissue-to-bone injuries and other ancillary products.
56
Our sales and distribution system in the United States currently consists of 82 geographic sales territories that are staffed by over
500 direct sales representatives and 27 independent sales agencies or distributors. These sales representatives and independent
sales agencies and distributors are generally aligned to selling either our upper extremities products or lower extremities products,
but, in some cases, certain agencies or direct sales representatives sell products from both our upper and lower extremities product
portfolios in their territories. Internationally, we utilize several distribution approaches that are tailored to the needs and
requirements of each individual market. Our international sales and distribution system currently consists of 15 direct sales
offices and approximately 90 distributors that sell our products in approximately 50 countries, with principal markets outside the
United States in Europe, Asia, Canada, Australia, and Latin America. Our U.S. sales accounted for 74.4% of total net sales in
2017.
Principal Products. We have focused our efforts into growing our position in the high-growth extremities and biologics markets.
We believe a more active and aging patient population with higher expectations regarding “quality of life,” an increasing global
awareness of extremities and biologics solutions, improved clinical outcomes as a result of the use of such products, and
technological advances resulting in specific designs for such products that simplify procedures and address unmet needs for early
interventions, and the growing need for revisions and revision-related solutions will drive the market for extremities and biologics
products.
The extremities market is one of the fastest growing market segments within orthopaedics, with annual growth rates of 7-10%. We
believe major trends in the extremities market include procedure-specific and anatomy-specific devices, locking plates, and an
increase in total ankle replacement or arthroplasty procedures. Upper extremities reconstruction involves implanting devices to
replace, reconstruct, or fixate injured or diseased joints and bones in the shoulder, elbow, wrist, and hand. It is estimated that
approximately 60% of the upper extremities market is in total shoulder replacement or arthroplasty implants. We believe major
trends in the upper extremities market include next-generation joint arthroplasty systems, bone preserving solutions, virtual
planning systems, and revision of failed previous shoulder replacements in older patients. Lower extremities reconstruction
involves implanting devices to replace, reconstruct, or fixate injured or diseased joints and bones in the foot and ankle. A large
segment of the lower extremities market is comprised of plating and screw systems for reconstructing and fusing joints or
repairing bones after traumatic injury. We believe major trends in the lower extremities market include the use of external fixation
devices in diabetic patients, total ankle arthroplasty, advanced tissue fixation devices, virtual planning systems, and biologics.
New technologies have been introduced into the lower extremities market in recent years, including next-generation total ankle
replacement systems.
Our principal upper extremities products include the AEQUALIS ASCEND® and SIMPLICITI® total shoulder replacement
systems, the AEQUALIS® REVERSED II™ reversed shoulder system, and the AEQUALIS ASCEND® FLEX™ convertible
shoulder system. SIMPLICITI® is the first minimally invasive, ultra-short stem total shoulder available in the United States. We
believe SIMPLICITI® allows us to expand the market to include younger patients that historically have deferred these procedures.
In December 2016, we received FDA 510(k) clearance of our AEQUALIS® PERFORM™ REVERSED Glenoid System, our first
reverse augmented glenoid, and we commercially launched it during the first quarter of 2017. Other principal upper extremities
products include the EVOLVE® radial head prosthesis for elbow fractures, the EVOLVE® Elbow Plating System, RAYHACK®
osteotomy system, and the MICRONAIL® intramedullary wrist fracture repair system.
Our principal lower extremities products include the INBONE® and INFINITY® Total Ankle Replacement Systems, both of which
can be used with our PROPHECY® Preoperative Navigation Guides, which combine computer imaging with a patient’s CT scan,
and are designed to provide alignment accuracy while reducing surgical steps. Our lower extremities products also include the
CLAW® II Polyaxial Compression Plating System, the ORTHOLOC® 3Di Reconstruction Plating System, the PhaLinx® System
used for hammertoe indications, PRO-TOE® VO Hammertoe System, the DARCO® family of locked plating systems, the
VALOR® ankle fusion nail system, and the Swanson line of toe joint replacement products. Physician testing of our most recent
total ankle replacement product, the INVISIONTM Total Ankle Revision System, began in 2016 and reached full commercial
launch in the third quarter of 2017. The MICA™ Minimally-Invasive Foot and Ankle system was launched to limited users in the
third quarter of 2017. Full commercial launch of MICA™ is planned for the second half of 2018. We also launched and plan to
continue to launch during 2018 a number of line extensions to the SALVATION™ limb salvage portfolio. We expect demand for
these new products during 2018.
Our biologic products use both biological tissue-based and synthetic materials to allow the body to regenerate damaged or
diseased bone and to repair damaged or diseased soft tissue. The newest addition to our biologics product portfolio is
AUGMENT® Bone Graft, which is based on recombinant human platelet-derived growth factor (rhPDGF-BB), a synthetic copy of
one of the body’s principal healing agents. FDA approval of AUGMENT® Bone Graft in the United States for ankle and/or
hindfoot fusion indications occurred during the third quarter of 2015. Prior to FDA approval, this product was available for sale in
Canada for foot and ankle fusion indications and in Australia and New Zealand for hindfoot and ankle fusion indications. The
AUGMENT® Bone Graft product line was acquired from BioMimetic in March 2013. We are currently pursuing FDA approval of
AUGMENT® Injectable Bone Graft with a PMA Panel Track Supplement as described within the In-process research and
development section below. Our other 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
Graft, the OSTEOSET® synthetic bone graft substitute, and the PRO-STIM® Injectable Inductive Graft.
Significant Business Developments. On December 14, 2017, we completed the acquisition of IMASCAP, a leader in the
development of software-based solutions for preoperative planning of shoulder replacement surgery. The intent of this transaction
is to ensure exclusive access to breakthrough software enabling technology and patents to further differentiate our product
57
portfolio and to further accelerate growth opportunities in our global extremities business. Under the terms of the agreement with
IMASCAP, we acquired 100% of IMASCAP’s outstanding equity on a fully diluted basis for an initial payment of €52.9 million,
or approximately $62.3 million, consisting of approximately €39.7 million, or approximately $46.7 million, in cash and
approximately €13.2 million, or approximately $15.6 million, representing 661,753 Wright ordinary shares, payable at closing.
Additionally the purchase price includes an estimated €15.1 million, or approximately $17.8 million, of contingent consideration
related to the achievement of certain technical milestones and sales earnouts. The technical milestones involve the development
and approval of a patient specific implant system and new software modules. The sales earnouts relate to patient specific guides
and the future patient specific implant system.
On October 3, 2017, WMT and the Court-appointed attorneys representing plaintiffs in the metal-on-metal hip replacement
product liability litigation pending before the MDL and the JCCP agreed on a comprehensive settlement intended to resolve
substantially all remaining metal-on-metal hip claims pending or tolled in the MDL and JCCP that were not settled in the
previously disclosed MSA dated November 1, 2016. The comprehensive settlement is evidenced by the Second Settlement
Agreements. The comprehensive settlement was contingent on availability of new insurance proceeds totaling at least $35 million
from applicable insurance carriers by December 31, 2017. On December 29, 2017, WMT entered into a First Amendment to the
Third Settlement Agreement pursuant to which the deadline for the recovery of new insurance proceeds totaling at least
$35 million from applicable insurance carriers was extended through February 28, 2018 and, on February 23, 2018, WMT entered
into a Second Amendment to the Third Settlement Agreement pursuant to which the deadline was extended through March 30,
2018. To date, certain of the insurance carriers have contributed or agreed to contribute $20 million of funds applicable against
the contingency.
During the third quarter of 2017, we completed a key initiative by transferring our U.S. upper extremities inventory into a hub
network, similar to how we operate our U.S. lower extremities inventory. We believe this will enable us to have more control and
visibility over the performance of our field inventory and instrument sets, resulting in an increase in our set turns and a reduction
in our field inventory days on hand and improve sales representative productivity.
During the fourth quarter of 2017, we finalized our key initiative to improve case planning with our surgeons in order reduce the
amount of inventory delivered for surgery in the fourth quarter of 2017. This initiative has enabled us to be more efficient while
providing superior service to our surgeons.
During the first half of 2017, we selectively expanded our U.S. sales force by adding additional direct quota-carrying
representatives, primarily weighted towards the lower extremities business. Of these new direct quota-carrying representatives,
most of them were current associate sales representatives that moved up to be quota-carrying representatives. Full year growth in
the core U.S. lower extremities and core biologics portfolio was significantly lower than our more technologically advanced
products due to slower than anticipated benefit from the sales representative additions that we made earlier in the year.
Financial Highlights. Net sales increased 7.9% totaling $745.0 million in 2017, compared to $690.4 million in 2016, driven
primarily by 9.3% growth in our U.S. net sales.
Our U.S. net sales increased by $47.0 million, or 9.3%, in 2017 as compared to 2016, driven primarily by sales of our
AEQUALIS® PERFORMTM REVERSED Glenoid System that was launched in 2017, as well as continued success of our
SIMPLICITI® shoulder system, our AUGMENT® Bone Graft product, and our INFINITY® total ankle replacement system.
Our international net sales increased $7.7 million, or 4.2%, in 2017 as compared to 2016, driven primarily by a 7.6% increase in
sales in our direct markets in Europe and Canada and a $0.9 million favorable impact from foreign currency exchange rates. This
growth was partially offset by a volume decrease in sales to stocking distributors, primarily due to stocking orders in 2016.
In 2017, our net loss from continuing operations totaled $64.9 million, compared to a net loss from continuing operations of
$164.9 million in 2016. This decrease in net loss from continuing operations was primarily driven by the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
improved profitability due to increase in sales and reduced costs due to manufacturing efficiencies and leverage of
fixed corporate spending;
$37.7 million, net of tax, decrease in non-cash amortization of inventory step-up fair value adjustment associated
with the Wright/Tornier merger;
$25.0 million tax benefit related to a change in the realizability of certain U.S. net operating losses following the
completion of a tax project;
$24.0 million decrease in transition expenses associated with the Wright/Tornier integration;
$10.0 million benefit from incentive and indirect tax projects;
$8.3 million tax benefit related to tax law reform in the U.S. and France; and
$28.3 million unrealized gain for the mark-to-market adjustment on our derivatives.
These favorable changes in net loss from continuing operations were partially offset by a $12.3 million write-off of unamortized
debt discount and deferred financing fees; and an unrealized loss of $8.7 million for the mark-to-market adjustment on the CVRs
issued in connection with the BioMimetic acquisition.
58
Opportunities and Challenges. We intend to continue to leverage the global strengths of our product brands as a pure-play
extremities and biologics business. Additionally, we believe the highly complementary nature of our businesses gives us
significant diversity and scale across a range of geographies and product categories. We believe our recent acquisition of
IMASCAP, a leader in the development of software-based solutions for preoperative planning of shoulder replacement surgery,
ensures exclusive access to breakthrough software enabling technology and patents, including BLUEPRINT™, to further
differentiate our product portfolio and to further accelerate growth opportunities in our global extremities business. We are also
currently pursuing FDA approval of AUGMENT® Injectable Bone Graft with a PMA Panel Track Supplement as described within
the In-process research and development section below.
Since the Wright/Tornier merger and through the end of 2017, we have completed the integration of our global sales force, co-
located and consolidated into one ERP system in three of our top five international markets, transferred our U.S. upper extremities
inventory into a hub network, and completed a substantial number of other integration activities, while incurring more cost
synergies earlier and less sales dis-synergies than we originally anticipated. We believe we have excellent opportunities to
improve efficiency and leverage our fixed costs going forward and capture cost synergies. We also believe we have significant
opportunity with the recent and anticipated launch of new products and through driving BLUEPRINT™ adoption, strategic
service at ambulatory surgery centers, and excellent and efficient service to our customers.
While our ultimate financial goal is to achieve sustained profitability, we anticipate continuing operating losses until we are able to
grow our sales to a sufficient level to support our cost structure, including the inherent infrastructure costs of our industry. In the
short term, we remain keenly focused on our revenue and cash initiatives.
Significant Industry Factors. Our industry is affected 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 maintain 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 FDA. Failure to comply
with regulatory requirements could have a material adverse effect on our business, operating results, and financial condition. We,
as well as other participants in our industry, are subject to product liability claims, which could have a material adverse effect on
our business, operating results, and financial condition.
Results of Operations
The discussion below is on a continuing operations basis, unless otherwise noted.
Comparison of the fiscal year ended December 31, 2017 to the fiscal year ended December 25, 2016
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 1, 2
Gross profit
Operating expenses:
Selling, general and administrative 1
Research and development 1
Amortization of intangible assets
Total operating expenses
Operating loss
Interest expense, net
Other expense (income), net
Loss from continuing operations before income taxes
Benefit for income taxes
Net loss from continuing operations
Loss from discontinued operations, net of tax
Net loss
___________________________
Fiscal year ended
December 31, 2017
December 25, 2016
Amount
% of net sales
Amount
% of net sales
744,989
160,947
584,042
525,222
50,115
28,396
603,733
(19,691 )
74,644
5,570
(99,905 )
(34,968 )
(64,937 )
(137,661 )
(202,598 )
100.0 % $
21.6 %
78.4 %
690,362
192,407
497,955
70.5 %
6.7 %
3.8 %
81.0 %
(2.6 )%
10.0 %
0.7 %
(13.4 )%
(4.7 )%
(8.7 )%
$
541,558
50,514
28,841
620,913
(122,958 )
58,530
(3,148 )
(178,340 )
(13,406 )
(164,934 )
(267,439 )
(432,373 )
100.0 %
27.9 %
72.1 %
78.4 %
7.3 %
4.2 %
89.9 %
(17.8 )%
8.5 %
(0.5 )%
(25.8 )%
(1.9 )%
(23.9 )%
$
$
59
1 These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated:
Cost of sales
Selling, general and administrative
Research and development
Fiscal year ended
December 31,
2017
% of net sales
December 25,
2016
% of net sales
$
565
17,705
1,123
0.1 % $
2.4 %
0.2 %
414
13,216
786
0.1 %
1.9 %
0.1 %
2 Cost of sales includes amortization of inventory step-up adjustment of $37.7 million for the fiscal year ended December 25,
2016.
The following table sets forth our net sales by product line for our U.S. and International businesses for the periods indicated (in
thousands) and the percentage of year-over-year change:
U.S.
Lower extremities
Upper extremities
Biologics
Sports med & other
Total U.S.
International
Lower extremities
Upper extremities
Biologics
Sports med & other
Total International
Total net sales
Net sales
December
31, 2017
Fiscal year ended
December
25, 2016
% change
$ 228,044 $ 222,936
201,579
74,603
8,429
$ 554,511 $ 507,547
239,965
78,361
8,141
$
58,473 $
94,699
22,276
15,030
62,701
86,502
18,883
14,729
$ 190,478 $ 182,815
2.3 %
19.0 %
5.0 %
(3.4 )%
9.3 %
(6.7 )%
9.5 %
18.0 %
2.0 %
4.2 %
$ 744,989 $ 690,362
7.9 %
U.S. net sales. U.S. net sales totaled $554.5 million in 2017, a 9.3% increase from $507.5 million in 2016, primarily due to
continued growth in our U.S. upper extremities business. U.S. sales represented approximately 74.4% of total net sales in 2017,
compared to 73.5% of total net sales in 2016.
Our U.S. lower extremities net sales increased to $228.0 million in 2017 from $222.9 million, representing growth of 2.3%, as
16.9% growth in our total ankle replacement products was partially offset by declines in foot and ankle fixation products driven
primarily by slower developing benefits from the hiring and training of approximately 100 new direct quota-carrying sales
representatives in the first quarter of 2017.
Our U.S. upper extremities net sales increased to $240.0 million in 2017 from $201.6 million, representing growth of 19.0%. This
growth was driven primarily by our innovative shoulder product portfolio, including the recent launch of our PERFORM TM
Reversed Glenoid System and continued success from our SIMPLICITI® shoulder system.
Our U.S. biologics net sales totaled $78.4 million in 2017, representing a 5.0% increase over 2016, driven primarily by continued
sales volume growth of AUGMENT® Bone Graft, partially offset by declines in our other biologics products.
International net sales. Net sales in our international regions totaled $190.5 million in 2017, compared to $182.8 million in 2016.
This 4.2% increase was due to a 7.6% increase in sales in our direct markets in Europe and Canada and a $0.9 million favorable
impact from foreign currency exchange rates. This growth was partially offset by lower levels of sales to stocking distributors.
Our international lower extremities net sales decreased 6.7% to $58.5 million in 2017 from $62.7 million in 2016 primarily due to
lower sales volumes to stocking distributors.
Our international upper extremities net sales increased 9.5% to $94.7 million in 2017 from $86.5 million in 2016, driven primarily
by a 16.7% increase in sales in our direct markets in Europe and Canada, and a $0.9 million favorable impact from foreign
currency exchange rates (a 1 percentage point favorable impact to international upper extremities sales growth rate). This growth
was partially offset by lower levels of sales to stocking distributors due to stocking orders in 2016.
60
Our international biologics net sales increased 18.0% to $22.3 million in 2017 from $18.9 million in 2016. This increase was
primarily attributable to new stocking distributors and accounts in China, as well as a $0.1 million favorable impact from foreign
currency exchange rates (a 1 percentage point favorable impact to international biologics sales growth rate).
Cost of sales
Our cost of sales totaled $160.9 million, or 21.6% of net sales, in 2017, compared to $192.4 million, or 27.9% of net sales, in
2016, representing a decrease of 6.3 percentage points as a percentage of net sales. This decrease was primarily driven by
$37.7 million (5.5% of net sales) of inventory step-up amortization in 2016 associated with inventory acquired from the
Wright/Tornier merger. The remaining decrease in cost of sales as a percentage of net sales was driven by manufacturing
efficiencies as compared to the prior year period.
Our cost of sales and corresponding gross profit percentages can be expected to fluctuate in future periods depending upon, among
other factors, changes in our product sales mix and prices, distribution channels and geographies, manufacturing yields, period
expenses, levels of production volume, and currency exchange rates.
Selling, general and administrative
Our selling, general and administrative expenses totaled $525.2 million, or 70.5% of net sales, in 2017, compared to
$541.6 million, or 78.4% of net sales, in 2016. These decreases were driven primarily by a decrease in spending on transition and
transaction costs which totaled $9.0 million (1.2% of net sales) and $31.9 million (4.6% of net sales) for 2017 and 2016,
respectively, as well as a benefit recognized in 2017 related to incentive and indirect tax projects completed during the fourth
quarter of 2017 totaling $9.0 million (1.2% of net sales). The remaining decrease as a percentage of net sales was primarily driven
by leverage of relatively flat general and administrative expenses over increased net sales and lower levels of cash incentive
compensation expense.
Our selling, general and administrative expenses are expected to decrease as a percentage of net sales in 2018, through a
combination of continued cost synergies and expense leverage as we expect net sales to continue to increase at a higher rate than
expenses.
Research and development
Our investment in research and development expense totaled $50.1 million in 2017 compared to $50.5 million in 2016. Research
and development costs remained constant at approximately 7% of net sales.
Our research and development expenses are estimated to range from 7% to 8% as a percentage of net sales in 2018.
Amortization of intangible assets
Charges associated with amortization of intangible assets totaled $28.4 million in 2017 compared to $28.8 million in 2016. Based
on intangible assets held at December 31, 2017, we expect to incur charges associated with amortization of intangible assets of
approximately $25.0 million in 2018, $23.0 million in 2019, $22.3 million in 2020, $22.1 million in 2021, and $22.1 million in
2022.
Interest expense, net
Interest expense, net, totaled $74.6 million in 2017 and $58.5 million in 2016. Increased interest expense was driven by the
increase in debt outstanding following the issuance of the 2021 Notes in the second quarter of 2016 and borrowings under our
ABL Facility established in the fourth quarter of 2016 (see Note 9 to our consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary Data” for further discussion of changes in our outstanding debt). Our interest expense in
2017 related primarily to non-cash interest expense associated with the amortization of the discount on the 2021 Notes and 2020
Notes of $18.1 million and $27.3 million, respectively; amortization of deferred financing charges on the 2021 Notes, 2020 Notes,
2017 Notes, and our ABL Facility totaling $4.9 million; and cash interest expense primarily associated with the coupon on the
2021 Notes, 2020 Notes, 2017 Notes and our ABL Facility totaling $23.5 million. Our interest expense in 2016 related primarily
to non-cash interest expense associated with the amortization of the discount on the 2021 Notes and 2020 Notes of $9.8 million
and $25.9 million, respectively; amortization of deferred financing charges on the 2021 Notes, 2020 Notes, and 2017 Notes
totaling $3.9 million; and cash interest expense on the 2021 Notes, 2020 Notes, and 2017 Notes totaling $17.8 million. An
insignificant amount of interest income was recorded during 2017 and 2016.
61
Other expense (income), net
Other expense, net was $5.6 million of expense in 2017, compared to $3.1 million of income in 2016.
In 2017, other expense, net, primarily consisted of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a $4.5 million loss on currency translation, including hedging activities;
an unrealized loss of $5.3 million for the mark-to-market adjustment on CVRs issued in connection with the
BioMimetic acquisition; partially offset by
an unrealized gain of $4.8 million for the net mark-to-market adjustments on our derivative assets and liabilities;
and
a benefit of $0.6 million related to incentive and indirect tax projects.
In 2016, other income, net, primarily consisted of:
(cid:120)
(cid:120)
(cid:120)
an unrealized gain of $28.3 million for the mark-to-market adjustment on our derivatives; partially offset by
a $12.3 million write-off of unamortized debt discount and deferred financing fees; and
an unrealized loss of $8.7 million for the mark-to-market adjustment on the CVRs issued in connection with the
BioMimetic acquisition.
Benefit for income taxes
We recorded a tax benefit of $35.0 million in 2017 and $13.4 million in 2016. During 2017, our effective tax rate was
approximately 35.0%, as compared to 7.5% in 2016. Our 2017 tax benefit included approximately $25.0 million recorded due to a
change in our valuation allowance with respect to certain deferred tax assets that we had previously determined were not more
likely than not to be realized. In addition, our 2017 tax benefit included approximately $8.3 million resulting primarily from the
effects of lower statutory tax rates and provisions regarding certain tax attributes resulting from recently enacted tax reform
legislation in the United States and France. The remaining tax benefit in 2017 was primarily related to losses, including
amortization of intangible assets, in jurisdictions where we do not have a valuation allowance. Our 2016 tax benefit included a
$5.6 million benefit representing the deferred tax effects associated with the acquired Tornier operations, as well as a $2.3 million
benefit related to the resolution of an IRS tax audit. The remaining tax benefit in 2016 was primarily related to losses, including
amortization of inventory fair value step-up and intangible assets, in jurisdictions where we do not have a valuation allowance.
Loss from discontinued operations, net of tax
Loss from discontinued operations, net of tax, consists primarily of costs associated with legal defense, income/loss associated
with product liability insurance recoveries/denials, and changes to any contingent liabilities associated with the OrthoRecon
business that was sold to MicroPort and, to a lesser degree, costs associated with the Large Joints business that was sold to Corin.
During 2017 and 2016, we recognized charges, net of insurance proceeds, of $94.0 million and $196.6 million, respectively, for
certain retained metal-on-metal product liability claims associated with the OrthoRecon business. See Note 4 and Note 16 to our
consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data” for further discussion
regarding our discontinued operations and our retained contingent liabilities associated with the OrthoRecon business.
Reportable segments
The following tables set forth, for the periods indicated, net sales and operating income of our reportable segments expressed as
dollar amounts (in thousands) and as a percentage of net sales:
Net sales
Operating income
Operating income as a percent of net sales
Net sales
Operating income
Operating income as a percent of net sales
Fiscal year ended December 31, 2017
U.S. Lower
Extremities
& Biologics
U.S. Upper
Extremities
International
Extremities
& Biologics
309,713
79,889
$
25.8 %
244,798
78,866
$
32.2 %
190,478
3,631
1.9 %
Fiscal year ended December 25, 2016
U.S. Lower
Extremities
& Biologics
U.S. Upper
Extremities
International
Extremities
& Biologics
300,847
85,645
$
28.5 %
206,700
65,231
$
31.6 %
182,815
5,872
3.2 %
$
$
62
Net sales of our U.S. lower extremities and biologics segment increased $8.9 million in 2017 over the prior year. This increase
was driven by continued growth in our total ankle replacement products and continued sales volume growth of AUGMENT® Bone
Graft and was offset by declines in foot and ankle fixation products driven primarily by slower developing benefits from the hiring
and training of approximately 100 new direct quota-carrying sales representatives in the first quarter of 2017. Operating income
of our U.S. lower extremities and biologics segment decreased $5.8 million in 2017 over the prior year. This decrease was
primarily due to investments in research and development for product development and clinical studies, as well as higher levels of
selling, general and administrative expenses to support the initiative to hire and train approximately 100 new direct quota-carrying
sales representatives.
Net sales of our U.S. upper extremities segment increased $38.1 million in 2017 over the prior year. Operating income of our U.S.
upper extremities segment increased $13.6 million in 2017 over the prior year. These increases to both net sales and operating
income were primarily driven by our innovative shoulder product portfolio, including the launch of our PERFORMTM Reversed
glenoid system and continued contribution from our SIMPLICITI® shoulder system.
Net sales of our International extremities and biologics segment increased $7.7 million in 2017 over the prior year. This increase
was primarily due to increased sales in our total direct markets, with continued growth in our international upper extremities
business. Operating income of our International extremities and biologics segment decreased $2.2 million in 2017 over the prior
year, primarily due to higher levels of sales and marketing expenses.
Comparison of the fiscal year ended December 25, 2016 to the fiscal year ended December 27, 2015
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 1,2
Gross profit
Operating expenses:
Selling, general and administrative 2
Research and development 2
Amortization of intangible assets
Total operating expenses
Operating loss
Interest expense, net
Other (income) expense, net
Loss from continuing operations before income taxes
Benefit for income taxes
Net loss from continuing operations
Loss from discontinued operations, net of tax
Net loss
___________________________
Fiscal year ended
December 25, 2016
December 27, 2015
Amount
% of net sales
Amount
% of net sales
$
$
690,362
192,407
497,955
541,558
50,514
28,841
620,913
(122,958)
58,530
(3,148)
(178,340)
(13,406)
(164,934)
(267,439)
(432,373)
100.0 % $
27.9 %
72.1 %
78.4 %
7.3 %
4.2 %
89.9 %
(17.8 )%
8.5 %
(0.5 )%
(25.8 )%
(1.9 )%
(23.9 )%
$
405,326
113,622
291,704
424,377
39,339
16,754
480,470
(188,766 )
41,358
10,884
(241,008 )
(3,652 )
(237,356 )
(61,345 )
(298,701 )
100.0 %
28.0 %
72.0 %
104.7 %
9.7 %
4.1 %
118.5 %
(46.6 )%
10.2 %
2.7 %
(59.5 )%
(0.9 )%
(58.6 )%
1 Cost of sales includes amortization of inventory step-up adjustment of $37.7 million and $10.3 million for the fiscal years
ended December 25, 2016 and December 27, 2015, respectively.
2 These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated:
Cost of sales
Selling, general and administrative
Research and development
Fiscal year ended
December 25,
2016
% of net sales
December 27,
2015
% of net sales
$
414
13,216
786
0.1 % $
1.9 %
0.1 %
287
22,777
1,900
0.1 %
5.6 %
0.5 %
63
The following table sets forth our net sales by product line for our U.S. and International businesses for the periods indicated (in
thousands) and the percentage of year-over-year change:
U.S.
Lower extremities
Upper extremities
Biologics
Sports med & other
Total U.S.
International
Lower extremities
Upper extremities
Biologics
Sports med & other
Total International
Total net sales
December
25, 2016
Fiscal year ended
December
27, 2015
% change
$ 222,936 $ 187,096
58,756
50,583
3,388
$ 507,547 $ 299,823
201,579
74,603
8,429
19.2 %
243.1 %
47.5 %
148.8 %
69.3 %
$
62,701 $
86,502
18,883
14,729
51,200
24,789
19,652
9,862
$ 182,815 $ 105,503
22.5 %
249.0 %
(3.9 )%
49.4 %
73.3 %
$ 690,362 $ 405,326
70.3 %
Supplemental Non-GAAP Pro Forma Information. Due to the significance of the legacy Tornier business that is not included in
our results of operations for the majority of the fiscal year ended December 27, 2015 and to supplement our consolidated financial
statements above prepared in accordance with US GAAP, we use certain non-GAAP financial measures, including combined pro
forma net sales. Our non-GAAP financial measures are not in accordance with, or an alternative for, GAAP measures and may be
different from non-GAAP financial measures used by other companies. In addition, our non-GAAP financial measures are not
based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our non-GAAP
financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent,
the usefulness of such measures for comparison purposes. We believe that non-GAAP financial measures have limitations in that
they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that
these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
See table below for a reconciliation of our non-GAAP combined pro forma net sales for the fiscal year ended December 27, 2015
to our net sales for such period as calculated in accordance with US GAAP.
The results of operations discussion that appears below has been presented utilizing a combination of historical unaudited and,
where relevant, non-GAAP combined pro forma unaudited information to include the effects on our consolidated financial
statements of our acquisition of Tornier, as if we had acquired Tornier as of January 1, 2014. The combined pro forma net sales
have been adjusted to reflect a combination of the historical results of operations of Tornier, as adjusted to reflect the effect on our
combined net sales of incremental revenues that would have been recognized had Tornier been acquired on January 1, 2014. The
combined pro forma net sales have been developed based on available information and upon assumptions that our management
believes are reasonable in order to reflect, on a pro forma basis, the impact of the Wright/Tornier merger.
The pro forma financial data is not necessarily indicative of results of operations that would have occurred had the Wright/Tornier
merger been consummated at the beginning of the period presented or which might be attained in the future.
The following table reconciles our non-GAAP combined pro forma net sales by product line for the fiscal year ended December
27, 2015 (in thousands):
Legacy Tornier
N.V. standalone
nine months ended
September 27,
2015 2
Fiscal year ended December 27, 2015
Legacy Tornier
Stub Period
(September 28,
2015 - September
30, 2015) 3
Legacy Tornier
net sales divested 4
Non-GAAP
combined pro
forma
net sales
Net sales as
reported 1
U.S.
Lower extremities
Upper extremities
Biologics
Sports med & other
Total extremities & biologics
Large joint
Total U.S.
International
Lower extremities
Upper extremities
Biologics
$
$
$
187,096 $
58,756
50,583
3,388
299,823
—
299,823 $
29,637 $
115,846
1,290
5,021
151,794
119
151,913 $
51,200 $
24,789
19,652
7,402 $
51,293
357
64
279 $
1,773
66
4
2,122
—
2,122 $
152 $
1,260
13
(9,733 ) $
—
—
—
(9,733 )
(119 )
(9,852 ) $
— $
—
—
207,279
176,375
51,939
8,413
444,006
—
444,006
58,754
77,342
20,022
Legacy Tornier
N.V. standalone
nine months ended
September 27,
2015 2
Fiscal year ended December 27, 2015
Legacy Tornier
Stub Period
(September 28,
2015 - September
30, 2015) 3
Net sales as
reported 1
Sports med & other
Total extremities & biologics
Large joint
Total International
Global
Lower extremities
Upper extremities
Biologics
Sports med & other
$
$
Total extremities & biologics
Large joint
Total net sales
___________________________
$
9,862
105,503
—
105,503 $
238,296 $
83,545
70,235
13,250
405,326
—
405,326 $
5,372
64,424
29,921
94,345 $
37,039 $
167,139
1,647
10,393
216,218
30,040
246,258 $
Legacy Tornier
net sales divested 4
—
—
(30,674 )
(30,674 ) $
132
1,557
753
2,310 $
431 $
3,033
79
136
3,679
753
4,432 $
(9,733 ) $
—
—
—
(9,733 )
(30,793 )
(40,526 ) $
Non-GAAP
combined pro
forma
net sales
15,366
171,484
—
171,484
266,033
253,717
71,961
23,779
615,490
—
615,490
1 The 2015 results were restated for the divestiture of our Large Joints business.
2 Legacy Tornier product line sales have been recast to reflect the reclassification of cement, instruments and freight from the
historical Tornier product line “Large Joints and Other” to the product line associated with those revenues that will be utilized
for future revenue reporting.
3 To add revenues from Legacy Tornier's fourth quarter of 2015 for the period prior to the merger closing date when operations
became consolidated.
4 To reduce from Tornier’s historical sales the U.S. sales associated with Tornier’s Salto Talaris and Salto XT ankle
replacement products and silastic toe replacement products that were divested prior to the merger and the global sales
associated with Tornier's Large Joints business that have been reflected in discontinued operations.
The following table sets forth our 2016 net sales growth rates by product line as compared to our 2015 non-GAAP combined
pro forma net sales for the periods indicated (in thousands) and the percentage of year-over-year change:
U.S.
Lower extremities
Upper extremities
Biologics
Sports med & other
Total U.S.
International
Lower extremities
Upper extremities
Biologics
Sports med & other
Total International
Global
Lower extremities
Upper extremities
Biologics
Sports med & other
Total net sales
Net sales
Fiscal year ended
December 25, 2016
Non-GAAP
combined pro forma
net sales
Fiscal year ended
December 27, 2015
%
change
$
$
$
$
$
$
222,936 $
201,579
74,603
8,429
507,547 $
62,701 $
86,502
18,883
14,729
182,815 $
285,637 $
288,081
93,486
23,158
690,362 $
207,279
176,375
51,939
8,413
444,006
58,754
77,342
20,022
15,366
171,484
266,033
253,717
71,961
23,779
615,490
7.6 %
14.3 %
43.6 %
0.2 %
14.3 %
6.7 %
11.8 %
(5.7 )%
(4.1 )%
6.6 %
7.4 %
13.5 %
29.9 %
(2.6 )%
12.2 %
65
Net sales
U.S. net sales. U.S. net sales totaled $507.5 million in 2016, a 69.3% increase from $299.8 million in 2015, primarily due to the
impact of the Wright/Tornier merger. U.S. net sales in 2016 increased 14.3% as compared to 2015 pro forma net sales. U.S. sales
represented approximately 73.5% of total net sales in 2016, compared to 74.0% of total net sales in 2015.
Our U.S. lower extremities net sales increased to $222.9 million in 2016 from $187.1 million, representing growth of 19.2%,
driven by growth in legacy Wright's lower extremities business, as well as the impact of the Wright/Tornier merger. Our U.S.
lower extremities net sales grew 7.6% in 2016 as compared to 2015 pro forma net sales. This pro forma net sales growth was
driven by 27.2% net sales growth in our total ankle replacement products, as well as sales from the launch of our SALVATION®
limb salvage system for treating Charcot foot and limb salvage cases, partially offset by declines in sales of legacy Tornier foot
and ankle products due to merger-related sales dis-synergies.
Our U.S. upper extremities net sales increased to $201.6 million in 2016 from $58.8 million, representing growth of 243.1%. This
growth was driven almost entirely by the impact of the Wright/Tornier merger. Our U.S. upper extremities net sales grew 14.3%
in 2016 as compared to 2015 pro forma net sales. This pro forma growth was driven by success of our AEQUALIS ASCEND®
shoulder products, including the AEQUALIS ASCEND® FLEXTM convertible shoulder system, as well as sales from our
SIMPLICITI® shoulder system that was launched late in the third quarter of 2015.
Our U.S. biologics net sales totaled $74.6 million in 2016, representing a 47.5% increase over 2015, driven primarily by sales of
AUGMENT® Bone Graft, which was commercially launched in the fourth quarter 2015. Our U.S. biologics net sales grew 43.6%
in 2016 as compared to 2015 pro forma net sales, primarily driven by sales of AUGMENT ® Bone Graft.
International net sales. Net sales of our extremities products in our international regions totaled $182.8 million in 2016, a 73.3%
increase from $105.5 million in 2015, primarily due to the impact of the Wright/Tornier merger. Our international net sales in
2016 increased 6.6% as compared to 2015 pro forma international net sales, and included a $4.7 million unfavorable impact from
foreign currency exchange rates (a 3 percentage point unfavorable impact to pro forma international net sales growth rate).
Our international lower extremities net sales increased 22.5% to $62.7 million in 2016 from $51.2 million in 2015. Our
international lower extremities sales grew 6.7% in 2016 as compared to 2015 pro forma international lower extremities net sales,
primarily driven by a 16.7% increase in sales to stocking distributors and lower than normal sales in Latin America in the prior
year period. This increase was partially offset by merger-related sales dis-synergies and a $2.1 million unfavorable impact from
foreign currency exchange rates (a 4 percentage point unfavorable impact to pro forma international lower extremities sales
growth rate).
Our international upper extremities net sales increased 249.0% to $86.5 million in 2016 from $24.8 million in 2015, driven
entirely by the impact of the Wright/Tornier merger. Our international upper extremities net sales grew 11.8% in 2016 as
compared to 2015 pro forma international upper extremities net sales, driven primarily by a 7.3% increase in sales in our direct
markets in Europe and a 37.9% increase in sales in Australia as a result of a stocking sale to a distributor, partially offset by a
$1.4 million unfavorable impact from foreign currency exchange rates (a 2 percentage point unfavorable impact to pro forma
international upper extremities sales growth rate).
Our international biologics net sales decreased 3.9% to $18.9 million in 2016 from $19.7 million in 2015. On a pro forma basis,
our international biologics net sales decreased 5.7% in 2016 as compared to 2015 pro forma international biologics net sales. This
decrease was primarily attributable to lower levels of sales to stocking distributors, as well as a $0.6 million unfavorable impact
from foreign currency exchange rates (a 3 percentage point unfavorable impact to pro forma international biologics sales growth
rate).
Cost of sales
Our cost of sales totaled $192.4 million, or 27.9% of net sales, in 2016, compared to $113.6 million, or 28.0% of net sales, in
2015, representing a decrease of 0.1 percentage points as a percentage of net sales. Cost of sales included $37.7 million (5.5% of
net sales) and $10.3 million (2.5% of net sales) of inventory step-up amortization in 2016 and 2015, respectively, associated with
inventory acquired from the Wright/Tornier merger. The remaining decrease in cost of sales as a percentage of net sales was
primarily driven by favorable geographic and product mix, as increased provisions for excess and obsolete inventory were
relatively flat as a percentage of sales due to the additional sales following the Wright/Tornier merger.
Selling, general and administrative
Our selling, general and administrative expenses totaled $541.6 million, or 78.4% of net sales, in 2016, compared to
$424.4 million, or 104.7% of net sales, in 2015. Selling, general and administrative expense for 2016 and 2015 included
$31.9 million (4.6% of net sales) and $75.9 million (18.7% of net sales), respectively, of transition and transaction costs associated
with the Wright/Tornier merger. The remaining decrease in selling, general and administrative expenses as a percentage of net
sales was driven primarily by leveraged spending in our U.S. lower extremities and biologics segment as expense grew at a
significantly lower rate than net sales, the addition of the legacy Tornier U.S. upper extremities business with a lower percentage
66
of selling, general and administrative expenses as a percentage of net sales than legacy Wright, and lower levels of corporate
spending as a percentage of net sales following the Wright/Tornier merger.
Research and development
Our investment in research and development expense totaled $50.5 million in 2016 compared to $39.3 million in 2015. This
increase was almost entirely due to $15.1 million of additional research and development expenses associated with the acquired
Tornier business.
Amortization of intangible assets
Charges associated with amortization of intangible assets totaled $28.8 million in 2016, compared to $16.8 million in 2015. This
increase was driven by amortization of intangible assets acquired as part of the Wright/Tornier merger.
Interest expense, net
Interest expense, net, totaled $58.5 million in 2016 and $41.4 million in 2015. Increased interest expense was driven by the
increase in debt outstanding following the issuance of the 2021 Notes in the second quarter of 2016 (see Note 9 to our
consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data” for further discussion of
changes in our outstanding debt). Our interest expense in 2016 related primarily to non-cash interest expense associated with the
amortization of the discount on the 2021 Notes and 2020 Notes of $9.8 million and $25.9 million, respectively; amortization of
deferred financing charges on the 2021 Notes, 2020 Notes, and 2017 Notes totaling $3.9 million; and cash interest expense
primarily associated with the coupon on the 2021 Notes, 2020 Notes, and 2017 Notes totaling $17.8 million. Our interest expense
in 2015 related primarily to non-cash interest expense associated with the amortization of the discount on the 2020 Notes and
2017 Notes of $21.8 million and $2.9 million, respectively, amortization of deferred financing charges on the 2020 Notes and
2017 Notes totaling $2.7 million and $0.5 million, respectively; and cash interest expense on the 2020 Notes and 2017 Notes
totaling $12.8 million. An insignificant amount of interest income was recorded during 2016 and 2015.
Other (income) expense, net
Other (income) expense, net was $3.1 million of income in 2016, compared to $10.9 million of expense in 2015. For 2016, other
income, net included a gain of $28.3 million for the net mark-to-market adjustments on our derivative assets and liabilities. This
gain was partially offset by a $12.3 million charge for write-off of pro rata unamortized deferred financing fees and debt discount
which resulted from the exchanges and repurchases of the 2017 Notes for the 2021 Notes, and an unrealized loss of $8.7 million
for the mark-to-market adjustment on CVRs issued in connection with the BioMimetic acquisition. In 2015, other expense, net
included a gain of $7.6 million for the mark-to-market adjustment on the CVRs issued in connection with the BioMimetic
acquisition, as well as an unrealized gain of $9.8 million for the mark-to-market adjustment on our derivatives, offset by a
$25.1 million charge for write-off of pro rata unamortized deferred financing fees and debt discount with repayment of
$240 million of the 2017 Notes.
Benefit for income taxes
We recorded a tax benefit of $13.4 million in 2016 and $3.7 million in 2015. During 2016, our effective tax rate was
approximately 7.5%, as compared to 1.7% in 2015. Our 2016 tax benefit included a $5.6 million benefit representing the deferred
tax effects associated with the acquired Tornier operations, as well as a $2.3 million benefit related to the resolution of an IRS tax
audit. The remaining tax benefit in 2016 was primarily related to losses, including amortization of inventory fair value step-up
and intangible assets, in jurisdictions where we do not have a valuation allowance. Our 2015 tax benefit was primarily
attributable to losses benefited in jurisdictions where we did not have a valuation allowance. Our relatively low effective tax rate
in both periods was primarily related to the valuation allowance on our U.S. net deferred tax assets, resulting in the inability to
recognize a tax benefit for pre-tax losses in the United States except to the extent to which we recognize a gain in discontinued
operations.
Loss from discontinued operations, net of tax
Loss from discontinued operations, net of tax, consists primarily of costs associated with legal defense, income/loss associated
with product liability insurance recoveries/denials, and changes to any contingent liabilities associated with the OrthoRecon
business that was sold to MicroPort and, to a lesser degree, costs associated with the Large Joints business that was sold to Corin.
During 2016, we recognized a $196.6 million charge, net of insurance proceeds, for certain retained metal-on-metal product
liability claims associated with the OrthoRecon business primarily as a result of the Master Settlement Agreement we entered into
in November 2016 (see Note 16 to our consolidated financial statements contained in “Item 8. Financial Statements and
Supplementary Data” for further discussion). See Note 4 to our consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data” for further discussion of our discontinued operations.
67
Reportable segments
The following tables set forth, for the periods indicated, net sales and operating income (loss) of our reportable segments
expressed as dollar amounts (in thousands) and as a percentage of net sales:
Net sales
Operating income
Operating income as a percent of net sales
Net sales
Operating income (loss)
Operating income (loss) as a percent of net sales
Fiscal year ended December 25, 2016
U.S. Lower
Extremities
& Biologics
U.S. Upper
Extremities
International
Extremities
& Biologics
300,847
85,645
$
28.5 %
206,700
65,231
$
31.6 %
182,815
5,872
3.2 %
Fiscal year ended December 27, 2015
U.S. Lower
Extremities
& Biologics
U.S. Upper
Extremities
International
Extremities
& Biologics
239,748
39,008
$
16.3 %
60,075
21,394
$
35.6 %
105,503
(5,567 )
(5.3 )%
$
$
Net sales of our U.S. lower extremities and biologics segment increased $61.1 million in 2016 over 2015. This increase was
driven by growth in legacy Wright's lower extremities business, sales of AUGMENT® Bone Graft, which was commercially
launched in the fourth quarter 2015, as well as the impact of the Wright/Tornier merger. Operating income of our U.S. lower
extremities and biologics segment increased $46.6 million in 2016 over 2015. This increase was driven by leveraging expenses,
as net sales increased at a higher rate than operating expenses.
Net sales of our U.S. upper extremities segment increased $146.6 million in 2016 over 2015. This increase was driven almost
entirely by the impact of the Wright/Tornier merger. Operating income of our U.S. upper extremities segment increased
$43.8 million in 2016 over 2015. This increase was driven almost entirely by the acquired Tornier business.
Net sales of our International extremities and biologics segment increased $77.3 million in 2016 over 2015. This increase was
primarily due to the impact of the Wright/Tornier merger. Operating income of our International extremities and biologics segment
increased $11.4 million in 2016 over 2015. This increase was primarily driven by the acquired Tornier business.
Seasonality and Quarterly Fluctuations
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. This typically results in selling, general and
administrative expenses and research and development expenses as a percentage of net sales that are higher during this period 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 meetings held by the American College of Foot and Ankle Surgeons and the
American Academy of Orthopaedic Surgeons. During these three-day events, we display our most recent and innovative products
in the lower extremities market.
We have experienced and expect to continue to experience meaningful variability in our net sales and cost of sales as a percentage
of net sales among quarters, as well as within each quarter, as a result of a number of factors including, among other things, the
number and mix of products sold in the quarter and the geographies in which they are sold; the demand for, and pricing of our
products and the products of our competitors; the timing of or failure to obtain regulatory clearances or approvals for products;
costs, benefits, and timing of new product introductions; the level of competition; the timing and extent of promotional pricing or
volume discounts; changes in average selling prices; the availability and cost of components and materials; number of selling
days; fluctuations in foreign currency exchange rates; the timing of patients’ use of their calendar year medical insurance
deductibles; and impairment and other special charges.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, certain liquidity measures (in thousands):
Cash and cash equivalents
Restricted cash
Working capital
December 31,
2017
167,740 $
$
—
151,599
December 25,
2016
262,265
150,000
285,107
68
Operating activities. Cash (used in) provided by operating activities totaled $(184.8) million, $37.8 million, and $(195.9) million
in 2017, 2016, and 2015, respectively. The increase in cash used in operating activities in 2017 as compared to the cash provided
by operating activities in 2016 was driven by cash payments for previously agreed upon product liability settlements related to the
former OrthoRecon business and the 2016 receipt of $60 million insurance proceeds associated with metal-on-metal product
liabilities (see Note 16 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary
Data” for further discussion of these liabilities). Other working capital changes were more than offset by an increase in cash
profitability.
The increase in cash provided by operating activities in 2016 as compared to the cash used in operating activities in 2015 was
driven by higher cash profitability due to decreased spending on transition and transaction expenses and leveraged expenses
following the Wright/Tornier merger, the receipt of $60 million insurance proceeds associated with metal-on-metal product
liabilities (see Note 16 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary
Data” for further discussion), and a 2015 milestone payment associated with the BioMimetic acquisition upon the FDA approval
of AUGMENT® Bone Graft totaling $98 million, of which $28 million represented the excess over the value originally assigned
as part of the purchase price allocation and was included as a cash outflow within operating activities.
Investing activities. The majority of our cash used in financing activities is the result of capital spending. Our capital
expenditures totaled $63.5 million in 2017, $50.1 million in 2016, and $43.7 million in 2015. The majority of our capital
spending primarily relates to surgical instrumentation; however, we also incurred capital expenditures in 2017, 2016 and 2015
associated with integration activities of the Wright/Tornier merger, including spending on computer systems and facilities as we
integrated operations in certain international markets.
In addition to capital expenditures, during 2017, we paid $44.1 million in conjunction with the IMASCAP acquisition, net of cash
acquired. See Note 3 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary
Data” for additional information regarding this acquisition.
During 2016, we received proceeds of $20.7 million related to the sale of the Large Joints business. See Note 4 to our
consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data” for additional information
regarding this sale.
During 2015, we acquired $30.1 million of cash, primarily as a result of the Wright/Tornier merger since the merger was an all-
stock transaction, and we paid for the acquisition of the Surgical Specialties sales and distribution business.
Financing activities. Cash provided by financing activities totaled $46.8 million, $270.4 million, $126.9 million in 2017, 2016
and 2015, respectively. Cash provided by financing activities in 2017 was primarily attributable to $34.9 million of debt proceeds
largely from additional borrowings from the ABL Facility, partially offset by $11.5 million of debt payments including a
$2.0 million payment of the 2017 Notes and net payments due to the weekly lockbox repayment/re-borrowing arrangement
underlying the ABL Facility. During 2016, cash provided by financing was primarily attributable to the $30 million proceeds
received from the ABL Facility and proceeds received from the issuance of convertible notes, partially offset by the partial
settlement of previously outstanding convertible notes. See Note 6 and Note 9 of our consolidated financial statements contained
in “Item 8. Financial Statements and Supplementary Data” for additional information regarding our derivative and debt activity,
respectively. During 2017, we also received $27.6 million of cash in connection with the issuance of shares under our share-based
compensation plan, as compared to $8.5 million and $3.5 million in 2016 and 2015, respectively.
As of October 1, 2015, legacy Tornier had approximately $75 million in outstanding term debt and $7 million in a line of credit
under a pre-existing credit agreement. Upon completion of the Wright/Tornier merger, we terminated all commitments under this
credit agreement and repaid approximately $81 million in outstanding indebtedness. We did not incur any early termination
penalties in connection with such repayment and termination.
During 2015, we paid a milestone payment associated with the BioMimetic acquisition upon FDA approval of AUGMENT® Bone
Graft totaling $98 million, of which $70 million represented the value originally assigned as part of the purchase price allocation
and was included as a cash outflow from financing activities.
Repatriation. As of December 31, 2017, approximately $5.6 million of our cash and cash equivalents was held by certain U.S.-
controlled non-U.S. subsidiaries which may not represent available liquidity for general corporate purposes. Recent legislative
changes under the 2017 U.S. Tax Cuts and Jobs Act required us to include our cumulative undistributed earnings of our U.S.
controlled non-U.S. subsidiaries in our current year U.S. taxable income. Additionally, this legislation provides us an opportunity
to repatriate cash to the U.S. without additional U.S. income tax consequences. However, our current plans do not foresee a need
to repatriate funds that are designated as permanently reinvested in order to fund our operations or meet currently anticipated
liquidity and capital investment needs.
Discontinued operations. Cash flows from discontinued operations are combined with cash flows from continuing operations in
the consolidated statements of cash flows. Cash flows from discontinued operations include those related to both the Large Joints
and OrthoRecon businesses.
69
During the fiscal year ended December 31, 2017, cash used in operating activities by the Large Joints business totaled
$6.5 million, and cash used in operating activities by the OrthoRecon business totaled $221.6 million.
During the fiscal year ended December 25, 2016, cash provided by operating and investing activities from the Large Joints
business totaled $5.2 million and $20.7 million, respectively. Cash provided by operating activities from the OrthoRecon business
totaled $16.7 million, primarily due to the receipt of the $60 million insurance settlement offset by legal defense costs and
settlement of product liabilities.
During the fiscal year ended December 27, 2015, cash provided by operating activities from the Large Joints business totaled
$2.9 million. Cash used by operating activities from the OrthoRecon business was approximately $28 million associated with
legal defense costs and settlement of product liabilities, net of insurance proceeds received.
We expect significant cash outflows resulting from product liabilities during 2018 and 2019, associated with the metal-on-metal
settlements described in Note 16 to our consolidated financial statements contained in “Item 8. Financial Statements and
Supplementary Data.” We do not expect that the future cash outflows from discontinued operations, including the payment of
these retained liabilities of the OrthoRecon business, will have an impact on our ability to meet contractual cash obligations and
fund our working capital requirements, operations, and anticipated capital expenditures.
Contractual cash obligations. At December 31, 2017, we had contractual cash obligations and commercial commitments as
follows (in thousands):
Contractual obligations
Amounts reflected in consolidated balance sheet:
Capital lease obligations 1
Notes payable 2
Amounts not reflected in consolidated balance
sheet:
Operating leases
Interest on notes payable 3
Total contractual cash obligations
_______________________________
1
Payments include amounts representing interest.
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Payments due by periods
$
23,690 $
990,503
4,371 $
1,737
7,946 $
589,776
4,830 $
396,031
6,543
2,959
34,884
59,559
8,076
20,715
12,909
31,050
8,125
7,794
5,774
—
$ 1,108,636 $
34,899 $
641,681 $
416,780 $
15,276
2 Our notes payable include 2020 Notes, 2021 Notes, shareholder debt, mortgages, and other debt. See further discussion in
Note 9 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”
3 Represents interest on 2020 Notes, 2021 Notes, shareholder debt, and mortgages, and other debt. See further discussion in
Note 9 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”
The amounts reflected in the table above exclude product liabilities, including the settlement of certain metal-on-metal hip
replacement product liability litigation, described in Note 16 to our consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary Data.”
The table above also does not include debt outstanding under the ABL Credit Agreement. We have reflected this debt as a current
liability on our consolidated balance sheets as of December 31, 2017 as required by US GAAP due to the weekly lockbox
repayment/re-borrowing arrangement underlying the agreement, as well as the ability for the lenders to accelerate the repayment
of the debt under certain circumstances as described in Note 9 to our consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary Data.”
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, 2017. These future payments are subject to foreign currency exchange rate risk.
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 consolidated balance sheet at December 31, 2017. The minimum lease payments related to these leases are
discussed further in Note 9 to our consolidated financial statements contained in “Item 8. 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. In accordance with US GAAP, our operating leases are not
recognized on our consolidated balance sheets; however, the minimum lease payments related to these agreements are disclosed in
Note 16 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”
70
The table above does not include the 2021 and 2020 Notes Conversion Derivative (see “Item 7A. Quantitative and Qualitative
Disclosures About Market Risk” for quantitative analysis on possible cash obligations upon maturity at various assumed stock
prices).
The table above also does not include certain contingent consideration:
(cid:120) Contingent consideration of up to $84 million may be paid upon reaching certain revenue milestones related to the
BioMimetic acquisition. If, prior to March 1, 2019, sales of AUGMENT® Bone Graft reach $40 million over 12
consecutive months, a cash payment would be required at $1.50 per share, or $42 million. Further, if, prior to March
1, 2019, sales of AUGMENT® Bone Graft reach $70 million over 12 consecutive months, an additional cash
payment would be required at $1.50 per share, or $42 million.
(cid:120) As part of the IMASCAP acquisition, contingent consideration of approximately €15.1 million or $17.8 million will
be required in potential sales earnouts and milestone payments for new software modules and a potential future
implant system.
(cid:120) Contingent consideration of up to $0.9 million may be paid upon achieving revenue milestones related to the
acquisition of Surgical Specialties Australia Pty.
The estimated fair value of the contingent consideration has been recorded on our consolidated balance sheets within “Accrued
expenses and other current liabilities” and “Other long-term liabilities” as described in Note 6 and Note 12.
In addition to the contractual cash obligations discussed above, all of our U.S. net sales and a portion of our international net sales
are subject to commissions based on net sales. A substantial portion of our global net sales are subject to royalties earned based on
product sales.
Additionally, as of December 31, 2017, we had approximately $6 million of unrecognized tax benefits recorded on our
consolidated balance sheet. This represents the tax benefits associated with various tax positions taken, or expected to be taken,
on U.S. 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. 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 “Item 8. Financial Statements and Supplementary Data.”
Other liquidity information. We have historically funded our cash needs through various equity and debt issuances, more recently
borrowings under our ABL Facility, and through cash flow from operations.
On December 23, 2016, we, together with WMG and certain of our other wholly-owned U.S. subsidiaries, entered into a ABL
Credit Agreement with Midcap Financial Trust, as administrative agent (Agent) and a lender and the additional lenders from time
to time party thereto. The ABL Credit Agreement provides for a $150 million senior secured asset based line of credit, subject to
the satisfaction of a borrowing base requirement (ABL Facility). The ABL Facility may be increased by up to $100 million upon
our request, subject to the consent of the Agent and each of the other lenders providing such increase and the satisfaction of
customary conditions. We are required to maintain net revenue at or above specified minimum levels, to maintain liquidity in the
United States above a specified level and to comply with other covenants under the ABL Credit Agreement. We are in compliance
with all covenants as of December 31, 2017. As of December 31, 2017, we had $53.6 million in borrowings outstanding under the
ABL Facility and $96.4 million in unused availability under the ABL Facility. As of December 25, 2016, we had $30.0 million in
borrowings outstanding under the ABL Facility and $120.0 million in unused availability under the ABL Facility.
On November 1, 2016, WMT entered into the MSA with Court-appointed attorneys representing plaintiffs in the metal-on-metal
hip replacement product liability litigation pending before the United States District Court for the MDL and the JCCP. Under the
terms of the MSA, the parties agreed to settle 1,292 specifically identified claims associated with CONSERVE®, DYNASTY® and
LINEAGE® products that meet the eligibility requirements of the MSA and were either pending in the MDL or JCCP, or subject to
court-approved tolling agreements in the MDL or JCCP, for a settlement amount of $240 million.
On October 3, 2017, WMT and the Court-appointed attorneys representing plaintiffs in the metal-on-metal hip replacement
product liability litigation pending before the MDL and the JCCP agreed on a comprehensive settlement intended to resolve
substantially all remaining metal-on-metal hip claims pending or tolled in the MDL and JCCP that were not settled in the
previously disclosed MSA dated November 1, 2016. The comprehensive settlement is evidenced by the Second Settlement
Agreements. The comprehensive settlement was contingent on availability of new insurance proceeds totaling at least $35 million
from applicable insurance carriers by December 31, 2017. On December 29, 2017, WMT entered into a First Amendment to the
Third Settlement Agreement pursuant to which the deadline for the recovery of new insurance proceeds totaling at least
$35 million from applicable insurance carriers was extended through February 28, 2018 and, on February 23, 2018, WMT entered
into a Second Amendment to the Third Settlement Agreement pursuant to which the deadline was extended through March 30,
2018. To date, certain of the insurance carriers have contributed or agreed to contribute $20 million of funds applicable against
the contingency.
As of December 31, 2017, our accrual for metal-on-metal claims totaled $177.5 million, of which $127.4 million is included in
our consolidated balance sheet within “Accrued expenses and other current liabilities” and $50.1 million is included within “Other
71
liabilities.” As of December 25, 2016, our accrual for metal-on-metal claims totaled $256.7 million, of which $242.8 million is
included in our consolidated balance sheet within “Accrued expenses and other current liabilities” and $13.9 million is included
within “Other liabilities.” See Note 16 to our consolidated financial statements for additional discussion regarding the MSA and
Second Settlement Agreements and our accrual methodologies for the metal-on-metal hip replacement product liability claims.
In May 2016, we issued $395 million aggregate principal amount of the 2021 Notes, which, after consideration of the exchange of
approximately $54 million principal amount of the 2017 Notes and $45 million principal amount of the 2020 Notes, generated net
proceeds of approximately $237.5 million. In connection with the offering of the 2021 Notes, we entered into convertible note
hedging transactions with two counterparties. We also entered into warrant transactions in which we sold stock warrants for an
aggregate of 18.5 million ordinary shares to these two counterparties. We used approximately $45 million of the net proceeds
from the offering to pay the cost of the convertible note hedging transactions (after such cost was partially offset by the proceeds
we received from the sale of the warrants).
In February 2015, WMG issued $632.5 million of the 2020 Notes, which generated net proceeds of approximately $613 million.
In connection with the offering of the 2020 Notes, WMG entered into convertible note hedging transactions with three
counterparties. WMG also entered into warrant transactions in which WMG sold warrants for an aggregate of 20,489,142 shares
of WMG common stock to these three counterparties. WMG used approximately $58 million of the net proceeds from the offering
to pay the cost of the convertible note hedging transactions (after such cost was partially offset by the proceeds we received from
the sale of the warrants). WMG also used approximately $292 million of the net proceeds from the offering to repurchase
approximately $240 million aggregate principal amount of outstanding 2017 Notes in privately negotiated transactions. On
November 24, 2015, we entered into a supplemental indenture to the indenture governing the 2020 Notes which provided for,
among other things, our full and unconditional guarantee, on a senior unsecured basis, of all of WMG's obligations relating to the
2020 Notes and to make certain other adjustments to the terms of the indenture to give effect to the Wright/Tornier merger. Also
on November 24, 2015, we assumed the warrants initially issued by WMG in connection with the 2020 Notes offering.
Although it is difficult for us to predict our future liquidity requirements, we believe that our cash and cash equivalents balance of
approximately $167.7 million, together with $96.4 million in availability under our ABL Facility as of December 31, 2017, will be
sufficient for the next 12 months to fund our working capital requirements and operations, permit anticipated capital expenditures
in 2018 of approximately $55 million, pay retained metal-on-metal product and other liabilities of the OrthoRecon business,
including without limitation amounts under the MSA and Second Settlement Agreements, net of insurance recoveries, fund
contingent consideration including without limitation the up to $42 million CVR milestone payment, and meet our other
anticipated contractual cash obligations in 2018. We may face liquidity challenges during the next few years in light of anticipated
significant contingent liabilities and financial obligations and commitments, including among others, acquisition-related
contingent consideration payments, payments related to our outstanding indebtedness, and costs and payments related to pending
litigation.
In the event that we would require additional working capital to fund future operations, we could seek to acquire that through
borrowings under the additional $100.0 million that may be available under the ABL Facility or additional equity or debt financing
arrangements which may or may not be available on favorable terms at such time. If we raise additional funds by issuing equity
securities, our shareholders may experience dilution. Additional debt financing, if available, may involve additional covenants
restricting our operations or our ability to incur additional debt, in addition to those under our existing indentures and the ABL
Credit Agreement. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us
or our shareholders. If we do not have, or are not able to obtain, sufficient funds, we may not be able to develop or enhance our
products, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated
customer requirements or we may have to delay development or commercialization of our products or scale back our operations.
In-process research and development. In connection with the BioMimetic acquisition, we acquired in-process research and
development (IPRD) technology related to projects that had not yet reached technological feasibility as of the acquisition date,
which included AUGMENT® Injectable Bone Graft. The acquisition-date fair value of the IPRD technology was $27.1 million for
AUGMENT® Injectable Bone Graft. The fair value of the IPRD technology was reduced to $0 as of December 31, 2014, which
reflects the impairment charges recognized in 2013 after receipt of the not approvable letter from the FDA in response to a PMA
application for AUGMENT® Bone Graft for use as an alternative to autograft in hindfoot and ankle fusion procedures.
In connection with the Wright/Tornier merger, we acquired IPRD technology related to three projects that had not yet reached
technological feasibility as of the merger date. These projects included PerFORM Rev/Rev+, AEQUALIS® Adjustable Reversed
Ext (AARE) (re-branded in 2016 to AEQUALIS® Flex Revive), and PerFORM+ that were assigned fair values of $14.5 million,
$2.1 million, and $0.4 million, respectively, on the acquisition date. During 2016, we received FDA clearance of PerFORM
Rev/Rev+ and PerFORM+.
In connection with the IMASCAP acquisition, we acquired IPRD technology related to a patient specific implant system that had
not yet reached technological feasibility as of the acquisition date. This project was assigned a fair value of $5.3 million on the
acquisition date.
72
The current IPRD projects we acquired in our IMASCAP acquisition, BioMimetic acquisition, and the Wright/Tornier merger are
as follows:
(cid:120) The patient specific implant is a reverse shoulder replacement implant having glenoid or glenoid and humeral
implant components. We have an anticipated first clinical use in 2020 and launch in the first half of 2021. Project
cost to complete is estimated to be less than $2 million. However, the risks and uncertainties associated with
completion are dependent upon testing validations and FDA and CE mark clearance.
(cid:120) Augment Injectable combines rhPDGF-BB with an injectable osteoconductive matrix. Augment Injectable can be
injected into a fusion site during a surgical procedure, delivering rhPDGF-BB to promote fusion as a bone graft
substitute. Our initial clinical development program for Augment Injectable has focused on securing regulatory
approval for ankle and hindfoot fusion indications in the United States. Augment Injectable is already approved in
several markets outside the United States. We currently estimate it could take one to three years to complete this
project. We have incurred expenses of approximately $5.9 million for Augment Injectable since the date of
acquisition and $1.0 million in the fiscal year ended December 31, 2017. We are currently pursuing FDA approval
with a PMA Panel Track Supplement. This does not necessarily result in a panel meeting, but it affords the FDA
additional time to review the submission beyond 180 days.
(cid:120) AARE will ultimately be our second-generation revision product, with an improved implant that is convertible and
addresses more indications, and a more comprehensive instrument set that includes universal extraction
instrumentation to address the entire revision procedure, not just the final implant. The instruments and implants for
the new revision system are currently in design phase. We have an anticipated first clinical use in 2018 and launch
in the first half of 2019. Project cost to complete is estimated to be less than $1 million. However, the risks and
uncertainties associated with completion are dependent upon testing validations and FDA clearance.
Critical Accounting Estimates
All of our significant accounting policies and estimates are described in Note 2 to our consolidated financial statements contained
in “Item 8. Financial Statements and Supplementary Data.” 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 our 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 our financial statements. Those
financial estimates include:
Discontinued operations. On October 21, 2016, pursuant to the binding offer letter dated as of July 8, 2016, we, Corin, and
certain other entities related to us entered into a business sale agreement and simultaneously completed and closed the sale of our
business operations formerly operating under the Large Joints segment. Pursuant to the terms of the agreement, we sold
substantially all of our assets related to our hip and knee, or large joints, business to Corin for approximately €29.7 million in cash,
less approximately €11.1 million for net working capital adjustments.
We determined that the Large Joints business meets the criteria for classification as discontinued operations. All historical
operating results for the Large Joints business, including costs associated with corporate employees and infrastructure to be
transferred as a part of the sale, are reflected within discontinued operations in our consolidated statements of operations. Further,
all assets and associated liabilities transferred to Corin were classified as assets and liabilities held for sale in our consolidated
balance sheets for all periods presented. We recognized an impairment loss on held for sale classification of $21.3 million before
the effect of income taxes, during 2016 based on the difference between the net carrying value of the assets and liabilities held for
sale and the purchase price, less estimated adjustments and costs to sell. This loss was recorded within “Net loss from
discontinued operations” in our consolidated statements of operations. All current operating results for the Large Joints business
are reflected within discontinued operations in our consolidated financial statements.
On January 9, 2014, legacy Wright completed the sale of the OrthoRecon business, which consists of legacy Wright's hip and knee
product implants, to MicroPort. We determined that this transaction meets the criteria for classification as discontinued operations
under the provisions of FASB ASC 205-20. As such, all historical operating results for the OrthoRecon business are reflected
within discontinued operations in our consolidated statements of operations. As this sale occurred in early 2014, costs for 2014,
2015 and 2016 primarily relate to product liability claims, including legal defense, settlements and judgments, and changes in
contingent liabilities net of product liability insurance recoveries. Further, all assets and associated liabilities transferred to
MicroPort were classified as assets and liabilities held for sale on our consolidated balance sheet, in accordance with FASB ASC
360.
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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 and surgery centers. Our products are sold
through a network of employee and independent sales representatives in the United States and by a combination of employee sales
representatives, independent sales representatives, and stocking distributors outside the United States. 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.
During the fiscal quarter ended December 27, 2015, following the Wright/Tornier merger, we changed our estimate of uninvoiced
revenue. While we have generally recognized revenue at the time that the product was surgically implanted, from a timing
perspective, we now recognize revenue at the time the surgery and associated products used are reported, as opposed to previously
when we received clerical documentation from the hospital. We accounted for this as a change in estimate and recorded additional
revenue of approximately $3 million in the fiscal quarter ended December 27, 2015.
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 stocking
distributors are obligated to pay us within specified terms regardless of when, if ever, they sell the products. In general, our
stocking 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. An insignificant amount of sales related to these types of agreements
were deferred and not yet recognized as revenue as of December 31, 2017 and December 25, 2016.
We must make estimates of potential future product returns related to current period product sales. We base our estimate for sales
returns on historical sales and product return information, including historical experience and trend information. Our reserve for
sales returns has historically been immaterial. We charge our customers for shipping and handling and recognize these amounts as
part of revenue.
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and has
subsequently issued several supplemental and/or clarifying ASUs (collectively ASC 606). Accounting Standards Codification
(ASC) 606 prescribes a single common revenue standard that replaces most existing US GAAP revenue recognition guidance.
ASC 606 outlines a five-step model, under which we will recognize revenue as performance obligations within a customer
contract are satisfied. ASC 606 is intended to provide more consistent interpretation and application of the principles outlined in
the standard across filers in multiple industries and within the same industries compared to current practices, which should
improve comparability. Adoption of ASC 606 is required for annual reporting periods beginning after December 15, 2017 (fiscal
year 2018 for Wright), including interim periods within the reporting period. Based on our review of our current portfolio of
customer contracts, including a review of historical accounting policies and practices, we expect that revenue will continue to be
recognized at a point in time, generally upon surgical implantation or shipment of products to distributors, consistent with our
current revenue recognition model. Therefore, adoption of ASC 606 is not expected to have a material effect on our consolidated
financial statements.
In 2011, we entered into a trademark license agreement with KCI Medical Resources, a subsidiary of Kinetic Concepts, Inc.
(KCI). In exchange for $8.5 million, of which $5.5 million was received immediately and $3 million was received in January
2012, this license agreement provides KCI with a non-transferable license to use our trademarks associated with our
GRAFTJACKET® line of products in connection with the marketing and distribution of KCI's soft tissue graft containment
products used in the wound care field, subject to certain exceptions. License revenue under this agreement is being recognized
over 12 years on a straight-line basis.
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 and surgery centers. Our collection history has been favorable with
minimal bad debts from these customers. 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 repeated collection efforts.
We believe that the amount included in our allowance for doubtful accounts has been a historically appropriate 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, which would necessitate additional allowances in future periods. Our
allowances for doubtful accounts were $4.3 million and $4.5 million at December 31, 2017 and December 25, 2016, 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. We estimate excess and obsolete inventory based on both the current age of kit inventory as compared to its estimated life
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cycle and our forecasted product demand and production requirements for other inventory items for the next 36 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.
Total charges incurred to write down excess and obsolete inventory to net realizable value included in “Cost of sales” were
approximately $19.2 million, $21.5 million, and $14.2 million for the fiscal years ended December 31, 2017, December 25, 2016,
and December 27, 2015, respectively. During the fiscal years ended December 31, 2017 and December 25, 2016, our excess and
obsolete charges included product rationalization initiative adjustments of $3.1 million and $4.1 million, respectively. During the
year ended December 27, 2015, our excess and obsolete inventory charges included $4.1 million related to a change in estimate.
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.
Business combinations, goodwill and long-lived assets. We account for acquired businesses using the purchase method of
accounting. Under the purchase method, our consolidated financial statements include the financial results of an acquired business
starting from the date the acquisition is completed. In addition, the assets acquired, liabilities assumed, and any contingent
consideration must be recorded at the date of acquisition at their respective estimated fair values, with any excess of the purchase
price over the estimated fair values of the net assets acquired recorded as goodwill. Significant judgment is required in estimating
the fair value of contingent consideration and intangible assets and in assigning their respective useful lives. Accordingly, we
typically obtain the assistance of third-party valuation specialists for significant acquisitions. The fair value estimates are based
on available historical information and on future expectations and assumptions deemed reasonable by management, but are
inherently uncertain.
We use a discounted cash flow analysis given probability and estimated timing of payout to determine the fair value of contingent
consideration on the date of acquisition. Significant changes in the discount rate used could affect the accuracy of the fair value
calculation. Contingent consideration is adjusted based on experience in subsequent periods and the impact of changes related to
assumptions are recorded in operating expenses as incurred.
We typically use an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected
future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a
consideration of other marketplace participants and include the amount and timing of future cash flows (including expected
growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry, and the discount
rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may result in a triggering event
for which we would test for impairment.
Determining the useful life of an intangible asset also requires judgment. Our assessment as to trademarks and brands that have a
finite life is based on a number of factors including competitive environment, market share, trademark and/or brand history,
underlying product life cycles, operating plans, and the macroeconomic environment of the countries in which the trademarks or
brands are sold. All of our acquired technology and customer-related intangibles are expected to have finite useful lives.
As of December 31, 2017, we had approximately $933.7 million of goodwill recorded as a result of our acquisition of businesses,
including the IMASCAP acquisition and the Wright/Tornier merger. Goodwill is tested for impairment annually, or more
frequently if changes in circumstances or the occurrence of events suggest that impairment exists. The annual evaluation of
goodwill impairment may require the use of estimates and assumptions to determine the fair value of our reporting units using
projections of future cash flows. Unless circumstances otherwise dictate, the annual impairment test is performed on October 1
each year.
During the first quarter of 2016, we had a change in segment reporting that required an interim review of potential goodwill
impairment which we performed as of February 2016. Upon completion of this analysis, we determined that the fair value of our
reporting units, determined primarily by an income approach using projected cash flows, exceeded their carrying values; and
therefore, no goodwill was impaired.
We also performed a quantitative analysis of goodwill for impairment as of October 1, 2017 for our reporting units and determined
that it is not more likely than not that the respective carrying values of our reporting units exceeded their fair value, indicating that
goodwill was not impaired.
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 technological obsolescence, as well as other competitive factors beyond our control. We account for
the impairment of finite, long-lived assets in accordance with the FASB ASC Section 360, Property, Plant and Equipment.
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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, if 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.
Valuation of in-process research and development. The estimated fair value attributed to IPRD represents an estimate of the fair
value of purchased in-process technology for research programs that have not reached technological feasibility and have no
alternative future use. Only those research programs that had advanced to a stage of development where management believed
reasonable net future cash flow forecasts could be prepared and a reasonable possibility of technical success existed were included
in the estimated fair value.
IPRD is recorded as an indefinite-lived intangible asset until completion or abandonment of the associated research and
development projects. Accordingly, no amortization expense is reflected in the results of operations. If a project is completed, the
carrying value of the related intangible asset will be amortized over the remaining estimated life of the asset beginning with the
period in which the project is completed. If a project becomes impaired or is abandoned, the carrying value of the related
intangible asset will be written down to its fair value and an impairment charge will be taken in the period the impairment occurs.
These intangible assets are tested for impairment on an annual basis, or earlier if impairment indicators are present.
Product liability claims and related insurance recoveries 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. As additional information becomes available, we reassess the
estimated liability related to our pending claims and make revisions as necessary.
The product liability claims described in this section relate primarily to Wright Medical Technology, Inc., an indirect subsidiary of
Wright Medical Group N.V., and are not necessarily applicable to Wright Medical Group N.V. or other affiliated entities.
Maintaining separate legal entities within our corporate structure is intended to ring-fence liabilities. We believe our ring-fenced
structure should preclude corporate veil-piercing efforts against entities whose assets are not associated with particular claims.
We have received claims for personal injury against us associated with fractures of our PROFEMUR® long titanium modular neck
product (PROFEMUR® Claims). As of December 31, 2017 there were approximately 30 pending U.S. lawsuits and
approximately 60 pending non-U.S. lawsuits alleging such claims. The overall fracture rate for the product is low and the
fractures appear, at least in part, to relate to patient demographics. Beginning in 2009, we began offering a cobalt-chrome version
of our PROFEMUR® modular neck, which has greater strength characteristics than the alternative titanium version. Historically,
we have reflected our liability for these claims as part of our standard product liability accruals on a case-by-case basis. However,
during the fiscal quarter ended September 30, 2011, as a result of an increase in the number and monetary amount of these claims,
management estimated our liability to patients in the United States and Canada who have previously required a revision following
a fracture of a PROFEMUR® long titanium modular neck, or who may require a revision in the future. Management has estimated
that this aggregate liability is $21.5 million. We have classified $12.0 million of this liability as current in “Accrued expenses and
other current liabilities,” as we expect to pay such claims within the next twelve months, and $9.5 million as non-current in “Other
liabilities” on our consolidated balance sheet. We expect to pay the majority of these claims within the next three years. Any
claims associated with this product outside of the United States and Canada, or for any other products, will be managed as part of
our standard product liability accrual methodology on a case-by-case basis.
We are aware that MicroPort has recalled certain sizes of its cobalt chrome modular neck products as a result of alleged fractures.
As of December 31, 2017, there were four pending U.S. lawsuits and eight pending non-U.S. lawsuits against us alleging personal
injury resulting from the fracture of a cobalt chrome modular neck. These claims will be managed as part of our standard product
liability accrual methodology on a case-by-case basis. On October 27, 2017, our primary insurance carrier agreed to defend us in
connection with these lawsuits under a reservation of rights.
We have maintained product liability insurance coverage on a claims-made basis. During the fiscal quarter ended March 31, 2013,
we received a customary reservation of rights from our primary product liability insurance carrier asserting that present and future
claims related to fractures of our PROFEMUR® titanium modular neck hip products and which allege certain types of injury
(Titanium Modular Neck Claims) would be covered as a single occurrence under the policy year the first such claim was asserted.
The effect of this coverage position would be to place Titanium Modular Neck Claims into a single prior policy year in which
applicable claims-made coverage was available, subject to the overall policy limits then in effect. Management agrees with the
assertion that the Titanium Modular Neck Claims should be treated as a single occurrence, but notified the carrier that it disputed
the carrier's selection of available policy years. During the second quarter of 2013, we received confirmation from the primary
carrier confirming their agreement with our policy year determination. Based on our insurer's treatment of Titanium Modular Neck
Claims as a single occurrence, we increased our estimate of the total probable insurance recovery related to Titanium Modular
Neck Claims by $19.4 million, and recognized such additional recovery as a reduction to our selling, general and administrative
expenses for the fiscal quarter ended March 31, 2013, within results of discontinued operations. In the fiscal quarter ended June
30, 2013, we received payment from the primary insurance carrier of $5 million. In the fiscal quarter ended September 30, 2013,
we received payment of $10 million from the next insurance carrier in the tower. We have requested, but not yet received,
payment of the remaining $25 million from the third insurance carrier in the tower for that policy period. The policies with the
second and third carrier in this tower are “follow form” policies and management believes the third carrier should follow the
coverage position taken by the primary and secondary carriers. On September 29, 2015, that third carrier asserted that the terms
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and conditions identified in its reservation of rights will preclude coverage for the Titanium Modular Neck Claims. We strongly
dispute the carrier's position and, in accordance with the dispute resolution provisions of the policy, have initiated an arbitration
proceeding in London, England seeking payment of these funds. Pursuant to applicable accounting standards, we reduced our
insurance receivable balance for this claim to $0, and recorded a $25 million charge within “Net loss from discontinued
operations” during the fiscal year ended December 27, 2015. The arbitration proceeding was completed on February 15, 2018 and
the parties await the decision of the arbitration tribunal.
Claims for personal injury have also been made against us associated with our metal-on-metal hip products (primarily our
CONSERVE® product line). The pre-trial management of certain of these claims has been consolidated in the federal court
system, in the United States District Court for the Northern District of Georgia under the MDL and certain other claims by the
JCCP in state court in Los Angeles County, California (collectively the Consolidated Metal-on-Metal Claims).
As of December 31, 2017, there were approximately 800 lawsuits pending in the MDL and JCCP, and an additional 50 cases
pending in various U.S. state courts. As of that date, we have also entered into approximately 700 so called “tolling agreements”
with potential claimants who have not yet filed suit. The number of lawsuits pending in the MDL and JCCP and tolling
agreements disclosed above includes the claims that have been resolved pursuant to the MSA and Second Settlement Agreements
discussed below. Based on presently available information, we believe approximately 300 of these matters allege claims
involving bilateral implants. As of December 31, 2017, there were also approximately 50 non-U.S. lawsuits pending. We believe
we have data that supports the efficacy and safety of our metal-on-metal hip products.
Every metal-on-metal hip case involves fundamental issues of law, science and medicine that often are uncertain, that continue to
evolve, and which present contested facts and issues that can differ significantly from case to case. Such contested facts and issues
include medical causation, individual patient characteristics, surgery specific factors, statutes of limitation, and the existence of
actual, provable injury.
The first bellwether trial in the MDL commenced on November 9, 2015 in Atlanta, Georgia. On November 24, 2015, the jury
returned a verdict in favor of the plaintiff and awarded the plaintiff $1 million in compensatory damages and $10 million in
punitive damages. We believe there were significant trial irregularities and vigorously contested the trial result. On December 28,
2015, we filed a post-trial motion for judgment as a matter of law or, in the alternative, for a new trial or a reduction of damages
awarded. On April 5, 2016, the trial judge issued an order reducing the punitive damage award from $10 million to $1.1 million,
but otherwise denied our motion. On May 4, 2016, we filed a notice of appeal with the United States Court of Appeals for the
Eleventh Circuit. The United States Court of Appeals for the Eleventh Circuit heard oral arguments on January 26, 2017 and on
March 20, 2017, the Eleventh Circuit Court of Appeals upheld the lower court’s verdict. On April 10, 2017, we filed a petition for
rehearing en banc or for panel rehearing, which was denied. In light of this denial, we elected to forego a further appeal and paid
the judgment in July 2017.
The first bellwether trial in the JCCP, which was scheduled to commence on October 31, 2016, and subsequently rescheduled to
January 9, 2017, was settled for an immaterial amount.
The first state court metal-on-metal hip trial not part of the MDL or JCCP commenced on October 24, 2016, in St. Louis,
Missouri. On November 3, 2016, the jury returned a verdict in our favor. The plaintiff appealed and the appellate court heard oral
argument on November 8, 2017. On February 20, 2018, the Missouri Court of Appeals, Eastern District, denied the plaintiff’s
appeal and upheld the verdict of the trial court.
On November 1, 2016, WMT entered into the MSA with Court-appointed attorneys representing plaintiffs in the MDL and JCCP.
Under the terms of the MSA, the parties agreed to settle 1,292 specifically identified claims associated with CONSERVE®,
DYNASTY® and LINEAGE® products that meet the eligibility requirements of the MSA and are either pending in the MDL or
JCCP, or subject to court-approved tolling agreements in the MDL or JCCP, for a settlement amount of $240 million.
The $240 million settlement amount is a maximum settlement based on the pool of 1,292 specific, existing claims comprised of an
identified mix of CONSERVE®, DYNASTY® and LINEAGE® products (Initial Settlement Pool), with a value assigned to each
product type, resulting in a total settlement of $240 million for the 1,292 claims in the Initial Settlement Pool.
Actual settlements paid to individual claimants are determined under the claims administration procedures contained in the MSA
and may be more or less than the amounts used to calculate the $240 million settlement for the 1,292 claims in the Initial
Settlement Pool. However in no event will variations in actual settlement amounts payable to individual claimants affect WMT’s
maximum settlement obligation of $240 million or the manner in which it may be reduced due to opt outs, final product mix, or
elimination of ineligible claims.
If it is determined a claim in the Initial Settlement Pool is ineligible due to failure to meet the eligibility criteria of the MSA, such
claim will be removed and, where possible, replaced with a new eligible claim involving the same product, with the goal of having
the number and mix of claims in the final settlement pool (before opt-outs) (Final Settlement Pool) equal, as nearly as possible, the
number and mix of claims in the Initial Settlement Pool. Additionally, if any DYNASTY® or LINEAGE® claims in the Final
Settlement Pool are determined to have been misidentified as CONSERVE® claims, or vice versa, the total settlement amount will
be adjusted based on the value for each product type (not to exceed $240 million).
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The MSA contains specific eligibility requirements and establishes procedures for proof and administration of claims, negotiation
and execution of individual settlement agreements, determination of the final total settlement amount, and funding of individual
settlement amounts by WMT. Eligibility requirements include, without limitation, that the claimant has a claim pending or tolled
in the MDL or JCCP, that the claimant has undergone a revision surgery within eight years of the original implantation surgery,
and that the claim has not been identified by WMT as having possible statute of limitation issues. Claimants who have had
bilateral revision surgeries will be counted as two claims but only to the extent both claims separately satisfy all eligibility criteria.
The MSA includes a 95% opt-in requirement, meaning the MSA could have been terminated by WMT prior to any settlement
disbursement if claimants holding greater than 5% of eligible claims in the Final Settlement Pool elected to “opt-out” of the
settlement. WMT has confirmed that of the 1,292 eligible claims, 1,279 opted to participate in the settlement and 13 opted out,
resulting in a final opt-in percentage of approximately 99%, well in excess of the required 95% threshold. On March 2, 2017,
WMT agreed to replace the 13 opt-out claims with 13 additional claims that would have been eligible to participate in the MSA
but for the 1,292 claim limit, bringing the total MSA settlement to the maximum limit of $240 million to settle 1,292 claims. Due
to apparent demand from additional claimants excluded from settlement because of the 1,292 claims ceiling, but otherwise eligible
for participation, on May 15, 2017 WMT agreed to settle an additional 53 such claims, on terms substantially identical to the MSA
settlement terms, for a maximum additional settlement amount of $9.4 million.
During 2016 WMT escrowed $150 million to secure its obligations under the MSA, all of which had been paid as of December
31, 2017. As additional security, Wright Medical Group N.V., the indirect parent company of WMT, agreed to guarantee WMT’s
obligations under the MSA.
On October 3, 2017, WMT entered into the Second Settlement Agreements with the Court-appointed attorneys representing
plaintiffs in the MDL and JCCP. Under the terms of the Second Settlement Agreements, the parties agreed to settle
629 specifically identified CONSERVE®, DYNASTY® and LINEAGE® claims that meet the eligibility requirements of the
Second Settlement Agreements and are either pending in the MDL or JCCP, or subject to court-approved tolling agreements in the
MDL or JCCP, for a maximum settlement amount of $89.75 million. The comprehensive settlement amount was contingent on
WMT’s recovery of new insurance proceeds totaling at least $35 million from applicable insurance carriers by December 31,
2017. On December 29, 2017, WMT entered into a First Amendment to the Third Settlement Agreement pursuant to which the
deadline for the recovery of new insurance proceeds totaling at least $35 million from applicable insurance carriers was extended
through February 28, 2018 and, on February 23, 2018, WMT entered into a Second Amendment to the Third Settlement
Agreement pursuant to which the deadline was extended through March 30, 2018. To date, certain of the insurance carriers have
contributed or agreed to contribute $20 million of funds applicable against the contingency.
The $89.75 million settlement amount is a maximum settlement based on the pool of 629 specific, existing claims comprised of an
identified mix of CONSERVE®, DYNASTY® and LINEAGE® products (Second Settlement Initial Settlement Pool), with a value
assigned to each product type. The actual settlement may be less, but not more, depending on several factors including the mix of
products and claimants in the final settlement pool (Second Settlement Final Settlement Pool) and the number of claimants
electing to “opt-out” of the settlement.
The total maximum settlement amount of $89.75 million is allocated among the following three tranches: (1) Tranche 1:
$7.9 million to settle 49 additional claims that would have been eligible to participate in the MSA but for the claim limit contained
therein, which amount will be funded as such claims are settled; (2) Tranche 2: $5.1 million to settle 39 eligible claims of the
oldest claimants (by age), which amount will be funded as such claims are settled; and (3) Tranche 3: $76.75 million to settle
511 eligible claims pending or tolled in the MDL and JCCP existing as of June 30, 2017, and 30 new eligible claims which were
presented between July 1, 2017 and October 1, 2017, which amount will be funded as follows: $45 million by June 30, 2018 and
$31.75 million by September 30, 2019. Actual funding may extend beyond these dates pending completion of claims
administration processes. The Tranche 3 settlement is contingent upon WMT receiving at least $35 million of new insurance
proceeds from applicable carriers by March 30, 2018. There is no contingency with respect to Tranches 1 and 2.
Actual settlements paid to individual claimants will be determined under the claims administration procedures contained in the
Second Settlement Agreements and may be more or less than the amounts used to calculate the $89.75 million settlement for the
629 claims in the Second Settlement Initial Settlement Pool. However in no event will variations in actual settlement amounts
payable to individual claimants affect WMT’s maximum settlement obligation of $89.75 million or the manner in which it may be
reduced due to opt outs, final product mix, or elimination of ineligible claims.
If it is determined that a claim in the Second Settlement Initial Settlement Pool is ineligible due to failure to meet the eligibility
criteria of the Second Settlement Agreements, such claim will be removed and, where possible, replaced with a new eligible claim
involving the same products as the removed claim.
The Second Settlement Agreements contain specific eligibility requirements and establish procedures for proof and administration
of claims, negotiation and execution of individual settlement agreements, determination of the final total settlement amount, and
funding of individual settlement amounts by WMT. Eligibility requirements include, without limitation, that the claimant has a
claim pending or tolled in the MDL or JCCP and that, with limited exceptions, the claimant has undergone a revision surgery.
Claimants who have had bilateral revision surgeries will be counted as two claims but only to the extent both claims separately
satisfy all eligibility criteria.
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Each of the Second Settlement Agreements includes a 95% opt-in requirement, meaning WMT may terminate either Settlement
Agreement prior to any settlement disbursement if claimants holding greater than 5% of eligible claims in Tranches 1 and 2,
collectively, or claimants holding greater than 5% of eligible claims in Tranche 3 in the Second Settlement Final Settlement Pool,
elect to “opt-out” of the settlement. On January 2, 2018, WMT received notification that 100% of the claimants in Tranches 1 and
2 opted-in. WMT is currently reviewing proof of claim documentation for these claimants and has until March 2, 2018 to confirm
that the 95% opt-in requirement has been met. Claimants in Tranche 3 have until April 2, 2018 to opt into the Second Settlement
Agreements.
While the Second Settlement Agreements did not require WMT to escrow any amount to secure its obligations thereunder, as
additional security, Wright Medical Group N.V., the indirect parent company of WMT, agreed to guarantee WMT’s obligations
under the Second Settlement Agreements.
The MSA (which reference includes the supplemental settlements described above) and the Second Settlement Agreements were
entered into solely as a compromise of the disputed claims being settled and are not evidence that any claim has merit nor are they
an admission of wrongdoing or liability by WMT. WMT will continue to vigorously defend metal-on-metal hip claims not settled
pursuant to the above agreements. The Second Settlement Agreements are contingent upon the dismissal without prejudice of
pending and tolled claims in the MDL and JCCP that do not meet the inclusion criteria of the MDL or JCCP. Additionally, the
Second Settlement Agreements are contingent upon the dismissal without prejudice of all remaining non-revision claims in the
MDL and JCCP, pursuant to a tolling agreement that tolls applicable statutes of limitation and repose for three months from a
revision of the products or determination that a revision of the products is necessary. The MDL and JCCP courts have both
entered orders closing these proceedings to new claims.
As of December 31, 2017, we estimate there were approximately 50 outstanding metal-on-metal hip revision claims that were not
included in the MSA or Second Settlement Agreements, approximately 50 claims pending in U.S courts other than the MDL and
JCCP, and approximately 50 claims pending in non-U.S. courts. We also estimate that there were approximately 600 outstanding
metal-on-metal hip non-revision claims as of December 31, 2017. These non-revision cases were excluded from the MSA and
Second Settlement Agreements. As a result of entering into the Second Settlement Agreements during the third quarter of 2017,
we recorded an additional accrual of $82.7 million for the 629 matters included within the settlement and for matters that have the
same eligibility criteria.
As of December 31, 2017, our accrual for metal-on-metal claims totaled $177.5 million, of which $127.4 million is included in
our consolidated balance sheet within “Accrued expenses and other current liabilities” and $50.1 million is included within “Other
liabilities.” Our accrual is based on (i) case by case accruals for specific cases where facts and circumstances warrant, and (ii) the
implied settlement values for eligible claims under the MSA or Second Settlement Agreements. We are unable to reasonably
estimate the high-end of a possible range of loss for claims which elected or will elect to opt-out of the MSA or Second Settlement
Agreements. Claims we can confirm would meet MSA or Second Settlement Agreements eligibility criteria but are excluded from
the settlements due to the maximum settlement cap, or because they are state cases not part of the MDL or JCCP, have been
accrued as of the respective settlement rates. Due to the general uncertainties surrounding all metal-on metal claims as noted
above, as well as insufficient information about individual claims, we are presently unable to reasonably estimate a range of loss
for future claims; hence we have not accrued for these claims at the present time.
We are unable to predict whether we will be successful in recovering the necessary insurance proceeds required to complete the
comprehensive settlement pursuant to the Second Settlement Agreements within the requisite timeframe. We continue to believe
the high-end of a possible range of loss for existing revision claims that do not meet eligibility criteria of the MSA or Second
Settlement Agreements will not, on an average per case basis, exceed the average per case accrual we take for revision claims we
can confirm do meet eligibility criteria of the MSA or Second Settlement Agreements, as applicable. Future claims will be
evaluated for accrual on a case by case basis using the accrual methodologies described above (which could change if future facts
and circumstances warrant).
We have maintained product liability insurance coverage on a claims-made basis. During the fiscal quarter ended September 30,
2012, we received a customary reservation of rights from our primary product liability insurance carrier asserting that certain
present and future claims which allege certain types of injury related to our CONSERVE® metal-on-metal hip products
(CONSERVE® Claims) would be covered as a single occurrence under the policy year the first such claim was asserted. The
effect of this coverage position would be to place CONSERVE® Claims into a single prior policy year in which applicable claims-
made coverage was available, subject to the overall policy limits then in effect. Management agrees that there is insurance
coverage for the CONSERVE® Claims, but has notified the carrier that it disputes the carrier's characterization of the
CONSERVE® Claims as a single occurrence
In June 2014, Travelers, which was an excess carrier in our coverage towers across multiple policy years, filed a declaratory
judgment action in Tennessee state court naming us and certain of our other insurance carriers as defendants and asking the court
to rule on the rights and responsibilities of the parties with regard to the CONSERVE® Claims. Among other things, Travelers
appeared to dispute our contention that the CONSERVE® Claims arise out of more than a single occurrence thereby triggering
multiple policy periods of coverage. Travelers further sought a determination as to the applicable policy period triggered by the
alleged single occurrence. We filed a separate lawsuit in state court in California for declaratory judgment against certain carriers
and breach of contract against the primary carrier, and moved to dismiss or stay the Tennessee action on a number of grounds,
including that California is the most appropriate jurisdiction. During the third quarter of 2014, the California Court granted
Travelers' motion to stay our California action. On April 29, 2016, we filed a dispositive motion seeking partial judgment in our
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favor in the Tennessee action, which motion is pending and has been referred to a Special Master to consider the parties’
arguments. On June 10, 2016, Travelers withdrew its motion for summary judgment in the Tennessee action. One of the other
insurance companies in the Tennessee action has stated that it will re-file a similar motion in the future.
In March 2017, Lexington, which had been dismissed from the Tennessee action, requested arbitration under five Lexington
insurance policies in connection with the CONSERVE® Claims. We subsequently engaged in discussions and correspondence
with Lexington about the scope of the requested arbitration(s). On or about October 27, 2017, Lexington filed an Application for
Order to Compel Arbitration in the Commonwealth of Massachusetts, Suffolk County Superior Court, naming WMT, Wright
Medical Group, Inc., and Wright Medical Group N.V. We opposed the Application, which remains pending.
On October 28, 2016, WMT and Wright Medical Group, Inc. (Wright Entities), entered into a Settlement Agreement, Indemnity
and Hold Harmless Agreement and Policy Buyback Agreement (Insurance Settlement Agreement) with a subgroup of three
insurance carriers, namely Columbia Casualty Company, Travelers and AXIS Surplus Lines Insurance Company (collectively, the
Three Settling Insurers), pursuant to which the Three Settling Insurers paid WMT an aggregate of $60 million (in addition to
$10 million previously paid by Columbia) in a lump sum. This amount is in full satisfaction of all potential liability of the Three
Settling Insurers relating to metal-on-metal hip and similar metal ion release claims, including but not limited to all claims in the
MDL and the JCCP, and all claims asserted by WMT against the Three Settling Insurers in the Tennessee action described above.
On December 13, 2016, we filed a motion in the Tennessee action described above to include allegations of bad faith against the
primary insurance carrier. The motion was subsequently amended on February 8, 2017 to add similar bad faith claims against the
remaining excess carriers. On April 13, 2017, the Court denied our motion, without prejudice to our right to re-assert the motion
at a later time. On August 29, 2017, we refiled the motion to add a bad faith claim against the primary and excess insurance
carriers. The Court granted our motion on October 19, 2017 and, on October 23, 2017, we filed amended cross-claims alleging
bad faith against all of the insurance carriers. On November 9, 2017, our primary insurance carrier brought a motion to dismiss
and strike our bad faith claim. The remaining excess carriers either joined the primary insurer’s motion or brought their own
separate motions. On December 22, 2017 and December 29, 2017, we opposed the insurers’ motions to dismiss and strike our
claim for bad faith. The motions remain pending.
As part of the settlement with the Three Settling Insurers, the Three Settling Insurers bought back from WMT their policies in the
five policy years beginning with the August 15, 2007- August 15, 2008 policy year (Repurchased Policy Years). Consequently, the
Wright Entities have no further coverage from the Three Settling Insurers for any present or future claims falling in the
Repurchased Policy Years, or any other period in which a released claim is asserted. Additionally, the Insurance Settlement
Agreement contains a so-called most favored nation provision which could require us to refund a pro rata portion of the settlement
amount if we voluntarily enter into a settlement with the remaining carriers in the Repurchased Policy Years on certain terms more
favorable than analogous terms in the Insurance Settlement Agreement. The Tennessee action will continue as to the remaining
defendant insurers other than the Three Settling Insurers. The amount due to the Wright Entities under the Insurance Settlement
Agreement was paid in the fourth quarter of 2016 and the Three Settling Insurers have been dismissed from the Tennessee action.
On February 22, 2018, we and certain of our subsidiaries entered into the Second Insurance Settlement Agreement with Federal,
pursuant to which Federal agreed to pay us an aggregate of $15 million (in addition to $5 million previously paid by Federal) in a
lump sum on or before the 10th business day after execution of the Second Insurance Settlement Agreement. This amount will be
in full satisfaction of all potential liability of Federal relating to designated metal-on-metal hip claims, including but not limited to
all claims asserted by our subsidiary WMT against Federal in the previously disclosed insurance coverage litigation. We have
recorded a $15 million receivable as a result of this agreement within “Other current assets” as of December 31, 2017. On
February 9, 2018, the Tennessee action was stayed for 60 days to allow Wright and Federal to finalize and document their
settlement and for the remaining parties to negotiate potential settlement of all remaining claims.
As of December 31, 2017, we have received $78.4 million of insurance proceeds, including the above amount from the Three
Settling Insurers, and our insurance carriers have paid a total of $6.7 million directly to claimants in connection with various
settlements, which represents amounts undisputed by the carriers. Except as provided in the Insurance Settlement Agreement and
the Second Insurance Settlement Agreement, our acceptance of the insurance proceeds was not a waiver of any other claim we
may have against the insurance carriers. However, the amount we ultimately receive will depend on the outcome of our dispute
with the remaining carriers (other than the Three Settling Carriers and Federal) concerning the number of policy years available.
We believe our contracts with the insurance carriers are enforceable for these claims; and, therefore, we believe it is probable we
will receive additional recoveries from the remaining carriers. Settlement discussions with the remaining insurance carriers
continue.
Given the substantial or indeterminate amounts sought in these matters, and the inherent unpredictability of such matters, an
adverse outcome in these matters in excess of the amounts included in our accrual for contingencies could have a material adverse
effect on our financial condition, results of operations and cash flow. Future revisions to our estimates of these provisions could
materially impact our results of operations and financial position. We use the best information available to determine the level of
accrued product liabilities, and believe our accruals are adequate.
In June 2015, a jury returned a $4.4 million verdict against us in a case involving a fractured hip implant stem sold prior to the
MicroPort closing. This was a one-of-a-kind case unrelated to the modular neck fracture cases we have been reporting. There are
no other cases pending related to this component, nor are we aware of other instances where this component has fractured. In
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September 2015, the trial judge reduced the jury verdict to $1.025 million and indicated that if the plaintiff did not accept the
reduced award he would schedule a new trial solely on the issue of damages. The plaintiff elected not to accept the reduced
damage award, and both parties have appealed. The Court has not set a date for a new trial on the issue of damages and we do not
expect it will do so until the appeals are adjudicated. We will maintain our current $4.4 million accrual as a probable liability until
the matter is resolved. The $4.4 million probable liability associated with this matter is reflected within “Accrued expenses and
other current liabilities,” and a $4 million receivable associated with the probable recovery from product liability insurance is
reflected within “Other current assets.” On November 14, 2017, our primary insurance carrier agreed to defend and indemnify us
in connection with this lawsuit under a reservation of rights. On January 9, 2018, the California appellate court heard oral
argument on the parties’ cross-appeals.
Accounting for income taxes. We account for income taxes in accordance with provisions which set forth an asset and liability
approach that requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets and liabilities. 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.
In December 2017, the United States enacted new legislation under the 2017 Tax Act which included significant provision
changes in the U.S. including, but not limited to, lowering the federal statutory rate to 21% beginning in January 2018, changing
the net operating loss carryforward period and introducing a limitation on usage of these attributes, repealing the alternative
minimum tax (AMT) system, and imposing a one-time toll charge on a U.S. shareholder’s cumulative undistributed post-1986
earnings of foreign subsidiaries. We are required to recognize the effect of any tax law changes during the period of enactment
including re-measuring any deferred tax assets and liabilities based on when these attributes are expected to be realized in the
future and re-analyzing positive and negative evidence regarding the realizability of deferred tax assets. Also in December 2017,
the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118),
which allows us to record provisional amounts under a one-year measurement period to consider upcoming guidance and
interpretations and to complete further analysis that may affect our current estimates in our consolidated financial statements
within the next year.
Our valuation allowance balances totaled $366.8 million and $479.4 million as of December 31, 2017 and December 25, 2016,
respectively, due to uncertainties related to our ability to realize, before expiration, certain of our deferred tax assets for both U.S.
and foreign income tax purposes.
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. In accordance
with ASC 740 Income Taxes, we recognize the tax effects of an income tax position only if they are “more-likely-than-not” to be
sustained based solely on the technical merits as of the reporting date. 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 unrecognized tax benefits totaled $6.0 million and $8.1 million
as of December 31, 2017 and December 25, 2016, respectively.
Share-based compensation. We calculate the grant date fair value of restricted stock units and performance share units as the
closing sale price of our ordinary shares on the grant date, as reported by the Nasdaq Global Select Market. Share-based
compensation expense associated with outstanding performance share units is measured using the grant date fair value and is
based on the estimated achievement of the established performance criteria at the end of each reporting period until the
performance period ends, recognized on a straight-line basis over the performance period. Share-based compensation expense is
only recognized for performance share units that we expect to vest, which we estimate based upon an assessment of the
probability that the performance criteria will be achieved. The performance share units granted during the fiscal year ended
December 31, 2017 have a three-year performance-based metric measured over a performance period from June 26, 2017 to June
28, 2020. Share-based compensation expense associated with outstanding performance share units is updated for actual
forfeitures.
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 share-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.
We estimate the expected life of options evaluating the historical activity as required by FASB ASC Topic 718, Compensation —
Stock Compensation. Prior to the Wright/Tornier merger, the expected life of options was estimated based on historical option
exercise and employee termination data. Post merger, the expected life of options was estimated based on the simplified method
due to a lack of comparable, historical option exercise, and employee termination data for the combined company. The expected
stock price volatility assumption was estimated based upon historical volatility of our ordinary shares for both legacy Wright and
legacy Tornier prior to October 1, 2015 for and the total combined company after the Wright/Tornier merger. 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.
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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 share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-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 share-based payments in the future. Certain share-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 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 share-based compensation expense only for those
awards that are expected to vest. All share-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 share-based compensation expense in future periods, such
share-based compensation expense in 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. A change in assumptions 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 “Item 8. Financial Statements and Supplementary Data” for
further information regarding our share-based compensation.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 to the consolidated financial statements in “Item 8.
Financial Statements and Supplementary Data”.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our exposure to interest rate risk arises principally from variable interest rates applicable to borrowings under our ABL Facility
and the interest rates associated with our invested cash balances.
Borrowings under our ABL Facility bear interest at variable rates. The interest rate margin applicable to borrowings under the
ABL Facility is, at the option of the Borrowers, equal to either (a) 3.25% for base rate loans or (b) 4.25% for LIBOR rate loans,
subject to a 0.75% LIBOR floor. As of December 31, 2017, we had $53.6 million of borrowings under our ABL Facility. Based
upon this debt level, and the LIBOR floor on our interest rate, a 100 basis point increase in the annual interest rate on such
borrowings would have an immaterial impact on our interest expense on an annual basis.
Our exposure to interest rate risk arises principally from the interest rates associated with our invested cash balances. On
December 31, 2017, we had invested cash and cash equivalents of approximately $167.7 million. We believe that a 10 basis point
change in interest rates is reasonably possible in the near term. Based on our current level of investment, an increase or decrease
of 10 basis points in interest rates would have an annual impact of approximately $0.2 million to our interest income.
As of December 31, 2017, we had outstanding $587.5 million and $395.0 million principal amount of our 2020 and 2021 Notes,
respectively. We carry these instruments at face value less unamortized discount on our consolidated balance sheets. Since these
instruments bear interest at a fixed rate, we have no financial statement risk associated with changes in interest rates. However,
the fair value of these instruments fluctuates when interest rates change, and when the market price of our ordinary shares
fluctuates. We do not carry the 2020 and 2021 Notes at fair value, but present the fair value of the principal amount of our 2020
and 2021 Notes for disclosure purposes.
Equity Price Risk
On February 13, 2015, WMG issued $632.5 million of the 2020 Notes, which generated net proceeds of approximately
$613 million. The holders of the 2020 Notes may convert their 2020 Notes into cash upon the satisfaction of certain
circumstances as described in Note 9. The conversion and settlement provisions of the 2020 Notes are based on the price of our
ordinary shares at conversion or at maturity of the notes. In addition, the hedges and warrants associated with these convertible
notes also include settlement provisions that are based on the price of our ordinary shares. The amount of cash we may be
required to pay, or the number of shares we may be required to provide to note holders at conversion or maturity of these notes, is
determined by the price of our ordinary shares. The amount of cash that we may receive from hedge counterparties in connection
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with the related hedges and the number of shares that we may be required to provide warrant counterparties in connection with the
related warrants are also determined by the price of our ordinary shares.
Upon the expiration of our warrants issued in connection with the 2020 Notes, we will issue ordinary shares to the purchasers of
the warrants to the extent the price of our ordinary shares exceeds the warrant strike price at that time. On November 24, 2015,
Wright Medical Group N.V. assumed WMG's obligations pursuant to the warrants, and the strike price of the warrants was
adjusted from $40.00 to $38.8010 per ordinary share. The following table shows the number of shares that we would issue to
warrant counterparties at expiration of the warrants assuming various closing prices of our ordinary shares on the date of warrant
expiration:
Share price
$42.68
$46.56
$50.44
$54.32
$58.20
(10% greater than strike price)
(20% greater than strike price)
(30% greater than strike price)
(40% greater than strike price)
(50% greater than strike price)
Shares (in thousands)
1,784
3,270
4,528
5,606
6,540
The fair value of the 2020 Notes Conversion Derivative and the 2020 Notes Hedge is directly impacted by the price of our
ordinary shares. We entered into the 2020 Notes Hedges in connection with the issuance of the 2020 Notes with the option
counterparties. The 2020 Notes Hedges, which are cash-settled, are intended to reduce our exposure to potential cash payments
that we are required to make upon conversion of the 2020 Notes in excess of the principal amount of converted notes if our
ordinary share price exceeds the conversion price. The following table presents the fair values of the 2020 Notes Conversion
Derivative and 2020 Notes Hedge as a result of a hypothetical 10% increase and decrease in the price of our ordinary shares. We
believe that a 10% change in our share price is reasonably possible in the near term:
(in thousands)
2020 Notes Hedges (Asset)
2020 Notes Conversion Derivative (Liability)
Fair value of security given
a 10% decrease in share
price
$29,871
$28,619
Fair value of security as of
December 31, 2017
$45,033
$44,132
Fair value of security given
a 10% increase in share
price
$63,590
$63,350
On May 20, 2016, we issued $395.0 million aggregate principal amount of the 2021 Notes. The holders of the 2021 Notes may
convert their 2021 Notes into cash upon the satisfaction of certain circumstances as described in Note 9. The conversion and
settlement provisions of the 2021 Notes are based on the price of our ordinary shares at conversion or at maturity of the notes. In
addition, the hedges and warrants associated with these convertible notes also include settlement provisions that are based on the
price of our ordinary shares. The amount of cash we may be required to pay, or the number of shares we may be required to
provide to note holders at conversion or maturity of these notes, is determined by the price of our ordinary shares. The amount of
cash that we may receive from hedge counterparties in connection with the related hedges and the number of shares that we may
be required to provide warrant counterparties in connection with the related warrants are also determined by the price of our
ordinary shares.
Upon the expiration of our warrants issued in connection with the 2021 Notes, we will issue ordinary shares to the purchasers of
the warrants to the extent the price of our ordinary shares exceeds the warrant strike price of $30.00 at that time. The following
table shows the number of shares that we would issue to warrant counterparties at expiration of the warrants assuming various
closing prices of our ordinary shares on the date of warrant expiration:
Share price
$33.00
$36.00
$39.00
$42.00
$45.00
(10% greater than strike price)
(20% greater than strike price)
(30% greater than strike price)
(40% greater than strike price)
(50% greater than strike price)
Shares (in thousands)
1,681
3,082
4,268
5,284
6,164
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The fair value of the 2021 Notes Conversion Derivative and the 2021 Notes Hedge is directly impacted by the price of our
ordinary shares. We entered into the 2021 Notes Hedges in connection with the issuance of the 2021 Notes with the option
counterparties. The 2021 Notes Hedges, which are cash-settled, are intended to reduce our exposure to potential cash payments
that we are required to make upon conversion of the 2021 Notes in excess of the principal amount of converted notes if our
ordinary share price exceeds the conversion price. The following table presents the fair values of the 2021 Notes Conversion
Derivative and 2021 Notes Hedge as a result of a hypothetical 10% increase and decrease in the price of our ordinary shares. We
believe that a 10% change in our share price is reasonably possible in the near term:
(in thousands)
2021 Notes Hedges (Asset)
2021 Notes Conversion Derivative (Liability)
Foreign Currency Exchange Rate Fluctuations
Fair value of security given
a 10% decrease in share
price
$99,791
$96,539
Fair value of security as of
December 31, 2017
$127,063
$126,148
Fair value of security given
a 10% increase in share
price
$156,415
$158,159
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our financial results.
Approximately 23% of our net sales from continuing operations were denominated in foreign currencies during the fiscal year
ended December 31, 2017 and we expect that foreign currencies will continue to represent a similarly significant percentage of
our net sales in the future. The cost of sales related to these sales is 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. For sales not denominated in U.S. dollars, an increase in the rate at which a foreign currency is exchanged for U.S.
dollars will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such
cases, if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase
went into effect. If we price our products in U.S. dollars and our competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our prices not being competitive in a market where business is transacted in
the local currency.
In 2017, approximately 90% of our net sales denominated in foreign currencies were derived from European Union countries,
which are denominated in the Euro; from the United Kingdom, which are denominated in the British pound; from Australia which
are denominated in Australian dollar; and from Canada, which are denominated in the Canadian dollar. Additionally, we have
significant intercompany receivables, payables, and debt from our foreign subsidiaries that are denominated in foreign currencies,
principally the Euro, the Japanese yen, the British pound, the Australian dollar, and the Canadian dollar. Our principal exchange
rate risk, therefore, exists between the U.S. dollar and the Euro, British pound, Australian dollar, and the Canadian dollar.
Fluctuations from the beginning to the end of any given reporting period result in the revaluation of our foreign currency-
denominated intercompany receivables, payables, and debt generating currency translation gains or losses that impact our non-
operating income and expense levels in the respective period.
As discussed in Note 6 to the consolidated financial statements contained in “Item 8. Financial Statements and Supplementary
Data,” during 2017 we entered 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 currently in Euros, 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.
A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our transactions are denominated
would have resulted in an increase in operating income of approximately $2.4 million for the fiscal year ended December 31,
2017. This hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S.
dollar. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change
in sales levels or local currency prices, which can also be affected by the change in exchange rates. We plan to discontinue our
foreign currency forward contracts derivative program in 2018.
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Item 8.
Financial Statements and Supplementary Data.
Wright Medical Group N.V.
Consolidated Financial Statements
for the Fiscal Years Ended December 31, 2017, December 25, 2016, and December 27, 2015
Index to Financial Statements
Reports of Independent Registered Public Accounting Firm ....................................................................................
Consolidated Financial Statements:
Consolidated Balance Sheets ...................................................................................................................................
Consolidated Statements of Operations ...................................................................................................................
Consolidated Statements of Comprehensive Loss ...................................................................................................
Consolidated Statements of Cash Flows ..................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity .................................................................................
Notes to Consolidated Financial Statements ............................................................................................................
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Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Wright Medical Group N.V.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Wright Medical Group N.V. and subsidiaries (the Company) as
of December 31, 2017 and December 25, 2016, and the related consolidated statements of operations, comprehensive loss, cash
flows and shareholders’ equity for the years ended December 31, 2017, December 25, 2016, and December 27, 2015, and the
related notes and the financial statement schedule (collectively, the “consolidated financial statements”). 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, 2017 and December 25, 2016, and the results of their operations and their cash flows for the years ended
December 31, 2017, December 25, 2016, and December 27, 2015, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on the criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 27, 2018 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statement 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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits of the consolidated financial statements included performing procedures to assess the
risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Memphis, Tennessee
February 27, 2018
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Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Wright Medical Group N.V.:
Opinion on Internal Control Over Financial Reporting
We have audited Wright Medical Group N.V. and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and December 25, 2016, and the related
consolidated statements of operations, comprehensive loss, cash flows and shareholders’ equity for the years ended December 31,
2017, December 25, 2016, and December 27, 2015, and the related notes and the financial statement schedule (collectively, the
“consolidated financial statements”), and our report dated February 27, 2018 expressed an unqualified opinion on those
consolidated financial statements.
Basis for Opinion
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, included in the accompanying Item 9A of the
Company’s Annual Report on Form 10-K as of December 31, 2017. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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 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 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.
/s/ KPMG LLP
Memphis, Tennessee
February 27, 2018
87
Wright Medical Group N.V.
Consolidated Balance Sheets
(In thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents
Restricted cash (Note 17)
Accounts receivable, net
Inventories (Note 5)
Prepaid expenses
Other current assets
Total current assets
Property, plant and equipment, net (Note 7)
Goodwill (Note 8)
Intangible assets, net (Note 8)
Deferred income taxes (Note 11)
Other assets
Total assets
Liabilities and Shareholders’ Equity:
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities (Note 12)
Current portion of long-term obligations (Note 9)
Total current liabilities
Long-term debt and capital lease obligations (Note 9)
Deferred income taxes (Note 11)
Other liabilities (Note 12)
Total liabilities
Commitments and contingencies (Note 16)
Shareholders’ equity:
Ordinary shares, €0.03 par value, authorized: 320,000,000 shares; issued and outstanding:
105,807,424 shares at December 31, 2017 and 103,400,995 shares at December 25, 2016
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2017
December 25,
2016
$
167,740 $
—
130,610
168,144
13,555
86,845
566,894
262,265
150,000
130,602
150,849
11,678
54,231
759,625
212,379
933,662
231,001
937
183,851
201,732
851,042
231,797
1,498
244,892
$ 2,128,724 $ 2,290,586
$
41,831 $
314,558
58,906
415,295
836,208
15,780
272,745
1,540,028
32,866
407,704
33,948
474,518
780,407
27,550
321,247
1,603,722
3,896
1,971,347
22,290
(1,408,837 )
588,696
3,815
1,908,749
(19,461 )
(1,206,239 )
686,864
$ 2,128,724 $ 2,290,586
The accompanying notes are an integral part of these consolidated financial statements.
88
Wright Medical Group N.V.
Consolidated Statements of Operations
(In thousands, except per share data)
Net sales
Cost of sales 1, 2
Gross profit
Operating expenses:
Selling, general and administrative 2
Research and development 2
Amortization of intangible assets
Total operating expenses
Operating loss
Interest expense, net
Other expense (income), net
Loss from continuing operations before income taxes
Benefit for income taxes (Note 11)
Net loss from continuing operations
Loss from discontinued operations, net of tax (Note 4)
Net loss
December 31,
2017
744,989 $
160,947
584,042
Fiscal year ended
December 25,
2016
690,362 $
192,407
497,955
$
December 27,
2015
405,326
113,622
291,704
525,222
50,115
28,396
603,733
(19,691 )
74,644
5,570
(99,905 )
(34,968 )
(64,937 )
(137,661 )
(202,598 ) $
541,558
50,514
28,841
620,913
(122,958 )
58,530
(3,148 )
(178,340 )
(13,406 )
(164,934 )
(267,439 )
(432,373 ) $
424,377
39,339
16,754
480,470
(188,766 )
41,358
10,884
(241,008 )
(3,652 )
(237,356 )
(61,345 )
(298,701 )
$
Net loss from continuing operations per share-basic and diluted (Note 13): 3
$
Net loss from discontinued operations per share-basic and diluted (Note 13): 3 $
Net loss per share-basic and diluted (Note 13): 3
$
(0.62 ) $
(1.32 ) $
(1.94 ) $
(1.60 ) $
(2.60 ) $
(4.20 ) $
(3.66 )
(0.95 )
(4.61 )
Weighted-average number of ordinary shares outstanding-basic and diluted 3
___________________________
104,531
102,968
64,808
1 Cost of sales includes amortization of inventory step-up adjustment of $37.7 million and $10.3 million for the fiscal year
ended December 25, 2016 and December 27, 2015, respectively.
2 These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated:
Cost of sales
Selling, general and administrative
Research and development
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
$
565 $
17,705
1,123
414 $
13,216
786
287
22,777
1,900
3 The 2015 weighted-average shares outstanding includes additional shares issued on October 1, 2015 as part of the
Wright/Tornier merger as described in Note 13.
The accompanying notes are an integral part of these consolidated financial statements.
89
Wright Medical Group N.V.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive income (loss), net of tax:
Changes in foreign currency translation
Other comprehensive income (loss)
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
$
(202,598 ) $
(432,373 ) $
(298,701 )
41,751
41,751
(8,977 )
(8,977 )
(12,882 )
(12,882 )
Comprehensive loss
$
(160,847 ) $
(441,350 ) $
(311,583 )
The accompanying notes are an integral part of these consolidated financial statements.
90
Wright Medical Group N.V.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation
Share-based compensation expense (Note 14)
Amortization of intangible assets
Amortization of deferred financing costs and debt discount
Deferred income taxes (Note 11)
Provision for excess and obsolete inventory
Write-off of deferred financing costs
Amortization of inventory step-up adjustment
Non-cash adjustment to derivative fair value
Loss on sale of business (Note 4)
Mark-to-market adjustment for CVRs (Note 2)
Reduction of insurance receivable
Other
Changes in assets and liabilities (net of acquisitions):
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other liabilities
CVR payment in excess of value assigned as part of PPA
Metal on metal product liabilities (Note 16)
Net cash (used in) provided by operating activities
Investing activities:
Capital expenditures
Acquisition of businesses, net of cash acquired
Purchase of intangible assets
Cash acquired from merger with Tornier
Sales and maturities of available-for-sale marketable securities
Proceeds from sale of assets
Proceeds from sale of businesses
Net cash used in investing activities
Financing activities:
Issuance of ordinary shares
Proceeds from stock warrants
Payment of note hedge options
Repurchase of stock warrants
Payment of notes premium
Proceeds from notes hedge options
Payment of debt acquired from merger with Tornier
Proceeds from other debt
Payments of debt
Redemption of convertible notes
Payments of deferred financing costs and equity issuance costs
Payment of contingent consideration
Payments of capital leases
Net cash provided by financing activities
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
$
(202,598 ) $
(432,373 ) $
(298,701 )
56,832
19,393
28,396
50,379
(13,791 )
19,171
—
—
(4,797 )
—
5,320
—
1,385
2,483
(29,526 )
(22,744 )
6,260
(21,834 )
—
(79,139 )
(184,810 )
(63,474 )
(44,128 )
(2,099 )
—
—
280
—
(109,421 )
27,551
—
—
—
—
—
—
34,901
(11,517 )
—
—
(1,429 )
(2,690 )
46,816
56,782
14,416
29,180
40,487
(20,583 )
22,046
12,343
41,503
(28,273 )
21,342
8,688
—
4,425
(1,118 )
(187 )
22,441
1,495
(11,251 )
—
256,461
37,824
(50,099 )
—
(4,845 )
—
—
—
20,703
(34,241 )
8,460
54,629
(99,816 )
(3,319 )
(1,619 )
3,892
—
425,821
—
(102,974 )
(11,108 )
(1,035 )
(2,514 )
270,417
29,481
24,964
16,922
27,600
(3,087 )
14,218
25,101
11,356
(10,045 )
—
(7,571 )
25,000
4,780
(13,078 )
(24,695 )
(10,471 )
(2,919 )
23,258
(27,983 )
—
(195,870 )
(43,666 )
(4,905 )
(82 )
30,117
2,566
—
—
(15,970 )
3,513
87,072
(144,843 )
(59,803 )
(49,152 )
69,764
(81,367 )
632,500
—
(240,000 )
(20,081 )
(70,120 )
(621 )
126,862
Effect of exchange rates on cash, cash equivalents and restricted cash
$
2,890 $
(1,539 ) $
(2,544 )
Net (decrease) increase in cash, cash equivalents and restricted cash
(244,525 )
272,461
(87,522 )
Cash, cash equivalents and restricted cash, beginning of year
412,265
139,804
227,326
Cash, cash equivalents and restricted cash, end of year (Note 17)
$
167,740 $
412,265 $
139,804
The accompanying notes are an integral part of these consolidated financial statements.
91
Wright Medical Group N.V.
Consolidated Statements of Changes in Shareholders’ Equity
For the fiscal years ended December 27, 2015, December 25, 2016, and December 31, 2017
(In thousands, except share data)
Balance at December 31, 2014 1
2015 Activity:
Net loss
Foreign currency translation
Issuances of ordinary shares
Ordinary shares issued in connection
with Tornier merger
Grant of restricted stock awards
Forfeitures of restricted stock awards
Vesting of restricted stock units
Share-based compensation
Issuance of stock warrants, net of
equity issuance costs
Balance at December 27, 2015
2016 Activity:
Net loss
Foreign currency translation
Issuances of ordinary shares
Vesting of restricted stock units
Share-based compensation
Issuance of stock warrants, net of
repurchases and equity issuance costs
Balance at December 25, 2016
2017 Activity:
Net loss
Foreign currency translation
Issuances of ordinary shares
Shares issued in connection with
IMASCAP acquisition
Vesting of restricted stock units
Share-based compensation
Balance at December 31, 2017
Ordinary shares
Number of
shares
Amount
52,913,093 $
2,101 $
—
—
160,306
49,569,007
5,246
(5,869 )
30,895
—
—
—
6
1,666
—
—
17
—
Additional
paid-in
capital
749,469 $
Accumulated
deficit
(475,165 ) $
Accumulated
other
comprehensive
income (loss)
Total
shareholders'
equity
278,803
2,398 $
—
—
3,514
(298,701 )
—
—
—
(12,882 )
—
(298,701 )
(12,882 )
3,520
1,032,570
—
—
(17 )
24,803
—
—
—
—
—
—
—
—
25,247
102,672,678 $
3,790 $ 1,835,586 $
(773,866 ) $
—
—
440,355
287,962
—
—
—
—
15
10
—
—
—
—
8,455
(10 )
14,406
50,312
(432,373 )
—
—
—
—
—
103,400,995 $
3,815 $ 1,908,749 $ (1,206,239 ) $
—
—
—
—
—
1,034,236
—
—
—
24,803
—
25,247
(10,484 ) $ 1,055,026
—
(8,977 )
—
—
—
(432,373 )
(8,977 )
8,470
—
14,406
—
(19,461 ) $
50,312
686,864
—
—
1,352,549
661,753
392,127
—
—
—
45
23
13
—
—
—
27,506
15,620
(13 )
19,485
(202,598 )
—
—
—
41,751
—
(202,598 )
41,751
27,551
—
—
—
—
—
—
22,290 $
15,643
—
19,485
588,696
105,807,424 $
3,896 $ 1,971,347 $ (1,408,837 ) $
1 During 2015, the 2014 balances of ordinary shares and additional paid in capital were restated to meet post-merger
conversion values as further described within Note 13.
The accompanying notes are an integral part of these consolidated financial statements.
92
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Description of Business
Wright Medical Group N.V. is a global medical device company focused on extremities and biologics products. We are committed
to delivering innovative, value-added solutions improving quality of life for patients worldwide and are a recognized leader of
surgical solutions for the upper extremities (shoulder, elbow, wrist and hand), lower extremities (foot and ankle) and biologics
markets, three of the fastest growing segments in orthopaedics. We market our products in approximately 50 countries worldwide.
Our global corporate headquarters are located in Amsterdam, the Netherlands. We also have significant operations located in
Memphis, Tennessee (U.S. headquarters, research and development, sales and marketing administration, and administrative
activities); Bloomington, Minnesota (upper extremities sales and marketing and warehousing operations); Arlington, Tennessee
(manufacturing and warehousing operations); Franklin, Tennessee (manufacturing and warehousing operations); Montbonnot,
France (manufacturing and warehousing operations); Plouzané, France (research and development); and Macroom, Ireland
(manufacturing). In addition, we have local sales and distribution offices in Canada, Australia, Asia, Latin America, and throughout
Europe. For purposes of this report, references to “international” or “foreign” relate to non-U.S. matters while references to
“domestic” relate to U.S. matters.
Upon completion of the Wright/Tornier merger effective October 1, 2015, Robert J. Palmisano, former President and Chief
Executive Officer (CEO) of legacy Wright, became President and CEO of the combined company, and Lance A. Berry, former
Senior Vice President (SVP) and Chief Financial Officer (CFO) of legacy Wright, became SVP and CFO. Immediately upon
completion of the merger, legacy Wright shareholders owned approximately 52% of the combined company and legacy Tornier
shareholders owned approximately 48% of the combined company, and our board of directors was comprised of five representatives
from legacy Wright's board of directors and five representatives from legacy Tornier's board of directors. In connection with the
merger, the trading symbol for our ordinary shares changed from “TRNX” to “WMGI.” Because of these and other facts and
circumstances, the merger was accounted for as a “reverse acquisition” under US GAAP, and as such, legacy Wright was considered
the acquiring entity for accounting purposes. Therefore, legacy Wright’s historical results of operations replaced legacy Tornier’s
historical results of operations for all periods prior to the merger. More specifically, the accompanying consolidated financial
statements for periods prior to the merger are those of legacy Wright and its subsidiaries, and for periods subsequent to the merger
also include legacy Tornier and its subsidiaries.
Our fiscal year-end is generally determined on a 52-week basis and runs from the Monday nearest to the 31st of December of a year,
and ends on the Sunday nearest to the 31st of December of the following year. Every few years, it is necessary to add an extra week
to the year making it a 53-week period. The fiscal year ended December 31, 2017 was a 53-week period. References in this report to
a particular year generally refer to the applicable fiscal year. Accordingly, references to “2017” or “the year ended December 31,
2017” mean the fiscal year ended December 31, 2017.
The consolidated financial statements and accompanying notes present our consolidated results for each of the fiscal years in the
three-year period ended December 31, 2017, December 25, 2016, and December 27, 2015.
All amounts are presented in U.S. dollars ($), except where expressly stated as being in other currencies, e.g., Euros (€).
References in these notes to consolidated financial statements to “we,” “our” and “us” refer to Wright Medical Group N.V. and its
subsidiaries after the Wright/Tornier merger and Wright Medical Group, Inc. and its subsidiaries before the merger.
2.
Summary of Significant Accounting Policies
Principles of consolidation. The accompanying consolidated financial statements include our accounts and those of our controlled
subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with US GAAP 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, accounting for business combinations and
the evaluation of goodwill and long-lived assets, valuation of in-process research and development, product liability claims, product
liability insurance recoveries and other litigation, income taxes, and share-based compensation.
Discontinued operations. On October 21, 2016, pursuant to a binding offer letter dated as of July 8, 2016, Tornier France SAS and
certain other entities related to us and Corin entered into a business sale agreement and simultaneously completed and closed the sale
of our Large Joints business. Pursuant to the terms of the agreement, we sold substantially all of our assets related to our Large
Joints business to Corin for approximately €29.7 million in cash, less approximately €11.1 million for net working capital
adjustments. Upon closing, the parties also executed a transitional services agreement and supply agreement, among other ancillary
agreements required to implement the transaction. These agreements were on arm’s length terms and were not material to our
financial statements.
93
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
On January 9, 2014, pursuant to an Asset Purchase Agreement, dated as of June 18, 2013 (the MicroPort Agreement), by and among
us and MicroPort, we completed the divesture and sale of our business operations operating under our prior OrthoRecon operating
segment (the OrthoRecon Business) to MicroPort. Pursuant to the terms of the MicroPort Agreement, the purchase price (as defined
in the agreement) for the OrthoRecon Business was approximately $283 million (including a working capital adjustment), which
MicroPort paid in cash.
All historical operating results for the Large Joints and OrthoRecon businesses, including costs associated with corporate employees
and infrastructure transferred as a part of the sales, are reflected within discontinued operations in the consolidated statements of
operations. See Note 4 for further discussion of discontinued operations. Other than Note 4, unless otherwise stated, all discussion
of assets and liabilities in these Notes to the Consolidated Financial Statements reflect the assets and liabilities held and used in our
continuing operations, and all discussion of revenues and expenses reflect those associated with our continuing operations.
Cash and cash equivalents. Cash and cash equivalents include all cash balances and short-term investments with original maturities
of three months or less. Any such investments are readily convertible into known amounts of cash, and are so near their maturity
that they present insignificant risk of changes in value because of interest rate variation.
Restricted cash. Amounts included in restricted cash at December 25, 2016 represent those that were required to be held in a
restricted escrow account by a contractual agreement to secure the obligations of WMT under the MSA as described in Note 16. For
additional information regarding restricted cash, see Note 17.
Inventories. Our inventories are valued at the lower of cost or market on a FIFO basis. Inventory costs include material, labor costs,
and manufacturing overhead. Our excess and obsolete inventory reserve is based on both the current age of kit inventory as
compared to its estimated life cycle and our forecasted product demand and production requirements for other inventory items for
the next 36 months.
Total charges incurred to write down excess and obsolete inventory to net realizable value included in “Cost of sales” were
approximately $19.2 million, $21.5 million, and $14.2 million for the fiscal years ended December 31, 2017, December 25, 2016,
and December 27, 2015, respectively. During the fiscal years ended December 31, 2017 and December 25, 2016, our excess and
obsolete charges included product rationalization initiative adjustments of $3.1 million and $4.1 million, respectively. During the
year ended December 27, 2015, our excess and obsolete inventory charges included $4.1 million related to a change in estimate.
Product liability claims and related insurance recoveries and other litigation. We are involved in legal proceedings involving
product liability claims as well as contract, patent protection, and other matters. See Note 16 for additional information regarding
product liability claims, product liability insurance recoveries, and other litigation.
We make provisions for claims specifically identified for which we believe the likelihood of an unfavorable outcome is probable and
the amount of loss can be estimated. For unresolved contingencies with potentially material exposure that are deemed reasonably
possible, we evaluate whether a potential loss or range of loss can be reasonably estimated. Our evaluation of these matters is the
result of a comprehensive process designed to ensure that recognition of a loss or disclosure of these contingencies is made in a
timely manner. In determining whether a loss should be accrued or a loss contingency disclosed, we evaluate a number of factors
including: the procedural status of each lawsuit; any opportunities for dismissal of the lawsuit before trial; the amount of time
remaining before trial date; the status of discovery; the status of settlement; arbitration or mediation proceedings; and management’s
estimate of the likelihood of success prior to or at trial. The estimates used to establish a range of loss and the amounts to accrue are
based on previous settlement experience, consultation with legal counsel, and management’s settlement strategies. If the estimate of
a probable loss is in a range and no amount within the range is more likely, we accrue the minimum amount of the range. We
recognize legal fees as an expense in the period incurred. These expenses are reflected in either continuing or discontinued
operations depending on the product associated with the claim.
We record insurance recoveries from product liability insurance that is in force when they are realized or realizable, normally when
we believe it is probable that the insurance carrier will settle the claim.
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 and building improvements
Machinery and equipment
Furniture, fixtures and office equipment
Surgical instruments
15 to 25 years
10 to 40 years
3 to 14 years
3 to 14 years
6 years
94
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
Valuation of long-lived assets. Management periodically evaluates carrying values of long-lived assets, including property, plant and
equipment and finite-lived 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 with FASB ASC 360. Accordingly, we evaluate impairment of our
long-lived assets 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 difference between the asset’s fair market value and the
asset's carrying value.
Intangible assets and goodwill. Goodwill is recognized for the excess of the purchase price over the fair value of net assets of
businesses acquired. FASB ASC 350-30-35-18 requires companies to evaluate for impairment intangible assets not subject to
amortization, such as our IPRD assets, if events or changes in circumstances indicate than an asset might be impaired. Further,
FASB ASC 350-20-35-30 requires companies to evaluate goodwill and intangibles not subject to amortization for impairment
between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of
a reporting unit below its carrying amount. Unless circumstances otherwise dictate, the annual impairment test is performed on
October 1 each year. See Note 8 for discussion of our 2017 goodwill impairment analysis.
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. This method of amortization approximates the expected future cash flow generated from their use.
Finite-lived intangibles are reviewed for impairment in accordance with FASB ASC Section 360, Property, Plant and Equipment
(FASB ASC 360). The weighted average amortization periods for our intangible assets are as follows:
Completed technology
Distribution channels
Trademarks
Licenses
Customer relationships
Non-compete agreements
Other intangible assets
10 years
5 years
4 years
11 years
18 years
4 years
3 years
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 and surgery centers. Our collection history has been favorable with
minimal bad debts from these customers. 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 repeated collection efforts. Our allowance for
doubtful accounts totaled $4.3 million and $4.5 million at December 31, 2017 and December 27, 2016, respectively.
Concentration of credit risk. Financial instruments that 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. Collateral or other security is generally not required for accounts receivable.
Concentrations of supply of raw material. We rely on a limited number of suppliers for the components used in our products. For
certain human biologic products, such as Allomatrix®, we depend on one supplier of demineralized bone matrix and cancellous bone
matrix. We rely on one supplier for our GRAFTJACKET® family of soft tissue repair and graft containment products. We maintain
adequate stock from these suppliers in order to meet market demand. Additionally, we have other soft tissue repair products which
include our CONEXA™ Reconstructive Tissue Matrix, ACTISHIELD™ and ACTISHIELD™ CF Amniotic Barrier Membranes,
VIAFLOW™ and VIAFLOW™ C Flowable Placental Tissue Matrices, BIOFIBER® biologic absorbable scaffold products, and
PHANTOM FIBER™ high strength, resorbable suture products.
We rely on one supplier for a key component of our AUGMENT® Bone Graft. In December 2013, our supplier notified us of its
intent to terminate the supply agreement in December 2015. This supplier was contractually required to meet our supply
requirements until the termination date, and to use commercially reasonable efforts to assist us in identifying a new supplier and
support the transfer of technology and supporting documentation to produce this component. In April 2016, we entered into a
commercial supply agreement with FUJIFILM Diosynth Biotechnologies U.S.A., Inc. pursuant to which Fujifilm agreed to
manufacture and sell to us and we agreed to purchase the key component of our AUGMENT® Bone Graft. Pursuant to our supply
agreement with Fujifilm, commercial production of the key component is expected to begin in 2019. Although we believe that our
95
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
current supply of the key component from our former supplier should be sufficient to last until after the component becomes
available under the new agreement, no assurance can be provided that it will be sufficient.
Income taxes. Income taxes are accounted for pursuant to the provisions of FASB ASC Section 740, Income Taxes (FASB ASC
740). 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
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. See Note 11 for further discussion
of our consolidated deferred tax assets and liabilities, and the associated valuation allowance.
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.
In December 2017, the United States enacted new legislation under the 2017 Tax Act which included significant provision changes
in the U.S. including, but not limited to, lowering the federal statutory rate to 21% beginning in January 2018, changing the net
operating loss carryforward period and introducing a limitation on usage of these attributes, repealing the AMT system, and
imposing a one-time toll charge on a U.S. shareholder’s cumulative undistributed post-1986 earnings of foreign subsidiaries. We are
required to recognize the effect of any tax law changes during the period of enactment including re-measuring any deferred tax
assets and liabilities based on when these attributes are expected to be realized in the future and re-analyzing positive and negative
evidence regarding the realizability of deferred tax assets. Also in December 2017, the SEC issued Staff Accounting Bulletin No.
118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts
under a one-year measurement period to consider upcoming guidance and interpretations and to complete further analysis that may
affect our current estimates in our consolidated financial statements within the next year.
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 statements 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 United States and by a combination of
employee sales representatives, independent sales representatives, and stocking distributors outside the United States. 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.
During the fiscal quarter ended December 27, 2015, following the Wright/Tornier merger, we changed our estimate of uninvoiced
revenue. While we have generally recognized revenue at the time that the product was surgically implanted, from a timing
perspective, we now recognize revenue at the time the surgery and associated products used are reported, as opposed to previously
when we received clerical documentation from the hospital. We have accounted for this as a change in estimate and recorded
additional revenue of approximately $3 million in the fiscal quarter ended December 27, 2015.
We record revenues from sales to our stocking distributors outside the United States 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. These repurchase 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. We establish an allowance for
sales returns in the accounting period when the return becomes probable. Our reserve for sales returns was immaterial as of
December 31, 2017 and December 25, 2016.
Shipping and handling costs. We incur shipping and handling costs associated with the shipment of goods to customers,
independent distributors, and our subsidiaries. Amounts billed to customers for shipping and handling of products are included in net
sales. Costs incurred related to shipping and handling of products to customers are included in selling, general and administrative
expenses. Shipping and handling costs within selling, general and administrative expenses include instrument depreciation of
$27.1 million, $26.1 million, and $13.8 million for the fiscal years ended December 31, 2017, December 25, 2016, and
December 27, 2015, respectively. All other shipping and handling costs are included in cost of sales. These amounts totaled
$22.3 million, $17.9 million, and $9.8 million for the fiscal years ended December 31, 2017, December 25, 2016, and December 27,
2015, respectively.
Research and development costs. Research and development costs are charged to expense as incurred.
96
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Foreign currency translation. The financial statements of our subsidiaries whose functional currency is the local currency 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 loss in shareholders’ equity. Gains and losses resulting from transactions denominated in a currency
other than the local functional currency are included in “Other expense (income), net” in our consolidated statements of operations.
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 loss and our comprehensive loss is attributable
to foreign currency translation.
Share-based compensation. We account for share-based compensation in accordance with FASB ASC Section 718, Compensation —
Stock Compensation (FASB ASC 718). Under the fair value recognition provisions of FASB ASC 718, share-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 period. The determination of the fair value of share-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. The determination of the fair value of performance-
based share-based payment awards, such as performance share units, is based on the estimated achievement of the established
performance criteria on the date of grant and updated at the end of each reporting period until the performance period ends. Share-
based compensation expense is only recognized for performance share units that we expect to vest, which we estimate based upon an
assessment of the probability that the performance criteria will be achieved.
We recorded share-based compensation expense of $19.4 million, $14.4 million, and $25.0 million during the fiscal years ended
December 31, 2017, December 25, 2016, and December 27, 2015, respectively, within our results of continuing operations. A
significant portion of the expense in 2015 related to accelerated vesting of all unvested awards upon the closing of the
Wright/Tornier merger. See Note 14 for further information regarding our share-based compensation assumptions and expenses.
Derivative instruments. We account for derivative instruments and hedging activities under FASB ASC Section 815, Derivatives and
Hedging (FASB ASC 815). Accordingly, all of our derivative instruments are recorded in the accompanying consolidated balance
sheets 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 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 FASB ASC 815. 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 plan to discontinue our foreign
currency forward contracts derivative program in 2018.
We recorded a net loss of approximately $4.6 million, $0.8 million, and $0.3 million on our foreign currency contracts for the fiscal
years ended December 31, 2017, December 25, 2016, December 27, 2015, respectively. These gains and losses substantially offset
translation losses and gains recorded on our intercompany receivable and payable balances, and are also included in “Other (income)
expense, net.” At December 31, 2017, we had no foreign currency contracts outstanding. At December 25, 2016, we had $0.4
million in foreign currency contracts outstanding.
On August 31, 2012, February 13, 2015, and May 20, 2016, we issued the 2017 Notes, 2020 Notes, and 2021 Notes, respectively, as
defined and described in Note 9. The 2017 Notes Conversion Derivatives, 2020 Notes Conversion Derivatives, and 2021 Notes
Conversion Derivatives, each as defined and described in Note 6, requires bifurcation from the 2017 Notes, 2020 Notes, and 2021
Notes in accordance with ASC Topic 815, and are accounted for as derivative liabilities. We also entered into 2017, 2020, and 2021
Notes Hedges, as defined and described in Note 6, in connection with the issuance of the 2017, 2020, and 2021 Notes. As of
December 31, 2017, the 2020 and 2021 Notes Hedges were outstanding. The 2020 and 2021 Notes Hedges, which are cash-settled,
are intended to reduce our exposure to potential cash payments that we are required to make upon conversion of the 2020 and 2021
Notes in excess of the principal amount of converted notes if our ordinary share price exceeds the conversion price. The 2020 and
2021 Notes Hedges are accounted for as derivative assets in accordance with ASC Topic 815. The 2017 Notes Hedges, as defined
and described in Note 6, were fully settled in February 2015 when the 2020 Notes were issued.
Supplemental cash flow information. Cash paid for interest and income taxes was as follows (in thousands):
Interest
Income taxes
97
December 31,
2017
24,641 $
7,359 $
$
$
Fiscal year ended
December 25,
2016
18,678 $
4,334 $
December 27,
2015
11,198
1,051
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Recent Accounting Pronouncements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and
has subsequently issued several supplemental and/or clarifying ASUs (collectively ASC 606). ASC 606 prescribes a single common
revenue standard that replaces most existing US GAAP revenue recognition guidance. ASC 606 outlines a five-step model, under
which we will recognize revenue as performance obligations within a customer contract are satisfied. ASC 606 is intended to
provide more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries
and within the same industries compared to current practices, which should improve comparability. Adoption of ASC 606 is
required for annual reporting periods beginning after December 15, 2017 (fiscal year 2018 for Wright), including interim periods
within the reporting period. Based on our review of our current portfolio of customer contracts, including a review of historical
accounting policies and practices, we expect that revenue will continue to be recognized at a point in time, generally upon surgical
implantation or shipment of products to distributors, consistent with our current revenue recognition model. Therefore, adoption of
ASC 606 is not expected to have a material effect on our consolidated financial statements. We expect to adopt ASC 606 using the
modified retrospective method, which recognizes the cumulative effect at the date of initial application.
FASB ASU 2015-11 Simplifying the Measurement of Inventory was issued in July 2015. This required entities to measure most
inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must
measure inventory at the lower of cost or market. We adopted this ASU during 2017. The adoption of this ASU did not have a
material impact on our consolidated financial statements.
On September 25, 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments to
simplify the accounting for measurement-period adjustments. The ASU, which is part of the FASB’s simplification initiative, was
issued in response to stakeholder feedback that restatements of prior periods to reflect adjustments made to provisional amounts
recognized in a business combination increase the cost and complexity of financial reporting but do not significantly improve the
usefulness of the information. We adopted this ASU during fiscal year 2016. Under this ASU, an acquirer must recognize
adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment
amounts are determined and must present these amounts separately on the face of the income statement or disclose in the notes, the
portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods
if the adjustment to the provisional amounts had been recognized as of the acquisition date.
On February 25, 2016, the FASB issued ASU 2016-02, Leases, which introduces a lessee model that brings most leases on the
balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in FASB ASC
606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore,
the ASU addresses other concerns related to the current leases model. The ASU will be effective for us beginning in fiscal year
2019. We are in the initial phases of our adoption plans and; accordingly, we are unable to estimate any effect this may have on our
consolidated financial statements.
On March 30, 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting, which is to simplify accounting for income taxes, forfeitures, and withholding taxes, and reduce
ambiguity in cash flow reporting. We adopted this ASU during 2017 and noted that this change did not significantly impact our
consolidated financial statements. There were no income tax effects of this adoption due to the valuation allowance in the U.S.
3. Acquisitions and Disposition
IMASCAP
On December 14, 2017, we completed the acquisition of IMASCAP, a leader in the development of software-based solutions for
preoperative planning of shoulder replacement surgery. The intent of this transaction is to ensure exclusive access to breakthrough
software enabling technology and patents to further differentiate our product portfolio and to further accelerate growth opportunities
in our global extremities business. Under the terms of the agreement with IMASCAP, we acquired 100% of IMASCAP’s
outstanding equity on a fully diluted basis for an initial payment of €52.9 million, or approximately $62.3 million, consisting of
approximately €39.7 million, or approximately $46.7 million, in cash and approximately €13.2 million, or approximately
$15.6 million, representing 661,753 Wright ordinary shares, payable at closing. Additionally the purchase price includes an
estimated €15.1 million, or approximately $17.8 million, of contingent consideration related to the achievement of certain technical
milestones and sales earnouts. The technical milestones involve the development and approval of a patient specific implant system
and new software modules. The sales earnouts relate to patient specific guides and the future patient specific implant system.
98
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Purchase Consideration and Net Assets Acquired
The following presents the preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed on
December 14, 2017 (in thousands):
Cash and cash equivalents
Accounts receivable
Other current assets
Property, plant and equipment
Intangible assets
Total assets acquired
Current liabilities
Long-term debt
Deferred income taxes
Total liabilities assumed
Net assets acquired
Goodwill
Total preliminary purchase consideration
$
$
$
2,569
522
181
15
10,865
14,152
(2,065 )
(902 )
(3,033 )
(6,000 )
8,152
71,981
80,133
The purchase consideration was allocated to the net assets acquired based on their estimated fair values at the acquisition date. The
fair values were based on management’s analysis, including work performed by third-party valuation specialists.
Operating assets and liabilities were valued at their existing carrying values as they represented the fair value of those items at the
acquisition date, based on management’s judgments and estimates.
In determining the fair value of intangibles, we used an income method which is based on forecasts of the expected future cash flows
attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other
marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability),
technology life cycles, and the discount rate applied to the cash flows.
Of the $10.9 million of acquired intangible assets, $5.6 million was assigned to developed technology (6 year life) and $5.3 million
was assigned to in-process research and development.
The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The goodwill is
primarily attributable to strategic opportunities that arose from the acquisition of IMASCAP. The goodwill is not expected to be
deductible for tax purposes.
Wright/Tornier merger
On October 1, 2015, we completed the Wright/Tornier merger. Immediately upon completion of the merger, legacy Wright
shareholders owned approximately 52% of the combined company and legacy Tornier shareholders owned approximately 48% of
the combined company. Effective upon completion of the merger, we have operated under the leadership of the legacy Wright
management team and our board of directors was comprised of five representatives from legacy Wright’s board of directors and five
representatives from legacy Tornier’s board of directors. Because of these and other facts and circumstances, the merger was
accounted for as a “reverse acquisition” under US GAAP. As such, legacy Wright was considered the acquiring entity for
accounting purposes; and therefore, legacy Wright’s historical results of operations replaced legacy Tornier’s historical results of
operations for all periods prior to the merger. As part of the merger, each legacy Wright share was converted into the right to receive
1.0309 ordinary shares of the combined company. The Wright/Tornier merger added legacy Tornier’s complementary extremities
product portfolio to further accelerate growth opportunities in our global extremities business. The results of operations of both
companies are included in our consolidated financial statements for all periods after completion of the merger.
The acquired business contributed net sales of $73.3 million and operating loss of $13.4 million to our consolidated results of
operations from the date of acquisition through December 27, 2015, which included $10.3 million of inventory step-up amortization
and $4.0 million of intangible asset amortization. This operating loss does not include the merger-related transaction costs discussed
below.
Merger-Related Transaction Costs
In conjunction with the merger, we incurred approximately $20.1 million of merger-related transaction costs during the fiscal year
ended December 27, 2015, which was recognized as selling, general and administrative expense in our consolidated statements of
operations. These expenses primarily related to advisory fees, legal fees, and accounting and tax professional fees.
99
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Purchase Consideration and Net Assets Acquired
The purchase consideration in a reverse acquisition is determined with reference to the value of equity that the accounting acquirer,
legacy Wright, would have had to issue to the owners of the accounting acquiree, legacy Tornier, to give them the same percentage
interest in the combined entity. The fair value of WMG common stock used in determining the purchase price was $21.02 per share,
the closing price on September 30, 2015, which resulted in a total purchase consideration of $1.034 billion.
The calculation of the purchase consideration is as follows (in thousands):
Fair value of ordinary shares effectively transferred to Tornier shareholders
Fair value of ordinary shares effectively transferred to Tornier share award holders
Fair value of ordinary shares effectively issued to Tornier stock option holders
Fair value of total consideration
$
$
1,005,468
8,091
20,676
1,034,235
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 fair value of the assets acquired is recorded as goodwill. The fair values were
based on management’s analysis, including work performed by third-party valuation specialists.
The following presents the allocation of the purchase consideration to the assets acquired and liabilities assumed on October 1, 2015
(in thousands):
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Property, plant and equipment
Intangible assets
Deferred income taxes
Other assets
Total assets acquired
Current liabilities
Long-term debt
Deferred income taxes
Other non-current liabilities
Total liabilities assumed
Net assets acquired
Goodwill
Total preliminary purchase consideration
$
$
$
30,117
63,797
138,659
9,256
122,927
213,600
1,399
8,658
588,413
(101,623 )
(79,554 )
(31,878 )
(8,434 )
(221,489 )
366,924
667,311
1,034,235
We made various changes to the purchase allocation during the measurement period. These changes were recorded in the reporting
period in which the adjustment amounts were determined in accordance with ASU 2015-16.
During the fiscal quarter ended March 27, 2016, we revised the opening balances of current liabilities and goodwill acquired as part
of the Wright/Tornier merger by $0.6 million.
During the fiscal quarter ended June 26, 2016, we revised the opening balances of intangible assets, accounts receivable, inventories,
current liabilities, and goodwill acquired as part of the Wright/Tornier merger based on new information that existed as of the
acquisition date. As a result of the completion of the valuation of acquired intangible assets by our third-party valuation firm, we
increased the opening balance of acquired intangible assets by $9.4 million, with a corresponding decrease to goodwill. This
allocation adjustment resulted in an increase to amortization expense of $0.3 million for the six months ended June 26, 2016, of
which $0.1 million related to each of the previous two quarters. We also revised the opening balance of acquired working capital
accounts by a net decrease of $0.5 million, with a corresponding increase to goodwill.
During the fiscal quarter ended September 25, 2016, as a result of the finalization of the valuation of acquired intangible assets by
tax jurisdiction, we reduced the opening balance of deferred income taxes by $4.7 million, with a corresponding decrease to
goodwill. This allocation adjustment resulted in a $0.4 million decrease to our income tax benefit for the nine months ended
September 25, 2016. We revised the opening balance of property, plant, and equipment by $0.2 million with a corresponding
increase to goodwill. The decrease in property, plant, and equipment resulted in an immaterial impact to depreciation expense. We
also revised the opening balance of acquired working capital accounts by a net increase of $2.1 million, with a corresponding
decrease to goodwill, primarily due to the completion of our assessment on inventory and current liabilities. The purchase price
allocation was considered final as of September 25, 2016.
100
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The acquisition was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition
date. Trade receivables and payables, as well as certain other current and non-current assets and liabilities, were valued at the
existing carrying values as they represented the fair value of those items at the acquisition date, based on management’s judgments
and estimates. Trade receivables included gross contractual amounts of $73.9 million and our best estimate of $10.1 million which
represented contractual cash flows not expected to be collected at the acquisition date.
Inventory was recorded at estimated selling price less costs of disposal and a reasonable selling profit. The resulting inventory step-
up adjustment is being recognized in cost of sales as the related inventory is sold. The fair value of property, plant and equipment
utilized a combination of the cost and market approaches, depending on the characteristics of the asset classification.
In determining the fair value of intangibles, we used an income method which is based on forecasts of the expected future cash flows
attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflected a consideration of
other marketplace participants and included the amount and timing of future cash flows (including expected growth rates and
profitability), the underlying product or technology life cycles, the economic barriers to entry, and the discount rate applied to the
cash flows.
Of the $213.6 million of acquired intangible assets, $99.9 million was assigned to customer relationships (20 year life),
$89.5 million was assigned to developed technology (10 year life), $15.9 million was assigned to in-process research and
development, and $8.3 million was assigned to trade names (2.6 year life).
The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The goodwill is
primarily attributable to strategic opportunities that arose from the acquisition of Tornier. The goodwill is not expected to be
deductible for tax purposes.
The assets acquired in connection with the acquisition of Tornier and included in the above allocation of the purchase consideration
include, among other assets, assets associated with legacy Tornier's Large Joints business. As described in more detail in Note 4, on
October 21, 2016, pursuant to a binding offer letter dated as of July 8, 2016, Tornier France SAS and certain other entities related to
us and Corin entered into a business sale agreement and simultaneously completed and closed the sale of our Large Joints business.
Pursuant to the terms of the agreement, we sold substantially all of our assets related to our Large Joints business to Corin for
approximately €29.7 million in cash, less approximately €11.1 million for net working capital adjustments.
Pro Forma Combined Financial Information (Unaudited)
The following unaudited pro forma combined financial information (in thousands) summarizes the results of operations for the
periods indicated as if the Wright/Tornier merger had been completed as of January 1, 2014.
Net sales
Net loss from continuing operations
Fiscal year ended
December 27, 2015
615,490
(293,055 )
$
$
The pro forma net loss for the fiscal year ended December 27, 2015 includes the following non-recurring items: $32.1 million of
merger-related transaction expenses, $30.1 million of non-cash share-based compensation charges, and $5.5 million of contractual
change-in-control severance charges.
Pro forma information reflects adjustments that are expected to have a continuing impact on our results of operations and are directly
attributable to the merger. The pro forma results include adjustments to reflect, among other things, the amortization of the
inventory step-up, the incremental intangible asset amortization to be incurred based on the fair values of each identifiable intangible
asset, and to eliminate interest expense related to legacy Tornier's former bank term debt and line of credit, which were repaid upon
completion of the Wright/Tornier merger. The pro forma amounts do not purport to be indicative of the results that would have
actually been obtained if the merger had occurred as of January 1, 2014 or that may be obtained in the future, and do not reflect
future synergies, integration costs, or other such costs or savings.
Divestiture of Certain Legacy Tornier Ankle Replacement and Toe Assets
On October 1, 2015, simultaneous with the completion of the Wright/Tornier merger, we completed the divestiture of the U.S. rights
to legacy Tornier's SALTO TALARIS® and SALTO TALARIS® XT™ line of ankle replacement products and line of silastic toe
replacement products, among other assets, for cash. We retained the right to sell these products outside the United States for up to
20 years unless the purchaser exercises an option to purchase the ex-United States rights to the products. The completion of the
asset divestiture was subject to and contingent upon the completion of the Wright/Tornier merger and we believe was necessary in
order to obtain U.S. Federal Trade Commission approval of the Wright/Tornier merger. As these assets were not part of
Wright/Tornier merger, they were not part of the purchase allocation. Additionally, the pro forma results exclude the divested
operations as if the divestiture were to have occurred on January 1, 2014.
101
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4.
Discontinued Operations
For the fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015, our loss from discontinued operations,
net of tax, totaled $137.7 million, $267.4 million, and $61.3 million, respectively, and was attributable primarily to expenses
associated with legacy Wright's former OrthoRecon business and, to a lesser degree, the former Large Joints business.
Large Joints Business
On October 21, 2016, pursuant to a binding offer letter dated as of July 8, 2016, Tornier France, Corin, and certain other entities
related to us and Corin entered into a business sale agreement and simultaneously completed and closed the sale of our Large Joints
business. Pursuant to the terms of the agreement, we sold substantially all of the assets related to our Large Joints business to Corin
for approximately €29.7 million in cash, less approximately €11.1 million for net working capital adjustments. Upon closing, the
parties also executed a transitional services agreement and supply agreement, among other ancillary agreements required to
implement the transaction. These agreements are on arm’s length terms and are not expected to be material to our consolidated
financial statements.
All historical operating results for the Large Joints business as well as continued involvement in accordance with the transitional
service agreement and supply agreement are reflected within discontinued operations in the consolidated statements of operations.
We recognized an impairment loss on assets held for sale of $21.3 million, before the effect of income taxes during 2016, based on
the difference between the net carrying value of the assets and liabilities held for sale and the purchase price, less estimated
adjustments and costs to sell. This loss was recorded within “Net loss from discontinued operations” in our consolidated statements
of operations for the fiscal year ended December 25, 2016.
For the fiscal year ended December 31, 2017, our loss from discontinued operations for the Large Joints business, net of tax, totaled
$4.1 million and was primarily attributable to professional fees and internal costs to support transition activities, costs associated
with transition services and working capital adjustments. The basic and diluted weighted-average number of ordinary shares
outstanding was 104.5 million for the fiscal year ended December 31, 2017. The basic and diluted net loss from discontinued
operations per share for the Large Joints business was $0.04 for the fiscal year ended December 31, 2017.
The following table summarizes the results of discontinued operations for the Large Joints business (in thousands, except per share
data) for the fiscal years ended December 25, 2016 and December 27, 2015:
Net sales
Cost of sales
Selling, general and administrative
Other
Loss from discontinued operations before income taxes
Impairment loss on assets held for sale, before income taxes
Total loss from discontinued operations before income taxes
Benefit for income taxes
Total loss from discontinued operations, net of tax
Fiscal year ended
December 25, 2016 December 27, 2015
10,135
5,633
5,021
684
(1,203 )
—
(1,203 )
(199 )
(1,004 )
35,318 $
20,244
18,808
—
(3,734 )
21,342
(25,076 )
(5,615 )
(19,461 ) $
$
$
Net loss from discontinued operations per share-basic and diluted (Note 13) 1
$
(0.19 ) $
(0.02 )
Weighted-average number of ordinary shares outstanding-basic and diluted (Note 13) 1
102,968
64,808
1 The 2015 weighted-average shares outstanding and net loss per share amounts were converted to meet post-merger valuations
as described within Note 13.
Cash used in operating activities by the Large Joints business totaled $6.5 million for the fiscal year ended December 31, 2017.
Cash provided by operating activities and investing activities from the Large Joints business totaled $5.2 million and $20.7 million,
respectively, for the fiscal year ended December 25, 2016.
OrthoRecon Business
On January 9, 2014, legacy Wright completed the divestiture and sale of its OrthoRecon business to MicroPort. Pursuant to the terms
of the agreement, the purchase price (as defined in the agreement) was approximately $283 million (including a working capital
adjustment), which MicroPort paid in cash. As a result of the transaction, we recognized approximately $24.3 million as the gain on
disposal of the OrthoRecon business, before the effect of income taxes.
102
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Certain liabilities associated with the OrthoRecon business, including product liability claims associated with hip and knee products
sold by legacy Wright prior to the closing, were not assumed by MicroPort. Charges associated with these product liability claims,
including legal defense, settlements and judgments, income associated with product liability insurance recoveries, and changes to
any contingent liabilities associated with the OrthoRecon business have been reflected within results of discontinued operations, and
we will continue to reflect these within results of discontinued operations in future periods.
All current and historical operating results for the OrthoRecon business are reflected within discontinued operations in the
consolidated financial statements. The following table summarizes the results of discontinued operations for the OrthoRecon
business (in thousands, except per share data):
Net sales
Selling, general and administrative
Loss from discontinued operations before income taxes
Benefit for income taxes
Total loss from discontinued operations, net of tax
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
$
$
— $
135,235
(135,235 )
(1,707 )
(133,528 ) $
— $
247,978
(247,978 )
—
(247,978 ) $
—
60,341
(60,341 )
—
(60,341 )
Net loss from discontinued operations per share-basic and diluted (Note 13) 1 $
(1.28 ) $
(2.41 ) $
(0.93 )
Weighted-average number of ordinary shares outstanding-basic and diluted
(Note 13) 1
104,531
102,968
64,808
1 The 2015 weighted-average shares outstanding and net loss per share amounts were converted to meet post-merger valuations
as described within Note 13.
During the fiscal years ended December 31, 2017 and December 25, 2016, we recognized charges, net of insurance proceeds, of
$94.0 million and $196.6 million, respectively, within discontinued operations related to the retained metal-on-metal product liability
claims associated with the OrthoRecon business (see Note 16 for additional discussion). We will incur continuing cash outflows
associated with legal defense costs and the ultimate resolution of these contingent liabilities until these liabilities are resolved.
During the fiscal year ended December 27, 2015, we recognized a $25 million charge to write down an insurance receivable
associated with product liability claims. Additionally, during 2015, we increased our estimated product liability by approximately
$4 million for claims that had been incurred in prior periods. We have analyzed the impact of this adjustment and determined that
this out-of-period charge did not have a material impact to the prior period financial statements. See Note 16 for additional
information regarding our product liabilities and the associated insurance.
We will incur continuing cash outflows associated with legal defense costs and the ultimate resolution of these contingent liabilities,
net of insurance proceeds, until these liabilities are resolved. Cash used in operating activities by the OrthoRecon business totaled
$221.6 million for the fiscal year ended December 31, 2017. Cash provided by operating activities from the OrthoRecon business
totaled $16.7 million for the fiscal year ended December 25, 2016, primarily due to the receipt of the $60 million insurance
settlement, offset by legal defense costs and settlement of product liabilities. See further discussion in Note 16.
5.
Inventories
Inventories consist of the following (in thousands):
Raw materials
Work-in-process
Finished goods
December 31,
2017
10,816 $
28,581
128,747
168,144 $
December 25,
2016
15,319
22,422
113,108
150,849
$
$
6. Fair Value of Financial Instruments and Derivatives
We account for derivatives in accordance with FASB ASC 815, which establishes accounting and reporting standards requiring that
derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in
the derivatives' fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met.
103
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FASB ASC Section 820, Fair Value Measurements and Disclosures 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:
Level 3:
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.
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.
2021 Notes Conversion Derivative and Notes Hedges
On May 20, 2016, we issued $395 million aggregate principal amount of 2.25% 2021 Notes. See Note 9 of the consolidated
financial statements for additional information regarding the 2021 Notes. The 2021 Notes have a conversion derivative feature
(2021 Notes Conversion Derivative) that requires bifurcation from the 2021 Notes in accordance with ASC Topic 815, and is
accounted for as a derivative liability. The fair value of the 2021 Notes Conversion Derivative at the time of issuance of the 2021
Notes was $117.2 million.
In connection with the issuance of the 2021 Notes, we entered into hedges (2021 Notes Hedges) with two option counterparties. The
2021 Notes Hedges, which are cash-settled, are generally intended to reduce our exposure to potential cash payments that we are
required to make upon conversion of the 2021 Notes in excess of the principal amount of converted notes if our ordinary share price
exceeds the conversion price. The aggregate cost of the 2021 Notes Hedges was $99.8 million and is accounted for as a derivative
asset in accordance with ASC Topic 815. However, in connection with certain events, these option counterparties have the
discretion to make certain adjustments to the 2021 Note Hedges, which may reduce the effectiveness of the 2021 Note Hedges.
The following table summarizes the fair value and the presentation in our consolidated balance sheets (in thousands) of the 2021
Notes Hedges and 2021 Notes Conversion Derivative:
2021 Notes Hedges
2021 Notes Conversion Derivative
Location on consolidated
balance sheet
Other assets
Other liabilities
$
$
December 31,
2017
December 25,
2016
127,063 $
126,148 $
159,095
161,601
In the first fiscal quarter of 2017, the closing price of our ordinary shares was greater than 130% of the 2021 Notes conversion price
for 20 or more of the 30 consecutive trading days preceding the quarter-end; and, therefore, the holders of the 2021 Notes had the
ability to convert the notes during the succeeding quarterly period. Due to the ability of the holders of the 2021 Notes to convert the
notes during this period, the carrying value of the 2021 Notes and the fair value of the 2021 Notes Conversion Derivative were
classified as current liabilities, and the fair value of the 2021 Notes Hedges were classified as current assets as of March 26, 2017.
There were no conversions during the second quarter of 2017. The closing price of our ordinary shares was less than 130% of the
2021 Notes conversion price for more than 20 of the 30 consecutive trading days preceding the calendar fiscal quarters ended June
30, 2017, September 30, 2017, and December 31, 2017, which resulted in the 2021 Notes no longer being convertible. As such, the
2021 Notes, 2021 Notes Conversion Derivative and 2021 Notes Hedges were classified as long-term as of December 31, 2017.
The 2021 Notes Hedges and the 2021 Notes Conversion Derivative are measured at fair value using Level 3 inputs. These
instruments are not actively traded and are valued using an option pricing model that uses observable and unobservable market data
for inputs.
Neither the 2021 Notes Conversion Derivative nor the 2021 Notes Hedges qualify for hedge accounting; thus, any change in the fair
value of the derivatives is recognized immediately in the consolidated statements of operations.
The following table summarizes the net gain (loss) on changes in fair value (in thousands) related to the 2021 Notes Hedges and
2021 Notes Conversion Derivative:
2021 Notes Hedges
2021 Notes Conversion Derivative
Net gain on changes in fair value
104
Fiscal year
ended December
31, 2017
Fiscal year
ended December
25, 2016
$
$
(32,032 ) $
35,453
3,421 $
59,278
(44,377 )
14,901
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2020 Notes Conversion Derivative and Notes Hedges
On February 13, 2015, WMG issued $632.5 million aggregate principal amount of 2.00% cash convertible senior notes due 2020
(2020 Notes). See Note 9 of the consolidated financial statements for additional information regarding the 2020 Notes. The 2020
Notes have a conversion derivative feature (2020 Notes Conversion Derivative) that requires bifurcation from the 2020 Notes in
accordance with ASC Topic 815, and is accounted for as a derivative liability. The fair value of the 2020 Notes Conversion
Derivative at the time of issuance of the 2020 Notes was $149.8 million.
In connection with the issuance of the 2020 Notes, WMG entered into hedges (2020 Notes Hedges) with three option counterparties.
The 2020 Notes Hedges, which are cash-settled, are generally intended to reduce WMG's exposure to potential cash payments that
WMG is required to make upon conversion of the 2020 Notes in excess of the principal amount of converted notes if our ordinary
share price exceeds the conversion price. The aggregate cost of the 2020 Notes Hedges was $144.8 million and is accounted for as a
derivative asset in accordance with ASC Topic 815. However, in connection with certain events, these option counterparties have
the discretion to make certain adjustments to the 2020 Note Hedges, which may reduce the effectiveness of the 2020 Note Hedges.
Concurrently with the issuance and sale of the 2021 Notes, certain holders of the 2020 Notes exchanged approximately $45 million
aggregate principal amount of 2020 Notes (including the 2020 Notes Conversion Derivative) for the 2021 Notes. For each $1,000
principal amount of 2020 Notes validly submitted for exchange, we delivered $990.00 principal amount of the 2021 Notes (subject,
in each case, to rounding down to the nearest $1,000 principal amount of the 2021 Notes, the difference being referred as the
rounded amount) to the investor plus an amount of cash equal to the unpaid interest on the 2020 Notes and the rounded amount at an
aggregate cost of approximately $44.6 million. We settled the associated portion of the 2020 Notes Conversion Derivative at a
benefit of approximately $0.4 million and satisfied the accrued interest, which was not material.
In addition, during the second quarter of 2016, we settled a portion of the 2020 Notes Hedges (receiving $3.9 million) and
repurchased a portion of the warrants associated with the 2020 Notes (paying $3.3 million), generating net proceeds of
approximately $0.6 million.
The following table summarizes the fair value and the presentation in our consolidated balance sheets (in thousands) of the 2020
Notes Hedges and 2020 Notes Conversion Derivative:
2020 Notes Hedges
2020 Notes Conversion Derivative
Location on consolidated
balance sheet
Other assets
Other liabilities
$
$
December 31,
2017
December 25,
2016
45,033 $
44,132 $
77,232
77,758
The 2020 Notes Hedges and the 2020 Notes Conversion Derivative are measured at fair value using Level 3 inputs. These
instruments are not actively traded and are valued using an option pricing model that uses observable and unobservable market data
for inputs.
Neither the 2020 Notes Conversion Derivative nor the 2020 Notes Hedges qualify for hedge accounting; thus, any change in the fair
value of the derivatives is recognized immediately in the consolidated statements of operations.
The following table summarizes the net gain (loss) on changes in fair value (in thousands) related to the 2020 Notes Hedges and
2020 Notes Conversion Derivative:
2020 Notes Hedges
2020 Notes Conversion Derivative
Net gain on changes in fair value
2017 Notes Conversion Derivative and Notes Hedges
Fiscal year ended
December 31,
2017
(32,199 ) $
33,626
1,427 $
December 25,
2016
(46,634 )
51,799
5,165
$
$
On August 31, 2012, WMG issued $300 million aggregate principal amount of 2.00% cash convertible senior notes due 2017 (the
2017 Notes). The 2017 Notes matured and the remaining $2.0 million principal amount was repaid on August 15, 2017. See Note 9
of the consolidated financial statements for additional information regarding the 2017 Notes. The 2017 Notes had a conversion
derivative feature (2017 Notes Conversion Derivative) that required bifurcation from the 2017 Notes in accordance with ASC Topic
815, and was accounted for as a derivative liability. The fair value of the 2017 Notes Conversion Derivative at the time of issuance
of the 2017 Notes was $48.1 million.
In connection with the issuance of the 2017 Notes, WMG entered into hedges (2017 Notes Hedges) with three option counterparties.
The aggregate cost of the 2017 Notes Hedges was $56.2 million and was accounted for as a derivative asset in accordance with ASC
Topic 815.
105
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In connection with the issuance of the 2020 Notes, WMG used approximately $292 million of the 2020 Notes' net proceeds to
repurchase and extinguish approximately $240 million aggregate principal amount of the 2017 Notes, settle the associated portion of
the 2017 Notes Conversion Derivative at a cost of approximately $49 million, and satisfy the accrued interest of $2.4 million. WMG
also settled all of the 2017 Notes Hedges (receiving $70 million) and repurchased all of the warrants associated with the 2017 Notes
(paying $60 million), generating net proceeds of approximately $10 million.
Concurrently with the issuance and sale of the 2021 Notes, certain holders of the 2017 Notes exchanged approximately $54.4 million
aggregate principal amount of 2017 Notes (including the 2017 Notes Conversion Derivative) for the 2021 Notes. For each $1,000
principal amount of 2017 Notes validly submitted for exchange, we delivered $1,035.40 principal amount of the 2021 Notes
(subject, in each case, to rounding down to the nearest $1,000 principal amount of the 2021 Notes, the difference being referred as
the rounded amount) to the investor plus an amount of cash equal to the unpaid interest on the 2017 Notes and the rounded amount
at a cost of approximately $56.3 million. We settled the associated portion of the 2017 Notes Conversion Derivative at a cost of
approximately $1.9 million and satisfied the accrued interest, which was not material.
In addition, during the second quarter of 2016, we repurchased and extinguished an additional $3.6 million aggregate principal
amount of the 2017 Notes in privately negotiated transactions and settled the associated portion of the 2017 Notes Conversion
Derivative at a cost of approximately $0.1 million, and satisfied the accrued interest, which was not material. The remainder of the
2017 Notes Conversion Derivative was settled at a cost of approximately $0.2 million in conjunction with the maturity of the 2017
Notes on August 15, 2017.
The following table summarizes the fair value and the presentation in our consolidated balance sheets (in thousands) of the 2017
Notes Conversion Derivative:
2017 Notes Conversion Derivative
Location on consolidated
balance sheet
Other liabilities
$
December 31,
2017
December 25,
2016
— $
164
The 2017 Notes Conversion Derivative was measured at fair value using Level 3 inputs. This instrument was not actively traded and
was valued using an option pricing model that used observable and unobservable market data for inputs.
Neither the 2017 Notes Conversion Derivative nor the 2017 Notes Hedges qualified for hedge accounting; thus, any change in the
fair value of the derivatives was recognized immediately in our consolidated statements of operations.
The following table summarizes the net (loss) gain on changes in fair value (in thousands) related to the 2017 Notes Conversion
Derivative:
2017 Notes Conversion Derivative
Fiscal year ended
December 31,
2017
December 25,
2016
(51 )
8,207
To determine the fair value of the embedded conversion option in the 2017, 2020, and 2021 Notes Conversion Derivatives, a
trinomial lattice model was used. A trinomial stock price lattice model generates three possible outcomes of stock price - one up,
one down, and one stable. This lattice generates a distribution of stock prices at the maturity date and throughout the life of the
2017, 2020, and 2021 Notes. Using this stock price lattice, a convertible note lattice was created where the value of the embedded
conversion option was estimated by comparing the value produced in a convertible note lattice with the option to convert against the
value without the ability to convert. In each case, the convertible note lattice first calculates the possible convertible note values at
the maturity date, using the distribution of stock prices, which equals to the maximum of (x) the remaining bond cash flows and
(y) stock price times the conversion price. The values of the 2017, 2020, and 2021 Notes Conversion Derivatives at the valuation
date were estimated using the values at the maturity date and moving back in time on the lattices (both for the lattice with the
conversion option and without the conversion option). Specifically, at each node, if the 2017, 2020, or 2021 Notes are eligible for
early conversion, the value at this node is the maximum of (i) converting to stock, which is the stock price times the conversion
price, and (ii) holding onto the 2017, 2020, and 2021 Notes, which is the discounted and probability-weighted value from the three
possible outcomes at the future nodes plus any accrued but unpaid coupons that are not considered at the future nodes. If the 2017,
2020, or 2021 Notes are not eligible for early conversion, the value of the conversion option at this node equals to (ii). In the lattice,
a credit adjustment was applied to the discount for each cash flow in the model as the embedded conversion option, as well as the
coupon and notional payments, is settled with cash instead of shares.
To estimate the fair value of the 2020 and 2021 Notes Hedges, we used the Black-Scholes formula combined with credit
adjustments, as the option counterparties have credit risk and the call options are cash settled. We assumed that the call options will
be exercised at the maturity since our ordinary shares do not pay any dividends and management does not expect to declare
dividends in the near term.
106
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following assumptions were used in the fair market valuations of the 2020 Notes Conversion Derivative, 2020 Notes Hedge,
2021 Notes Conversion Derivative, and 2021 Notes Hedge as of December 31, 2017:
Stock Price Volatility 1
Credit Spread for Wright 2
Credit Spread for Deutsche Bank AG 3
Credit Spread for Wells Fargo Securities, LLC 3
Credit Spread for JPMorgan Chase Bank 3
Credit Spread for Bank of America 3
2020 Notes
Conversion
Derivative
33.41%
2.24%
N/A
N/A
N/A
N/A
2020 Notes
Hedge
33.41%
N/A
0.38%
0.22%
0.21%
N/A
2021 Notes
Conversion
Derivative
34.58%
2.90%
N/A
N/A
N/A
N/A
2021 Notes
Hedge
34.58%
N/A
N/A
N/A
0.32%
0.31%
1 Volatility selected based on historical and implied volatility of ordinary shares of Wright Medical Group N.V.
2
3
Credit spread implied from traded price.
Credit spread of each bank is estimated using CDS curves. Source: Bloomberg.
The fair value of our notes conversion derivatives is determined using a trinomial lattice model and is classified in Level 3. We used
a stock price volatility, which is one of the most significant assumptions, of 33.41%, and 34.58% in calculating the fair value of our
2020 and 2021 Notes Conversion Derivatives, respectively, as of December 31, 2017. The change in the fair value resulting from a
change in the stock price volatility would have a direct impact on net profit, with an increase in volatility resulting in an increase in
the net loss and a decrease in volatility resulting in a decrease in the net loss for the period.
The following table depicts the impact that a 10% change in the stock price volatility would have on the fair value of the 2020 and
2021 Notes Conversion Derivatives (in thousands except for percentages):
2020 Notes Conversion Derivative
2021 Notes Conversion Derivative
Stock price volatility
33.41%
34.58%
$
$
Fair value at
December 31, 2017
Fair value with 10%
decrease in stock
price volatility
Fair value with 10%
increase in stock price
volatility
44,132 $
126,148 $
21,104 $
97,047 $
69,045
154,271
The fair value of our notes hedges is determined using the Black-Scholes formula combined with credit adjustments and is classified
in Level 3. A significant change in the stock price volatility price would result in a significant change in the fair value. We used a
stock price volatility, which is one of the most significant assumptions, of 33.41% and 34.58% in calculating the fair value of the
2020 and 2021 Notes Hedges, respectively, as of December 31, 2017. The change in the fair value resulting from a change in the
stock price volatility would have a direct impact on net profit, with an increase in volatility resulting in a decrease in the net loss and
a decrease in volatility resulting in an increase in the net loss for the period. The impact on profit would be offset due to volatility of
notes hedges by a similar change in volatility of the notes conversion derivatives.
The following table depicts the impact that a 10% change in the stock price volatility would have on the fair value of the 2020 and
2021 Notes Hedges (in thousands except for percentages):
2020 Notes Hedges
2021 Notes Hedges
Stock price volatility
33.41%
34.58%
$
$
Fair value at
December 31, 2017
Fair value with 10%
decrease in stock
price volatility
Fair value with 10%
increase in stock price
volatility
45,033 $
127,063 $
21,984 $
99,010 $
69,790
154,476
Derivatives not Designated as Hedging Instruments
We employ a derivative program using 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 FASB ASC Topic 815. 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. As of December 25, 2016, we had
$0.4 million in “Accrued expenses and other current liabilities” on our consolidated balance sheet related to foreign currency
contracts outstanding. As of December 31, 2017, there were no unsettled foreign currency contracts recorded within our
consolidated balance sheet. We plan to discontinue our foreign currency forward contracts derivative program in 2018.
As part of our acquisition of WG Healthcare on January 7, 2013, we were obligated to pay contingent consideration upon the
achievement of certain revenue milestones. As of December 25, 2016, we had recorded an estimated fair value of future
consideration of $0.4 million which was paid during 2017.
107
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As a result of the acquired sales and distribution business of Surgical Specialties Australia Pty. Ltd in 2015, we have recorded the
estimated fair value of future contingent consideration of approximately $0.9 million and $1.7 million as of December 31, 2017 and
December 25, 2016, respectively. We paid $1.0 million and $0.3 million in revenue earnout payments related to this contingent
consideration in the fiscal years ended December 31, 2017 and December 25, 2016, respectively.
As a result of the acquired business of IMASCAP in 2017, we have recorded the estimated fair value of future contingent
consideration of approximately €15.1 million, or approximately $17.8 million, related to the achievement of certain technical
milestones and sales earnouts. The estimated fair value of contingent consideration related to technical milestones totaled
$11.9 million and is contingent upon the development and approval of a patient specific implant system and new software modules.
The estimated fair value of contingent consideration related to sales earnouts totaled $5.9 million and is contingent upon the sale of
patient specific guides and the future patient specific implant system.
The fair values of the sales earn out contingent consideration as of December 31, 2017 and December 25, 2016 were determined
using a discounted cash flow model and probability adjusted estimates of the future earnings and is classified in Level 3. The
discount rate is 12% for IMASCAP and 14% for Surgical Specialties Australia Pty. Ltd.
In addition to the sales earn out contingent consideration, we also have contingent consideration from the IMASCAP acquisition
related to meeting certain developmental milestones for new software modules and for the FDA and CE approval for the future
patient specific implant system. The fair value of this contingent consideration as of December 31, 2017 was determined using
probability adjusted estimates of the future payments and is classified in Level 3. The discount rate is approximately 6% for
IMASCAP.
A change in the discount rate would have limited impact on our profits or the fair value of this contingent consideration. Changes in
the fair value of contingent consideration are recorded in “Other expense (income), net” in our consolidated statements of
operations.
On March 1, 2013, as part of our acquisition of BioMimetic, we issued Contingent Value Rights (CVRs) as part of the merger
consideration. Each CVR entitles its holder to receive additional cash payments of up to $6.50 per share, which are payable upon
receipt of FDA approval of AUGMENT® Bone Graft and upon achieving certain revenue milestones. On September 1, 2015,
AUGMENT® Bone Graft received FDA approval and the first of the milestone payments associated with the CVRs was paid out at
$3.50 per share, which totaled $98.1 million. The fair value of the CVRs outstanding at December 31, 2017 and December 25, 2016
was $42.3 million and $37.0 million, respectively, and was determined using the closing price of the security in the active market
(Level 1). For the fiscal years ended December 31, 2017 and December 25, 2016, the change in the fair value of the CVRs resulted
in expense of $5.3 million and $8.7 million, respectively. The income or expense related to the change in the fair value of the CVRs
is recorded in “Other expense (income), net” in our consolidated statements of operations. If, prior to March 1, 2019, sales of
AUGMENT® Bone Graft reach $40 million over 12 consecutive months, cash payment would be required at $1.50 per share, or
$42 million. Further, if, prior to March 1, 2019, sales of AUGMENT® Bone Graft reach $70 million over 12 consecutive months, an
additional cash payment would be required at $1.50 per share, or $42 million. As of December 31, 2017, we have reflected the
$42.0 million balance related to CVR liability within “Accrued expenses and other current liabilities.”
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates the fair value of these
financial instruments at December 31, 2017 and December 25, 2016 due to their short maturities and variable rates.
The following tables summarize the valuation of our financial instruments (in thousands):
At December 31, 2017
Assets
Cash and cash equivalents
Restricted cash
2020 Notes Hedges
2021 Notes Hedges
Total
Liabilities
2020 Notes Conversion Derivative
2021 Notes Conversion Derivative
Contingent consideration
Contingent consideration (CVRs)
Total
Quoted prices
in active
markets
(Level 1)
Prices with
other
observable
inputs
(Level 2)
Prices with
unobservable
inputs
(Level 3)
Total
$
$
$
$
167,740 $
—
45,033
127,063
339,836 $
167,740 $
—
—
—
167,740 $
44,132 $
126,148
19,188
42,325
231,793 $
— $
—
—
42,325
42,325 $
— $
—
—
—
— $
— $
—
—
—
— $
—
—
45,033
127,063
172,096
44,132
126,148
19,188
—
189,468
108
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
At December 25, 2016
Assets
Cash and cash equivalents
Restricted Cash
2020 Notes Hedges
2021 Notes Hedges
Total
Liabilities
2017 Notes Conversion Derivative
2020 Notes Conversion Derivative
2021 Notes Conversion Derivative
Contingent consideration
Contingent consideration (CVRs)
Total
Quoted prices
in active
markets
(Level 1)
Prices with
other
observable
inputs
(Level 2)
Prices with
unobservable
inputs
(Level 3)
Total
$
$
$
$
262,265 $
150,000
77,232
159,095
648,592 $
262,265 $
150,000
—
—
412,265 $
164 $
77,758
161,601
2,249
36,999
278,771 $
— $
—
—
—
36,999
36,999 $
— $
—
—
—
— $
— $
—
—
—
—
— $
—
—
77,232
159,095
236,327
164
77,758
161,601
2,249
—
241,772
The following is a roll forward of our assets and liabilities measured at fair value (in thousands) on a recurring basis using
unobservable inputs (Level 3) (in thousands):
Balance at
December 25,
2016
Additions
Transfers
into Level 3
Gain/(loss)
included in
earnings
Settlements
Currency
Balance at
December 31,
2017
2017 Notes Conversion
Derivative
2020 Notes Hedges
2020 Notes Conversion
Derivative
2021 Notes Hedges
2021 Notes Conversion
Derivative
Contingent consideration
$
(164 ) $
77,232
(77,758 )
159,095
$
—
—
—
—
(161,601 )
(2,249 )
—
(17,820 )
$
—
—
(51 ) $
(32,199 )
$
215
—
$
—
—
—
45,033
—
—
—
—
33,626
(32,032 )
35,453
(72 )
—
—
—
1,429
—
—
(44,132 )
127,063
—
(476 )
(126,148 )
(19,188 )
7. Property, Plant and Equipment
Property, plant and equipment, net 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,
2017
December 25,
2016
$
$
2,163 $
41,537
60,859
142,299
14,403
187,660
448,921
(236,542 )
212,379 $
1,952
40,570
45,141
125,844
7,058
147,713
368,278
(166,546 )
201,732
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
109
$
December 31,
2017
15,530 $
12,478
960
28,968
(7,749 )
21,219 $
December 25,
2016
15,529
5,356
—
20,885
(4,482 )
16,403
$
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Depreciation expense recognized within results of continuing operations approximated $56.8 million, $55.8 million, and
$28.4 million for the fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015, respectively, and included
depreciation of assets under capital leases.
8. Goodwill and Intangibles
Changes in the carrying amount of goodwill occurring during the fiscal year ended December 31, 2017, are as follows (in
thousands):
Goodwill at December 25, 2016
Goodwill associated with IMASCAP acquisition
Foreign currency translation
Goodwill at December 31, 2017
U.S. Lower
Extremities
& Biologics
$
218,525 $
—
—
$
218,525 $
U.S. Upper
Extremities
International
Extremities
& Biologics
558,669 $
71,981
—
630,650 $
73,848 $
—
10,639
84,487 $
Total
851,042
71,981
10,639
933,662
On December 14, 2017, we completed the acquisition of IMASCAP. As part of the preliminary purchase price allocation, we
acquired $10.9 million of intangible assets related to completed technology and in-process research and development and
$72.0 million of goodwill. Of the $10.9 million of acquired intangible assets, $5.6 million was assigned to developed technology
(6 year life) and $5.3 million was assigned to in-process research and development.
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. As of October 1, 2017, we performed a quantitative analysis to
test for goodwill impairment and determined that it is not more likely than not that the carrying value of our U.S. Lower Extremities
& Biologics, U.S. Upper Extremities, and International Extremities & Biologics reporting units exceeded their respective fair values,
indicating that goodwill was not impaired.
The components of our identifiable intangible assets, net are as follows (in thousands):
Indefinite life intangibles:
IPRD technology
Finite life intangibles:
Distribution channels
Completed technology
Licenses
Customer relationships
Trademarks
Non-compete agreements
Other
Total finite life intangibles
Total intangibles
Less: Accumulated amortization
Intangible assets, net
December 31, 2017
December 25, 2016
Cost
Accumulated
amortization
Cost
Accumulated
amortization
$
6,422
$
938
900 $
149,645
5,268
129,693
14,368
3,964
569
304,407 $
640
40,810
1,530
23,268
10,487
2,603
490
79,828
900 $
133,966
4,868
122,974
13,950
11,810
524
288,992 $
374
26,550
1,115
15,133
6,881
7,833
247
58,133
310,829
(79,828 )
231,001
$
289,930
(58,133 )
231,797
$
Based on the total finite life intangible assets held at December 31, 2017, we expect to amortize approximately $25.0 million in
2018, $23.0 million in 2019, $22.3 million in 2020, $22.1 million in 2021, and $22.1 million in 2022.
110
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. Debt and Capital Lease Obligations
Debt and capital lease obligations consist of the following (in thousands):
Capital lease obligations
2021 Notes
2020 Notes
2017 Notes
Asset-based line of credit
Other debt
Less: current portion
2021 Notes
December 31,
2017
20,401 $
December 25,
2016
14,892
$
300,051
513,014
—
53,645
8,003
895,114
(58,906 )
836,208 $
280,811
482,364
1,971
30,000
4,317
814,355
(33,948 )
780,407
$
On May 20, 2016, we issued $395 million aggregate principal amount of the 2021 Notes pursuant to an indenture (2021 Notes) dated
as of May 20, 2016 between us and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2021 Notes require
interest to be paid at an annual rate of 2.25% semi-annually in arrears on each May 15 and November 15, and will mature on
November 15, 2021 unless earlier converted or repurchased. The 2021 Notes are convertible, subject to certain conditions, solely
into cash. The initial conversion rate for the 2021 Notes will be 46.8165 ordinary shares (subject to adjustment as provided in the
2021 Notes Indenture) per $1,000 principal amount of the 2021 Notes (subject to, and in accordance with, the settlement provisions
of the 2021 Notes Indenture), which is equal to an initial conversion price of approximately $21.36 per ordinary share. We may not
redeem the 2021 Notes prior to the maturity date, and no “sinking fund” is available for the 2021 Notes, which means that we are not
required to redeem or retire the 2021 Notes periodically.
The holders of the 2021 Notes may convert their 2021 Notes at any time prior to May 15, 2021 solely into cash, in multiples of
$1,000 principal amount, upon satisfaction of one or more of the following circumstances: (1) during any calendar quarter
commencing after the calendar quarter ending on June 30, 2016 (and only during such calendar quarter), if the last reported sale
price of our ordinary shares for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price
on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the
trading price per $1,000 principal amount of 2021 Notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of our ordinary shares and the conversion rate on each such trading day; or (3) upon the
occurrence of specified corporate events. On or after May 15, 2021 until the close of business on the second scheduled trading day
immediately preceding the maturity date, holders may convert their 2021 Notes solely into cash, regardless of the foregoing
circumstances. Upon conversion, a holder will receive an amount in cash, per $1,000 principal amount of the 2021 Notes, equal to
the settlement amount as calculated under the 2021 Notes Indenture. If we undergo a fundamental change, as defined in the 2021
Notes Indenture, subject to certain conditions, holders of the 2021 Notes will have the option to require us to repurchase for cash all
or a portion of their 2021 Notes at a repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased,
plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date, as defined in the 2021 Notes
Indenture. In addition, following certain corporate transactions, we, under certain circumstances, will increase the applicable
conversion rate for a holder that elects to convert its 2021 Notes in connection with such corporate transaction. The 2021 Notes are
senior unsecured obligations that rank: (i) senior in right of payment to any of our indebtedness that is expressly subordinated in
right of payment to the 2021 Notes; (ii) equal in right of payment to any of our unsecured indebtedness that is not so subordinated;
(iii) effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such
indebtedness; and (iv) structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. As a
result of the issuance of the 2021 Notes, we recorded deferred financing charges of approximately $7.3 million, which are being
amortized over the term of the 2021 Notes using the effective interest method.
In the first fiscal quarter of 2017, the closing price of our ordinary shares was greater than 130% of the 2021 Notes conversion price
for 20 or more of the 30 consecutive trading days preceding the quarter-end; and, therefore, the holders of the 2021 Notes had the
ability to convert the notes during the succeeding quarterly period. Due to the ability of the holders of the 2021 Notes to convert the
notes during this period, the carrying value of the 2021 Notes and the fair value of the 2021 Notes Conversion Derivative were
classified as current liabilities, and the fair value of the 2021 Notes Hedges were classified as current assets as of March 26, 2017.
There were no conversions during the second quarter of 2017. The closing price of our ordinary shares was less than 130% of the
2021 Notes conversion price for more than 20 of the 30 consecutive trading days preceding the calendar fiscal quarters ended June
30, 2017, September 30, 2017, and December 31, 2017, which resulted in the 2021 Notes no longer being convertible. As such, the
2021 Notes, 2021 Notes Conversion Derivative and 2021 Notes Hedges were classified as long-term as of December 31, 2017.
111
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The 2021 Notes Conversion Derivative requires bifurcation from the 2021 Notes in accordance with ASC Topic 815, Derivatives
and Hedging, and is accounted for as a derivative liability. See Note 6 for additional information regarding the 2021 Notes
Conversion Derivative. The fair value of the 2021 Notes Conversion Derivative at the time of issuance of the 2021 Notes was
$117.2 million and was recorded as original debt discount for purposes of accounting for the debt component of the 2021 Notes.
This discount is amortized as interest expense using the effective interest method over the term of the 2021 Notes. For the fiscal
years ended December 31, 2017 and December 25, 2016, we recorded $18.1 million and $9.8 million, respectively, of interest
expense related to the amortization of the debt discount based upon an effective rate of 9.72%.
The components of the 2021 Notes were as follows (in thousands):
Principal amount of 2021 Notes
Unamortized debt discount
Unamortized debt issuance costs
Net carrying amount of 2021 Notes
December 31, 2017
December 25, 2016
395,000 $
(89,332 )
(5,617 )
300,051 $
395,000
(107,441 )
(6,748 )
280,811
$
$
The estimated fair value of the 2021 Notes was approximately $481.9 million at December 31, 2017, based on a quoted price in an
active market (Level 1).
We entered into 2021 Notes Hedges in connection with the issuance of the 2021 Notes with two counterparties. The 2021 Notes
Hedges, which are cash-settled, are generally intended to reduce our exposure to potential cash payments that we would be required
to make if holders elect to convert the 2021 Notes at a time when our ordinary share price exceeds the conversion price. However,
in connection with certain events, including, among others, (i) a merger or other make-whole fundamental change (as defined in the
2021 Notes Indenture); (ii) certain hedging disruption events, which may include changes in tax laws, an increase in the cost of
borrowing our ordinary shares in the market or other material increases in the cost to the option counterparties of hedging the 2021
Note Hedges; (iii) our failure to perform certain obligations under the 2021 Notes Indenture or under the 2021 Notes Hedges;
(iv) certain payment defaults on our existing indebtedness in excess of $25 million; or (v) if we or any of our significant subsidiaries
become insolvent or otherwise becomes subject to bankruptcy proceedings, the option counterparties have the discretion to terminate
the 2021 Notes Hedges, which may reduce the effectiveness of the 2021 Notes Hedges. In addition, the option counterparties have
broad discretion to make certain adjustments to the 2021 Notes Hedges and warrant transactions upon the occurrence of certain other
events, including, among others, (i) any adjustment to the conversion rate of the 2021 Notes; or (ii) upon the announcement of
certain significant corporate events, including events that may give rise to a termination event as described above, such as the
announcement of a third-party tender offer. Any such adjustment may also reduce the effectiveness of the 2021 Note Hedges. The
aggregate cost of the 2021 Notes Hedges was $99.8 million and is accounted for as a derivative asset in accordance with ASC Topic
815. See Note 6 of the consolidated financial statements for additional information regarding the 2021 Notes Hedges and the 2021
Notes Conversion Derivative.
We also entered into warrant transactions in which we sold warrants for an aggregate of 18.5 million ordinary shares to the two
option counterparties, subject to adjustment, for an aggregate of $54.6 million. The strike price of the warrants is $30.00 per share,
which was 69% above the last reported sale price of our ordinary shares on May 12, 2016. The warrants are expected to be net-share
settled and exercisable over the 100 trading day period beginning on February 15, 2022. The warrant transactions will have a
dilutive effect on our ordinary shares to the extent that the market value per ordinary share during such period exceeds the applicable
strike price of the warrants. However, in connection with certain events, these option counterparties have the discretion to make
certain adjustments to warrant transactions, which may increase our obligations under the warrant transactions.
Aside from the initial payment of the $99.8 million premium in the aggregate to the two option counterparties and subject to the
right of the option counterparties to terminate the 2021 Notes Hedges in certain circumstances, we do not expect to be required to
make any cash payments to the option counterparties under the 2021 Notes Hedges and expect to be entitled to receive from the
option counterparties cash, generally equal to the amount by which the market price per ordinary share exceeds the strike price of the
convertible note hedging transactions during the relevant valuation period. The strike price under the 2021 Notes Hedges is initially
equal to the conversion price of the 2021 Notes. However, in connection with certain events, these option counterparties have the
discretion to make certain adjustments to the 2021 Note Hedges, which may reduce the effectiveness of the 2021 Note Hedges.
Additionally, if the market value per ordinary share exceeds the strike price on any settlement date under the warrant transaction, we
will generally be obligated to issue to the option counterparties in the aggregate a number of shares equal in value to one percent of
the amount by which the then-current market value of one ordinary share exceeds the then-effective strike price of each warrant,
multiplied by the number of ordinary shares into which the 2021 Notes are initially convertible. We will not receive any additional
proceeds if warrants are exercised.
112
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As described in more detail below, concurrently with the issuance and sale of the 2021 Notes, certain holders of the 2017 Notes and
the 2020 Notes exchanged their 2017 Notes or 2020 Notes for the 2021 Notes.
2020 Notes
On February 13, 2015, WMG issued $632.5 million aggregate principal amount of the 2020 Notes pursuant to an indenture (2020
Notes), dated as of February 13, 2015 between WMG and The Bank of New York Mellon Trust Company, N.A., as trustee. The
2020 Notes require interest to be paid semi-annually on each February 15 and August 15 at an annual rate of 2.00%, and mature on
February 15, 2020 unless earlier converted or repurchased. The 2020 Notes were initially issued whereby they were convertible at
the option of the holder, during certain periods and subject to certain conditions described below, solely into cash at an initial
conversion rate of 32.3939 shares of WMG common stock per $1,000 principal amount of the 2020 Notes, subject to adjustment
upon the occurrence of certain events, which represented an initial conversion price of approximately $30.87 per share of WMG
common stock. On November 24, 2015, Wright Medical Group N.V. executed a supplemental indenture, fully and unconditionally
guaranteeing, on a senior unsecured basis, WMG’s obligations relating to the 2020 Notes, changing the underlying reference
securities from WMG common stock to Wright Medical Group N.V. ordinary shares and making a corresponding adjustment to the
conversion price. From and after the effective time of the Wright/Tornier merger, (i) all calculations and other determinations with
respect to the 2020 Notes previously based on references to WMG common stock are calculated or determined by reference to our
ordinary shares, and (ii) the conversion rate (as defined in the 2020 Notes Indenture) for the 2020 Notes was adjusted to a conversion
rate of 33.39487 ordinary shares (subject to adjustment as provided in the 2020 Notes Indenture) per $1,000 principal amount of the
2020 Notes, which represents a conversion price of approximately $29.94 per ordinary share (subject to, and in accordance with, the
settlement provisions of the 2020 Notes Indenture). The 2020 Notes may not be redeemed by WMG prior to the maturity date, and
no “sinking fund” is available for the 2020 Notes, which means that WMG is not required to redeem or retire the 2020 Notes
periodically.
The holders of the 2020 Notes may convert their notes at any time prior to August 15, 2019 solely into cash, in multiples of $1,000
principal amount, upon satisfaction of one or more of the following circumstances: (1) during any calendar quarter commencing
after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our
ordinary shares for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the
last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each
applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading
price per $1,000 principal amount of 2020 Notes for each trading day of the measurement period was less than 98% of the product of
the last reported sale price of our ordinary shares and the conversion rate on each such trading day; or (3) upon the occurrence of
specified corporate events. The Wright/Tornier merger did not result in a conversion right for holders of the 2020 Notes. On or after
August 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders
may convert their 2020 Notes solely into cash, regardless of the foregoing circumstances. Upon conversion, a holder will receive an
amount in cash, per $1,000 principal amount of the 2020 Notes, equal to the settlement amount as calculated under the 2020 Notes
Indenture. If WMG undergoes a fundamental change, as defined in the 2020 Notes Indenture, subject to certain conditions, holders
of the 2020 Notes will have the option to require WMG to repurchase for cash all or a portion of their notes at a purchase price equal
to 100% of the principal amount of the 2020 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the
fundamental change repurchase date, as defined in the 2020 Notes Indenture. In addition, following certain corporate transactions,
WMG, under certain circumstances, will increase the applicable conversion rate for a holder that elects to convert its 2020 Notes in
connection with such corporate transaction. The 2020 Notes are senior unsecured obligations that rank: (i) senior in right of
payment to any of WMG's indebtedness that is expressly subordinated in right of payment to the 2020 Notes; (ii) equal in right of
payment to any of WMG's unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment to any
secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all
indebtedness and other liabilities (including trade payables) of WMG's subsidiaries. In conjunction with the issuance of the 2020
Notes, we recorded deferred financing charges of approximately $18.1 million, which are being amortized over the term of the 2020
Notes using the effective interest method.
The 2020 Notes Conversion Derivative requires bifurcation from the 2020 Notes in accordance with ASC Topic 815, Derivatives
and Hedging, and is accounted for as a derivative liability. See Note 6 of the consolidated financial statements for additional
information regarding the 2020 Notes Conversion Derivative. The fair value of the 2020 Notes Conversion Derivative at the time of
issuance of the 2020 Notes was $149.8 million and was recorded as original debt discount for purposes of accounting for the debt
component of the 2020 Notes. This discount is amortized as interest expense using the effective interest method over the term of the
2020 Notes. For the fiscal years ended December 31, 2017 and December 25, 2016, we recorded $27.3 million and $25.9 million,
respectively, of interest expense related to the amortization of the debt discount based upon an effective rate of 8.54%.
Concurrently with the issuance and sale of the 2021 Notes, certain holders of the 2020 Notes exchanged approximately $45.0 million
aggregate principal amount of their 2020 Notes for the 2021 Notes. For each $1,000 principal amount of 2020 Notes validly
submitted for exchange, we delivered $990.00 principal amount of the 2021 Notes (subject to rounding down to the nearest $1,000
principal amount of the 2021 Notes, the difference being referred as the rounded amount) to the investor plus an amount of cash
equal to the unpaid interest on the 2020 Notes and the rounded amount. As a result of this note exchange and retirement of
$45.0 million aggregate principal amount of the 2020 Notes, we recognized approximately $9.3 million for the write-off of related
pro rata unamortized deferred financing fees and debt discount within “Other expense (income), net” in our consolidated statements
of operations during the fiscal year ended December 25, 2016.
113
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The components of the 2020 Notes were as follows (in thousands):
Principal amount of 2020 Notes
Unamortized debt discount
Unamortized debt issuance costs
Net carrying amount of 2020 Notes
December 31, 2017
December 25, 2016
587,500 $
(66,418 )
(8,068 )
513,014 $
587,500
(93,749 )
(11,387 )
482,364
$
$
The estimated fair value of the 2020 Notes was approximately $603.8 million at December 31, 2017, based on a quoted price in an
active market (Level 1).
WMG entered into the 2020 Notes Hedges in connection with the issuance of the 2020 Notes with three option counterparties. See
Note 6 of the consolidated financial statements for additional information on the 2020 Notes Hedges. The 2020 Notes Hedges,
which are cash-settled, are generally intended to reduce WMG's exposure to potential cash payments that WMG would be required
to make if holders elect to convert the 2020 Notes at a time when our ordinary share price exceeds the conversion price. However,
in connection with certain events, including, among others, (i) a merger or other make-whole fundamental change (as defined in the
2020 Notes indenture); (ii) certain hedging disruption events, which may include changes in tax laws, an increase in the cost of
borrowing our ordinary shares in the market or other material increases in the cost to the option counterparties of hedging the 2020
Note Hedges; (iii) WMG's failure to perform certain obligations under the 2020 Notes Indenture or under the 2020 Notes Hedges;
(iv) certain payment defaults on WMG's existing indebtedness in excess of $25 million; or (v) if WMG or any of its significant
subsidiaries become insolvent or otherwise becomes subject to bankruptcy proceedings, the option counterparties have the discretion
to terminate the 2020 Note Hedges at a value determined by them in a commercially reasonable manner and/or adjust the terms of
the 2020 Note Hedges, which may reduce the effectiveness of the 2020 Note Hedges. In addition, the option counterparties have
broad discretion to make certain adjustments to the 2020 Notes Hedges upon the occurrence of certain other events, including,
among others, (i) any adjustment to the conversion rate of the 2020 Notes; or (ii) upon the announcement of certain significant
corporate events, including events that may give rise to a termination event as described above, such as the announcement of a third-
party tender offer. Any such adjustment may also reduce the effectiveness of the 2020 Note Hedges. The aggregate cost of the 2020
Notes Hedges was $144.8 million and is accounted for as a derivative asset in accordance with ASC Topic 815. See Note 6 of the
consolidated financial statements for additional information regarding the 2020 Notes Hedges and the 2020 Notes Conversion
Derivative.
WMG also entered into warrant transactions in which it sold warrants for an aggregate of 20.5 million shares of WMG common
stock to the three option counterparties, subject to adjustment. The strike price of the warrants was initially $40 per share of WMG
common stock, which was 59% above the last reported sale price of WMG common stock on February 9, 2015. On November 24,
2015, Wright Medical Group N.V. assumed WMG's obligations pursuant to the warrants. Following the assumption, the warrants
became exercisable for 21.1 million Wright Medical Group N.V. ordinary shares and the strike price of the warrants was adjusted to
$38.8010 per ordinary share. The warrants are expected to be net-share settled and exercisable over the 200 trading day period
beginning on May 15, 2020. The warrant transactions will have a dilutive effect on our ordinary shares to the extent that the market
value per ordinary share during such period exceeds the applicable strike price of the warrants. However, in connection with certain
events, these option counterparties have the discretion to make certain adjustments to warrant transactions, which may increase our
obligations under the warrant transactions.
In addition, during the second quarter of 2016, we settled a portion of the 2020 Notes Hedges (receiving $3.9 million) and
repurchased a portion of the warrants associated with the 2020 Notes (paying $3.3 million), generating net proceeds of
approximately $0.6 million. Subsequent to this partial settlement, we had warrants which were exercisable for 19.6 million ordinary
shares and the strike price of the warrants remained $38.8010 per ordinary share.
Aside from the initial payment of the $144.8 million premium in the aggregate to the option counterparties, we do not expect to be
required to make any cash payments to the option counterparties under the 2020 Notes Hedges and expect to be entitled to receive
from the option counterparties cash, generally equal to the amount by which the market price per ordinary share exceeds the strike
price of the convertible note hedging transactions during the relevant valuation period. The strike price under the 2020 Notes
Hedges is initially equal to the conversion price of the 2020 Notes. However, in connection with certain events, these option
counterparties have the discretion to make certain adjustments to the 2020 Note Hedges, which may reduce the effectiveness of the
2020 Note Hedges. Additionally, if the market value per ordinary share exceeds the strike price on any settlement date under the
warrant transaction, we will generally be obligated to issue to the option counterparties in the aggregate a number of ordinary shares
equal in value to one half of one percent of the amount by which the then-current market value of one ordinary share exceeds the
then-effective strike price of each warrant, multiplied by the number of reference ordinary shares into which the 2020 Notes are
initially convertible. We will not receive any additional proceeds if warrants are exercised.
114
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2017 Notes
On August 31, 2012, WMG issued $300 million aggregate principal amount of the 2017 Notes pursuant to an indenture (2017 Notes)
dated as of August 31, 2012 between WMG and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2017 Notes
matured on August 15, 2017. Prior to maturity, we paid interest on the 2017 Notes semi-annually on each February 15 and August
15 at an annual rate of 2.00%. WMG could not redeem the 2017 Notes prior to the maturity date, and no “sinking fund” was
available for the 2017 Notes, which means that WMG was not required to redeem or retire the 2017 Notes periodically. The 2017
Notes were convertible at the option of the holder, during certain periods and subject to certain conditions as described below, solely
into cash at an initial conversion rate of 39.3140 shares per $1,000 principal amount of the 2017 Notes, subject to adjustment upon
the occurrence of specified events, which represented an initial conversion price of $25.44 per share. Holders could have converted
their 2017 Notes at any time prior to February 15, 2017 only under the following circumstances: (1) during any calendar quarter
commencing after the calendar quarter ending December 31, 2012 (and only during such calendar quarter), if the last reported sale
price of our ordinary shares for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding calendar quarter was greater than or equal to 130% of the conversion
price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which
the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of our ordinary shares and the conversion rate on each such trading day; or (3) upon the
occurrence of specified corporate events. On or after February 15, 2017 until the close of business on the second scheduled trading
day immediately preceding the maturity date, holders could convert their 2017 Notes solely into cash, regardless of the foregoing
circumstances. The 2017 Notes were senior unsecured obligations that ranked: (i) senior in right of payment to any of WMG's
indebtedness that is expressly subordinated in right of payment to the 2017 Notes; (ii) equal in right of payment to any of WMG's
unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment to any secured indebtedness to the
extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all indebtedness and other liabilities
(including trade payables) of WMG's subsidiaries. As a result of the issuance of the 2017 Notes, we recognized deferred financing
charges of approximately $8.8 million, which were amortized over the term of the 2017 Notes using the effective interest method.
The 2017 Notes Conversion Derivative required bifurcation from the 2017 Notes in accordance with ASC Topic 815, Derivatives
and Hedging, and was accounted for as a derivative liability. See Note 6 of the consolidated financial statements for additional
information regarding the 2017 Notes Conversion Derivative. The fair value of the 2017 Notes Conversion Derivative at the time of
issuance of the 2017 Notes was $48.1 million and was recorded as original debt discount for purposes of accounting for the debt
component of the 2017 Notes. This discount was amortized as interest expense using the effective interest method over the term of
the 2017 Notes. For the fiscal year ended December 25, 2016, we recorded $0.9 million of interest expense related to the
amortization of the debt discount based upon an effective rate of 6.47%. Interest on the 2017 Notes for the fiscal year ended
December 31, 2017 was not significant.
In connection with the issuance of the 2020 Notes, on February 13, 2015, WMG repurchased and extinguished
$240 million aggregate principal amount of the 2017 Notes and settled all of the 2017 Notes Hedges (receiving $70 million) and
repurchased all of the warrants (paying $60 million) associated with the 2017 Notes. As a result of the repurchase, we recognized
approximately $25.1 million for the write-off of related pro rata unamortized deferred financing fees and debt discount within “Other
expense (income), net” in our consolidated statements of operations during the fiscal year ended December 27, 2015.
Concurrently with the issuance and sale of the 2021 Notes, certain holders of the 2017 Notes exchanged approximately $54.4 million
aggregate principal amount their 2017 Notes for the 2021 Notes. For each $1,000 principal amount of 2017 Notes validly submitted
for exchange, we delivered $1,035.40 principal amount of 2021 Notes (subject to rounding down to the nearest $1,000 principal
amount of the 2021 Notes, the difference being referred as the rounded amount) to the investor plus an amount of cash equal to the
unpaid interest on the 2017 Notes and the rounded amount. In addition, during the fiscal quarter ended June 26, 2016, we
repurchased and extinguished an additional $3.6 million aggregate principal amount of the 2017 Notes in privately negotiated
transactions. As a result of this exchange and these repurchases, we recognized approximately $3.0 million for the write-off of
related pro rata unamortized deferred financing fees and debt discount within “Other expense (income), net” in our consolidated
statements of operations during the fiscal year ended December 25, 2016.
The components of the 2017 Notes were as follows (in thousands):
Principal amount of 2017 Notes
Unamortized debt discount
Unamortized debt issuance costs
Net carrying amount of 2017 Notes
December 31, 2017
December 25, 2016
— $
—
—
— $
2,026
(47 )
(8 )
1,971
$
$
115
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
ABL Facility
On December 23, 2016, we, together with WMG and certain of our other wholly-owned U.S. subsidiaries (collectively, Borrowers),
entered into a ABL Credit Agreement with Midcap Financial Trust, as administrative agent (Agent) and a lender and the additional
lenders from time to time party thereto. The ABL Credit Agreement provides for a $150.0 million senior secured asset based line of
credit, subject to the satisfaction of a borrowing base requirement (ABL Facility). The ABL Facility may be increased by up to
$100.0 million upon the Borrowers’ request, subject to the consent of the Agent and each of the other lenders providing such
increase. All borrowings under the ABL Facility are subject to the satisfaction of customary conditions, including the absence of
default, the accuracy of representations and warranties in all material respects and the delivery of an updated borrowing base
certificate. As of December 31, 2017 and December 25, 2016 we had $53.6 million and $30.0 million, respectively, in borrowings
outstanding under the ABL Facility. We have reflected this debt as a current liability on our consolidated balance sheets as of
December 31, 2017 and December 25, 2016, as required by US GAAP due to the weekly lockbox repayment/re-borrowing
arrangement underlying the agreement, as well as the ability for the lenders to accelerate the repayment of the debt under certain
circumstances as described below. As of December 31, 2017 and December 25, 2016, we had $2.2 million and $2.5 million,
respectively, of unamortized debt issuance costs related to the ABL Facility. These amounts are included within “Other assets” on
our consolidated balance sheets as of December 31, 2017 and December 25, 2016 and will be amortized over the five-year term of
the ABL Facility as described below.
The interest rate margin applicable to borrowings under the ABL Facility is, at the option of the Borrowers, equal to either (a) 3.25%
for base rate loans or (b) 4.25% for LIBOR rate loans, subject to a 0.75% LIBOR floor. In addition to paying interest on the
outstanding loans under the ABL Facility, the Borrowers also are required to pay a customary unused line fee equal to 0.50% per
annum in respect of unutilized commitments and certain other customary fees related to Agent’s administration of the ABL Facility.
Beginning January 1, 2017, the Borrowers are required to maintain a minimum drawn balance on the ABL Facility equal to 20% of
the average borrowing base for each month. To the extent the actual drawn balance is less than 20%, the Borrowers must pay a fee
equal to the amount the lenders under the ABL Facility would have earned had the Borrowers maintained a minimum drawn balance
equal to 20% of the average borrowing base for such month.
The ABL Credit Agreement requires that the Borrowers calculate the borrowing base for the ABL Facility on at least a monthly basis
and each time the Borrowers make a draw on the ABL Facility in accordance with the formula set forth in the ABL Credit
Agreement. The borrowing base is subject to adjustment and the implementation of reserves by the Agent in its permitted discretion,
as further described in the ABL Credit Agreement. If at any time the outstanding drawn balance under the ABL Facility exceeds the
borrowing base as in effect at such time, Borrowers will be required to prepay loans under the ABL Facility in an amount equal to
such excess. Certain accounts receivables and proceeds of collateral of the Borrowers will be applied to reduce the outstanding
principal amount of the ABL Facility on a periodic basis.
There is no scheduled amortization under the ABL Facility and (subject to borrowing base requirements and applicable conditions to
borrowing) the available revolving commitment may be borrowed, repaid and reborrowed without restriction. All outstanding loans
under the ABL Facility will be due and payable in full on the date that is the earliest to occur of (x) December 23, 2021; (y) the date
that is 91 days prior to the maturity date of the 2020 Notes or (z) the date that is 91 days prior to the maturity date of the 2021 Notes;
provided that, the springing maturity under clauses (y) and (z) are subject to the Borrowers’ ability to refinance, extend, renew or
replace the 2020 Notes and/or the 2021 Notes, as applicable, in full pursuant to the terms of the ABL Credit Agreement. Any
voluntary or mandatory permanent reduction or termination of the revolving commitments under the ABL Facility is subject to a
prepayment premium applicable to such reduced or terminated amount equal to (i) 3.0% through December 23, 2017, (ii) 2.0% from
December 24, 2017 through December 23, 2018 and (iii) 0.75% at any time thereafter.
The ABL Credit Agreement contains certain negative covenants that restrict our ability to take certain actions as specified in the ABL
Credit Agreement and an affirmative covenant that we maintain net revenue at or above minimum levels and maintain liquidity in
the United States at a level specified in the ABL Credit Agreement, subject to certain exceptions. All of the obligations under the
ABL Facility are guaranteed jointly and severally by Wright Medical Group N.V. and each of the Borrowers on the terms set forth in
the ABL Credit Agreement. Subject to certain exceptions set forth in the ABL Credit Agreement, amounts outstanding under the
ABL Facility are secured by a senior first priority security interest in substantially all existing and after-acquired assets of Wright
Medical Group N.V. and each Borrower.
Other Debt
Other debt primarily includes mortgages, shareholder debt and loans acquired as a result of the IMASCAP acquisition. We have
mortgages that had an outstanding balance of $1.0 million and $1.5 million at December 31, 2017 and December 25, 2016,
respectively. These mortgages are secured by an office building in Montbonnot, France and bear fixed annual interest rates of
2.55%-4.9%. As a result of the IMASCAP acquisition, we have two zero interest loans with a state investment company that had an
outstanding balance of $1.2 million at December 31, 2017. We also had shareholder debt outstanding of $1.6 million and $1.8
million as of December 31, 2017 and December 25, 2016, respectively. The remainder of other debt totals approximately $4.2
million and $1.0 million as of December 31, 2017 and December 25, 2016, respectively.
116
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The shareholder debt was acquired in conjunction with the Wright/Tornier merger. This debt was the result of a 2008 transaction
where a 51%-owned and consolidated subsidiary of legacy Tornier borrowed $2.2 million from a then-current member of the legacy
Tornier board of directors, who was also a 49% owner of the consolidated subsidiary. This loan was used to partially fund the
purchase of real estate in Grenoble, France, to be used as a manufacturing facility. Interest on the debt is variable-based on the three-
month Euro Libor rate plus 0.5% and has no stated term.
Maturities
Aggregate annual maturities of our current and long-term obligations at December 31, 2017, excluding capital lease obligations and
the ABL Facility, are as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
$
$
1,737
1,048
588,728
395,840
191
2,959
990,503
The table set forth above excludes amounts borrowed under the ABL Facility. As described previously, all outstanding loans under
the ABL Facility will be due and payable in full on December 23, 2021 or earlier under certain specified circumstances as previously
described.
As discussed in Note 7, we have acquired certain property and equipment pursuant to capital leases. At December 31, 2017, future
minimum lease payments under capital lease obligations, together with the present value of the net minimum lease payments, are as
follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total minimum payments
Less amount representing interest
Present value of minimum lease payments
Current portion
Long-term portion
$
$
4,371
4,334
3,612
2,718
2,112
6,543
23,690
(3,289 )
20,401
(3,524 )
16,877
10. Accumulated Other Comprehensive Income (AOCI)
Other comprehensive income (OCI) includes certain gains and losses that under US GAAP are included in comprehensive income
but are excluded from net loss as these amounts are initially recorded as an adjustment to shareholders’ equity. Amounts in OCI may
be reclassified to net loss upon the occurrence of certain events.
Our 2015, 2016, and 2017 OCI is comprised solely of foreign currency translation adjustments.
Changes in AOCI for the fiscal years ended December 27, 2015, December 25, 2016, and December 31, 2017 were as follows (in
thousands):
Balance December 31, 2014
Other comprehensive loss
Balance December 27, 2015
Other comprehensive loss
Balance December 25, 2016
Other comprehensive income
Balance December 31, 2017
117
Currency
translation
adjustment
2,398
(12,882)
(10,484 )
(8,977)
(19,461 )
41,751
22,290
$
$
$
$
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. Income Taxes
The components of our loss from continuing operations before income taxes are as follows (in thousands):
U.S.
Foreign
Loss from continuing operations before income taxes
The components of our benefit for income taxes are as follows (in thousands):
December 31,
2017
(56,808 ) $
(43,097 )
(99,905 ) $
Fiscal year ended
December 25,
2016
(140,190 ) $
(38,150 )
(178,340 ) $
$
$
December 27,
2015
(225,473 )
(15,535 )
(241,008 )
Current (benefit) provision:
U.S.:
Federal
State
Foreign
Total current (benefit) provision
Deferred (benefit) provision:
U.S.:
Federal
State
Foreign
Total deferred benefit
Total benefit for income taxes
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
$
$
(23,781 ) $
390
2,214
(21,177 )
(1,971 ) $
(281 )
3,860
1,608
—
255
562
817
(5,098 )
(93 )
(8,600 )
(13,791 )
(34,968 ) $
1,244
142
(16,400 )
(15,014 )
(13,406 ) $
(1,450 )
(166 )
(2,853 )
(4,469 )
(3,652 )
A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate for continuing operations is as follows:
Income tax benefit at statutory rate
State income taxes
Change in valuation allowance
CVR fair market value adjustment
Foreign income tax rate differential
Changes in tax reserves
Effects of U.S. tax reform
Other, net
Total
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
35.0 %
1.5 %
(3.5)%
(1.9)%
(6.1)%
2.9 %
6.5 %
0.6 %
35.0 %
35.0 %
2.9 %
(32.6 )%
(1.7 )%
3.3 %
0.8 %
— %
(0.2 )%
7.5 %
35.0 %
3.7 %
(36.5 )%
1.1 %
(0.9 )%
(0.1 )%
— %
(0.6 )%
1.7 %
118
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The significant components of our deferred income taxes as of December 31, 2017 and December 25, 2016 are as follows (in
thousands):
Deferred tax assets:
Net operating loss carryforwards
General business credit carryforwards
Reserves and allowances
Share-based compensation expense
Convertible debt notes and conversion options
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Intangible assets
Convertible notes bond hedges
Other
Total deferred tax liabilities
Net deferred tax liabilities
Fiscal year ended
December 31,
2017
December 25,
2016
$
283,708 $
12,993
90,246
13,679
10,747
1,642
(366,825 )
333,282
5,671
158,834
20,818
28,437
1,173
(479,404 )
46,190
68,811
6,383
42,862
11,668
120
10,055
52,123
30,120
2,565
61,033
94,863
$
(14,843 ) $
(26,052 )
The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act includes a number of changes in existing tax law
impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent
reduction in the U.S. federal statutory rate from 35% to 21%. We recognized the income tax effects of the 2017 Tax Act in our 2017
financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of
ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, our financial results
include an approximate $6.6 million benefit resulting from the revaluation of our net deferred tax liabilities and reduction of our
valuation allowance due to the change in the net operating loss carryforward period. Our analysis is complete with respect to these
items. While we have included a provisional amount pertaining to the one-time deemed repatriation charge, there is no net income
tax impact due to the valuation allowance provided on our U.S. deferred tax assets. Based on current guidance and interpretations,
we did not identify other items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable
estimate could not be determined as of December 31, 2017.
At December 31, 2017, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately
$960.0 million. The federal net operating losses begin to expire in 2018 and extend through 2037. State net operating loss
carryforwards at December 31, 2017 totaled approximately $1.0 billion, which begin to expire in 2018 and extend through 2037.
Additionally, we had general business credit carryforwards of approximately $13.0 million, which begin to expire in 2018 and
extend through 2037. At December 31, 2017, we had foreign net operating loss carryforwards of approximately $137.0 million,
$65.0 million of which do not expire and $72.0 million which begin to expire in 2018 and extend through 2026.
At December 31, 2017 and December 25, 2016, we had a valuation allowance of $367.0 million and $479.0 million, respectively,
related to certain U.S. and foreign deferred tax assets. We realized a net decrease in the valuation allowance of $112.0 million
during the fiscal year ended December 31, 2017, of which approximately $30.0 million was recognized as an income tax benefit.
The net decrease was primarily due to recent U.S. tax reform and change in the realizability of certain U.S. deferred tax assets, offset
by the valuation allowance on projected current year taxable losses. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and
carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. Based upon the levels
of historical taxable income, projections of future taxable income and the reversal of deferred tax liabilities over the periods in which
the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these
deductible differences, net of the existing valuation allowance.
It is our current practice and intention to reinvest the earnings of our subsidiaries in those operations. Therefore, we do not provide
for deferred taxes on the excess of the financial reporting over the tax basis in our investments in subsidiaries that are essentially
permanent in duration. We would recognize a deferred income tax liability if we were to determine that such earnings are no longer
indefinitely reinvested. Due to the number of tax jurisdictions involved, the complexity of our legal entity structure, and the
complexity of the tax laws in the relevant jurisdictions, we believe it is not practicable to estimate the amount of additional taxes
which may be payable upon distribution of these earnings, however it is not expected to be significant. Further, the 2017 Tax Act
119
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
imposed a mandatory transition tax on accumulated foreign earnings of our U.S. controlled foreign subsidiaries and eliminates U.S.
income taxes on distributions from U.S. controlled foreign subsidiaries.
As of December 31, 2017, our unrecognized tax benefits totaled approximately $6.0 million. The total amount of net unrecognized
tax benefits that, if recognized, would affect the tax rate was approximately $3.0 million at December 31, 2017. Our 2015 U.S.
federal income tax return and our 2012-2015 French corporate income tax returns are currently under audit by the respective tax
authorities. It is, therefore, reasonably possible that our unrecognized tax benefits could change in the next twelve months as a result
of settlements with taxing authorities as well as expirations of the statutes of limitations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at beginning of fiscal year
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 end of fiscal year
Fiscal year ended
December
31, 2017
December
25, 2016
$
$
8,095 $
215
20
(3,174 )
—
869
6,025 $
9,941
407
721
(2,657 )
(74 )
(243 )
8,095
We accrue interest required to be paid by the tax law for the underpayment of taxes 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 and penalties, that if incurred, would be recognized as penalty expense within
“Other expense (income)” on our consolidated statements of operations. As of December 31, 2017, accrued interest and penalties
related to our unrecognized tax benefits totaled approximately $0.2 million.
We file numerous consolidated and separate company income tax returns in the United States and in many foreign jurisdictions.
With few exceptions, we are subject to U.S. federal, state, and local income tax examinations for years 2014 through 2016. We are
no longer subject to foreign income tax examinations by tax authorities in significant jurisdictions for years before 2012. However,
U.S. and foreign 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. Other Balance Sheet Information
Other long-term liabilities consist of the following (in thousands):
Product liability reserves (Note 16)
Notes Conversion Derivatives (Note 6)
Contingent consideration and CVRs (Note 6)
Other
December 31,
2017
60,711 $
$
170,280
18,301
23,453
272,745 $
December 25,
2016
21,605
239,523
37,918
22,201
321,247
Accrued expenses and other current liabilities consist of the following (in thousands):
$
Employee bonuses
Other employee benefits
Royalties
Taxes other than income
Commissions
Professional and legal fees
Contingent consideration (Note 6)
Product liability and other legal accruals (Note 16)
CVRs (Note 6)
Other
120
$
December 31,
2017
12,803 $
22,401
12,563
8,933
19,330
12,388
1,168
151,027
42,044
31,901
314,558 $
December 25,
2016
28,791
20,383
8,534
19,559
16,891
11,031
1,330
264,827
—
36,358
407,704
$
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Capital Stock and Earnings Per Share
We are authorized to issue up to 320 million ordinary shares, each share with a par value of three Euro cents (€0.03). We had
105.8 million and 103.4 million ordinary shares issued and outstanding as of December 31, 2017 and December 25, 2016,
respectively. As discussed in Note 3, the Wright/Tornier merger completed on October 1, 2015 has been accounted for as a “reverse
acquisition” under US GAAP. As such, legacy Wright was considered the acquiring entity for accounting purposes; and therefore,
legacy Wright’s historical results of operations replaced legacy Tornier’s historical results of operations for all periods prior to the
merger. Additionally, each legacy Wright share was converted into the right to receive 1.0309 ordinary shares of the combined
company and the par value was revised to reflect the €0.03 par value as compared to the legacy Wright par value of $0.01. As a
result of the 2015 share conversion, the ordinary shares and APIC balances for the 2014 period included within the statements of
shareholders' equity have been restated.
FASB ASC Topic 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per
share is calculated based on the weighted-average number of ordinary shares outstanding during the period. Diluted earnings per
share is calculated to include any dilutive effect of our ordinary share equivalents. For the fiscal year ended December 31, 2017, our
ordinary share equivalents consisted of stock options, restricted stock units, performance share units, and warrants. For the fiscal
years ended December 25, 2016 and December 27, 2015, our ordinary share equivalents consisted of stock options, restricted stock
units, and warrants. The dilutive effect of the stock options, restricted stock units, performance share units, and warrants is
calculated using the treasury-stock method.
We had outstanding options to purchase 10.0 million ordinary shares, 1.3 million restricted stock units, and 0.1 million performance
share units (assuming target performance) at December 31, 2017, options to purchase 10.4 million ordinary shares and 1.3 million
restricted stock units at December 25, 2016, and options to purchase 9.9 million ordinary shares and 1.1 million restricted stock units
at December 27, 2015. We had outstanding net-share settled warrants on the 2020 Notes of 19.6 million ordinary shares at
December 31, 2017 and December 25, 2016 and 21.1 million ordinary shares at December 27, 2015. We also had net-share settled
warrants on the 2021 Notes of 18.5 million ordinary shares at December 31, 2017 and December 25, 2016.
None of the options, restricted stock units, performance share units, or warrants were included in diluted earnings per share for the
fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015 because we recorded a net loss for all periods;
and therefore, including these instruments would be anti-dilutive.
The weighted-average number of ordinary shares outstanding for basic and diluted loss per share purposes is as follows (in
thousands):
Weighted-average number of ordinary shares outstanding — basic
Ordinary share equivalents
Weighted-average number of ordinary shares outstanding — diluted
14. Share-Based Compensation
December 31,
2017
104,531
—
104,531
Fiscal year ended
December 25,
2016
102,968
—
102,968
December 27,
2015
64,808
—
64,808
We currently have two share-based compensation plans under which share-based awards may be granted - the Wright Medical Group
N.V. 2017 Equity and Incentive Plan and the Wright Medical Group N.V. Amended and Restated Employee Stock Purchase Plan,
which are described below. In addition, we have the Wright Medical Group N.V. Amended and Restated 2010 Incentive Plan and
several legacy Wright and legacy Tornier share-based compensation plans and non-plan agreements under which stock options and
restricted stock units are outstanding, but no future share-based awards may be granted.
121
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Amounts recognized in the consolidated financial statements with respect to share-based compensation are as follows:
Total cost of share-based arrangements
Amounts capitalized into inventory
Amortization of capitalized amounts
Impact to net loss
Impact to basic and diluted loss per share 1
Weighted-average number of shares outstanding - basic and diluted 1
December 31,
2017
19,485 $
(669 )
577
19,393 $
0.19 $
Fiscal year ended
December 25,
2016
14,406 $
(416 )
426
14,416 $
0.14 $
$
$
$
104,531
102,968
December 27,
2015
24,716
(51 )
299
24,964
0.39
64,808
1 The 2015 balances were converted to meet post-merger valuations as described in Note 13.
The compensation costs related to share-based awards were as follows:
December 31,
2017
Fiscal year ended
December 25,
2016
Stock options
Restricted stock units and restricted stock awards
Performance share units
Employee stock purchase plan
Total compensation cost for share-based awards
$
$
8,988 $
9,373
441
683
19,485 $
December 27,
2015
15,985
8,731
—
—
24,716
5,844 $
8,416
—
146
14,406 $
As of December 31, 2017, we had $44.3 million of total unrecognized share-based compensation cost related to unvested share-
based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.67 years.
On October 1, 2015, all stock options, restricted stock units and restricted stock awards outstanding as of the effective time of the
Wright/Tornier merger automatically vested, resulting in $14.2 million in share-based compensation expense. Upon this
acceleration, 1.3 million stock options vested with a weighted-average exercise price of $25.53 per share, and 0.3 million restricted
stock units and restricted stock awards vested with a weighted-average grant-date fair value of $26.30 per share.
Equity Incentive Plans and Non-Plan Inducement Agreements
The Wright Medical Group N.V. 2017 Equity and Incentive Plan (the 2017 Plan) was approved by our shareholders on June 23,
2017. The 2017 Plan authorizes us to grant a wide variety of share-based and cash-based awards, including incentive and non-
qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards, cash-based
awards, and other share-based awards. To date, only stock options, restricted stock units (RSUs), and performance share units
(PSUs) have been granted.
The options and RSUs granted to our employees generally have graded vesting periods of 4 years. The options granted to our non-
executive directors have graded vesting period of 2 years and the RSUs granted to our non-executive directors cliff vest on the one-
year anniversary of the date of grant. All options are granted with exercise prices equal to the closing price of our ordinary shares on
the date of grant, as reported by the Nasdaq Global Select Market, and expire 10 years after the grant date. The PSUs granted to our
executive officers cliff vest after a three-year performance period only if certain minimum pre-established performance criteria are
achieved and the number shares issued upon vesting depends upon the level of achievement of the performance criteria, with a cap
of 200% of target levels. The PSUs granted during the fiscal year ended December 31, 2017 were granted in the third quarter of
2017 and have a performance period from June 26, 2017 to June 28, 2020.
The 2017 Plan reserves for issuance a number of ordinary shares equal to the sum of (i) 5,000,000 shares; (ii) 1,329,648 shares,
which was the number of shares available for grant under the Wright Medical Group N.V. Amended and Restated 2010 Incentive
Plan (the 2010 Plan) as of June 23, 2017, the date of shareholder approval of the 2017 Plan, but not subject to outstanding awards;
and (iii) up to 6,405,992 shares subject to awards outstanding under the 2010 Plan as of June 23, 2017 that are subsequently forfeited
or cancelled or expire or otherwise terminate without the issuance of such shares. As of December 31, 2017, 4,430,789 ordinary
shares remained available for future grant of equity awards under the 2017 Plan.
As of December 31, 2017, there were 11,376,770 ordinary shares covering awards outstanding under all of our equity incentive
plans, including the 2017 Plan, the 2010 Plan and legacy Wright and legacy Tornier plans and non-plan agreements. The legacy
Wright and Tornier plans and non-plan agreements include the Wright Medical Group, Inc. 2009 Equity Incentive Plan, as amended
and restated (the Legacy Wright 2009 Plan), the Wright Medical Group, Inc. 1999 Equity Incentive Plan, as amended and restated,
the Tornier N.V. Stock Option Plan, as amended and restated, and four legacy Wright non-plan inducement option agreements. All
122
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
of these plans and non-plan agreements were terminated with respect to future awards, and thus, no future share-based awards may
be granted under any of these legacy plans and agreements.
No stock options or other share-based awards were granted under legacy Wright's share-based compensation plans during 2015 due
to the then pending Wright/Tornier merger. All of the options issued under the legacy Wright plans and non-plan agreements expire
after 10 years from the date of grant. All outstanding awards under the legacy Wright plans and non-plan agreements automatically
vested on October 1, 2015 as a result of the Wright/Tornier merger; therefore, there are no restricted stock awards or RSUs
outstanding at December 31, 2017 under these plans. However, there were 3,353,172 stock options outstanding as of December 31,
2017 under the legacy Wright plans and non-plan agreements.
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. Prior to the Wright/Tornier merger, the expected life of options was estimated based on historical
option exercise and employee termination data. Post-merger, the expected life of options was estimated based on the simplified
method due to a lack of comparable, historical option exercise and employee termination data for the combined company. The
expected stock price volatility assumption was estimated based upon historical volatility of our ordinary shares for both legacy
Wright and legacy Tornier prior to October 1, 2015 and for the combined company after the Wright/Tornier merger. 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 share-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 2017, 2016, and 2015 was $9.80 per share,
$7.36 per share, and $7.05 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
December 31,
2017
Fiscal year ended
December 25,
2016
1.9% - 2.0% 1.1% - 1.4% 1.4% - 1.6%
6 years
34%
December 27,
2015
6 years
33%
6 years
33%
During 2017, 2016, and 2015, we did not grant any stock options to non-employees (other than our non-executive directors who
received such grants in consideration of their director service).
A summary of our stock option activity during 2017 is as follows:
Outstanding at December 25, 2016
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
________________________________
Shares
(000’s)
9,488 $
1,335
(1,243)
(466)
9,114 $
5,862 $
Weighted-
average
exercise
price
Weighted-
average
remaining
contractual life
Aggregate
intrinsic value*
($000’s)
21.70
27.84
20.42
22.49
22.73
22.24
6.61 $
5.44 $
11,070
8,501
* The aggregate intrinsic value is calculated as the difference between the market value of our ordinary shares as of December 31,
2017 and the respective exercise prices of the options. The market value as of December 31, 2017 was $22.20 per share, which
is the closing sale price of our ordinary shares on December 29, 2017, the last trading day prior to December 31, 2017, as
reported by the Nasdaq Global Select Market.
The total intrinsic value of options exercised during 2017, 2016, and 2015 was $9.1 million, $2.1 million, and $0.4 million,
respectively.
123
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A summary of our stock options outstanding and exercisable at December 31, 2017 is as follows (shares in thousands):
Range of exercise prices
$2.00 — $20.00
$20.01 — $21.00
$21.01 — $25.00
$25.01 — $32.00
Options outstanding
Weighted-
average
remaining
contractual life
Weighted-
average
exercise
price
Number
outstanding
Options exercisable
Number
exercisable
Weighted-
average
exercise
price
1,153
2,504
3,002
2,455
9,114
4.33 $
7.14
6.58
7.17
6.61 $
17.43
20.64
22.08
28.15
22.73
1,128 $
1,531
2,021
1,182
5,862 $
17.41
20.65
22.49
28.49
22.24
Restricted stock units and restricted stock awards
We calculate the grant date fair value of RSUs using the closing sale price of our ordinary shares on the grant date, as reported by the
Nasdaq Global Select Market. 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 share-
based compensation expense only for those awards that are expected to vest.
During 2017, 2016, and 2015, we granted 0.5 million, 0.7 million, 1.1 million RSUs to employees with weighted-average grant-date
fair values of $27.83, $21.17, and $20.60 per share, respectively. The fair value of the unvested restricted stock units granted after
completion of the Wright/Tornier merger will be recognized on a straight-line basis over the respective requisite service period,
which is generally the vesting period.
During 2017, 2016, and 2015, we did not grant any RSUs to non-employees (other than our non-executive directors who received
such grants in consideration of their director service).
A summary of our RSU activity during 2017 is as follows:
Unvested at December 25, 2016
Granted
Vested
Forfeited
Unvested at December 31, 2017
___________________
Shares
(000’s)
1,335 $
493
(404)
(144)
1,280 $
Weighted-
average
grant-date
fair value
Aggregate
intrinsic value*
($000’s)
20.91
27.83
20.91
22.02
23.45 $
28,407
* The aggregate intrinsic value is calculated as the market value of our ordinary shares as of December 31, 2017. The market
value as of December 31, 2017 was $22.20 per share, which is the closing sale price of our ordinary shares on December 29,
2017, the last trading day prior to December 31, 2017, as reported by the Nasdaq Global Select Market.
The total fair value of shares underlying RSUs and restricted stock awards vested during 2017, 2016, and 2015 was $9.0 million,
$7.0 million, and $11.8 million, respectively.
Performance share units
We calculate the grant date fair value of PSUs as the closing sale price of our ordinary shares on the grant date, as reported by the
Nasdaq Global Select Market. Share-based compensation expense associated with outstanding PSUs is measured using the grant
date fair value and is based on the estimated achievement of the established performance criteria at the end of each reporting period
until the performance period ends, recognized on a straight-line basis over the performance period. Share-based compensation
expense is only recognized for PSUs that we expect to vest, which we estimate based upon an assessment of the probability that the
performance criteria will be achieved. The PSUs granted during the fiscal year ended December 31, 2017 have a three-year
performance-based metric measured over a performance period from June 26, 2017 to June 28, 2020. Share-based compensation
expense associated with outstanding PSUs is updated for actual forfeitures.
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WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
During 2017, we granted 0.1 million PSUs (based on an assumed target level of performance) to employees with a weighted-average
grant-date fair value of $27.86 per share. During 2017, we did not grant any PSUs to non-employees.
A summary of our PSU activity during 2017 is as follows:
Unvested at December 25, 2016
Granted
Vested
Forfeited
Unvested at December 31, 2017
___________________
Shares
(000’s)
Weighted-
average
grant-date
fair value
Aggregate
intrinsic value*
($000’s)
—
114
—
(6)
108 $
—
27.86
—
27.86
27.86 $
2,407
* The aggregate intrinsic value is calculated as the market value of our ordinary shares as of December 31, 2017. The market
value as of December 31, 2017 was $22.20 per share, which is the closing sale price of our ordinary shares on December 29,
2017, the last trading day prior to December 31, 2017, as reported by the Nasdaq Global Select Market.
Non-plan inducement stock options
On occasion, legacy Wright granted stock options under a non-plan inducement stock option agreement, in order to induce a
candidate to commence employment with legacy Wright as a member of the executive management team. These options, which are
fully vested, vested over a service period ranging from 3 to 4 years. All of the options granted under these non-plan agreements will
expire 10 years from the date of grant.
A summary of our non-plan inducement stock option activity during 2017 is as follows:
Outstanding at December 25, 2016
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
________________________________
Shares
(000’s)
Weighted-
average
exercise
price
Weighted-
average
remaining
contractual life
Aggregate
intrinsic value*
($000’s)
917 $
—
(42 )
—
875 $
875 $
16.69
—
20.61
—
16.50
16.50
3.9 $
3.9 $
4,986
4,986
* The aggregate intrinsic value is calculated as the difference between the market value of our ordinary shares as of December 31,
2017 and the respective exercise prices of the options. The market value as of December 31, 2017 was $22.20 per share, which
is the closing sale price of our ordinary shares on December 29, 2017, the last trading day prior to December 31, 2017, as
reported by the Nasdaq Global Select Market.
A summary of our non-plan inducement stock options outstanding and exercisable at December 31, 2017 is as follows (shares in
thousands):
Range of exercise prices
$2.00 — $16.00
$16.01 — $32.00
Employee Stock Purchase Plan
Options outstanding
Weighted-
average
remaining
contractual life
Weighted-
average
exercise
price
Number
outstanding
Options exercisable
Number
exercisable
Weighted-
average
exercise
price
696
179
875
3.7 $
4.7
3.9 $
15.57
20.12
16.50
696 $
179
875 $
15.57
20.12
16.50
The Wright Medical Group N.V. Amended and Restated Employee Stock Purchase Plan (the ESPP), which is an amended and
restated version of the Tornier N.V. 2010 Employee Stock Purchase Plan, was approved by our shareholders on June 28, 2016.
Under the ESPP, we are authorized to issue and sell up to the sum of (i) 333,333 ordinary shares registered previously under the
Tornier N.V. 2010 Employee Stock Purchase Plan and (ii) 216,227 additional ordinary shares approved under the ESPP. The total of
550,000 ordinary shares are authorized to be issued to employees of our company and certain designated subsidiaries who work at
least 20 hours per week. Under the ESPP, there are two six-month offering periods during each calendar year, one beginning
125
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
January 1 and ending on June 30, and the other beginning July 1 and ending on December 31. However the compensation
committee of the board of directors determined that the first offering period would be the three months beginning October 1, 2016
and ending December 31, 2016. Under the terms of the ESPP, each eligible employee can choose each offering period to have up to
20% of his or her eligible earnings withheld to purchase up to 1,000 ordinary shares. The purchase price of the shares is 85% of the
market price on the first or last trading day of the offering period, whichever is lower. As of December 31, 2017, there were 434,293
ordinary shares available for future issuance under the ESPP.
Under the ESPP, the first offering period purchase occurred on December 31, 2016, which was during the 2017 fiscal year.
In applying the Black-Scholes methodology to purchase rights granted under the ESPP, we used the following assumptions:
Risk-free interest rate
Expected life
Expected price volatility
15. Retirement Benefit Plans
Fiscal year ended
December 31,
2017
December 25,
2016
1.3% - 1.9% 1.2% - 1.3%
6 months
24%
3 months
33%
During the fiscal year ended December 31, 2017 and December 25, 2016, we offered a defined contribution retirement benefit plan
for our U.S. based employees. Our defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as
amended (Code), covers U.S. employees who are 18 years of age and over. Under this plan, we have elected to make matching
contributions to all eligible participants in an amount equal to 100% of the first three percent of eligible compensation, and 50% of
the next two percent of eligible compensation, contributed to the Plan as deferral contributions. Employees are 100% vested in their
rollover contributions, employer non-elective contributions, employer matching contributions, qualified non-elective contributions,
deferral contributions, safe harbor matching employer contributions and any earnings thereon. The expense related to this plan
recognized within our results from continuing operations was $5.5 million in 2017 and $4.9 million in 2016.
Prior to 2016, we offered one plan sponsored by legacy Wright and another sponsored by legacy Tornier. Expense related to the
Legacy Wright defined contribution plan recognized within our results from continuing operations was $2.5 million in 2015.
Expense related to the Legacy Tornier qualified defined contribution plan recognized within our results from continuing operations
was $0.2 million in 2015.
16. Commitments and Contingencies
Operating Leases
We lease certain equipment and office space under non-cancelable operating leases. Rental expense under operating leases
approximated $8.9 million, $10.5 million, and $8.6 million for the fiscal years ended December 31, 2017, December 25, 2016, and
December 27, 2015, 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, 2017 (in thousands):
2018
2019
2020
2021
2022
Thereafter
$
$
8,076
7,196
5,713
4,833
3,292
5,774
34,884
Portions of our payments for operating leases are denominated in foreign currencies and were translated in the table above based on
their respective U.S. dollar exchange rates at December 31, 2017. These future payments are subject to foreign currency exchange
rate risk.
Purchase Obligations
We have entered into certain supply agreements for our products which include minimum purchase obligations. As of December 31,
2017, we have minimum purchase obligations of $3 million for 2018.
126
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Legal Contingencies
The legal contingencies described in this footnote relate primarily to WMT, an indirect subsidiary of Wright Medical Group N.V.,
and are not necessarily applicable to Wright Medical Group N.V. or other affiliated entities. Maintaining separate legal entities
within our corporate structure is intended to ring-fence liabilities. We believe our ring-fenced structure should preclude corporate
veil-piercing efforts against entities whose assets are not associated with particular claims.
As described below, our business is subject to various contingencies, including patent and other litigation, product liability claims,
and a government inquiry. These contingencies could result in losses, including damages, fines, or penalties, any of which could be
substantial, as well as criminal charges. Although such matters are inherently unpredictable, and negative outcomes or verdicts can
occur, we believe we have significant defenses in all of them, and are vigorously defending all of them. However, we could incur
judgments, pay settlements, or revise our expectations regarding the outcome of any matter. Such developments, if any, could have a
material adverse effect on our results of operations in the period in which applicable amounts are accrued, or on our cash flows in the
period in which amounts are paid, however, unless otherwise indicated, we do not believe any of them will have a material adverse
effect on our financial position.
Our legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss or the
measurement of a loss can be complex. We have accrued for losses that are both probable and reasonably estimable. Unless
otherwise indicated, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessment
process relies on estimates and assumptions that may prove to be incomplete or inaccurate. Unanticipated events and circumstances
may occur that could cause us to change our estimates and assumptions.
Governmental Inquiries
On August 3, 2012, we received a subpoena from the United States Attorney's Office for the Western District of Tennessee
requesting records and documentation relating to our PROFEMUR® series of hip replacement devices. The subpoena covers the
period from January 1, 2000 to August 2, 2012. We will continue to cooperate as required.
Patent Litigation
On September 23, 2014, Spineology filed a patent infringement lawsuit, Case No. 0:14-cv-03767, in the U.S. District Court in
Minnesota, alleging that our X-REAM® bone reamer infringes U.S. Patent No. RE42,757 entitled “EXPANDABLE REAMER.” In
January 2015, on the deadline for service of its complaint, Spineology dismissed its complaint without prejudice and filed a new,
identical complaint. We filed an answer to the new complaint with the Court on April 27, 2015. The Court conducted a Markman
hearing on March 23, 2016. Mediation was held on August 11, 2016, but no agreement could be reached. The Court issued a
Markman decision on August 30, 2016, in which it found all asserted product claims invalid as indefinite under applicable patent
laws and construed several additional claim terms. The parties completed fact and expert discovery with respect to the remaining
asserted method claims. We filed a motion for summary judgment of non-infringement of the remaining asserted patent claims and
motions to exclude testimony from Spineology’s technical and damages experts. Spineology filed a motion for summary judgment
of infringement. On July 25, 2017, the Court granted our motion for summary judgment of non-infringement; denied Spineology’s
motion for summary judgment of infringement; and denied all remaining motions as moot. The Court also entered judgment in our
favor and against Spineology on all issues. Spineology has appealed the judgment to the U.S. Court of Appeals for the Federal
Circuit and we are awaiting oral argument.
On September 13, 2016, we filed a civil action, Case No. 2:16-cv-02737-JPM, against Spineology in the U.S. District Court for the
Western District of Tennessee alleging breach of contract, breach of implied warranty against infringement, and seeking a judicial
declaration of indemnification from Spineology for patent infringement claims brought against us stemming from our sale and/or use
of certain expandable reamers purchased from Spineology. Spineology filed a motion to dismiss on October 17, 2016, but withdrew
the motion on November 28, 2016. On December 7, 2016, Spineology filed an answer to our complaint and counterclaims,
including counterclaims relating to a 2004 non-disclosure agreement between Spineology and WMT. On December 28, 2016, we
filed a motion to dismiss the counterclaims relating to that 2004 agreement. On January 4, 2017, Spineology filed a motion for
summary judgment on certain claims set forth in our complaint. We opposed that motion. On January 27, 2017, we filed a motion
for summary judgment on certain issues pertaining to our indemnification claims. Spineology opposed that motion. On July 7, 2017,
the Court extended the deadlines for completing discovery until after it ruled on those pending motions. On August 29, 2017, the
Court ruled on the motions to dismiss and for summary judgment. In view of that decision, on September 22, 2017, the parties
stipulated to, and the Court entered, a judgment that effectively ended the case in a draw. We have appealed the judgment as to our
claims against Spineology to the U.S. Court of Appeals for the Sixth Circuit. Spineology did not appeal the District Court’s
dismissal of its contract counterclaim.
In August 2016, we received a letter from KFx alleging that a legacy Tornier product (the Piton Suture Anchor) infringes one of
KFx’s patents when used in knotless double row tissue fixation techniques. On April 6, 2017, we filed a declaratory judgment action
in the United States District Court for the District of Delaware, Case No. 1:17-cv-00384, seeking declaratory judgment of non-
infringement and invalidity of United States Patent Nos. 7,585,311; 8,100,942; and 8,109,969. On April 20, 2017, KFx filed an
answer and counterclaim alleging we indirectly infringe, and induce infringement of, these patents. In February 2018, the parties
127
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
reached a settlement in principle intended to fully resolve the matter and end the litigation. Under the settlement in principle, we
will pay KFx a one-time lump sum license fee in an immaterial amount in exchange for a fully paid global license to the relevant
KFx patents. The settlement is presently being documented.
Product Liability
We have received claims for personal injury against us associated with fractures of our PROFEMUR® long titanium modular neck
product (PROFEMUR® Claims). As of December 31, 2017 there were approximately 30 pending U.S. lawsuits and approximately
60 pending non-U.S. lawsuits alleging such claims. The overall fracture rate for the product is low and the fractures appear, at least
in part, to relate to patient demographics. Beginning in 2009, we began offering a cobalt-chrome version of our
PROFEMUR® modular neck, which has greater strength characteristics than the alternative titanium version. Historically, we have
reflected our liability for these claims as part of our standard product liability accruals on a case-by-case basis. However, during the
fiscal quarter ended September 30, 2011, as a result of an increase in the number and monetary amount of these claims, management
estimated our liability to patients in the United States and Canada who have previously required a revision following a fracture of a
PROFEMUR® long titanium modular neck, or who may require a revision in the future. Management has estimated that this
aggregate liability is $21.5 million. We have classified $12.0 million of this liability as current in “Accrued expenses and other
current liabilities,” as we expect to pay such claims within the next twelve months, and $9.5 million as non-current in “Other
liabilities” on our consolidated balance sheet. We expect to pay the majority of these claims within the next three years. Any claims
associated with this product outside of the United States and Canada, or for any other products, will be managed as part of our
standard product liability accrual methodology on a case-by-case basis.
We are aware that MicroPort has recalled certain sizes of its cobalt chrome modular neck products as a result of alleged fractures.
As of December 31, 2017, there were four pending U.S. lawsuits and eight pending non-U.S. lawsuits against us alleging personal
injury resulting from the fracture of a cobalt chrome modular neck. These claims will be managed as part of our standard product
liability accrual methodology on a case-by-case basis. On October 27, 2017, our primary insurance carrier agreed to defend us in
connection with these lawsuits under a reservation of rights.
We have maintained product liability insurance coverage on a claims-made basis. During the fiscal quarter ended March 31, 2013,
we received a customary reservation of rights from our primary product liability insurance carrier asserting that present and future
claims related to fractures of our PROFEMUR® titanium modular neck hip products and which allege certain types of injury
(Titanium Modular Neck Claims) would be covered as a single occurrence under the policy year the first such claim was asserted.
The effect of this coverage position would be to place Titanium Modular Neck Claims into a single prior policy year in which
applicable claims-made coverage was available, subject to the overall policy limits then in effect. Management agrees with the
assertion that the Titanium Modular Neck Claims should be treated as a single occurrence, but notified the carrier that it disputed the
carrier's selection of available policy years. During the second quarter of 2013, we received confirmation from the primary carrier
confirming their agreement with our policy year determination. Based on our insurer's treatment of Titanium Modular Neck Claims
as a single occurrence, we increased our estimate of the total probable insurance recovery related to Titanium Modular Neck Claims
by $19.4 million, and recognized such additional recovery as a reduction to our selling, general and administrative expenses for the
fiscal quarter ended March 31, 2013, within results of discontinued operations. In the fiscal quarter ended June 30, 2013, we
received payment from the primary insurance carrier of $5 million. In the fiscal quarter ended September 30, 2013, we received
payment of $10 million from the next insurance carrier in the tower. We have requested, but not yet received, payment of the
remaining $25 million from the third insurance carrier in the tower for that policy period. The policies with the second and third
carrier in this tower are “follow form” policies and management believes the third carrier should follow the coverage position taken
by the primary and secondary carriers. On September 29, 2015, that third carrier asserted that the terms and conditions identified in
its reservation of rights will preclude coverage for the Titanium Modular Neck Claims. Pursuant to applicable accounting standards,
we reduced our insurance receivable balance for this claim to $0, and recorded a $25 million charge within “Net loss from
discontinued operations” during the fiscal year ended December 27, 2015. We strongly dispute the carrier's position and, in
accordance with the dispute resolution provisions of the policy, have initiated an arbitration proceeding in London, England seeking
payment of these funds. The arbitration proceeding was completed on February 15, 2018 and the parties await the decision of the
arbitration tribunal.
Claims for personal injury have also been made against us associated with our metal-on-metal hip products (primarily our
CONSERVE® product line). The pre-trial management of certain of these claims has been consolidated in the federal court system,
in the United States District Court for the Northern District of Georgia under the MDL and certain other claims by the JCCP in state
court in Los Angeles County, California (collectively the Consolidated Metal-on-Metal Claims).
As of December 31, 2017, there were approximately 800 lawsuits pending in the MDL and JCCP, and an additional 50 cases pending
in various U.S. state courts. As of that date, we have also entered into approximately 700 so called “tolling agreements” with
potential claimants who have not yet filed suit. The number of lawsuits pending in the MDL and JCCP and tolling agreements
disclosed above includes the claims that have been resolved pursuant to the Master Settlement Agreement and Second Settlement
Agreements discussed below. Based on presently available information, we believe approximately 300 of these matters allege
claims involving bilateral implants. As of December 31, 2017, there were also approximately 50 non-U.S. lawsuits pending. We
believe we have data that supports the efficacy and safety of our metal-on-metal hip products.
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WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Every metal-on-metal hip case involves fundamental issues of law, science and medicine that often are uncertain, that continue to
evolve, and which present contested facts and issues that can differ significantly from case to case. Such contested facts and issues
include medical causation, individual patient characteristics, surgery specific factors, statutes of limitation, and the existence of
actual, provable injury.
The first bellwether trial in the MDL commenced on November 9, 2015 in Atlanta, Georgia. On November 24, 2015, the jury
returned a verdict in favor of the plaintiff and awarded the plaintiff $1 million in compensatory damages and $10 million in punitive
damages. We believe there were significant trial irregularities and vigorously contested the trial result. On December 28, 2015, we
filed a post-trial motion for judgment as a matter of law or, in the alternative, for a new trial or a reduction of damages awarded. On
April 5, 2016, the trial judge issued an order reducing the punitive damage award from $10 million to $1.1 million, but otherwise
denied our motion. On May 4, 2016, we filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit.
The United States Court of Appeals for the Eleventh Circuit heard oral arguments on January 26, 2017 and on March 20, 2017, the
Eleventh Circuit Court of Appeals upheld the lower court’s verdict. On April 10, 2017, we filed a petition for rehearing en banc or
for panel rehearing, which was denied. In light of this denial, we elected to forego a further appeal and paid the judgment in July
2017.
The first bellwether trial in the JCCP, which was scheduled to commence on October 31, 2016, and subsequently rescheduled to
January 9, 2017, was settled for an immaterial amount.
The first state court metal-on-metal hip trial not part of the MDL or JCCP commenced on October 24, 2016, in St. Louis, Missouri.
On November 3, 2016, the jury returned a verdict in our favor. The plaintiff appealed and the appellate court heard oral argument on
November 8, 2017. On February 20, 2018, the Missouri Court of Appeals, Eastern District, denied the plaintiff’s appeal and upheld
the verdict of the trial court.
On November 1, 2016, WMT entered into the MSA with Court-appointed attorneys representing plaintiffs in the MDL and JCCP.
Under the terms of the MSA, the parties agreed to settle 1,292 specifically identified claims associated with CONSERVE®,
DYNASTY® and LINEAGE® products that meet the eligibility requirements of the MSA and are either pending in the MDL or
JCCP, or subject to court-approved tolling agreements in the MDL or JCCP, for a settlement amount of $240 million.
The $240 million settlement amount is a maximum settlement based on the pool of 1,292 specific, existing claims comprised of an
identified mix of CONSERVE®, DYNASTY® and LINEAGE® products (Initial Settlement Pool), with a value assigned to each
product type, resulting in a total settlement of $240 million for the 1,292 claims in the Initial Settlement Pool.
Actual settlements paid to individual claimants are determined under the claims administration procedures contained in the MSA and
may be more or less than the amounts used to calculate the $240 million settlement for the 1,292 claims in the Initial Settlement
Pool. However in no event will variations in actual settlement amounts payable to individual claimants affect WMT’s maximum
settlement obligation of $240 million or the manner in which it may be reduced due to opt outs, final product mix, or elimination of
ineligible claims.
If it is determined a claim in the Initial Settlement Pool is ineligible due to failure to meet the eligibility criteria of the MSA, such
claim will be removed and, where possible, replaced with a new eligible claim involving the same product, with the goal of having
the number and mix of claims in the final settlement pool (before opt-outs) (Final Settlement Pool) equal, as nearly as possible, the
number and mix of claims in the Initial Settlement Pool. Additionally, if any DYNASTY® or LINEAGE® claims in the Final
Settlement Pool are determined to have been misidentified as CONSERVE® claims, or vice versa, the total settlement amount will be
adjusted based on the value for each product type (not to exceed $240 million).
The MSA contains specific eligibility requirements and establishes procedures for proof and administration of claims, negotiation
and execution of individual settlement agreements, determination of the final total settlement amount, and funding of individual
settlement amounts by WMT. Eligibility requirements include, without limitation, that the claimant has a claim pending or tolled in
the MDL or JCCP, that the claimant has undergone a revision surgery within eight years of the original implantation surgery, and that
the claim has not been identified by WMT as having possible statute of limitation issues. Claimants who have had bilateral revision
surgeries will be counted as two claims but only to the extent both claims separately satisfy all eligibility criteria.
The MSA includes a 95% opt-in requirement, meaning the MSA could have been terminated by WMT prior to any settlement
disbursement if claimants holding greater than 5% of eligible claims in the Final Settlement Pool elected to “opt-out” of the
settlement. WMT has confirmed that of the 1,292 eligible claims, 1,279 opted to participate in the settlement and 13 opted out,
resulting in a final opt-in percentage of approximately 99%, well in excess of the required 95% threshold. On March 2, 2017, WMT
agreed to replace the 13 opt-out claims with 13 additional claims that would have been eligible to participate in the MSA but for the
1,292 claim limit, bringing the total MSA settlement to the maximum limit of $240 million to settle 1,292 claims. Due to apparent
demand from additional claimants excluded from settlement because of the 1,292 claims ceiling, but otherwise eligible for
participation, on May 15, 2017 WMT agreed to settle an additional 53 such claims, on terms substantially identical to the MSA
settlement terms, for a maximum additional settlement amount of $9.4 million.
129
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
During 2016 WMT escrowed $150 million to secure its obligations under the MSA, all of which had been paid as of December 31,
2017. As additional security, Wright Medical Group N.V., the indirect parent company of WMT, agreed to guarantee WMT’s
obligations under the MSA.
On October 3, 2017, WMT entered into the Second Settlement Agreements with the Court-appointed attorneys representing
plaintiffs in the MDL and JCCP. Under the terms of the Second Settlement Agreements, the parties agreed to settle 629 specifically
identified CONSERVE®, DYNASTY® and LINEAGE® claims that meet the eligibility requirements of the Second Settlement
Agreements and are either pending in the MDL or JCCP, or subject to court-approved tolling agreements in the MDL or JCCP, for a
maximum settlement amount of $89.75 million. The comprehensive settlement amount was contingent on WMT’s recovery of new
insurance proceeds totaling at least $35 million from applicable insurance carriers by December 31, 2017. On December 29, 2017,
WMT entered into a First Amendment to the Third Settlement Agreement pursuant to which the deadline for the recovery of new
insurance proceeds totaling at least $35 million from applicable insurance carriers was extended through February 28, 2018 and, on
February 23, 2018, WMT entered into a Second Amendment to the Third Settlement Agreement pursuant to which the deadline was
extended through March 30, 2018. To date, certain of the insurance carriers have contributed or agreed to contribute $20 million of
funds applicable against the contingency.
The $89.75 million settlement amount is a maximum settlement based on the pool of 629 specific, existing claims comprised of an
identified mix of CONSERVE®, DYNASTY® and LINEAGE® products (Second Settlement Initial Settlement Pool), with a value
assigned to each product type. The actual settlement may be less, but not more, depending on several factors including the mix of
products and claimants in the final settlement pool (Second Settlement Final Settlement Pool) and the number of claimants electing
to “opt-out” of the settlement.
The total maximum settlement amount of $89.75 million is allocated among the following three tranches: (1) Tranche 1:
$7.9 million to settle 49 additional claims that would have been eligible to participate in the MSA but for the claim limit contained
therein, which amount will be funded as such claims are settled; (2) Tranche 2: $5.1 million to settle 39 eligible claims of the oldest
claimants (by age), which amount will be funded as such claims are settled; and (3) Tranche 3: $76.75 million to settle 511 eligible
claims pending or tolled in the MDL and JCCP existing as of June 30, 2017, and 30 new eligible claims which were presented
between July 1, 2017 and October 1, 2017, which amount will be funded as follows: $45 million by June 30, 2018 and
$31.75 million by September 30, 2019. Actual funding may extend beyond these dates pending completion of claims administration
processes. The Tranche 3 settlement is contingent upon WMT receiving at least $35 million of new insurance proceeds from
applicable carriers by March 30, 2018. There is no contingency with respect to Tranches 1 and 2.
Actual settlements paid to individual claimants will be determined under the claims administration procedures contained in the
Second Settlement Agreements and may be more or less than the amounts used to calculate the $89.75 million settlement for the
629 claims in the Second Settlement Initial Settlement Pool. However in no event will variations in actual settlement amounts
payable to individual claimants affect WMT’s maximum settlement obligation of $89.75 million or the manner in which it may be
reduced due to opt outs, final product mix, or elimination of ineligible claims.
If it is determined that a claim in the Second Settlement Initial Settlement Pool is ineligible due to failure to meet the eligibility
criteria of the Second Settlement Agreements, such claim will be removed and, where possible, replaced with a new eligible claim
involving the same products as the removed claim.
The Second Settlement Agreements contain specific eligibility requirements and establish procedures for proof and administration of
claims, negotiation and execution of individual settlement agreements, determination of the final total settlement amount, and
funding of individual settlement amounts by WMT. Eligibility requirements include, without limitation, that the claimant has a claim
pending or tolled in the MDL or JCCP and that, with limited exceptions, the claimant has undergone a revision surgery. Claimants
who have had bilateral revision surgeries will be counted as two claims but only to the extent both claims separately satisfy all
eligibility criteria.
Each of the Second Settlement Agreements includes a 95% opt-in requirement, meaning WMT may terminate either Settlement
Agreement prior to any settlement disbursement if claimants holding greater than 5% of eligible claims in Tranches 1 and 2,
collectively, or claimants holding greater than 5% of eligible claims in Tranche 3 in the Second Settlement Final Settlement Pool,
elect to “opt-out” of the settlement. On January 2, 2018, WMT received notification that 100% of the claimants in Tranches 1 and 2
opted-in. WMT is currently reviewing proof of claim documentation for these claimants and has until March 2, 2018 to confirm that
the 95% opt-in requirement has been met. Claimants in Tranche 3 have until April 2, 2018 to opt into the Second Settlement
Agreements.
While the Second Settlement Agreements did not require WMT to escrow any amount to secure its obligations thereunder, as
additional security, Wright Medical Group N.V., the indirect parent company of WMT, agreed to guarantee WMT’s obligations
under the Second Settlement Agreements.
The MSA (which reference includes the supplemental settlements described above) and the Second Settlement Agreements were
entered into solely as a compromise of the disputed claims being settled and are not evidence that any claim has merit nor are they
an admission of wrongdoing or liability by WMT. WMT will continue to vigorously defend metal-on-metal hip claims not settled
130
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
pursuant to the above agreements. The Second Settlement Agreements are contingent upon the dismissal without prejudice of
pending and tolled claims in the MDL and JCCP that do not meet the inclusion criteria of the MDL or JCCP. Additionally, the
Second Settlement Agreements are contingent upon the dismissal without prejudice of all remaining non-revision claims in the MDL
and JCCP, pursuant to a tolling agreement that tolls applicable statutes of limitation and repose for three months from a revision of
the products or determination that a revision of the products is necessary. The MDL and JCCP courts have both entered orders
closing these proceedings to new claims.
As of December 31, 2017, we estimate there were approximately 50 outstanding metal-on-metal hip revision claims that were not
included in the MSA or Second Settlement Agreements, approximately 50 claims pending in U.S courts other than the MDL and
JCCP, and approximately 50 claims pending in non-U.S. courts. We also estimate that there were approximately 600 outstanding
metal-on-metal hip non-revision claims as of December 31, 2017. These non-revision cases were excluded from the MSA and
Second Settlement Agreements. As a result of entering into the Second Settlement Agreements during the third quarter of 2017, we
recorded an additional accrual of $82.7 million for the 629 matters included within the settlement and for matters that have the same
eligibility criteria.
As of December 31, 2017, our accrual for metal-on-metal claims totaled $177.5 million, of which $127.4 million is included in our
consolidated balance sheet within “Accrued expenses and other current liabilities” and $50.1 million is included within “Other
liabilities.” Our accrual is based on (i) case by case accruals for specific cases where facts and circumstances warrant, and (ii) the
implied settlement values for eligible claims under the MSA or Second Settlement Agreements. We are unable to reasonably
estimate the high-end of a possible range of loss for claims which elected or will elect to opt-out of the MSA or Second Settlement
Agreements. Claims we can confirm would meet MSA or Second Settlement Agreements eligibility criteria but are excluded from
the settlements due to the maximum settlement cap, or because they are state cases not part of the MDL or JCCP, have been accrued
as of the respective settlement rates. Due to the general uncertainties surrounding all metal-on metal claims as noted above, as well
as insufficient information about individual claims, we are presently unable to reasonably estimate a range of loss for future claims;
hence we have not accrued for these claims at the present time.
We are unable to predict whether we will be successful in recovering the necessary insurance proceeds required to complete the
comprehensive settlement pursuant to the Second Settlement Agreements within the requisite timeframe. We continue to believe the
high-end of a possible range of loss for existing revision claims that do not meet eligibility criteria of the MSA or Second Settlement
Agreements will not, on an average per case basis, exceed the average per case accrual we take for revision claims we can confirm
do meet eligibility criteria of the MSA or Second Settlement Agreements, as applicable. Future claims will be evaluated for accrual
on a case by case basis using the accrual methodologies described above (which could change if future facts and circumstances
warrant).
We have maintained product liability insurance coverage on a claims-made basis. During the fiscal quarter ended September 30,
2012, we received a customary reservation of rights from our primary product liability insurance carrier asserting that certain present
and future claims which allege certain types of injury related to our CONSERVE® metal-on-metal hip products
(CONSERVE® Claims) would be covered as a single occurrence under the policy year the first such claim was asserted. The effect
of this coverage position would be to place CONSERVE® Claims into a single prior policy year in which applicable claims-made
coverage was available, subject to the overall policy limits then in effect. Management agrees that there is insurance coverage for the
CONSERVE® Claims, but has notified the carrier that it disputes the carrier's characterization of the CONSERVE® Claims as a
single occurrence.
In June 2014, Travelers, which was an excess carrier in our coverage towers across multiple policy years, filed a declaratory
judgment action in Tennessee state court naming us and certain of our other insurance carriers as defendants and asking the court to
rule on the rights and responsibilities of the parties with regard to the CONSERVE® Claims. Among other things, Travelers appeared
to dispute our contention that the CONSERVE® Claims arise out of more than a single occurrence thereby triggering multiple policy
periods of coverage. Travelers further sought a determination as to the applicable policy period triggered by the alleged single
occurrence. We filed a separate lawsuit in state court in California for declaratory judgment against certain carriers and breach of
contract against the primary carrier, and moved to dismiss or stay the Tennessee action on a number of grounds, including that
California is the most appropriate jurisdiction. During the third quarter of 2014, the California Court granted Travelers' motion to
stay our California action. On April 29, 2016, we filed a dispositive motion seeking partial judgment in our favor in the Tennessee
action, which motion is pending and has been referred to a Special Master to consider the parties’ arguments. On June 10, 2016,
Travelers withdrew its motion for summary judgment in the Tennessee action. One of the other insurance companies in the
Tennessee action has stated that it will re-file a similar motion in the future.
In March 2017, Lexington, which had been dismissed from the Tennessee action, requested arbitration under five Lexington
insurance policies in connection with the CONSERVE® Claims. We subsequently engaged in discussions and correspondence with
Lexington about the scope of the requested arbitration(s). On or about October 27, 2017, Lexington filed an Application for Order to
Compel Arbitration in the Commonwealth of Massachusetts, Suffolk County Superior Court, naming WMT, Wright Medical Group,
Inc., and Wright Medical Group N.V. We opposed the Application, which remains pending.
On October 28, 2016, WMT and Wright Medical Group, Inc. (Wright Entities) entered into a Settlement Agreement, Indemnity and
Hold Harmless Agreement and Policy Buyback Agreement (Insurance Settlement Agreement) with a subgroup of three insurance
carriers, namely Columbia Casualty Company, Travelers and AXIS Surplus Lines Insurance Company (collectively, the Three
131
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Settling Insurers), pursuant to which the Three Settling Insurers paid WMT an aggregate of $60 million (in addition to $10 million
previously paid by Columbia) in a lump sum. This amount is in full satisfaction of all potential liability of the Three Settling
Insurers relating to metal-on-metal hip and similar metal ion release claims, including but not limited to all claims in the MDL and
the JCCP, and all claims asserted by WMT against the Three Settling Insurers in the Tennessee action described above.
On December 13, 2016, we filed a motion in the Tennessee action described above to include allegations of bad faith against the
primary insurance carrier. The motion was subsequently amended on February 8, 2017 to add similar bad faith claims against the
remaining excess carriers. On April 13, 2017, the Court denied our motion, without prejudice to our right to re-assert the motion at a
later time. On August 29, 2017, we refiled the motion to add a bad faith claim against the primary and excess insurance carriers.
The Court granted our motion on October 19, 2017 and, on October 23, 2017, we filed amended cross-claims alleging bad faith
against all of the insurance carriers. On November 9, 2017, our primary insurance carrier brought a motion to dismiss and strike our
bad faith claim. The remaining excess carriers either joined the primary insurer’s motion or brought their own separate motions. On
December 22, 2017 and December 29, 2017, we opposed the insurers’ motions to dismiss and strike our claim for bad faith. The
motions remain pending.
As part of the settlement with the Three Settling Insurers, the Three Settling Insurers bought back from WMT their policies in the
five policy years beginning with the August 15, 2007- August 15, 2008 policy year (Repurchased Policy Years). Consequently, the
Wright Entities have no further coverage from the Three Settling Insurers for any present or future claims falling in the Repurchased
Policy Years, or any other period in which a released claim is asserted. Additionally, the Insurance Settlement Agreement contains a
so-called most favored nation provision which could require us to refund a pro rata portion of the settlement amount if we
voluntarily enter into a settlement with the remaining carriers in the Repurchased Policy Years on certain terms more favorable than
analogous terms in the Insurance Settlement Agreement. The Tennessee action will continue as to the remaining defendant insurers
other than the Three Settling Insurers. The amount due to the Wright Entities under the Insurance Settlement Agreement was paid in
the fourth quarter of 2016 and the Three Settling Insurers have been dismissed from the Tennessee action.
On February 22, 2018, we and certain of our subsidiaries entered into the Second Insurance Settlement Agreement with Federal,
pursuant to which Federal agreed to pay us an aggregate of $15 million (in addition to $5 million previously paid by Federal) in a
lump sum on or before the 10th business day after execution of the Second Insurance Settlement Agreement. This amount will be in
full satisfaction of all potential liability of Federal relating to designated metal-on-metal hip claims, including but not limited to all
claims asserted by our subsidiary WMT against Federal in the previously disclosed insurance coverage litigation. We have recorded
a $15 million receivable as a result of this agreement within “Other current assets” as of December 31, 2017. On February 9, 2018,
the Tennessee action was stayed for 60 days to allow Wright and Federal to finalize and document their settlement and for the
remaining parties to negotiate potential settlement of all remaining claims.
As of December 31, 2017, we have received $78.4 million of insurance proceeds, including the above amount from the Three
Settling Insurers, and our insurance carriers have paid a total of $6.7 million directly to claimants in connection with various
settlements, which represents amounts undisputed by the carriers. Except as provided in the Insurance Settlement Agreement and
the Second Insurance Settlement Agreement, our acceptance of the insurance proceeds was not a waiver of any other claim we may
have against the insurance carriers. However, the amount we ultimately receive will depend on the outcome of our dispute with the
remaining carriers (other than the Three Settling Carriers and Federal) concerning the number of policy years available. We believe
our contracts with the insurance carriers are enforceable for these claims; and, therefore, we believe it is probable we will receive
additional recoveries from the remaining carriers. Settlement discussions with the remaining insurance carriers continue.
Given the substantial or indeterminate amounts sought in these matters, and the inherent unpredictability of such matters, an adverse
outcome in these matters in excess of the amounts included in our accrual for contingencies could have a material adverse effect on
our financial condition, results of operations and cash flow. Future revisions to our estimates of these provisions could materially
impact our results of operations and financial position. We use the best information available to determine the level of accrued
product liabilities, and believe our accruals are adequate.
In June 2015, a jury returned a $4.4 million verdict against us in a case involving a fractured hip implant stem sold prior to the
MicroPort closing. This was a one-of-a-kind case unrelated to the modular neck fracture cases we have been reporting. There are no
other cases pending related to this component, nor are we aware of other instances where this component has fractured. In
September 2015, the trial judge reduced the jury verdict to $1.025 million and indicated that if the plaintiff did not accept the
reduced award he would schedule a new trial solely on the issue of damages. The plaintiff elected not to accept the reduced damage
award, and both parties have appealed. The Court has not set a date for a new trial on the issue of damages and we do not expect it
will do so until the appeals are adjudicated. We will maintain our current $4.4 million accrual as a probable liability until the matter
is resolved. The $4.4 million probable liability associated with this matter is reflected within “Accrued expenses and other current
liabilities,” and a $4 million receivable associated with the probable recovery from product liability insurance is reflected within
“Other current assets.” On November 14, 2017, our primary insurance carrier agreed to defend and indemnify us in connection with
this lawsuit under a reservation of rights. On January 9, 2018, the California appellate court heard oral argument on the parties’
cross-appeals.
132
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Other
In addition to those noted above, we are subject to various other legal proceedings, product liability claims, corporate governance,
and other matters which arise in the ordinary course of business.
17. Restricted Cash
During the fourth quarter of 2016, WMT deposited $150.0 million into a restricted escrow account to secure its obligations under the
MSA that WMT entered into in connection with the metal-on-metal hip litigation, as described in Note 16 to the consolidated
financial statements. All individual settlements under the MSA were funded first from the escrow account and then, once all funds
held in the escrow account have been exhausted, directly by WMT. During the fiscal year ended December 31, 2017, WMT paid
$150 million in settlement payments from the escrow account, bringing the balance in the restricted escrow account to $0 as of
December 31, 2017. Therefore, as of December 31, 2017, none of our cash was considered restricted under US GAAP. See Note 16
to the consolidated financial statements for further discussion regarding the MSA and the metal-on-metal hip litigation.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance
sheets that sum to the totals of the same such amounts shown in the consolidated statements of cash flows (in thousands):
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash shown in the consolidated
statements of cash flows
$
$
December 31, 2017
December 25, 2016
167,740 $
—
167,740
$
262,265
150,000
412,265
18. Certain Relationships and Related-Party Transactions
The related party disclosures in this note relate to transactions with a former director of legacy Tornier, Alain Tornier. Mr. Tornier
departed from our board of directors effective October 1, 2015 in connection with the closing of the Wright/Tornier merger.
Accordingly, the indebtedness and lease agreements described below are not related party transactions during 2016 or 2017.
On July 29, 2008, Tornier SAS, a subsidiary of legacy Tornier, formed a real estate holding company (SCI Calyx) together with
Alain Tornier, a former director of legacy Tornier (Mr. Tornier). SCI Calyx is owned 51% by Tornier SAS and 49% by Mr. Tornier.
SCI Calyx was initially capitalized by a contribution of capital of €10,000 funded 51% by Tornier SAS and 49% by Mr. Tornier. SCI
Calyx then acquired a combined manufacturing and office facility in Montbonnot, France, for approximately $6.1 million. The
manufacturing and office facility acquired was to be used to support the manufacture of certain of legacy Tornier’s current products
and house certain operations already located in Montbonnot, France. This real estate purchase was funded through mortgage
borrowings of $4.1 million and $2.0 million cash borrowed from the two current shareholders of SCI Calyx. The $2.0 million cash
borrowed from the SCI Calyx shareholders originally consisted of a $1.0 million note due to Mr. Tornier and a $1.0 million note due
to Tornier SAS. Both of the notes issued by SCI Calyx bear annual interest at the three-month Euro Libor rate plus 0.5% and have
no stated term. During 2010, SCI Calyx borrowed approximately $1.4 million from Mr. Tornier in order to fund on-going leasehold
improvements necessary to prepare the Montbonnot facility for its intended use. This cash was borrowed under the same terms as
the original notes. On September 3, 2008, Tornier SAS entered into a lease agreement with SCI Calyx relating to these facilities.
The agreement, which terminates in 2018, provides for an annual rent payment of €440,000, which has subsequently been increased
and is currently €965,655 annually. Annual lease payments to SCI Calyx amounted to $2.2 million during the fiscal year ended
December 27, 2015, $0.6 million of which is reflected in our consolidated financial statements in light of the timing of the
Wright/Tornier merger. As of December 27, 2015, future minimum payments under this lease were $12.3 million in the aggregate.
As of December 27, 2015, SCI Calyx had related-party debt outstanding to Mr. Tornier of $2.0 million. The SCI Calyx entity is
consolidated by us, and the related real estate and liabilities are included on our consolidated balance sheets.
Since 2006, Tornier SAS has entered into various lease agreements with entities affiliated with Mr. Tornier or members of his family.
On December 29, 2007, Tornier SAS entered into a lease agreement with Animus SCI, relating to our facilities in Montbonnot Saint
Martin, France. On August 18, 2012, the parties amended the lease agreement to extend the term until May 31, 2022 and reduce the
annual rent. The amended agreement provides for an initial annual rent payment of €279,506, which was subsequently increased to
€296,861. Animus SCI is wholly owned by Mr. Tornier. On February 6, 2008, Tornier SAS entered into a lease agreement with
Balux SCI, effective as of May 22, 2006, relating to our facilities in Montbonnot Saint Martin, France. On August 18, 2012, the
parties amended the lease agreement to extend the term until May 31, 2022 and reduce the annual rent. The amended agreement
provides for an initial annual rent payment of €252,254, which was subsequently increased to €564,229. Balux SCI is wholly-owned
by Mr. Tornier and his sister, Colette Tornier.
133
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
19. Quarterly Results of Operations (unaudited):
The following tables present a summary of our unaudited quarterly operating results for each of the four quarters in 2017 and 2016,
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 report 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
Total operating expenses
Operating (loss) income
Net (loss) income from continuing operations, net of tax
(Loss) income from discontinued operations, net of tax
Net (loss) income
Net (loss) income, continuing operations per share, basic
Net (loss) income, continuing operations per share, diluted
Net (loss) income per share, basic
Net (loss) income per share, diluted
Weighted-average number of shares outstanding-basic
Weighted-average number of shares outstanding-diluted
Our 2017 operating (loss) income included the following:
2017
$
First
quarter
177,191 $
37,126
140,065
Second
quarter
179,693 $
38,122
141,571
Third
quarter
170,503 $
38,421
132,082
Fourth
quarter
217,602
47,278
170,324
129,834
12,432
7,397
149,663
(9,598 )
(36,707 )
(21,992 )
(58,699 ) $
(0.35 ) $
(0.35 ) $
(0.57 ) $
(0.57 ) $
103,663
103,663
130,818
12,547
6,999
150,364
(8,793 )
(20,960 )
(20,202 )
(41,162 ) $
(0.20 ) $
(0.20 ) $
(0.39 ) $
(0.39 ) $
104,377
104,377
131,421
11,992
7,178
150,591
(18,509 )
(34,122 )
(97,748 )
(131,870 ) $
(0.33 ) $
(0.33 ) $
(1.26 ) $
(1.26 ) $
104,836
104,836
133,149
13,144
6,822
153,115
17,209
26,852
2,281
29,133
0.26
0.25
0.28
0.27
105,195
106,578
$
$
$
$
$
(cid:120)
(cid:120)
transaction and transition costs totaling $3.0 million, $3.2 million, $3.3 million, and $2.9 million during the first,
second, third, and fourth quarters of 2017, respectively; and
a benefit from incentive and indirect tax projects of $9.0 million in the fourth quarter of 2017.
Our 2017 net (loss) income from continuing operations included the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the after-tax effect of the above amounts;
the after-tax effects of our CVR mark-to-market adjustments of $6.2 million unrealized loss, $3.9 million unrealized
gain, $4.5 million unrealized loss, and $1.4 million unrealized gain recognized in the first, second, third, and fourth
quarters of 2017, respectively;
the after-tax effects of non-cash interest expense related to the amortization of the debt discount on our 2017 Notes,
2020 Notes and 2021 Notes totaling $11.0 million, $11.2 million, $11.5 million, and $11.7 million during the first,
second, third, and fourth quarters of 2017, respectively;
the after-tax effects of our mark-to-market adjustments on derivative assets and liabilities totaling a $0.4 million loss,
$4.3 million gain, $0.2 million gain, and $0.6 million gain recognized in the first, second, third, and fourth quarters of
2017, respectively;
the after-tax effects of our fair value adjustments to contingent consideration totaling a $0.2 million unrealized loss,
$0.1 million unrealized loss, and $0.2 million unrealized gain in the second, third, and fourth quarters of 2017,
respectively;
a tax benefit related to the realizability of net operating losses of $8.9 million and $16.0 million in the third and fourth
quarters of 2017, respectively;
the tax effects of tax law reform in the U.S. and France totaling $8.3 million in the fourth quarter of 2017; and
the tax effects of a benefit from incentive and indirect tax projects of $0.8 million in the fourth quarter of 2017.
134
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Total operating expenses
Operating loss
Net loss, continuing operations, net of tax
Net loss, discontinued operations, net of tax
Net loss
Net loss, continuing operations per share, basic and diluted
Net loss per share, basic and diluted
Weighted-average number of shares outstanding-basic and
diluted 1
Our 2016 operating loss included the following:
2016
$
First
quarter
169,291 $
46,666
122,625
Second
quarter
170,716 $
49,009
121,707
Third
quarter
157,332 $
46,149
111,183
Fourth
quarter
193,023
50,583
142,440
134,746
12,116
6,457
153,319
(30,694 )
(40,193 )
(7,799 )
(47,992 ) $
(0.39 ) $
(0.47 ) $
136,483
12,108
7,484
156,075
(34,368 )
(42,031 )
(187,329 )
(229,360 ) $
(0.41 ) $
(2.23 ) $
129,840
12,481
7,466
149,787
(38,604 )
(52,709 )
(57,436 )
(110,145 ) $
(0.51 ) $
(1.07 ) $
140,489
13,809
7,434
161,732
(19,292 )
(30,002 )
(14,874 )
(44,876 )
(0.29 )
(0.43 )
$
$
$
102,704
102,785
103,072
103,309
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
transaction and transition costs totaling $10.8 million, $9.0 million, $8.1 million, and $8.4 million during the first,
second, third, and fourth quarters of 2016, respectively;
amortization of inventory step-up of $10.2 million, $10.4 million, $10.3 million, and $6.8 million in the first, second,
third, and fourth quarters of 2016, respectively, associated with inventory acquired from the Wright/Tornier merger;
costs associated with executive management changes of $1.3 million in the second quarter of 2016;
costs related to a legal settlement of $1.8 million in the second quarter of 2016; and
costs associated with debt refinancing of $0.2 million in the second quarter of 2016.
Our 2016 net loss from continuing operations included the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the after-tax effect of the above amounts;
the after-tax effects of our CVR mark-to-market adjustments of $5.3 million unrealized loss, $1.4 million unrealized
loss, $2.2 million unrealized loss, and $0.3 million unrealized gain recognized in the first, second, third, and fourth
quarters of 2016, respectively;
the after-tax effects of $12.3 million non-cash loss of extinguishment of debt to write-off unamortized debt discount
and deferred financing fees associated with the partial settlement of 2017 Notes and 2020 Notes during the second
quarter of 2016;
the after-tax effects of non-cash interest expense related to the amortization of the debt discount on our 2017 Notes,
2020 Notes and 2021 Notes totaling $7.1 million, $8.2 million, $10.5 million, and $10.8 million during the first,
second, third, and fourth quarters of 2016, respectively;
the after-tax effects of our mark-to-market adjustments on derivative assets and liabilities totaling a $6.6 million gain,
$16.6 million gain, $3.2 million gain, and $1.8 million gain recognized in the first, second, third, and fourth quarters of
2016, respectively;
the after-tax effects of charges due to the fair value adjustment to contingent consideration totaled $0.3 million,
$0.1 million, and $0.1 million in the second, third, and fourth quarters of 2016, respectively;
the after-tax effects of a $3.1 million interest and income tax benefit related to the settlement of an IRS audit in the
second quarter of 2016; and
a $5.6 million income tax benefit representing the deferred tax effects associated with the acquired Tornier operations
in the fourth quarter of 2016.
135
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
20. Segment and Geographic Data
During the first quarter of 2016, our management, including our Chief Executive Officer, who is our chief operating decision maker,
began managing our operations as four operating business segments: U.S. Lower Extremities & Biologics, U.S. Upper Extremities,
International Extremities & Biologics, and Large Joints. We determined that each of these operating segments represented a
reportable segment. Our Chief Executive Officer reviews financial information at the operating segment level to allocate resources
and to assess the operating results and performance of each segment. As a result of the classification of the Large Joints business as
a discontinued operation during the second quarter of 2016, the Large Joints reportable segment is presented in our consolidated
statements of operations as discontinued operations and is excluded from segment results for all periods presented. See Note 4 of
the consolidated financial statements for additional information regarding this divestiture. U.S. Lower Extremities & Biologics, U.S.
Upper Extremities, and International Extremities & Biologics are our remaining three reportable segments as of December 31, 2017.
Our U.S. Lower Extremities & Biologics segment consists of our operations focused on the sale in the United States of our lower
extremities products, such as joint implants and bone fixation devices for the foot and ankle, and our biologics products used to
support treatment of damaged or diseased bone, tendons, and soft tissues or to stimulate bone growth. Our U.S. Upper Extremities
segment consists of our operations focused on the sale in the United States of our upper extremities products, such as joint implants
and bone fixation devices for the shoulder, elbow, wrist, and hand and products used across several anatomic sites to mechanically
repair tissue-to-tissue or tissue-to-bone injuries and other ancillary products. As the IMASCAP operations will be managed by the
U.S. Upper Extremities management team, results of operations and assets related to IMASCAP will be included within the U.S.
Upper Extremities segment. Our International Extremities & Biologics segment consists of our operations focused on the sale
outside the United States of all lower and upper extremities products, including associated biologics products.
Management measures segment profitability using an internal operating performance measure that excludes the impact of inventory
step-up amortization and due diligence, transaction and transition costs associated with acquisitions, as such items are not considered
representative of segment results. Management's change to the way it monitors performance, aligns strategies, and allocates
resources results in a change in our reportable segments and a change in reporting units for goodwill impairment measurement
purposes. We have determined that each reportable segment represents a reporting unit and, in accordance with ASC 350, requires
an allocation of goodwill to each reporting unit. As of December 31, 2017, we have allocated $218.5 million, $630.7 million, and
$84.5 million of goodwill to the U.S. Lower Extremities & Biologics, U.S. Upper Extremities, and International Extremities &
Biologics reportable segments, respectively.
Net sales by product line are as follows (in thousands):
U.S.
Lower extremities
Upper extremities
Biologics
Sports med & other
Total U.S.
International
Lower extremities
Upper extremities
Biologics
Sports med & other
Total International
Total
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
$
$
$
$
$
228,044 $
239,965
78,361
8,141
554,511 $
222,936 $
201,579
74,603
8,429
507,547 $
187,096
58,756
50,583
3,388
299,823
58,473 $
94,699
22,276
15,030
190,478 $
62,701 $
86,502
18,883
14,729
182,815 $
51,200
24,789
19,652
9,862
105,503
744,989 $
690,362 $
405,326
Our principal geographic regions consist of the United States, EMEA (which includes Europe, the Middle East and Africa), and
Other (which principally represents Asia, Australia, Canada, and Latin America). Net sales attributed to each geographic region are
based on the location in which the products were sold.
136
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Net sales by geographic region are as follows (in thousands):
Net sales by geographic region:
United States
EMEA
Other
Total
December 31,
2017
Fiscal year ended
December 25,
2016
December 27,
2015
$
$
554,511 $
120,202
70,276
744,989 $
507,547 $
117,268
65,547
690,362 $
299,823
62,662
42,841
405,326
No single foreign country accounted for more than 10% of our total net sales during 2017, 2016, or 2015.
Assets in the U.S. Upper Extremities, U.S. Lower Extremities & Biologics, and International Extremities & Biologics segments are
those assets used exclusively in the operations of each business segment or allocated when used jointly. Assets in the Corporate
category are principally cash and cash equivalents, derivative assets, property, plant and equipment associated with our corporate
headquarters, assets associated with discontinued operations, product liability insurance receivables, and assets associated with
income taxes. Total assets by business segment as of December 31, 2017 and December 25, 2016 are as follows (in thousands):
Total assets
Total assets
U.S. Lower
Extremities &
Biologics
U.S. Upper
Extremities
December 31, 2017
International
Extremities &
Biologics
Corporate
Total
$
490,528 $
929,930 $
301,985 $
406,281 $ 2,128,724
U.S. Lower
Extremities &
Biologics
U.S. Upper
Extremities
December 25, 2016
International
Extremities &
Biologics
Corporate
Total
$
491,531 $
845,102 $
264,680 $
689,273 $ 2,290,586
Selected financial information related to our segments is presented below for the fiscal years ended December 31, 2017, December
25, 2016, and December 27, 2015 (in thousands):
U.S. Lower
Extremities &
Biologics
Fiscal year ended December 31, 2017
International
Extremities &
Biologics
U.S. Upper
Extremities
Corporate 1
Net sales from external customers
Depreciation expense
Amortization expense
Segment operating income (loss)
Other:
Transaction and transition expenses
Incentive and indirect tax projects
Operating loss
Interest expense, net
Other expense, net
Loss before income taxes
Capital expenditures
$
$
309,713 $
12,532
—
79,889 $
244,798 $
10,211
—
78,866 $
190,478 $
12,366
—
3,631 $
— $
21,723
28,396
(178,642 ) $
$
19,355 $
22,897 $
19,555 $
$
1,667 $
137
Total
744,989
56,832
28,396
(16,256 )
12,400
(8,965 )
(19,691 )
74,644
5,570
(99,905 )
63,474
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Net sales from external customers
Depreciation expense
Amortization expense
Segment operating income (loss)
Other:
Inventory step-up amortization
Transaction and transition expenses
Legal settlement
Management changes
Costs associated with new convertible debt
Operating loss
Interest expense, net
Other income, net
Loss before income taxes
Capital expenditures
Net sales from external customers
Depreciation expense
Amortization expense
Segment operating income (loss)
Other:
Inventory step-up amortization
Due diligence, transaction and transition
expenses
Share-based compensation acceleration
Distributor conversion and non-compete charges
Operating loss
Interest expense, net
Other expense, net
Loss before income taxes
Capital expenditures
U.S. Lower
Extremities &
Biologics
Fiscal year ended December 25, 2016
International
Extremities &
Biologics
U.S. Upper
Extremities
Corporate 1
$
$
300,847 $
13,000
—
85,645 $
206,700 $
11,190
—
65,231 $
182,815 $
11,427
—
5,872 $
— $
20,213
28,841
(202,261 ) $
$
13,145 $
10,101 $
13,517 $
$
13,336 $
U.S. Lower
Extremities &
Biologics
$
$
239,748 $
10,502
—
39,008 $
Fiscal year ended December 27, 2015
International
Extremities &
Biologics
U.S. Upper
Extremities
Corporate 1
60,075 $
1,092
—
21,394 $
105,503 $
5,795
—
(5,567 ) $
— $
12,119
16,754
(136,836 ) $
$
25,410 $
6,903 $
7,140 $
$
4,213 $
Total
690,362
55,830
28,841
(45,513 )
37,689
36,374
1,800
1,348
234
(122,958 )
58,530
(3,148 )
(178,340 )
50,099
Total
405,326
29,508
16,754
(82,001 )
10,315
82,195
14,190
65
(188,766 )
41,358
10,884
(241,008 )
43,666
1 The Corporate category primarily reflects general and administrative expenses not specifically associated with the U.S.
Lower Extremities & Biologics, U.S. Upper Extremities, and International Extremities & Biologics segments. These non-
allocated corporate expenses relate to global administrative expenses that support all segments, including salaries and
benefits of certain executive officers and expenses such as: information technology administration and support; corporate
headquarters; legal, compliance, and corporate finance functions; insurance; and all share-based compensation.
138
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management,
including our principal executive officer and principal financial officer, to allow timely decisions regarding disclosure. The CEO
and the CFO, with assistance from other members of management, have reviewed the design and effectiveness of our disclosure
controls and procedures as of December 31, 2017 and, based on their evaluation, have concluded that the disclosure controls and
procedures were effective as of December 31, 2017.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) under the Exchange Act.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017, based on the
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the
Treadway Commission (COSO). Based on this assessment, management concluded that our internal control over financial reporting
was effective as of December 31, 2017.
Our internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report, which is included herein.
Remediation of Prior Year Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on
a timely basis. Management previously reported in our Annual Report on Form 10-K for the fiscal year ended December 25, 2016 a
material weakness in our internal control over financial reporting related to ineffective design and operation of general information
technology controls related to user access to certain information technology systems that are relevant to our financial reporting
processes and that are intended to ensure that access to financial applications and data is adequately restricted to appropriate
personnel and monitored to ensure adherence to Company policies. During 2017, as disclosed in our Quarterly Reports on Form 10-
Q for the first three quarters of 2017, the Company implemented and executed a plan to remediate the material weakness and as of
the end of the third quarter of 2017, such remediation plans were successfully tested and the material weakness was deemed
remediated.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) during the fiscal quarter ended December 31, 2017, that materially affected, or that
are reasonably likely to materially affect, our internal control over financial reporting, except for changes that we made to begin to
incorporate the internal control over financial reporting of IMASCAP with and into our internal control over financial reporting.
139
Item 9B. Other Information.
Second Amendment to the Third Settlement Agreement
As previously reported, on October 3, 2017, WMT, a wholly-owned subsidiary of Wright Medical Group N.V. (the Company), and
the Court-appointed attorneys representing plaintiffs in the metal-on-metal hip litigation known as In Re: Wright Medical
Technology, Inc., CONSERVE® Hip Implant Products Liability Litigation, MDL No. 2329 (MDL) and In re: Wright Hip System
Cases, Judicial Council Coordination Proceeding No. 4710 (JCCP) agreed on a comprehensive settlement intended to resolve
substantially all remaining metal-on-metal hip claims pending or tolled in the MDL and JCCP that were not settled in the previously
disclosed Master Settlement Agreement dated November 1, 2016. The comprehensive settlement was contingent on WMT’s receipt
of new insurance proceeds totaling at least $35 million from applicable insurance carriers by December 31, 2017. On December 29,
2017, WMT and the Court-appointed attorneys representing plaintiffs in the MDL and JCCP entered into an amendment to extend
this date to February 28, 2018 and, on February 23, 2018, the parties entered into a second amendment that extended this date to
March 30, 2018.
The foregoing represents only a summary of the material terms of the foregoing described amendment, does not purport to be
complete and is qualified in its entirety by reference to the complete text of the amendment, which is filed as Exhibit 10.90 to this
Annual Report on Form 10-K, and is incorporated by reference herein.
Settlement and Release Agreement
On February 22, 2018, we and certain of our subsidiaries entered into a Settlement and Release Agreement with Federal Insurance
Company, a subsidiary of Chubb Insurance (Federal), pursuant to which Federal agreed to pay us an aggregate of $15 million (in
addition to $5 million previously paid by Federal) in a lump sum on or before the 10th business day after execution of the settlement
agreement. This amount will be in full satisfaction of all potential liability of Federal relating to designated metal-on-metal hip
claims, including but not limited to all claims asserted by our subsidiary WMT against Federal in the previously disclosed insurance
coverage litigation.
More information regarding the pending insurance coverage litigation can be found at Note 16 to the consolidated financial
statements contained in this report and in the section entitled “Legal Proceedings.”
140
Item 10.
Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
PART III
The table below sets forth, as of February 23, 2018, certain information concerning our current directors and executive officers. No
family relationships exist among any of our directors or executive officers.
Name
Robert J. Palmisano
Lance A. Berry
Robert P. Burrows
James A. Lightman
J. Wesley Porter
Julie D. Tracy
Jason D. Asper
Jennifer S. Walker
Kevin D. Cordell
Peter S. Cooke
Patrick Fisher
Timothy L. Lanier
Julie B. Andrews
David D. Stevens(1)(2)
Gary D. Blackford(1)(3)
John L. Miclot(4)
Kevin C. O’Boyle(3)(4)
Amy S. Paul(1)
Richard F. Wallman(2)(3)
Elizabeth H. Weatherman(1)(2)(4)
________________________
Position
Age
73 President and Chief Executive Officer and Executive Director
45 Senior Vice President and Chief Financial Officer
71 Senior Vice President, Supply Chain
60 Senior Vice President, General Counsel and Secretary
48 Senior Vice President and Chief Compliance Officer
56 Senior Vice President and Chief Communications Officer
43 Senior Vice President, Strategy and Corporate Development
50 Senior Vice President, Process Improvement
52 President, U.S.
52 President, International
44 President. Lower Extremities
56 President, Upper Extremities
46 Vice President and Chief Accounting Officer
64 Chairman and Non-Executive Director
60 Non-Executive Director
58 Non-Executive Director
61 Non-Executive Director
66 Non-Executive Director
66 Non-Executive Director
57 Non-Executive Director
(1)
(2)
(3)
(4)
Member of the nominating, corporate governance and compliance committee.
Member of the strategic transactions committee.
Member of the audit committee.
Member of the compensation committee.
The following is a biographical summary of the experience of our directors and executive officers:
Robert J. Palmisano was appointed our President and Chief Executive Officer and an executive director and member of our board
of directors in October 2015 in connection with the Wright/Tornier merger. Mr. Palmisano has served as President and Chief
Executive Officer of Wright Medical Group, Inc. since September 2011. Prior to joining legacy Wright, Mr. Palmisano served as
President and Chief Executive Officer of ev3 Inc., a global endovascular device company, from April 2008 to July 2010, when it was
acquired by Covidien plc. From 2003 to 2007, Mr. Palmisano was President and Chief Executive Officer of IntraLase Corp. Before
joining IntraLase, Mr. Palmisano was President and Chief Executive Officer of MacroChem Corporation from 2001 to 2003.
Mr. Palmisano currently serves on the Providence College Board of Trustees and serves on the board of directors of Avedro Inc., a
privately held ophthalmic medical device and pharmaceutical company. Mr. Palmisano previously served on the board of directors
of ev3 Inc., Osteotech, Inc. and Abbott Medical Optics, Inc., all publicly held companies, and Bausch & Lomb, a privately held
company. Under the terms of his employment agreement, we have agreed that Mr. Palmisano will be nominated by our board of
directors for election as an executive director and a member of our board of directors at each annual general meeting of shareholders
during the term of his employment as President and Chief Executive Officer of our company. Mr. Palmisano’s qualifications to
serve on our board of directors include his day-to-day knowledge of our company and business due to his position as President and
Chief Executive Officer, his experience serving on other public companies’ boards of directors, and his extensive business
knowledge working with other public companies in the medical device industry.
Lance A. Berry was appointed our Senior Vice President and Chief Financial Officer in October 2015 in connection with the
Wright/Tornier merger. Mr. Berry has served as Senior Vice President and Chief Financial Officer of Wright Medical Group, Inc.
since 2009. He joined legacy Wright in 2002, and, until his appointment as Chief Financial Officer, served as Vice President and
Corporate Controller. Prior to joining Wright, Mr. Berry served as audit manager with the Memphis, Tennessee office of Arthur
Andersen LLP from 1995 to 2002.
Robert P. Burrows was appointed our Senior Vice President, Supply Chain in October 2015 in connection with the Wright/Tornier
merger. Mr. Burrows joined Wright Medical Group, Inc. in August 2014 as Senior Vice President, Supply Chain. Prior to joining
legacy Wright, he served as Managing Principal of The On-Point Group, a privately held logistics and supply chain consultancy,
from July 1994 through July 2014. While at On-Point, Mr. Burrows led over 40 client engagements, most recently as an operations
consultant overseeing the transition and expansion of legacy Wright’s extremities and biologics manufacturing.
141
James A. Lightman was appointed our Senior Vice President, General Counsel and Secretary in October 2015 in connection with
the Wright/Tornier merger. Mr. Lightman joined Wright Medical Group, Inc. in December 2011 as Senior Vice President, General
Counsel and Secretary. Prior to joining legacy Wright, Mr. Lightman served in various legal and executive positions with Bausch &
Lomb Incorporated, a privately held supplier of eye health products. From February 2008 to November 2009, Mr. Lightman served
as Vice President and Assistant General Counsel of Bausch & Lomb, and most recently held the position of Vice President, Global
Sales Operations until August 2011. From June 2007 to February 2008, he served as Vice President and General Counsel of
Eyeonics, Inc. Prior to joining Eyeonics, Mr. Lightman served as Senior Vice President and General Counsel of IntraLase Corp.
from February 2005 to April 2007.
J. Wesley Porter was appointed our Senior Vice President and Chief Compliance Officer in October 2015 in connection with the
Wright/Tornier merger. Mr. Porter joined Wright Medical Group, Inc. in July 2014 as Vice President, Compliance and became
Senior Vice President and Chief Compliance Officer in October 2014. Prior to joining legacy Wright, Mr. Porter served as Vice
President, Deputy Compliance Officer of Allergan, Inc. from September 2012 to February 2014, Vice President, Ethics and
Compliance of CareFusion Corp. from June 2009 to September 2012, and Senior Corporate Counsel, Compliance, HIPAA and
Reimbursement of Smith & Nephew, Inc. from April 2006 to May 2009.
Julie D. Tracy was appointed our Senior Vice President and Chief Communications Officer in October 2015 in connection with the
Wright/Tornier merger. Ms. Tracy served as Senior Vice President, Chief Communications Officer of Wright Medical Group, Inc.
from October 2011 to October 2015. Prior to joining legacy Wright, Ms. Tracy served as Chief Communications Officer of
Epocrates, Inc., a publicly held company that sold physician platforms for clinical content, practice tools and health industry
engagement, from March 2011 to October 2011. From January 2008 to July 2010, Ms. Tracy was Senior Vice President and Chief
Communications Officer of ev3 Inc. Prior to ev3, Ms. Tracy held marketing and investor relations positions at Kyphon Inc. from
January 2003 to November 2007 and Thoratec Corporation from January 1998 to January 2003. Ms. Tracy currently serves as a
member of the board of directors for the National Investor Relations Institute, the professional association of corporate officers and
investor relations consultants responsible for communication among corporate management, shareholders, securities analysts and
other financial community constituents.
Jason D. Asper was appointed our Senior Vice President, Strategy and Corporate Development in August 2017. Prior to joining
Wright, Mr. Asper served as a principal for Deloitte Consulting, LLP, a global consulting company, from September 2012 to July
2017.
Jennifer S. Walker was appointed our Senior Vice President, Process Improvement in October 2015 in connection with the
Wright/Tornier merger. Ms. Walker served as Senior Vice President, Process Improvement of Wright Medical Group, Inc. from
December 2011 to October 2015 and Vice President and Corporate Controller from December 2009 to December 2011. Since
joining legacy Wright’s financial organization in 1993, she served as Assistant Controller, Director, Financial Reporting & Risk
Management, Director, Corporate Tax & Risk Management, and Tax Manager of legacy Wright. Prior to joining legacy Wright,
Ms. Walker was a senior tax accountant with Arthur Andersen LLP. Ms. Walker is a certified public accountant.
Kevin D. Cordell was appointed our President, U.S. in June 2016. From October 2015 to June 2016, he served as our President,
Lower Extremities and Biologics. Mr. Cordell served as President, U.S. Extremities of Wright Medical Group, Inc. from September
2014 to October 2015. Prior to joining legacy Wright, Mr. Cordell served as Vice President of Sales for the GI Solutions business at
Covidien plc, a global healthcare products company, from May 2012 to September 2014. While at Covidien, he served as Vice
President of Sales and Global Marketing for its Peripheral Vascular business from July 2010 to May 2012. He joined Covidien in
July 2010 through the acquisition of ev3 Inc., a global endovascular device company, where he served as Vice President of U.S.
Sales from January 2009 to July 2010. Prior to ev3, Mr. Cordell served as Vice President, Global Sales of FoxHollow Technologies,
Inc. from March 2007 until it was acquired by ev3 in October 2007. Earlier in his career, Mr. Cordell held various positions of
increasing responsibility for Johnson & Johnson’s Cordis Cardiology and Centocor companies. Mr. Cordell serves on the board of
directors of TissueGen, Inc., a privately-held developer of biodegradable polymer technology for implantable drug delivery.
Peter S. Cooke was appointed our President, International in October 2015 in connection with the Wright/Tornier merger.
Mr. Cooke served as President, International of Wright Medical Group, Inc. from January 2014 to October 2015 and served as
Senior Vice President, International from January 2013 to January 2014. Prior to joining legacy Wright, Mr. Cooke served as Vice
President and General Manager, Vascular Therapies Emerging Markets of Covidien plc, a global healthcare products company, from
July 2010 to January 2013. Prior to Covidien, Mr. Cooke served in various general management roles for ev3 Inc., a global
endovascular device company acquired by Covidien in July 2010, including Vice President and General Manager, International from
July 2008 to July 2010; Vice President, General Manager, International from November 2006 to June 2008; Vice President, Sales
International from January 2005 until November 2006; and Regional Director Asia Pacific and China from February 2003 until
January 2005. Prior to ev3, Mr. Cooke spent eleven years at Guidant Corporation, three years at Baxter Healthcare Corporation and
two years at St. Jude Medical, Inc.
Patrick Fisher was appointed our President, Lower Extremities in June 2016. From October 2015 to June 2016, Mr. Fisher served as
our Vice President, U.S. Sales. From October 2012 to October 2015, Mr. Fisher served as Vice President, U.S. Sales of Wright
Medical Group, Inc., and from October 2010 to October 2012, Mr. Fisher served as Regional Vice President of Sales - West Region.
Timothy L. Lanier was appointed our President, Upper Extremities in June 2016. Mr. Lanier has over 25 years of experience in
medical device and commercial operations in both small and large companies that include various medical specialties such as
orthopedics, vascular, oncology and ophthalmology. Prior to joining Wright, from September 2013 to June 2016, Mr. Lanier served
as Vice President of Sales of DFINE Inc., a company committed to the treatment of metastatic tumors and other diseases of the
spine. From July 2010 to September 2013, Mr. Lanier served as Vice President of US Sales for the Endovascular Division of
142
Covidien plc, a global healthcare products company, where he built a world-class sales organization dedicated to treating both
arterial and venous disease. He joined Covidien in July 2010 through the acquisition of ev3 Inc., where he served as Area Vice
President from January 2008 to July 2010. Prior to ev3, Mr. Lanier served as Vice President of Commercial Operations at Anulex
Technologies, Inc. from January 2007 to January 2008. He also had increasing executive responsibility at Zimmer Orthopedics,
Spine Division and Spine-Tech, Inc. from 1997 to 2007, including Vice President of Commercial Operations.
Julie B. Andrews was appointed our Vice President and Chief Accounting Officer in October 2015 in connection with the
Wright/Tornier merger. Ms. Andrews served as Vice President and Chief Accounting Officer of Wright Medical Group, Inc. from
May 2012 to October 2015. From February 1998 to May 2012, Ms. Andrews held numerous key financial positions with Medtronic,
Inc., a global medical device company. Most recently, Ms. Andrews served as Medtronic’s Vice President, Finance for its spinal and
biologics business units. Ms. Andrews has significant accounting, finance, and business skills as well as global experience, having
held positions in worldwide planning and analysis in Medtronic Sofamor Danek and in Medtronic’s spinal and biologics business.
Prior to joining Medtronic, Ms. Andrews worked with Thomas & Betts Corporation in Memphis, Tennessee and Thomas Havey,
LLP in Chicago, Illinois.
David D. Stevens joined our board of directors as a non-executive director in October 2015 in connection with the Wright/Tornier
merger. Mr. Stevens serves as our Chairman. Mr. Stevens was a member of the board of directors of Wright Medical Group, Inc.
from 2004 to 2015 and served as Chairman of the Board from 2009 to October 2015 and interim Chief Executive Officer of Wright
from April 2011 to September 2011. He has been a private investor since 2006. Mr. Stevens served as Chief Executive Officer of
Accredo Health Group, Inc., a subsidiary of Medco Health Solutions, Inc., from 2005 to 2006. He was Chief Executive Officer of
Accredo Health, Inc. from 1996 to 2005, served as Chairman of the Board from 1999 to 2005, and was President and Chief
Operating Officer of the predecessor companies of Accredo Health from their inception in 1983 until 1996. He serves on the board
of directors of Allscripts Healthcare Solutions, Inc., a publicly held company. He previously served on the board of directors of
Viasystems Group, Inc., a publicly held company, from 2012 until May 2015 when it was acquired by TTM Technologies, Inc.,
Medco Health Solutions, Inc., a publicly held company, from 2006 until 2012 when it was acquired by Express Scripts Holding
Company, and Thomas & Betts Corporation, a publicly held company, from 2004 to 2012 when it was acquired by ABB Ltd.
Mr. Stevens's qualifications to serve on our board of directors include his extensive experience serving as a chief executive officer,
including as interim chief executive officer of legacy Wright, his close familiarity with our business, and his prior experience as a
director of legacy Wright.
Gary D. Blackford joined our board of directors as a non-executive director in October 2015 in connection with the Wright/Tornier
merger. Mr. Blackford was a member of the board of directors of Wright Medical Group, Inc. from 2008 to 2015. From 2002 to
February 2015, Mr. Blackford served as President and Chief Executive Officer and a member of the board of directors of Universal
Hospital Services, Inc., a provider of medical technology outsourcing and services to the healthcare industry, and from 2007 to
February 2015, served as Chairman of the Board. From 2001 to 2002, Mr. Blackford served as Chief Executive Officer of Curative
Health Services Inc. From 1999 to 2001, Mr. Blackford served as Chief Executive Officer of ShopforSchool, Inc. He served as
Chief Operating Officer for Value Rx from 1995 to 1998 and Chief Operating Officer and Chief Financial Officer of MedIntel
Systems Corporation from 1993 to 1994. Mr. Blackford currently serves on the board of directors of Halyard Health, Inc. and
ReShape Lifesciences Inc. (formerly EnteroMedics Inc.), both publicly held companies. He also serves on the board of directors of
Pipeline Rx, Inc., a privately held telepharmacy company and is the Vice Chairman of the Minnesota Children's Hospitals and
Clinics. Mr. Blackford previously served on the board of directors of Compex Technologies, Inc., a publicly held medical device
company, from 2005 until its acquisition by Encore Medical Corporation in 2006. Mr. Blackford’s qualifications to serve as a
member of our board of directors include his experience as a chief executive officer and director of a healthcare services company
and other companies and as a director of other public companies in the healthcare industry, his extensive experience leading
healthcare companies, and his prior experience as a director of legacy Wright.
John L. Miclot joined our board of directors as a non-executive director in October 2015 in connection with the Wright/Tornier
merger. Mr. Miclot was a member of the board of directors of Wright Medical Group, Inc. from 2007 to 2015. Mr. Miclot has
served as President and Chief Executive Officer and a member of the board of directors of LinguaFlex, Inc., a medical device
company focused on treatment of sleep disordered breathing, since August 2015. From December 2011 to December 2014, he
served as Chief Executive Officer and a member of the board of directors of Tengion Inc., a publicly held company that focused on
organ and cell regeneration. Prior to joining Tengion, Mr. Miclot was an Executive-in Residence at Warburg Pincus, LLC. From
2008 to 2010, he was President and Chief Executive Officer of CCS Medical, Inc., a provider of products and services for patients
with chronic diseases. From 2003 until 2008, he served as President and Chief Executive Officer of Respironics, Inc., a provider of
sleep and respiratory products, and prior to such time, served in various positions at Respironics, Inc. from 1998 to 2003, including
Chief Strategic Officer and President of the Homecare Division. From 1995 to 1998, he served as Senior Vice President, Sales and
Marketing of Healthdyne Technologies, Inc., a medical device company that was acquired by Respironics, Inc. in 1998. Mr. Miclot
spent the early part of his medical career at DeRoyal Industries, Inc., Baxter International Inc., Ohmeda Medical, Inc. and Medix
Inc. Mr. Miclot serves as Chairman and a member of the board of directors of Breathe Technologies, Inc., a privately held company.
Mr. Miclot also serves as a director of the Pittsburgh Zoo and PPG Aquarium, charitable and educational institutions, serves on the
University of Iowa Tippie College of Business board of advisors and serves as an industrial advisor to EQT Partners, an investment
company. Mr. Miclot previously served on the board of directors of DENTSPLY International Inc., a dental products company, prior
to its merger with Sirona Dental Systems, Inc. in February 2016, and ev3 Inc., a global endovascular device company, prior to the
sale of the company in 2010. Mr. Miclot’s qualifications to serve on our board of directors include his substantial experience as a
chief executive officer of several medical device companies, his deep knowledge of the medical device industry, and his prior
experience as a director of legacy Wright.
Kevin C. O’Boyle has served as a non-executive director and member of our board of directors since June 2010. In November 2012,
Mr. O’Boyle was appointed as Interim Vice Chairman of Tornier, a position he held for about a year. From December 2010 to July
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2011, Mr. O’Boyle served as Senior Vice President and Chief Financial Officer of Advanced BioHealing Inc., a medical device
company that was acquired by Shire plc in July 2011. From January 2003 until December 2009, Mr. O’Boyle served as Chief
Financial Officer of NuVasive, Inc., a medical device orthopedics company specializing in spinal disorders. Prior to that time,
Mr. O’Boyle served in various positions during his six years with ChromaVision Medical Systems, Inc., a publicly held medical
device company specializing in the oncology market, including as its Chief Financial Officer and Chief Operating Officer. Mr.
O’Boyle also held various positions during his seven years with Albert Fisher North America, Inc., a publicly held international food
company, including Chief Financial Officer and Senior Vice President of Operations. Mr. O’Boyle serves on the board of directors
of GenMark Diagnostics, Inc. and Sientra, Inc., both publicly held companies. Mr. O’Boyle previously served on the board of
directors of ZELTIQ Aesthetics, Inc., a public company acquired by Allergan plc in April 2017, and Durata Therapeutics, Inc. until
its acquisition by Actavis plc in November 2014. Mr. O’Boyle’s qualifications to serve on our board of directors includes his
executive experience in the healthcare industry, his experience with companies during their transition from being privately held to
publicly held, and his financial and accounting expertise.
Amy S. Paul joined our board of directors as a non-executive director in October 2015 in connection with the Wright/Tornier
merger. Ms. Paul was a member of the board of directors of Wright Medical Group, Inc. from 2008 to 2015. Ms. Paul retired in
2008 following a 26-year career with C.R. Bard, Inc., a medical device company, most recently serving as the Group Vice President-
International since 2003. She served in various positions at C.R. Bard, Inc. from 1982 to 2003, including President of Bard Access
Systems, Inc., President of Bard Endoscopic Technologies, Vice President and Business Manager of Bard Ventures, Vice President
of Marketing of Bard Cardiopulmonary Division, Marketing Manager for Davol Inc., and Senior Product Manager for Davol Inc.
Ms. Paul previously served on the board of directors of Derma Sciences, Inc., a publicly held company, Viking Systems, Inc., a
publicly held company, until October 2012 when it was acquired by Conmed Corporation, and was a commissioner of the Northwest
Commission on Colleges and Universities from 2010 to 2013. Ms. Paul serves on the President’s Innovation Network at
Westminster College. Ms. Paul’s qualifications to serve on our board of directors include her over three decades of experience in the
medical device industry, including having served in various executive roles with responsibilities that include international and
divisional operations as well as marketing and sales functions, her experience as a director of other public companies in the
healthcare industry, and her prior experience as a director of legacy Wright.
Richard F. Wallman has served as a non-executive director and member of our board of directors since December 2008. From 1995
through his retirement in 2003, Mr. Wallman served as Senior Vice President and Chief Financial Officer of Honeywell
International, Inc., a diversified technology company, and AlliedSignal, Inc., a diversified technology company (prior to its merger
with Honeywell International, Inc.). Prior to joining AlliedSignal, Inc., Mr. Wallman served as Controller of International Business
Machines Corporation. Mr. Wallman serves on the board of directors of Charles River Laboratories International, Inc., Extended
Stay America, Inc. and Roper Technologies, Inc., all publicly held companies. Mr. Wallman previously served on the board of
directors of Convergys Corporation, Dana Holding Corporation and ESH Hospitality, Inc., all publicly held companies.
Mr. Wallman’s qualifications to serve on our board of directors include his prior public company experience, including as Chief
Financial Officer of Honeywell, his significant public company director experience, and his financial experience and expertise.
Elizabeth H. Weatherman has served as a non-executive director and member of our board of directors since July 2006.
Ms. Weatherman was initially appointed as a director of Tornier in connection with the securityholders’ agreement that Tornier
entered into with certain shareholders. The securityholders’ agreement terminated by its terms in May 2016. Ms. Weatherman has
been a Special Limited Partner of Warburg Pincus LLC, a private equity firm, since January 2016. Ms. Weatherman previously was
a Partner of Warburg Pincus & Co., a Member and Managing Director of Warburg Pincus LLC and a member of the firm’s
Executive Management Group. Ms. Weatherman joined Warburg Pincus in 1988 and primarily focused on the firm’s healthcare
investment activities. Ms. Weatherman serves on the board of directors of several privately held companies. Ms. Weatherman
previously served on the boards of directors of several publicly held companies, primarily in the medical device industry, including
ev3 Inc., Wright Medical Group, Inc., and Kyphon Inc. Ms. Weatherman’s qualifications to serve on our board of directors include
her extensive experience as a director of several public and private companies in the medical device industry.
Board Structure and Composition
We have a one-tier board structure. Our articles of association provide that the number of members of our board of directors will be
determined by our board of directors, provided that our board of directors will be comprised of at least one executive director and
two non-executive directors. Our board of directors currently consists of eight directors, one of whom is an executive director and
seven of whom are non-executive directors. With respect to the composition of our board of directors, under the terms of his
employment agreement, we have agreed that Mr. Palmisano will be nominated by our board of directors for election as an executive
director and a member of our board of directors at each annual general meeting of shareholders.
All seven of our non-executive directors are “independent directors” under the Listing Rules of the Nasdaq Stock Market.
Independence requirements for service on our audit committee are discussed below under “Audit Committee” and independence
requirements for service on our compensation committee are discussed below under “Compensation Committee.” All of our non-
executive directors are independent under the independence definition in the Dutch Corporate Governance Code.
The general meeting of shareholders appoints the members of our board of directors, subject to a binding nomination to be drawn up
by our board of directors in accordance with the relevant provisions of the Dutch Civil Code. Our board of directors makes the
binding nomination based on a recommendation of our nominating, corporate governance and compliance committee. If the list of
candidates contains one candidate for each open position to be filled, such candidate will be appointed by the general meeting of
shareholders unless the binding nature of the nominations by our board of directors is set aside by the general meeting of
shareholders. The binding nature of nomination(s) by our board of directors can only be set aside by a vote of at least two-thirds of
the votes cast at an annual or extraordinary general meeting of shareholders, provided such two-thirds vote constitutes more than
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one-half of our issued share capital. In such case, a new meeting is called at which the resolution for appointment of a member of
our board of directors will require a majority of at least two-thirds of the votes cast representing more than one-half of our issued
share capital.
A resolution of the general meeting of shareholders to suspend a member of our board of directors requires the affirmative vote of an
absolute majority of the votes cast. A resolution of the general meeting of shareholders to suspend or dismiss members of our board
of directors, other than pursuant to a proposal by our board of directors, requires a majority of at least two-thirds of the votes cast,
representing more than one-half of our issued share capital.
Under our articles of association, our internal rules for the board of directors, and Dutch law, the members of our board of directors
are collectively responsible for our management, general and financial affairs, and policy and strategy. Our executive director is
primarily responsible for managing our day-to-day affairs as well as other responsibilities that have been delegated to him in
accordance with our articles of association and internal rules for the board of directors. Our non-executive directors supervise our
executive director and our general affairs and provide general advice to him. In performing their duties, our directors are guided by
the interests of our company and, within the boundaries set by relevant Dutch law, must take into account the relevant interests of
our stakeholders. The internal affairs of our board of directors are governed by our internal rules for the board of directors, a copy of
which is available on the Investor Relations-Corporate Information-Governance Documents & Charters section of our corporate
website at www.wright.com.
Mr. Stevens serves as our Chairman. The duties and responsibilities of the Chairman include, among others: determining the
agenda and chairing the meetings of our board of directors, managing our board of directors to ensure that it operates effectively,
ensuring that the members of our board of directors receive accurate, timely and clear information, encouraging active engagement
by all the members of our board of directors, promoting effective relationships and open communication between the non-executive
directors and the executive director, and monitoring effective implementation of our board of directors decisions.
Under our internal rules for the board of directors, meetings of our board of directors may be held in such locations as the board of
directors determines appropriate. At each meeting, each director has the right to cast one vote and may be represented at a meeting
of our board of directors by a fellow director. Our board of directors may pass resolutions only if a majority of the directors is
present at the meeting and all resolutions must be passed by a majority of the directors that have no conflict of interest present or
represented. As required by Dutch law, our articles of association provide that when one or more members of our board of directors
is absent or prevented from acting, the remaining members of our board of directors will be entrusted with the management of our
company. The intent of this provision is to satisfy certain requirements under Dutch law and provide that, in rare circumstances,
when a director is incapacitated, severely ill, or similarly absent or prevented from acting, the remaining members of our board of
directors (or, in the event there are no such remaining members, a person appointed by our shareholders at a general meeting) will be
entitled to manage our company, notwithstanding the general requirement that otherwise requires a majority of our board of directors
in office to be present. In these limited circumstances, our articles of association permit our board of directors to pass resolutions
even if a majority of the directors in office is not present at the meeting.
Subject to Dutch law and any director’s objection, resolutions may be passed in writing by all of the directors in office. Under
Dutch law, members of the board of directors may not participate in the deliberation and the decision-making process on a subject or
transaction in relation to which he or she has a direct or indirect personal interest that conflicts with the interest of our company and
business enterprise. If all directors are conflicted and in the absence of a supervisory board, the resolution will be adopted by the
general meeting of shareholders, except if the articles of association prescribe otherwise. Our articles of association provide that a
director will not take part in any vote on a subject or transaction in relation to which he or she has a direct or indirect personal
interest that conflicts with the interest of our company and business enterprise. In such event, the other directors will be authorized
to adopt the resolution. If all directors have a conflict of interest as mentioned above, the resolution will be adopted by the non-
executive directors.
Board Committees
Our board of directors has four standing board committees: audit committee, compensation committee, nominating, corporate
governance and compliance committee, and strategic transactions committee. Each of these committees has the composition
described in the table below and the responsibilities described in the sections below. Our board of directors has adopted a written
charter for each committee of our board of directors. These charters are available on the Investor Relations-Corporate Information-
Governance Documents & Charters section of our corporate website at www.wright.com. Our board of directors from time to time
may establish other committees.
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The following table summarizes the current membership of each of our four board committees.
Director
Robert J. Palmisano
Gary D. Blackford
John L. Miclot
Kevin C. O’Boyle
Amy S. Paul
David D. Stevens
Richard F. Wallman
Elizabeth H. Weatherman
Audit Committee
Audit
—
√
—
√
—
—
Chair
—
Compensation
—
—
Chair
√
—
—
—
√
Nominating, corporate
governance and compliance
—
√
—
—
Chair
√
—
√
Strategic transactions
—
—
—
—
—
√
√
Chair
The audit committee oversees a broad range of issues surrounding our accounting and financial reporting processes and audits of our
consolidated financial statements. The primary responsibilities of the audit committee include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
assisting our board of directors in monitoring the integrity of our consolidated financial statements, our compliance
with legal and regulatory requirements insofar as they relate to our consolidated financial statements and financial
reporting obligations and any accounting, internal accounting controls or auditing matters, our independent registered
public accounting firm's qualifications and independence, and the performance of our internal audit function and
independent registered public accounting firm;
appointing, compensating, retaining, and overseeing the work of any independent registered public accounting firm
engaged for the purpose of performing any audit, review, or attest services and dealing directly with any such auditing
firm; provided, that such appointment will be subject to shareholder ratification or decision in the case of the auditor
for our Dutch statutory annual accounts;
providing a medium for consideration of matters relating to any audit issues;
establishing procedures for the receipt, retention, and treatment of complaints received by us regarding accounting,
internal accounting controls, or auditing matters, and for the confidential, anonymous submission by our employees of
concerns regarding questionable accounting or auditing matters; and
reviewing and approving all related party transactions required to be disclosed under the U.S. federal securities laws.
The audit committee reviews and evaluates, at least annually, the performance of the audit committee and its members, including
compliance of the committee with its charter.
The audit committee has the sole authority to select, retain, oversee, and terminate its own counsel, consultants, and advisors and
approve the fees and other retention terms of such counsel, consultants, and advisors, as it deems appropriate.
The audit committee consists of Mr. Wallman (Chair), Mr. Blackford, and Mr. O’Boyle. We believe that the composition of the
audit committee complies with the applicable rules of the SEC and the Nasdaq Stock Market. Our board of directors has determined
that each of Mr. Wallman, Mr. Blackford, and Mr. O’Boyle is an “independent director” under the rules of the Nasdaq Stock Market,
an “audit committee financial expert,” as defined in SEC rules, and satisfies the financial sophistication requirements of the Nasdaq
Stock Market. Our board of directors also has determined that each of Mr. Wallman, Mr. Blackford, and Mr. O’Boyle meets the
more stringent independence requirements for audit committee members of Rule 10A-3(b)(1) under the Exchange Act and the
Listing Rules of the Nasdaq Stock Market and is independent under the Dutch Corporate Governance Code.
Compensation Committee
The primary responsibilities of our compensation committee, which are within the scope of the board of directors compensation
policy adopted by the general meeting of our shareholders, include:
(cid:120)
reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer
and other executive officers, evaluating the performance of these officers in light of those goals and objectives, and
setting compensation of these officers based on such evaluations;
(cid:120)
(cid:120) making recommendations to our board of directors with respect to incentive compensation and equity-based plans that
are subject to board and shareholder approval, administering or overseeing all of our incentive compensation and
equity-based plans, and discharging any responsibilities imposed on the committee by any of these plans;
reviewing and recommending to our board of directors any severance or similar termination payments proposed to be
made to our Chief Executive Officer and reviewing and approving any severance or similar termination payments
proposed to be made to any other executive officer;
reviewing and discussing with our Chief Executive Officer and reporting periodically to our board of directors plans
for development and corporate succession plans for our executive officers and other key employees, which include
transitional leadership in the event of an unplanned vacancy;
reviewing and discussing with management the “Compensation Discussion and Analysis” section of this report and
based on such discussions, recommending to our board of directors whether the “Compensation Discussion and
Analysis” section should be included in this report; and
(cid:120)
(cid:120)
146
(cid:120)
approving, or recommending to our board of directors for approval, the compensation programs, and the payouts for
all programs, applying to our non-executive directors, including reviewing the competitiveness of our non-executive
director compensation programs and reviewing the terms to make sure they are consistent with our board of directors
compensation policy adopted by the general meeting of our shareholders.
The compensation committee reviews and evaluates, at least annually, the performance of the compensation committee and its
members, including compliance of the committee with its charter.
The compensation committee has the sole authority to select, retain, oversee, and terminate its own counsel, consultants, and
advisors and approve the fees and other retention terms of such counsel, consultants, and advisors, as it deems appropriate. Before
selecting any such counsel, consultant or advisor, the compensation committee reviews and considers the independence of such
counsel, consultant or advisor, including any other services the counsel, consultant or other advisor is providing to our company and
management.
The compensation committee consists of Mr. Miclot (Chair), Mr.O’Boyle, and Ms. Weatherman. We believe that the composition of
our compensation committee complies with the applicable rules of the SEC and the Nasdaq Stock Market. Our board of directors
has determined that each of Mr. Miclot, Mr. O’Boyle and Ms. Weatherman is an “independent director” under the rules of the
Nasdaq Stock Market, meets the more stringent independence requirements for compensation committee members of Rule 10C-1
under the Exchange Act and the Listing Rules of the Nasdaq Stock Market and is independent under the Dutch Corporate
Governance Code. None of our executive officers has served as a member of the board of directors or compensation committee of
any entity that has an executive officer serving as a member of our board of directors.
Nominating, Corporate Governance and Compliance Committee
The primary responsibilities of our nominating, corporate governance and compliance committee include:
(cid:120)
reviewing and making recommendations to our board of directors regarding the size and composition of our board of
directors;
identifying, reviewing, and recommending nominees for election as directors;
(cid:120)
(cid:120) making recommendations to our board of directors regarding corporate governance matters and practices, including
(cid:120)
any revisions to our internal rules for our board of directors; and
overseeing our compliance efforts with respect to our legal, regulatory, and quality systems requirements and ethical
programs, including our code of business conduct, other than with respect to matters relating to our financial
statements and financial reporting obligations and any accounting, internal accounting controls or auditing matters,
which are within the purview of the audit committee.
The nominating, corporate governance and compliance committee reviews and evaluates, at least annually, the performance of the
nominating, corporate governance and compliance committee and its members, including compliance of the committee with its
charter.
The nominating, corporate governance and compliance committee has the sole authority to select, retain, oversee, and terminate its
own counsel, consultants, and advisors and approve the fees and other retention terms of such counsel, consultants, and advisors, as
it deems appropriate.
The nominating, corporate governance and compliance committee consists of Ms. Paul (Chair), Mr. Blackford, Mr. Stevens, and Ms.
Weatherman. We believe that the composition of our nominating, corporate governance and compliance committee complies under
the applicable rules of the Nasdaq Stock Market. Our board of directors has determined that each of Ms. Paul, Mr. Blackford, Mr.
Stevens, and Ms. Weatherman is an “independent director” under the rules of the Nasdaq Stock Market.
The nominating, corporate governance and compliance committee considers all candidates recommended by our shareholders
pursuant to specific minimum qualifications that the nominating, corporate governance and compliance committee believes must be
met by a recommended nominee for a position on our board of directors, which qualifications are described in the nominating,
corporate governance and compliance committee’s charter, a copy of which is available on the Investor Relations-Corporate
Information-Governance Documents & Charters section of our corporate website www.wright.com. We have made no material
changes to the procedures by which shareholders may recommend nominees to our board of directors as described in our most
recent proxy statement.
Strategic Transactions Committee
The primary responsibilities of our strategic transactions committee include:
(cid:120)
(cid:120)
reviewing and evaluating potential opportunities for strategic business combinations, acquisitions, mergers,
dispositions, divestitures, investments, and similar strategic transactions involving our company or any one or more of
our subsidiaries outside the ordinary course of our business that may arise from time to time;
approving on behalf of our board of directors any strategic transaction that may arise from time to time and is deemed
appropriate by the strategic transactions committee and involves total cash consideration of less than $5.0 million;
provided, however, that the strategic transactions committee is not authorized to approve any strategic transaction
147
involving the issuance of capital stock or in which any director, officer, or affiliate of our company has a material
interest;
(cid:120)
(cid:120)
(cid:120) making recommendations to our board of directors concerning approval of any strategic transactions that may arise
from time to time and are deemed appropriate by the strategic transactions committee and are beyond the authority of
the strategic transactions committee to approve;
reviewing integration efforts with respect to completed strategic transactions from time to time and making
recommendations to management and our board of directors, as appropriate;
assisting management in developing, implementing, and adhering to a strategic plan and direction for its activities with
respect to strategic transactions and making recommendations to management and our board of directors, as
appropriate;
reviewing and approving the settlement or compromise of any material litigation or claim against us; and
reviewing and evaluating potential opportunities for restructuring our business in response to completed strategic
transactions or otherwise in an effort to realize anticipated cost and expense savings for, and other benefits, to our
company and making recommendations to management and our board of directors, as appropriate.
(cid:120)
(cid:120)
The strategic transactions committee reviews and evaluates periodically the performance of the committee and its members,
including compliance of the committee with its charter.
The strategic transactions committee has the sole authority to select, retain, oversee, and terminate its own counsel, consultants, and
advisors and approve the fees and other retention terms of such counsel, consultants, and advisors, as it deems appropriate.
The strategic transactions committee consists of Ms. Weatherman (Chair), Mr. Stevens, and Mr. Wallman.
Code of Business Conduct
We have adopted a code of business conduct, which applies to all of our directors, officers, and employees. The code of business
conduct is available on the Investor Relations-Corporate Information-Governance Documents & Charters section of our corporate
website at www.wright.com. Any person may request a copy free of charge by writing to James A. Lightman, Senior Vice President,
General Counsel and Secretary, Wright Medical Group N.V., Prins Bernhardplein 200, 1097 JB Amsterdam, the Netherlands. We
intend to disclose on our corporate website any amendment to, or waiver from, a provision of our code of business conduct that
applies to directors and executive officers and that is required to be disclosed pursuant to the rules of the SEC and the Nasdaq Stock
Market.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, and all persons who beneficially own more than 10% of
our outstanding ordinary shares to file with the SEC initial reports of ownership and reports of changes in ownership of our ordinary
shares. Directors, executive officers, and greater than 10% beneficial owners also are required to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based on review of the copies of such reports and amendments to such reports
furnished to us with respect to the fiscal year ended December 31, 2017, and based on written representations by our directors and
executive officers, all required Section 16 reports under the Exchange Act for our directors, executive officers, and beneficial owners
of greater than 10% of our ordinary shares were filed on a timely basis during the fiscal year ended December 31, 2017.
Item 11.
Executive Compensation.
Compensation Discussion and Analysis
In this Compensation Discussion and Analysis (CD&A), we describe the key principles and approaches we use to determine
elements of compensation paid to, awarded to and earned by the following executive officers, whose compensation is set forth in the
Summary Compensation Table found under “-Executive Compensation Tables and Narratives-Summary Compensation
Information”:
(cid:120) Robert J. Palmisano, who serves as our President and Chief Executive Officer;
(cid:120) Lance A. Berry, who serves as our Senior Vice President and Chief Financial Officer;
(cid:120) Kevin D. Cordell, who serves as our President, U.S.;
(cid:120)
(cid:120)
Jason D. Asper, who serves as our Senior Vice President, Strategy and Corporate Development; and
James A. Lightman, who serves as our Senior Vice President, General Counsel and Secretary.
We refer to these executive officers as our “named executive officers” and our President and Chief Executive Officer as our “CEO”
in this CD&A. This CD&A should be read in conjunction with the accompanying compensation tables, corresponding notes and
narrative discussion, as they provide additional information and context to our compensation disclosures.
148
Executive Summary
One of our key executive compensation objectives is to link pay to performance by aligning the financial interests of our executives
with those of our shareholders and by emphasizing pay for performance in our compensation programs. We strive to accomplish this
objective primarily through our annual performance incentive plan (PIP), which compensates executives for achieving annual
corporate and divisional financial and other goals. For 2017, we had three corporate performance measures. While our 2017 net
sales increased 8% over 2016, they were below our targeted expectations as set forth in our corporate performance goals for 2017.
Our earnings before interest, taxes, depreciation and amortization, as adjusted, and free cash flow for 2017 also were below our
targeted expectations as set forth in our corporate performance goals for 2017.
The table below sets forth the three corporate performance measures for 2017, in each case, from continuing operations and as
adjusted for certain items, and our actual results and performance vis a vis these corporate objectives. Because our overall weighted
achievement rating was between minimum and threshold performance, there were no PIP payouts based on corporate performance.
This resulted in decreased total compensation for 2017 for our CEO and most of our other named executive officers compared to
2016.
2017 corporate performance measures and weighting
Global net sales (40%)
Adjusted EBITDA (30%)
Free cash flow (30%)
Overall weighted corporate performance achievement rating
Actual
$730.9 million
$108.9 million
$(24.0) million
2017 performance
Between minimum and threshold
Between threshold and target
Below minimum
Between minimum and threshold
Only two NEOs received bonuses based on 2017 performance: Mr. Cordell and Mr. Lightman. A portion of Mr. Cordell’s PIP
payout was based on the performance of our U.S. business and a portion of Mr. Lightman’s PIP payout was based on individual
performance. The table below sets forth the five U.S. business performance measures for 2017 and our actual results and
performance vis a vis these objectives.
2017 divisional performance measures and weighting
U.S. net sales (35%)
Adjusted EBITDA for U.S. business (30%)
Day-on-hand for U.S. business (15%)
Days sales outstanding for U.S. business (15%)
AUGMENT® Bone Graft revenue (5%)
Overall weighted achievement rating
2017 performance
Between minimum and threshold
Slightly below threshold
Between target and above target
Between threshold and target
Slightly below threshold
At threshold
As described in more detail below under “-Shareholder Outreach Efforts and 2017 Changes to Our Executive Compensation”, we
reviewed our executive compensation program last year to ensure that it not only motivates our executives, but also aligns with
shareholder interests and prevailing market practice. As a result of this review and based on feedback from investors and
shareholders, we implemented several new executive compensation practices. One of these changes was to change the mix of our
long-term incentives to incorporate performance-based awards. Our current long-term incentive mix now consists of one-third
performance share unit awards in addition to time-based stock options and time-based restricted stock unit awards. To further
emphasize the importance of future revenue growth, the performance share unit awards will vest only upon achievement of a
minimum net sales growth goal over a three-year performance period. We intend to continue to review our executive compensation
program to align the financial interests of our executives with those of our shareholders and emphasize pay for performance.
Shareholder Outreach Efforts and 2017 Changes to Our Executive Compensation
During 2017, we spent considerable time reviewing our executive compensation program to ensure that it not only motivates our
executives, but also aligns with shareholder interests and prevailing market practice. As part of this review, we reached out and
listened to shareholders. In 2017, we contacted our top 50 institutional shareholders, representing approximately 89% of our
outstanding ordinary shares and attended over 300 meetings for investors and interested investors. For the individual investor
meetings, our CEO, Chief Financial Officer and/or Chief Communications Officer attended. The agenda for these meetings
requested feedback from investors and shareholders and generally included: (1) a review of our operations and results to date; (2) a
summary of our strategic priorities and focus; and (3) a review of our compensation philosophy and its alignment with our strategic
direction. The three most common themes noted from investors and shareholders included incorporating the use of performance-
based equity awards, eliminating single trigger change-in-control provisions in our equity plan and holding an annual (versus
triennial) say-on-pay vote.
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As a result of this review and based on feedback from investors and shareholders, we implemented the following new executive
compensation practices during 2017:
Performance-Based Awards
Double Trigger Vesting
Minimum Vesting Periods
Clawback Policy
Annual Say-on-Pay Vote
We changed the mix of our executive long-term incentive awards to incorporate
performance-based awards. We moved to a mix comprised of one-third performance
share unit awards, one-third time-based stock options and one-third time-based
restricted stock unit awards. The performance share unit awards will vest upon
achievement of performance goals over a three-year performance period.
Our new equity and incentive plan (approved by shareholders in 2017) (referred to as
our 2017 equity plan) includes a double trigger change-in-control vesting provision.
Our 2017 equity plan requires all new equity awards to contain minimum vesting
periods of at least one year for performance-based awards and three years for time-
based full value awards granted to employees.
We adopted a clawback policy that authorizes recovery of gains from incentive
compensation, including equity awards, in the event of certain financial restatements.
We now provide our shareholders with an annual say-on-pay vote as opposed to our
prior practice of a triennial say-on-pay vote.
Compensation Highlights and Best Practices
Our compensation practices include many best pay practices that support our executive compensation objectives and principles, and
benefit our shareholders.
What We Do:
Pay for Performance
Bonus Caps
Performance Measure Mix
At-risk Pay
Equity-based Pay
LTI Grant Guidelines
Long-term Vesting
Clawback Policy
Stock Ownership Guidelines
Independent Committee and
Consultant
What We Don't Do:
No Repricing
No Excessive Perquisites
No Tax Gross-Ups
No Hedging or Pledging
No Dividends on Unvested Awards
We tie compensation directly to financial and other performance metrics. Our annual
incentive plan pays out only if certain levels of performance are met. In 2017, we
granted performance share units, which comprise of one-third of executives’ long-term
incentive and will be earned only if certain levels of performance are met.
We cap our PIP bonuses and new performance-based awards at 200% of target.
We use a mix of performance measures within our PIP.
A significant portion of our executive compensation is “performance-based” or “at
risk.”
A significant portion of our executive compensation is “equity-based” and in the form
of equity awards.
We have adopted and review annually long-term incentive guidelines for the grant of
equity awards.
Value received under equity awards is tied to three to four-year vesting and any value
from stock options is contingent upon long-term stock price performance. Our
performance-based awards vest only if certain levels of performance are achieved over
a three-year performance period.
Our clawback policy authorizes recovery of gains from incentive compensation in the
event of certain financial restatements.
We maintain stock ownership guidelines for all our executives.
We have an independent compensation committee which is advised by an independent
external compensation consultant.
We do not allow repricing or exchange of any equity awards without shareholder
approval.
We do not provide excessive perquisites to our executives.
We do not provide tax “gross-up” payments to our executives, other than customary
tax gross-up payments under our relocation policy and to our CEO under his
employment agreement.
We do not allow our employees to engage in hedging transactions, including short
sales, transactions in publicly traded options, such as puts, calls and other derivatives,
and pledging our securities.
We do not pay dividends on unvested equity awards.
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Say-on-Pay Vote
At our 2017 annual general meeting, our shareholders had the opportunity to vote on an advisory say-on-pay proposal. At this
meeting, almost 80% of the votes cast by our shareholders were in favor of our say-on-pay vote. Additionally, as required every six
years, our shareholders had the opportunity at our 2017 annual general meeting to provide an advisory vote on the frequency o f
future advisory say-on-pay votes. Our board of directors recommended, and our shareholders approved, an annual say-on-pay vote.
Some of the changes made to our executive compensation program in 2017, as described above, were made in response to
shareholder feedback, including our say-on-pay vote last year.
Compensation Objectives and Philosophies
Our executive compensation policies, plans and programs seek to enhance our financial performance, and thus shareholder value, by
aligning the financial interests of our executives with those of our shareholders and by emphasizing pay-for-performance.
Specifically, our executive compensation programs are designed to:
(cid:120) Reinforce our corporate mission, vision and values;
(cid:120) Attract and retain executives important to the success of our Company;
(cid:120) Align the interests of our executives with the interests of our shareholders; and
(cid:120) Reward executives for the achievement of Company performance objectives, the creation of shareholder value in the
short- and long-term, and their contributions to the success of our Company.
To achieve these objectives, although the compensation committee has not adopted any formal or informal policies or guidelines for
allocating compensation, the committee makes executive compensation decisions based on the following philosophies:
(cid:120) Base salary and total compensation levels are generally targeted to be within a reasonable range of the 67th percentile
of a group of similarly-sized peer companies. However, the specific competitiveness of any individual executive’s
salary and compensation will be determined considering factors like the executive’s experience, skills and capabilities,
contributions as a member of the executive management team, contributions to our overall performance, and the
sufficiency of total compensation potential to ensure the retention of an executive when considering the compensation
potential that may be available elsewhere.
(cid:120) At least two-thirds of the CEO’s compensation and half of other executives’ compensation opportunity should be in
the form of variable compensation that is tied to financial results and/or creation of shareholder value.
(cid:120) The portion of total compensation that is performance-based or at-risk should increase with an executive’s overall
responsibilities, job level, and compensation. However, compensation programs should not encourage excessive risk-
taking behavior among executives and should support our commitment to corporate compliance.
(cid:120) Primary emphasis should be placed on company performance as measured against goals approved by the
compensation committee rather than on individual performance.
(cid:120) At least half of the CEO’s compensation and one-third of other executives’ compensation opportunity should be in the
form of stock-based incentive awards.
Executive Compensation Components
The principal elements of our executive compensation program for 2017 were:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
base salary;
short-term cash incentive compensation;
long-term equity-based incentive compensation, in the form of stock options, restricted stock unit (RSU) awards and
performance share unit (PSU) awards; and
other compensation arrangements, such as benefits made generally available to our other employees, limited and
modest executive benefits and perquisites, and severance and change in control arrangements.
Except as otherwise described in this CD&A, the compensation committee has not adopted any formal or informal policies or
guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash
compensation, or among different forms of non-cash compensation. However, the compensation committee’s philosophy is to make
a greater percentage of an executive’s compensation performance-based, and therefore at risk, as the executive’s position changes
and responsibility increases given the influence more senior level executives generally have on Company performance. Thus,
individuals with greater roles and responsibilities associated with achieving our objectives should bear a greater proportion of the
risk that those goals are not achieved and should receive a greater proportion of the reward if objectives are met or surpassed.
Accordingly, our objective is that at least two-thirds of the CEO’s compensation and one-half of other executives’ compensation
opportunity be in the form of variable compensation that is tied to financial results or share price and that at least half of the CEO’s
compensation and one-third of other executives’ compensation opportunity be in the form of stock-based incentive awards.
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The overall mix of annual base salaries, target annual cash incentive awards and grant date fair value long-term incentive awards as
a percent of target total direct compensation for our CEO and other named executive officers as a group for 2017 is provided below.
The value of the long-term incentives represented is based on the grant date fair value of stock options, RSU awards and PSU
awards granted during 2017. Actual long-term incentive value will be based on long-term stock price performance and whether the
PSU performance goals are achieved. All other compensation is excluded from the table below.
Base Salary
Overview. We provide a base salary for our named executive officers that, unlike some of the other elements of our executive
compensation program, is not subject to company or individual performance risk. We recognize the need for most executives to
receive at least a portion of their total compensation in the form of a guaranteed base salary that is paid in cash regularly throughout
the year. Base salaries are established upon hiring an executive, and are subject to subsequent annual adjustments.
Setting Initial Salaries for New Executives. We initially fix base salaries for executives at a level we believe enables us to hire and
retain them in a competitive environment and to reward satisfactory individual performance and a satisfactory level of contribution
to our overall business objectives. During 2017, we hired Jason D. Asper as Senior Vice President, Strategy and Corporate
Development. In setting his initial base salary at $335,000, we considered his base salary at his prior employer and target market
positioning of companies in our peer group.
Annual Salary Increases. We review the base salaries of our named executive officers each year following the completion of our
prior year individual performance reviews. If appropriate, we increase base salaries to recognize annual increases in the cost of
living and superior individual performance and to ensure that our base salaries remain market competitive. In addition, with respect
to Mr. Palmisano, we also take into consideration his employment agreement which provides that we review his base salary at least
annually for any increase. We refer to annual base salary increases as a result of cost of living adjustments and individual
performance as “merit increases.” In addition, we may make additional upward adjustments to an executive’s base salary to
compensate the executive for assuming increased roles and responsibilities, to retain an executive at risk of recruitment by other
companies, and/or to bring an executive’s base salary closer to our target market positioning of companies in our peer group. We
refer to these base salary increases as “market adjustments.”
The 2017 base salary merit increases for our named executive officers ranged from 3.5% to 4.0% over their respective 2016 base
salaries. No upward market adjustments were made during 2017, except in the case of Mr. Berry who received an upward market
adjustment of approximately $20,000. We believe the base salaries of all of our named executive officers are within a reasonable
range of our targeted positioning among our peer group.
2017 Base Salaries. The table below sets forth the 2016 base salaries (which were effective April 1, 2016) of our named executive
officers, their 2017 base salaries effective April 1, 2017, and the percentage increase compared to their 2016 base salaries:
Name
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
2016
base salary
($)
$921,648
413,400
454,740
N/A
388,024
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2017
base salary
($)
$958,514
450,000
470,656
335,000
403,545
2017 base salary %
increase compared to
2016 base salary
4.0%
8.9%
3.5%
N/A
4.0%
Short-Term Cash Incentive Compensation
Our short-term cash incentive compensation is paid as an annual cash bonus under our PIP and is intended to compensate executives
for achieving annual corporate financial performance goals and, in some cases, divisional financial and individual performance
goals. The PIP provides broad discretion to the compensation committee in interpreting and administering the plan. All 2017 short-
term cash incentive bonuses to our named executive officers are expected to be paid out in early March 2018 and were dependent
upon executives’ continued service through the end of 2017.
Target Bonus Percentages. Target short-term cash incentive bonuses for 2017 for each executive were based on a percentage of base
salary and were as follows for each named executive officer:
Name
Percentage of base salary
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
100%
65%
60%
45%
50%
The 2017 target bonus percentages for our named executive officers did not change from their 2016 levels for those executives who
were executives in 2016. Based on an executive compensation analysis by our compensation consultant, we believe the target bonus
percentages for our named executive officers are generally aligned with our target market positioning within our peer group.
Performance Goal Mix. 2017 bonuses to our named executive officers were based upon achievement of corporate performance
goals for all executives, as well as divisional performance goals for Mr. Cordell, and individual performance goals for Mr. Lightman.
Named executive officer
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
Percentage based upon
corporate
performance goals
100%
100%
40%
100%
80%
Percentage based upon
divisional
performance goals
0%
0%
60%
0%
0%
Percentage based upon
individual
performance goals
0%
0%
0%
0%
20%
Corporate Performance Goals. For 2017, we had three corporate performance measures as set forth in the table below. These three
measures were selected because they were determined to be the three most important indicators of our financial performance for
2017 as evaluated by management and analysts.
2017 corporate performance metric
Global net sales (1)
Adjusted EBITDA (2)
Free cash flow (3)
_________________
Weighting
40%
30%
30%
(1)
(2)
(3)
This performance measure was calculated using a non-GAAP financial measure, which we believe provides meaningful supplemental
information regarding our core operational performance. The net sales goal and actual results were calculated based on a foreign
currency exchange planning rate to adjust for any impact of foreign currency on underlying performance.
This performance measure was calculated using a non-GAAP financial measure, which we believe provides meaningful supplemental
information regarding our core operational performance. Adjusted EBITDA from continuing operations means net loss from continuing
operations plus charges for interest, income taxes, depreciation and amortization expenses, non-cash share-based compensation expense
and non-operating income and expense. Additionally, adjusted EBITDA from continuing operations excluded transaction and transition
costs associated with acquisitions and divestitures; tax benefit related to realizability of net operating losses; and bonus compensation.
This performance measure was calculated using a non-GAAP financial measure, which we believe provides meaningful supplemental
information regarding our core operational performance. Adjusted free cash flow means net cash flow provided by operating activities
(excluding net cash flow from certain discontinued operations, AUGMENT payment milestone and foreign currency gains and losses)
less capital expenditures.
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The percentage of the target bonus earned by bonus objective was based on the following performance levels and an overall
weighted average corporate payout:
Performance level
Minimum
Threshold (50% payout)
Target (100% payout)
Above target (150% payout)
High (200% payout)
Percent of target bonus earned
0%
50.1% to 99.9%
100%
100.1% to 150%
150.1% to 200%
In setting the threshold, target, above target, and maximum performance achievement levels, we considered past performance,
market conditions, and the financial, strategic, and operational plans presented by management. When setting the target
performance levels, we sought to ensure that at- or above-market performance was the goal. For above-target performance levels,
the achievement levels required “stretch” performance by the management team to achieve this level of performance. At the
threshold level, targets would be set on a steeper slope than at the above target/maximum categories, so that missed target
performance would result in more rapidly declining bonus opportunity.
The performance level of each corporate performance measure is set forth in the table below.
Performance level
Minimum
Threshold (50% payout)
Target (100% payout)
Above target (150% payout)
High (200% payout)
Global net sales
$717.2 million
$744.7 million
$779.4 million
$799.9 million
$827.5 million
Adjusted EBITDA
$89.7 million
$101.0 million
$112.3 million
$136.0 million
$160.1 million
Free cash flow
$(5.0) million
$0.0 million
$9.05 million
$27.7 million
$42.1 million
The table below sets forth our actual performance for each corporate performance measure and the overall weighted corporate
performance achievement rating, which was between minimum and threshold, resulting in a zero payout for our corporate
performance measures.
2017 corporate performance measures and weighting
Global net sales (40%)
Adjusted EBITDA (30%)
Free cash flow (30%)
Overall weighted achievement rating
Actual
$730.9 million
$108.9 million
$(24.0) million
Payout
Between minimum and threshold
Between threshold and target
Below minimum
Between minimum and threshold
Divisional Performance Goals. As President, U.S., Mr. Cordell’s 2017 PIP bonus was based 40% on corporate performance goals
and 60% on U.S. business performance goals. The portion of Mr. Cordell’s 2017 PIP bonus that was tied to the performance of the
U.S. business was based on five divisional performance measures. The table below sets forth the five U.S. divisional performance
measures and reflects how that business unit performed in 2017 and the overall weighted average divisional performance
achievement rating. Mr. Cordell’s 2017 PIP bonus reflected an overall weighted average achievement rating for the U.S. business
performance goals of 50% of target.
2017 divisional performance measures and weighting
U.S. net sales (35%)
Adjusted EBITDA for U.S. business (30%)
Days-on-hand for U.S. business (15%)
Days sales outstanding for U.S. business (15%)
AUGMENT® Bone Graft revenue (5%)
Overall weighted achievement rating
2017 performance
Between minimum and threshold
Slightly below threshold
Between target and above target
Between threshold and target
Slightly below threshold
At threshold
The specific performance levels for our U.S. divisional performance measures are maintained as proprietary and confidential. We
believe that disclosure of these specific performance levels would represent competitive harm to us as these divisional goals and
results are not publicly disclosed and are competitively sensitive. For each divisional performance measure, the target goal reflects
the annual financial business plan goal set for the division. Based on historical performance, the compensation committee believes
the attainment of the target performance level, while uncertain, could be reasonably anticipated. Threshold goals represent the
minimum level of performance necessary for that performance measure and the compensation committee believes the threshold
goals are likely to be achieved. Maximum goals represent levels of performance at which the compensation committee determines a
payout of 200% of target would be appropriate. The compensation committee believes that the maximum goals established for each
division performance measure are more aggressive goals.
Individual Performance Goals. To foster cooperation and communication among executives, the compensation committee places
primary emphasis on overall corporate and divisional performance goals rather than on individual performance goals. For named
executive officers, at least 80% of their 2017 annual PIP bonuses were determined based on the achievement of corporate or
divisional performance goals and only 20% or less were based on achievement of individual performance goals. The individual
performance goals used to determine annual PIP bonuses were management by objectives, known internally as MBOs. MBOs are
generally two to three written, specific and measurable objectives agreed to and approved by the executive, CEO and compensation
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committee in the beginning of the year. The only named executive officer with MBOs for 2017 was Mr. Lightman. His MBOs for
2017 related to our insurance carrier litigation and customer satisfaction and his MBO achievement rating was 75%.
2017 Actual PIP Bonuses. The table below sets for the 2017 PIP bonuses for all named executive officers, which bonuses are
anticipated to be paid in early March 2018:
Named executive officer
2017 PIP bonus
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
$
0
0
84,718
0
30,266
PIP Performance Goals for 2018. In February 2017, the compensation committee approved PIP performance goals for 2018. The
2018 target bonus percentages for our named executive officers did not change from their 2017 levels. Consistent with the design
for 2017 plan, the annual bonus for our CEO is based 100% on achievement of corporate performance goals, with no individual
performance components. Bonuses for our other named executive officers are based 100% on achievement of corporate
performance goals for Mr. Berry, 40% on achievement of corporate performance goals and 60% on achievement of divisional
performance goals for Mr. Cordell, and 80% on achievement of corporate performance goals and 20% on achievement of individual
goals for Messrs. Asper and Lightman. The corporate performance measures for 2018 are based on net sales, adjusted EBITDA from
continuing operations, and free cash flow. The divisional performance goals for Mr. Cordell are similar to the goals for 2017, except
that there will be no AUGMENT Bone Graft net sales goal.
Long-Term Equity-Based Incentive Compensation
Generally. The compensation committee’s primary objectives with respect to long-term equity-based incentives are to align the
interests of our executives with the long-term interests of our shareholders, promote stock ownership, and create significant
incentives for executive retention. Long-term equity-based incentives typically comprise a significant portion of each named
executive officer’s compensation package, consistent with our executive compensation philosophy.
Types of Equity Grants. Under our long-term incentive grant guidelines, our board of directors, on recommendation of the
compensation committee, generally grants two types of equity-based incentive awards to our named executive officers: annual
performance recognition grants and new hire talent acquisition grants. On limited occasion, we may make special recognition grants
or discretionary grants to executive officers for retention or other purposes. Such grants may vest based on the passage of time
and/or the achievement of certain performance goals. During 2017, annual performance recognition grants and new hire talent
acquisition grants were made to one or more of our named executive officers, as described in more detail under “-2017 Equity
Awards.”
Annual performance recognition grants are discretionary annual grants that are made during mid-year to give the compensation
committee another formal opportunity during the year to review executive compensation and recognize executive and other key
employee performance. The recipients and size of the annual performance recognition grants are determined based on our long-term
incentive grant guidelines, which we review annually to ensure continued alignment with our target positioning. Under our long-
term incentive grant guidelines for annual performance recognition grants, named executive officers received a certain percentage of
their respective base salaries in stock options, RSU awards and PSU awards. Consistent with the principle that the interests of our
executives should be aligned with those of our shareholders and that the portion of an executive’s total compensation that varies
with performance and is at risk should increase with the executive’s level of responsibility, incentive grants, expressed as a
percentage of base salary and dollar values, increase as an executive’s level of responsibility increases.
The table below describes our long-term incentive grant guidelines for annual performance recognition grants that applied to our
named executive officers for 2017. Mr. Asper did not receive an annual performance recognition grant since he joined Wright in
August 2017.
Named executive officer
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
James A. Lightman
Incentive grant guideline
expressed as % of base salary
400%
200%
175%
125%
$
Dollar value of
incentive grant guideline as of
July 25, 2017 grant date ($)
3,834,056
900,000
823,648
504,431
Once the target total long-term equity value was determined for each executive based on the executive’s relevant percentage of base
salary, one-third of the value was provided in stock options, one-third was provided in RSU awards and one-third was provided in
PSU awards. The reasons why we use stock options, RSU awards and PSU awards are described below under “-Stock Options,” “-
RSU Awards” and “-PSU Awards.” The number of stock options, RSU awards and target PSU awards is based on the Black-Scholes
value of our ordinary shares as determined on the third business day prior to the corporate approval of the award and using an
average closing price of our ordinary shares over the most recent 10-trading days.
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Talent acquisition grants are used for new hires. These new hire equity grants are considered and approved as part of the executive’s
compensation package at the time of hire (with the grant date and exercise price delayed until the hire date). As with our annual
performance recognition grants, the size of our talent acquisition grants is determined by dollar amount (as opposed to number of
underlying shares), and under our long-term incentive grant guidelines, is generally two times the long-term incentive grant
guidelines for annual performance recognition grants, as recommended by our compensation consultant. We recognize that higher
initial grants often are necessary to attract a new executive, especially one who may have accumulated a substantial amount of
equity-based long-term incentive awards or other equity at a previous employer that would typically be forfeited upon acceptance of
employment with us. In some cases, we may need to further increase a talent acquisition grant to attract an executive. Mr. Asper was
the only named executive officer to receive new hire talent acquisition grants during 2017. His incentive grant guideline expressed
as a percentage of base salary is 100% and consistent with our practice for new hire talent acquisition grants was two times the long-
term incentive grant guideline for annual performance recognition grants, resulting in a new hire talent acquisition grant value equal
to $670,000.
Stock Options. Historically, we have granted stock options to our named executive officers, as well as other key employees. We
believe that options effectively incentivize employees to maximize company performance, as the value of awards is directly tied to
an appreciation in the value of our ordinary shares. They also provide an effective retention mechanism because of vesting
provisions. An important objective of our long-term incentive program is to strengthen the relationship between the long-term value
of our ordinary shares and the potential financial gain for employees. Stock options provide recipients with the opportunity to
purchase our ordinary shares at a price fixed on the grant date regardless of future market price. The vesting of our stock options is
generally time-based, with 25% of the shares underlying the stock option typically vesting on the one-year anniversary of the grant
date and the remaining 75% of the underlying shares vesting over a three-year period thereafter in 36 nearly equal monthly
installments. Our policy is to grant options only with an exercise price equal to or more than the fair market value of an ordinary
share on the grant date.
Because stock options become valuable only if the share price increases above the exercise price and the option holder remains
employed during the period required for the option to vest, they provide an incentive for an executive to remain employed. In
addition, stock options link a portion of an employee’s compensation to the interests of our shareholders by providing an incentive to
achieve corporate goals and increase the market price of our ordinary shares over the four-year vesting period.
RSU Awards. RSU awards are intended to retain key employees, including named executive officers, through vesting periods. RSU
awards provide the opportunity for capital accumulation and more predictable long-term incentive value than stock options. All of
our RSU awards are a commitment by us to issue ordinary shares at the time the RSU award vests. The specific terms of vesting of
an RSU award depends on whether the award is an annual performance recognition grant or new hire talent acquisition grant.
Annual performance recognition grants of RSU awards are made mid-year and vest in four annual installments on August 15th of
each year. New hire talent acquisition grants of RSU awards vest in a similar manner, except that the first installment is often pro-
rated and vests in four annual installments beginning on either August 15, November 15, March 1st or May 15th depending on the
grant date. In all cases, the first vesting date is at least one year after the grant date. We changed our RSU award vesting in 2017
upon the adoption of our 2017 equity plan, which contains a minimum one-year vesting provision.
PSU Awards. PSU awards are intended to retain key employees, including named executive officers, through the three-year
performance periods. PSU awards are paid out in Wright ordinary shares following completion of a three-year performance period
if certain performance goals are achieved. Because the PSU award grants are made in July each year, they are based on three-year
performance periods beginning on the first day of our third fiscal quarter and ending on the last day of our second fiscal quarter of
the third year thereafter.
At the beginning of the first year in the three-year period, the compensation committee establishes performance measures,
weightings, goals and performance adjustment events, if any, for the entire three-year performance period, as well as thresholds,
targets, and maximums. Factors we consider when establishing the performance goals for the three-year period include our prior
year and year-to-date financial business results and long-term strategic plan outlook, our competitive situation and anticipated state
of our business, and any anticipated business opportunities. At the end of the three-year performance period, the compensation
committee will certify performance against the performance goals, including the applicability of any performance adjustment events,
and a corresponding payout, which is expressed as a percent of target. Actual payouts for the PSU awards can range from 0% (if the
threshold levels of performance are not met) to 200% of the target award (if maximum levels of performance are met).
While the performance measure is net sales growth, the specific performance goal for the three-year PSU awards granted in 2017 is
maintained by us as proprietary and confidential. We believe that disclosure of this specific performance goal would represent
competitive harm to us. Based on historical performance, we believe the attainment of the target performance level, while uncertain,
could be reasonably anticipated. The threshold goal represents the minimum level of performance necessary for there to be a payout
and we believe is likely to be achieved. The maximum goal represents the performance at which a payout is 200% of the target
award and represents the level of performance of which we believe a payout of 200% would be appropriate. We believe that the
maximum goal established for the performance measure is much more aggressive than the target goal.
Since 2017 was the first year that we granted PSU awards and since the performance period was three years, no payouts for PSU
awards were determined during 2017.
156
2017 Equity Awards. The table below sets forth the number of stock options, RSU awards and target PSU awards granted to each of
our named executive officers in 2017. As mentioned earlier, Mr. Asper received new hire talent acquisition grants, which are two
times the long-term incentive grant guideline for annual performance recognition grants and do not include PSU awards.
Named executive officer
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
Stock
options (#)
RSU
awards (#)
PSU awards
(assuming target
performance) (#)
137,373
32,247
29,511
35,303
18,074
46,533
10,923
9,996
12,321
6,122
46,533
10,923
9,996
N/A
6,122
Additional information concerning the long-term incentive compensation information for our named executive officers for 2017 is
included in the Summary Compensation Table and Grants of Plan-Based Awards Table under the heading “Executive Compensation
Tables and Narratives.”
All Other Compensation
Retirement Benefits. In 2017, our named executive officers had the opportunity to participate in retirement plans maintained by our
operating subsidiaries, including a 401(k) plan, on the same basis as our other employees. We believe these plans provide an
opportunity for our executives to plan for and meet their retirement savings needs. Except for these plans, we do not provide
pension arrangements or post-retirement health coverage for our employees, including named executive officers. We also do not
provide any nonqualified defined contribution or other deferred compensation plans.
Relocation Benefits. We provide our executive officers with customary relocation assistance benefits if they relocate at our request.
Tax protection may be provided in these situations to avoid an executive being penalized from a tax perspective for a relocation on
behalf of our company. During 2017, both Messrs. Asper and Lightman received relocation benefits. The value of these benefits
can be found under “Executive Compensation Tables and Narratives-Summary Compensation Information-All Other Compensation
for 2017-Supplemental.”
Perquisites and Other Benefits. We provide our executive officers with modest perquisites to attract and retain them. The
perquisites provided to our named executive officers during 2017 included $1,000 for certain personal insurance premiums and up to
$5,000 reimbursement for financial and tax planning and tax preparation. In addition, we are required to provide our CEO additional
perquisites under the terms of his employment agreement, which we agreed upon at the time of his initial hiring by legacy Wright to
attract him to our company. These additional perquisites include additional reimbursement for financial and tax planning and tax
preparation, a monthly allowance of $7,500 for housing and automobile expenses, reimbursement for reasonable travel expenses
between Memphis, Tennessee and his residences, and an annual physical examination. To the extent that the reimbursements for his
housing and automobile expenses and travel expenses between Memphis, Tennessee and his residences are not deductible by
Mr. Palmisano for income tax purposes, such amounts are “grossed-up” for income tax purposes so that the reimbursed items will be
received net of any deduction for income and payroll taxes. We agreed to this gross-up provision at the time of his initial hiring by
legacy Wright to attract him to our company and ease the financial burden on him to travel between Memphis, Tennessee and his
residences.
In addition, in 2017, we provided certain additional benefits to Mr. Asper to encourage him to accept an offer of employment with
us, including a sign-on bonus, guaranteed pro rata annual incentive bonus for 2017 and reimbursement for reasonable travel
expenses between Memphis, Tennessee and his current residence in Chicago, Illinois. The sign-on bonus must be paid back by
Mr. Asper if he voluntarily terminates his employment with Wright prior to the two-year anniversary of his hire date.
We believe perquisites and certain other benefits are an important part of our overall compensation package and help us accomplish
our goal of attracting, retaining, and rewarding top executive talent. The value of all of the perquisites and other compensation
provided to our named executive officers for 2017 can be found under “Executive Compensation Tables and Narratives- Summary
Compensation Information-All Other Compensation for 2017-Supplemental.”
Change in Control and Post-Termination Severance Arrangements
Change in Control Arrangements. To encourage continuity, stability and retention when considering the potential disruptive impact
of an actual or potential corporate transaction, we have established change in control arrangements, including provisions in our
equity-based compensation plans, separation pay agreements with our executives, and our employment agreement with our CEO,
which are described in more detail below and under “Executive Compensation Tables and Narratives-Potential Payments Upon a
Termination or Change in Control.” These arrangements are designed to incentivize our executives to remain with our company in
the event of a change in control or potential change in control.
Under the terms of our prior equity plan and the individual award documents provided to recipients of awards under that plan, all
stock options and RSU awards will become immediately vested (and, in the case of options, exercisable) upon the completion of a
change in control of our company. Thus, the immediate vesting of stock options and RSU awards is triggered by the change in
control, itself, and thus is known as a “single trigger” change in control arrangement. The intent of our prior “single trigger” equity
acceleration change in control arrangements was to provide retention incentives during what can often be an uncertain time for
157
employees. They also provided executives with additional monetary motivation to focus on and complete a transaction that our
board of directors believes is in the best interests of our company and shareholders rather than to seek new employment
opportunities. The immediate acceleration of equity-based awards also aligned the interests of our executives and other employees
with those of our shareholders by allowing our executives to participate fully in the benefits of a change in control as to all of their
equity. If an executive were to leave before the completion of the change in control, unvested awards held by the executive would
terminate.
However, we recognized that our single trigger change in control arrangements did not align with current market practice and the
desires of many of our shareholders. Accordingly, in connection with our new 2017 equity plan that our shareholders approved at
our 2017 annual general meeting, we implemented a new “double trigger” change in control provision with respect to equity awards.
Under this new provision, equity awards granted under the 2017 equity plan will not vest in connection with a change in control
unless there is a termination event or the equity awards are not continued, assumed or substituted with like awards by the successor.
The equity awards granted to our named executive officers during 2017 were granted under the 2017 equity plan and, therefore, are
subject to the new “double trigger” change in control provision.
In addition to the change in control provisions in our 2017 equity plan, we have entered into an employment agreement with our
CEO and separation pay agreements with our other named executive officers and other officers which provide certain payments and
benefits in the event of a termination of employment in connection with a change in control. These “double trigger” change in
control protections are intended to induce executives to accept or continue employment with our company, provide consideration to
executives for certain restrictive covenants that apply following termination of employment, and provide continuity of management
in connection with a threatened or actual change in control transaction. If an executive’s employment is terminated without “cause”
or by the executive for “good reason” (as such terms are defined in the agreements) within 12 months (24 months for our CEO)
following a change in control, the executive will be entitled to receive a severance payment and certain benefits. These
arrangements and a quantification of the payment and benefits provided under these arrangements are described in more detail under
“Executive Compensation Tables and Narratives-Potential Payments Upon a Termination or Change in Control.”
We believe our change in control arrangements are an important part of our executive compensation program in part because they
mitigate some of the risk for executives working in a smaller company where there is a meaningful likelihood that the company may
be acquired. Change in control benefits are intended to attract and retain qualified executives who, absent these arrangements and in
anticipation of a possible change in control of our company, might consider seeking employment alternatives to be less risky than
remaining with our company through the transaction. We believe that relative to our company’s overall value, our potential change
in control benefits are relatively small and are aligned with current peer company practices.
Other Severance Arrangements. Each of our named executive officers is entitled to receive severance benefits upon certain other
qualifying terminations of employment, other than a change in control, pursuant to the provisions of an employment agreement for
our CEO and separation pay agreements for our other named executive officers. These severance arrangements are intended to
induce the executives to accept or continue employment with our company and are primarily intended to retain our executives and
provide consideration to those executives for certain restrictive covenants that apply following a termination of employment.
Additionally, we entered into these agreements because they provide us valuable protection by subjecting the executives to
restrictive covenants that prohibit the disclosure of confidential information during and following their employment and limit their
ability to engage in competition with us or otherwise interfere with our business relationships following their termination of
employment.
For more information on our severance arrangements with our named executive officers, see the discussions below under
“-Executive Compensation Tables and Narratives-Potential Payments Upon a Termination or Change in Control.”
Stock Ownership Guidelines
We have established stock ownership guidelines that are intended to further align the interests of our executives with those of our
shareholders. Stock ownership targets for each of our executive officers have been set at that number of our ordinary shares with a
value equal to a multiple of the executive’s annual base salary. Each of the executive officers has five years from the date of hire or,
if the ownership multiple has increased during his or her tenure, five years from the date established in connection with such
increase to reach his or her stock ownership targets. Until his or her stock ownership target is achieved, each executive is required to
retain an amount equal to 75% of the net shares received as a result of the exercise of stock options or the vesting of RSU awards. If
there is a significant decline in the price of our ordinary shares that causes executives to be out of compliance, such executives will
be subject to the 75% retention ratio, but will not be required to purchase additional shares to meet the applicable targets. Our
compensation committee reports on compliance with the guidelines at least annually to our board of directors. Each of our named
executive officers is in compliance with our stock ownership guidelines, taking to account the five-year compliance deadline for new
hires.
Named executive officer
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
Stock ownership target as a
multiple of
base salary
4x
2x
2x
2x
2x
In
compliance (yes/no)
Yes
Yes
Yes
Yes
Yes
158
Anti-Hedging and Pledging
Our code of conduct on insider trading and confidentiality prohibits our executive officers from engaging in hedging transactions,
such as short sales, transactions in publicly traded options, such as puts, calls and other derivatives, and pledging our ordinary
shares.
Clawback Policy
During 2017, we adopted a clawback policy that authorizes recovery of gains from incentive compensation, including equity awards,
in the event of certain financial restatements. In addition, under our equity plans, if an executive is determined by the compensation
committee to have taken action that would constitute “cause” or an “adverse action,” as those terms are defined in the plan, during or
within one year after the termination of the executive’s employment, all rights of the executive under the plan and any agreements
evidencing an equity award then held by the executive will terminate and be forfeited. In addition, the compensation committee
may require the executive to surrender and return to us any shares received, and/or to disgorge any profits or any other economic
value made or realized by the executive in connection with any awards or any shares issued upon the exercise or vesting of any
awards during or within one year after the termination of the executive’s employment or other service. Mr. Palmisano’s employment
agreement also contains a clawback provision in the event of certain financial restatements.
Risk Assessment
As a result of our annual assessment on risk in our compensation programs, we concluded that our compensation policies, practices,
and programs and related compensation governance structure, work together in a manner so as to encourage our executives (and
other employees) to pursue growth strategies that emphasize shareholder value creation, but not to take unnecessary or excessive
risks that could threaten the value of our company. For more information on this assessment, see the discussions below under
“-Executive Compensation Tables and Narratives-Risk Assessment of Compensation Policies, Practices and Programs.”
Executive Compensation Decision Making
Role of Compensation Committee and Board. The responsibilities of the compensation committee include reviewing and approving
corporate goals and objectives relevant to the compensation of our executive officers, evaluating each executive’s performance in
light of those goals and objectives and, either as a committee or together with the other directors, determining and approving each
executive’s compensation, including performance-based compensation based on these evaluations (and, in the case of executives,
other than the CEO, the CEO’s evaluation of such executive’s individual performance). Consistent with our shareholder-approved
board of directors compensation policy, the compensation package for our CEO, who also serves as executive director of our
company, is determined by our non-executive directors, based upon recommendations from the compensation committee.
In setting or recommending executive compensation for our named executive officers, the compensation committee considers the
following primary factors:
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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each executive’s position within the company and the level of responsibility;
the ability of the executive to impact key business initiatives;
the executive’s individual experience and qualifications;
compensation paid to executives of comparable positions by companies similar to us;
company performance, as compared to specific pre-established objectives;
individual performance, generally and as compared to specific pre-established objectives;
the executive’s current and historical compensation levels;
advancement potential and succession planning considerations;
an assessment of the risk that the executive would leave us and the harm to our business initiatives if the executive
left;
the retention value of executive equity holdings, including outstanding stock options, RSU awards and PSU awards;
the dilutive effect on the interests of our shareholders of long-term equity-based incentive awards; and
anticipated share-based compensation expense as determined under applicable accounting rules.
The compensation committee also considers the recommendations of our CEO with respect to executive compensation to be paid to
other executives. In making its final decision regarding the form and amount of compensation to be paid to our named executive
officers (other than the CEO), the compensation committee considers and gives great weight to the recommendations of the CEO
recognizing that due to his reporting and otherwise close relationship with each executive, the CEO often is in a better position than
the compensation committee to evaluate the performance of each executive (other than himself). In making its final decision
regarding the form and amount of compensation to be paid to the CEO, the compensation committee considers the results of the
CEO’s self-review and his individual annual performance review by the compensation committee, benchmarking data gathered by
our compensation consultant, and the recommendations of our non-executive directors.
Role of Management. Three members of our executive team play a role in our executive compensation process and regularly attend
meetings of the compensation committee - the CEO, Senior Vice President, Human Resources, and Senior Vice President, General
Counsel and Secretary. The CEO assists the compensation committee primarily by making formal recommendations regarding the
amount and type of compensation to be paid to executives (other than himself). In making these recommendations, the CEO
considers many of the same factors listed above that the compensation committee considers in setting executive compensation,
including in particular the results of each executive’s annual performance review and the executive’s achievement of his or her
159
individual management performance objectives established in connection with our PIP, described below. The Senior Vice President,
Human Resources assists the compensation committee primarily by gathering compensation related data regarding executives and
coordinating the exchange of this information and other executive compensation information among the members of the
compensation committee, the compensation committee’s compensation consultant and management in anticipation of compensation
committee meetings. The Senior Vice President, General Counsel and Secretary assists the compensation committee primarily by
ensuring compliance with legal and regulatory requirements and educating the committee on executive compensation trends and best
practices from a corporate governance perspective and acting as corporate secretary of meetings. Final deliberations and decisions
regarding the compensation to be paid to each executive, however, are made by our board of directors or compensation committee
without the presence of the executive.
Role of Consultant. The compensation committee has retained the services of Mercer (US) Inc. (Mercer) to provide executive
compensation advice. Mercer’s engagement by the compensation committee includes reviewing and advising on all significant
aspects of executive compensation, as well as non-executive director compensation. This includes base salaries, short-term cash
incentives and long-term equity incentives for executives. At the request of the compensation committee, each year, Mercer
recommends a peer group of companies, collects relevant market data from these companies to allow the compensation committee to
compare elements of our compensation program to those of our peers, provides information on executive compensation trends and
implications for us and makes other recommendations to the compensation committee regarding certain aspects of our executive
compensation program. Our management, principally the Senior Vice President, Human Resources and the chair of the
compensation committee, regularly consult with a representative of Mercer before compensation committee meetings. A
representative of Mercer regularly attends meetings of the compensation committee. In making its final decision regarding the form
and amount of compensation to be paid to executives, the compensation committee considers the information gathered by and
recommendations of Mercer. The compensation committee values Mercer’s benchmarking information and input regarding best
practices and trends in executive compensation matters.
Use of Peer Group and Other Market Data. To help determine appropriate levels of compensation for certain elements of our
executive compensation program, the compensation committee reviews annually the compensation levels of our named executive
officers and other executives against the compensation levels of comparable positions with companies similar to us in terms of
industry, revenues, products and operations. The elements of our executive compensation program to which the compensation
committee “benchmarks” or uses to base or justify a compensation decision or to structure a framework for compensating executives
include base salary, short-term cash incentive opportunity, and long-term equity incentives. With respect to other elements of our
executive compensation program, such as perquisites, severance, and change in control arrangements, the compensation committee
benchmarks these elements on a periodic or as needed basis and in some cases uses peer group or market data more as a “market
check” after determining the compensation on some other basis. The compensation committee believes that compensation paid by
peer group companies is more representative of the compensation required to attract, retain, and motivate our executive talent than
broader survey data and that compensation paid by peer companies that are in the same industry, with similar products and
operations, and with revenues in a range similar to us, generally provides more relevant comparisons.
In 2016, Mercer worked with the compensation committee to identify a peer group of 13 companies. Companies in the peer group
are public companies in the health care equipment and supplies business with products and operations similar to ours and that had
annual revenues generally within a range of our annual revenues. The peer group included the following companies:
The Cooper Companies, Inc.
Globus Medical, Inc.
Greatbatch, Inc.
Haemonetics Corporation
Integra LifeSciences Holdings Corporation
Masimo Corporation
Merit Medical Systems, Inc.
Natus Medical Incorporated
NxStage Medical, Inc.
NuVasive, Inc.
ResMed Inc.
Insulet Corporation
Abiomed, Inc.
The table below sets forth certain revenue and other financial information as of a date available prior to the date Mercer used to
compile the proposed peer group and market capitalization information as of May 31, 2016 regarding the peer group that the
compensation committee used in connection with its recommendations and decisions regarding executive compensation for 2017.
25th percentile
50th percentile
75th percentile
Wright's percentile rank
Trailing 12-month
revenue
(in millions)
$374
647
917
52%
One-year
revenue growth
6%
7%
12%
N/A
Three-year
revenue growth
24%
29%
39%
N/A
Trailing
12-month EBIT
$58
107
137
N/A
Market
capitalization
(in millions)
$1,217
2,315
2,770
45%
In reviewing benchmarking data, the compensation committee recognizes that benchmarking may not always be appropriate as a
stand-alone tool for setting compensation due to aspects of our business and objectives that may be unique to us. Nevertheless, the
compensation committee believes that gathering this information is an important part of its compensation-related decision-making
process. However, where a sufficient basis for comparison does not exist between the peer group data and an executive, the
compensation committee gives less weight to the peer group data. For example, relative compensation benchmarking analysis does
not consider individual specific performance or experience or other case-by-case factors that may be relevant in hiring or retaining a
particular executive.
160
Market Positioning. In general, we target base salary and total compensation levels to be within a reasonable range of the 67th
percentile of our peer group. However, the specific competitiveness of any individual executive’s pay will be determined
considering factors like the executive’s experience, skills and capabilities, contributions as a member of the executive management
team, and contributions to our overall performance. The compensation committee will also consider the sufficiency of total
compensation potential and the structure of pay plans to ensure the hiring or retention of an executive when considering the
compensation potential that may be available elsewhere.
Tax Deductibility of Compensation
In designing our executive compensation program, we consider the deductibility of executive compensation under Code Section
162(m), which provides that we may not deduct more than $1 million (referred to as the $1 Million Cap) paid to certain executive
officers. During 2017, there was an exception for “performance-based” compensation meeting certain requirements. Our equity
plans incorporate provisions intended to satisfy the requirements for awarding “performance-based” compensation as defined in
Code Section 162(m) under the plan. Other than stock options and our PSU awards, we did not grant any other “performance-based”
compensation under the plans during 2017. In addition, while we designed our plans to operate in a manner intended to qualify as
“performance-based” under Code Section 162(m), the compensation committee may administer the plans in a manner that does not
satisfy the requirements of Code Section 162(m) to achieve a result that the compensation committee determines to be appropriate.
The Tax Cuts and Jobs Act signed into law on December 22, 2017 (referred to as the Tax Act), repealed the exception from the
$1 Million Cap for “performance-based” compensation. This change is effective for our fiscal years beginning January 1, 2018 and
thereafter. In addition, the Tax Act expanded the group of executive officers who are subject to the $1 Million Cap. The revised
limit for the $1 Million Cap will apply to any named executive officer who in the fiscal year ending in 2017, or in any year
thereafter, was either the principal executive officer, the principal financial officer, or one of the three highest paid officers (referred
to as a Covered Employee), and, once the limit applies to a Covered Employee, all future compensation payable to or on behalf of
that individual will remain subject to the $1 Million Cap. As a result, compensation amounts that were previously outside of the
scope of the $1 Million Cap will now be subject to it. Despite the changes to Code Section 162(m) as a result of the Tax Act, we
expect that we will continue to structure our executive compensation program so that a significant portion of total executive
compensation is linked to the performance of our company.
Compensation Committee Report
The compensation committee has reviewed and discussed the foregoing “-Compensation Discussion and Analysis” with our
management. Based on this review and these discussions, the compensation committee has recommended to our board of directors
that the foregoing “-Compensation Discussion and Analysis” be included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2017 and proxy statement in connection with our 2018 annual general meeting of shareholders.
Compensation Committee
John L. Miclot
Kevin C. O’Boyle
Elizabeth H. Weatherman
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Executive Compensation Tables and Narratives
Summary Compensation Information
The table below provides summary information concerning all compensation awarded to, earned by, or paid to the individuals that
served as our principal executive officer or principal financial officer during the fiscal year ended December 31, 2017 and other
named executive officers for each of the last three fiscal years of which they served as an executive officer.
SUMMARY COMPENSATION TABLE - 2017
Year
2017
2016
2015
2017
2016
2015
2017
2016
2017
Salary(1)
($)
Bonus(2)
($)
945,792 —
905,095 —
228,185 —
440,146 —
409,119 —
105,894 —
466,371 —
429,789 —
115,962 452,183
Stock awards(3)
($)
2,592,818
2,003,654
5,972,830
608,630
449,375
837,275
556,978
432,510
351,765
Option
awards(4)
($)
1,346,571
2,004,824
5,914,722
316,095
449,628
829,143
289,276
432,765
354,619
Non-equity
incentive plan
compensation(5)
($)
All other
compen-
sation(6)
Total
($)
($)
5,146,774
261,593
—
1,435,928
6,613,773
264,272
1,247,655 1,668,463 15,031,855
1,381,671
16,800
1,744,202
17,430
2,369,037
253,346
1,414,143
16,800
1,688,357
16,600
1,303,680
29,151
—
418,650
343,379
84,718
376,693
—
2017
2016
2015
399,366 —
384,006 —
97,295 —
341,118
263,610
561,420
177,167
263,764
555,955
30,266
192,003
253,015
208,207
10,600
285,730
1,156,124
1,113,983
1,753,415
Name and principal position
Robert J. Palmisano(7)
President and Chief Executive
Officer and Executive Director
Lance A. Berry(8)
Senior Vice President and
Chief Financial Officer
Kevin D. Cordell(9)
President, U.S.
Jason D. Asper(10)
Senior Vice President, Strategy
and Corporate Development
James A. Lightman(11)
Senior Vice President, General
Counsel and Secretary
____________________
(1)
(2)
(3)
Five percent of Mr. Palmisano’s annual base salary was allocated to his service as an executive director and member of our board of
directors.
We generally do not pay any discretionary bonuses or bonuses that are subjectively determined and did not pay any such bonuses to any
named executive officers in 2017, other than a sign-on bonus and guaranteed pro rata annual bonus paid to Mr. Asper as part of his offer
package. Annual cash incentive bonus payouts based on performance against pre-established performance goals under our performance
incentive plan are reported in the “Non-equity incentive plan compensation” column.
Amounts reported represent the aggregate grant date fair value for RSU and PSU awards for 2017 and RSU awards for 2016 and 2015,
in each case computed in accordance with FASB ASC Topic 718. The grant date fair value is determined based on the per share closing
sale price of our ordinary shares on the grant date. Amounts reported for each named executive officer and each award for 2017 are set
forth in the “Grants of Plan-Based Awards - 2017” table in the “Grant Date Fair Value of Stock and Option Awards” column. Provided
below is the 2017 grant date fair value of PSU awards assuming maximum levels of performance. The maximum value is calculated
using the number of shares reflected in the “Maximum” column of the “Estimated Future Payouts Under Equity Incentive Plan Awards”
section of the “Grants of Plan-Based Awards - 2017” table and the closing price of our ordinary shares on July 25, 2017, the grant date,
of $27.86, as reported by Nasdaq Global Select Market.
Name
Mr. Palmisano
Mr. Berry
Mr. Cordell
Mr. Asper
Mr. Lightman
Grant Date Fair Value at
Maximum Levels of
Performance
($)
2,592,818
608,630
556,977
—
341,118
(4)
Amounts reported represent the aggregate grant date fair value for option awards granted to each named executive officer computed in
accordance with FASB ASC Topic 718. The grant date fair value is determined based on our Black-Scholes option pricing model. The
table below sets forth the specific assumptions used in the valuation of each such option award:
Grant
date
07/25/2017
08/14/2017
07/19/2016
10/13/2015
Grant date
fair value
per share ($)
9.80
10.05
7.40
7.06
Risk free
interest rate
1.875%
1.875%
1.125%
1.375%
Expected
life
6.10 years
6.10 years
6.08 years
6.08 years
Expected
volatility
32.50%
32.50%
34.00%
32.70%
Expected
dividend
yield
—
—
—
—
162
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Amounts reported represent payouts under our performance incentive plan and for each year reflect the amounts earned for that year but
paid during the following year.
Amounts reported in this column for 2017 are described under “-All Other Compensation for 2017 - Supplemental.”
Mr. Palmisano was appointed our President and Chief Executive Officer effective upon completion of the Wright/Tornier merger, on
October 1, 2015. Prior to such time, Mr. Palmisano served as President and Chief Executive Officer of Wright Medical Group, Inc. and,
in such capacity, earned or was awarded or paid salary and other compensation by legacy Wright prior to October 1, 2015, which
amounts are not included in the above table.
Mr. Berry was appointed our Senior Vice President and Chief Financial Officer effective upon completion of the Wright/Tornier merger,
on October 1, 2015. Prior to such time, Mr. Berry served as Senior Vice President and Chief Financial Officer of Wright Medical Group,
Inc. and, in such capacity, earned or was paid salary and other compensation by legacy Wright prior to October 1, 2015, which amounts
are not included in the above table.
Mr. Cordell was not a named executive officer in 2015; therefore, his information is only provided for 2017 and 2016.
Mr. Asper was appointed our Senior Vice President, Strategy and Corporate Development effective August 14, 2017 and was not a
named executive officer in 2016 or 2015; therefore, his information is only provided for 2017.
Mr. Lightman was appointed our Senior Vice President, General Counsel and Secretary effective upon completion of the Wright/Tornier
merger, on October 1, 2015. Prior to such time, Mr. Lightman served as Senior Vice President, General Counsel and Secretary of Wright
Medical Group, Inc. and, in such capacity, earned or was paid salary and other compensation by legacy Wright prior to October 1, 2015,
which amounts are not included in the above table.
Agreements with Robert J. Palmisano. Effective October 1, 2015, we entered into a service agreement and one of our subsidiaries
entered into an employment agreement with Robert J. Palmisano, our President and Chief Executive Officer.
The service agreement deals with certain Dutch law matters relating to Mr. Palmisano’s role as an executive director. Under the
terms of the service agreement, we have allocated a portion of Mr. Palmisano’s annual base salary to his service as an executive
director, which amounts are paid after deduction of applicable withholdings for taxes and social security contributions. In addition,
under the terms of the service agreement, we have agreed to provide Mr. Palmisano with indemnification and director and officer
liability insurance, on terms and conditions that are at least as favorable to Mr. Palmisano as those then provided to any other current
or former director or executive officer of our company or any of our affiliates.
The employment agreement provides that during the term of the agreement, Mr. Palmisano will serve as President and Chief
Executive Officer of our company and each principal operating subsidiary and will report to our Chairman and board of directors.
During the term, we agreed to nominate Mr. Palmisano for election as an executive director and member of our board of directors at
each annual general meeting of shareholders. The employment agreement expires on December 31, 2019, subject to earlier
termination under certain circumstances. On October 1, 2018 and on each anniversary thereafter, the term will automatically extend
for an additional one-year period, unless at least 30 days prior to such date, either party gives notice of non-extension to the other.
With respect to compensation, the employment agreement established an annual base salary for Mr. Palmisano and provides that our
board of directors will review his compensation at least annually for any increase. The employment agreement acknowledges that a
certain percentage of Mr. Palmisano’s base salary will be paid by Wright Medical Group N.V. in consideration for his services as an
executive director under the service agreement described above. The employment agreement provides that Mr. Palmisano is eligible
to receive an annual performance incentive bonus depending on whether, and to what extent, certain performance goals established
by the compensation committee for such year have been achieved. The amount of the performance incentive bonus payable to
Mr. Palmisano will be targeted at 100% of his annual base salary and will not exceed 200% of his annual base salary. The
employment agreement provides that Mr. Palmisano will receive an annual equity grant equal to 300% of his annual base salary. In
addition, the employment agreement provides that Mr. Palmisano is eligible to participate in the fringe benefit programs, including
those for medical and disability insurance and retirement benefits that we generally make available to our executive officers from
time to time. During the term, Mr. Palmisano will be reimbursed for up to $1,000 for personal insurance premiums, other than for
insurance coverage that pays for medical, prescription drug, dental, vision, or other medical care expenses. In addition, he may
elect, in accordance with our cafeteria plan rules, not to participate in the medical and disability insurance programs provided by us,
in which case, we will pay him up to $900 per month (or such greater amount that we would otherwise pay for medical and
disability coverage for him and his spouse under our benefits programs). Mr. Palmisano is also entitled to receive reimbursement for
up to $15,000 for financial and tax planning and tax preparation, and an annual physical examination at our expense. The
employment agreement also provides for a monthly allowance of $7,500 for housing and automobile expenses, and Mr. Palmisano
will be reimbursed for reasonable travel expenses between Memphis, Tennessee and his residences. To the extent that these
reimbursements are not deductible by Mr. Palmisano for income tax purposes, such amounts will be “grossed-up” for income tax
purposes so that the reimbursed items will be received net of any deduction for income and payroll taxes. The employment
agreement contains severance provisions as described in more detail under “-Potential Payments Upon a Termination or Change in
Control.” We have guaranteed the obligations of our subsidiary under Mr. Palmisano’s employment agreement.
Mr. Palmisano and one of our subsidiaries also entered into a confidentiality, non-competition, non-solicitation and intellectual
property rights agreement, pursuant to which Mr. Palmisano agreed to certain covenants that impose obligations on him regarding
confidentiality of information, transfer of inventions, non-solicitation of employees, customers and suppliers, and non-competition
with our business.
Agreements with Other Named Executive Officers. Each of the other named executive officers also is a party to a confidentiality,
non-competition, non-solicitation and intellectual property rights agreement with us, the material terms of which are substantially
similar to Mr. Palmisano’s agreement, as described above. In addition, through one of our subsidiaries, we have entered into
163
separation pay agreements with our named executive officers who are currently executive officers, other than Mr. Palmisano, which
agreements are described in more detail under “-Potential Payments Upon a Termination or Change in Control.”
Offer Letter with Jason D. Asper. In July 2017, we entered into an offer letter with Mr. Asper pursuant to which we agreed to
provide him certain additional benefits to encourage him to accept an offer of employment with us, including a sign-on bonus,
guaranteed pro rata annual incentive bonus for 2017 and reimbursement for reasonable travel expenses between Memphis,
Tennessee and his current residence in Chicago, Illinois. The sign-on bonus must be paid back by Mr. Asper if he voluntarily
terminates his employment with Wright prior to the two-year anniversary of his hire date.
Indemnification Agreements. We have entered into indemnification agreements with all of our named executive officers. The
indemnification agreements are governed by the laws of the State of Delaware (USA) and provide, among other things, for
indemnification to the fullest extent permitted by law and our articles of association against any and all expenses (including
attorneys’ fees) and liabilities, judgments, fines and amounts paid in settlement that are paid or incurred by the executive or on his or
her behalf in connection with such action, suit or proceeding. We will be obligated to pay these amounts only if the executive acted
in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of our company. The
indemnification agreements provide that the executive will not be indemnified and expenses advanced with respect to an action, suit
or proceeding initiated by the executive unless (i) so authorized or consented to by our board of directors or the company has joined
in such action, suit or proceeding or (ii) the action, suit or proceeding is one to enforce the executive’s rights under the
indemnification agreement. The company’s indemnification and expense advance obligations are subject to the condition that an
appropriate person or body not party to the particular action, suit or proceeding shall not have determined that the executive is not
permitted to be indemnified under applicable law. The indemnification agreements also set forth procedures that apply in the event
an executive requests indemnification or an expense advance.
All Other Compensation for 2017 - Supplemental. The table below provides information concerning amounts reported in the “All
other compensation” column of the Summary Compensation Table for 2017 with respect to each named executive officer.
Additional detail on these amounts are provided below the table.
Name
Mr. Palmisano
Mr. Berry
Mr. Cordell
Mr. Asper
Mr. Lightman
Retirement
benefits
$
10,800
10,800
10,800
—
9,814
Housing/car
allowance
$
90,000
—
—
—
—
Commuting
expenses
$
43,250
—
—
29,151
—
Relocation
benefits
$
—
—
—
—
193,393
Financial and
tax planning
$
15,000
5,000
5,000
—
5,000
Insurance
premium
$
10,800
1,000
1,000
—
—
Gross-up
payments
$
91,743
—
—
—
—
Total other
compensation
$
261,593
16,800
16,800
29,151
208,207
Retirement Benefits. Under our 401(k) plan, participants, including our named executive officers, may voluntarily request that we
reduce his or her pre-tax compensation and contribute such amounts to the 401(k) plan’s trust up to certain statutory maximums. We
contribute matching contributions in an amount equal to 3% of the participant’s eligible earnings for a pay period, or if less, 50% of
the participant’s pre-tax 401(k) contributions (other than catch-up contributions) for that pay period. We do not provide any
nonqualified defined contribution or other deferred compensation plans for our executives, although Mr. Asper's benefits were in the
form of commuting expenses.
Relocation Benefits. We provide our executive officers with customary relocation assistance benefits if they relocate at our request.
Tax protection may be provided in these situations to avoid an executive being penalized from a tax perspective for a relocation on
behalf of our company. During 2017, both Messrs. Asper and Lightman received relocation benefits.
Perquisites and Other Benefits. We provide our executive officers with modest perquisites to attract and retain them. The
perquisites provided to our named executive officers during 2017 included $1,000 for certain personal insurance premiums and up to
$5,000 reimbursement for financial and tax planning and tax preparation. In addition, we are required to provide our CEO additional
perquisites under the terms of his employment agreement, which we agreed upon at the time of his initial hiring by legacy Wright to
attract him to our company. These additional perquisites include additional reimbursement for financial and tax planning and tax
preparation, a monthly allowance of $7,500 for housing and automobile expenses, reimbursement for reasonable travel expenses
between Memphis, Tennessee and his residences, and an annual physical examination. To the extent that the reimbursements for his
housing and automobile expenses and travel expenses between Memphis, Tennessee and his residences are not deductible by Mr.
Palmisano for income tax purposes, such amounts are “grossed-up” for income tax purposes so that the reimbursed items will be
received net of any deduction for income and payroll taxes. We agreed to this gross-up provision at the time of his initial hiring by
legacy Wright to attract him to our company and ease the financial burden on him to travel between Memphis, Tennessee and his
residences.
To encourage Mr. Asper to accept an offer of employment with us, we agreed in his offer letter to provide him a $400,000 sign-on
bonus, a guaranteed pro rata target annual incentive bonus for 2017 which amounted to $52,183, and reimbursement for reasonable
travel expenses between Memphis, Tennessee and his current residence in Chicago, Illinois. The sign-on bonus must be paid back
by Mr. Asper if he voluntarily terminates his employment with Wright prior to the two-year anniversary of his hire date.
164
Grants of Plan-Based Awards
The table below provides information concerning grants of plan-based awards to each of our named executive officers during the
fiscal year ended December 31, 2017. Non-equity incentive plan awards were granted to our named executive officers under our
performance incentive plan, the material terms of which are described under “-Compensation Discussion and Analysis.” Stock
awards (in the form of RSU awards and PSU awards) and option awards were granted under the Wright Medical Group N.V. 2017
Equity and Incentive Plan (2017 plan). The material terms of these awards and the material plan provisions relevant to these awards
are described under “-Compensation Discussion and Analysis,” or in the notes to the table below or the narrative following the table
below.
GRANTS OF PLAN-BASED AWARDS - 2017
Estimated future payouts under
non-equity incentive plan
awards(1)
Estimated future payouts under
non-equity incentive plan
awards(4)
Grant
date
Board
approval
date
Thres-
hold(2) ($)
Target
($)
Maxi-
mum(3) ($)
Thres-
hold (#)
Target
(#)
Maxi-
mum (#)
All other
stock
awards:
number of
shares of
stock or
units(5) (#)
All other
option
awards:
number of
securities
underlying
options(6)
(#)
Exercise
or base
price of
option
awards
($/Sh)
Grant date
fair value
stock and
option
awards(7)(8)
($)
N/A
7/25/17
7/25/17
7/25/17
2/15/17
7/25/17
7/25/17
7/25/17
479,257
—
—
—
958,514
—
—
—
1,917,028
—
—
—
—
—
—
23,266
—
46,533
—
93,066
—
—
46,533
—
—
—
—
—
137,373
—
—
— 1,296,409
— 1,296,409
27.86 1,346,571
N/A
7/25/17
7/25/17
7/25/17
2/15/17
7/25/17
7/25/17
7/25/17
146,250
—
—
—
292,500
—
—
—
585,000
—
—
—
—
—
5,461
—
—
—
10,923
—
N/A
7/25/17
7/25/17
7/25/17
2/15/17
7/25/17
7/25/17
7/25/17
56,478
—
—
—
282,394
—
—
—
564,787
—
—
—
—
—
4,998
—
—
—
9,996
—
—
—
21,846
—
—
—
19,992
—
—
10,923
—
—
—
9,996
—
—
—
—
—
32,247
—
—
—
29,511
—
—
—
27.86
—
—
—
27.86
—
304,315
304,315
316,095
—
278,489
278,489
289,276
N/A
8/14/17
8/14/17
7/24/17
7/25/17
7/25/17
26,092
—
—
52,183
—
—
104,366
—
—
—
—
—
—
—
—
—
—
—
—
12,321
—
—
—
35,303
—
—
28.55
—
351,765
354,619
Name
Robert J. Palmisano
Cash incentive
award
RSU award
PSU award
Stock option
Lance A. Berry
Cash incentive
award
RSU award
PSU award
Stock option
Kevin D. Cordell
Cash incentive
award
RSU award
PSU award
Stock option
Jason D. Asper
Cash incentive
award
RSU award
Stock option
James A. Lightman
Cash incentive
award
N/A
7/25/17
7/25/17
7/25/17
____________________
RSU award
PSU award
Stock option
2/15/17
7/25/17
7/25/17
7/25/17
20,177
—
—
—
201,773
—
—
—
403,545
—
—
—
—
—
3,061
—
—
—
6,122
—
—
—
12,244
—
—
6,122
—
—
—
—
—
18,074
—
—
—
27.86
—
170,559
170,559
177,167
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Amounts reported represent estimated future payouts under our performance incentive plan. Actual payouts under these performance
incentive plans are reflected in the “Non-equity incentive compensation” column of the Summary Compensation Table.
Threshold amounts for awards payable under the performance incentive plan assume the satisfaction of the threshold level of the lowest
weighted corporate performance goal.
Maximum amounts reflect payouts at a maximum rate of 200% of target for our performance incentive plan.
Amounts reported represent PSU awards granted under our 2017 plan. The PSU awards have a three-year performance period from
June 26, 2017 to June 28, 2020. Information regarding the PSU awards is set forth within the “Compensation Discussion and Analysis”
under “Long-Term Incentives-PSU Awards”.
Amounts reported represent RSU awards granted under our 2017 plan. The RSU awards vest and become issuable over time, with the
last tranche becoming issuable on August 15, 2021, in each case, so long as the individual remains an employee or consultant of our
company.
Amounts reported represent option awards granted under our 2017 plan. All options have a ten-year term and vest over a four-year
period, with 25% of the underlying shares vesting on the one-year anniversary of the grant date and the remaining 75% of the underlying
shares vesting over a three-year period thereafter in 36 as nearly equal as possible monthly installments, in each case, so long as the
individual remains an employee or consultant of our company.
See notes (3) and (4) to the Summary Compensation Table for a discussion of the assumptions made in calculating the grant date fair
value of stock and option awards.
Amounts reported represent the grant date fair value of PSU awards, assuming target performance, based on the closing price of our
ordinary shares, as reported by the Nasdaq Global Select Market, on July 25, 2017, the date of grant, of $27.86. These amounts are
reflected in the “Stock Awards” column of the Summary Compensation Table.
165
Wright Medical Group N.V. Performance Incentive Plan. Under the terms of the Wright Medical Group N.V. Performance Incentive
Plan, our named executive officers, as well as other employees, may earn cash incentive bonuses based on our financial performance
for 2017. The material terms of the plan are described in detail under “-Compensation Discussion and Analysis-Short-Term Cash
Incentive Compensation.”
Wright Medical Group N.V. 2017 Equity and Incentive Plan. At an annual general meeting of shareholders held on June 23, 2017,
our shareholders approved the Wright Medical Group N.V. 2017 Equity and Incentive Plan, which permits the grant of a wide
variety of stock-based and cash-based awards, including non-statutory and incentive stock options, stock appreciation rights,
restricted stock awards, restricted stock units, deferred stock units, performance awards, annual performance cash awards, non-
employee director awards, other cash-based awards and other stock-based awards. Our 2017 plan is designed to assist us in
attracting and retaining employees, directors and consultants, provide an additional incentive to such individuals to work to increase
the value of our ordinary shares, and provide such individuals with a stake in our future which corresponds to the stake of our
shareholders.
The 2017 plan reserves for issuance a number of ordinary shares equal to the sum of (i) 5,000,000 shares, (ii) the number of ordinary
shares available for grant under the Wright Medical Group N.V. Amended and Restated 2010 Incentive Plan as of June 23, 2017 (not
including issued or outstanding shares granted pursuant to options under such plan as of such date) which was 1,329,648, and
(iii) the number of ordinary shares forfeited upon the expiration, cancellation, forfeiture, cash settlement, or other termination
following June 23, 2017 under our 2010 plan which was 6,405,992. As of December 31, 2017, 4,430,789 ordinary shares remained
available for future grant of equity awards under the 2017 plan.
Ordinary shares that are issued under the 2017 plan or that are subject to outstanding awards will be applied to reduce the maximum
number of ordinary shares remaining available for issuance under the 2017 plan only to the extent they are used; provided, however,
that the full number of ordinary shares subject to a stock-settled SAR or other stock-based award will be counted against the
ordinary shares authorized for issuance under the 2017 plan, regardless of the number of ordinary shares actually issued upon
settlement of such SAR or other stock-based award. Furthermore, any ordinary shares withheld to satisfy tax withholding
obligations on awards issued under the 2017 plan, any ordinary shares withheld to pay the exercise price or grant price of awards
under the 2017 plan and any ordinary shares not issued or delivered as a result of the “net exercise” of an outstanding option or
settlement of a SAR in shares will be counted against the ordinary shares authorized for issuance under the 2017 plan and will not be
available again for grant under the 2017 plan. Any ordinary shares subject to awards settled in cash will again be available for
issuance under the 2017 plan. Any ordinary shares repurchased by us on the open market using the proceeds from the exercise of an
award will not increase the number of ordinary shares available for future grant of awards. Any ordinary shares related to awards
granted under the 2017 plan, and ordinary shares related to awards granted under the 2010 plan, that terminate by expiration,
forfeiture, cancellation or otherwise without the issuance of the ordinary shares, will be available again for grant under the 2017 plan
and correspondingly increase the total number of ordinary shares available for issuance under the 2017 plan. To the extent permitted
by applicable law, ordinary shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in
any form of combination by us will not be counted against ordinary shares available for issuance pursuant to the 2017 plan. The
ordinary shares available for issuance under the 2017 plan may be authorized and unissued ordinary shares or ordinary shares which
have been reacquired by us.
Under the terms of the 2017 plan, stock options must be granted with a per share exercise price equal to at least 100% of the fair
market value of an ordinary share on the grant date. For purposes of the plan, the fair market value of an ordinary share is the
closing sale price of our ordinary shares, as reported by the Nasdaq Global Select Market. We set the per share exercise price of all
stock options granted under the plan at an amount at least equal to 100% of the fair market value of our ordinary shares on the grant
date. Options become exercisable at such times and in such installments as may be determined by our board of directors, provided
that most options may not be exercisable after 10 years from their grant date. The vesting of our stock options is generally time-
based and is as follows: 25% of the shares underlying the stock option vest on the one-year anniversary of the grant date and the
remaining 75% of the underlying shares vest over a three-year period thereafter in 36 as nearly equal as possible monthly
installments, in each case so long as the individual remains an employee or consultant of our company.
Currently, optionees must pay the exercise price of stock options in cash, except that the compensation committee may allow
payment to be made (in whole or in part) by a “cashless exercise” effected through an unrelated broker through a sale on the open
market, by a “net exercise” of the option, or by a combination of such methods. In the case of a “net exercise” of an option, we will
not require a payment of the exercise price of the option from the grantee but will reduce the number of our ordinary shares issued
upon the exercise by the largest number of whole shares that has a fair market value that does not exceed the aggregate exercise
price for the shares exercised under this method.
The 2017 plan provides for certain default rules in the event of a termination of a participant’s employment or other service. These
default rules may be modified in an award agreement, any individual agreement between a participant and us or any plan or policy
of our company applicable to the participant. If a participant’s employment or other service with us is terminated for cause, then all
outstanding awards held by such participant will be immediately terminated and forfeited. In the event a participant’s employment
or other service with us is terminated by reason of death or disability, then:
(cid:120) All outstanding stock options and SARs held by the participant will, to the extent exercisable, remain exercisable for a
period of one year after such termination, but not later than the date the stock options or SARs expire and all
outstanding stock options and SARs that are not exercisable will be terminated and forfeited; provided, however, that
if the exercise of a stock option that is exercisable is prevented by securities laws or other restrictions, the stock option
will remain exercisable until 30 days after the date such exercise first would no longer be prevented by such
provisions, but in any event no later than the date the stock option expires;
166
(cid:120) All outstanding unvested restricted stock awards will be terminated and forfeited; and
(cid:120) All outstanding but unvested RSUs, performance awards, annual performance cash awards, other cash-based awards
and other stock-based awards held by the participant will terminate and be forfeited. However, with respect to any
awards that vest based on the achievement of performance goals, if a participant’s employment or other service with
us is terminated prior to the end of the performance period of such award, but after the conclusion of a portion of the
performance period (but in no event less than one year), the committee may cause shares to be delivered or payment
made with respect to the participant’s award, but only if otherwise earned for the entire performance period and only
with respect to the portion of the applicable performance period completed at the date of such event, with proration
based on the number of months or years that the participant was employed or performed services during the
performance period.
In the event a participant’s employment or other service with us is terminated by reason other than for cause, death or disability,
then:
(cid:120) All outstanding stock options and SARs held by the participant that then are exercisable will remain exercisable for
three months after the date of such termination, but will not be exercisable later than the date the stock options or
SARs expire and all outstanding stock options and SARs that are not exercisable will be terminated and forfeited;
provided, however, that if the exercise of a stock option that is exercisable is prevented by securities laws or other
restrictions, the stock option will remain exercisable until 30 days after the date such exercise first would no longer be
prevented by such provisions, but in any event no later than the date the stock option expires;
(cid:120) All outstanding unvested restricted stock awards will be terminated and forfeited; and
(cid:120) All outstanding unvested RSUs, performance awards, annual performance cash awards, other cash-based awards and
other stock-based awards will be terminated and forfeited. However, with respect to any awards that vest based on the
achievement of performance goals, if a participant’s employment or other service with us is terminated prior to the end
of the performance period of such award, but after the conclusion of a portion of the performance period (but in no
event less than one year), the committee may, in its sole discretion, cause shares to be delivered or payment made with
respect to the participant’s award, but only if otherwise earned for the entire performance period and only with respect
to the portion of the applicable performance period completed at the date of such event, with proration based on the
number of months or years that the participant was employed or performed services during the performance period.
Upon a participant’s termination of employment or other service with us, the committee may, in its discretion (which may be
exercised at any time on or after the grant date, including following such termination) cause stock options or SARs (or any part
thereof) held by such participant as of the effective date of such termination to become or continue to become exercisable or remain
exercisable following such termination of employment or service, and restricted stock, RSUs, performance awards, annual
performance cash awards, other cash-based awards and other stock-based awards held by such participant as of the effective date of
such termination to vest or become free of restrictions and conditions to payment, as the case may be, following such termination of
employment or service, in each case in the manner determined by the committee; provided, however, that (a) no stock option or SAR
may remain exercisable beyond its expiration date; (b) the committee may not adjust the amount payable pursuant to an award under
the 2017 plan that is intended to qualify as “performance-based compensation” under Code Section 162(m) upwards (unless the
applicable tax or securities laws change to permit committee discretion to alter the governing performance measures without
obtaining shareholder approval, in which case the committee will have sole discretion to make such changes without obtaining
shareholder approval); and (c) any such action by the committee adversely affecting any outstanding award will not be effective
without the consent of the affected participant, except to the extent the committee is authorized by the 2017 plan to take such action.
If a participant is determined by the committee to have taken any action while providing services to us or within one year after
termination of such services, that would constitute “cause” or an “adverse action,” as such terms are defined in the 2017 plan, all
rights of the participant under the 2017 plan and any agreements evidencing an award then held by the participant will terminate and
be forfeited. The committee has the authority to rescind the exercise, vesting, issuance or payment in respect of any awards of the
participant that were exercised, vested, issued or paid, and require the participant to pay to us, within 10 days of receipt of notice,
any amount received or the amount gained as a result of any such rescinded exercise, vesting, issuance or payment. We may defer
the exercise of any stock option or SAR for up to six months after receipt of notice of exercise in order for the committee to
determine whether “cause” or “adverse action” exists. We are entitled to withhold and deduct future wages to collect any amount
due.
All awards also are subject to any required automatic clawback, forfeiture or other penalties pursuant to any applicable law,
including without limitation under Section 304 of the Sarbanes-Oxley Act of 2002. In addition, all awards are subject to clawback,
forfeiture or other penalties pursuant to any policy adopted by us and such clawback, forfeiture and/or penalty conditions or
provisions as determined by the committee. In 2017, we adopted a clawback policy that provides for the clawback of certain
incentive compensation in the event of certain financial accounting restatements.
As a condition of receiving awards, recipients, including our named executive officers, must agree to pay all applicable tax
withholding obligations in connection with the awards. In the case of our RSU and PSU award grants, recipients upon acceptance of
the award may provide a “sell-to-cover” instruction pursuant to which the executive gives instructions to, and authorizes, a
brokerage firm to sell on the executive’s behalf that number of ordinary shares issuable upon vesting of the award as determined to
be appropriate to generate cash proceeds sufficient to satisfy any applicable tax withholding obligations.
As described in more detail under “-Potential Payments Upon Termination or Change in Control,” if a change in control of our
company occurs, then under certain circumstances, the award may vest or lapse.
167
Outstanding Equity Awards at Fiscal Year-End
The table below provides information regarding unexercised options awards, unvested RSU awards and unvested PSU awards for
each of our named executive officers that remained outstanding at our fiscal year-end, December 31, 2017.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END - 2017
Option awards
Stock awards
Number of
securities
underlying
unexercised
options
exercisable
(#)
Number of
securities
underlying
unexercised
option
unexercisable(1)
(#)
Option
exercise
price ($)
Option
expiration
date(2)
Number of
shares or
units of
stock that
have not
vested(3)
(#)
Market
value of
shares or
units that
have not
vested(4)
($)
Equity
incentive
plan awards:
number of
unearned
shares, units
or other
rights that
have not
vested(5)
(#)
Equity
incentive plan
awards:
market or
payout value
of unearned
shares, units or
other rights
that have not
vested(6)
($)
628,849
4,112
145,500
9,771
144,625
7,939
129,462
453,624
95,960
—
10,309
6,575
9,635
12,528
1,924
19,557
30,602
18,262
63,590
21,521
—
34,626
36,337
20,714
—
—
—
—
—
—
—
—
384,559
175,116
137,373
15.55 09/17/2021
17.70 04/16/2022
20.75 05/09/2022
22.55 04/17/2023
23.93 05/14/2023
30.14 04/01/2024
29.06 05/13/2024
20.62 10/13/2025
21.24 07/19/2026
27.86 07/25/2027
—
—
—
—
—
—
—
—
53,909
39,274
32,247
28.32 05/14/2018
15.01 05/13/2019
17.82 05/13/2020
15.04 05/11/2021
17.70 04/16/2022
20.75 05/09/2022
23.93 05/14/2023
29.06 05/13/2024
20.62 10/13/2025
21.24 07/19/2026
27.86 07/25/2027
—
30,805
37,801
29,511
30.08 09/26/2024
20.62 10/13/2025
21.24 07/19/2026
27.86 07/25/2027
262,116 5,818,975
46,533
1,033,033
47,094 1,045,487
10,923
242,491
36,871
818,536
9,996
221,911
—
35,303
28.55 08/14/2027
12,321
273,526
33,504
566
7,444
1,999
11,099
9,086
42,638
12,625
—
—
—
—
—
—
—
36,147
23,039
18,074
15.75 12/29/2021
17.70 04/16/2022
20.75 05/09/2022
22.55 04/17/2023
23.93 05/14/2023
29.06 05/13/2024
20.62 10/13/2025
21.24 07/19/2026
27.86 07/25/2027
168
29,045
644,799
6,122
135,908
Name
Robert J. Palmisano
Stock options
RSU awards
PSU award
Lance A. Berry
Stock options
RSU awards
PSU award
Kevin D. Cordell
Stock options
RSU awards
PSU award
Jason D. Asper
Stock options
RSU awards
James A. Lightman
Stock options
RSU awards
PSU award
____________________
(1)
(2)
(3)
(4)
(5)
(6)
All stock options vest over a four-year period, with 25% of the underlying shares vesting on the one-year anniversary of the grant date
and the remaining 75% of the underlying shares vesting over a three-year period thereafter in 36 as nearly equal as possible monthly
installments, in each case so long as the individual remains an employee or consultant of our company. If a change in control of our
company occurs, outstanding options may become immediately exercisable in full and remain exercisable for the remainder of their
terms, depending upon the plan under which the options were granted and, in the case of options granted under the 2017 plan, whether
the option is continued, assumed or substituted by the successor entity and whether the executive experiences a termination event in
connection with or within two years following the change in control. For more information, see the discussion under “-Potential
Payments Upon a Termination or Change in Control.”
All option awards have a 10-year term, but may terminate earlier if the recipient’s employment or service relationship with our company
terminates.
The release dates and release amounts for the unvested RSU awards are as follows:
Name
Mr. Palmisano
Mr. Berry
Mr. Cordell
Mr. Asper
Mr. Lightman
06/01/2018
08/15/2018
06/01/2019
08/15/2019
06/01/2020
08/15/2020
95,999
15,440
10,891
—
9,910
11,633
2,730
2,499
3,080
1,530
96,000
15,441
10,893
—
9,910
11,633
2,731
2,499
3,080
1,531
23,584
5,290
5,091
—
3,103
11,633
2,731
2,499
3,080
1,530
08/15/2021
11,634
2,731
2,499
3,081
1,531
If a change in control of our company occurs, outstanding unvested RSU awards may become immediately vested in full, depending
upon the plan under which the stock awards were granted and, in the case of RSU awards granted under the 2017 plan, whether the
award is continued, assumed or substituted by the successor entity and whether the executive experiences a termination event in
connection with or within two years following the change in control. For more information, see the discussion under “-Potential
Payments Upon a Termination or Change in Control.”
The market value of RSU awards that had not vested as of December 31, 2017 is based on the closing sale price of our ordinary shares,
as reported by the Nasdaq Global Select Market, on the last trading day of our fiscal year, December 29, 2017 ($22.20).
Amounts reported represent the number of PSU awards that were in progress based on target levels of performance. The PSU awards
will vest based on the achievement of the performance goal established for the June 26, 2017 - June 28, 2020 performance period. For
information regarding the treatment of such awards upon a change in control of our company, see the discussion under “-Potential
Payments Upon a Termination or Change in Control.”
Amounts reported represent the target value of PSU awards that were in progress based on the closing sale price of our ordinary shares,
as reported by the Nasdaq Global Select Market, on the last trading day of our fiscal year, December 29, 2017 ($22.20).
Options Exercised and Stock Vested During Fiscal Year
The table below provides information regarding stock awards that vested for each of our named executive officers during the fiscal
year ended December 31, 2017. No option awards were exercised by any of our named executive officers during the fiscal year
ended December 31, 2017.
Name
Robert J. Palmisano
Restricted stock units
Lance A. Berry
Restricted stock units
Kevin D. Cordell
Restricted stock units
Jason D. Asper
Restricted stock units
James A. Lightman
Restricted stock units
____________________
Stock awards(1)
Number of shares
acquired on vesting
(#)
Value realized on
vesting
($)
95,998
15,441
10,891
—
9,909
2,615,946
420,767
296,780
—
270,020
(1)
The number of shares acquired upon vesting reflects the gross number of shares acquired absent netting of shares surrendered or sold to
satisfy tax withholding requirements. The value realized on vesting of the RSU awards held by each of the named executive represents
the gross number of ordinary shares acquired, multiplied by the closing sale price of our ordinary shares on the vesting date or the last
trading day prior to the vesting date if the vesting date was not a trading day, as reported by the Nasdaq Global Select Market.
Potential Payments Upon a Termination or Change in Control
Employment Agreement with Robert J. Palmisano. Effective October 1, 2015, Wright Medical Group, Inc., one of our subsidiaries,
entered into an employment agreement with Robert J. Palmisano, our President and Chief Executive Officer. Under the terms of our
employment agreement with Mr. Palmisano, in the event of a termination of his employment, the post-employment pay and benefits,
if any, to be received by him will vary according to the basis for his termination. We have guaranteed the obligations under the
employment agreement since our subsidiary, Wright Medical Group, Inc., is party to the agreement. The employment agreement
169
will continue until December 31, 2019, subject to earlier termination under certain circumstances, and on October 1, 2018, will
automatically renew for additional one-year periods unless we or Mr. Palmisano provides notice of non-extension of the agreement.
In the event that Mr. Palmisano’s employment is terminated for “cause” or he terminates his employment other than for “good
reason” (as such terms are defined in the employment agreement) or disability, we will have no obligations to him, other than
payment of accrued obligations. Accrued obligations include: (i) any accrued base salary through the date of termination; (ii) any
annual cash incentive compensation awards earned but not yet paid; (iii) the value of any accrued vacation; (iv) reimbursement for
any unreimbursed business expenses; and (v) only in the case of a termination at any time by reason of death or disability, his annual
target incentive payment for the year that includes the date of termination.
In the event of an involuntary termination of his employment, we will be required to provide him, in addition to his accrued
obligations: (i) a lump sum payment equal to two and one-half times the sum of: (a) his then current annual base salary; plus (b) his
annual target incentive bonus; (ii) payment or reimbursement for the cost of COBRA continuation coverage for up to 12 months;
(iii) outplacement assistance for a period of 12 months, subject to termination if Mr. Palmisano accepts employment with another
employer; (iv) financial planning services for a period of 12 months; and (v) an annual physical examination within 12 months of
termination.
In the event of a termination of his employment due to death or disability, we will be required to provide him, in addition to his
accrued obligations, his annual target incentive bonus.
In the event of an involuntary termination of his employment in anticipation of or within a 24-month period following a “change in
control,” we will be required to provide him, in addition to his accrued obligations: (i) a lump sum payment equal to three times the
sum of: (a) his then current annual base salary, plus (b) his annual target incentive bonus; (ii) his annual target incentive bonus for
the year in which his termination occurs; (iii) payment or reimbursement for the cost of COBRA continuation coverage for up to
12 months; (iv) outplacement assistance for a period of 12 months, subject to termination if Mr. Palmisano accepts employment with
another employer; (v) financial planning services for a period of 12 months; and (vi) an annual physical examination within
12 months of termination.
Upon termination for any reason other than for cause, disability, or death, Mr. Palmisano must enter into a release of all claims
within 30 days after the date of termination before any payments will be made to him under the employment agreement, other than
accrued obligations. If he breaches the terms of the confidentiality, non-competition, non-solicitation, intellectual property rights
agreement, then our obligations to make payments or provide benefits will cease immediately and permanently, and he will be
required to repay an amount equal to 30% of the post-employment payments and benefits previously provided to him under the
employment agreement, with interest. The employment agreement provides for other clawback and forfeiture provisions, including
if we are required to restate our financial statements under certain circumstances. All payments under his employment agreement
will be net of applicable tax withholding obligations. The agreement also provides that if any severance payments or other payments
or benefits deemed made in connection with a future change in control are subject to the “golden parachute” excise tax under Code
Section 4999, the payments will be reduced to one dollar less than the amount that would subject him to the excise tax if the
reduction results in him receiving a greater amount on a net-after tax basis than would be received if he received the payments and
benefits and paid the excise tax.
Severance Pay Agreements with Other Named Executive Officers. Our subsidiary, Wright Medical Group, Inc., has entered into
separation pay agreements with our named executive officers, other than Mr. Palmisano. We have guaranteed the obligations under
these separation pay agreements. The separation pay agreements will continue until October 1, 2019 and, on October 1, 2018, will
automatically renew for additional one-year periods unless we or the executive provides notice of termination of the agreement.
Under the terms of the separation pay agreement, in the event that the executive is terminated for cause or the executive terminates
his employment other than for good reason or disability, we will have no obligations, other than payment of accrued obligations.
Accrued obligations include: (i) any accrued base salary through the date of termination; (ii) any annual cash incentive
compensation awards earned but not yet paid; (iii) the value of any accrued vacation; (iv) reimbursement for any unreimbursed
business expenses; and (v) only in the case of a termination at any time by reason of death or disability, an annual incentive target
bonus for the year that includes the date of termination, prorated for the portion of the year that the executive was employed.
In the event of an involuntary termination of the executive’s employment, other than for cause, we will be obligated to pay a
severance payment and accrued obligations and provide certain benefits to the executive. The severance payment will equal the sum
of (i) the executive’s then current annual base salary, plus (ii) an amount equal to his then current annual target bonus. Half of the
total severance payment amount will be payable at or within a reasonable time after the date of termination and the remaining half
will be payable in installments beginning six months after the date of termination, with a final installment to be made on or before
March 15 of the calendar year following the year of termination. In the event of an involuntary termination of the executive’s
employment in connection with a change in control, then his severance payment will equal two times the amount of his severance
payment as described above. Under the separation pay agreement, an involuntary termination of the executive’s employment will
occur if we terminate the executive’s employment other than for cause, disability, voluntary retirement, or death or if the executive
resigns for good reason, in each case as defined in the separation pay agreement.
In addition to a severance payment, the executive also will be entitled to receive the following benefits in the event of an involuntary
termination of his employment: (i) a pro rata portion of the executive’s annual cash incentive compensation award for the fiscal year
that includes the termination date, if earned pursuant to the terms thereof and at such time and in such manner as determined
pursuant to the terms thereof, less any payments thereof already made during such fiscal year (or, in the event of an involuntary
170
termination in connection with a change in control, a pro rata portion of the executive’s target annual cash incentive compensation
award for the fiscal year that includes the termination date, less any payments thereof already made during such fiscal year);
(ii) payment or reimbursement for the cost of COBRA continuation coverage for up to 12 months (18 months in the event of an
involuntary termination in connection with a change in control); (iii) outplacement assistance for a period of one year (two years in
the event of an involuntary termination in connection with a change in control), subject to termination if the executive accepts
employment with another employer; (iv) financial planning services for a period of one year (two years in the event of an
involuntary termination in connection with a change in control); (v) payment to continue insurance coverage equal to the executive’s
annual supplemental insurance premium benefit provided to him or her prior to the date of termination (twice the premium benefit in
the event of an involuntary termination in connection with a change in control); (vi) an annual physical examination within
12 months of termination; and (vii) reasonable attorneys’ fees and expenses if any such fees or expenses are incurred to recover
benefits rightfully owed under the separation pay agreement.
In the event of a termination of an executive’s employment due to death or disability, we will be required to provide the executive, in
addition to his or her accrued obligations, a pro rata portion of his or her annual target incentive bonus.
Upon termination for any reason other than cause, disability, or death, the executive must enter into a release of all claims within
30 days after the date of termination before any payments will be made to the executive under the separation pay agreement, other
than accrued obligations. If the executive breaches the terms of the confidentiality, non-competition, non-solicitation, and
intellectual property rights agreement or the release, then our obligations to make payments or provide benefits will cease
immediately and permanently, and the executive will be required to repay an amount equal 90% of the payments and benefits
previously provided to the executive under the separation pay agreement, with interest. All payments under the separation pay
agreement will be net of applicable tax withholding obligations. The separation pay agreement provides that if any severance
payments or other payments or benefits deemed made in connection with a future change in control are subject to the “golden
parachute” excise tax under Code Section 4999, the payments will be reduced to one dollar less than the amount that would subject
the executive to the excise tax if the reduction results in the executive receiving a greater amount on a net-after tax basis than would
be received if the executive received the payments and benefits and paid the excise tax.
Change in Control Provisions in Equity Plans. Our equity plans under which awards have been granted to our named executive
officers contain “change in control” provisions.
Under our current 2017 equity plan, a “change in control” means:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the acquisition (other than from us) by any person, entity or group, subject to certain exceptions, of 50% or more of
either our then-outstanding ordinary shares or the combined voting power of our then-outstanding ordinary shares or
the combined voting power of our then-outstanding capital stock entitled to vote generally in the election of directors;
the “continuity directors” cease for any reason to constitute at least a majority of our board of directors;
consummation of a reorganization, merger or consolidation, in each case, with respect to which persons who were our
shareholders immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own
more than 50% of the combined voting power entitled to vote generally in the election of directors of the then-
outstanding voting securities of the reorganized, merged, consolidated, or other surviving corporation (or its direct or
indirect parent corporation);
approval by our shareholders of a liquidation or dissolution of our company; or
the consummation of the sale of all or substantially all of our assets with respect to which persons who were our
shareholders immediately prior to such sale do not, immediately thereafter, own more than 50% of the combined
voting power entitled to vote generally in the election of directors of the then-outstanding voting securities of the
acquiring corporation (or its direct or indirect parent corporation).
Under the 2017 equity plan, if a change in control of our company occurs, then if an award is continued, assumed or substituted by
the successor entity, the award will not vest or lapse solely as a result of the change of control but will instead remain outstanding
under the terms pursuant to which it has been continued, assumed or substituted and will continue to vest or lapse pursuant to such
terms. If the award is continued, assumed or substituted by the successor entity and within two years following the change in
control the participant is either terminated by the successor entity without “cause” or, if the participant is an employee, resigns for
“good reason,” each as defined in the 2017 plan, then:
(cid:120) All outstanding stock options and SARs held by such participant will become immediately vested and exercisable in
full and will remain exercisable for the remainder of their respective terms;
(cid:120) All restrictions imposed on restricted stock, RSUs or deferred units that are not performance-based held by such
participant will lapse and be of no further force and effect;
(cid:120) All performance-based awards held by such participant for which the performance period has been completed as of the
date of such termination or resignation but have not yet been paid will vest and be paid in cash or shares and at such
time as provided in the award agreement based on actual attainment of each performance goal; and
(cid:120) All performance-based awards held by such participant for which the performance period has not been completed as of
the date of such termination or resignation will with respect to each performance goal vest and be paid out for the
entire performance period (and not pro rata) based on actual performance achieved through the date of such
termination or resignation with the manner of payment to be made in cash or shares as provided in the award
agreement within 30 days following the date of termination or resignation.
If a change in control of our company occurs, and if an award participant suffers a “termination of continued employment” in
connection with such change in control, or if outstanding awards are not continued, assumed or substituted with equivalent awards
171
by the successor entity, or in the case of a dissolution or liquidation of our company, outstanding awards will be subject to the
following rules:
(cid:120) All outstanding stock options and SARs will become fully vested and exercisable and the committee will give such
participant a reasonable opportunity to exercise any and all stock options and SARs before but conditioned upon the
resulting change in control and if a participant does not exercise all stock options and SARs, the committee will pay
such participant the difference between the exercise price for the stock option or grant price for the SAR and the per
share consideration provided to other similarly situated shareholders in the change in control, provided that if the
exercise or grant price exceeds the consideration in the change in control, provided, however, that if the exercise price
or grant price exceeds the consideration provided, then such exercised stock option or SAR will be canceled and
terminated without payment;
(cid:120) All restrictions imposed on restricted stock, RSUs or deferred units that are not performance-based will lapse and be of
no further force and effect, and RSUs and deferred units will be settled and paid in cash or shares and at such time as
provided in the award agreement, provided, however, that if any such payment is to be made in shares, the committee
may provide such holders the consideration provided to other similarly situated shareholders in the change in control;
(cid:120) All performance-based awards held by such participant for which the performance period has been completed as of
the date of the change in control but have not yet been paid will vest and be paid in cash or shares and at such time as
provided in the award agreement based on actual attainment of each performance goal; and
(cid:120) All performance-based awards held by such participant for which the performance period has not been completed as of
the date of the change in control will with respect to each performance goal vest and be paid out for the entire
performance period (and not pro rata) based on actual performance achieved through the date of the change in control
with the manner of payment to be made in cash or shares as provided in the award agreement within 30 days following
the change in control.
These change in control provisions may not be terminated, amended or modified in any manner that adversely affects any then-
outstanding award or award participant without the prior written consent of such participant.
The 2017 plan defines “cause” as, unless otherwise provided in an award agreement, cause as defined in any employment,
consulting, severance or similar agreement between the participant and us (an “individual agreement”), or if there is no such
individual agreement or if it does not define cause: (i) the participant has engaged in conduct that in the judgment of the committee
constitutes gross negligence, misconduct, or gross neglect in the performance of the participant’s duties and responsibilities or
conduct resulting or intending to result directly or indirectly in gain or personal enrichment for the participant at our expense; (ii) the
participant has engaged or is about to engage in conduct materially injurious to us; (iii) the participant has engaged in or is about to
engage in conduct that is materially inconsistent with our legal and healthcare compliance policies, programs or obligations,
including but not limited to our code of business conduct and ethics and our code of conduct on insider trading and confidentiality;
(iv) the participant’s bar from participation in programs administered by the United States Department of Health and Human
Services or the United States Food and Drug Administration or any succeeding agencies; (v) the participant’s conviction of or
entering of a guilty or no contest plea to a felony charge (or equivalent thereof) in any jurisdiction; or (vi) the participant has
engaged in a material breach of any employment, service, confidentiality, non-compete or non-solicitation agreement entered into
with us or a breach of any company policy for which termination of employment or service is a permissible consequence of such
breach.
The 2017 plan defines “good reason” as, unless otherwise provided in an award agreement, the occurrence of any of the following
without the prior written consent of the participant, unless such act or failure to act is corrected by us within 30 days of the
participant providing notice of the occurrence: (a) a material reduction in the participant's then current responsibilities or assignment
to the participant of duties materially inconsistent with such participant's then current range of duties and responsibilities; and for
the avoidance of doubt, the following circumstances would be considered a material reduction of a participant's responsibilities:
(i) the reporting structure of a participant who reports to the chief executive officer of the entire organization is modified or the
participant is informed that it will be modified such that the participant would no longer report to such chief executive officer or
(ii) a participant who is the chief executive officer or organization-wide leader of a material function in a public company would no
longer be, or is informed that he or she will no longer be, the chief executive officer or organization-wide leader of such function, or
would no longer lead that function in a public company environment; (b) a material reduction (i.e., more than 10%) in the
participant's aggregate annualized compensation target (including bonus opportunity as a percentage of base salary) and benefits
opportunities, except for an across the board reduction or modification to any benefit plan affecting all similarly situated
participants; (c) failure to pay to the participant any portion of the participant's current compensation and benefits, under any plan,
program or policy of, or other contract or agreement within 30 days of the date such compensation and/or benefits are due;
(d) cancellation or material reduction in scope of any indemnification and/or director and officer liability insurance; (e) the
relocation of the participant's then current principal place of employment, or principal location, to a location which is more than
40 miles from the principal location; or (f) material breach other than by the participant of any material provision of the participant's
employment, severance or similar agreement.
The 2017 plan defines “termination of continued employment” as termination of an individual’s employment with our company or if
the individual is a director, his or her service as a director, without cause in connection with a change of control and includes, by
way of example and without limitation, the following circumstances: (i) such individual is notified within the 60 day period
preceding the change of control that the individual’s employment is or will be terminated without cause prior to or after the change
of control, (ii) such individual is notified within the 60 day period preceding the change of control that the individual’s continued
employment with our company after the change of control is conditioned upon acceptance of a position with the successor or an
affiliate of the successor under terms which would entitle the individual to resign for good reason and the individual in fact resigns
172
for good reason on this basis, and (iii) such individual is a director and will not become a director of the successor parent
immediately after the change in control.
Under the terms of our 2010 equity plan, if there is a change in control of our company, then, all outstanding options become
immediately exercisable in full and remain exercisable for the remainder of their terms and all issuance conditions on all outstanding
RSU awards will be deemed satisfied. Alternatively, the compensation committee may determine that outstanding awards will be
cancelled as of the consummation of the change in control and that holders of cancelled awards will receive a payment in respect of
such cancellation based on the amount of per share consideration being paid in connection with the change in control less, in the
case of options and other awards subject to exercise, the applicable exercise price.
Potential Payments to Named Executive Officers. The table below reflects the amount of compensation and benefits payable to each
named executive officer, in the event of (i) any voluntary resignation or termination or termination for cause; (ii) an involuntary
termination without cause; (iii) an involuntary termination without cause or a resignation for good reason within 12 months
(24 months in the case of Mr. Palmisano and two years in the case of equity awards acceleration) following a change in control, or a
qualifying change in control termination; (iv) termination by reason of an executive’s death or disability; and (v) a change in control.
The amounts reported in the table assume that the applicable triggering event occurred on December 31, 2017, and, therefore, are
estimates of the amounts that would be paid to the named executive officers upon the occurrence of such triggering event.
Name
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
Type of payment(1)
Cash severance
Benefit continuation
Annual bonus(2)
Outplacement benefits
Other termination benefits(3)
Option award acceleration(4)
RSU award acceleration(5)
PSU award acceleration(6)
Total
Cash severance
Benefit continuation
Annual bonus(2)
Outplacement benefits
Other termination benefits(3)
Option award acceleration(4)
RSU award acceleration(5)
PSU award acceleration(6)
Total
Cash severance
Benefit continuation
Annual bonus(2)
Outplacement benefits
Other termination benefits(3)
Option award acceleration(4)
RSU award acceleration(5)
PSU award acceleration(6)
Total
Cash severance
Benefit continuation
Annual bonus(2)
Outplacement benefits
Other termination benefits(3)
Option award acceleration(4)
RSU award acceleration(5)
Total
Involuntary
termination
without
cause
($)
4,792,570
19,920
958,514
30,000
6,000
—
—
—
5,807,004
Qualifying
change in
control
termination
($)
5,751,084
19,920
958,514
30,000
6,000
775,715
5,818,975
1,033,033
14,393,241
742,500
19,920
292,500
30,000
6,000
—
—
—
1,090,920
753,050
19,920
282,394
30,000
6,000
—
—
—
1,091,364
519,250
19,920
184,250
30,000
6,000
—
—
759,420
1,485,000
29,880
292,500
60,000
12,000
122,879
1,045,487
242,491
3,290,237
1,506,099
29,880
282,394
60,000
12,000
84,961
818,536
221,911
3,015,781
1,038,500
29,880
184,250
60,000
12,000
—
273,526
1,598,156
Death/
disability
($)
Change in
control
($)
—
—
958,514
—
—
—
—
—
958,514
—
—
292,500
—
—
—
—
—
292,500
—
—
282,394
—
—
—
—
—
282,394
—
—
184,250
—
—
—
—
184,250
—
—
—
—
—
775,715
5,818,975
1,033,033
7,627,723
—
—
—
—
—
122,879
1,045,487
242,491
1,410,857
—
—
—
—
—
84,961
818,536
221,911
1,125,408
—
—
—
—
—
—
273,526
273,526
Voluntary/
for cause
termination
($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
173
Name
James A. Lightman
Type of payment(1)
Cash severance
Benefit continuation
Annual bonus(2)
Outplacement benefits
Other termination benefits(3)
Option award acceleration(4)
RSU award acceleration(5)
PSU award acceleration(6)
Total
Voluntary/
for cause
termination
($)
—
—
—
—
—
—
—
—
—
Involuntary
termination
without
cause
($)
605,318
19,920
201,773
30,000
6,000
—
—
—
863,011
Qualifying
change in
control
termination
($)
1,210,635
29,880
201,773
60,000
12,000
79,230
644,799
135,908
2,374,225
Death/
disability
($)
Change in
control
($)
—
—
201,773
—
—
—
—
—
201,773
—
—
—
—
—
79,230
644,799
135,908
859,937
____________________
(1)
(2)
(3)
(4)
(5)
(6)
The benefit amounts set forth in the table do not reflect any reduction that may be necessary to prevent the payment from being subject
to an excise tax under Code Section 280G, if applicable.
Assumes payment equal to full target annual bonus for the year in which the termination date occurs.
Reflects the cost of financial planning services and continued executive insurance. Reimbursement of reasonable attorneys’ fees and
expenses is not included as the amount is not estimable.
Based on the difference between: (i) the per share market price of the ordinary shares underlying the unvested stock options held by such
executive as of December 29, 2017, the last trading day of fiscal 2017, based upon the closing sale price of our ordinary shares, as
reported by the Nasdaq Global Select Market, on the last trading day of our fiscal year, December 29, 2017 ($22.20), and (ii) the per
share exercise price of the options held by such executive. The per share exercise price of all unvested stock options held by our named
executive officers included in the table as of December 31, 2017 range from $20.62 to $28.55. The “Change in Control” scenario
assumes that options granted under the 2017 plan are not continued, assumed or substituted with equivalent awards in connection with
the change in control.
Based on: (i) the number of unvested RSU awards held by such executive as of December 31, 2017, multiplied by (ii) the per share
market price of our ordinary shares as of December 29, 2017, the last trading day of fiscal 2017, based upon the closing sale price of our
ordinary shares, as reported by the Nasdaq Global Select Market, on the last trading day of our fiscal year, December 29, 2017 ($22.20).
The “Change in Control” scenario assumes that RSU awards granted under the 2017 plan are not continued, assumed or substituted with
equivalent awards in connection with the change in control.
Amounts reported represent the value of the immediate payout of the target number of ordinary shares that the named executive officer
would have been entitled to receive as payout for PSU awards for the June 26, 2017 - June 28, 2020 performance period. The value is
based on: (a) the number of outstanding PSU awards at target, multiplied by (b) the closing sale price of our ordinary shares, as reported
by the Nasdaq Global Select Market, on the last trading day of our fiscal year, December 29, 2017 ($22.20). The “Change in Control”
scenario assumes that PSU awards granted under the 2017 plan are not continued, assumed or substituted with equivalent awards in
connection with the change in control and are paid out, assuming target performance.
Risk Assessment of Compensation Policies, Practices, and Programs
As a result of our annual assessment on risk in our compensation programs, we concluded that our compensation policies, practices,
and programs and related compensation governance structure, work together in a manner so as to encourage our employees,
including our named executive officers, to pursue growth strategies that emphasize shareholder value creation, but not to take
unnecessary or excessive risks that could threaten the value of our company. As part of our assessment, we noted in particular the
following:
(cid:120)
annual base salaries for employees are not subject to performance risk and, for most non-executive employees,
constitute the largest part of their total compensation;
(cid:120)
(cid:120)
(cid:120) while performance-based, or at risk, compensation constitutes a significant percentage of the overall total
compensation of many of our employees, including our executives, non-performance based compensation for most
employees for most years is still a sufficiently high percentage of their overall total compensation that the
performance-based compensation does not encourage unnecessary or excessive risk taking;
for most employees, our performance-based compensation has appropriate maximums;
a significant portion of performance-based compensation of our employees is in the form of long-term equity
incentives which do not encourage unnecessary or excessive risk because they generally vest over a three to four-year
period of time thereby focusing our employees on our long-term interests; and
performance-based or variable compensation awarded to our employees, which for our higher-level employees,
including our named executive officers, constitutes the largest part of their total compensation, is appropriately
balanced between annual and long-term performance and cash and equity compensation, and utilizes several different
performance measures and goals that are drivers of long-term success for our company and shareholders.
(cid:120)
As a matter of best practice, we will continue to monitor our compensation policies, practices, and programs to ensure that they
continue to align the interest of our employees, including in particular our executive officers, with those of our long-term
shareholders while avoiding unnecessary or excessive risk.
174
Compensation Committee Interlocks and Insider Participation
Sean D. Carney, John L. Miclot, Kevin C. O’Boyle and Elizabeth H. Weatherman served as members of the compensation
committee of our board of directors during 2017. Sean D. Carney, a former director, served as a member of the compensation
committee of our board of directors until April 30, 2017. No member of the compensation committee is or was an officer or
employee of ours or any of our subsidiaries while serving on the compensation committee. In addition, no executive officer of ours
served during 2017 as a director or a member of the compensation committee of any entity that had an executive officer serving as
our director or a member of the compensation committee.
Director Compensation
Overview
Under the terms of our board of directors compensation policy, which was approved by the general meeting of our shareholders on
August 26, 2010 and was amended on October 28, 2010, the compensation packages for our non-executive directors are determined
by our non-executive directors, based upon a recommendation by the compensation committee. Such compensation is determined
by our non-executive directors pursuant to the terms of our articles of association, which provide that if all directors have a conflict
of interest in the matter to be acted upon, the matter shall be approved by our non-executive directors. In determining non-executive
director compensation, we target compensation in the market median range of our peer companies; although, we may deviate from
the median if we determine necessary or appropriate on a case-by-case basis.
Under the terms of our non-executive director compensation program, compensation for our non-executive directors is comprised of
both cash compensation and equity-based compensation. Cash compensation is in the form of annual or other retainers for non-
executive directors, chairman, committee chairs, and committee members. Equity-based compensation is in the form of initial and
annual stock option and RSU award grants. Each of these components is described in more detail below. We do not provide
perquisites and other personal benefits to our non-executive directors.
Cash Compensation
The table below sets forth the annual cash retainers paid to each non-executive director and the additional annual cash retainers paid
to the chairman and each board committee chair and board committee member during 2017:
Description
Non-executive director
Chairman premium
Audit committee chair premium
Compensation committee chair premium
Nominating, corporate governance and compliance committee chair premium
Strategic transactions committee chair premium
Audit committee member (including chair)
Compensation committee member (including chair)
Nominating, corporate governance and compliance committee member (including chair)
Strategic transactions committee member (including chair)
Annual cash retainer
($)
60,000
75,000
20,000
13,000
10,000
10,000
15,000
7,000
7,000
5,000
The annual cash retainers are paid on a quarterly basis in arrears within 30 days of the end of each calendar quarter. For example,
the retainers for the first calendar quarter covering the period from January 1 through March 31 are paid within 30 days of March 31.
In addition, each non-executive director receives a cash travel stipend of $2,000 for each board meeting attended in person that takes
place in the Netherlands or other location outside the United States.
Equity-Based Compensation
The equity-based compensation component of our non-executive director compensation consists of initial stock option and RSUs
awards to new non-executive directors upon their first appointment or election to our board of directors and annual stock option and
RSU awards to all non-executive directors on the same date that annual performance recognition grants of equity awards are made to
our employees.
Non-executive directors, upon their initial election to our board of directors and on an annual basis thereafter effective as of the same
date that annual performance recognition grants of equity awards are made to our employees, receive a certain dollar amount equal
to $195,000, one-half of which is paid in stock options and the remaining one-half of which is paid in RSU awards. The number of
ordinary shares underlying the stock options and RSU awards is determined based on the 10-trading day average closing sale price
of an ordinary share, as reported by the Nasdaq Global Select Market, and as determined on the third trading day prior to the date of
anticipated corporate approval of the award. The stock options have a term of 10 years and a per share exercise price equal to 100%
of the fair market value of an ordinary share on the grant date. The stock options vest over a two-year period, with one-half of the
underlying shares vesting on each of the one-year and two-year anniversaries of the grant date, in each case so long as the director is
still a director as of such date. The RSU awards vest in full on the one-year anniversary of the grant date so long as the director is
still a director as of such date.
175
Election to Receive Equity-Based Compensation in Lieu of Cash Compensation
Our non-executive director compensation policy allows our non-executive directors to elect to receive an RSU award in lieu of
100% of their annual cash retainers payable for services to be rendered as a non-executive director, chairman and chair or member of
any board committee. Each non-executive director who elects to receive an RSU award in lieu of such director’s annual cash
retainers is granted an RSU award under our 2017 plan for that number of ordinary shares as determined by dividing the aggregate
dollar amount of all annual cash retainers anticipated to payable to such director for the period commencing on July 1 of each year to
June 30 of the following year by the 10-trading day average closing sale price of our ordinary shares as reported by the Nasdaq
Global Select Market and as determined on the third trading day prior to the date of anticipated corporate approval of the award.
These RSU awards are typically granted effective as of the same date that other director equity grants are made and annual
performance recognition grants of equity awards are made to our employees. These RSU awards vest in four equal installments on
the following September 30th, December 31st, March 31st and June 30th.
If a non-executive director who elected to receive an RSU award in lieu of such director’s annual cash retainers is no longer a
director before such director’s interest in all of the ordinary shares underlying RSU award have vested and become issuable, then
such director will forfeit his or her rights to receive all of the shares underling such RSU award that have not vested and been issued
as of the date such director’s status as a director so terminates. In such case, the non-executive director will receive in cash a pro
rata portion of his or her annual cash retainers for the quarter in which the director’s status as a director terminates.
If a non-executive director who elected to receive an RSU award in lieu of such director’s annual cash retainers becomes entitled to
receive an increased or additional annual cash retainer during the period from July 1 to June 30 of the next year, such director will
receive such increased or additional annual cash retainer in cash until July 1 of the next year when the director may elect (on or prior
to June 15 of the next year) to receive an RSU award in lieu of such director’s annual cash retainers.
If a non-executive director who elected to receive an RSU award in lieu of such director’s annual cash retainers experiences a
change in the director’s membership on one or more board committees or chair positions prior to June 30 of the next year such that
the director becomes entitled to receive annual cash retainers for the period from July 1 to June 30 of the next year aggregating an
amount less than the aggregate amount used to calculate the director’s most recent RSU award received, the director will forfeit as
of the effective date of such board committee or chair change his or her rights to receive a pro rata portion of the shares underlying
such RSU award reflecting the decrease in the director’s aggregate annual cash retainers and the date on which such decrease
occurred. In addition, the vesting of the RSU award will be revised appropriately to reflect any such change in the number of shares
underlying the RSU award and the date on which such change occurred.
Summary of Cash and Other Director Compensation
The table below summarizes the compensation received by each individual who served as a non-executive director of our company
during the fiscal year ended December 31, 2017. While Mr. Palmisano did not receive additional compensation for his service as
executive director, a portion of his compensation was allocated to his service as executive director. For more information regarding
the allocation of Mr. Palmisano’s compensation, please refer to note (1) to the Summary Compensation Table under “-Executive
Compensation Tables and Narratives-Summary Compensation.”
DIRECTOR COMPENSATION- 2017
Name
Gary D. Blackford
Sean D. Carney(8)
John L. Miclot
Kevin C. O’Boyle
Amy S. Paul
David D. Stevens
Richard F. Wallman
Elizabeth H. Weatherman
____________________
Fees earned
or paid
in cash(1)
($)
79,667
29,000
75,667
79,667
77,000
147,000
100,000
82,000
Stock
awards(2)(3)
($)
99,906
—
99,906
99,906
99,906
99,906
152,375
99,906
Option
awards(4)(5)
($)
100,719
—
100,719
100,719
100,719
100,719
100,719
100,719
All other
compensation(6)(7)
($)
8,000
4,000
8,000
8,000
8,000
8,000
8,000
8,000
Total
($)
288,292
33,000
284,292
288,292
285,625
355,625
361,094
290,625
(1)
Unless a director otherwise elects to convert all of his or her annual retainers into RSU awards, annual retainers are paid in cash on a
quarterly basis in arrears within 30 days of the end of each calendar quarter. One of our non-executive directors elected to convert all of
his annual retainers covering the period of service and from July 1, 2017 to June 30, 2018 into RSU awards and accordingly, was granted
an RSU award on July 25, 2017 under our 2017 plan for that number of ordinary shares as determined based on the following formula:
(a) the aggregate dollar amount of all annual cash retainers that otherwise would have been payable to the non-executive director for
services to be rendered as a non-executive director, chairman and chair or member of any board committee (based on such director’s
board committee memberships and chair positions as of the grant date), divided by (b) the 10-trading day average closing sale price of an
ordinary share, as reported by the Nasdaq Global Select Market, and as determined on the third trading day prior to the date of
anticipated corporate approval of the award. The RSU award vests and the underlying shares become issuable in four as nearly equal as
possible quarterly installments, on September 30, December 31, March 31 and June 30, in each case so long as the non-executive
director is a director of our company as of such date.
176
The table below sets forth: (a) the number of RSU awards granted to the non-executive director on July 25, 2017; (b) the total amount of
annual retainers converted by such director into RSU awards; (c) of such total amount of annual retainers converted into RSU awards,
the amount attributed to the director’s service during 2017, which amount is included in the “Fees earned or paid in cash” column for
each director; (d) the grant date fair value of the stock awards computed in accordance with FASB ASC Topic 718; and (e) the
incremental grant date fair value for the stock awards above and beyond the amount of annual retainers for 2017 service converted into
RSU awards computed in accordance with FASB ASC Topic 718.
Total amount of
retainers converted
into RSU awards
($)
100,000
Number of
RSU awards
(#)
3,678
Amount of retainer
converted into RSU
awards attributable to
2016 service
($)
50,000
Grant date fair
value of RSU
awards
($)
102,469
Incremental grant date
fair value of RSU
awards received during
2016
($)
52,469
Name
Mr. Wallman
On July 25, 2017, each non-executive director received an RSU award for 3,586 ordinary shares granted under the 2017 plan. The RSU
awards vest and the underlying shares become issuable on the one-year anniversary of the grant date, so long as the non-executive
director is a director of our company as of such date. In addition, as described above in note (1), Mr. Wallman elected to convert his
annual retainers covering the period of service from July 1, 2017 to June 30, 2018 into RSU awards under our 2017 plan. The amount
reported in the “Stock awards” column represents the aggregate grant date fair value for the July 25, 2017 RSU awards granted to each
director in 2017 and for Mr. Wallman, the incremental grant date fair value for the additional RSU awards granted to him as described
above in note (1), in each case as computed in accordance with FASB ASC Topic 718. The grant date fair value for RSU awards is
determined based on the closing sale price of our ordinary shares on the grant date.
As of December 31, 2017, each non-executive director held the following number of unvested stock awards (all of which are in the form
of RSU awards): Mr. Blackford (3,586); Mr. Carney (0); Mr. Miclot (3,586); Mr. O’Boyle (3,586); Ms. Paul (3,586); Mr. Stevens
(3,586); Mr. Wallman (5,425); and Ms. Weatherman (3,586).
On July 25, 2017, each non-executive director received a stock option to purchase 10,275 ordinary shares at an exercise price of $27.86
per share granted under the 2017 plan. Such option expires on July 25, 2027 and vests with respect to one-half of the underlying
ordinary shares on each of July 25, 2018 and July 25, 2019, so long as the individual remains a director of our company as of such date.
Amounts reported in the “Option awards” column represent the aggregate grant date fair value for option awards granted to each non-
executive director in 2017 computed in accordance with FASB ASC Topic 718. The grant date fair value is determined based on our
Black-Scholes option pricing model. The grant date fair value per share for the options granted on July 25, 2017 was $9.80 and was
determined using the following specific assumptions: risk free interest rate: 1.875%; expected life: 6.10 years; expected volatility:
32.5%; and expected dividend yield: 0.
The table below provides information regarding the aggregate number of options to purchase ordinary shares outstanding at December
31, 2017 and held by each of the non-executive directors named in the above table:
Name
Mr. Blackford
Mr. Carney
Mr. Miclot
Mr. O’Boyle
Ms. Paul
Mr. Stevens
Mr. Wallman
Ms. Weatherman
Aggregate number of
shares underlying
options
94,910
—
105,221
110,878
110,375
84,603
29,840
35,349
Exercisable/
unexercisable
78,752/16,158
—
89,063/16,158
94,720/16,158
94,217/16,158
68,445/16,158
13,682/16,158
19,191/16,158
Range of
exercise
price(s) ($)
15.01-29.06
—
15.01-29.06
18.04-27.86
15.01-29.06
15.01-29.06
21.24-27.86
20.62-27.86
Range of
expiration
date(s)
05/14/2018-07/25/2027
—
05/14/2018-07/25/2027
06/03/2020-07/25/2027
05/14/2018-07/25/2027
05/14/2018-07/25/2027
05/12/2021-07/25/2027
05/12/2021-07/25/2027
Represents travel stipends of $2,000 for each board meeting attended in person that takes place in the Netherlands or other location
outside the United States.
We do not provide perquisites and other personal benefits to our non-executive directors. Any perquisites or personal benefits actually
provided to any non-executive director were less than $10,000 in the aggregate.
Mr. Carney resigned from our board of directors effective as of April 30, 2017.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
177
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners
The table below sets forth certain information concerning the beneficial ownership of our ordinary shares as of February 23, 2018,
by each person known by us to beneficially own more than 5% of our ordinary shares. The calculations in the table below assume
that there are 105,906,409 ordinary shares outstanding. Beneficial ownership is determined in accordance with the rules and
regulations of the SEC. In computing the number of ordinary shares beneficially owned by a person and the percentage ownership
of that person, we have included ordinary shares that the person has the right to acquire within 60 days, including through the
exercise of any option, warrant or other right, the conversion of any other security, and the issuance of ordinary shares upon the
vesting of stock awards granted in the form of restricted stock units. The ordinary shares that a shareholder has the right to acquire
within 60 days, however, are not included in the computation of the percentage ownership of any other person.
Name and address of beneficial owner
Class of
securities
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
____________________
FMR LLC (1)
T. Rowe Price Associates, Inc. (2)
The Vanguard Group, Inc. (3)
BlackRock, Inc. (4)
OrbiMed Advisors LLC (5)
Invesco Ltd. (6)
Ordinary shares
beneficially owned
Number
15,717,232
10,366,976
8,745,836
7,255,388
6,852,068
5,841,441
Percent
14.8%
9.8%
8.3%
6.9%
6.5%
5.5%
*
(1)
(2)
(3)
(4)
(5)
(6)
Represents beneficial ownership of less than 1% of our outstanding ordinary shares.
Based solely on information contained in a Schedule 13G/A of FMR LLC, an investment advisor, filed with the SEC on February 13,
2018, with sole investment discretion with respect to all such shares and sole voting authority with respect to 1,058,818 shares. Abigail P.
Johnson is a Director, the Chairman and Chief Executive Officer of FMR LLC. Members of the Johnson family, including Abigail P.
Johnson, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of
the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders’ voting
agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting
common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders’ voting
agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group
with respect to FMR. Neither FMR nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by
the various investment companies registered under the Investment Company Act (Fidelity Funds) advised by Fidelity Management &
Research Company (FMR Co), a wholly owned subsidiary of FMR, which power resides with the Fidelity Funds’ Boards of Trustees.
Fidelity Co carries out the voting of the shares under written guidelines established by the Fidelity Funds’ Boards of Trustees. The
business address of FMR LLC is 245 Summer Street, Boston, Massachusetts 02210.
Based solely on information contained in a Schedule 13G/A of T. Rowe Price Associates, Inc., an investment advisor, filed with the SEC
on February 14, 2018, reflecting beneficial ownership as of December 31, 2017, with sole investment discretion with respect to all such
shares, and sole voting authority with respect to 1,523,091 shares. The address of T. Rowe Price Associates, Inc. is 100 East Pratt Street,
Baltimore, Maryland 21202.
Based solely on information contained in a Schedule 13G/A of The Vanguard Group, Inc., an investment adviser, filed with the SEC on
February 8, 2018, reflecting beneficial ownership as of December 31, 2017, with sole investment discretion with respect to 8,536,079
shares, sole voting authority with respect to 203,683 shares, shared investment discretion with respect to 209,757 shares and shared
voting authority with respect to 15,075 shares. The address of The Vanguard Group, Inc. is 100 Vanguard Boulevard, Malvern,
Pennsylvania 19355.
Based solely on information contained in a Schedule 13G/A of BlackRock, Inc., a parent holding company, filed with the SEC on
January 30, 2018, reflecting beneficial ownership as of December 31, 2017, with sole investment discretion with respect to all such
shares, and sole voting authority with respect to 7,044,125 shares. The address of BlackRock, Inc. is 55 East 52nd Street, New York,
New York 10055.
Based solely on a Schedule 13G/A filed on February 13, 2018 by OrbiMed Advisors LLC (Advisors) and OrbiMed Capital LLC
(Capital), reflecting beneficial ownership as of December 31, 2017. The beneficial ownership reflected in the table includes 2,778,004
ordinary shares beneficially owned by Advisors with shared voting and investment discretion and 4,074,064 ordinary shares beneficially
owned by Capital with shared voting and investment discretion. Advisors and Capital exercise investment and voting power over the
shares through a management committee comprised of Carl L. Gordon, Sven H. Borho and Jonathan T. Silverstein, each of whom
disclaims beneficial ownership of the shares. Neither reporting person beneficially owns more than 5% of the outstanding shares.
Advisors disclaims beneficial ownership of the shares held indirectly by Capital, and Capital disclaims beneficial ownership of the
shares held indirectly by Advisors. The address of their principal business office is 601 Lexington Avenue, 54th Floor, New York, New
York 10022
Based solely on information contained in a Schedule 13G/A of Invesco Ltd., a parent holding company, filed with the SEC on February
13, 2018, reflecting beneficial ownership as of December 29, 2017, with sole investment discretion with respect to all such shares and
sole voting authority with respect to 5,411,205 shares. The address of Invesco Ltd. is 1555 Peachtree Street NE, Suite 1800, Atlanta,
Georgia 30309.
178
Security Ownership of Management
The table below sets forth certain information concerning the beneficial ownership of our ordinary shares as of February 23, 2018,
by each of our directors and named executive officers and all of our current directors and executive officers as a group.
The calculations in the table below assume that there are 105,906,409 ordinary shares outstanding. Beneficial ownership is
determined in accordance with the rules and regulations of the SEC. In computing the number of ordinary shares beneficially owned
by a person and the percentage ownership of that person, we have included ordinary shares that the person has the right to acquire
within 60 days, including through the exercise of any option, warrant or other right, the conversion of any other security, and the
issuance of ordinary shares upon the vesting of stock awards granted in the form of restricted stock units. The ordinary shares that a
shareholder has the right to acquire within 60 days, however, are not included in the computation of the percentage ownership of any
other person.
Name and address of beneficial owner
Number
Class of
securities
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
____________________
David D. Stevens
Gary D. Blackford
John L. Miclot
Kevin C. O’Boyle
Amy S. Paul
Richard F. Wallman
Elizabeth H. Weatherman
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
All directors and executive officers as a group (20 persons)
Ordinary shares
beneficially owned(1)
141,787
140,439
123,513
110,345
130,131
109,203
27,405
2,031,500
281,760
121,307
—
149,038
4,045,597
Percent
*
*
*
*
*
*
*
1.9%
*
*
*
*
3.7%
*
(1)
Represents beneficial ownership of less than 1% of our outstanding ordinary shares.
Includes for the persons listed below the following ordinary shares subject to options held by that person that are currently exercisable or
become exercisable within 60 days of February 23, 2018 and ordinary shares issuable upon the vesting of RSU awards within 60 days of
February 23, 2018:
Name
Options
RSU awards
David D. Stevens
Gary D. Blackford
John L. Miclot
Kevin C. O’Boyle
Amy S. Paul
Richard F. Wallman
Elizabeth H. Weatherman
Robert J. Palmisano
Lance A. Berry
Kevin D. Cordell
Jason D. Asper
James A. Lightman
All directors and executive officers as a group (20 persons)
68,445
78,752
89,063
94,720
94,217
13,682
19,191
1,712,132
209,336
102,130
—
128,483
3,169,687
—
—
—
—
—
919
—
—
—
—
—
—
919
179
Securities Authorized for Issuance Under Equity Compensation Plans
The table below provides information regarding the number of ordinary shares to be issued upon the exercise of outstanding stock
options and RSU awards granted under our equity compensation plans and the number of ordinary shares remaining available for
future issuance our equity compensation plans as of December 31, 2017.
EQUITY COMPENSATION PLAN INFORMATION
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
____________________
Number of securities
to be issued upon
exercise of outstanding
options, warrants and rights
(a)
8,023,598 (1)(2)(3)
—
8,023,598 (1)(2)(3)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
$22.22 (4)
—
$22.22 (4)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
4,865,082 (5)
—
4,865,082 (5)
(1)
(2)
(3)
(4)
(5)
Amount includes ordinary shares issuable upon the exercise of stock options granted under the Wright Medical Group N.V. 2017 Equity
and Incentive Plan, Wright Medical Group N.V. Amended and Restated 2010 Incentive Plan and Tornier N.V. Amended and Restated
Stock Option Plan, ordinary shares issuable upon the vesting of RSU awards granted under the Wright Medical Group N.V. 2017 Equity
and Incentive Plan and Wright Medical Group N.V. Amended and Restated 2010 Incentive Plan and PSU awards granted under the
Wright Medical Group N.V. 2017 Equity and Incentive Plan, assuming target PSU payouts.
Excludes employee stock purchase rights under the Wright Medical Group N.V. Amended and Restated Employee Stock Purchase Plan,
which is an amended and restated version of the Tornier N.V. 2010 Employee Stock Purchase Plan, was approved by our shareholders on
June 28, 2016. Under such plan, each eligible employee may purchase ordinary shares at semi-annual intervals on June 30th and
December 31st each calendar year at a purchase price per share equal to 85% of the closing sales price per share of our ordinary shares
on the last day of the offering period.
Excludes an aggregate of 3,353,172 ordinary shares issuable upon the exercise of stock options granted under legacy Wright equity
compensation plans and non-plan inducement option agreements assumed by us in connection with the Wright/Tornier merger. The
weighted-average per share exercise price of these assumed stock options as of December 31, 2017 was $22.12. No further grants or
awards will be made under these assumed legacy Wright equity compensation plans and non-plan inducement option agreements.
Not included in the weighted-average exercise price calculation are 1,279,588 RSU awards and 108,414 PSU awards.
Amount includes 4,430,789 ordinary shares remaining available for future issuance under the Wright Medical Group N.V. 2017 Equity
and Incentive Plan and 434,293 ordinary shares remaining available for future issuance under the Wright Medical Group N.V. Amended
and Restated Employee Stock Purchase Plan, assuming maximum PSU payouts. No shares remain available for grant under the Wright
Medical Group N.V. Amended and Restated 2010 Incentive Plan, Tornier N.V. Amended and Restated Stock Option Plan or any of the
legacy Wright equity compensation plans since such plans have been terminated with respect to future grants.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Procedures Regarding Approval of Related Party Transactions
As provided in our audit committee charter, all related party transactions are to be reviewed and pre-approved by the audit
committee. Related party transactions are transactions to which we were or are a participant and in which:
(cid:120)
(cid:120)
the amounts involved exceeded or will exceed $120,000; and
a related person (including any director, director nominee, executive officer, holder of more than 5% of our ordinary
shares or any member of their immediate family) had or will have a direct or indirect material interest.
In determining whether to approve a related party transaction, the audit committee generally will evaluate the transaction in terms of
(i) the benefits to our Company; (ii) the impact on a director’s independence in the event the related person is a director, an
immediate family member of a director, or an entity in which a director is a partner, shareholder or executive officer; (iii) the
availability of other sources for comparable products or services; (iv) the terms and conditions of the transaction; and (v) the terms
available to unrelated third parties or to employees generally. The audit committee will then document its findings and conclusions
in written minutes. In the event a transaction relates to a member of the audit committee, that member will not participate in the
audit committee’s deliberations.
We are unaware of any related party transactions that have occurred since the beginning of our last fiscal year, or any currently
proposed related party transactions requiring disclosure in this report.
Director Independence
The information regarding director independence is disclosed in “Part III - Item 10. Directors, Executive Officers and Corporate
Governance—Board Structure and Composition” and in “Part III - Item 10. Directors, Executive Officers and Corporate
Governance—Board Committees” of this report.
180
Item 14.
Principal Accounting Fees and Services.
Appointment of Independent Registered Public Accounting Firms
The audit committee of our board of directors is directly responsible for the appointment, compensation, and oversight of our
independent auditor or independent registered public accounting firm. Our general meeting of shareholders is directly responsible
for the appointment of the auditor that audits our Dutch statutory annual accounts prepared in accordance with Dutch law each year.
Audit, Audit-Related, Tax, and All Other Fees
The following table shows the fees that we paid or accrued for audit and other services provided by our independent registered
public accounting firm, KPMG LLP, for 2017 and 2016:
Fees
Audit fees
Audit-related fees
Tax fees
All other fees
Total
$
$
2017
2,050,153 $
72,550
—
3,000
2,125,703 $
2016
2,400,253
43,000
265,000
120,000
2,828,253
In the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees for professional services for the audit of
our consolidated financial statements included in this annual report on Form 10-K, and the review of our consolidated financial
statements included in quarterly reports on Form 10-Q and registration statements and for services that are normally provided by our
independent registered public accounting firm in connection with statutory and regulatory filings or engagements; “audit-related
fees” are fees for assurance and related services that are reasonably related to the performance of the audit or review of our
consolidated financial statements and are not included in “audit fees” and include fees for services performed related to audits on our
benefit plan and due diligence on acquisitions; “tax fees” are fees for tax compliance and consultation primarily related to assistance
with international tax compliance and tax audits, tax advice on acquisitions, and tax planning; and “all other fees” are fees for any
services not included in the first three categories, which includes fees for a risk management review and assessment.
Pre-Approval Policies and Procedures
In addition to retaining KPMG LLP to audit our consolidated financial statements for 2017, the audit committee retained KPMG
LLP to provide other auditing and advisory services in 2017. The audit committee understands the need for our independent
registered public accounting firm to maintain objectivity and independence in its audits of our consolidated financial statements.
The audit committee has reviewed all non-audit services provided by KPMG LLP in 2017 and has concluded that the provision of
such services was compatible with maintaining KPMG LLP’s independence in the conduct of its auditing functions.
To help ensure the independence of the independent auditor, the audit committee pre-approves all audit and permissible non-audit
services to be provided to us by our independent registered public accounting firm prior to commencement of services. Our audit
committee chairman has the delegated authority to pre-approve such services up to a specified aggregate fee amount. These pre-
approval decisions are presented to the full audit committee at its next scheduled meeting.
181
Item 15.
Exhibits, Financial Statement Schedules.
Financial Statements
PART IV
See Index to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Financial Statement Schedules
See Schedule II — Valuation and Qualifying Accounts on page S-1 of this report.
Exhibits
The exhibits to this report are listed below. A copy of any of the exhibits will be furnished at a reasonable cost, upon receipt of a
written request for any such exhibit. Such request should be sent to James A. Lightman, Senior Vice President, General Counsel and
Secretary, Wright Medical Group N.V., Prins Bernhardplein 200, 1097 JB Amsterdam, the Netherlands. The Exhibit Index indicates
each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
Exhibit No.
2.1
Exhibit
Business Sale Agreement dated October 21,
2.2
2.3
2.4
2.5
2.6
2016 between Tornier SAS, Corin France SAS,
Corin Orthopaedics Holdings Limited and
Certain Related Entities Party Thereto*
Agreement and Plan of Merger dated as of
October 27, 2014 among Tornier N.V., Trooper
Holdings Inc., Trooper Merger Sub Inc. and
Wright Medical Group, Inc.*
Agreement and Plan of Merger dated as of
January 30, 2014 among Wright Medical
Group, Inc., WMMS, LLC, OrthoPro, L.L.C.
and OP CHA, Inc., as Company Holders’
Agent*
Agreement and Plan of Merger dated as of
January 30, 2014 among Wright Medical
Group, Inc., Winter Solstice LLC, Solana
Surgical, LLC, and Alan Taylor, as Members’
Representative*
Asset Purchase Agreement dated as of June 18,
2013 among MicroPort Medical B.V.,
MicroPort Scientific Corporation and Wright
Medical Group, Inc.*
Agreement and Plan of Merger dated as of
November 19, 2012 among BioMimetic
Therapeutics, Inc., Wright Medical Group, Inc.,
Achilles Merger Subsidiary, Inc. and Achilles
Acquisition Subsidiary, LLC*
3.1
Articles of Association of Wright Medical
Group N.V.
4.1
4.2
Indenture dated as of May 20, 2016 between
Wright Medical Group N.V. and The Bank of
New York Mellon Trust Company, N.A.
(including the Form of the 2.25% Cash
Convertible Senior Note due 2021)
Indenture dated as of February 13, 2015
between Wright Medical Group, Inc. and Bank
of New York Mellon Trust Company, N.A.
(including the Form of the 2.00% Cash
Convertible Senior Note due 2020)
182
Method of Filing
Incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K as filed with the Securities
and Exchange Commission on October 24, 2016 (File No.
001-35065)
Incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K as filed with the Securities
and Exchange Commission on October 27, 2014 (File No.
001-35065)
Incorporated by reference to Exhibit 2.1 to Wright Medical
Group, Inc.’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on January 31, 2014
(File No. 001-35823)
Incorporated by reference to Exhibit 2.2 to Wright Medical
Group, Inc.’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on January 31, 2014
(File No. 001-35823)
Incorporated by reference to Exhibit 2.1 to Wright Medical
Group, Inc.’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on June 21, 2013
(File No. 001-35823)
Incorporated by reference to Exhibit 2.1 to Wright Medical
Group, Inc.’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 19,
2012 (File No. 001-32883)
Incorporated by reference to Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K as filed with the Securities
and Exchange Commission on July 1, 2016 (File No. 001-
35065)
Incorporated by reference to Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K as filed with the Securities
and Exchange Commission on May 25, 2016 (File No.
001-35065)
Incorporated by reference to Exhibit 4.1 to Wright Medical
Group, Inc.’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on February 13,
2015 (File No. 001-35823)
Method of Filing
Incorporated by reference to Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K as filed with the Securities
and Exchange Commission on November 27, 2015 (File
No. 001-35065)
Incorporated by reference to Exhibit 10.1 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on March 1,
2013 (File No. 001-32883)
Incorporated by reference to Exhibit 4.2 to the Registrant’s
Registration Statement on Form 8-A as filed with the
Securities and Exchange Commission on October 1, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on June 27, 2017
(File No. 001-35065)
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.5 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.6 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.7 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.8 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.9 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.10 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Exhibit No.
4.3
Exhibit
Supplemental Indenture dated as of November
24, 2015 among Wright Medical Group, Inc.,
Wright Medical Group N.V., as Guarantor, and
The Bank of New York Mellon Trust Company,
N.A., as Trustee
4.4
4.5
Contingent Value Rights Agreement dated as of
March 1, 2013 between Wright Medical Group,
Inc. and American Stock Transfer & Trust
Company, LLC
Assignment and Assumption Agreement dated
as of October 1, 2015 between Wright Medical
Group, Inc., Wright Medical Group N.V. and
American Stock Transfer & Trust Company,
LLC, as Trustee
10.1
Wright Medical Group N.V. 2017 Equity and
Incentive Plan**
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Option Award Agreement under the
Wright Medical Group N.V. 2017 Equity and
Incentive Plan Representing Stock Options
Granted to Executive Officers**
Form of Restricted Stock Unit Award
Agreement under the Wright Medical Group
N.V. 2017 Equity and Incentive Plan
Representing Restricted Stock Units Granted to
Executive Officers**
Form of Restricted Stock Unit Award
Agreement under the Wright Medical Group
N.V. 2017 Equity and Incentive Plan
Representing Restricted Stock Units Granted to
New Executive Officers**
Form of Performance Award Agreement under
the Wright Medical Group N.V. 2017 Equity
and Incentive Plan Representing Performance
Awards Granted to Executive Officers**
Form of Option Award Agreement under the
Wright Medical Group N.V. 2017 Equity and
Incentive Plan Representing Stock Options
Granted to Robert J. Palmisano**
Form of Restricted Stock Unit Award
Agreement under the Wright Medical Group
N.V. 2017 Equity and Incentive Plan
Representing Restricted Stock Units Granted to
Robert J. Palmisano**
Form of Performance Award Agreement under
the Wright Medical Group N.V. 2017 Equity
and Incentive Plan Representing Performance
Awards Granted to Robert J. Palmisano**
Form of Option Award Agreement under the
Wright Medical Group N.V. 2017 Equity and
Incentive Plan Representing Stock Options
Granted to Non-Executive Directors**
10.10
Form of Restricted Stock Unit Award
Agreement under the Wright Medical Group
N.V. 2017 Equity and Incentive Plan
Representing Restricted Stock Units Granted to
Non-Executive Directors**
183
Exhibit No.
10.11
Exhibit
Method of Filing
Form of Restricted Stock Unit Award
Agreement under the Wright Medical Group
N.V. 2017 Equity and Incentive Plan
Representing Restricted Stock Units Granted to
Non-Executive Directors in Lieu of Cash
Retainers**
10.12
Wright Medical Group N.V. Amended and
Restated 2010 Incentive Plan**
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Form of Option Certificate under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Stock
Options Granted to Executive Officers**
Form of Stock Grant Certificate (in the Form of
a Restricted Stock Unit) under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Restricted
Stock Units Granted to Executive Officers**
Form of Stock Grant Certificate (in the Form of
a Restricted Stock Unit) under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Restricted
Stock Units Granted to New Executive
Officers**
Form of Option Certificate under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Stock
Options Granted to Robert J. Palmisano**
Form of Stock Grant Certificate (in the Form of
a Restricted Stock Unit) under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Restricted
Stock Units Granted to Robert J. Palmisano**
Form of Option Certificate under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Stock
Options Granted to Non-Executive Directors**
Form of Stock Grant Certificate (in the Form of
a Restricted Stock Unit) under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Restricted
Stock Units Granted to Non-Executive
Directors**
10.20
Form of Stock Grant Certificate (in the Form of
a Restricted Stock Unit) under the Wright
Medical Group N.V. Amended and Restated
2010 Incentive Plan Representing Restricted
Stock Units Granted to Non-Executive
Directors in Lieu of Cash Retainers**
Tornier N.V. Amended and Restated 2010
Incentive Plan**
10.21
10.22
Form of Option Certificate under the Tornier
N.V. 2010 Incentive Plan**
10.23
Tornier N.V. Amended and Restated Stock
Option Plan**
184
Incorporated by reference to Exhibit 10.11 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 25, 2017 (File No. 001-35065)
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on June 19, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.6 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.7 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.8 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.9 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on June 19, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.9 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 29, 2013 (File No. 001-35065)
Incorporated by reference to Exhibit 10.9 to the
Registrant’s Amendment No. 9 to Registration Statement
on Form S-1 as filed with the Securities and Exchange
Commission on January 18, 2011 (Registration No. 333-
167370)
Exhibit No.
10.24
Exhibit
Method of Filing
Form of Option Agreement under the
Tornier N.V. Stock Option Plan for Directors
and Officers**
10.25
Wright Medical Group, Inc. Second Amended
and Restated 2009 Equity Incentive Plan**
10.26
Form of Executive Stock Option Agreement
under the Wright Medical Group, Inc. Second
Amended and Restated 2009 Equity Incentive
Plan**
10.27
Form of Non-Employee Director Stock Option
Agreement under the Wright Medical Group,
Inc. Second Amended and Restated 2009
Equity Incentive Plan**
10.28
Wright Medical Group, Inc. Fifth Amended and
Restated 1999 Equity Incentive Plan**
10.29
10.30
10.31
First Amendment to the Wright Medical Group,
Inc. Fifth Amended and Restated 1999 Equity
Incentive Plan**
Form of Executive Stock Option Agreement
under the Wright Medical Group, Inc. Fifth
Amended and Restated 1999 Equity Incentive
Plan**
Form of Non-Employee Director Stock Option
Agreement under the Wright Medical Group,
Inc. Fifth Amended and Restated 1999 Equity
Incentive Plan**
10.32
Wright Medical Group N.V. Amended and
Restated Employee Stock Purchase Plan**
10.33
Wright Medical Group N.V. Performance
Incentive Plan**
10.34
Form of Indemnification Agreement**
10.35
Service Agreement effective as of October 1,
2015 between Wright Medical Group N.V. and
Robert J. Palmisano**
10.36
Employment Agreement effective as of October
1, 2015 between Wright Medical Group, Inc.
and Robert J. Palmisano**
10.37
Guaranty by Wright Medical Group N.V.
effective as of October 1, 2015 with respect to
Wright Medical Group, Inc. Obligations under
Employment Agreement with Robert J.
Palmisano**
10.38
Confidentiality, Non-Competition, Non-
Solicitation and Intellectual Property Rights
Agreement effective as of October 1, 2015
between Wright Medical Group, Inc. and
Robert J. Palmisano**
185
Incorporated by reference to Exhibit 10.9 to the
Registrant’s Registration Statement on Form S-1 as filed
with the Securities and Exchange Commission on June 8,
2010 (Registration No. 333-167370)
Incorporated by reference to Wright Medical Group, Inc.’s
Definitive Proxy Statement as filed with the Securities and
Exchange Commission on April 4, 2013 (File No. 001-
35823)
Incorporated by reference to Exhibit 10.4 to Wright
Medical Group, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2012 (File No. 001-32883)
Incorporated by reference to Exhibit 10.6 to Wright
Medical Group, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2012 (File No. 001-32883)
Incorporated by reference to Wright Medical Group, Inc.’s
Definitive Proxy Statement as filed with the Securities and
Exchange Commission on April 14, 2008 (File No. 001-
32883)
Incorporated by reference to Exhibit 10.2 to Wright
Medical Group, Inc.’s Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 2008 (File No. 001-
32883)
Incorporated by reference to Exhibit 10.13 to Wright
Medical Group, Inc.’s Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2009 (File No. 001-
32883)
Incorporated by reference to Exhibit 10.15 to Wright
Medical Group, Inc.’s Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2009 (File No. 001-
32883)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on July 1, 2016 (File
No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 1, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.10 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.11 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.12 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.13 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Exhibit
Method of Filing
Offer Letter dated July 3, 2017 between Wright
Medical Group, Inc. and Jason D. Asper**
Filed herewith
Incorporated by reference to Exhibit 10.2 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on
September 22, 2011 (File No. 001-32883)
Incorporated by reference to Exhibit 10.16 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.20 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.31 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 25, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.32 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 25, 2016 (File No. 001-35065)
Filed herewith
Filed herewith
Incorporated by reference to Exhibit 10.42 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 27, 2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.43 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 27, 2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.32 to Wright
Medical Group, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2011 (File No. 001-32883)
Incorporated by reference to Exhibit 10.23 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 16, 2015
(File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on December 29,
2016 (File No. 001-35065)
Exhibit No.
10.39
Inducement Stock Option Grant Agreement
dated as of September 17, 2011 between Wright
Medical Group, Inc. and Robert J. Palmisano**
10.40
Confidentiality, Non-Competition, Non-
Solicitation and Intellectual Property Rights
Agreement effective as of October 1, 2015
between Wright Medical Group, Inc. and Lance
A. Berry**
10.41
Separation Pay Agreement effective as of
October 1, 2015 between Wright Medical
Group, Inc. and Lance A. Berry**
10.42
Confidentiality, Non-Competition, Non-
Solicitation and Intellectual Property Rights
Agreement effective as of October 1, 2015
between Wright Medical Group, Inc. and Kevin
D. Cordell**
Separation Pay Agreement effective as of
October 1, 2015 between Wright Medical
Group, Inc. and Kevin D. Cordell**
Confidentiality, Non-Competition, Non-
Solicitation and Intellectual Property Rights
Agreement dated as of August 14, 2017
between Wright Medical Group, Inc. and Jason
D. Asper**
Separation Pay Agreement effective as of
August 14, 2017 between Wright Medical
Group, Inc. and Jason D. Asper**
Confidentiality, Non-Competition, Non-
Solicitation and Intellectual Property Rights
Agreement effective as of October 1, 2015
between Wright Medical Group, Inc. and James
A. Lightman**
Separation Pay Agreement effective as of
October 1, 2015 between Wright Medical
Group, Inc. and James A. Lightman**
Inducement Stock Option Grant Agreement
dated as of December 29, 2011 between Wright
Medical Group, Inc. and James A. Lightman**
Form of Guaranty by Wright Medical Group
N.V. with respect to Wright Medical Group,
Inc. Obligations under Separation Pay
Agreements with Executive Officers**
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
Credit, Security and Guaranty Agreement dated
as of December 23, 2016 among Wright
Medical Group N.V. (as Guarantor), Wright
Medical Group, Inc. (as Borrower), Certain
Other Direct and Indirect Subsidiaries Listed
on the Signature Pages Thereto (each as
Borrower), Midcap Financial Trust (as Lender
and Agent) and the Financial Institutions or
Other Entities Parties Thereto
186
Exhibit No.
10.52
Exhibit
Method of Filing
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended March 26, 2017 (File No. 001-35065)
Amendment No. 1 to Credit, Security and
Guaranty Agreement dated as of February 2,
2017 among Wright Medical Group N.V. (as
Guarantor), Wright Medical Group, Inc. (as
Borrower), Certain Other Direct and Indirect
Subsidiaries Listed on the Signature Pages
Thereto (each as Borrower), Midcap Funding
IV Trust (as Lender and Agent) and the
Financial Institutions or other Entities Parties
Thereto
10.53
Limited Consent and Amendment No. 2 to
Filed herewith
Credit, Security and Guaranty Agreement dated
as of December 14, 2017 among Wright
Medical Group N.V. (as Guarantor), Wright
Medical Group, Inc. (as Borrower), Certain
Other Direct and Indirect Subsidiaries Listed
on the Signature Pages Thereto (each as
Borrower), Midcap Funding IV Trust (as
Lender and Agent) and the Financial
Institutions or other Entities Parties Thereto
Form of Exchange/Subscription Agreement
dated as of May 12, 2016 between Wright
Medical Group N.V. and Each Investor Party
Thereto
Form of Subscription Agreement dated as of
May 12, 2016 between Wright Medical Group
N.V. and Each Investor Party Thereto
Call Option Transaction Confirmation dated as
of May 12, 2016 between Wright Medical
Group N.V. and JPMorgan Chase Bank,
National Association
Call Option Transaction Confirmation dated as
of May 12, 2016 between Wright Medical
Group N.V. and Bank of America, N.A.
Warrants Confirmation dated as of May 12,
2016 between Wright Medical Group N.V. and
JPMorgan Chase Bank, National Association
Warrants Confirmation dated as of May 12,
2016 between Wright Medical Group N.V. and
Bank of America, N.A.
Base Call Option Transaction Confirmation
dated as of February 9, 2015 between Wright
Medical Group, Inc. and Deutsche Bank AG,
London Branch
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
Base Call Option Transaction Confirmation
dated as of February 9, 2015 between Wright
Medical Group, Inc. and JPMorgan Chase
Bank, National Association
10.62
Base Call Option Transaction Confirmation
dated as of February 9, 2015 between Wright
Medical Group, Inc. and Wells Fargo Bank,
National Association
10.63
Base Warrants Confirmation dated as of
February 9, 2015 between Wright Medical
Group, Inc. and Deutsche Bank AG, London
Branch
10.64
Base Warrants Confirmation dated as of
February 9, 2015 between Wright Medical
Group, Inc. and JPMorgan Chase Bank,
National Association
187
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 18, 2016
(File No. 001-35065)
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 18, 2016
(File No. 001-35065)
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 26, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 26, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.5 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 26, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.6 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 26, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.3 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.5 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.7 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.9 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Exhibit No.
10.65
Exhibit
Method of Filing
Base Warrants Confirmation dated as of
February 9, 2015 between Wright Medical
Group, Inc. and Wells Fargo Bank, National
Association
10.66
Additional Call Option Transaction
10.67
Confirmation dated as of February 10, 2015
between Wright Medical Group, Inc. and
Deutsche Bank AG, London Branch
Additional Call Option Transaction
Confirmation dated as of February 10, 2015
between Wright Medical Group, Inc. and
JPMorgan Chase Bank, National Association
10.68
Additional Call Option Transaction
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
Confirmation dated as of February 10, 2015
between Wright Medical Group, Inc. and Wells
Fargo Bank, National Association
Additional Warrants Confirmation dated as of
February 10, 2015 between Wright Medical
Group, Inc. and Deutsche Bank AG, London
Branch
Additional Warrants Confirmation dated as of
February 10, 2015 between Wright Medical
Group, Inc. and JPMorgan Chase Bank,
National Association
Additional Warrants Confirmation dated as of
February 10, 2015 between Wright Medical
Group, Inc. and Wells Fargo Bank, National
Association
Amendment to the Base Warrant Confirmation
dated as of November 24, 2015 between Wright
Medical Group N.V. and Deutsche Bank AG,
London Branch
Amendment to the Base Warrant Confirmation
dated as of November 24, 2015 between Wright
Medical Group N.V. and JPMorgan Chase
Bank, National Association
Amendment to the Base Warrant Confirmation
dated as of November 24, 2015 between Wright
Medical Group N.V. and Wells Fargo Bank,
National Association
Amendment to the Additional Warrant
Confirmation dated as of November 24, 2015
between Wright Medical Group N.V. and
Deutsche Bank AG, London Branch
Amendment to the Additional Warrant
Confirmation dated as of November 24, 2015
between Wright Medical Group N.V. and
JPMorgan Chase Bank, National Association
10.77
Amendment to the Additional Warrant
Confirmation dated as of November 24, 2015
between Wright Medical Group N.V. and Wells
Fargo Bank, National Association
10.78
Form of Partial Termination Confirmation
among Wright Medical Group N.V., Wright
Medical Group, Inc. and each of JPMorgan
Chase
10.79
Agreement of Lease dated as of December 31,
2013 between RBM Cherry Road Partners and
Wright Medical Technology, Inc.
188
Incorporated by reference to Exhibit 10.11 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.2 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.4 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.6 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.8 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.10 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.12 to Wright
Medical Group, Inc.’s Current Report on Form 8-K as filed
with the Securities and Exchange Commission on February
13, 2015 (File No. 001-35823)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 27,
2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 27,
2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 27,
2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 27,
2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 27,
2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.6 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 27,
2015 (File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (with respect to
Item 1.01) as filed with the Securities and Exchange
Commission on June 16, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.94 to Wright
Medical Group Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2013 (File No. 001-35823)
Exhibit
Method of Filing
Exhibit No.
10.80
First Amendment to Agreement of Lease dated
as of January 1, 2014 between RBM Cherry
Road Partners and Wright Medical Technology,
Inc.
10.81
10.82
Second Amendment to Agreement of Lease
dated as of January 1, 2014 between RBM
Cherry Road Partners and Wright Medical
Technology, Inc.
Third Amendment to Agreement of Lease dated
as of May 1, 2015 between RBM Cherry Road
Partners and Wright Medical Technology, Inc.
10.83
Lease Agreement dated as of May 14, 2012
between Liberty Property Limited Partnership,
as Landlord, and Tornier, Inc., as Tenant
10.84
Commercial Lease dated December 23, 2008
between Seamus Geaney and Tornier
Orthopedics Ireland Limited
10.85
10.86
10.87
10.88
10.89
10.90
Commercial Supply Agreement dated March
29, 2016 between BioMimetic Therapeutics,
LLC and FUJIFILM Diosynth Biotechnologies
U.S.A., Inc. (1)
Settlement Agreement dated as of November 1,
2016 between Wright Medical Technology, Inc.
and the Counsel Listed on the Signature Pages
Thereto
Second Settlement Agreement dated as of
October 3, 2017 between Wright Medical
Technology, Inc. and the Counsel Listed on the
Signature Pages Thereto
Third Settlement Agreement dated as of
October 3, 2017 between Wright Medical
Technology, Inc. and the Counsel Listed on the
Signature Pages Thereto
First Amendment to the Third Settlement
Agreement dated as of December 29, 2017
between Wright Medical Technology, Inc. and
the Counsel Listed on the Signature Pages
Thereto
Second Amendment to the Third Settlement
Agreement dated as of February 23, 2018
between Wright Medical Technology, Inc. and
the Counsel Listed on the Signature Pages
Thereto
Incorporated by reference to Exhibit 10.67 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 25, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.68 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 25, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.69 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 25, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 15, 2012
(File No. 001-35065)
Incorporated by reference to Exhibit 10.27 to the
Registrant’s Amendment No. 1 to Registration Statement
on Form S-1 as filed with the Securities and Exchange
Commission on July 15, 2010 (Registration No. 333-
167370)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on April 7, 2016
(File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 25, 2016 (File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 4, 2017
(File No. 001-35065)
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 4, 2017
(File No. 001-35065)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on January 5, 2018
(File No. 001-35065)
Filed herewith
12.1
Computation of Ratio of Earnings to Fixed
Filed herewith
Charges
21.1
23.1
31.1
Subsidiaries of Wright Medical Group N.V.
Consent of KPMG LLP, an Independent
Registered Public Accounting Firm
Certification of Chief Executive Officer
pursuant to Exchange Act Rules 13a-14(a)/15d-
14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Filed herewith
Filed herewith
Filed herewith
31.2
Certification of Chief Financial Officer
Filed herewith
pursuant to Exchange Act Rules 13a-14(a)/15d-
14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
189
Exhibit No.
32.1
Exhibit
Method of Filing
Certification of Chief Executive Officer and
Furnished herewith
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from Wright Medical
Filed herewith
Group N.V.’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2017,
formatted in XBRL (Extensible Business
Reporting Language): (i) the Consolidated
Balance Sheets as of December 31, 2017 and
December 25, 2016, (ii) the Consolidated
Statements of Operations for each of the fiscal
years in the three-year period ended December
31, 2017, (iii) the Consolidated Statements of
Comprehensive Loss for each of the fiscal
years in the three-year period ended December
25, 2016, (iv) the Consolidated Statements of
Cash Flows for each of the fiscal years in the
three-year period ended December 31, 2017,
(v) Consolidated Statements of Shareholders’
Equity for each of the fiscal years in the three-
year period ended December 31, 2017, and (vi)
Notes to Consolidated Financial Statements
__________________________
*
**
(1)
All exhibits and schedules to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The
Registrant will furnish the omitted exhibits and schedules to the Securities and Exchange Commission upon request by the
Securities and Exchange Commission.
A management contract or compensatory plan or arrangement.
Portions of this exhibit have been redacted and are subject to an order granting confidential treatment under Rule 24b-2 of
the Securities Exchange Act of 1934, as amended (File No. 001-35065, CF #33696). The redacted material was filed
separately with the Securities and Exchange Commission.
Note: Certain instruments defining the rights of holders of long-term debt securities of the Registrant or its subsidiaries are
omitted pursuant to Item 601(b)(4)(iii) of SEC Regulation S-K. The Registrant hereby undertakes to furnish to the
Securities and Exchange Commission, upon request, copies of any such instruments.
Item 16.
Form 10-K Summary.
None.
190
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
February 27, 2018
WRIGHT MEDICAL GROUP N.V.
By:
/s/ Robert J. Palmisano
Robert J. Palmisano
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Robert J. Palmisano
Robert J. Palmisano
/s/ Lance A. Berry
Lance A. Berry
/s/ Julie B. Andrews
Julie B. Andrews
/s/ David D. Stevens
David D. Stevens
/s/ Gary D. Blackford
Gary D. Blackford
/s/ John L. Miclot
John L. Miclot
/s/ Kevin C. O'Boyle
Kevin C. O'Boyle
/s/ Amy S. Paul
Amy S. Paul
/s/ Richard F. Wallman
Richard F. Wallman
/s/ Elizabeth H. Weatherman
Elizabeth H. Weatherman
President, Chief Executive Officer and
Executive Director
(Principal Executive Officer)
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer )
Vice President and Chief Accounting
Officer
(Principal Accounting Officer )
Date
February 27, 2018
February 27, 2018
February 27, 2018
Chairman
February 27, 2018
Non-Executive Director
February 27, 2018
Non-Executive Director
February 27, 2018
Non-Executive Director
February 27, 2018
Non-Executive Director
February 27, 2018
Non-Executive Director
February 27, 2018
Non-Executive Director
February 27, 2018
191
Wright Medical Group N.V.
Schedule II-Valuation and Qualifying Accounts
(In thousands)
Allowance for doubtful accounts:
For the period ended:
December 31, 2017
December 25, 2016
December 27, 2015
Balance at
Beginning of
Period
Charged to
Cost and
Expenses
Deductions
and Other
Balance at
End of
Period
$
$
$
4,469 $
1,189 $
930 $
1,243 $
3,475 $
(878) $
(1,384) $
(195) $
1,137 $
4,328
4,469
1,189
S-1
Senior Management
Directors
Robert J. Palmisano
President & Chief Executive Officer
Jason D. Asper
SVP, Strategy & Corporate
Development
Lance A. Berry
SVP, Chief Financial Officer
Robert P. Burrows
SVP, Supply Chain
Julie D. Dewey
SVP, Chief Communications Officer
James A. Lightman
SVP, General Counsel & Secretary
Andrew C. Morton
SVP, Chief Human Resources Officer
J. Wesley Porter
SVP, Chief Compliance Officer
Kevin C. Smith
SVP, Quality and Regulatory
Jennifer S. Walker
SVP, Process Improvement
Kevin D. Cordell
President, US
Peter S. Cooke
President, International
Patrick Fisher
President, Lower Extremities
Timothy L. Lanier
President, Upper Extremities
Julie B. Andrews
VP, Finance & Chief Accounting
Officer
David D. Stevens 1,2
Chairman, Non-
Executive Director
Most recently Chief
Executive Officer,
Accredo Health Group,
Inc., a subsidiary of
Medco Health Solutions,
Inc.
Gary D. Blackford 1,3
Non-Executive Director
Most recently President &
Chief Executive Officer,
Universal Hospital
Services, Inc.
John L. Miclot 4
Non-Executive Director
President and Chief
Executive Officer,
LinguaFlex, Inc.
Kevin C. O’Boyle 3,4
Non-Executive Director
Most Recently Interim Vice
Chairman, Tornier N.V. and
Chief Financial Officer,
NuVasive, Inc.
Amy S. Paul 1
Non-Executive Director
Most recently Group Vice
President, International,
C.R. Bard, Inc.
Richard F. Wallman 2,3
Non-Executive Director
Most recently Senior
Vice President and
Chief Financial Officer of
Honeywell International,
Inc.
Elizabeth H. Weatherman 1,2,4
Non-Executive Director
Special Limited Partner,
Warburg Pincus LLC
Robert J. Palmisano
Executive Director
President and Chief
Executive Officer,
Wright Medical Group N.V.
Committees of the Board of Directors
1 – member of the nominating, corporate
governance and compliance committee
2 – member of the strategic transactions
committee
3 – member of the audit committee
4 – member of the compensation committee
Shareholder Information
Independent Auditors
KPMG LLP
Memphis, TN
Transfer Agent & Registrar
American Stock Transfer & Trust Company,
LLC
6201 15th Avenue, Brooklyn, NY 11219
718.921.8124
800.937.5449
help@astfinancial.com
Share Information
Our ordinary shares are traded on the
NASDAQ Global Select Market under
the symbol “WMGI.”
Investor & Media Inquiries
Julie D. Tracy
SVP, Chief Communications Officer
901.290.5817
julie.tracy@wright.com
Annual General Meeting
The annual general meeting of
our shareholders will be held on
Friday, June 29, 2018, beginning at
9am (Central European Time) at:
Worldwide Headquarters:
Prins Bernhardplein 200
1097 JB Amsterdam, The Netherlands
1023 Cherry Road
Memphis, TN 38117
800 238 7117
901 867 9971
www.wright.com
56 Kingston Road
Staines-upon-Thames
Middlesex TW18 4NL
United Kingdom
+44 (0)845 833 4435
161 Rue Lavoisier
38330 Montbonnot
Saint Martin
France
+33 (0)4 76 61 35 00
Prins Bernhardplein 200
1097 JB Amsterdam,
The Netherlands
™Trademarks and ®Registered marks of Wright Medical Group N.V. or its affiliates.
©2018 Wright Medical Group N.V. or its affiliates. All Rights Reserved. 016869A_07-May-2018