Wright Medical Group, Inc. Reports 2012 Third Quarter Financial Results And Updated Guidance

About Wright Medical

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

Non-GAAP Financial Measures

The Company uses non-GAAP financial measures, such as net sales, excluding the impact of foreign currency; operating income, as adjusted; net income, as adjusted; net income, as adjusted, per diluted share; effective tax rate, as adjusted; and free cash flow. The Company’s management believes that the presentation of these measures provides useful information to investors. These measures may assist investors in evaluating the Company’s operations, period over period. The measures exclude such items as costs related to the U.S. governmental inquiries and the DPA, costs associated with distributor conversions and non-competes, non-cash interest expense related to the Company’s 2017 Convertible Notes, mark-to-market adjustments on derivative assets and liabilities, losses associated with the termination of derivative instruments, write-off of unamortized deferred financing costs, restructuring charges, transaction costs, changes in estimates associated with the Company’s liability for PROFEMUR ^® long modular neck claims, costs related to settlement of certain employment matters and the hiring of a new CEO, and non-cash stock-based expense, all of which may be highly variable, difficult to predict and of a size that could have substantial impact on the Company’s reported results of operations for a period. Management uses these measures internally for evaluation of the performance of the business, including the allocation of resources and the evaluation of results relative to employee performance compensation targets. Investors should consider these non-GAAP measures only as a supplement to, not as a substitute for or as superior to, measures of financial performance prepared in accordance with GAAP.

Cautionary Note Regarding Forward-Looking Statements

This press release may contain “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s current 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 press release, and we undertake no obligation to update such statements after this date. Risks and uncertainties that could cause our actual results to materially differ from those described in forward-looking statements are discussed in our filings with the Securities and Exchange Commission (including those described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, in each case under the heading “Risk Factors” and elsewhere in such filings). By way of example and without implied limitation, such risks and uncertainties include: future actions of the United States Attorney’s office, the FDA, the Department of Health and Human Services or other U.S. or foreign government authorities 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; any actual or alleged breach of the Corporate Integrity Agreement to which we are subject through September 2015 which could expose us to significant liability including exclusion from Medicare, Medicaid and other federal healthcare programs, potential criminal prosecution, and civil and criminal fines or penalties; adverse outcomes in existing product liability litigation; new product liability claims; inadequate insurance coverage; the possibility of private securities litigation or shareholder derivative suits; demand for and market acceptance of our new and existing products; potentially burdensome tax measures; lack of suitable business development opportunities; product quality or patient safety issues; challenges to our intellectual property rights; geographic and product mix impact on our sales; our inability to retain key sales representatives, independent distributors and other personnel or to attract new talent; inventory reductions or fluctuations in buying patterns by wholesalers or distributors; inability to realize the anticipated benefits of restructuring initiatives; negative impact of the commercial and credit environment on us, our customers and our suppliers; and the potentially negative effect of our ongoing compliance enhancements on our relationships with customers, and on our ability to deliver timely and effective medical education, clinical studies, and new products.

Wright Medical Group, Inc. Condensed Consolidated Statements of Operations (in thousands, except per share data--unaudited)
			Three Months Ended								Nine Months Ended
			September 30, 2012				September 30, 2011				September 30, 2012				September 30, 2011
Net sales			$	110,363			$	118,184			$	360,299			$	386,075
Cost of sales			35,089				36,185				110,329				116,457
Cost of Sales - restructuring			—				1,900				435				1,900
Gross profit			75,274				80,099				249,535				267,718
Operating expenses:
Selling, general and administrative			70,851				83,581				216,061				229,227
Research and development			6,612				6,769				19,577				23,783
Amortization of intangible assets			1,827				721				3,823				2,088
Restructuring charges			—				12,132				1,153				12,132
Total operating expenses			79,290				103,203				240,614				267,230
Operating (loss) income			(4,016		)		(23,104		)		8,921				488
Interest expense, net			2,574				1,464				6,268				4,774
Other expense, net			2,027				59				2,035				4,775
(Loss) income before income taxes			(8,617		)		(24,627		)		618				(9,061		)
(Benefit) provision for income taxes			(3,278		)		(8,582		)		686				(2,755		)
Net loss			$	(5,339	)		$	(16,045	)		$	(68	)		$	(6,306	)
Net loss per share, basic			$	(0.14	)		$	(0.42	)		$	(0.00	)		$	(0.16	)
Net loss per share, diluted			$	(0.14	)		$	(0.42	)		$	(0.00	)		$	(0.16	)
Weighted-average number of shares outstanding-basic			38,907				38,406				38,706				38,228
Weighted-average number of shares outstanding-diluted			38,907				38,406				38,706				38,228

Wright Medical Group, Inc. Consolidated Sales Analysis (dollars in thousands--unaudited)
			Three Months Ended											Nine Months Ended
			September 30, 2012				September 30, 2011				% change			September 30, 2012				September 30, 2011				% change
Geographic
Domestic			$	65,751			$	69,382			(5.2	%)		$	205,029			$	222,678			(7.9	%)
International			44,612				48,802				(8.6	%)		155,270				163,397				(5.0	%)
Total net sales			$	110,363			$	118,184			(6.6	%)		$	360,299			$	386,075			(6.7	%)
			Three Months Ended											Nine Months Ended
			September 30, 2012				September 30, 2011				% change			September 30, 2012				September 30, 2011				% change
OrthoRecon
Hips			$	33,048			$	39,045			(15.4	%)		$	114,621			$	130,486			(12.2	%)
Knees			25,657				27,204				(5.7	%)		86,928				93,429				(7.0	%)
Other			770				1,464				(47.4	%)		3,025				4,082				(25.9	%)
Total OrthoRecon			59,475				67,713				(12.2	%)		204,574				227,997				(10.3	%)
Extremities
Foot and Ankle			29,030				25,681				13.0	%		87,537				78,210				11.9	%
Upper Extremity			6,207				6,692				(7.2	%)		19,101				21,189				(9.9	%)
Biologics			14,614				16,610				(12.0	%)		45,255				53,846				(16.0	%)
Other			1,037				1,488				(30.3	%)		3,832				4,833				(20.7	%)
Total Extremities			50,888				50,471				0.8	%		155,725				158,078				(1.5	%)
Total Sales			$	110,363			$	118,184			(6.6	%)		$	360,299			$	386,075			(6.7	%)

Wright Medical Group, Inc. Supplemental Sales Information (unaudited)
			Third Quarter 2012 Sales Growth
			Domestic As Reported			Int'l Constant Currency			Int'l As Reported			Total Constant Currency			Total As Reported
OrthoRecon
Hips			(15%)			(12%)			(15%)			(13%)			(15%)
Knees			(9%)			1%			(2%)			(4%)			(6%)
Other			(60%)			(42%)			(44%)			(46%)			(47%)
Total OrthoRecon			(12%)			(9%)			(12%)			(10%)			(12%)
Extremities
Foot and Ankle			12%			23%			17%			14%			13%
Upper Extremity			(8%)			(4%)			(6%)			(7%)			(7%)
Biologics			(14%)			(2%)			(3%)			(12%)			(12%)
Other			(46%)			(12%)			(19%)			(27%)			(30%)
Total Extremities			0%			7%			3%			2%			1%
Total Sales			(5%)			(5%)			(9%)			(5%)			(7%)

Wright Medical Group, Inc. Supplemental Sales Information (unaudited)
			Sales as a % of Total Sales
			Three Months Ended September 30, 2012									Nine Months Ended September 30, 2012
			Domestic			International			Total			Domestic			International			Total
OrthoRecon
Hips			11%			19%			30%			11%			21%			32%
Knees			12%			11%			23%			12%			12%			24%
Other			0%			1%			1%			0%			1%			1%
Total OrthoRecon			24%			30%			54%			23%			34%			57%
Extremities
Foot and Ankle			22%			5%			26%			20%			5%			24%
Upper Extremity			4%			2%			6%			4%			2%			5%
Biologics			10%			3%			13%			10%			3%			13%
Other			0%			1%			1%			0%			1%			1%
Total Extremities			36%			10%			46%			34%			10%			43%
Total Sales			60%			40%			100%			57%			43%			100%

Wright Medical Group, Inc. Reconciliation of Net Sales to Net Sales Excluding the Impact of Foreign Currency (dollars in thousands--unaudited)
			Three Months Ended												Nine Months Ended
			September 30, 2012												September 30, 2012
			International Net Sales						Total Net Sales						International Net Sales						Total Net Sales
Net sales, as reported			$	44,612					$	110,363					$	155,270					$	360,299
Currency impact as compared to prior period			1,739						1,739						4,313						4,313
Net sales, excluding the impact of foreign currency			$	46,351					$	112,102					$	159,583					$	364,612

Wright Medical Group, Inc. Reconciliation of As Reported Results to Non-GAAP Financial Measures (in thousands, except per share data--unaudited)
			Three Months Ended								Nine Months Ended
			September 30, 2012				September 30, 2011				September 30, 2012				September 30, 2011
Operating (Loss) Income
Operating (loss) income, as reported			$	(4,016	)		$	(23,104	)		$	8,921			$	488
Reconciling items impacting Gross Profit:
Non-cash, stock-based compensation			359				356				1,053				1,063
Cost of sales - restructuring			—				1,900				435				1,900
Inventory step-up amortization			48				—				144				—
Employment matters (1)			—				99				—				99
Total			407				2,355				1,632				3,062
Reconciling items impacting Selling, General and Administrative expenses:
Non-cash, stock-based compensation			2,188				1,715				6,879				5,083
U.S. governmental inquiries/DPA related			1,707				4,974				6,647				9,541
Distributor conversions			416				—				624				—
Employment matters			—				1,783				—				1,783
Product liability			—				13,199				—				13,199
Total			4,311				21,671				14,150				29,606
Reconciling items impacting Research and Development expenses:
Non-cash, stock-based compensation			147				150				534				542
Employment matters (1)			—				135				—				135
Total			147				285				534				677
Reconciling items impacting Amortization of Intangible Assets
Amortization of distributor non-competes			1,169				—				1,740				—
Other Reconciling Items:
Restructuring charges			—				12,132				1,153				12,132
Operating income, as adjusted			$	2,018			$	13,339			$	28,130			$	45,965
Operating income, as adjusted, as a percentage of net sales			1.8		%		11.3		%		7.8		%		11.9		%
(1) Costs associated with settlement of certain employment matters and the hiring of a new CEO.

Wright Medical Group, Inc. Reconciliation of As Reported Results to Non-GAAP Financial Measures (in thousands, except per share data--unaudited)
			Three Months Ended								Nine Months Ended
			September 30, 2012				September 30, 2011				September 30, 2012				September 30, 2011
Net (Loss) Income
(Loss) income before taxes, as reported			$	(8,617	)		$	(24,627	)		$	618			$	(9,061	)
Pre-tax impact of reconciling items:
Non-cash, stock-based compensation			2,694				2,221				8,466				6,688
U.S. governmental inquiries/DPA related			1,707				4,974				6,647				9,541
Restructuring charges			—				14,032				1,588				14,032
Inventory step-up amortization			48				—				144				—
Distributor conversion and non-competes			1,585				—				2,364				—
Loss on interest rate swap termination			1,769				—				1,769				—
Non-cash interest expense on 2017 Convertible Notes			687				—				687				—
Derivatives mark-to-market adjustment			(2,330		)		—				(2,330		)		—
Write-off of deferred financing fees associated with Senior Credit Facility and 2014 Convertible Notes			2,721				—				2,721				—
Employment matters (1)			—				2,017				—				2,017
Product liability provision			—				13,199				—				13,199
Write-off of deferred financing fees and transaction costs associated with Convertible Notes Tender Offer			—				—				—				4,099
Income before taxes, as adjusted			264				11,816				22,674				40,515
(Benefit) provision for income taxes, as reported			(3,278		)		(8,582		)		686				(2,755		)
Non-cash, stock-based compensation			1,305				744				2,689				2,093
U.S. governmental inquiries/DPA related			146				1,873				2,295				3,371
Restructuring charges			—				4,574				620				4,574
Inventory step-up amortization			19				—				56				—
Distributor conversion and non-competes			477				—				816				—
Loss on interest rate swap termination			691				—				691				—
Non-cash interest expense on 2017 Convertible Notes			268				—				268				—
Derivatives mark-to-market adjustment			(910		)		—				(910		)		—
Write-off of deferred financing fees associated with Senior Credit Facility and 2014 Convertible Notes			1,063				—				1,063				—
Employment matters (1)			—				720				—				720
Product liability provision			—				4,740				—				4,740
Write-off of deferred financing fees and transaction costs associated with Convertible Notes Tender Offer			—				—				—				1,599
(Benefit) provision for income taxes, as adjusted			$	(219	)		$	4,069			$	8,274			$	14,342
Effective tax rate, as adjusted			(83.0		%)		34.4		%		36.5		%		35.4		%
Net income, as adjusted			$	483			$	7,747			$	14,400			$	26,173
(1) Costs associated with settlement of certain employment matters and the hiring of a new CEO.

Wright Medical Group, Inc. Reconciliation of As Reported Results to Non-GAAP Financial Measures (continued)
			Three Months Ended								Three Months Ended
			September 30, 2012								September 30, 2011
			As Reported				As Adjusted				As Reported				As Adjusted
Basic net (loss) income			$	(5,339	)		$	483			$	(16,045	)		$	7,747
Interest expense on 2014 convertible notes			N/A				N/A				N/A				137
Diluted net (loss) income			$	(5,339	)		$	483			$	(16,045	)		$	7,884
Basic shares			38,907				38,907				38,406				38,406
Dilutive effect of stock options and restricted shares			N/A				379				—				130
Dilutive effect of 2014 convertible notes			N/A				N/A				N/A				891
Diluted shares			38,907				39,286				38,406				39,427
Net (loss) income per share, diluted			$	(0.14	)		$	0.01			$	(0.42	)		$	0.20
			Nine Months Ended								Nine Months Ended
			September 30, 2012								September 30, 2011
			As Reported				As Adjusted				As Reported				As Adjusted
Basic net income (loss)			$	(68	)		$	14,400			$	(6,306	)		$	26,173
Interest expense on 2014 convertible notes			N/A				N/A				N/A				1,066
Diluted net income (loss)			$	(68	)		$	14,400			$	(6,306	)		$	27,239
Basic shares			38,706				38,706				38,228				38,228
Dilutive effect of stock options and restricted shares			N/A				374				—				149
Dilutive effect of 2014 convertible notes			N/A				N/A				N/A				2,249
Diluted shares			38,706				39,080				38,228				40,626
Net income (loss) per share, diluted			$	(0.00	)		$	0.37			$	(0.16	)		$	0.67
			Three Months Ended								Nine Months Ended
			September 30, 2012				September 30, 2011				September 30, 2012				September 30, 2011
Net (Loss) Income per Diluted Share
Net (loss) income, as reported, per diluted share			$	(0.14	)		$	(0.42	)		$	(0.00	)		$	(0.16	)
Interest expense on convertible notes			N/A				—				0.00				0.03
Effect of convertible notes on diluted shares			N/A				0.01				0.00				0.01
Non-cash, stock-based compensation			0.04				0.04				0.15				0.11
U.S. governmental inquiries/DPA related			0.04				0.08				0.12				0.15
Restructuring charges			—				0.24				0.02				0.23
Inventory step-up amortization			0.00				—				0.00				—
Distributor conversion and non-competes			0.03				—				0.04				—
Loss on interest rate swap termination			0.03				—				0.03				—
Non-cash interest expense on 2017 Convertible Notes			0.01				—				0.01				—
Derivatives mark-to-market adjustment			(0.04		)		—				(0.04		)		—
Write-off deferred financing fees associated with Senior Credit Facility and 2014 Convertible Notes			0.04				—				0.04				—
Employment matters (1)			—				0.03				—				0.03
Product liability provision			—				0.22				—				0.21
Write-off deferred financing fees and transaction costs associated with Convertible Notes Tender Offer			—				—				—				0.06
Net income, as adjusted, per diluted share			$	0.01			$	0.20			$	0.37			$	0.67

Wright Medical Group, Inc. Reconciliation of Free Cash Flow (dollars in thousands--unaudited)
			Three Months Ended									Nine Months Ended
			September 30, 2012				September 30, 2011					September 30, 2012				September 30, 2011
Net cash provided by operating activities			16,639				9,770					57,752				48,786
Capital expenditures			(4,718	)			(11,822	)				(13,291	)			(35,198	)
Free cash flow			11,921				(2,052	)				44,461				13,588

Wright Medical Group, Inc. Segment Income Statement (In thousands, except share data) (unaudited)
			Three Months Ended September 30, 2012
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Net sales			$	59,475			$	50,888			$	—			$	—			$	110,363
Cost of sales			23,219				11,463				—				407				35,089
Gross profit			36,256				39,425				—				(407		)		75,274
Operating expenses:
Selling, general and administrative			28,948				25,512				12,080				4,311				70,851
Research and development			3,125				3,340				—				147				6,612
Amortization of intangible assets			58				600				—				1,169				1,827
Restructuring charges			—				—				—				—				—
Total operating expenses			32,131				29,452				12,080				5,627				79,290
Operating income (loss)			$	4,125			$	9,973			$	(12,080	)		$	(6,034	)		$	(4,016	)
Operating income (loss) as a percent of net sales			6.9		%		19.6		%		N/A				N/A				(3.6		)%
			Three Months Ended September 30, 2012
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Depreciation expense			$	5,834			$	2,841			$	611			$	—			$	9,286
Amortization expense			58				600				—				1,169				1,827
Capital expenditures			1,711				1,464				1,543				—				4,718
_____________________
(1) Other consists exclusively of the reconciling items from Operating Income, as reported, to Operating Income, as adjusted, as included in the reconciliations above.

Wright Medical Group, Inc. Segment Income Statement (continued)
			Three Months Ended September 30, 2011
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Net sales			$	67,713			$	50,471			$	—			$	—			$	118,184
Cost of sales			21,332				14,398				—				2,355				38,085
Gross profit			46,381				36,073				—				(2,355		)		80,099
Operating expenses:
Selling, general and administrative			29,385				22,078				10,447				21,671				83,581
Research and development			3,056				3,428				—				285				6,769
Amortization of intangible assets			132				589				—				—				721
Restructuring charges			—				—				—				12,132				12,132
Total operating expenses			32,573				26,095				10,447				34,088				103,203
Operating income (loss)			$	13,808			$	9,978			$	(10,447	)		$	(36,443	)		$	(23,104	)
Operating income (loss) as a percent of net sales			20.4		%		19.8		%		N/A				N/A				(19.5		)%
			Three Months Ended September 30, 2011
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Depreciation expense			$	6,600			$	2,793			$	583			$	—			$	9,976
Amortization expense			132				589				—				—				721
Capital expenditures			2,722				4,689				4,411				—				11,822
_____________________
(1) Other consists exclusively of the reconciling items from Operating Income, as reported, to Operating Income, as adjusted, as included in the reconciliations above.

Wright Medical Group, Inc. Segment Income Statement (continued)
			Nine Months Ended September 30, 2012
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Net sales			$	204,574			$	155,725			$	—			$	—			$	360,299
Cost of sales			74,907				34,225				—				1,632				110,764
Gross profit			129,667				121,500				—				(1,632		)		249,535
Operating expenses:
Selling, general and administrative			91,008				73,934				36,969				14,150				216,061
Research and development			9,052				9,991				—				534				19,577
Amortization of intangible assets			275				1,808				—				1,740				3,823
Restructuring charges			—				—				—				1,153				1,153
Total operating expenses			100,335				85,733				36,969				17,577				240,614
Operating income (loss)			$	29,332			$	35,767			$	(36,969	)		$	(19,209	)		$	8,921
Operating income as a percent of net sales			14.3		%		23.0		%		N/A				N/A				2.5		%
			Nine Months Ended September 30, 2012
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Depreciation expense			$	18,406			$	8,494			$	2,282			$	—			$	29,182
Amortization expense			275				1,808				—				1,740				3,823
Capital expenditures			4,285				5,914				3,092				—				13,291
_____________________
(1) Other consists exclusively of the reconciling items from Operating Income, as reported, to Operating Income, as adjusted, as included in the reconciliations above.

Wright Medical Group, Inc. Segment Income Statement (continued)
			Nine Months Ended September 30, 2011
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Net sales			$	227,997			$	158,078			$	—			$	—			$	386,075
Cost of sales			72,842				42,453				—				3,062				118,357
Gross profit			155,155				115,625				—				(3,062		)		267,718
Operating expenses:
Selling, general and administrative			94,955				68,046				36,620				29,606				229,227
Research and development			12,256				10,850				—				677				23,783
Amortization of intangible assets			324				1,764				—				—				2,088
Restructuring charges			—				—				—				12,132				12,132
Total operating expenses			107,535				80,660				36,620				42,415				267,230
Operating income (loss)			$	47,620			$	34,965			$	(36,620	)		$	(45,477	)		$	488
Operating income as a percent of net sales			20.9		%		22.1		%		N/A				N/A				0.1		%
			Nine Months Ended September 30, 2011
			OrthoRecon				Extremities				Corporate				Other (1)				Total
Depreciation expense			$	19,602			$	7,963			$	1,649			$	—			$	29,214
Amortization expense			324				1,764				—				—				2,088
Capital expenditures			14,008				9,825				11,365				—				35,198
_____________________
(1) Other consists exclusively of the reconciling items from Operating Income, as reported, to Operating Income, as adjusted, as included in the reconciliations above.

Wright Medical Group, Inc. Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited)
			September 30, 2012					December 31, 2011
Assets:
Current assets:
Cash and cash equivalents			$	304,009				$	153,642
Marketable securities			13,613					13,597
Accounts receivable, net			96,516					98,995
Inventories			153,176					164,600
Prepaid expenses and other current assets			69,767					69,699
Total current assets			637,081					500,533
Property, plant and equipment, net			143,277					160,284
Goodwill and intangible assets, net			81,115					75,651
Marketable securities			—					4,502
Other assets			91,520					13,610
Total assets			$	952,993				$	754,580
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable			$	13,369				$	11,651
Accrued expenses and other current liabilities			63,592					55,831
Current portion of long-term obligations			975					8,508
Total current liabilities			77,936					75,990
Long-term obligations			256,477					166,792
Other liabilities			103,696					43,334
Total liabilities			$	438,109				$	286,116
Stockholders’ equity:			514,884					468,464
Total liabilities and stockholders’ equity			$	952,993				$	754,580

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