UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
| | |
þ☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 24, 2017June 28, 2020
ORor
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| | |
o☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | | |
| 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 | | 98-0509600 |
(State or other jurisdiction
of incorporation or organization)
| | (I.R.S. Employer Identification No.) |
|
| | | | | |
Prins Bernhardplein 200 | | None |
| 1097 JB | Amsterdam, | The | Netherlands | | (Zip Code) |
| (Address of principal executive offices) | | None
(Zip Code)
|
(+31)20521 4777
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
_________________Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Ordinary shares, par value €0.03 per share | | WMGI | | Nasdaq Global Select Market |
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. þ☑Yeso☐ 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). þ☑Yeso☐ No
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company"company” and "emerging“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer☑ Accelerated filer ☐ |
| | |
Large accelerated filer þ
| | Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
| | Smaller reporting company o
Emerging growth company o
|
Non-accelerated filer ☐ Smaller reporting company ☐Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o☐ Yes þ☑ No
As of October 27, 2017,July 24, 2020, there were 105,015,417129,271,023 ordinary shares outstanding.
WRIGHT MEDICAL GROUP N.V.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 24, 2017JUNE 28, 2020
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document may contain certain “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'smanagement’s current knowledge, assumptions, beliefs, estimates, and expectations and express management'smanagement’s current view of future performance, results, and trends. Forward-lookingForward 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 our most recent Annual Report on Form 10-K, which was filed with the SEC on February 23, 2017)24, 2020). By way of example and without implied limitation, such risks and uncertainties include:
the occurrence of any event, change or other circumstance that could give rise to the termination of the definitive agreement that we entered into with Stryker Corporation (Stryker) and its wholly-owned acquisition subsidiary on November 4, 2019, pursuant to which we expect to become a wholly-owned subsidiary of Stryker;
the failure to satisfy required closing conditions under the agreement with Stryker, including, but not limited to, the tender of a minimum number of our outstanding ordinary shares in the related tender offer, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), and the receipt of required regulatory approvals, or the failure to complete the acquisition in a timely manner;
risks related to disruption of management’s attention from our ongoing business operations due to the pendency of the transaction with Stryker;
the effect of the announcement of the transaction with Stryker on our operating results and business generally, including, but not limited to, our ability to retain and hire key personnel and maintain our relationships with customers, strategic partners and suppliers;
the impact of the pending transaction with Stryker on our strategic plans and operations and our ability to respond effectively to competitive pressures, industry developments and future opportunities;
the outcome of any legal proceedings that have been or in the future may be instituted against us and others relating to the proposed transaction with Stryker;
the effect of the global novel strain of coronavirus (COVID-19);
inability to achieve or sustain profitability;
failure to realize the anticipated benefits from previous acquisitions and dispositions, including our October 2018 acquisition of Cartiva, Inc. (Cartiva);
| |
| • | failure to obtain anticipated commercial sales of our AUGMENT® Bone Graft and AUGMENT® Injectable products; |
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 our metal-on-metal master settlement agreements and the settlement agreements with certain of our insurance companies, including without limitation, the effect of the broad release of certain insurance coverage for present and future claims;
adverse outcomes in existing product liability litigation;
copycat claims against 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 and term loan facility;
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;
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;
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;
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 metal-on-metal master settlement agreement, the settlement agreement with the three insurance companies, and the recent metal-on-metal settlement agreements, including without limitation, the final settlement amounts and the final number of claims settled under such agreements, the resolution of the remaining unresolved claims, the contingency of receipt of new insurance payments, 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;
failure to realize the anticipated benefits from previous acquisitions and dispositions;
adverse outcomes in existing product liability litigation;
new product liability claims;
inadequate insurance coverage;
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;
| |
• | failure to obtain anticipated commercial sales of our AUGMENT® Bone Graft in the United States;
|
challenges to our intellectual property rights or inability to defend our products against the intellectual property rights of others;
adverse effects of diverting resources and attention to transition services provided to the purchaser of our Large Joints business;
failures of, interruptions to, or unauthorized tampering with, our information technology systems;
failure or delay in obtaining FDA or other regulatory approvalsclearance for our products;
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;
the possibility of private securities litigation or shareholder derivative suits;
insufficient demand for and market acceptance of our new and existing products;
recently enacted healthcare laws and changes in product reimbursements, which could generate downward pressure on our product pricing;
potentially burdensome tax measures;
lack of suitable business development opportunities;
inability to capitalize on business development opportunities;
product quality or patient safety issues;
geographic and product mix impact on our sales;
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 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 negative impact of the commercial and credit environment on us, our customers, and our suppliers;
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;
fluctuations in foreign currency exchange rates;
not successfully developing and marketing new products and technologies and implementing our business strategy;
not successfully competing against our existing or potential competitors and the effect of significant recent consolidations amongst our competitors;
the reliance of our business plan on certain market assumptions;
our private label manufacturers failing to provide us with sufficient supply of their products, or failing to meet appropriate quality requirements;
our inability to timely manufacture products or instrument sets to meet demand;
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;
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;
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;
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;
pendingchanges in healthcare laws, which could generate downward pressure on our product pricing;
ability of healthcare providers to obtain reimbursement for our products or a reduction in the current levels of reimbursement, which could result in reduced use of our products and futurea decline in sales;
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 litigation,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;
potentially burdensome tax measures; and
risks that we may identify future material weaknessesfluctuations in our internal control over financial reporting.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”Factors” of our most recent Annual Report on Form 10-K.10-K and “Part II. Item 1A. Risk Factors” of this report. The risks and uncertainties described above and in “Part I. Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K and “Part II. 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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited).
Wright Medical Group N.V. Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) |
| | | | | | | |
| | June 28, 2020 | | December 29, 2019 |
| Assets: | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 133,651 |
| | $ | 166,856 |
|
| Accounts receivable, net | 107,701 |
| | 147,400 |
|
| Inventories | 238,783 |
| | 198,374 |
|
| Prepaid expenses | 14,847 |
| | 16,031 |
|
Other current assets 1 | 212,121 |
| | 214,997 |
|
| Total current assets | 707,103 |
| | 743,658 |
|
| | | | |
| Property, plant and equipment, net | 259,313 |
| | 251,922 |
|
| Goodwill | 1,262,296 |
| | 1,260,967 |
|
| Intangible assets, net | 243,589 |
| | 257,382 |
|
| Deferred income taxes | 991 |
| | 1,012 |
|
| Other assets | 90,235 |
| | 70,699 |
|
| Total assets | $ | 2,563,527 |
| | $ | 2,585,640 |
|
| | | | |
| Liabilities and Shareholders’ Equity: | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 36,162 |
| | $ | 32,121 |
|
Accrued expenses and other current liabilities 1 | 370,716 |
| | 387,025 |
|
Current portion of long-term obligations 1 | 454,337 |
| | 430,862 |
|
| Total current liabilities | 861,215 |
| | 850,008 |
|
| | | | |
| Long-term debt and finance lease obligations | 756,829 |
| | 737,167 |
|
| Deferred income taxes | 9,914 |
| | 10,384 |
|
| Other liabilities | 94,646 |
| | 96,288 |
|
| Total liabilities | 1,722,604 |
| | 1,693,847 |
|
Commitments and contingencies (Note 11) |
| |
|
| Shareholders’ equity: | | | |
| Ordinary shares, €0.03 par value, authorized: 320,000,000 shares; issued and outstanding: 129,059,876 shares at June 28, 2020 and 128,614,026 shares at December 29, 2019 | 4,706 |
| | 4,691 |
|
| Additional paid-in capital | 2,630,194 |
| | 2,608,939 |
|
| Accumulated other comprehensive loss | (27,340 | ) | | (29,499 | ) |
| Accumulated deficit | (1,766,637 | ) | | (1,692,338 | ) |
| Total shareholders’ equity | 840,923 |
| | 891,793 |
|
| Total liabilities and shareholders’ equity | $ | 2,563,527 |
| | $ | 2,585,640 |
|
Wright Medical Group N.V. Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) |
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Assets: | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 238,867 |
| | $ | 262,265 |
|
| Restricted cash | 38,922 |
| | 150,000 |
|
| Accounts receivable, net | 114,948 |
| | 130,602 |
|
| Inventories | 172,311 |
| | 150,849 |
|
| Prepaid expenses | 14,159 |
| | 11,678 |
|
| Other current assets | 61,912 |
| | 54,231 |
|
| Total current assets | 641,119 |
| | 759,625 |
|
| | | | |
| Property, plant and equipment, net | 211,785 |
| | 201,732 |
|
| Goodwill | 860,860 |
| | 851,042 |
|
| Intangible assets, net | 226,617 |
| | 231,797 |
|
| Deferred income taxes | 1,690 |
| | 1,498 |
|
| Other assets | 258,612 |
| | 244,892 |
|
| Total assets | $ | 2,200,683 |
| | $ | 2,290,586 |
|
| Liabilities and Shareholders’ Equity: | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 43,481 |
| | $ | 32,866 |
|
| Accrued expenses and other current liabilities | 387,561 |
| | 407,704 |
|
| Current portion of long-term obligations | 56,783 |
| | 33,948 |
|
| Total current liabilities | 487,825 |
| | 474,518 |
|
| | | | |
| Long-term debt and capital lease obligations | 818,873 |
| | 780,407 |
|
| Deferred income taxes | 27,813 |
| | 27,550 |
|
| Other liabilities | 327,656 |
| | 321,247 |
|
| Total liabilities | 1,662,167 |
| | 1,603,722 |
|
Commitments and contingencies (Note 12) | | | |
| Shareholders’ equity: | | | |
| Ordinary shares, €0.03 par value, authorized: 320,000,000 shares; issued and outstanding: 105,011,678 shares at September 24, 2017 and 103,400,995 shares at December 25, 2016 | 3,868 |
| | 3,815 |
|
| Additional paid-in capital | 1,947,717 |
| | 1,908,749 |
|
| Accumulated other comprehensive income (loss) | 24,901 |
| | (19,461 | ) |
| Accumulated deficit | (1,437,970 | ) | | (1,206,239 | ) |
| Total shareholders’ equity | 538,516 |
| | 686,864 |
|
| Total liabilities and shareholders’ equity | $ | 2,200,683 |
| | $ | 2,290,586 |
|
| |
1 | At June 28, 2020 and December 29, 2019, 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 are able to convert the notes during the succeeding quarterly period. Due to the ability of the holders of the 2021 Notes to convert the notes, 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 June 28, 2020 and December 29, 2019. See Note 5 and Note 8. The accompanying notes are an integral part of these condensed consolidated financial statements.
Wright Medical Group N.V. Condensed Consolidated Statements of Operations (In thousands, except per share data) (unaudited) | Wright Medical Group N.V. Condensed Consolidated Statements of Operations (In thousands, except per share data) (unaudited) | Wright Medical Group N.V. Condensed Consolidated Statements of Operations (In thousands, except per share data) (unaudited) |
| | | Three months ended | | Nine months ended | Three months ended | | Six months ended |
| | September 24, 2017 | | September 25, 2016 | | September 24, 2017 | | September 25, 2016 | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
| Net sales | $ | 170,503 |
| | $ | 157,332 |
| | $ | 527,387 |
| | $ | 497,339 |
| $ | 129,955 |
| | $ | 229,734 |
| | $ | 348,495 |
| | $ | 459,861 |
|
Cost of sales 1, 2 | 38,421 |
| | 46,149 |
| | 113,669 |
| | 141,824 |
| |
Cost of sales 1 | | 28,723 |
| | 48,338 |
| | 67,638 |
| | 94,655 |
|
| Gross profit | 132,082 |
| | 111,183 |
| | 413,718 |
| | 355,515 |
| 101,232 |
| | 181,396 |
| | 280,857 |
| | 365,206 |
|
| Operating expenses: | | | | | | | | | | | | | | |
Selling, general and administrative 1 | 131,421 |
| | 129,840 |
| | 392,073 |
| | 401,069 |
| 118,241 |
| | 152,112 |
| | 272,830 |
| | 305,418 |
|
Research and development 1 | 11,992 |
| | 12,481 |
| | 36,971 |
| | 36,705 |
| 14,178 |
| | 18,756 |
| | 33,778 |
| | 35,728 |
|
| Amortization of intangible assets | 7,178 |
| | 7,466 |
| | 21,574 |
| | 21,407 |
| 8,091 |
| | 7,862 |
| | 16,215 |
| | 15,449 |
|
| Total operating expenses | 150,591 |
| | 149,787 |
| | 450,618 |
| | 459,181 |
| 140,510 |
| | 178,730 |
| | 322,823 |
| | 356,595 |
|
| Operating loss | (18,509 | ) | | (38,604 | ) | | (36,900 | ) | | (103,666 | ) | |
| Operating (loss) income | | (39,278 | ) | | 2,666 |
| | (41,966 | ) | | 8,611 |
|
| Interest expense, net | 18,978 |
| | 16,795 |
| | 55,512 |
| | 41,673 |
| 21,176 |
| | 19,995 |
| | 41,646 |
| | 39,690 |
|
| Other expense (income), net | 5,457 |
| | (365 | ) | | 6,875 |
| | (3,494 | ) | |
| Other (income) expense, net | | (7,462 | ) | | (1,831 | ) | | (21,169 | ) | | 11,064 |
|
| Loss from continuing operations before income taxes | (42,944 | ) | | (55,034 | ) | | (99,287 | ) | | (141,845 | ) | (52,992 | ) | | (15,498 | ) | | (62,443 | ) | | (42,143 | ) |
| Benefit for income taxes | (8,822 | ) | | (2,325 | ) | | (7,498 | ) | | (6,913 | ) | |
| (Benefit) provision for income taxes | | (11 | ) | | 3,434 |
| | 2,127 |
| | 7,045 |
|
| Net loss from continuing operations | (34,122 | ) | | (52,709 | ) | | (91,789 | ) | | (134,932 | ) | (52,981 | ) | | (18,932 | ) | | (64,570 | ) | | (49,188 | ) |
| Loss from discontinued operations, net of tax | (97,748 | ) | | (57,436 | ) | | (139,942 | ) | | (252,571 | ) | |
| (Loss) income from discontinued operations, net of tax | | (6,412 | ) | | 1,120 |
| | (9,729 | ) | | (5,225 | ) |
| Net loss | $ | (131,870 | ) | | $ | (110,145 | ) | | $ | (231,731 | ) | | $ | (387,503 | ) | $ | (59,393 | ) | | $ | (17,812 | ) | | $ | (74,299 | ) | | $ | (54,413 | ) |
| | | | | | | | | | | | | | | |
Net loss from continuing operations per share-basic and diluted (Note 11): | $ | (0.33 | ) | | $ | (0.51 | ) | | $ | (0.88 | ) | | $ | (1.31 | ) | |
Net loss from discontinued operations per share-basic and diluted (Note 11): | $ | (0.93 | ) | | $ | (0.56 | ) | | $ | (1.34 | ) | | $ | (2.46 | ) | |
Net loss per share-basic and diluted (Note 11): | $ | (1.26 | ) | | $ | (1.07 | ) | | $ | (2.22 | ) | | $ | (3.77 | ) | |
Net loss from continuing operations per share - basic and diluted (Note 10): | | $ | (0.41 | ) | | $ | (0.15 | ) | | $ | (0.50 | ) | | $ | (0.39 | ) |
Net (loss) income from discontinued operations per share - basic and diluted (Note 10): | | $ | (0.05 | ) | | $ | 0.01 |
| | $ | (0.08 | ) | | $ | (0.04 | ) |
Net loss per share - basic and diluted (Note 10): | | $ | (0.46 | ) | | $ | (0.14 | ) | | $ | (0.58 | ) | | $ | (0.43 | ) |
| | | | | | | | | | | | | | | |
| Weighted-average number of ordinary shares outstanding-basic and diluted: | 104,836 |
| | 103,072 |
| | 104,292 |
| | 102,854 |
| |
| Weighted-average number of ordinary shares outstanding - basic and diluted: | | 128,922 |
| | 126,267 |
| | 128,833 |
| | 126,040 |
|
___________________________
| |
1 | These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated: |
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
| Cost of sales | $ | 253 |
| | $ | 137 |
| | $ | 477 |
| | $ | 257 |
|
| Selling, general and administrative | 6,649 |
| | 6,835 |
| | 13,124 |
| | 13,822 |
|
| Research and development | 669 |
| | 651 |
| | 1,300 |
| | 1,165 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 24, 2017 | | September 25, 2016 | | September 24, 2017 | | September 25, 2016 |
| Cost of sales | $ | 152 |
| | $ | 146 |
| | $ | 403 |
| | $ | 321 |
|
| Selling, general and administrative | 4,960 |
| | 3,168 |
| | 12,939 |
| | 9,070 |
|
| Research and development | 333 |
| | 214 |
| | 789 |
| | 510 |
|
| |
2
| Cost of sales includes amortization of inventory step-up adjustment of $10.3 million and $30.9 million for the three and nine months ended September 25, 2016, respectively. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Wright Medical Group N.V.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(unaudited)
| | | | Three months ended | | Nine months ended | Three months ended | | Six months ended |
| | September 24, 2017 | | September 25, 2016 | | September 24, 2017 | | September 25, 2016 | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
| Net loss | $ | (131,870 | ) | | $ | (110,145 | ) | | $ | (231,731 | ) | | $ | (387,503 | ) | $ | (59,393 | ) | | $ | (17,812 | ) | | $ | (74,299 | ) | | $ | (54,413 | ) |
| | | | | | | | | | | | | | | |
| Other comprehensive income: | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | |
| Changes in foreign currency translation | 25,132 |
| | 4,480 |
| | 44,362 |
| | 11,763 |
| 11,271 |
| | (123 | ) | | 2,159 |
| | (11,426 | ) |
| Other comprehensive income | 25,132 |
| | 4,480 |
| | 44,362 |
| | 11,763 |
| |
| Other comprehensive income (loss) | | 11,271 |
| | (123 | ) | | 2,159 |
| | (11,426 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive loss | $ | (106,738 | ) | | $ | (105,665 | ) | | $ | (187,369 | ) | | $ | (375,740 | ) | $ | (48,122 | ) | | $ | (17,935 | ) | | $ | (72,140 | ) | | $ | (65,839 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Wright Medical Group N.V. Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) |
| | | | | | | |
| | Six months ended |
| | June 28, 2020 | | June 30, 2019 |
| Operating activities: | | | |
| Net loss | $ | (74,299 | ) | | $ | (54,413 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | |
| Depreciation | 31,232 |
| | 31,673 |
|
| Share-based compensation expense | 14,901 |
| | 15,244 |
|
| Amortization of intangible assets | 16,215 |
| | 15,449 |
|
| Amortization of deferred financing costs and debt discount | 27,178 |
| | 26,948 |
|
| Deferred income taxes | (509 | ) | | (1,238 | ) |
| Provision for excess and obsolete inventory | 6,732 |
| | 6,016 |
|
| Amortization of inventory step-up adjustment | — |
| | 704 |
|
| Non-cash adjustment to derivative fair values | (25,762 | ) | | (1,812 | ) |
| Net loss on exchange of cash convertible notes | — |
| | 14,274 |
|
| Mark-to-market adjustment for CVRs | — |
| | (420 | ) |
| Other | 1,859 |
| | (4,127 | ) |
| Changes in assets and liabilities: | | | |
| Accounts receivable | 36,884 |
| | 1,689 |
|
| Inventories | (47,992 | ) | | (21,921 | ) |
| Prepaid expenses and other current assets | 7,322 |
| | (10,596 | ) |
| Accounts payable | 3,904 |
| | (4,205 | ) |
| Accrued expenses and other liabilities | (5,568 | ) | | 2,834 |
|
Metal-on-metal product liabilities (Note 11) | (3,039 | ) | | (13,998 | ) |
| Net cash (used in) provided by operating activities | (10,942 | ) | | 2,101 |
|
| Investing activities: | | | |
| Capital expenditures | (39,179 | ) | | (48,007 | ) |
| Purchase of intangible assets | (3,733 | ) | | (3,614 | ) |
| Acquisition of business | — |
| | 722 |
|
| Other investing | — |
| | 3,766 |
|
| Net cash used in investing activities | (42,912 | ) | | (47,133 | ) |
| Financing activities: | | | |
| Issuance of ordinary shares | 6,353 |
| | 14,014 |
|
| Issuance of stock warrants | — |
| | 21,210 |
|
| Payment of notes premium | (146 | ) | | — |
|
| Payment of notes hedge options | — |
| | (30,144 | ) |
| Repurchase of stock warrants | — |
| | (11,026 | ) |
| Payment of equity issuance costs | — |
| | (350 | ) |
| Proceeds from notes hedge options | 351 |
| | 16,849 |
|
| Proceeds from debt | 77,010 |
| | 3,551 |
|
| Payments of debt | (58,782 | ) | | (2,631 | ) |
| Payment of financing costs | — |
| | (3,154 | ) |
| Payment of contingent consideration | (320 | ) | | — |
|
| Payments of finance lease obligations | (3,754 | ) | | (3,904 | ) |
Wright Medical Group N.V. Condensed Consolidated Statements of Cash Flows (Continued) (In thousands)
|
| | | | | | | |
| | Six months ended |
| | June 28, 2020 | | June 30, 2019 |
| Net cash provided by financing activities | $ | 20,712 |
| | $ | 4,415 |
|
| Effect of exchange rates on cash and cash equivalents | (63 | ) | | (160 | ) |
| Net decrease in cash and cash equivalents | (33,205 | ) | | (40,777 | ) |
| Cash and cash equivalents, beginning of period | 166,856 |
| | 191,351 |
|
| Cash and cash equivalents, end of period | $ | 133,651 |
| | $ | 150,574 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Wright Medical Group N.V. Condensed Consolidated Statements of Changes in Shareholders’ Equity (In thousands, except share data) (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 28, 2020 |
| | Ordinary shares | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total shareholders’ equity |
| | Number of shares | | Amount |
| Balance at March 29, 2020 | 128,817,336 |
| | $ | 4,697 |
| | $ | 2,620,516 |
| | $ | (38,611 | ) | | $ | (1,707,244 | ) | | $ | 879,358 |
|
| 2020 Activity: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (59,393 | ) | | (59,393 | ) |
| Foreign currency translation | — |
| | — |
| | — |
| | 11,271 |
| | — |
| | 11,271 |
|
| Issuances of ordinary shares | 110,236 |
| | 4 |
| | 2,115 |
| | — |
| | — |
| | 2,119 |
|
| Vesting of restricted stock units | 132,304 |
| | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 7,568 |
| | — |
| | — |
| | 7,568 |
|
| Balance at June 28, 2020 | 129,059,876 |
| | $ | 4,706 |
| | $ | 2,630,194 |
| | $ | (27,340 | ) | | $ | (1,766,637 | ) | | $ | 840,923 |
|
| | | | | | | | | | | | |
| | Three months ended June 30, 2019 |
| | Ordinary shares | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total shareholders’ equity |
| | Number of shares | | Amount |
| Balance at March 31, 2019 | 126,105,530 |
| | $ | 4,608 |
| | $ | 2,542,747 |
| | $ | (19,386 | ) | | $ | (1,614,714 | ) | | $ | 913,255 |
|
| 2019 Activity: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (17,812 | ) | | (17,812 | ) |
| Foreign currency translation | — |
| | — |
| | — |
| | (123 | ) | | — |
| | (123 | ) |
| Issuances of ordinary shares | 137,025 |
| | 4 |
| | 3,009 |
| | — |
| | — |
| | 3,013 |
|
| Vesting of restricted stock units | 338,397 |
| | 11 |
| | (11 | ) | | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 7,697 |
| | — |
| | — |
| | 7,697 |
|
| Balance at June 30, 2019 | 126,580,952 |
| | $ | 4,623 |
| | $ | 2,553,442 |
| | $ | (19,509 | ) | | $ | (1,632,526 | ) | | $ | 906,030 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 28, 2020 |
| | Ordinary shares | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total shareholders’ equity |
| | Number of shares | | Amount |
| Balance at December 29, 2019 | 128,614,026 |
| | $ | 4,691 |
| | $ | 2,608,939 |
| | $ | (29,499 | ) | | $ | (1,692,338 | ) | | $ | 891,793 |
|
| 2019 Activity: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (74,299 | ) | | (74,299 | ) |
| Foreign currency translation | — |
| | — |
| | — |
| | 2,159 |
| | — |
| | 2,159 |
|
| Issuances of ordinary shares | 298,951 |
| | 10 |
| | 6,343 |
| | — |
| | — |
| | 6,353 |
|
| Vesting of restricted stock units | 146,899 |
| | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 14,917 |
| | — |
| | — |
| | 14,917 |
|
| Balance at June 28, 2020 | 129,059,876 |
| | $ | 4,706 |
| | $ | 2,630,194 |
| | $ | (27,340 | ) | | $ | (1,766,637 | ) | | $ | 840,923 |
|
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2019 |
| | Ordinary shares | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Accumulated deficit | | Total shareholders’ equity |
| | Number of shares | | Amount |
| Balance at December 30, 2018 | 125,555,751 |
| | $ | 4,589 |
| | $ | 2,514,295 |
| | $ | (8,083 | ) | | $ | (1,578,342 | ) | | $ | 932,459 |
|
| 2019 Activity: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (54,413 | ) | | (54,413 | ) |
| Cumulative impact of lease accounting adoption | — |
| | — |
| | — |
| | — |
| | 229 |
| | 229 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | (11,426 | ) | | — |
| | (11,426 | ) |
| Issuances of ordinary shares | 683,585 |
| | 23 |
| | 13,991 |
| | — |
| | — |
| | 14,014 |
|
| Vesting of restricted stock units | 341,616 |
| | 11 |
| | (11 | ) | | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 15,333 |
| | — |
| | — |
| | 15,333 |
|
| Issuance of stock warrants, net of repurchases and equity issuance costs | — |
| | — |
| | 9,834 |
| | — |
| | — |
| | 9,834 |
|
| Balance at June 30, 2019 | 126,580,952 |
| | $ | 4,623 |
| | $ | 2,553,442 |
| | $ | (19,509 | ) | | $ | (1,632,526 | ) | | $ | 906,030 |
|
Wright Medical Group N.V. Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) |
| | | | | | | |
| | Nine months ended |
| | September 24, 2017 | | September 25, 2016 |
| Operating activities: | | | |
| Net loss | $ | (231,731 | ) | | $ | (387,503 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation | 42,124 |
| | 42,066 |
|
| Share-based compensation expense | 14,131 |
| | 9,901 |
|
| Amortization of intangible assets | 21,574 |
| | 21,746 |
|
| Amortization of deferred financing costs and debt discount | 37,373 |
| | 28,676 |
|
| Deferred income taxes | (2,059 | ) | | (9,534 | ) |
| Provision for excess and obsolete inventory | 13,770 |
| | 16,171 |
|
| Write-off of deferred financing costs | — |
| | 12,343 |
|
| Amortization of inventory step-up adjustment | — |
| | 34,346 |
|
| Non-cash adjustment to derivative fair values | (4,163 | ) | | (26,460 | ) |
Impairment loss on large joints assets held for sale (Note 3) | — |
| | 21,876 |
|
Mark-to-market adjustment for CVRs (Note 5) | 6,721 |
| | 8,968 |
|
| Other | 2,093 |
| | 3,494 |
|
| Changes in assets and liabilities: | | | |
| Accounts receivable | 18,807 |
| | 9,900 |
|
| Inventories | (28,210 | ) | | (3,662 | ) |
| Prepaid expenses and other current assets | 5,851 |
| | 20,066 |
|
| Accounts payable | 8,260 |
| | (6,659 | ) |
| Accrued expenses and other liabilities | (21,343 | ) | | (9,820 | ) |
Metal-on-metal product liabilities (Note 12) | (12,506 | ) | | 188,732 |
|
| Net cash used in operating activities | (129,308 | ) | | (25,353 | ) |
| Investing activities: | | | |
| Capital expenditures | (49,476 | ) | | (37,800 | ) |
| Purchase of intangible assets | (1,408 | ) | | (4,761 | ) |
| Net cash used in investing activities | (50,884 | ) | | (42,561 | ) |
| Financing activities: | | | |
| Issuance of ordinary shares | 24,828 |
| | 5,654 |
|
| Proceeds from stock warrants | — |
| | 54,629 |
|
| Payment of notes hedge options | — |
| | 3,892 |
|
| Repurchase of stock warrants | — |
| | (3,319 | ) |
| Payment of notes premium | — |
| | (1,619 | ) |
| Proceeds from notes hedge options | — |
| | (99,816 | ) |
| Proceeds from convertible senior notes | — |
| | 395,000 |
|
| Proceeds from other debt | 32,000 |
| | 821 |
|
| Payments of debt | (10,722 | ) | | — |
|
| Redemption of convertible senior notes | — |
| | (102,974 | ) |
| Payments of deferred financing costs and equity issuance costs | — |
| | (8,318 | ) |
| Payment of contingent consideration | (1,429 | ) | | (664 | ) |
| Payments of capital lease obligations | (1,863 | ) | | (1,822 | ) |
| Net cash provided by financing activities | 42,814 |
| | 241,464 |
|
| Effect of exchange rates on cash, cash equivalents and restricted cash | 2,902 |
| | 960 |
|
| Net (decrease) increase in cash, cash equivalents and restricted cash | (134,476 | ) | | 174,510 |
|
| Cash, cash equivalents and restricted cash, beginning of period | 412,265 |
| | 139,804 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 277,789 |
| | $ | 314,314 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Description of Business
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, three3 of the fastest growing segments in orthopaedics. We market our products in overapproximately 50 countries worldwide.
On November 4, 2019, we entered into a definitive agreement with Stryker and its subsidiary, Stryker B.V. Under the terms of the purchase agreement, and upon the terms and subject to the conditions thereof, Stryker B.V. has commenced a tender offer to purchase all of the outstanding ordinary shares of Wright for $30.75 per share, without interest and less applicable withholding taxes, in cash (the Offer). The Offer is currently scheduled to expire at 5:00 p.m., Eastern Time, on August 31, 2020, but may be extended in accordance with the terms of the purchase agreement between Stryker and Wright. The closing of the transaction is subject to receipt of applicable regulatory approvals, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), completion of the Offer, and other customary closing conditions.
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); Columbia City, Indiana (research and development); Alpharetta, Georgia (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"“international” or "foreign"“foreign” relate to non-U.S. matters while references to "domestic"“domestic” relate to U.S. matters. Our ordinary shares are traded on the Nasdaq Global Select Market under the symbol “WMGI.”
Impact of Global COVID-19 Pandemic. The global COVID-19 pandemic has led to the temporary closure of businesses, travel restrictions and the implementation of social distancing measures. Hospitals, ambulatory surgery centers and other medical facilities have deferred elective procedures, diverted resources to patients suffering from infections and limited access for non-patients, including our sales representatives. Because of the COVID-19 pandemic, surgeons and their patients are required, or are choosing, to defer procedures in which our products otherwise would be used, and many facilities that specialize in the procedures in which our products otherwise would be used have temporarily closed or reduced operating hours. These circumstances have negatively impacted the ability of our employees, independent sales representatives and distributors to effectively market and sell our products.
In response to the COVID-19 pandemic, we set our corporate priorities and actions as follows. First, we are focused on the health and safety of our employees. Second, we are focused on continuity of product supply and service for our customers and their patients. Third, we are focused on minimizing the spread of the virus to reduce the impact on our communities and hospital systems. Finally, we are focused on maintaining the sustainability of our Company by diligently and thoughtfully conserving and allocating resources, and pausing non-critical spending and non-critical hiring. In furtherance of this objective, we implemented temporary reductions in base salaries for our executive officers and certain other employees, including a 50% reduction for our Chief Executive Officer, 25% reductions for other officers and 15% reductions for certain other employees, as well as a temporary 50% reduction in cash retainers for our Board of Directors. These temporary reductions ended in July 2020 for our executive officers and in June 2020 for our other employees. Our other sustainability measures remain in place.
Because of the anticipated temporary decline in our net sales, on May 7, 2020, we agreed with MidCap to amend the Credit Agreement to, among other things, suspend the quarterly-tested minimum net revenue and minimum adjusted EBITDA financial covenants through the end of 2020 and add a minimum liquidity covenant that will apply from the date of the amendment through May 15, 2021. See Note 8 to the condensed consolidated financial statements for a description of this amendment. 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. Prior to the merger (the Wright/Tornier merger or the merger) with Tornier N.V. (legacy Tornier) in October 2015, our fiscal year ended December 31 each year.
The condensed consolidated financial statements and accompanying notes present our consolidated results for each of the three and ninesix months ended September 24, 2017June 28, 2020 and September 25, 2016.June 30, 2019. The three and ninesix months ended September 24, 2017June 28, 2020 and September 25, 2016June 30, 2019 each consisted of thirteen and thirty-ninetwenty-six weeks, respectively.
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 condensed 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. (WMG or legacy Wright) and its subsidiaries before the Wright/Tornier merger.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation. The unaudited condensed consolidated interim financial statements of Wright Medical Group N.V. have been prepared in accordance with U.S. generally accepted accounting principles in the United States (US GAAP) for interim financial statements and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to these rules and regulations. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 25, 2016,29, 2019, as filed with the U.S. Securities and Exchange Commission (SEC)SEC on February 23, 2017.24, 2020.
In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments necessary for a fair presentation of our interim financial results. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not indicative of results for the full fiscal year. The accompanying unaudited condensed consolidated interim financial statements include our accounts and those of our domestic and international subsidiaries, all of which are wholly-ownedcontrolled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates.
Discontinued Operations. On October 21, 2016, pursuantRevenue recognition. Our revenues are primarily generated through 2 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 binding offer letter datednetwork 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 upon transfer of control of promised products in an amount that reflects the consideration we expect to receive in exchange for those products, which is generally when the product is surgically implanted in a patient.
We record revenues from sales to our stocking distributors at a point in time upon transfer of control of promised products to the distributor. Our stocking distributors, who sell the products to their customers, take control of the products and assume all risks of ownership upon transfer. 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 was deferred and not yet recognized as revenue as of July 8, 2016, Tornier France SAS (Tornier France)June 28, 2020 and certain other entitiesJune 30, 2019.
We must make estimates of potential future product returns related to uscurrent period product sales. We base our estimate for sales returns on historical sales and Corin Orthopaedics Holdings Limited (Corin) entered into a business sale agreementproduct return information, including historical experience and simultaneously completedtrend information. Our reserve for sales returns has historically been immaterial. We incur shipping and closedhandling costs associated with the saleshipment of goods to customers, independent distributors, and our business operations operating undersubsidiaries. 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. We also record depreciation on surgical instruments used by our hospital and surgery center customers within selling, general and administrative expense as these costs are considered to be similar to shipping and handling costs, necessary to deliver the large joints operating segment. Pursuantimplant products to the termsend customer.
Inventories. Our inventories are valued at the lower of cost or market on a first in, first out (FIFO) basis. Inventory costs include material, labor costs, and manufacturing overhead. We regularly review inventory quantities on hand for excess and obsolete inventory, and, when circumstances indicate, we incur charges to write down inventories to their net realizable value. Historically, our excess and obsolete inventory reserve was based on both the agreement, Tornier Francecurrent 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. During the quarter ended September 29, 2019, we changed our estimate of excess and obsolete inventory reserves to better reflect the future usage for inventory in excess of estimated three-year demand. The impact of this change in estimate was approximately $26 million. We reduce our inventory reserve and recognize an offset to cost of sales as the related inventory is sold substantially allbased on an estimated inventory turnover period of 2.5 years.
Total charges incurred to write down excess and obsolete inventory to net realizable value included in “Cost of sales” were approximately $5.2 million and $2.5 million for the assets relatedthree months ended June 28, 2020 and June 30, 2019, respectively. Total charges incurred to our hipwrite down excess and knee, or large joints, business (the Large Joints business)obsolete inventory to Corinnet realizable value included in “Cost of sales” were approximately $6.7 million and $6.0 million for approximately €29.7 million in cash, less approximatelythe six months ended June 28, 2020 and June 30, 2019, respectively. During the three and six
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
€11.1months ended June 28, 2020, our cost of sales included a favorable adjustment of $2.6 million and $5.2 million, respectively, as a result of our change in accounting estimate of reserves for net working capital adjustmentsexcess and subject to certain other closing adjustments. Upon closing, the parties also executed a transitional services agreement and supply agreement, among other ancillary agreements required to implement the transaction.obsolete inventory, as such inventory was sold.
Discontinued Operations.On January 9, 2014, legacy Wrightpursuant to an Asset Purchase Agreement, dated as of June 18, 2013 (the MicroPort Agreement), by and among us and MicroPort Scientific Corporation (MicroPort), we completed the divestiture and sale of its hip and knee (OrthoRecon)our business operations operating under our prior OrthoRecon operating segment to MicroPort Scientific Corporation (MicroPort). Certain liabilities associated with the OrthoRecon business, including product liability claims associated with hip and knee products sold 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.
All current and historical operating results for the Large Joints and OrthoRecon businessesbusiness are reflected within discontinued operations in the condensed consolidated financial statements.
See Note 3 for further discussion of discontinued operations. Other than the discontinued operations discussed in Note 3, unless otherwise stated, all discussion of assets and liabilities in these notesNotes to the condensed consolidated financial statements 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. Recent Accounting Pronouncements. In May 2014,On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, 2016-02, Leases, and has subsequently issued several supplemental and/or clarifying ASUs (collectively ASC 606)842). Accounting Standards Codification (ASC) 606 prescribes a single common revenue standard that replaces most existing U.S. 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. Upon adoption, we must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application. We are currently assessing the impact that the future adoption of ASC 606 may have on our consolidated financial statements by analyzing our current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606. Based on our review of our customer contracts, we expect that revenue on the majority of our customer contracts 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. We expect to adopt ASC 606 using the modified retrospective method, which recognizes the cumulative effect at the date of initial application.
On February 25, 2016, the FASB issued ASU 2016-02, Leases, which introduces842 introduced 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 ASCAccounting Standards Codification (ASC) 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore,We adopted ASC 842 during the ASU addresses other concerns relatedquarter ended March 31, 2019 using the hindsight practical expedient, the practical expedient for short-term leases, and the practical expedient package which primarily limited the need for reassessing lease classification on existing leases. During 2019, with the adoption of ASC 842, we recognized all operating leases with terms greater than twelve months in duration on our condensed consolidated balance sheet as right-of-use assets and lease liabilities which totaled approximately $20 million. Additionally, we recorded a cumulative adjustment of $0.2 million to our accumulated deficit upon adoption during the current leases model. The ASU will be effective for us beginning in fiscal yearquarter ended March 31, 2019. We are inadopted the initial phases of our adoption plans;standard using the prospective approach and accordingly, we are unabledid not retrospectively apply it to estimate any effect this may have on our consolidated financial statements.prior periods.
On March 30,June 16, 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,2016-13, Measurement of Credit Losses on Financial Instruments and has subsequently issued several supplemental and/or clarifying ASUs. The new standard adds an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is to simplify accounting for income taxes, forfeitures, and withholding taxes associated with share-based payment arrangements, and reduce ambiguitythe FASB believes will result in cash flow reporting.more timely recognition of such losses. We adopted this ASU during the quarter ended March 26, 2017 and noted noin fiscal year 2020, however, this guidance did not have a significant impact on our condensed consolidated financial statements.
On August 26, 2016,29, 2018, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts2018-15, Intangibles-Goodwill and Cash Payments, which amends theOther-Internal-Use Software (Subtopic 350-40) to provide guidance on implementation costs incurred in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose ofa cloud computing arrangement (CCA) that is a service contract. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40, Internal Use Software, to reduce the diversitydetermine which implementation costs should be capitalized in practice that has resulted from the lack of consistent principles onsuch a CCA. We adopted this topic. The ASU’s amendments add or clarify guidance on eight cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. We elected to early adopt this guidance for theASU in fiscal year ended December 25, 2016. The application of2020; however, this guidance did not have a significant impact the historical presentation ofon our condensed consolidated statement of cash flows.financial statements.
In November 2016,On December 18, 2019, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
total amounts shown on the statement of cash flows. We elected to early adopt the methodology for presenting restricted cash resulting from the Escrow Agreement described in Note 13 for the year ended December 25, 2016.On January 26, 2017, the FASB issued ASU 2017-04, 2019-12, Simplifying the TestAccounting for Goodwill Impairment, Income Taxeswhich removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. Under theadds new guidance if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference.to simplify the accounting for income taxes and changes the accounting for certain income tax transactions. The guidance in the ASUnew standard is effective for our interimfiscal years beginning after December 15, 2020, and annual goodwill impairment tests beginning in 2020 with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017.is permitted. We are in the initial phases of our adoption plans; and, accordingly, we are unabledo not expect this standard to estimate any effect this may have a material impact on our consolidated financial statements.
3. Discontinued Operations
For the three months ended September 24, 2017 and September 25, 2016, our loss from discontinued operations, net of tax, totaled $97.7 million and $57.4 million, respectively. For the nine months ended September 24, 2017 and September 25, 2016, our loss from discontinued operations, net of tax, totaled $139.9 million and $252.6 million, respectively. Our loss from discontinued operations 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 condensed 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 condensed consolidated statements of operations.
For the three and nine months ended September 24, 2017, our loss from discontinued operations for the Large Joints business, net of tax, totaled $0.9 million and $2.4 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 104.8 million and 104.3 million for the three and nine months ended September 24, 2017, respectively. The basic and diluted net loss from discontinued operations per share for the Large Joints business was $0.01 and $0.02 for the three and nine months ended September 24, 2017, respectively.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table summarizes the results of discontinued operations for the Large Joints business for the three and nine months ended September 25, 2016 (in thousands, except per share data):
|
| | | | | | |
| | Three months ended | Nine months ended |
| | September 25, 2016 | September 25, 2016 |
| Net sales | $ | 7,320 |
| $ | 29,220 |
|
| Cost of sales | 4,348 |
| 15,708 |
|
| Selling, general and administrative | 4,897 |
| 15,069 |
|
| Other | 396 |
| 1,630 |
|
| Loss from discontinued operations before income taxes | (2,321 | ) | (3,187 | ) |
| Impairment loss on assets held for sale, before income taxes | — |
| (21,876 | ) |
| Total loss from discontinued operations before income taxes | (2,321 | ) | (25,063 | ) |
| Income tax benefit | 759 |
| 5,529 |
|
| Total loss from discontinued operations, net of tax | $ | (1,562 | ) | $ | (19,534 | ) |
| | | |
Net loss from discontinued operations per share-basic and diluted (Note 11) | $ | (0.02 | ) | $ | (0.19 | ) |
| | | |
Weighted-average number of ordinary shares outstanding-basic and diluted (Note 11) | 103,072 |
| 102,854 |
|
Cash used in operating activities from the Large Joints business totaled $3.5 million for the nine months ended September 24, 2017. Cash provided by operating activities from the Large Joints business totaled $3.0 million for the nine months ended September 25, 2016.
OrthoRecon Business
On January 9, 2014, legacy Wrightwe completed the divestiture and sale of itsour OrthoRecon business to MicroPort Scientific Corporation. 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.
Certain liabilities associated with the OrthoRecon business, including product liability claims associated with hip and knee products sold by legacy Wrightus 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.
For the three and six months ended June 28, 2020, our loss from discontinued operations, net of tax, totaled $6.4 million and $9.7 million, respectively. For the three and six months ended June 30, 2019, our income (loss) from discontinued operations, net of tax, totaled $1.1 million and $(5.2) million, respectively. Our operating results from discontinued operations and cash used in discontinued operations during 2020 and 2019 were attributable primarily to expenses, net of insurance recoveries, associated with our former OrthoRecon business as described in Note 11. Cash used in discontinued operations totaled $11.3 million and $32.1 million for the six months ended June 28, 2020 and June 30, 2019, respectively. We will incur continuing cash outflows associated
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
with legal defense costs and the ultimate resolution of these contingent liabilities, net of insurance proceeds, until these liabilities are resolved.
All current and historical operating results for the OrthoRecon business are reflected within discontinued operations in the condensed consolidated financial statements. The following table summarizes the results of discontinued operations for the OrthoRecon business (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 24, 2017 | | September 25, 2016 | | September 24, 2017 | | September 25, 2016 |
| Net sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Selling, general and administrative | 96,917 |
| | 55,874 |
| | 137,578 |
| | 233,037 |
|
| Loss from discontinued operations before income taxes | (96,917 | ) | | (55,874 | ) | | (137,578 | ) | | (233,037 | ) |
| Benefit for income taxes | — |
| | — |
| | — |
| | — |
|
| Total loss from discontinued operations, net of tax | $ | (96,917 | ) | | $ | (55,874 | ) | | $ | (137,578 | ) | | $ | (233,037 | ) |
| | | | | | | | |
Net loss from discontinued operations per share-basic and diluted (Note 11) | $ | (0.92 | ) | | $ | (0.54 | ) | | $ | (1.32 | ) | | $ | (2.27 | ) |
| | | | | | | | |
Weighted-average number of ordinary shares outstanding-basic and diluted (Note 11) | 104,836 |
| | 103,072 |
| | 104,292 |
| | 102,854 |
|
The above selling, general and administrative expenses during the three and nine months ended September 24, 2017 included charges of $86.9 million and $103.3 million, respectively, related to the retained metal-on-metal product liability claims associated with the OrthoRecon business. The three and nine months ended September 25, 2016 included charges of $38.7 million and $188.7 million, respectively, related to the retained metal-on-metal product liability claims associated with the OrthoRecon business. See Note 12 to the condensed consolidated financial statements for further discussion regarding the metal-on-metal product liability claims.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 $142.7 million and $29.7 million for the nine months ended September 24, 2017 and September 25, 2016, respectively.
4. Inventories
Inventories consist of the following (in thousands):
|
| | | | | | | |
| | June 28, 2020 | | December 29, 2019 |
| Raw materials | $ | 14,814 |
| | $ | 12,681 |
|
| Work-in-process | 29,613 |
| | 27,528 |
|
| Finished goods | 194,356 |
| | 158,165 |
|
| | $ | 238,783 |
| | $ | 198,374 |
|
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Raw materials | $ | 10,695 |
| | $ | 15,319 |
|
| Work-in-process | 29,714 |
| | 22,422 |
|
| Finished goods | 131,902 |
| | 113,108 |
|
| | $ | 172,311 |
| | $ | 150,849 |
|
5. 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'derivatives’ fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met.
FASB ASC Section 820, Fair Value Measurements and DisclosuresMeasurement 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. |
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
| |
| Level 2: | Financial instruments determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. |
| |
| Level 3: | Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques. |
2021 Notes Conversion Derivative and Notes Hedges
On May 20, 2016,As of June 28, 2020, we issued $395 million aggregate principal amount ofhad 2.25% cash convertible senior notes due 2021 (2021 Notes). and 1.625% cash convertible senior notes due 2023 (2023 Notes) outstanding. The 2.00% cash convertible senior notes due 2020 (2020 Notes) matured and were repaid on February 15, 2020.
See Note 8 of the condensed consolidated financial statements for additional information regardingabout the 2021 Notes.convertible notes. These notes are cash settled upon conversion for the principal amount of the notes plus a conversion premium (valued at the amount our ordinary share price exceeds the respective conversion price of the notes). The 2021 Notes haveconversion premium is a conversion derivative feature (2021 Notes Conversion Derivative) that requires bifurcation from the 2021 Notesnotes in accordance with ASC Topic 815 and is accounted for as a derivative liability. The fair value of the 2021 Notesliability (Notes Conversion Derivative atDerivative). At the time of issuance of the 2021 Notes was $117.2 million.
In connection with the issuance of the 2021 Notes,notes, we entered into hedges
(2021 Notes Hedges) with
twocertain option
counterparties. The 2021 Notes Hedges, which are cash-settled, are generally intendedcounterparties to reduce our exposure to potential cash payments
that we are required
to make uponfor these conversion premiums (Notes Hedges). Upon conversion of the
2021 Notesnotes, the option counterparties would settle these hedges with us in
excess ofcash, valued in the
principal amount of converted notes if our ordinary share price exceedssame manner as the conversion
price.premiums. The
aggregate cost of the 2021 Notes Hedges
was $99.8 million and isare accounted for as a derivative asset in accordance with ASC Topic 815.
However, inIn connection with certain events,
theseincluding in connection with the Offer as further described in Note 8, our option counterparties have the discretion to make certain adjustments to the 2021 Note Hedges, which may reduce the effectiveness of the 2021 Note Hedges.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table summarizes the fair valuevalues and the presentation in our condensed consolidated balance sheets (in thousands) of our Notes Hedges and our Notes Conversion Derivatives:
|
| | | | | | | | | | | |
| | June 28, 2020 | | December 29, 2019 |
| | Location on condensed consolidated balance sheet | | Amount | | Location on condensed consolidated balance sheet | | Amount |
| 2023 Notes Hedges | Other assets | | $ | 62,307 |
| | Other assets | | $ | 39,240 |
|
| 2023 Notes Conversion Derivative | Other liabilities | | $ | 38,981 |
| | Other liabilities | | $ | 31,555 |
|
| 2021 Notes Hedges | Other current assets | | $ | 182,436 |
| | Other current assets | | $ | 183,437 |
|
| 2021 Notes Conversion Derivative | Accrued expenses and other current liabilities | | $ | 168,258 |
| | Accrued expenses and other current liabilities | | $ | 179,478 |
|
| 2020 Notes Hedges | Other current assets | | $ | — |
| | Other current assets | | $ | 1,969 |
|
| 2020 Notes Conversion Derivative | Accrued expenses and other current liabilities | | $ | — |
| | Accrued expenses and other current liabilities | | $ | 1,666 |
|
As of June 28, 2020 and December 29, 2019, the sale price condition (as defined in Note 8) for the 2021 Notes Hedgeswas satisfied and, 2021 Notes Conversion Derivative: |
| | | | | | | |
| | Location on condensed consolidated balance sheet | September 24, 2017 | December 25, 2016 |
| 2021 Notes Hedges | Other assets | $ | 177,818 |
| $ | 159,095 |
|
| 2021 Notes Conversion Derivative | Other liabilities | $ | 177,870 |
| $ | 161,601 |
|
In the first quarter of 2017, the closing price of our ordinary shares was greater than 130% oftherefore, 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 notesare convertible at any time during the succeeding calendar 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 wereare classified as current liabilities, and the fair value of the 2021 Notes Hedges wereare classified as current assets as of March 26, 2017.June 28, 2020 and December 29, 2019. There were no significant conversions through July 28, 2020.
The 2020 Note Hedge and 2020 Conversion Derivative were settled during the secondfirst quarter of 2017. The closing price2020 and resulted in net proceeds of our ordinary shares was less than 130%approximately $0.2 million.
Neither the Notes Conversion Derivatives nor the Notes Hedges qualify for hedge accounting; thus, any changes in the fair value of the 2021 Notes conversion price for more than 20derivatives are recognized immediately in our condensed consolidated statements of operations. The following table summarizes the 30 consecutive trading days precedingnet gain on changes in fair value (in thousands) related to the calendar quarters ended June 30, 2017 and September 30, 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 September 24, 2017.
The 2021 Notes Hedges and Notes Conversion Derivatives:
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
| 2023 Notes Hedges | $ | 21,894 |
| | $ | (36,757 | ) | | $ | 23,067 |
| | $ | 18,433 |
|
| 2023 Notes Conversion Derivative | (21,501 | ) | | 37,404 |
| | (7,426 | ) | | (18,319 | ) |
| 2021 Notes Hedges | 25,242 |
| | (37,358 | ) | | (1,001 | ) | | 24,563 |
|
| 2021 Notes Conversion Derivative | (15,570 | ) | | 37,543 |
| | 11,220 |
| | (23,217 | ) |
| 2020 Notes Hedges | — |
| | (3,208 | ) | | (1,618 | ) | | 5,042 |
|
| 2020 Notes Conversion Derivative | — |
| | 3,192 |
| | 1,520 |
| | (4,690 | ) |
| Net gain on changes in fair value | $ | 10,065 |
| | $ | 816 |
| | $ | 25,762 |
| | $ | 1,812 |
|
In addition to the 2021above net gain on changes in fair value, we also recognized a $12.6 million net loss on the Notes Conversion Derivatives during the quarter ended March 31, 2019 as part of the additional 2023 Notes exchange as described in Note 8. The Notes Hedges and the 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 our condensed 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:
|
| | | | | | | | | | | | | | |
| | | Three months ended | | Nine months ended |
| | | September 24, 2017 | September 25, 2016 | | September 24, 2017 | September 25, 2016 |
| |
| | 2021 Notes Hedges | $ | (9,074 | ) | $ | 85,182 |
| | $ | 18,723 |
| $ | 69,671 |
|
| | 2021 Notes Conversion Derivative | 9,321 |
| (86,275 | ) | | (16,269 | ) | (55,478 | ) |
| | Net gain (loss) on changes in fair value | $ | 247 |
| $ | (1,093 | ) | | $ | 2,454 |
| $ | 14,193 |
|
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 8 of the condensed 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 condensed consolidated balance sheets (in thousands) of the 2020 Notes Hedges and 2020 Notes Conversion Derivative:
|
| | | | | | | |
| | Location on condensed consolidated balance sheet | September 24, 2017 | December 25, 2016 |
| 2020 Notes Hedges | Other assets | $ | 73,694 |
| $ | 77,232 |
|
| 2020 Notes Conversion Derivative | Other liabilities | $ | 72,460 |
| $ | 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 our condensed consolidated statements of operations. The following table summarizes the net (loss) gain on changes in fair value (in thousands) related to the 2020 Notes Hedges and 2020 Notes Conversion Derivative:
|
| | | | | | | | | | | | | | |
| | | Three months ended | | Nine months ended |
| | | September 24, 2017 | September 25, 2016 | | September 24, 2017 | September 25, 2016 |
| |
| | 2020 Notes Hedges | $ | (10,340 | ) | $ | 49,887 |
| | $ | (3,538 | ) | $ | (40,558 | ) |
| | 2020 Notes Conversion Derivative | 10,292 |
| (45,421 | ) | | 5,298 |
| 44,701 |
|
| | Net (loss) gain on changes in fair value | $ | (48 | ) | $ | 4,466 |
| | $ | 1,760 |
| $ | 4,143 |
|
2017 Notes Conversion Derivative and Notes Hedges
On August 31, 2012, WMG issued $300 million aggregate principal amount of 2.00% cash convertible senior notes due 2017 (2017 Notes). The 2017 Notes matured and the remaining $2.0 million principal amount was repaid on August 15, 2017. See Note 8 of the condensed 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
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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 condensed consolidated balance sheets (in thousands) of the 2017 Notes Conversion Derivative:
|
| | | | | | | |
| | Location on condensed consolidated balance sheet | September 24, 2017 | December 25, 2016 |
| 2017 Notes Conversion Derivative | Accrued expenses and other current liabilities | $ | — |
| $ | 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 condensed 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:
|
| | | | | | | | | | | | | | |
| | | Three months ended | | Nine months ended |
| | | September 24, 2017 | September 25, 2016 | | September 24, 2017 | September 25, 2016 |
| |
| | 2017 Notes Conversion Derivative | $ | 15 |
| $ | (186 | ) | | $ | (51 | ) | $ | 8,124 |
|
| | Net (loss) gain on changes in fair value | $ | 15 |
| $ | (186 | ) | | $ | (51 | ) | $ | 8,124 |
|
To determine the fair value of the embedded conversion option in the 2017, 2020, 2021, and 20212023 Notes Conversion Derivatives, a trinomial lattice model was used. A trinomial stock price lattice 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, 2021, and 20212023 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, 2021, and 20212023 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, 2021, or 20212023 Notes are eligible for
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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, 2021, and 20212023 Notes, which is the discounted and probability-weighted value
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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, 2021, or 20212023 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, 2021 and 20212023 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.
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 September 24, 2017:June 28, 2020:
| | | | 2020 Notes Conversion Derivative | 2020 Notes
Hedge | 2021 Notes Conversion Derivative | 2021 Notes Hedge | 2021 Notes Conversion Derivative | 2021 Notes Hedge | 2023 Notes Conversion Derivative | 2023 Notes Hedge |
| Stock Price Volatility (1) | 31.07% | 35.58% | |
Black Stock Volatility (1) | | 42.3% | 19.88% |
| Credit Spread for Wright (2) | 2.31% | N/A | 3.42% | N/A | 0.55% | N/A | 0.30% | N/A |
| Credit Spread for Deutsche Bank AG (3) | N/A | 0.43% | N/A | N/A | 0.83% |
| Credit Spread for Wells Fargo Securities, LLC (3) | N/A | 0.19% | N/A | N/A |
| Credit Spread for JPMorgan Chase Bank (3) | N/A | 0.24% | N/A | 0.41% | N/A | 0.39% | N/A | 0.48% |
| Credit Spread for Bank of America (3) | N/A | 0.42% | N/A | 0.39% | N/A | 0.49% |
| |
(1) | Volatility selected based on historical and implied volatility of ordinary shares of Wright Medical Group N.V. |
| |
(2) | Credit spread implied from traded price. |
| |
(3) | Credit spread of each bank is estimated using CDS curves. Source: Bloomberg. |
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 condensed consolidated statements of operations. At September 24, 2017 and December 25, 2016, we had $1 million and $0.4 million in foreign currency contracts outstanding, respectively.
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 September 24, 2017, we have made all required contingent consideration payments based on the achievement of these milestones. As of December 25, 2016, we had recorded an estimated fair value of future contingent consideration of $0.4 million.
As a result of the acquired sales and distribution business of Surgical Specialties Australia Pty. LtdIMASCAP in 2015,2017, we have recorded the estimated fair value of future contingent consideration of approximately $1.1€28.0 million, or approximately $31.5 million, related to the achievement of certain technical milestones and sales earnouts as of June 28, 2020. The estimated fair value of contingent consideration related to technical milestones totaled $24.1 million and $1.7$20.8 million as of September 24, 2017June 28, 2020 and December 25, 2016, respectively.
29, 2019, respectively, and is contingent upon the development and approval of a next generation reverse shoulder implant system and new software modules. The estimated fair value of contingent consideration related to sales earnouts totaled $7.4 million and $7.2 million as of June 28, 2020 and December 29, 2019, respectively, and is contingent upon the sale of certain guides and the next generation reverse shoulder implant system.
The fair values of the sales earn out contingent consideration as of September 24, 2017June 28, 2020 and December 25, 2016 was29, 2019 were determined using a discounted cash flow model and probability adjusted estimates of the future earnings and are classified in Level 3. The discount rate is 12% for the sales earnout contingent consideration.
The contingent consideration from the IMASCAP acquisition related to technical milestones is based on meeting certain developmental milestones for new software modules and for the FDA and CE approval for the next generation reverse shoulder implant system. The fair value of this contingent consideration as of June 28, 2020andDecember 29, 2019 was determined using probability adjusted estimates of the future payments and is classified in Level 3. ChangesThe discount rate is approximately 6% for the contingent consideration related to technical milestones. A change in the discount rate would have limited impact on our profits or the fair value of this contingent consideration are recorded in “Other expense (income), net” in our condensed consolidated statements of operations.consideration.
On March 1, 2013, as part of our acquisition of BioMimetic Therapeutics, Inc. (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 September 24, 2017 and December 25, 2016 was $43.7 million and $37.0 million, respectively, and was determined using the closing price of the security in the active market (Level 1). For the three and nine months ended September 24, 2017, the change in the fair value of the CVRs resulted in expense of $4.5 million and $6.7 million, respectively. For the three and nine months ended September 25, 2016, the change in the fair value of the CVRs resulted in expense of $2.3 million and $9.0 million, respectively. The income or
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
expense related to the change in the value of the CVRs is recorded in “Other expense (income), net” in our condensed 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 September 24, 2017, we have reflected the $42 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 September 24, 2017June 28, 2020 and December 25, 201629, 2019 due to their short maturities and variable rates.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following tables summarize the valuation of our financial instruments (in thousands):
| | | | Total | Quoted prices in active markets (Level 1) | Prices with other observable inputs (Level 2) | Prices with unobservable inputs (Level 3) | Total | Quoted prices in active markets (Level 1) | Prices with other observable inputs (Level 2) | Prices with unobservable inputs (Level 3) |
| At September 24, 2017 | | |
June 28, 2020 | | |
| Assets | | |
| Cash and cash equivalents | $ | 238,867 |
| $ | 238,867 |
| $ | — |
| $ | — |
| $ | 133,651 |
| $ | 133,651 |
| $ | — |
| $ | — |
|
| Restricted cash | 38,922 |
| 38,922 |
| — |
| — |
| |
| 2020 Notes Hedges | 73,694 |
| — |
| — |
| 73,694 |
| |
| 2021 Notes Hedges | 177,818 |
| — |
| — |
| 177,818 |
| 182,436 |
| — |
| — |
| 182,436 |
|
| 2023 Notes Hedges | | 62,307 |
| — |
| — |
| 62,307 |
|
| Total | $ | 529,301 |
| $ | 277,789 |
| $ | — |
| $ | 251,512 |
| $ | 378,394 |
| $ | 133,651 |
| $ | — |
| $ | 244,743 |
|
| | | |
| Liabilities | | |
| 2020 Notes Conversion Derivative | $ | 72,460 |
| $ | — |
| $ | — |
| $ | 72,460 |
| |
| 2021 Notes Conversion Derivative | 177,870 |
| — |
| — |
| 177,870 |
| $ | 168,258 |
| $ | — |
| $ | — |
| $ | 168,258 |
|
| 2023 Notes Conversion Derivative | | 38,981 |
| — |
| — |
| 38,981 |
|
| Contingent consideration | 1,306 |
| — |
| — |
| 1,306 |
| 31,456 |
| — |
| — |
| 31,456 |
|
| Contingent consideration (CVRs) | 43,726 |
| 43,726 |
| — |
| — |
| |
| Total | $ | 295,362 |
| $ | 43,726 |
| $ | — |
| $ | 251,636 |
| $ | 238,695 |
| $ | — |
| $ | — |
| $ | 238,695 |
|
| | | | Total | Quoted prices
in active
markets
(Level 1) | Prices with
other
observable
inputs
(Level 2) | Prices with
unobservable
inputs
(Level 3) | Total | Quoted prices
in active
markets
(Level 1) | Prices with
other
observable
inputs
(Level 2) | Prices with
unobservable
inputs
(Level 3) |
| At December 25, 2016 | | |
| December 29, 2019 | | |
| Assets | | |
| Cash and cash equivalents | $ | 262,265 |
| $ | 262,265 |
| $ | — |
| $ | — |
| $ | 166,856 |
| $ | 166,856 |
| $ | — |
| $ | — |
|
| Restricted cash | 150,000 |
| 150,000 |
| — |
| — |
| |
| 2020 Notes Hedges | 77,232 |
| — |
| — |
| 77,232 |
| 1,969 |
| — |
| — |
| 1,969 |
|
| 2021 Notes Hedges | 159,095 |
| — |
| — |
| 159,095 |
| 183,437 |
| — |
| — |
| 183,437 |
|
| 2023 Notes Hedges | | 39,240 |
| — |
| — |
| 39,240 |
|
| Total | $ | 648,592 |
| $ | 412,265 |
| $ | — |
| $ | 236,327 |
| $ | 391,502 |
| $ | 166,856 |
| $ | — |
| $ | 224,646 |
|
| | | |
| Liabilities | |
| |
| |
| |
| |
| |
| |
| |
|
| 2017 Notes Conversion Derivative | $ | 164 |
| $ | — |
| $ | — |
| $ | 164 |
| |
| 2020 Notes Conversion Derivative | 77,758 |
| — |
| — |
| 77,758 |
| $ | 1,666 |
| $ | — |
| $ | — |
| $ | 1,666 |
|
| 2021 Notes Conversion Derivative | 161,601 |
| — |
| — |
| 161,601 |
| 179,478 |
| — |
| — |
| 179,478 |
|
| 2023 Notes Conversion Derivative | | 31,555 |
| — |
| — |
| 31,555 |
|
| Contingent consideration | 2,249 |
| — |
| — |
| 2,249 |
| 28,077 |
| — |
| — |
| 28,077 |
|
| Contingent consideration (CVRs) | 36,999 |
| 36,999 |
| — |
| — |
| |
| Total | $ | 278,771 |
| $ | 36,999 |
| $ | — |
| $ | 241,772 |
| $ | 240,776 |
| $ | — |
| $ | — |
| $ | 240,776 |
|
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following is a roll forward of our assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Balance at December 29, 2019 | Additions | Transfers into Level 3 | Gain/(loss) on fair value adjustments included in earnings | Settlements | Currency | Balance at June 28, 2020 |
| 2020 Notes Hedges | $ | 1,969 |
| — |
| — |
| (1,618 | ) | (351 | ) | — |
| $ | — |
|
| 2020 Notes Conversion Derivative | $ | (1,666 | ) | — |
| — |
| 1,520 |
| 146 |
| — |
| $ | — |
|
| 2021 Notes Hedges | $ | 183,437 |
| — |
| — |
| (1,001 | ) | — |
| — |
| $ | 182,436 |
|
| 2021 Notes Conversion Derivative | $ | (179,478 | ) | — |
| — |
| 11,220 |
| — |
| — |
| $ | (168,258 | ) |
| 2023 Notes Hedges | $ | 39,240 |
| — |
| — |
| 23,067 |
| — |
| — |
| $ | 62,307 |
|
| 2023 Notes Conversion Derivative | $ | (31,555 | ) | — |
| — |
| (7,426 | ) | — |
| — |
| $ | (38,981 | ) |
| Contingent consideration | $ | (28,077 | ) | — |
| — |
| (3,509 | ) | (320 | ) | 450 |
| $ | (31,456 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at December 25, 2016 | Additions | Transfers into Level 3 | Gain/(loss) included in earnings | Settlements | Currency | Balance at September 24, 2017 |
| | | | | | | | | |
| 2017 Notes Conversion Derivative | | $ | (164 | ) | $ | — |
| $ | — |
| $ | (51 | ) | $ | 215 |
| $ | — |
| $ | — |
|
| 2020 Notes Hedges | | 77,232 |
| — |
| — |
| (3,538 | ) | — |
| — |
| 73,694 |
|
| 2020 Notes Conversion Derivative | | (77,758 | ) | — |
| — |
| 5,298 |
| — |
| — |
| (72,460 | ) |
| 2021 Notes Hedges | | 159,095 |
| — |
| — |
| 18,723 |
| — |
| — |
| 177,818 |
|
| 2021 Notes Conversion Derivative | | (161,601 | ) | — |
| — |
| (16,269 | ) | — |
| — |
| (177,870 | ) |
| Contingent consideration | | (2,249 | ) | — |
| — |
| (305 | ) | 1,429 |
| (181 | ) | (1,306 | ) |
6. Property, Plant and Equipment
Property, plant and equipment, net consists of the following (in thousands):
|
| | | | | | | |
| | June 28, 2020 | | December 29, 2019 |
| Property, plant and equipment, at cost | $ | 695,387 |
| | $ | 648,318 |
|
| Less: Accumulated depreciation | (436,074 | ) | | (396,396 | ) |
| | $ | 259,313 |
| | $ | 251,922 |
|
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Property, plant and equipment, at cost | $ | 428,419 |
| | $ | 368,278 |
|
| Less: Accumulated depreciation | (216,634 | ) | | (166,546 | ) |
| | $ | 211,785 |
| | $ | 201,732 |
|
7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill occurring during the ninesix months ended September 24, 2017June 28, 2020 and June 30, 2019 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | U.S. Lower Extremities & Biologics | | U.S. Upper Extremities | | International Extremities & Biologics | | Total |
| Balance at December 29, 2019 | $ | 569,970 |
| | $ | 625,926 |
| | $ | 65,071 |
| | $ | 1,260,967 |
|
| Foreign currency translation | — |
| | 426 |
| | 903 |
| | 1,329 |
|
| Balance at June 28, 2020 | $ | 569,970 |
| | $ | 626,352 |
| | $ | 65,974 |
| | $ | 1,262,296 |
|
| | | | | | | | |
| Balance at December 30, 2018 | $ | 569,970 |
| | $ | 627,850 |
| | $ | 71,134 |
| | $ | 1,268,954 |
|
| Foreign currency translation | — |
| | (1,191 | ) | | (3,805 | ) | | (4,996 | ) |
| Balance at June 30, 2019 | $ | 569,970 |
| | $ | 626,659 |
| | $ | 67,329 |
| | $ | 1,263,958 |
|
|
| | | | | | | | | | | | | | | |
| | U.S. Lower Extremities & Biologics | | U.S. Upper Extremities | | International Extremities & Biologics | | Total |
| Goodwill at December 25, 2016 | $ | 218,525 |
| | $ | 558,669 |
| | $ | 73,848 |
| | $ | 851,042 |
|
| Foreign currency translation | — |
| | — |
| | 9,818 |
| | 9,818 |
|
| Goodwill at September 24, 2017 | $ | 218,525 |
| | $ | 558,669 |
| | $ | 83,666 |
| | $ | 860,860 |
|
Goodwill is recognized for the excess of the purchase price over the fair value of net assets of businesses acquired. Goodwill is required to be tested for impairment at least annually. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter annually.
Following the December 2017 IMASCAP acquisition, foreign currency translation has been reported within the U.S. Upper Extremities segment. While the IMASCAP offices are located in France and the majority of their operations have a functional currency of the euro, the results of the IMASCAP business are managed by the U.S. Upper Extremities segment.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of our identifiable intangible assets, net, are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | June 28, 2020 | | December 29, 2019 |
| | Cost | | Accumulated amortization | | Cost | | Accumulated amortization |
| Indefinite life intangibles: | | | | | | | |
| In-process research and development (IPRD) technology | $ | 7,860 |
| | $ | — |
| | $ | 6,238 |
| | $ | — |
|
| Total indefinite life intangibles | 7,860 |
| | | | 6,238 |
| | |
| | | | | | | | |
| Finite life intangibles: | | | | | | | |
| Completed technology | 172,632 |
| | 81,204 |
| | 172,111 |
| | 72,140 |
|
| Licenses | 9,247 |
| | 3,395 |
| | 9,247 |
| | 2,835 |
|
| Customer relationships | 181,184 |
| | 46,779 |
| | 181,094 |
| | 41,389 |
|
| Trademarks | 13,916 |
| | 11,987 |
| | 14,002 |
| | 11,834 |
|
| Non-compete agreements | 3,439 |
| | 2,490 |
| | 5,713 |
| | 4,090 |
|
| Other | 1,523 |
| | 357 |
| | 2,022 |
| | 757 |
|
| Total finite life intangibles | 381,941 |
| | $ | 146,212 |
| | 384,189 |
| | $ | 133,045 |
|
| | | | | | | | |
| Total intangibles | 389,801 |
| | | | 390,427 |
| | |
| Less: Accumulated amortization | (146,212 | ) | | | | (133,045 | ) | | |
| Intangible assets, net | $ | 243,589 |
| | | | $ | 257,382 |
| | |
|
| | | | | | | | | | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| | Cost | | Accumulated amortization | | Cost | | Accumulated amortization |
| Indefinite life intangibles: | | | | | | | |
| In-process research and development (IPRD) technology | $ | 1,071 |
| | | | $ | 938 |
| | |
| | | | | | | | |
| Finite life intangibles: | | | | | | | |
| Distribution channels | 900 |
| | $ | 575 |
| | 900 |
| | $ | 374 |
|
| Completed technology | 145,223 |
| | 38,531 |
| | 133,966 |
| | 26,550 |
|
| Licenses | 4,868 |
| | 1,427 |
| | 4,868 |
| | 1,115 |
|
| Customer relationships | 129,819 |
| | 21,434 |
| | 122,974 |
| | 15,133 |
|
| Trademarks | 14,505 |
| | 9,767 |
| | 13,950 |
| | 6,881 |
|
| Non-compete agreements | 11,020 |
| | 9,192 |
| | 11,810 |
| | 7,833 |
|
| Other | 580 |
| | 443 |
| | 524 |
| | 247 |
|
| Total finite life intangibles | 306,915 |
| | $ | 81,369 |
| | 288,992 |
| | $ | 58,133 |
|
| | | | | | | | |
| Total intangibles | 307,986 |
| | | | 289,930 |
| | |
| Less: Accumulated amortization | (81,369 | ) | | | | (58,133 | ) | | |
| Intangible assets, net | $ | 226,617 |
| | | | $ | 231,797 |
| | |
Based on the total finite life intangible assets held at September 24, 2017,June 28, 2020, we expect amortization expense of approximately $29.3 million in 2017, $24.1 million in 2018, $22.0 million in 2019, $21.3$31 million in 2020, and $21.1$30 million in 2021.
2021, $30 million in 2022, $30 million in 2023, and $27 million in 2024.
8. Debt and CapitalFinance Lease Obligations
Debt and capitalfinance lease obligations consist of the following (in thousands):
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Capital lease obligations | $ | 17,268 |
| | $ | 14,892 |
|
| | | | |
| 2021 Notes | 295,065 |
| | 280,811 |
|
| 2020 Notes | 505,106 |
| | 482,364 |
|
2017 Notes 1 | — |
|
| 1,971 |
|
| Asset-based line of credit | 53,908 |
| | 30,000 |
|
| Mortgages | 2,626 |
| | 2,544 |
|
| Shareholder debt | 1,683 |
| | 1,773 |
|
| | 875,656 |
| | 814,355 |
|
| Less: Current portion | (56,783 | ) | | (33,948 | ) |
| | $ | 818,873 |
| | $ | 780,407 |
|
|
| | | | | | | | | |
| | Maturity by Fiscal Year | | June 28, 2020 | | December 29, 2019 |
| Finance lease obligations | 2020-2026 | | $ | 23,029 |
| | $ | 25,086 |
|
| Convertible Notes | | | | | |
| 1.625% Notes | 2023 | | 709,421 |
| | 695,748 |
|
2.25% Notes 1 | 2021 | | 357,184 |
| | 344,635 |
|
| 2.0% Notes | 2020 | | — |
| | 55,997 |
|
| Term loan facility | 2021 | | 54,463 |
|
| 19,296 |
|
Asset-based line of credit 2 | 2021 | | 61,709 |
| | 20,652 |
|
| Other debt | 2020-2024 | | 5,360 |
| | 6,615 |
|
| | | | 1,211,166 |
| | 1,168,029 |
|
Less: Current portion 1,2 | | | (454,337 | ) | | (430,862 | ) |
| Long-term debt and finance lease obligations | | | $ | 756,829 |
| | $ | 737,167 |
|
_______________________
| |
1 | The 2017As of June 28, 2020 and December 29, 2019, the sale price condition (as defined below) for the 2021 Notes matured on August 15, 2017.was satisfied and, therefore, the 2021 Notes are convertible at any time during the succeeding calendar quarterly period. As a result, the carrying value of the 2021 Notes was classified as a current liability as of June 28, 2020 and December 29, 2019. |
| |
2 | We have reflected this debt as a current liability as of June 28, 2020 and December 29, 2019, 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. |
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2021Convertible Notes
On May 20, 2016, we issued $395 million aggregate principal amountThe components of the 2021our Convertible Notes pursuant to an indenture (2021 Notes Indenture), datedwere as of May 20, 2016, between us and The Bank of New York Mellon Trust Company, N.A., as trustee. follows (in thousands):
|
| | | | | | | |
| | June 28, 2020 | | December 29, 2019 |
| Principal amount of 2023 Notes | $ | 814,556 |
| | $ | 814,556 |
|
| Unamortized debt discount | (95,495 | ) | | (107,916 | ) |
| Unamortized debt issuance costs | (9,640 | ) | | (10,892 | ) |
| Net carrying amount of 2023 Notes | $ | 709,421 |
| | $ | 695,748 |
|
| | | | |
| Principal amount of 2021 Notes | $ | 395,000 |
| | $ | 395,000 |
|
| Unamortized debt discount | (35,593 | ) | | (47,405 | ) |
| Unamortized debt issuance costs | (2,223 | ) | | (2,960 | ) |
| Net carrying amount of 2021 Notes | $ | 357,184 |
| | $ | 344,635 |
|
| | | | |
| Principal amount of 2020 Notes | $ | — |
| | $ | 56,455 |
|
| Unamortized debt discount | — |
| | (408 | ) |
| Unamortized debt issuance costs | — |
| | (50 | ) |
| Net carrying amount of 2020 Notes | $ | — |
| | $ | 55,997 |
|
The 2021 Notes require interest to be paid at an annual rate of 2.25% semi-annually in arrearswere issued by us and the 2020 Notes and the 2023 Notes were issued by Wright Medical Group, Inc. (WMG) and are fully and unconditionally guaranteed by Wright Medical Group N.V. The 2020 Notes matured and were repaid on each MayFebruary 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.2020.
The holders of the 2021Convertible Notes may convert their 2021 Notesnotes solely into cash at their option at any time prior to May 15, 2021 solely into cash, in multiples of $1,000 principal amount, upon satisfaction of one or more ofthe Early Conversion date (as defined below) only under 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;day (the sale price condition); (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 2021Convertible 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. events, including in connection with the Offer as further described below and within Note 1. The Certain terms of conversion are set forth below: |
| | | | | | | |
| | 2021 Notes | | 2023 Notes |
| Conversion rate | 46.8165 |
| | 29.9679 |
|
| Conversion price | $ | 21.36 |
| | $ | 33.37 |
|
| Early Conversion date | May 15, 2021 |
| | December 15, 2022 |
|
| Maturity date | November 15, 2021 |
| | June 15, 2023 |
|
On or after May 15, 2021the Early Conversion date until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2021Convertible 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 2021Convertible Notes, equal to the settlement amount as calculated under the 2021 Notes Indenture. If we undergo a fundamental change, as defined in the 2021applicable Notes Indenture, occurs, subject to certain conditions, holders of the 2021applicable series of Convertible Notes will have the option to require us to repurchase for cash all or a portion of their 2021Convertible 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 2021applicable Notes Indenture. In addition, following certain corporate transactions,if a make-whole fundamental change, as defined in the applicable Notes Indenture, occurs prior to the maturity date, we under certain circumstances, willare required to increase the applicable conversion rate for a holder that elects to convert its 2021 Notes in connection with such corporate transaction.make-whole fundamental change.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On November 4, 2019, we entered into a definitive agreement with Stryker and its subsidiary, Stryker B.V. Under the terms of the agreement, and upon the terms and subject to the conditions thereof, Stryker B.V. commenced the Offer to purchase all of the outstanding ordinary shares of Wright for $30.75 per share, without interest and less applicable withholding taxes, in cash. The obligation of Stryker and Stryker B.V. to consummate the Offer is subject to the tender of a minimum number of our outstanding shares in the related tender offer, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), receipt of applicable regulatory approvals and other customary conditions. If these conditions are satisfied and the Offer closes, Stryker may acquire any remaining shares through a post-offer reorganization. Wright expects that a fundamental change and a make-whole fundamental change will occur at the time Stryker B.V. accepts for purchase and pays for all shares validly tendered pursuant to the Offer. Wright also expects that the Offer will trigger certain conversion rights under each of the Notes Indentures prior to the closing of the proposed acquisition by Stryker.
As described above, the 2021 Notes were convertible during the first and second quarters of 2020 and are convertible for the third quarter of 2020. There were no significant conversions through July 28, 2020.
The 2021 Notes and our guarantee of the 2023 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;guarantee; (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 ofBecause 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 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 quarters ended June 30, 2017 and September 30, 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 September 24, 2017.
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 5 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 three and nine months ended September 24, 2017, we recorded $4.6 million and $13.4 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective rate of 9.72%. For the three and nine months ended September 25, 2016, we recorded $4.2 million and $5.6 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective rate of 9.72%.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the 20212023 Notes were as follows (in thousands):issued by WMG, they are structurally senior to all indebtedness and other liabilities of Wright Medical Group N.V.
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Principal amount of 2021 Notes | $ | 395,000 |
| | $ | 395,000 |
|
| Unamortized debt discount | (94,025 | ) | | (107,441 | ) |
| Unamortized debt issuance costs | (5,910 | ) | | (6,748 | ) |
| Net carrying amount of 2021 Notes | $ | 295,065 |
| | $ | 280,811 |
|
The estimated fair value of the 2021 and 2023 Notes was approximately $528.4$553.0 million and $840.5 million, respectively, at September 24, 2017,June 28, 2020, based on a quoted price in an active market (Level 1).
We entered into 2021The Notes HedgesConversion Derivatives require bifurcation from the Convertible Notes in accordance with ASC Topic 815, Derivatives and Hedging, and are accounted for as a derivative liability. See Note 5 for additional information regarding the Notes Conversion Derivative.In connection with the issuance of each series of Convertible Notes, we and WMG entered into the 2021 Notes with two counterparties. The 2021 NotesNote Hedges, which are cash-settled, are generally intended to reduce our exposure to potential cash payments that we or WMG, as applicable, would be required to make if holders elect to convert the 2021Convertible Notes at a time when our ordinary share price exceeds the conversion price. We also entered into warrant transactions (the Warrants) in connection with the issuance of each series of Convertible Notes in which we sold warrants that are initially exercisable in the same number of shares as are issuable upon conversion of the applicable series of Convertible Notes at the initial conversion rate. The strike price of the Note Hedge for each series of Convertible Notes is equal to the conversion price of the applicable series of Convertible Notes and the exercise prices for the Warrants issued with the 2021 and 2023 Notes are $30.00 and $40.86, respectively. The strike prices of the Notes Hedges and exercise prices of the Warrants are subject to adjustment upon the occurrence of certain events including in connection with the Offer as further described above and within Note 1. See Note 5 for additional information regarding the Notes Hedges. The 2020 Note Hedge and 2020 Conversion Derivative were settled during the first quarter of 2020 and resulted in net proceeds of approximately $0.2 million. The warrants associated with the 2020 Notes have an exercise price of $38.80 and are expected to be net-share settled and exercisable over a certain trading period as detailed below. However, in connection with certain events, including, among others, (i) a merger or other make-whole fundamental change, (as definedincluding in connection with the 2021 Notes Indenture)Offer as further described above and within Note 1; (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, existingor any of our other subsidiary’s indebtedness in excess of $25 million; or (v) if we, or any of our significant subsidiaries become insolvent or otherwise becomesbecome subject to bankruptcy proceedings or (vi) if we repurchase Convertible Notes in the open market, through a tender or exchange offer or in individually negotiated transactions, 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 transactionsWarrants 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.offer, including in connection with the Offer as further described above and within Note 1; or (ii) solely with respect to the Notes Hedges, any adjustment to the conversion rate of the Notes. Any such adjustment may also reduce the effectiveness of the 2021 Note Hedges. The aggregate costHedges and further the dilutive effect 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 5 of the condensed 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.Warrants.
Aside from the initial payment of the $99.8 million premium in the aggregatepremiums paid to the two option counterparties and subject to the right of the option counterparties to terminate the 2021 Notes Hedges and Warrants in certain circumstances, we do not generally expect to be required to make any cash payments
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
to the option counterparties under the 2021 Notes Hedges and Warrants 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 transactionsapplicable Note Hedge during the relevant valuation period.
The strike price underWarrants are expected to be net-share settled and exercisable over a certain trading period after the 2021Convertible 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, ifmature as detailed below:
|
| | | | | |
| 2020 Notes | | 2021 Notes | | 2023 Notes |
| Exercisable period | 200 trading day period beginning on May 15, 2020 | | 100 trading day period beginning on February 15, 2022 | | 120 trading day period beginning on September 15, 2023 |
If the market value per ordinary share exceeds the strike price on any settlement date under the warrant transaction,applicable Warrant, we will generally be obligated to issue to the option counterpartiesWarrant holders 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,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 areWarrants exercised.
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 Indenture), dated as of February 13, 2015 between WMG and The Bank of New York Mellon Trust Company, N.A., as
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 5 of the condensed 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 three and nine months ended September 24, 2017, we recorded $6.9 million and $20.3 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective rate of 8.54%. For the three and nine months ended September 25, 2016, we recorded $6.3 million and $19.4 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
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 condensed consolidated statements of operations during the three months ended June 26, 2016.
The components of the 2020 Notes were as follows (in thousands):
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Principal amount of 2020 Notes | $ | 587,500 |
| | $ | 587,500 |
|
| Unamortized debt discount | (73,470 | ) | | (93,749 | ) |
| Unamortized debt issuance costs | (8,924 | ) | | (11,387 | ) |
| Net carrying amount of 2020 Notes | $ | 505,106 |
| | $ | 482,364 |
|
The estimated fair value of the 2020 Notes was approximately $632.4 million at September 24, 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 5 of the condensed 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 5 of the condensed 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 transactionsWarrants 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,Warrants.
As of June 28, 2020 and December 29, 2019, we had warrants outstanding related to the 2020 Notes, 2021 Notes and 2023 Notes which were exercisable for 1.9 million ordinary shares, 18.5 million ordinary shares, and 24.4 million ordinary shares, respectively.
As of June 28, 2020, our effective interest rates for the 2020, 2021, and 2023 Notes were 8.54%, 9.72%, and 5.76%, respectively. For the three and six months ended June 28, 2020 and June 30, 2019, we recorded the following interest expense related to the amortization of the debt discount (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
| 2023 Notes | $ | 6,256 |
| | $ | 5,937 |
| | $ | 12,422 |
| | $ | 11,461 |
|
| 2021 Notes | 5,977 |
| | 5,426 |
| | 11,812 |
| | 10,723 |
|
| 2020 Notes | — |
| | 770 |
| | 408 |
| | 2,215 |
|
On February 7, 2019, WMG issued an additional $139.6 million aggregate principal amount of 2023 Notes in connection with certain events, these option counterparties haveexchange for $130.1 million aggregate principal amount of 2020 Notes. For each $1,000 principal amount of 2020 Notes validly submitted for exchange, we delivered $1,072.40 principal amount of 2023 Notes to the discretionexchanging investor (subject, in each case, to make certain adjustmentsrounding to warrant transactions, which may increase our obligations under the warrant transactions.
In addition, during the second quarter of 2016, we settlednearest $1,000 aggregate principal amount for each such exchanging investor). As this was a portiondebt modification, a pro rata share of the 2020 Notes Hedges (receiving $3.9 million)discount and repurchased a portiondeferred financing costs which totaled $7.4 million and $0.9 million, respectively, was transferred to the 2023 Notes discount and deferred financing costs. Additionally, the 2023 Notes discount was adjusted in order for net debt to remain the same subsequent to the exchange. The discount and deferred financing costs will be amortized over the remaining term of the warrants2023 Notes using the effective interest method.
The fair value of the 2023 Notes Conversion Derivative associated with the additional $139.6 million of 2023 Notes was $28.9 million at the time of issuance, and the pro rata share of 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 priceConversion Derivative that was settled as part of the warrants remained $38.8010 per ordinary share.
Aside from the initial paymentadditional 2023 Notes exchange had a fair value of $16.3 million immediately prior to issuance of the $144.8additional 2023 Notes. As the exchange was accounted for as a debt modification, the net amount of $12.6 million premiumwas recognized as a loss on settlement during the quarter ended March 31, 2019.
On January 30, 2019 and January 31, 2019, we entered into additional Note Hedge and Warrant transactions with the same strike and exercise prices as set forth above for the 2023 Notes. We paid approximately $30.1 million in the aggregate to the option counterparties we do not expect to be required to make any cash payments tofor the additional Note Hedge, and received approximately $21.2 million in the aggregate from the option counterparties underfor the Warrants, resulting in a net cost to us of approximately $8.9 million. In addition, we settled a pro rata share of the 2020 Notes Hedges corresponding to the amount of the 2020 Notes exchanged pursuant to the above-described exchange. We received proceeds of approximately $16.8 million related to 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 adjustmentspaid $11.0 million related to the 2020 Note Hedges, which may reduceWarrants, generating net proceeds of $5.8 million.
For more information relating to our Convertible Notes, please refer to our Annual Report on Form 10-K for the effectiveness ofyear ended December 29, 2019.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
2017 Notes
On August 31, 2012, WMG issued $300 million aggregate principal amount of the 2017 Notes pursuant to an indenture (2017 Notes Indenture), 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 5 of the condensed 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 is amortized as interest expense using the effective interest method over the term of the 2017 Notes. For the three and nine months ended September 25, 2016, we recorded $18.0 thousand and $0.9 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective rate of 6.47%. The amount of interest expense related to the amortization of debt discount for the three and nine months ended September 24, 2017 was insignificant.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 condensed consolidated statements of operations during the three months ended March 31, 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 three months 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
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
related pro-rata unamortized deferred financing fees and debt discount within “Other expense (income), net” in our condensed consolidated statements of operations during the three months ended June 26, 2016.
The components of the 2017 Notes were as follows (in thousands):
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Principal amount of 2017 Notes | $ | — |
| | $ | 2,026 |
|
| Unamortized debt discount | — |
| | (47 | ) |
| Unamortized debt issuance costs | — |
| | (8 | ) |
| Net carrying amount of 2017 Notes | $ | — |
| | $ | 1,971 |
|
ABL FacilityCredit Agreement
On December 23, 2016, we, together with WMG and certain of our other wholly-owned U.S. subsidiaries (collectively, Borrowers), entered into a Credit, Security and Guaranty Agreement (ABL Credit Agreement) with MidcapMidCap Financial Trust, as administrative agent (Agent) and a lender and the additional lenders from time to time party thereto. thereto, which agreement was subsequently amended and restated in May 2018 and subsequently amended thereafter on several occasions, including the May 7, 2020 amendment described herein, which, among other things, suspended certain financial covenants through the end of 2020 (as amended, the Credit Agreement).
The ABL Credit Agreement provides for a $150.0$175 million senior secured asset-based line of credit, subject to the satisfaction of a borrowing base requirement (ABL Facility) and a $55 million term loan facility (Term Loan Facility). The ABL Facility may be increased by up to $100.0$75 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. The initial $20 million term loan tranche was funded at closing in May 2018 and the second $35 million term loan tranche was funded in May 2020. All borrowings under the Term Loan Facility are subject to the satisfaction of customary conditions, including the absence of default and the accuracy of representations and warranties in all material respects.
As of September 24, 2017 and December 25, 2016,June 28, 2020, we had $53.9$61.7 million and $30.0 million, respectively, in borrowings outstanding under the ABL Facility. We have reflected this debt as a current liability on our condensed consolidated balance sheet as of September 24, 2017Facility 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$113.3 million in unused availability under certain circumstances as described below. As of September 24, 2017 and December 25, 2016, we had $2.4 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 condensed consolidated balance sheets and will be amortized over the five-year term ofWe borrowed $40 million under the ABL Facility as described below.during the second quarter of 2020. As of December 29, 2019, we had $20.7 million in borrowings outstanding under the ABL Facility and $154.3 million in unused availability under the ABL Facility.
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 Notes2021 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 toif we refinance, extend, renew or replace the 2020 Notes and/orat least 85% of the 2021 Notes, as applicable, in fulloutstanding as of the closing date of the ABL Facility pursuant to the terms of the ABL Credit Agreement. Agreement, the maturity date will be deemed extended.
Any voluntary or mandatory permanent reduction or termination of the revolving commitments under the ABL Facility is subject to a prepayment premium applicableequal to 0.75% of such reduced or terminated amountamount.
The interest rate applicable to borrowings under the Term Loan Facility is 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.one-month LIBOR plus 7.85%, subject to a 1.00% LIBOR floor. The Credit Agreement previously provided that amortization payments under the Term Loan Facility were due in equal monthly installments beginning on May 1, 2019 unless we meet certain adjusted EBITDA targets; in which case, the amortization payments would not commence until May 1, 2021. We had previously met all such targets. As a result of the May 7, 2020 amendment to the Credit Agreement, the monthly straight line amortization payments of the Term Loan Facility will now commence on January 1, 2021. In addition to paying interest on the outstanding loans under the Term Loan Facility, the Borrowers are also required to pay certain other customary fees related to Agent’s administration of the Term Loan Facility.
The Term Loan Facility requires mandatory prepayments, subject to the right of reinvestment and certain other exceptions, in amounts equal to 100% of the net cash proceeds from certain asset sales and casualty and condemnation events in excess of $10 million in any fiscal year. Any voluntary or mandatory prepayment under the Term Loan Facility, subject to certain exceptions,
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
was previously subject to a 1.00% prepayment premium, but as a result of the May 7, 2020 amendment to the Credit Agreement, the prepayment premium under the Term Loan Facility is now 1.25%. The advances under the Term Loan Facility are due and payable in full at the same time as the outstanding loans under the ABL Facility.
All of the obligations under the ABL Facility and the Term Loan Facility are guaranteed jointly and severally by us and each of the Borrowers and are secured by a senior first priority security interest in substantially all existing and after-acquired assets of us and each Borrower on the terms set forth in the Credit Agreement.
The 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
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
in the United States at a level specified in the ABL Credit Agreement, subject to certain exceptions. AllIn addition to financial and liquidity covenants consistent with those in the Credit Agreement, while the Term Loan Facility is outstanding, the Company is required to maintain a minimum adjusted EBITDA, as described in the Credit Agreement. On May 7, 2020, we agreed with MidCap to amend the Credit Agreement to suspend the quarterly-tested minimum net revenue and minimum adjusted EBITDA financial covenants through the end of 2020 and add a minimum liquidity covenant that will apply from the date of the amendment through May 15, 2021. The Credit Agreement will not affect our ability to meet our existing contractual obligations, except in circumstances where an event of default (subject to certain exceptions) has occurred and is continuing. The Credit Agreement also contains negative covenants, representations and warranties, affirmative covenants and events of default, in each case subject to grace periods, thresholds, and materiality qualifiers consistent with the Credit Agreement.
Our exposure to interest rate risk arises principally from variable interest rates applicable to borrowings under our Credit Agreement and the interest rates associated with our invested cash balances.
Borrowings under our Credit Agreement, including our ABL Facility and Term Loan Facility, bear interest at variable rates. The interest rate margin applicable to borrowings under the ABL Facility are guaranteed jointly and severally by Wright Medical Group N.V. and eachis, 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. The interest rate applicable to borrowings under the Term Loan Facility is equal to one-month LIBOR plus 7.85%, subject to a 1.00% LIBOR floor. Based upon our debt level and the LIBOR floor on the terms set forthour interest rate, a 100 basis point increase 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. As of September 24, 2017, we were in compliance with all covenants under the ABL Credit Agreement.
Mortgages and Shareholder Debt
We have mortgages that had an outstanding balance of $2.6 million and $2.5 million as of September 24, 2017 and December 25, 2016, respectively. The majority of this debt is mortgages that were acquired as a result of the Wright/Tornier merger. These mortgages are secured by an office building in Montbonnot, France and bear fixed annual interest rates of 2.55%-4.9%.rate on such borrowings would have an immaterial impact on our interest expense on an annual basis.
The shareholderOther Debt
Other debt acquired was the result of a 2008 transaction where a 51%-ownedprimarily includes government loans, mortgages, 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. The outstanding balance on this debt was $1.7 million as of September 24, 2017 and $1.8 million as of December 25, 2016.
miscellaneous international bank loans.
9. Accumulated Other Comprehensive Income (AOCI)
Other comprehensive income (OCI) includes certain gains and losses that under US GAAP are included in comprehensive incomeloss 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.
For the ninethree and six months ended September 24, 2017June 28, 2020 and September 25, 2016,June 30, 2019, OCI was comprised solely of foreign currency translation adjustments.
Changes in AOCI for the ninethree and six months ended September 24, 2017June 28, 2020 and September 25, 2016June 30, 2019 were as follows (in thousands):
|
| | | |
| | Nine months ended September 24, 2017 |
| | Currency translation adjustment |
| Balance at December 25, 2016 | $ | (19,461 | ) |
| Other comprehensive income | 44,362 |
|
| Balance at September 24, 2017 | $ | 24,901 |
|
|
| | | |
| | Three months ended June 28, 2020 |
| | Currency translation adjustment |
| Balance at March 29, 2020 | $ | (38,611 | ) |
| Other comprehensive income | 11,271 |
|
| Balance at June 28, 2020 | $ | (27,340 | ) |
|
| | | |
| | Three months ended June 30, 2019 |
| | Currency translation adjustment |
| Balance at March 31, 2019 | $ | (19,386 | ) |
| Other comprehensive loss | (123 | ) |
| Balance at June 30, 2019 | $ | (19,509 | ) |
|
| | | |
| | Nine months ended September 25, 2016 |
| | Currency translation adjustment |
| Balance at December 27, 2015 | $ | (10,484 | ) |
| Other comprehensive income | 11,763 |
|
| Balance at September 25, 2016 | $ | 1,279 |
|
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. Changes in Shareholders' Equity
The below table provides an analysis of changes in each balance sheet caption of shareholders’ equity for the nine months ended September 24, 2017 and September 25, 2016 (in thousands, except share data):
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 24, 2017 |
| | Ordinary shares | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Total shareholders' equity |
| | Number of shares | | Amount | |
| Balance at December 25, 2016 | 103,400,995 |
| | $ | 3,815 |
| | $ | 1,908,749 |
| | $ | (1,206,239 | ) | | $ | (19,461 | ) | | $ | 686,864 |
|
| 2017 Activity: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (231,731 | ) | | — |
| | (231,731 | ) |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 44,362 |
| | 44,362 |
|
| Issuances of ordinary shares | 1,217,088 |
| | 40 |
| | 24,788 |
| | — |
| | — |
| | 24,828 |
|
| Vesting of restricted stock units | 393,595 |
| | 13 |
| | (13 | ) | | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 14,193 |
| | — |
| | — |
| | 14,193 |
|
| Balance at September 24, 2017 | 105,011,678 |
| | $ | 3,868 |
| | $ | 1,947,717 |
| | $ | (1,437,970 | ) | | $ | 24,901 |
| | $ | 538,516 |
|
| | | | | | | | | | | | |
| | Nine Months Ended September 25, 2016 |
| | Ordinary shares | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Total shareholders' equity |
| | Number of shares | | Amount | |
| Balance at December 27, 2015 | 102,672,678 |
| | $ | 3,790 |
| | $ | 1,835,586 |
| | $ | (773,866 | ) | | $ | (10,484 | ) | | $ | 1,055,026 |
|
| 2016 Activity: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (387,503 | ) | | — |
| | (387,503 | ) |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 11,763 |
| | 11,763 |
|
| Issuances of ordinary shares | 287,328 |
| | 10 |
| | 5,654 |
| | — |
| | — |
| | 5,664 |
|
| Vesting of restricted stock units | 265,378 |
| | 9 |
| | (9 | ) | | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 9,843 |
| | — |
| | — |
| | 9,843 |
|
| Issuance of stock warrants, net of repurchases and equity issuance costs | — |
| | — |
| | 50,312 |
| | — |
| | — |
| | 50,312 |
|
| Balance at September 25, 2016 | 103,225,384 |
| | $ | 3,809 |
| | $ | 1,901,386 |
| | $ | (1,161,369 | ) | | $ | 1,279 |
| | $ | 745,105 |
|
|
| | | |
| | Six months ended June 28, 2020 |
| | Currency translation adjustment |
| Balance at December 29, 2019 | $ | (29,499 | ) |
| Other comprehensive income | 2,159 |
|
| Balance at June 28, 2020 | $ | (27,340 | ) |
|
| | | |
| | Six months ended June 30, 2019 |
| | Currency translation adjustment |
| Balance at December 30, 2018 | $ | (8,083 | ) |
| Other comprehensive loss | (11,426 | ) |
| Balance at June 30, 2019 | $ | (19,509 | ) |
11.10. Capital Stock and Earnings Per Share
We areOur articles of association provide an authorized to issue up tocapital of €9.6 million divided into 320 million ordinary shares, each share with a par value of three Euro cents (€0.03).At our 2019 annual general meeting of shareholders, our shareholders authorized our board of directors until June 28, 2021 to issue, or grant rights to purchase or subscribe for, our unissued ordinary shares up to 20% of our issued and outstanding shares at the time of issue, which is further divided into 10% for general corporate purposes (including potential mergers and acquisitions) and an additional 10% only for potential mergers and acquisitions. We had 105.0129.1 million and 103.4128.6 million ordinary shares issued and outstanding as of September 24, 2017June 28, 2020 and December 25, 2016,29, 2019, respectively.
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 three and ninesix months ended September 24, 2017June 28, 2020 and September 25, 2016,June 30, 2019, our ordinary share equivalents consisted of stock options, restricted stock units, performance share 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 10.48.6 million ordinary shares, 1.41.1 million restricted stock units, and 0.10.8 million performance stockshare units, assuming maximum performance, at September 24, 2017June 28, 2020 and outstanding options to purchase 10.79.2 million ordinary shares, and 1.41.0 million restricted stock units, and 0.2 million performance share units, assuming maximum performance, at September 25, 2016. June 30, 2019.
We had outstanding net-share settled warrants on the 2020 Notes, 2021 Notes and 2023 Notes of 19.61.9 million ordinary shares, at September 24, 2017 and September 25, 2016. We also had net-share settled warrants on the 2021 Notes of 18.5 million ordinary shares, and 24.4 million ordinary shares, respectively, at September 24, 2017June 28, 2020 and September 25, 2016.June 30, 2019. See Note 8 of the condensed consolidated financial statements for additional information about the convertible notes and the related warrants.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
None of the options, restricted stock units, performance share units, or warrants were included in the calculation of diluted earningsnet loss from continuing operations per share, diluted loss from discontinued operations per share, and diluted net loss per share for the three and ninesix months ended September 24, 2017June 28, 2020 or September 25, 2016June 30, 2019, because we recorded a net loss from continuing operations for all periods; and therefore, includingperiods. Including these instruments would be anti-dilutive as the net loss from continuing operations is the control number in determining whether those potential common shares are dilutive or anti-dilutive.
The weighted-average number of ordinary shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
|
| | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
| Weighted-average number of ordinary shares outstanding-basic and diluted | 128,922 |
| | 126,267 |
| | 128,833 |
| | 126,040 |
|
|
| | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 24, 2017 | | September 25, 2016 | | September 24, 2017 | | September 25, 2016 |
| Weighted-average number of ordinary shares outstanding-basic and diluted | 104,836 |
| | 103,072 |
| | 104,292 |
| | 102,854 |
|
12.11. Commitments and Contingencies
Legal Contingencies
The legal contingencies described in this footnote relate primarily to Wright Medical Technology, Inc. (WMT),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.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As described below, our business is subject to various contingencies, including patent and other litigation and product liability claims, and a government inquiry.claims. These contingencies could result in losses, including damages, fines, or penalties, any of which could be substantial, as well as criminal charges.substantial. 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 continue to cooperate with the investigation.
Patent Litigation
In June 2013, Anglefix, LLCOn March 23, 2018, WMT filed suit against Paragon 28, Inc. (Paragon 28) in the United States District Court for the Western District of Tennessee,Colorado, alleging that our ORTHOLOC® products infringe Anglefix’s asserted patent, which was licensed to Anglefix by the Universityinfringement of North Carolina (UNC). On April 14, 2014, we filed a request for Inter Partes Review (IPR) with the U.S. Patent10 patents concerning orthopaedic plates, plating systems and Trademark Office.instruments, and related methods of use. Our complaint seeks damages, injunctive relief and attorneys’ fees. On June 30, 2015, the Patent Office Board entered judgment in our favor as to all patent claims at issue in the IPR and twelve patent claims remained at issue in the District Court. In January 2017, UNC was added to the District Court case as a co-plaintiff. On July 13, 2017, the Court denied plaintiffs’ motion for summary judgment of infringement, and granted our motion for summary judgment of noninfringement as to the asserted apparatus claims. The Court denied our motion as to the asserted method claims based on the perceived possible existence of a fact issue. In the wake of the Court’s rulings, on July4, 2018, Paragon 28 2017, plaintiffs Anglefix and UNC stipulated to dismissal of their claims against us with prejudice. On the same date, the Court entered judgment dismissing plaintiffs’ claims against us with prejudice thereby ending the case.
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
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new, identical complaint. We filed an amended 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 summarycounterclaim seeking declaratory judgment of non-infringement and invalidity of the remaining asserted patent claimspatent-in-suit, 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.
attorneys’ fees. On September 13, 2016, we28, 2018, WMT filed a civil action, Case No. 2:16-cv-02737-JPM,an amended complaint adding claims against Spineology in the U.S. District CourtParagon 28 for the Western Districtmisappropriation of Tennessee alleging breach of contract, breach of implied warranty against infringement,trade secrets 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. Spineologyrelated wrongdoing. Paragon 28 filed a motion to dismiss on October 17, 2016, but withdrewthose trade secret-related claims, which WMT opposed. On September 30, 2019, the motion on November 28, 2016. On December 7, 2016, Spineology filedCourt issued an answer to our complaintorder granting in part and counterclaims, including counterclaims relating to a 2004 non-disclosure agreement between Spineology and WMT. On December 28, 2016, we filed adenying in part the motion to dismiss, leaving intact the counterclaims relating to that 2004 agreement. On January 4, 2017, Spineology filed amajority of the trade secret-related claims. A motion for summary judgmentclarification of the order remains pending. In March 2019, Paragon 28 filed 4 petitions with the Patent Trial and Appeal Board seeking Inter Partes Reviews of the patents in question, which WMT opposed. On September 25, 2019 and October 4, 2019, the Patent Trial and Appeal Board granted Paragon 28’s petitions. Oral arguments were heard on certain claims set forth in our complaint. We opposed that motion. On January 27, 2017,June 18, 2020, and we filedexpect the Patent Trial and Appeal Board to render a motion for summary judgment on certain issues pertaining to our indemnification claims. Spineology has opposed that motion. On July 7, 2017, the Court extended the deadlines for completing discovery until after it rules on those pending motions. On August 29, 2017, the Court ruledsubstantive decision on the motions to dismiss and for summary judgment. In viewmerits of that decision, on September 22, 2017, the parties stipulated to, and the Court entered, a judgment that effectively ended the casepetitions 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.October 2020.
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, we24, 2020, ConforMIS, Inc. filed a declaratory judgment actionsuit against WMT and Tornier, Inc. in the United States District Court for the District of Delaware Case No. 1:17-cv-00384, seeking declaratory judgment of non-infringementalleging that the patient specific instrumentation (PSI) Wright makes available for use in certain shoulder arthroplasty procedures infringes its asserted patents. The suit alleges that shoulder implants and invalidity of United States Patent Nos. 7,585,311; 8,100,942;related products, when used together with PSI, also infringe the asserted patents. The suit seeks, among other things, a permanent injunction, statutory damages and 8,109,969. On April 20, 2017, KFx filed an answertreble damages for willful infringement. We dispute these allegations and counterclaim alleging we indirectly infringe, and induce infringement of, these patents.intend to defend the suit vigorously.
Product Liability
We have received claims for personal injury against us associated with fractures of ourthe PROFEMUR® long titanium modular neck product (PROFEMUR® Claims). As of September 24, 2017June 28, 2020, there were approximately 3032 unresolved pending U.S. lawsuits and approximately 605 unresolved 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 inIn 2009, we began offering a cobalt-chrome version of ourthe 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 ranges from approximately $22.4As of June 28, 2020, our accrual for PROFEMUR® Claims totaled $11.8 million, of which $6.4 million is included in our condensed consolidated balance sheet within “Accrued expenses and other current liabilities” and $5.4 million is included within “Other liabilities.” As of December 29, 2019, our accrual for PROFEMUR® Claims totaled $12.1 million, of which $8.8 million is included in our consolidated balance sheet within “Accrued expenses and other current liabilities” and $3.3 million is included within “Other liabilities.” We expect to $25.5 million.pay the majority of these claims within the next two 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.
Due to the uncertainty within our aggregate range of loss resulting from the estimation of the number of claims and related monetary payments, we have recorded a liability of $22.4 million, which represents the low-end of our estimated aggregate range of loss. We have classified $14.5 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 $7.9 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.
We are aware that MicroPort has recalled a certain sizessize of its cobalt chrome modular neck productsproduct as a result of alleged fractures. As of September 24, 2017,June 28, 2020, there were six11 pending U.S. lawsuits and eight5 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.
We have maintained product liability insurance coverage on a claims-made basis. During the quarter ended March 31, 2013, we received a customary reservation of rights from our primary product liability insurance carrier asserting that present and future
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claims relatedOn May 18, 2020, certain plaintiffs’ counsel filed a motion to fracturescoordinate (Motion to Transfer) pre-trial management of our PROFEMUR® 42 cases involving both titanium and cobalt chrome PROFEMUR® modular neck hip products and which allege certain types of injury (Titanium Modular Neck Claims) would be covered asnecks in 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 assertionmulti-district litigation. Plaintiffs request that the Titanium Modular Neck Claims shouldcases be treated ascoordinated before a single occurrence, but notifiedjudge in 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 expensesUnited States District Court for the three months ended March 31, 2013, within resultsEastern District of discontinued operations. In the quarter ended June 30, 2013, we received payment from the primary insurance carrier of $5 million. In the quarter ended September 30, 2013, we received payment of $10 million from the next insurance carrier in the tower.Arkansas. We have requested, but not yet received, payment ofopposed the remaining $25 million fromMotion to Transfer and a hearing on the third insurance carrier in the towerMotion to Transfer is scheduled 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. 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 year ended December 27, 2015. The arbitration proceeding is ongoing.July 30, 2020.
Claims for personal injury have also been made against us associated with our metal-on-metal hip products (primarily ourthe CONSERVE® product line). The pre-trial management of certain of these claims has beenwas consolidated in the federal court system, in the United States District Court for the Northern District of Georgia under multi-district litigation (MDL) and certain other claims by the Judicial Counsel Coordinated Proceedings (JCCP) in state court in Los Angeles County, California (collectively(JCCP and, together with the MDL, the Consolidated Metal-on-Metal Claims).
As of September 24, 2017, there were approximately 1,000 lawsuits pending Pursuant to previously disclosed settlement agreements with the Court-appointed attorneys representing plaintiffs 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 850 so called "tolling agreements" with potential claimants who have not yet filed suit. The number of lawsuits pending indescribed below (the MoM Settlement Agreements), the MDL and JCCP were closed to new cases effective October 18, 2017 and tolling agreements disclosed aboveOctober 31, 2017, respectively.
Excluding claims resolved in the MoM Settlement Agreements, as of June 28, 2020, there were approximately 235 unresolved metal-on-metal hip cases pending in the U.S. This number includes cases ineligible for settlement under the MoM Settlement Agreements, cases which opted out of such settlements, post-settlement cases, tolled cases, and existing state court cases that were not part of the MDL or JCCP. As of June 28, 2020, we estimate there also were pending approximately 28 unresolved non-U.S. metal-on metal hip cases, 59 unresolved U.S. modular neck cases alleging claims related to the release of metal ions, and 0 non-U.S. modular neck cases with metal ion allegations. We also estimate that as of June 28, 2020, there were approximately 509 non-revision claims either dismissed or awaiting dismissal from the MDL and JCCP, which dismissal is a condition of the MoM Settlement Agreements. Although there is a limited time period during which dismissed non-revision claims may be refiled, it is presently unclear how many non-revision claimants will elect to do so. As of June 28, 2020, no dismissed non-revision cases have been resolved pursuant to the Master Settlement Agreement and Second Settlement Agreements discussed below. Based on presently available information, we believe approximately 350 of these matters allege claims involving bilateral implants. As of September 24, 2017, there were also approximately 50 non-U.S. lawsuits pending. refiled.
We believe we have data that supports the efficacy and safety of ourthese hip products. Every hip implant case, including metal-on-metal hip products.
Every metal-on-metal hip casecases, 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 onAs previously disclosed, between 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,October 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 has appealed.
On November 1, 2016, WMT entered into a Master3 MoM Settlement Agreement (MSA)Agreements with Court-appointed attorneys representing plaintiffs in the MDL and JCCP. Under the terms of the MSA, the parties agreedJCCP to settle 1,292 specifically identified claims
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associated with CONSERVE®, DYNASTY® and LINEAGE® products1,974 cases that meetmet the eligibility requirements of the MSAMoM Settlement Agreements and arewere either pending in the MDL or JCCP, or subject to court-approved tolling agreements in the MDL or JCCP, for a settlement amountan aggregate sum of $240$339.2 million.
The $240 As of June 28, 2020, we had funded $337.4 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 will be determined under the claims administration procedures contained inMoM Settlement Agreements. We, the MSA and may be more or less thanindirect parent company of WMT, have guaranteed WMT’s obligations under the amounts used to calculate the $240 million settlement for the 1,292 claims in the InitialMoM 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).Agreements.
The MSA containsMoM Settlement Agreements contain specific eligibility requirements and establishesestablish 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, with limited exceptions, 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.
WMT escrowed $150 million, of which $38.9 million was remaining as of September 24, 2017, to secure its obligations under the MSA. 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 two additional 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 payments totaling at least $35 million from applicable insurance carriers by December 31, 2017.
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
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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. The Tranche 3 settlement is contingent upon WMT receiving at least $35 million of new insurance payments from applicable carriers by December 31, 2017. 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.
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 SecondMoM 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 SecondMoM 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 parties are in the process of jointly coordinating the closures of the MDL and JCCP to new claims.Agreements.
As of September 24, 2017, we estimate there were approximately 15 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 650 outstanding metal-on-metal hip non-revision claims as of September 24, 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 September 24, 2017,June 28, 2020, our accrual for metal-on-metal claims totaled $244.2$37.4 million, of which $199.3$30.4 million is included in our condensed consolidated balance sheet within “Accrued expenses and other current liabilities” and $44.9$7.0 million is included within “Other liabilities.” As of December 29, 2019, our accrual for metal-on-metal claims totaled $40.5 million, of which $33.0 million was included in our consolidated balance sheet within “Accrued expenses and other current liabilities” and $7.5 million was 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 SecondMoM 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-outopt out of the MSA or SecondMoM Settlement Agreements. Claims we can confirm would meet MSA or Secondthe eligibility criteria set forth in the MoM 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 ofconsistent with the respective settlement rates. Due to the general uncertainties surrounding all metal-on metal claims as noted
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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.
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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 SecondMoM 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.applicable settlement agreement. 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 Federal, our then primary product liability insurance carrier, asserting that certain present and future claims which allege certain types of injury related to ourthe 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 behave been 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 agreesWe notified Federal that there is insurance coverage for the CONSERVE® Claims, but has notified the carrier that it disputes the carrier'swe disputed its characterization of the CONSERVE® Claims as a single occurrence.occurrence, which resulted in multi-year insurance coverage litigation (the Tennessee Coverage Litigation) that has recently been resolved as discussed below.
In June 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 Tennessee state court naming us and certain of our otherAs previously disclosed, we entered into settlement agreements with all 7 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 towhom metal-on-metal hip coverage was in 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 and report to the Court by December 8, 2017. Oral argument on the motion is scheduled for February 23, 2018. 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 are presently considering our response to the Application.
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)Federal, Catlin Specialty Insurance Company, Catlin Underwriting Agencies Limited for and on behalf of Syndicate 2003 at Lloyd’s of London, and Lexington Insurance Company (Lexington), 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 isthus resolving 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 MDLTennessee Coverage Litigation and the JCCP,separate litigation and all claims asserted by WMT against the Three Settling Insurers in the Tennessee action described above.arbitration proceedings with Lexington.
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.
As part of the settlement, 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
Management has recorded an insurance receivable of $5.0 million for the probable recovery of spending from the remaining carriers (other than the Three Settling Carriers) in excess of our retention for a single occurrence. As of September 24, 2017, we have received $73.3 million of insurance proceeds, including the above amount from the Three Settling Insurers, andJune 28, 2020, our insurance carriers have paid a totalan aggregate of $120.4 million of insurance proceeds related to the metal-on-metal claims, including amounts received under the above referenced settlement agreements, of which $113.7 million has been paid directly to us and $6.7 million has been paid directly to claimantsclaimants. Except as provided in connection with various settlements, which represents amounts undisputed by the carriers. Oursuch settlement agreements, our acceptance of thesethe 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 ofcarriers unrelated to metal-on-metal coverage and our disputedisputes with the remaining carriers (other than the Three Settling Carriers) 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.relating thereto.
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,Stryker Acquisition Related Litigation
On January 15, 2020, John Thompson, a jury returnedpurported shareholder of the Company, filed a $4.4 million verdictputative class action lawsuit against us, members of our board of directors, Stryker B.V., and Stryker Corporation in a case involving a fractured hip implant stem sold priorthe United States District Court for the District of Delaware. The lawsuit is captioned Thompson v. Wright Medical Group N.V., et al., Case No. 1:20-cv-00061 (the Thompson Action). The complaint filed in the Thompson Action alleges that we and the members of our board of directors violated federal securities laws and regulations by failing to disclose material information in the MicroPort closing. This was a one-of-a-kind case unrelated toSchedule 14D-9 filed in connection with 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,transactions contemplated by the trial judge reduced the jury verdict to $1.025 million and indicated that ifStryker purchase agreement, which the plaintiff did not acceptin the reduced award he would schedule a new trial solely onThompson Action alleges rendered the issueSchedule 14D-9 false and misleading. In addition, the plaintiff in the Thompson Action alleges that members of damages.our board of directors and Stryker acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff electedin the Thompson Action seeks, among other things, an order enjoining consummation of the transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; an order directing our board of directors to file a Schedule 14D-9 that does not contain any untrue statements of material fact and that states all material facts required or necessary to acceptmake the reduced damagestatements contained therein not misleading; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and both parties have appealed.expenses.
On January 31, 2020, William Grubb, a purported shareholder of the Company, filed a lawsuit against us and members of our board of directors in the United States District Court for the Eastern District of New York. The Court has not set a date for a new trial onlawsuit is captioned Grubb v. Wright Medical Group N.V., et al., Case No. 1:20-cv-00553 (the Grubb Action). The complaint filed in the issueGrubb Action alleges that we and the members of damagesour board of directors violated federal securities laws and we do not expect it will do so untilregulations by failing to disclose material information in 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 associatedSchedule 14D-9 filed in connection with the probable recovery from product liability insurancetransactions contemplated by the Stryker purchase agreement, which the plaintiff in the Grubb Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Grubb Action alleges that members of our board of directors acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff in the Grubb Action seeks, among other things, an order enjoining consummation of the transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and expenses.
On April 9, 2020, Gracie Woodward, a purported shareholder of the Company, filed a lawsuit against us and members of our board of directors in the United States District Court for the District of Delaware. The lawsuit is reflectedcaptioned Woodward v. Wright Medical Group N.V., et al., Case No. 1:20-cv-494 (the Woodward Action). The complaint filed in the Woodward Action alleges that we and the members of our board of directors violated federal securities laws and regulations by failing to disclose material information in the Schedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Woodward Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Woodward Action alleges that members of our board of directors acted as controlling persons of the company within “Other current assets.”the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff in the Woodward Action seeks, among other things, an order enjoining consummation of the transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and expenses.
On April 15, 2020, Marcy Curtis, a purported shareholder of the Company, filed a putative class action lawsuit against us, members of our board of directors, Stryker B.V., and Stryker Corporation in the United States District Court for the District of Delaware. That suit is captioned Curtis v. Wright Medical Group N.V., et al., Case No. 1:20-cv-00509 (the Curtis Action). The complaint filed in the Curtis Action alleges that we and the members of our board of directors violated federal securities laws and regulations by failing to disclose material information in the Schedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Curtis Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Curtis Action alleges that members of our board of directors and Stryker acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff in the Curtis Action seeks, among other things, an order enjoining consummation of the transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; an order directing our board of directors to file a Schedule 14D-9 that does not contain any untrue statements of material fact and that states all material facts required or necessary to make the statements contained therein not misleading; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and expenses.
On April 28, 2020, Shiva Stein, a purported shareholder of the Company, filed a lawsuit against us, members of our board of directors, Stryker B.V., and Stryker Corporation in the United States District Court for the District of Delaware. That suit is captioned Stein v. Wright Medical Group N.V., et al., Case No. 1:20-cv-00582 (the “Stein Action”). The complaint filed in the Stein Action alleges that we,the members of our board of directors, and the Stryker defendants violated federal securities laws and regulations by failing to disclose material information in the Schedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Stein Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Stein Action alleges that members of our board of directors acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff in the Stein Action seeks, among other things, an order enjoining consummation of the transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; and an award of plaintiff’s costs, including attorneys’ fees and expenses.
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.
13. 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 12 to the condensed consolidated financial statements. All individual settlements under the MSA will be funded first from the escrow account and then, once all funds held in the escrow account have been exhausted, directly by WMT. Within 30 days of each funding request, unless WMT in good faith objects to the accuracy of any payment request, WMT will instruct the escrow agent to transfer funds from the restricted escrow account to a master account designated by plaintiffs’ counsel, who will then arrange for disbursements of individual settlement amounts. During the quarter ended September 24, 2017, WMT made $111.1 million in settlement payments from the escrow account. As of September 24, 2017, $38.9 million remained in the restricted escrow account, and therefore, considered restricted cash under US GAAP. WMT expects to utilize the remaining funds held in the escrow account during the fourth quarter of 2017. See Note 12 to the condensed 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 condensed consolidated balance sheets that sum to the totals of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Cash and cash equivalents | $ | 238,867 |
| | $ | 262,265 |
|
| Restricted cash | 38,922 |
| | 150,000 |
|
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 277,789 |
| | $ | 412,265 |
|
14.12. Segment Information
Our management, including our Chief Executive Officer, who is our chief operating decision maker, manages our operations as three3 operating business segments: U.S. Lower Extremities & Biologics, U.S. Upper Extremities, and International Extremities & Biologics. We determined that each of these operating segments represented a reportable segment. Our Chief Executive Officer
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
reviews financial information at the operating segment level to allocate resources and to assess the operating results and performance of each segment.
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 primarily 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 are managed by the U.S. Upper Extremities management team, results of operations and assets related to IMASCAP are included within the U.S. Upper Extremities segment. Our International Extremities and 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 transaction and transition costs associated with acquisitions, as such items are not considered representative of segment results. We have determined that each reportable segment represents a reporting unit and, in accordance with ASC 350, each reporting unit requires an allocation of goodwill to each reporting unit.goodwill.
Selected financial information related to our segments is presented below for the three and six months ended September 24, 2017June 28, 2020 and September 25, 2016June 30, 2019 (in thousands):
| | | | Three months ended September 24, 2017 | Three months ended June 28, 2020 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total |
| Net sales from external customers | $ | 70,946 |
| $ | 55,918 |
| $ | 43,639 |
| $ | — |
| $ | 170,503 |
| $ | 53,067 |
| $ | 51,238 |
| $ | 25,650 |
| $ | — |
| $ | 129,955 |
|
| Depreciation expense | 3,871 |
| 2,372 |
| 3,298 |
| 5,459 |
| 15,000 |
| 2,327 |
| 3,513 |
| 3,451 |
| 5,902 |
| 15,193 |
|
| Amortization expense | — |
| — |
| — |
| 7,178 |
| 7,178 |
| — |
| — |
| — |
| 8,091 |
| 8,091 |
|
| Segment operating income (loss) | $ | 13,506 |
| $ | 16,575 |
| $ | (1,563 | ) | $ | (43,716 | ) | $ | (15,198 | ) | $ | 7,647 |
| $ | 15,029 |
| $ | (12,787 | ) | $ | (44,904 | ) | $ | (35,015 | ) |
| Other: | | |
| Transaction and transition expenses | | 3,311 |
| |
| Transaction and transition costs | | | 4,263 |
|
| Operating loss | | (18,509 | ) | | (39,278 | ) |
| Interest expense, net | | 18,978 |
| | 21,176 |
|
| Other expense, net | | 5,457 |
| |
| Other income, net | | | (7,462 | ) |
| Loss before income taxes | | $ | (42,944 | ) | | $ | (52,992 | ) |
36 |
| | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total |
| Net sales from external customers | $ | 91,204 |
| $ | 81,342 |
| $ | 57,188 |
| $ | — |
| $ | 229,734 |
|
| Depreciation expense | 2,533 |
| 3,174 |
| 3,970 |
| 6,495 |
| 16,172 |
|
| Amortization expense | — |
| — |
| — |
| 7,862 |
| 7,862 |
|
| Segment operating income (loss) | $ | 23,009 |
| $ | 28,784 |
| $ | 308 |
| $ | (48,486 | ) | $ | 3,615 |
|
| Other: | | | | | |
| Inventory step-up amortization | | | | | 352 |
|
| Transition costs | | | | | 597 |
|
| Operating income | | | | | 2,666 |
|
| Interest expense, net | | | | | 19,995 |
|
| Other income, net | | | | | (1,831 | ) |
| Loss before income taxes | | | | | $ | (15,498 | ) |
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Six months ended June 28, 2020 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total |
| Net sales from external customers | $ | 139,604 |
| $ | 138,494 |
| $ | 70,397 |
| $ | — |
| $ | 348,495 |
|
| Depreciation expense | 5,348 |
| 6,805 |
| 7,059 |
| 12,020 |
| 31,232 |
|
| Amortization expense | — |
| — |
| — |
| 16,215 |
| 16,215 |
|
| Segment operating income (loss) | $ | 27,823 |
| $ | 48,897 |
| $ | (17,786 | ) | $ | (90,517 | ) | $ | (31,583 | ) |
| Other: | | | | | |
| Transaction and transition costs | | | | | 10,383 |
|
| Operating loss | | | | | (41,966 | ) |
| Interest expense, net | | | | | 41,646 |
|
| Other income, net | | | | | (21,169 | ) |
| Loss before income taxes | | | | | $ | (62,443 | ) |
|
| | | | | | | | | | | | | | | |
| | Six months ended June 30, 2019 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total |
| Net sales from external customers | $ | 186,020 |
| $ | 164,293 |
| $ | 109,548 |
| $ | — |
| $ | 459,861 |
|
| Depreciation expense | 5,221 |
| 6,325 |
| 7,733 |
| 12,394 |
| 31,673 |
|
| Amortization expense | — |
| — |
| — |
| 15,449 |
| 15,449 |
|
| Segment operating income (loss) | $ | 51,950 |
| $ | 60,232 |
| $ | (1,181 | ) | $ | (100,665 | ) | $ | 10,336 |
|
| Other: | | | | | |
| Inventory step-up amortization | | | | | 704 |
|
| Transaction and transition costs | | | | | 1,021 |
|
| Operating income | | | | | 8,611 |
|
| Interest expense, net | | | | | 39,690 |
|
| Other expense, net | | | | | 11,064 |
|
| Loss before income taxes | | | | | $ | (42,143 | ) |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 25, 2016 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total |
| Net sales from external customers | $ | 70,654 |
| $ | 47,411 |
| $ | 39,267 |
| $ | — |
| $ | 157,332 |
|
| Depreciation expense | 3,494 |
| 3,181 |
| 3,086 |
| 5,124 |
| 14,885 |
|
| Amortization expense | — |
| — |
| — |
| 7,466 |
| 7,466 |
|
| Segment operating income (loss) | $ | 17,980 |
| $ | 12,594 |
| $ | (2,945 | ) | $ | (47,822 | ) | $ | (20,193 | ) |
| Other: | | | | | |
| Inventory step-up amortization | | | | | 10,306 |
|
| Transaction and transition expenses | | | | | 8,105 |
|
| Operating loss | | | | | (38,604 | ) |
| Interest expense, net | | | | | 16,795 |
|
| Other income, net | | | | | (365 | ) |
| Loss before income taxes | | | | | $ | (55,034 | ) |
Selected financial information related to our segments is presented below for the nine months ended September 24, 2017 and September 25, 2016 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 24, 2017 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total |
| Net sales from external customers | $ | 220,259 |
| $ | 171,695 |
| $ | 135,433 |
| $ | — |
| $ | 527,387 |
|
| Depreciation expense | 10,080 |
| 7,321 |
| 8,539 |
| 16,184 |
| 42,124 |
|
| Amortization expense | — |
| — |
| — |
| 21,574 |
| 21,574 |
|
| Segment operating income (loss) | $ | 51,988 |
| $ | 52,942 |
| $ | 1,641 |
| $ | (133,987 | ) | $ | (27,416 | ) |
| Other: | | | | | |
| Transaction and transition expenses | | | | | 9,484 |
|
| Operating loss | | | | | (36,900 | ) |
| Interest expense, net | | | | | 55,512 |
|
| Other expense, net | | | | | 6,875 |
|
| Loss before income taxes | | | | | $ | (99,287 | ) |
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 25, 2016 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate 1 | Total |
| Net sales from external customers | $ | 214,559 |
| $ | 149,923 |
| $ | 132,857 |
| $ | — |
| $ | 497,339 |
|
| Depreciation expense | 9,183 |
| 8,400 |
| 8,541 |
| 14,881 |
| 41,005 |
|
| Amortization expense | — |
| — |
| — |
| 21,407 |
| 21,407 |
|
| Segment operating income (loss) | $ | 57,813 |
| $ | 46,729 |
| $ | 840 |
| $ | (146,792 | ) | $ | (41,410 | ) |
| Other: | | | | | |
| Inventory step-up amortization | | | | | 30,922 |
|
| Transaction and transition expenses | | | | | 27,952 |
|
| Legal settlement | | | | | 1,800 |
|
| Management changes | | | | | 1,348 |
|
| Costs associated with new convertible debt | | | | | 234 |
|
| Operating loss | | | | | (103,666 | ) |
| Interest expense, net | | | | | 41,673 |
|
| Other income, net | | | | | (3,494 | ) |
| Loss before income taxes | | | | | $ | (141,845 | ) |
| |
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. |
Our principal geographic regions consist of the United States, EMEAEMEAC (which includes Europe, the Middle East, Africa, and Africa)Canada), 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.
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Net sales by geographic region by product line are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
| United States | | | | | | | |
| Lower extremities | $ | 39,020 |
| | $ | 66,832 |
| | $ | 104,385 |
| | $ | 138,140 |
|
| Upper extremities | 50,521 |
| | 80,146 |
| | 136,761 |
| | 161,873 |
|
| Biologics | 13,533 |
| | 23,588 |
| | 33,955 |
| | 46,228 |
|
| Sports med & other | 1,231 |
| | 1,980 |
| | 2,997 |
| | 4,072 |
|
| Total United States | $ | 104,305 |
| | $ | 172,546 |
| | $ | 278,098 |
| | $ | 350,313 |
|
| | | | | | | | |
| EMEAC | | | | | | | |
| Lower extremities | $ | 3,878 |
| | $ | 12,111 |
| | $ | 14,541 |
| | $ | 24,369 |
|
| Upper extremities | 11,378 |
| | 24,138 |
| | 31,037 |
| | 47,415 |
|
| Biologics | 754 |
| | 2,092 |
| | 2,454 |
| | 4,164 |
|
| Sports med & other | 888 |
| | 2,513 |
| | 3,157 |
| | 5,139 |
|
| Total EMEAC | $ | 16,898 |
| | $ | 40,854 |
| | $ | 51,189 |
| | $ | 81,087 |
|
| | | | | | | | |
| Other | | | | | | | |
| Lower extremities | $ | 1,987 |
| | $ | 4,872 |
| | $ | 4,812 |
| | $ | 8,165 |
|
| Upper extremities | 3,765 |
| | 7,016 |
| | 8,987 |
| | 13,204 |
|
| Biologics | 2,872 |
| | 4,239 |
| | 5,121 |
| | 6,705 |
|
| Sports med & other | 128 |
| | 207 |
| | 288 |
| | 387 |
|
| Total other | $ | 8,752 |
| | $ | 16,334 |
| | $ | 19,208 |
| | $ | 28,461 |
|
| | | | | | | | |
| Total net sales | $ | 129,955 |
| | $ | 229,734 |
| | $ | 348,495 |
| | $ | 459,861 |
|
|
| | | | | | | |
| | Three months ended |
| Net sales by geographic region: | September 24, 2017 | | September 25, 2016 |
| United States | $ | 126,864 |
| | $ | 118,065 |
|
| EMEA | 25,371 |
| | 23,693 |
|
| Other | 18,268 |
| | 15,574 |
|
| Total | $ | 170,503 |
| | $ | 157,332 |
|
|
| | | | | | | |
| | Nine months ended |
| Net sales by geographic region: | September 24, 2017 | | September 25, 2016 |
| United States | $ | 391,954 |
| | $ | 364,482 |
|
| EMEA | 85,181 |
| | 87,040 |
|
| Other | 50,252 |
| | 45,817 |
|
| Total | $ | 527,387 |
| | $ | 497,339 |
|
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 September 24, 2017June 28, 2020 and December 25, 201629, 2019 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | June 28, 2020 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate | Total |
| Total assets | $ | 941,741 |
| $ | 914,931 |
| $ | 293,978 |
| $ | 412,877 |
| $ | 2,563,527 |
|
38 |
| | | | | | | | | | | | | | | |
| | December 29, 2019 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate | Total |
| Total assets | $ | 952,187 |
| $ | 914,317 |
| $ | 292,929 |
| $ | 426,207 |
| $ | 2,585,640 |
|
WRIGHT MEDICAL GROUP N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | September 24, 2017 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate | Total |
| Total assets | $ | 472,925 |
| $ | 842,029 |
| $ | 306,258 |
| $ | 579,471 |
| $ | 2,200,683 |
|
|
| | | | | | | | | | | | | | | |
| | December 25, 2016 |
| | U.S. Lower Extremities & Biologics | U.S. Upper Extremities | International Extremities & Biologics | Corporate | Total |
| Total assets | $ | 491,531 |
| $ | 845,102 |
| $ | 264,680 |
| $ | 689,273 |
| $ | 2,290,586 |
|
ITEM 2. 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 for the three and ninesix months ended September 24, 2017.June 28, 2020. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, our Annual Report on Form 10-K for the year ended December 25, 2016,29, 2019, which includes additional information about our critical accounting policies and practices and risk factors, and "“Special Note Regarding Forward-Looking Statements."”
Background
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.Proposed Acquisition by Stryker
On October 21, 2016, pursuant to a binding offer letter dated as of July 8, 2016,November 4, 2019, we Corin Orthopaedics Holdings Limited (Corin), and certain other entities related to us entered into a business saledefinitive agreement with Stryker and its subsidiary, Stryker B.V. Under the terms of the purchase agreement, and simultaneously completedupon the terms and closedsubject to the sale of our Large Joints business. The financial results of our Large Joints business, including costs associated with corporate employees and infrastructure transferred asconditions thereof, Stryker B.V. has commenced a parttender offer to purchase all of the saleoutstanding ordinary shares of Wright for $30.75 per share, without interest and services we are providing Corin under a transitional servicesless applicable withholding taxes, in cash (Offer). The Offer is currently scheduled to expire at 5:00 p.m., Eastern Time, on August 31, 2020, but may be extended in accordance with the terms of the purchase agreement between Stryker and supply agreement, are reflected within discontinued operations for all periods presented, unless otherwise noted. Further, all assets and associated liabilities transferredWright. The closing of the transaction is subject to Corin were classified as assets and liabilities held for sale in our consolidated balance sheets forreceipt of applicable regulatory approvals, the periods prioradoption of certain resolutions relating to the divestiture.transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), completion of the Offer, and other customary closing conditions.
Background
On January 9, 2014, legacy Wrightwe completed the sale of itsour former hip and knee (OrthoRecon) business to MicroPort Scientific Corporation (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 businessesbusiness are reflected within discontinued operations in the condensed consolidated financial statements.statements for all periods presented, unless otherwise noted.
Other than the discontinued operations discussed above,of the OrthoRecon business, unless otherwise stated, all discussion of assets and liabilities in the notes to the condensed 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 yearyear-end is generally determined on a 52-week basis and runs from the first Monday after the last Sunday of December of a year and ends on the last Sunday 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 three and ninesix months ended September 24, 2017June 28, 2020 and September 25, 2016June 30, 2019 each consisted of thirteen and thirty-ninetwenty-six weeks, respectively.
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 product portfolio consists of the following product categories:
Upper extremities, which include joint implants and bone fixation devices for the shoulder, elbow, wrist, and hand;
Lower extremities, which include joint implants and bone fixation devices for the foot and ankle;
Biologics, which include products used to support treatment of damaged or diseased bone, tendons, and soft tissues or to stimulate bone growth; and
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); Columbia City, Indiana (research and development); Alpharetta, Georgia (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 promotesell our products in overapproximately 50 countries with principal markets in the United States, Europe, Asia, Canada, Australia, and Latin America. Our products are sold primarily 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.
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 relatedrevision-related solutions will drive the market for extremities and biologics products.
Our principal upper extremities products include the AEQUALIS ASCEND® FLEX™ convertible shoulder system and SIMPLICITI®total shoulder replacement systems,system, AEQUALIS® PERFORM™ Reversed Glenoid System, and the AEQUALIS® REVERSED II™ reversed shoulder system, and the AEQUALIS ASCENDsystem. SIMPLICITI® FLEX™ convertible shoulder system. SIMPLICITI® is the first minimally invasive, ultra-short stemcanal sparing total shoulder available in the United States. In December 2016, we received FDA 510(k) clearance of our AEQUALISWe believe SIMPLICITI® PERFORM™ REVERSED Glenoid System, our first reverse augmented glenoid, and we commercially launched it during allows us to expand the first quarter of 2017. We continuemarket to release new options for our BluePrintinclude younger patients that historically have deferred these procedures. Our BLUEPRINT™ 3D Planning software , whichSoftware can be used with our AEQUALIS® PERFORM™ REVERSED Glenoid Systemproducts to assist surgeons in accurately positioning the glenoid implantand humeral implants and replicating the pre-operationpre-operative surgical plan. Other principal upper extremities products include the EVOLVE® radial head prosthesis for elbow fractures, the EVOLVE® Elbow Plating System, and the RAYHACK® osteotomy system. AEQUALIS® FLEX REVIVE™ was launched to limited users early in the first quarter of 2019 and was fully launched at the end of the second quarter of 2019.
Our principal lower extremities products include the INBONE® and, INFINITY®, INFINITY® with Adaptis Technology, and INVISION™ Total Ankle Replacement Systems. In July 2017, we commercially launchedsystems, all of which can be used with our most recent totalPROPHECY® Preoperative Navigation Guides, which combine computer imaging with a patient’s CT scan, and are designed to provide alignment accuracy while reducing surgical steps. As a result of our October 2018 acquisition of Cartiva, our lower extremities product portfolio includes Cartiva’s Synthetic Cartilage Implant (SCI), the only PMA approved product for treatment of first Metatarsophalangeal (MTP) joint osteoarthritis. Our lower extremities products also include the PROstep™ Minimally Invasive Surgery system for foot and ankle, replacement product,Salvation external fixation system for the INVISION™ Total Ankle Revisiontreatment of Charcot diabetic foot, the CLAW® II Polyaxial Compression Plating System, the ORTHOLOCORTHOLOC™ 3Di Ankle Fracture Low ProfileReconstruction Plating System, the PHALINX® system used for hammertoe indications, PRO-TOE® VO Hammertoe System, the VALOR® ankle fusion nail system, and the MICATM Minimally-Invasive FootSwanson line of toe joint replacement products.
Our biologic products use both biological tissue-based and Ankle System. We also launched line extensions for our SALVATION Limb Salvage System insynthetic materials to allow the third quarter of 2017.
body to regenerate damaged or diseased bone and to repair damaged or diseased soft tissue. Our principal biologic products include AUGMENT® Bone Graft whichand AUGMENT® Injectable. AUGMENT® 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 inOther principal biologics products include the United States for ankle and/or hindfoot fusion indications occurred during the third quarter of 2015, and we continue to roll out this product and work through Value Analysis Committee approvals. We are currently pursuing FDA approval of AUGMENTGRAFTJACKET® and GRAFTJACKET NOW™lines of soft tissue repair and containment membranes, the ACTISHIELD™ and VIAFLOW™ products which are derived from amniotic and placental tissues, the ALLOMATRIX® line of injectable tissue-based bone graft substitutes, the PRO-DENSE®Injectable Bone Graft, with a Pre-Market Application (PMA) Panel Track Supplement. This does not necessarily result in a panel meeting, but it affords the FDA additional time to reviewOSTEOSET® synthetic bone graft substitute, and the submission beyond 180 days.
Significant Quarterly Business Developments. During the first half of 2017,PRO-STIM® Injectable Inductive Graft. Additionally, 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. Third quarter 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.
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. We also made progress during the third quarter of 2017 on our key initiative to reduce the amount of inventory delivered for surgery.
Financial Highlights. Net sales increased 8.4% totaling $170.5 millionintroduced BIOSKIN® Amniotic Wound Matrix in the third quarter of 2017,2019 to address chronic wounds treated by surgical podiatrists.
Impact of Global COVID-19 Pandemic. The global COVID-19 pandemic has led to the temporary closure of businesses, travel restrictions and the implementation of social distancing measures. Hospitals, ambulatory surgery centers and other medical facilities have deferred elective procedures, diverted resources to patients suffering from infections and limited access for non-patients, including our sales representatives. Because of the COVID-19 pandemic, surgeons and their patients are required, or are choosing, to defer procedures in which our products otherwise would be used, and many facilities that specialize in the procedures in which our products otherwise would be used have temporarily closed or reduced operating hours. These circumstances have negatively impacted the ability of our employees, independent sales representatives and distributors to effectively market and sell our products.While the disruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2020, we experienced a significant increase in volume in June 2020 compared to $157.3earlier in the second quarter of 2020. While we continue to believe the impact of COVID-19 on our business will be temporary, we cannot precisely estimate the length or severity of the impact.
In response to the COVID-19 pandemic, we set our corporate priorities and actions as follows. First, we are focused on the health and safety of our employees. Second, we are focused on continuity of product supply and service for our customers and their patients. Third, we are focused on minimizing the spread of the virus to reduce the impact on our communities and hospital systems. Finally, we are focused on maintaining the sustainability of our Company by diligently and thoughtfully conserving and allocating resources, and pausing non-critical spending and non-critical hiring. In furtherance of this objective, we implemented temporary reductions in base salaries for our executive officers and certain other employees, including a 50% reduction for our Chief Executive Officer, 25% reductions for other officers and 15% reductions for certain other employees, as well as a temporary 50% reduction in cash retainers for our Board of Directors. These temporary reductions ended in July 2020 for our executive officers and in June 2020 for our other employees. Our other sustainability measures remain in place.
Because of the anticipated temporary decline in our net sales, on May 7, 2020, we agreed with MidCap to amend the Credit Agreement to, among other things, suspend the quarterly-tested minimum net revenue and minimum adjusted EBITDA financial
covenants through the end of 2020 and add a minimum liquidity covenant that will apply from the date of the amendment through May 15, 2021. See Note 8 to the condensed consolidated financial statements for a description of this amendment. Other Significant Quarterly Business Developments.
On June 8, 2020, the U.S. Centers for Medicare & Medicaid Services (CMS) published an update to the reimbursement calculation used to determine the transitional pass-through payment for the device category applicable to AUGMENT® Regenerative Solutions, including AUGMENT® Bone Graft and AUGMENT® Injectable, originally implemented on January 1, 2020. Based on this update, when hindfoot and ankle fusions are performed in the hospital outpatient and ambulatory surgical center settings of care, the facility will be paid for the incremental cost of AUGMENT. This updated payment amount is made retroactive to January 1, 2020 and will remain in place for three years. Transitional pass-through payments are intended to facilitate Medicare beneficiary access to the advantages of new and innovative devices by allowing for adequate payment for these new devices while the necessary cost data is collected to incorporate the costs for these devices into the procedure Ambulatory Payment Classifications (APC) rate.
Financial Highlights. Net sales decreased 43.4% totaling $130.0 million in the thirdsecond quarter of 2016, driven primarily by 7.5% growth2020, compared to $229.7 million in our U.S. net sales.
the second quarter of 2019, due to the impact of the COVID-19 pandemic. Our U.S. net sales increased $8.8decreased $68.2 million, or 7.5%39.5%, in the thirdsecond quarter of 20172020 as compared to the thirdsecond quarter of 2016, driven primarily2019, due to the COVID-19 pandemic. Sales in our U.S. lower extremities business, U.S. upper extremities business and U.S. biologics business declined by 41.6%, 37.0% and 42.6%, respectively, during the second quarter of 2020 compared to the prior year period. While the disruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2020, we experienced an increase in volume in June 2020 compared to earlier in the second quarter of 2020, noting that U.S. sales ofin June 2020 declined only 3% as compared to June 2019. Additionally, our AEQUALIS® PERFORM™ REVERSED Glenoid System that was launchedU.S. lower extremities business included 8% net sales growth in 2017, as well as the continued success of our SIMPLICITI® shoulder system, our AUGMENT® Bone Graft product, and our INFINITY® total ankle replacement system. products and our U.S. upper extremities business included 12% net sales growth in our shoulder products in June 2020 compared to June 2019.
Our international net sales increased $4.4decreased $31.5 million, or 11.1%55.1%, in the thirdsecond quarter of 20172020 as compared to the thirdsecond quarter of 2016, driven by 11.1% growth in our direct markets2019, due to the impact of the COVID-19 pandemic and a $1.2$0.3 million favorableunfavorable impact from foreign currency exchange rates. However, we experienced an increase in volume in June 2020 compared to earlier in the second quarter of 2020, but more modestly than in the U.S.
In the thirdsecond quarter of 2017,2020, our net loss from continuing operations totaled $34.1was $53.0 million, compared to a net loss from continuing operations of $52.7$18.9 million for the thirdsecond quarter of 2016.2019. This decreaseincrease in net loss from continuing operations was primarily driven by the following:
$8.0 million,reduced profitability as a result of lower net of tax, decrease in non-cash amortization of inventory step-up fair value adjustment associated with the Wright/Tornier merger;
$4.8 million decrease in transaction and transition expenses;
$8.9 million tax benefit related to a change in the realizability of certain U.S. net operating losses following the completion of a tax project; and
improved profitabilitysales due to manufacturing efficiencies and leveragethe impact of fixed corporate spending.the COVID-19 pandemic.
The favorable changes in net loss from continuing operations were partially offset by:
$5.8 million increase in other expense (income), net, primarily driven by changes in fair value adjustments associated with derivative assets and liabilities and the CVRs issued in the BioMimetic acquisition; and
$2.2 million of incremental interest expense, due to cash interest expense associated with the borrowings under our asset-based line of credit facility (ABL Facility) established in the fourth quarter of 2016.
Opportunities and Challenges. On November 4, 2019, we entered into a definitive agreement with Stryker and its subsidiary, Stryker B.V. pursuant to which, and upon the terms and subject to the conditions thereof, Stryker B.V. commenced the Offer to purchase all of the outstanding ordinary shares of Wright for $30.75 per share, without interest and less applicable withholding taxes, in cash.
We intend to continue to leveragefocus on leveraging the global strengths of both our legacy Wright and legacy Tornier product brands as a pure-play extremities and biologics business. We believe our leadership has been and will continue to be further enhanced by the FDA approval of AUGMENT® Bone Graft, a biologic solution that adds additional depth to one of the most comprehensive extremities product portfolios in the industry, as well as provides a platform technology for future new product development. WeAdditionally, we believe the highly complementary nature of legacy Wright’s and legacy Tornier’sour businesses gives us significant diversity and scale across a range of geographies and product categories. We believe we are differentiateda leader in the marketplace bydevelopment of software-based solutions for preoperative planning of shoulder replacement surgery, using BLUEPRINT™, to further differentiate our strategic focus on extremitiesproduct portfolio and biologics, our full portfolio of upper and lower extremities and biologics products, and our specialized and focused sales organization.
We are highly focused on ensuring that no business momentum is lost as we continue to integrate legacy Wright and legacy Tornier. Since the merger, we have completed the integration offurther accelerate growth opportunities in our global sales force, co-located and consolidated into one enterprise resource planning (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. Although we recognize that we will continue to have revenue dis-synergies during the remaining integration period, we believe we have an excellent opportunity to improve efficiency and leverage fixed costs in our business going forward and capture cost synergies.business. We also believe we have significant opportunity in the future with the recent and anticipated launch of new products, including our AEQUALIS™ PERFORM™ Reversed Glenoid System, AEQUALIS™ FLEX REVIVE™ revision shoulder system, our PROstep™ Minimally Invasive Surgery system, AUGMENT® Injectable, and through driving BLUEPRINT™ adoption and by focusing on implementing initiatives to help us better compete at ambulatory surgery centers.
Despite these opportunities, as described in more detail above, the same timeCOVID-19 pandemic is likely to advance certain balance sheet initiatives, such as improvingcontinue to temporarily adversely affect our inventory, instrument set utilization, and days sales outstanding (DSO).business.
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.Factors and Challenges. 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 and on a timely basis to meet demand, 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.regulation. 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. Finally, as described in more detail above, our industry is currently being adversely affected by the COVID-19 pandemic.
Results of Operations
Comparison of the three months ended September 24, 2017June 28, 2020 to the three months ended September 25, 2016June 30, 2019
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:
| | | | Three months ended | Three months ended |
| | September 24, 2017 | | September 25, 2016 | June 28, 2020 | | June 30, 2019 |
| | Amount | % of net sales | | Amount | % of net sales | Amount | % of net sales | | Amount | % of net sales |
| Net sales | $ | 170,503 |
| 100.0 | % | | $ | 157,332 |
| 100.0 | % | $ | 129,955 |
| 100.0 | % | | $ | 229,734 |
| 100.0 | % |
Cost of sales 1,2 | 38,421 |
| 22.5 | % | | 46,149 |
| 29.3 | % | |
Cost of sales 1 | | 28,723 |
| 22.1 | % | | 48,338 |
| 21.0 | % |
| Gross profit | 132,082 |
| 77.5 | % | | 111,183 |
| 70.7 | % | 101,232 |
| 77.9 | % | | 181,396 |
| 79.0 | % |
| Operating expenses: | | |
| | | |
| | |
| | | |
|
Selling, general and administrative 1 | 131,421 |
| 77.1 | % | | 129,840 |
| 82.5 | % | 118,241 |
| 91.0 | % | | 152,112 |
| 66.2 | % |
Research and development 1 | 11,992 |
| 7.0 | % | | 12,481 |
| 7.9 | % | 14,178 |
| 10.9 | % | | 18,756 |
| 8.2 | % |
| Amortization of intangible assets | 7,178 |
| 4.2 | % | | 7,466 |
| 4.7 | % | 8,091 |
| 6.2 | % | | 7,862 |
| 3.4 | % |
| Total operating expenses | 150,591 |
| 88.3 | % | | 149,787 |
| 95.2 | % | 140,510 |
| 108.1 | % | | 178,730 |
| 77.8 | % |
| Operating loss | (18,509 | ) | (10.9 | )% | | (38,604 | ) | (24.5 | )% | |
| Operating (loss) income | | (39,278 | ) | (30.2 | )% | | 2,666 |
| 1.2 | % |
| Interest expense, net | 18,978 |
| 11.1 | % | | 16,795 |
| 10.7 | % | 21,176 |
| 16.3 | % | | 19,995 |
| 8.7 | % |
| Other expense (income), net | 5,457 |
| 3.2 | % | | (365 | ) | (0.2 | )% | |
| Other (income) expense, net | | (7,462 | ) | (5.7 | )% | | (1,831 | ) | (0.8 | )% |
| Loss from continuing operations before income taxes | (42,944 | ) | (25.2 | )% | | (55,034 | ) | (35.0 | )% | (52,992 | ) | (40.8 | )% | | (15,498 | ) | (6.7 | )% |
| Benefit for income taxes | (8,822 | ) | (5.2 | )% | | (2,325 | ) | (1.5 | )% | |
| Provision for income taxes | | (11 | ) | 0.0 | % | | 3,434 |
| 1.5 | % |
| Net loss from continuing operations | $ | (34,122 | ) | (20.0 | )% | | $ | (52,709 | ) | (33.5 | )% | $ | (52,981 | ) | (40.8 | )% | | $ | (18,932 | ) | (8.2 | )% |
| Loss from discontinued operations, net of tax | (97,748 | ) | | | (57,436 | ) | | |
| (Loss) income from discontinued operations, net of tax | | (6,412 | ) | | | 1,120 |
| |
| Net loss | $ | (131,870 | ) | | | $ | (110,145 | ) | | $ | (59,393 | ) | | | $ | (17,812 | ) | |
| |
1 | These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated: |
| | | | Three months ended | Three months ended |
| | September 24, 2017 | % of net sales | | September 25, 2016 | % of net sales | June 28, 2020 | % of net sales | | June 30, 2019 | % of net sales |
| Cost of sales | $ | 152 |
| 0.1 | % | | $ | 146 |
| 0.1 | % | $ | 253 |
| 0.2 | % | | $ | 137 |
| 0.1 | % |
| Selling, general and administrative | 4,960 |
| 2.9 | % | | 3,168 |
| 2.0 | % | 6,649 |
| 5.1 | % | | 6,835 |
| 3.0 | % |
| Research and development | 333 |
| 0.2 | % | | 214 |
| 0.1 | % | 669 |
| 0.5 | % | | 651 |
| 0.3 | % |
| |
2
| Cost of sales includes amortization of inventory step-up adjustment of $10.3 million for the three months ended September 25, 2016. |
The following tables set forth our net sales by product line for the U.S. and International for the periods indicated (in thousands) and the percentage of year-over-year change:
| | | | Three months ended | Three months ended |
| | September 24, 2017 | | September 25, 2016 | | % change | June 28, 2020 | | June 30, 2019 | | % change |
| U.S. | | | | | | | | | | |
| Lower extremities | $ | 51,417 |
| | $ | 51,586 |
| | (0.3 | )% | $ | 39,020 |
| | $ | 66,832 |
| | (41.6 | )% |
| Upper extremities | 54,788 |
| | 46,207 |
| | 18.6 | % | 50,521 |
| | 80,146 |
| | (37.0 | )% |
| Biologics | 18,640 |
| | 18,247 |
| | 2.2 | % | 13,533 |
| | 23,588 |
| | (42.6 | )% |
| Sports med & other | 2,019 |
| | 2,025 |
| | (0.3 | )% | 1,231 |
| | 1,980 |
| | (37.8 | )% |
| Total U.S. | $ | 126,864 |
| | $ | 118,065 |
| | 7.5 | % | $ | 104,305 |
| | $ | 172,546 |
| | (39.5 | )% |
| | | | | | | | | | | |
| International | | | | | | | | | | |
| Lower extremities | $ | 13,963 |
| | $ | 14,201 |
| | (1.7 | )% | $ | 5,865 |
| | $ | 16,983 |
| | (65.5 | )% |
| Upper extremities | 21,197 |
| | 17,326 |
| | 22.3 | % | 15,143 |
| | 31,154 |
| | (51.4 | )% |
| Biologics | 5,193 |
| | 4,739 |
| | 9.6 | % | 3,626 |
| | 6,331 |
| | (42.7 | )% |
| Sports med & other | 3,286 |
| | 3,001 |
| | 9.5 | % | 1,016 |
| | 2,720 |
| | (62.6 | )% |
| Total International | $ | 43,639 |
| | $ | 39,267 |
| | 11.1 | % | $ | 25,650 |
| | $ | 57,188 |
| | (55.1 | )% |
| | | | | | | | | | | |
| Total net sales | $ | 170,503 |
| | $ | 157,332 |
| | 8.4 | % | $ | 129,955 |
| | $ | 229,734 |
| | (43.4 | )% |
Net sales
U.S. Sales. U.S. net sales totaled $126.9$104.3 million in the thirdsecond quarter of 2017,2020, a 7.5% increase39.5% decrease from $118.1$172.5 million in the thirdsecond quarter of 2016, primarily2019, due to continued growth in our U.S. upper extremities business, which was partially offset by a negative impact from the hurricanes that hiteffects of the U.S. in the third quarter.COVID-19 pandemic. U.S. sales represented approximately 74.4%80.3% of total net sales in the thirdsecond quarter of 2017,2020, compared to 75.0%75.1% of total net sales in the thirdsecond quarter of 2016.2019. While the disruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2020, we experienced an increase in volume in June 2020 compared to earlier in the second quarter of 2020, noting that U.S. sales in June 2020 declined 3% as compared to June 2019.
Our U.S. lower extremities net sales were flat at $51.4decreased to $39.0 million in the thirdsecond quarter of 20172020 compared to $51.6$66.8 million in the thirdsecond quarter of 2016. During2019, representing a 41.6% decrease. While the thirddisruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2017,2020, we hadexperienced an increase in volume in June 2020 compared to earlier in the second quarter of 2020, noting that sales in June 2020 declined 11% as compared to June 2019. Further, we experienced 8% net sales growth of 14.3% in our total ankle replacement products. This net sales growth was offset by continued distraction caused by the addition of new direct quota-carrying representativesproducts in the first quarter of 2017.June 2020 as compared to June 2019.
Our U.S. upper extremities net sales increaseddecreased to $54.8$50.5 million in the thirdsecond quarter of 20172020 from $46.2$80.1 million in the thirdsecond quarter of 2016,2019, representing a decline of 37.0%. While the disruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2020, we experienced an increase in volume in June 2020 compared to earlier in the second quarter of 2020, noting sales in June 2020 increased by 12% as compared to June 2019, driven by 12% net sales growth of 18.6%. This growth wasour shoulder products. Our U.S. upper extremities sales continue to be driven by our innovative shoulder product portfolio, including the recentongoing launch of ourFLEX REVIVE™ revision shoulder system and continued success of the combination of our BLUEPRINT™ enabling technology, PERFORM™ Reversed Glenoid System and continued success of the SIMPLICITI® shoulder system.system.
Our U.S. biologics net sales totaled $18.6decreased to $13.5 million in the thirdsecond quarter of 2017,2020 from $23.6 million in the second quarter of 2019, representing a 2.2% increase over42.6% decrease. While the thirddisruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2016, driven primarily by continued2020, we experienced an increase in volume in June 2020 compared to earlier in the second quarter of 2020. Net sales volume growth of AUGMENT® Bone Graft, mostly offset by declines in our other biologic products.June 2020 declined 23% as compared to June 2019.
International Sales. Net sales in our international regions totaled $43.6$25.7 million in the thirdsecond quarter of 2017,2020 compared to $39.3$57.2 million in the thirdsecond quarter of 2016.2019. This 11.1% increase55.1% decrease was due to 11.1% growth in our direct markets andthe impact of the COVID-19 pandemic, as well as a $1.2$0.3 million favorableunfavorable impact from foreign currency exchange rates (a 31 percentage point favorableunfavorable impact to international sales growth rate).
Our international lower extremities net sales decreased 1.7%65.5% to $14.0$5.9 million in the thirdsecond quarter of 20172020 from $14.2$17.0 million in the thirdsecond quarter of 2016. Sales decreased2019 due to lower sales volumesthe impact of the COVID-19 pandemic and, to stocking distributors and timing of stocking orders. These decreases were partially offset by a 8.6% increase in sales in our direct markets, primarily in Australia, as well aslesser extent, a $0.3$0.1 million favorableunfavorable impact from foreign currency exchange rates (a 21 percentage point favorableunfavorable impact to international lower extremities sales growth rate). While the disruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2020, we experienced a modest increase in volume in June 2020 compared to earlier in the second quarter of 2020.
Our international upper extremities net sales increased 22.3%decreased 51.4% to $21.2$15.1 million in the thirdsecond quarter of 20172020 from $17.3$31.2 million in the thirdsecond quarter of 2016, which included2019. This decrease was due to the impact of the COVID-19 pandemic and, to a $0.7lesser extent, a $0.2 million favorableunfavorable impact from foreign currency exchange rates (a 41 percentage point favorableunfavorable impact to international upper extremities sales growth rate). Sales increased by 14.9%While the disruption of the pandemic to worldwide surgical volume was significant during the second quarter of 2020, we experienced an increase in volume in June 2020 compared to earlier in the second quarter of 2020, noting June 2020 sales declined 20% in our European direct markets in Europe and a combined 22.5% increase in our Canada, Australia and Japan direct markets.
as compared to June 2019.
Our international biologics net sales increased 9.6%decreased 42.7% to $5.2$3.6 million in the thirdsecond quarter of 20172020 from $4.7$6.3 million in the thirdsecond quarter of 2016. This increase was primarily attributable2019 due to increased volumesthe impact of the COVID-19 pandemic and, to our stocking distributors anda lesser extent, a $0.1 million favorableunfavorable impact from foreign currency exchange rates (a 21 percentage point favorableunfavorable impact to international biologics sales growth rate).
While we experienced a significant increase in volume in June 2020 compared to earlier in the second quarter of 2020, our net sales for the quarter ended June 28, 2020 were significantly lower as a result of the COVID-19 pandemic, and the resulting continued demand for our products has been lower. While we continue to believe the impact of COVID-19 on our business will be temporary, we cannot precisely estimate the length or severity of the impact.
Cost of sales
Our cost of sales totaled $38.4$28.7 million, or 22.5%22.1% of net sales, in the thirdsecond quarter of 2017,2020, compared to $46.1$48.3 million, or 29.3%21.0% of net sales, in the thirdsecond quarter of 2016, representing2019. Our second quarter 2020 cost of sales included a decrease of 6.8 percentage points as a percentage of net sales. This decrease was primarily driven by $10.3$2.6 million (6.6%(2.0% of net sales) favorable adjustment as a result of our change in accounting estimate of reserves for excess and obsolete inventory, step-up amortizationas such inventory was sold (see Note 2 to the condensed consolidated financial statements for further discussion of change in the third quarter of 2016 associated with inventory acquired from the Wright/Tornier merger.our estimate). The remaining decrease inincrease to cost of sales as a percentage of net sales was primarily driven by manufacturing efficienciesthe impact of certain period costs, including provisions for excess and obsolete inventory, as compared toa percentage of the prior year period.lower net sales in 2020, as well as unfavorable geographic and product mix. Selling, general and administrative
Our selling, general and administrative expenses totaled $131.4$118.2 million, or 77.1%91.0% of net sales, in the thirdsecond quarter of 2017,2020, compared to $129.8$152.1 million, or 82.5%66.2% of net sales, in the thirdsecond quarter of 2016. This increase in total expenses was primarily the result of increased variable expenses from increased sales.2019. Selling, general and administrative expenses as a percentage of net sales decreased primarilyincreased due to decreased net sales as a decreaseresult of the impact of the COVID-19 pandemic, and to a lesser extent, a $3.7 million (3 percentage point) increase in transaction and transition costs as a result of the pending Stryker transaction.
Our selling, general and administrative spending on transition and transaction costs which totaled $1.9 million (1.1% of net sales) and $6.4 million (4.1% of net sales) forin the thirdsecond quarter of 20172020 reflect a curtailment of certain costs in response to the COVID-19 pandemic, including lower levels of travel and 2016, respectively. The remaining decreaserelated expenses, as well as surgeon training expenses, as a result of mandated travel restrictions. Further, we reduced non-critical spending and non-critical hiring and we implemented temporary reductions in base salaries for our executive officers and certain other employees, including a 50% reduction for our Chief Executive Officer, 25% reductions for other officers and 15% reductions for certain other employees, as well as a temporary 50% reduction in cash retainers for our Board of Directors. These temporary reductions ended in July 2020 for our executive officers and in June 2020 for our other employees. Our other sustainability measures remain in place.
Despite these decreases, we expect a significant portion of our selling, general and administrative spending to continue as we continue to support our customers and invest in manufacturing and our supply chain to ensure supply for our customers. This anticipated continued spending will likely result in a continued increase in our selling, general and administrative expenses as a percentage of net sales was primarily driven by leveragein the third quarter of relatively flat general and administrative expenses over increased net sales and lower levels of cash incentive compensation expense.2020 compared to the prior year period.
Research and development
Our research and development expenseexpenses totaled $12.0$14.2 million, or 10.9% of net sales, in the thirdsecond quarter of 20172020 compared to $12.5$18.8 million, or 8.2% of net sales, in the thirdsecond quarter of 2016.2019. 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 increased 3 percentage points due primarily to investments in 2017.our new product pipeline and decreased net sales as a result of the impact of the COVID-19 pandemic.
Amortization of intangible assets
Charges associated with amortization of intangible assets totaled $7.2$8.1 million in the thirdsecond quarter of 2017,2020, compared to $7.5$7.9 million in the thirdsecond quarter of 2016.2019. Based on intangible assets held at September 24, 2017,June 28, 2020, we expect amortization expense to be approximately $29.3between $27 million and $31 million per year for the full year of 2017, $24.1 million in 2018, $22.0 million in 2019, $21.3 million inyears 2020 and $21.1 million in 2021.through 2024.
Interest expense, net
Interest expense, net, totaled $19.0$21.2 million in the thirdsecond quarter of 20172020 and $16.8$20.0 million in the thirdsecond quarter of 2016. Increased interest expense was driven by the increase in debt outstanding following borrowings under our ABL Facility established in the fourth quarter of 2016.2019. Our interest expense in the thirdsecond quarter of 20172020 related primarily to non-cash interest expense associated with the amortization of the discount on the 2023 Notes and 2021 Notes and 2020 Notes of $4.6$6.2 million and $6.9$6.0 million, respectively; amortization of deferred financing charges on the 2021 Notes, 2020 Notes, 2017 Notes, and our ABL Facilityborrowings totaling $1.2$1.3 million; and cash interest expense totaling $7.7 million primarily associated with the coupon on the2023 Notes, 2021 Notes 2020 Notes, and 2017 Notes, andborrowings under our ABL Facility totaling $6.0 million. and the Term Loan Facility.
Our interest expense, net in the thirdsecond quarter of 20162019 related primarily to non-cash interest expense associated with the amortization of the discount on the 2023 Notes, 2021 Notes and 2020 Notes of $4.2$5.9 million, $5.4 million and $6.3$0.8 million, respectively, non-cash interest expense associated with therespectively: amortization of deferred financing charges on our borrowings totaling $1.3 million; and cash interest expense totaling $7.4 million primarily associated with the 2023 Notes, 2021 Notes, 2020 Notes and 2017 Notes totaling $0.9 million;borrowings under our ABL Facility and cashthe Term Loan Facility, partially offset by interest expense primarily associated with the coupon on the 2021 Notes, 2020 Notes, and 2017 Notes totaling $5.1income of $0.8 million.
Other (income) expense, (income), net
Other expense,income, net totaled $5.5$7.5 million in the thirdsecond quarter of 2017,2020, compared to $0.4$1.8 million of other income, net in the thirdsecond quarter of 2016.
2019. In the thirdsecond quarter of 2017,2020, other expense,income, net consisted primarily consisted of:
an unrealized loss of $4.5a $10.1 million for the mark-to-market adjustment on CVRs issued in connection with the BioMimetic acquisition; partially offset by
an unrealized gain of $0.2 million for the netrelated to mark-to-market adjustments on our derivative assets and liabilities.
Inliabilities and non-cash foreign currency translation income of $0.7 million, partially offset by a $3.1 million loss related to fair value adjustments to contingent consideration. During the thirdsecond quarter of 2016,2019, other income, net consisted primarily consisted of:
an unrealizedof a net gain on investments of $3.2$3.3 million for the net mark-to-market adjustments on and settlements of our derivative assets and liabilities;. This amount was partially offset by non-cash adjustments to contingent consideration fair values.
an unrealized loss of $2.2 million for the mark-to-market adjustment on CVRs issued in connection with the acquisition of BioMimetic.
Benefit(Benefit) provision for income taxes
We recorded aan immaterial tax benefit of $8.8 millionfrom continuing operations in the thirdsecond quarter of 2017,2020, compared to a tax benefitprovision from continuing operations of $2.3$3.4 million in the thirdsecond quarter of 2016.2019. Our income tax benefit during the thirdsecond quarter of 2017 includes a $8.9 million benefit 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. The remainder2020 is primarily the result of any difference results from the mix of earnings in the various jurisdictions. We record income tax expense or benefit on net earnings in jurisdictions for whichwhere we do not have a valuation allowance, butallowance. We are unable to recognize a tax benefit in jurisdictions where we are incurring losses (primarily the U.S.) due to the remaining valuation allowance on our net deferred tax assets.assets, except to the extent to which we recognize a gain in discontinued operations. During the thirdsecond quarter of 2016,2019, the tax benefits primarily relatedprovision includes a $2.6 million tax provision due to losses, including amortizationa change in tax rates on income from deferred intercompany transactions and the result of inventory fair value step-up and intangibles assets,net earnings in jurisdictions where we do not have a valuation allowance.
Loss(Loss) income from discontinued operations, net of tax
Loss(Loss) income from discontinued operations, net of tax, consists primarily of the 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 MicroPortMicroPort.
Our (loss) income from discontinued operations for the quarter ended June 28, 2020 and to a lesser degree, costs associated with the Large Joints business thatJune 30, 2019 was sold to Corin. During the third quarter of 2017 and 2016, we recognized a charge of $86.9$(6.4) million and $38.7$1.1 million, respectively, for certain retained metal-on-metal product liability claims associated with the OrthoRecon business.respectively. See Note 3 and Note 1211 to our condensed consolidated financial statements for further discussion regarding our discontinued operations and our retained contingent liabilities associated with the OrthoRecon business.
Comparison of the ninesix months ended September 24, 2017June 28, 2020 to the ninesix months ended September 25, 2016June 30, 2019
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:
| | | | Nine months ended | Six months ended |
| | September 24, 2017 | | September 25, 2016 | June 28, 2020 | | June 30, 2019 |
| | Amount | % of net sales | | Amount | % of net sales | Amount | % of net sales | | Amount | % of net sales |
| Net sales | $ | 527,387 |
| 100.0 | % | | $ | 497,339 |
| 100.0 | % | $ | 348,495 |
| 100.0 | % | | $ | 459,861 |
| 100.0 | % |
Cost of sales 1,2 | 113,669 |
| 21.6 | % | | 141,824 |
| 28.5 | % | |
Cost of sales 1 | | 67,638 |
| 19.4 | % | | 94,655 |
| 20.6 | % |
| Gross profit | 413,718 |
| 78.4 | % | | 355,515 |
| 71.5 | % | 280,857 |
| 80.6 | % | | 365,206 |
| 79.4 | % |
| Operating expenses: | | |
| | | |
| | |
| | | |
|
Selling, general and administrative 1 | 392,073 |
| 74.3 | % | | 401,069 |
| 80.6 | % | 272,830 |
| 78.3 | % | | 305,418 |
| 66.4 | % |
Research and development 1 | 36,971 |
| 7.0 | % | | 36,705 |
| 7.4 | % | 33,778 |
| 9.7 | % | | 35,728 |
| 7.8 | % |
| Amortization of intangible assets | 21,574 |
| 4.1 | % | | 21,407 |
| 4.3 | % | 16,215 |
| 4.7 | % | | 15,449 |
| 3.4 | % |
| Total operating expenses | 450,618 |
| 85.4 | % | | 459,181 |
| 92.3 | % | 322,823 |
| 92.6 | % | | 356,595 |
| 77.5 | % |
| Operating loss | (36,900 | ) | (7.0 | )% | | (103,666 | ) | (20.8 | )% | |
| Operating (loss) income | | (41,966 | ) | (12.0 | )% | | 8,611 |
| 1.9 | % |
| Interest expense, net | 55,512 |
| 10.5 | % | | 41,673 |
| 8.4 | % | 41,646 |
| 12.0 | % | | 39,690 |
| 8.6 | % |
| Other expense (income), net | 6,875 |
| 1.3 | % | | (3,494 | ) | (0.7 | )% | |
| Other (income) expense, net | | (21,169 | ) | (6.1 | )% | | 11,064 |
| 2.4 | % |
| Loss from continuing operations before income taxes | (99,287 | ) | (18.8 | )% | | (141,845 | ) | (28.5 | )% | (62,443 | ) | (17.9 | )% | | (42,143 | ) | (9.2 | )% |
| Benefit for income taxes | (7,498 | ) | (1.4 | )% | | (6,913 | ) | (1.4 | )% | |
| Provision for income taxes | | 2,127 |
| 0.6 | % | | 7,045 |
| 1.5 | % |
| Net loss from continuing operations | $ | (91,789 | ) | (17.4 | )% | | $ | (134,932 | ) | (27.1 | )% | $ | (64,570 | ) | (18.5 | )% | | $ | (49,188 | ) | (10.7 | )% |
| Loss from discontinued operations, net of tax | (139,942 | ) | | | (252,571 | ) | | (9,729 | ) | | | (5,225 | ) | |
| Net loss | $ | (231,731 | ) | | | $ | (387,503 | ) | | $ | (74,299 | ) | | | $ | (54,413 | ) | |
| |
1 | These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated: |
| | | | Nine months ended | Six months ended |
| | September 24, 2017 | % of net sales | | September 25, 2016 | % of net sales | June 28, 2020 | % of net sales | | June 30, 2019 | % of net sales |
| Cost of sales | $ | 403 |
| 0.1 | % | | $ | 321 |
| 0.1 | % | $ | 477 |
| 0.2 | % | | $ | 257 |
| 0.1 | % |
| Selling, general and administrative | 12,939 |
| 2.5 | % | | 9,070 |
| 1.8 | % | 13,124 |
| 5.1 | % | | 13,822 |
| 3.0 | % |
| Research and development | 789 |
| 0.1 | % | | 510 |
| 0.1 | % | 1,300 |
| 0.5 | % | | 1,165 |
| 0.3 | % |
| |
| Cost of sales includes amortization of inventory step-up adjustment of $30.9 million for the nine months ended September 25, 2016. |
The following tables set forth our net sales by product line for the U.S. and International for the periods indicated (in thousands) and the percentage of year-over-year change:
| | | | Nine months ended | Six months ended |
| | September 24, 2017 | | September 25, 2016 | | % change | June 28, 2020 | | June 30, 2019 | | % change |
| U.S. | | | | | | | | | | |
| Lower extremities | $ | 161,228 |
| | $ | 158,872 |
| | 1.5 | % | $ | 104,385 |
| | $ | 138,140 |
| | (24.4 | )% |
| Upper extremities | 168,280 |
| | 146,117 |
| | 15.2 | % | 136,761 |
| | 161,873 |
| | (15.5 | )% |
| Biologics | 56,547 |
| | 53,167 |
| | 6.4 | % | 33,955 |
| | 46,228 |
| | (26.5 | )% |
| Sports med & other | 5,899 |
| | 6,326 |
| | (6.7 | )% | 2,997 |
| | 4,072 |
| | (26.4 | )% |
| Total U.S. | $ | 391,954 |
| | $ | 364,482 |
| | 7.5 | % | $ | 278,098 |
| | $ | 350,313 |
| | (20.6 | )% |
| | | | | | | | | | | |
| International | | | | | | | | | | |
| Lower extremities | $ | 42,372 |
| | $ | 45,984 |
| | (7.9 | )% | $ | 19,353 |
| | $ | 32,534 |
| | (40.5 | )% |
| Upper extremities | 66,606 |
| | 62,241 |
| | 7.0 | % | 40,024 |
| | 60,619 |
| | (34.0 | )% |
| Biologics | 15,492 |
| | 13,804 |
| | 12.2 | % | 7,575 |
| | 10,869 |
| | (30.3 | )% |
| Sports med & other | 10,963 |
| | 10,828 |
| | 1.2 | % | 3,445 |
| | 5,526 |
| | (37.7 | )% |
| Total International | $ | 135,433 |
| | $ | 132,857 |
| | 1.9 | % | $ | 70,397 |
| | $ | 109,548 |
| | (35.7 | )% |
| | | | | | | | | | | |
| Total net sales | $ | 527,387 |
| | $ | 497,339 |
| | 6.0 | % | $ | 348,495 |
| | $ | 459,861 |
| | (24.2 | )% |
Net sales
U.S. Sales. U.S. net sales totaled $392.0$278.1 million in the first ninesix months of 2017,2020, a 7.5% increase20.6% decrease from $364.5$350.3 million in the first ninesix months of 2016, primarily2019, due to continued growth in our U.S. upper extremities business.the impact of the COVID-19 pandemic. U.S. sales represented approximately 74.3%79.8% of total net sales in the first ninesix months of 2017,2020, compared to 73.3%76.2% of total net sales in the first ninesix months of 2016.2019.
International Sales. International net sales totaled $135.4$70.4 million in the first ninesix months of 20172020 compared to $132.9$109.5 million in the first ninesix months of 2016.2019. This 1.9% increase35.7% decrease was primarily driven bydue to the impact of the COVID-19 pandemic and, to a 5.8% increase in our direct markets in Europe. This increase was partially offset bylesser extent, a $2.1$1.5 million unfavorable impact from foreign currency exchange rates (a 21 percentage point unfavorable impact to international sales growth rate).
Cost of sales
Our cost of sales as a percentage of net sales decreased slightly to 21.6%19.4% in the first ninesix months of 2017, as2020 compared to 28.5%20.6% in the first ninesix months of 2016.2019. This decrease as a percentage of sales was primarily driven by $30.9 million (6.2% of net sales) of inventory step-up amortizationdue to favorable geographic and product mix in the first nine months of 2016 associated with inventory acquired from the Wright/Tornier merger, as well as manufacturing efficiencies as compared to the priorcurrent year period.
Operating expenses
As a percentage of net sales, operating expenses decreasedincreased to 85.4%92.6% in the first ninesix months of 2017,2020 compared to 92.3%77.5% in the first ninesix months of 2016.2019. This decreaseincrease was driven primarily the result of reduced net sales during the current year period due to the COVID-19 pandemic.
Other (income) expense, net
Other income, net totaled $21.2 million in the first six months of 2020, compared to $11.1 million of other expense, net in the first six months of 2019. In the first six months of 2020, other income, net consisted primarily of a $25.8 million gain related to mark-to-market adjustments on derivative assets and liabilities partially offset by a $3.5 million loss related to fair value adjustments to contingent consideration. During the decrease in spendingfirst six months of 2019, other expense, net consisted primarily of $14.3 million loss on transition and transaction costs, as well as leveragethe exchange of relatively flat general and administrative expenses over increaseddebt which was partially offset by a $3.3 million net sales.gain on investments.
BenefitProvision for income taxes
We recorded an income tax benefitprovision from continuing operations of $7.5$2.1 million in the first ninesix months of 2017,2020, compared to a tax benefitprovision from continuing operations of $6.9$7.0 million in the first ninesix months of 2016.2019. The tax benefitprovision for the current year period2019 includes a $8.9$5.2 million benefit recordedtax provision due to a change in our valuation allowance with respect to certaintax rates on income from deferred tax assets that we had previously determined were not more likely than not to be realized. The remaining is the result of net earnings in jurisdictions for which we do not have a valuation allowance. The tax benefit for the prior year period includes a $2.3 million tax benefit related to the resolution of an IRS tax audit as well as the recognition of net losses, including amortization of inventory fair value step-up and intangible assets, in jurisdictions we do not have a valuation allowance. intercompany transactions.
Loss from discontinued operations, net of tax
Loss from discontinued operations, net of tax, for the first six months of 2020 and 2019 consists primarily of the 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 MicroPortMicroPort. See Note 3 and to a lesser degree, costs associated with the Large Joints business that was sold to Corin. During the nine months ended September 24, 2017 and September 25, 2016, we recognized $103.3 million and $188.7 million, respectively, for certain retained metal-on-metal product liability claims associated with the OrthoRecon business. See Note 311 and Note 12 to our condensed consolidated financial statements 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:
|
| | | | | | | | | | | |
| | Three months ended September 24, 2017 |
| | U.S. Lower Extremities & Biologics | | U.S. Upper Extremities | | International Extremities & Biologics |
| Net sales | $ | 70,946 |
| | $ | 55,918 |
| | $ | 43,639 |
|
| Operating income | $ | 13,506 |
| | $ | 16,575 |
| | $ | (1,563 | ) |
| Operating income as a percent of net sales | 19.0 | % | | 29.6 | % | | (3.6 | )% |
|
| | | | | | | | | | | |
| | Three months ended June 28, 2020 |
| | U.S. Lower Extremities & Biologics | | U.S. Upper Extremities | | International Extremities & Biologics |
| Net sales | $ | 53,067 |
| | $ | 51,238 |
| | $ | 25,650 |
|
| Operating income (loss) | $ | 7,647 |
| | $ | 15,029 |
| | $ | (12,787 | ) |
| Operating income (loss) as a percent of net sales | 14.4 | % | | 29.3 | % | | (49.9 | )% |
| | | | Three months ended September 25, 2016 | Three months ended June 30, 2019 |
| | U.S. Lower Extremities
& Biologics | | U.S. Upper Extremities | | International Extremities
& Biologics | U.S. Lower Extremities
& Biologics | | U.S. Upper Extremities | | International Extremities
& Biologics |
| Net sales | $ | 70,654 |
| | $ | 47,411 |
| | $ | 39,267 |
| $ | 91,204 |
| | $ | 81,342 |
| | $ | 57,188 |
|
| Operating income | $ | 17,980 |
| | $ | 12,594 |
| | $ | (2,945 | ) | $ | 23,009 |
| | $ | 28,784 |
| | $ | 308 |
|
| Operating income as a percent of net sales | 25.4 | % | | 26.6 | % | | (7.5 | )% | 25.2 | % | | 35.4 | % | | 0.5 | % |
|
| | | | | | | | | | | |
| | Nine Months Ended September 24, 2017 |
| | U.S. Lower Extremities & Biologics | | U.S. Upper Extremities | | International Extremities & Biologics |
| Net sales | $ | 220,259 |
| | $ | 171,695 |
| | $ | 135,433 |
|
| Operating income | $ | 51,988 |
| | $ | 52,942 |
| | $ | 1,641 |
|
| Operating income as a percent of net sales | 23.6 | % | | 30.8 | % | | 1.2 | % |
|
| | | | | | | | | | | |
| | Six months ended June 28, 2020 |
| | U.S. Lower Extremities & Biologics | | U.S. Upper Extremities | | International Extremities & Biologics |
| Net sales | $ | 139,604 |
| | $ | 138,494 |
| | $ | 70,397 |
|
| Operating income (loss) | $ | 27,823 |
| | $ | 48,897 |
| | $ | (17,786 | ) |
| Operating income (loss) as a percent of net sales | 19.9 | % | | 35.3 | % | | (25.3 | )% |
|
| | | | | | | | | | | |
| | Nine Months Ended September 25, 2016 |
| | U.S. Lower Extremities
& Biologics | | U.S. Upper Extremities | | International Extremities
& Biologics |
| Net sales | $ | 214,559 |
| | $ | 149,923 |
| | $ | 132,857 |
|
| Operating income | $ | 57,813 |
| | $ | 46,729 |
| | $ | 840 |
|
| Operating income as a percent of net sales | 26.9 | % | | 31.2 | % | | 0.6 | % |
|
| | | | | | | | | | | |
| | Six months ended June 30, 2019 |
| | U.S. Lower Extremities
& Biologics | | U.S. Upper Extremities | | International Extremities
& Biologics |
| Net sales | $ | 186,020 |
| | $ | 164,293 |
| | $ | 109,548 |
|
| Operating income (loss) | $ | 51,950 |
| | $ | 60,232 |
| | $ | (1,181 | ) |
| Operating income (loss) as a percent of net sales | 27.9 | % | | 36.7 | % | | (1.1 | )% |
Net sales of our U.S. lower extremities and biologics segment increased $0.3decreased $38.1 million and $5.7$46.4 million infor the three and ninesix months ended September 24, 2017,June 28, 2020, respectively, as compared to the three and ninesix months ended September 25, 2016. These increases were driven by net sales growth from the recent launch of our SALVATION® limb salvage system for treating Charcot foot and
limb salvage cases and sales of AUGMENT® Bone Graft, which was commercially launched in the fourth quarter of 2015.June 30, 2019. Operating income of our U.S. lower extremities and biologics segment decreased $15.4 million and $24.1 million for the three and ninesix months ended September 24, 2017,June 28, 2020, respectively, compared to the three and ninesix months ended September 25, 2016 primarilyJune 30, 2019. These decreases to both net sales and operating income were 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 certain growth initiatives.the adverse impact on net sales from the COVID-19 pandemic.
Net sales of our U.S. upper extremities segment increased $8.5decreased $30.1 million and $21.8$25.8 million in the three and ninesix months ended September 24, 2017,June 28, 2020, respectively, as compared to the three and ninesix months ended September 25, 2016.June 30, 2019. Operating income of our U.S. upper extremities segment increased $4.0decreased $13.8 million and $6.2$11.3 million in the three and ninesix months ended September 24, 2017,June 28, 2020, respectively, as compared to the three and ninesix months ended September 25, 2016.June 30, 2019. These increasesdecreases to both net sales and operating income were primarily driven bydue to the adverse impact on net sales of our innovative shoulder product portfolio, includingfrom the recent launch of our PERFORM™ Reversed Glenoid System and continued success of the SIMPLICITI® shoulder system.COVID-19 pandemic.
Net sales of our International extremities and biologics segment increased $4.4decreased $31.5 million and $2.6$39.2 million in the three and ninesix months ended September 24, 2017,June 28, 2020, respectively, as compared to the three and ninesix months ended September 25, 2016, primarilyJune 30, 2019. These decreases were due to increased sales in our total direct markets, with continued growth in our international upper extremities business. Operating incomethe adverse impact of our International extremitiesthe COVID-19 pandemic and biologics segment increased $1.4 million and $0.8 million in the three and nine months ended September 24, 2017, respectively, as compared to the three and nine months ended September 25, 2016, primarily driven by increased sales in our total direct markets.unfavorable impacts from foreign currency exchange rates.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, certain liquidity measures (in thousands):
|
| | | | | | | |
| | September 24, 2017 | | December 25, 2016 |
| Cash and cash equivalents | $ | 238,867 |
| | $ | 262,265 |
|
| Restricted cash | 38,922 |
| | 150,000 |
|
| Working capital | 153,294 |
| | 285,107 |
|
|
| | | | | | | |
| | June 28, 2020 | | December��29, 2019 |
| Cash and cash equivalents | $ | 133,651 |
| | $ | 166,856 |
|
Working capital (deficit)1 | (154,112 | ) | | (106,350 | ) |
___________________________
| |
1 | As of June 28, 2020 and December 29, 2019, 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 are able to convert the notes during the succeeding quarterly period. Due to the ability of the holders of the 2021 Notes to convert the notes, the carrying value of the 2021 Notes and the fair value of the 2021 Notes Conversion Derivatives were classified as current liabilities and the fair value of the 2021 Notes Hedges was classified as current assets as of June 28, 2020 and December 29, 2019. |
Operating Activities. Cash used in(used in) provided by operating activities totaled $129.3$(10.9) million and $25.4$2.1 million in the first ninesix months of 20172020 and 2016,2019, respectively. The increasedecrease in cash used inprovided by operating activities in the first ninesix months of 20172020 was primarily driven primarily by lower levels of cash payments of previously agreed upon product liability settlements (see Note 12to our condensed consolidated financial statements for further discussion of these liabilities) relatedprofitability due to the former OrthoRecon business, impact on net sales from the COVID-19 pandemic, partially offset by a decreaselower levels of cash used in net loss and working capital changes.discontinued operations. Investing Activities. Our capital expenditures totaled $49.5$39.2 million and $37.8$48.0 million in the first ninesix months of 20172020 and 2016,2019, respectively. Historically, ourOur capital expenditures have consistedconsist principally of surgical instrumentation, purchased manufacturing equipment, research and testing equipment, and computer systems. WeIn total, we expect to incur capital expenditures of more than $50approximately $70 million in 2017.2020.
Financing Activities. During the first nine months of 2017, cash Cash provided by financing activities totaled $42.8$20.7 million compared to $241.5and $4.4 million in the first ninesix months of 2016. 2020 and 2019, respectively.
Cash provided by financing activities in the first ninesix months of 20172020 was primarily attributable to $24.8$18.2 million of net debt proceeds and $6.4 million in cash received from the issuance of ordinary shares in connection with option exercises, $32.0 million of proceeds from additional borrowings from the ABL Facility, offsetexercises.
Cash provided by $8.7 million of net payments due to timing of the weekly lockbox repayment/re-borrowing arrangement underlying the ABL Facility and a $2.0 million payment of the 2017 Notes. Duringfinancing activities in the first ninesix months of 2016, cash provided by financing2019 was primarily attributable to the proceeds$14.0 million in cash received from the issuance of the 2021 cash convertible notes,ordinary shares in connection with option exercises. These proceeds were partially offset by $5.7 million of net payments related to the partialexchange of 2023 Notes for 2020 Notes (as further described below) and the associated issuance of additional 2023 Notes Hedges and warrants, and settlement of previously outstandingpro rata portions of the 2020 Notes Hedges and warrants.
On February 7, 2019, WMG issued $139.6 million of additional 2023 Notes in exchange for $130.1 million aggregate principal amount of 2020 Notes. As this was a debt modification, a pro rata share of the 2020 Notes deferred financing costs and discount was transferred to the 2023 Notes deferred financing costs and discount. Additionally, the 2023 Notes discount was adjusted in order for net debt to remain the same subsequent to the exchange. While the debt modification was a non-cash transaction, we paid approximately $3.2 million of convertible notes. debt modification costs during the first six months of 2019.
Additionally, on January 30, 2019 and January 31, 2019, we, along with WMG, entered into cash-settled convertible note hedge transactions with certain option counterparties. WMG paid approximately $30.1 million in the aggregate to the option counterparties for the note hedge transactions, and received approximately $21.2 million in the aggregate from the option counterparties for the warrants, resulting in a net cost to us of approximately $8.9 million. In connection with the above described exchange, WMG also settled a pro rata share of the 2020 Notes Hedges and warrants corresponding to the amount of 2020 Notes exchanged pursuant to this transaction. We received proceeds of approximately $16.8 million related to the 2020 Notes Hedges and paid $11.0 million related to the 2020 Warrants, generating net proceeds of $5.8 million.
Repatriation.We provide for tax liabilities in our condensed consolidated financial statements with respect to amounts that we expect to repatriate from subsidiaries (to the extent the repatriation would be subject to tax); however, no tax liabilities are recorded for amounts that we consider to be permanently reinvested. 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. Our cash flows from discontinued operations during the first six months of 2020 and 2019 were attributable primarily to our former OrthoRecon business as described in Note 11. Cash flows used in discontinued operations
totaled $11.3 million and $32.1 million for the six months ended June 28, 2020 and June 30, 2019, respectively. Cash flows from discontinued operations are combined with cash flows from continuing operations in the condensed consolidated statements of cash flows. Cash flows from discontinued operations include those related to both the Large Joints and OrthoRecon businesses.
During the first nine months of 2017 and 2016, cash used in the former OrthoRecon business was approximately $142.7 million and $29.7 million, respectively, for settlements of product liability claims and legal defense costs. Cash used in operating activities
from the Large Joints business totaled $3.5 million for the nine months ended September 24, 2017. Cash provided by operating activities from the Large Joints business totaled $3.0 million for the nine months ended September 25, 2016.
We expect significant cash outflows resulting from product liabilities during the remainder of 2017, and each year through 2019, associated with the metal-on-metal settlements described in Note 12. We do not expect that the future cash outflows from discontinued operations, including the payment of these retained liabilities of the OrthoRecon business, net of insurance recoveries, 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. As of September 24, 2017,June 28, 2020, there were no material changes to our contractual cash obligations and commercial commitments as disclosed in in "“Part II. Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Contractual Cash Obligations"” of our Annual Report on Form 10-K for the year ended December 25, 2016. As previously disclosed, subsequent to the end of the third quarter, we agreed on a comprehensive settlement intended to resolve substantially all remaining metal-on-metal hip revision claims pending or tolled in the metal-on-metal hip replacement product liability litigation described below that were not settled in the previously disclosed Master Settlement Agreement dated November 2, 2016. The comprehensive settlement is contingent on recovery of new insurance payments totaling at least $35 million from applicable insurance carriers by December 31, 2017. Assuming the receipt of such insurance payments, total obligations under the new settlement agreements are in the aggregate $89.75 million. See Note 12to our condensed consolidated financial statements for additional discussion regarding this recent settlement.29, 2019. Other Liquidity Information. We have historically funded our cash needs through various equity and debt issuances, more recently borrowings under our ABL Facility,Credit Agreement, and through cash flow from operations.
On December 23, 2016, we, together with WMG and certain of our other wholly-owned U.S. subsidiaries (collectively, Borrowers), entered into a Credit, Security and Guaranty Agreement (ABL Credit Agreement) with MidcapMidCap Financial Trust, as administrative agent (Agent) and a lender and the additional lenders from time to time party thereto. thereto, which agreement was subsequently amended and restated in May 2018 and subsequently amended thereafter on several occasions, including the May 7, 2020 amendment described in Note 8, which, among other things, suspended certain financial covenants through the end of 2020 (as amended, the Credit Agreement). The ABL Credit Agreement provides for a $150$175 million senior secured asset-based line of credit, subject to the satisfaction of a borrowing base requirement.requirement (ABL Facility) and a $55 million term loan facility (Term Loan Facility). The ABL Facility may be increased by up to $100$75 million upon ourthe Borrowers’ request, subject to the consent of the Agent and each of the other lenders providing such increase andincrease. All borrowings under the ABL Facility are subject to the satisfaction of customary conditions. We are requiredconditions, including the absence of default, the accuracy of representations and warranties in all material respects and the delivery of an updated borrowing base certificate. The initial $20 million term loan tranche was funded at closing in May 2018 and the second $35 million term loan tranche was funded in May 2020. On May 7, 2020, we agreed with MidCap to maintainamend the Credit Agreement to, among other things, suspend the quarterly-tested minimum net revenue at or above specifiedand minimum levels,adjusted EBITDA financial covenants through the end of 2020 and add a minimum liquidity covenant that will apply from the date of the amendment through May 15, 2021. See Note 8 to maintain liquidity in the United States abovecondensed consolidated financial statements for a specified level and to comply with other covenants under the ABL Credit Agreement. We are in compliance with all covenants asdescription of September 24, 2017. this amendment. As of September 24, 2017,June 28, 2020, we had $53.9$61.7 million in borrowings outstanding under the ABL Facility and $96.1$113.3 million in unused availability under the ABL Facility. We borrowed $40 million under the ABL Facility during the second quarter of 2020. As of December 25, 2016,29, 2019, we had $30.0$20.7 million in borrowings outstanding under the ABL Facility and $120.0$154.3 million in unused availability under the ABL Facility.
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 payments totaling at least $35 million from applicable insurance carriers by December 31, 2017.
On November 1, 2016, Wright Medical Technology, Inc. (WMT) entered into a Master Settlement Agreement (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 Northern District of Georgia (the MDL) and the California State Judicial Counsel Coordinated Proceedings (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 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.
As of September 24, 2017,June 28, 2020, our accrual for metal-on-metal claims totaled $244.2$37.4 million, of which $199.3$30.4 million is included in our condensed consolidated balance sheet within “Accrued expenses and other current liabilities” and $44.9$7.0 million is included within “Other liabilities.” As of December 25, 2016,29, 2019, our accrual for metal-on-metal claims totaled $256.7$40.5 million, of which $242.8$33.0 million is included in our condensed consolidated balance sheet within “Accrued expenses and other current liabilities” and $13.9$7.5 million is included within “Other liabilities.” See Note 1211 to our condensed consolidated financial statements for additional discussion regarding the MSA and SecondMoM Settlement Agreements and our accrual methodologies for the metal-on-metal hip replacement product liability claims. During the fourth quarter of 2016, WMT deposited $150 million into a restricted escrow account to secure its obligations under the MSA. All individual settlements under the MSA will be funded first from the escrow account and then, once all funds held in the escrow account have been exhausted, directly by WMT. During the quarter ended September 24, 2017, WMT made $111.1 million in settlement payments from the escrow account. As of September 24, 2017, $38.9 million remained in the restricted
escrow account, and therefore, considered restricted cash under US GAAP. See Note 12 and Note 13 to our condensed consolidated financial statements for further discussion regarding the MSA, the metal-on-metal hip litigation and the funding for such 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).
Although it is difficult for us to predict our future liquidity requirements, we believe that our cash and cash equivalents of $133.7 million and restricted cash balance of approximately $277.8 million, together with $96.1the $113.3 million in availability under the ABL Facility as of September 24, 2017June 28, 2020, will be sufficient for at least the next 12 months to fund ourthe working capital requirements and operations, permit anticipated capital expenditures, during the remainder of 2017, pay retained metal-on-metal product and other liabilities of the OrthoRecon business, including without limitation amounts under the MSA and Second Settlement Agreements, fund contingent considerations, including without limitation the up to $42 million CVR milestone payment, and meet our other anticipated contractual cash obligations in 2017 and 2018. We may face liquidity challenges during the next few years in light of anticipated significant contingent liabilitiestwelve months.
In-process research 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. development. In connection with the BioMimeticIMASCAP acquisition in 2017, we acquired in-process research and development (IPRD) technology related to projectsa next generation reverse shoulder implant system that had not yet reached technological feasibility as of the acquisition date, which included AUGMENT® Injectable Bone Graft. The acquisition-datedate. This project was assigned a fair value of $5.3 million on 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 reflected the impairment charges recognized in 2013 after receipt of the not approvable letter from the FDA in response to a pre-market approval (PMA) application for AUGMENT® Bone Graft for use as an alternative to autograft in hindfoot and ankle fusion procedures.acquisition date.
InIn connection with the Wright/Tornier merger,our acquisition of Cartiva, Inc. (Cartiva) in 2018, we acquired IPRD technology related to three projectsa thumb implant (CMC) that had not yet reached technological feasibility asis in development. This project was assigned a fair value 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$1.0 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+.
The current IPRD projects we acquired in our BioMimetic acquisitionIMASCAP and the Wright/Tornier mergerCartiva acquisitions are as follows:
| |
• | AUGMENT® Injectable Bone Graft (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 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 $5.7 million for Augment Injectable since the date of acquisition and $0.3 million in the three months ended September 24, 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.
|
| |
• | AEQUALIS® Adjustable Reversed Ext (AARE) (re-branded in 2016 to AEQUALIS® Flex Revive) will ultimately be our second-generation revision product, with an improvedThe next generation reverse shoulder 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,a reverse shoulder replacement implant having glenoid or glenoid and humeral implant components. We have an anticipated first clinical use in 2021 and launch in the second half of 2022; however, the risks and uncertainties associated with completion are dependent upon testing validations and FDA and CE mark clearance. We have incurred expenses of less than $0.1 million in the six months ended June 28, 2020. Project cost to complete is estimated to be less than $2 million.
The CMC thumb implant is an arthroplasty device designed to resurface the CMC joint for the treatment of osteoarthritis. We anticipate the launch of the CMC thumb implant no earlier than 2021; however, the risks and uncertainties associated with completion are dependent upon testing validations and FDA premarket approval. We have incurred expenses of approximately $0.2 million in the six months ended June 28, 2020. Project cost to complete is estimated to be less than $3 million.
Critical Accounting Policies and Estimates
Information on judgments related to our most critical accounting policies and estimates is discussed in "“Part II. Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates"” of our Annual Report on Form 10-K for the year ended December 25, 201629, 2019 filed with the SEC on February 23, 2017.24, 2020. 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. Actual results may differ from these judgments under different assumptions or conditions. Different, reasonable estimates could have been used for 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.
There have been no material changes to our critical accounting policies and estimates discussed in "“Part II. Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates"” of our Annual Report on Form 10-K for the year ended December 25, 2016.29, 2019.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 to our condensed consolidated financial statements. ITEM 3. 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 FacilityCredit Agreement and the interest rates associated with our invested cash balances.
Borrowings under our Credit Agreement, including our ABL Facility and Term Loan 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. The interest rate applicable to borrowings under the Term Loan Facility is equal to one-month LIBOR plus 7.85%, subject to a 1.00% LIBOR floor. As of September 24, 2017,June 28, 2020, we had $53.9$61.7 million of borrowings under our ABL Facility and $55.0 million principal outstanding under our Term Loan 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.
On September 24, 2017,June 28, 2020, we had invested cash and cash equivalents and restricted cash of approximately $277.8$133.7 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 $0.3$0.1 million to our interest income.
As of September 24, 2017,June 28, 2020, we had outstanding $587.5an aggregate of $395.0 million and $395$814.6 million, principal amount of our 20202021 Notes and 20212023 Notes, respectively. We carry these instruments at face value less unamortized discount and unamortized debt issuance costs on our condensed 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 instrumentsthe 2021 Notes and 2023 Notes fluctuates when interest rates change and when the market price of our ordinary shares fluctuates. We do not carry the 20202021 Notes and 2021or 2023 Notes at fair value, but present the fair value of the principal amount of our 20202021 Notes and 20212023 Notes for disclosure purposes.
Equity Price Risk
On February 13, 2015, WMGJune 28, 2018, we issued $632.5$675.0 million aggregate principal amount of the 2023 Notes. Additional 2023 Notes were issued in exchange for a portion of 2020 Notes which generated net proceedsin February 2019. As of approximately $613 million.June 28, 2020, $814.6 million aggregate principal amount was
outstanding on the 2023 Notes. The holders of the 20202023 Notes may convert their 20202023 Notes into cash upon the satisfaction of certain circumstances as described in Note 8. The conversion and settlement provisions of the 20202023 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 20202023 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 $40.86 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 based on the warrants outstanding as of June 28, 2020 assuming various closing prices of our ordinary shares on the date of warrant expiration:
|
| | |
| Share price | | Shares (in thousands) |
| $42.68 | (10% greater than strike price) | 1,784 |
| $46.56 | (20% greater than strike price) | 3,270 |
| $50.44 | (30% greater than strike price) | 4,528 |
| $54.32 | (40% greater than strike price) | 5,606 |
| $58.20 | (50% greater than strike price) | 6,540 |
|
| | |
| Share price | | Shares (in thousands) |
| $44.95 | (10% greater than strike price) | 2,219 |
| $49.03 | (20% greater than strike price) | 4,068 |
| $53.12 | (30% greater than strike price) | 5,633 |
| $57.20 | (40% greater than strike price) | 6,974 |
| $61.29 | (50% greater than strike price) | 8,137 |
The fair value of the 20202023 Notes Conversion Derivative and the 20202023 Notes Hedge is directly impacted by the price of our ordinary shares. We entered into the 20202023 Notes Hedges in connection with the issuance of the 20202023 Notes with the option counterparties. The 20202023 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 20202023 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 20202023 Notes Conversion Derivative and 20202023 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) | | | |
| | Fair value of security given a 10% decrease in share price | Fair value of security as of September 24, 2017 | Fair value of security given a 10% increase in share price |
| 2020 Notes Hedges (Asset) | $50,688 | $73,694 | $100,837 |
| 2020 Notes Conversion Derivative (Liability) | $48,473 | $72,460 | $101,092 |
|
| | | |
| (in thousands) | | | |
| | Fair value of security given a 10% decrease in share price | Fair value of security as of June 28, 2020 | Fair value of security given a 10% increase in share price |
| 2023 Notes Hedges (Asset) | $36,437 | $62,307 | $96,175 |
| 2023 Notes Conversion Derivative (Liability) | $14,614 | $38,981 | $76,404 |
On May 20, 2016, we issued $395 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 8. At June 28, 2020, 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 may convert the notes during the succeeding calendar quarter 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 was classified as current assets as of June 28, 2020. We currently do not expect significant conversions because the 2021 Notes currently trade at a premium to the as-converted value, and a converting holder would forego future interest payments. However, any conversions would reduce our cash resources. 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 based on the warrants outstanding as of June 28, 2020 assuming various closing prices of our ordinary shares on the date of warrant expiration:
|
| | |
| Share price | | Shares (in thousands) |
| $33.00 | (10% greater than strike price) | 1,681 |
| $36.00 | (20% greater than strike price) | 3,082 |
| $39.00 | (30% greater than strike price) | 4,268 |
| $42.00 | (40% greater than strike price) | 5,284 |
| $45.00 | (50% greater than strike price) | 6,164 |
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) | | |
| | Fair value of security given a 10% decrease in share price | Fair value of security as of September 24, 2017 | Fair value of security given a 10% increase in share price | Fair value of security given a 10% decrease in share price | Fair value of security as of June 28, 2020 | Fair value of security given a 10% increase in share price |
| 2021 Notes Hedges (Asset) | $143,147 | $177,818 | $214,475 | $140,270 | $182,436 | $227,519 |
| 2021 Notes Conversion Derivative (Liability) | $138,848 | $177,870 | $219,133 | $120,510 | $168,258 | $218,841 |
Foreign Currency Exchange Rate Fluctuations
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies have in the past and could continue to adversely affect our financial results. Approximately 25.6%During the three and 25.0%six months ended June 28, 2020, approximately 17% and 18%, respectively, of our net sales from continuing operations were from international sales for the three months ended September 24, 2017denominated in foreign currencies, and September 25, 2016, respectively. Approximately 25.7% and 26.7% of our net sales were from international sales for the nine months ended September 24, 2017 and September 25, 2016, respectively. Wewe expect that foreign salescurrencies 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.
As discussedFor the three and six months ended June 28, 2020, approximately 85% and 89%, respectively, of our net sales denominated in Note 5foreign 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 the 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, the Japanese yen, the British pound, the Australian dollar, and the Canadian dollar. Fluctuations from the beginning to the condensed consolidated financial statements, we enter into certain short-term derivative financial instrumentsend of any given reporting period result in the formrevaluation of our foreign currency-denominated intercompany receivables, payables, and debt generating currency forward contracts. These forward contracts are designed to mitigatetranslation gains or losses that impact our exposure to currency fluctuations in our intercompany balances denominated currently in Euros, British pounds,non-operating income and Canadian dollars. Any changeexpense levels 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 changerespective period.A uniform 10% strengthening in the value of the intercompany balance.U.S. dollar relative to the currencies in which our transactions are denominated would have resulted in an increase in operating income of approximately $4.9 million and $5.1 million for the three and six months ended June 28, 2020, respectively. 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.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
OurWe have established disclosure controls and procedures, (asas such term is defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)1934. Our disclosure controls and procedures are designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our principal executive officer and principal financial officer by others within our organization. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 28, 2020 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms of the Securitiesforms. Disclosure controls and Exchange Commissionprocedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer (CEO)Based on this evaluation, our principal executive officer and the Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the design and effectiveness of our disclosure controls and procedures as of September 24, 2017 and, based on their evaluation, haveprincipal financial officer concluded that our disclosure controls and procedures were effective as of such date.
Remediation of Previously Disclosed Material Weakness in Internal Control Over Financial Reporting
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. Our management initiated a plan to remediate the material weakness. With detailed oversight, our management implemented the following corrective actions:
improved the design, operation and monitoring of control activities and procedures associated with user access to our information technology systems;
hired additional information technology expertise to support our controls over and monitoring of our information technology systems; and
educated and re-trained control owners regarding internal control processes to mitigate identified risks and maintain adequate documentation to evidence the effective design and operation of such processes.
During the fiscal quarter ended September 24, 2017, we completed our testing of the operational effectiveness of the actions discussed above. We have concluded that the enhanced control processes have now been operating for a sufficient period of time so as to provide reasonable assurance as to their effectiveness, and, as a result, that the material weakness described above was remediated as of September 24, 2017.June 28, 2020.
Changes in Internal Control Over Financial Reporting
Other thanDespite most employees working remotely due to the remediation steps taken above,COVID-19 pandemic, 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 September 24, 2017,June 28, 2020 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. 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 Wright Medical Technology, Inc. (WMT),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 continue to cooperate with the investigation.
Patent Litigation
In June 2013, Anglefix, LLCOn March 23, 2018, WMT filed suit against Paragon 28, Inc. (Paragon 28) in the United States District Court for the Western District of Tennessee,Colorado, alleging that our ORTHOLOC® products infringe Anglefix’s asserted patent, which was licensed to Anglefix by the Universityinfringement of North Carolina (UNC). On April 14, 2014, we filed a request for Inter Partes Review (IPR) with the U.S. Patentten patents concerning orthopaedic plates, plating systems and Trademark Office.instruments, and related methods of use. Our complaint seeks damages, injunctive relief and attorneys’ fees. On June 30, 2015, the Patent Office Board entered judgment in our favor as to all patent claims at issue in the IPR and twelve patent claims remained at issue in the District Court. In January 2017, UNC was added to the District Court case as a co-plaintiff. On July 13, 2017, the Court denied plaintiffs’ motion for summary judgment of infringement, and granted our motion for summary judgment of noninfringement as to the asserted apparatus claims. The Court denied our motion as to the asserted method claims based on the perceived possible existence of a fact issue. In the wake of the Court’s rulings, on July4, 2018, Paragon 28 2017, plaintiffs Anglefix and UNC stipulated to dismissal of their claims against us with prejudice. On the same date, the Court entered judgment dismissing plaintiffs’ claims against us with prejudice, thereby ending the case.
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 amended 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 summarycounterclaim seeking declaratory judgment of non-infringement and invalidity of the remaining asserted patent claimspatent-in-suit, 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.
attorneys’ fees. On September 13, 2016, we28, 2018, WMT filed a civil action, Case No. 2:16-cv-02737-JPM,an amended complaint adding claims against Spineology in the U.S. District CourtParagon 28 for the Western Districtmisappropriation of Tennessee alleging breach of contract, breach of implied warranty against infringement,trade secrets 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. Spineologyrelated wrongdoing. Paragon 28 filed a motion to dismiss on October 17, 2016, but withdrewthose trade secret-related claims, which WMT opposed. On September 30, 2019, the motion on November 28, 2016. On December 7, 2016, Spineology filedCourt issued an answer to our complaintorder granting in part and counterclaims, including counterclaims relating to a 2004 non-disclosure agreement between Spineology and WMT. On December 28, 2016, we filed adenying in part the motion to dismiss, leaving intact the counterclaims relating to that 2004 agreement. On January 4, 2017, Spineology filed amajority of the trade secret-related claims. A motion for summary judgmentclarification of the order remains pending. In March 2019, Paragon 28 filed four petitions with the Patent Trial and Appeal Board seeking Inter Partes Reviews of the patents in question, which WMT opposed. On September 25, 2019 and October 4, 2019, the Patent Trial and Appeal Board granted Paragon 28’s petitions. Oral arguments were heard on certain claims set forth in our complaint. We opposed that motion. On January 27, 2017,June 18, 2020, and we filedexpect the Patent Trial and Appeal Board to render 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 rules on those pending motions. On August 29, 2017, the Court ruledsubstantive decision on the motions to dismiss and for summary judgment. In viewmerits of that decision, on September 22, 2017, the parties stipulated, and the Court entered, a judgment that effectively ended the casepetitions 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.October 2020.
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, we24, 2020, ConforMIS, Inc. filed a declaratory judgment actionsuit against WMT and Tornier, Inc. in the United States District Court for the District of Delaware, Case No. 1:17-cv-00384, seeking declaratory judgment of non-infringement20-cv-00562-LPS, alleging that the patient specific instrumentation (PSI) Wright makes available for use in certain shoulder arthroplasty procedures infringes its asserted patents. The suit alleges that shoulder implants and invalidity of United States Patent Nos. 7,585,311; 8,100,942;related products, when used together with PSI, also infringe the asserted patents. The suit seeks, among other things, a permanent injunction, statutory damages and 8,109,969. On April 20, 2017, KFx filed an answertreble damages for willful infringement. We dispute these allegations and counterclaim alleging we indirectly infringe, and induce infringement of, these patents.intend to defend the suit vigorously.
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. Pursuant to previously disclosed settlement agreements with the Court-appointed attorneys representing plaintiffs in the MDL and JCCP described below (the MoM Settlement Agreements), the MDL and JCCP were closed to new cases effective October 18, 2017 and October 31, 2017, respectively.
Every hip implant case, including metal-on-metal hip casecases, 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.
As of September 24, 2017, there were approximately 1,000 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 850 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 350 of these matters allege claims involving bilateral implants. As of September 24, 2017, there were also approximately 50 non-U.S. lawsuits pending. We believe we have data that supports the efficacy and safety of ourthese hip products.
Excluding claims resolved in the MoM Settlement Agreements, as of June 28, 2020, there were approximately 235 unresolved metal-on-metal hip products. While continuingcases pending in the U.S. This number includes cases ineligible for settlement under the MoM Settlement Agreements, cases which opted out of such settlements, post-settlement cases, tolled cases, and existing state court cases that were not part of the MDL or JCCP. As of June 28, 2020, we estimate there also were pending approximately 28 unresolved non-U.S. metal-on metal hip cases, 59 unresolved U.S. modular neck cases alleging claims related to dispute liability, the parties continuerelease of metal ions, and zero non-U.S. modular neck cases with metal ion allegations. We also estimate that as of June 28, 2020, there were approximately 509 non-revision claims either dismissed or awaiting dismissal from the MDL and JCCP, which dismissal is a condition of the MoM Settlement Agreements. Although there is a limited time period during which dismissed non-revision claims may be refiled, it is presently unclear how many non-revision claimants will elect to mediate unresolved claims.do so. As of June 28, 2020, no dismissed non-revision cases have been refiled.
OnAs previously disclosed, between November 1, 2016 and October 2017, WMT entered into a Masterthree MoM Settlement Agreement (MSA)Agreements with Court-appointed attorneys representing plaintiffs in the MDL and JCCP. Under the terms of the MSA, the parties agreedJCCP to settle 1,292 specifically identified CONSERVE®, DYNASTY®and LINEAGE® claimsa total of 1,974 cases that meetmet the eligibility requirements of the MSAMoM Settlement Agreements and arewere either pending in the MDL or JCCP, or subject to court-approved tolling agreements in the MDL or JCCP, for a settlement amountan aggregate sum of $240$339.2 million. DueSee Note 11 to apparent demand fromour condensed consolidated financial statements for additional claimants excluded from settlement because ofinformation regarding 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.MoM Settlement Agreements.On October 3, 2017, WMT entered into two additional 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 payments totaling at least $35 million from applicable insurance carriers by December 31, 2017.
We have received claims for personal injury against us associated with fractures of ourthe PROFEMUR® long titanium modular neck product (Titanium Modular Neck Claims). As of September 24, 2017,June 28, 2020, there were 30approximately 32 unresolved pending U.S. lawsuits and 60approximately five unresolved pending non-U.S. lawsuits alleging such claims. These lawsuits generally seek monetary damages.
We are aware that MicroPort has recalled a certain sizessize of its cobalt chrome modular neck productsproduct as a result of alleged fractures. As of September 24, 2017,June 28, 2020, there were sixeleven pending U.S. lawsuits and eightfive 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.
In June 2015,On May 18, 2020, certain plaintiffs’ counsel filed a jury returned a $4.4 million verdict against usmotion to coordinate (Motion to Transfer) pre-trial management of 42 cases involving both titanium and cobalt chrome PROFEMUR® modular necks in a case involvingmultidistrict litigation. Plaintiffs request that the cases be coordinated before 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 triedjudge in the SuperiorUnited States District Court of the State of California for the CountyEastern District of Los Angeles, Central District. In September 2015,Arkansas. We have opposed the trial judge reduced the jury verdictMotion to $1.025 millionTransfer and indicated that if the plaintiff did not accept the reduced award he would schedule a new trial solelyhearing on the issue of damages. The plaintiff elected notMotion to accept the reduced damage award, and both parties have appealed. The Court has not set a dateTransfer is scheduled for a new trial on the issue of damages and we do not expect it will do so until the appeals are adjudicated.July 30, 2020.
Insurance Litigation
On June 10, 2014, St. Paul Surplus Lines Insurance Company (Travelers),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 Federal, our then primary product liability insurance carrier, asserting that certain present and future claims which was an excess carrier in our coverage towers across multiple policy years, filed a declaratory judgment action in the Chancery Courtallege certain types 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 regardinjury related to the CONSERVE® Claims. This case is known Claims would be covered asSt. 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 multipleunder the policy periodsyear the first such claim was asserted. The effect of coverage. Travelers further soughtthis coverage position would have been to place CONSERVE® Claims into a determination assingle prior policy year in which applicable claims-made coverage was available, subject to the applicableoverall policy period triggered by the alleged single occurrence. On June 17, 2014,limits then in effect. We notified Federal that we filed a separate lawsuit in the Superior Courtdisputed its characterization 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 theCONSERVE® Claims as a single occurrence, which resulted in multi-year insurance coverage litigation (the Tennessee action on a number of grounds, includingCoverage Litigation) that California is the most appropriate jurisdiction. This case is knownhas recently been resolved 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,discussed below.
As previously disclosed, 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 and report to the Court by December 8, 2017. Oral argument on the motion is scheduled for February 23, 2018. 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 are presently considering our response to the Application.
On October 28, 2016, WMT and Wright Medical Group, Inc. (WMG) entered into a Settlement Agreement, Indemnity and Hold Harmless Agreement and Policy Buyback Agreement (Insurance Settlement Agreement)confidential settlement agreements with a subgroup of threeall seven insurance carriers namelywith whom metal on metal hip coverage was in dispute - Columbia Casualty Company, (Columbia), Travelers, and AXIS Surplus Lines Insurance Company, (collectively, the Three Settling Insurers)Federal, Catlin Specialty Insurance Company, Catlin Underwriting Agencies Limited for and on behalf of Syndicate 2003 at Lloyd’s of London and Lexington Insurance Company (Lexington), 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 isthus resolving 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 MDLTennessee Coverage Litigation and the JCCP,separate litigation 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.arbitration proceedings with Lexington.
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 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 the first round of arbitration and the second round of arbitration is scheduled for later this year.
Wright/Tornier MergerStryker Acquisition 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), byJanuary 15, 2020, John Thompson, a purported shareholder of WMG under the caption CityCompany, filed a putative class action lawsuit against us, members of Warwick Retirement System v. Gary D. Blackford et al.our board of directors, Stryker B.V., CT-005015-14. An amended complaintand Stryker Corporation in the action wasUnited States District Court for the District of Delaware. The lawsuit is captioned Thompson v. Wright Medical Group N.V., et al., Case No. 1:20-cv-00061 (the Thompson Action). The complaint filed on January 5, 2015. The amended complaint names as defendants WMG, Tornier, Trooper Holdings Inc. (Holdco), Trooper Merger Sub Inc. (Merger Sub),in the Thompson Action alleges that we 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 WMGour board of directors breached their fiduciary duties owed to the WMG shareholders in connection with entering into the merger agreement, approving the merger,violated federal
securities laws and causing WMG to issue a preliminary Form S-4 that allegedly failsregulations by failing to disclose material information aboutin the merger. The amended complaint furtherSchedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Thompson Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Thompson Action alleges that Tornier, Holdco, and Merger Sub aided and abetted the alleged breachesmembers of fiduciary duties by the WMGour board of directors.directors and Stryker acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff is seeking,in the Thompson Action seeks, among other things, injunctive reliefan order enjoining consummation of the transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; an order directing our board of directors to file a Schedule 14D-9 that does not contain any untrue statements of material fact and that states all material facts required or rescindingnecessary to make the mergerstatements contained therein not misleading; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and costs.expenses.
On December 2, 2014, a separate class action complaint was filed in the Tennessee Chancery Court byJanuary 31, 2020, William Grubb, a purported shareholder of WMG under the caption Paulette JacquesCompany, filed a lawsuit against us and members of our board of directors in the United States District Court for the Eastern District of New York. The lawsuit is captioned Grubb v. Wright Medical Group Inc.N.V., et al.al., CH-14-1736-1. An amendedCase No. 1:20-cv-00553 (the Grubb Action). The complaint filed in the action was filed on January 27, 2015. The amended complaint names as defendants WMG, Tornier, Holdco, Merger Sub, Warburg Pincus LLCGrubb Action alleges that we 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 WMGour board of directors breached their fiduciary duties owed to the WMG shareholders in connection with entering into the merger agreement, approving the merger,violated federal securities laws and causing WMG to issue a preliminary Form S-4 that allegedly failsregulations by failing to disclose material information aboutin the merger. The amended complaint furtherSchedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Grubb Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Grubb Action alleges that WMG, Tornier, Warburg Pincus LLC, Holdco and Merger Sub aided and abetted the alleged breachesmembers of fiduciary duties by the WMGour board of directors.directors acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff is seeking,in the Grubb Action seeks, among other things, injunctive reliefan order enjoining or rescindingconsummation of the mergertransactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and costs.expenses.
In an order dated March 31, 2015,On April 9, 2020, Gracie Woodward, a purported shareholder of the Tennessee Circuit Court transferred CityCompany, filed a lawsuit against us and members of Warwick Retirement System v. Gary D. Blackford et al., CT-005015-14 toour board of directors in the Tennessee ChanceryUnited States District Court for consolidation with Paulette Jacquesthe District of Delaware. The lawsuit is captioned Woodward v. Wright Medical Group Inc.N.V., et al.al., CH-14-1736-1 (Consolidated TennesseeCase No. 1:20-cv-494 (the Woodward Action). The complaint filed in the Woodward Action alleges that we and the members of our board of directors violated federal securities laws and regulations by failing to disclose material information in the Schedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Woodward Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Woodward Action alleges that members of our board of directors acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff in the Woodward Action seeks, among other things, an order dated April 9, 2015, the Tennessee Chancery Court stayed the Consolidated Tennessee Action; that stay expired upon completionenjoining consummation of the Wright/Tornier merger. transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and expenses.
On September 19, 2016,April 15, 2020, Marcy Curtis, a purported shareholder of the Tennessee ChanceryCompany, filed a putative class action lawsuit against us, members of our board of directors, Stryker B.V., and Stryker Corporation in the United States District Court enteredfor the District of Delaware. That suit is captioned Curtis v. Wright Medical Group N.V., et al., Case No. 1:20-cv-00509 (the Curtis Action). The complaint filed in the Curtis Action alleges that we and the members of our board of directors violated federal securities laws and regulations by failing to disclose material information in the Schedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Curtis Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Curtis Action alleges that members of our board of directors and Stryker acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff in the Curtis Action seeks, among other things, an agreed order dismissingenjoining consummation of the Jacques case without prejudice.transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; an order directing our board of directors to file a Schedule 14D-9 that does not contain any untrue statements of material fact and that states all material facts required or necessary to make the statements contained therein not misleading; a declaration that the defendants violated certain federal securities laws and regulations; and an award of plaintiff’s costs, including attorneys’ fees and expenses.
On April 28, 2020, Shiva Stein, a purported shareholder of the Company, filed a lawsuit against us, members of our board of directors, Stryker B.V., and Stryker Corporation in the United States District Court for the District of Delaware. That suit is captioned Stein v. Wright Medical Group N.V., et al., Case No. 1:20-cv-00582 (the “Stein Action”). The complaint filed in the Stein Action alleges that we,the members of our board of directors, and the Stryker defendants violated federal securities laws and regulations by failing to disclose material information in the Schedule 14D-9 filed in connection with the transactions contemplated by the Stryker purchase agreement, which the plaintiff in the Stein Action alleges rendered the Schedule 14D-9 false and misleading. In addition, the plaintiff in the Stein Action alleges that members of our board of directors acted as controlling persons of the company within the meaning of and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14D-9. The plaintiff in the Stein Action seeks, among other things, an order
enjoining consummation of the transactions contemplated by the Stryker purchase agreement; rescission of such transactions if they have already been consummated and rescissory damages; and an award of plaintiff’s costs, including attorneys’ fees and expenses.
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.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors that were discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 25, 2016,29, 2019, as filed with the SEC on February 23, 2017,24, 2020, other than the new or updated risk factors belowbelow.
Public health crises, such as the coronavirus, impact our business.
In late 2019, a novel strain of coronavirus emerged, and, on March 11, 2020, the World Health Organization declared a global pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, U.S. President Trump announced a National Emergency relating to the pandemic. Leaders in many other countries have taken comparable steps. Government authorities throughout the world have imposed various social distancing, quarantine, and isolation measures on large portions of populations. These have included, in many jurisdictions, mandateddelays in elective surgeries. Both the outbreak and the containment and mitigation measures impact the economy, the severity and duration of which update or replaceare uncertain. Government stabilization efforts will only partially mitigate the existing risk factors addressingconsequences. Factors that will influence the same topic.
Product liability lawsuits could harmimpact on our businessoperations include the extent and adversely affect our operating results or results from discontinued operationsduration of the outbreak, the extent of containment and financial condition if adverse outcomes exceed our product liability insurance coverage.mitigation measures, and the general economic consequences of the pandemic on medical technology companies.
The manufacture and saleproposed acquisition of medical devices expose usWright by Stryker is subject to significant risk of product liability claims. We are currently defendants in a number of product liability matters, including those relatingconditions beyond our control. Failure to complete 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 divestingproposed acquisition within 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,expected time frame, 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 September 24, 2017, there were approximately 1,000 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 850 so called "tolling agreements" with potential claimants who have not yet filed suit. As of September 24, 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 payments totaling at least $35 million from applicable insurance carriers by December 31, 2017.
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 12 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 andall, could have a material adverse effect on our financial position,business, operating results, financial condition and our share price.On November 4, 2019, we entered into a Purchase Agreement (the Purchase Agreement) with Stryker and Stryker’s subsidiary, Stryker B.V., related to the proposed acquisition of Wright by Stryker (the Acquisition). Pursuant to the Purchase Agreement, and upon the terms and subject to the conditions thereof, Stryker B.V. has commenced a tender offer (the Offer) to purchase all of our outstanding ordinary shares. If certain conditions are satisfied or resultswaived to the extent they can be waived and the Offer closes, Stryker may acquire any Wright shares that were not tendered in the Offer through a reorganization of the Company. The obligation of Stryker and Stryker B.V. to consummate the Offer is subject to the condition that there be validly tendered and not withdrawn prior to the expiration of the Offer a number of ordinary shares representing at least 95% of the ordinary shares outstanding as of the scheduled expiration of the Offer (such condition, the Minimum Condition). Because Wright’s shareholders have adopted certain resolutions related to the reorganization of the Company at an extraordinary general meeting of shareholders, the Minimum Condition has been reduced to 80%. The Minimum Condition may not be waived by Stryker without the prior written consent of Wright. The obligation of Stryker B.V. to consummate the Offer is also subject to the expiration of the waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act), and the receipt of other required approvals and clearances under applicable antitrust laws outside the U.S., and other customary conditions. We currently expect the Acquisition to close during the second half of 2020, but no assurance can be provided that it will close within this time frame, or at all.
We cannot predict whether and when the conditions to the Offer will be satisfied. If one or more of these conditions is not satisfied, and as a result, we do not complete the proposed Acquisition, we would remain liable for significant transaction costs, and the focus of our management would have been diverted from discontinued operations, and cash flows.
Inseeking other potential strategic opportunities, in each case without realizing any benefits of the future, weproposed Acquisition. Certain costs associated with the proposed Acquisition have already been incurred or may be subjectpayable even if the proposed Acquisition is not consummated. Finally, any disruptions to additional product liability claims. We also could experience a material design or manufacturing failureour business resulting from the announcement and pendency of the proposed Acquisition, including any adverse changes in our products, a quality system failure,relationships with our customers, partners, suppliers and employees, could continue or accelerate in the event that we fail to consummate the proposed Acquisition.
Our share price may also fluctuate significantly based on announcements by Stryker and other safety issues,third parties or heightened regulatory scrutinyus regarding the Acquisition or based on market perceptions of the likelihood of the satisfaction of the conditions to the consummation of the Acquisition. Such announcements may lead to perceptions in the market that would warrant a recall of somethe Acquisition may not be completed, which could cause our share price to fluctuate or decline. If we do not consummate the Acquisition, the price of our products. Product liability lawsuits and claims, safety alerts and product recalls, regardlessordinary shares may decline significantly from the current market price, which may reflect a market assessment of their ultimate outcome,the probability that the proposed Acquisition will be consummated. Any of these events 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, operating results and reputationfinancial condition and could cause a decline in the price of our ordinary shares.
The Purchase Agreement does not provide that the Offer consideration payable to holders of our ordinary shares will be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, or in the event of any change in our share price.
The Purchase Agreement does not provide that the Offer consideration payable to holders of our ordinary shares will be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, or changes in the market price of, analyst estimates of, or projections relating to, our ordinary shares. For example, if we experienced an improvement in our business, assets, liabilities, prospects, outlook, financial condition or results of operations prior to the consummation of the proposed Acquisition, there would be no increase in the amount of the proposed Offer consideration.
The Purchase Agreement contains provisions that could discourage a potential competing acquirer.
Under the terms of the Purchase Agreement, we have agreed not to solicit or initiate discussions with third parties regarding other proposals to acquire Wright and are subject to restrictions on our ability to respond to any such proposal, except as permitted under the terms of the Purchase Agreement. In the event that we receive an acquisition proposal from a third party, we must notify Stryker of such proposal and negotiate in good faith with Stryker prior to terminating the Purchase Agreement or effecting a change in the recommendation of our Board of Directors to our shareholders with respect to the proposed Acquisition. The Purchase Agreement also contains certain termination rights for both Stryker and us and further provides that, upon termination of the Purchase Agreement under specified circumstances, including certain terminations in connection with an alternative business combination transaction as permitted by the terms of the Purchase Agreement, we will be required to pay Stryker a termination fee of $150 million.
These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of us from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the Offer consideration contemplated by the Purchase Agreement. These provisions also might result in a potential third-party acquirer proposing to pay a lower price to our shareholders than it might otherwise have proposed to pay due to the added expense of the $150 million termination fee that may become payable in certain circumstances.
If the Purchase Agreement is terminated, and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the proposed Acquisition.
Shareholder litigation could prevent or delay the closing of the proposed Acquisition or otherwise negatively impact our business, operating results and financial condition.
We may incur additional costs in connection with the defense or settlement of existing and any future shareholder litigation in connection with the proposed Acquisition, including five shareholder lawsuits to date that have been brought against us in connection with the Acquisition. See Legal Proceedings for additional information regarding these lawsuits. These lawsuits or other future litigation may adversely affect our ability to complete the proposed Acquisition. We could incur significant costs in connection with any such litigation lawsuits, including costs associated with the indemnification of obligations to our directors.
Furthermore, one of the conditions to the closing of the proposed Acquisition is the absence of any governmental order or law preventing the Acquisition or making the consummation of the proposed Acquisition illegal. Consequently, if a plaintiff were to secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting our ability to complete the proposed Acquisition, then such injunctive or other relief may prevent the proposed Acquisition from becoming effective within the expected time frame or at all.
We may be unable to obtain the regulatory approvals required to complete the proposed Acquisition.
One of the conditions to consummation of the proposed Acquisition is receipt of certain regulatory approvals, including the expiration or termination of the applicable waiting periods (and any extension thereof) under the HSR Act and antitrust notification and approvals in certain European and other jurisdictions. On December 31, 2019, Wright and Stryker each received a request for additional information and documentary materials with respect to the Offer (a Second Request) from the U.S. Federal Trade Commission. As a result of the Second Requests, the waiting period under the HSR Act applicable to the Offer has been extended until 11:59 p.m., Eastern Time, on the 10th calendar day following the date on which Stryker substantially complies with the Second Request, unless such waiting period is earlier terminated. Thereafter, the waiting period may be extended only by court order or with Stryker’s consent. There can be no assurance that such regulatory approvals, or any other regulatory approvals that might be required to consummate the proposed Acquisition, will be obtained. If such regulatory approvals are obtained, there can be no assurance as to the timing of such approvals, our ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals.
At any time before or after the consummation of the proposed Acquisition (and notwithstanding the termination of the waiting period under the HSR Act), the U.S. Department of Justice, Federal Trade Commission or any state or non-U.S. governmental entity could take such action, under antitrust laws or otherwise, as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the proposed Acquisition or seeking the divestiture of substantial
assets. Private parties may also seek to take legal action under antitrust laws under certain circumstances. If the proposed Acquisition does not receive, or timely receive, the required regulatory approvals and clearances, or if another event occurs delaying or preventing the proposed Acquisition, such delay or failure to complete the proposed Acquisition may create uncertainty or otherwise have negative consequences that may materially and adversely affect our financial condition and results of operations, as well as the price per share for our ordinary shares.
While the proposed Acquisition is pending, we are subject to business uncertainties and contractual restrictions that could disrupt our business, and the proposed Acquisition may impair our ability to attract and retain customers.qualified employees or retain and maintain relationships with our customers, suppliers and other business partners.
Our obligationWhether or not the proposed Acquisition is consummated, the proposed Acquisition may disrupt our current plans and operations, which could have an adverse effect on our business and financial results. The pendency of the Acquisition may also divert management’s attention and our resources from ongoing business and operations and our employees and other key personnel may have uncertainties about the effect of the proposed Acquisition, and the uncertainties may impact our ability to settle substantially allretain, recruit and hire key personnel while the remaining outstanding metal-on-metal hip claimsproposed Acquisition is pending or if it fails to close. Furthermore, if key personnel depart because of such uncertainties, or because they do not wish to remain with the combined company after closing, our business and results of operations may be cancelled if an insufficient numberadversely affected. In addition, we cannot predict how our suppliers, customers and other business partners will view or react to the proposed Acquisition upon consummation. If we are unable to reassure our customers, suppliers and other business partners to continue transacting business with us, our sales, financial condition and results of eligible claimants choose to participate, which would leave a substantial numberoperations may be adversely affected.
In addition, the Purchase Agreement, absent Stryker’s consent, generally requires that we operate in the ordinary course of metal-on-metal hip claims unresolved.
Eachbusiness consistent with past practice, pending consummation 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 1Acquisition, 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. If a 95% participation rate is not achievedrestricts us from taking certain actions with respect to both Settlement Agreements there is a significant risk the Second Settlement Agreementsour business and financial affairs without Stryker’s consent. Such restrictions will be cancelled.in place until either the Acquisition is consummated or the Purchase Agreement is terminated. These restrictions could restrict our ability to, or prevent us from, pursuing attractive business opportunities (if any) that arise prior to the consummation of the Acquisition. These restrictions also impose contractual constraints on our flexibility in responding to unanticipated events, like the COVID-19 pandemic. For these and other reasons, the pendency of the Acquisition could adversely affect our business, operating results and financial condition.
We have incurred, and will continue to incur, direct and indirect costs as a result of the proposed Acquisition.
We have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs, in connection with the Acquisition, including costs that we may not currently expect. We must pay many of these costs and expenses whether or not the transaction is completed. If the Second Settlement Agreements are cancelledPurchase Agreement is terminated under specified circumstances, we willwould 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 obligationpay 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 leaveStryker a substantialtermination fee equal to $150 million. There are a number of metal-on-metal hip claims unresolved.
Underfactors beyond our control that could affect the termstotal amount or the timing of the Second Settlement Agreements, the parties agreed to settle 629 specifically identified CONSERVE®, DYNASTY®these costs 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 payments
totaling at least $35 million from applicable insurance carriers by December 31, 2017. To date, the insurance carriers have not agreed to contribute this or any other amount to the settlement. 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. 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.expenses.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.The temporary salary reductions implemented on April 23, 2020 ended in July 2020 for our executive officers and June 2020 for our other employees.
ITEM 6. EXHIBITS.
The following exhibits are being filed or furnished with this Quarterly Report on Form 10-Q:
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| | | | |
| Exhibit No. | | Exhibit | | Method of Filing |
| 2.1 | | Purchase Agreement, dated November 4, 2019, among Wright Medical Group N.V., Stryker Corporation and Stryker B.V.* | | |
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| | | | |
| Exhibit No. | | Exhibit | | Method of Filing |
| 3.1 | | Articles of Association of Wright Medical Group N.V. | | |
| 3.2 | | Amendment of the Articles of Association, dated April 24, 2020, of Wright Medical Group N.V. | | |
| 10.1 | | Amendment No. 4 to Amended and Restated Credit, Security and Guaranty Agreement dated as of May 7, 2020 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 | | |
| 31.1 | | 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 | | |
| | Certification of Chief Financial 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 | | |
| | Certification of Chief Executive Officer and 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 Group N.V.’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 24, 2017,June 28, 2020, formatted in XBRL (ExtensibleiXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 24, 2017June 28, 2020 and December 25, 2016,29, 2019, (ii) the Consolidated Statements of Operations for the three and ninesix months ended September 24, 2017June 28, 2020 and September 25, 2016,June 30, 2019, (iii) the Consolidated Statements of Comprehensive Loss for the three and ninesix months ended September 24, 2017June 28, 2020 and September 25, 2016,June 30, 2019, (iv) the Consolidated Statements of Cash Flows for the ninesix months ended September 24, 2017June 28, 2020 and September 25, 2016,June 30, 2019, (v) the Consolidated Statements of Changes in Shareholders’ Equity for the three and (v)six months ended June 28, 2020 and June 30, 2019, and (vi) Notes to Consolidated Financial Statements (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.) | | Filed herewith |
| 104 | | The cover page from Wright Medical Group N.V.’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2020 is formatted in iXBRL (Inline eXtensible Business Reporting Language) | | Included in Exhibit 101 |
* The schedules to the Purchase Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby agrees to supplementally furnish copies of any such schedules to the U.S. Securities and Exchange Commission upon request.
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.
November 1, 2017July 28, 2020
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WRIGHT MEDICAL GROUP N.V. |
| By: | /s/ Robert J. Palmisano |
| | Robert J. Palmisano |
| | President and Chief Executive Officer |
| | (principal executive officer) |
| | |
| By: | /s/ Lance A. Berry |
| | Lance A. Berry |
| | SeniorExecutive Vice President, and Chief Financial and Operations Officer |
| | (principal financial officer) |