| Re: | Wright Medical Group, Inc. | |
| Form 10-K for the year ended December 31, 2005 | ||
| Form 10-Q for the quarter ended September 30, 2006 | ||
| Form 8-K filed October 25, 2006 | ||
| File No 0-32883 |
| 1. | Please note that there are no contractual terms with respect to the usage of our instruments by our customers. Surgeons are under no contractual commitment to use our instruments. We maintain ownership of these instruments and, when requested, we allow the surgeons to use our instruments to facilitate implantation of our products. We do not charge for the use of our instruments and there are no minimum purchase commitments for our products. As is the case with other companies in our industry, our surgical instruments are typically used by the surgeon because they are unique to our products. Therefore, there are no contractual terms to disclose. |
| As the Company’s surgical instrumentation is used numerous times over several years, we classify these instruments as a component of property, plant and equipment. Unlike depreciation of the machinery and equipment used in manufacturing our products, depreciation of surgical instruments is instead a cost associated with Company’s selling process. Therefore, and consistent with other companies in our industry, we record the depreciation of surgical instrumentation within selling, general and administrative expenses. Because instrument depreciation is unrelated to the Company’s cost of goods sold, we believe that SAB Topic 11-B does not apply. Specific examples of our direct competitors that record depreciation of surgical instrumentation within selling, general and administrative expenses include Zimmer Holdings, Inc., and Stryker Corporation. |
| 2. | In future filings, the Company will clarify whether our officers have concluded that our disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. |
| 3. | In future filings, the Company will remove the non-cash stock-based compensation subtotal from the table included as a footnote on the face of our statements of income. The Company will disclose the information in this table within the notes to the financial statements as well as within Management’s Discussion and Analysis as permitted in SAB Topic 14-F. |
| 4. | The Company will remove the pro forma statement of income from all future filings in accordance with your comments. Instead, we will disclose only those non-GAAP measures used by management that we wish to highlight for investors, with the appropriate reconciliations. We will revise our disclosure regarding the use of non-GAAP measures to provide all of the disclosures required by paragraph (e)(1)(i) of Item 10 of Regulation S-K. A sample of our proposed revised disclosure regarding the use of non-GAAP measures and our proposed revised reconciliations of the non-GAAP measures presented, based upon our Form 8-K dated October 25, 2006, is attached to this letter for your review. |
| cc: | Gary Henley, President and Chief Executive Officer | |
| Jason Hood, Vice President, General Counsel and Secretary | ||
| Lance Berry, Vice President and Corporate Controller | ||
| Peter H. Kesser, Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. | ||
| Mike Landrum, KPMG LLP |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Gross Profit | ||||||||||||||||
Gross profit, as reported | $ | 56,120 | $ | 53,216 | $ | 180,140 | $ | 171,460 | ||||||||
| Non-cash, stock-based compensation | 258 | — | 487 | 11 | ||||||||||||
Gross profit, as adjusted | $ | 56,378 | $ | 53,216 | $ | 180,627 | $ | 171,471 | ||||||||
Selling, General and Administrative Expense | ||||||||||||||||
Selling, general and administrative expense, as reported | $ | 45,494 | $ | 40,110 | $ | 143,396 | $ | 121,276 | ||||||||
| Non-cash, stock-based compensation | (2,845 | ) | (65 | ) | (8,007 | ) | (380 | ) | ||||||||
Selling, general and administrative expense, as adjusted | $ | 42,649 | $ | 40,045 | $ | 135,389 | $ | 120,896 | ||||||||
Research and Development Expense | ||||||||||||||||
Research and development expense, as reported | $ | 6,175 | $ | 5,904 | $ | 19,994 | $ | 16,505 | ||||||||
| Non-cash, stock-based compensation | (556 | ) | — | (1,627 | ) | (5 | ) | |||||||||
Research and development expense, as adjusted | $ | 5,619 | $ | 5,904 | $ | 18,367 | $ | 16,500 | ||||||||
Operating Income | ||||||||||||||||
Operating income, as reported | $ | 3,464 | $ | 6,182 | $ | 13,496 | $ | 30,560 | ||||||||
| Non-cash, stock-based compensation | 3,659 | 65 | 10,121 | 396 | ||||||||||||
Operating income, as adjusted | $ | 7,123 | $ | 6,247 | $ | 23,617 | $ | 30,956 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Income Before Income Taxes | ||||||||||||||||
Income before income taxes, as reported | $ | 5,584 | $ | 6,310 | $ | 16,167 | $ | 30,445 | ||||||||
| Non-cash, stock-based compensation | 3,659 | 65 | 10,121 | 396 | ||||||||||||
| Gain on sale of investment | (1,499 | ) | — | (1,499 | ) | — | ||||||||||
Income before income taxes, as adjusted | $ | 7,744 | $ | 6,375 | $ | 24,789 | $ | 30,841 | ||||||||
Provision for Income Taxes | ||||||||||||||||
Provision for income taxes, as reported | $ | 1,979 | $ | 2,324 | $ | 7,503 | $ | 11,423 | ||||||||
| Tax impact of non-cash, stock-based expense | 918 | 26 | 2,149 | 157 | ||||||||||||
| Tax impact of gain on sale of investment | (95 | ) | — | (95 | ) | — | ||||||||||
Provision for income taxes, as adjusted | $ | 2,802 | $ | 2,350 | $ | 9,557 | $ | 11,580 | ||||||||
Net Income | ||||||||||||||||
Net income, as reported | $ | 3,605 | $ | 3,986 | $ | 8,664 | $ | 19,022 | ||||||||
| Non-cash, stock-based compensation, net of taxes | 2,741 | 39 | 7,972 | 239 | ||||||||||||
| Gain on sale of investment, net of taxes | (1,404 | ) | — | (1,404 | ) | — | ||||||||||
Net income, as adjusted | $ | 4,942 | $ | 4,025 | $ | 15,232 | $ | 19,261 | ||||||||
Net Income Per Diluted Share | ||||||||||||||||
Net income per diluted share, as reported | $ | 0.10 | $ | 0.11 | $ | 0.25 | $ | 0.54 | ||||||||
| Non-cash, stock-based compensation, net of taxes | 0.08 | 0.00 | 0.23 | 0.01 | ||||||||||||
| Gain on sale of investment, net of taxes | (0.04 | ) | — | (0.04 | ) | — | ||||||||||
Net income per diluted share, as adjusted | $ | 0.14 | $ | 0.11 | $ | 0.43 | $ | 0.55 | ||||||||
