Item 2.02. Results of Operations and Financial Condition.
On January 7, 2019, Wright Medical Group N.V. (Wright) issued a press release announcing preliminary, unaudited net sales for the fourth quarter and fiscal year ended December 30, 2018. A copy of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K and the information set forth therein is incorporated herein by reference and constitutes a part of this report.
Wright is furnishing the information contained in this report, including Exhibit 99.1, pursuant to Item 2.02 of Form 8-K promulgated by the United States Securities and Exchange Commission (SEC). This information shall not be deemed to be filed with the SEC for purposes of Section 18 of the United States Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any filing under the United States Securities Act of 1933, as amended (Securities Act), except as expressly set forth by specific reference in such filing. By filing this report and furnishing this information, Wright makes no admission as to the materiality of any information contained in this report, including Exhibit 99.1. This report shall not be incorporated into any future filings by Wright under the Securities Act or the Exchange Act.
To supplement Wright’s consolidated financial statements prepared in accordance with United States generally accepted accounting principles (GAAP), Wright uses certain non-GAAP financial measures. In the press release furnished as Exhibit 99.1 to this report, Wright uses net sales, excluding the impact of foreign currency, often referred to as net sales on a constant currency basis; net sales growth rates on a constant currency basis; non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin; and non-GAAP adjusted gross margin, in each case from continuing operations.
Wright uses net sales on a constant currency basis for internal budgeting process and evaluation of net sales performance. To measure net sales on a constant currency basis, it is necessary to remove the impact of changes in foreign currency exchange rates, which affects the comparability and trend of net sales. Net sales, on a constant currency basis, is calculated by translating current period results at prior period average foreign currency exchange rates and, in the case of the net sales growth rates on a constant currency basis, then calculating the growth rate.
For internal budgeting and resource allocation process, management also uses EBITDA, EBITDA, as adjusted, and gross margin, as adjusted. EBITDA is calculated by adding back to net loss from continuing operations charges for interest, provision (benefit) from income taxes, depreciation, and amortization expenses. EBITDA, as adjusted, is calculated by excluding non-cash share-based compensation expense, non-operating income and expense, as well as the applicable adjustments below, from EBITDA. Non-GAAP adjusted gross margins are calculated by excluding transaction and transition costs from gross profit from continuing operations and dividing by net sales from continuing operations.
Wright uses non-GAAP financial measures in making operating decisions because Wright believes these measures provide meaningful supplemental information regarding its core operational performance and give it a better understanding of how it should invest in research and development activities and how it should allocate resources to both ongoing and prospective business initiatives. Wright uses these measures to help make budgeting and spending decisions, for example, between research and development and selling, general and administrative expenses. Additionally, management is evaluated on the basis of certain non-GAAP financial measures when determining achievement of performance incentive plan compensation targets. Further, these non-GAAP financial measures facilitate management’s internal comparisons to both Wright’s historical operating results and to its competitors’ operating results by factoring out potential differences caused by charges not related to its regular, ongoing business, including without limitation, non-cash charges, certain large and unpredictable charges, acquisitions and dispositions, legal settlements, and tax positions.
Wright excludes the following items from one or more of its non-GAAP financial measures for the following reasons:
Foreign currency impact on net sales
. Wright excludes the foreign currency impact on net sales compared to prior period from its non-GAAP financial measure, primarily because it is not reflective of Wright’s ongoing operating results, and it is not used by management for internal budgeting process and evaluation of net sales performance. Wright further believes that excluding this item is useful to investors in that it allows for period-over-period comparability.
Non-cash interest expense on convertible notes
. Wright excludes the non-cash interest expense on convertible notes from its non-GAAP financial measures, primarily because it is a non-cash expense. Wright believes that it is useful to investors to understand Wright’s operational performance, liquidity, and its ability to invest in research and development and to fund acquisitions and capital expenditures. While interest expense associated with the amortization of the debt discount constitutes an ongoing and recurring expense, such expense is excluded from Wright’s non-GAAP financial measures because it is not an expense that requires cash settlement and is not used by management to assess the core profitability of its business operations.
Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Non-cash loss on extinguishment of debt
. Wright excludes the non-cash loss on extinguishment of debt from its non-GAAP financial measures, primarily because it is not reflective of Wright’s ongoing operating results, and it is not used by management to assess the core profitability of its business operations. Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Mark-to-market adjustment of derivatives
. Wright excludes the adjustment of the mark-to-market adjustments on derivatives from its non-GAAP financial measures, primarily because it is not reflective of Wright’s ongoing operating results, and it is not used by management to assess the core profitability of its business operations. Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Transaction and transition costs
. Wright excludes the transaction and transition costs associated with acquisitions and mergers, including the Wright/Tornier merger, from its non-GAAP financial measures, primarily because such costs are not reflective of Wright’s ongoing operating results and are not used by management to assess the core profitability of its business operations Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
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on-cash foreign currency translation charges
. Wright excludes the non-cash foreign currency translation charges from its non-GAAP financial measures, primarily because such charges are not reflective of Wright’s ongoing operating results, and are not used by management to assess the core profitability of its business operations. Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
BioMimetic CVR mark-to-market adjustments
. Wright excludes the adjustment of the mark-to-market adjustments on the contingent value rights associated with acquired assets and liabilities from its BioMimetic acquisition from its non-GAAP financial measures, primarily because it is not reflective of Wright’s ongoing operating results, and it is not used by management to assess the core profitability of its business operations. Wright further believes that excluding this item from its non-GAAP results is useful to investors in that such exclusion allows for period-over-period comparability.
Contingent consideration fair value adjustment
. Wright excludes the fair value adjustment of its contingent consideration from its non-GAAP measures, primarily because it is not reflective of Wright’s ongoing operating results, and it is not used by management to assess the core profitability of its business operations. Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Tax benefit related to realizability of net operating losses
. Wright excludes a tax benefit related to a change in the realizability of certain U.S. net operating losses following the completion of a tax project from its non-GAAP financial measures, primarily because they are not reflective of its ongoing operating results, and they are not used by management to assess the core profitability of its business operations. Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
U.S. tax provision (benefit) within continuing operations
. Wright excludes the U.S. tax provision (benefit) within continuing operations recorded as a result of the pre-tax gain recognized within discontinued operations due to the previously announced $30.75 million insurance settlement from its non-GAAP measures, primarily because it is not reflective of Wright’s ongoing operating results, and it is not used by management to assess the core profitability of its business operations. Wright further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Income tax effects of the foregoing
. This amount is used to present each of the amounts described above, except for foreign currency exchange rate impact on net sales, on an after-tax basis consistent with the presentation of net income, as adjusted.
Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial measures used by other companies. In addition, non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of Wright’s non-GAAP financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such measures for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with Wright’s financial results as determined in accordance with GAAP. These measures should only be used to evaluate Wright’s financial results in conjunction with the corresponding GAAP measures. Accordingly, Wright qualifies its use of non-GAAP financial information in a statement when non-GAAP financial information is presented.
All of the historical non-GAAP financial measures used in Wright’s press release are reconciled to the most directly comparable GAAP measure. With respect to Wright’s 2018 financial guidance regarding adjusted EBITDA from continuing operations and long-term financial targets for 2019 through 2021, Wright cannot provide a quantitative reconciliation to the most directly comparable GAAP measure without unreasonable effort due to its inability to make accurate projections and estimates related to certain information needed to calculate some of the adjustments. However, Wright has described in this report the anticipated differences between these non-GAAP financial measures and the most directly comparable GAAP measure qualitatively.