Acelity L.P. Inc. - FORM 8-K - EX-99.1 - EXHIBIT 99.1 FOURTH QUARTER AND FULL YEAR FINANCIAL RESULTS FOR 2014 - February 17, 2015

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ACELITY L.P. INC. REPORTS
FOURTH QUARTER AND FULL YEAR FINANCIAL RESULTS FOR 2014

- Fourth quarter revenue grew 6.5% compared to the prior-year period, on a constant currency basis

- Fourth quarter 2014 Adjusted EBITDA from continuing operations1 grew 5.4% compared to the prior-year period, on a constant currency basis

- Fourth quarter loss from continuing operations was $30.9 million compared to $52.0 million for the prior-year period

“I am pleased with our execution in the fourth quarter, which has again led to solid financial performance and continued momentum in the business, particularly within Advanced Wound Therapeutics devices where we reached record volumes,” said Joe Woody, President and Chief Executive Officer. “Our Systagenix integration continues as planned and is translating into a strategic growth platform for Acelity. We continue to make focused investments in market development, geographic expansion and innovation to further accelerate growth for the long term.”

Results of the fourth quarter and year ended December 31, 2014

Acelity revenue for the fourth quarter of 2014 was $482.7 million, up from the prior-year period by 4.4% as reported and 6.5% on a constant currency basis.
•
Advanced Wound Therapeutics ("AWT") revenue was $369.0 million, up 7.6% as reported and 10.3% on a constant currency basis, compared to the prior-year period. Excluding Systagenix, AWT revenue grew 6.0% on a constant currency basis due primarily to NPWT volume growth during the quarter. The remaining AWT growth was fueled by the fourth quarter 2013 addition of Systagenix to our global portfolio of product offerings.
•
Regenerative Medicine revenue was $109.3 million, down 5.9% as reported and 5.4% on a constant currency basis, compared to the prior-year period. The decline was primarily due to lower volumes associated with hernia repair procedures, partially offset by growth in breast reconstruction and growth in international markets.

Adjusted EBITDA from continuing operations for the fourth quarter of 2014 increased 3.6% to $198.3 million from $191.5 million in the prior-year period. The growth rate of Adjusted EBITDA from continuing operations was negatively impacted by 1.8% due to unfavorable movements in foreign exchange rates. Our loss from continuing operations for the fourth quarter of 2014 was $30.9 million, compared to $52.0 million in the prior-year period.

Acelity revenue for the year ended December 31, 2014, was $1.866 billion, up from the prior year by 7.7% as reported and 8.3% on a constant currency basis.
•
AWT revenue was $1.420 billion, up 10.3% as reported and 11.1% on a constant currency basis, compared to the prior year. Year-over-year revenue growth was primarily the result of our acquisition of Systagenix in the fourth quarter of 2013. Excluding Systagenix, our AWT business declined 1.9% on a constant currency basis due primarily to lower average pricing resulting from increased competition, healthcare reform and declining reimbursement. Higher volumes from our North America NPWT business and continued growth in the fastest growing markets around the globe partially offset this decline.
•
Regenerative Medicine revenue was $428.1 million, down 3.2% as reported and 3.1% on a constant currency basis, compared to the prior year. This decline was due primarily to reduced volumes in our hernia repair business, partially offset by growth in our breast reconstruction business and continued international growth.

Adjusted EBITDA from continuing operations for the year ended December 31, 2014, declined 0.8% to $712.1 million from $717.6 million in the prior year. On a constant currency basis, Adjusted EBITDA from continuing operations for the year ended




December 31, 2014 declined 0.2%. Our loss from continuing operations for the year ended December 31, 2014 was $235.0 million compared to $555.1 million in the prior year.

Financial Position

Total cash at December 31, 2014, was $183.5 million. During 2014, Acelity generated cash of $91.8 million from operations, used cash of $78.3 million in investing activities and used cash of $28.7 million in financing activities.

As of December 31, 2014, total long-term debt outstanding was $4.84 billion and our Net Leverage Ratio2 was 6.2x.

Key Highlights

The Company's key highlights include:
•
Achieving double digit volume growth in U.S. AWT devices business;
•
Attaining new record for AWT devices volumes in the fourth quarter of 2014;
•
Delivering record PrevenaTM Incision Management System revenues on further market expansion;
•
Recent clinical data on ABTheraTM Open Abdomen Negative Pressure Therapy published in the Annals of Surgery observed a greater than 50% reduction in 90-day mortality in patients who received ABThera versus the traditional Barker's vacuum- packing technique for treatment of the open abdomen;
•
In October, Acelity announced the appointment of Greg Kayata as Senior Vice President, Human Resources;
•
In November, Acelity announced the appointment of Thomas Casey as Executive Vice President and Chief Financial Officer;
•
In December, Acelity announced the appointment of Gaurav S. Agarwal as Group President, Businesses and Innovation.

Acquisition of Systagenix

In the fourth quarter of 2013, we closed the acquisition of Systagenix, an established provider of advanced wound therapeutics products. Financial results of Systagenix are included within our consolidated financial statements for the period subsequent to the acquisition date. Combining Systagenix' advanced wound dressings with our KCI wound care business and innovation pipeline has enabled us to create additional value for customers by providing more complete solutions for patients and clinicians.

Transfer of SPY® Elite System Marketing and Distribution Rights

On October 29, 2014, LifeCell Corporation entered into an agreement with Novadaq® Technologies Inc. (“Novadaq”) to transfer all marketing and distribution rights to the SPY® Elite System from LifeCell to Novadaq, effective November 30, 2014. In connection with the transfer, the parties agreed to terminate various distribution agreements entered into between 2010 and 2011. The U.S. agreement for the core fields of plastic, general and gastrointestinal surgeries was set to expire in November 2015. The termination agreement provided for a one-time payment of $4.5 million to LifeCell on November 30, 2014, and the repurchase of existing inventory. These operations are classified as gain (loss) from discontinued operations, net of tax within the accompanying Condensed Consolidated Statements of Operations.

Company Structure

Acelity is a non-operating holding company whose business is comprised of the operations of wholly owned subsidiaries that commercialize our advanced wound therapeutics and regenerative medicine products. Our Advanced Wound Therapeutics business is conducted by KCI and its subsidiaries, including Systagenix, and our Regenerative Medicine business is conducted by LifeCell. Acelity is controlled by investment funds advised by Apax Partners and controlled affiliates of Canada Pension Plan Investment Board, the Public Sector Pension Investment Board and certain other co-investors.  Unless otherwise noted in this report, the terms “we,” “our” or “Company,” refer to Acelity and its subsidiaries, collectively.

Non-GAAP Financial Information

Within this document, we have presented 1) Adjusted EBITDA from continuing operations, as defined in our senior secured credit agreement and 2) supplemental revenue and EBITDA data to exclude the impact of foreign currency fluctuations on a non-GAAP basis.

These non-GAAP financial measures do not replace the presentation of our GAAP results. We have provided this supplemental non-GAAP information because it may provide meaningful information regarding our results on a basis that better facilitates an understanding of our results of operations which may not be otherwise apparent under GAAP. Management uses this non-GAAP




financial information, along with GAAP information, for reviewing the operating results of its business segments and for analyzing potential future business trends. In addition, we believe some investors may use this information in a similar fashion. A reconciliation of certain GAAP selected financial information for the periods presented to the non-GAAP selected financial information provided is included herein.


1Adjusted EBITDA from continuing operations excludes the operations of our previously divested TSS business, the impact of our SPY Elite business and the impact of merger-related expenses, foreign currency gains or losses, business optimization expenses and other expenses specified in the reconciliation within this release.

2 The Net Leverage Ratio represents Net Debt divided by Consolidated EBITDA for the last twelve months. Net Debt consists of total indebtedness including capital leases and other financing obligations, less cash and cash equivalents up to the greater of$300.0 million or 40% of Consolidated EBITDA for the last twelve months. Consolidated EBITDA, as defined in our senior secured credit agreement, represents Adjusted EBITDA from continuing operations plus "run rate" cost savings.


FOR MORE INFORMATION, CONTACT:
Investors

Caleb Moore
Office: (210) 255-6433
caleb.moore@acelity.com
 
News Media
Mike Barger
Office: (210) 255-6824
mike.barger@acelity.com





ACELITY L.P. INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands)
(unaudited)

 
Three months ended December 31,
 
Year ended December 31,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
$
192,415

 
$
179,135

 
7.4
 %
 
$
719,864

 
$
743,818

 
(3.2
)%
Sales
290,318

 
283,247

 
2.5

 
1,146,475

 
989,083

 
15.9

Total revenue
482,733

 
462,382

 
4.4

 
1,866,339

 
1,732,901

 
7.7

 
 
 
 
 
 
 
 
 
 
 
 
Rental expenses
78,643

 
83,987

 
(6.4
)
 
332,762

 
353,504

 
(5.9
)
Cost of sales
78,092

 
76,522

 
2.1

 
323,363

 
251,842

 
28.4

Gross profit
325,998

 
301,873

 
8.0

 
1,210,214

 
1,127,555

 
7.3

 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
205,908

 
175,172

 
17.5

 
713,554

 
684,601

 
4.2

Research and development expenses
17,719

 
19,484

 
(9.1
)
 
69,321

 
75,577

 
(8.3
)
Acquired intangible asset amortization
47,072

 
49,448

 
(4.8
)
 
194,433

 
188,571

 
3.1

Wake Forest settlement
—

 
—

 
—

 
198,578

 
—

 
—

Impairment of goodwill and intangible assets
—

 
—

 
—

 
—

 
443,400

 
—

Operating earnings (loss)
55,299

 
57,769

 
(4.3
)
 
34,328

 
(264,594
)
 
(113.0
)
 
 
 
 
 
 
 
 
 
 
 
 
Interest income and other
3,422

 
323

 
—

 
3,667

 
1,602

 
128.9

Interest expense
(104,258
)
 
(104,733
)
 
(0.5
)
 
(412,733
)
 
(419,877
)
 
(1.7
)
Loss on extinguishment of debt
—

 
—

 
—

 
—

 
(2,364
)
 
—

Foreign currency gain (loss)
4,157

 
(10,291
)
 
—

 
17,844

 
(22,226
)
 
—

Derivative instruments gain (loss)
(2,513
)
 
(1,624
)
 
54.7

 
(5,183
)
 
1,576

 
—

Loss from continuing operations before income tax benefit
(43,893
)
 
(58,556
)
 
(25.0
)
 
(362,077
)
 
(705,883
)
 
(48.7
)
Income tax benefit
(12,965
)
 
(6,572
)
 
97.3

 
(127,031
)
 
(150,792
)
 
(15.8
)
Loss from continuing operations
(30,928
)
 
(51,984
)
 
(40.5
)
 
(235,046
)
 
(555,091
)
 
(57.7
)
Gain (loss) from discontinued operations, net of tax
1,392

 
(751
)
 
—

 
4,573

 
(3,567
)
 
—

Net loss
$
(29,536
)
 
$
(52,735
)
 
(44.0
)%
 
$
(230,473
)
 
$
(558,658
)
 
(58.7
)%









ACELITY L.P. INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)

 
December 31,
2014
 
December 31,
2013
Assets:
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
183,541

 
$
206,949

Accounts receivable, net
370,483

 
407,578

Inventories, net
178,222

 
181,567

Deferred income taxes
63,025

 
23,621

Prepaid expenses and other
27,563

 
53,161

Total current assets
822,834

 
872,876

 
 
 
 
Net property, plant and equipment
288,048

 
333,725

Debt issuance costs, net
77,896

 
102,054

Deferred income taxes
31,692

 
31,459

Goodwill
3,378,298

 
3,378,661

Identifiable intangible assets, net
2,397,251

 
2,549,201

Other non-current assets
4,694

 
4,669

 
 
 
 
 
$
7,000,713

 
$
7,272,645

 
 
 
 
Liabilities and Equity:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
51,827

 
$
50,316

Accrued expenses and other
343,484

 
328,975

Current installments of long-term debt
25,721

 
26,311

Income taxes payable
1,305

 
3,368

Deferred income taxes
113,658

 
2,199

Total current liabilities
535,995

 
411,169

 
 
 
 
Long-term debt, net of current installments and discount
4,815,290

 
4,865,503

Non-current tax liabilities
33,300

 
53,682

Deferred income taxes
792,157

 
1,003,784

Other non-current liabilities
163,258

 
40,432

Total liabilities
6,340,000

 
6,374,570

Equity:
 
 
 
General partner’s capital
—

 
—

Limited partners’ capital
670,787

 
900,218

Accumulated other comprehensive loss, net
(10,074
)
 
(2,143
)
Total equity
660,713

 
898,075

 
 
 
 
 
$
7,000,713

 
$
7,272,645










ACELITY L.P. INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)

 
Year ended December 31,
 
2014
 
2013
Cash flows from operating activities:
(unaudited)
 
 
Net loss
$
(230,473
)
 
$
(558,658
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of debt issuance costs and discount
38,966

 
35,838

Depreciation and other amortization
303,905

 
335,959

Loss (gain) on disposition of assets
(900
)
 
4,423

Amortization of fair value step-up in inventory
6,680

 
3,162

Fixed asset and inventory impairment
—

 
30,580

Impairment of goodwill and intangible assets
—

 
443,400

Write-off of other intangible assets
—

 
16,885

Provision for bad debt
14,032

 
7,308

Loss on extinguishment of debt
—

 
2,364

Gain on sale of investment
(3,211
)
 
—

Equity-based compensation expense
4,033

 
2,925

Deferred income tax benefit
(159,170
)
 
(187,089
)
Unrealized gain on derivative instruments
(10,670
)
 
(4,645
)
Unrealized loss (gain) on revaluation of cross currency debt
(39,756
)
 
14,450

Change in assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable, net
26,596

 
(10,924
)
Increase in inventories, net
(3,096
)
 
(17,171
)
Decrease (increase) in prepaid expenses and other
19,308

 
(9,338
)
Increase in accounts payable
1,608

 
1,137

Increase in accrued expenses and other
125,677

 
20,449

Increase (decrease) in tax liabilities, net
(1,734
)
 
5,724

Net cash provided by operating activities
91,795

 
136,779

 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(66,584
)
 
(80,911
)
Decrease (increase) in inventory to be converted into equipment for short-term rental
(3,563
)
 
1,286

Dispositions of property, plant and equipment
3,652

 
1,298

Proceeds from disposition of assets
5,212

 
—

Proceeds from sale of investment
4,211

 
—

Business acquired in purchase transaction, net of cash acquired
(9,613
)
 
(478,748
)
Increase in identifiable intangible assets and other non-current assets
(11,587
)
 
(6,747
)
Net cash used by investing activities
(78,272
)
 
(563,822
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Distribution to limited partners
—

 
(1,572
)
Settlement of profits interest units
(2,332
)
 
(176
)
Repayments of long-term debt and capital lease obligations
(26,403
)
 
(69,396
)
Payment of debt issuance costs
—

 
(20,477
)
Acquisition financing for Systagenix:
 
 
 
Proceeds from borrowings on Incremental Term Loan
—

 
349,563

Payment of debt issuance costs
—

 
(7,340
)
Net cash provided (used) by financing activities
(28,735
)
 
250,602

Effect of exchange rate changes on cash and cash equivalents
(8,196
)
 
240

Net decrease in cash and cash equivalents
(23,408
)
 
(176,201
)
Cash and cash equivalents, beginning of period
206,949

 
383,150

Cash and cash equivalents, end of period
$
183,541

 
$
206,949





ACELITY L.P. INC. AND SUBSIDIARIES
Reconciliation from GAAP to Non-GAAP
Supplemental Revenue Data
(dollars in thousands)
(unaudited)
 
Three months ended December 31,
 
GAAP % Change
 
Constant Currency % Change (1)
 
2014
 
2013 GAAP
 
 
 
GAAP
 
FX Impact
 
Constant
Currency
 
 
 
Advanced Wound Therapeutics revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
$
192,415

 
$
2,346

 
$
194,761

 
$
179,135

 
7.4
 %
 
8.7
 %
Sales
176,630

 
6,765

 
183,395

 
163,726

 
7.9

 
12.0

  Total
369,045

 
9,111

 
378,156

 
342,861

 
7.6

 
10.3

 
 
 
 
 
 
 
 
 
 
 
 
Regenerative Medicine revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
109,298

 
659

 
109,957

 
116,181

 
(5.9
)
 
(5.4
)
 
 
 
 
 
 
 
 
 
 
 
 
Other revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
4,390

 
121

 
4,511

 
3,340

 
31.4

 
35.1

 
 
 
 
 
 
 
 
 
 
 
 
Total Revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
192,415

 
2,346

 
194,761

 
179,135

 
7.4

 
8.7

Sales
290,318

 
7,545

 
297,863

 
283,247

 
2.5

 
5.2

  Total
$
482,733

 
$
9,891

 
$
492,624

 
$
462,382

 
4.4
 %
 
6.5
 %


 
Year ended December 31,
 
GAAP % Change
 
Constant Currency % Change (1)
 
2014
 
2013 GAAP
 
 
 
GAAP
 
FX Impact
 
Constant
Currency
 
 
 
Advanced Wound Therapeutics revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
$
719,864

 
$
2,796

 
$
722,660

 
$
743,818

 
(3.2
)%
 
(2.8
)%
Sales
700,414

 
7,324

 
707,738

 
543,569

 
28.9

 
30.2

  Total
1,420,278

 
10,120

 
1,430,398

 
1,287,387

 
10.3

 
11.1

 
 
 
 
 
 
 
 
 
 
 
 
Regenerative Medicine revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
428,089

 
582

 
428,671

 
442,174

 
(3.2
)
 
(3.1
)
 
 
 
 
 
 
 
 
 
 
 
 
Other revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
17,972

 
(110
)
 
17,862

 
3,340

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total Revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
719,864

 
2,796

 
722,660

 
743,818

 
(3.2
)
 
(2.8
)
Sales
1,146,475

 
7,796

 
1,154,271

 
989,083

 
15.9

 
16.7

  Total
$
1,866,339

 
$
10,592

 
$
1,876,931

 
$
1,732,901

 
7.7
 %
 
8.3
 %

(1) Represents percentage change between 2014 non-GAAP Constant Currency revenue and 2013 GAAP revenue.





ACELITY L.P. INC. AND SUBSIDIARIES
Reconciliation from GAAP to Non-GAAP
Selected Financial Information
(dollars in thousands)
(unaudited)

 
Three months ended December 31,
 
Year ended December 31,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net loss
$
(29,536
)
 
$
(52,735
)
 
$
(230,473
)
 
$
(558,658
)
Loss (gain) from discontinued operations, net of tax
(1,392
)
 
751

 
(4,573
)
 
3,567

Interest expense, net of interest income
104,165

 
104,689

 
412,438

 
419,337

Income tax benefit
(12,965
)
 
(6,572
)
 
(127,031
)
 
(150,792
)
Foreign currency (gain) loss
(4,157
)
 
10,291

 
(17,844
)
 
22,226

Depreciation and other amortization
69,391

 
83,933

 
303,905

 
335,959

Derivative instruments (gain) loss
2,513

 
1,624

 
5,183

 
(1,576
)
Management fees and expenses
1,356

 
4,787

 
5,050

 
8,910

Equity-based compensation expense
1,067

 
879

 
4,033

 
2,925

Acquisition, disposition and financing expenses (1)
793

 
13,518

 
5,885

 
36,364

Business optimization expenses(2)
24,740

 
22,832

 
79,412

 
91,525

Wake Forest settlement
—

 
—

 
198,578

 
—

Other permitted expenses (3)
42,357

 
7,493

 
77,553

 
507,777

Adjusted EBITDA from continuing operations
198,332

 
191,490

 
712,116

 
717,564

Adjusted EBITDA from discontinued operations (4)
1,365

 
263

 
6,537

 
(927
)
Total adjusted EBITDA
$
199,697

 
$
191,753

 
$
718,653

 
$
716,637

 
 
 
 
 
 
 
 
Adjusted EBITDA from continuing operations as a percentage of revenue
41.1
%
 
41.4
%
 
38.2
%
 
41.4
%

(1) Represents labor, travel, training, consulting and other costs associated with acquisition, disposition and financing activities, such as the acquisition of Systagenix, technology acquisitions and the repricing of our senior secured credit facility.
(2) Represents labor, travel, training, consulting and other costs associated exclusively with our business optimization initiatives.
(3) Represents charges for the impairment of goodwill, intangible assets and fixed assets, the write-off of in-process research and development and other intangible assets, amortization of the fair value step-up in inventory, litigation settlement and other permitted expenses.
(4) Adjusted EBITDA from discontinued operations includes the (gain) loss from discontinued operations, excluding any related gain or loss on
disposition of assets, adjusted as defined in our senior secured credit agreement.


 
 
 
GAAP % Change
 
Constant Currency % Change (1)
 
2014
 
2013 GAAP
 
 
 
GAAP
 
FX Impact
 
Constant
Currency
 
 
 
Three months ended December 31,
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA from continuing operations
$
198,332

 
$
3,511

 
$
201,843

 
191,490

 
3.6
 %
 
5.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA from continuing operations
712,116

 
4,366

 
$
716,482

 
717,564

 
(0.8
)%
 
(0.2
)%





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