Attached files

file filename
EX-99.1 - EX-99.1 - DJO Finance LLCdjo-ex991_235.htm
EX-32.2 - EX-32.2 - DJO Finance LLCdjo-ex322_8.htm
EX-32.1 - EX-32.1 - DJO Finance LLCdjo-ex321_177.htm
EX-31.2 - EX-31.2 - DJO Finance LLCdjo-ex312_178.htm
EX-31.1 - EX-31.1 - DJO Finance LLCdjo-ex311_179.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2016

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission File Number: 333-142188

 

DJO Finance LLC

(Exact name of Registrant as specified in its charter)

 

 

State of Delaware

20-5653965

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

1430 Decision Street

Vista, California

92081

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (800) 336-5690

 

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.    Yes  ¨    No  x    (Note: As of January 1, 2014, the registrant was no longer subject to the filing requirements of Section 13 or 15(d) of the Exchange Act; however, the registrant filed all reports required to be filed during the period it was subject to Section 13 or 15(d) of the Exchange Act.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

x  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 2, 2016, 100% of the issuer’s membership interests were owned by DJO Holdings LLC.

 

 

 

 


DJO Finance LLC

INDEX

 

 

 

 

Page
Number

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

1

 

Unaudited Condensed Consolidated Balance Sheets as of July 1, 2016 and December 31, 2015

 

1

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2016 and June 27, 2015

 

2

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended July 1, 2016 and June 27, 2015

 

3

 

Unaudited Condensed Consolidated Statement of Deficit for the six months ended July 1, 2016

 

4

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2016 and June 27, 2015

 

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 4.

Controls and Procedures

 

45

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

46

Item 1A.

Risk Factors

 

46

Item 5.

Other Information

 

46

Item 6.

Exhibits

 

47

 

 

 


PART 1 – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

July 1,

2016

 

 

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,699

 

 

$

48,943

 

Accounts receivable, net

 

 

177,128

 

 

 

172,360

 

Inventories, net

 

 

177,548

 

 

 

174,573

 

Prepaid expenses and other current assets

 

 

22,309

 

 

 

21,179

 

Current assets of discontinued operations

 

 

 

 

 

2,878

 

Total current assets

 

 

418,684

 

 

 

419,933

 

Property and equipment, net

 

 

130,845

 

 

 

117,273

 

Goodwill

 

 

1,019,186

 

 

 

1,018,104

 

Intangible assets, net

 

 

710,549

 

 

 

749,045

 

Other assets

 

 

6,599

 

 

 

5,174

 

Non-current assets of discontinued operations

 

 

 

 

 

29

 

Total assets

 

$

2,285,863

 

 

$

2,309,558

 

Liabilities and Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

73,968

 

 

$

58,492

 

Accrued interest

 

 

11,062

 

 

 

16,998

 

Current portion of debt obligations

 

 

10,550

 

 

 

10,550

 

Other current liabilities

 

 

92,168

 

 

 

102,173

 

Current liabilities of discontinued operations

 

 

946

 

 

 

13,371

 

Total current liabilities

 

 

188,694

 

 

 

201,584

 

Long-term debt obligations

 

 

2,392,464

 

 

 

2,344,562

 

Deferred tax liabilities, net

 

 

219,930

 

 

 

213,856

 

Other long-term liabilities

 

 

21,319

 

 

 

15,092

 

Total liabilities

 

$

2,822,407

 

 

$

2,775,094

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Deficit:

 

 

 

 

 

 

 

 

DJO Finance LLC membership deficit:

 

 

 

 

 

 

 

 

Member capital

 

 

842,627

 

 

 

841,510

 

Accumulated deficit

 

 

(1,354,934

)

 

 

(1,293,339

)

Accumulated other comprehensive loss

 

 

(27,273

)

 

 

(16,341

)

Total membership deficit

 

 

(539,580

)

 

 

(468,170

)

Noncontrolling interests

 

 

3,036

 

 

 

2,634

 

Total deficit

 

 

(536,544

)

 

 

(465,536

)

Total liabilities and deficit

 

$

2,285,863

 

 

$

2,309,558

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

1


DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1,

2016

 

 

June 27,

2015

 

 

July 1,

2016

 

 

June 27,

2015

 

Net sales

 

$

292,852

 

 

$

279,902

 

 

$

571,758

 

 

$

527,413

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of amortization of intangible

   assets of $7,080 and $14,487 for the three and six

   months ended July 1, 2016 and $7,535 and $15,070 for

   the three and six months ended June 27, 2015, respectively)

 

 

120,474

 

 

 

117,770

 

 

 

238,557

 

 

 

219,654

 

Selling, general and administrative

 

 

121,627

 

 

 

108,612

 

 

 

243,556

 

 

 

215,797

 

Research and development

 

 

10,122

 

 

 

8,688

 

 

 

19,976

 

 

 

17,552

 

Amortization of intangible assets

 

 

19,085

 

 

 

19,818

 

 

 

38,663

 

 

 

39,646

 

 

 

 

271,308

 

 

 

254,888

 

 

 

540,752

 

 

 

492,649

 

Operating income

 

 

21,544

 

 

 

25,014

 

 

 

31,006

 

 

 

34,764

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(42,396

)

 

 

(44,564

)

 

 

(84,666

)

 

 

(87,430

)

Loss on extinguishment of debt

 

 

-

 

 

 

(67,967

)

 

 

-

 

 

 

(67,967

)

Other income (expense), net

 

 

468

 

 

 

743

 

 

 

752

 

 

 

(3,413

)

 

 

 

(41,928

)

 

 

(111,788

)

 

 

(83,914

)

 

 

(158,810

)

Loss before income taxes

 

 

(20,384

)

 

 

(86,774

)

 

 

(52,908

)

 

 

(124,046

)

Income tax provision

 

 

(3,577

)

 

 

(5,911

)

 

 

(8,990

)

 

 

(7,856

)

Net loss from continuing operations

 

 

(23,961

)

 

 

(92,685

)

 

 

(61,898

)

 

 

(131,902

)

Net income from discontinued operations

 

 

855

 

 

 

14,873

 

 

 

665

 

 

 

18,865

 

Net loss

 

 

(23,106

)

 

 

(77,812

)

 

 

(61,233

)

 

 

(113,037

)

Net income attributable to noncontrolling interests

 

 

(169

)

 

 

(165

)

 

 

(362

)

 

 

(466

)

Net loss attributable to DJO Finance LLC

 

$

(23,275

)

 

$

(77,977

)

 

$

(61,595

)

 

$

(113,503

)

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

2


DJO Finance LLC

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1,

2016

 

 

June 27,

2015

 

 

July 1,

2016

 

 

June 27,

2015

 

Net loss

 

$

(23,106

)

 

$

(77,812

)

 

$

(61,233

)

 

$

(113,037

)

Other comprehensive (loss) income, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax benefit (provision) of $111 and $(166) for the three

and six months ended July 1, 2016 and $(152) and $340

for the three and six months ended June 27, 2015, respectively

 

 

(8,458

)

 

 

4,137

 

 

 

(2,850

)

 

 

(5,305

)

Unrealized loss on cash flow hedges, net of tax provision of zero for the three and six months ended July 1, 2016

 

 

(2,651

)

 

 

 

 

 

(8,042

)

 

 

 

Other comprehensive (loss) income

 

 

(11,109

)

 

 

4,137

 

 

 

(10,892

)

 

 

(5,305

)

Comprehensive loss

 

 

(34,215

)

 

 

(73,675

)

 

 

(72,125

)

 

 

(118,342

)

Comprehensive income attributable to noncontrolling interests

 

 

(101

)

 

 

(243

)

 

 

(402

)

 

 

(260

)

Comprehensive loss attributable to DJO Finance LLC

 

$

(34,316

)

 

$

(73,918

)

 

$

(72,527

)

 

$

(118,602

)

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

3


DJO Finance LLC

Unaudited Condensed Consolidated Statements of Deficit

(in thousands)

 

 

 

DJO Finance LLC

 

 

 

 

 

 

 

 

 

 

 

Member

capital

 

 

Accumulated

deficit

 

 

Accumulated

other

comprehensive

loss

 

 

Total

membership

deficit

 

 

Non-controlling

interests

 

 

Total

deficit

 

Balance at December 31, 2015

 

$

841,510

 

 

$

(1,293,339

)

 

$

(16,341

)

 

$

(468,170

)

 

$

2,634

 

 

$

(465,536

)

Net (loss) income

 

 

 

 

 

(61,595

)

 

 

 

 

 

(61,595

)

 

 

362

 

 

 

(61,233

)

Other comprehensive (loss) income, net of taxes

 

 

 

 

 

 

 

 

(10,932

)

 

 

(10,932

)

 

 

40

 

 

 

(10,892

)

Stock-based compensation

 

 

1,521

 

 

 

 

 

 

 

 

 

1,521

 

 

 

 

 

 

1,521

 

Exercise of stock options

 

 

(404

)

 

 

 

 

 

 

 

 

(404

)

 

 

 

 

 

(404

)

Balance at July 1, 2016

 

$

842,627

 

 

$

(1,354,934

)

 

$

(27,273

)

 

$

(539,580

)

 

$

3,036

 

 

$

(536,544

)

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

4


DJO Finance LLC

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended

 

 

 

July 1,

2016

 

 

June 27,

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(61,233

)

 

$

(113,037

)

Net income from discontinued operations

 

 

(665

)

 

 

(18,865

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

20,513

 

 

 

16,837

 

Amortization of intangible assets

 

 

38,663

 

 

 

39,646

 

Amortization of debt issuance costs and non-cash interest expense

 

 

3,815

 

 

 

4,235

 

Stock-based compensation expense

 

 

1,521

 

 

 

1,152

 

Loss on disposal of assets, net

 

 

530

 

 

 

258

 

Deferred income tax expense

 

 

3,812

 

 

 

3,735

 

Loss on modification and extinguishment of debt

 

 

-

 

 

 

67,967

 

Changes in operating assets and liabilities, net of acquired assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,209

)

 

 

(5,949

)

Inventories

 

 

(5,650

)

 

 

(8,751

)

Prepaid expenses and other assets

 

 

(637

)

 

 

(2,032

)

Accrued interest

 

 

(5,937

)

 

 

(5,420

)

Accounts payable and other current liabilities

 

 

(2,589

)

 

 

(1,945

)

Net cash used in continuing operating activities

 

 

(12,066

)

 

 

(22,169

)

Net cash (used in) provided by discontinued operations

 

 

(8,853

)

 

 

29,397

 

Net cash (used in) provided by operating activities

 

 

(20,919

)

 

 

7,228

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(31,500

)

 

 

(16,608

)

Proceeds from disposition of assets

 

 

700

 

 

 

 

Net cash used in investing activities from continuing operations

 

 

(30,800

)

 

 

(16,608

)

Net cash used in investing activities from discontinued

   operations

 

 

 

 

 

(451

)

Net cash used in investing activities

 

 

(30,800

)

 

 

(17,059

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

63,000

 

 

 

2,445,826

 

Repayments of debt obligations

 

 

(18,913

)

 

 

(2,356,121

)

Payment of debt issuance, modification and extinguishment costs

 

 

-

 

 

 

(61,662

)

Net cash provided by financing activities

 

 

44,087

 

 

 

28,043

 

Effect of exchange rate changes on cash and cash equivalents

 

 

388

 

 

 

(971

)

Net (decrease) increase in cash and cash equivalents

 

 

(7,244

)

 

 

17,241

 

Cash and cash equivalents at the beginning of the period

 

 

48,943

 

 

 

31,144

 

Cash and cash equivalents at the end of the period

 

$

41,699

 

 

$

48,385

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

86,793

 

 

$

88,506

 

Cash paid for taxes, net

 

$

2,684

 

 

$

3,753

 

 

 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of surgical instruments included in accounts payable

 

$

4,234

 

 

$

2,383

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

5


Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization and Business

We are a global developer, manufacturer and distributor of medical devices that provide solutions for musculoskeletal health, vascular health and pain management. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee and shoulder.

DJO Finance LLC (DJOFL) is a wholly owned indirect subsidiary of DJO Global, Inc. (DJO). Substantially all business activities of DJO are conducted by DJOFL and its wholly owned subsidiaries. Except as otherwise indicated, references to “us,” “we,” “DJOFL,” “our,” or “the Company,” refers to DJOFL and its consolidated subsidiaries.

Segment Reporting

We market and distribute our products through four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant; and International. Our Bracing and Vascular, Recovery Sciences, and Surgical Implant segments generate their revenues within the United States. Our Bracing and Vascular segment offers rigid knee braces, orthopedic soft goods, cold therapy products, vascular systems, compression therapy products and therapeutic footwear for the diabetes care market. Our Recovery Sciences segment offers home electrotherapy, iontophoresis, home traction products, bone growth stimulation products and clinical physical therapy equipment. Our Surgical Implant segment offers a comprehensive suite of reconstructive joint products for the knee, hip and shoulder. Our International segment offers all of our products to customers outside the United States. See Note 15 for additional information about our reportable segments.

During the fourth quarter of 2015, we ceased manufacturing, selling and distributing products of our Empi business and the related insurance billing operations domestically. The Empi business primarily manufactured and sold transcutaneous electrical nerve stimulation (TENS) devices for pain relief, other electrotherapy and orthopedic products and the related supplies.  Empi was facing a challenging regulatory and compliance environment, decreasing reimbursement rates and remained below the level needed to reach adequate profitability within an economically justified period of time. Empi was part of our Recovery Sciences operating segment. For financial statement purposes, the results of the Empi business are reported within discontinued operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are used in accounting for, among other things, contractual allowances, rebates, product returns, warranty obligations, allowances for doubtful accounts, valuation of inventories, self-insurance reserves, income taxes, loss contingencies, fair values of derivative instruments, fair values of long-lived assets and any related impairments, capitalization of costs associated with internally developed software and stock-based compensation. Actual results could differ from those estimates.

Basis of Presentation

We consolidate the results of operations of our 50% owned subsidiary, Medireha GmbH (Medireha), and reflect the 50% share of results not owned by us as non-controlling interests in our Consolidated Statements of Operations. We maintain control of Medireha through certain rights that enable us to prohibit certain business activities that are not consistent with our plans for the business and provide us with exclusive distribution rights for products manufactured by Medireha.


6


 

Interim Reporting

The accompanying Unaudited Condensed Consolidated Financial Statements include our accounts and all voting interest entities where we exercise a controlling financial interest through the ownership of a direct or indirect majority voting interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and with the instructions to Form 10–Q and Article 10 of Regulation S–X for interim financial information. Accordingly, these financial statements do not include all of the information required by GAAP or Securities and Exchange Commission (SEC) rules and regulations for complete annual financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The Company operates on a manufacturing calendar. Each quarter consists of thirteen weeks, two four week and one five week period. Our first quarters may have more or fewer shipping days from year to year based on the days of week holidays fall. The first half of 2016 had more shipping days than in the first half of 2015.

Recent Accounting Standards

In May 2014, the FASB issued an accounting standards update related to revenue from contracts with customers. The new standard provides a five-step approach to be applied to all contracts with customers. The accounting standards update also requires expanded disclosures about revenue recognition. On July 9, 2015, the FASB decided to defer the effective date of the standard. The guidance is now effective for fiscal years beginning after December 15, 2017 and interim periods within that reporting period. Early adoption is permitted as early as the original effective date of December 15, 2016. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

In April 2015, the FASB issued an accounting standards update related to the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early application is permitted. The Company has early adopted this update and the impact is reflected in the current and prior periods presented.

In April 2015, the FASB issued an accounting standards update related to internal-use software. The standard provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company adopted this ASU with prospective application in the first quarter of 2016. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In July 2015, the FASB issued an accounting standards update which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance does not apply to inventory that is measured using last-in, first-out (LIFO). The guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. Adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

In September 2015, the FASB issued an accounting standards update which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance also sets forth new disclosure requirements related to the adjustments. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In November 2015, the FASB issued an accounting standards update which requires all deferred income taxes be presented on the balance sheet as noncurrent. The new guidance is intended to simplify financial reporting by eliminating the requirement to classify deferred taxes between current and noncurrent. The guidance is effective for annual and interim periods beginning after December 15, 2016. The Company has early adopted this update and the impact is reflected prospectively in the Company’s financial statements.

7


In January 2016, the FASB issued an accounting standards update which affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This guidance retains the current accounting for classifying and measuring investments in debt securities and loans but requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. The guidance also changes the accounting for investments without a readily determinable fair value and that do not qualify for the practical expedient permitted by the guidance to estimate fair value. A policy election can be made for these investments whereby estimated fair value may be measured at cost and adjusted in subsequent periods for any impairment or changes in observable prices of identical or similar investments. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. Adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

In February 2016, the FASB issued an accounting standards update which affects the accounting for leases. The guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The amendment also will require qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We are still assessing the impact of adoption on our consolidated financial statements.

In March 2016, the FASB issued an accounting standards update which affects the accounting for employee share-based payments. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The guidance is effective for interim and annual reporting periods beginning after beginning after December 15, 2016. Early adoption is permitted. Adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

 

 

2. DIVESTITURES

 

Discontinued Operations

For disposal transactions that occur on or after January 1, 2015, a component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification, is disposed of by sale or is disposed of other than by sale (e.g. abandonment) if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. The Company has evaluated the quantitative and qualitative factors related to the disposal of the Empi business and concluded that those conditions for discontinued operations presentation have been met. For financial statement purposes, the Empi business financial results are reported within discontinued operations in the Consolidated Financial Statements.

 

Income (loss) from discontinued operations, net of taxes, is comprised of the following (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1,

2016

 

 

June 27,

2015

 

 

July 1,

2016

 

 

June 27,

2015

 

Net sales

 

$

 

 

$

30,941

 

 

$

 

 

$

63,531

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

7,766

 

 

 

 

 

 

15,124

 

Selling, general and administrative

 

 

 

 

 

10,412

 

 

 

 

 

 

22,999

 

Research and development

 

 

 

 

 

51

 

 

 

 

 

 

87

 

Amortization of intangible assets

 

 

 

 

 

2,281

 

 

 

 

 

 

4,563

 

Impairment of intangible assets

 

 

 

 

 

 

4,500

 

 

 

 

 

 

 

4,500

 

Other income

 

 

855

 

 

 

24

 

 

 

665

 

 

 

74

 

Income from discontinued operations before income taxes

 

$

855

 

 

$

5,955

 

 

$

665

 

 

$

16,332

 

Income tax benefit

 

 

 

 

 

8,918

 

 

 

 

 

 

2,533

 

Net income from discontinued operations

 

$

855

 

 

$

14,873

 

 

$

665

 

 

$

18,865

 

 

8


Net liabilities for discontinued operations are as follows (in thousands):

 

 

 

July 1,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Accounts receivable, net

 

$

 

 

$

2,743

 

Other current assets

 

 

 

 

 

135

 

Property and equipment, net

 

 

 

 

 

22

 

Intangible and other non-current assets

 

 

 

 

 

7

 

Total assets

 

 

 

 

 

2,907

 

Accounts payable and other liabilities

 

 

946

 

 

 

13,371

 

Net liabilities

 

$

(946

)

 

$

(10,464

)

 

 

3. ACCOUNTS RECEIVABLE RESERVES

A summary of activity in our accounts receivable reserves for doubtful accounts is presented below (in thousands):

 

 

 

Six Months Ended

 

 

 

July 1,

2016

 

 

June 27,

2015

 

Balance, beginning of period

 

$

32,893

 

 

$

23,585

 

Provision for doubtful accounts

 

 

11,861

 

 

 

12,014

 

Write-offs, net of recoveries

 

 

(11,495

)

 

 

(6,714

)

Balance, end of period

 

$

33,259

 

 

$

28,885

 

 

Our allowance for sales returns balance was $3.1 million and $3.7 million as of July 1, 2016 and June 27, 2015, respectively.

 

 

4. INVENTORIES

Inventories consist of the following (in thousands):

 

 

 

July 1,

2016

 

 

December 31,

2015

 

Components and raw materials

 

$

61,949

 

 

$

57,372

 

Work in process

 

 

9,908

 

 

 

10,330

 

Finished goods

 

 

94,810

 

 

 

99,167

 

Inventory held on consignment

 

 

33,721

 

 

 

29,746

 

 

 

 

200,388

 

 

 

196,615

 

Inventory reserves

 

 

(22,840

)

 

 

(22,042

)

 

 

$

177,548

 

 

$

174,573

 

 

A summary of the activity in our reserves for estimated slow moving, excess, obsolete and otherwise impaired inventory is presented below (in thousands):

 

 

 

Six Months Ended

 

 

 

July 1,

2016

 

 

June 27,

2015

 

Balance, beginning of period

 

$

22,042

 

 

$

22,094

 

Provision charged to costs of sales

 

 

4,922

 

 

 

2,714

 

Write-offs, net of recoveries

 

 

(4,124

)

 

 

(1,288

)

Balance, end of period

 

$

22,840

 

 

$

23,520

 

 

The write-offs to the reserve were principally related to the disposition of fully reserved inventory.

 

 

9


5. LONG-LIVED ASSETS

Goodwill

Changes in the carrying amount of goodwill for the six months ended July 1, 2016 are presented in the table below (in thousands):

 

 

 

Bracing &

Vascular

 

 

Recovery

Sciences

 

 

Surgical

Implant

 

 

International

 

 

Total

 

Balance, beginning of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

483,258

 

 

$

249,601

 

 

$

49,229

 

 

$

333,022

 

 

$

1,115,110

 

Accumulated impairment losses

 

 

 

 

 

(49,600

)

 

 

(47,406

)

 

 

 

 

 

(97,006

)

Goodwill, net of accumulated impairment losses at

   December 31, 2015

 

 

483,258

 

 

 

200,001

 

 

 

1,823

 

 

 

333,022

 

 

 

1,018,104

 

Current Year Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

1,082

 

 

 

1,082

 

Balance, end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

483,258

 

 

 

249,601

 

 

 

49,229

 

 

 

334,104

 

 

 

1,116,192

 

Accumulated impairment losses

 

 

 

 

 

(49,600

)

 

 

(47,406

)

 

 

 

 

 

(97,006

)

Goodwill, net of accumulated impairment losses at

   July 1, 2016

 

$

483,258

 

 

$

200,001

 

 

$

1,823

 

 

$

334,104

 

 

$

1,019,186

 

 

Intangible Assets

Identifiable intangible assets consisted of the following (in thousands):

 

July 1, 2016

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangible

Assets, Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

476,460

 

 

$

(343,667

)

 

$

132,793

 

Patents and technology

 

 

446,840

 

 

 

(260,982

)

 

 

185,858

 

Trademarks and trade names

 

 

29,756

 

 

 

(14,155

)

 

 

15,601

 

Distributor contracts and relationships

 

 

4,772

 

 

 

(4,230

)

 

 

542

 

Non-compete agreements

 

 

6,655

 

 

 

(6,085

)

 

 

570

 

 

 

$

964,483

 

 

$

(629,119

)

 

 

335,364

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

 

 

 

 

 

 

 

375,185

 

Net identifiable intangible assets

 

 

 

 

 

 

 

 

 

$

710,549

 

 

December 31, 2015

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangible

Assets, Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

475,776

 

 

$

(320,991

)

 

$

154,785

 

Patents and technology

 

 

446,854

 

 

 

(246,509

)

 

 

200,345

 

Trademarks and trade names

 

 

29,737

 

 

 

(12,695

)

 

 

17,042

 

Distributor contracts and relationships

 

 

4,693