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8-K - FORM 8-K - DJO Finance LLCd146753d8k.htm

Exhibit 99.1

 

LOGO

DJO Investor/Media Contact:

DJO Global, Inc.

Matt Simons

SVP Business Development and Investor Relations

760.734.5548

matt.simons@DJOglobal.com

FOR IMMEDIATE RELEASE

DJO GLOBAL ANNOUNCES FINANCIAL RESULTS FOR THIRD QUARTER

SAN DIEGO, CA, November 8, 2016 DJO Global, Inc. (“DJO” or the “Company”), a leading global provider of medical technologies designed to get and keep people moving, today announced financial results for its public reporting subsidiary, DJO Finance LLC (“DJOFL”), for the third quarter ended September 30, 2016.

Third Quarter Highlights

Net sales grew 3.2% quarter over quarter to $287.0 million

 

    Bracing & Vascular – 0.9% growth

 

    Recovery Sciences – 5.0% growth

 

    Surgical – 8.5% growth (28% organic growth)

 

    International - 3.5% growth (4.7% constant currency growth)

“During the third quarter, we had strong revenue growth in our Surgical, Recovery Sciences and International segments, offset by slower growth in our Bracing & Vascular segment,” said Mike Mogul, DJO’s President and Chief Executive Officer. “The Vascular business was impacted negatively, as we restored service in the quarter following challenges integrating that business into our Oracle ERP system. We also initiated the restructuring of our business units, in which we will fold our Recovery Sciences segment into our other business units, in order to streamline our costs and our operating model,” continued Mike Mogul.

 

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Sales Results

DJOFL achieved net sales for the third quarter of 2016 of $287.0 million, reflecting growth of 3.2%, compared with net sales of $278.3 million for the third quarter of 2015. Changes in foreign currency exchange rates did not have a material impact on the third quarter results.

Net sales for DJO’s Bracing and Vascular segment were $134.4 million in the third quarter of 2016, reflecting an increase of 0.9%, compared to the third quarter of 2015, due to continued momentum in DJO’s Consumer products, offset by continued market pressures in DJO’s Dr. Comfort business.

Net sales for DJO’s Recovery Sciences segment were $39.8 million in the third quarter of 2016, reflecting an increase of 5.0%, compared to the third quarter of 2015, driven by strong sales of Chattanooga rehabilitation equipment and Compex Muscle Stimulators.

Net sales for the Surgical Implant segment were $40.9 million for the third quarter of 2016, reflecting growth of 8.5% over net sales in the third quarter of 2015. The increase was primarily driven by strong organic growth of 27.6% across our existing Shoulder (23%), Hip (23%) and Knee (69%) products, partially offset by a decline of our acquired Biomet bone cement business.

Net sales for DJO’s International segment were $72.0 million in the third quarter of 2016, reflecting an increase of 3.5% (4.7% on a constant currency basis) from the third quarter of 2015, primarily driven by stronger sales in our established direct markets, especially in France, Canada, Italy, Spain and Australia, and increased sales penetration in emerging markets.

Earnings Results

For the third quarter of 2016, DJOFL reported a net loss attributable to DJOFL of $22.6 million, compared to a net loss of $177.8 million for the third quarter of 2015. As detailed in the attached financial tables, the results for the current and prior year third quarter periods and the current and prior year nine month periods were impacted by significant non-cash items, non-recurring items and other adjustments.

 

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Adjusted EBITDA for the third quarter of 2016 was $63.3 million, or 22.1% of net sales, reflecting a decrease of 0.2% as reported when compared with Adjusted EBITDA of $63.4 million, or 22.8% of net sales, for the third quarter of 2015. For the twelve months ended September 30, 2016, including cost savings programs currently underway of $13.8 million, Adjusted EBITDA was $258.5 million, or 22.2% percent of LTM net sales.

The Company defines Adjusted EBITDA as net (loss) income attributable to DJOFL plus interest expense, net, income tax provision (benefit), and depreciation and amortization, further adjusted for certain non-cash items, non-recurring items and other adjustment items as permitted in calculating covenant compliance under the Company’s senior secured credit facilities (“Senior Credit Facilities”) and the indentures governing its 8.125% second lien notes and its 10.75% third lien notes. Reconciliation between net loss and Adjusted EBITDA is included in the attached financial tables.

As of September 30, 2016, the Company had cash balances of $46.4 million and available liquidity of $78.8 million under its $150 million revolving credit facility.

“We also initiated the restructuring of our business units, with Recovery Sciences being folded into our other business units, in order to streamline our costs and our operating model,” continued Mike Mogul. “This restructuring addresses many of the stranded costs left from last year’s Empi discontinuation and will simplify our operating structure and costs.”

Conference Call Information

DJO has scheduled a conference call to discuss this announcement beginning at 1:00 pm, Eastern Time Tuesday, November 8, 2016. Individuals interested in listening to the conference call may do so by dialing (866) 394-8509 (International callers please use (706) 643-6833), using the reservation code 22322226. A telephone replay will be available for 48 hours following the conclusion of the call by dialing (855) 859-2056 and using the above reservation code. The live conference call and replay will be available via the Internet at www.DJOglobal.com.

 

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About DJO Global

DJO Global is a leading global provider of medical technologies designed to get and keep people moving. The Company’s 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. Its products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. In addition, many of the Company’s medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. The Company’s 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. The Company’s surgical division offers a comprehensive suite of reconstructive joint products for the hip, knee and shoulder. DJO Global’s products are marketed under a portfolio of brands including Aircast®, Chattanooga, CMF™, Compex®, DonJoy®, ProCare®, DJO® Surgical, Dr. Comfort® and ExosTM. For additional information on the Company, please visit www.DJOglobal.com.

Safe Harbor Statement

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements relate to, among other things, the Company’s expectations for its growth in revenue and Adjusted EBITDA and its opportunities to improve commercial execution and to develop new products and services. The words “believe,” “will,” “should,” “expect,” ”target,” “intend,” “estimate” and “anticipate,” variations of such words and similar expressions identify forward-looking statements, but their absence does not mean that a statement is not a forward-looking statement. These forward-looking statements are based on the Company’s current expectations and are subject to a number of risks, uncertainties and assumptions, many of which are beyond the Company’s ability to control or predict. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The important factors that could cause actual operating results to differ significantly from those expressed or implied by such forward-looking statements include, but are not limited to: the successful execution of the Company’s business strategies relative to its Bracing and Vascular, Recovery Sciences, International and Surgical Implant

 

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segments; the successful execution of the Company’s restructuring of its business units to realize anticipated cost savings; the continued growth of the markets the Company addresses and any impact on these markets from changes in global economic conditions; the successful execution of the Company’s acquisition strategies; the impact of potential reductions in reimbursement levels and coverage by Medicare and other governmental and commercial payors; the Company’s highly leveraged financial position; the Company’s ability to successfully develop, license or acquire, and timely introduce and market new products or product enhancements; risks relating to the Company’s international operations; resources needed and risks involved in complying with government regulations; costs associated with government investigations; the availability and sufficiency of insurance coverage for pending and future product liability claims; and the effects of healthcare reform, Medicare competitive bidding, managed care and buying groups on the prices of the Company’s products. These and other risk factors related to DJO are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 25, 2016. Many of the factors that will determine the outcome of the subject matter of this press release are beyond the Company’s ability to control or predict.

 

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DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(In thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2016
    September 26,
2015
    September 30,
2016
    September 26,
2015
 

Net sales

   $ 287,040      $ 278,263      $ 858,798      $ 805,676   

Operating expenses:

        

Cost of sales (exclusive of amortization, see note 1)

     122,533        114,239        361,090        333,893   

Selling, general and administrative

     114,788        113,704        358,344        329,501   

Research and development

     8,481        7,598        28,457        25,150   

Amortization of intangible assets

     18,994        20,242        57,657        59,888   
  

 

 

   

 

 

   

 

 

   

 

 

 
     264,796        255,783        805,548        748,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     22,244        22,480        53,250        57,244   

Other (expense) income:

        

Interest expense, net

     (42,683     (42,127     (127,349     (129,557

Loss on extinguishment of debt

     —          (335     —          (68,302

Other (expense) income, net

     (20     (3,056     732        (6,469
  

 

 

   

 

 

   

 

 

   

 

 

 
     (42,703     (45,518     (126,617     (204,328
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (20,459     (23,038     (73,367     (147,084

Income tax provision

     (2,166     (2,124     (11,156     (9,980
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (22,625     (25,162     (84,523     (157,064

Net income (loss) from discontinued operations

     142        (152,536     807        (133,671
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (22,483     (177,698     (83,716     (290,735

Net income attributable to noncontrolling interests

     (99     (140     (461     (606
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to DJO Finance LLC

   $ (22,582   $ (177,838   $ (84,177   $ (291,341
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Note 1 — Cost of sales is exclusive of amortization of intangible assets of $7,057 and $21,544 for the three months and nine months ended September 30, 2016 and $7,864 and $22,934 for the three and nine months ended September 26, 2015, respectively.

 

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DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(In thousands)

 

     September 30,
2016
    December 31,
2015
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 46,434      $ 48,943   

Accounts receivable, net

     181,814        172,360   

Inventories, net

     183,122        174,573   

Prepaid expenses and other current assets

     23,818        21,179   

Current assets of discontinued operations

     511        2,878   
  

 

 

   

 

 

 

Total current assets

     435,699        419,933   

Property and equipment, net

     129,760        117,273   

Goodwill

     1,019,510        1,018,104   

Intangible assets, net

     691,604        749,045   

Other assets

     7,260        5,174   

Non-current assets of discontinued operations

     —          29   
  

 

 

   

 

 

 

Total assets

   $ 2,283,833      $ 2,309,558   
  

 

 

   

 

 

 
Liabilities and Deficit     

Current liabilities:

    

Accounts payable

   $ 69,938      $ 58,492   

Accrued interest

     45,521        16,998   

Current portion of debt obligations

     10,550        10,550   

Other current liabilities

     94,234        102,173   

Current liabilities of discontinued operations

     262        13,371   
  

 

 

   

 

 

 

Total current liabilities

     220,505        201,584   

Long-term debt obligations

     2,377,418        2,344,562   

Deferred tax liabilities, net

     222,376        213,856   

Other long-term liabilities

     21,145        15,092   
  

 

 

   

 

 

 

Total liabilities

   $ 2,841,444      $ 2,775,094   
  

 

 

   

 

 

 

Commitments and contingencies

    

Deficit:

    

DJO Finance LLC membership deficit:

    

Member capital

     842,912        841,510   

Accumulated deficit

     (1,377,516     (1,293,339

Accumulated other comprehensive loss

     (26,174     (16,341
  

 

 

   

 

 

 

Total membership deficit

     (560,778     (468,170

Noncontrolling interests

     3,167        2,634   
  

 

 

   

 

 

 

Total deficit

     (557,611     (465,536
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 2,283,833      $ 2,309,558   
  

 

 

   

 

 

 

 

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DJO Finance LLC

Unaudited Segment Information

(In thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2016
    September 26,
2015
    September 30,
2016
    September 26,
2015
 

Net sales:

        

Bracing and Vascular

   $ 134,421      $ 133,204      $ 390,388      $ 383,287   

Recovery Sciences

     39,793        37,895        114,817        112,522   

Surgical Implant

     40,852        37,651        126,477        92,648   

International

     71,974        69,513        227,116        217,219   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 287,040      $ 278,263      $ 858,798      $ 805,676   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

Bracing and Vascular

   $ 30,393      $ 31,902      $ 79,999      $ 84,295   

Recovery Sciences

     7,683        7,916        22,184        19,318   

Surgical Implant

     7,908        7,819        21,190        16,531   

International

     11,657        11,548        35,299        37,245   

Expenses not allocated to segments and eliminations

     (35,397     (36,705     (105,422     (100,145
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 22,244      $ 22,480      $ 53,250      $ 57,244   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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DJO Finance LLC

Adjusted EBITDA

For the Three and Nine Months Ended September 30, 2016 and September 26, 2015

(unaudited)

Our Senior Secured Credit Facilities, consisting of a $1,044.5 million term loan facility (including a $20.0 million delayed draw term loan facility) and a $150.0 million asset-based revolving credit facility, under which $65.0 million was outstanding as of September 30, 2016, and the Indentures governing our $1,015.0 million of 8.125% second lien notes and $298.5 million of 10.75% third lien notes (collectively, the “notes”) represent significant components of our capital structure. Under our Senior Secured Credit Facilities, we are required to maintain a specified senior secured first lien leverage ratio, which is determined based on our Adjusted EBITDA. If we fail to comply with the senior secured first lien leverage ratio under our Senior Secured Credit Facilities, we would be in default. Upon the occurrence of an event of default under the Senior Secured Credit Facilities, the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the Senior Secured Credit Facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under the Senior Secured Credit Facilities and under the notes. Any acceleration under the Senior Secured Credit Facilities would also result in a default under the Indentures governing the notes, which could lead to the note holders electing to declare the principal, premium, if any, and interest on the then outstanding notes immediately due and payable. In addition, under the Indentures governing the notes, our and our subsidiaries’ ability to engage in activities such as incurring additional indebtedness, making investments, refinancing subordinated indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Adjusted EBITDA. Our ability to meet the covenants specified in the Senior Secured Credit Facilities and the Indentures governing those notes will depend on future events, some of which are beyond our control, and we cannot assure you that we will meet those covenants.

Adjusted EBITDA is defined as net income (loss) attributable to DJOFL plus interest expense, net, income tax provision (benefit), and depreciation and amortization, further adjusted for certain non-cash items, non-recurring items and other adjustment items as permitted in calculating covenant compliance and other ratios under our Senior Secured Credit Facilities and the Indentures governing the notes. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about the calculation of, and compliance with, certain financial covenants and other ratios in our Senior Secured Credit Facilities and the Indentures governing the notes. Adjusted EBITDA is a material component of these calculations.

Adjusted EBITDA should not be considered as an alternative to net income (loss) or other performance measures presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), or as an alternative to cash flow from operations as a measure of our liquidity. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definition of Adjusted EBITDA under our Senior Secured Credit Facilities and the Indentures governing the notes allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

 

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The following table provides reconciliation between net loss and Adjusted EBITDA:

 

                             Twelve  
                             Months  
     Three Months Ended     Nine Months Ended     Ended  
     September 30,     September 26,     September 30,     September 26,     September 30,  
     2016     2015     2016     2015     2016  

Net loss attributable to DJO Finance LLC

   $ (22,582   $ (177,838   $ (84,177   $ (291,341   $ (133,763

(Income) loss from discontinued operations, net

     (142     152,536        (806     133,671        23,103   

Interest expense, net

     42,683        42,127        127,349        129,557        170,085   

Income tax provision

     2,166        2,124        11,156        9,980        13,431   

Depreciation and amortization

     29,031        28,904        88,208        85,416        120,276   

Non-cash charges (a)

     338        1,076        2,941        2,330        4,014   

Non-recurring and integration charges (b)

     9,895        9,140        25,832        20,656        39,152   

Other adjustment items (c)

     1,938        5,356        5,302        80,807        8,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     63,327        63,425        175,805        171,076        244,670   

Permitted pro forma adjustments applicable to the twelve month period only (d)

          

Future cost savings

             13,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 63,327      $ 63,425      $ 175,805      $ 171,076      $ 258,477   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Non-cash charges are comprised of the following:

 

                                Twelve  
                                Months  
     Three Months Ended      Nine Months Ended      Ended  
     September 30,     September 26,      September 30,      September 26,      September 30,  
     2016     2015      2016      2015      2016  

Stock compensation expense

   $ 285      $ 298       $ 1,806       $ 1,450       $ 2,161   

(Gain) loss on disposal of fixed assets and assets held for sale, net

     (4     396         886         211         1,452   

Purchase accounting adjustments (1)

     57        382         249         669         401   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash charges

   $ 338      $ 1,076       $ 2,941       $ 2,330       $ 4,014   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Purchase accounting adjustments consisted of amortization of fair market value inventory adjustments for all periods presented.

 

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(b) Non-recurring and integration charges are comprised of the following:

 

                                 Twelve  
                                 Months  
     Three Months Ended      Nine Months Ended      Ended  
     September 30,      September 26,      September 30,      September 26,      September 30,  
     2016      2015      2016      2015      2016  

Integration charges:

              

Global business unit reorganization and integration

   $ 1,177       $ 2,486       $ 3,998       $ 6,978       $ 5,616   

Acquisition related expenses and integration (1)

     2,873         2,927         8,855         3,982         13,508   

CFO Transition

     914         —           954         —           954   

Litigation and regulatory costs and settlements, net (2)

     4,576         1,304         11,062         3,890         16,036   

Other non-recurring items (3)

     287         1,343         895         3,168         1,974   

Automation projects

     68         1,080         68         2,638         1,064   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-recurring and integration charges

   $ 9,895       $ 9,140       $ 25,832       $ 20,656       $ 39,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Consists of direct acquisition costs and integration expenses related to acquired businesses and costs related to potential acquisitions.
(2) For the twelve months ended September 30, 2016, litigation and regulatory costs consisted of $2.8 million in litigation costs related to ongoing product liability issues and $13.2 million related to other litigation and regulatory costs and settlements.
(3) For the twelve months ended September 30, 2016, other non-recurring items consisted of $1.7 million in specifically identified non-recurring operational and regulatory projects and $0.2 million in other non-recurring travel and professional fees.
(c) Other adjustment items before permitted pro forma adjustments are comprised of the following:

 

                                Twelve  
                                Months  
     Three Months Ended      Nine Months Ended      Ended  
     September 30,      September 26,      September 30,     September 26,      September 30,  
     2016      2015      2016     2015      2016  

Blackstone monitoring fees

   $ 1,750       $ 1,750       $ 5,250      $ 5,250       $ 7,000   

Non-controlling interests

     99         140         461        606         695   

Loss on modification and extinguishment of debt (1)

     —           335         —          68,302         172   

Other (2)

     89         3,131         (409     6,649         505   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total other adjustment items

   $ 1,938       $ 5,356       $ 5,302      $ 80,807       $ 8,372   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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(1) Loss on modification and extinguishment of debt for the nine months ended September 26, 2015 consisted of $47.8 million in premiums related to the redemption of our 8.75% Notes, 9.875% Notes and 7.75% Notes, $11.9 million related to the non-cash write off of unamortized debt issuance costs and original issue discount associated with the portion of our debt that was extinguished and $8.3 million of arrangement and amendment fees and other fees and expenses incurred in connection with the refinancing.
(2) Other adjustments consist primarily of net realized and unrealized foreign currency transaction gains and losses.
(d) Permitted pro forma adjustments include future cost savings related to the exit of our Empi business and the restructuring of our Recovery Sciences Segment.