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8-K - FORM 8-K - DJO Finance LLCd433193d8k.htm

Exhibit 99.1

 

LOGO

DJO Investor/Media Contact:

DJO Global, Inc.

David Smith

SVP and Treasurer

760.734.3075

ir@djoglobal.com

FOR IMMEDIATE RELEASE

DJO GLOBAL ANNOUNCES FINANCIAL RESULTS FOR SECOND QUARTER 2017

Business Transformation On Schedule

SAN DIEGO, CA, August 10, 2017DJO 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 second quarter ended July 1, 2017.

Second Quarter Financial Highlights

 

  Net sales grew 0.6% to $294.7 million, or 2.3% on a sales-per-day, constant currency basis.

 

  Net loss attributable to DJOFL was $34.4 million compared to $23.3 million in the prior year period.

 

  Adjusted EBITDA was $63.5 million.

Business Transformation Progress

 

  Significant investments were made, as planned, in the Company’s transformation which remains on track to deliver 7% to 10% annual cost reduction by the end of 2018.

 

  Transformation actions taken to date expected to contribute $15 million in annual savings over the next four quarters.

“Our results for the second quarter, and for the first half, of the year are ahead of our annual operating plan and reflect the hard work our team has contributed to growing the business while transforming our operations,” said Brady Shirley, DJO’s President and Chief Executive Officer. “Over the first half of 2017, we continued to grow our global business and we grew Adjusted EBITDA faster than revenue. We also continued to execute on our business transformation, making investments and taking actions that support our priorities of improved profitability, liquidity, growth and customer experience. Looking forward, we remain confident in both our transformation and the team that we have in place to deliver long-term value to our customers, employees and investors.”


Sales Results

DJOFL achieved net sales for the second quarter of 2017 of $294.7 million, reflecting growth of 0.6%, compared with net sales of $292.9 million for the second quarter of 2016. The second quarter of 2017 included 61 shipping days for our international business compared to 63 for the same period in 2016, while domestic shipping days remained constant at 64 for both the second quarter of 2017 and 2016. Sales in the second quarter of 2017 grew 2.3% on a sales-per-day, constant currency basis over sales in the second quarter of 2016. For the six months ending July 1, 2017, sales grew 2.0% to $583.1 million over the same period in 2016, or 2.7% on a constant currency basis.

Net sales for the Surgical Implant segment grew 17.4% in the second quarter of 2017 to $50.0 million. Sales across all three implant subcategories (knee, hip and shoulder) again grew at double digit rates compared to the prior year. For the six months ending July 1, 2017, Surgical Implant sales grew 16.3%, over the comparable period in 2016, to $99.6 million.

Net sales for DJO’s International segment were $79.6 million in the second quarter of 2017, a decline of 0.6% compared to the second quarter of 2016. On the basis of constant currency and taking into account 61 shipping days for our international business compared to 63 in the prior year, International sales grew 5.3% driven by stronger sales in the Company’s direct markets, primarily Australia, France, and Spain, as well as continued growth in the Company’s export markets. For the six months ending July 1, 2017, International sales grew 1.7% to $157.8 million, or 4.3% on a constant currency basis over the comparable period in 2016.

Net sales for DJO’s Recovery Sciences segment were $38.8 million in the second quarter of 2017, reflecting growth of 0.8% compared to the second quarter of 2016. Growth in both of the segment’s major product lines, Chattanooga rehabilitation equipment and Regeneration CMF was relatively flat in the quarter compared to the prior year period. For the six months ending July 1, 2017, Recovery Sciences sales grew 3.0% to $77.3 million.

Net sales for DJO’s Bracing and Vascular segment were $126.4 million in the second quarter of 2017, a decline of 4.1%, compared to the second quarter of 2016, reflecting general softness across the Company’s bracing and support products, as well as continued pressure in the Company’s Dr. Comfort product line. For the six months ending July 1, 2017, Bracing and Vascular sales declined 2.9% to $248.5 million.

 

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Earnings Results

For the second quarter of 2017, DJOFL reported a net loss of $34.4 million, compared to a net loss of $23.3 million for the second quarter of 2016. As detailed in the attached financial tables, the results for the current and prior year second quarter periods and the current and prior year twelve-month periods were impacted by significant non-cash items, non-recurring items and other adjustments.

Adjusted EBITDA for the second quarter of 2017 was $63.5 million compared with Adjusted EBITDA of $63.6 million in the second quarter of 2016. Adjusted EBITDA for the first six months of 2017 was $120.8 million compared with Adjusted EBITDA of $112.5 million in the first six months of 2016. Including projected future savings from cost savings programs currently underway of $15.0 million as permitted under our credit agreement and the indentures governing our outstanding notes, Adjusted EBITDA for the twelve months ended July 1, 2017 was $258.6 million.

The Company defines Adjusted EBITDA as net (loss) income attributable to DJOFL plus net interest expense, 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 secured term loan and revolving credit facilities (“Senior Secured Credit Facilities”) and the indentures governing its 8.125% second lien notes and its 10.75% third lien notes. A reconciliation between net loss attributable to DJOFL and Adjusted EBITDA is included in the attached financial tables.

Net cash provided by continuing operating activities for the six months ending July 1, 2017 was $38.1 million compared to a net use of cash of $10.6 million for the same period of 2016. The improvement in cash flow was primarily attributable to working capital initiatives executed as part of the Company’s overall business transformation.

 

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Conference Call Information

DJO has scheduled a conference call to discuss this announcement beginning at 4:30 pm, Eastern Time Thursday, August 10, 2017. 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.

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, enabling people to regain or maintain their natural motion. Its products are used by orthopaedic 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 orthopaedic 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 improved liquidity, estimated cost reductions associated with the execution of its business transformation plans and improved efficiencies. 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

 

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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 transformation plans, including achievement of planned actions to improve liquidity, improvements in operational effectiveness, optimization of the Company’s procurement activities, improvements in manufacturing, distribution, sales and operations planning, and actions to improve the profitability of the mix of our product and customers. Other 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: business strategies relative to our Bracing and Vascular, Recovery Sciences, International and Surgical Implant segments; the continued growth of the markets the Company addresses and any impact on these markets from changes in global economic conditions; 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 and 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, 2016, filed with the Securities and Exchange Commission on March 15, 2017. 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.

-tables to follow-

 

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DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(In thousands)

 

     Three Months Ended     Six Months Ended  
     July 1,
2017
    July 1,
2016
    July 1,
2017
    July 1,
2016
 

Net sales

   $ 294,746     $ 292,852     $ 583,135     $ 571,758  

Operating expenses:

        

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

     124,885       120,474       244,454       238,557  

Selling, general and administrative

     135,739       121,627       269,901       243,556  

Research and development

     9,063       10,122       18,202       19,976  

Amortization of intangible assets

     16,016       19,085       34,861       38,663  
  

 

 

   

 

 

   

 

 

   

 

 

 
     285,703       271,308       567,418       540,752  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     9,043       21,544       15,717       31,006  

Other (expense) income:

        

Interest expense, net

     (43,068     (42,396     (85,755     (84,666

Other income, net

     896       468       1,184       752  
  

 

 

   

 

 

   

 

 

   

 

 

 
     (42,172     (41,928     (84,571     (83,914
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (33,129     (20,384     (68,854     (52,908

Income tax provision

     (1,095     (3,577     (5,173     (8,990
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (34,224     (23,961     (74,027     (61,898

Net income from discontinued operations

     47       855       105       665  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (34,177     (23,106     (73,922     (61,233

Net income attributable to noncontrolling interests

     (206     (169     (430     (362
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to DJO Finance LLC

   $ (34,383   $ (23,275   $ (74,352   $ (61,595
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Note 1 — Cost of sales is exclusive of amortization of intangible assets of $6,980 and $13,961 for the three and six months ended July 1, 2017 and $7,080 and $14,487 for the three and six months ended July 1, 2016, respectively.

 

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DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(In thousands)

 

     July 1,
2017
    December 31,
2016
 
Assets             

Current assets:

    

Cash and cash equivalents

   $ 35,197     $ 35,212  

Accounts receivable, net

     170,057       178,193  

Inventories, net

     148,585       151,557  

Prepaid expenses and other current assets

     21,300       23,650  

Current assets of discontinued operations

     511       511  
  

 

 

   

 

 

 

Total current assets

     375,650       389,123  

Property and equipment, net

     133,889       128,019  

Goodwill

     860,597       855,626  

Intangible assets, net

     637,989       672,134  

Other assets

     5,137       5,536  
  

 

 

   

 

 

 

Total assets

   $ 2,013,262     $ 2,050,438  
  

 

 

   

 

 

 
Liabilities and Deficit             

Current liabilities:

    

Accounts payable

   $ 93,514     $ 63,822  

Accrued interest

     12,934       16,740  

Current portion of debt obligations

     12,557       10,550  

Other current liabilities

     124,227       113,265  
  

 

 

   

 

 

 

Total current liabilities

     243,232       204,377  

Long-term debt obligations

     2,381,701       2,392,238  

Deferred tax liabilities, net

     208,213       202,740  

Other long-term liabilities

     15,744       14,932  
  

 

 

   

 

 

 

Total liabilities

   $ 2,848,890     $ 2,814,287  
  

 

 

   

 

 

 

Commitments and contingencies

    

Deficit:

    

DJO Finance LLC membership deficit:

    

Member capital

     841,424       844,294  

Accumulated deficit

     (1,653,994     (1,579,642

Accumulated other comprehensive loss

     (24,622     (30,580
  

 

 

   

 

 

 

Total membership deficit

     (837,192     (765,928

Noncontrolling interests

     1,564       2,079  
  

 

 

   

 

 

 

Total deficit

     (835,628     (763,849
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 2,013,262     $ 2,050,438  
  

 

 

   

 

 

 

 

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DJO Finance LLC

Unaudited Segment Information

(In thousands)

 

     Three Months Ended     Six Months Ended  
     July 1,
2017
    July 1,
2016
    July 1,
2017
    July 1,
2016
 

Net sales:

        

Bracing and Vascular

   $ 126,415     $ 131,751     $ 248,468     $ 255,967  

Recovery Sciences

     38,774       38,449       77,277       75,024  

Surgical Implant

     49,991       42,575       99,583       85,625  

International

     79,566       80,077       157,807       155,142  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 294,746     $ 292,852     $ 583,135     $ 571,758  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

Bracing and Vascular

   $ 24,225     $ 29,072     $ 45,232     $ 49,606  

Recovery Sciences

     10,709       8,056       19,616       14,501  

Surgical Implant

     10,062       6,053       18,202       13,282  

International

     13,509       14,653       27,119       23,642  

Expenses not allocated to segments and eliminations

     (49,462     (36,290     (94,452     (70,025
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 9,043     $ 21,544     $ 15,717     $ 31,006  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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DJO Finance LLC

Adjusted EBITDA

For the Three and Six Months Ended July 1, 2017 and 2016

(unaudited)

Our Senior Secured Credit Facilities, consisting of a $1,036.5 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 $68.0 million was outstanding as of July 1, 2017, 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) attributable to DJOFL 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) attributable to DJOFL 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) attributable to DJOFL. 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 attributable to DJOFL and Adjusted EBITDA (in thousands):

 

     Three Months Ended      Six Months Ended      Twelve
Months
Ended
 
     July 1,
2017
     July 1,
2016
     July 1,
2017
     July 1,
2016
     July 1,
2017
 

Net loss attributable to DJO Finance LLC

   $ (34,383    $ (23,275    $ (74,352    $ (61,595    $ (299,060

Income from discontinued operations, net

     (47      (855      (105      (665      (579

Interest expense, net

     43,068        42,396        85,755        84,666        171,168  

Income tax provision (benefit)

     1,095        3,577        5,173        8,990        (10,669

Depreciation and amortization

     26,942        29,274        56,716        59,176        115,432  

Non-cash charges (a)

     537        2,204        1,108        2,603        180,904  

Non-recurring and integration charges (b)

     25,195        8,605        43,584        15,937        76,322  

Other adjustment items (c)

     1,142        1,636        2,911        3,366        10,102  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     63,549        63,562        120,790        112,478        243,620  

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

              

Future cost savings

                 14,988  

Adjusted EBITDA

   $ 63,549      $ 63,562      $ 120,790      $ 112,478      $ 258,608  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended      Six Months Ended      Twelve
Months
Ended
 
     July 1,
2017
     July 1,
2016
     July 1,
2017
     July 1,
2016
     July 1,
2017
 

Stock compensation expense

   $ 392      $ 1,316      $ 846      $ 1,521      $ 2,513  

Loss on disposal of fixed assets and assets held for sale, net

     145        783        262        890        321  

Impairment of goodwill (1)

     —          —          —          —          160,000  

Inventory adjustments (2)

     —          —          —          —          18,013  

Purchase accounting adjustments (3)

     —          105        —          192        57  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash charges

   $ 537      $ 2,204      $ 1,108      $ 2,603      $ 180,904  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Impairment of goodwill and intangible assets for the twelve months ended July 1, 2017 consisted of goodwill impairment charges of $99.0 million and $61.0 million related to the CMF and Vascular reporting units, respectively. The impairment charge for our CMF reporting unit resulted from reductions in our projected operating results and estimated future cash flows due to disruption caused by our exit of the Empi business. The impairment charge for our Vascular reporting unit resulted from reductions in our projected operating results and estimated future cash flows due to a loss of revenue caused by disruption as we transitioned our Dr. Comfort therapeutic footwear manufacturing and distribution to a new ERP system and market pressure in the therapeutic shoe market.

 

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  (2) In the fourth quarter of fiscal 2016, current management implemented a new strategy relating to our procurement, manufacturing and liquidation philosophies in order to significantly reduce inventory levels. Historically, our strategy was to purchase inventory in large quantities to capture purchase discounts and rebates and provide an expansive mix of products for our customers. Our new strategy aims to integrate our supply chain services with customer demand through focused forecasted consumption and sales efforts, therefore limiting the range of SKUs we plan to offer. As a result of these changes, the Company recorded a charge to cost of sales and corresponding reduction in inventory of approximately $18.0 million. The E&O reserve expense in fiscal 2016 included $5.7 million related to the Company’s decision to discontinue certain SKUs mainly within the Bracing and Vascular product lines, $8.3 million related to holding inventory for shorter periods and the planned scrapping of long-dated inventory, $2.0 million related to new Surgical Implant products that changed the expected life cycle of its current product portfolio, and $2.0 million of slow moving consigned inventory within certain OfficeCare clinics for which management has decided not to strategically relocate.
  (3) Purchase accounting adjustments consisted of amortization of fair market value inventory adjustments for all periods presented.
  (b) Non-recurring and integration charges are comprised of the following:

 

     Three Months Ended      Six Months Ended      Twelve
Months
Ended
 
     July 1,
2017
     July 1,
2016
     July 1,
2017
     July 1,
2016
     July 1,
2017
 

Restructuring and reorganization

   $ 23,273      $ 1,476      $ 39,069      $ 3,469      $ 52,478  

Acquisition related expenses and integration (1)

     277        2,657        579        5,982        4,947  

Executive transition

     (49      —          (49      —          4,767  

Litigation and regulatory costs and settlements, net (2)

     1,290        4,472        3,392        6,486        13,468  

IT automation projects

     404        —          593        —          662  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-recurring and integration charges

   $ 25,195      $ 8,605      $ 43,584      $ 15,937      $ 76,322  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (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 July 1, 2017, litigation and regulatory costs consisted of $1.4 million in litigation costs related to ongoing product liability issues and $12.1 million related to other litigation and regulatory costs and settlements.
  (c) Other adjustment items are comprised of the following:

 

     Three Months Ended      Six Months Ended      Twelve
Months
Ended
 
     July 1,
2017
     July 1,
2016
     July 1,
2017
     July 1,
2016
     July 1,
2017
 

Blackstone monitoring fees

   $ 1,750      $ 1,750      $ 3,500      $ 3,500      $ 7,000  

Non-controlling interests

     206        169        430        362        691  

Other (1)

     (814      (283      (1,019      (496      2,411  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other adjustment items

   $ 1,142      $ 1,636      $ 2,911      $ 3,366      $ 10,102  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 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 our business transformation initiative.

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