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EX-32.2 - EX-32.2 - DJO Finance LLCdjo-ex322_8.htm
EX-32.1 - EX-32.1 - DJO Finance LLCdjo-ex321_7.htm
EX-31.2 - EX-31.2 - DJO Finance LLCdjo-ex312_6.htm
EX-31.1 - EX-31.1 - DJO Finance LLCdjo-ex311_9.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2017

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      (Note: Prior to the effectiveness of the registrant’s Registration Statement on Form S-4 (File No. 333-213164) on August 31, 2016, the registrant was a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act. As of January 1, 2017, the registrant became a voluntary filer again and was no longer subject to the filing requirements of Section 13 or 15(d) of the Exchange Act; however, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant would have been required to file such reports) as if it were subject to such filing requirements).

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      No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

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

As of November 14, 2017, 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 September 30, 2017 and December 31, 2016

 

1

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and September 30, 2016

 

2

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and September 30, 2016..........................................................................................................

 

3

 

Unaudited Condensed Consolidated Statement of Deficit for the nine months ended September 30, 2017

 

4

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and September 30, 2016

 

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 6.

Exhibits

 

47

 

 

 

 


 

PART 1 – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,018

 

 

$

35,212

 

Accounts receivable, net

 

 

175,031

 

 

 

178,193

 

Inventories, net

 

 

158,928

 

 

 

151,557

 

Prepaid expenses and other current assets

 

 

24,218

 

 

 

23,650

 

Current assets of discontinued operations

 

 

511

 

 

 

511

 

Total current assets

 

 

397,706

 

 

 

389,123

 

Property and equipment, net

 

 

134,538

 

 

 

128,019

 

Goodwill

 

 

863,011

 

 

 

855,626

 

Intangible assets, net

 

 

622,460

 

 

 

672,134

 

Other assets

 

 

6,109

 

 

 

5,536

 

Total assets

 

$

2,023,824

 

 

$

2,050,438

 

Liabilities and Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

93,102

 

 

$

63,822

 

Accrued interest

 

 

41,738

 

 

 

16,740

 

Current portion of debt obligations

 

 

14,593

 

 

 

10,550

 

Other current liabilities

 

 

130,941

 

 

 

113,265

 

Total current liabilities

 

 

280,374

 

 

 

204,377

 

Long-term debt obligations

 

 

2,372,850

 

 

 

2,392,238

 

Deferred tax liabilities, net

 

 

210,772

 

 

 

202,740

 

Other long-term liabilities

 

 

15,330

 

 

 

14,932

 

Total liabilities

 

$

2,879,326

 

 

$

2,814,287

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Deficit:

 

 

 

 

 

 

 

 

DJO Finance LLC membership deficit:

 

 

 

 

 

 

 

 

Member capital

 

 

841,907

 

 

 

844,294

 

Accumulated deficit

 

 

(1,676,688

)

 

 

(1,579,642

)

Accumulated other comprehensive loss

 

 

(22,551

)

 

 

(30,580

)

Total membership deficit

 

 

(857,332

)

 

 

(765,928

)

Noncontrolling interests

 

 

1,830

 

 

 

2,079

 

Total deficit

 

 

(855,502

)

 

 

(763,849

)

Total liabilities and deficit

 

$

2,023,824

 

 

$

2,050,438

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

1


 

DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

September 30,

2017

 

 

September 30,

2016

 

Net sales

 

$

290,876

 

 

$

287,040

 

 

$

874,011

 

 

$

858,798

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of amortization of intangible assets of $6,981 and $20,942 and $7,057 and $21,544 for three and nine months ended September 30, 2017 and 2016, respectively)

 

 

122,325

 

 

 

122,533

 

 

 

366,779

 

 

 

361,090

 

Selling, general and administrative

 

 

122,066

 

 

 

114,788

 

 

 

391,967

 

 

 

358,344

 

Research and development

 

 

8,864

 

 

 

8,481

 

 

 

27,066

 

 

 

28,457

 

Amortization of intangible assets

 

 

15,852

 

 

 

18,994

 

 

 

50,713

 

 

 

57,657

 

 

 

 

269,107

 

 

 

264,796

 

 

 

836,525

 

 

 

805,548

 

Operating income

 

 

21,769

 

 

 

22,244

 

 

 

37,486

 

 

 

53,250

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(43,691

)

 

 

(42,683

)

 

 

(129,446

)

 

 

(127,349

)

Other income (expense), net

 

 

824

 

 

 

(20

)

 

 

2,008

 

 

 

732

 

 

 

 

(42,867

)

 

 

(42,703

)

 

 

(127,438

)

 

 

(126,617

)

Loss before income taxes

 

 

(21,098

)

 

 

(20,459

)

 

 

(89,952

)

 

 

(73,367

)

Income tax provision

 

 

(1,504

)

 

 

(2,166

)

 

 

(6,677

)

 

 

(11,156

)

Net loss from continuing operations

 

 

(22,602

)

 

 

(22,625

)

 

 

(96,629

)

 

 

(84,523

)

Net income from discontinued operations

 

 

123

 

 

 

142

 

 

 

228

 

 

 

807

 

Net loss

 

 

(22,479

)

 

 

(22,483

)

 

 

(96,401

)

 

 

(83,716

)

Net income attributable to noncontrolling interests

 

 

(214

)

 

 

(99

)

 

 

(644

)

 

 

(461

)

Net loss attributable to DJO Finance LLC

 

$

(22,693

)

 

$

(22,582

)

 

$

(97,045

)

 

$

(84,177

)

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

September 30,

2017

 

 

September 30,

2016

 

Net loss

 

$

(22,479

)

 

$

(22,483

)

 

$

(96,401

)

 

$

(83,716

)

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax (provision) of ($1,636), $(5,851) and $(1), $(167) for the three and nine months ended September 30, 2017 and 2016, respectively

 

 

1,804

 

 

 

1,086

 

 

 

6,757

 

 

 

(1,764

)

Unrealized (loss) gain on cash flow hedges, net of tax provision of $116, $137 thousand for the three and nine months ended September 30, 2017 and zero for the three and nine months ended September 30, 2016, respectively

 

 

319

 

 

 

45

 

 

 

379

 

 

 

(7,997

)

Other comprehensive income (loss)

 

 

2,123

 

 

 

1,131

 

 

 

7,136

 

 

 

(9,761

)

Comprehensive loss

 

 

(20,356

)

 

 

(21,352

)

 

 

(89,265

)

 

 

(93,477

)

Comprehensive income (loss) attributable to noncontrolling interests

 

 

(266

)

 

 

(131

)

 

 

249

 

 

 

(533

)

Comprehensive loss attributable to DJO Finance LLC

 

$

(20,622

)

 

$

(21,483

)

 

$

(89,016

)

 

$

(94,010

)

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

3


 

DJO Finance LLC

Unaudited Condensed Consolidated Statement 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, 2016

 

$

844,294

 

 

$

(1,579,642

)

 

$

(30,580

)

 

$

(765,928

)

 

$

2,079

 

 

$

(763,849

)

Net (loss) income

 

 

 

 

 

(97,045

)

 

 

 

 

 

(97,045

)

 

 

644

 

 

 

(96,401

)

Repurchase of common stock

 

 

(3,600

)

 

 

 

 

 

 

 

 

(3,600

)

 

 

 

 

 

(3,600

)

Investment by parent

 

 

500

 

 

 

 

 

 

 

 

 

500

 

 

 

 

 

 

500

 

Other comprehensive (loss) income, net of taxes

 

 

 

 

 

 

 

 

8,029

 

 

 

8,029

 

 

 

(893

)

 

 

7,136

 

Stock-based compensation

 

 

1,329

 

 

 

 

 

 

 

 

 

1,329

 

 

 

 

 

 

1,329

 

Exercise of stock options

 

 

(616

)

 

 

 

 

 

 

 

 

(616

)

 

 

 

 

 

(616

)

Balance at September 30, 2017

 

$

841,907

 

 

$

(1,676,688

)

 

$

(22,551

)

 

$

(857,332

)

 

$

1,830

 

 

$

(855,502

)

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

4


 

DJO Finance LLC

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(96,401

)

 

$

(83,716

)

Net income from discontinued operations

 

 

(228

)

 

 

(807

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

32,288

 

 

 

30,551

 

Amortization of intangible assets

 

 

50,713

 

 

 

57,657

 

Amortization of debt issuance costs and non-cash interest expense

 

 

6,153

 

 

 

5,769

 

Stock-based compensation expense

 

 

1,329

 

 

 

1,806

 

Loss on disposal of assets, net

 

 

1,001

 

 

 

572

 

Deferred income tax expense

 

 

2,865

 

 

 

6,235

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

7,472

 

 

 

(9,041

)

Inventories

 

 

(7,959

)

 

 

(12,918

)

Prepaid expenses and other assets

 

 

(562

)

 

 

(2,192

)

Accrued interest

 

 

24,998

 

 

 

28,522

 

Accounts payable and other current liabilities

 

 

40,080

 

 

 

(2,542

)

Net cash provided by  continuing operating activities

 

 

61,749

 

 

 

19,896

 

Net cash provided by (used in) discontinued operations

 

 

228

 

 

 

(9,906

)

Net cash provided by operating activities

 

 

61,977

 

 

 

9,990

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(33,597

)

 

 

(40,791

)

Proceeds from disposition of assets

 

 

 

 

 

946

 

Net cash used in investing activities

 

 

(33,597

)

 

 

(39,845

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

65,275

 

 

 

63,000

 

Repayments of debt obligations

 

 

(87,290

)

 

 

(35,913

)

Repurchase of common stock

 

 

(3,600

)

 

 

 

Investment by parent

 

 

443

 

 

 

 

Dividend paid to minority interests

 

 

(1,102

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(26,274

)

 

 

27,087

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,700

 

 

 

259

 

Net increase (decrease) in cash and cash equivalents

 

 

3,806

 

 

 

(2,509

)

Cash and cash equivalents at the beginning of the period

 

 

35,212

 

 

 

48,943

 

Cash and cash equivalents at the end of the period

 

$

39,018

 

 

$

46,434

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

97,879

 

 

$

92,921

 

Cash paid for taxes, net

 

$

3,510

 

 

$

3,564

 

 

 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of surgical instruments included in accounts payable

 

$

4,731

 

 

$

1,829

 

 

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 high-quality medical devices with a broad range of products used for rehabilitation, pain management and physical therapy. 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 clinical 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, shoulder and elbow. 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 home electrotherapy devices, such as TENS devices for pain relief, other electrotherapy and orthopedic products and 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 Unaudited Condensed 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, 2016.

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 nine months of 2017 had one less shipping day than the first nine months of 2016.

Recent Accounting Standards

In May 2014, the Financial Accounting Standards Board (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 has a team in place to analyze the impact of this accounting standards update across all revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. In 2016, the Company presented its initial findings to the audit committee and has plans to start drafting its accounting policies and evaluating the new disclosure requirements and the impact they will have on its business processes, controls and systems in 2017. The Company is still assessing the impact of adoption on our consolidated financial statements. The Company expects to adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.

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.

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. The Company has a team in place to analyze the impact of this ASU which includes reviewing current lease contracts to identify potential differences that would result from applying the requirements under the new standard. In 2016, the Company presented its initial plan to the audit committee which includes compiling an inventory of all of its current leases to assess the global impact of this update and developing tools for the tracking of and accounting for lease contracts. The Company is still assessing the impact of adoption on our consolidated financial statements.

7


 

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 did not have a material effect on the Company’s financial statements.

In August 2016, the FASB issued an accounting standards update which affects the classification of certain cash receipts and cash payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are still assessing the impact of adoption on our consolidated financial statements.

In October 2016, the FASB issued an accounting standards update which will require companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and should be applied on a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Early adoption is permitted. We are still assessing the impact of adoption on our consolidated financial statements.

In January 2017, the FASB issued an accounting standards update which will require an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance is effective for annual and interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Early adoption of this standard is not expected to have a material impact on the financials.

 

 

 

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 Unaudited Condensed Consolidated Financial Statements. The impact of these results is immaterial to the periods presented.

 

 

3. ACCOUNTS RECEIVABLE RESERVES

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

 

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

Balance, beginning of period

 

$

36,070

 

 

$

32,893

 

Provision for doubtful accounts

 

 

17,745

 

 

 

19,478

 

Write-offs, net of recoveries

 

 

(23,985

)

 

 

(20,186

)

Balance, end of period

 

$

29,830

 

 

$

32,185

 

 

Our allowance for sales returns balance was $2.3 million and $3.8 million as of September 30, 2017 and September 30, 2016, respectively.

 

 

8


 

4. INVENTORIES

Inventories consist of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Components and raw materials

 

$

57,119

 

 

$

52,977

 

Work in process

 

 

5,296

 

 

 

8,374

 

Finished goods

 

 

90,492

 

 

 

92,299

 

Inventory held on consignment

 

 

37,735

 

 

 

36,219

 

 

 

 

190,642

 

 

 

189,869

 

Inventory reserves

 

 

(31,714

)

 

 

(38,312

)

 

 

$

158,928

 

 

$

151,557

 

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

Balance, beginning of period

 

$

38,312

 

 

$

22,042

 

Provision charged to costs of sales

 

 

2,088

 

 

 

5,921

 

Write-offs, net of recoveries

 

 

(8,686

)

 

 

(4,487

)

Balance, end of period

 

$

31,714

 

 

$

23,476

 

 

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

 

 

5. LONG-LIVED ASSETS

Goodwill

Changes in the carrying amount of goodwill for the nine months ended September 30, 2017 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

 

 

$

330,544

 

 

$

1,112,632

 

Accumulated impairment losses

 

 

(61,000

)

 

 

(148,600

)

 

 

(47,406

)

 

 

 

 

 

(257,006

)

Goodwill, net of accumulated impairment losses at

   December 31, 2016

 

 

422,258

 

 

 

101,001

 

 

 

1,823

 

 

 

330,544

 

 

 

855,626

 

Current Year Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

7,385

 

 

 

7,385

 

Balance, end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

483,258

 

 

 

249,601

 

 

 

49,229

 

 

 

337,929

 

 

 

1,120,017

 

Accumulated impairment losses

 

 

(61,000

)

 

 

(148,600

)

 

 

(47,406

)

 

 

 

 

 

(257,006

)

Goodwill, net of accumulated impairment losses at

   September 30, 2017

 

$

422,258

 

 

$

101,001

 

 

$

1,823

 

 

$

337,929

 

 

$

863,011

 

 

9


 

Intangible Assets

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

 

September 30, 2017

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangible

Assets, Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

477,908

 

 

$

(394,024

)

 

$

83,884

 

Patents and technology

 

 

446,906

 

 

 

(296,028

)

 

 

150,878

 

Trademarks and trade names

 

 

29,832

 

 

 

(17,835

)

 

 

11,997

 

Distributor contracts and relationships

 

 

4,808

 

 

 

(4,713

)

 

 

95

 

Non-compete agreements

 

 

6,741

 

 

 

(6,646

)

 

 

95

 

 

 

$

966,195

 

 

$

(719,246

)

 

 

246,949

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

 

 

 

 

 

 

 

375,511

 

Net identifiable intangible assets

 

 

 

 

 

 

 

 

 

$

622,460

 

 

December 31, 2016

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangible

Assets, Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

475,280

 

 

$

(364,582

)

 

$

110,698

 

Patents and technology

 

 

446,734

 

 

 

(274,914

)

 

 

171,820

 

Trademarks and trade names

 

 

29,695

 

 

 

(15,543

)

 

 

14,152

 

Distributor contracts and relationships

 

 

4,753

 

 

 

(4,486

)

 

 

267

 

Non-compete agreements

 

 

6,604

 

 

 

(6,224

)

 

 

380

 

 

 

$

963,066

 

 

$

(665,749

)

 

$

297,317

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

 

 

 

 

 

 

 

374,817

 

Net identifiable intangible assets

 

 

 

 

 

 

 

 

 

$

672,134

 

 

Our definite lived intangible assets are being amortized using the straight line method over their remaining weighted average useful lives of 3.5 years for customer relationships, 6.3 years for patents and technology, 1.6 years for distributor contracts and relationships, 5.2 years for trademarks and trade names, and 0.3 years for non-compete agreements. Based on our amortizable intangible asset balance as of September 30, 2017, we estimate that amortization expense will be as follows for the next five years and thereafter (in thousands):

 

Remaining 2017

 

$

15,415

 

2018

 

 

57,974

 

2019

 

 

53,056

 

2020

 

 

37,085

 

2021

 

 

32,484

 

Thereafter

 

 

50,935

 

 

 

$

246,949

 

 

 

10


 

6. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Accrued wages and related expenses

 

$

38,081

 

 

$

30,340

 

Accrued commissions

 

 

14,290

 

 

 

16,254

 

Accrued rebates

 

 

9,750

 

 

 

14,023

 

Accrued other taxes

 

 

5,309

 

 

 

2,926

 

Accrued professional expenses

 

 

5,196

 

 

 

3,593

 

Income taxes payable

 

 

117

 

 

 

231

 

Derivative liability

 

 

1,189

 

 

 

1,497

 

Other accrued liabilities

 

 

57,009

 

 

 

44,401

 

 

 

$

130,941

 

 

$

113,265

 

 

 

7. DERIVATIVE INSTRUMENTS

From time to time, we use derivative financial instruments to manage interest rate risk related to our variable rate credit facilities and risk related to foreign currency exchange rates. Our objective is to reduce the risk to earnings and cash flows associated with changes in interest rates and changes in foreign currency exchange rates. Before acquiring a derivative instrument to hedge a specific risk, we evaluate potential natural hedges. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, and the availability, effectiveness and cost of derivative instruments. We do not use derivative instruments for speculative or trading purposes.

All derivatives, whether designated as hedging relationships or not, are recorded on the balance sheet at fair value. The fair value of our derivatives is determined through the use of models that consider various assumptions, including time value, yield curves and other relevant economic measures which are inputs that are classified as Level 2 in the fair value hierarchy. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Our interest rate cap agreements were designated as cash flow hedges, and accordingly, effective portions of changes in the fair value of the derivatives were recorded in accumulated other comprehensive income (loss) and subsequently reclassified into our Unaudited Condensed Consolidated Statement of Operations when the hedged forecasted transaction affects income (loss). Ineffective portions of changes in the fair value of cash flow hedges are recognized in income (loss).

Interest Rate Cap Agreements. We utilize interest rate caps to manage the risk of unfavorable movements in interest rates on a portion of our outstanding floating rate loan balances. Our interest rate cap agreements were designated as cash flow hedges for accounting purposes, and the hedges were considered effective. As such, the effective portion of the gain or loss on the derivative instrument was reported as a component of accumulated other comprehensive income (loss) and reclassified into interest expense in our Unaudited Condensed Consolidated Statement of Operations in the period in which it affected income (loss).

 

The following table summarizes the fair value of derivative instruments in our Unaudited Condensed Consolidated Balance Sheets (in thousands):

 

 

 

Balance Sheet Location

 

September 30,

2017

 

 

December 31,

2016

 

Derivative Liabilities:

 

 

 

 

 

 

 

 

 

 

Interest rate cap agreements designated

   as cash flow hedges

 

Other current liabilities

 

$

1,189

 

 

$

1,497

 

Interest rate cap agreements designated

   as cash flow hedges

 

Other long-term liabilities

 

 

1,409

 

 

 

1,283

 

 

11


 

The following table summarizes the effect our derivative instruments have on our Unaudited Condensed Consolidated Statements of Operations (in thousands):

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Location of gain (loss)

 

September 30,

2017

 

 

September 30,

2016

 

 

September 30,

2017

 

 

September 30,

2016

 

Interest rate cap agreements designated