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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_9.htm
EX-31.2 - EX-31.2 - DJO Finance LLCdjo-ex312_7.htm
EX-31.1 - EX-31.1 - DJO Finance LLCdjo-ex311_6.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 March 31, 2018

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 May 14, 2018, 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 March 31, 2018 and December 31, 2017

 

1

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and April 1, 2017 

 

2

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and April 1, 2017

 

3

 

Unaudited Condensed Consolidated Statement of Deficit for the three months ended March 31, 2018

 

4

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and April 1, 2017

 

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

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

 

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4.

Controls and Procedures

 

38

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

39

Item 1A.

Risk Factors

 

39

Item 6.

Exhibits

 

40

 

 

 

 


 

PART 1 – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,597

 

 

$

31,985

 

Accounts receivable, net

 

 

196,478

 

 

 

190,324

 

Inventories, net

 

 

187,675

 

 

 

169,137

 

Prepaid expenses and other current assets

 

 

21,984

 

 

 

20,218

 

Current assets of discontinued operations

 

 

511

 

 

 

511

 

Total current assets

 

 

441,245

 

 

 

412,175

 

Property and equipment, net

 

 

133,269

 

 

 

133,522

 

Goodwill

 

 

865,116

 

 

 

864,112

 

Intangible assets, net

 

 

592,609

 

 

 

607,088

 

Other assets

 

 

5,884

 

 

 

5,128

 

Total assets

 

$

2,038,123

 

 

$

2,022,025

 

Liabilities and Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

123,351

 

 

$

98,331

 

Accrued interest

 

 

46,565

 

 

 

18,015

 

Current portion of debt obligations

 

 

16,102

 

 

 

15,936

 

Other current liabilities

 

 

99,821

 

 

 

126,360

 

Total current liabilities

 

 

285,839

 

 

 

258,642

 

Long-term debt obligations

 

 

2,397,386

 

 

 

2,398,184

 

Deferred tax liabilities, net

 

 

144,708

 

 

 

142,597

 

Other long-term liabilities

 

 

14,077

 

 

 

13,080

 

Total liabilities

 

$

2,842,010

 

 

$

2,812,503

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Deficit:

 

 

 

 

 

 

 

 

DJO Finance LLC membership deficit:

 

 

 

 

 

 

 

 

Member capital

 

 

844,563

 

 

 

844,115

 

Accumulated deficit

 

 

(1,633,162

)

 

 

(1,615,536

)

Accumulated other comprehensive loss

 

 

(17,723

)

 

 

(21,072

)

Total membership deficit

 

 

(806,322

)

 

 

(792,493

)

Noncontrolling interests

 

 

2,435

 

 

 

2,015

 

Total deficit

 

 

(803,887

)

 

 

(790,478

)

Total liabilities and deficit

 

$

2,038,123

 

 

$

2,022,025

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

1


 

DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

April 1,

2017

 

Net sales

 

$

292,629

 

 

$

288,389

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of sales (exclusive of amortization of intangible assets of $6,658 and $6,981 for three months ended March 31, 2018 and April 1, 2017, respectively)

 

 

119,936

 

 

 

119,569

 

Selling, general and administrative

 

 

115,316

 

 

 

134,162

 

Research and development

 

 

9,282

 

 

 

9,139

 

Amortization of intangible assets

 

 

14,598

 

 

 

18,845

 

 

 

 

259,132

 

 

 

281,715

 

Operating income

 

 

33,497

 

 

 

6,674

 

Other (expense) income:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(43,922

)

 

 

(42,687

)

Other (expense) income, net

 

 

(1,540

)

 

 

288

 

 

 

 

(45,462

)

 

 

(42,399

)

Loss before income taxes

 

 

(11,965

)

 

 

(35,725

)

Income tax provision

 

 

(5,385

)

 

 

(4,078

)

Net loss from continuing operations

 

 

(17,350

)

 

 

(39,803

)

Net income from discontinued operations

 

 

144

 

 

 

58

 

Net loss

 

 

(17,206

)

 

 

(39,745

)

Net income attributable to noncontrolling interests

 

 

(362

)

 

 

(224

)

Net loss attributable to DJO Finance LLC

 

$

(17,568

)

 

$

(39,969

)

 

 

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

 

 

 

March 31,

2018

 

 

April 1,

2017

 

Net loss

 

$

(17,206

)

 

$

(39,745

)

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax provision of $1,366 and $(112) for the three months ended March 31, 2018 and April 1, 2017, respectively

 

 

1,502

 

 

 

1,749

 

Unrealized gain on cash flow hedges, net of tax provision of $471 and zero for the three months ended March 31, 2018 and April 1, 2017, respectively

 

 

1,905

 

 

 

846

 

Other comprehensive income

 

 

3,407

 

 

 

2,595

 

Comprehensive loss

 

 

(13,799

)

 

 

(37,150

)

Comprehensive income attributable to noncontrolling interests

 

 

(420

)

 

 

(253

)

Comprehensive loss attributable to DJO Finance LLC

 

$

(14,219

)

 

$

(37,403

)

 

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, 2017

 

$

844,115

 

 

$

(1,615,536

)

 

$

(21,072

)

 

$

(792,493

)

 

$

2,015

 

 

$

(790,478

)

Net (loss) income

 

 

 

 

 

(17,568

)

 

 

 

 

 

(17,568

)

 

 

362

 

 

 

(17,206

)

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

3,349

 

 

 

3,349

 

 

 

58

 

 

 

3,407

 

Stock-based compensation

 

 

448

 

 

 

 

 

 

 

 

 

448

 

 

 

 

 

 

448

 

Balance at March 31, 2018

 

$

844,563

 

 

$

(1,633,162

)

 

$

(17,723

)

 

$

(806,322

)

 

$

2,435

 

 

$

(803,887

)

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

4


 

DJO Finance LLC

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

April 1,

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,206

)

 

$

(39,745

)

Net income from discontinued operations

 

 

(144

)

 

 

(58

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

10,907

 

 

 

10,929

 

Amortization of intangible assets

 

 

14,598

 

 

 

18,845

 

Amortization of debt issuance costs and non-cash interest expense

 

 

2,138

 

 

 

2,019

 

Stock-based compensation expense

 

 

448

 

 

 

454

 

Loss on disposal of assets, net

 

 

398

 

 

 

130

 

Deferred income tax expense

 

 

99

 

 

 

2,910

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,147

)

 

 

6,033

 

Inventories

 

 

(16,936

)

 

 

(2,375

)

Prepaid expenses and other assets

 

 

(2,328

)

 

 

3,138

 

Accrued interest

 

 

28,550

 

 

 

28,602

 

Accounts payable and other current liabilities

 

 

(3,210

)

 

 

7,741

 

Net cash provided by continuing operating activities

 

 

12,167

 

 

 

38,623

 

Net cash provided by discontinued operations

 

 

144

 

 

 

58

 

Net cash provided by operating activities

 

 

12,311

 

 

 

38,681

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6,914

)

 

 

(7,474

)

Net cash used in investing activities

 

 

(6,914

)

 

 

(7,474

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

20,000

 

 

 

-

 

Repayments of debt obligations

 

 

(23,357

)

 

 

(8,638

)

Repurchase of common stock

 

 

-

 

 

 

(3,600

)

Investment by parent

 

 

-

 

 

 

500

 

Net cash used in financing activities

 

 

(3,357

)

 

 

(11,738

)

Effect of exchange rate changes on cash and cash equivalents

 

 

572

 

 

 

319

 

Net increase in cash and cash equivalents

 

 

2,612

 

 

 

19,788

 

Cash and cash equivalents at the beginning of the period

 

 

31,985

 

 

 

35,212

 

Cash and cash equivalents at the end of the period

 

$

34,597

 

 

$

55,000

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

15,928

 

 

$

12,137

 

Cash paid for taxes, net

 

$

1,611

 

 

$

1,201

 

 

 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of surgical instruments included in accounts payable

 

$

4,190

 

 

$

4,080

 

 

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, 2017.

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 fiscal quarter of 2018 had the same number of shipping days as the first fiscal quarter of 2017.

 

Recent Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update (ASU) No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company put a team in place to analyze the impact of this ASU across all revenue streams to evaluate the impact of the new standard on revenue contracts. This included 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 started drafting its accounting policies and evaluating the new disclosure requirements and their impact on the Company’s business processes, controls and systems in 2017. Effective January 1, 2018, the Company has adopted 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. The timing of revenue recognition under the new standards is not materially different from our previous revenue recognition policy. Based on the Company’s analysis of open contracts as of January 1, 2018, the cumulative effect of applying the new standards was not material.  

In January 2016, the FASB issued an ASU 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. The Company adopted this guidance effective in the first quarter of 2018.  Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In February 2016, the FASB issued an ASU 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 and developing tools for the tracking of and accounting for lease contracts. As such, we are still assessing the impact of adoption on our consolidated financial statements.

7


 

In August 2016, the FASB issued an ASU 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. The Company adopted this guidance effective in the first quarter of 2018. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In October 2016, the FASB issued an ASU 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 was applied on a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Adoption of this new guidance did not have a material effect on the Company’s financial statements.

In January 2017, the FASB issued an ASU 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. We have adopted this guidance as of the fourth quarter of 2017 and it did not have a material effect on the Company’s financial statements.

 

 

 

2. DIVESTITURES

 

Discontinued Operations

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

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

April 1,

2017

 

Balance, beginning of period

 

$

29,238

 

 

$

36,070

 

Provision for doubtful accounts

 

 

4,277

 

 

 

5,349

 

Write-offs, net of recoveries

 

 

(1,995

)

 

 

(11,049

)

Balance, end of period

 

$

31,520

 

 

$

30,370

 

 

 

 

 

4. INVENTORIES

Inventories consist of the following (in thousands):

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Components and raw materials

 

$

71,529

 

 

$

67,220

 

Work in process

 

 

4,571

 

 

 

5,652

 

Finished goods

 

 

103,270

 

 

 

89,468

 

Inventory held on consignment

 

 

39,383

 

 

 

38,219

 

 

 

 

218,753

 

 

 

200,559

 

Inventory reserves

 

 

(31,078

)

 

 

(31,422

)

 

 

$

187,675

 

 

$

169,137

 

 

8


 

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

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

April 1,

2017

 

Balance, beginning of period

 

$

31,422

 

 

$

38,312

 

Provision charged to costs of sales

 

 

518

 

 

 

3,424

 

Write-offs, net of recoveries

 

 

(862

)

 

 

(10,314

)

Balance, end of period

 

$

31,078

 

 

$

31,422

 

 

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 three months ended March 31, 2018 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

 

 

$

339,030

 

 

$

1,121,118

 

Accumulated impairment losses

 

 

(61,000

)

 

 

(148,600

)

 

 

(47,406

)

 

 

 

 

 

(257,006

)

Goodwill, net of accumulated impairment losses at

   December 31, 2017

 

 

422,258

 

 

 

101,001

 

 

 

1,823

 

 

 

339,030

 

 

 

864,112

 

Current Year Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

1,004

 

 

 

1,004

 

Balance, end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

483,258

 

 

 

249,601

 

 

 

49,229

 

 

 

340,034

 

 

 

1,122,122

 

Accumulated impairment losses

 

 

(61,000

)

 

 

(148,600

)

 

 

(47,406

)

 

 

 

 

 

(257,006

)

Goodwill, net of accumulated impairment losses at

   March 31, 2018

 

$

422,258

 

 

$

101,001

 

 

$

1,823

 

 

$

340,034

 

 

$

865,116

 

 

Intangible Assets

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

 

March 31, 2018

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangible

Assets, Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

478,343

 

 

$

(409,372

)

 

$

68,971

 

Patents and technology

 

 

446,871

 

 

 

(309,440

)

 

 

137,431

 

Trademarks and trade names

 

 

29,888

 

 

 

(19,331

)

 

 

10,557

 

Distributor contracts and relationships

 

 

4,794

 

 

 

(4,729

)

 

 

65

 

Non-compete agreements

 

 

6,749

 

 

 

(6,749

)

 

 

-

 

 

 

$

966,645

 

 

$

(749,621

)

 

 

217,024

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

 

 

 

 

 

 

 

375,585

 

Net identifiable intangible assets

 

 

 

 

 

 

 

 

 

$

592,609

 

9


 

 

December 31, 2017

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangible

Assets, Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

478,114

 

 

$

(402,005

)

 

$

76,109

 

Patents and technology

 

 

446,894

 

 

 

(302,805

)

 

 

144,089

 

Trademarks and trade names

 

 

29,851

 

 

 

(18,576

)

 

 

11,275

 

Distributor contracts and relationships

 

 

4,805

 

 

 

(4,725

)

 

 

80

 

Non-compete agreements

 

 

6,750

 

 

 

(6,750

)

 

 

-

 

 

 

$

966,414

 

 

$

(734,861

)

 

$

231,553

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

 

 

 

 

 

 

 

375,535

 

Net identifiable intangible assets

 

 

 

 

 

 

 

 

 

$

607,088

 

 

Our definite lived intangible assets are being amortized using the straight line method over their remaining weighted average useful lives of 3.3 years for customer relationships, 6.0 years for patents and technology, 1.1 years for distributor contracts and relationships and 5.0 years for trademarks and trade names. Based on our amortizable intangible asset balance as of March 31, 2018, we estimate that amortization expense will be as follows for the next five years and thereafter (in thousands):

 

Remaining 2018

 

$

43,425

 

2019

 

 

53,068

 

2020

 

 

37,096

 

2021

 

 

32,495

 

2022

 

 

28,694

 

Thereafter

 

 

22,246

 

 

 

$

217,024

 

 

 

6. OTHER CURRENT LIABILITIES

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Accrued wages and related expenses

 

$

25,247

 

 

$

41,482

 

Accrued commissions

 

 

13,764

 

 

 

16,994

 

Accrued rebates

 

 

8,573

 

 

 

12,896

 

Accrued other taxes

 

 

5,400

 

 

 

5,743

 

Accrued professional expenses

 

 

4,016

 

 

 

3,879

 

Income taxes payable

 

 

2,727

 

 

 

1,937

 

Derivative liability

 

 

 

 

 

268

 

Other accrued liabilities

 

 

40,094

 

 

 

43,161

 

 

 

$

99,821

 

 

$

126,360

 

 

 

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

10


 

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 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 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

 

March 31,

2018

 

 

December 31,

2017

 

Derivative Assets:

 

 

 

 

 

 

 

 

 

 

Interest rate cap agreements designated

   as cash flow hedges

 

Other current assets

 

$

1,140

 

 

$

 

Interest rate cap agreements designated

   as cash flow hedges

 

Other long-term assets

 

 

1,038

 

 

 

84

 

 

 

 

 

$

2,178

 

 

$

84

 

Derivative Liabilities:

 

 

 

 

 

 

 

 

 

 

Interest rate cap agreements designated

   as cash flow hedges

 

Other current liabilities

 

$

 

 

$

268

 

 

 

 

 

$

 

 

$

268

 

 

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

 

 

 

 

 

Three Months Ended

 

 

 

Location of gain (loss)

 

March 31,

2018

 

 

April 1,

2017

 

Interest rate cap agreements designated

   as cash flow hedges

 

Interest (income) expense, net

 

$

(196

)

 

$

295

 

 

The pre-tax loss on derivative instruments designated as cash flow hedges recognized in other comprehensive income (loss) is presented below (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

April 1,

2017

 

Interest rate cap agreements designated as cash flow hedges

 

$

1,905

 

 

$

846

 

 

 

8. FAIR VALUE MEASUREMENTS

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

11


 

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis (in thousands):

 

As of March 31, 2018

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Recorded

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap agreements designated

   as cash flow hedges

 

$

 

 

$

2,178

 

 

$

 

 

$

2,178

 

 

As of December 31, 2017

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Recorded

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap agreements designated

   as cash flow hedges

 

$

 

 

$

84

 

 

$

 

 

$

84

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap agreements designated

   as cash flow hedges

 

$

 

 

$

268

 

 

$

 

 

$

268

 

 

 

9. DEBT

Debt obligations consist of the following (in thousands):

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Credit facilities:

 

 

 

 

 

 

 

 

Revolving credit facility, net of unamortized debt issuance

   costs of $1.0 million and $1.2 million as of

   March 31, 2018 and December 31, 2017,

   respectively

 

$

73,962

 

 

$

73,843

 

Term loan:

 

 

 

 

 

 

 

 

$1,028.6 million Term Loan, net of unamortized debt

   issuance costs and original issuance discount of

   $7.8 million and $8.6 million as of

   March 31, 2018 and December 31, 2017,

   respectively

 

 

1,020,842

 

 

 

1,022,630

 

Notes:

 

 

 

 

 

 

 

 

$1,015.0 million 8.125% Second Lien Notes, net

   of unamortized debt issuance costs and original issuance

   discount of $10.9 million and $11.6 million as of

   March 31, 2018 and December 31, 2017,

   respectively

 

 

1,004,097

 

 

 

1,003,382

 

$298.5 million 10.75% Third Lien Notes, net of

   unamortized debt issuance costs and original

   issuance discount of $4.4 million and $4.8 million as of

   March 31, 2018 and December 31, 2017,

   respectively

 

 

294,110

 

 

 

293,657

 

Capital lease obligations and other

 

 

20,477

 

 

 

20,608

 

Total debt

 

 

2,413,488

 

 

 

2,414,120

 

Current maturities