Attached files

file filename
8-K - FORM 8-K - DJO Finance LLCd397552d8k.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 FIRST QUARTER 2017

Strong growth and Business Transformation on track

SAN DIEGO, CA, May 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 first quarter ended April 1, 2017.

First Quarter Highlights

 

  Net sales grew 3.4% as reported to $288.4 million and grew 4.7% on a sales per day constant currency basis.

 

  Net loss was $40.0 million compared to $38.3 million in the prior year period.

 

  Adjusted EBITDA increased 17.0% as reported to $57.2 million, an improvement of 15.4% in constant currency, or greater than 3 times revenue growth.

 

  Net cash provided by continuing operating activities grew $25.2 million to $38.6 million.

“We are off to a solid start in 2017 with growth across our global business, earnings growing faster than revenue and improvement in our cash flow during the first quarter,” said Brady Shirley, DJO’s President and Chief Executive Officer. “Our business transformation is underway and we have begun initiatives to improve liquidity, organization effectiveness, procurement optimization, manufacturing, sales and operations planning, and customer and product profitability, and we are beginning to see early positive results of our efforts. There is still a lot of work ahead of us, but I am confident that this transformation positions the company for sustainable long-term financial performance and value creation for all of our stakeholders.”


Sales Results

DJOFL achieved net sales for the first quarter of 2017 of $288.4 million, reflecting as reported growth of 3.4%, compared with net sales of $278.9 million for the first quarter of 2016. Additionally, the first quarter of 2017 included 64 shipping days, while the comparable period in 2016 included 65 shipping days. Sales in the first quarter of 2017 grew 4.7% on a sales per day constant currency basis over sales in the first quarter of 2016.

Net sales for the Surgical Implant segment were $49.6 million for the first quarter of 2017, reflecting as reported growth of 15.2% compared to the first quarter of 2016. Surgical sales grew 17.0% on a sales day per day basis. The continued growth in the Surgical Implant segment was primarily driven by strong organic growth across the Company’s shoulder, hip and knee products.

Net sales for DJO’s International segment were $78.2 million in the first quarter of 2017, reflecting as reported growth of 4.2% over net sales in the first quarter of 2016. International sales grew 4.9% on a sales per day constant currency basis, driven by stronger sales in the Company’s direct markets, primarily Australia, France, and Spain.

Net sales for DJO’s Recovery Sciences segment were $38.5 million in the first quarter of 2017, reflecting as reported growth of 5.3% compared to the first quarter of 2016. Recovery Sciences sales grew 6.9% on a sales per day basis, reflecting continued strong growth in the segment’s consumer products and Chattanooga rehabilitation equipment product line.

Net sales for DJO’s Bracing and Vascular segment were $122.1 million in the first quarter of 2017, a reported decline of 1.7%, compared to the first quarter of 2016. Bracing and Vascular sales declined 0.2% on a sales per day basis, reflecting softness in the Company’s Aircast and Procare, deep vein thrombosis, and Dr. Comfort products, offset by growth in the Company’s OfficeCare channel, direct consumer and DonJoy products.

 

2


Earnings Results

For the first quarter of 2017, DJOFL reported a net loss attributable to DJOFL of $40.0 million, compared to a net loss of $38.3 million for the first quarter of 2016. As detailed in the attached financial tables, the results for the current and prior year first 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 first quarter of 2017 was $57.2 million compared with Adjusted EBITDA of $48.9 million in the first quarter of 2016, representing 17.0% growth over the prior year and 15.4% growth on a constant currency basis. Strong productivity during the period drove growth in Adjusted EBITDA at over three times the rate of revenue growth. Including projected future savings from cost savings programs currently underway of $6.2 million as permitted under our credit agreement and the indentures governing our outstanding notes, Adjusted EBITDA for the twelve months ended April 1, 2017 was $249.9 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 first quarter of 2017 was $38.6 million compared to $13.4 million for the first quarter of 2016. The improvement in cash flow was primarily attributable to working capital initiatives executed as part of the Company’s overall business transformation.

Conference Call Information

DJO has scheduled a conference call to discuss this announcement beginning at 4:30 pm, Eastern Time Wednesday, May 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.

 

3


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 after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. Its products are used by orthopaedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. In addition, many of the Company’s medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. The Company’s product lines include rigid and soft 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 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

 

4


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-

 

5


DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(In thousands)

 

     Three Months Ended  
     April 1,
2017
    April 1,
2016
 

Net sales

   $ 288,389     $ 278,906  

Operating expenses:

    

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

     119,569       118,083  

Selling, general and administrative

     134,162       121,929  

Research and development

     9,139       9,854  

Amortization of intangible assets

     18,845       19,578  
  

 

 

   

 

 

 
     281,715       269,444  
  

 

 

   

 

 

 

Operating income

     6,674       9,462  

Other (expense) income:

    

Interest expense, net

     (42,687     (42,270

Other income, net

     288       284  
  

 

 

   

 

 

 
     (42,399     (41,986
  

 

 

   

 

 

 

Loss before income taxes

     (35,725     (32,524

Income tax provision

     (4,078     (5,413
  

 

 

   

 

 

 

Net loss from continuing operations

     (39,803     (37,937

Net income (loss) from discontinued operations

     58       (190
  

 

 

   

 

 

 

Net loss

     (39,745     (38,127

Net income attributable to noncontrolling interests

     (224     (193
  

 

 

   

 

 

 

Net loss attributable to DJO Finance LLC

   $ (39,969   $ (38,320
  

 

 

   

 

 

 

 

Note 1 — Cost of sales is exclusive of amortization of intangible assets of $6,981 and $7,407 for the three months ended April 1, 2017 and 2016, respectively.

 

6


DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(In thousands)

 

     April 1,
2017
    December 31,
2016
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 55,000     $ 35,212  

Accounts receivable, net

     172,844       178,193  

Inventories, net

     152,329       151,557  

Prepaid expenses and other current assets

     20,849       23,650  

Current assets of discontinued operations

     511       511  
  

 

 

   

 

 

 

Total current assets

     401,533       389,123  

Property and equipment, net

     128,632       128,019  

Goodwill

     856,589       855,626  

Intangible assets, net

     653,427       672,134  

Other assets

     5,249       5,536  
  

 

 

   

 

 

 

Total assets

   $ 2,045,430     $ 2,050,438  
  

 

 

   

 

 

 
Liabilities and Deficit     

Current liabilities:

    

Accounts payable

   $ 76,981     $ 63,822  

Accrued interest

     45,342       16,740  

Current portion of debt obligations

     10,550       10,550  

Other current liabilities

     111,015       113,265  
  

 

 

   

 

 

 

Total current liabilities

     243,888       204,377  

Long-term debt obligations

     2,385,619       2,392,238  

Deferred tax liabilities, net

     204,801       202,740  

Other long-term liabilities

     14,818       14,932  
  

 

 

   

 

 

 

Total liabilities

   $ 2,849,126     $ 2,814,287  
  

 

 

   

 

 

 

Commitments and contingencies

    

Deficit:

    

DJO Finance LLC membership deficit:

    

Member capital

     841,597       844,294  

Accumulated deficit

     (1,619,611     (1,579,642

Accumulated other comprehensive loss

     (28,014     (30,580
  

 

 

   

 

 

 

Total membership deficit

     (806,028     (765,928

Noncontrolling interests

     2,332       2,079  
  

 

 

   

 

 

 

Total deficit

     (803,696     (763,849
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 2,045,430     $ 2,050,438  
  

 

 

   

 

 

 

 

7


DJO Finance LLC

Unaudited Segment Information

(In thousands)

 

     Three Months Ended  
     April 1,
2017
    April 1,
2016
 

Net sales:

    

Bracing and Vascular

   $ 122,053     $ 124,216  

Recovery Sciences

     38,503       36,575  

Surgical Implant

     49,592       43,050  

International

     78,241       75,065  
  

 

 

   

 

 

 
   $ 288,389     $ 278,906  
  

 

 

   

 

 

 

Operating income:

    

Bracing and Vascular

   $ 21,007     $ 20,534  

Recovery Sciences

     8,907       6,445  

Surgical Implant

     8,140       7,229  

International

     13,610       8,989  

Expenses not allocated to segments and eliminations

     (44,990     (33,735
  

 

 

   

 

 

 
   $ 6,674     $ 9,462  
  

 

 

   

 

 

 

 

8


DJO Finance LLC

Adjusted EBITDA

For the Three Months Ended April 1, 2017 and 2016

(unaudited)

Our Senior Secured Credit Facilities, consisting of a $1,039.2 million term loan facility and a $150.0 million asset-based revolving credit facility, under which $76.0 million was outstanding as of April 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.

 

9


The following table provides a reconciliation between net loss attributable to DJO Finance LLC and Adjusted EBITDA:

 

                   Twelve  
                   Months  
     Three Months Ended      Ended  
     April 1,
2017
     April 1,
2016
     April 1,
2017
 

Net loss attributable to DJO Finance LLC

   $ (39,969    $ (38,320    $ (287,952

(Income) loss from discontinued operations, net

     (58      190        (1,386

Interest expense, net

     42,687        42,270        170,498  

Income tax provision

     4,078        5,413        (8,188

Depreciation and amortization

     29,774        29,902        117,764  

Non-cash charges (a)

     571        399        182,571  

Non-recurring and integration charges (b)

     18,389        7,332        59,732  

Other adjustment items (c)

     1,769        1,728        10,594  
  

 

 

    

 

 

    

 

 

 
     57,241        48,914        243,633  

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

        

Future cost savings

           6,242  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 57,241      $ 48,914      $ 249,875  
  

 

 

    

 

 

    

 

 

 

 

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

 

                   Twelve  
                   Months  
     Three Months Ended      Ended  
     April 1,
2017
     April 1,
2016
     April 1,
2017
 

Stock compensation expense

   $ 454      $ 205      $ 3,437  

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

     117        107        959  

Impairment of goodwill (1)

     —          —          160,000  

Inventory adjustments (2)

     —          —          18,013  

Purchase accounting adjustments (3)

     —          87        162  
  

 

 

    

 

 

    

 

 

 

Total non-cash charges

   $ 571      $ 399      $ 182,571  
  

 

 

    

 

 

    

 

 

 

 

(1) Impairment of goodwill and intangible assets for the twelve months ended April 1, 2017 consisted of a goodwill impairment charge 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.

 

10


(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:

 

                   Twelve  
                   Months  
     Three Months Ended      Ended  
     April 1,
2017
     April 1,
2016
     April 1,
2017
 

Restructuring and reorganization

   $ 15,796      $ 1,993      $ 30,641  

Acquisition related expenses and integration (1)

     302        3,325        7,327  

Executive transition

     —          —          4,856  

Litigation and regulatory costs and settlements, net (2)

     2,102        2,014        16,650  

IT automation projects

     189        —          258  
  

 

 

    

 

 

    

 

 

 

Total non-recurring and integration charges

   $ 18,389      $ 7,332      $ 59,732  
  

 

 

    

 

 

    

 

 

 

 

(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 April 1, 2017, litigation and regulatory costs consisted of $2.6 million in litigation costs related to ongoing product liability issues and $14.1 million related to other litigation and regulatory costs and settlements.
(c) Other adjustment items are comprised of the following:

 

                   Twelve  
                   Months  
     Three Months Ended      Ended  
     April 1,
2017
     April 1,
2016
     April 1,
2017
 

Blackstone monitoring fees

   $ 1,750      $ 1,750      $ 7,000  

Non-controlling interests

     224        193        654  

Other (1)

     (205      (215      2,940  
  

 

 

    

 

 

    

 

 

 

Total other adjustment items

   $ 1,769      $ 1,728      $ 10,594  
  

 

 

    

 

 

    

 

 

 

 

(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 the restructuring of our Recovery Sciences Segment.

# # #

 

11