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Report of Independent Auditors
To the Board of Directors of DJO Global, Inc.
the accompanying consolidated financial statements of DJO Global, Inc., which comprise the consolidated balance sheets as of December 31, 2017, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, deficit
and cash flows for each of the three years in the period ended December 31, 2017, and the related notes to the consolidated financial statements.
Management s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting
principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor s Responsibility
Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement for the financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of DJO Global, Inc. at December 31, 2017, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
member firm of Ernst & Young Global Limited
Consolidated Balance Sheets
(in thousands, except share amounts)
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Assets | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | $ | 31,985 | $ | 35,212 | $ | 48,943 | ||||||
| Accounts receivable, net | 190,324 | 178,193 | 172,360 | |||||||||
| Inventories, net | 169,137 | 151,557 | 174,573 | |||||||||
| Prepaid expenses and other current assets | 20,218 | 23,650 | 21,179 | |||||||||
| Current assets of discontinued operations | 511 | 511 | 2,878 | |||||||||
| Total current assets | 412,175 | 389,123 | 419,933 | |||||||||
| Property and equipment, net | 133,522 | 128,019 | 117,273 | |||||||||
| Goodwill | 864,112 | 855,626 | 1,018,104 | |||||||||
| Intangible assets, net | 607,088 | 672,134 | 749,045 | |||||||||
| Other assets | 5,128 | 5,536 | 5,174 | |||||||||
| Non-current assets of discontinued operations | 29 | |||||||||||
| Total assets | $ | 2,022,025 | $ | 2,050,438 | $ | 2,309,558 | ||||||
| Liabilities and Deficit | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | 98,331 | $ | 63,822 | $ | 58,492 | ||||||
| Accrued interest | 18,015 | 16,740 | 16,998 | |||||||||
| Current portion of debt obligations | 15,936 | 10,550 | 10,550 | |||||||||
| Other current liabilities | 126,360 | 113,265 | 102,173 | |||||||||
| Current liabilities of discontinued operations | 13,371 | |||||||||||
| Total current liabilities | 258,642 | 204,377 | 201,584 | |||||||||
| Long-term debt obligations | 2,398,184 | 2,392,238 | 2,344,562 | |||||||||
| Deferred tax liabilities, net | 142,597 | 202,740 | 213,856 | |||||||||
| Other long-term liabilities | 13,080 | 14,932 | 15,092 | |||||||||
| Total liabilities | $ | 2,812,503 | $ | 2,814,287 | $ | 2,775,094 | ||||||
| Commitments and contingencies | ||||||||||||
| Stockholders deficit: | ||||||||||||
| Common stock: $0.01 par value; 150,000,000 shares authorized at December 31, 2017, 2016 and 2015; 49,501,143 shares issued and 49,282,431 shares outstanding at December 31, 2017; 49,407,203 and 49,364,117 shares issued and outstanding at December 31, 2016 and 2015, respectively | 495 | 494 | 493 | |||||||||
| Treasury stock at cost | (3,600 | ) | ||||||||||
| Additional paid-in capital | 847,220 | 843,800 | 841,017 | |||||||||
| Accumulated deficit | (1,615,536 | ) | (1,579,642 | ) | (1,293,339 | ) | ||||||
| Accumulated other comprehensive loss | (21,072 | ) | (30,580 | ) | (16,341 | ) | ||||||
| Total stockholders deficit | (792,493 | ) | (765,928 | ) | (468,170 | ) | ||||||
| Noncontrolling interests | 2,015 | 2,079 | 2,634 | |||||||||
| Total deficit | (790,478 | ) | (763,849 | ) | (465,536 | ) | ||||||
| Total liabilities and deficit | $ | 2,022,025 | $ | 2,050,438 | $ | 2,309,558 |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Operations
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net sales | $ | 1,186,206 | $ | 1,155,288 | $ | 1,113,627 | ||||||
| Costs and operating expenses: | ||||||||||||
| Cost of sales (exclusive of amortization of intangible assets of $27,732, $28,525 and $30,719 for the year ended December 31, 2017, 2016, and 2015, respectively | 498,107 | 511,414 | 466,019 | |||||||||
| Selling, general and administrative | 510,523 | 490,693 | 454,724 | |||||||||
| Research and development | 35,429 | 37,710 | 35,105 | |||||||||
| Amortization of intangible assets | 66,146 | 76,526 | 79,964 | |||||||||
| Impairment of goodwill | 160,000 | |||||||||||
| 1,110,205 | 1,276,343 | 1,035,812 | ||||||||||
| Operating income (loss) | 76,001 | (121,055 | ) | 77,815 | ||||||||
| Other expense: | ||||||||||||
| Interest expense, net | (174,238 | ) | (170,082 | ) | (172,290 | ) | ||||||
| Loss on modification and extinguishment of debt | (68,473 | ) | ||||||||||
| Other income (expense), net | 2,113 | (2,534 | ) | (7,303 | ) | |||||||
| (172,125 | ) | (172,616 | ) | (248,066 | ) | |||||||
| Loss before income taxes | (96,124 | ) | (293,671 | ) | (170,251 | ) | ||||||
| Income tax (benefit) provision | (60,720 | ) | (6,853 | ) | 12,256 | |||||||
| Net loss from continuing operations | (35,404 | ) | (286,818 | ) | (182,507 | ) | ||||||
| Net income (loss) from discontinued operations | 309 | 1,138 | (157,580 | ) | ||||||||
| Net loss | (35,095 | ) | (285,680 | ) | (340,087 | ) | ||||||
| Net income attributable to noncontrolling interests | (799 | ) | (623 | ) | (840 | ) | ||||||
| Net loss attributable to DJO Global, Inc. | $ | (35,894) | $ | (286,303 | ) | $ | (340,927 | ) |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Loss
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net loss | $ | (35,095 | ) | $ | (285,680 | ) | $ | (340,087 | ) | |||
| Other comprehensive income (loss), net of taxes: | ||||||||||||
| Foreign currency translation adjustments, net of tax provision (benefit) of $7,400, $(34), and $(540), for the year ended December 31, 2017, 2016 and 2015, respectively | 5,638 | (10,342 | ) | (6,006 | ) | |||||||
| Unrealized gain (loss) on cash flow hedges, net of tax provision of $1,144, zero and zero for the year ended December 31, 2017, 2016 and 2015, respectively | 3,007 | (3,969 | ) | 985 | ||||||||
| Other comprehensive income (loss) | 8,645 | (14,311 | ) | (5,021 | ) | |||||||
| Comprehensive loss | (26,450 | ) | (299,991 | ) | (345,108 | ) | ||||||
| Comprehensive loss (income) attributable to non-controlling interests | 64 | (550 | ) | (557 | ) | |||||||
| Comprehensive loss attributable to DJO Global, Inc. | $ | (26,386 | ) | $ | (300,541 | ) | $ | (345,665 | ) |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Deficit
(in thousands, except share amounts)
| DJO Global, Inc. | ||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | |||||||||||||||||||||||||||||||||||||||
| Number of shares | Par value | Number of shares | Par amount | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total stockholders deficit | Non- controlling interests | Total deficit | |||||||||||||||||||||||||||||||
| Balance at December 31, 2014 | 49,345,913 | $ | 493 | $ | $ | 839,288 | $ | (952,412 | ) | $ | (11,603 | ) | $ | (124,234 | ) | $ | 2,618 | $ | (121,616 | ) | ||||||||||||||||||||
| Net (loss) income | (340,927 | ) | (340,927 | ) | 840 | (340,087 | ) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (4,738 | ) | (4,738 | ) | (283 | ) | (5,021 | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 1,805 | 1,805 | 1,805 | |||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 18,204 | (76 | ) | (76 | ) | (76 | ) | |||||||||||||||||||||||||||||||||
| Dividend paid by subsidiary to non-controlling interests owners | (541 | ) | (541 | ) | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2015 | 49,364,117 | 493 | 841,017 | (1,293,339 | ) | (16,341 | ) | (468,170 | ) | 2,634 | (465,536 | ) | ||||||||||||||||||||||||||||
| Net (loss) income | (286,303 | ) | (286,303 | ) | 623 | (285,680 | ) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (14,239 | ) | (14,239 | ) | (72 | ) | (14,311 | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | 3,188 | 3,188 | 3,188 | |||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 43,086 | 1 | (405 | ) | (404 | ) | (404 | ) | ||||||||||||||||||||||||||||||||
| Dividend paid by subsidiary to non-controlling interests owners | (1,106 | ) | (1,106 | ) | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 49,407,203 | 494 | 843,800 | (1,579,642 | ) | (30,580 | ) | (765,928 | ) | 2,079 | (763,849 | ) | ||||||||||||||||||||||||||||
| Net (loss) income | (35,894 | ) | (35,894 | ) | 799 | (35,095 | ) | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes | 9,508 | 9,508 | (863 | ) | 8,645 | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | 3,698 | 3,698 | 3,698 | |||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | 218,712 | (3,600 | ) | (3,600 | ) | (3,600 | ) | |||||||||||||||||||||||||||||||||
| Issuance of common stock | 30,377 | 500 | 500 | 500 | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 45,774 | 1 | (485 | ) | (484 | ) | (484 | ) | ||||||||||||||||||||||||||||||||
| Issuance of shares upon vesting of restricted stock units, net of taxes | 17,789 | (293 | ) | (293 | ) | (293 | ) | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 49,501,143 | $ | 495 | 218,712 | $ | (3,600 | ) | $ | 847,220 | $ | (1,615,536 | ) | $ | (21,072 | ) | $ | (792,493 | ) | $ | 2,015 | $ | (790,478 | ) |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cash Flows From Operating Activities: | ||||||||||||
| Net loss | $ | (35,095 | ) | $ | (285,680 | ) | $ | (340,087 | ) | |||
| Net (income) loss from discontinued operations | (309 | ) | (1,138 | ) | 157,580 | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
| Depreciation | 45,115 | 41,367 | 37,491 | |||||||||
| Amortization of intangible assets | 66,146 | 76,526 | 79,964 | |||||||||
| Amortization of debt issuance costs and non-cash interest expense | 8,274 | 7,755 | 7,850 | |||||||||
| Stock-based compensation expense | 3,696 | 3,188 | 1,805 | |||||||||
| Impairment of goodwill | 160,000 | |||||||||||
| Loss on disposal of assets, net | 1,321 | 642 | 1,447 | |||||||||
| Deferred income tax (benefit) provision | (68,449 | ) | (11,297 | ) | 5,940 | |||||||
| Loss on modification and extinguishment of debt | 68,473 | |||||||||||
| Changes in operating assets and liabilities, net of acquired assets and liabilities: | ||||||||||||
| Accounts receivable | (7,219 | ) | (7,830 | ) | (8,064 | ) | ||||||
| Inventories | (18,339 | ) | 15,674 | (8,106 | ) | |||||||
| Prepaid expenses and other assets | 3,970 | (2,516 | ) | (7,516 | ) | |||||||
| Accrued interest | 1,274 | (258 | ) | (12,600 | ) | |||||||
| Accounts payable and other | 44,221 | 12,184 | 26,064 | |||||||||
| Net cash provided by continuing operating activities | 44,606 | 8,617 | 10,241 | |||||||||
| Net cash provided by (used in) discontinued operations | 309 | (9,837 | ) | 39,861 | ||||||||
| Net cash provided by (used in) operating activities | 44,915 | (1,220 | ) | 50,102 | ||||||||
| Cash Flows From Investing Activities: | ||||||||||||
| Purchases of property and equipment | (47,361 | ) | (51,428 | ) | (44,665 | ) | ||||||
| Proceeds from disposition of assets | 946 | |||||||||||
| Cash paid in connection with acquisitions, net of cash acquired | (24,000 | ) | ||||||||||
| Other investing activities, net | 27 | |||||||||||
| Net cash used in investing activities from continuing operations | (47,361 | ) | (50,482 | ) | (68,638 | ) | ||||||
| Net cash used in investing activities from discontinued operations | (575 | ) | ||||||||||
| Net cash used in investing activities | (47,361 | ) | (50,482 | ) | (69,213 | ) | ||||||
| Cash Flows From Financing Activities: | ||||||||||||
| Proceeds from issuance of debt | 103,552 | 107,000 | 2,518,033 | |||||||||
| Repayments of debt obligations | (101,335 | ) | (67,079 | ) | (2,419,027 | ) | ||||||
| Payment of debt issuance, modification and extinguishment costs | (62,375 | ) | ||||||||||
| Repurchase of treasury stock | (3,600 | ) | ||||||||||
| Dividend paid by subsidiary to owners of noncontrolling interests | (1,102 | ) | (1,106 | ) | (541 | ) | ||||||
| Other financing activities, net | (175 | ) | 11 | |||||||||
| Net cash (used in) provided by financing activities | (2,660 | ) | 38,815 | 36,101 | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,879 | (844 | ) | 809 | ||||||||
| Net (decrease) increase in cash and cash equivalents | (3,227 | ) | (13,731 | ) | 17,799 | |||||||
| Cash and cash equivalents, beginning of year | 35,212 | 48,943 | 31,144 | |||||||||
| Cash and cash equivalents, end of year | $ | 31,985 | $ | 35,212 | $ | 48,943 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 164,087 | $ | 162,644 | $ | 176,739 | ||||||
| Cash paid for taxes, net | $ | 4,278 | $ | 4,900 | $ | 7,584 | ||||||
| Non-cash investing activities: | ||||||||||||
| Purchases of surgical instruments included in accounts payable | $ | 2,491 | $ | 310 | $ | 1,506 |
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization and Business
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 Global, Inc. (DJO) is the parent company to DJO Finance
LLC (DJOFL), a wholly owned indirect subsidiary. 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 DJO and its consolidated subsidiaries.
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 18 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.
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
The Consolidated Financial Statements include the Company and its controlled subsidiaries. Intercompany transactions are eliminated. 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 noncontrolling interests in our 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.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents. Cash consists of deposits with financial institutions. We consider all short-term, highly liquid investments and investments
in money market funds and commercial paper with remaining maturities of less than three months at the time of purchase to be cash equivalents. While our cash and cash equivalents are on deposit with high-quality institutions, such deposits exceed
Federal Deposit Insurance Corporation insured limits.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are recorded at
the invoiced amount and do not bear interest. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. Management analyzes accounts receivable based on historical
collection rates and bad debts write-offs, customer concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged off against the allowance
when the Company believes it is probable the receivable will not be recovered.
Sales Returns and Allowances. We make estimates of the amount of
sales returns and allowances that will eventually be incurred. Management analyzes sales programs that are in effect, contractual arrangements, market acceptance and historical trends when evaluating the adequacy of sales returns and allowance
accounts. We estimate contractual discounts and allowances for reimbursement amounts from our third party payor customers based on negotiated contracts and historical experience.
Inventories. Inventories are valued at the lower of cost or market. We use standard cost methodology to determine cost basis for our inventories. This
methodology approximates actual cost on a first-in, first-out basis. We establish reserves for slow moving and excess inventory, product obsolescence, shrinkage and
other valuation allowances based on future demand and historical experience to make corresponding adjustments to the carrying value of these inventories to reflect the lower of cost or market value.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets that range from three to 25 years. Leasehold improvements and equipment under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated
useful life of the asset. We capitalize surgical implant instruments that we provide to surgeons, free of charge, for use while implanting our products and the related depreciation expense is recorded as a component of Selling, general and
administrative expense. We also capitalize electrotherapy devices that we rent to patients and record the related depreciation expense in cost of sales.
Software Developed For Internal Use. Software is stated at cost less accumulated amortization and is amortized on a straight-line basis over estimated
useful lives ranging from three to ten years. We capitalize costs of internally developed software during the development stage, including external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for
employees who are directly associated with a software project. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable. Upgrades and enhancements are capitalized if they result
in added functionality. Amortization expense related to internally developed software was $1.7 million for each of the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, 2016 and 2015, we had $3.4 million, $5.1 million and $6.8 million, respectively, of unamortized internally
developed software costs included within property and equipment in our Consolidated Balance Sheets.
Intangible Assets and Amortization. Our
primary intangible assets are goodwill, customer relationships, patents and technology and trademarks and trade names. Goodwill represents the excess purchase price over the fair value of the identifiable net assets acquired in business
combinations. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with definite lives are amortized over their respective estimated useful lives
and reviewed for impairment when circumstances warrant.
We evaluate the carrying value of goodwill and indefinite life intangible assets annually on the
first day of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. We evaluate the carrying value of finite life intangible assets whenever events or circumstances indicate the carrying value may
not be recoverable. Significant assumptions are required to estimate the fair value of goodwill and intangible assets, most notably estimated future cash flows generated by these assets. As such, these fair valuation measurements use significant