Published: 2009-08-22 18:00:41
Author: DJO Incorporated | July 30, 2009
DJO Incorporated ("DJO" or the "Company") a global provider of medical devices that provide solutions for musculoskeletal health, vascular health and pain management, today announced financial results for its operating subsidiary, DJO Finance LLC ("DJOFL"), for the second quarter of 2009, ended June 27, 2009. ReAble Therapeutics, Inc. ("ReAble") acquired DJO Incorporated ("DJO Opco") in a transaction completed on November 20, 2007 (the "DJO Merger"). Following completion of the DJO Merger, ReAble changed its name to DJO Incorporated. The Company sold its Empi Therapy Solutions ("ETS") catalog business, formerly known as Rehab Medical Equipment, or RME, to Patterson Medical, a division of Patterson Companies, Inc. on June 12, 2009. The ETS business, a non-core part of the Company's Empi business unit, consisted primarily of the resale of non-DJO branded rehabilitation equipment and supplies and generated annual revenue of approximately $30 million. Results of the ETS business for periods prior to the date of sale, have been presented as discontinued operations. Certain prior period amounts have been reclassified to conform with this presentation.
Second Quarter Results
DJOFL achieved net sales from continuing operations for the second quarter of 2009 of $235.1 million, compared to $241.4 million for the second quarter of 2008. Sales for the second quarter of 2009 were reduced by approximately $8.5 million due to unfavorable changes in foreign currency exchange rates from the rates in effect in the second quarter of 2008. On the basis of constant currency, sales in the second quarter of 2009 increased approximately one percent over sales in the second quarter of 2008.
For the second quarter of 2009, DJOFL reported a net loss of $13.1 million, compared to a net loss of $20.8 million for the second quarter of 2008. The results for the current and prior year second quarter periods were impacted by significant non-recurring charges and other adjustments related to the DJO Merger and certain other smaller acquisitions. The reported net loss for the second quarter of 2009 includes a loss of approximately $0.6 million, net of tax, from discontinued operations, compared to income of approximately $0.6 million for the second quarter of 2008.
The Company defines Adjusted EBITDA as net income (loss) plus loss (income) from discontinued operations, interest expense, net, provision (benefit) for income taxes, and depreciation and amortization, further adjusted for certain non-cash items, non-recurring items and other adjustment items, including the addition of certain future cost savings expected to be achieved related to recent acquisitions, all as permitted in calculating covenant compliance under the Company's senior secured credit facility and the indentures governing its 10.875% senior notes and its 11.75% senior subordinated notes. A reconciliation between net loss and Adjusted EBITDA is included in the attached financial tables.
Adjusted EBITDA for the second quarter of 2009, before future cost savings to be achieved related to the DJO Merger, was $63.7 million, or 27.1 percent of net sales, growing approximately 14.6 percent, compared to Adjusted EBITDA, before future cost savings, of $55.6 million, or 23.0 percent of net sales achieved in the second quarter of 2008. Adjusted EBITDA for the second quarter of 2009 also grew sequentially by 31.0 percent from Adjusted EBITDA of $48.6 million for the first quarter 2009. The improvement is primarily attributable to incremental cost savings realized from integration activities in connection with the DJO Merger combined with cost savings from other cost reductions, partially offset by the impact of unfavorable changes in foreign currency exchange rates, which reduced Adjusted EBITDA for the second quarter of 2009 by approximately $3.4 million, compared to what it would have been had rates in effect in the second quarter of 2008 remained in effect. Excluding the effects of changes in foreign currency exchange rates, second quarter 2009 Adjusted EBITDA would have reflected growth of 20.7 percent over Adjusted EBITDA in the second quarter of 2008. For the twelve month period ended June 27, 2009 (LTM), Adjusted EBITDA was $242.6 million, or 26.1 percent of LTM net sales, including future cost savings to be achieved related to the DJO Merger of $20.6 million.
Cash flow from operations was $65.1 million in the second quarter of 2009 before cash interest paid of $58.1 million, but after funding cash payments of $5.8 million for non-recurring charges in connection with the DJO Merger and related integration activities. The Company also received cash proceeds of approximately $21.8 million from the sale of the ETS business. Cash flow from operations for the second quarter, combined with the proceeds from the sale of ETS, was sufficient to fund the Company's interest obligations, which included the semi-annual interest on the Company's senior notes and senior subordinated notes, as well as the Company's capital expenditures, and still permitted the Company to reduce its total outstanding net debt by over $25 million. The Company had cash balances of $41.9 million at June 27, 2009 and available liquidity of $92.0 million under its revolving line of credit.
Six Month Results
Net revenues from continuing operations for the first six months of 2009 were $452.8 million, reflecting a decrease of approximately 4.4 percent, compared with net revenues from continuing operations of $473.4 million for the first six months of 2008. Sales for the first half of 2009 were reduced by approximately $16.6 million due to unfavorable changes in foreign currency exchange rates from the rates in effect in the first half of 2008. On the basis of constant currency, average daily sales in the first half of 2009 increased approximately one percent over average daily sales in the first half of 2008.
Adjusted EBITDA for the first six months of 2009, before future cost savings to be achieved related to the DJO Merger, was $112.3 million, or 24.8 percent of net sales, compared to $103.9 million, or 22.0 percent of net sales, for the first six months of 2008.
"While 2009 remains a challenging year for certain DJO businesses, we are pleased with our second quarter results, which reflected good sales traction in many of our businesses and very strong EBITDA contributions from all of our businesses as we continue to supplement contributions from revenue growth, which has been limited by the difficult economic environment, with strong cost control across our organization," said Les Cross, president and chief executive officer.
"Excluding the effects of unfavorable changes in foreign currency exchange rates, net sales in the second quarter of 2009 grew modestly over the second quarter of 2008 and also grew sequentially over the first quarter of 2009 on a sales per day basis. We are encouraged by the trends we saw in the second quarter in most of our businesses.
"Within our Domestic Rehabilitation segment, our Bracing and Supports, Empi, and Regeneration businesses all delivered solid growth in the second quarter of 2009, compared to the second quarter of 2008. Our Bracing and Supports business achieved much better growth in the second quarter than it has in recent quarters, as that business continues to work through certain transitions in distribution, particularly on the west coast. Unfortunately, however, our Chattanooga business continues to be impacted by lower capital spending and tight credit markets. In spite of Chattanooga's second quarter sales decline of approximately 22%, our Domestic Rehabilitation segment grew 2.7% in the second quarter of 2009, compared to the second quarter of 2008.
"Our Domestic Surgical Implant segment also reported a significant improvement in second quarter sales, growing 7.1% over the second quarter of 2008, led by strong sales of shoulder products. Although procedure volumes for hips and knees appear to be impacted to a certain extent by the sluggish economy, we saw a strong turn-around in our knee sales in the second quarter, which grew 2.3% over the second quarter of 2008, compared to the decline in sales we experienced in Q1 this year.
"Sales within our International segment declined by 16.4% compared to the second quarter of 2008, primarily due to the impact of unfavorable changes in foreign currency exchange rates, which totaled $8.5 million in the second quarter of 2009. Excluding the impact of foreign exchange, International segment sales declined by 4.3% compared to the second quarter of 2008. Although international sales of our Bracing and Supports products and certain other product lines remained strong, they were not sufficient to overcome declining international sales of clinical physical therapy and consumer products and sales into certain export markets serviced by local independent distributors. These portions of our international business remain challenged by local economic conditions and constraints in the availability of credit.
"In spite of the soft economy and the continued pressure on our capital equipment and consumer products businesses worldwide, continued traction with our integration cost reduction initiatives, combined with a favorable mix of products sold, enabled us to improve our adjusted gross profit margin to approximately 65.4% in the second quarter, improving 70 basis points over the second quarter of 2008 and 110 basis points sequentially from the first quarter of this year.
"We are also very pleased to report strong Adjusted EBITDA results in the second quarter, which set a Company record, and excluding the effects of foreign exchange, reflected very strong growth of 20.7% over the second quarter of last year. Adjusted EBITDA growth continues to benefit from the strength of DJO's product diversity, which has enabled the Company to weather the recession better than many other businesses, and from the disciplined focus we have maintained on our post-merger integration cost savings initiatives and general expense control measures.
"We continue to have great confidence in our ability to responsibly manage our cost structure and accelerate incremental cost reduction opportunities as economic conditions dictate. In this regard, we undertook additional measures late in the second quarter to right-size our worldwide operations, which will contribute additional cost savings benefits to our future operating results. We also commenced the second-phase of integration-related cost savings initiatives, as our initial programs wind down, with the announcement of the consolidation of Chattanooga's operations.
"Consolidating Chattanooga's activities into our other existing centers of excellence over the next nine to twelve months will provide significant cost-reduction benefits as well as enhanced quality and customer service benefits.
"Also, with the sale of the non-core ETS business, which was one of our lowest margin businesses, Empi can now devote its full resources on its higher-margin, industry-leading brands and products.
"Chattanooga and Empi remain very important components of the DJO story and the Company's product portfolio, which is among the broadest in the industry. DJO is uniquely positioned to provide a full range of solutions that cover the entire patient experience from injury prevention to joint replacement and through virtually every aspect of physical therapy, rehabilitation and pain control and we will continue to invest in new products and new technologies for each of these business units going forward to better serve our customers.
"We continue to believe that industry drivers outside of capital equipment, consumer products and certain export markets remain relatively healthy. This combined with DJO's aggressive list of sales initiatives and new product launches, and what we believe is a slowly improving sales environment, should strengthen DJO's revenue results in the second half of this year. With that said, we believe that we may continue to experience headwinds in our businesses that relate to capital equipment and consumer products, and those that rely heavily on export markets, which may constrain our total growth rates at the lower end of historical ranges. If current foreign currency exchange trends remain in effect in the third quarter, we should see an improvement in what has been a challenging foreign exchange environment this year. We will also continue to remain well focused on cost reduction programs, which we expect to generate further positive benefits to our margin structure and our EBITDA levels."
Conference Call Information
DJO has scheduled a conference call to discuss this announcement beginning at 1 PM, Eastern Time today, July 30, 2009. Individuals interested in listening to the conference call may do so by dialing (877) 864-4577 (International callers please use (706) 634-0177), using the reservation code 21584800. A telephone replay will be available for 48 hours following the conclusion of the call by dialing (706) 645-9291 and using the above reservation code. The live conference call and replay will be available via the Internet at www.DJOglobal.com.
About DJO Incorporated
DJO is a leading global developer, manufacturer and distributor of high-quality medical devices that provide solutions for musculoskeletal health, vascular health and pain management. The Company's products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease. 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. 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 orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular systems, 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's products are marketed under the brands Aircast®, DonJoy®, ProCare®, CMF, Empi®, Saunders®, Chattanooga, DJO Surgical, Cefar®-Compex® and Ormed®. DJO uses its website as a channel of distribution of material Company information. Financial and other material information regarding the Company is routinely posted and accessible at www.DJOglobal.com.