Third quarter 2009 financial results announced by DJO

DJO IncorporatedOct 28 2009

DJO Incorporated (“DJO” or the “Company”), a global provider of medical device solutions for musculoskeletal health, vascular health and pain management, today announced financial results for its operating subsidiary, DJO Finance LLC (“DJOFL”), for the third quarter of 2009, ended September 26, 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 in June 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.

Third Quarter Results

DJOFL achieved net sales from continuing operations for the third quarter of 2009 of $236.2 million, compared to $235.5 million for the third quarter of 2008. Sales for the third quarter of 2009 were reduced by approximately $3.4 million due to unfavorable changes in foreign currency exchange rates from the rates in effect in the third quarter of 2008. On the basis of constant currency, sales in the third quarter of 2009 increased approximately two percent over sales in the third quarter of 2008.

For the third quarter of 2009, DJOFL reported a net loss of $11.4 million, compared to a net loss of $14.4 million for the third quarter of 2008. The results for the current and prior year third quarter periods were impacted by significant non-recurring charges and other adjustments related to the DJO Merger and certain other smaller acquisitions.

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 the DJO Merger and other 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 third quarter of 2009, before future cost savings related to the DJO Merger and other recent acquisitions, was $64.9 million, or 27.5 percent of net sales, growing approximately 20.0 percent, compared to Adjusted EBITDA, before future cost savings, of $54.1 million, or 23.0 percent of net sales, for the third quarter of 2008. The year-over-year improvement is primarily attributable to incremental cost savings realized from integration activities in connection with the DJO Merger and other cost savings initiatives, partially offset by the impact of unfavorable changes in foreign currency exchange rates, which reduced Adjusted EBITDA for the third quarter of 2009 by approximately $1.2 million, compared to what it would have been had rates in effect in the third quarter of 2008 remained in effect. Excluding the effects of changes in foreign currency exchange rates, third quarter 2009 Adjusted EBITDA reflected growth of 22.3 percent over Adjusted EBITDA in the third quarter of 2008. For the twelve month period ended September 26, 2009 (LTM), Adjusted EBITDA was $247.2 million, or 26.6 percent of LTM net sales, including future cost savings to be achieved related to the DJO Merger and other recent acquisitions of $13.2 million.

Cash flow from operations was $52.6 million in the third quarter of 2009 before cash interest paid of $14.7 million, but after funding cash payments of $8.9 million for non-recurring charges in connection with the DJO Merger and related integration activities. The Company had cash balances of $51.3 million at September 26, 2009 and available liquidity of $100 million under its revolving line of credit.

Nine Month Results

Net revenues from continuing operations for the first nine months of 2009 were $689.0 million, reflecting a decrease of approximately three percent, compared with net revenues from continuing operations of $708.9 million for the first nine months of 2008. Sales for the first nine months of 2009 were reduced by approximately $20.0 million due to unfavorable changes in foreign currency exchange rates from the rates in effect in the first nine months of 2008. On the basis of constant currency, average daily sales in the first nine months of 2009 increased approximately one percent over average daily sales in the first nine months of 2008.

Adjusted EBITDA for the first nine months of 2009, before future cost savings related to the DJO Merger and other recent acquisitions, was $177.2 million, or 25.7 percent of net sales, compared to $158.0 million, or 22.2 percent of net sales, for the first nine months of 2008.

“We are generally pleased with DJO’s results for third quarter of 2009. Although we continue to face certain sales challenges imposed by the sluggish economy, year over year sales growth on the basis of constant currency did improve in the third quarter,” said Les Cross, president and chief executive officer. “And importantly, Adjusted EBITDA levels continued to expand as the diligent cost savings initiatives we have in place across the organization, and a more favorable foreign currency exchange environment, continued to supplement constrained sales growth. At almost $65 million and 27.5% of net sales, Adjusted EBITDA for the third quarter of 2009 established a new DJO record.

“Excluding the effects of unfavorable changes in foreign currency exchange rates, net sales in the third quarter of 2009 grew approximately 2% over the third quarter of 2008.

“Third quarter sales from our Domestic Rehabilitation segment, which includes our Bracing and Supports, Empi, Regeneration and Chattanooga businesses, were approximately flat compared with sales levels in the third quarter of 2008, but approximately 3% higher sequentially from the second quarter of this year on a sales per day basis. This result helped drive strong Adjusted EBITDA margins in all of these businesses. Our Chattanooga business continues to be impacted by lower capital spending and tight credit markets that have affected all of 2009, but these unfavorable trends appear to be improving and Chattanooga sales improved sequentially from the second quarter of 2009 by over 10%.

“Sales in our Domestic Surgical Implant segment grew more than 6% over the third quarter of 2008, led by strong sales of our Reverse Shoulder Prosthesis and our new primary shoulder system, Turon.

“Late in the third quarter, we strengthened our domestic sales leadership with the appointment of Andrew Holman to the position of Executive Vice President, Sales and Marketing, U.S. Commercial Businesses. Andrew joins DJO with considerable experience, most recently with Smith & Nephew, where he served as President of the U.S. Orthopaedics Reconstruction and Trauma business. Prior to that, he held multiple sales and marketing leadership positions at Johnson & Johnson and Boston Scientific. We look forward to Andrew’s contributions to DJO.

“Third quarter sales within our International segment grew modestly higher compared to the third quarter of 2008, in spite of the impact of unfavorable changes in foreign currency exchange rates, which totaled $3.4 million in the third quarter of 2009. Excluding the impact of foreign exchange, our International segment sales increased by approximately 6% compared to the third quarter of 2008, including the benefit of our small Canadian acquisitions. DJO Canada acquired the Canadian master distributors of DJO’s Chattanooga, Saunders, Empi and Cefar/Compex branded products in two separate transactions that closed August 4, 2009. International sales continued to be led by bracing and supports products, but we saw improvement during the quarter in our sales of Chattanooga products internationally, as well as our sales in certain export markets, which have been impacted this year by the economic recession. Portions of our international business remain challenged by local economic conditions and constraints in the availability of credit, but we are becoming more optimistic about the future in most of these areas.

“While we have certainly not been immune to the effects of the global recession, DJO’s disciplined focus on our post-merger integration cost savings initiatives and general expense control measures have enabled us to identify and accelerate incremental cost reduction opportunities throughout DJO to strengthen our operating metrics during these unfavorable economic conditions. As a result of these initiatives, we were able to expand our adjusted gross profit margin by 160 basis points, compared to the third quarter of 2008, to 64.7%. These efforts also enabled us to report very strong Adjusted EBITDA margins, expanding 450 basis points over the third quarter of last year.

“We continue to believe that industry drivers outside of capital equipment, consumer products and certain export markets remain relatively healthy. While we are seeing modest incremental improvement in our markets, we believe that we may continue to experience headwinds in certain of our businesses that may continue to constrain our total growth rates to the lower end of historical ranges. Foreign currency exchange headwinds, which have affected all of 2009, appear to be subsiding as the U.S. dollar weakens globally, providing a more moderate, and potentially positive, foreign exchange environment in the fourth quarter of this year. Within this environment, we remain well focused on the Company’s cost structure and continue to execute on our cost savings initiatives and general cost reduction programs, which we expect will further benefit our margin structure and our Adjusted EBITDA levels.”

Conference Call Information

DJO has scheduled a conference call to discuss this announcement beginning at 1 PM, Eastern Time today, October 28, 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 36220503. 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.