DJO Global, Inc. ("DJO" or the "Company"), a leading 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 fiscal 2011, ended October 1, 2011.
Third Quarter Results
DJOFL achieved net sales for the third quarter of 2011 of $263.1 million, reflecting growth of 12.7 percent compared to net sales of $233.6 million for the third quarter of 2010. Net sales for the third quarter of 2011 were favorably impacted by changes in foreign currency exchange rates compared to the rates in effect in the third quarter of 2010. Excluding the impact of foreign exchange rate changes ("constant currency"), net sales for the third quarter of 2011 increased 10.7 percent compared to net sales for the third quarter of 2010.
DJO's third quarter 2011 included net sales from businesses recently acquired, as follows: Elastic Therapy, Inc. ("ETI"), acquired on January 4, 2011; Circle City Medical ("Circle City"), acquired on March 10, 2011; and Dr. Comfort ("DRC"), acquired on April 7, 2011. On a pro forma basis, as if the acquisitions of ETI, Circle City and DRC had all closed on January 1, 2010, DJO net sales for the current quarter would reflect pro forma growth of 1.4 percent over pro forma net sales of $259.4 million for the third quarter of 2010. In constant currency, net sales for the current quarter were approximately flat with pro forma net sales in the third quarter of 2010. Sales to customers in the United States by all of the acquired businesses are included within the Company's Bracing and Vascular segment, and sales to international customers are included within the Company's International segment.
For the third quarter of 2011, DJOFL reported a net loss attributable to DJOFL of $25.8 million, compared to a net loss of $7.7 million for the third quarter of 2010. As detailed in the attached financial tables, the results for the current and prior year third quarter periods were impacted by significant non-cash items, non-recurring items and other adjustments.
The Company defines Adjusted EBITDA as net (loss) income attributable to DJOFL plus interest expense, net, income tax expense (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 senior secured credit facility and the indentures governing its 10.875% and 7.75% senior notes and its 9.75% senior subordinated notes. Reconciliation between net loss and Adjusted EBITDA is included in the attached financial tables.
Adjusted EBITDA for the third quarter of 2011 was $61.0 million, or 23.2 percent of net sales, approximately flat with Adjusted EBITDA of $61.3 million, or 26.2 percent of net sales, for the third quarter of 2010. Adjusted EBITDA for the third quarter of 2011 includes $0.5 million related to favorable changes in foreign currency exchange rates compared to the rates in effect in the third quarter of 2010. Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales (Adjusted EBITDA margin) in the current third quarter period were unfavorably impacted, compared to the third quarter of 2010, by certain changes in product mix, net freight expense and pricing, all of which reduced gross profit as a percentage of net sales, and also by certain operating expense investments made in the Company's commercial infrastructure. On September 30, 2011, the Company announced a leadership transition for its U.S. commercial organization and that the Company had taken steps to reduce its operating expenses to better match current global market conditions and to make funds available to invest in future growth opportunities. These actions are expected to reduce the Company's annualized operating expense run rate by $4 - 5 million, beginning in the fourth quarter of 2011.
For the twelve month period ended October 1, 2011 (LTM), Adjusted EBITDA was $285.6 million, or 26.3 percent of LTM pro forma net sales of $1,086.8 million, including LTM pre-acquisition Adjusted EBITDA from recently acquired businesses of $15.4 million and future cost savings expected to be achieved related to the acquired businesses of $8.3 million.
As of October 1, 2011, the Company had cash balances of $39.3 million and available liquidity of $77.0 million under its revolving line of credit.
"Although many parts of our business performed quite well in the third quarter," said Mike Mogul, DJO's president and chief executive officer, "these wins were largely offset by headwinds in certain of our markets that are constraining our total net revenue growth.
"We are seeing exciting early success with new products recently launched, including our VenaFlow Elite™ dynamic compression therapy pump used to combat Deep Vein Thrombosis, our Reaction™ knee brace for patients with anterior knee pain and our Exos range of upper extremity products incorporating thermoformable polymer technology, all within our Bracing and Vascular segment, our first-to-market Compex® wireless muscle stimulator and our Shockwave™ clinical device in our International segment and our Turon™ shoulder product in our Surgical Implant segment. We expect that these new products, and other important new products we intend to launch in the first quarter of 2012, will make strong contributions to accelerating DJO's future revenue growth.
"Many other parts of our business also continue to perform quite well, with net sales growth compared to the prior year in the mid-single digits or higher, such as spinal stimulation, which continues to grow faster than we believe the market is growing, several product lines within our Chattanooga business, which are benefiting from our increasing penetration of the long-term care market segment, our shoulder portfolio within our Surgical Implant segment, which, including the new Turon product and our Reverse® Shoulder Prosthesis, delivered very strong growth in net sales of over 25% in the third quarter, and several markets within our International segment where we are either increasing our penetration of new market segments or taking market share.
"Offsetting these highlights, certain of our businesses continue to face significant market headwinds. Our business that is currently the most impacted is our Empi business, which saw net sales decline by $4.4 million in the third quarter as compared to net sales in the prior year third quarter period. The decline in Empi revenue is primarily due to unfavorable decisions made by certain third party payors related to insurance pricing for certain products and a reported decrease in patient visits to physical therapy clinics, where many of the Empi products are dispensed. Sales of hip and knee products within our Surgical Implant segment also declined by $1.4 million in the third quarter compared to the prior year period due to poor market conditions and the loss of certain customers. The aggregate decline in revenue in our Empi and surgical hip and knee businesses reduced the Company's total revenue growth in the quarter by 240 basis points.
"Although there may not be short-term fixes available for each of these challenges, we are approaching anniversary dates for some of the Empi reimbursement changes, which will make future year-over-year sales comparisons more favorable, and we have other strategies in place, which should positively impact the Empi business and the surgical hip and knee business in the medium to long-term.
"In the four months since I joined DJO, I have become increasingly optimistic about the depth and breadth of opportunities available to add value to our customers and to accelerate DJO's revenue growth. We see many opportunities to improve commercial execution, to develop new products and services and to expand our market penetration with our strong commercial footprint. We expect these opportunities to positively impact our reported growth rates in the very near future."
Sales by Business Segment
With the addition of the recent acquisitions, DJO's Bracing and Vascular segment reported over 29% sales growth in the third quarter of 2011, compared to the third quarter of 2010. On a pro forma basis, as if all of the acquisitions had closed at the beginning of the third quarter in 2010, current quarter revenue in the Bracing and Vascular segment increased 0.7% compared with the third quarter of the prior year.
Primarily as a result of declining sales within the Empi business, sales for the Recovery Sciences segment contracted by 4.6% compared to the third quarter of 2010.
Third quarter sales within our International segment were strong at $64.5 million, growing 17.3% over the prior year period. This result included the international component of the ETI and DRC acquisitions, as well as approximately $4.5 million of favorable foreign exchange benefit. In constant currency, and on a pro forma basis for the acquisitions, growth over the prior year third quarter was 3.1%.
Surgical Implant segment sales were $15.2 million in the third quarter, growing 4.6% over the third quarter of 2010.
Nine Month Results
DJOFL achieved net sales of $790.6 million for the first nine months of 2011, reflecting growth of 10.4 percent compared to net sales of $716.2 million for the first nine months of 2010. Net sales for the first nine months of 2011 were favorably impacted by changes in foreign currency exchange rates compared to the rates in effect in the first nine months of 2010. The first nine months of 2011 included 191 shipping days compared to 192 days in the first nine months of 2010. In constant currency, average daily sales for the first nine months of 2011 increased 9.3 percent compared to average daily sales for the first nine months of 2010.
DJO's first nine months of 2011 included net sales from businesses recently acquired. On a pro forma basis, as if the acquisitions of ETI, Circle City and DRC had closed on January 1, 2010, DJO net sales would have been $811.3 million for the first nine months of 2011 and $795.2 million for the first nine months of 2010, reflecting pro forma growth in average daily sales for the first nine months of 2011 of 2.6 percent, or 1.0 percent in constant currency, over pro forma average daily sales in the first nine months of 2010.
For the first nine months of 2011, DJOFL reported a net loss attributable to DJOFL of $66.3 million, compared to a net loss attributable to DJOFL of $41.1 million for the first nine months of 2010. As detailed in the attached financial tables, the results for the current and prior year nine month periods were impacted by significant non-cash items, non-recurring items and other adjustments.
Adjusted EBITDA for the first nine months of 2011 was $189.8 million, or 24.0 percent of net sales, compared to Adjusted EBITDA of $190.2 million, or 26.6 percent of net sales, for the first nine months of 2010. Adjusted EBITDA for the first nine months of 2011 includes $1.4 million related to favorable changes in foreign currency exchange rates compared to the rates in effect for the first nine months of 2010.
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