EX-99.1 2 a9912016q2earningsrelease.htm EXHIBIT 99.1 SECOND QUARTER AND FIRST HALF FINANCIAL RESULTS FOR 2016 Exhibit



ACELITY L.P. INC. REPORTS
SECOND QUARTER AND FIRST HALF FINANCIAL RESULTS FOR 2016


Second Quarter Financial Highlights

•
Revenue for the second quarter of 2016 of $472.4 million, grew 2.3% as reported on a GAAP basis and 2.8% on a constant currency basis, from the prior-year period

•
Revenue from Advanced Wound Therapeutics ("AWT") grew 0.2% as reported on a GAAP basis and 0.8% on a constant currency basis, led by solid volume growth in advanced wound devices compared to the prior-year period

•
Revenue from Regenerative Medicine ("RM") grew 11.0% as reported on a GAAP basis and on a constant currency basis, due primarily to higher volumes associated with breast reconstruction procedures

•
Net loss was $20.1 million, as reported on a GAAP basis, up from $17.6 million net loss in the prior-year period, due primarily to the loss on extinguishment of debt and professional fees related to our second quarter debt transactions

•
Adjusted EBITDA1 of $171.1 million, declined 1.0% as reported from the prior-year period and 0.8% on a constant currency basis, primarily due to investments in our franchise structure and sales force to drive growth


Operational Highlights

•
Building strong partnerships with leading plastic surgeons to develop and educate on an innovative breast reconstruction technique resulted in the Regenerative Medicine Team achieving the highest growth rate since 2012.  Recent sales initiatives and new product introductions also contributed to strong growth in breast reconstruction procedures.

•
Acelity launched the TIELLE™ Foam Dressing Family in the United States, which includes seven new advanced dressings that can be used on a variety of wounds.  This launch is strategically important, allowing the Company to further diversify the business, giving clinicians more efficient and cost effective patient solutions with Acelity’s industry leading AWT portfolio.


Joe Woody, President and Chief Executive Officer, commented, “Acelity’s solid financial performance in the second quarter marks our seventh consecutive quarter of organic revenue growth, accomplished by outstanding execution in Regenerative Medicine and strong growth in sales of our Advanced Wound Therapeutics expansion products, such as Prevena and ABThera.  With our strategy in place, the results in the first half of 2016 position us to reap the benefits of our investments to broaden and complement our innovative portfolio, reach new markets, distribution channels and patients, and provide valuable solutions to clinicians.”






Results of the second quarter and six months ended June 30, 2016

Acelity second quarter revenue increased 2.3% as reported on a GAAP basis to $472.4 million, compared with $461.6 million for the prior-year period. On a constant currency basis, revenue increased 2.8%.

•
AWT revenue was $355.0 million, up 0.2% as reported on a GAAP basis and 0.8% on a constant currency basis, compared to the prior-year period. Growth in AWT revenue was fueled primarily by increased volumes in advanced wound devices during the quarter and double-digit growth in expansion products, led by sales of Prevena™, partially offset by lower average pricing and decreased revenue from advanced wound dressings in international markets.

•
RM revenue was $114.9 million, up 11.0% as reported on a GAAP basis and on a constant currency basis, compared to the prior-year period. The increase in RM revenue was primarily due to double digit growth in revenue related to breast reconstruction procedures in the United States and Strattice growth in Europe, partially offset by lower revenue from hernia repair procedures in the United States.

Net loss for the second quarter of 2016 was $20.1 million, as reported on a GAAP basis, compared to $17.6 million in the prior-year period. This increase was primarily due to the loss on debt extinguishment of $10.1 million and professional fees of $6.9 million associated with our debt transactions in the second quarter of 2016, partially offset by foreign currency gains. Adjusted EBITDA for the second quarter of 2016 decreased $1.8 million to $171.1 million compared to $172.9 million in the prior-year period and decreased 0.8% on a constant currency basis. The decline in Adjusted EBITDA was attributable to investments being made in our franchise structure and sales force to drive growth, partially offset by revenue growth and expense savings associated with our integration and business optimization efforts.

Acelity’s revenue for the six months ended June 30, 2016, increased 2.0% as reported on a GAAP basis to $923.8 million, compared with $905.7 million for the prior-year period. On a constant currency basis, revenue increased 2.9%.

•
AWT revenue was $694.0 million, up 0.4% as reported on a GAAP basis and 1.5% on a constant currency basis, compared to the prior-year period. Growth in AWT revenue was fueled primarily by increased volumes in advanced wound devices during the period and continued strength in expansion products, partially offset by lower average pricing and decreased revenue from advanced wound dressings in international markets.

•
RM revenue was $224.8 million, up 8.2% as reported on a GAAP basis and 8.4% on a constant currency basis, compared to the prior-year period. The increase in RM revenue was primarily due to strong growth in revenue related to breast reconstruction procedures in the United States and Strattice growth in Europe, partially offset by lower revenue from hernia repair procedures in the United States.

Net loss for the six months ended June 30, 2016, was $46.1 million, as reported on a GAAP basis, compared to $22.2 million in the prior-year period. This increase was primarily due to the loss on debt extinguishment of $13.7 million and professional fees of $7.5 million associated with our 2016 debt transactions and a decrease in foreign currency gains compared to the prior-year period. Adjusted EBITDA for the six months ended June 30, 2016, decreased $6.6 million to $332.1 million compared to $338.7 million in the prior-year period and decreased 1.5% on a constant currency basis. The decline in Adjusted EBITDA was attributable to investments being made in our franchise structure and sales force to drive growth, partially offset by revenue growth and expense savings associated with our integration and business optimization efforts.


Financial Position

Total cash at June 30, 2016, was $99.2 million. During the first six months of 2016, Acelity used cash of $39.6 million for operations, used cash of $39.5 million in investing activities and generated cash of $88.3 million from financing activities.

The Company executed an “amend and extend” of its USD and EUR Senior Term E-1 Credit Facilities due May 4, 2018, extending approximately $2 billion of the Senior Term Loans to November 4, 2020. Additionally, the Company refinanced a portion of the non-extended USD Senior Term E-1 Loan with the proceeds from the offering of $190.0 million of 7.875% First Lien Secured Notes due 2021.

As of June 30, 2016, total long-term debt outstanding was $4.869 billion and our Net Leverage Ratio2 was 6.6x.






Company Structure

Acelity is a leading global medical technology company committed to the development and commercialization of advanced wound care and regenerative medicine solutions. Acelity was formed by uniting the strengths of three organizations, KCI, Systagenix and LifeCell, into our two business segments: Advanced Wound Therapeutics and Regenerative Medicine. Our mission is to change the clinical practice of medicine with solutions that speed healing, reduce complications, create economic value and improve patients’ lives. Acelity is controlled by investment funds advised by Apax Partners LLP and Apax Partners L.P. and controlled affiliates of Canada Pension Plan Investment Board and the Public Sector Pension Investment Board and certain other co-investors.  Unless otherwise noted in this report, the terms “we,” “our” or “Company,” refer to Acelity and its subsidiaries, collectively.

Non-GAAP Financial Information

The following provides information regarding non-GAAP financial measures used in this earnings release:

To supplement our consolidated results presented in accordance with accounting principles generally accepted in the United States (“GAAP”), we have disclosed non-GAAP financial measures of operating results that exclude or adjust certain items. A reconciliation of Adjusted EBITDA to net loss is provided later in this earnings release. In addition, the Company presents certain of its financial results on a constant currency basis in addition to GAAP results. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. In this release, we calculate constant currency by calculating current-year results using prior-year foreign currency exchange rates.

Management believes these non-GAAP financial measures provide useful supplemental information for its and investors' evaluation of our business performance and are useful for period-over-period comparisons of the performance of our business. While management believes that these financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies. See "Reconciliation from GAAP to Non-GAAP" included within this release for a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures.


1Adjusted EBITDA excludes the impact of merger-related expenses, foreign currency gains or losses, business optimization expenses and other expenses specified in the reconciliation within this release.

2 The Net Leverage Ratio represents Net Debt divided by Consolidated EBITDA for the last twelve months. Net Debt consists of total indebtedness including capital leases and other financing obligations, less cash and cash equivalents up to the greater of $300.0 million or 40% of Consolidated EBITDA for the last twelve months. Consolidated EBITDA, as defined in our senior secured credit agreement, represents Adjusted EBITDA plus “run rate” cost savings.


FOR MORE INFORMATION, CONTACT:
Investors
Caleb Moore
Office: (210) 255-6433
caleb.moore@acelity.com
 
Media
Cheston Turbyfill
Office: (210) 255-6696
media@acelity.com





ACELITY L.P. INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands)
(unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
$
175,422

 
$
180,397

 
(2.8
)%
 
$
345,521

 
$
353,236

 
(2.2
)%
Sales
296,999

 
281,248

 
5.6

 
578,266

 
552,459

 
4.7

Total revenue
472,421

 
461,645

 
2.3

 
923,787

 
905,695

 
2.0

 
 
 
 
 
 
 
 
 
 
 
 
Rental expenses
75,794

 
77,869

 
(2.7
)
 
150,689

 
156,047

 
(3.4
)
Cost of sales
78,118

 
75,509

 
3.5

 
156,697

 
148,923

 
5.2

Gross profit
318,509

 
308,267

 
3.3

 
616,401

 
600,725

 
2.6

 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
182,194

 
158,994

 
14.6

 
346,638

 
306,757

 
13.0

Research and development expenses
14,717

 
14,391

 
2.3

 
28,695

 
29,069

 
(1.3
)
Acquired intangible asset amortization
41,159

 
44,712

 
(7.9
)
 
83,361

 
90,589

 
(8.0
)
Operating earnings
80,439

 
90,170

 
(10.8
)
 
157,707

 
174,310

 
(9.5
)
 
 
 
 
 


 
 
 
 
 
 
Interest income and other
589

 
67

 
—

 
696

 
214

 
—

Interest expense
(110,428
)
 
(107,374
)
 
2.8

 
(218,980
)
 
(212,100
)
 
3.2

Loss on extinguishment of debt
(10,107
)
 
—

 
—

 
(13,716
)
 
—

 
—

Foreign currency gain (loss)
8,998

 
(6,799
)
 
—

 
4,668

 
12,601

 
(63.0
)
Derivative instruments loss
(357
)
 
(919
)
 
(61.2
)
 
(1,039
)
 
(4,267
)
 
(75.7
)
Loss before income tax benefit
(30,866
)
 
(24,855
)
 
24.2

 
(70,664
)
 
(29,242
)
 
141.7

Income tax benefit
(10,751
)
 
(7,224
)
 
48.8

 
(24,574
)
 
(7,080
)
 
—

Net loss
$
(20,115
)
 
$
(17,631
)
 
14.1
 %
 
$
(46,090
)
 
$
(22,162
)
 
108.0
 %









ACELITY L.P. INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)

 
June 30,
2016
 
December 31,
2015
Assets:
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
99,197

 
$
88,409

Accounts receivable, net
413,440

 
413,531

Inventories, net
197,583

 
181,309

Deferred income taxes
51,968

 
74,521

Prepaid expenses and other
40,117

 
34,985

Total current assets
802,305

 
792,755

 
 
 
 
Net property, plant and equipment
260,569

 
273,076

Deferred income taxes
22,333

 
29,909

Goodwill
3,406,475

 
3,405,823

Identifiable intangible assets, net
2,139,366

 
2,219,088

Other non-current assets
5,033

 
6,104

 
 
 
 
 
$
6,636,081

 
$
6,726,755

 
 
 
 
Liabilities and Equity:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
52,718

 
$
57,910

Accrued expenses and other
326,302

 
373,440

Current installments of long-term debt
23,307

 
22,130

Income taxes payable
4,372

 
3,561

Deferred income taxes
113,595

 
113,595

Total current liabilities
520,294

 
570,636

 
 
 
 
Long-term debt, net of current installments, premium, discount and debt issuance costs
4,845,783

 
4,720,363

Non-current tax liabilities
34,533

 
34,833

Deferred income taxes
681,592

 
760,737

Other non-current liabilities
15,153

 
37,021

Total liabilities
6,097,355

 
6,123,590

Equity:
 
 
 
General partner’s capital
—

 
—

Limited partners’ capital
577,979

 
622,899

Accumulated other comprehensive loss, net
(39,253
)
 
(19,734
)
Total equity
538,726

 
603,165

 
 
 
 
 
$
6,636,081

 
$
6,726,755










ACELITY L.P. INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 
Six months ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(46,090
)
 
$
(22,162
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
Amortization of debt issuance costs, premium and discount
19,352

 
20,311

Depreciation and other amortization
127,418

 
132,334

Loss on disposition of assets
1,122

 
1,265

Amortization of fair value step-up in inventory
164

 
—

Provision for bad debt
3,429

 
3,266

Loss on extinguishment of debt
13,716

 
—

Equity-based compensation expense
1,602

 
1,305

Deferred income tax benefit
(46,880
)
 
(30,224
)
Unrealized gain on derivative instruments
(5,944
)
 
(3,078
)
Unrealized gain on foreign currency
(7,147
)
 
(16,683
)
Change in assets and liabilities:
 
 
 
Increase in accounts receivable, net
(7,500
)
 
(968
)
Increase in inventories, net
(5,656
)
 
(10,856
)
Increase in prepaid expenses and other
(5,133
)
 
(4,685
)
Decrease in accounts payable
(5,543
)
 
(3,533
)
Decrease in accrued expenses and other
(74,994
)
 
(76,509
)
Increase (decrease) in tax liabilities, net
(1,495
)
 
6,213

Net cash used by operating activities
(39,579
)
 
(4,004
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(35,762
)
 
(29,574
)
Increase in inventory to be converted into equipment for short-term rental
(98
)
 
(4,144
)
Dispositions of property, plant and equipment
2

 
—

Businesses acquired in purchase transactions, net of cash acquired
—

 
(2,948
)
Increase in identifiable intangible assets and other non-current assets
(3,684
)
 
(3,646
)
Net cash used by investing activities
(39,542
)
 
(40,312
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Distribution to limited partners
—

 
(55
)
Settlement of equity-based awards
(226
)
 
(1,348
)
Proceeds from revolving credit facility
25,000

 
30,000

Proceeds from debt issuance
595,044

 
—

Repayments of long-term debt and capital lease obligations
(518,570
)
 
(15,389
)
Debt issuance costs
(12,899
)
 
(6,256
)
Net cash provided by financing activities
88,349

 
6,952

Effect of exchange rate changes on cash and cash equivalents
1,560

 
(5,025
)
Net increase (decrease) in cash and cash equivalents
10,788

 
(42,389
)
Cash and cash equivalents, beginning of period
88,409

 
183,541

Cash and cash equivalents, end of period
$
99,197

 
$
141,152





ACELITY L.P. INC. AND SUBSIDIARIES
Reconciliation from GAAP to Non-GAAP
Supplemental Revenue Data
(dollars in thousands)
(unaudited)
 
Three months ended June 30,
 
GAAP % Change
 
Constant Currency % Change (1)
 
2016
 
2015 GAAP
 
 
 
GAAP
 
FX Impact
 
Constant
Currency
 
 
 
Advanced Wound Therapeutics revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
$
175,422

 
$
(238
)
 
$
175,184

 
$
180,397

 
(2.8
)%
 
(2.9
)%
Sales
179,546

 
2,291

 
181,837

 
173,817

 
3.3

 
4.6

  Total
354,968

 
2,053

 
357,021

 
354,214

 
0.2

 
0.8

 
 
 
 
 
 
 
 
 
 
 
 
Regenerative Medicine revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
114,905

 
27

 
114,932

 
103,529

 
11.0

 
11.0

 
 
 
 
 
 
 
 
 
 
 
 
Other revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
2,548

 
171

 
2,719

 
3,902

 
(34.7
)
 
(30.3
)
 
 
 
 
 
 
 
 
 
 
 
 
Total revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
175,422

 
(238
)
 
175,184

 
180,397

 
(2.8
)
 
(2.9
)
Sales
296,999

 
2,489

 
299,488

 
281,248

 
5.6

 
6.5

  Total
$
472,421

 
$
2,251

 
$
474,672

 
$
461,645

 
2.3
 %
 
2.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
GAAP % Change
 
Constant Currency % Change (1)
 
2016
 
2015 GAAP
 
 
 
GAAP
 
FX Impact
 
Constant
Currency
 
 
 
Advanced Wound Therapeutics revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
$
345,521

 
$
540

 
$
346,061

 
$
353,236

 
(2.2
)%
 
(2.0
)%
Sales
348,489

 
6,958

 
355,447

 
338,237

 
3.0

 
5.1

  Total
694,010

 
7,498

 
701,508

 
691,473

 
0.4

 
1.5

 
 
 
 
 
 
 
 
 
 
 
 
Regenerative Medicine revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
224,779

 
325

 
225,104

 
207,698

 
8.2

 
8.4

 
 
 
 
 
 
 
 
 
 
 
 
Other revenue:
 
 
 
 
 
 
 
 
 
 
 
Sales
4,998

 
315

 
5,313

 
6,524

 
(23.4
)
 
(18.6
)
 
 
 
 
 
 
 
 
 
 
 
 
Total revenue:
 
 
 
 
 
 
 
 
 
 
 
Rental
345,521

 
540

 
346,061

 
353,236

 
(2.2
)
 
(2.0
)
Sales
578,266

 
7,598

 
585,864

 
552,459

 
4.7

 
6.0

  Total
$
923,787

 
$
8,138

 
$
931,925

 
$
905,695

 
2.0
 %
 
2.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
(1) Represents percentage change between 2016 non-GAAP Constant Currency revenue and 2015 GAAP revenue.







ACELITY L.P. INC. AND SUBSIDIARIES
Reconciliation from GAAP to Non-GAAP
Selected Financial Information
(dollars in thousands)
(unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net loss
$
(20,115
)
 
$
(17,631
)
 
$
(46,090
)
 
$
(22,162
)
Interest expense, net of interest income
110,238

 
107,288

 
218,689

 
211,939

Income tax benefit
(10,751
)
 
(7,224
)
 
(24,574
)
 
(7,080
)
Foreign currency loss (gain)
(8,998
)
 
6,799

 
(4,668
)
 
(12,601
)
Depreciation and other amortization
62,684

 
66,003

 
127,418

 
132,334

Derivative instruments loss
357

 
919

 
1,039

 
4,267

Management fees and expenses
1,317

 
1,365

 
3,536

 
2,677

Equity-based compensation expense
834

 
770

 
1,602

 
1,305

Acquisition, disposition and financing expenses (1)
17,447

 
1,351

 
22,571

 
3,931

Business optimization expenses (2)
10,338

 
7,222

 
18,875

 
13,350

Other permitted expenses (3)
7,752

 
6,028

 
13,718

 
10,766

Adjusted EBITDA
$
171,103

 
$
172,890

 
$
332,116

 
$
338,726

 
 
 
 
 
 
 
 
Adjusted EBITDA as a percentage of revenue
36.2
%
 
37.5
%
 
36.0
%
 
37.4
%
 
 
 
 
 
 
 
 
(1) Represents labor, travel, training, consulting and other costs associated with acquisition, disposition and financing activities, such as the issuance of new notes, the amendment of our Senior Secured Credit Facility and technology acquisitions.
(2) Represents labor, travel, training, consulting and other costs associated exclusively with our business optimization initiatives.
(3) Represents charges for other permitted expenses as defined under our Senior Secured Credit Facility.


 
 
 
As Reported % Change
 
Constant Currency % Change (1)
 
2016
 
2015
 
 
 
As Reported
 
FX Impact
 
Constant
Currency
 
As Reported
 
 
Three months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
171,103

 
$
332

 
$
171,435

 
$
172,890

 
(1.0
)%
 
(0.8
)%
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
332,116

 
$
1,436

 
$
333,552

 
$
338,726

 
(2.0
)%
 
(1.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
(1) Represents percentage change between 2016 Constant Currency Adjusted EBITDA and 2015 As Reported Adjusted EBITDA.