SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[☒] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
[☐] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-15103
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
|(IRS Employer Identification No.)|
|One Invacare Way,||Elyria,||Ohio||44035|
|(Address of principal executive offices)||(Zip Code)|
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
|Title of each class||Trading Symbol||Name of exchange on which registered|
|Common Shares, without par value||IVC||New York Stock Exchange|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 3, 2021, the registrant had 34,951,521 Common Shares and 3,667 Class B Common Shares outstanding.
Table of Contents
About Invacare Corporation
Invacare Corporation (NYSE: IVC) ("Invacare" or the "company") is a leading manufacturer and distributor in its markets for medical equipment used in non-acute care settings. At its core, the company designs, manufactures and distributes medical devices that help people to move, breathe, rest and perform essential hygiene. The company provides clinically complex medical device solutions for congenital (e.g., cerebral palsy, muscular dystrophy, spina bifida), acquired (e.g., stroke, spinal cord injury, traumatic brain injury, post-acute recovery, pressure ulcers) and degenerative (e.g., ALS, multiple sclerosis, chronic obstructive pulmonary disease (COPD), age related, bariatric) conditions. The company's products are important parts of care for people with a wide range of challenges, from those who are active and heading to work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company sells its products principally to home medical equipment providers with retail and e-commerce channels, residential care operators, dealers and government health services in North America, Europe and Asia Pacific. For more information about the company and its products, visit the company's website at www.invacare.com. The contents of the company's website are not part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis presented below is concerned with material changes in financial condition and results of operations between the periods specified in the condensed consolidated balance sheets at March 31, 2021 and December 31, 2020, and in the condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2021 and March 31, 2020. All comparisons
presented are with respect to the same period last year, unless otherwise stated. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A included in the company's Annual Report on Form 10-K for the year ended December 31, 2020. For some matters, SEC filings from prior periods may be useful sources of information.
Invacare is a multi-national company with integrated capabilities to design, manufacture and distribute durable medical devices. The company makes products that help people move, breathe, rest and perform essential hygiene, and with those products the company supports people with congenital, acquired and degenerative conditions. The company's products and solutions are important parts of care for people with a range of challenges, from those who are active and involved in work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company operates in facilities in North America, Europe and Asia Pacific, which are the result of more than 50 acquisitions made over the company's 40+ year history.
COVID-19 Impact on Access to Healthcare and Global Supply Chain
The company continues to actively monitor the coronavirus (COVID-19) pandemic, which has negatively impacted the business primarily by limiting access to healthcare and disrupting the global supply chain. As a result, and consistent with expectations, the company realized lower net sales in 1Q21 compared to the first quarter of the prior year period, which was not impacted by these factors. The decline in net sales resulted in operational inefficiencies which in turn resulted in reduced profitability.
Demand for the company's products remains high as evidenced by a strong order book and elevated backlog. However, fulfilling orders during the first quarter was challenging due to global supply chain and logistics disruptions. Invacare's products include a large number components, and these disruptions have delayed delivery of components required for final assembly and order fulfillment. Further, certain countries have reinstated shutdowns and stay-at-home orders causing additional assembly and production delays that have also delayed order fulfillment. As a result,
backlog has increased in all product categories from December 31, 2020.
While public health restrictions remain, the company anticipates, as vaccination initiatives progress, healthcare access resumes, and more active lifestyles return during the summer months, higher net sales for the balance of 2021 with growth as compared to prior year.
As a result of the company's view that the net sales decline during 1Q21 is temporary, the company has opted not to impose more robust cost containment measures to offset the impact of reduced net sales. The company believes its human capital resources will be essential to facilitate anticipated sales recovery for the remainder of 2021 and to address current backlog and anticipated demand.
The extent to which the company’s operations will be further impacted by the pandemic will depend largely on future developments, which remain highly uncertain and difficult to accurately predict, including, among other things, new information which may emerge concerning the severity of the pandemic; new and growing outbreaks of COVID-19 or new strains of COVID-19; actions by government authorities to contain COVID-19 or treat its impact, such as reimposed public health restrictions or restrictions on access to healthcare facilities; efforts to combat COVID-19, such as vaccine development and distribution; and global supply chain disruption which may impact access to components and products.
As an “essential” business making medical devices, the company has continued to operate in all of its facilities, having taken the recommended public health measures to ensure worker and workplace safety. The company continues to experience high demand globally for its respiratory products. These products are being deployed in the fight against the COVID-19 pandemic to provide access to purified oxygen needed in respiratory care. The company continues to work to increase its capacity to produce these critical products and resolve global supply chain challenges that are compounded
by the effects of the pandemic. As a result, there are practical limits to the extent the company can increase output. In addition, the company continues to take steps to offset cost increases from pandemic-related supply chain disruptions.
The initial stages of the pandemic appropriately focused the provision of healthcare to urgent non-elective care, reducing access to clinicians and healthcare facilities on which other parts of the company’s business rely to engage with customers for product trials and fittings. As a result, and combined with various stay-at-home orders, the company experienced a global decline in quotes for mobility and seating products, and a resultant decline in orders starting primarily in the second quarter of 2020. While the company believes the decline in net sales is temporary in nature, the rebound of the business will depend on the continued restoration of access to healthcare and loosening of public health measures, and will be impacted by several items including government actions and policies related to the pandemic, and the magnitude of the pandemic.
The company continues to optimize its balance sheet for the current environment. In the first quarter of 2021, the company issued $125,000,000 aggregate principal amount of 4.25% convertible senior notes due in 2026 (the "2026 Notes"), purchased related capped calls for the 2026 Notes to minimize potential dilution from the 2026 Notes, repurchased $78,850,000 aggregate principal amount of its 4.50% convertible senior notes due 2022 (the "2022 Notes") and settled $1,250,000 aggregate principal amount of its 5.00% convertible senior notes due 2021 (the "2021 Notes") which matured during the quarter. Borrowings on the company's asset-based lending (ABL) credit facilities were reduced in the first quarter. These transactions enhanced financial flexibility in reducing near-term debt with the proceeds of the new convertible notes maturing in March 2026. These actions, as well as the continued borrowing availability under the ABL revolving credit facilities, and the anticipated generation of Adjusted EBITDA and free cash flow, should provide the company sufficient liquidity to manage the business and meet its obligations.
The company has committed to providing medical products that deliver the best clinical value; promote recovery, independence and active lifestyles; and support long-term conditions and palliative care. The company's strategy aligns its resources to produce products and solutions that assist customers and end-users with the most clinically complex needs. By focusing the company's efforts to provide the best possible assistance and outcomes to the people and caregivers who use its products, the company aims to improve its financial condition for sustainable profit and growth. To execute this strategy, the company is undertaking a substantial multi-year business optimization plan.
Business Optimization Efforts
The company is executing a multi-year strategy to return the company to profitability by focusing its resources on products and solutions that provide greater healthcare value in clinically complex rehabilitation and post-acute care. The company's business optimization actions and growth plan balances innovative organic growth, product portfolio changes across all regions, and cost improvements in supply chain and administrative functions. Key elements of the enhanced transformation and growth plan are:
•Globally, continue to drive all business segments and product lines based on their potential to achieve a leading market position and to support profitability goals;
•In Europe, leverage centralized innovation and supply chain capabilities while reducing the cost and complexity of a legacy infrastructure;
•In North America, adjust the portfolio to consistently grow profitability amid cost increases by adding new products, reducing costs and continuing to improve customers' experience;
•In Asia Pacific, remain focused on sustainable growth and expansion in the southeast Asia region; and
•Take actions globally to reduce working capital and improve free cash flow.
As it navigates the uncertain business environment resulting from COVID-19, the company continues to allocate more resources to the business units experiencing increased demand and expects to continue taking actions to mitigate the potential negative financial and operational impacts on other parts of the company's business that have declined. In the medium-term, the company still expects to execute on its business optimization strategy, such as global IT modernization initiative which is expected to ultimately result in optimization of the operating structure.
The company participates in growing durable healthcare markets and serves a persistent need for its products. The company will continue to improve operating efficiency, together with the lifting of public health restrictions and resolution of supply chain disruptions, to yield improved financial performance. As a result, the company continues to expect to grow revenue, profitability, and improve its cash flow performance for the year. As approximately 95% of the company's revenues are generated in the Northern Hemisphere, the company expects sales growth for the remainder of the year assuming the expectation of healthcare access resuming, a return to more active lifestyles in the
warmer months as the pandemic subsides, and amplified by the adoption of new products and pent up demand from the prior year.
The company's earnings performance is expected to benefit from: (1) new product introductions with improved commercialization plans and additional investments in the sales force and demonstration equipment, which are expected to result in profitable incremental sales, as well as higher sales and margins on existing products; and (2) margin expansion expected as a result of efficiencies related to the plant consolidations in Germany; supply chain actions to expand gross profits, offset by higher freight and logistics costs, and the impact of U.S. tariff exclusions which expired on January 1, 2021. The company expects SG&A expense to be higher than 2020 levels but lower than 2019 levels as it adds back sales and marketing related spending to support sales growth and activity-based spending. Stock compensation expense is expected to be closer to 2019 levels. In addition, while the new IT system implementation is a key project for the company in North America during 2021, benefits related to improved customer experience and efficiencies have not been considered in the guidance as a result of the anticipated timing to roll out the new system in North America.
Cash flow for 2021 is expected to fund one-time payments for severance costs related to the German plant consolidation and funding VAT and other taxes deferred from 2020 as a result of programs implemented by many jurisdictions as result of the pandemic. The company has historically generated negative cash flow performance during the first half of the year. This pattern is expected to continue due to the timing of annual one-time payments such as customer rebates and employee bonuses earned during the prior year, and higher working capital usage from seasonal inventory increases. Quarterly cash flow is anticipated to be impacted by timing of sales growth which will impact accounts receivable collections. The company anticipates spending $20,000,000 on capital expenditures in 2021.
Favorable Long-Term Demand
Ultimately, demand for the company's products and services is based on the need to provide care for people with certain conditions. The company's medical devices provide solutions for end-users and caregivers. Therefore, the demand for the company's medical equipment is largely driven by population growth and the incidence of certain conditions where treatment may be supplemented by the company's devices. The company also provides solutions to help equipment providers and residential care operators deliver cost-effective and high-quality care. The company believes that its commercial team, customer relationships, products and solutions, supply chain infrastructure, and strong research and development pipeline will create sustainable and favorable business potential.
RESULTS OF OPERATIONS - NET SALES
The company operates in two primary business segments: North America and Europe with each selling the company's primary product categories, which include: lifestyle, mobility and seating and respiratory therapy products. Sales in Asia Pacific are reported in All Other and include products similar to those sold in North America and Europe.
|($ in thousands USD)||1Q21*||1Q20||% Change |
|Foreign Exchange % Impact||Divestiture % Impact||Constant Currency % Change|
|Europe||112,775 ||120,968 ||(6.8)||8.0 ||— ||(14.8)|
|North America||75,974 ||86,971 ||(12.6)||0.5 ||— ||(13.1)|
|All Other (Asia Pacific)||7,453 ||10,501 ||(29.0)||14.1 ||(26.7)||(16.4)|
|Consolidated||196,202 ||218,440 ||(10.2)||5.3 ||(1.3)||(14.2)|
* Date format is quarter and year in each instance.
The table above provides net sales change as reported and as adjusted to exclude the impact of foreign exchange translation and divestitures (constant currency net sales). “Constant currency net sales" is a non-Generally Accepted Accounting Principles ("GAAP") financial measure, which is defined as net sales excluding the impact of foreign currency translation and divestitures. The current year's functional currency net sales are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's sales to calculate the constant currency net sales change. For the divestiture impact, the company adjusted a portion of net sales as the Dynamic Controls business was divested as of March 7, 2020. Management believes that this financial measure provides meaningful information for evaluating the core operating performance of the company.
The global pandemic continued to impact sales across all segments. Public health restrictions limited access to healthcare professionals and institutions needed for certain product selections and global supply chain disruptions related to transportation and logistics delayed receipt of components and limited conversion of orders to shipments in the quarter. These items impacted each of the regions in 1Q21 and resulted in declines in net sales compared to the same period last year. The company believes the global supply chain disruptions from 1Q21 are temporary, and as these disruptions subside and access to healthcare increases, sales growth should return for the remainder of the year. In addition, the pandemic did not impact 1Q20.
Europe - Constant currency net sales decreased $17,870,000, or 14.8% in 1Q21 compared to 1Q20 as sales continued to be significantly impacted by the pandemic. Shutdown orders in certain countries contributed to decreases in sales of mobility and seating products and lifestyle products, which was slightly offset by growth in respiratory products. Shutdowns impacted the company's operations to various degrees in France, Germany, UK and the Nordic countries.
North America - Constant currency net sales for 1Q21 decreased $11,391,000 or 13.1% compared to 1Q20 driven by declines in sales of mobility and seating and non-bed lifestyle products which more than offset growth in respiratory products.
All Other - Constant currency net sales, which relate entirely to the Asia Pacific region, decreased $1,263,000 or 16.4% for 1Q21 compared to 1Q20 driven by declines in lifestyle products offset by growth in mobility and seating products.
Constant currency net sales of mobility and seating products, which comprise most of the company's clinically complex product portfolio, decreased to 35.8% of net sales in 1Q21 from 39.8% in 1Q20.
This decrease reflects the significant impacts of the pandemic, particularly limited access to healthcare professionals and institutions needed for certain product selections, specifically for mobility and seating products and non-bed related lifestyle products. In addition, net sales in 1Q21 were impacted by global supply chain disruptions impacting the availability of components.
Gross profit as a percentage of net sales for 1Q21 decreased 100 basis points to 27.8%, primarily attributable to unfavorable manufacturing variances as a result of reduced net sales. Gross profit was also impacted by unfavorable product mix. Unfavorable manufacturing variances in 1Q21 were the result of both lower volumes and increased costs due to component shortages and transportation delays which impacted labor costs in several of our manufacturing and assembly locations in Europe and North America.
Gross profit drivers by segment:
Europe - Gross profit as a percentage of net sales for 1Q21 decreased 1.6 percentage points and $3,972,000, compared to 1Q20 driven by lower net sales and unfavorable manufacturing variances as a result of reduced net sales.
North America - Gross profit as a percentage of net sales for 1Q21 was flat while gross profit dollars declined $3,887,000 compared to 1Q20 driven by lower net sales and unfavorable manufacturing variances as a result of reduced net sales.
All Other - Gross profit as a percentage of net sales for Asia Pacific increased 7.3 percentage points while gross profit dollars declined $1,040,000 compared to 1Q20 primarily driven by reduced sales and divestiture of the Dynamic Controls business as of March 7, 2020.
All Other also includes the impact of intercompany profit eliminations for the consolidated company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|($ in thousands USD)||1Q21||1Q20||Reported Change||Foreign Exchange Impact||Divestiture % Impact||Constant Currency Change|
|SG&A expenses - $||58,821 ||61,738 ||(2,917)||3,006 ||(826)||(5,097)|
|SG&A expenses - % change||(4.7)||5.0 ||(1.3)||(8.4)|
|% to net sales||30.0 ||28.3 |
The table above provides selling, general and administrative (SG&A) expense change as reported and as adjusted to exclude the impact of foreign exchange translation (constant currency SG&A). “Constant currency SG&A" is a non-GAAP financial measure, which is defined as SG&A expenses excluding the impact of foreign currency translation and divestitures. The current year's functional currency SG&A expenses are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's SG&A expenses to calculate the constant currency SG&A expense change. Management believes that this financial measure provides meaningful information for evaluating the core operating performance of the company.
The divestiture impact is related to a portion of the SG&A expenses related to the Dynamic Controls business divested on March 7, 2020.
SG&A expenses, excluding the impact of foreign currency translation and divestitures, which is referred to as "constant currency SG&A," decreased for 1Q21 compared to the same period last year primarily due to reduced employment costs and lower sales and marketing expenses partially offset by unfavorable foreign currency transactions.
SG&A expense drivers by segment:
Europe - SG&A expenses for 1Q21 decreased $953,000 or 3.3% compared to 1Q20 with foreign currency translation increasing SG&A expenses by $2,537,000, or 8.8%. Constant currency SG&A expenses decreased $3,490,000, or 12.1%. The decreased expense was primarily attributable to lower employment costs and sales and marketing expenses.
North America - SG&A expenses for 1Q21 decreased $3,557,000 or 13.6%, compared to 1Q20 with foreign currency translation increasing SG&A expenses by $166,000. Constant currency SG&A expenses decreased $3,723,000, or 14.3% driven primarily by employment costs and sales and marketing expenses.
All Other - SG&A expenses for 1Q21 increased by $1,593,000 compared to 1Q20 with foreign currency translation increasing SG&A expenses by $303,000 and divestitures decreasing SG&A expenses by $826,000.
Constant currency SG&A expenses increased by $2,116,000. All Other includes SG&A related to the Asia Pacific businesses and non-allocated corporate costs. SG&A expenses related to non-allocated corporate costs for 1Q21 increased 7.4%, or $397,000, compared to 1Q20 driven primarily by stock compensation expense. Related to the Asia Pacific businesses, constant currency SG&A expenses increased $1,719,000, due to foreign currency transactions.
|MD&A||Operating Income (Loss)|
OPERATING INCOME (LOSS)
|($ in thousands USD)||1Q21||1Q20||$ Change||% Change|
|Europe||3,832 ||6,850 ||(3,018)||(44.1)|
|Gain on sale of business||— ||9,590 ||(9,590)||(100.0)|
|Charges related to restructuring||(1,552)||(1,392)||(160)||(11.5)|
|Consolidated Operating Income (Loss)||(5,735)||9,448 ||(15,183)||(160.7)|
For 1Q21, consolidated operating income (loss) declined significantly due to a $9,590,000 gain from the divestiture of Dynamic Controls in the prior year period and lower gross profit on net sales declines impacted by the pandemic, partially offset by lower SG&A expenses.
Operating income (loss) by segment:
Europe - Operating income for 1Q21 declined by $3,018,000, or 44.1%, primarily due to lower gross profit on net sales declines impacted by the pandemic, partially offset by lower SG&A expenses.
North America - Operating loss for 1Q21 increased by $330,000, or 16.1%, primarily due to lower gross profit on net sales declines impacted by the pandemic, partially offset by lower SG&A expenses.
All Other - Operating loss for All Other includes the operating income of the Asia Pacific businesses, offset by unallocated SG&A expenses and intercompany eliminations. Operating loss increased $2,085,000, or 58.6%, primarily driven by foreign currency transactions and divestiture of Dynamic Controls.
Charges Related to Restructuring Activities
Restructuring charges totaled $1,552,000 for 1Q21 compared to $1,392,000 for 1Q20 and were principally related to severance costs. Restructuring charges were incurred in the Europe segment of $730,000 and North America segment of $822,000.
Loss on debt extinguishment including debt finance changes and fees
|($ in thousands USD)||1Q21||1Q20|
|Loss on debt extinguishment including debt finance fees||709 ||— |
During the first quarter of 2021, the company repurchased and retired, at par plus accrued interest, $78,850,000 of its 2022 Notes. The result of the transaction was a loss on debt extinguishment including debt and finance fees of $709,000.
|($ in thousands USD)||1Q21||1Q20||$ Change||% Change|
|Interest expense||5,731 ||6,676 ||(945)||(14.2)|
|Interest income||(1)||(60)||59 ||(98.3)|
The decrease in interest expense for 1Q21 compared to the same period of prior year was primarily related to the adoption of ASU 2020-06 which eliminated interest expense from convertible debt discount amortization upon adoption on January 1, 2021 offset by accretion the company's 5.00% series II convertible senior exchange notes due 2024 (the "Series II 2024 Notes") which started in the second quarter of 2020. Refer to "Accounting Policies" in the Notes to the Condensed Consolidated Financial Statements for discussion of adoption.
The company had an effective tax rate of 15.4% on losses and 74.2% on earnings before tax for the three months ended March 31, 2021 and March 31, 2020, respectively, compared to an expected benefit for the three months ended March 31, 2021 and an expected expense for the three months ended March 31, 2020 of 21.0% on the pre-tax loss and earnings for each period. The company's effective tax rate for the three months ended March 31, 2021 and March 31, 2020 were unfavorable as compared to the U.S. federal statutory rate, principally due to the negative impact of the company not being able to record tax benefits related to the significant losses in countries which had tax valuation allowances. The effective tax rate was increased for the three months ended March 31, 2021 and March 31, 2020 by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate higher than the U.S. statutory rate, except for the gain on the disposition of Dynamic Controls which was not taxable locally for the three
months ended March 31, 2020. In addition, the company had accrued withholding taxes on earnings of its Chinese subsidiary based on the expectation of not permanently reinvesting those earnings. The sale of this entity, without such distribution resulted in the reversal of this accrual in the amount of $988,000 for the three months ended March 31, 2020.
As a result of the COVID-19 pandemic and the global impact on business activity, various governments have provided programs to help offset the liquidity pressures and impact on society. The company has taken advantage of some of these programs and will continue to consider other programs as they are announced. To date, the company has determined it has benefited or will benefit from: 1) deferral of U.S. payroll tax related to employer portion of social security from 2020, to be paid over 2 years; 2) a U.S. business interest limitation increase from 30% to 50% of US Federal adjusted taxable income for the 2019 and 2020 tax years; 3) the treatment of qualified improvement property as 15-year property in the U.S.; 4) and the deferral of income and indirect tax payments over various periods in other countries around the world where the company operates. Such programs had resulted in tax deferrals totaling approximately $11,000,000 through December 31, 2020 as a benefit to cash flows for that period then ended. In the first quarter of 2021, approximately $2,800,000 was paid related to the tax deferrals from 2020.
|MD&A||Liquidity and Capital Resources|
LIQUIDITY AND CAPITAL RESOURCES
The company continues to maintain an adequate liquidity position through its cash balances and bank lines of credit (refer to Long-Term Debt in the Notes to Condensed Consolidated Financial Statements included in this report) as described below.
Key balances on the company's balance sheet and related metrics:
|($ in thousands USD)||March 31, 2021||December 31, 2020||$ Change||% Change|
|Cash and cash equivalents||86,052 ||105,298 ||(19,246)||(18.3)|
Working capital (1)
|132,048 ||144,080 ||(12,032)||(8.4)|
Total debt (2)
|369,951 ||339,928 ||30,023 ||8.8 |
Long-term debt (2)
|361,527 ||330,903 ||30,624 ||9.3 |
Total shareholders' equity (3)
|282,701 ||333,846 ||(51,145)||(15.3)|
Credit agreement borrowing availability (4)
|31,792 ||36,509 ||(4,717)||(12.9)|
(1) Current assets less current liabilities.
(2) Total debt and Long-term debt include finance leases but exclude debt issuance costs recognized as a deduction from the carrying amount of debt liability and debt discounts in 2020 classified as debt or equity and operating leases.
(3) 1Q21 reflects the adoption of ASU 2020-06 "Debt with Conversion and Other Options" on January 1, 2021 which reduced total shareholders' equity by $25,128,000 and purchase of capped calls, related to the 2026 notes issued in 1Q21, also reduced total shareholders' equity by $18,787,000.
(4) Reflects the combined availability of the company's North American and European asset-based revolving credit facilities before borrowings. The change in borrowing availability is due to changes in the calculated borrowing base, primarily due to lower accounts receivable balances as a result of reduced net sales impacted by the pandemic. At March 31, 2021, the company had $10,376,000 of borrowings outstanding on the European credit facility and no borrowings outstanding on its North America credit facility. Outstanding borrowings are based on credit availability calculated on a month lag related to the European credit facility.
The company's cash and cash equivalents balances were $86,052,000 and $105,298,000 at March 31, 2021 and December 31, 2020, respectively. The decrease in cash in the first three months of 2021 is primarily attributable to use from operating activities and cash used for continued investment in business improvement initiatives. In the first quarter of 2021, the company issued $125,000,000 principal amount of 2026 Notes, paid $4,608,000 in financing costs, purchased capped calls related to the 2026 Notes for $18,787,000, repurchased $78,850,000 principal amount of 2022 Notes, repaid $1,250,000 principal amount of 2021 Notes and reduced outstanding borrowings under its credit facilities by $21,126,000. The North America and Europe credit facilities under the company's Credit Agreement provides for asset-based-lending senior secured revolving credit facilities.
Refer to "Long-Term Debt" in the Notes to the Condensed Consolidated Financial statements included in this report for a summary of the material terms of the Company's long-term indebtedness.
Debt repayments, acquisitions, divestitures, the timing of vendor payments, the timing of customer rebate payments, the granting of extended payment terms to significant national accounts and other activity can have a significant impact on the company's cash flow and borrowings outstanding such that the cash reported at the end of a given period may be
materially different than cash levels during a given period. While the company has cash balances in various jurisdictions around the world, there are no material restrictions regarding the use of such cash for dividends within the company, loans or other purposes.
The company's total debt outstanding, inclusive of the company's convertible senior notes due 2022, 2024 and 2026 and finance lease obligations, increased by $30,023,000 to $369,951,000 at March 31, 2021 from $339,928,000 as of December 31, 2020. The increase is primarily driven by issuance of $125,000,000 principal amount of 2026 Notes offset by repayment of $1,250,000 principal amount of 2021 Notes, repurchase of $78,850,000 principal amount of 2022 Notes and reduction of $21,126,000 of outstanding borrowings under the company's credit facilities.
The company may from time to time seek to retire or purchase its convertible senior notes, in open market purchases, privately negotiated transactions or otherwise. Such purchases, if any, will depend on prevailing market conditions, the company’s liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
|MD&A||Liquidity and Capital Resources|
The company is actively managing its business to maintain cash flow and liquidity. As discussed elsewhere in this report, the company has taken several defensive measures to enhance liquidity in response to the COVID-19 pandemic, including reducing expenses, managing capital expenditure, suspending its cash dividend, leveraging borrowings available under its credit facilities, raising capital and refinancing its near-term convertible debt, obtaining a loan pursuant to the CARES Act in the second quarter of 2020 and accessing other government programs in the US and Europe which resulted in making payments on value added tax deferrals from 2020 in the first quarter of 2021.
Based on the company's current expectations, the company believes that its cash and cash equivalent balances and available borrowing capacity under its Credit Agreement should be sufficient to meet working capital needs, capital requirements and commitments for at least the next twelve months. Notwithstanding the company's expectations, if the company's operating results decrease as the result of pressures on the business due to, for example, prolonged, or worsening of, negative impacts of the COVID-19 pandemic, currency fluctuations or regulatory issues or the company's failure to execute its business plans or if the company's business improvement actions take longer than expected to materialize, the company may require additional financing, or may be unable to comply with its obligations under the credit facilities, and its lenders could demand repayment of any amounts outstanding under the company's credit facilities. If additional financing is required, there can be no assurance that financing will be available on terms satisfactory to the company, if at all. As the company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the company’s customers and suppliers, the negative financial impact to the company’s results cannot be reasonably estimated, but could be material.
The company also has an agreement with De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide lease financing to the company's U.S. customers. Either party could terminate this agreement with 180 days notice or 90 days notice by DLL upon the occurrence of certain events. Should this agreement be terminated, the company's borrowing needs under its credit facilities could increase.
While most of the company's debt has fixed interest, should interest rates increase, the company expects that it would be able to absorb modest rate increases without any material impact on its liquidity or capital resources. The weighted average interest rate on revolving credit borrowings, excluding finance leases, was 4.5% for the three months ended March 31, 2021 and 4.6% for the year ended December 31, 2020. Refer to "Long-Term Debt" and "Leases and Commitments" in the Notes to the Condensed Consolidated Financial Statements for more details regarding the company's credit facilities and lease liabilities, respectively.
The company estimates that capital investments for 2021 could be approximately $20,000,000 compared to actual capital expenditures of $22,304,000 in 2020. The continued investment at this level relates primarily to the new ERP system. The company believes that its balances of cash and cash equivalents and existing borrowing facilities will be sufficient to meet its operating cash requirements and fund capital expenditures (refer to "Liquidity and Capital Resources"). The Credit Agreement limits the company's annual capital expenditures to $35,000,000.
On May 21, 2020, the Board of Directors suspended the quarterly dividend on the company's Common Shares in light of the impacts of the COVID-19 pandemic on the business. The Board of Directors suspended the company's regular dividend on the Class B Common Shares starting in Q3 2018. Less than 4,000 Class B Common Shares remain outstanding and suspending the regular Class B dividend allows the company to save on the administrative costs and compliance expenses associated with that dividend. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis and would be eligible for any Common Share dividends declared following any such conversion.
The increase in cash used by operating activities for the three months ended March 31, 2021 was driven primarily by reduced profit, increased inventory and reduction of accrued expenses. Inventories increased significantly as a result of the pandemic including supply chain disruptions. This inventory should largely convert to net sales within the next two quarters. Accrued expenses declined as result of payment of severance related to German manufacturing facility consolidation, customer rebate payments and payment of a portion of tax deferrals from 2020.
The year over year change in Cash flows related to investing activities was driven primarily by gross proceeds of $14,563,000 from the sale of Dynamic Controls in the first quarter of 2020.
Cash flows used by financing activities in the first three months of 2021 included the issuance of $125,000,000 principal amount of 2026 Notes, payment of $4,608,000 in financing costs, purchase of capped calls related to the 2026 Notes for $18,787,000, repurchase of $78,850,000 principal amount of 2022 Notes and repayment of $1,250,000 principal amount of 2021 Notes. In addition, the company reduced its outstanding borrowings on its credit facilities by $21,126,000. Cash flows generated by financing activities in the first three months of 2020 were the result of increased borrowings on its credit facilities of $21,600,000. Borrowings on credit facilities are under the company's Credit Agreement which provides an asset-based-lending senior secured revolving credit facilities.
Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
| ($ in thousands USD)||1Q21||1Q20|
|Net cash used by operating activities||(13,760)||(9,839)|
|Plus: Sales of property and equipment||23 ||4 |
|Less: Purchases of property and equipment||(4,118)||(2,121)|
|Free Cash Flow||(17,855)||(11,956)|
Free cash flow for the first three months 2021 and 2020 was primarily impacted by the same items that affected cash flows used by operating activities. Free cash flow is a non-GAAP financial measure that is comprised of net cash used by operating activities plus purchases of property and equipment less proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.).
Generally, the first half of the year is cash consumptive and impacted by significant disbursements related to annual customer rebate payments which normally occur in the first quarter of the year and earned employee bonuses historically paid in the second quarter of the year. In addition, investment in inventory is typically heavy in the first half of the year with planning around the company's supply chain to fulfill shipments in the second half of the year and can be impacted by footprint rationalization projects. The growth in inventory in 1Q21 was also impacted by supply chain and operations disruptions which prevented the completion and sale of products. Historically, the company realizes stronger cash flow in the second half of the year versus the first half of the year. Given the company's anticipation of net sales growth for the remainder of 2021, seasonality of cash flow is also anticipated to be impacted by working capital needed to support sales growth. However, because the company cannot predict the duration or scope of the COVID-19 pandemic and its negative impact on the company’s cash flow, these historic trends may not apply in 2021 or beyond.
The company's approximate cash conversion days at March 31, 2021, December 31, 2020 and March 31, 2020 were as follows:
For the quarter ended March 31, 2021, days in inventory and days in accounts payable were both impacted by the business disruption due to the COVID-19 pandemic, including supply chain disruptions.
Days in receivables are equal to current quarter net current receivables divided by trailing four quarters of net sales multiplied by 365 days. Days in inventory and accounts payable are equal to current quarter net inventory and accounts payable, respectively, divided by trailing four quarters of cost
of sales multiplied by 365 days. Total cash conversion days are equal to days in receivables plus days in inventory less days in accounts payable.
The company provides a summary of days of cash conversion for the components of working capital so investors may see the rate at which cash is disbursed, collected and how quickly inventory is converted and sold.
|MD&A||Accounting Estimates and Pronouncements|
ACCOUNTING ESTIMATES AND PRONOUNCEMENTS
CRITICAL ACCOUNTING ESTIMATES
The Condensed Consolidated Financial Statements included in the report include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Condensed Consolidated Financial Statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, thus, actual results could differ from these estimates. Refer to the Critical Accounting Estimates section within MD&A of company's Annual Report on Form 10-K for the period ending December 31, 2020.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the company’s disclosure regarding recently issued accounting pronouncements, see Accounting Policies - Recent Accounting Pronouncements in the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
This Form 10-Q contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “could,” “plan,” “intend,” “expect,” “continue,” “believe” and “anticipate,” as well as similar comments, denote forward-looking statements that are subject to inherent uncertainties that are difficult to predict. Actual results and events may differ significantly from those expressed or anticipated as a result of risks and uncertainties, which include, but are not limited to, the following: the duration and scope of the COVID-19 pandemic, the resumption of access to healthcare, including clinics and elective care, and loosening of public health restrictions, or any reimposed restrictions on access to health care or tightening of public health restrictions which could impact the demand for the company’s products; global shortages in, or increasing costs for, transportation and logistics services and capacity; the inability of the company to obtain needed products, components or raw materials from its suppliers; actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the effects of steps the company takes to reduce operating costs; the inability of the company to sustain profitable sales growth, achieve anticipated improvements in segment operating performance, convert high inventory or accounts receivable levels to cash or reduce its costs to maintain competitive prices for its products; lack of market acceptance of the company's new product innovations; circumstances or developments that may make the company unable to implement or realize the anticipated benefits, or that may increase the costs, of its current and planned business initiatives, in particular the key elements of its growth plan such as its new product introductions, additional investments in sales force and demonstration equipment, supply chain actions and global information technology outsourcing and ERP implementation activities, finance and accounting systems outsourcing and other outsourcing activities; possible adverse effects on the company's liquidity, including the company's ability to address future debt maturities; adverse changes in government and other third-party payor reimbursement levels and practices both in the U.S. and in other countries; consolidation of health care providers; increasing pricing pressures in the markets for the company's products; risks of failures in, or disruptions to, legacy IT systems; risks of cybersecurity attack, data breach or data loss and/or delays in or inability to recover or restore data and IT systems; adverse effects of the company's consent decree of injunction with the U.S. Food and Drug Administration (FDA), including but not limited to, compliance costs, inability to rebuild negatively impacted customer relationships,
unabsorbed capacity utilization, including fixed costs and overhead; any circumstances or developments that might adversely impact the third-party expert auditor's required audits of the company's quality systems at the facilities impacted by the consent decree, including any possible failure to comply with the consent decree or FDA regulations; regulatory proceedings or the company's failure to comply with regulatory requirements or receive regulatory clearance or approval for the company's products or operations in the United States or abroad; adverse effects of regulatory or governmental inspections of company facilities at any time and governmental enforcement actions; including the investigation of pricing practices at one of the company's former rentals businesses; product liability or warranty claims; product recalls, including more extensive warranty or recall experience than expected; possible adverse effects of being leveraged, including interest rate or event of default risks; exchange rate fluctuations, particularly in light of the relative importance of the company's foreign operations to its overall financial performance and including the existing and potential impacts from Brexit; legal actions, including adverse judgments or settlements of litigation or claims in excess of available insurance limits; tax rate fluctuations; additional tax expense or additional tax exposures, which could affect the company's future profitability and cash flow; uncollectible accounts receivable; risks inherent in managing and operating businesses in many different foreign jurisdictions; decreased availability or increased costs of materials which could increase the company's costs of producing or acquiring the company's products, including the adverse impacts of tariffs and increases in commodity costs or freight costs; heightened vulnerability to a hostile takeover attempt or other shareholder activism; provisions of Ohio law or in the company's debt agreements, charter documents or other agreements that may prevent or delay a change in control, as well as the risks describe in the Annual Report on Form 10-K and from time to time in the company's reports as filed with the Securities and Exchange Commission. Except to the extent required by law, the company does not undertake and specifically declines any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Comprehensive Income (Loss) (unaudited)
| (In thousands, except per share data)||Three Months Ended March 31,|
|Net sales||$||196,202 ||$||218,440 |
|Cost of products sold||141,564 ||155,452 |
|Gross Profit||54,638 ||62,988 |
|Selling, general and administrative expenses||58,821 ||61,738 |
|Gain on sale of business||— ||(9,590)|
|Charges related to restructuring activities||1,552 ||1,392 |
|Operating Income (Loss)||(5,735)||9,448 |
|Loss on debt extinguishment including debt finance charges and fees||709 ||— |
|Interest expense||5,731 ||6,676 |
|Earnings (Loss) Before Income Taxes||(12,174)||2,832 |
|Income tax provision||1,870 ||2,100 |
|Net Income (Loss)||$||(14,044)||$||732 |
|Dividends Declared per Common Share||$||— ||$||0.0125 |
|Net Income (Loss) per Share—Basic||$||(0.41)||$||0.02 |
|Weighted Average Shares Outstanding—Basic||34,495 ||33,784 |
|Net Income (Loss) per Share—Assuming Dilution||$||(0.41)||$||0.02 |
|Weighted Average Shares Outstanding—Assuming Dilution||35,210 ||33,853 |
|Net Income (Loss)||$||(14,044)||$||732 |
|Other comprehensive income (loss):|
|Foreign currency translation adjustments||5,677 ||(4,194)|
|Defined Benefit Plans:|
|Amortization of prior service costs and unrecognized losses||349 ||(169)|
|Deferred tax adjustment resulting from defined benefit plan activity||(58)||18 |
|Valuation reserve associated with defined benefit plan activity||58 ||(18)|
|Current period loss on cash flow hedges||(875)||(142)|
|Deferred tax benefit (provision) related to gain on cash flow hedges||83 ||— |
|Other Comprehensive Income (Loss)||5,234 ||(4,505)|
|(Elements as a % of Net Sales)|
|Net sales||100.0 ||%||100.0 ||%|
|Cost of products sold||72.2 ||71.2 |
|Gross Profit||27.8 ||28.8 |
|Selling, general and administrative expenses||30.0 ||28.3 |
|Gain on sale of business||— ||(4.4)|
|Charges related to restructuring activities||0.8 ||0.6 |
|Operating Income (Loss)||(2.9)||4.3 |
|Loss on debt extinguishment including debt finance charges and fees||0.4 ||— |
|Interest expense||2.9 ||3.1 |
|Interest income||— ||— |
|Earnings (Loss) Before Income Taxes||(6.2)||1.3 |
|Income tax provision||1.0 ||1.0 |
|Net Income (Loss)||(7.2)||%||0.3 ||%|
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
|Cash and cash equivalents||$||86,052 ||$||105,298 |
|Trade receivables, net||99,773 ||108,588 |
|Installment receivables, net||239 ||379 |
|Inventories, net||132,394 ||115,484 |
|Other current assets||35,483 ||44,717 |
|Total Current Assets||353,941 ||374,466 |
|Other Assets||5,643 ||5,925 |
|Intangibles, net||28,066 ||27,763 |
|Property and Equipment, net||57,793 ||56,243 |
|Finance Lease Assets, net||69,096 ||64,031 |
|Operating Lease Assets, net||14,053 ||15,092 |
|Goodwill||407,726 ||402,461 |
|Total Assets||$||936,318 ||$||945,981 |
|Liabilities and Shareholders’ Equity|
|Accounts payable||$||93,111 ||$||85,424 |
|Accrued expenses||112,278 ||126,273 |
|Current taxes payable||2,470 ||3,359 |
|Current portion of long-term debt||4,840 ||5,612 |
|Current portion of finance lease obligations||3,584 ||3,405 |
|Current portion of operating lease obligations||5,610 ||6,313 |
|Total Current Liabilities||221,893 ||230,386 |
|Long-Term Debt||283,750 ||239,441 |
|Finance Lease Long-Term Obligations||68,346 ||63,137 |
|Operating Leases Long-Term Obligations ||8,356 ||8,697 |
|Other Long-Term Obligations||71,272 ||70,474 |
Preferred Shares (Authorized 300 shares; none outstanding)
|— ||— |
Common Shares (Authorized 150,000 shares; 39,007 and 38,613 issued and outstanding at March 31, 2021 and December 31, 2020, respectively)—no par
|9,917 ||9,816 |
Class B Common Shares (Authorized 12,000 shares; 4 and 4 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)—no par
|2 ||2 |
|Additional paid-in-capital||273,982 ||326,088 |
|Retained earnings||54,164 ||58,538 |
|Accumulated other comprehensive income ||50,670 ||45,436 |
Treasury Shares (4,184 and 4,184 shares at March 31, 2021 and December 31, 2020, respectively)
|Total Shareholders’ Equity||282,701 ||333,846 |
|Total Liabilities and Shareholders’ Equity||$||936,318 ||$||945,981 |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (unaudited)
|For the Three Months Ended March 31,|
|Operating Activities||(In thousands)|
|Net income (loss)||$||(14,044)||$||732 |
|Adjustments to reconcile net income (loss) to net cash used by operating activities:|
|Gain on sale of business||— ||(9,590)|
|Depreciation and amortization||4,079 ||3,407 |
|Amortization of operating lease right of use assets||1,634 ||1,937 |
|Provision for losses on trade and installment receivables||45 ||(71)|
|Benefit for deferred income taxes||672 ||240 |
|Provision (benefit) for other deferred liabilities||(72)||469 |
|Provision for equity compensation||1,580 ||1,200 |
|Loss (gain) on disposals of property and equipment||— ||1 |
|Loss on debt extinguishment including debt finance charges and fees||709 ||— |
|Convertible debt discount amortization and accretion||870 ||2,732 |
|Amortization of debt fees||418 ||475 |
|Changes in operating assets and liabilities:|
|Trade receivables||9,768 ||1,627 |
|Installment sales contracts, net||228 ||26 |
|Other current assets||9,761 ||(10,934)|
|Accounts payable||6,197 ||7,950 |
|Other long-term liabilities||627 ||(1,323)|
|Net Cash Used by Operating Activities||(13,760)||(9,839)|
|Purchases of property and equipment||(4,118)||(2,121)|
|Proceeds from sale of property and equipment||23 ||4 |
|Proceeds from sale of business||— ||14,563 |
|Change in other long-term assets||2 ||(135)|
|Net Cash Provided (Used) by Investing Activities||(4,093)||10,198 |
|Proceeds from revolving lines of credit and long-term borrowings||125,000 ||21,600 |
|Repurchases of convertible debt, payments on revolving lines of credit and finance leases||(104,079)||(266)|
|Payment of financing costs||(4,608)||— |
|Payment of dividends||— ||(414)|
|Purchases of capped calls||(18,787)||— |
|Purchases of treasury shares||— ||(773)|
|Net Cash Provided (Used) by Financing Activities||(2,474)||20,147 |
|Effect of exchange rate changes on cash||1,081 ||(1,637)|
|Increase (decrease) in cash and cash equivalents||(19,246)||18,869 |
|Cash and cash equivalents at beginning of year||105,298 ||80,063 |
|Cash and cash equivalents at end of period||$||86,052 ||$||98,932 |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
|January 1, 2021 Balance||$||9,816 ||$||2 ||$||326,088 ||$||58,538 ||$||45,436 ||$||(106,034)||$||333,846 |
|Performance awards||— ||— ||668 ||— ||— ||— ||668 |
|Restricted share awards||101 ||— ||811 ||— ||— ||— ||912 |
|Net loss||— ||— ||— ||(14,044)||— ||— ||(14,044)|
|Foreign currency translation adjustments||— ||— ||— ||— ||5,677 ||— ||5,677 |
|Unrealized loss on cash flow hedges||— ||— ||— ||— ||(792)||— ||(792)|
|Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits||— ||— ||— ||— ||349 ||— ||349 |
|Total comprehensive loss||(8,810)|
|Adoption of ASU 2020-06||— ||— ||(34,798)||9,670 ||— ||— ||(25,128)|
|Purchase of capped calls||$||— ||$||— ||(18,787)||$||— ||$||— ||$||— ||(18,787)|
|March 31, 2021 Balance||$||9,917 ||$||2 ||$||273,982 ||$||54,164 ||$||50,670 ||$||(106,034)||$||282,701 |
|January 1, 2020 Balance||$||9,588 ||$||2 ||$||312,650 ||$||87,475 ||$||3,128 ||$||(104,327)||$||308,516 |
|Performance awards||90 ||— ||304 ||— ||— ||(774)||(380)|
|Restricted share awards||137 ||— ||669 ||— ||— ||— ||806 |
|Net income||— ||— ||— ||732 ||— ||— ||732 |
|Foreign currency translation adjustments||— ||— ||— ||— ||(4,194)||— ||(4,194)|
|Unrealized loss on cash flow hedges||— ||— ||— ||— ||(142)||— ||(142)|
|Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits||— ||— ||— ||— ||(169)||— ||(169)|
|Total comprehensive loss||(3,773)|
|Dividends||— ||— ||— ||(414)||— ||— ||(414)|
|Adoption of credit loss standard||— ||— ||— ||(243)||— ||— ||(243)|
|March 31, 2020 Balance||$||9,815 ||$||2 ||$||313,623 ||$||87,550 ||$||(1,377)||$||(105,101)||$||304,512 |
See notes to condensed consolidated financial statements.
|Notes to Financial Statements||Accounting Policies|
Principles of Consolidation: The condensed consolidated financial statements include the accounts of the company and its wholly owned subsidiaries and include all adjustments, which were of a normal recurring nature, necessary to present fairly the financial position of the company as of March 31, 2021 and the results of its operations and changes in its cash flow for the three months ended March 31, 2021 and 2020, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using a February 28 quarter end to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company's financial statements. All significant intercompany transactions are eliminated. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.
Use of Estimates: The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates.
Recent Accounting Pronouncements (Already Adopted):
In August 2020, the FASB issued ASU 2020-06 "Debt with Conversion and Other Options" (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity's Own Equity (Subtopic 815-40)", which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature (CCF) and (2) convertible instrument with a beneficial conversion feature (BCF). As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.
The company adopted ASU 2020-06 effective January 1, 2021, using the modified retrospective method, which resulted in the removal of convertible debt discounts of $25,218,000,
adjustment of $34,798,000 to additional paid-in-capital and $9,670,000 adjustment to retained earnings. Convertible debt discounts prior to adoption of ASU 2020-06 were amortized over the convertible debt term through interest expense. Subsequent to adoption, convertible debt discounts are not applicable when accounting for debt as a single unit of account. Interest expense for the three months ended March 31, 2020 related to debt discount amortization (which was not recognized in the first quarter of 2021 due to adoption) was $2,732,000 or $0.08 per basic and diluted share. There was no impact of adoption on performance metrics used for short-term or long-term incentive compensation. Accretion specific to the Series II 2024 Notes was unaffected by adoption. Due to the valuation allowance, there was no net impact to income taxes for the adoption. Subsequent to adoption weighted average shares when calculating diluted earnings per share requires the application of the if-converted method for all convertible instruments.
Recent Accounting Pronouncements (Not Yet Adopted):
In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting," which is intended to provide temporary optional expedients an exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates if certain criteria are met. The guidance may be adopted in any period prior to the guidance expiration on December 31, 2022. The company is currently reviewing the impact of the adoption of 2020-04 but does not expect the adoption to have a material impact on the company's financial statements.
|Notes to Financial Statements||Divested Businesses|
On March 7, 2020, the company, completed the sale (the “Transaction”) of its subsidiary, Dynamic Controls, a New Zealand incorporated unlimited company (“Dynamic Controls”), to Allied Motion Christchurch Limited, a New Zealand limited company (the “Purchaser”), pursuant to a Securities Purchase Agreement among the company, Invacare Holdings New Zealand, a New Zealand incorporated unlimited company, and the Purchaser, dated March 6, 2020 (the “Purchase Agreement”). Dynamic Controls was a producer of electronic control systems for powered medical mobility devices, including systems incorporating the LiNX™ technology platform. Dynamic Controls was a component of the All Other Segment.
Dynamic Controls was a supplier of power mobility products and respiratory components to the company as well as supplying power mobility products to external customers. Sales in 2020 through the date of disposition were $5,331,000, including intercompany sales of $2,532,000, compared to sales for the full year of 2019 of $30,261,000, including intercompany sales of $13,087,000. Income before income taxes was approximately $445,000 in 2020, through the date of disposition, compared to $853,000 in 2019, inclusive of intercompany profits on sales to the company.
The transaction was the result of considering options for the products sold by Dynamic Controls which resulted in selling the business to a third-party which can provide access to further technological innovations to further differentiate the company’s power mobility products.
The gross proceeds from the Transaction were $14,563,000, net of taxes and expenses. The company realized a pre-tax gain of $9,790,000 with a remaining accrued expenses balance of $240,000 as of March 31, 2021.
The Purchase Agreement contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, which are subject to certain exceptions, terms and limitations described further in the Purchase Agreement.
At the closing of the Transaction, the parties entered into a supply agreement pursuant to which Dynamic Controls will supply certain electronic components as required by the company for the five-year period following the Transaction, including ongoing supply and support of the LiNX™ electronic control system with informatics technology, continued contract manufacturing of certain electronic components for the company’s respiratory products and continued infrastructure and applications support for the
informatics solution for the company’s respiratory products. The estimated continued inflows and outflows following the disposal with the Purchaser are not expected to be material to the company.
The assets and liabilities of Dynamic Controls as of March 7, 2020 consisted of the following (in thousands):
|March 7, 2020|
|Trade receivables, net||$||4,129 |
|Inventories, net||3,082 |
|Other assets||855 |
|Property and equipment, net||600 |
|Operating lease assets, net||2,127 |
|Total assets||$||10,793 |
|Accounts payable||$||4,692 |
|Accrued expenses||2,473 |
|Current taxes payable||41 |
|Current portion of operating lease obligations||366 |
|Long-term obligations||1,019 |
|Total liabilities||$||8,591 |
Trade receivables as of March 7, 2020 includes receivables previously classified as intercompany related to product sold by Dynamic Controls to other Invacare entities.
|Notes to Financial Statements||Current Assets|
Receivables consist of the following (in thousands):
|March 31, 2021||December 31, 2020|
|Accounts receivable, gross||$||118,278 ||$||131,055 |
|Customer rebate reserve||(8,914)||(10,730)|
|Cash discount reserves||(4,995)||(7,320)|
|Allowance for doubtful accounts||(4,172)||(4,031)|
|Other, principally returns and allowances reserves||(424)||(386)|
|Accounts receivable, net||$||99,773 ||$||108,588 |
Reserves for customer rebates and cash discounts are recorded as a reduction in revenue and netted against gross accounts receivable. Customer rebates in excess of a given customer's accounts receivable balance are classified in Accrued Expenses. Customer rebates and cash discounts are estimated based on the most likely amount principle as well as historical experience and anticipated performance. In addition, customers have the right to return product within the company’s normal terms policy, and as such, the company estimates the expected returns based on an analysis of historical experience and adjusts revenue accordingly.
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all the company’s receivables are due from health care, medical equipment providers and long-term care facilities predominantly located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to providers, both foreign and domestic, are ultimately funded through government reimbursement programs such as Medicare and Medicaid in the U.S. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability.
The company's approach is to separate its receivables into good-standing and collection receivables. Good-standing receivables are assigned to risk pools of high, medium and low. The risk pools are driven by the specifics associated with the geography of origination. Expected loss percentages are calculated and assigned to each risk pool, driven primarily by historical experience. The historical loss percentages are calculated for each risk pool and then judgmentally revised to consider current risk factors as well as consideration of the impact of forecasted events, as applicable. The expected loss percentages are then applied to receivables balances each period to determine the allowance for doubtful accounts.
In North America, excluding Canada, good-standing receivables are assigned to the low risk pool and assigned an expected loss percentage of 1.0% as these receivables are deemed to share the same risk profile and collections efforts are the same. Installment receivables in North America are characterized as collection receivables and thus reserves based on specific analysis of each customer. In Canada, good-standing receivables are deemed low risk and assigned a loss percentage of 0.2%.
In Europe, expected losses are determined by each location in each region. Most locations have a majority of their receivables assigned to the low risk pool, which has an average expected loss percentage of 0.4%. About half of the locations have a portion of their receivables assigned as medium risk with an average expected loss percentage of 1.5%. Only a few locations have any receivables characterized as high risk and the average credit loss percentage for those locations is 2.5%. Collection risk is generally low as payment terms in certain key markets, such as Germany, are immediate and in many locations the ultimate customer is the government.
In the Asia Pacific region, receivables are characterized as low risk, which have an average expected loss percentage of 0.3%. Historical losses are low in this region where the use of credit insurance is often customary.
|Notes to Financial Statements||Current Assets|
The movement in the trade receivables allowance for doubtful accounts was as follows (in thousands):
| ||Three Months Ended |
March 31, 2021
|Balance as of beginning of period||$||4,031 |
|Current period provision||131 |
|Recoveries (direct write-offs), net||10 |
|Balance as of end of period||$||4,172 |
The company did not make any material changes to the assignment of receivables to the different risk pools or to the expected loss reserves in the quarter. The company is monitoring the impacts of the COVID-19 pandemic and the possibility for an impact on collections, but to date this has not materially impacted 2021.
For collections receivables, the estimated allowance for uncollectible amounts is based primarily on management’s evaluation of the financial condition of each customer. In addition, as a result of the company's financing arrangement with DLL, a third-party financing company which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishes reserves for specific customers as needed.
The company writes off uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. See Concentration of Credit Risk in the Notes to the Condensed Consolidated Financial Statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the condensed consolidated balance sheet.