Research and Development. The company continues to invest in research and development activities. The company dedicates funds to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures, which are included in costs of products sold, decreased to $18,677,000 in 2015 from $23,149,000 in 2014. The expenditures, as a percentage of net sales, were 1.6% and 1.8% in 2015 and 2014, respectively.2017 Versus 2016
Net Gain (Loss) on Convertible Debt Derivatives
|
| | | | |
| ($ in thousands USD) | Change in Fair Value - Gain (Loss) |
| | 2017 | 2016 |
| Convertible Note Hedge Assets | 43,344 |
| (2,504 | ) |
| Convertible Debt Conversion Liabilities | (47,001 | ) | 3,772 |
|
| Net gain (loss) on convertible debt derivatives | (3,657 | ) | 1,268 |
|
| | | |
Net Sales. ConsolidatedThe company recognized a net sales for 2014 decreased 4.8% for the year, to $1,270,163,000 from $1,334,505,000loss of $3,657,000 in 2013. Foreign currency translation increased net sales by 0.2 of a percentage point. Constant currency net sales decreased 5.0% as a result of declines in the North America/HME, IPG and Asia/Pacific segments being offset by increases in the European segment.
Europe
European net sales increased 4.7% in 20142017 compared to the prior year to $610,555,000 from $583,143,000 as foreign currency translation increaseda net sales by 1.1 percentage points. Constant currency net sales increased 3.6% principally due to increasesgain of $1,268,000 in lifestyle and mobility and seating products, which were partially offset by declines in respiratory products.
North America/Home Medical Equipment (North America/HME)
North America/HME net sales decreased 13.8% in 2014 versus the prior year to $507,867,000 from $589,240,000 with foreign currency translation decreasing net sales by 0.5 of a percentage point. The constant currency net sales decrease of 13.3% was driven by declines in all product categories. The net sales decline in respiratory products was primarily attributable to a significant shipment of Invacare® HomeFill® oxygen systems to a large national account in 2013 that did not repeat in 2014. The net sales decline in lifestyle products was primarily impacted by a shift toward lower cost products for certain lifestyle products that are subject to the Centers for Medicare and Medicaid Services' National Competitive Bidding program and pre- and post-payment audits. The net sales decline in mobility and seating products was primarily driven by reduced net sales of scooter products, which the company decided to exit domestically. In addition, the mobility and seating product category continued to be impacted by the FDA consent decree, which limits production of custom power wheelchairs and seating systems at the Taylor Street manufacturing facility to products having properly completed verification of medical necessity (VMN) documentation. The VMN is a signed document from a clinician, and in some instances a physician, that certifies that the product is deemed medically necessary for a particular patient's condition, which cannot be adequately addressed by another manufacturer's product or which is a replacement of the patient's existing product.
Institutional Products Group (IPG)
IPG net sales decreased 8.5% in 2014 over the prior year to $102,796,000 from $112,290,000 with foreign currency translation decreasing sales by 0.3 of a percentage point. The constant currency net sales decrease of 8.2% was driven primarily by declines in all product categories except therapeutic support surfaces and patient transport products.
Asia/Pacific
Asia/Pacific net sales decreased 1.8% in 2014 from the prior year to $48,945,000 from $49,832,000. Foreign currency translation decreased net sales by 1.4 percentage points. Constant currency net sales decreased 0.4% largely due to declines at the company's subsidiary that produces microprocessor controllers primarily related to its decision to exit the contract manufacturing business for customers outside of the healthcare industry. This was partially offset by growth in the company's Australian distribution business. Changes in exchange rates, particularly with the euro and U.S. dollar had a significant impact on sales in this segment.
Gross Profit. Consolidated gross profit as a percentage of net sales was 27.3% in 2014 as compared to 27.5% in 2013. The margin decline was principally related to reduced volumes, sales mix favoring lower margin product lines and lower margin customers and an incremental warranty expense related to three recalls. Gross profit as a percentage of net sales for the Europe, IPG and Asia/Pacific segments was favorable as compared to the prior year with the North America/HME segment unfavorable compared to the prior year. The 2014 gross margin reflected an incremental warranty expense for three previously disclosed recalls of $11,493,000 or 0.9 of a percentage point. The incremental warranty expense was recorded in the North America/HME, Europe and Asia/Pacific reporting segments. The company's warranty reserve is subject to adjustment as new developments change the company's estimates. The 2013 gross margin reflected an incremental warranty expense for a power wheelchair joystick recall of $7,264,000 or 0.5 of a percentage point. The incremental warranty expense was recorded in the North America/HME and Asia/Pacific reporting segments. In addition, the 2013 gross margin benefited by $1,389,000 or 0.1 of a percentage point, related to an amended value added tax (VAT) filing recognized in the European segment.
Gross profit in Europe as a percentage of net sales increased 1.0 percentage point in 2014 from the prior year. The increase in margin was principally due to favorable customer and product mix and lower product costs partially offset by increased warranty and freight expense. The 2014 gross margin reflected an incremental warranty expense of $3,395,000 pre-tax or 0.6 of a percentage point for a previously disclosed recall. Gross margin in 2013 benefited by $1,389,000 or 0.2 of a percentage point, related to an amended VAT filing recognized in the fourth quarter of 2013.
North America/HME gross profit as a percentage of net sales decreased 2.5 percentage points in 2014 from the prior year. The decline in margins was principally due to an unfavorable sales mix favoring lower margin products, increased warranty expense and asset write-offs attributable to canceled product launches. The 2014 gross margin reflected an incremental recall expense of $6,833,000 or 1.3 of a percentage point for three recalls compared to $2,625,000 or 0.4 of a percentage point for the joystick recall initiated in 2013.
IPG gross profit as a percentage of net sales increased 0.9 of a percentage point in 2014 from the prior year. The increase in margin was primarily attributable to lower R&D and warranty expense.
Gross profit in Asia/Pacific as a percentage of net sales increased 2.4 percentage points in 2014 from the prior year. The increase was primarily as a result of reduced warranty expense and a favorable product mix2016 related to the company's decision to exit the contract manufacturing business for customers outsidefair value of the healthcare industry partially offset by unfavorable absorption of fixed costs at the company's subsidiary which produces microprocessor controllers. The 2014 gross margin reflected an incremental warranty expense for the power wheelchair joystick recall of $1,265,000 pre-tax, or 2.6 percentage points compared an incremental warranty expense for the power wheelchair joystick recall of $4,639,000 pre-tax, or 9.3 percentage points, recorded in 2013.
convertible debt derivatives. See “Current Liabilities”"Long-Term Debt" in the Notesnotes to the Consolidated Financial Statements included elsewhere in this report for more detail.
Interest
|
| | | | | | | | |
| ($ in thousands USD) | 2017 | 2016 | $ Change | % Change |
| Interest Expense | 22,907 |
| 15,875 |
| 7,032 |
| 44.3 |
|
| Interest Income | (473 | ) | (265 | ) | (208 | ) | (78.5 | ) |
Interest expense increased due to the total provision amounts and a reconciliation of the changesconvertible debt issuance in the warranty accrual.second quarter of 2017.
Selling, General and Administrative. Consolidated selling, general and administrative (SG&A) expenses as a percentage of net sales were 30.2% in 2014 and 29.8% in 2013. The overall dollar decrease was $13,419,000, or 3.4%, with foreign currency translation increasing expense by $85,000. Excluding the impact of foreign currency translation, SG&A expenses decreased $13,504,000, or 3.4%. This decrease was primarily attributable to reduced employment, bad debt and consulting expense, including lower regulatory and compliance costs related to quality systems improvements.Income Taxes
European SG&A expenses increased by 5.2%, or $6,917,000, in 2014 compared to 2013. Foreign currency translation increased expense by approximately $1,569,000 or 1.2 percentage points. Excluding the foreign currency translation impact, SG&A expenses increased by $5,348,000, or 4.0%, primarily due to higher employment costs.
SG&A expenses for North America/HME decreased 11.2%, or $19,626,000, in 2014 compared to 2013 with foreign currency translation decreasing expense by $1,009,000 or 0.6 of a percentage point. Excluding the foreign currency translation, SG&A expense decreased $18,617,000, or 10.6%, due principally to reduced employment, bad debt and consulting expense, including lower regulatory and compliance costs related to quality systems improvements.
SG&A expenses for IPG decreased by 6.5%, or $2,862,000, in 2014 compared to 2013 with foreign currency translation decreasing expense by $144,000, or 0.3 of a percentage point. Excluding the impact of foreign currency translation, SG&A expenses decreased by $2,718,000, or 6.2%, primarily due to reduced employment costs.
Asia/Pacific SG&A expenses decreased 4.7%, or $1,059,000, in 2014 compared to 2013. Foreign currency translation decreased expense by $331,000 or 1.5 percentage points. Excluding the foreign currency translation impact, SG&A expenses decreased $728,000, or 3.2%, principally as a result of reduced associate costs and depreciation expense.
SG&A expenses related to the Other Segment increased by 14.9% or $3,211,000 in 2014 as compared to 2013. The increase is attributable to increased employment costs including $1,800,000 related to the retirement of an executive officer of the company.
Asset write-downs to intangible assets. In accordance with ASC 350, Intangibles - Goodwill and Other, the company reviews intangibles for impairment. As a result of the company's 2014 intangible review, the company recognized intangible write-down charges in the IPG segment of $13,041,000 comprised of a customer list impairment of $12,826,000 and a non-compete agreement of $215,000 as the actual and remaining cash flows associated with the intangibles were less than the cash flows originally used to value the intangibles, primarily driven by reduced net sales. The after-tax and pre-tax impairment amounts were the same for each of the above impairments.
As a result of the company's 2013 intangible impairment review, the company recognized intangible write-down charges of $1,523,000 comprised of trademarks with indefinite lives impairment of $568,000, a trademark with a definite life impairment of $123,000, customer list impairment of $442,000 and developed technology impairment of $223,000 all recorded in the IPG segment and a customer list impairment of $167,000 recorded in the North America/HME segment. The after-tax and pre-tax impairment amounts were the same for each of the above impairments except for the indefinite-lived trademark impairments in the IPG segment, which were $496,000 after-tax.
Charge Related to Restructuring Activities. The company's restructuring charges were necessitated primarily by continued declines in Medicare and Medicaid reimbursement by the U.S. government, as well as similar healthcare reimbursement pressures abroad, which negatively affect the company's customers (e.g. home health care providers) and continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations. In addition, restructuring decisions were also the result of reduced profitability in the North America/HME segment impacted by the FDA consent decree. While the company's
restructuring efforts have been executed on a timely basis resulting in operating cost savings, the savings have been more than offset by continued margin decline, principally as a result of product mix, reduced volumes and regulatory and compliance costs related to quality system improvements which are unrelated to the restructuring actions. The company expects any near-term cost savings from restructuring will be offset by other costs as a result of pressures on the business.
Charges for the year ended December 31, 2014 totaled $11,112,000 including charges for severance ($9,841,000), other charges in IPG and Europe ($1,286,000) principally related to building write-downs and lease termination cost reversals ($15,000). Severance charges were incurred in the North America/HME segment ($4,404,000), Other ($2,978,000), IPG segment ($1,163,000), Asia/Pacific segment ($769,000) and Europe segment ($527,000). The North America/HME segment severance was principally related to additional positions eliminated due to lost sales volumes resulting from the impact of the FDA consent decree. The Other severance related to the elimination of two senior corporate executive positions. IPG segment severance related principally to the closure of the London, Ontario facility. Europe and Asia/Pacific severance related to the elimination of certain positions as a result of general restructuring efforts. The costs related to the building write-downs related to two plant closures. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the company. Payments for the year ended December 31, 2014 were $11,131,000 and were funded with operating cash flows and the company's revolving credit facility. The majority of the 2014 charges are expected to be paid out within the next 12 months.
Charges for the year ended December 31, 2013 totaled $9,336,000, including charges for severance ($8,282,000), lease termination costs ($698,000) and other miscellaneous charges ($356,000). Severance charges were primarily incurred in the North America/HME segment ($5,405,000), Europe segment ($1,640,000) and Asia/Pacific segment ($970,000). The charges were incurred as a result of the elimination of various positions as part of the company's globalization initiatives. North America/HME segment severance was principally related to positions eliminated due to lost sales volumes resulting from the impact of the FDA consent decree. In Europe, severance was incurred for elimination of certain sales and supply chain positions. In Asia/Pacific, severance was principally incurred at the company's subsidiary, which produces microprocessor controllers, as a result of the company's decision in 2012 to cease the contract manufacturing business for companies outside of the healthcare industry. The lease termination costs were principally related to Australia as a result of the restructuring announced in 2012. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the company. Payments for the year ended December 31, 2013 totaled were $11,844,000 and were funded with operating cash flows and the company's revolving credit facility. The 2013 charges have been paid out.
Interest. Interest expense decreased to $3,039,000 in 2014 from $3,078,000 in 2013, representing a 1.3% decrease. This decrease was attributable primarily to debt reduction during the year as proceeds from the sale of a business were utilized to reduce debt, which was principally offset by higher borrowing rates and reduced supplier cash discounts. Interest income in 2014 was $507,000 as compared to $384,000 in 2013, primarily due to interest income earned in Europe on a VAT receivable.
Income Taxes.The company had an effective tax rate charge of 8.8%15.5% and 45.0% on losses before taxes in 20142017 and 2016, respectively, compared to an expected benefit at the U.S. statutory rate of 35% on the continuing operations pre-tax loss and 25.0% in 2013 compared to an expected benefit of 35%35.0% on the pre-tax loss from continuing operations.losses for each period. The company's effective tax rate in 20142017 and 2016 was unfavorable compared to the expected U.S. federal statutory rate expected benefit, principally due to the negative impact of the company not being ablecompany's inability to record tax benefits related to the significant losses in countries which had tax valuation allowances forallowances. During the year, except infourth quarter of 2017, the company's effective tax rate also provisionally benefited by 2.4% due to the U.S. where a benefit of $7,175,000federal tax legislation rate reduction. The effective tax rate was recognized asreduced by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an intra-period allocation with discontinued operations against a portion of the domestic taxable loss from continuing operations, moreeffective rate lower than offsetting the benefit of foreign income taxed at rates below the U.S. statutory rate. The company's effectiveDuring 2016, installment payments were made related to a previously disclosed liability for uncertain tax rate in 2013 was unfavorable topositions including accelerating the expected U.S. federal statutory rate benefit due to the negative impactbalance of the company not being ableinstallment obligation, in order to record tax benefits related to losses in countries which had tax valuation allowances for the year, except in the U.S. where a benefit of $3,445,000 was recognized as an intra-period allocation with discontinued operations, more than offsetting the benefit of foreign income taxed at rates below the U.S. statutory rate. In 2013, the company's losses without benefit and valuation allowances existed in the United States, Australia and New Zealand, and for 2014 also existed for one company in Switzerland. During 2013 a Danish valuation allowance of $390,000 was reversed due to a pattern of profitability.reduce interest costs. See “Income Taxes” in the Notes to the Consolidated Financial Statements included elsewhere in this report for more detail.
Research and Development. Research and development expenditures, which are included in costs of products sold, increased to $23,149,000 in 2014 from $24,075,000 in 2013. The expenditures, as a percentage of net sales, were 1.8% and 1.8% in 2014 and 2013, respectively.
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INFLATION
Although the company cannot determine the precise effects of inflation, management believes that inflation does continue to have an influence on the cost of materials, salaries and benefits, utilities and outside services. The company attempts to minimize or offset the effects through increased sales volumes, capital expenditure programs designed to improve productivity, alternative sourcing of material and other cost control measures.
LIQUIDITY AND CAPITAL RESOURCES
The company continues to maintain an adequate liquidity position through its cash balances and unused bank lines of credit (see Long-Term Debt in the Notes to Consolidated Financial Statements included in this report), the net proceeds of the company's issuance in February 2016 of $130,000,000 aggregate principal amount of 5.00% convertible senior notes due in 2021 (see Subsequent Events in the Notes to Consolidated Financial Statements included in this report) and working capital management.as described below.
The company's total debt outstanding, inclusive ofKey balances on the debt discount included in equity in accordance with FSB APB 14-1, increased by $25,993,000 to $48,323,000 at December 31, 2015 from $22,330,000 as of December 31, 2014. The company's balance sheet reflects the impact of ASC 470-20, which reduced debt and increased equity by $1,203,000 and $1,999,000 as of December 31, 2015 and December 31, 2014, respectively. The debt discount decreased $796,000 during 2015, as a result of amortization of the convertible debt discount. The debt increase during the year was principally the result of the recording of $32,339,000 in capital lease liabilities as a result of the company's real estate sale and leaseback transaction completed in the second quarter of 2015. related metrics:
|
| | | | | | | | |
| ($ in thousands USD) | December 31, 2018 | December 31, 2017 | $ Change | % Change |
| Cash and cash equivalents | 116,907 |
| 176,528 |
| (59,621 | ) | (33.8 | ) |
Working capital (1) | 199,202 |
| 238,850 |
| (39,648 | ) | (16.6 | ) |
Total debt (2) | 299,912 |
| 301,415 |
| (1,503 | ) | (0.5 | ) |
Long-term debt (2) | 297,802 |
| 299,375 |
| (1,573 | ) | (0.5 | ) |
| Total shareholders' equity | 359,147 |
| 423,294 |
| (64,147 | ) | (15.2 | ) |
Credit agreement borrowing availability (3) | 33,362 |
| 39,949 |
| (6,587 | ) | (16.5 | ) |
| |
(1) | Current assets less current liabilities. |
| |
(2) | Long-term debt and Total debt include debt issuance costs recognized as a deduction from the carrying amount of debt liability and debt discounts classified as debt or equity. |
| |
(3) | Reflects the combined availability of the company's North American and European asset-based revolving credit facilities. The change is borrowing availability is due to changes in the calculated borrowing base. |
The company's cash and cash equivalents were $60,055,000$116,907,000 and $176,528,000 at December 31, 2015 compared to $38,931,0002018 and December 31, 2017, respectively. The decrease in cash balances at December 31, 2014. At2018 compared to December 31, 2015,2017 was primarily the company had no borrowings outstanding on its revolving credit facility compared to $4,000,000 asresult of December 31, 2014.
The company's borrowing capacity and cash balances were utilized for normal operations during the period ended December 31, 2015. in 2018.
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 debtcash reported at the end of a given period may be materially different than debtcash levels during a given period. During 2015, the outstanding borrowings on the company's revolving credit facility varied from a low of zero to a high of $35,000,000. 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, except in China where the cash balance as of December 31, 20152018 was approximately $5,500,000.$496,000.
On January 16, 2015,The company's total debt outstanding, inclusive of the debt discount related to the debentures included in equity in accordance with FSB APB 14-1 as well as the debt discount and fees associated with the company's Convertible Senior
Notes due 2021 and 2022 ("the Notes"), decreased by $1,503,000 to $299,912,000 at December 31, 2018 from $301,415,000 as of December 31, 2017.
The debt discount and fees associated with the 2021 and 2022 Notes reduced the company's reported debt balance by $44,267,000 and $57,970,000 as of December 31, 2018 and December 31, 2017, respectively. At December 31, 2018 and December 31, 2017, the company entered intohad zero borrowings outstanding under its revolving credit facility.
The company has an asset-based lending Amended and Restated Revolving Credit and Security Agreement (the “Prior Credit“Credit Agreement”), which was amended on April 22, 2015 and amended and restated on September 30, 2015 to provideprovides for a new revolving line of credit, letter of credit and swing line facility for Europeanthe company's U.S. and Canadian borrowers (the “Amended and Restated Credit Agreement”). The initial borrowings under the Prior Credit Agreement were used to repay approximately $17,000,000 in an aggregate principal amount of borrowingsup to $100,000,000 (the "U.S. and terminate the company's previous credit agreement,Canadian Credit Facility") and a similar facility for European borrowers in an aggregate principal amount of up to $30,000,000 (the "European Credit Facility") each of which was scheduledis subject to mature in October 2015. variable rates and availability based on a borrowing base formula.
As determined pursuant to the borrowing base formula for the U.S. and Canadian borrowers, the company’scompany's borrowing base including the period ending December 31, 20152018 under the U.S. and Canadian Credit Facility of the Amended and Restated Credit Agreement was approximately $64,655,000,$41,469,000, with aggregate borrowing availability of approximately $38,230,000,$21,274,000, taking into account the then-applicable $10,000,000$5,000,000 minimum availability reserve, then-outstanding letters of credit, other reserves and the $11,250,000 dominion trigger amount noted below. As determined pursuant to the borrowing base formula for the European borrowers, the company’scompany's borrowing base including the period ending December 31, 20152018 under the European Credit Facility of the Amended and Restated Credit Agreement was approximately $21,528,000,$18,463,000, with aggregate borrowing availability of approximately $15,153,000, taking into account$12,088,000, considering the $3,000,000 minimum availability reserve then-outstanding letters of credit, other reserves and the $3,375,000 dominion trigger amount noted below. As of See Long-Term Debt inDecember 31, 2018, the Notes tocombined aggregate borrowing availability under the Consolidated Financial Statements for more details regardingU.S. and Canadian Credit Facility and the Amended and RestatedEuropean Credit Agreement.Facility of the Credit Agreement was $33,362,000.
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As a result of entering into the Amended and Restated Credit Agreement, the company incurred $1,954,000 in fees which were capitalized and are being amortized as interest expense through January 2018. In addition,16, 2021 of which $797,000 are yet to be amortized as a result of terminating the previous credit agreement, which was scheduled to mature in October 2015, the company wrote-off $668,000 in previously capitalized fees in the first quarter of 2015, which is reflected in the expense of the North America / HME segment.December 31, 2018.
As of December 31, 2015,2018, the company was in compliance with all covenant requirements.requirements under the Credit Agreement. The Amended and Restated Credit Agreement contains customary representations, warranties and covenants including dominion triggers requiring the company to maintain borrowing capacity of not less than $11,250,000 on anany given business day or $12,500,000 for five consecutive days related to the U.S. and Canadian borrowers, and $3,375,000 on anany given business day or 12.5% of the maximum amount that may be drawn under the European Credit Facility for five consecutive days related to European borrowers, in order to avoid triggering
full control by an agent for the lenders of the company's cash receipts for application to the company's obligations under the agreement.
If the company is unable to comply with the provisions in the Amended and Restated Credit Agreement, it could result in a default, which could trigger acceleration of, or the right to accelerate, the related debt. Because of cross-default provisions in its agreements and instruments governing certain of the company's indebtedness, a default under the Amended and Restated Credit Agreement could result in a default under, and the acceleration of, certain other company indebtedness. In addition, the company's lenders would be entitled to proceed against the collateral securing the indebtedness.
Based on the company's current expectations, the company believes that its cash balances cash generated by operations and available borrowing capacity under its Amended and Restated Credit Agreement should be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months, including payments of $9,379,000 to settle tax liabilities during the next twelve months. Notwithstanding the company's expectations, if the company's operating results decline as the result of pressures on the business due to, for example, currency fluctuations or regulatory issues or the company's failure to execute its business plans, the company may be unable to comply with its obligations under the Amended and Restated Credit Agreement, and its lenders could demand repayment of theany amounts outstanding under the company's credit facilities.
On February 23,In the first quarter of 2016, the company issued $130,000,000$150,000,000 aggregate principal amount of 5.00% convertible senior notes due 2021 Notes in a private offering. The notesoffering which bear interest at a rate of 5.00% per year payable semi-annually and will mature in February 2021, unless repurchased or converted in accordance with their terms prior to such date. Prior to August 15, 2020, the notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The net proceeds from the offering of the 2021 Notes were
$144,034,000, after deducting fees and offering expenses payable by the company. Approximately $5,000,000 of the net proceeds from the offering was used to repurchase the company's common shares, and $15,600,000 of the net proceeds was used to pay the net cost of the convertible note hedge and warrant transactions. The company incurred fees which were capitalized and are being amortized as interest expense through February 2021 of which $2,547,000 have yet to be amortized as of December 31, 2018.
In the second quarter of 2017, the company issued $120,000,000 aggregate principal amount of the 2022 Notes in a private offering which bear interest at a rate of 4.50% per year payable semi-annually and will mature in June 2022, unless repurchased or converted in accordance with their terms prior to such date. Prior to December 1, 2021, the 2022 notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The net proceeds from the offering of the 2022 notes were approximately $115,289,000, after deducting fees and offering expenses of $4,711,000. These debt issuance costs were capitalized and are being amortized as interest expense through June 2022 of which $3,051,000 have yet to be amortized as of December 31, 2018. A portion of the net proceeds from the offering were used to pay the cost of the convertible note hedge transactions (after such cost is partially offset by the proceeds to the company from the warrant transactions), which net cost was $10,680,000.
Unless and until the company obtains shareholder approval of the issuance of the company's common shares upon conversion of the Notes under applicable New York Stock Exchange rules, the notesNotes will be convertible, subject to certain conditions, into cash. If the company obtains such shareholder approval, the notesNotes may be settled in cash, the company’scompany's common shares or a combination of cash and the company’scompany's common shares, at the company’scompany's election. The company is considering whether to seek such shareholder approval at its 2019 annual meeting of shareholders.
In connection with the offering of the notes,Notes offerings, the company entered into privately negotiated convertible note hedge transactions with twocertain financial institutions (the “option counterparties”). These transactions cover, subject to customary anti-dilution adjustments, the number of the company’scompany's common shares that will initially underlie the notes,Notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the notes.Notes. The company entered into separate, privately negotiated warrant transactions with the option counterparties at a higher strike price relating to the same number of the company’scompany's common shares, subject to customary anti-dilution adjustments, pursuant to which the company will sellsold warrants to the option counterparties. The
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warrants could have a dilutive effect on the company’scompany's outstanding common shares and the company’scompany's earnings per share to the extent that the price of the company’scompany's common shares exceeds the strike price of those warrants.
The net proceeds from the offering were approximately $124,800,000, after deducting feescompany has used, and estimated offering expenses payable by the company. Approximately $5,000,000 of the net proceeds from the offering was usedintends to repurchase the company’s common shares, and $13,520,000 of the net proceeds was used to pay the net cost of the convertible note hedge and warrant transactions. The company intendscontinue to use the remaining net proceeds from the offeringNotes offerings for working capital and general corporate purposes, which may include funding portions of the company’scompany's ongoing turnaround and addressing potential risks and contingencies described in the “Risk Factors” contained in this Annual Report on Form 10-K.contingencies. The net proceeds will allowhave allowed the company to invest in new products, people, marketing initiatives and working capital to transform the business and pursue growth.
See Subsequent Events in the Notes to the Consolidated Financial Statements for more information regarding the 5.00% convertible senior notes due 2021 and the related convertible note hedge and warrant transactions.
The company also has an agreement with De Lage Landen, Inc. (“DLL”), a third partythird-party financing company, to provide the majority of future lease financing to the company's North AmericaU.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 the Amended and Restated Credit Agreement could increase.
While there is general concern in the company about the potential for rising interest rates, the company believes that its exposure to interest rate fluctuations is manageable as the company has the ability to utilize swaps to exchange variable rate debt for fixed rate debt, if needed, and the company expects that it will be able to absorb any modest rate increases in the months ahead without any material impact on its liquidity or capital resources. For 20152018 and 2014,2017, the weighted average interest rate on all borrowings, excluding capital leases, was 3.83%4.78% and 2.87%4.84%, respectively.
See Long-Term Debt in the Notes to the Consolidated Financial Statements for more details regarding the company's credit facilities.
I-50
CAPITAL EXPENDITURES
There arewere no individually material capital expenditure commitments outstanding as of December 31, 2015.2018. The company estimates that capital investments for 20162019 will be between $18,000,000 and $25,000,000approximately $15,000,000 to $20,000,000 compared to actual capital expenditures of $7,522,000$9,823,000 in 2015.2018. The anticipated increase considersrelates primarily to the company's investments to transform the company. 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 required capital expenditures for the foreseeable future.(see "Liquidity and Capital Resources"). The Amended and Restated Credit Agreement as amended in February 2016, limits the company's annual capital expenditures to $35,000,000.
CASH FLOWS
Cash flows used by operating activities were $5,378,000 in 2015, compared to cash flows provided by operating activities of $8,892,000 in the previous year. The 2015 operating cash flows were impacted by a decline in accrued expenses, accounts payable and other long-term obligations, which was partially offset by the positive cash flow impact of a lower net loss and a reduction in inventory and accounts receivable. The current year decline in accrued expenses was largely driven by benefit payments of $24,651,000 related to the 2014 retirements of executive officers of the company.
Cash flows provided by investing activities were $44,376,000 in 2015, compared to $33,582,000 in 2014. Cash flows provided by investing activities in 2015 included the receipt of $23,000,000 in proceeds from the company's real estate sale leaseback transaction as well as the surrender of corporate-owned life insurance of $11,902,000 to fund payments in 2015 related to the retirement of certain executive officers of the company in 2014. In addition, the company received net proceeds of $13,700,000 from the sale of its rental businesses in July 2015. By comparison, cash flows provided by investing activities in 2014 were driven by the proceeds from the sale of a business of $21,870,000 and the sale of corporate-owned life insurance assets of $21,338,000.
Cash flows used by financing activities in 2015 were $14,346,000 compared to $32,158,000 in 2014. The decrease in cash used was principally the result of lower net repayments of debt. Cash used for financing in 2015 also included payment of financing costs related to the company's refinancing of debt in 2015.
During 2015, the company generated free cash flow of $13,940,000 compared to free cash flow of $8,412,000 in 2014. The increase was most significantly affected by the positive impact of $23,000,000 in proceeds related to the company's real estate sale leaseback transaction and the negative impact of benefit payments of $24,651,000 related to the 2014 retirements of executive officers of the company. Free cash flow is a non-GAAP financial measure that is comprised of net cash provided by operating activities, excluding net cash impact related to restructuring activities, less net purchases of property and equipment, net of 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.).
The non-GAAP financial measure is reconciled to the GAAP measure as follows (in thousands):
|
| | | | | | | |
| | Twelve Months Ended December 31, |
| | 2015 | | 2014 |
| Net cash provided by operating activities | $ | (5,378 | ) | | $ | 8,892 |
|
| Plus: Net cash impact related to restructuring activities | 3,723 |
| | 9,326 |
|
| Sales of property and equipment | 23,117 |
| | 2,521 |
|
| Less: Purchases of property and equipment—net | (7,522 | ) | | (12,327 | ) |
| Free Cash Flow | $ | 13,940 |
| | $ | 8,412 |
|
BUSINESS SEGMENT NET SALES
The following tables provide net sales change for continuing operations as reported and as adjusted to exclude the impact of foreign exchange translation (constant currency net sales) as well as net sales further adjusted to exclude the impact of the sale of the rentals businesses, which were sold in July 2015 and not deemed discontinued operations for financial reporting purposes.
Twelve months ended December 31, 2015 compared to December 31, 2014:
|
| | | | | | | | |
| | Reported | | Foreign Currency Translation Impact | | Constant Currency |
| North America / HME | (6.6 | )% | | (1.0 | )% | | (5.6 | )% |
| Institutional Products Group | (15.2 | )% | | (0.8 | )% | | (14.4 | )% |
| Europe | (12.1 | )% | | (15.6 | )% | | 3.5 | % |
| Asia/Pacific | (9.0 | )% | | (16.5 | )% | | 7.5 | % |
| Consolidated | (10.1 | )% | | (8.7 | )% | | (1.4 | )% |
| | | | | | |
| | Reported | | Impact of Rentals Businesses | | Reported excluding Rentals Businesses |
| Institutional Products Group | (15.2 | )% | | (17.7 | )% | | 2.5 | % |
| Consolidated | (10.1 | )% | | (1.2 | )% | | (8.9 | )% |
| | | | | | |
| | Constant Currency | | Impact of Rentals Businesses | | Constant Currency excluding Rentals Businesses |
| Institutional Products Group | (14.4 | )% | | (18.1 | )% | | 3.7 | % |
| Consolidated | (1.4 | )% | | (1.4 | )% | | — | % |
Twelve months ended December 31, 2014 compared to December 31, 2013:
|
| | | | | | | | |
| | Reported | | Foreign Currency Translation Impact | | Constant Currency |
| North America / HME | (13.8 | )% | | (0.5 | )% | | (13.3 | )% |
| Institutional Products Group | (8.5 | )% | | (0.3 | )% | | (8.2 | )% |
| Europe | 4.7 | % | | 1.1 | % | | 3.6 | % |
| Asia/Pacific | (1.8 | )% | | (1.4 | )% | | (0.4 | )% |
| Consolidated | (4.8 | )% | | 0.2 | % | | (5.0 | )% |
CONTRACTUAL OBLIGATIONS
The company’s contractual obligations as of December 31, 2015 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| 4.125% Convertible Senior Subordinated Debentures due 2027 | $ | 19,476 |
| | $ | 551 |
| | $ | 1,101 |
| | $ | 1,101 |
| | $ | 16,723 |
|
| Operating lease obligations | 32,623 |
| | 15,067 |
| | 13,809 |
| | 3,479 |
| | 268 |
|
| Capital lease obligations | 47,812 |
| | 3,375 |
| | 6,223 |
| | 5,342 |
| | 32,872 |
|
| Purchase obligations (primarily computer systems contracts) | 20,754 |
| | 8,622 |
| | 11,364 |
| | 768 |
| | — |
|
| Product liability | 17,709 |
| | 3,127 |
| | 6,935 |
| | 3,206 |
| | 4,441 |
|
| Tax liability | 10,857 |
| | 9,379 |
| | 1,478 |
| | — |
| | — |
|
| Supplemental Executive Retirement Plan | 6,209 |
| | 1,279 |
| | 782 |
| | 782 |
| | 3,366 |
|
| Other, principally deferred compensation | 4,321 |
| | 155 |
| | 310 |
| | 141 |
| | 3,715 |
|
| Total | $ | 159,761 |
| | $ | 41,555 |
| | $ | 42,002 |
| | $ | 14,819 |
| | $ | 61,385 |
|
The table does not include any payments related to liabilities recorded for uncertain tax positions as the company cannot make a reasonably reliable estimate as to the timing of any other payments. See Income Taxes in the Notes to the Consolidated Financial Statements included in this report.
DIVIDEND POLICY
It is the company’scompany's policy to pay a nominal dividend in order for its stock to be more attractive to a broader range of investors. The current annual dividend rate remains atFor 2018, annualized dividends of $0.05 per Common Share and $0.045$0.023 per Class B Common Share.Share were declared and paid. It is not anticipated that this annual dividend rate for Common Shares will change materially as the company believes that capital should be kept available for use ininvestments and growth opportunities through internal development and acquisitions. For 2015, annualized dividendsas a result of $0.05 per Common Share and $0.045 perits multi-year turnaround strategy. The Board of Directors has suspended the company's regular quarterly dividend on the Class B Common Shares starting in Q3 2018. Less than 7,000 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 weredividends declared and paid.following any such conversion.
CASH FLOWS
Cash flows used by operating activities were $46,423,000 in 2018, compared to cash flow used of $25,774,000 in the previous year. The 2018 operating cash flows benefited from a significantly lower operating loss which was more than offset by increased inventory and a decrease in accrued expenses. The increase inventory levels were primarily driven by inventory related to facility consolidation production transfers in Europe and reduced respiratory sales in NA/HME. In 2017, operating cash flows were negatively impacted by a net loss and declines in accrued expenses and accounts payable.
Cash flows used by investing activities were $6,363,000 in 2018, compared to cash flows used by investing activities of $14,648,000 in 2017. The decrease in cash flows used for investing was driven by lower purchases of property, plant and equipment as well as an advance payment of $3,524,000 related to the sale of the company's Isny, Germany facility for which control is not expected
to transfer until April 2020. Cash flow used by investing activities in 2017 included an increase of approximately $5,250,000 in demonstration equipment classified as purchases of property and equipment. The company determined the 2017 investment in certain demonstration equipment should be recorded as fixed assets and depreciated over their estimated useful life considering their estimated recoverable values. This determination was based on the company deciding to place the equipment in provider locations for longer periods of time versus historically, selling the units.
Cash flows used by financing activities in 2018 were $2,924,000 compared to cash flow provided of $88,097,000 in 2017. Cash flows provided in 2017 reflect net proceeds received as a result of the issuance of the 2022 Notes, including the net proceeds used for the related convertible note hedge transactions and payment of financing costs. These proceeds were partially offset by the repayment of $13,350,000 in aggregate principal amount of the 2027 Debentures.
Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
|
| | | | | | | |
| ($ in thousands USD) | Twelve Months Ended December 31, |
| | 2018 | | 2017 |
| Net cash used by operating activities | $ | (46,423 | ) | | $ | (25,774 | ) |
| Plus: Sales of property and equipment | 40 |
| | 369 |
|
| Plus: Advance payment from sale of property | 3,524 |
| | — |
|
| Less: Purchases of property and equipment | (9,823 | ) | | (14,569 | ) |
| Free Cash Flow | $ | (52,682 | ) | | $ | (39,974 | ) |
| | | | |
Free cash flow was negative $52,682,000 in 2018 compared to $39,974,000 in 2017. Free cash flow was impacted in both years by the same items affecting cash flows used by operating activities. Free cash flow is a non-GAAP financial measure comprised of net cash used by operating activities less purchases of property and equipment plus 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.).
Free cash flow for 2018 improved sequentially each quarter of 2018 as the company historically realizes stronger cash flow in the second half of the year versus the first half of the year and the company anticipates this cash flow seasonality will be similar in 2019. While each of the first three quarters were also an improvement over the same periods of 2017, Q4 18 free cash flow was $19,459,000 lower than Q4 17 as a result of increased accounts receivable balances and an expected temporary increase in inventory related to reduced net sales of respiratory products in NA/HME and facility consolidation production transfers in Europe.
The company has historically generated negative free cash flow 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. The absence of these payments and somewhat seasonally stronger sales in the second half of the year typically result in more favorable free cash flow in the second half of the year.
The company's approximate cash conversion days at December 31, 2018 and December 31, 2017 are as follows:
The decrease in days in receivables from 2017 to 2018 was driven primarily by lower receivables at the end of 2018 compared to 2017.
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.
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| Part II | Management Discussion & Analysis | Accounting Estimates and Pronouncements |
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ACCOUNTING ESTIMATES AND PRONOUNCEMENTS
CRITICAL ACCOUNTING ESTIMATESPOLICIES
The 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 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, as a result, actual results could differ from these estimates.
The following critical accounting policies, among others, affect the more significant judgments and estimates used in preparation of the company’scompany's consolidated financial statements.
Revenue Recognition
Invacare’sThe company recognizes revenues are recognized when products are shippedcontrol of the product or services providedservice is transferred to unaffiliated customers. Revenue RecognitionRevenues from Contracts with Customers, ASC 605,606, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP under ASC 606.
All of the company's product-related contracts, and ASC 605. Shippinga portion related to services, have a single performance obligation, which is the promise to transfer an individual good or service, with revenue recognized at a point in time. Certain service-related contracts contain multiple performance obligations that require the company to allocate the transaction price to each performance obligation. For such contracts, the company allocates revenue to each performance obligation based on its relative standalone selling price at inception of the contract. The company determined the standalone selling price based on the expected cost-plus margin methodology. Revenue related to the service contracts with multiple performance obligations is recognized over time. To the extent performance obligations are satisfied over time, the company defers revenue recognition until the performance obligations are satisfied.
The determination of when and handling costshow much revenue to recognize can require the use of significant judgment. Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the company's products and services to the customer.
Revenue is measured as the amount of consideration expected to be received in exchange for transferring the product or providing services. The amount of consideration received and recognized as revenue by the company can vary as a result of variable consideration terms included in costthe contracts such as customer rebates, cash discounts and return policies. Customer rebates and cash discounts are estimated based on the most likely amount principle and these estimates are based on historical experience and anticipated performance. 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 goods sold.historical experience. The company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration the company expects to receive changes or when the consideration becomes fixed. The company generally does not expect that there will be significant changes to its estimates of variable consideration (see Receivables in the Notes to the Consolidated Financial Statements include elsewhere in this report).
Depending on the terms of the contract, the company may defer recognizing a portion of the revenue at the end of a given period as the result of title transfer terms that are based upon delivery and or acceptance which align with transfer of control of the company's products to its customers.
Sales are made only to customers with whom the company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.
The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The company does not ship any goods on consignment.
Distributed products sold by the company are accounted for in accordance with the revenue recognition guidance in ASC 605-45-05. The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns. The company's payment terms are for relatively short periods and thus do not contain any element of financing. Additionally, no contract costs are incurred that would require capitalization and amortization.
Product salesSales, value-added, and other taxes the company collects concurrent with revenue producing activities are excluded from revenue. Incidental items that give riseare immaterial in the context of the contract are recognized as expense. Shipping and handling costs are included in cost of products sold.
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| Part II | Management Discussion & Analysis | Accounting Estimates and Pronouncements |
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The majority of the company's warranties are considered assurance-type warranties and continue to installment receivablesbe recognized as expense when the products are sold (see Current Liabilities in the Notes to the Consolidated Financial Statements include elsewhere in this report). These warranties cover against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. A provision for estimated warranty cost is recorded at the time of sale whenbased upon actual experience. The company continuously assesses the risksadequacy of its product warranty accruals and rewards of ownershipmakes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are transferred. Interest income is recognized on installment agreementsadjusted as needed. However, the company does consider other events, such as a product recall, which could require additional warranty reserve provisions. See Accrued Expenses in accordance with the termsNotes to the Consolidated Financial Statements for a reconciliation of the agreements. Installment accounts are monitored and if a customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for usingchanges in the same methodology, regardless of duration ofwarranty accrual. In addition, the installment agreements.company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. The company has established procedures to appropriately defer such revenue.
Allowance for Uncollectible Accounts Receivable
The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of the customer. In addition, as a result of the third partythird-party financing arrangement, 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 establishing reserves for specific customers as needed.
The company continues to closely monitor the credit-worthiness of its customers and adhere to tight credit policies. In 2013, the Centers for Medicare and Medicaid Services announced new Medicare prices which became effective in July 2013 for the second round of the NCB program, which was expanded to include 91 additional MSAs. In January 2016, CMS began expanding NCB to rural areas which would expandexpanded the program to 100% of the Medicare population. The NCB program contract pricing continued through the end of 2018. The company believes the changes could have a significant impact on the collectability of accounts receivable for those customers which are in the rural locations impacted and which have a portion of their revenues tied to Medicare reimbursement. In addition, there is a risk that these precedent-setting price reductions could influence other non-CMS payors' reimbursement rates for the same product categories. As a result, this is an additional risk factor
which the company considers when assessing the collectability of accounts receivable.
The company has an agreement with DLL, a third partythird-party financing company, to provide the majority of future lease financing to Invacare's North AmericaU.S. customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation for events of default under the contracts. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out method. Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management’s review of inventories on hand compared to estimated future usage and sales. A provision for excess and obsolete inventory is recorded as needed based upon the discontinuation of products, redesigning of existing products, new product introductions, market changes and safety issues. Both raw materials and finished goods are reserved for on the balance sheet.
In general, Invacare reviews inventory turns as an indicator of obsolescence or slow moving product as well as the impact of new product introductions. Depending on the situation, the company may partially or fully reserve for the individual item. The company continues to increase its overseas sourcing efforts, increase its emphasis on the development and introduction of new products, and decrease the cycle time to bring new product offerings to market. These initiatives are potential sources of inventory obsolescence for both raw material and finished goods.
Goodwill, Intangible and Other Long-Lived Assets
Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Under Intangibles-Goodwill and Other, ASC 350, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. The company's measurement date for its annual goodwill impairment test is October 1 and the analysis is completed in the fourth quarter. Furthermore, goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The majorityMost of the company's goodwill and intangible assets relate to the company's Europe and IPG segments which arewere profitable in 2015.2018.
To review goodwill for impairment in accordance with ASC 350, the company first estimates the fair value of each reporting unit and compares the calculated fair value to the carrying value of the each reporting unit. A reporting unit is defined as an operating segment or one level below. The company has determined that its reporting units are the same as its operating segments. The company completes its annual impairment tests in the fourth quarter of each year. To estimate the fair values of the reporting units, the company utilizes a discounted cash flow (DCF) method in which the company forecasts income statement and balance sheet amounts based on assumptions regarding future sales growth, profitability, inventory turns, days' sales outstanding, etc. to forecast future cash flows. The cash flows are discounted using a weighted average cost of capital discount rate where the cost of debt is based on quoted rates for 20-year debt of companies of similar credit risk and the cost of equity is based upon the 20-year treasury rate for the risk freerisk-free rate, a market risk premium, the industry average beta and a small cap stock adjustment. The discount rates used have a significant impact upon the discounted cash flow methodology utilized in the company's annual impairment testing as higher discount rates decrease the fair value estimates. The assumptions used are based on a market participant's point of view and yielded a discount rate of 9.41%12.41% in 20152018 for the company's annual impairment analysis for the reporting units with goodwill compared to 9.89%9.07% in 20142017 and 10.00%8.67% in 2013.2016.
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| Part II | Management Discussion & Analysis | Accounting Estimates and Pronouncements |
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The company also utilizes an Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Method to compute the fair value of its reporting units which considers potential acquirers and their EV to EBITDA multiples adjusted by an estimated premium. While more weight is given to the discounted cash flow method, the EV to EBITDA method does provide corroborative evidence of the reasonableness of the discounted cash flow method results.
As part of the company's review of goodwill for impairment, the company also considers the potential for impairment of any other assets. In 2015, 2014 and 2013,2018, the company performed a review for potential impairments of any other assets includingand recognized an intangible impairment charge in the company's Taylor Street facility which is subjectIPG segment of $583,000 ($431,000 after-tax) compared to the FDA consent decree that limits the company's manufacture and distribution of custom power and manual wheelchairs, wheelchair components and wheelchair subassemblies at the Taylor Street facility. The
company determined there was no$320,000 ($237,000 after-tax) in 2017 related to a trademark with an indefinite life. No impairment of the property, plant and equipmentany asset was recognized in 2016. The fair value of the Taylor Street facility based ontrademark was calculated using a comparison ofrelief from royalty payment methodology which requires applying an estimated market royalty rate to forecasted net sales and discounting the forecasted undiscountedresulting cash flows to the carrying value of the net assets in accordance with ASC 360. In addition, the company determined there was no impairment of inventory associated with the facility.determine fair value.
While there was no indication of impairment in 20152018 related to goodwill for the Europe or IPG segments, a future potential impairment is possible for any of the company's segments should actual results differ materially from forecasted results used in the valuation analysis. Furthermore, the company's annual valuation of goodwill can differ materially if the market inputs used to determine the discount rate change significantly. For instance, higher interest rates or greater stock price volatility would increase the discount rate and thus increase the chance of impairment. In consideration of this potential, the company reviewed the results if the discount rate used were 100 basis points higher for the 20152018 impairment analysis and determined that there still would not be any indicator of potential impairment for the segments with goodwill which are Europe and IPG.or IPG segments.
The company's intangible assets consist of intangible assets with defined lives as well as intangible assets with indefinite lives. Defined-lived intangible assets consist principally of customer lists and developed technology, license agreements, patents and other miscellaneous intangibles such as non-compete agreements.technology. The company's indefinite lived intangible assets consist entirely of trademarks.
The company evaluates the carrying value of definite-lived assets whenever events or circumstances indicate possible impairment. Definite-lived assets are determined to be impaired if the future un-discounted cash flows expected to be generated by the asset are less than the carrying value. Actual impairment amounts for definite-lived assets are then calculated using a discounted cash flow calculation. The company reviews indefinite-lived assets for impairment annually in the fourth quarter of each year and whenever events or circumstances indicate possible impairment. Any
impairment amounts for indefinite-lived assets are calculated as the difference between the future discounted cash flows expected to be generated by the asset less than the carrying value for the asset.
During 2014, the company recognized intangible write-down charges in the IPG segment of $13,041,000 comprised of a customer list impairment of $12,826,000 and a non-compete agreement of $215,000 as the actual and remaining cash flows associated with the intangibles were less than the cash flows originally used to value the intangibles, primarily driven by reduced net sales. The after-tax and pre-tax impairment amounts were the same for each of the above impairments.
During 2013, the company recognized intangible write-down charges of $1,523,000 comprised of: trademarks with indefinite lives impairment of $568,000, a trademark with a definite life impairment of $123,000, customer list impairment of $442,000 and developed technology impairment of $223,000 all recorded in the IPG segment and a customer list impairment of $167,000 recorded in the North America/HME segment. The after-tax and pre-tax impairment amounts were the same for each of the above impairments except for the indefinite-lived trademark impairments in the IPG segment, which were $496,000 after-tax.
The fair values of the customer lists were calculated using an excess earnings method, using a discounted cash flow model. Estimated cash flow returns to the customer relationship were reduced by the cash flows required to satisfy the return requirements of each of the assets employed with the residual cash flow then discounted to value the customer list. The fair values of the trademarks and developed technology were calculated using a relief from royalty payment methodology which requires applying an estimated market royalty rate to forecasted net sales and discounting the resulting cash flows to determine fair value. The patent was impaired as the related product was discontinued.
Product Liability
The company is self-insured in North America for product liability exposures through its captive insurance company, Invatection Insurance Company, which currently has a policy year that runs from September 1 to August 31 and insures annual policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The company also has additional layers of external insurance coverage, related to all lines of insurance coverage, insuring up to $75,000,000 in aggregate losses per policy year arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the company’scompany's per country foreign liability limits, as applicable. There can be no assurance that Invacare’sInvacare's current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and other indicators. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the company in estimating the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimates made are adjusted on a regular basis and can be
impacted by actual loss awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.
Warranty
Generally, the company’scompany's products are covered by assurance-type warranties against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the
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| Part II | Management Discussion & Analysis | Accounting Estimates and Pronouncements |
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adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company’scompany's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could warrant additional warranty reserve provision. See Current LiabilitiesAccrued Expenses in the Notes to the Consolidated Financial Statements for a reconciliation of the changes in the warranty accrual.
Accounting for Stock-Based Compensation
The company accounts for share based compensation under the provisions of Compensation—Stock Compensation, ASC 718. The company has not made any modifications to the terms of any previously granted optionsawards and no changes have been made regarding the valuation methodologies or assumptions used to determine the fair value of optionsawards granted and the company continues to use a Black-Scholes valuation model.model to value options granted. As of December 31, 2015,2018, there was $10,535,000$16,849,000 of total unrecognized compensation cost from stock-based compensation arrangements, which is related to non-vested options and shares, and includes $9,476,000$7,469,000 related to restricted stock awards, $7,441,000 related to performance awards and $1,059,000$1,939,000 related to non-qualified stock options.
The substantial majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods. Performance awards granted are expensed based on estimated achievement of the performance objectives over the relevant performance award periods.
Income Taxes
As part of the process of preparing its financial statements, the company is required to estimate income taxes in various jurisdictions. The process requires estimating the company’scompany's current tax liability, including assessing uncertainties related to tax return filing positions, as well as estimating temporary differences due to the different treatment of items for tax and accounting policies. The temporary differences are reported as deferred tax assets and or liabilities. The company also must estimate whether it will more likely than not realize its deferred tax assets and whether a valuation allowance should be established. Substantially all of the company’s U.S., Australia and New ZealandThe company's deferred tax assets are offset by a valuation allowance.allowance in the U.S., Australia, Switzerland and New Zealand. In the event that actual results differ from its estimates, the company’scompany's provision for income taxes could be materially impacted. The company does not believe that there is a substantial likelihood that materially different amounts would be reported related to its critical accounting policies.
On December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings, if any, of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating a base erosion anti-abuse tax (BEAT), a new minimum tax, (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year form the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Accounting for Convertible Debt and Related Derivatives
In 2016 and 2017, the company issued $150,000,000 and $120,000,000 aggregate principal amount of the 2021 and 2022 Notes (the "Notes"), respectively. In connection with the offering of the Notes, the company entered into privately negotiated convertible note hedge transactions with certain counterparties. These transactions cover, subject to customary anti-dilution adjustments, the number of the company's common shares that will initially underlie the Notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the Notes.
The company entered into separate, privately negotiated warrant transactions with the option counterparties at a higher strike price relating to the same number of the company's common shares, subject to customary anti-dilution adjustments, pursuant to which the company sold warrants to the option counterparties. The
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| Part II | Management Discussion & Analysis | Accounting Estimates and Pronouncements |
| | |
warrants could have a dilutive effect on the company's outstanding common shares and the company's earnings per share to the extent that the price of the company's common shares exceeds the strike price of those warrants. The initial strike price of the warrants is $22.4175 and $21.4375 per share on the 2021 and 2022 Notes, respectively, and is subject to certain adjustments under the terms of the warrant transactions.
The convertible debt conversion liabilities and the convertible note hedges are accounted for as derivatives that are fair valued quarterly while the warrants are included as equity. The fair value of the convertible debt conversion liabilities and the convertible note hedges are estimated using a lattice model incorporating the terms and conditions of the notes and considering, for example, changes in the prices of the company's common shares, company stock price volatility, risk-free rates and changes in market rates. The valuations are, among other things, subject to changes in both the company's credit worthiness and the counter-parties to the instruments as well as change in general market conditions. While the change in fair value of the convertible debt conversion liabilities and the convertible note hedges are generally expected to move in opposite directions, the net change in any given period may be material.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the company’scompany's disclosure regarding recently issued accounting pronouncements, see Accounting Policies - Recent Accounting Pronouncements in the Notes to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
The company's contractual obligations as of December 31, 2018 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| 5.00% Convertible Senior Subordinated Debentures due 2021 | $ | 165,938 |
| | $ | 7,500 |
| | $ | 158,438 |
| | $ | — |
| | $ | — |
|
| 4.500% Convertible Senior Subordinated Debentures due 2022 | 138,450 |
| | 5,400 |
| | 10,800 |
| | 122,250 |
| | — |
|
| Future lease obligations (1) | 70,129 |
| | — |
| | 5,844 |
| | 7,013 |
| | 57,272 |
|
| Capital lease obligations | 41,307 |
| | 3,407 |
| | 6,107 |
| | 4,798 |
| | 26,995 |
|
| Operating lease obligations | 28,537 |
| | 10,346 |
| | 11,688 |
| | 4,432 |
| | 2,071 |
|
| Purchase obligations (primarily computer systems contracts) | 13,779 |
| | 7,740 |
| | 5,738 |
| | 301 |
| | — |
|
| Product liability | 16,593 |
| | 2,728 |
| | 6,660 |
| | 3,162 |
| | 4,043 |
|
| Supplemental Executive Retirement Plan | 5,641 |
| | 391 |
| | 782 |
| | 782 |
| | 3,686 |
|
| Other, principally deferred compensation | 5,712 |
| | 135 |
| | 43 |
| | — |
| | 5,534 |
|
| Total | $ | 486,086 |
| | $ | 37,647 |
| | $ | 206,100 |
| | $ | 142,738 |
| | $ | 99,601 |
|
________________________
(1) In December 2018, the company entered into a lease agreement in Germany. The lease is not expected to commence until April 2020.
The table does not include any payments related to liabilities recorded for uncertain tax positions as the company cannot make a reasonably reliable estimate as to the timing of any other payments. See Income Taxes in the Notes to the Consolidated Financial Statements included in this report.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
| |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
The company is at times exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. The company does at times use interest swap agreements to mitigate its exposure to interest rate fluctuations. Based on December 31, 20152018 debt levels, a 1% change in interest rates would have no impact on annual on interest expense as the company did not have any variable rate debt outstanding. Additionally, the company operates internationally and, as a result, is exposed to foreign currency fluctuations. Specifically, the exposure results from intercompany loans, intercompany sales or payments and third partythird-party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized to hedge intercompany purchases and sales as well as third partythird-party purchases and sales. The company does not believe that any potential loss related to these financial instruments would have a material adverse effect on the company’scompany's financial condition or results of operations.
The company is party to the Amended and Restated Credit Agreement which was originally entered into on January 16, 2015 and matures in January 2018.2021, as extended by an amendment to the Credit Agreement which became effective on November 30, 2016. Accordingly, while the company is exposed to increases in interest rates, its exposure to the volatility of the current market environment is currently limited asuntil the company recently entered into its Amended and Restated Credit
Agreement. Agreement expires. The Amended and Restated Credit Agreement contains customary default provisions, with certain grace periods and exceptions, which provide that events of default that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than ten consecutive days. Should the company fail to comply with these requirements, the company would potentially have to attempt to obtain alternative financing and thus likely be required to pay much higher interest rates.
As of December 31, 2015,2018, the company had no borrowings outstanding under its Amended and Restated Credit Agreement, which provides for a senior secured revolving credit facility for U.S. and Canadian borrowers of up to $100,000,000 at variable rates, subject to availability based on a borrowing base formula, and in addition provides for a revolving credit, letter of credit and swing line loan facility for European borrowers allowing borrowing up to an aggregate principal amount of $30,000,000 at variable rates, also subject to availability based on a borrowing base formula. As of December 31, 2015,2018, the company had $13,350,000 outstanding$150,000,000 and $120,000,000 in principal onamount outstanding of its 4.125% Convertible Senior Subordinated Debentures due in February 2027, of which $1,203,000 is included in equity.fixed rate 2021 Notes and 2022 Notes, respectively.
On February 23, 2016, the company issued $130,000,000 aggregate principal amount of 5.00% convertible senior notes due 2021 in a private offering. The notes bear interest at a rate of 5.00% per year payable semi-annually and will mature in February 2021, unless repurchased or converted in accordance with their terms prior to such date. See Subsequent Events in the Notes to the Consolidated Financial Statements for more information regarding the 5.00% convertible senior notes due 2021 and the related convertible note hedge and warrant transactions.
Item 8. Financial Statements and Supplementary Data.
| |
| Item 8. | Financial Statements and Supplementary Data. |
Reference is made to the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statement of Comprehensive Income (Loss),Loss, Consolidated Statement of Cash Flows, Consolidated Statement of Shareholders’Shareholders' Equity, Notes to Consolidated Financial Statements and Financial Statement Schedule, which appear on pages FS-173 to FS-61129 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 20152018, an evaluation was performed, under the supervision and with the participation of the company’scompany's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’scompany's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company’scompany's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company’scompany's disclosure controls and procedures were effective as of December 31, 20152018, in ensuring that information required to be disclosed by the company in the reports it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission’sCommission's rules and forms and (2) accumulated and communicated to the company’scompany's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
(b) Management’sManagement's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining a system of adequate internal control over financial reporting that provides reasonable assurance that assets are safeguarded and that transactions are authorized, recorded and reported properly. The system includes self-monitoring mechanisms; regular testing by the company’scompany's internal auditors; a Code of Conduct; written policies and procedures; and a careful selection and training of employees. Actions are taken to correct deficiencies as they are identified. An effective internal control system, no matter how well designed, has inherent limitations—including the possibility of the circumvention or overriding of controls—and therefore can provide only reasonable assurance that errors and fraud
that can be material to the financial statements are prevented or would be detected on a timely basis. Further, because of changes in conditions, internal control system effectiveness may vary over time.
Management’sManagement's assessment of the effectiveness of the company’scompany's internal control over financial reporting is based on the Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
In management’smanagement's opinion, internal control over financial reporting is effective as of December 31, 20152018.
(c) Attestation Report of the Independent Registered Public Accounting Firm
The company’scompany's independent registered public accounting firm, Ernst & Young LLP, audited the company’scompany's internal control over financial reporting and, based on that audit, issued an attestationits report regarding the company’scompany's internal control over financial reporting, which is included in this Annual Report on Form 10-K on page FS-2.74.
(d) Changes in Internal Control Over Financial Reporting
There have been no changes in the company’scompany's internal control over financial reporting during the company’scompany's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company’scompany's internal control over financial reporting.
Item 9B. Other Information.
None.Effective as of March 5, 2019 (the “Effective Date”), the Company's Board of Directors adopted and approved, and the company's Compensation and Management Development Committee previously adopted and approved, and the Company and certain of its employees entered into, an Omnibus Amendment (the “Omnibus Amendment”) to certain of the Company's compensation plans and certain agreements between the Company and the employees named in the Omnibus Amendment, including the Company's current executive officers.
Under the Omnibus Amendment, to the extent that any (1) Company equity compensation plan or Company executive retirement, benefit and/or incentive bonus plan existing on the Effective Date and (2) agreement between the Company and each of the employees named in the Omnibus Amendment existing on the Effective Date contains a definition of Company change of control, or any other provision, with a clause that excludes an event involving the Company's former chairman, A. Malachi Mixon, or any affiliate of Mr. Mixon, that exclusion was deleted and no longer applies to such plans and agreements, as of the Effective Date.
The Omnibus Amendment applies to the Company's plans filed as Exhibits 10(c), 10(e), 10(j), 10(r) and 10(ac), and the agreements filed as Exhibits 10(ai) and 10(aj), to this Annual Report on Form 10-K
I-58The foregoing summary of the terms and conditions of the Omnibus Amendment is qualified in its entirety by reference to the full text of the Omnibus Amendment, which is attached as Exhibit 10(bx) to this Annual Report on Form 10-K and incorporated by reference into this Item 9B.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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| Item 10. | Directors, Executive Officers and Corporate Governance. |
Information required by Item 10 as to the executive officers of the company is included in Part I of this Annual Report on Form 10-K. The other information required by Item 10 as to the directors of the company, the Audit Committee, the Audit Committee financial experts, the procedures by which security holders may recommend nominees to the Board of Directors, compliance with Section 16(a) of the Exchange Act, code of ethics and corporate governance is incorporated herein by reference to the information set forth under the captions “Election of Directors,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the company’scompany's definitive Proxy Statement on Schedule 14A for the 20162019 Annual Meeting of Shareholders.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the information set forth under the captions “Corporate Governance”, “Executive Compensation” and “Corporate Governance”“CEO Pay Ratio” in the company’scompany's definitive Proxy Statement on Schedule 14A for the 20162019 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. |
The information required by Item 12 is incorporated by reference to the information set forth under the caption “Share“Security Ownership of PrincipalCertain Beneficial Holders and Management” in the company’scompany's definitive Proxy Statement on Schedule 14A for the 20162019 Annual Meeting of Shareholders.
Information regarding the securities authorized for issuance under the company’scompany's equity compensation plans is incorporated by reference to the information set forth under the captions “Equity Compensation Plan Information” in the company’scompany's definitive Proxy Statement on Schedule 14A for the 20162019 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by Item 13 is incorporated by reference to the information set forth under the caption “Certain Relationships and Related Transactions” in the company’scompany's definitive Proxy Statement on Schedule 14A for the 20162019 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services.
| |
| Item 14. | Principal Accountant Fees and Services. |
The information required by Item 14 is incorporated by reference to the information set forth under the caption “Independent Auditors”Registered Public Accounting Firm Fees and “Pre-Approval Policies and Procedures”Services” in the company’scompany's definitive Proxy Statement on Schedule 14A for the 20162019 Annual Meeting of Shareholders.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements.
The following financial statements of the company are included in Part II, Item 8:
Consolidated Statement of Comprehensive Income (Loss)—Loss—years ended December 31, 20152018, 20142017 and 20132016
Consolidated Balance Sheet—December 31, 20152018 and 20142017
Consolidated Statement of Cash Flows—years ended December 31, 20152018, 20142017 and 20132016
Consolidated Statement of Shareholders’Shareholders' Equity—years ended December 31, 20152018, 20142017 and 20132016
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
The following financial statement schedule of the company is included in Part II, Item 8:
Schedule II—Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits.
See Exhibit Index at page number I-6266 of this Annual Report on Form 10-K.
Item 16. Form 10-K Summary.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 3, 2016.7, 2019.
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| | |
| | INVACARE CORPORATION |
| | | |
| | By: | /s/ MATTHEW E. MONAGHAN |
| | | Matthew E. Monaghan |
| | | Chairman of the Board of Directors, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 3, 2016.
|
| | |
| Exhibit Index | | |
Signature | | Title |
| |
/s/ MATTHEW E. MONAGHAN | | Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) |
Matthew E. Monaghan | |
| | | |
/s/ ROBERT K. GUDBRANSON | | Senior Vice President and Chief Financial Officer (Principal Finance and Accounting Officer) |
Robert K. Gudbranson | |
| | |
/s/ MICHAEL F. DELANEY | | Director |
Michael F. Delaney | |
| | |
/s/ MARC M. GIBELEY | | Director |
Marc M. Gibeley | |
| | |
/s/ C. MARTIN HARRIS, M.D. | | Director |
C. Martin Harris, M.D. | |
| | |
/s/ JAMES L. JONES | | Director |
James L. Jones | |
| |
/s/ DALE C. LAPORTE | | Director |
Dale C. LaPorte | |
| |
/s/ MICHAEL J. MERRIMAN | | Director |
Michael J. Merriman | |
| | |
/s/ CLIFFORD D. NASTAS | | Director |
Clifford D. Nastas | |
| |
/s/ BAIJU R. SHAH | | Director |
Baiju R. Shah | | |
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended December 31, 2015.2018.
Exhibit Index
|
| | | |
Official Exhibit No. | Description | | Sequential Page No. |
1.1 | Purchase Agreement, dated as of February 17, 2016, by and among Invacare Corporation and the several Initial Purchasers named in Schedule 1 thereto for whom J.P. Morgan Securities LLC acted as Representative. | | (A) |
| Share Purchase Agreement among AssuraMed, Inc., Invacare Corporation and Invacare Supply Group, Inc., dated December 21, 2012. (Pursuant to Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to supplementally furnish to the Securities and Exchange Commission upon request any omitted schedule or exhibit to the agreement.) | | (B) |
2.2 | Share Purchase Agreement among Champion Equity Holdings, LLC, Invacare Corporation and Champion Manufacturing Inc., dated August 7, 2013. (Pursuant to Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to supplementally furnish to the Securities and Exchange Commission upon request any omitted schedule or exhibit to the agreement.) | | (C) |
2.3 | Share Purchase Agreement among REP Acquisition Corporation, Invacare Corporation and Altimate Medical, Inc., dated August 29, 2014. (Pursuant to Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to supplementally furnish to the Securities and Exchange Commission upon request any omitted schedule or exhibit to the agreement.) | | (D) |
2.4 | Membership Interest Purchase Agreement among Invacare Continuing Care, Inc., Invacare Corporation and Joerns Healthcare Parent, LLC, dated July 2, 2015. (Pursuant to Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to supplementally furnish to the Securities and Exchange Commission upon request any omitted schedule or exhibit to the agreement.) | | (E)(A) |
| Share Purchase Agreement among Invacare Corporation, Garden City Medical Inc. and Compass Health Brands Corp., dated September 30, 2016. (Pursuant to Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to supplementally furnish to the Securities and Exchange Commission upon request any omitted schedule or exhibit to the agreement.) | | (B) |
| Second Amended and Restated Articles of Incorporation | | (F)(C) |
| Second Amended and Restated Code of Regulations, of the company, as amended on February 13, 2014 | | (G)(D) |
| Specimen Share Certificate for Common Shares | | (H)(E) |
| Specimen Share Certificate for Class B Common Shares | | (H)(E) |
| Indenture, dated as of February 12, 2007, by and among Invacare Corporation, the Guarantors named therein and Wells Fargo Bank, N.A., as trustee (including the Form of 4.125% Convertible Senior Subordinated Debenture due 2027 and related Guarantee attached as Exhibit A) | | (I) |
4(d) | Indenture, dated as of February 23, 2016, by and between Invacare Corporation and Wells Fargo Bank, National Association (including the form of the 5.00% Convertible Senior Notes due 2021). | | (A)(F) |
| Indenture, dated as of June 14, 2017, by and between Invacare Corporation and Wells Fargo Bank, National Association (including the form of the 4.50% Convertible Senior Notes due 2022). | | (DD) |
| Invacare Retirement Savings Plan, effective January 1, 2001, as amended | | (J)(G)* |
| Invacare Corporation 401(K) Plus Benefit Equalization Plan, effective January 1, 2003, as amended and restated | | (J)(G)* |
| Invacare Corporation Amended and Restated 2003 Performance Plan | | (K)* |
10(d)** | Form of Change of Control Agreement entered into by and between the company and certain of its executive officers and schedule of all such agreements with certain executive officers | | * |
10(e)** | Form of Indemnity Agreement entered into by and between the company and its directors and certain of its executive officers and schedule of all such agreements with directors and executive officers | | * |
10(f) | Invacare Corporation Deferred Compensation Plus Plan, effective January 1, 2005, as amended August 19, 2009 and on November 23, 2010 | | (L)(H)* |
10(g) | Amendment No. 3 to Invacare Corporation Deferred Compensation Plus Plan, effective January 1, 2005 | | (I)* |
| Invacare Corporation Death Benefit Only Plan, effective January 1, 2005, as amended | | (J)(G)* |
10(h) | Supplemental Executive Retirement Plan, as amended and restated effective February 1, 2000 | | (M)* |
10(i) | Form of Director Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
10(j) | Form of Director Deferred Option Award under Invacare Corporation 2003 Performance Plan | | (L)* |
|
| | | |
Official
Exhibit No.
| Description | | Sequential
Page No.
|
10(k) | Form of Restricted Stock Award under Invacare Corporation 2003 Performance Plan | | (N) |
10(l) | Form of Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
10(m) | Form of Executive Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
10(n) | Form of Switzerland Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
10(o) | Form of Switzerland Executive Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
10(p)** | Director Compensation Schedule | | * |
10(q) | Form of Rule 10b5-1 Sales Plan entered into between the company and certain of its executive officers and other employees and a schedule of all such agreements with executive officers and other employees | | (L) |
10(r) | Retirement Agreement and Release, dated as of November 14, 2014, by and between Invacare Corporation and A. Malachi Mixon, III. | | (O)* |
10(s) | Cash Balance Supplemental Executive Retirement Plan, as amended and restated, effective December 31, 2008 | | (P)(K)* |
10(t) | Amendment No. 1 to the Cash Balance Supplemental Executive Retirement Plan, effective August 19, 2009 | | (N)** |
| Form of Participation Agreement, for current participants in the Cash Balance Supplemental Executive Retirement Plan, as of December 31, 2008, entered into by and between the company and certain participants and a schedule of all such agreements with participants | | (M)* |
10(u) | RetirementInvacare Corporation Amended and Restated 2003 Performance Plan | | (N)* |
| Form of Director Stock Option Award under Invacare Corporation 2003 Performance Plan | | (G)* |
| Form of Director Deferred Option Award under Invacare Corporation 2003 Performance Plan | | (H)* |
| Form of Restricted Stock Award under Invacare Corporation 2003 Performance Plan | | (I) |
| Form of Stock Option Award under Invacare Corporation 2003 Performance Plan | | (G)* |
| Form of Executive Stock Option Award under Invacare Corporation 2003 Performance Plan | | (G)* |
| Form of Switzerland Stock Option Award under Invacare Corporation 2003 Performance Plan | | (G)* |
| Form of Switzerland Executive Stock Option Award under Invacare Corporation 2003 Performance Plan | | (G)* |
|
| | | |
Official Exhibit No. | Description | | Sequential Page No. |
| Invacare Corporation 2013 Equity Compensation Plan | | (O) |
| Amendment No. 1 to the Invacare Corporation 2013 Equity Compensation Plan | | (P)* |
| Form of Executive Stock Option Award under the Invacare Corporation 2013 Equity Compensation Plan | | (Q) |
| Form of Stock Option Award under the Invacare Corporation 2013 Equity Compensation Plan | | (Q) |
| Form of Executive Stock Option Award for Swiss Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (Q) |
| Form of Stock Option Award for Swiss Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (Q) |
| Form of Director Restricted Stock Award under the Invacare Corporation 2013 Equity Compensation Plan | | (Q) |
| Form of Restricted Stock Award under the Invacare Corporation 2013 Equity Compensation Plan | | (Q) |
| Form of Performance Share Award Agreement under the Invacare Corporation 2013 Equity Compensation Plan | | (R) |
| Form of Restricted Stock Award Agreement for Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (S) |
| Form of Director Restricted Stock Unit under the Invacare Corporation 2013 Equity Compensation Plan | | (FF) |
| Invacare Corporation Executive Incentive Bonus Plan, as amended and Release,restated | | (P)* |
| Employment Agreement, dated as of July 23, 2014,January 21, 2015, by and between the company and Matthew E. Monaghan. | | (T)* |
| Letter Agreement, dated as of February 20, 2018, by and between Invacare Corporation and Gerald B. BlouchKathleen P. Leneghan. | | (Q)(U)* |
10(v) | Amendment No. 1 toLetter agreement, dated as of July 31, 2008, by and between the Cash Balance Supplemental Executive Retirement Plan, effective August 19, 2009company and Anthony C. LaPlaca. | | (R)(M)* |
10(w) | Employment Agreement, dated as of October 21, 2016, by and between the company and Ralf Ledda. | | (FF) |
| Change of Control Agreement, dated as of December 31, 2008, by and between the company and Anthony C. LaPlaca | | (HH) |
| Form of Change of Control Agreement entered into by and between the company and certain of its executive officers and schedule of all such agreements with certain executive officers | | * |
10(x) | Technical Information & Non-Competition Agreement, dated April 1, 2015, entered into by and between the company and Matthew E. Monaghan | | (M)* |
| Technical Information & Non-Competition Agreement, dated April 6, 2008, entered into by and between the company and Robert K. Gudbranson | | (M)* |
| Technical Information & Non-Competition Agreement entered into by and between the company and certain of its executive officers and schedule of all such agreements with executive officers | | (M)* |
| Indemnity Agreement, dated April 1, 2015, entered into by and between the company and Matthew E. Monaghan. | | (M)* |
| Form of Indemnity Agreement entered into by and between the company and its directors and certain of its executive officers and schedule of all such agreements with directors and executive officers | | * |
| Form of Rule 10b5-1 Sales Plan entered into between the company and certain of its former Executive Vice Presidentexecutive officers and General Manager, North Americaother employees and Global Product Developmenta schedule of all such agreements with executive officers and other employees | | (S)*(H) |
10(y) | 2012 Non-employee Directors DeferredDirector Compensation Plan, effective January 1, 2012Schedule | | (N)* |
|
10(z) | Amendment No. 3 to Invacare Corporation Deferred Compensation Plus Plan, effective January 1, 2005 | |
| Exhibit Index | | (N)* |
10(aa) | Invacare Corporation 2013 Equity Compensation Plan | | (T) |
10(ab) | Form of Executive Stock Option Award under the Invacare Corporation 2013 Equity Compensation Plan | | (U) |
10(ac) | Form of Stock Option Award under the Invacare Corporation 2013 Equity Compensation Plan | | (U) |
10(ad) | Form of Executive Stock Option Award for Swiss Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (U) |
10(ae) | Form of Stock Option Award for Swiss Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (U) |
10(af) | Form of Director Restricted Stock Award under the Invacare Corporation 2013 Equity Compensation Plan | | (U) |
10(ag) | Form of Restricted Stock Award under the Invacare Corporation 2013 Equity Compensation Plan | | (U) |
10(ah) | Form of Performance Share Award Agreement under the Invacare Corporation 2013 Equity Compensation Plan | | (V) |
10(ai) | Form of Restricted Stock Award Agreement for Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (W) |
10(aj) | Retirement Agreement and Release by and between Invacare Corporation and Louis F.J. Slangen executed February 26, 2014. | | (X)* |
10(ak) | Employment Agreement, dated as of July 23, 2014, by and between Invacare Corporation and Robert K. Gudbranson. | | (Q)* |
| | | | |
|
| | | |
Official Exhibit No. | Description | | Sequential Page No. |
10(al) | 2012 Non-employee Directors Deferred Compensation Plan, effective January 1, 2012, Amended and Restated as of November 17, 2016 | | (FF) |
| Retirement Agreement and Release, dated as of November 14, 2014, by and between Invacare Corporation and Joseph B. Richey, II.A. Malachi Mixon, III. | | (O)(V)* |
10(am) | Employment Agreement, dated as of January 21, 2015, by and between the company and Matthew E. Monaghan. | | (Y)* |
10(an) | Purchase and Sale Agreement, dated as of February 24, 2015, by and between the company and Industrial Realty Group, LLC. | | (Z)(W) |
10(ao) | Form of Lease Agreement by and among the company and the affiliates of
Industrial Realty Group, LLC named therein. | | (Z)(W) |
10(ap) | Invacare Corporation Executive Incentive Bonus Plan, as amended and restated | | (AA)* |
10(aq) | Amendment No. 1 to the Invacare Corporation 2013 Equity Compensation Plan | | (AA)* |
10(ar) | Amended and Restated Revolving Credit and Security Agreement, dated as of September 30, 2015, by and among the company, the other Borrowers party thereto, the Guarantors party thereto, the Lenders party thereto, PNC Bank, National Association, as administrative agent, JP Morgan Chase Bank, N.A. and J.P. Morgan Europe Limited, as European agent. | | (AB)(X) |
10(as)** | Indemnity Agreement, dated April 1, 2015, entered into by and between the company and Matthew E. Monaghan. | | * |
10(at) | First Amendment to Amended and Restated Revolving Credit and Security Agreement, dated as of February 16, 2016, by and among the company, the other borrowers party thereto, the guarantors party thereto, the lenders party thereto, PNC Bank, National Association, as administrative agent, and J.P. Morgan Europe Limited, as European agent. | | (AC)(Y) |
10(au)** | EmploymentSecond Amendment to Amended and Restated Revolving Credit and Security Agreement, dated as of January 4, 2012,May 3, 2016 by and betweenamong the company, the other borrowers party thereto, the guarantors party thereto, the lenders party thereto, PNC Bank, National Association, as administrative agent, and Gordon Sutherland.J.P. Morgan Europe Limited, as European agent. | | *(FF) |
10(av)** | Technical Information & Non-CompetitionThird Amendment to Amended and Restated Revolving Credit and Security Agreement, dated April 6, 2008, entered into by and between the company and Robert K. Gudbranson | | * |
10(aw)** | Technical Information & Non-Competition Agreement, dated April 1, 2015, entered into by and between the company and Matthew E. Monaghan | | * |
10(ax)** | Technical Information & Non-Competition Agreement entered into by and between the company and certain of its executive officers and schedule of all such agreements with executive officers | | * |
10(ay)** | Letter agreement, dated as of July 31, 2008,September 30, 2016, by and betweenamong the company, the other borrowers party thereto, the guarantors party thereto, the lenders party thereto, PNC Bank, National Association, as administrative agent, and Anthony C. LaPlaca.J.P. Morgan Europe Limited, as European agent. | | *(FF) |
| Letter agreement,Fourth Amendment to Amended and Restated Revolving Credit and Security Agreement, dated as of April 15, 2015,November 30, 2016, by and betweenamong the company, the other borrowers party thereto, the guarantors party thereto, the lenders party thereto, PNC Bank, National Association, as agent for the lenders, and Dean J. Childers.J.P. Morgan Europe Limited, as European agent for the lenders. | | *(Z) |
| Call optionOption Transaction Confirmation entered into between JPMorgan Chase Bank, National Association, London Branch and Invacare Corporation as of February 17, 2016 | | (A)(F) |
| Call optionOption Transaction Confirmation entered into between Wells Fargo Bank, National Association and Invacare Corporation as of February 17, 2016 | | (A)(F) |
| Warrants Confirmation between Invacare Corporation to JPMorgan Chase Bank, National Association, London Branch as of February 17, 2016 | | (A)(F) |
| Warrants Confirmation between Invacare Corporation to Wells Fargo Bank, National Association as of February 17, 2016 | | (A)(F) |
| Additional Call Option Transaction Confirmation, dated March 4, 2016, between JPMorgan Chase Bank, National Association, London Branch and Invacare Corporation. | | (AA) |
| Additional Call Option Transaction Confirmation, dated March 4, 2016, between Wells Fargo Bank, National Association and Invacare Corporation. | | (AA) |
| Additional Warrants Confirmation, dated March 4, 2016, between JPMorgan Chase Bank, National Association, London Branch and Invacare Corporation. | | (AA) |
| Additional Warrants Confirmation, dated March 4, 2016, between Wells Fargo Bank, National Association and Invacare Corporation. | | (AA) |
| Form of Performance-Based Stock Option Award under Invacare Corporation 2013 Equity Compensation Plan. | | (BB) |
| Waiver and Fifth Amendment to Amended and Restated Revolving Credit and Security Agreement, dated as of November 30, 2016, by and among the company, the other borrowers party thereto, the guarantors party thereto, the lenders party thereto, PNC Bank, National Association, as agent for the lenders, and J.P. Morgan Europe Limited, as European agent for the lenders. | | 10(CC) |
| Base Call Option Transaction Confirmation, dated June 8, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | 10(DD) |
|
| | | |
Official Exhibit No. | Description | | Sequential Page No. |
| Base Warrants Confirmation, dated June 8, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | 10(DD) |
| Additional Call Option Transaction Confirmation, dated June 9, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | 10(DD) |
| Additional Warrants Confirmation, dated June 9, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | 10(DD) |
| Separation Agreement and Release by and between Invacare Corporation and Patricia A. Stumpp. | | 10(EE)* |
| Invacare Corporation 2018 Equity Compensation Plan | | 10(II) |
| Form of Restricted Stock Award under Invacare Corporation 2018 Equity Compensation Plan | | 10(JJ) |
| Form of Restricted Stock Unit Award under Invacare Corporation 2018 Equity Compensation Plan | | 10(JJ) |
| Form of Director Restricted Stock Unit Award under Invacare Corporation 2018 Equity Compensation Plan | | 10(JJ) |
| Form of Performance Award under Invacare Corporation 2018 Equity Compensation Plan | | 10(JJ) |
| Form of Performance Unit Award under Invacare Corporation 2018 Equity Compensation Plan | | 10(JJ) |
| Letter agreement, dated as of May 9, 2018, by and between the company and Darcie L. Karol | | 10(JJ)* |
| Separation Agreement and Release by and between Invacare Corporation and Dean J. Childers | | 10(KK)* |
| Omnibus Amendment | | |
| Subsidiaries of the company | | |
| Consent of Independent Registered Public Accounting Firm | | |
| Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | |
| Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | |
| Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | |
| Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | |
| Consent Decree of Permanent Injunction, as filed with the U.S. District Court for the Northern District of Ohio on December 20, 2012. | | (AD)(GG) |
| 101.INS** | XBRL instance document | | |
|
| | | |
Official
Exhibit No. | Description | | Sequential
Page No. |
| 101.SCH** | XBRL taxonomy extension schema | | |
| 101.CAL** | XBRL taxonomy extension calculation linkbase | | |
| 101.DEF** | XBRL taxonomy extension definition linkbase | | |
| 101.LAB** | XBRL taxonomy extension label linkbase | | |
| 101.PRE** | XBRL taxonomy extension presentation linkbase | | |
________________________
| |
| * | Management contract, compensatory plan or arrangement |
| |
| (A) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated February 23, 2016, which Exhibit is incorporated herein by reference. |
| |
(B) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 21, 2012, which Exhibit is incorporated herein by reference. |
| |
(C) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated August 7, 2013, which Exhibit is incorporated herein by reference. |
| |
(D) | Reference is made to Exhibit 2.1 of the company report on Form 8-K, dated August 29, 2014, which Exhibit is incorporated herein by reference. |
| |
(E) | Reference is made to Exhibit 2.1 of the company report on Form 8-K, dated July 2, 2015, which Exhibit is incorporated herein by reference. |
| |
(F)(B) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated October 3, 2016, which Exhibit is incorporated herein by reference. |
| |
| (C) | Reference is made to Exhibit 3(a) of the company report on Form 10-K for the fiscal year ended December 31, 2008, which Exhibit is incorporated herein by reference. |
| |
(G)(D) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated February 13, 2014, which Exhibit is incorporated herein by reference. |
| |
| (E) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2005, which Exhibit is incorporated herein by reference. |
| |
| (F) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated February 23, 2016, which Exhibit is incorporated herein by reference. |
| |
| (G) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2007, which Exhibit is incorporated herein by reference. |
| |
| (H) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2005,2010, which Exhibit is incorporated herein by reference. |
| |
| (I) | Reference is made to the appropriate Exhibit 4.1 of the company report on Form 8-K, dated February 12, 2007,10-K for the fiscal year ended December 31, 2011, which Exhibit is incorporated herein by reference. |
| |
| (J) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2007,2004, which Exhibit is incorporated herein by reference. |
| |
| (K) | Reference is made to the appropriate Exhibit 10.1 of the company report on Form 8-K, dated May 21, 2009,December 31, 2008, which Exhibit is incorporated herein by reference. |
| |
| (L) | Reference is made to the appropriate Exhibit 10.2 of the company report on Form 10-K for the fiscal year ended December 31, 2010,10-Q, dated September 30, 2009, which Exhibit is incorporated herein by reference. |
| |
| (M) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2004,2015, which Exhibit is incorporated herein by reference. |
| |
| (N) | Reference is made to the appropriate Exhibit 10.1 of the company report on Form 10-K for the fiscal year ended December 31, 2011,8-K, dated May 21, 2009, which Exhibit is incorporated herein by reference. |
| |
| (O) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated November 14, 2014, which Exhibit is incorporated herein by reference. |
| |
(P) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 31, 2008, which Exhibit is incorporated herein by reference. |
| |
(Q) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated July 23, 2014, which Exhibit is incorporated herein by reference. |
| |
(R) | Reference is made to the Exhibit 10.2 of the company report on Form 10-Q, dated September 30, 2009, which Exhibit is incorporated herein by reference. |
| |
(S) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2014, which Exhibit is incorporated herein by reference. |
| |
(T) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 16, 2013, which Exhibit is incorporated herein by reference. |
| |
(U)(P) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 14, 2015, which Exhibit is incorporated herein by reference. |
| |
| (Q) | Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended September 30, 2013, which Exhibit is incorporated herein by reference. |
| |
(V)(R) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated March 7, 2014, which Exhibit is incorporated herein by reference. |
| |
(W)(S) | Reference is made to Exhibit 10.2 of the company report on Form 8-K, dated March 7, 2014, which Exhibit is incorporated herein by reference. |
| |
(X) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated February 26, 2014, which Exhibit is incorporated herein by reference. |
| |
(Y)(T) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated January 21, 2015, which Exhibit is incorporated herein by reference. |
| |
(Z)(U) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated February 22, 2018, which Exhibit is incorporated herein by reference. |
| |
| (V) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated November 14, 2014, which Exhibit is incorporated herein by reference. |
| |
| (W) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated April 23, 2015, which Exhibit is incorporated herein by reference. |
| |
(AA) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 14, 2015, which Exhibit is incorporated herein by reference. |
| |
(AB)(X) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated September 30, 2015, which Exhibit is incorporated herein by reference. |
| |
(AC)(Y) | Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated February 16, 2016, which Exhibit is incorporated herein by reference. |
| |
(AD)(Z) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated November 30, 2016, which Exhibit is incorporated herein by reference. |
| |
| (AA) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated March 7, 2016, which Exhibit is incorporated herein by reference. |
| |
| (BB) | Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended March 31, 2017, which Exhibit is incorporated herein by reference. |
| |
| (CC) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated June 7, 2017, which Exhibit is incorporated herein by reference. |
| |
| (DD) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated June 8, 2017, which Exhibit is incorporated herein by reference. |
| |
| (EE) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 14, 2017, which Exhibit is incorporated herein by reference. |
| |
| (FF) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2016, which Exhibit is incorporated herein by reference. |
| |
| (GG) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 20, 2012, which Exhibit is incorporated herein by reference. |
| |
| (HH) | Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2017, which Exhibit is incorporated herein by reference. |
| |
| (II) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 18, 2018, which Exhibit is incorporated herein by reference. |
| |
| (JJ) | Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended June 30, 2018, which Exhibit is incorporated herein by reference. |
| |
| (KK) | Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated October 10, 2018, which Exhibit is incorporated herein by reference. |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 7, 2019.
|
| | |
| | |
| Signature | | Title |
| |
| /s/ MATTHEW E. MONAGHAN | | Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) |
| Matthew E. Monaghan | |
| | |
| /s/ KATHLEEN P. LENEGHAN | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
| Kathleen P. Leneghan | |
| | |
| /s/ SUSAN H. ALEXANDER | | Director |
| Susan H. Alexander | |
| | |
| /s/ PETRA DANIELSOHN-WEIL, PhD | | Director |
| Petra Danielsohn-Weil, PhD | | |
| | |
| /s/ DIANA S. FERGUSON | | Director |
| Diana S. Ferguson | | |
| | |
| /s/ MARC M. GIBELEY | | Director |
| Marc M. Gibeley | |
| | |
| /s/ C. MARTIN HARRIS, M.D. | | Director |
| C. Martin Harris, M.D. | |
| | |
| /s/ CLIFFORD D. NASTAS | | Director |
| Clifford D. Nastas | |
| |
| /s/ BAIJU R. SHAH | | Director |
| Baiju R. Shah | | |
|
| | |
| Reports of Independent Registered Public Accounting Firm | | |
| | |
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and Board of Directors and Shareholders
of Invacare Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Invacare Corporation and subsidiaries (the Company) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of comprehensive income (loss),loss, shareholders' equity and cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2015. Our audits also included2018, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2), (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),and our report dated March 7, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements and schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe Company's financial statements and schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,/s/ Ernst & Young LLP
We have served as the consolidated financial statements referred to above present fairly, in all material respects,Company's auditor since 1984.
Cleveland, Ohio
March 7, 2019
|
| | |
| Reports of Independent Registered Public Accounting Firm | | |
| | |
To the consolidated financial positionShareholders and Board of Directors of Invacare Corporation and subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U. S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Opinion on Internal Control over Financial Reporting
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), Invacare Corporation’sCorporation and subsidiaries' internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 3, 2016 expressed an unqualified opinion thereon.
|
| |
| /s/ Ernst & Young LLP |
Cleveland, Ohio | |
March 3, 2016 | |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Invacare Corporation and Subsidiaries
We have audited Invacare Corporation’s internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control—Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Invacare Corporation’sCorporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Companyas of December 31, 2018 and 2017, the related consolidated statements of comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated March 7, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s“Management's Annual Report on Internal Control over Financial Reporting” which is included in Item 9A.. Our responsibility is to express an opinion on the Company’sCompany's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Companycompany are being made only in accordance with authorizations of management and directors of the Company;company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Cleveland, Ohio
In our opinion, Invacare Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.March 7, 2019
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Invacare Corporation and subsidiaries as of December 31, 2015 and 2014 and the related consolidated statements of comprehensive income (loss), cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2015 of Invacare Corporation and our report dated March 3, 2016 expressed an unqualified opinion thereon.
|
| |
| /s/ Ernst & Young LLP |
Cleveland, OhioFinancial Statements | | |
March 3, 2016 | | |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
INVACARE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Comprehensive Loss
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | (In thousands, except per share data) |
| Net sales | $ | 1,142,338 |
| | $ | 1,270,163 |
| | $ | 1,334,505 |
|
| Cost of products sold | 829,514 |
| | 922,775 |
| | 967,079 |
|
| Gross Profit | 312,824 |
| | 347,388 |
| | 367,426 |
|
| Selling, general and administrative expenses | 319,847 |
| | 383,913 |
| | 397,332 |
|
| Charges related to restructuring activities | 1,971 |
| | 11,112 |
| | 9,336 |
|
| Asset write-downs to intangible assets | — |
| | 13,041 |
| | 1,523 |
|
| Interest expense | 2,911 |
| | 3,039 |
| | 3,078 |
|
| Interest income | (165 | ) | | (507 | ) | | (384 | ) |
| Loss from Continuing Operations Before Income Taxes | (11,740 | ) | | (63,210 | ) | | (43,459 | ) |
| Income taxes | 14,710 |
| | 5,550 |
| | 10,875 |
|
| Net Loss from Continuing Operations | (26,450 | ) |
| (68,760 | ) | | (54,334 | ) |
| Net earnings from discontinued operations (net of tax of $0; $1,200 and $2,235) | — |
| | 1,596 |
| | 6,442 |
|
| Gain on sale (net of tax of $140; $5,975 and $1,220) | 260 |
| | 11,094 |
| | 80,943 |
|
| Total Net Earnings from Discontinued Operations | 260 |
| | 12,690 |
| | 87,385 |
|
| Net Earnings (loss) | $ | (26,190 | ) | | $ | (56,070 | ) | | $ | 33,051 |
|
| Net Earnings (loss) per Share—Basic: | | | | | |
| Net loss from continuing operations | $ | (0.82 | ) | | $ | (2.15 | ) | | $ | (1.70 | ) |
| Net earnings from discontinued operations | $ | 0.01 |
| | $ | 0.40 |
| | $ | 2.74 |
|
| Net Earnings (loss) per Share—Basic | $ | (0.81 | ) | | $ | (1.75 | ) | | $ | 1.04 |
|
| Weighted Average Shares Outstanding—Basic | 32,171 |
| | 32,009 |
| | 31,915 |
|
| Net Earnings (loss) per Share—Assuming Dilution: | | | | | |
| Net loss from continuing operations | $ | (0.82 | ) | | $ | (2.15 | ) | | $ | (1.70 | ) |
| Net earnings from discontinued operations | $ | 0.01 |
| | $ | 0.39 |
| | $ | 2.73 |
|
| Net Earnings (loss) per Share—Assuming Dilution | $ | (0.81 | ) | | $ | (1.75 | ) | | $ | 1.03 |
|
| Weighted Average Shares Outstanding—Assuming Dilution | 32,683 |
| | 32,197 |
| | 32,043 |
|
| | | | | | |
| Net Earnings (loss) | $ | (26,190 | ) | | $ | (56,070 | ) | | $ | 33,051 |
|
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustments | (81,404 | ) | | (51,508 | ) | | 10,969 |
|
| Defined benefit plans: | | | | | |
| Amortization of prior service costs and unrecognized gains (losses) | (1,375 | ) | | (2,178 | ) | | 1,771 |
|
| Amounts arising during the year, primarily addition of new participants | (784 | ) | | — |
| | (320 | ) |
| Deferred tax adjustment resulting from defined benefit plan activity | (44 | ) | | 213 |
| | (355 | ) |
| Valuation reserve (reversal) associated with defined benefit plan activity | 47 |
| | (222 | ) | | 275 |
|
| Current period gain (loss) on cash flow hedges | 2,731 |
| | 244 |
| | 83 |
|
| Deferred tax benefit (loss) related to gain (loss) on cash flow hedges | (177 | ) | | (86 | ) | | (10 | ) |
| Other Comprehensive Income (Loss) | (81,006 | ) | | (53,537 | ) | | 12,413 |
|
| Comprehensive Income (Loss) | $ | (107,196 | ) | | $ | (109,607 | ) | | $ | 45,464 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands, except per share data) |
| Net sales | $ | 972,347 |
| | $ | 966,497 |
| | $ | 1,047,474 |
|
| Cost of products sold | 704,671 |
| | 697,246 |
| | 763,847 |
|
| Gross Profit | 267,676 |
| | 269,251 |
| | 283,627 |
|
| Selling, general and administrative expenses | 281,906 |
| | 296,816 |
| | 303,781 |
|
| Gains on sale of businesses | — |
| | — |
| | (7,386 | ) |
| Charges related to restructuring activities | 3,481 |
| | 12,274 |
| | 2,447 |
|
| Impairment of an intangible asset | 583 |
| | 320 |
| | — |
|
| Operating Loss | (18,294 | ) | | (40,159 | ) | | (15,215 | ) |
| Net loss (gain) on convertible debt derivatives | (11,994 | ) | | 3,657 |
| | (1,268 | ) |
| Interest expense | 28,336 |
| | 22,907 |
| | 15,875 |
|
| Interest income | (534 | ) | | (473 | ) | | (265 | ) |
| Loss Before Income Taxes | (34,102 | ) | | (66,250 | ) | | (29,557 | ) |
| Income taxes | 9,820 |
| | 10,291 |
| | 13,299 |
|
| Net Loss | $ | (43,922 | ) | | $ | (76,541 | ) | | $ | (42,856 | ) |
| Net Loss per Share—Basic | $ | (1.33 | ) | | $ | (2.34 | ) | | $ | (1.32 | ) |
| Weighted Average Shares Outstanding—Basic | 33,124 |
| | 32,752 |
| | 32,471 |
|
| Net Loss per Share—Assuming Dilution | $ | (1.33 | ) | | $ | (2.34 | ) | | $ | (1.32 | ) |
| Weighted Average Shares Outstanding—Assuming Dilution | 33,543 |
| | 33,216 |
| | 32,590 |
|
| | | | | | |
| Net Loss | $ | (43,922 | ) | | $ | (76,541 | ) | | $ | (42,856 | ) |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustments | (30,858 | ) | | 54,591 |
| | (7,194 | ) |
| Defined benefit plans: | | | | | |
| Amortization of prior service costs and unrecognized losses | 4,949 |
| | 3,596 |
| | (1,580 | ) |
| Deferred tax adjustment resulting from defined benefit plan activity | (51 | ) | | (67 | ) | | (134 | ) |
| Valuation reserve associated with defined benefit plan activity | 51 |
| | 67 |
| | 223 |
|
| Current period gain (loss) on cash flow hedges | 1,894 |
| | (2,088 | ) | | (1,407 | ) |
| Deferred tax benefit (loss) related to gain (loss) on cash flow hedges | (62 | ) | | 106 |
| | 144 |
|
| Other Comprehensive Income (Loss) | (24,077 | ) | | 56,205 |
| | (9,948 | ) |
| Comprehensive Loss | $ | (67,999 | ) | | $ | (20,336 | ) | | $ | (52,804 | ) |
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
INVACARE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
| | | | December 31,
2015 | | December 31,
2014 | December 31,
2018 | | December 31,
2017 |
| | (In thousands) | (In thousands) |
| Assets | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | $ | 60,055 |
| | $ | 38,931 |
| $ | 116,907 |
| | $ | 176,528 |
|
| Trade receivables, net | 133,655 |
| | 154,207 |
| 119,743 |
| | 125,615 |
|
| Installment receivables, net | 1,145 |
| | 1,054 |
| 1,574 |
| | 1,334 |
|
| Inventories, net | 132,807 |
| | 155,561 |
| 128,123 |
| | 121,933 |
|
| Deferred income taxes | — |
| | 2,048 |
| |
| Other current assets | 34,459 |
| | 36,798 |
| 31,063 |
| | 31,504 |
|
| Assets held for sale | — |
| | 17,388 |
| |
| Total Current Assets | 362,121 |
| | 405,987 |
| 397,410 |
| | 456,914 |
|
| Other Assets | 4,659 |
| | 19,053 |
| 6,360 |
| | 97,576 |
|
| Intangibles | 31,000 |
| | 38,013 |
| 26,506 |
| | 30,244 |
|
| Property and Equipment, net | 78,683 |
| | 79,659 |
| 74,306 |
| | 80,016 |
|
| Goodwill | 361,680 |
| | 421,019 |
| 381,273 |
| | 401,283 |
|
| Total Assets | $ | 838,143 |
| | $ | 963,731 |
| $ | 885,855 |
| | $ | 1,066,033 |
|
| Liabilities and Shareholders’ Equity | | | | |
| Liabilities and Shareholders' Equity | | | | |
| Current Liabilities | | | | | | |
| Accounts payable | $ | 105,608 |
| | $ | 119,927 |
| $ | 92,469 |
| | $ | 90,566 |
|
| Accrued expenses | 122,420 |
| | 155,699 |
| 99,867 |
| | 118,697 |
|
| Current taxes, payable and deferred | 17,588 |
| | 12,634 |
| |
| Current taxes payable | | 3,762 |
| | 6,761 |
|
| Short-term debt and current maturities of long-term obligations | 2,028 |
| | 959 |
| 2,110 |
| | 2,040 |
|
| Liabilities held for sale | — |
| | 1,013 |
| |
| Total Current Liabilities | 247,644 |
| | 290,232 |
| 198,208 |
| | 218,064 |
|
| Long-Term Debt | 45,092 |
| | 19,372 |
| 253,535 |
| | 241,405 |
|
| Other Long-Term Obligations | 82,589 |
| | 88,805 |
| 74,965 |
| | 183,270 |
|
| Shareholders’ Equity | | | | |
| Shareholders' Equity | | | | |
| Preferred Shares (Authorized 300 shares; none outstanding) | — |
| | — |
| — |
| | — |
|
| Common Shares (Authorized 100,000 shares; 35,024 and 34,219 issued in 2015 and 2014, respectively)—no par | 8,815 |
| | 8,591 |
| |
| Class B Common Shares (Authorized 12,000 shares; 734 and 1,085 issued and outstanding in 2015 and 2014)—no par | 184 |
| | 272 |
| |
| Common Shares (Authorized 100,000 shares; 37,010 and 36,532 issued and outstanding in 2018 and 2017, respectively)—no par | | 9,419 |
| | 9,304 |
|
| Class B Common Shares (Authorized 12,000 shares; 6 issued and outstanding in 2018 and 2017)—no par | | 2 |
| | 2 |
|
| Additional paid-in-capital | 247,022 |
| | 240,743 |
| 297,919 |
| | 290,125 |
|
| Retained earnings | 310,583 |
| | 338,362 |
| 142,447 |
| | 187,999 |
|
| Accumulated other comprehensive earnings | (9,387 | ) | | 71,619 |
| |
| Treasury shares (3,194 and 3,187 shares in 2015 and 2014, respectively) | (94,399 | ) | | (94,265 | ) | |
| Total Shareholders’ Equity | 462,818 |
| | 565,322 |
| |
| Total Liabilities and Shareholders’ Equity | $ | 838,143 |
| | $ | 963,731 |
| |
| Accumulated other comprehensive income | | 12,793 |
| | 36,870 |
|
| Treasury shares (3,841 and 3,701 shares in 2018 and 2017, respectively) | | (103,433 | ) | | (101,006 | ) |
| Total Shareholders' Equity | | 359,147 |
| | 423,294 |
|
| Total Liabilities and Shareholders' Equity | | $ | 885,855 |
| | $ | 1,066,033 |
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
INVACARE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Operating Activities | (In thousands) | (In thousands) |
| Net earnings (loss) | $ | (26,190 | ) | | $ | (56,070 | ) | | $ | 33,051 |
| |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
| Gain on sale of business (pre-tax) | (424 | ) | | (17,069 | ) | | (82,163 | ) | |
| Net loss | | $ | (43,922 | ) | | $ | (76,541 | ) | | $ | (42,856 | ) |
| Adjustments to reconcile net earnings to net cash used by operating activities: | | | | | | |
| Gains on sale of businesses (pre-tax) | | — |
| | — |
| | (7,386 | ) |
| Depreciation and amortization | 19,430 |
| | 32,789 |
| | 36,789 |
| 15,556 |
| | 14,631 |
| | 14,635 |
|
| Provision for losses on trade and installment receivables | 754 |
| | 1,775 |
| | 3,689 |
| 2,029 |
| | 2,042 |
| | 1,059 |
|
| Provision (benefit) for deferred income taxes | 3,588 |
| | (2,387 | ) | | 2,017 |
| (2,800 | ) | | (4,370 | ) | | 901 |
|
| Provision (benefit) for other deferred liabilities | 266 |
| | 1,393 |
| | (146 | ) | (121 | ) | | 589 |
| | 996 |
|
| Provision for stock-based compensation | 4,013 |
| | 5,626 |
| | 5,957 |
| 5,283 |
| | 7,347 |
| | 6,894 |
|
| Loss on disposals of property and equipment | 5,135 |
| | 1,074 |
| | 666 |
| |
| Asset write-downs to intangible assets | — |
| | 13,041 |
| | 1,523 |
| |
| Asset write-downs related to restructuring activities | — |
| | 1,163 |
| | — |
| |
| Loss (gain) on disposals of property and equipment | | 928 |
| | (87 | ) | | 51 |
|
| Impairment of an intangible asset | | 583 |
| | 320 |
| | — |
|
| Amortization of convertible debt discount | 796 |
| | 710 |
| | 633 |
| 11,608 |
| | 8,811 |
| | 5,454 |
|
| Amortization of debt fees | | 2,489 |
| | 2,220 |
| | 1,991 |
|
| Loss (gain) on convertible debt derivatives | | (11,994 | ) | | 3,657 |
| | (1,268 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Trade receivables | 9,164 |
| | 17,211 |
| | 9,706 |
| (666 | ) | | 2,395 |
| | 10,210 |
|
| Installment sales contracts, net | 283 |
| | 15 |
| | (3,773 | ) | (603 | ) | | (930 | ) | | (1,236 | ) |
| Inventories | 11,610 |
| | (9,527 | ) | | 23,797 |
| (11,497 | ) | | 22,263 |
| | (9,944 | ) |
| Other current assets | 5,283 |
| | 1,950 |
| | (2,070 | ) | (873 | ) | | 1,925 |
| | 84 |
|
| Accounts payable | (7,240 | ) | | 8,329 |
| | (19,013 | ) | 4,505 |
| | (2,168 | ) | | (13,648 | ) |
| Accrued expenses | (22,003 | ) | | 34,113 |
| | 1,396 |
| (17,158 | ) | | (5,711 | ) | | (18,491 | ) |
| Other long-term liabilities | (9,843 | ) | | (25,244 | ) | | (2,005 | ) | 230 |
| | (2,167 | ) | | (4,059 | ) |
| Net Cash (Used) Provided by Operating Activities | (5,378 | ) | | 8,892 |
| | 10,054 |
| |
| Net Cash Used by Operating Activities | | (46,423 | ) | | (25,774 | ) | | (56,613 | ) |
| Investing Activities | | | | | | | | | | |
| Purchases of property and equipment | (7,522 | ) | | (12,327 | ) | | (14,158 | ) | (9,823 | ) | | (14,569 | ) | | (10,151 | ) |
| Proceeds from sale of property and equipment | 23,117 |
| | 2,521 |
| | 885 |
| 40 |
| | 369 |
| | 42 |
|
| Advance Payment from Sale of Property | | 3,524 |
| | — |
| | — |
|
| Proceeds from sale of businesses | 13,700 |
| | 21,870 |
| | 187,552 |
| — |
| | — |
| | 13,829 |
|
| Decrease in other long-term assets | 15,003 |
| | 20,949 |
| | 1,001 |
| (116 | ) | | (361 | ) | | (167 | ) |
| Other | 78 |
| | 569 |
| | 65 |
| 12 |
| | (87 | ) | | 96 |
|
| Net Cash Provided for Investing Activities | 44,376 |
| | 33,582 |
| | 175,345 |
| |
| Net Cash Provided (Used) by Investing Activities | | (6,363 | ) | | (14,648 | ) | | 3,649 |
|
| Financing Activities | | | | | | | | | | |
| Proceeds from revolving lines of credit and long-term borrowings | 219,603 |
| | 255,658 |
| | 352,455 |
| — |
| | 95,220 |
| | 122,025 |
|
| Payments on revolving lines of credit and long-term borrowings | (232,808 | ) | | (286,712 | ) | | (545,874 | ) | (1,493 | ) | | (16,308 | ) | | (2,830 | ) |
| Proceeds from exercise of equity awards | 2,402 |
| | 480 |
| | 512 |
| 2,626 |
| | 2,676 |
| | 17 |
|
| Payment of financing costs | (1,954 | ) | | — |
| | — |
| — |
| | (4,711 | ) | | (6,125 | ) |
| Payment of dividends | (1,589 | ) | | (1,584 | ) | | (1,581 | ) | (1,630 | ) | | (1,604 | ) | | (1,583 | ) |
| Net Cash Used by Financing Activities | (14,346 | ) | | (32,158 | ) | | (194,488 | ) | |
| Issuance of warrants | | — |
| | 14,100 |
| | 12,376 |
|
| Purchases of treasury shares | | (2,427 | ) | | (1,276 | ) | | (5,331 | ) |
| Net Cash Provided (Used) by Financing Activities | | (2,924 | ) | | 88,097 |
| | 118,549 |
|
| Effect of exchange rate changes on cash | (3,528 | ) | | (1,170 | ) | | 83 |
| (3,911 | ) | | 4,619 |
| | (1,406 | ) |
| Increase (decrease) in cash and cash equivalents | 21,124 |
| | 9,146 |
| | (9,006 | ) | |
| Increase in cash and cash equivalents | | (59,621 | ) | | 52,294 |
| | 64,179 |
|
| Cash and cash equivalents at beginning of year | 38,931 |
| | 29,785 |
| | 38,791 |
| 176,528 |
| | 124,234 |
| | 60,055 |
|
| Cash and cash equivalents at end of year | $ | 60,055 |
| | $ | 38,931 |
| | $ | 29,785 |
| $ | 116,907 |
| | $ | 176,528 |
| | $ | 124,234 |
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
INVACARE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
| | | | Common Stock | | Class B Stock | | Additional Paid-in- Capital | | Retained Earnings | | Accumulated Other Comprehensive Earnings | | Treasury Stock | | Total | |
| | (In thousands) | |
| January 1, 2013 Balance | $ | 8,503 |
| | $ | 272 |
| | $ | 228,187 |
| | $ | 364,546 |
| | $ | 112,743 |
| | $ | (93,262 | ) | | $ | 620,989 |
| |
| (In thousands) | | Common Stock | | Class B Stock | | Additional Paid-in- Capital | | Retained Earnings | | Accumulated Other Comprehensive Earnings | | Treasury Stock | | Total |
| January 1, 2016 Balance | | $ | 8,815 |
| | $ | 184 |
| | $ | 247,022 |
| | $ | 310,583 |
| | $ | (9,387 | ) | | $ | (94,399 | ) | | $ | 462,818 |
|
| Deferred equity compensation | | 69 |
| | — |
| | (69 | ) | | — |
| | — |
| | — |
| | — |
|
| Exercise of stock options | 7 |
| | — |
| | 505 |
| | — |
| | — |
| | — |
| | 512 |
| — |
| | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
| Non-qualified stock option expense | — |
| | — |
| | 3,925 |
| | — |
| | — |
| | — |
| | 3,925 |
| |
| Performance awards | | — |
| | — |
| | 1,110 |
| | — |
| | — |
| | — |
| | 1,110 |
|
| Non-qualified stock options | | — |
| | — |
| | 745 |
| | — |
| | — |
| | — |
| | 745 |
|
| Restricted stock awards | 29 |
| | — |
| | 2,003 |
| | — |
| | — |
| | (532 | ) | | 1,500 |
| 89 |
| | — |
| | 4,950 |
| | — |
| | — |
| | (331 | ) | | 4,708 |
|
| Net earnings | — |
| | — |
| | — |
| | 33,051 |
| | — |
| | — |
| | 33,051 |
| |
| Conversion from Class B to Common Stock | | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Net loss | | — |
| | — |
| | — |
| | (42,856 | ) | | — |
| | — |
| | (42,856 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | 10,969 |
| | — |
| | 10,969 |
| — |
| | — |
| | — |
| | — |
| | (7,194 | ) | | — |
| | (7,194 | ) |
| Unrealized gain on cash flow hedges | — |
| | — |
| | — |
| | — |
| | 73 |
| | — |
| | 73 |
| |
| Unrealized loss on cash flow hedges | | — |
| | — |
| | — |
| | — |
| | (1,263 | ) | | — |
| | (1,263 | ) |
| Defined benefit plans: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of prior service costs and unrecognized losses and credits | — |
| | — |
| | — |
| | — |
| | 1,691 |
| | — |
| | 1,691 |
| — |
| | — |
| | — |
| | — |
| | (1,491 | ) | | — |
| | (1,491 | ) |
| Additions - new participants | — |
| | — |
| | — |
| | — |
| | (320 | ) | | — |
| | (320 | ) | |
| Total comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 45,464 |
| |
| Total comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (52,804 | ) |
| Issuance of warrants | | — |
| | — |
| | 12,376 |
| | — |
| | — |
| | — |
| | 12,376 |
|
| Dividends | — |
| | — |
| | — |
| | (1,581 | ) | | — |
| | — |
| | (1,581 | ) | — |
| | — |
| | — |
| | (1,583 | ) | | — |
| | — |
| | (1,583 | ) |
| December 31, 2013 Balance | $ | 8,539 |
| | $ | 272 |
| | $ | 234,620 |
| | $ | 396,016 |
| | $ | 125,156 |
| | $ | (93,794 | ) | | $ | 670,809 |
| |
| Deferred equity compensation | — |
| | — |
| | 69 |
| | — |
| | — |
| | — |
| | 69 |
| |
| Purchase of treasury shares | | — |
| | — |
| | — |
| | — |
| | — |
| | (5,000 | ) | | (5,000 | ) |
| December 31, 2016 Balance | | 8,974 |
| | 183 |
| | 266,151 |
| | 266,144 |
| | (19,335 | ) | | (99,730 | ) | | 422,387 |
|
| Exercise of stock options | 8 |
| | — |
| | 472 |
| | — |
| | — |
| | — |
| | 480 |
| 48 |
| | — |
| | 2,628 |
| | — |
| | — |
| | (65 | ) | | 2,611 |
|
| Non-qualified stock option expense | — |
| | — |
| | 3,356 |
| | — |
| | — |
| | — |
| | 3,356 |
| |
| Performance awards | | — |
| | — |
| | 1,834 |
| | — |
| | — |
| | — |
| | 1,834 |
|
| Non-qualified stock options | | — |
| | — |
| | 865 |
| | — |
| | — |
| | — |
| | 865 |
|
| Restricted stock awards | 44 |
| | — |
| | 2,226 |
| | — |
| | — |
| | (471 | ) | | 1,799 |
| 101 |
| | — |
| | 4,547 |
| | — |
| | — |
| | (1,211 | ) | | 3,437 |
|
| Net earnings | — |
| | — |
| | — |
| | (56,070 | ) | | — |
| | — |
| | (56,070 | ) | |
| Conversion from Class B to Common Stock | | 181 |
| | (181 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Net loss | | — |
| | — |
| | — |
| | (76,541 | ) | | — |
| | — |
| | (76,541 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (51,508 | ) | | — |
| | (51,508 | ) | — |
| | — |
| | — |
| | — |
| | 54,591 |
| | — |
| | 54,591 |
|
| Unrealized gain on cash flow hedges | — |
| | — |
| | — |
| | — |
| | 158 |
| | — |
| | 158 |
| |
| Unrealized loss on cash flow hedges | | — |
| | — |
| | — |
| | — |
| | (1,982 | ) | | — |
| | (1,982 | ) |
| Defined benefit plans: | | | | | | | | | | | | | | |
| Amortization of prior service costs and unrecognized losses and credits | | — |
| | — |
| | — |
| | — |
| | 3,596 |
| | — |
| | 3,596 |
|
| Total comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (20,336 | ) |
| Issuance of warrants | | — |
| | — |
| | 14,100 |
| | — |
| | — |
| | — |
| | 14,100 |
|
| Dividends | | — |
| | — |
| | — |
| | (1,604 | ) | | — |
| | — |
| | (1,604 | ) |
| December 31, 2017 Balance | | 9,304 |
| | 2 |
| | 290,125 |
| | 187,999 |
| | 36,870 |
| | (101,006 | ) | | 423,294 |
|
| Exercise of stock options | | 46 |
| | — |
| | 2,580 |
| | — |
| | — |
| | (919 | ) | | 1,707 |
|
| Performance awards | | — |
| | — |
| | 777 |
| | — |
| | — |
| | — |
| | 777 |
|
| Non-qualified stock options | | — |
| | — |
| | 201 |
| | — |
| | — |
| | — |
| | 201 |
|
| Restricted stock awards | | 69 |
| | — |
| | 4,236 |
| | — |
| | — |
| | (1,508 | ) | | 2,797 |
|
| Net loss | | — |
| | — |
| | — |
| | (43,922 | ) | | — |
| | — |
| | (43,922 | ) |
| Foreign currency translation adjustments | | — |
| | — |
| | — |
| | — |
| | (30,858 | ) | | — |
| | (30,858 | ) |
| Unrealized loss on cash flow hedges | | — |
| | — |
| | — |
| | — |
| | 1,832 |
| | — |
| | 1,832 |
|
| Defined benefit plans: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of prior service costs and unrecognized losses and credits | — |
| | — |
| | — |
| | — |
| | (2,187 | ) | | — |
| | (2,187 | ) | — |
| | — |
| | — |
| | — |
| | 4,949 |
| | — |
| | 4,949 |
|
| Total comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (109,607 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (67,999 | ) |
| Dividends | — |
| | — |
| | — |
| | (1,584 | ) | | — |
| | — |
| | (1,584 | ) | — |
| | — |
| | — |
| | (1,630 | ) | | — |
| | — |
| | (1,630 | ) |
| December 31, 2014 Balance | $ | 8,591 |
| | $ | 272 |
| | $ | 240,743 |
| | $ | 338,362 |
| | $ | 71,619 |
| | $ | (94,265 | ) | | $ | 565,322 |
| |
| Exercise of stock options | 43 |
| | — |
| | 2,359 |
| | — |
| | — |
| | — |
| | 2,402 |
| |
| Non-qualified stock option expense | — |
| | — |
| | 1,228 |
| | — |
| | — |
| | — |
| | 1,228 |
| |
| Restricted stock awards | 93 |
| | — |
| | 2,692 |
| | — |
| | — |
| | (134 | ) | | 2,651 |
| |
| Conversion from Class B Stock to Common Stock | 88 |
| | (88 | ) | | | | | | | | | | — |
| |
| Net loss | — |
| | — |
| | — |
| | (26,190 | ) | | — |
| | — |
| | (26,190 | ) | |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (81,404 | ) | | — |
| | (81,404 | ) | |
| Unrealized gain on cash flow hedges | — |
| | — |
| | — |
| | — |
| | 2,554 |
| | — |
| | 2,554 |
| |
| Defined benefit plans: | | | | | | | | | | | | | | |
| Amortization of prior service costs and unrecognized losses and credits | — |
| | — |
| | — |
| | — |
| | (1,372 | ) | | — |
| | (1,372 | ) | |
| Additions - new participants | — |
| | — |
| | — |
| | — |
| | (784 | ) | | — |
| | (784 | ) | |
| Total comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (107,196 | ) | |
| Dividends | — |
| | — |
| | — |
| | (1,589 | ) | | — |
| | — |
| | (1,589 | ) | |
| December 31, 2015 Balance | $ | 8,815 |
| | $ | 184 |
| | $ | 247,022 |
| | $ | 310,583 |
| | $ | (9,387 | ) | | $ | (94,399 | ) | | $ | 462,818 |
| |
| December 31, 2018 Balance | | $ | 9,419 |
| | $ | 2 |
| | $ | 297,919 |
| | $ | 142,447 |
| | $ | 12,793 |
| | $ | (103,433 | ) | | $ | 359,147 |
|
See notes to consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies
Nature of Operations: Invacare Corporation is a leading manufacturer and distributor of medical equipment used in the home based upon the company’scompany's distribution channels, breadth of product line and net sales. The company designs, manufactures and distributes an extensive line of health care products for the non-acute care environment, including the home health care, retail and continuing care markets.
Principles of Consolidation: The 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 December 31, 20152018 and the results of its operations and changes in its cash flow for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using a November 30 fiscal year end in order to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company’scompany's financial statements. All significant intercompany transactions are eliminated.
Use of Estimates: The 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.
Cash and Cash Equivalents: The company's policy is to treat investments that are readily convertible to cash and with maturities so near that there is little risk of changes in value due to changes in interest rates as cash and cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
Accounts Receivable: The company records accounts receivable when control of the product ships or services are providedservice transfers to its unaffiliated customers, risk of loss is passed and title is transferred. The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of specific customers. The company records accounts receivable reserves for amounts that may become uncollectible in the future. The company writes off accounts receivable when it becomes apparent, based upon customer circumstances, that such amounts will not be collected and legal remedies are exhausted.
Reserves for customer bonus 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 principal 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.
Inventories: Inventories are stated at the lower of cost or marketnet realizable value with cost determined by the first-in, first-out method. Market values are based onNet realizable value is the lowerestimated selling prices in the ordinary course of replacement cost or estimated net realizable value.business, less reasonably predictable costs of completion, disposal, and transportation. Finished goods and work in process inventories include material, labor and manufacturing overhead costs. Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management’smanagement's review of inventories on hand compared to estimated future usage and sales.
Property and Equipment: Property and equipment are stated based on the basis of cost. The company principally uses the straight-line method of depreciation for financial reporting purposes based on annual rates sufficient to amortize the cost of the assets over their estimated useful lives. Machinery and equipment as well as furniture and fixtures are generally depreciated using lives of 3 to 10 years, while buildings and improvements are depreciated using lives of 5 to 40 years. Accelerated methods of depreciation are used for federal income tax purposes. Expenditures for maintenance and repairs are charged to expense as incurred. Amortization of assets under capital leases is included in depreciation expense. In 2017, the company determined that certain demonstration equipment should be recorded as fixed assets and depreciated to their estimated recoverable values over their estimated useful lives. This determination was based on the company deciding to place the equipment in provider locations for longer periods of time versus selling the units. Accordingly, approximately $5,250,000 in demonstration equipment was reclassed from inventory to property and equipment as of December 31, 2017.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value.
Goodwill and Other Intangibles: In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill and indefinite lived intangibles are subject to annual impairment testing. For purposes of the goodwill impairment test, the fair value of each reporting unit is estimated using an income approach by forecasting cash flows and discounting those cash flows using appropriate discount rates.rates as well as considering market and cost approaches as appropriate. The fair values are then compared to the carrying value of the net assets of each reporting unit. Intangibles assets are also reviewed for impairment by estimating forecasted cash flows and discounting those cash flows as needed to calculate impairment amounts.
During 2014,2018 and 2017, the company recognized an intangible write-down chargesimpairment charge of $13,041,000 comprised of a customer list impairment of $12,826,000$583,000 and a non-compete agreement impairment of $215,000 each$320,000 respectively, related to an indefinite-lived trademark recorded in the IPG segment.
During 2013, the company recognized intangible write-down charges of $1,523,000 comprised of: trademarks with indefinite lives impairment of $568,000, a trademark with a definite life impairment of $123,000, customer list impairment of $442,000 and a developed technology impairment of $223,000 each recorded in the IPG segment and a customer list impairment of $167,000 recorded in the North America/HME segment.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Accrued Warranty Cost: Generally, the company’scompany's products are covered by assurance-type warranties against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company’scompany's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could warrantnecessitate additional warranty reserve provision.provisions. See Current LiabilitiesAccrued Expenses in the Notes to the Consolidated Financial Statements for a reconciliation of the changes in the warranty accrual.
Product Liability Cost: The company is self-insured in North America for product liability exposures through its captive insurance company, Invatection Insurance Company, which currently has a policy year that runs from September 1 to August 31 and insures annual policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The company also has additional layers of external insurance coverage, related to all lines of insurance coverage, insuring up to $75,000,000 in aggregate losses per policy year arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the company’scompany's per country foreign liability limits, as applicable. There can be no assurance that Invacare’sInvacare's current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and other indicators. Additional reserves, in excess of the specific individual case reserves, are provided for incurred
but not reported claims based upon actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the company in estimating the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.
Revenue Recognition: Invacare’sThe company recognizes revenues are recognized when products are shippedcontrol of the product or service providedis transferred to unaffiliated customers, risk of loss is passed and title is transferred.customers. Revenue RecognitionRevenues from Contracts with Customers, ASC 605,606, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. ShippingThe company has concluded that its revenue recognition policy is appropriate and handling costsin accordance with GAAP under ASC 606.
All of the company's product-related contracts, and a portion related to services, have a single performance obligation, which is the promise to transfer an individual good or service, with revenue recognized at a point in time. Certain service-related contracts contain multiple performance obligations that require the company to allocate the transaction price to each performance obligation. For such contracts, the company allocates revenue to each performance obligation based on its relative standalone selling price at inception of the contract. The company determined the standalone selling price based on the expected cost-plus margin methodology. Revenue related to the service contracts with multiple performance obligations is recognized over time. To the extent performance obligations are satisfied over time, the company defers revenue recognition until the performance obligations are satisfied.
The determination of when and how much revenue to recognize can require the use of significant judgment. Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the company's products and services to the customer.
Revenue is measured as the amount of consideration expected to be received in exchange for transferring the product or providing services. The amount of consideration received and recognized as revenue by the company can vary as a result of variable consideration terms included in costthe contracts such as customer rebates, cash discounts and return
policies. Customer rebates and cash discounts are estimated based on the most likely amount principle and these estimates are based on historical experience and anticipated performance. 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. The company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration the company expects to receive changes or when the consideration becomes fixed. The company generally does not expect that there will be significant changes to its estimates of variable consideration (see Receivables in the Notes to the Consolidated Financial Statements include elsewhere in this report).
Depending on the terms of the contract, the company may defer recognizing a portion of the revenue at the end of a given period as the result of title transfer terms that are based upon delivery and or acceptance which align with transfer of control of the company's products to its customers.
Sales are made only to customers with whom the company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.
The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The company does not sell any goods on consignment.
Distributed products sold by the company are accounted for in accordance with the revenue recognition guidance in ASC 605-45-05. The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns. The company's payment terms are for relatively short periods and thus do not contain any element of financing. Additionally, no contract costs are incurred that would require capitalization and amortization.
Product salesSales, value-added, and other taxes the company collects concurrent with revenue producing activities are excluded from revenue. Incidental items that give riseare immaterial in the context of the contract are recognized as expense. Shipping and handling costs are included in cost of products sold.
The majority of the company's warranties are considered assurance-type warranties and continue to installment receivablesbe recognized as expense when the products are sold (see Current Liabilities in the Notes to the Consolidated Financial Statements include elsewhere in this report). These warranties cover against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. In addition, the company has sold
extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. A provision for estimated warranty cost is recorded at the time of sale whenbased upon actual experience. The company continuously assesses the risksadequacy of its product warranty accruals and rewards of ownershipmakes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are transferred. Asadjusted as needed. However, the company does consider other events, such interest income is recognized based onas a product recall, which could require additional warranty reserve provisions. See Accrued Expenses in the termsNotes to the Consolidated Financial Statements for a reconciliation of the installment agreements. Installment accounts are monitored and if a customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for usingchanges in the same methodology, regardless of duration ofwarranty accrual. In addition, the installment agreements.company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. The company has entered into an agreement with De Lage Landen, Inc. (“DLL”), a third party financing company,established procedures to provide the majority of future lease financing to Invacare customers.appropriately defer such revenue.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Research and Development: Research and development costs are expensed as incurred and included in cost of products sold. The company’scompany's annual expenditures for product development and engineering were approximately $18,677,000, $23,149,000$17,377,000, $17,796,000 and $24,075,000$17,123,000 for 2015, 20142018, 2017 and 2013,2016, respectively.
Advertising: Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expenses amounted to $9,203,000, $13,463,000$10,109,000, $10,463,000 and $15,026,000$13,593,000 for 2015, 20142018, 2017 and 2013,2016, respectively, the majority of which is incurred for advertising in the United States and Europe.
Income Taxes: The company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. The liability method requires that deferred income taxes reflect the tax consequences of currently enacted rates for differences between the tax and financial reporting bases of assets and liabilities. With the exception of two subsidiaries, foreign subsidiaries with undistributed earnings are considered to have such earnings indefinitely reinvested and, accordingly with the exception of the two subsidiaries, no deferred tax liability has been provided for future repatriation of $24,100,000 of unremitted earnings of these foreign subsidiaries. The amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are permanently reinvested is not practically determinable. The company has recorded the deferred tax impact of the unremitted earnings of the two subsidiaries for which the earnings are not permanently reinvested.
Value Added Taxes: The company operates internationally and is required to comply with value added tax (VAT) or goods and service tax (GST) regulations, particularly in Europe and Asia/Pacific. VAT and GST are taxes on consumption in which the company pays tax on its purchases of goods and services and charges customers on the sale of product. The difference between billings to customers and payments on purchases is then remitted or received from the government as filings are due. The company records tax assets and liabilities related to these taxes and the balances in these accounts can vary significantly from period to period based on the timing of the underlying transactions.
Derivative Instruments: Derivatives and Hedging, ASC 815, requires companies to recognize all derivative
instruments in the consolidated balance sheet as either assets or liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated and qualifying as hedging instruments, the company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. A majority of the company’scompany's derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change.
In 2016, the company issued $150,000,000 aggregate principal amount of 5.00% Convertible Senior Notes due 2021 and, in the second quarter of 2017, issued $120,000,000 aggregate principal amount of 4.50% Convertible Senior Notes due 2022 (the “notes”). In connection with the offering of the notes, the company entered into privately negotiated convertible note hedge transactions with certain financial institutions (the “option counterparties”). The convertible debt conversion liabilities and the convertible note hedges are accounted for as derivatives that are fair valued quarterly. The fair value of the convertible debt conversion liabilities and the convertible note hedge assets are estimated using a lattice model incorporating the terms and conditions of the notes and considering, for example, changes in the prices of the company's common stock, company stock price volatility, risk-free rates and changes in market rates. The valuations are, among other things, subject to changes in both the company's credit worthiness and the counter-parties to the instruments as well as change in general market conditions. The change in the fair value of the convertible note hedges and convertible debt conversion liabilities are recognized in net income (loss) for the respective period. While the change in fair value of the convertible debt conversion liabilities and the convertible note hedge assets are generally expected to move in opposite directions, the net change in any given period may be material.
Foreign Currency Translation: The functional currency of the company’scompany's subsidiaries outside the United States is the applicable local currency. The assets and liabilities of the company’scompany's foreign subsidiaries are translated into U.S. dollars at year-end exchange rates. Revenues and expenses are translated at monthly average exchange rates. Gains and losses resulting from translation of balance sheet
items are included in accumulated other comprehensive earnings.
Net Earnings Per Share: Basic earnings per share are computed based on the weighted-average number of Common Shares and Class B Common Shares outstanding during the year. Diluted earnings per share are computed based on the weighted-average number of Common Shares and Class B Common Shares outstanding plus the effects of dilutive stock options and awards outstanding during the year. Diluted earnings per share can potentially be impacted by the convertible notes issued in 2007 should the conditions be met to make the notes convertible or if average market price of company stock for the period exceeds the conversion price of $24.79. For periods in which there was a net loss, loss per share assuming dilution utilized weighted average shares-basic.
Defined Benefit Plans: The company’scompany's benefit plans are accounted for in accordance with Compensation-Retirement Benefits, ASC 715 which requires plan sponsors to recognize the funded status of their defined benefit postretirement benefit plans in the consolidated balance sheet, measure the fair value of plan assets and benefit obligations as of the balance sheet date and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Reclassifications: During the first quarter of 2017, a subsidiary, formerly included in the Europe segment, was transferred to the NA/HME segment as the subsidiary is managed by the NA/HME segment manager effective January 1, 2017. Segment results for 2016 have been changed accordingly. In May 2015,2016, the company's board of directors authorizedcompany redefined the sale ofmeasure by which it evaluates segment profit or loss to be segment operating profit (loss). The previous performance measure was earnings before income taxes. All periods presented reflect the company's former rentals businesses. Accordingly, the rentals businesses were treated as held for sale. The company's December 31, 2014 Balance Sheet was restated to reflect this treatment.new measure. See Operations Held for SaleBusiness Segments in the Notes to the Consolidated Financial Statements for a description of the impact onchange.
Certain other minor reclassifications also made in the consolidated balance sheet.Notes to the Consolidated Financial Statements to conform to current year presentation.
Recent Accounting Pronouncements:Pronouncements (Already Adopted):
In April 2014,March 2016, the FASB issued ASU 2014-08 changing2016-09, "Compensation – Stock Compensation: Topic 718: Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 is intended to simplify several aspects of the presentationaccounting for share-based payment transactions, including the income tax consequences, classification of discontinued operationsawards as either equity or liabilities, and classification on the statementsstatement of incomecash flows. The company has historically withheld shares for tax-withholding purposes and other requirements for reporting discontinued operations. Underreflected the new standard,taxes paid as a disposal of a component or a group of components of an entityfinancing activity, which is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component meets the criteria to be classified as held for sale or is disposed. The amendments in this update also require additional disclosures about discontinued operations and disposal of an individually significant component of an entity that does not qualify for discontinued operations. This standard must be prospectively applied to all reporting periods presented in financial reports issued after the effective date. Early adoption was permitted for disposals that were not reported in financial statements previously issued or available for issuance. The new accounting guidance was effective for interim and annual periods beginning after December 15, 2014. This standard can impact the presentation of the company's financial statements but does not affect the calculation of net income, comprehensive income or earnings per share.consistent with ASU 2016-09. The company adopted ASU 2014-082016-09, effective January 1, 2017, which did not have a material impact on the company's financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” to simplify the subsequent measurement of inventory. With effectiveness of this update, entities are required to subsequently measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. The company adopted ASU 2015-11, effective January 1, 2017, which impacteddid not have a material impact on the company’s Condensed Consolidated Statement of Comprehensive Income (Loss), Balance Sheets and Statement of Cash Flows. Specifically, the disposal of the United States Rentals businesses, in the third quarter of 2015, was not deemed to be a discontinued operation.company's financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires a company to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance requires five steps to be applied: 1) identify the contract(s) with customers, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligation in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures, which are more comprehensive than existing revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flow. An entity can apply
Effective January 1, 2018, the company adopted the new revenueaccounting standard, retrospectively to each prior reporting period presented orand all the related amendments, on a modified retrospective basis, with theno cumulative effect of initially applyingadjustment to equity needed. Upon adoption, the standard recognized at the date of initial application in retained earnings. The new accounting guidance is effective for annual periods beginning after December 15, 2017, due to an approved one-year deferral, and early adoption is not permitted. The company is currently reviewing the impact of the adoption of ASU 2014-09 on the company's financial statements.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, which is similar presentation of debt discounts or premiums. Debt issuance costs are currently reported on the balance sheet as assets and amortized as interest expense. ASU 2015-03 does not change the recognition and measurement guidance for debt issuance costs and requires retrospective application to all periods presented upon adoption. The new accounting guidance is effective for fiscal periods beginning after December 15, 2015 and early adoption is permitted. The company has determined the adoption of ASU 2015-03 willdid not have a material impact on the company's financial statements.
In July 2015,results of operations or cash flows nor does the FASB issuedcompany expect it to have a material impact on future periods. Pursuant to ASU 2015-11, “Inventory (Topic 330): Simplifying2014-09, revenues are recognized as control transfers to the Measurement of Inventory,” to simplifycustomers, which is consistent with the subsequent measurement of inventory. Entities are now required to subsequently measure inventory atprior revenue recognition model and the lower of cost or net realizable value rather than atprior accounting for the lower of cost or market. This update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, and early adoption is permitted. The company is currently reviewing the impactvast majority of the adoptioncompany's contracts. While the company does have a minor amount of ASU 2015-11 onservice business for which revenue is recognized over time as compared to a point in time, the company's financial statements.process to estimate the amount of revenue to be recognized did not change as a result of the implementation of the new standard.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent amounts on the balance sheet. The new accounting guidance is effective for fiscal periods beginning after December 15, 2016 and early adoption is permitted. The company adopted ASU 2015-17, on a prospective basis, effective October 1, 2015 and thus the company's deferred tax assets and liabilities have been classified as long-term in its Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted.Recent Accounting Pronouncements (Not Yet Adopted):
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases on their balance sheet while recognizing expense in a manner similar to existing accounting. The new accounting guidance iswas effective for fiscal periods beginning after December 15, 2018 and early adoption was permitted. The company adopted ASU 2016-02, effective on January 1, 2019, using the optional transitional method in which periods prior to 2019 will not be restated. The company elected to apply the package of practical expedients in which lease identification,
classification and treatment of initial direct costs is permitted.retained, and will recognize right of use lease assets and liabilities for all leases regardless of lease term. The company has completed an assessment of its systems, data and processes related to implementing this standard and has substantially completed its information system design and solution development as well as the development of related internal controls. As a result of adoption of this standard, the company expects to record between $23 million and $27 million in operating lease right of use assets offset by an equivalent amount of lease liabilities on the company's consolidated balance sheets. The standard did not have a material impact on the company's results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Statements." ASU 2016-13 requires a new credit loss standard for most financial assets and certain other instruments. For example, entities will be required to use an "expected loss" model that will generally require earlier recognition of allowances for losses for trade receivables. The standard also requires additional disclosures, including disclosures regarding how an entity tracks credit quality. The amendments in the pronouncement are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities may early adopt the amendments as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The company is currently reviewing the impact of the adoption of ASU 2016-022016-13 on the company's financial statements.
FS-10In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The guidance in ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The company is currently reviewing the impact of the adoption of ASU 2017-04 but does not expect the adoption to impact the company's financial statements.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Divested Businesses
Operations Held for Sale
On May 14, 2015, the company's board of directors authorizedPrior to 2018, the company and Invacare Continuing Care, Inc., a Missouri Corporation and wholly-owned subsidiary of the company ("ICC") to enter into an agreement to sell all the issued and outstanding membership interests of Dynamic Medical Systems, LLC, a Nevada limited liability company, and Invacare Outcomes Management, LLC, a Delaware limited liability company, each a wholly-owned subsidiary of ICC (“collectively the rentals businesses”). The company determined on that date that the "held for sale" criteria of ASC 360-10-45-9 were met, and accordingly, the assets and liabilities of the rentals businesses (long-lived asset disposal group) were shown at their carrying amounts, which approximate their fair values. The rentals businesses had been operated on a stand-alone basis and reported as part of the Institutional Products Group (IPG) segment of the company.
On July 2, 2015, ICC completed the sale (the "Transaction") of all the issued and outstanding membership interests in the rentals businesses, pursuant to a Membership Interest Purchase Agreement (the “Purchase Agreement”) among the company, ICC and Joerns Healthcare Parent, LLC, a Delaware limited liability company. The price paid to ICC for the rentals businesses was approximately $15,500,000 in cash, which was subject to certain post-closing adjustments required by the Purchase Agreement. Net proceeds from the Transaction were approximately $13,700,000, net of taxes and expenses. The company recorded a pre-tax gain of approximately $24,000 in the third quarter of 2015, which represents the excess of the net sales price over the book value of the assets and liabilities of the rentals businesses, as of the date of completion of the disposition. The company recorded expenses related to the sale of the rentals businesses totaling $1,792,000,operations held for sale of $2,892,000 of which $1,244,000 have$2,366,000 has been paid out as of December 31, 2015. The sale of the rentals businesses was not dilutive to the company's results. The company utilized the net proceeds from the sale to reduce debt outstanding under its credit agreement. The company determined that the sale of the rentals businesses did not meet the criteria for classification as a discontinued operation in accordance with ASU 2014-08. The rentals businesses were treated as held for sale as of June 30, 2015 until sold on July 2, 2015. As a result, the December 31, 2014 Balance Sheet was restated to reflect this treatment.2018.
The assets and liabilities of the rentals businesses that were sold and shown as held for sale in the company's Consolidated Balance Sheets were comprised of the following (in thousands):
|
| | | | | | | |
| | July 2,
2015 | | December 31,
2014 |
| Trade receivables, net | $ | 5,834 |
| | $ | 6,207 |
|
| Inventories, net | 412 |
| | 315 |
|
| Other current assets | 212 |
| | 221 |
|
| Property and equipment, net | 4,126 |
| | 5,896 |
|
| Goodwill | 4,518 |
| | 4,692 |
|
| Intangibles | 40 |
| | 57 |
|
| Assets sold | $ | 15,142 |
| | $ | 17,388 |
|
| | | | |
| Accounts payable | $ | 410 |
| | $ | 225 |
|
| Accrued expenses and other short-term obligations | 1,056 |
| | 788 |
|
| Liabilities sold | $ | 1,466 |
| | $ | 1,013 |
|
Discontinued Operations
On December 21,From 2012 in order to focus on its core equipment product lines, the company entered into an agreement to sell ISG and determined on that date that the "held for sale" criteria of ASC 360-10-45-9 were met. On January 18, 2013, the company completed the sale of the ISG medical supplies business to AssuraMed, Inc. for a purchase price of $150,800,000 in cash. ISG had been operated on a stand-alone basis and reported as a reportable segment of the company. The company recorded a gain of $59,402,000 pre-tax in 2013 which represented the excess of the net sales price over the book value of the assets and liabilities of ISG, excluding cash. The sale of this business is dilutive to the company's results. The company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the first quarter of 2013. In 2013, the net sales of the discontinued operation of ISG were $18,498,000 and earnings before income taxes were $402,000,
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On August 6, 2013, the company sold Champion, its domestic medical recliner business for dialysis clinics, to Champion Equity Holdings, LLC for $45,000,000 in cash, which was subject to final post-closing adjustments. Champion had been operated on a stand-alone basis and reported as part of the IPG segment of the company. The company recorded a gain of $22,761,000 pre-tax in the third quarter of 2013, which represented the excess of the net sales price over the book value of the assets and liabilities of Champion. The sale of this business was dilutive to the company's results. The company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the third quarter of 2013. The gain recorded by the company reflects the company's estimated final purchase adjustments.
In 2013, the net sales of the discontinued operation of Champion were $15,857,000 and earnings before income taxes were $3,156,000. Results for Champion include an interest expense allocation from continuing operations to discontinued operations of $449,000 in 2013, as proceeds from the sale were required to be utilized to pay down debt. The interest allocation was based on the net proceeds assumed to pay down debt applying the company's average interest rates for the periods presented.
In addition, in accordance with ASC 350, when a portion of a reporting entity that constitutes a business is disposed of, goodwill associated with that business should be included in the carrying amount of the net assets of the business sold in determining the gain or loss on the disposal. As such, the company allocated additional goodwill of $16,205,000 to Champion from the continuing operations of the IPG segment based on the relative fair value of Champion as compared to the remaining IPG reporting unit.
On August 29,through 2014, the company sold Altimate Medical, Inc. (Altimate), its manufacturer of stationary standing assistive devices for use in patient rehabilitation,three businesses which were classified as discontinued operations. Prior to REP Acquisition Corporation for $23,000,000 in cash, which was subject to final post-closing adjustments. Altimate had been operated on a stand-alone basis and reported as part of the North America/HME segment of the company. The company recorded a gain of $17,069,000 pre-tax in the third quarter of 2014, which represented the excess of the net sales price over the book value of the assets and liabilities of Altimate. The sale of this business was dilutive to the company's results. The company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the third quarter of 2014. The gain recorded by2018, the company reflects the company's estimated final purchase adjustments. The assets and liabilities of Altimate were the following as of the date of the sale, August 29, 2014, and as of December 31, 2013 (in thousands):
|
| | | | |
| | | August 29,
2014 |
| Trade receivables, net | | $ | 2,019 |
|
| Inventories, net | | 1,954 |
|
| Other current assets | | 246 |
|
| Property and equipment, net | | 176 |
|
| Other Intangibles | | 1,047 |
|
| Assets sold | | $ | 5,442 |
|
| | | |
| Accounts payable | | $ | 425 |
|
| Accrued expenses | | 316 |
|
| Liabilities sold | | $ | 741 |
|
The net sales of the Altimate discontinued operations were $11,778,000 and $17,854,000 for 2014 and 2013, respectively, and earnings before income taxes were $2,796,000 and $5,118,000, respectively for the same periods. Results for Altimate include an interest expense allocation from continuing operations to discontinued operations of $202,000 and $323,000 for 2014 and 2013, respectively, as proceeds from the sale were required to be utilized to pay down debt. The interest allocation was based on the net proceeds assumed to pay down debt applying the company's average interest rates for the periods presented.
The companyhad recorded totalcumulative expenses related to the sale of discontinued operations noted above oftotaling $8,801,000, of which $8,405,000 were paid as of December 31, 2015.
The company recorded an incremental intra-period tax allocation expense to discontinued operations for 2015, 2014 and 2013 representing the cumulative intra-period allocation expense to discontinued operations based on the company's domestic taxable loss related to continuing operations for 2015, 2014 and 2013.
The company has classified ISG, Champion and Altimate as a discontinued operations for all periods presented.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Current Assets
Receivables
Receivables as of December 31, 2018 and 2017 consist of the following (in thousands):
Receivables |
| | | | | | | |
| | 2018 | | 2017 |
| Accounts receivable, gross | $ | 146,482 |
| | $ | 154,966 |
|
| Customer rebate reserve | (15,452 | ) | | (18,747 | ) |
| Allowance for doubtful accounts | (5,268 | ) | | (5,113 | ) |
| Cash discount reserves | (4,777 | ) | | (4,252 | ) |
| Other, principally returns and allowances reserves | (1,242 | ) | | (1,239 | ) |
| Accounts receivable, net | $ | 119,743 |
| | $ | 125,615 |
|
Reserves for customer bonus 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 principal 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 of the company’scompany's receivables are due from health care, medical equipment providers and long termlong-term care facilities located throughout the United States, Australia, Canada, New Zealand, China 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 estimated allowance for uncollectible amounts ($10,487,000 in 2015 and $11,970,000 in 2014) is based primarily on management’smanagement's evaluation of the financial condition of specific customers. In addition, as a result of the company's financing arrangement with DLL, a third partythird-party financing company which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’scompany's limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishingestablishes reserves for specific customers as needed. The company chargeswrites 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 Consolidated Financial Statements for a description of the financing arrangement. Long-term
installment receivables are included in “Other Assets” on the consolidated balance sheet.
The company’scompany's U.S. customers electing to finance their purchases can do so using DLL. In addition, the company often provides financing directly for its Canadian customers for which DLL is not an option, as DLL typically provides financing to Canadian customers only on a limited basis. The installment receivables recorded on the books of the company represent a single portfolio segment of finance receivables to the independent provider channel and long-term care customers. The portfolio segment is comprised of two classes of receivables distinguished by geography and credit quality. The U.S. installment receivables are the first class and represent installment receivables re-purchased from DLL because the customers were in default. Default with DLL is defined as a customer being delinquent by 3three payments. The Canadian installment receivables represent the second class of installment receivables which were originally financed by the company because third party financing was not available to the HME providers. The Canadian installment receivables are typically financed for twelve months and historically have had a very low risk of default.
The estimated allowance for uncollectible amounts and evaluation for impairment for both classes of installment receivables is based on the company’scompany's quarterly review of the financial condition of each individual customer with the allowance for doubtful accounts adjusted accordingly. Installments are individually and not collectively reviewed for impairment. The company assesses the bad debt reserve levels based upon the status of the customer’scustomer's adherence to a legally negotiated payment schedule and the company’scompany's ability to enforce judgments, liens, etc.
For purposes of granting or extending credit, the company utilizes a scoring model to generate a composite score that considers each customer’scustomer's consumer credit score and and/or D&B credit rating, payment history, security collateral and time in business. Additional analysis is performed for most customers desiring credit greater than $250,000, which generally includes a detailed review of the customer’scustomer's financials as well as consideration of other factors such as exposure to changing reimbursement laws.
Interest income is recognized on installment receivables based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments and is moved to collection, interest income is no longer recognized. Subsequent payments received once an account is put on non-accrual status are generally first applied to the principal balance and then to the interest. Accruing of interest on collection accounts would only be restarted if the account became current again.
All installment accounts are accounted for using the same methodology regardless of the duration of the installment agreements. When an account is placed in collection status, the company goes through a legal process for pursuing collection of outstanding amounts, the length of
which typically approximates eighteen months. Any write-offs are made after the legal process has been completed. The company has not made any changes to either its accounting policies or methodology to estimate allowances for doubtful accounts in the last twelve months.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Installment receivables as of December 31, 20152018 and 20142017 consist of the following (in thousands):
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | Current | | Long- Term | | Total | | Current | | Long- Term | | Total | Current | | Long- Term | | Total | | Current | | Long- Term | | Total |
| Installment receivables | $ | 2,309 |
| | $ | 2,318 |
| | $ | 4,627 |
| | $ | 2,692 |
| | $ | 5,117 |
| | $ | 7,809 |
| $ | 1,986 |
| | $ | 1,374 |
| | $ | 3,360 |
| | $ | 2,415 |
| | $ | 2,076 |
| | $ | 4,491 |
|
| Less: | | | | | | | | | | | | |
| Unearned interest | (42 | ) | | — |
| | (42 | ) | | (46 | ) | | — |
| | (46 | ) | |
| Less: Unearned interest | | (22 | ) | | — |
| | (22 | ) | | (38 | ) | | — |
| | (38 | ) |
| | 2,267 |
| | 2,318 |
| | 4,585 |
| | 2,646 |
| | 5,117 |
| | 7,763 |
| 1,964 |
| | 1,374 |
| | 3,338 |
| | 2,377 |
| | 2,076 |
| | 4,453 |
|
| Allowance for doubtful accounts | (1,122 | ) | | (1,670 | ) | | (2,792 | ) | | (1,592 | ) | | (4,260 | ) | | (5,852 | ) | (390 | ) | | (1,152 | ) | | (1,542 | ) | | (1,043 | ) | | (1,601 | ) | | (2,644 | ) |
| | $ | 1,145 |
| | $ | 648 |
| | $ | 1,793 |
| | $ | 1,054 |
| | $ | 857 |
| | $ | 1,911 |
| $ | 1,574 |
| | $ | 222 |
| | $ | 1,796 |
| | $ | 1,334 |
| | $ | 475 |
| | $ | 1,809 |
|
Installment receivables purchased from DLL during the twelve months ended December 31, 20152018 increased the gross installment receivables balance by $936,000$1,295,000 during the year compared to $2,123,000$2,362,000 in 2014.2017. No sales of installment receivables were made by the company during the year.
The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):
| | | | 2015 | | 2014 | 2018 | | 2017 |
| Balance as of January 1 | $ | 5,852 |
| | $ | 6,039 |
| $ | 2,644 |
| | $ | 2,838 |
|
| Current period (benefit) provision | (332 | ) | | 796 |
| |
| Current period provision | | 550 |
| | 1,001 |
|
| Direct write-offs charged against the allowance | (2,728 | ) | | (983 | ) | (1,652 | ) | | (1,195 | ) |
| Balance as of December 31 | $ | 2,792 |
| | $ | 5,852 |
| $ | 1,542 |
| | $ | 2,644 |
|
Installment receivables by class as of December 31, 20152018 consist of the following (in thousands):
| | | | Total Installment Receivables | | Unpaid Principal Balance | | Related Allowance for Doubtful Accounts | | Interest Income Recognized | Total Installment Receivables | | Unpaid Principal Balance | | Related Allowance for Doubtful Accounts | | Interest Income Recognized |
| U.S. | | | | | | | | | | | | | | |
| Impaired installment receivables with a related allowance recorded | $ | 3,618 |
| | $ | 3,618 |
| | $ | 2,729 |
| | $ | — |
| $ | 2,669 |
| | $ | 2,669 |
| | $ | 1,540 |
| | $ | — |
|
| Canada | | | | | | | | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 946 |
| | 904 |
| | — |
| | 52 |
| |
| Non-impaired installment receivables with no related allowance recorded | | 689 |
| | 667 |
| | — |
| | 127 |
|
| Impaired installment receivables with a related allowance recorded | 63 |
| | 63 |
| | 63 |
| | — |
| 2 |
| | 2 |
| | 2 |
| | — |
|
| Total Canadian installment receivables | $ | 1,009 |
| | $ | 967 |
| | $ | 63 |
| | $ | 52 |
| 691 |
| | 669 |
| | 2 |
| | 127 |
|
| Total | | | | | | | | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 946 |
| | 904 |
| | — |
| | 52 |
| |
| Non-impaired installment receivables with no related allowance recorded | | 689 |
| | 667 |
| | — |
| | 127 |
|
| Impaired installment receivables with a related allowance recorded | 3,681 |
| | 3,681 |
| | 2,792 |
| | — |
| 2,671 |
| | 2,671 |
| | 1,542 |
| | — |
|
| Total installment receivables | $ | 4,627 |
| | $ | 4,585 |
| | $ | 2,792 |
| | $ | 52 |
| $ | 3,360 |
| | $ | 3,338 |
| | $ | 1,542 |
| | $ | 127 |
|
FS-14 |
| | |
| Notes to Financial Statements | Current Assets | |
| | |
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Installment receivables by class as of December 31, 20142017 consist of the following (in thousands):
| | | | Total Installment Receivables | | Unpaid Principal Balance | | Related Allowance for Doubtful Accounts | | Interest Income Recognized | Total Installment Receivables | | Unpaid Principal Balance | | Related Allowance for Doubtful Accounts | | Interest Income Recognized |
| U.S. | | | | | | | | | | | | | | |
| Impaired installment receivables with a related allowance recorded | $ | 6,735 |
| | $ | 6,735 |
| | $ | 5,786 |
| | $ | — |
| $ | 3,566 |
| | $ | 3,566 |
| | $ | 2,642 |
| | $ | — |
|
| Canada | | | | | | | | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 1,008 |
| | 962 |
| | — |
| | 82 |
| |
| Non-impaired installment receivables with no related allowance recorded | | 923 |
| | 885 |
| | — |
| | 74 |
|
| Impaired installment receivables with a related allowance recorded | 66 |
| | 66 |
| | 66 |
| | — |
| 2 |
| | 2 |
| | 2 |
| | — |
|
| Total Canadian installment receivables | $ | 1,074 |
| | $ | 1,028 |
| | $ | 66 |
| | $ | 82 |
| 925 |
| | 887 |
| | 2 |
| | 74 |
|
| Total | | | | | | | | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 1,008 |
| | 962 |
| | — |
| | 82 |
| |
| Non-impaired installment receivables with no related allowance recorded | | 923 |
| | 885 |
| | — |
| | 74 |
|
| Impaired installment receivables with a related allowance recorded | 6,801 |
| | 6,801 |
| | 5,852 |
| | — |
| 3,568 |
| | 3,568 |
| | 2,644 |
| | — |
|
| Total installment receivables | $ | 7,809 |
| | $ | 7,763 |
| | $ | 5,852 |
| | $ | 82 |
| $ | 4,491 |
| | $ | 4,453 |
| | $ | 2,644 |
| | $ | 74 |
|
Installment receivables with a related allowance recorded as noted in the table above represent those installment receivables on a non-accrual basis in accordance with ASU 2010-20. As of December 31, 2015,2018, the company had no U.S. installment receivables past due of 90 days or more for which the company is still accruing interest. Individually, all U.S. installment receivables are assigned a specific allowance for doubtful accounts based on management’s
management's review when the company does not expect to receive both the contractual principal and interest payments as specified in the loan agreement. In Canada, the company had an immaterial amount of installment receivables which were past due of 90 days or more as of December 31, 20152018 and December 31, 20142017 for which the company is still accruing interest.
The aging of the company’scompany's installment receivables was as follows as of December 31, 20152018 and 20142017 (in thousands):
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| | Total | | U.S. | | Canada | | Total | | U.S. | | Canada | Total | | U.S. | | Canada | | Total | | U.S. | | Canada |
| Current | $ | 908 |
| | $ | — |
| | $ | 908 |
| | $ | 976 |
| | $ | — |
| | $ | 976 |
| $ | 663 |
| | $ | — |
| | $ | 663 |
| | $ | 916 |
| | $ | — |
| | $ | 916 |
|
| 0-30 days past due | 16 |
| | — |
| | 16 |
| | 15 |
| | — |
| | 15 |
| 11 |
| | — |
| | 11 |
| | 6 |
| | — |
| | 6 |
|
| 31-60 days past due | 12 |
| | — |
| | 12 |
| | 2 |
| | — |
| | 2 |
| 10 |
| | — |
| | 10 |
| | — |
| | — |
| | — |
|
| 61-90 days past due | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| 6 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
| 90+ days past due | 3,690 |
| | 3,618 |
| | 72 |
| | 6,816 |
| | 6,735 |
| | 81 |
| 2,670 |
| | 2,669 |
| | 1 |
| | 3,569 |
| | 3,566 |
| | 3 |
|
| | $ | 4,627 |
| | $ | 3,618 |
| | $ | 1,009 |
| | $ | 7,809 |
| | $ | 6,735 |
| | $ | 1,074 |
| $ | 3,360 |
| | $ | 2,669 |
| | $ | 691 |
| | $ | 4,491 |
| | $ | 3,566 |
| | $ | 925 |
|
Inventories
Inventories, net of reserves, as of December 31, 20152018 and 20142017 consist of the following (in thousands):
| | | | 2015 | | 2014 | 2018 | | 2017 |
| Finished goods | $ | 67,207 |
| | $ | 85,828 |
| $ | 62,766 |
| | $ | 52,773 |
|
| Raw materials | 54,005 |
| | 57,509 |
| 55,120 |
| | 59,497 |
|
| Work in process | 11,595 |
| | 12,224 |
| 10,237 |
| | 9,663 |
|
| | $ | 132,807 |
| | $ | 155,561 |
| $ | 128,123 |
| | $ | 121,933 |
|
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Other Current Assets
Other current assets as of December 31, 20152018 and 2014 consist of the following (in thousands):
|
| | | | | | | |
| | 2015 | | 2014 |
| Value added tax receivables | $ | 18,031 |
| | $ | 21,273 |
|
| Recoverable income taxes | 367 |
| | 261 |
|
| Derivatives (foreign currency forward contracts) | 4,143 |
| | 520 |
|
| Prepaid insurance | 2,538 |
| | 2,713 |
|
| Prepaid and other current assets | 9,380 |
| | 12,031 |
|
| | $ | 34,459 |
| | $ | 36,798 |
|
Other Long-Term Assets
Other long-term assets as of December 31, 2015 and 20142017 consist of the following (in thousands):
|
| | | | | | | |
| | 2015 | | 2014 |
| Cash surrender value of life insurance policies | $ | 1,674 |
| | $ | 15,765 |
|
| Deferred financing fees | 1,088 |
| | 408 |
|
| Investments | 160 |
| | 249 |
|
| Long-term installment receivables | 648 |
| | 857 |
|
| Long-term deferred taxes | 908 |
| | 613 |
|
| Other | 181 |
| | 1,161 |
|
| | $ | 4,659 |
| | $ | 19,053 |
|
The company sold life insurance policies of $11,902,000 and $21,338,000 in 2015 and 2014, respectively, to fund payments as the result of the retirement of certain executive officers of the company. |
| | | | | | | |
| | 2018 | | 2017 |
| Value added tax receivables | $ | 16,372 |
| | $ | 16,174 |
|
| Prepaid insurance | 2,626 |
| | 2,647 |
|
| Service contracts | 2,201 |
| | 2,812 |
|
| Derivatives (foreign currency forward contracts) | 1,020 |
| | 730 |
|
| Recoverable income taxes | 787 |
| | 341 |
|
| Prepaid inventory | 521 |
| | 711 |
|
| Prepaid debt fees | 395 |
| | 397 |
|
| Prepaid and other current assets | 7,141 |
| | 7,692 |
|
| | $ | 31,063 |
| | $ | 31,504 |
|
Property and equipmentLong-Term Assets
Other long-term assets as of December 31, 20152018 and 20142017 consist of the following (in thousands):
|
| | | | | | | |
| | 2015 | | 2014 |
| Machinery and equipment | $ | 299,721 |
| | $ | 318,286 |
|
| Land, buildings and improvements | 73,830 |
| | 81,219 |
|
| Furniture and fixtures | 10,031 |
| | 11,738 |
|
| Leasehold improvements | 11,966 |
| | 14,517 |
|
| | 395,548 |
| | 425,760 |
|
| Less allowance for depreciation | (316,865 | ) | | (346,101 | ) |
| | $ | 78,683 |
| | $ | 79,659 |
|
|
| | | | | | | |
| | 2018 | | 2017 |
| Convertible 2021 note hedge asset | $ | 1,028 |
| | $ | 46,915 |
|
| Convertible 2022 note hedge asset | 2,062 |
| | 46,680 |
|
| Cash surrender value of life insurance policies | 1,948 |
| | 1,991 |
|
| Deferred financing fees | 402 |
| | 787 |
|
| Investments | 90 |
| | 103 |
|
| Long-term installment receivables | 222 |
| | 475 |
|
| Long-term deferred taxes | 352 |
| | 518 |
|
| Other | 256 |
| | 107 |
|
| | $ | 6,360 |
| | $ | 97,576 |
|
As part of issuing debt, the company entered into related convertible note hedge derivatives which are included in Other Long-Term Assets, the value of which will be adjusted quarterly to reflect fair value.
See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail regarding the company's issuance of convertible debt and the related convertible note hedge derivatives.
Property and Equipment
Property and equipment as of December 31, 2018 and 2017 consist of the following (in thousands):
|
| | | | | | | |
| | 2018 | | 2017 |
| Machinery and equipment | $ | 301,040 |
| | $ | 307,244 |
|
| Land, buildings and improvements | 76,899 |
| | 78,522 |
|
| Furniture and fixtures | 9,898 |
| | 10,264 |
|
| Leasehold improvements | 8,847 |
| | 9,947 |
|
| | 396,684 |
| | 405,977 |
|
| Less allowance for depreciation | (322,378 | ) | | (325,961 | ) |
| | $ | 74,306 |
| | $ | 80,016 |
|
Machinery and equipment includes demonstration units placed in provider locations which are depreciated to their estimated recoverable values over their estimated useful lives.
In the fourththird quarter of 2015,2018, the company wrote off $4,031,000 of costs previously capitalized associatedagreed to sell its Isny, Germany location with a canceled legacy software program based on a changenet book value at the signing of the agreement of approximately $2,900,000, which is included in Land, buildings and improvements in the North America/HME IT strategy.table above. In accordance with the agreement, control will not transfer to the buyer until April 2020; however, the company received an advance payment of $3,524,000 representing a majority of the proceeds to be received, which is reflected in the investing section of the Consolidated Statement of Cash
FS-16
Flows and classified in Other Long-Term Obligation in the Consolidated Balance Sheets. The company will continue to depreciate the building and expects to record a gain on the transaction when completed in 2020.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The carrying amount of goodwill by operating segment is as follows (in thousands):
|
| | | | | | | | | | | |
| | Institutional Products Group | | Europe | | Consolidated |
| Balance at January 1, 2014 | $ | 31,615 |
| | $ | 425,919 |
| | $ | 457,534 |
|
| Foreign currency translation adjustments | (1,696 | ) | | (34,819 | ) | | (36,515 | ) |
| Balance at December 31, 2014 | 29,919 |
| | 391,100 |
| | 421,019 |
|
| Foreign currency translation adjustments | (2,763 | ) | | (56,576 | ) | | (59,339 | ) |
| Balance at December 31, 2015 | $ | 27,156 |
| | $ | 334,524 |
| | $ | 361,680 |
|
|
| | | | | | | | | | | |
| | Institutional Products Group | | Europe | | Consolidated |
| Balance at December 1, 2017 | $ | 27,606 |
| | $ | 332,996 |
| | $ | 360,602 |
|
| Foreign currency translation adjustments | 1,124 |
| | 39,557 |
| | 40,681 |
|
| Balance at December 31, 2017 | 28,730 |
| | 372,553 |
| | 401,283 |
|
| Foreign currency translation adjustments | (1,353 | ) | | (18,657 | ) | | (20,010 | ) |
| Balance at December 31, 2018 | $ | 27,377 |
| | $ | 353,896 |
| | $ | 381,273 |
|
In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is reviewed annually for impairment. The company first estimates the fair value of each reporting unit and compares the calculated fair value to the carrying value of each reporting unit. A reporting unit is defined as an operating segment or one level below. The company has determined that its reporting units are the same as its operating segments.
The company completes its annual impairment tests in the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To estimate the fair values of the reporting units, the company utilizes a discounted cash flow method model in which the company forecasts income statement and balance sheet amounts based on assumptions regarding future sales growth, profitability, inventory turns, days' sales outstanding, etc. to forecast future cash flows. The cash flows are discounted using a weighted average cost of capital discount rate where the cost of debt is based on quoted rates for 20-year debt of potential acquirer companies of similar credit risk and the cost of equity is based upon the 20-year treasury rate for the risk freerisk-free rate, a market risk premium, the industry average beta and a small cap stock adjustment. The discount rates used have a significant impact upon the discounted cash flow methodology utilized in the company's annual impairment testing as higher discount rates decrease the fair value estimates. The assumptions used are based on a market participant's point of view and yielded a discount rate of 9.41%12.41% in 20152018 for the company's initialannual impairment analysis for the reporting units with goodwill compared to 9.89%9.07% in 20142017 and 10.00%8.67% in 2013.2016.
The company also utilizes an Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Method to compute the fair value of its reporting units which considers potential acquirers and their EV to EBITDA multiples adjusted by an estimated premium. While more weight is given to the discounted cash flow method, the EV to EBITDA Method does provide corroborative evidence of the reasonableness of the discounted cash flow method results.
While there was no indication of impairment in 20152018 related to goodwill for the Europe or IPG segments, a future potential impairment is possible for these segments should actual results differ materially from forecasted results used in the valuation analysis. Furthermore, the company's annual valuation of goodwill can differ materially if the market inputs used to determine the discount rate change significantly. For instance, higher interest rates or greater stock price volatility would increase the discount rate and thus increase the chance of impairment. In consideration of this potential, the company reviewed the results if the discount rate used were 100 basis points higher for the 20152018 impairment analysis and determined that there still would not be an indicator of potential impairment for the Europe or IPG segments.reporting units.
As part of the company's review of goodwill for impairment, the company also considers the potential for impairment of any other assets. In 2015, 2014 and 2013,See Intangibles in the company performedNotes to the Consolidated Financial Statements for a review for potential impairmentsdescription of any other assets, including the company's Taylor Street facility which is subject to the FDA consent decree that limits the company's manufacture and distribution of custom power and manual wheelchairs, wheelchair components and wheelchair subassemblies at the Taylor Street facility. The company determined there was no impairment of the property, plant and equipment of the Taylor Street facility based on a comparison of the forecasted undiscounted cash flows to the carrying value of the net assets in accordance with ASC 360. In addition, the company determined there was no impairment of net inventory associated with the facility.
FS-17intangible impairments.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Intangibles
All of the company’scompany's other intangible assets have been assigned definite lives and continue to be amortized over their useful lives, except for $24,524,000 related to trademarks shown below, which have indefinite lives.
The changes in intangible balances reflected on the balance sheet from December 31, 20142017 to December 31, 20152018 were the result of foreign currency translation and amortization.amortization except for an intangible impairment noted below.
The company’scompany's intangibles consist of the following (in thousands):
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| | Historical Cost | | Accumulated Amortization | | Historical Cost | | Accumulated Amortization | Historical Cost | | Accumulated Amortization | | Historical Cost | | Accumulated Amortization |
| Customer lists | $ | 49,858 |
| | $ | 45,019 |
| | $ | 78,693 |
| | $ | 71,343 |
| $ | 51,828 |
| | $ | 50,768 |
| | $ | 54,516 |
| | $ | 51,957 |
|
| Trademarks | 24,524 |
| | — |
| | 28,314 |
| | — |
| 24,385 |
| | — |
| | 26,372 |
| | — |
|
| License agreements | 1,098 |
| | 1,098 |
| | 1,290 |
| | 1,290 |
| 733 |
| | 733 |
| | 1,187 |
| | 1,187 |
|
| Developed technology | 7,405 |
| | 5,921 |
| | 8,297 |
| | 6,340 |
| 7,608 |
| | 6,563 |
| | 7,925 |
| | 6,636 |
|
| Patents | 5,959 |
| | 5,843 |
| | 6,102 |
| | 5,804 |
| 5,500 |
| | 5,497 |
| | 5,566 |
| | 5,559 |
|
| Other | 1,161 |
| | 1,124 |
| | 2,548 |
| | 2,454 |
| 1,162 |
| | 1,149 |
| | 1,162 |
| | 1,145 |
|
| | $ | 90,005 |
| | $ | 59,005 |
| | $ | 125,244 |
| | $ | 87,231 |
| $ | 91,216 |
| | $ | 64,710 |
| | $ | 96,728 |
| | $ | 66,484 |
|
Amortization expense related to other intangibles was $1,907,000, $20,358,000$2,218,000, $1,881,000 and $10,567,000$1,629,000 for 2015, 20142018, 2017 and 2013,2016, respectively. Estimated amortization expense for each of the next five years is expected to be $1,626,000$1,247,000 for 2016, $1,549,0002019, $186,000 in 2017, $1,530,0002020, $186,000 in 2018, $992,0002021, $186,000 in 20192022 and $184,000$186,000 in 2020.2023. Amortized intangibles are being amortized on a straight-line basis over remaining lives from 1 to 10 years with the majority of the intangibles being amortized over an average remaining life of approximately 53 years.
In accordance with ASC 350, Intangibles—Goodwill and Other, the company reviews intangibles for impairment. The company's intangible assets consist of intangible assets with defined lives as well as intangible assets with indefinite lives. Defined-lived intangible assets consist principally of customer lists and developed technology, license agreements, patents and other miscellaneous intangibles such as non-compete agreements.technology. The company's indefinite lived intangible assets consist entirely of trademarks.
The company evaluates the carrying value of definite-lived assets whenever events or circumstances indicate possible impairment. Definite-lived assets are determined to be impaired if the future un-discounted cash flows expected to be generated by the asset are less than the carrying value.value of the asset group. Actual impairment amounts for definite-lived assets are then calculated using a discounted cash flow calculation. The company reviews indefinite-lived assets for impairment annually in the fourth quarter of each year and whenever events or circumstances indicate possible impairment. Any impairment amounts for indefinite-lived assets are calculated as the difference between the future discounted cash flows expected to be generated by the asset less than the carrying value for the asset.
During 2014,2018 and 2017, the company recognized an intangible write-down chargesimpairment charge in the IPG segment of $13,041,000 comprised of a customer list impairment of $12,826,000$583,000 ($431,000 after-tax) and a non-compete agreement of $215,000 as the actual and remaining cash flows associated with the intangibles were less than the cash flows originally used$320,000 ($237,000 after-tax) respectively, related to value the intangibles, primarily driven by reduced net sales. The after-tax and pre-tax impairment amounts were the same for each of the above impairments.
During 2013, the company recognized intangible write-down charges of $1,523,000 comprised of: trademarks with indefinite lives impairment of $568,000, a trademark with a definite life impairment of $123,000, customer list impairment of $442,000 and developed technology impairment of $223,000 all recorded in the IPG segment and a customer list impairment of $167,000 recorded in the North America/HME segment.an indefinite life. The after-tax and pre-tax impairment amounts were the same for eachfair value of the above impairments except for the indefinite-lived trademark impairment in the IPG segment, which was $496,000 after-tax.
The fair values of the customer lists were calculated using an excess earnings method, using a discounted cash flow model. Estimated cash flow returns to the customer relationship were reduced by the cash flows required to satisfy the return requirements of each of the assets employed with the residual cash flow then discounted to value the customer list. The fair values of the trademarks and developed technology were calculated using a relief from royalty payment methodology which requires applying an estimated market royalty rate to forecasted net sales and discounting the resulting cash flows to determine fair value. The patent was impaired as the related product was discontinued.
|
| | |
| Notes to Financial Statements | Current Liabilities | |
| | |
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Current Liabilities
Accrued Expenses
Accrued expenses as of December 31, 20152018 and 20142017 consisted of accruals for the following (in thousands):
| | | | 2015 | | 2014 | 2018 | | 2017 |
| Salaries and wages | $ | 41,305 |
| | $ | 40,850 |
| $ | 23,289 |
| | $ | 33,390 |
|
| Taxes other than income taxes, primarily Value Added Taxes | 21,424 |
| | 24,743 |
| 23,197 |
| | 22,627 |
|
| Warranty cost | 22,820 |
| | 30,738 |
| 16,353 |
| | 22,468 |
|
| Rebates | | 7,966 |
| | 5,831 |
|
| Professional | | 5,888 |
| | 5,203 |
|
| Interest | | 3,992 |
| | 3,919 |
|
| Freight | | 3,363 |
| | 4,002 |
|
| Product liability, current portion | | 2,728 |
| | 2,905 |
|
| Deferred revenue | | 2,416 |
| | 2,770 |
|
| Severance | | 1,657 |
| | 3,704 |
|
| Insurance | | 738 |
| | 645 |
|
| Rent | | 483 |
| | 808 |
|
| Supplemental Executive Retirement Plan (SERP) | 1,279 |
| | 21,517 |
| 391 |
| | 391 |
|
| Freight | 6,153 |
| | 6,202 |
| |
| Professional | 5,774 |
| | 6,613 |
| |
| Product liability, current portion | 3,127 |
| | 4,334 |
| |
| Rebates | 1,791 |
| | 1,722 |
| |
| Insurance | 695 |
| | 1,266 |
| |
| Interest | 872 |
| | 1,068 |
| |
| Derivatives (foreign currency forward exchange contracts) | 2,014 |
| | 2,526 |
| 219 |
| | 2,120 |
|
| Severance | 2,477 |
| | 4,209 |
| |
| Other items, principally trade accruals | 12,689 |
| | 9,911 |
| 7,187 |
| | 7,914 |
|
| | $ | 122,420 |
| | $ | 155,699 |
| $ | 99,867 |
| | $ | 118,697 |
|
As a resultDepending on the terms of the retirementcontract, the company may defer the recognition of certain executivesa portion of the revenue at the end of a reporting period to align with the transfer of control of the company's products to the customer. In addition, to the extent performance obligations are satisfied over time, the company during 2015, Supplemental Executive Retirement Program (SERP) and deferred compensation payments of $21,126,000 and $3,525,000, respectively, were made in 2015.defers revenue recognition until the performance obligations are satisfied.
Accrued rebates relate to several volume incentive programs the company offers its customers. The company accounts for these rebates as a reduction of revenue when the products are sold in accordance with the guidance in ASC 605-50, Customer Payments and Incentives. Rebates are netted against gross accounts receivables unless in excess of such receivables and then classified as accrued expenses.
Generally, the company's products are covered by warranties against defects in material and workmanship for various periods depending on the product from the date of sales to the customer. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. The company has established procedures to appropriate defer such revenue.
The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product field action and recalls, which could warrant additional warranty reserve provision.
|
| | |
| Notes to Financial Statements | Current Liabilities | |
| | |
Changes in accrued warranty costs were as follows (in thousands):
| | | | 2015 | | 2014 | 2018 | | 2017 |
| Balance as of January 1 | $ | 30,738 |
| | $ | 27,393 |
| $ | 22,468 |
| | $ | 23,302 |
|
| Warranties provided during the period | 11,561 |
| | 21,472 |
| 7,106 |
| | 10,176 |
|
| Settlements made during the period | (17,817 | ) | | (22,752 | ) | (13,731 | ) | | (11,917 | ) |
| Changes in liability for pre-existing warranties during the period, including expirations | (1,662 | ) | | 4,625 |
| 510 |
| | 907 |
|
| Balance as of December 31 | $ | 22,820 |
| | $ | 30,738 |
| $ | 16,353 |
| | $ | 22,468 |
|
The company's warranty expense for 20152016 includes reversals of $2,325,000$2,856,000 principally driven by a $2,000,000 reversal as a result of changes in the company's estimate of costs related to a recall for a component in a stationary oxygen concentrator that was manufactured in the company’s facility in Suzhou, China, and sold globally, which is no longer used in production.
The company's warranty expense for 2014 includes $11,493,000 for threetwo specific product issues. First, an expense of $6,559,000$1,366,000 for a product recall which was related to a component inon a stationary oxygen concentrator that was manufacturedlifestyle product, recorded in the company’s facility in Suzhou, China, and sold globally,NA/HME segment. Secondly, an additional warranty expense of $1,490,000 for a component of a lifestyles product which is no longer used in production. This expense was recorded in the European segment ($3,395,000) and North America/HME segment ($3,164,000). Second, an expense of $2,057,000 for the recall of a sieve bed component used within stationary oxygen concentrators manufactured during August 2014, which was recorded in the North
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
America/HME segment. Third, an incremental expense of $2,877,000 related to the company's joystick recall as a result of higher than previously anticipated response rates from larger customers in the U.S. and Canada and a shift in the product mix toward higher cost joysticks, which was recorded in the North America/HME segment ($1,612,000) and the Asia/Pacific segment ($1,265,000).
These warranty
Warranty reserves are subject to adjustment in future periods as new developments change the company's estimate of the total cost of these matters.cost.
Long-Term Debt
Debt as of December 31, 20152018 and 20142017 consisted of the following (in thousands):
| | | | 2015 | | 2014 | 2018 | | 2017 |
| Senior secured revolving credit facility, due in October 2015 | $ | — |
| | $ | 4,000 |
| |
| Convertible senior subordinated debentures at 4.125%, due in February 2027 | 12,147 |
| | 11,351 |
| |
| Convertible senior notes at 5.00%, due in February 2021 | | $ | 130,260 |
| | $ | 122,355 |
|
| Convertible senior notes at 4.50%, due in June 2022 | | 95,473 |
| | 89,675 |
|
| Other notes and lease obligations | 34,973 |
| | 4,980 |
| 29,912 |
| | 31,415 |
|
| | 47,120 |
| | 20,331 |
| 255,645 |
| | 243,445 |
|
| Less current maturities of long-term debt | (2,028 | ) | | (959 | ) | (2,110 | ) | | (2,040 | ) |
| | $ | 45,092 |
| | $ | 19,372 |
| $ | 253,535 |
| | $ | 241,405 |
|
The company had outstanding letters of credit of $3,230,000$3,123,000 and $7,063,000$2,945,000 as of December 31, 20152018 and 2014,2017, respectively. There were no borrowings denominated in foreign currencies, excluding a portion of the company's capital leases, as of December 31, 2018 or December 31, 2017. For 2018 and 2017, the weighted average interest rate on all borrowings, excluding capital leases, was 4.78% and 4.84%, respectively.
On September 30, 2015, the company entered into an Amended and Restated Revolving Credit and Security Agreement, (the “Amended and Restated Credit Agreement”), amending and restating the company’s existing Revolving Credit and Security Agreement which was originally entered into on January 16, 2015 andsubsequently amended on April 22, 2015 (the “Prior Credit Agreement”"Credit Agreement") and which matures inon January 2018.16, 2021. The Amended and Restated Credit Agreement was entered into by and among the company, certain of the company’scompany's direct and indirect U.S. and Canadian subsidiaries and certain of the company’scompany's European subsidiaries (together with the company, the “Borrowers”), certain other of the company’scompany's direct and indirect U.S., Canadian and European subsidiaries (the “Guarantors”), and PNC Bank, National Association (“PNC”), JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, KeyBank National Association, and Citizens Bank, National Association (the “Lenders”). PNC is the administrative agent (the “Administrative Agent”) and J.P. Morgan Europe Limited is the European agent (the “European Agent”) under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement contains customary representations, warranties and covenants. Exceptions to the operating covenants in the Amended and Restated Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale and leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also contains a covenant requiring the company to maintain minimum availability under the U.S. and Canadian Credit Facility of not less than the greater of (i) 11.25% of the maximum amount that may be drawn under the U.S. and Canadian Credit Facility for five (5) consecutive business days, or (ii) $10,000,000 on any business day (which amount was reduced to $5,000,000 pursuant to an amendment in February 2016 -- see “Subsequent Events”). The company also is subject to dominion triggers under the U.S. and Canadian Credit Facility (as defined below) requiring the company to maintain borrowing capacity of not less than $11,250,000 on any business day or $12,500,000 for five consecutive days in order to avoid triggering full control by an agent for the lenders of the company's cash receipts for application to the company’s obligations under the agreement.
The Amended and Restated Credit Agreement contains customary default provisions, with certain grace periods and exceptions, which provide that events of default that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than 10 consecutive days. The initial borrowings under the U.S. and Canadian Credit Facility were used to repay and terminate the company’s previous credit agreement, which was scheduled to mature in October 2015.
The Prior Credit Agreement was amended on April 22, 2015 to provide for certain technical amendments, including: (1) revising various provisions of the Prior Credit Agreement to allow the company to issue letters of credit denominated in foreign currencies other than those originally contemplated under the Prior Credit Agreement; and (2) amending certain covenants in the
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Prior Credit Agreement to permit the company (i) to make a single acquisition of assets of a third-party for cash consideration not to exceed $500,000 on or before September 30, 2015 and (ii) to accept surrenders of company shares by employees to facilitate the payment of tax withholding obligations in connection with employee equity compensation.
In connection with entering into the Prior Credit Agreement and subsequent Amended and Restatedcompany's Credit Agreement, the company incurred $1,954,000 in fees which were capitalized and are being amortized as interest expense. As of December 31, 2018, debt fees yet to be amortized through January 2018. In addition, as a result of terminating the previous credit agreement, which was scheduled to mature in October 2015, the company wrote-off $668,000 in previously capitalized fees in the first quarter of 2015, which is reflected in the expense of the North America / HME segment. In comparison, the company wrote-off $1,070,000 in fees previously capitalized in the first quarter of 2014 as a result of a reduction in the borrowing capacity under the company's previous credit agreement, which was scheduled to mature in October 2015.2021 totaled $797,000.
U.S. and Canadian Borrowers Credit Facility
For the company's U.S. and Canadian Borrowers, the Amended and Restated Credit Agreement provides for an asset-based-lending senior secured revolving credit facility which is secured by substantially all of the company’scompany's U.S. and Canadian assets, other than real estate. The Amended and Restated Credit Agreement provides the company and the other Borrowers with a credit facility in an aggregate principal amount of $100,000,000, subject to availability based on a borrowing base formula, under a senior secured revolving credit, letter of credit and swing line
loan facility (the “U.S. and Canadian Credit Facility”). Up to $25,000,000 of the U.S. and Canadian Credit Facility will be available for issuance of letters of credit. The aggregate principal amount of the U.S. and Canadian Credit Facility may be increased by up to $25,000,000 to the extent requested by the company and agreed to by any Lender or new financial institution approved by the Administrative Agent.
The aggregate borrowing availability under the U.S. and Canadian Credit Facility is determined based on a borrowing base formula set forth in the Amended and Restated Credit Agreement and summarized below.
Under the Amended and Restated Credit Agreement, theformula. The aggregate usage under the U.S. and Canadian Credit Facility may not exceed an amount equal to the sum of (a) 85% of eligible U.S. accounts receivable plus (b) the lesser of (i) 70% of eligible U.S. inventory and eligible foreign in-transit inventory and (ii) 85% of the net orderly liquidation value of eligible U.S. inventory and eligible foreign in-transit inventory (not to exceed $4,000,000), plus (c) the lesser of (i) 85% of the net orderly liquidation value of U.S. eligible machinery and equipment and (ii) $2,485,000$731,000 as of December 31, 2018 (subject to reduction as provided in the Amended and Restated Credit Agreement), plus (d) 85% of eligible Canadian accounts receivable, plus (e) the lesser of (i) 70% of eligible Canadian inventory and (ii) 85% of the net orderly liquidation value of eligible Canadian inventory, less (f) swing loans outstanding under the U.S. and Canadian Credit Facility, less (g) letters of credit issued and undrawn under the U.S. and Canadian Credit Facility, less (h) a $10,000,000$5,000,000 minimum availability reserve, less (i) other reserves required by the Administrative Agent, and in each case subject to the definitions and limitations in the Amended and Restated Credit Agreement. As of December 31, 2015,2018, the company was in compliance with all covenant requirements and had borrowing capacity on the U.S. and Canadian Credit Facility under the Amended and Restated Credit Agreement of $38,230,000, taking into account$21,274,000, considering the $10,000,000 minimum availability reserve, (which amount was reduced to $5,000,000 pursuant to an amendment in February 2016 - see "Subsequent Events"), then-outstanding letters of credit, other reserves and the $11,250,000 dominion trigger amount noted above.described below. Borrowings under the U.S. and Canadian Credit Facility are secured by substantially all the company's U.S. and Canadian assets, other than real estate.
Interest will accrue on outstanding indebtedness under the Amended and Restated Credit Agreement at the LIBOR rate, plus a margin ranging from 2.25% to 2.75%, or at the alternate base rate,
plus a margin ranging from 1.25% to 1.75%, as selected by the company. Borrowings under the U.S. and Canadian Credit Facility are subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.
The Credit Agreement contains customary representations, warranties and covenants. Exceptions to the operating covenants in the Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale and leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Credit Agreement, as amended. The Credit Agreement also contains a covenant requiring the company to maintain minimum availability under the U.S. and Canadian Credit Facility of not less than the greater of (i) 11.25% of the maximum amount that may be drawn under the U.S. and Canadian Credit Facility for five (5) consecutive business days, or (ii) $5,000,000 on any business day. The company also is subject to dominion triggers under the U.S. and Canadian Credit Facility requiring the company to maintain borrowing capacity of not less than $11,250,000 on any business day or $12,500,000 for five consecutive days in order to avoid triggering full control by an agent for the lenders of the company's cash receipts for application to the company's obligations under the agreement.
The Credit Agreement contains customary default provisions, with certain grace periods and exceptions, which provide that events of default that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than 10 consecutive days. There were no borrowings under the U.S. and Canadian Credit Facility at December 31, 2018.
European Credit Facility
The Amended and Restated Credit Agreement retains the existing asset-based lending senior secured revolving credit facility provided for the company and the U.S. and Canadian Borrowers under the Prior Credit Agreement (the “Existing Credit Facility”) andalso provides for a new revolving credit, letter of credit and swing line loan facility which gives the company and European Borrowers the ability to borrow up to an aggregate principal amount of $30,000,000, with a $5,000,000 sublimit for letters of credit and a $2,000,000 sublimit for swing line loans (the “European Credit Facility”). Up to $15,000,000 of the European Credit Facility will be available to each of Invacare Limited (the “UK Borrower”) and Invacare Poirier SAS (the “French Borrower” and, together with the UK Borrower, the “European Borrowers”). The European Credit Facility matures in January 2018,2021, together with the ExistingU.S. and Canadian Credit Facility.
The aggregate borrowing availability for each European Borrower under the European Credit Facility is
determined based on a borrowing base formula set forth in the Amended and Restated Credit Agreement and summarized below. Under the Amended and Restated Credit Agreement, theformula. The aggregate borrowings of each of the European Borrowers under the European Credit Facility
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
may not exceed an amount equal to (a) 85% of the European Borrower’sBorrower's eligible accounts receivable, less (b) the European Borrower’sBorrower's borrowings and swing line loans outstanding under the European Credit Facility, less (c) the European Borrower’sBorrower's letters of credit issued and undrawn under the European Credit Facility, less (d) a $3,000,000 minimum availability reserve, less (e) other reserves required by the European Agent, and in each case subject to the definitions and limitations in the Amended and Restated Credit Agreement. As of December 31, 2015, as determined pursuant to the borrowing base formula,2018, the aggregate borrowing base availableavailability to the European Borrowers under the European Credit Facility was approximately $21,528,000, with aggregate borrowing availability of approximately $15,153,000, taking into account$12,088,000, considering the $3,000,000 minimum availability reserve and a $3,375,000 dominion trigger amount described below.
The aggregate principal amount of the European Credit Facility may be increased by up to $10,000,000 to the extent requested by the company and agreed to by any Lender or Lenders that wish to increase their lending participation or, if not agreed to by any Lender, a new financial institution that agrees to join the European Credit Facility and that is approved by the Administrative Agent and the European Agent.
Interest will accrue on outstanding indebtedness under the European Credit Facility at an adjusted LIBOR rate, plus a margin ranging from 2.50% to 3.00%, or for swing line loans, at the overnight LIBOR rate, plus a margin ranging from 2.50% to 3.00%., as selected by the company. The margin will be adjusted quarterly based on utilization. Borrowings under the European Credit Facility are subject to commitment fees of between 0.25% and 0.375% per year, depending on utilization.
The European Credit Facility is secured by substantially all of the personal property assets of the UK Borrower and its in-country subsidiaries, and all of the receivables of the French Borrower and its in-country subsidiaries. The UK and French facilities (which comprise the European Credit Facility) are cross collateralized, and the USU.S. personal property assets previously pledged under the ExistingU.S. and Canadian Credit Facility also serve as collateral for the European Credit Facility.
The European Credit Facility is subject to customary representations, warranties and covenants generally consistent with those applicable to the ExistingU.S. and Canadian Credit Facility. Exceptions to the operating covenants in the Amended and Restated Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale/leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also contains a covenant requiring the European Borrowers to
maintain undrawn availability under the European Credit Facility of not less than the greater of (i) 11.25% of the maximum amount that may be drawn under the European Credit Facility for five (5) consecutive business days, or (ii) $3,000,000 on any business day. The European Borrowers also are subject to cash dominion triggers under the European Credit Facility requiring the European Borrower to maintain borrowing capacity of not less than $3,375,000 on any business day or 12.50% of the maximum amount that may be drawn under the European Credit Facility for five (5) consecutive business days in order to avoid triggering full control by an agent for the Lenders of the European Borrower’sBorrower's cash receipts for application to its obligations under the European Credit Facility.
The European Credit Facility is subject to customary default provisions, with certain grace periods and exceptions, consistent with those applicable to the ExistingU.S. and Canadian Credit Facility, which provide that events of default include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, cross-default, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption in the operations of any material manufacturing facility for more than 10 consecutive days.
The proceeds of the European Credit Facility will be used to finance the working capital and other business needs of the company. There were no borrowings outstanding under the European Credit Facility at December 31, 2018.
Convertible senior subordinated debentures due in 2027
In 2007, the company issued $135,000,000 principal amount of 4.125% Convertible Senior Subordinated Debentures due 2027. The debentures are unsecured senior subordinated obligations2027 (the "debentures"), of which $0 principal amount remained outstanding at December 31, 2018 as the company guaranteed by substantially all of the company’s domestic subsidiaries (which guarantees were released effective February 16, 2016, see "Subsequent Events"), pay interest at 4.125% per annum on each February 1 and August 1, and are convertible upon satisfaction of certain conditions into cash, common shares of the company, or a combination of cash and common shares of the company, subject to certain conditions. The debentures allow the company to satisfy the conversion using any combination of cash or stock, and at the company’s discretion. In the event of such a conversion, the company intends to satisfy the accreted valueholders of the debentures using cash. Assuming adequate cash on hand at the time of conversion, the company also intends to satisfy the conversion spread using cash, as opposed to stock. As of
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2015, the principal amount of the company’s Convertible Notes exceeded the if-converted value of those notes by $3,379,000.
The company includes the dilutive effect of shares necessary to settle the conversion spread in the Net Earnings per Share- Assuming Dilution calculation unless such amounts are anti-dilutive as was the case in 2015, 2014 and 2013. The initial conversion rate is 40.3323 shares per $1,000 principal amount of debentures, which represents an initial conversion price of approximately $24.79 per share. Holders of the debentures can convert the debt to common stock if the company’s common stock price is at a level in excess of $32.23, a 30% premium to the initial conversion price for at least 20 trading days during a period of thirty consecutive trading days preceding the date on which the notice of conversion is given. At a conversion price of $32.23 (30% premium over $24.79), the full conversion of the convertible debt equates to 539,000 shares. The debentures are redeemable at the company’s option, subject to specified conditions, on or after February 6, 2012 through and including February 1, 2017. The company may redeem some or all of the debentures for cash on or after February 1, 2017. Holders have theexercised their right to require the company to repurchase all or some of theirthe debentures upon the occurrence of certain circumstances on February 1, 2017 and 2022. The company evaluated the termsat a price equal to 100% of the call, redemption and conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the features did not require separate accounting as derivatives. The notes, debentures and common shares issuable upon conversionprincipal amount. As a result of the debentures have been registered underrepurchase, the Securities Act.company wrote-off unamortized debt fees of $207,000 and recognized amortization expense of $311,000 in the first quarter of 2017.
The components of the company’s convertible debtunamortized discount as of December 31, 2015 and 2014 consist2016 was fully amortized in the first quarter 2017 due to the repurchase of all the following (in thousands):debentures on February 1, 2017.
|
| | | | | | | |
| | 2015 | | 2014 |
| Carrying amount of equity component | $ | 25,381 |
| | $ | 25,381 |
|
| | | | |
| Principal amount of liability component | $ | 13,350 |
| | $ | 13,350 |
|
| Unamortized discount | (1,203 | ) | | (1,999 | ) |
| Net carrying amount of liability component | $ | 12,147 |
| | $ | 11,351 |
|
The unamortized discount of $1,203,000 is to be amortized through February 2017. The effective interest rate on the liability component was 11.5% for 2007 through 2014.. Non-cash interest expense of $796,000, $710,000$311,000 and $633,000$892,000 was recognized in 2015, 20142017 and 2013,2016, respectively, in comparison to actual interest expense paid of $551,000, $551,000$275,000 and $551,000 based on the stated coupon rate of 4.125%, for each of the same periods.
Convertible senior notes due 2021
In the first quarter of 2016, the company issued $150,000,000 aggregate principal amount of 5.00% Convertible Senior Notes due 2021 (the “2021 notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The notes bear interest at a rate of 5.00% per year payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2016. The notes will mature on February 15, 2021, unless repurchased or converted in accordance with their terms prior to such date. Prior to August 15, 2020, the 2021 notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Unless and until the company obtains shareholder approval under applicable New York Stock Exchange rules, the 2021 notes will be convertible, subject to certain conditions, into cash. If the company obtains such shareholder approval, the 2021 notes may be settled in cash, the company's common shares or a combination of cash and the company's common shares, at the company's election.
Holders of the 2021 notes will have the right to require the company to repurchase all or some of their 2021 notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 60.0492 common shares per $1,000 principal amount of 2021 notes (equivalent to an initial conversion price of approximately $16.65 per common share). The company evaluated the terms of the conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the features did require separate accounting as a derivative. This derivative was capitalized on the balance sheet as a long-term liability and will be adjusted to reflect fair value each quarter. The fair value of the convertible debt conversion liability related to the notes at issuance was $34,480,000. The fair value of the convertible debt conversion liability at December 31, 2018 was $1,458,000 compared to $53,154,000 as of December 31, 2017. The company recognized a gain of $51,696,000 in 2018 compared to a loss of $22,446,000 in 2017 related to the convertible debt conversion liability.
In connection with the offering of the 2021 notes, the company entered into privately negotiated convertible note hedge transactions with two financial institutions (the “option counterparties”). These transactions cover, subject to customary anti-dilution adjustments, the number of the company's common shares that will initially underlie the 2021 notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the 2021 notes. The company evaluated the note hedges under the applicable accounting literature, including
Derivatives and Hedging, ASC 815, and determined that the note hedges should be accounted for as derivatives. These derivatives were capitalized on the balance sheet as long-term assets and will be adjusted to reflect fair value each quarter. The fair value of the convertible note hedge assets at issuance was $27,975,000. The fair value of the convertible note hedge asset at December 31, 2018 was $1,028,000 compared to $46,915,000 as of December 31, 2017. The company recognized a loss of $45,887,000 in 2018 compared to a gain of $21,444,000 in 2017 related to the convertible note hedge asset.
The company entered into separate, privately negotiated warrant transactions with the option counterparties at a higher strike price relating to the same number of the company's common shares, subject to customary anti-dilution adjustments, pursuant to which the company sold warrants to the option counterparties. The warrants could have a dilutive effect on the company's outstanding common shares and the company's earnings per share to the extent that the price of the company's common shares exceeds the strike price of those warrants. The initial strike price of the warrants is $22.4175 per share and is subject to certain adjustments under the terms of the warrant transactions. The company evaluated the warrants under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the warrants meet the definition of a derivative, are indexed to the company's own stock and should be classified in shareholder's equity. The amount paid for the warrants and capitalized in shareholder's equity was $14,100,000.
The net proceeds from the offering of the notes were approximately $144,034,000, after deducting fees and offering expenses of $5,966,000, which were paid in 2016. These debt issuance costs were capitalized and are being amortized as interest expense through February 2021. In accordance with ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, these debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability. Approximately $5,000,000 of the net proceeds from the offering were used to repurchase the company's common shares from purchasers of 2021 notes in the offering in privately negotiated transactions. A portion of the net proceeds from the offering were used to pay the cost of the convertible note hedge transactions (after such cost is partially offset by the proceeds to the company from the warrant transactions), which net cost was $15,600,000.
The liability components of the 2021 notes consist of the following (in thousands):
|
| | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | |
| Principal amount of liability component | $ | 150,000 |
| | $ | 150,000 |
| |
| Unamortized discount | (17,193 | ) | | (23,900 | ) | |
| Debt fees | (2,547 | ) | | (3,745 | ) | |
| Net carrying amount of liability component | $ | 130,260 |
| | $ | 122,355 |
| |
The unamortized discount of $17,193,000 is to be amortized through February 2021. The effective interest rate on the liability component was 11.1%. Non-cash interest expense of $6,706,000 and $6,019,000 was recognized in 2018 and 2017, respectively, in comparison to actual interest expense accrued of $7,500,000 and $7,500,000 in 2018 and 2017, respectively, based on the stated coupon rate of 5.0%. The 2021 notes were not convertible as of December 31, 20152018 nor was the applicable conversion threshold met.
Convertible senior notes due 2022
In the second quarter of 2017, the company issued $120,000,000 aggregate principal amount of 4.50% Convertible Senior Notes due 2022 (the “2022 notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2022 notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year, beginning December 1, 2017. The 2022 notes will mature on June 1, 2022, unless repurchased or converted in accordance with their terms prior to such date. Prior to December 1, 2021, the 2022 notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Unless and until the company obtains shareholder approval of the issuance of the company's common shares upon conversion of the 2022 notes under applicable New York Stock Exchange rules, the 2022 notes will be convertible, subject to certain conditions, into cash. If the company obtains such shareholder approval, the 2022 notes may be settled in cash, the company's common shares or a combination of cash and the company's common shares, at the company's election.
Holders of the 2022 notes will have the right to require the company to repurchase all or some of their 2022 notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 61.6095 common shares per $1,000 principal amount of 2022 notes (equivalent to an initial conversion price of approximately $16.23 per common share). The company evaluated the terms of the conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the
features did require separate accounting as a derivative. This derivative was capitalized on the balance sheet as a long-term liability and will be adjusted to reflect fair value each quarter. The fair value of the convertible debt conversion price thresholdliability at issuance was $28,859,000. The fair value of $32.23 met during 2015.the convertible debt conversion liability at December 31, 2018 was $2,611,000 compared to $53,414,000 at December 31, 2017. The company recognized a gain of $50,803,000 in 2018 compared to a loss of $24,555,000 in 2017 related to the convertible debt conversion liability.
ThereIn connection with the offering of the 2022 notes, the company entered into privately negotiated convertible note hedge transactions with one financial institution (the “option counterparty”). These transactions cover, subject to customary anti-dilution adjustments, the number of the company's common shares that will initially underlie the 2022 notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the 2022 notes. The company evaluated the note hedges under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the note hedges should be accounted for as derivatives. These derivatives were no borrowings denominatedcapitalized on the balance sheet as long-term assets and will be adjusted to reflect fair value each quarter. The fair value of the convertible note hedge assets at issuance was $24,780,000. The fair value of the convertible note hedge assets at December 31, 2018 was $2,062,000 compared to $46,680,000 at December 31, 2017. The company recognized a loss of $44,618,000 in foreign currencies2018 compared to a gain of $21,900,000 in 2017 related to the convertible note hedge asset.
The company entered into separate, privately negotiated warrant transactions with the option counterparty at a higher strike price relating to the same number of the company's common shares, subject to customary anti-dilution adjustments, pursuant to which the company sold warrants to the option counterparties. The warrants could have a dilutive effect on the company's outstanding common shares and the company's earnings per share to the extent that the price of the company's common shares exceeds the strike price of those warrants. The initial strike price of the warrants is $21.4375 per share and is subject to certain adjustments under the terms of the warrant transactions. The company evaluated the warrants under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the warrants meet the definition of a derivative, are indexed to the company's own stock and should be classified in shareholder's equity. The amount paid for the warrants and capitalized in shareholder's equity was $14,100,000.
The net proceeds from the offering of the 2022 notes were approximately $115,289,000, after deducting fees and offering expenses of $4,711,000, which were paid in 2017. These debt issuance costs were capitalized and are being amortized as interest expense through June 2022. As of December 31, 2018, all the debt issuance costs were paid. In accordance with ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, these debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability. A portion of the net proceeds from the offering were used to pay the cost of the convertible note hedge transactions (after such cost is partially offset by the proceeds to the company from the warrant transactions), which net cost was $10,680,000.
The liability components of the 2022 notes consist of the following (in thousands):
|
| | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| Principal amount of liability component | $ | 120,000 |
| | $ | 120,000 |
|
| Unamortized discount | (21,476 | ) | | (26,378 | ) |
| Debt fees | (3,051 | ) | | (3,947 | ) |
| Net carrying amount of liability component | $ | 95,473 |
| | $ | 89,675 |
|
The unamortized discount of $21,476,000 is to be amortized through June 2022. The effective interest rate on the liability component was 10.9%. Non-cash interest expense of $4,902,000 and $2,481,000 was recognized in 2018 and 2017, respectively, in comparison to actual interest expense accrued of $5,400,000 and $2,955,000 for the same periods, based on the stated coupon rate of 4.5%. The 2022 notes were not convertible as of December 31, 2015 or December 31, 2014. For 2015 and 2014,2018 nor was the weighted average interest rate on all borrowings, excluding capital leases, was 3.83% and 2.87%, respectively.applicable conversion threshold met.
The aggregate minimum maturities of long-term debt for each of the next five years are as follows: $2,028,000 in 2016, $2,169,000 in 2017, $1,784,000 in 2018, $1,632,000$2,192,000 in 2019, $4,363,000 in 2020, $155,139,000 in 2021, $124,466,000 in 2022, and $1,703,000$4,314,000 in 2020.2023. Interest paid on all borrowings was $2,753,000, $3,302,000$14,526,000, $11,995,000 and $4,046,000$5,955,000 in 2015, 20142018, 2017 and 2013,2016, respectively.
Other Long-Term Obligations
Other long-term obligations as of December 31, 20152018 and 20142017 consist of the following (in thousands):
| | | | 2015 | | 2014 | 2018 | | 2017 |
| Supplemental Executive Retirement Plan liability | $ | 4,930 |
| | $ | 6,067 |
| |
| Deferred income taxes | | $ | 24,681 |
| | $ | 28,890 |
|
| Product liability | 14,582 |
| | 18,860 |
| 13,865 |
| | 13,575 |
|
| Deferred income taxes | 32,115 |
| | 30,423 |
| |
| Pension | | 6,670 |
| | 10,340 |
|
| Deferred gain on sale leaseback | 6,978 |
| | — |
| 6,124 |
| | 6,419 |
|
| Deferred compensation | 4,167 |
| | 5,667 |
| 5,577 |
| | 5,592 |
|
| Supplemental Executive Retirement Plan liability | | 5,250 |
| | 5,636 |
|
| Advance payment on sale of land & buildings | | 3,524 |
| | — |
|
| Convertible 2022 debt conversion liability | | 2,611 |
| | 53,414 |
|
| Uncertain tax obligation including interest | 4,467 |
| | 15,160 |
| 2,140 |
| | 2,738 |
|
| Convertible 2021 debt conversion liability | | 1,458 |
| | 53,154 |
|
| Other | 15,350 |
| | 12,628 |
| 3,065 |
| | 3,512 |
|
| Total long-term obligations | $ | 82,589 |
| | $ | 88,805 |
| $ | 74,965 |
| | $ | 183,270 |
|
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On April 23, 2015, the company entered into a real estate sales leaseback transaction which resulted in the recording of an initial deferred gain of $7,414,000, the majority of which is included in Other Long-Term Obligations and will be recognized over the 20-year life of the leases. The gain realized in 2015 was $171,000.$284,000 and $275,000 as of December 31, 2018 and 2017, respectively.
In the third quarter of 2018, the company agreed to sell its Isny, Germany location with a net book value at the signing of the agreement of approximately $2,900,000. In accordance with the agreement, control will not transfer to the buyer until April 2020; however, the company received an advance payment for a portion of the proceeds, as disclosed above. The decreaseadvance payment is reflected in the uncertain tax obligation was driven primarily byinvesting section of the Consolidated Statement of Cash Flows. The company will continue to depreciate the building and expects to record a reclassification from long term obligations to current taxes payable basedgain on the amount expected be paidtransaction when completed in the next twelve months.2020.
Leases and Commitments
The company leases a portion of its facilities, transportation equipment, data processing equipment and certain other equipment. These leases have terms from 1 to 20 years and provide for renewal options. Generally, the company iswas required to pay taxes and normal expenses of operating the facilities and equipment. As of December 31, 2015,2018, the company is committed under non-cancelable operating leases, which have initial or remaining terms in excess of one year and expire on various dates through 2024.2035. Lease expenses were approximately $20,360,000$13,527,000 in 2015, $23,568,0002018, $18,102,000 in 20142017 and $24,726,000$18,805,000 in 2013.2016.
On April 23, 2015, the company sold and leased back, under four separate lease agreements, four properties located in Ohio and one property in Florida for net proceeds of $23,000,000, which were used to reduce debt under the U.S. and Canadian Credit Facility. The initial total annual rent for the properties will bewas $2,275,000 for the first year, whichand can increase annually over the 20 year20-year term of the leases based on the applicable geographical consumer price index (CPI). Each of the four lease agreements contains three 10-year renewals with the rent for each option term based on the greater of the then-current fair market rent for each property or the then- current rate and increasing annually by the applicable CPI. Under the terms of the lease agreements, the company is responsible for all taxes, insurance and utilities. The company is permitted to sublet the properties; however, the properties are currently being utilized exclusively by the company and there is no current subletting. The company is required to adequately maintain each of the properties and any leasehold improvements will be amortized over the lesser of the lives of the improvements or the remaining lease lives.lives, consistent with any other company leases.
In connection with the transaction, the requirements for sale lease-back accounting were met. Accordingly, the company recorded the sale of the properties, removed the related property and equipment from the company's balance sheet, recognized an initial deferred gain of $7,414,000 and an immediate loss of $257,000 related to one property and recorded new lease liabilities. Specifically, the company recorded four capital leases totaling $32,339,000 and one operating lease related to leased land, which was not a material component of the transaction. The gains on the sales of the properties arewere required to be deferred and recognized over the life of the leases as the property sold is being leased back. The deferred gain is classified under Other Long-Term Obligations on the Condensed Consolidated Balance Sheet.
The amount of buildings and equipment capitalized in connection with capital leases was $42,640,000$39,293,000 and $12,123,000$44,629,000 at December 31, 20152018 and 2014,2017, respectively. At December 31, 20152018 and 2014,2017, accumulated amortization was $7,667,000$10,971,000 and $7,143,000,$13,215,000, respectively, which is included in depreciation expense.
Future minimum operating and capital lease commitments, as of December 31, 2015,2018, are as follows (in thousands):
| | | | Capital Leases | | Operating Leases | Capital Leases | | Operating Leases |
| 2016 | $ | 3,375 |
| | $ | 15,067 |
| |
| 2017 | 3,375 |
| | 8,804 |
| |
| 2018 | 2,848 |
| | 5,005 |
| |
| 2019 | 2,671 |
| | 2,378 |
| $ | 3,407 |
| | $ | 10,346 |
|
| 2020 | 2,671 |
| | 1,101 |
| 3,187 |
| | 6,635 |
|
| 2021 | | 2,920 |
| | 5,053 |
|
| 2022 | | 2,399 |
| | 3,239 |
|
| 2023 | | 2,399 |
| | 1,193 |
|
| Thereafter | 32,872 |
| | 268 |
| 26,995 |
| | 2,071 |
|
| Total future minimum lease payments | 47,812 |
| | $ | 32,623 |
| 41,307 |
| | $ | 28,537 |
|
| Amounts representing interest | (12,839 | ) | | | (11,395 | ) | | |
| Present value of minimum lease payments | $ | 34,973 |
| | | $ | 29,912 |
| | |
FS-24In December 2018, the company entered into a 20-year lease agreement in Germany. The lease is not expected to commence until April 2020. See "Contractual Obligations" for estimated future payments.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Retirement and Benefit Plans
Substantially all full-time salaried and hourly domestic employees are included in the Invacare Retirement Savings Plan sponsored by the company. The company makes matching cash contributions up to 66.7% of employees’employees' contributions up to 3% of compensation. The company also makes quarterly contributions to this Plan equal to a percentage of qualified wages. In 2015,2018, quarterly contributions were made at 1% of qualified wages. The company may make discretionary contributions to the domestic plans based on an annual resolution of the Board of Directors. Contribution expense for the Invacare Retirement Savings Plan in 2015, 20142018, 2017 and 20132016 was $2,573,000, $2,698,000$1,786,000, $2,131,000 and $3,126,000,$2,335,000, respectively.
The company sponsors a Deferred Compensation Plus Plan covering certain employees, which provides for elective deferrals and the company retirement deferrals so that the total retirement deferrals equal amounts that would have contributed to the company’scompany's principal retirement plans if it were not for limitations imposed by income tax regulations.
The company sponsors a non-qualified defined benefit Supplemental Executive Retirement Plan (SERP) for certain key executives. Effective December 31, 2008, the SERP was amended, in part to comply with IRS Section 409A. As a result of the amendment, the plan became a defined benefit cash balance plan for the non-retired participants and thus, future payments by the company will be madesince December 31, 2008 have been based upon a cash balance formula with interest credited at a rate determined annually by the Compensation and Management Development Committee of the Board of Directors. In 20152018, 2017 and 2016, respectively, interest was credited at 0% for active participants in the SERP in accordance with a July 1, 2011 resolution of the Compensation and Management Development Committee of the Board of Directors.SERP. The plan continues to be unfunded with individual hypothetical accounts maintained for each participant.
The SERP projected benefit obligation related to this unfunded plan was $6,209,000$5,641,000 and $27,548,000$6,027,000 at December 31, 20152018 and 2014,December 31, 2017, respectively, and the accumulated benefit obligation was $6,209,000$5,641,000 and $27,548,000$6,027,000 at December 31, 20152018 and 2014,December 31, 2017, respectively. The projected benefit obligations were calculated using an assumed future salary increase of 4%3.25% at both December 31, 20152018 and 2014.2017, respectively. The assumed discount rate, relevant for three participants unaffected by the plan conversion was 4.34%4.22% and 3.95%3.6% for 20152018 and 2014,2017, respectively, based upon the discount rate on high-quality fixed-income investments without adjustment. The retirement age was 67 for 20152018 and 672017, respectively. The mortality assumptions used for 2014. 2018 and 2017 were based upon the RP-2014 White Collar Fully Generational Mortality Table using Scale MP-2018 and MP-2017, respectively.
Expense for the planSERP in 20152018 was $142,000$5,000 compared to expense of $539,000$414,000 and $1,073,000 in 20142017 and income of $14,000 in 2013.2016, respectively. The expense was comprised of interest income of $42,000$193,000 in 2015,2018 and interest expense of $377,000$246,000 and $908,000 in 20142017 and income of $236,000 in 20132016, respectively, with the remaining portionnon-interest expense related to service costs, prior service costs and other gains/losses. Benefit payments in 2015, 20142018, 2017 and 20132016 were $21,517,000, $394,000$391,000, $391,000 and $398,000,$1,279,000, respectively.
The company also sponsors a Death Benefit Only Plan (DBO) for certain key executives that provides a benefit equal to three times the participant’sparticipant's final target earnings should the participant’sparticipant's death occur while an employee and a benefit equal to one timestime the participant’sparticipant's final earnings upon the participant’sparticipant's death after normal retirement or if a participant dies after his or her employment with the company is terminated following a change in control of the company. ExpenseIncome for the plan in 20152018 was $103,000$151,000 compared to expense of $808,000$150,000 in 2017 and income of $259,000$121,000 in 20142016. The 2018 and 2013, respectively. The expense was comprised of2016 amounts contained service and accrual adjustment income of $253,000 and $216,000, respectively, compared to expense of $28,000$69,000 in 2015, expense of $692,000 in 2014 and income of $364,000 in 20132017, with the remaining portionactivity in each year related to interest costs in each year, respectively.costs. There were no benefit payments in 2015, 20142018 or 2013.
2017 compared to benefit payments of $761,000 in 2016. In conjunction with these non-qualified and unfunded U.S. defined benefit plans,the company's DBO, the company has invested in life insurance policies related to certain employees to help satisfy these obligations of which $11,902,000 and $21,338,000 in life insurance policies were sold during 2015 and 2014, respectively, to fund payments related to the retirement of certain executive officers of the company.DBO obligations.
In Europe, the company maintains two defined benefit plans in Switzerland. In Switzerland, aThe statutory pension plan isplans are maintained with a private insurance company and, in accordance with Swiss law, the plan functionsplans function as a defined contribution planplans whereby employee and employer contributions are defined as a percentage of individual salary depending on the age of the employee and a guaranteed interest rate, which is annually defined by the Swiss Pension Fund. Under U.S. GAAP, the plans are treated as a defined benefit plans. During 2014,Expense for the company terminated its plan in the Netherlands which contained benefits and provisions for an Old Age Pension benefit that started at age 65 and were payable until death and a Survivors Pension that started immediately after the death of the insured and is payable until the death of the surviving spouse. Under U.S. GAAP the plan was treated as a defined benefit plan. Income for both the Switzerland and NetherlandsEuropean plans was $19,000, $220,000$1,079,000, $436,000 and $205,000$1,004,000 in 2015, 20142018, 2017 and 2013,2016, respectively.
Accumulated other comprehensive income associated with the SERP, DBO, Swiss and Netherlands pension plans combined was $9,757,000 and $7,601,000 as of December 31, 2015 and 2014, respectively for a net change of $2,156,000 with $226,000 in net periodic benefit income recognized during the year.
|
| | |
| Notes to Financial Statements | Revenue | |
| | |
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Revenue
The company has two revenue streams: product and services. Services include repair, refurbishment, preventive maintenance and rental of product. Services for the NA/HME and IPG segments include maintenance and repair of product. Services for the Europe segment include repair, refurbishment and preventive maintenance services. Services for the Asia Pacific segment include rental and repair of product. The following tables disaggregate the company's revenues by major source and by reportable segment for the year ended December 31, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | | | | | |
| | | 2018 |
| | | Product | | Service | | Total |
| Europe | | $ | 544,517 |
| | $ | 14,001 |
| | $ | 558,518 |
|
| NA/HME | | 305,912 |
| | 703 |
| | 306,615 |
|
| IPG | | 56,519 |
| | 1,456 |
| | 57,975 |
|
| Asia/Pacific | | 44,393 |
| | 4,846 |
| | 49,239 |
|
| Total | | $ | 951,341 |
| | $ | 21,006 |
| | $ | 972,347 |
|
| % Split | | 98% | | 2% | | 100% |
|
| | | | | | | | | | | | |
| | | 2017 |
| | | Product | | Service | | Total |
| Europe | | $ | 522,121 |
| | $ | 13,205 |
| | $ | 535,326 |
|
| NA/HME | | 319,225 |
| | 1,593 |
| | 320,818 |
|
| IPG | | 58,710 |
| | 762 |
| | 59,472 |
|
| Asia/Pacific | | 46,047 |
| | 4,834 |
| | 50,881 |
|
| Total | | $ | 946,103 |
| | $ | 20,394 |
| | $ | 966,497 |
|
| % Split | | 98% | | 2% | | 100% |
The company's revenues are principally related to the sale of products, approximately 98%, with the remaining 2% related to services including repair, refurbishment, preventive maintenance and rental of product. While the company has a significant amount of contract types, the sales split by contract type is estimated as follows: general terms and conditions (33%), large national customers (27%), governments, principally pursuant to tender contracts (19%) and other customers including buying groups and independent customers (21%).
All product and substantially all service revenues are recognized at a point in time. The remaining service revenue, recognized over time, are reflected in the Europe segment and include multiple performance obligations. For such contracts, the company allocates revenue to each performance obligation based on its relative standalone selling price. The company generally determines the standalone selling price based on the expected cost-plus margin methodology.
Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the company's products and services. Revenue is measured as the amount of consideration expected to be received in exchange for transferring product or providing services. The amount of consideration received and revenue recognized by the company can vary as a result of variable consideration terms included in the contracts related to customer rebates, cash discounts and return policies. Customer rebates and cash discounts are estimated based on the most likely amount principle and these estimates are based on 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. The company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed. The company generally does not expect that there will be significant changes to its estimates of variable consideration (see “Receivables” and "Accrued Expenses" in the Notes to the Consolidated Financial Statements include elsewhere in this report for more detail).
Depending on the terms of the contract, the company may defer the recognition of a portion of the revenue at the end of a reporting period to align with transfer of control of the company's products to the customer. In addition, to the extent performance obligations are satisfied over time, the company defers revenue recognition until the performance obligations are satisfied. As of December 31, 2018 and December 31, 2017, the company had deferred revenue of $2,416,000 and $2,770,000, respectively, related to outstanding performance obligations.
Equity Compensation
The company’scompany's Common Shares have a $.25 stated value. The Common Shares and the Class B Common Shares generally have identical rights, terms and conditions and vote together as a single class on most issues, except that the Class B Common Shares have ten votes per share, carry a 10% lower cash dividend rate and, in general, can only be transferred to family members.members or for estate planning purposes. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis. When Class B Common Shares are transferred out of a familial relationship, they automatically convert to Common Shares. The Board of Directors suspended further dividends on the Class B Common Shares.
As of December 31, 2018, 6,357 Class B Common Shares remained outstanding. Conversion of Class B Common Shares have substantially diminished the significance of the company's dual class voting structure. As of December 31, 2018, the holders of the Common Shares represent approximately 99.9% of the Company's total outstanding voting power.
Equity Compensation Plan
On May 16, 201317, 2018, the shareholders of the company approved the Invacare Corporation 2018 Equity Compensation Plan (the “2018 Plan”), which was adopted on March 27, 2018 by the company's Board of Directors (the “Board”). The company's Board adopted the 2018 Plan in order to authorize additional Common Shares for grant as equity compensation, and to reflect changes to Section 162(m) of the Internal Revenue Code (the “Code”) resulting from the U.S. Tax Cuts and Jobs Act of 2017.
Following shareholder approval of the 2018 Plan, all of the Common Shares then-remaining available for issuance under the Invacare Corporation 2013 Equity Compensation Plan (the “2013 Plan”), which was adopted on March 27, 2013 by and all of the company's BoardCommon Shares that were forfeited or remained unpurchased or undistributed upon termination or expiration of Directors (the “Board”). The Board adoptedawards under the 2013 Plan to replace the company's prior equity plan,and under the Invacare Corporation Amended and Restated 2003 Performance Plan (the “2003 Plan”), which expired on May 21, 2013. Due to its expiration, no new awards may be grantedbecome available for issuance under the 2018 Plan. Awards granted previously under the 2013 Plan and 2003 Plan; however, awards granted prior to its expirationPlan will remain in effect under their original terms.
The 20132018 Plan uses a fungible share-counting method, under which each common shareCommon Share underlying an award of stock options or stock appreciation rights ("SAR") will count against the number of total shares available under the 20132018 Plan as one share; and each common shareCommon Share underlying any award other than a stock option or a SAR will count against the number of total shares available under the 20132018 Plan as two shares. Shares underlying awards made under the 2003 Plan or 2013 Plan that are forfeited or remain unpurchased or undistributed upon termination or expiration of the awards
will become available under the 2018 Plan for use in future awards. Any common sharesCommon Shares that are added back to the 20132018 Plan as the result of the cancellationforfeiture, termination or forfeitureexpiration of an award granted under the 2018 Plan or the 2013 Plan will be added back in the same manner such shares were originally counted against the total number of shares available under the 2018 Plan or 2013 Plan.Plan, as applicable. Each common shareCommon Share that is added back to the 20132018 Plan due to a cancellationforfeiture, termination or forfeitureexpiration of an award granted under the 2003 Plan will be added back as one common share.Common Share.
The Compensation and Management Development Committee of the Board (the “Compensation Committee”), in its discretion, may grant an award under the 20132018 Plan to any director or employee of the company or an affiliate. The 2013As of December 31, 2018, 3,994,255 Common Shares were available for future issuance under the 2018 Plan initially allows the Compensation Committee to grant up to 4,460,337 common shares in connection with the following types of awards with respect to shares of the company's common shares:Common Shares: incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, unrestricted stock and performance shares. The Compensation Committee also may grant performance units that are payable in cash. The Compensation Committee has the authority to determine which participants will receive awards, the amount of the awards and the other terms and conditions of the awards.
At December 31, 2018, an aggregate of 410,408 Common Shares underlie awards which forfeited or expired unexercised under the 2003 and 2013 Plans and thus are available to be transferred under the 2018 Plan.
The 20132018 Plan provides that shares granted come from the company’scompany's authorized but unissued common sharesCommon Shares or treasury shares. In addition, the company’scompany's stock-based compensation plans allow employee participants to exchange mature shares for minimum withholding taxes, which results in the company acquiring treasury shares. Under these provisions, the company acquired approximately 7,000140,000 treasury shares for $134,000$2,427,000 in 2015, 29,0002018, 85,000 shares for $471,000$1,276,000 in 20142017 and 23,00032,000 shares for $532,000$331,000 in 2013.2016.
The amounts of equity-based compensation expense recognized as part of selling, general and administrative expenses in All Other in business segment reporting were as follows (in thousands):
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Non-Qualified stock options | $ | 1,228 |
| | $ | 3,356 |
| | $ | 3,926 |
| |
| Non-qualified stock options | | $ | 201 |
| | $ | 865 |
| | $ | 745 |
|
| Restricted stock and restricted stock units | 2,785 |
| | 2,270 |
| | 2,031 |
| 4,305 |
| | 4,648 |
| | 5,039 |
|
| Performance shares and performance share units | — |
| | — |
| | — |
| 777 |
| | 1,834 |
| | 1,110 |
|
| Total stock-based compensation expense | $ | 4,013 |
| | $ | 5,626 |
| | $ | 5,957 |
| $ | 5,283 |
| | $ | 7,347 |
| | $ | 6,894 |
|
As of December 31, 2015,2018, unrecognized compensation expense related to equity-based compensation arrangements granted under the company's 2013 Plan and previous plans, which is related to non-vested options and shares, was as follows (in thousands):
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Non-qualified stock options | $ | 1,939 |
| | $ | 2,502 |
| | $ | 175 |
|
| Restricted stock and restricted stock units | 7,469 |
| | 7,005 |
| | 8,740 |
|
| Performance shares and performance share units | 7,441 |
| | 5,523 |
| | 3,134 |
|
| Total stock-based compensation expense | $ | 16,849 |
| | $ | 15,030 |
| | $ | 12,049 |
|
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| Non-Qualified stock options | $ | 1,059 |
| | $ | 2,600 |
| | $ | 8,270 |
|
| Restricted stock and restricted stock units | 9,476 |
| | 4,461 |
| | 3,705 |
|
| Performance shares and performance share units | — |
| | — |
| | — |
|
| Total stock-based compensation expense | $ | 10,535 |
| | $ | 7,061 |
| | $ | 11,975 |
|
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Total unrecognized compensation cost will be adjusted for future changes in actual and estimated forfeitures and for updated vesting assumptions for the performance share awards (see "Performance Options" and "Performance Shares and Performance Share Units" below). No tax benefit for share-based compensation was realized during 2015, 20142018, 2017 and 2013 as a result of2016 due to a valuation allowance against deferred tax assets. In accordance with ASC 718, any tax benefits resulting from tax deductions in excess of the compensation expense recognized is classified as a component of financing cash flows.
Stock Options
Generally, non-qualified stock option awards typically have a term of ten years and arewere granted atwith an exercise price per share equal to the fair market value of the company’s common sharescompany's Common Shares on the date of grant. Stock option awards granted in 2017 were performance-based awards which will only become exercisable if the performance goals established by the Compensation Committee are achieved over a 3-year period ending in 2019 and subject to the Compensation Committee's exercise of negative discretion to reduce the number of options vested based on the progress towards the company's transformation. The company expects the compensation expense to be recognized over a weighted-average period of approximately 2two years.
The following table summarizes information about stock option activity for the three years ended 2015, 20142018, 2017 and 2013:2016: | | | | 2015 | | Weighted Average Exercise Price | | 2014 | | Weighted Average Exercise Price | | 2013 | | Weighted Average Exercise Price | 2018 | | Weighted Average Exercise Price | | 2017 | | Weighted Average Exercise Price | | 2016 | | Weighted Average Exercise Price |
| Options outstanding at January 1 | 3,600,132 |
| | $ | 22.74 |
| | 4,533,782 |
| | $ | 23.86 |
| | 4,664,634 |
| | $ | 26.21 |
| 2,631,569 |
| | $ | 19.44 |
| | 2,542,732 |
| | $ | 21.19 |
| | 2,942,783 |
| | $ | 21.22 |
|
| Granted | — |
| | 0.00 |
| | 8,977 |
| | 16.71 |
| | 756,700 |
| | 14.47 |
| — |
| | — |
| | 756,420 |
| | 12.15 |
| | — |
| | — |
|
| Exercised | (172,218 | ) | | 13.95 |
| | (33,810 | ) | | 14.16 |
| | (30,166 | ) | | 16.94 |
| (184,549 | ) | | 14.28 |
| | (193,263 | ) | | 13.51 |
| | (1,250 | ) | | 13.82 |
|
| Canceled | (485,131 | ) | | 34.98 |
| | (908,817 | ) | | 28.57 |
| | (857,386 | ) | | 28.63 |
| (561,658 | ) | | 23.34 |
| | (474,320 | ) | | 19.45 |
| | (398,801 | ) | | 21.47 |
|
| Options outstanding at December 31 | 2,942,783 |
| | $ | 21.22 |
| | 3,600,132 |
| | $ | 22.74 |
| | 4,533,782 |
| | $ | 23.86 |
| 1,885,362 |
| | $ | 18.78 |
| | 2,631,569 |
| | $ | 19.44 |
| | 2,542,732 |
| | $ | 21.19 |
|
| Options exercise price range at December 31 | $ 13.37 to |
| | | | $ 13.37 to |
| | | | $ 13.35 to |
| | | $ 12.15 to |
| | | | $ 12.15 to
|
| | | | $ 13.37 to |
| | |
| | $ | 33.36 |
| | | | $ | 47.80 |
| | | | $ | 47.80 |
| | | $ | 33.36 |
| | | | $ | 33.36 |
| | | | $ | 33.36 |
| | |
| Options exercisable at December 31 | 2,656,983 |
| | | | 2,954,082 |
| | | | 2,985,175 |
| | | 1,354,202 |
| | | | 2,029,773 |
| | | | 2,513,614 |
| | |
| Shares available for grant at December 31* | 2,659,562 |
| | | | 3,654,426 |
| | | | 4,460,337 |
| | | 3,994,255 |
| | | | 2,131,355 |
| | | | 3,891,121 |
| | |
________________________
| |
| * | Shares available for grant as of December 31, 20152018 reduced by net restricted stock /and restricted stock unit and performance share /and performance share unit award activity of 1,110,7402,358,070 shares and 681,0581,823,432 shares, respectively. |
The following table summarizes information about stock options outstanding at December 31, 2015:2018:
| | | | Options Outstanding | | Options Exercisable | Options Outstanding | | Options Exercisable |
| Exercise Prices | Number Outstanding At 12/31/15 | | Weighted Average Remaining Contractual Life Years | | Weighted Average Exercise Price | | Number Exercisable At 12/31/15 | | Weighted Average Exercise Price | Number Outstanding At 12/31/18 | | Weighted Average Remaining Contractual Life Years | | Weighted Average Exercise Price | | Number Exercisable At 12/31/18 | | Weighted Average Exercise Price |
| $ 13.37 – $20.00 | 778,159 |
| | 6.7 | | $ | 14.12 |
| | 493,671 |
| | $ | 14.11 |
| |
| $ 12.15 – $20.00 | | 809,592 |
| | 6.7 | | $ | 12.84 |
| | 278,432 |
| | $ | 14.14 |
|
| $ 20.01 – $25.00 | 1,353,578 |
| | 3.3 | | 22.59 |
| | 1,353,578 |
| | 22.59 |
| 726,751 |
| | 1.5 | | 22.20 |
| | 726,751 |
| | 22.20 |
|
| $ 25.01 – $30.00 | 783,738 |
| | 3.7 | | 25.55 |
| | 783,738 |
| | 25.55 |
| 344,523 |
| | 1.6 | | 25.33 |
| | 344,523 |
| | 25.33 |
|
| $ 30.01 – $33.36 | 27,308 |
| | 1.0 | | 31.74 |
| | 25,996 |
| | 31.73 |
| 4,496 |
| | 2.4 | | 33.36 |
| | 4,496 |
| | 33.36 |
|
| Total | 2,942,783 |
| | 4.3 | | $ | 21.22 |
| | 2,656,983 |
| | $ | 21.98 |
| 1,885,362 |
| | 3.8 | | $ | 18.78 |
| | 1,354,202 |
| | $ | 21.38 |
|
Pursuant to the Plans, the Committee has established that grants may not be exercised within one year from the date grantedThe 2018 Plan provides for a one-year minimum vesting period for stock options and, generally, options must be exercised within ten years from the date granted. Accordingly, forNo stock options were issued in 2018 and those issued in 2017 were performance-based and may vest after the conclusion of the three-year performance period ending December 31, 2019 based on achievement of performance goals established by the Compensation Committee and subject to the Compensation Committee's exercise of negative discretion to reduce the number of options vested based on the progress towards the company's transformation. All other outstanding stock options were issued in 2014 or prior years and were not performance-based.
For the stock options issued in 2014 and 2013,prior, 25% of such options vested in theone year following issuance. The stock options awarded during such yearsthe issuance and provided a four-year vesting period whereby options vest equally in 25% installments in each year. Options granted with graded vesting arewere accounted for as single options. The 2015, 2014 and 2013 expense has been adjusted for estimated forfeitures of awards that will not vest because service or employment requirements have not been met.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The fair value of each option grantoptions granted is estimated on the date of grant using the Black-Scholes option-pricing model withmodel. The calculated fair value of the 2017 performance option awards was $5.38 based on the following weighted-average assumptions for awards granted in 2014 and 2013 as no options were granted in 2015:assumptions:
|
| | |
| Expected dividend yield | 0.4 | % |
| Expected stock price volatility | 39.1 | % |
| Risk-free interest rate | 2.31 | % |
| Expected life in years | 7.8 |
|
| Forfeiture percentage | 5.0 | % |
|
| | | | | |
| | 2014 | | 2013 |
| Expected dividend yield | 0.3 | % | | 0.4 | % |
| Expected stock price volatility | 36.8 | % | | 38.2 | % |
| Risk-free interest rate | 1.76 | % | | 0.82 | % |
| Expected life in years | 6.1 |
| | 6.1 |
|
| Forfeiture percentage | 13.0 | % | | 9.2 | % |
Expected dividend yields arewas based on historical dividends as the company has no current intention of changing its dividend policy.dividends. Expected stock price volatility percentages arepercentage was calculated at each date of grant based on historical stock prices for a period of time commensurate with the expected life of the option. The assumed expected liveslife and forfeiture percentages arepercentage were based on the company's historical analysis of option history.
The weighted-average fair value of options granted during 2014 and 2013in 2017 was $6.23 and $5.33, respectively.$5.38. The weighted-average remaining contractual life of options outstanding at December 31, 2015, 20142018, 2017 and 20132016 was 4.3, 5.03.8, 3.9 and 5.83.5 years, respectively. The weighted-average contractual life of options exercisable at December 31, 20152018 was 4.02.0 years. The total intrinsic value of stock awards exercised in 2015, 20142018, 2017 and 20132016 was $1,107,000, $101,000$755,000, $350,000 and $158,000,$0, respectively. As of December 31, 2015,2018, the intrinsic value of all options outstanding and of all options exercisable was $2,562,000$0 and $1,636,000,$0, respectively.
The exercise of stock awards in 2015, 20142018, 2017 and 20132016 resulted in cash received by the company totaling $2,413,000, $480,000$2,626,000, $2,676,000 and $512,000$17,000 for each period, respectively with no tax benefits for any period. The total fair value of awards vested during 2015, 20142018, 2017 and 20132016 was $1,867,000, $3,436,000$1,000, $363,000 and $3,778,000,$953,000, respectively.
Restricted Stock and Restricted Stock Units
The following table summarizes information about restricted shares and restricted share units (for(primarily for non-U.S. recipients):
| | | | 2015 | Weighted Average Fair Value | | 2014 | Weighted Average Fair Value | | 2013 | Weighted Average Fair Value | 2018 | Weighted Average Fair Value | | 2017 | Weighted Average Fair Value | | 2016 | Weighted Average Fair Value |
| Stock / Units unvested at January 1 | 312,423 |
| $ | 17.91 |
| | 264,878 |
| $ | 16.69 |
| | 260,548 |
| $ | 19.15 |
| 776,520 |
| $ | 13.75 |
| | 878,356 |
| $ | 15.87 |
| | 641,505 |
| $ | 18.89 |
|
| Granted | 480,839 |
| 19.09 |
| | 218,276 |
| 19.36 |
| | 114,700 |
| 14.49 |
| 377,299 |
| 17.48 |
| | 523,412 |
| 12.37 |
| | 486,711 |
| 12.62 |
|
| Vested | (56,976 | ) | 16.47 |
| | (93,140 | ) | 17.62 |
| | (97,445 | ) | 20.33 |
| (386,275 | ) | 15.05 |
| | (369,128 | ) | 16.63 |
| | (139,298 | ) | 17.86 |
|
| Canceled | (94,781 | ) | 18.11 |
| | (77,591 | ) | 17.58 |
| | (12,925 | ) | 19.23 |
| (129,881 | ) | 14.43 |
| | (256,120 | ) | 14.02 |
| | (110,562 | ) | 16.60 |
|
| Stock / Units unvested at December 31 | 641,505 |
| $ | 18.89 |
| | 312,423 |
| $ | 17.91 |
| | 264,878 |
| $ | 16.69 |
| 637,663 |
| $ | 15.04 |
| | 776,520 |
| $ | 13.75 |
| | 878,356 |
| $ | 15.87 |
|
| | | | | | | | | | | | | | | | | |
The restricted stock awards generally vest ratably over the three years after the award date, except for those awards granted in 2014, which vest after a three-year period.date. Unearned restricted stock compensation, determined as the market value of the shares at the date of grant, is being amortized on a straight-line basis over the vesting period.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Performance Shares and Performance Share Units
The following table summarizes information about performance shares and performance share units (for(primarily for non-U.S. recipients):
| | | | 2015 | | Weighted Average Fair Value | | 2014 | | Weighted Average Fair Value | 2018 | | Weighted Average Fair Value | | 2017 | | Weighted Average Fair Value | | 2016 | | Weighted Average Fair Value |
| Shares / Units unvested at January 1 | 121,644 |
| | $ | 20.05 |
| | — |
| | $ | — |
| 457,879 |
| | $ | 12.33 |
| | 309,468 |
| | $ | 14.58 |
| | 198,401 |
| | $ | 19.50 |
|
| Granted | 114,257 |
| | 18.95 |
| | 152,800 |
| | 20.05 |
| 205,164 |
| | 17.48 |
| | 336,694 |
| | 12.02 |
| | 234,402 |
| | 12.82 |
|
| Vested | — |
| | — |
| | — |
| | — |
| (155,766 | ) | | 12.82 |
| | — |
| | — |
| | — |
| | — |
|
| Canceled | (37,500 | ) | | 19.62 |
| | (31,156 | ) | | 20.05 |
| (58,983 | ) | | 13.43 |
| | (188,283 | ) | | 15.48 |
| | (123,335 | ) | | 19.14 |
|
| Shares / Units unvested at December 31 | 198,401 |
| | $ | 19.50 |
| | 121,644 |
| | $ | 20.05 |
| 448,294 |
| | $ | 14.37 |
| | 457,879 |
| | $ | 12.33 |
| | 309,468 |
| | $ | 14.58 |
|
| | | | | | | | | | | | | | | | | | | |
During 20152018, 2017 and 2014,2016, the performance shares and performance share units (for non-U.S. recipients) were granted as performance awards with a 3 year3-year performance period with payouts based on achievement of certain performance goals. The awards are classified as equity awards as they will be settled in common shares upon vesting. The number of shares earned will be determined at the end of the performance period based on achievement of performance criteria for January 1, 2016 through December 31, 2016the periods established by the Compensation Committee at the time of grant. Recipients will be entitled to receive a number of common shares equal to the number of performance shares that vest based upon the levels of achievement which may range between 0% and 150% of the target number of shares with the target being 100% of the initial grant.
The fair value of the performance awards is based on the stock price on the date of grant discounted for the estimated value of dividends foregone as the awards are not eligible for dividends except to the extent vested. The company assesses the probability that the performance targets
will be met with expense recognized whenever it is probable that at least the minimum performance criteria will be achieved. Depending upon the company's assessment of the probability of achievement of the goals, the company may not recognize any expense associated with performance awards in a given period, may reverse prior expense recorded or record additional expense to make up for expense not recorded in a prior period. Performance award compensation expense is generally expected to be recognized over 3three years. However,No performance award expense was recognized for the years ended December 31, 2015 awards as the performance goals for these performance awards were not met and December 31, 2014,thus those awards were forfeited without any shares earned in 2017 and 2018, respectively. Expense was recognized at 75% of target for the 2016 awards. The company concluded thatcontinues to recognize expense related to the awards as it was notis considered probable that the performance goals as defined in the agreements, wouldfor those awards will be achieved and thus no performance award expense was recognized in 2015 or 2014.met.
Rights Agreement
Effective July 8, 2005, the company adopted a Rights Agreement to replace the company’s previous shareholder rights plan, which expired on July 7, 2005. In order to implement the new Rights Agreement, the Board of Directors declared a dividend of one Right for each outstanding share of the company’s Common Shares and Class B Common Shares to shareholders of record at the close of business on July 19, 2005. Each Right entitled the registered holder to purchase from the company one one-thousandth of a Series A Participating Serial Preferred Share, without par value, at a Purchase Price of $180.00 in cash, subject to adjustment. The Rights were not exercisable until after a person (an “Acquiring ”) has acquired, or obtained the right to acquire, or commences a tender offer to acquire, shares representing 30% or more of the company’s outstanding voting power, subject to deferral by the Board of Directors. If the Rights became exercisable, under certain circumstances, the Rights may have been exercisable to purchase Common Shares of the company, or common shares of an acquiring company, at a price equal to the exercise price of the Right divided by 50% of the then current market price per Common Share or acquiring company common share, as the case may be. The Rights expired on July 18, 2015 and were not redeemed or exchanged by the company. The company could have redeemed and terminated the Rights in whole, but not in part, at a price of $0.001 per Right at any time prior to 10 days following a public announcement that an Acquiring Party has acquired beneficial ownership of shares representing 30% or more of the company’s outstanding voting power, and in certain other circumstances described in the Rights Agreement. The company's Board of Directors did not renew the Rights Agreement which expired on July 18, 2015.
|
| | |
| Notes to Financial Statements | Accumulated Other Comprehensive Income | |
| | |
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Accumulated Other Comprehensive Income (Loss) by Component
Changes in accumulated other comprehensive income ("OCI") during the year ended December 31, 20152018 were as follows (in thousands):
| | | | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| December 31, 2014 | | $ | 86,236 |
| | $ | (6,465 | ) | | $ | (7,601 | ) | | $ | (551 | ) | | $ | 71,619 |
| |
| December 31, 2017 | | | $ | 50,376 |
| | $ | (4,612 | ) | | $ | (7,652 | ) | | $ | (1,242 | ) | | $ | 36,870 |
|
| OCI before reclassifications | | (91,980 | ) | | 10,576 |
| | (2,292 | ) | | 3,545 |
| | (80,151 | ) | | (38,132 | ) | | 7,274 |
| | 5,100 |
| | 2,098 |
| | (23,660 | ) |
| Amount reclassified from accumulated OCI | | — |
| | — |
| | 136 |
| | (991 | ) | | (855 | ) | | — |
| | — |
| | (151 | ) | | (266 | ) | | (417 | ) |
| Net current-period OCI | | (91,980 | ) | | 10,576 |
| | (2,156 | ) | | 2,554 |
| | (81,006 | ) | | (38,132 | ) | | 7,274 |
| | 4,949 |
| | 1,832 |
| | (24,077 | ) |
| December 31, 2015 | | $ | (5,744 | ) | | $ | 4,111 |
| | $ | (9,757 | ) | | $ | 2,003 |
| | $ | (9,387 | ) | |
| December 31, 2018 | | | $ | 12,244 |
| | $ | 2,662 |
| | $ | (2,703 | ) | | $ | 590 |
| | $ | 12,793 |
|
Changes in OCI during the year ended December 31, 20142017 were as follows (in thousands):
| | | | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| December 31, 2013 | | $ | 143,845 |
| | $ | (12,566 | ) | | $ | (5,414 | ) | | $ | (709 | ) | | $ | 125,156 |
| |
| December 31, 2016 | | | $ | (26,199 | ) | | $ | 17,372 |
| | $ | (11,248 | ) | | $ | 740 |
| | $ | (19,335 | ) |
| | | | | | | | | | | | |
| OCI before reclassifications | | (57,609 | ) | | 6,101 |
| | (3,223 | ) | | 562 |
| | (54,169 | ) | | 76,575 |
| | (21,984 | ) | | 3,446 |
| | (2,737 | ) | | 55,300 |
|
| Amount reclassified from accumulated OCI | | — |
| | — |
| | 1,036 |
| | (404 | ) | | 632 |
| | — |
| | — |
| | 150 |
| | 755 |
| | 905 |
|
| Net current-period OCI | | (57,609 | ) | | 6,101 |
| | (2,187 | ) | | 158 |
| | (53,537 | ) | | 76,575 |
| | (21,984 | ) | | 3,596 |
| | (1,982 | ) | | 56,205 |
|
| December 31, 2014 | | $ | 86,236 |
| | $ | (6,465 | ) | | $ | (7,601 | ) | | $ | (551 | ) | | $ | 71,619 |
| |
| | | | | | | | | | | | |
| December 31, 2017 | | | $ | 50,376 |
| | $ | (4,612 | ) | | $ | (7,652 | ) | | $ | (1,242 | ) | | $ | 36,870 |
|
OCI activity related to Long-Term Notes represents currency translation on notes that are long-term in nature and not intended to be settled.
Reclassifications out of accumulated OCI for the year ended December 31, 20152018 and December 31, 20142017 were as follows (in thousands):
| | | | | Amount reclassified from OCI | | Affected Statement of Comprehensive (Income) Loss line | | Amount reclassified from OCI | | Affected Statement of Comprehensive (Income) Loss line |
| | | 2015 | | 2014 | | | 2018 | | 2017 | |
| Defined Benefit Plans | | | | | | | |
| Defined Benefit Plans: | | | | | | | |
| Service and interest costs | | $ | 133 |
| | $ | 1,045 |
| | Selling, General and Administrative | | $ | (151 | ) | | $ | 150 |
| | Selling, General and Administrative |
| Tax | | 3 |
| | (9 | ) | | Income Taxes | | — |
| | — |
| | Income Taxes |
| Total after tax | | $ | 136 |
| | $ | 1,036 |
| | | $ | (151 | ) | | $ | 150 |
| |
| | | | | | | | | | | |
| Derivatives | | | | | | |
| Derivatives: | | | | | | |
| Foreign currency forward contracts hedging sales | | $ | 2,778 |
| | $ | 657 |
| | Net Sales | | $ | 1,352 |
| | $ | (517 | ) | | Net Sales |
| Foreign currency forward contracts hedging purchases | | (3,890 | ) | | (995 | ) | | Cost of Products Sold | | (1,591 | ) | | 1,357 |
| | Cost of Products Sold |
| Interest rate swaps | | — |
| | 12 |
| | Interest Expense | |
| Total before tax | | (1,112 | ) | | (326 | ) | | | (239 | ) | | 840 |
| |
| Tax | | 121 |
| | (78 | ) | | Income Taxes | | (27 | ) | | (85 | ) | | Income Taxes |
| Total after tax | | $ | (991 | ) | | $ | (404 | ) | | | $ | (266 | ) | | $ | 755 |
| |
|
| | |
| Notes to Financial Statements | Capital Stock | |
| | |
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Capital Stock
Capital stock activity for 2015, 20142018, 2017 and 20132016 consisted of the following (in thousands of shares):
| | | | Common Stock Shares | | Class B Shares | | Treasury Shares | Common Stock Shares | | Class B Shares | | Treasury Shares |
| January 1, 2013 Balance | 33,952 |
| | 1,085 |
| | (3,135 | ) | |
| Exercise of stock options | 30 |
| | — |
| | — |
| |
| Restricted stock awards | 102 |
| | — |
| | (23 | ) | |
| December 31, 2013 Balance | 34,084 |
| | 1,085 |
| | (3,158 | ) | |
| Exercise of stock options | 34 |
| | — |
| | — |
| |
| Restricted stock awards | 101 |
| | — |
| | (29 | ) | |
| December 31, 2014 Balance | 34,219 |
| | 1,085 |
| | (3,187 | ) | |
| January 1, 2016 Balance | | 35,024 |
| | 734 |
| | (3,194 | ) |
| Conversion of Class B to Common | 351 |
| | (351 | ) | | — |
| 5 |
| | (5 | ) | | — |
|
| Exercise of stock options | 172 |
| | — |
| | — |
| 1 |
| | — |
| | — |
|
| Restricted stock awards | 282 |
| | — |
| | (7 | ) | 288 |
| | — |
| | (32 | ) |
| December 31, 2015 Balance | 35,024 |
| | 734 |
| | (3,194 | ) | |
| Purchase of treasury shares | | — |
| | — |
| | (390 | ) |
| December 31, 2016 Balance | | 35,318 |
| | 729 |
| | (3,616 | ) |
| Conversion of Class B to Common | | 723 |
| | (723 | ) | | — |
|
| Exercise of stock options | | 193 |
| | — |
| | (4 | ) |
| Restricted stock awards | | 298 |
| | — |
| | (81 | ) |
| December 31, 2017 Balance | | 36,532 |
| | 6 |
| | (3,701 | ) |
| Exercise of stock options | | 185 |
| | — |
| | (50 | ) |
| Restricted stock awards | | 293 |
| | — |
| | (90 | ) |
| December 31, 2018 | | 37,010 |
| | 6 |
| | (3,841 | ) |
Stock awards for 94,781, 77,591129,881, 256,120 and 12,925110,562 shares were canceled in 2015, 20142018, 2017 and 2013,2016, respectively. In 2015, 20142018, 2017 and 2013,2016, dividends of $0.05 per Common Share were declared and paid. In 2018, dividends of $0.023 and $0.034 were declared and paid, respectively, per Class B Common Share as the Board of Directors suspended further dividends on the Class B Common Shares. In 2017 and 2016 dividend of $0.045 per Class B Common Share were declared and paid, respectively.
Charges Related to Restructuring Activities
The company's restructuring charges recorded since 2011 were primarily originally necessitated primarily by continued declines in Medicare and Medicaid reimbursement by the U.S. government, as well as similar healthcare reimbursement pressures abroad, which negatively affect the company's customers (e.g. home health care providers) and continued pricing pressures faced by the company as a result ofdue to the outsourcing by competitors to lower cost locations. In addition, restructuringRestructuring decisions were also the result of reduced profitability in the North America/NA/HME and Asia/Pacific segments. While the company's restructuring efforts have been executed on a timely basis resulting in operating cost savings, the savings have been more than offset by continued margin decline, principally as a result of product mix, reduced volumes and regulatory and compliance costs related to quality system improvements which are unrelated to the restructuring actions. The company expects any near-term cost savings from restructuring will be offset by other costs as a result of pressures on the business.
The company's restructuring commenced in the second quarter of 2011 with the company's decision to close the Hong, Denmark assembly facility as part of the company's ongoing globalization initiative to reduce complexity in the company's supply chain which is intended to reduce expenses to help offset pricing pressures. In the third quarter of 2011, the company continued to execute on the closure of the Hong, Denmark assembly facility and initiated the closure of a smaller facility in the U.S. Charges for the quarter ended December 31, 2011 were primarily incurred at the company's corporate headquarters for severance, with additional costs incurredaddition, as a result of the closure of the Hong, Denmark facility. The facility closures were completedcompany's transformation strategy, additional restructuring actions began in 2012 in addition to the elimination of various positions principally in the North America/Home Medical Equipment (HME)2016 and Asia/Pacific segments.continued through 2018.
Charges for the year ended December 31, 20112016 totaled $10,534,000 including$2,447,000 which were related to NA/HME segment ($2,347,000) and the Asia/Pacific segment ($100,000). In NA/HME, costs were incurred related to severance ($1,862,000) and lease termination costs ($485,000). The Asia/Pacific charges were for severance ($8,352,000), contract exit costs primarily related tocosts. Payments for the closure ofyear ended December 31, 2016 were $2,992,000 and the Hong, Denmark assembly facility ($1,788,000) and inventory write-offs ($277,000), recorded in cost of products sold, and miscellaneous costs ($117,000). The majority of the 2011 North America/HME charges were incurred for severance, primarily at the corporate headquarters as the result of the elimination of various positions principally in sales and administration in Elyria, Ohio. These eliminations were permanent reductions in workforce which primarily resulted in reduced selling, general and administrative expenses. In Europe, the charges were the result of the closure of the company's Hong, Denmark facility. The assembly activities were transferred to other company facilities or outsourced to third parties. This closure enabled the company to reduce fixed operating costs related to the facility and reduce headcount with the transfer of a portion of the production to other company facilities. The 2011 charges have now been paid out andcash payments were funded with operatingcompany's cash flows.on hand. The 2016 charges have been paid out.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Charges for the year ended December 31, 20122017 totaled $11,395,000 including charges for$12,274,000 which were related to NA/HME segment ($8,889,000), Europe ($1,975,000) and the Asia/Pacific segment ($1,410,000). In NA/HME, costs were incurred related to severance ($6,775,000),8,162,000) and lease termination costs ($1,725,000), building and asset write-downs, primarily related to the closure of the Hong, Denmark assembly facility, and other miscellaneous charges in Europe and Asia/Pacific ($2,404,000) and inventory write-offs ($491,000) in Asia/Pacific recorded in cost of products sold. Severance727,000). The European charges were primarily incurred in the North America/HME segmentrelated to
severance ($4,242,000),1,753,000) and lease termination costs ($222,000). The Asia/Pacific segment ($1,681,000) and Europe segment ($817,000). In addition, a portion of the North America/HME segmentcharges were for severance was related to positions eliminated, principally in sales and marketing as well as manufacturing, at the company's Taylor Street facility as a result of the FDA consent decree. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the company. In Europe, positions were eliminated as a result of finalizing the exit from the manufacturing facility in Denmark and an elimination of a senior management position in Switzerland. In Asia/Pacific, at the end of October 2012, the company's management approved a plan to restructure the company's operations in this segment. In Australia, the company consolidated offices / warehouses, decreased staffing and exited various activities while returning to a focus on distribution. At the company's subsidiary, which produces microprocessor controllers, the company decided to cease the contract manufacturing business for companies outside of the healthcare industry.costs. Payments for the year ended December 31, 20122017 were $9,381,000$10,438,000 and the cash payments were funded with operatingcompany's cash flows.on hand. The 20122017 charges have been paid out.
Charges for the year ended December 31, 20132018 totaled $9,336,000 including charges for severance ($8,282,000), lease termination costs ($698,000) and other miscellaneous charges principally in North America/HME ($356,000). Severance charges$3,481,000 which were primarily incurred in the North America/related to NA/HME segment ($5,405,000)1,359,000), Europe segment ($1,640,000)1,773,000) and the Asia/Pacific segment ($970,000)349,000). In NA/HME, costs were incurred related to severance ($1,471,000) and lease termination reversals were recognized ($112,000). The European and Asia/Pacific charges were incurred as a result of the elimination of various positions as part of the company's globalization initiatives. North America/HME segment severance was principally related to positions eliminated due to lost sales volumes resulting from the impact of the FDA consent decree. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the company. In Europe, severance incurred for elimination of certain sales and supply chain positions. In Asia/Pacific, severance principally incurred at the company's subsidiary, which produces microprocessor controllers, as a result of the company's decision in 2012 to cease the contract manufacturing business for companies outside of the healthcare industry. The lease termination costs were principally related to Australia as a result of the restructuring announced in 2012. Payments for the year ended December 31, 2013 were $11,844,000 and were funded with operating cash flows and cash on hand. The 2013 charges have been paid out.
Charges for the year ended December 31, 2014 totaled $11,112,000 including charges for severance ($9,841,000), other charges in IPG and Europe ($1,286,000) principally related to building write-downs and lease termination cost reversals ($15,000). Severance charges were incurred in the North America/HME segment ($4,404,000), Other ($2,978,000), IPG segment ($1,163,000), Asia/Pacific segment ($769,000) and Europe segment ($527,000). The North America/HME segment severance was principally related to additional positions eliminated due to lost sales volumes resulting from the continued impact of the FDA consent decree. The Other severance related to the elimination of two senior corporate executive positions. IPG segment severance related principally to the closure of the London, Canada facility. Europe and Asia/Pacific severance related to the elimination of certain positions as a result of general restructuring efforts. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the company. Payments for the year ended December 31, 2014 were $11,131,000 and were funded with operating cash flows and cash on hand.costs. The majority of the 2014 charges have been paid out other than certain executive charge payments which will be paid out over next few years.
Charges for the year ended December 31, 2015 totaled $1,971,000 including charges for severance ($1,678,000) and charges primarily in the North America/HME segment ($293,000) principally related to a building lease termination. Severance charges were incurred in the North America/HME segment ($1,069,000), Europe segment ($510,000), IPG segment ($73,000) and Asia/Pacific segment ($26,000) related to the elimination of certain positions as a result of general restructuring efforts. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the company. Payments for the year ended December 31, 2015 were $3,723,000 and were funded with operating cash flows and cash on hand. The majority of the 20152018 charges are expected to be paid out within the next 12twelve months. To date, the company's liquidity has not been materially impacted.
There have been no material changes in accrued balances related to the charges, either as a result of revisions in the plans or changes in estimates. In addition, the savings anticipated as a result of the company's restructuring plans have been or are expected to be achieved, primarily resulting in reduced salary and benefit costs principally impacting Selling, General and Administrative expenses, and to a lesser extent, Costs of Products Sold. However, these savings haveTo date, the company's liquidity has not been more than offset by continued margin decline, principally as a result of product mix, and higher regulatory and compliance costs related to quality system improvements as well as reduced net sales volumes.materially impacted.
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A progression by reporting segment of the accruals recorded as a result of the restructuring is as follows (in thousands):
| | | | Severance | | Inventory | | Lease Terminations | | Other | | Total | Severance | | Lease Terminations | | Total |
| December 31, 2010 Balance | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| December 31, 2015 Balance | | | | | | |
| NA/HME | | $ | 662 |
| | $ | 237 |
| | $ | 899 |
|
| Europe | | 312 |
| | — |
| | 312 |
|
| Other | | 1,503 |
| | — |
| | 1,503 |
|
| Total | | 2,477 |
| | 237 |
| | 2,714 |
|
| Charges | | | | | | | | | | | | | | |
| North America/HME | 4,755 |
| | — |
| | — |
| | 4 |
| | 4,759 |
| |
| IPG | 123 |
| | — |
| | — |
| | — |
| | 123 |
| |
| Europe | 3,288 |
| | 277 |
| | 1,788 |
| | 113 |
| | 5,466 |
| |
| NA/HME | | 1,862 |
| | 485 |
| | 2,347 |
|
| Asia/Pacific | 186 |
| | — |
| | — |
| | — |
| | 186 |
| 100 |
| | — |
| | 100 |
|
| Total | 8,352 |
| | 277 |
| | 1,788 |
| | 117 |
| | 10,534 |
| 1,962 |
| | 485 |
| | 2,447 |
|
| Payments | | | | | | | | | | | | | | |
| North America/HME | (1,663 | ) | | — |
| | — |
| | (4 | ) | | (1,667 | ) | |
| IPG | (52 | ) | | — |
| | — |
| | — |
| | (52 | ) | |
| NA/HME | | (1,741 | ) | | (602 | ) | | (2,343 | ) |
| Europe | (1,546 | ) | | (277 | ) | | (1,714 | ) | | (113 | ) | | (3,650 | ) | (312 | ) | | — |
| | (312 | ) |
| Asia/Pacific | (186 | ) | | — |
| | — |
| | — |
| | (186 | ) | (100 | ) | | — |
| | (100 | ) |
| Total | (3,447 | ) | | (277 | ) | | (1,714 | ) | | (117 | ) | | (5,555 | ) | |
| December 31, 2011 Balance | | | | | | | | | | |
| North America/HME | 3,092 |
| | — |
| | — |
| | — |
| | 3,092 |
| |
| IPG | 71 |
| | — |
| | — |
| | — |
| | 71 |
| |
| Europe | 1,742 |
| | — |
| | 74 |
| | — |
| | 1,816 |
| |
| Asia/Pacific | — |
| | — |
| | — |
| | — |
| | — |
| |
| Total | 4,905 |
| | — |
| | 74 |
| | — |
| | 4,979 |
| |
| Charges | | | | | | | | | | |
| North America/HME | 4,242 |
| | — |
| | 5 |
| | — |
| | 4,247 |
| |
| IPG | 35 |
| | — |
| | — |
| | — |
| | 35 |
| |
| Europe | 817 |
| | — |
| | 53 |
| | 1,223 |
| | 2,093 |
| |
| Asia/Pacific | 1,681 |
| | 491 |
| | 1,667 |
| | 1,181 |
| | 5,020 |
| |
| Total | 6,775 |
| | 491 |
| | 1,725 |
| | 2,404 |
| | 11,395 |
| |
| Payments | | | | | | | | | | |
| North America/HME | (3,587 | ) | | — |
| | (5 | ) | | — |
| | (3,592 | ) | |
| IPG | (106 | ) | | — |
| | — |
| | — |
| | (106 | ) | |
| Europe | (1,964 | ) | | — |
| | (127 | ) | | (1,223 | ) | | (3,314 | ) | |
| Asia/Pacific | (812 | ) | | (340 | ) | | (42 | ) | | (1,175 | ) | | (2,369 | ) | |
| Total | (6,469 | ) | | (340 | ) | | (174 | ) | | (2,398 | ) | | (9,381 | ) | |
| December 31, 2012 Balance | | | | | | | | | | |
| North America/HME | 3,747 |
| | — |
| | — |
| | — |
| | 3,747 |
| |
| Europe | 595 |
| | — |
| | — |
| | — |
| | 595 |
| |
| Asia/Pacific | 869 |
| | 151 |
| | 1,625 |
| | 6 |
| | 2,651 |
| |
| Total | 5,211 |
| | 151 |
| | 1,625 |
| | 6 |
| | 6,993 |
| |
| Charges | | | | | | | | | | |
| North America/HME | 5,405 |
| | — |
| | 164 |
| | 353 |
| | 5,922 |
| |
| IPG | 267 |
| | — |
| | — |
| | — |
| | 267 |
| |
| Europe | 1,640 |
| | — |
| | — |
| | — |
| | 1,640 |
| |
| Asia/Pacific | 970 |
| | — |
| | 534 |
| | 3 |
| | 1,507 |
| |
| Total | 8,282 |
| | — |
| | 698 |
| | 356 |
| | 9,336 |
| |
| Payments | | | | | | | | | | |
| North America/HME | (6,347 | ) | | — |
| | (164 | ) | | (353 | ) | | (6,864 | ) | |
| IPG | (175 | ) | | — |
| | — |
| | — |
| | (175 | ) | |
| Europe | (1,146 | ) | | — |
| | — |
| | — |
| | (1,146 | ) | |
| Asia/Pacific | (1,839 | ) | | (151 | ) | | (1,660 | ) | | (9 | ) | | (3,659 | ) | |
| Other | | (237 | ) | | — |
| | (237 | ) |
| Total | $ | (9,507 | ) | | $ | (151 | ) | | $ | (1,824 | ) | | $ | (362 | ) | | $ | (11,844 | ) | $ | (2,390 | ) | | $ | (602 | ) | | $ | (2,992 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | |
FS-33 |
| | |
| Notes to Financial Statements | Charges Related to Restructuring | |
| | |
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
| | | | Severance | | Inventory | | Lease Terminations | | Other | | Total | Severance | | Lease Terminations | | Total |
| December 31, 2013 Balance | | | | | | | | | | |
| North America/HME | $ | 2,805 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,805 |
| |
| IPG | 92 |
| | — |
| | — |
| | — |
| | 92 |
| |
| December 31, 2016 Balance | | | | | | |
| NA/HME | | $ | 783 |
| | $ | 120 |
| | $ | 903 |
|
| Other | | 1,266 |
| | — |
| | 1,266 |
|
| Total | | 2,049 |
| | 120 |
| | 2,169 |
|
| Charges | | | | | | |
| NA/HME | | 8,162 |
| | 727 |
| | 8,889 |
|
| Europe | 1,089 |
| | — |
| | — |
| | — |
| | 1,089 |
| 1,753 |
| | 222 |
| | 1,975 |
|
| Asia/Pacific | — |
| | — |
| | 499 |
| | — |
| | 499 |
| 1,410 |
| | — |
| | 1,410 |
|
| Total | 3,986 |
| | — |
| | 499 |
| | — |
| | 4,485 |
| 11,325 |
| | 949 |
| | 12,274 |
|
| Charges | | | | | | | | | | |
| North America/HME | 4,404 |
| | — |
| | — |
| | — |
| | 4,404 |
| |
| IPG | 1,163 |
| | — |
| | — |
| | 761 |
| | 1,924 |
| |
| Payments | | | | | | |
| NA/HME | | (6,506 | ) | | (680 | ) | | (7,186 | ) |
| Europe | 527 |
| | — |
| | — |
| | 525 |
| | 1,052 |
| (1,504 | ) | | (88 | ) | | (1,592 | ) |
| Asia/Pacific | 769 |
| | — |
| | (15 | ) | | — |
| | 754 |
| (1,410 | ) | | — |
| | (1,410 | ) |
| Other | 2,978 |
| | — |
| | — |
| | — |
| | 2,978 |
| (250 | ) | | — |
| | (250 | ) |
| Total | 9,841 |
| | — |
| | (15 | ) | | 1,286 |
| | 11,112 |
| (9,670 | ) | | (768 | ) | | (10,438 | ) |
| Payments | | | | | | | | | | |
| North America/HME | (6,547 | ) | | — |
| | — |
| | — |
| | (6,547 | ) | |
| IPG | (1,107 | ) | | — |
| | — |
| | (761 | ) | | (1,868 | ) | |
| December 31, 2017 Balance | | | | | | |
| NA/HME | | 2,439 |
| | 167 |
| | 2,606 |
|
| Europe | | 249 |
| | 134 |
| | 383 |
|
| Other | | 1,016 |
| | — |
| | 1,016 |
|
| Total | | 3,704 |
| | 301 |
| | 4,005 |
|
| Charges | | | | | | |
| NA/HME | | 1,471 |
| | (112 | ) | | 1,359 |
|
| Europe | (1,195 | ) | | — |
| | — |
| | (525 | ) | | (1,720 | ) | 1,773 |
| | — |
| | 1,773 |
|
| Asia/Pacific | (769 | ) | | — |
| | (227 | ) | | — |
| | (996 | ) | 349 |
| | — |
| | 349 |
|
| Total | (9,618 | ) | | — |
| | (227 | ) | | (1,286 | ) | | (11,131 | ) | 3,593 |
| | (112 | ) | | 3,481 |
|
| December 31, 2014 Balance | | | | | | | | | | |
| North America/HME | 662 |
| | — |
| | — |
| | — |
| | 662 |
| |
| IPG | 148 |
| | — |
| | — |
| | — |
| | 148 |
| |
| Payments | | | | | | |
| NA/HME | | (3,254 | ) | | (30 | ) | | (3,284 | ) |
| Europe | 421 |
| | — |
| | — |
| | — |
| | 421 |
| (1,841 | ) | | (134 | ) | | (1,975 | ) |
| Asia/Pacific | — |
| | — |
| | 257 |
| | — |
| | 257 |
| (285 | ) | | — |
| | (285 | ) |
| Other | 2,978 |
| | — |
| | — |
| | — |
| | 2,978 |
| (260 | ) | | — |
| | (260 | ) |
| Total | 4,209 |
| | — |
| | 257 |
| | — |
| | 4,466 |
| (5,640 | ) | | (164 | ) | | (5,804 | ) |
| Charges | | | | | | | | | | |
| North America/HME | 1,069 |
| | — |
| | 292 |
| | — |
| | 1,361 |
| |
| IPG | 73 |
| | — |
| | — |
| | — |
| | 73 |
| |
| Europe | 510 |
| | — |
| | — |
| | — |
| | 510 |
| |
| Asia/Pacific | 26 |
| | — |
| | 1 |
| | — |
| | 27 |
| |
| Total | 1,678 |
| | — |
| | 293 |
| | — |
| | 1,971 |
| |
| Payments | | | | | | | | | | |
| North America/HME | (1,069 | ) | | — |
| | (55 | ) | | — |
| | (1,124 | ) | |
| IPG | (221 | ) | | — |
| | — |
| | — |
| | (221 | ) | |
| December 31, 2018 Balance | | | | | | |
| NA/HME | | 656 |
| | 25 |
| | 681 |
|
| Europe | (619 | ) | | — |
| | — |
| | — |
| | (619 | ) | 181 |
| | — |
| | 181 |
|
| Asia/Pacific | (26 | ) | | — |
| | (258 | ) | | — |
| | (284 | ) | 64 |
| | — |
| | 64 |
|
| Other | (1,475 | ) | | — |
| | — |
| | — |
| | (1,475 | ) | 756 |
| | — |
| | 756 |
|
| Total | (3,410 | ) | | — |
| | (313 | ) | | — |
| | (3,723 | ) | $ | 1,657 |
| | $ | 25 |
| | $ | 1,682 |
|
| December 31, 2015 Balance | | | | | | | | | | |
| North America/HME | 662 |
| | — |
| | 237 |
| | — |
| | 899 |
| |
| Europe | 312 |
| | — |
| | — |
| | — |
| | 312 |
| |
| Other | 1,503 |
| | — |
| | — |
| | — |
| | 1,503 |
| |
| Total | $ | 2,477 |
| | $ | — |
| | $ | 237 |
| | $ | — |
| | $ | 2,714 |
| |
| | | | | | | |
INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Income Taxes
Earnings (loss) from continuing operations before income taxes consist of the following (in thousands):
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Domestic | $ | (54,812 | ) | | $ | (104,776 | ) | | $ | (73,529 | ) | $ | (72,703 | ) | | $ | (96,343 | ) | | $ | (68,949 | ) |
| Foreign | 43,072 |
| | 41,566 |
| | 30,070 |
| 38,601 |
| | 30,093 |
| | 39,392 |
|
| | $ | (11,740 | ) | | $ | (63,210 | ) | | $ | (43,459 | ) | $ | (34,102 | ) | | $ | (66,250 | ) | | $ | (29,557 | ) |
The company has provided for income taxes (benefits) from continuing operations as follows (in thousands):
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Current: | | | | | | | | | | |
| Federal | $ | (167 | ) | | $ | (7,105 | ) | | $ | (2,485 | ) | $ | (202 | ) | | $ | (125 | ) | | $ | (360 | ) |
| State | (150 | ) | | (63 | ) | | 300 |
| 147 |
| | (437 | ) | | (115 | ) |
| Foreign | 11,439 |
| | 15,105 |
| | 11,043 |
| 12,675 |
| | 15,223 |
| | 12,873 |
|
| | 11,122 |
| | 7,937 |
| | 8,858 |
| 12,620 |
| | 14,661 |
| | 12,398 |
|
| Deferred: | | | | | | | | | | |
| Federal | 3,222 |
| | 100 |
| | 3,011 |
| (2,073 | ) | | (2,164 | ) | | — |
|
| State | 318 |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Foreign | 48 |
| | (2,487 | ) | | (994 | ) | (727 | ) | | (2,206 | ) | | 901 |
|
| | 3,588 |
| | (2,387 | ) | | 2,017 |
| (2,800 | ) | | (4,370 | ) | | 901 |
|
| Income Taxes | $ | 14,710 |
| | $ | 5,550 |
| | $ | 10,875 |
| $ | 9,820 |
| | $ | 10,291 |
| | $ | 13,299 |
|
A reconciliation to the effective income tax rate from the federal statutory rate is as follows:
