UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[☒] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172022
OR
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[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[☐] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-15103
INVACARE CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio | Ohio | 95-2680965 | |
| (State or other jurisdiction of
incorporation or organization)
| (IRS Employer Identification No.) | |
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| One Invacare Way, Elyria, Ohio | | Elyria, | | Ohio | 44035 | |
| (Address of principal executive offices) | (Zip Code) | |
(440) 329-6000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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| Title of each class | Trading Symbol | Name of exchange on which registered |
| Common Shares, without par value | IVC | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ¨☐ Accelerated filer x☒ Non-accelerated filer ¨ (Do not check if a smaller reporting company) ☐Smaller reporting company ¨ ☒Emerging growth company ¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
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As of November 3, 2017,August 5, 2022, the registrant had 32,830,07638,310,514 Common Shares and 6,3573,667 Class B Common Shares outstanding.
Table of Contents
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| PART I: FINANCIAL INFORMATION | PART I: FINANCIAL INFORMATION | PART I: FINANCIAL INFORMATION |
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| PART II: OTHER INFORMATION | PART II: OTHER INFORMATION | PART II: OTHER INFORMATION |
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| 1A | | | 1A | |
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About Invacare Corporation
Invacare Corporation (NYSE: IVC) ("Invacare" or the "company") is a leading manufacturer and distributor in its markets for medical equipment used in non-acute care settings. At its core, the company designs, manufactures and distributes medical devices that help people to move, breathe, rest and perform essential hygiene. The company provides clinically complex medical device solutions for congenital (e.g., cerebral palsy, muscular dystrophy, spina bifida), acquired (e.g., stroke, spinal cord injury, traumatic brain injury, post-acute recovery, pressure ulcers) and degenerative (e.g., ALS, multiple sclerosis, chronic obstructive pulmonary disease (COPD), elderly,age related, bariatric) ailments.conditions. The company's products are important parts of care for people with a wide range of challenges, from those who are active and heading to work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company sells its products principally to home medical equipment providers with retail and e-commerce channels, residential care operators, dealers and government health services in North America, Europe and Asia/Asia Pacific. For more information about the company and its products, visit Invacare'sthe company's website at www.invacare.com. The contents of the company's website are not part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis presented below is concerned with material changes in financial condition and results of operations between the periods specified in the condensed consolidated balance sheetsheets at SeptemberJune 30, 20172022 and December 31, 2016,2021, and in the condensed consolidated statement of comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 2016.2021. All comparisons
presented are with respect to the same period last year, unless otherwise stated. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this quarterly reportQuarterly Report on Form 10-Q and the MD&A included in the company's annual reportAnnual Report on Form 10-K for the year ended December 31, 2016.2021. For some matters, SEC filings from prior periods may be useful sources of information.
OVERVIEW
OVERVIEW
Invacare is a multi-national company with integrated capabilities to design, manufacture and distribute durable medical devices. The company makes products that help people move, breathe, rest and perform essential hygiene, and with those products the company supports people with congenital, acquired and degenerative conditions. The company's products and solutions are important parts of care for people with a range of challenges, from those who are active and involved in work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company operates in facilities in North America, Europe and Asia Pacific, which are the result of dozens of acquisitions made over the company's forty-two-year history. Some of these acquisitions have been combined into integrated operating units, while others have remained relatively independent.
COVID-19 / Supply Chain Impacts
The company continues to monitor the impact of the pandemic, which continues to negatively impact the company’s business in 2022 with regard to supply chain disruptions impacting both input costs and availability of components, resulting in compressed gross margins. The company expects these issues will remain throughout 2022.While the company has implemented actions to mitigate the negative impact of higher input costs, it is expected that there could continue to be a difference between the timing of when the mitigation actions are effective and when the cost inflation is incurred.
The year-over-year decline in revenue experienced in the second quarter of 2022 was primarily in all product categories given supply chain challenges but most notably in North America. These challenges also impacted sequential revenue growth in respiratory and lifestyle product categories.
However, the company realized sequential growth in its mobility and seating product category in the second quarter of 2022 as a result of improved access to healthcare and loosening of public health restrictions. However, demand for mobility and seating product still has not returned to pre-pandemic levels.
The company continues to experience elevated backlog across all product categories and regions, with strong demand in mobility and seating and lifestyle products. During the second quarter of 2022, we started to experience slower demand for respiratory products which we believe is influenced by the progression of the pandemic resulting in a reduction in pandemic-related demand. The company has, and continues to, experience availability issues with components which may limit the ability to increase output and meet demand. In addition, the company has continued to experience cost increases from pandemic-related supply chain disruptions. These disruptions and availability issues, from pandemic-related supply chain challenges and supplier delivery holds resulting from past due payables, have resulted in intermittent production stoppages.
The extent to which the company’s operations will continue to be impacted by the pandemic will depend largely on future developments, which remain highly uncertain and difficult to accurately predict, including, among other things, new information which may emerge concerning the severity of the pandemic, actions by government authorities to contain COVID-19 and its variants or treat their impacts, such as restrictions imposed in China to control the pandemic, and potential of reimposed public health restrictions or restrictions on access to healthcare facilities. In addition, supply chain disruptions and inflation continue to negatively impact the global economy and may affect the business including availability and cost of components and freight, which may have a negative impact on the company and results of operations, if mitigation actions are not effective.
Strategy
For its first 35 years, theThe company historically had a strategy to be a leading provider of durable medical equipment to health care providers in global markets by providing the broadest portfolio available. This strategy hadhas not kept pace with certain reimbursement changes, competitive dynamics and company-specific challenges, especially in the United States market.challenges. Since 2015, the company has made a major shift in its strategy to alignstrategy. The company has since been aligning its resources to produce products and solutions that assist customers and end-users with their most clinically complex needs. By focusing the company’scompany's efforts to provide the best possible assistance and outcomes to the people and caregivers who use its products, the company aims to improve its financial condition for sustainable profit and growth. To execute this transformation,As a result, the company is undertaking a substantial three-phase, multi-year transformationbusiness optimization plan.
TransformationBusiness Optimization Efforts
The company has been executingcontinues to execute a multi-year transformationstrategy to shiftreturn the company to profitability by focusing its new strategy, especially in North America. This is expected to yield better financial results from the application of the company’s resources toon products and solutions that provide greater healthcare value in clinically complex rehabilitation and post-acute care.
Cost pressures on the business impacted by supply chain disruptions and inflationary economic conditions are anticipated to continue through 2022. While the company has implemented actions to mitigate these cost increases, additional actions may be needed to drive profitability and free cash flow generation. These actions could include further restructuring actions including organization optimization, supply chain rationalization, and product line rationalization for those product categories which do not deliver adequate profitability given the higher cost inputs being incurred. These actions are anticipated to result further restructuring costs in 2022.
The transformation is divided intocompany's business optimization actions balance product portfolio changes across all regions and cost improvements in supply chain and administrative functions. Key elements of the following three phases:global business optimization plans are:
•Continue to drive all business segments and product lines based on their potential to achieve a leading market position and to support profitability goals;
Phase One - Assess•Simplify the organization to leverage a reduced cost structure while allocating resources to the business units or product categories which deliver improved financial returns;
•Product rationalization and Reorient
Increase commercial effectiveness;
Shiftdiscontinuance with consideration of cost increases incurred by the company and narrowthose anticipated to continue. Adjust the product portfolio;portfolio to consistently grow profitability amid cost
Align innovation
increases by adding new products, reducing costs and continuing to improve customer experiences; and
•Take actions globally to reduce working capital and improve free cash flow.
As it navigates the uncertain business environment resulting from the pandemic, the company continues to allocate more resources to clinically complex solutions;
Accelerate quality efforts with culturethe business units experiencing increased demand and expects to continue taking actions to mitigate the potential negative financial and operational impacts on other parts of quality excellence; and
Develop and expand talent.
Phase One,the business that have declined. In the medium-term, the company still expects to execute on its business optimization strategy, such as the global IT modernization initiative which is largely complete in North America, was strategic alignment and investment phase with significant shifts inintended to optimize the mix of the company's business. During Phase One, the company made investments in SG&A, including hiring and training over 50% new North America/HME clinical sales representatives,
mainly in 2016. The company reduced net sales of less accretive product, including reducing net sales of aids for daily living, divested its Garden City Medical, Inc. (GCM) subsidiary, and discontinued non-core product categories such as consumer power wheelchairs in North America/HME. During Phase One, the North America/HME business also demonstrated gross margin percentage improvement through a more clinical mix of products from the integration of clinical subsidiaries, as well as an enhanced new product pipeline.
Phase Two - Build and Align
Leverage commercial improvements;
Optimize the business for cost and efficiency;
Continue to improve quality systems;
Launch new clinical product platforms; and
Expand talent management and culture.
operating structure.
The company is currentlyintends to continue to make significant investments in Phase Two of the transformation, focusedits business improvement initiatives with a focus on North America. By the end this phase, the company expects growth in sales and gross profit dollars, as well as an improvement in operating incomeimproving profitability and free cash flow. This is expectedflow generation. As a result, the company may take actions which may reduce sales in certain areas, refocus resources away from less profitable activities, and look at its global infrastructure for opportunities to comefurther optimize the business. As part of the company’s efforts to streamline its operations and focus its resources on core product lines that provide the greatest value and financial returns, the company continuously evaluates opportunities and activities, including potential divestitures, which it considers from time to time, particularly if they involve businesses or assets outside of the commercial executioncompany’s primary areas of phase one investments and new product launches. focus.
Outlook
The company also is optimizingparticipates in durable healthcare markets and serves a persistent need for its infrastructure and improving efficiencies. Since October 2016 the company has announced approximately $17.5 million in cost reduction activities.
Phase Three - Grow
Lead in quality culture and operations excellence; and
Grow above market.
products. By the end of phase three, the company expects continued improvements in net sales,continuing to drive for improved operating margin, operating income and free cash flow.
In the second half of 2017,efficiency, the company expects to grow revenue and profit, and improve sales sequentiallyits cash flow performance into the future.
Cost pressures on the business due to supply chain disruptions and inflationary economic conditions are anticipated to continue into 2022. The company continues to see higher input costs related to freight and materials, increasing the challenges to schedule deliveries of key components, including electronic components for respiratory and mobility and seating products.While the company has implemented actions to mitigate these cost increases, additional restructuring actions may be implemented to drive profit and improve cash flows. These restructuring actions may include organization simplification and supply chain rationalization. These actions are expected to include organization and supply chain changes and a narrowing of the product portfolio for those items which no longer meet customer or business needs. These actions are anticipated to take effect in 2022 and as a result the company anticipates incurring additional costs related to its North America/HME segment through new product and service offerings and increased commercial effectiveness from its salesforce. In the third quarter of 2017,restructuring actions.
consolidatedChallenges related to the availability of components continued to have a significant impact on the fulfillment of demand as experienced in 2Q22 and impacted the efficiency of operations. As these conditions continue into 3Q22, the company has suspended its financial guidance for the remainder of the year.
The benefit of additional liquidity available to the business is expected to improve access to components and support sequential improvement in net sales, decreased comparedbut is not anticipated to have a meaningful impact until the same period prior year,later half of 3Q22 and sequentially increased 3.7% compared tointo 4Q22. For 3Q22, the second quarter of 2017. Thiscompany anticipates sequential improvement wasin Adjusted EBITDA driven by Europe, North America/HMErevenue growth, pricing effectiveness, and Asia/Pacific. Grossrestructuring benefits partially offset by continued higher input costs. In addition, the financing transactions announced in July 2022 are anticipated to result in free cash flow usage for 3Q22, including a use of working capital to help accelerate the business evolution.
Improvement in the company's earnings performance for the future is expected to benefit from: (1) margin as a percentage of net sales improved principallyexpansion expected as a result of the strategiceffectiveness of pricing actions, favorable product mix shift toward clinically complex products and reduced freight costs.
The company expects to take advantage of opportunities for growth across its many product lines and businesses by providing clinical solutions to the growing demographic in need of the company’s products. The company also remains focused on building an enterprise-wide quality culture, which it believes will ultimately be a competitive advantage. The company intends to move forward with its transformation, while managing through external uncertainty, such as changes in payor reimbursement policies. The company has demonstrated some improvements in the key short-term metrics as a result of product rationalization efforts and improved efficiencies in our operations including maximizing our distribution structure offset by higher material and freight costs; and (2) benefit of restructuring actions. SG&A expense for the second half of 2022 is anticipated to continue to be impacted by classification of IT costs as operating expenses as a result of a temporary pause in the ERP roll-out. Stock compensation expense for the year is expected to be similar to 2021.
The company continues to focus on its strategic shift. However,transformation plan, revenue growth for clinically relevant product categories, and effectiveness of pricing actions to drive significant improvement in spitefinancial performance to deliver enhanced long-term shareholder value.
Favorable Long-Term Demand
Ultimately, demand for the company's products and services is based on the need to provide care for people with certain conditions. The company's medical devices provide solutions for end-users and caregivers. Therefore, the demand for the company's medical equipment is largely driven by population growth and the incidence of this, therecertain conditions where treatment may be interim periods wheresupplemented by the company’s investments do not fully yield expected financial improvements, particularly in light of various external factors.company's devices. The company also provides solutions to help equipment providers and residential care operators deliver cost-effective and high-quality care. The company believes that its commercial team, customer relationships, products and solutions, supply chain infrastructure, and strong research and development pipeline will create favorable business potential.
STATUS OF THE CONSENT DECREE
July 2022 Financings
On July 24, 2017,26, 2022, the company received noticeentered into a senior secured term loan agreement with certain funds managed by Highbridge Capital Management LLC, providing for delayed draws of up to $104.5 million. The company completed an initial drawdown of $66.5 million under the term loan agreement effective July 26, 2022. The secured term loan matures on July 26, 2026 and accrues interest at an initial annual rate of SOFR + 7.00% or a base rate plus 6.00% and after the second anniversary of the closing date at an annual rate of SOFR + 8.75% or a base rate plus 7.75%. The company may draw the remaining $38 million from the United States FoodTerm Loan Agreement in three incremental tranches subject to certain conditions.
Concurrently, the company entered into private exchange agreements providing for the settlement of $5.0 million aggregate principal amount of the company’s outstanding 5.00% Series II Convertible Senior Exchange Notes due 2024 and Drug Administration (FDA)up to $55.3 million aggregate principal amount of its outstanding 4.25% Convertible Senior Notes due 2026. The company completed the exchange of all $5.0 million aggregate principal amount of the 5.00% notes and $41.5 million aggregate principal amount of the 4.25% notes on July 26, 2022. This exchange was funded by $31.1 million aggregate principal amount of newly issued 5.68% Convertible Senior Secured Notes due 2026, 2.7 million Common Shares of the company, cash payment of $4.5 million, and cash equal to accrued and unpaid interest on the outstanding convertible notes exchanged in the transaction. The company may exchange the remaining $13.8 million aggregate principal amount of 4.25% notes for $10.4 million aggregate principal amount of new notes in two incremental tranches subject to certain conditions. The new notes will pay interest at a 5.68% annual rate and mature on July 1, 2026.
In addition, the company amended its existing asset based lending credit facility to extend its maturity to January 16, 2026 and reduce the maximum notional amount of the facility from $90 million to $35 million. Proceeds from the secured term loan were used to repay in full outstanding borrowings under the asset based lending credit facility.
Proceeds from the secured term loan are also anticipated to be used to fund working capital, restructuring actions and general purposes. The company recognizes that the company had satisfied the FDA’s requirements under the consent decree to resume full operations at its Corporatenear-term external factors of inflation and Taylor Street manufacturing facilities in Elyria, Ohio. As a result, the company then became able to produce and sell all products made in the Taylor Street facility without the previous restrictions under the consent decree, which has been in effect since December 21, 2012.
Also, the company became able to sell its wheelchairs designed and manufactured at the Taylor Street facility without having to obtain the verification of medical necessity (VMN) documentation previously required under the consent decree. To ensure the facilities are in continuous compliance with FDA regulations and the consent decree, the consent decree requires the company to undergo five years of audits by a third-party auditor selected by Invacare. The third-party auditor will inspect the Corporate and Taylor Street facilities every six months for the first year, and then once every 12 months for the four years thereafter. Other Invacare manufacturing facilities were unaffected by the consent decree and have remained fully operational.
For a complete description of the consent decree, see the “Contingencies” note to the financial statements contained in Item 1 of this Quarterly Report on Form 10-Q and “Forward-Looking Statements” contained below in this Item.
OUTLOOK
The company has been executing a multi-year strategic transformation of its overall approach to quality, product mix, commercial execution, supply chain challenges, as well as costs associated with restructuring actions, may require balance sheet action, including additional financing to support working capital requirements (refer to "Liquidity and engineering changes. The company is increasingly focused on solutions that provide the greatest clinical benefit to patients and help healthcare providers be most effective. These changes apply globally, although the efforts to drive change have been most intensely focused in North America. Part of this strategy has been to diminish sales of less clinically valuable products. Following a positive turn in sequential net sales growth after several quarters of transformation work, the company expects North America/HME net sales to continue to improve sequentially in the fourth quarter 2017 versus third quarter 2017. The company is gradually applying the transformation to the Europe segment, which may slightly reduce the segment's net sales as it begins to shift its product mix toward more clinically valued, higher margin products. Regarding the IPG segment, the company expects its new go-to-market strategy within the capital selling environment to continue to take time to yield growth.
The launch of the new Invacare® TDX® SP2 power wheelchair with LiNX® technology and Ultra Low Maxx seating in August 2017 and the ability to sell power and manual wheelchairs from the Taylor Street facility without the previous restrictions from the consent decree are unlikely to have a material impact on the business until at least 2018 due to the time it takes to earn that business combined with the industry's extended quote-to-order process. The quote-to-order process can delay the successful conversion of sales quotes to shipments between 60-90 days.
Capital Resources"). The company will continue to take actions to optimize its focus on reducing costs and improving efficiencies. The company's priorities remain: emphasizing a culture of quality excellence and achieving its long-term earnings potential. The company remains committedbusiness as required to its long-term earnings objective, which is largely based upon four parts:
•Net sales growth in North America/HME mobility and
seating segment;
•Net sales growthoperate in the IPG post-acute care business;present landscape.
•Cost reductions across the North America businesses; and
•Net sales growth and efficiency gains in Europe.
Because of the scope and magnitude of changes being undertaken and the realized and potential changes affecting the business, the company expects some variationRefer to Part I, Item 1-Long-Term Liabilities-Long-Term Debt-July 2022 Financing in the timing and relative magnitude of these results.notes to the condensed
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| MD&A | Overview | |
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MD&A | Results of Operations | |
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RESULTS OF OPERATIONS
On September 30, 2016, the company completed the sale of its subsidiary, Garden City Medical Inc. ("GCM"), to Compass Health Brands. GCM, doing business as PMI and Pinnacle Medsource, sourced and distributed primarily single-use products under the brand ProBasics™ by PMI. GCM was part of the North America/Home Medical Equipment (NA/HME) segment. This divestiture further refined the company’s focus on other lines of business where the company’s resources can best generate returns in areas of complex rehabilitation and post-acute care. CGM was not deemed a discontinued operation for financial reporting purposes, and therefore is included in the results below unless otherwise noted. For more information, see the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.for more information about the July 2022 financing transactions.
References herein to "year-to-date" refer to the first nine months of the fiscal year, ended September 30.
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| MD&A | Net Sales | |
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MD&A | Net Sales | |
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RESULTS OF OPERATIONS - NET SALES
The company operates in two primary business segments: North America and Europe with each selling the company's primary product categories, which include: lifestyle, mobility and seating and respiratory therapy products. Sales in Asia Pacific are reported in All Other and include products similar to those sold in North America and Europe.
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| ($ in thousands USD) | 2Q22* | 2Q21 | % Change
Fav/(Unfav) | Foreign Exchange % Impact | | Constant Currency % Change
Fav/(Unfav) |
| Europe | 112,768 | | 121,296 | | (7.0) | | (9.8) | | | 2.8 | |
| North America | 68,718 | | 96,247 | | (28.6) | | (0.2) | | | (28.4) | |
| All Other (Asia Pacific) | 7,531 | | 8,321 | | (9.5) | | (7.7) | | | (1.8) | |
| Consolidated | 189,017 | | 225,864 | | (16.3) | | (5.6) | | | (10.7) | |
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| ($ in thousands USD) | YTD 2Q22** | YTD 2Q21 | % Change
Fav/(Unfav) | Foreign Exchange % Impact | | Constant Currency % Change
Fav/(Unfav) |
| Europe | 230,847 | | 234,071 | | (1.4) | | (8.2) | | | 6.8 | |
| North America | 144,037 | | 172,221 | | (16.4) | | (0.2) | | | (16.2) | |
| All Other (Asia Pacific) | 15,121 | | 15,774 | | (4.1) | | (7.0) | | | 2.9 | |
| Consolidated | 390,005 | | 422,066 | | (7.6) | | (4.9) | | | (2.7) | |
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* Date format is quarter and year in each instance.
** YTD means the first six months of the year in each instance.
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| ($ in thousands USD) | Q3 17 | Q3 16 | Reported % Change | Foreign Exchange % Impact | Constant Currency % Change |
| Europe | 143,281 |
| 141,738 |
| 1.1 |
| 1.6 | (0.5 | ) |
| NA/HME | 79,516 |
| 99,323 |
| (19.9 | ) | 0.4 | (20.3 | ) |
| IPG | 13,975 |
| 15,343 |
| (8.9 | ) | 0.2 | (9.1 | ) |
| Asia/Pacific | 14,134 |
| 11,741 |
| 20.4 |
| 2.5 | 17.9 |
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| Consolidated | 250,906 |
| 268,145 |
| (6.4 | ) | 1.1 | (7.5 | ) |
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| NA/HME less divested GCM | 79,516 |
| 90,937 |
| (12.6 | ) | 0.3 | (12.9 | ) |
| Consolidated less divested GCM | 250,906 |
| 259,759 |
| (3.4 | ) | 1.1 | (4.5 | ) |
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| ($ in thousands USD) | YTD Q3 17 | YTD Q3 16 | Reported % Change | Foreign Exchange % Impact | Constant Currency % Change |
| Europe | 391,274 |
| 399,504 |
| (2.1 | ) | (2.9 | ) | 0.8 |
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| NA/HME | 241,467 |
| 317,695 |
| (24.0 | ) | 0.1 |
| (24.1 | ) |
| IPG | 45,668 |
| 49,702 |
| (8.1 | ) | — |
| (8.1 | ) |
| Asia/Pacific | 37,737 |
| 33,833 |
| 11.5 |
| 2.3 |
| 9.2 |
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| Consolidated | 716,146 |
| 800,734 |
| (10.6 | ) | (1.4 | ) | (9.2 | ) |
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| NA/HME less divested GCM | 241,467 |
| 291,087 |
| (17.0 | ) | 0.1 |
| (17.1 | ) |
| Consolidated less divested GCM | 716,146 |
| 774,126 |
| (7.5 | ) | (1.4 | ) | (6.1 | ) |
The table above provides net sales change 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 GCM, which was sold in September 2016 and not deemed a discontinued operation from an external reporting perspective.. “Constant currency net sales" is a non-GAAPnon-Generally Accepted Accounting Principles ("GAAP") financial measure, which is defined as net sales excluding the impact of foreign currency translation. The current year's functional currency net sales are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's sales to calculate the constant currency net sales change.
Global supply chain challenges continued to delay receipt of components and limit conversion of orders to sales, which continued to impact each of the regions in 2Q22 in different ways.
Europe - Constant currency net sales increased $3,366,000, or 2.8% in 2Q22 compared to 2Q21 as sales started to recover from pandemic-related challenges led by increased sales in mobility and seating and respiratory products reflecting the improving restoration of access to healthcare and timely receipt of respiratory product to fulfill
backlog. Constant currency net sales increased 6.8% YTD2Q22 compared to YTD 2Q21 with growth in all major product categories and led by mobility and seating products.
North America - Constant currency net sales for 2Q22 decreased $27,333,000 or 28.4% compared to 2Q21 with decreases in all categories but primarily attributable to lower respiratory sales. Supply chain disruptions continued to burden order fulfillment in all product categories. Constant currency net sales decreased 16.2% YTD2Q22 compared to YTD 2Q21 primarily due to lower respiratory sales which had higher sales in prior periods benefiting from pandemic-related demand. Respiratory products demand is down due to lower pandemic demand.
All Other - Constant currency net sales, which relates entirely to the Asia Pacific region, decreased $152,000 or 1.8% for 2Q22 compared to 2Q21 driven by respiratory products. Constant currency net sales increased 2.9% YTD 2Q22 compared to YTD 2Q21 driven by lifestyle products.
Constant currency net sales of mobility and seating products, which comprise most of the company's clinically complex product portfolio, were 40.7% of constant currency net sales in 2Q22 and 38.0% in 2Q21. Constant currency net sales of mobility and seating products were 39.2% YTD 2Q22 compared to 37.0% YTD in 2Q21.
The improvement in mix percentage for mobility and seating products is the result of continued improvement to access to healthcare compared to 2Q21 as well as the decrease in respiratory products attributable to component shortages. All product categories continued to be impacted by supply chain challenges, including timely delivery of components through 2Q22.
GROSS PROFIT
Gross profit decreased $12,836,000 and gross profit as a percentage of net sales for 2Q22 decreased 150 basis points to 25.4%, primarily attributable to lower sales impacting gross profit dollars. Increased pricing across product portfolios continue to lag higher costs as lower pricing orders are fulfilled. In addition, margin was negatively impacted by intermittent production stoppages and unfavorable foreign currency.
Sequentially, gross margin improved 160 basis points driven by the benefit of pricing actions and favorable product mix.
Gross profit decreased $19,745,000 and gross profit as a percentage of net sales for YTD 2Q22 decreased 290 basis points to 24.5%, primarily attributable to lower sales impacting gross profit dollars and unfavorable foreign currency. Increased pricing across product portfolios continue to lag higher costs as lower pricing orders are fulfilled.
Gross profit drivers by segment:
Europe - Gross profit dollars for 2Q22 decreased $5,356,000 on higher net sales compared to 2Q21. Gross profit as a percentage of net sales decreased 2.2% compared to 2Q21. Gross profit dollars were burdened by additional freight and material costs which were partially offset by pricing actions.
Gross profit dollars decreased $7,511,000 and gross profit as a percentage of net sales decreased 2.4% for YTD 2Q22 compared to YTD 2Q21. These decreases were driven by higher freight and material costs including expediting costs partially offset by pricing actions and volume increases.
North America - Gross profit dollars decreased $8,271,000 and gross profit as a percentage of net sales decreased 0.3% for 2Q22 compared to 2Q21 driven primarily by lower net sales. The decrease in gross profit as a percentage of net sales was driven by higher material and freight costs, partially offset by pricing actions.
Gross profit dollars decreased $12,539,000 and gross profit as a percentage of net sales decreased 2.3% for YTD 2Q22 compared to YTD 2Q21. The decrease in gross profit dollars and gross profit as a percentage of net sales driven primarily by lower net sales, higher material and freight costs, partially offset by pricing actions.
All Other - Asia Pacific gross profit dollars increased $320,000 and gross profit as a percentage of net sales increased 7.5% for 2Q22 compared to 2Q21 driven primarily by pricing actions to offset higher material costs.
Asia Pacific gross profit dollars increased $95,000 and gross profit as a percentage of net sales increased 2.1% for YTD 2Q22 compared to YTD 2Q21 driven primarily by pricing actions to offset higher material costs.
All Other also includes the impact of intercompany profit eliminations for the consolidated company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
| | | | | | | | | | | | | | | | | | |
| ($ in thousands USD) | 2Q22 | 2Q21 | Reported Change | Foreign Exchange Impact | | Constant Currency Change |
| SG&A expenses - $ | 58,623 | | 63,765 | | (5,142) | | (2,719) | | | (2,423) | |
| SG&A expenses - % change | | | (8.1) | | (4.3) | | | (3.8) | |
| % to net sales | 31.0 | | 28.2 | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
| ($ in thousands USD) | YTD 2Q22** | YTD 2Q21 | Reported Change | Foreign Exchange Impact | | Constant Currency Change |
| SG&A expenses - $ | 119,187 | | 122,586 | | (3,399) | | (4,467) | | | 1,068 | |
| SG&A expenses - % change | | | (2.8) | | (3.7) | | | 0.9 | |
| % to net sales | 30.6 | | 29.0 | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The table above provides selling, general and administrative (SG&A) expenses change as reported and as adjusted to exclude the impact of foreign exchange translation (constant currency SG&A). “Constant currency SG&A" is a non-GAAP financial measure, which is defined as SG&A expenses excluding the impact of foreign currency translation. The current year's functional currency SG&A expenses are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's SG&A expenses to calculate the constant currency SG&A expenses change. Management believes that this financial measure provides meaningful information for evaluating the core operating performance of the company.
For the quarter, constant currency net sales increased in the Asia Pacific segment but was more than offset by declines in the NA/HME, IPG and Europe segments.
Year-to-date constant currency net sales increased in the European and Asia/Pacific segments but was more than offset by declines in the NA/HME and IPG segments.
Excluding the divestiture of the GCM business, consolidated constant currency net sales declined 4.5% and 6.1% for the quarter and year-to-date, respectively, compared to the
same periods last year, with net sales declines in lifestyle, respiratory and IPG products partially offset by increases in mobility and seating products.
Constant currency net sales performance drivers by segment:
Europe - The slight decline in constant currency net salesSG&A decreased $2,423,000 or 3.8% for the quarter was driven by respiratory and lifestyle products partially offset by mobility and seating products. The year-to-date increase in constant currency net sales was driven by increases in mobility and seating products partially offset by declines in respiratory and lifestyle products.
North America/Home Medical Equipment (NA/HME) - Excluding the divestiture of the GCM business, constant currency net sales declined 12.9% and 17.1% for the quarter and year-to-date, respectively, compared to the same period last year. The decrease in constant currency net sales was driven by declines in all categories, though mostly in lifestyle and respiratory products. Mobility and seating product sales were a lesser part of the net sales decline. Sequential net sales improved 1.6% driven by mobility and seating and lifestyle products.
Institutional Products Group (IPG) - Constant currency net sales declined in all product categories for the quarter and year-to-date. As previously disclosed, the company is
transforming its go-to-market strategy in the post-acute care (PAC) channel. The company expects this new sales approach will take time to yield growth.
Asia/Pacific - The increase in constant currency net sales for the quarter and year-to-date occurred in all product categories but principally related to mobility and seating products.
The following tables provide net sales at reported rates for the quarters ended September 30, June 30, and March 31, 2017, respectively, and net sales for the quarters ended September 30 and June 30, 2017, respectively, as translated at the foreign exchange rates for the quarter ended March 31, 2017 with each then compared to the net sales for the most recent prior period (constant currency sequential net sales).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Q3 17 at Reported Foreign Exchange Rates | | Foreign Exchange Translation Impact | | Q3 17 at Q1 17 Foreign Exchange Rates | | Q2 17 at Q1 17 Foreign Exchange Rates | | Sequential Growth $ | | Sequential Growth % |
| Europe | $ | 143,281 |
| | $ | (9,931 | ) | | $ | 133,350 |
| | $ | 126,226 |
| | $ | 7,124 |
| | 5.6 | % |
| NA/HME | 79,516 |
| | (447 | ) | | 79,069 |
| | 77,791 |
| | 1,278 |
| | 1.6 |
|
| IPG | 13,975 |
| | (34 | ) | | 13,941 |
| | 15,335 |
| | (1,394 | ) | | (9.1 | ) |
| Asia Pacific | 14,134 |
| | (448 | ) | | 13,686 |
| | 12,114 |
| | 1,572 |
| | 13.0 |
|
| Consolidated | $ | 250,906 |
| | $ | (10,860 | ) | | $ | 240,046 |
| | $ | 231,466 |
| | $ | 8,580 |
| | 3.7 | % |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Q2 17 at Reported Foreign Exchange Rates | | Foreign Exchange Translation Impact | | Q2 17 at Q1 17 Foreign Exchange Rates | | Q1 17 at Reported Foreign Exchange Rates | | Sequential Growth $ | | Sequential Growth % |
| Europe | $ | 128,485 |
| | $ | (2,259 | ) | | $ | 126,226 |
| | $ | 119,508 |
| | $ | 6,718 |
| | 5.6 | % |
| NA/HME | 77,689 |
| | 102 |
| | 77,791 |
| | 84,262 |
| | (6,471 | ) | | (7.7 | ) |
| IPG | 15,320 |
| | 15 |
| | 15,335 |
| | 16,373 |
| | (1,038 | ) | | (6.3 | ) |
| Asia Pacific | 12,023 |
| | 91 |
| | 12,114 |
| | 11,580 |
| | 534 |
| | 4.6 |
|
| Consolidated | $ | 233,517 |
| | $ | (2,051 | ) | | $ | 231,466 |
| | $ | 231,723 |
| | $ | (257 | ) | | (0.1 | )% |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Q1 17 at Reported Foreign Exchange Rates | | Q2 17 at Q1 17 Foreign Exchange Rates | | Q3 17 at Q1 17 Foreign Exchange Rates | | Q2 17 vs Q1 17 Sequential Growth % | | Q3 17 vs Q2 17 Sequential Growth % |
| Europe | $ | 119,508 |
| | $ | 126,226 |
| | $ | 133,350 |
| | 5.6 | % | | 5.6 | % |
| NA/HME | 84,262 |
| | 77,791 |
| | 79,069 |
| | (7.7 | ) | | 1.6 |
|
| IPG | 16,373 |
| | 15,335 |
| | 13,941 |
| | (6.3 | ) | | (9.1 | ) |
| Asia Pacific | 11,580 |
| | 12,114 |
| | 13,686 |
| | 4.6 |
| | 13.0 |
|
| Consolidated | $ | 231,723 |
| | $ | 231,466 |
| | $ | 240,046 |
| | (0.1 | )% | | 3.7 | % |
| | | | | | | | | | |
The net sales amounts in the above table are converted at Q1 2017 foreign exchange rates so that the sequential change in net sales can be shown, excluding the impact of changes in foreign currency exchange rates.
Results in the third quarter of 2017 reflected the Company's efforts to stabilize net sales sequentially, specifically in its NA/HME segment through new product introduction and focus on
clinically complex products, and increased productivity from its new commercial salesforce.
Sequentially, net sales of both mobility and seating and lifestyle product lines increased from the second quarter of 2017 to the third quarter of 2017 on a consolidated basis, and for the Europe, NA/HME and Asia Pacific segments.
The company realized a favorable impact from sales mix year-to-date attributable to mobility and seating products, which comprise most of the company's clinically complex product portfolio. Sales mix increased to 41% from 36% for constant currency net sales by product for the third quarter of 2017 as compared to same period last year.
This favorable net sales mix shift is the result of the company's continued transformation and, in particular, the implementation of Phase One of the transformation, where the company focused on shifting and narrowing the product portfolio and alignment of resources to focus on clinically complex solutions.
GROSS PROFIT
Gross profit as a percentage of net sales increased by 0.8 of a percentage point in the quarter as compared to the same period last year. This increase was driven by favorable net sales mix, favorable foreign currency translation and transactions, as well as reduced freight costs partially offset by unfavorable manufacturing costs. Gross margin as a percentage of net sales increased for all segments. Gross profit dollars declined in the NA/HME and IPG segments but increased for the Europe and Asia/Pacific segments. The gross profit dollar decline was principally the result of lower net sales.
Gross profit as a percentage of net sales increased by 1.3 percentage points year-to-date as compared to the same period last year. This increase was driven by favorable net sales mix and reduced warranty and freight expense partially offset by unfavorable manufacturing variances, including the impact of foreign currency transactions and unfavorable foreign currency translation. Gross margin as a percentage of net sales increased for all the segments. Gross profit dollars declined in the NA/HME and IPG segments and increased in the Europe and Asia/Pacific segments. The gross profit dollar decline was principally the result of lower net sales.
Gross profit and gross margin drivers by segment:
Europe - For the quarter, gross margin as a percentage of net sales increased 0.6 of a percentage point, while gross profit dollars increased $1,578,000, compared to the same period last year. The increase in gross profit dollars was driven by favorable net sales mix and foreign currency translation and transactions, partially offset by unfavorable manufacturing costs and increased R&D expense.
Year-do-date, gross margin as a percentage of net sales increased 0.8 of a percentage point, while gross profit dollars increased $1,354,000, compared to the same period last year. The increase in gross profit dollars was driven by favorable net sales mix and reduced warranty costs partially offset by increased R&D expense and unfavorable foreign currency translation and transactions.
NA/HME - For the quarter, gross margin as a percentage of net sales increased by 0.7 of a percentage point, while gross profit dollars decreased $4,252,000, compared to the same period last year. Excluding the impact of the divested GCM business, gross margin as a percentage of net sales increased by 0.3 of a percentage point, while gross profit dollars decreased by $2,694,000. The decrease in gross profit dollars was primarily due to net sales volume declines and unfavorable manufacturing costs partially offset by lower R&D and freight expenses.
Year-to-date, gross margin as a percentage of net sales increased by 0.9 of a percentage point, while gross profit dollars decreased $15,298,000, compared to the same period last year. Excluding the impact of the divested GCM business, gross margin as a percentage of net sales increased by 0.6 of a percentage point, while gross profit dollars decreased by $9,801,000. The decrease in gross profit dollars was primarily due to net sales volume declines and unfavorable manufacturing variances partially offset by reduced freight, warranty and R&D expenses and favorable net sales mix.
IPG - For the quarter, gross margin as a percentage of net sales increased 0.2 of a percentage point, and gross profit dollars decreased $507,000, compared to the same period last year. The decrease in gross profit dollars was driven by volume declines and increased warranty expense partially offset by a favorable net sales mix. Year-to-date, gross margin as a percentage of net sales increased 1.0 percentage point while gross profit dollars
decreased $603,000, compared to the same period last year. The decrease in gross profit dollars was driven by volume declines partially offset by favorable sales mix and reduced freight expense.
Asia/Pacific - For the quarter, gross margin as a percentage of net sales increased by 3.8 percentage points, while gross profit dollars increased $912,000, compared to the same period last year. The increase in gross profit dollars was primarily due to volume increases, favorable net sales mix and reduced R&D expense. Year-to-date, gross margin as a percentage of net sales increased by 1.8 percentage points, and gross profit dollars increased $933,000, compared to the same period last year. The
increase in gross profit dollars was primarily attributable to favorable net sales mix partially offset by unfavorable manufacturing variances and increased research and development expense.
Sequential gross profit as a percentage of net sales and gross margin dollars increased by 0.4 of a percentage point and $5,718,000, respectively, comparing third quarter of 2017 to the second quarter of 2017. The increase in gross margin dollars was driven by volume increases, favorable sales mix, and favorable foreign currency partially offset by unfavorable manufacturing variances and increased freight and warranty expense.
Sequential gross profit as a percentage of net sales increased for all segments except NA/HME segment. Sequential gross margin dollars increased in the Europe and Asia/Pacific segments but declined in the NA/HME and IPG segments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
| | | | | | | | | | |
| ($ in thousands USD) | Q3 17 | Q3 16 | Reported Change | Foreign Exchange Impact | Constant Currency Change |
| SG&A Expenses - $ | 75,921 |
| 77,705 |
| (1,784 | ) | 757 |
| (2,541 | ) |
| SG&A Expenses - % change | | | (2.3 | ) | 1.0 |
| (3.3 | ) |
| % to net sales | 30.3 |
| 29.0 |
| | | |
| Consolidated less divested GCM - $ | 75,921 |
| 76,585 |
| (664 | ) | 757 |
| (1,421 | ) |
| Consolidated less divested GCM - % change | | | (0.9 | ) | 1.0 |
| (1.9 | ) |
| % to net sales | 30.3 |
| 29.5 |
| | �� | |
|
| | | | | | | | | | |
| ($ in thousands USD) | YTD Q3 17 | YTD Q3 16 | Reported Change | Foreign Exchange Impact | Constant Currency Change |
| SG&A Expenses - $ | 224,155 |
| 229,261 |
| (5,106 | ) | (1,783 | ) | (3,323 | ) |
| SG&A Expenses - % change | | | (2.2 | ) | (0.8 | ) | (1.4 | ) |
| % to net sales | 31.3 |
| 28.6 |
| | | |
| Consolidated less divested GCM - $ | 224,155 |
| 225,733 |
| (1,578 | ) | (1,783 | ) | 205 |
|
| Consolidated less divested GCM - % change | | | (0.7 | ) | (0.8 | ) | 0.1 |
|
| % to net sales | 31.3 |
| 29.2 |
| | | |
For the quarter, the decrease in SG&A expense, excluding the sale of GCM and the impact of foreign exchange, was primarily driven by reduced legal and employment costs partially offset by increased bad debt expense.
Year-to-date, the increase in SG&A expense, excluding the sale of GCM and the impact of foreign exchange, was primarily driven by negative impact of foreign currency transactions and higher bad debt expense partially offset by reduced employment, product liability and legal costs.
SG&A expense drivers by segment:
Europe - For the quarter, SG&A expenses increased by 4.1%, or $1,227,000,2Q22 compared to the same period last year withand reflects benefit of lower employment costs from previously announced restructuring actions and reduced stock compensation expense attributable a lower trading price on the company's Common Shares in 2Q22 on outstanding equity awards to which variable accounting applies. However, the current quarter includes IT expenses being classified as operating costs as a result of the temporary pause in the ERP roll-out, similar to 1Q22. In addition, the company incurred higher expense related to foreign currency translation increasing SG&A expenses by approximately $554,000, or 1.9%. transactions.
Constant currency SG&A expenses increased by $673,000,$1,068,000 or 2.2%. Year-to-date, SG&A expenses increased by 1.9%, or $1,739,000,0.9% for YTD 2Q22 compared to the same period last year increased IT costs partially offset by lower employment costs. 2Q22 YTD benefited from reduced stock compensation expense attributable a lower trading price on the company's Common Shares in first half of 2022 on outstanding equity awards to which variable accounting applies. In addition, the company incurred higher expense related to foreign currency transactions.
SG&A expense drivers by segment:
Europe - SG&A expenses for 2Q22 decreased $3,853,000 or 13.3% compared to 2Q21 with foreign currency translation decreasing SG&A expenses by approximately $2,098,000,$2,380,000, or 2.4%8.2%. Constant currency SG&A expenses decreased $1,473,000, or 5.1%. Lower employment costs were offset by foreign currency transactions losses and increased by $3,837,000, or 4.3%. The increase in expense for the quartersales and year-to-date is primarily attributable to increased employment and information technology expense.marketing costs.
NA/HMENorth America - For the quarter, SG&A expenses for 2Q22 decreased 8.1%,$417,000, or $2,814,000,1.8%, compared to the same period last year with foreign currency translation having an immaterial impact.2Q21. Constant currency SG&A expenses decreased $2,938,000,$318,000, or 8.5%. Excluding the impact of the divested GCM business1.4% primarily attributable to outside services and
foreign currency translation impact, constant currency SG&A expense decreased by $1,818,000 or 5.4% driven primarily by decreased legal and employment costs. Year-to-date, transactions.
All Other - SG&A expenses for 2Q22 decreased 5.0%, or $5,095,000,$872,000 compared to the same period last year2Q21 with foreign currency translation having an immaterial impact.decreasing SG&A expenses by $240,000. Constant currency SG&A expenses decreased $5,125,000, or 5.1%. Excludingby $632,000. All Other includes SG&A related to the impact of the divested GCM business, constantAsia Pacific businesses and non-allocated corporate costs. Constant currency SG&A expenseexpenses related to Asia Pacific businesses for 2Q22 decreased by $1,597,0007.6% or 1.6%$228,000, compared to 2Q21 driven primarily by decreased employment, legalreduced facility and product liabilitysales and marketing costs partially offset by unfavorable foreign currency transactions. The reduction in employmentUnallocated corporate costs for the quarter and year-to-date includes a reduction in bonus expense.
IPG - For the quarter, SG&A expenses for IPG decreased primarily due to increased IT costs partially offset by 7.6%, or $213,000, compared to the same period last year with foreign currency translation having an immaterial impact. Constant currency SG&A expenses decreased by $216,000 or 7.6%. Year-to-date, SG&A expenses for IPG decreased by 8.2% or $723,000, compared to the same period last year with foreign currency translation having an immaterial impact. Constant currency SG&A expenses decreased by $727,000 or 8.2%. The decline inlower stock compensation expense, for the quarter and year-to-date was primarily related to employment costs.
noted above.
| | | | | | | | |
| MD&A | Operating Income (Loss) | |
| | |
MD&A | SG&A | |
| | |
OPERATING INCOME (LOSS)
Asia/Pacific - For the quarter, SG&A expenses decreased 0.8%, or $34,000, compared to the same period last year with foreign currency translation increasing SG&A expenses by $76,000, or 1.9 percentage points. Constant currency SG&A expenses decreased by $110,000, or 2.7%. Year-to-date, SG&A expenses decreased 4.2%, or $506,000, compared to the same period last year with foreign currency translation increasing SG&A expenses by $281,000, or 2.4%. Constant currency SG&A expenses decreased $787,000, or 6.6%. The decline in expense year-to-date was primarily related to employment costs and foreign currency transactions.
Other - For the quarter, SG&A expenses increased by 0.8%, or $50,000, compared to the same period last year primarily driven by increased equity compensation expense partially offset by reduced legal expense. Year-to-date, SG&A expenses decreased by 3.1%, or $521,000, compared to the same period last year primarily driven by decline in legal expense, partially offset by increased equity compensation expense.
|
| | |
MD&A | Operating Income (Loss) | |
| | |
OPERATING INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands USD) | 2Q22 | 2Q21 | $ Change | | | YTD 2Q22 | YTD 2Q21 | $
Change | | |
| Europe | 3,489 | | 4,992 | | (1,503) | | | | 6,714 | | 8,824 | | (2,110) | | | |
| North America | (6,264) | | 1,590 | | (7,854) | | | | (14,600) | | (785) | | (13,815) | | | |
| All Other | (7,866) | | (9,529) | | 1,663 | | | | (15,590) | | (15,169) | | (421) | | | |
| | | | | | | | | | |
| Charges related to restructuring | (4,153) | | (547) | | (3,606) | | | | (7,943) | | (2,099) | | (5,844) | | | |
| | | | | | | | | | |
| Consolidated Operating Income (Loss) | (14,794) | | (3,494) | | (11,300) | | | | (31,419) | | (9,229) | | (22,190) | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| ($ in thousands USD) | Q3 17 | Q3 16 | $ Change | % Change | | YTD Q3 17 | YTD Q3 16 | $ Change | % Change |
| Europe | 11,987 |
| 11,638 |
| 349 |
| 3.0 |
| | 24,164 |
| 24,550 |
| (386 | ) | (1.6 | ) |
| NA/HME | (12,446 | ) | (11,007 | ) | (1,439 | ) | (13.1 | ) | | (34,267 | ) | (24,065 | ) | (10,202 | ) | (42.4 | ) |
| IPG | 1,202 |
| 1,497 |
| (295 | ) | (19.7 | ) | | 4,572 |
| 4,453 |
| 119 |
| 2.7 |
|
| Asia/Pacific | 387 |
| (559 | ) | 946 |
| 169.2 |
| | (161 | ) | (1,599 | ) | 1,438 |
| 89.9 |
|
| All Other | (6,311 | ) | (5,832 | ) | (479 | ) | (8.2 | ) | | (17,556 | ) | (17,703 | ) | 147 |
| 0.8 |
|
| Gain on sale of business | — |
| 7,386 |
| (7,386 | ) | (100.0 | ) | | — |
| 7,386 |
| (7,386 | ) | (100.0 | ) |
| Charges related to restructuring | (703 | ) | (508 | ) | (195 | ) | (38.4 | ) | | (8,973 | ) | (1,299 | ) | (7,674 | ) | (590.8 | ) |
| Consolidated Operating Income (Loss) | (5,884 | ) | 2,615 |
| (8,499 | ) | 325.0 |
| | (32,221 | ) | (8,277 | ) | (23,944 | ) | (289.3 | ) |
| | | | | | | | | | |
For the quarter and year-to-date, the increase in consolidated operating loss was impacted by the gain on sale of the divested GCM business recorded in 2016 and increased segment operating losses primarily related to volume declines and unfavorable manufacturing costs partially offset by reduced freight and R&D expenses and reduced SG&A expense. In addition, the year-to-date operating loss was negatively impacted by increased restructuring costs, partially offset by lower warranty expense.
Operating income (loss) by segment:
Europe - For the quarter, operating income increased compared to the same period last year principally due to favorable net sales mix and favorable foreign currency translation and transactions partially offset by unfavorable manufacturing variances and increased employment and information technology expenses. Year-to-date, operating income decreased compared to the same period last year primarily related to unfavorable manufacturing costs, including unfavorable foreign currency transactions, unfavorable foreign currency translation, increased R&D and employment costs partially offset by increased constant currency net sales, favorable net sales mix and reduced warranty expense.
NA/HME - For the quarter, operating loss increased compared to the same period last year primarily related to net sales declines and unfavorable manufacturing variances partially offset by reduced freight, R&D, legal and employment expenses as well as favorable sales mix. In addition, the third quarter of 2016 included approximately $437,000 in operating income for GCM. Year-to-date, operating loss increased compared to the same period last year primarily related to net sales declines partially offset by favorable sales mix and reduced freight, employment, warranty, legal and R&D expenses. In addition, the first nine months of 2016 included $1,969,000 in operating income for GCM.
IPG - For the quarter, operating income declined principally due to net sales decline and increased warranty expense partially
offset by reduced freight costs and lower SG&A expense, primarily due to lower employment expense. Year-to-date, operatingnet sales impacted lower gross profit, higher input costs not fully mitigated by pricing actions and unfavorable foreign currency.
Operating income increased as compared(loss) by segment:
Europe - Operating income for 2Q22 decreased by $1,503,000 primarily due to the same period last year primarily related to reduced SG&A, related to employmentlower gross profit dollars impacted by higher input costs and freight expenseforeign currency partially offset by net sales declines.increases including pricing actions.
Operating income for YTD 2Q22 decreased $2,110,000 compared to YTD 2Q21 attributable to lower gross profit dollars impacted by higher input costs and foreign currency.
Asia/PacificNorth America - For the quarter,Operating loss for 2Q22 increased by $7,854,000 primarily due to lower gross profit on lower sales. Benefit of pricing actions continue to lag higher input costs.
Operating loss for YTD 2Q22 was $14,600,000 compared to YTD 2Q21 operating income increased significantly as a resultloss of increased $785,000 due to lower gross profit impacted by lower net sales favorable net sales mix and reducedunfavorable costs associated with supply chain disruptions partially offset by lower SG&A expenses and R&D expenses. Year-to-date, operating loss decreased as compared to the same period last year primarily related to favorable sales mix and reduced SG&A expense primarily related to employment costs.pricing actions.
All Other - ForOperating loss for All Other includes the quarter, operating loss increase was primarily impacted by increasedresults of the Asia Pacific businesses, as well as unallocated SG&A relatedexpenses and intercompany eliminations. Operating loss increased $1,663,000, or 17.5%, primarily driven increased IT expenses classified as operating expenses partially offset by lower employment costs.
Operating loss for YTD 2Q22 increased $421,000 compared to equity compensation expense. Year-to-date, operating loss decline was impacted by reduced SG&A expense. Both the quarter and year to date were negatively impacted by unfavorable intercompany profit in inventory eliminations as a result of higher inventory levels.YTD 2Q21 increased IT expenses.
ChargeCharges Related to Restructuring Activities
Restructuring charges recorded in 2017 were primarily related$4,153,000 for 2Q22 compared to previously disclosed facility closures$547,000 for 2Q21 which includes severance and reduction in force actions in each of the segments.other restructuring costs. Restructuring charges totaled $8,973,000 in the first nine months of 2017 related to severance and contract terminations in the NA/HME segment ($6,000,000) and severancewere incurred in the Europe ($1,890,000)segment of $2,613,000 and Asia/Pacific ($1,083,000) segments. Charges in the NA/HMENorth America segment include the impact of the June 2017 closure of the company’s Suzhou, China, manufacturing facility,$1,540,000.
Restructuring charges were $7,943,000 for YTD 2Q22 compared to $2,099,000 for YTD 2Q21 which is expected to generate approximately $4,000,000 in annualized pre-tax savings for the segment.includes severance and other restructuring costs. Restructuring charges
In the first nine months of 2016, the company incurred restructuring charges of $1,299,000 related principally to severance costswere incurred in the NA/HMEEurope segment ($1,213,000)of $4,732,000 and the Asia/PacificNorth America segment ($86,000). Most of the outstanding restructuring accruals at September 30, 2017 are expected to be paid out in the next twelve months.were $3,202,000.
| | | | | | | | |
| MD&A | Other Items | |
| | |
MD&A | Other Items | |
| | |
OTHER ITEMS
Loss on debt extinguishment including debt finance changes and fees
Net Gain (Loss) | | | | | | | | | | | | | | |
| ($ in thousands USD) | YTD 2Q22 | YTD 2Q21 | $ Change | % Change |
| Loss on debt extinguishment including debt finance fees | — | | 709 | | (709) | | (100.0) | |
During the first quarter of 2021, the company repurchased and retired, at par plus accrued interest, $78,850,000 of its 2022 Notes. The result of the transaction was a loss on Convertible Debt Derivativesdebt extinguishment including debt and finance fees of $709,000.
|
| | | | | | | | |
| ($ in thousands USD) | Change in Fair Value - Gain (Loss) |
| | Q3 17 | Q3 16 | YTD Q3 17 | YTD Q3 16 |
| | | | | |
| Convertible Note Hedge Assets | 27,267 |
| (6,540 | ) | 33,028 |
| (11,297 | ) |
| Convertible Debt Conversion Liabilities | (29,817 | ) | 7,732 |
| (35,728 | ) | 13,579 |
|
| Net gain (loss) on convertible debt derivatives | (2,550 | ) | 1,192 |
| (2,700 | ) | 2,282 |
|
| | | | | |
| | | | | | | | | | | | | | |
| ($ in thousands USD) | 2Q22 | 2Q21 | $ Change | % Change |
| Interest expense | 6,230 | | 6,084 | | 146 | | 2.4 | |
| Interest income | (1) | | — | | (1) | | (100.0) | |
The company recognized net losses of $2,550,000 and $2,700,000 for the three and nine months ended September 30, 2017, respectively, compared to net gains of $1,192,000 and $2,282,000 for the three and nine months ended September 30, 2016, respectively, related to the fair value of convertible debt derivatives. See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.
Interest
|
| | | | | | | |
| ($ in thousands USD) | Q3 17 | Q3 16 | $ Change | % Change |
| Interest Expense | 6,844 |
| 4,481 |
| 2,363 |
| 52.7 |
| Interest Income | (137 | ) | (79 | ) | (58 | ) | 73.4 |
|
| | | | | | | |
| ($ in thousands USD) | YTD Q3 17 | YTD Q3 16 | $ Change | % Change |
| Interest Expense | 16,007 |
| 11,228 |
| 4,779 |
| 42.6 |
| Interest Income | (274 | ) | (207 | ) | (67 | ) | 32.4 |
| | | | | | | | | | | | | | |
| ($ in thousands USD) | YTD 2Q22 | YTD 2Q21 | $ Change | % Change |
| Interest expense | 12,482 | | 11,815 | | 667 | | 5.6 | |
| Interest income | (1) | | (1) | | — | | — | |
The increase in interest expense for the quarter2Q22 and year to date asYTD 2Q22 compared to the same periods lastof prior year was primarily duerelated to higher interest bearing debt for the issuancefull periods of convertible notes in2022 compared to 2021. Specifically, the second quarter2026 Notes were issued at the end of 2017.1Q21.
Income Taxes
The company had an effective tax rate of 22.8%4.4% and 16.2%5.1% on losses before income tax for the three and ninesix months ended SeptemberJune 30, 2017, respectively, and an effective tax rate of 743.7% and 48.2% for the three and nine months ended September 30, 2016,2022, respectively, compared to an expected benefit at the U.S. statutory rate of 35%21.0% on the pre-tax loss for each period. The company had an effective tax rate of 11.7% and 13.7% on losses before tax for the three and six months ended June 30, 2021, respectively, compared to an expected benefit of 21.0% on the pre-tax loss for each period. The company's effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 2016 was2021 were unfavorable as compared to the U.S. federal statutory rate, expected benefit, principally due to the negative impact of the company's inabilitycompany not being able to record tax benefits related to the significant losses in countries which had tax valuation allowances. The effective tax rate was reducedincreased for the three and six months ended June 30, 2022 and June 30, 2021 by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate lowerhigher than the U.S. statutory rate.
During 2016, installment payments were made related to a previously disclosed liability for uncertain tax positions, including an accelerated payment of the balance of the installment obligation, in order to reduce interest costs.
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| MD&A | Liquidity and Capital Resources | |
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MD&A | Liquidity and Capital Resources | |
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LIQUIDITY AND CAPITAL RESOURCES
The company continues to maintain an adequate liquidity position through its cash balances, and unused bank lines of credit (seeand secured term loan credit facility (refer to Long-Term Debt in the Notesnotes to Condensed Consolidated Financial Statementscondensed consolidated financial statements included in this report). as described below.
As described below under July 2022 Financings, the company recently completed a series of strategic capital markets transactions that altered its long-term debt and credit facility borrowing structure. Key balances on the company's balance sheet and related metrics:metrics prior to the July 2022 Financings are presented below:
| | | | | | | | | | | | | | |
| ($ in thousands USD) | June 30, 2022 | December 31, 2021 | $ Change | % Change |
| Cash and cash equivalents | $ | 43,909 | | $ | 83,745 | | $ | (39,836) | | (47.6) | |
Working capital (1) | 89,433 | | 138,134 | | (48,701) | | (35.3) | |
Total debt (2) | 384,138 | | 382,586 | | 1,552 | | 0.4 | |
Long-term debt (2) | 378,892 | | 376,462 | | 2,430 | | 0.6 | |
| | | | |
| Total shareholders' equity | 147,604 | | 218,489 | | (70,885) | | (32.4) | |
Prior Credit Agreement borrowing availability (3) | 40,014 | | 41,845 | | (1,831) | | (4.4) | |
|
| | | | | | | | |
| ($ in thousands USD) | September 30, 2017 | December 31, 2016 | $ Change | % Change |
| Cash and cash equivalents | 155,964 |
| 124,234 |
| 31,730 |
| 25.5 |
|
Working capital (1) | 258,002 |
| 188,211 |
| 69,791 |
| 37.1 |
|
Total debt (2) | 302,052 |
| 196,501 |
| 105,551 |
| 53.7 |
|
Long-term debt (2) | 300,112 |
| 181,240 |
| 118,872 |
| 65.6 |
|
| Total shareholders' equity | 436,025 |
| 422,387 |
| 13,638 |
| 3.2 |
|
Credit agreement borrowing availability (3) | 42,694 |
| 44,260 |
| (1,566 | ) | (3.5 | ) |
| |
(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)
| (2) Total debt and Long-term debt include finance leases but exclude debt issuance costs recognized as a deduction from the carrying amount of debt liability and operating leases. (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 total debt outstanding, inclusive of the debt discountcompany's North American and European asset-based revolving credit facilities before borrowings. At June 30, 2022, the company had $13,215,000 of borrowings outstanding on the European Credit Facility and $25,950,000 of borrowings outstanding on its North America Credit Facility. Outstanding borrowings are based on credit availability calculated on a month lag related to the convertible senior subordinated debentures due 2027 included in equity in accordance with FSB APB 14-1 as well as the debt discountEuropean credit facility.
The company's cash and fees associated with the company's Convertible Senior Notes due 2021cash equivalents balances were $43,909,000 and $83,745,000 at June 30, 2022 increased by $105,551,000 to $302,052,000 at September 30, 2017 from $196,501,000 as ofand December 31, 2016.2021, respectively. The debt increase duringdecrease in cash in the first ninesix months of 20172022 is primarily attributable to use from operating activities and cash used for continued investment in business improvement initiatives. Cash used by operating activities was principally a result of the company's second quarter 2017 issuance of $120,000,000 principal amount of 4.50% Convertible Senior Notes due 2022 (the "2022 Notes") partially offset by credit facilities borrowings. The North America and Europe Credit Facilities under the $13,350,000 repurchase of all of the outstanding principal amount of 4.125% Convertible Senior Subordinated Debentures due 2027 (the "2027 Debentures") as the holders exercised their February 1, 2017 rightcompany's Prior Credit Agreement provides for asset-based-lending senior secured revolving credit facilities.
Refer to require the company to repurchase their 2027 Debentures. See "Long-Term Debt" in the Notesnotes to Condensed Consolidated Financial Statementsthe condensed consolidated financial statements included in this report for more details regardinga summary of the material terms of the company's convertible notes and credit facilities.long-term indebtedness.
The company's cash balances were utilized for normal operations and debt repayment during the nine-month period ended September 30, 2017. 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. While the company maintainshas 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 wherepurposes.
The company's total debt outstanding, inclusive of the cash balance,company's convertible senior notes due 2022 (as of December 31, 2021), 2024 and 2026 and finance leases, increased by $1,552,000 to $384,138,000 at June 30, 2022 from $382,586,000 as of September 30, 2017, was $4,152,000.December 31, 2021. The increase is primarily driven by accretion on convertible senior notes due 2024, amortization of debt issuance costs and credit facility borrowings, $2,000,000 debt borrowed against cash surrender value of insurance policies, offset by $2,650,000 payment of 2022 Notes at maturity on June 1, 2022 and finance lease payments.
July 2022 Financings
In July 2022, the company consummated a series of financing transactions. Refer to "Long-Term Debt" / "July 2022 Financings" in the notes to the condensed consolidated financial statements included in this report for more information about the July 2022 financing transactions.
Outlook
The company may incur additional financing in the future, which could include substantial additional debt (including secured debt). Although the terms of the agreements governing existing debt restrict the company's ability to incur additional debt (including secured debt), such restrictions are subject to several exceptions and qualifications and such restrictions and qualifications may be waived or amended, and
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| MD&A | Liquidity and Capital Resources | |
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debt (including secured debt) incurred in compliance with such restrictions and qualifications (as they may be waived or amended) may be substantial.
The company may from time to time seek to repay or purchase, exchange or otherwise retire its convertible notes or other debt obligations, in open market transactions, privately negotiated transactions, tender offers, exchange offers, pursuant to the term of debt or otherwise. The company may also incur additional debt (including secured debt) to fund such transactions, refinance or restructure existing debt and/or exchange existing debt for newly issued debt obligations or equity or equity-like securities. Such transactions, if any, will depend on prevailing market conditions, trading prices of debt from time to time, the company's liquidity requirements and cash position, contractual restrictions and other factors. The amount involved in any such transactions, individually or in the aggregate, may be material. The company cannot provide any assurance as to if or when it will consummate any such transactions or the terms of any such transactions.
Based on the company's current expectations, the company believes that its cash balances and available borrowing capacity under its credit facilitiesABL Credit Agreement should be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. Notwithstanding the company's expectations, if the company's operating results declinedecrease as the result of pressures on the business due to, for example, prolonged, or worsening of, negative impacts of the COVID-19 pandemic, the impact of the pandemic on the company's supply chain, or political or geopolitical crises such as Russia's invasion of Ukraine, and actions taken in response on global and regional economies and economic activity, continued supply chain challenges, inflationary economic conditions, currency fluctuations or regulatory issues, or the company's failure to execute its business plans or if the company's transformation takesbusiness improvement actions take longer than expected to materialize or development of one or more of the other risks discussed in "Item 1A. Risk Factors" of the company’s Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, or if the conditions for subsequent draws under the Highbridge Loan Agreement are not satisfied, the company may require additional financing, or may be unable to comply with its obligations under the credit facilities or its other obligations, and its lenders or creditors could demand repayment of any amounts outstanding underoutstanding. If additional financing is required, there can be no assurance that it will be available on terms satisfactory to the company, if at all. The company also may evaluate and implement further changes to its strategic goals and business plans, which may involve additional restructuring of its operations. If and to the extent undertaken, any such restructuring may be substantial and involve significant effort and expense, and the company can make no assurances that such efforts, if undertaken, would be successful and result in improvements to the company’s business performance and financial condition. Refer to "Item 1A. Risk Factors" in the company’s Annual Report on Form 10-K and this Quarterly Report on Form 10-Q for a further discussion of risks
applicable to the company's credit facilities.liquidity, capital resources and financial condition.
The company also has an agreement with De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide lease financing to the company's U.S. customers. Either party could terminate this agreement with 180 days' notice or 90 days' notice by DLL upon the occurrence of certain events. Should this agreement be terminated, the company's borrowing needs under its credit facilities could increase.
While there is general concern aboutmost of the potential for risingcompany's debt has fixed interest, should interest rates increase, the company expects that it willwould be able to absorb modest rate increases in the months ahead without any material impact on its liquidity or capital resources. As of September 30, 2017, theThe weighted average floating interest rate on revolving credit borrowings, excluding capitalfinance leases, was 4.87% compared to 4.85% as of4.5% for the three and six months ended June 30, 2022 and 4.5% for the year ended December 31, 2016.
See2021. This weighted average interest rate will increase in the second half of the year as a result of the issuance of the new senior secured term loan entered into in July 2022. Refer to "Long-Term Debt" and "Leases and Commitments" in the Notesnotes to the Consolidated Financial Statementscondensed consolidated financial statements for more details regarding the company's credit facilities.facilities and lease liabilities, respectively.
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| MD&A | Accounting Estimates and Pronouncements | |
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MD&A | Liquidity and Capital Resources | |
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ACCOUNTING ESTIMATES AND PRONOUNCEMENTS
CAPITAL EXPENDITURESCRITICAL ACCOUNTING ESTIMATES
The company estimates that capital investments for 2017 could approximate between $10,000,000 and $12,000,000, compared to actual capital expenditures of $10,151,000condensed consolidated financial statements included in 2016. The estimated increase reflects the company's anticipated investments to transform the company. The termsreport include accounts of the company's credit facilities limitcompany and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the company's annual capital expendituresUnited States requires management to $35,000,000. Asmake estimates and assumptions in certain circumstances that affect amounts reported in the accompanying condensed consolidated financial statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of September 30, 2017,certain amounts included in the company has material capital expenditure commitments outstanding, consisting primarilyfinancial statements, giving due consideration to materiality. However, application of computer systems contracts. See Item 7. Contractual Obligationsthese accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, thus, actual results could differ from these estimates. Refer to the Critical Accounting Estimates section within MD&A of company's Annual Report on Form 10-K for the year endedperiod ending December 31, 2016.2021.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the company’s disclosure regarding recently issued accounting pronouncements, refer to Accounting Policies - Recent Accounting Pronouncements in the notes to the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.
CAPITAL EXPENDITURES
The company estimates that capital investments for 2022 could be approximately $5,000,000 compared to actual capital expenditures of $17,698,000 in 2021. The continued investment at this level relates primarily to the new ERP system. The company believes that its balances of cash and cash equivalents and available borrowing capacity under its existing credit facilities should be sufficient to meet its operating cash requirements and fund capital expenditures (refer to "Liquidity and Capital Resources"). The Prior Credit Agreement limited the company's annual capital expenditures to $35,000,000. In July of 2022, the Prior Credit Agreement was amended and restated. Among the updates was a reduction of the annual capital expenditures limitation to $25,000,000.
DIVIDEND POLICYRECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On August 18, 2017,For the company's Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share and $0.011364 per Class B Common Sharecompany’s disclosure regarding recently issued accounting pronouncements, refer to shareholders of record as of October 5, 2017, which was paid on October 16, 2017. AtAccounting Policies - Recent Accounting Pronouncements in the current rate, the cash dividend will amount to $0.05 per Common Share and $0.045 per Class B Common Share on an annual basis, subject to Board of Directors approval of future dividend payments.
CASH FLOWS
The cash used by operating activities for the three months ended September 30, 2017 was driven by net loss and reduced accounts payable partially offset by a reduction in inventory. The three months ended September 30, 2017 was negatively impacted by the settlement of net working capital assets, primarily accounts payable and employee severance payments, relatednotes to the closure of the company's Suzhou, China, manufacturing facility in June 2017. For the three months ended September 30, 2017, this facility used approximately $6,611,000 of cash for operating activities. The cash used by operating activities in the first nine months of 2017 was driven primarily by net loss and decreased accounts payable and accruals. The increase in cash used by operating activities in the first nine months of 2017 compared to the same period last year was principally driven by increased net loss partially offset by improvements in some working capital components.
The increase in cash flows used by investing activities for the first nine months of 2017 as compared to the same period last year was primarily related to the proceeds from the sale of GCM of $13,829,000 received in the third quarter of 2016.
Cash flows provided by financing activities in the first nine months of 2017 reflect net proceeds received due to the issuance of the company's Convertible Senior Notes due 2022, 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 $13,350,000 in aggregate principal amount of the 2027 Debentures. Cash flows provided by financing activities in the first nine months of 2016 reflect net proceeds received due to the issuance of the company's Convertible Senior Notes due 2021, including the net proceeds used for the related convertible note hedge transactions, repurchase of common shares and payment of financing costs.
Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
|
| | | | | | | | | | | |
| ($ in thousands USD) | Three Months Ended | | Nine Months Ended |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net cash provided (used) by operating activities | (2,899 | ) | | 4,446 |
| | (53,367 | ) | | (49,385 | ) |
| Plus: Sales or property and equipment | 21 |
| | 9 |
| | 211 |
| | 29 |
|
| Less: Purchases of property and equipment | (1,885 | ) | | (2,994 | ) | | (7,389 | ) | | (6,797 | ) |
| Free Cash Flow | (4,763 | ) | | 1,461 |
| | (60,545 | ) | | (56,153 | ) |
| | | | | | |
Free cash flow for the first nine months 2017 and 2016 was negatively impacted by the same items that affected cash flows used by operating activities. Free cash flow is a non-GAAP financial measure that is comprised of net cash used by operating activities 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 the third quarter of 2017 improved sequentially by $17,665,000 as compared to the second quarter of 2017 primarily as a result of improved working capital management related to the benefits of inventory and accounts receivable partially offset by accounts payable, and a reduced sequential net loss. In addition, the third quarter of 2017 reflects negative free cash flow related to the closure of the company's Suzhou, China, manufacturing facility as compared to positive free cash flow generated by the facility in the second quarter of 2017.
The company's approximate cash conversion days at September 30, 2017, December 31, 2016 and September 30, 2016 are as follows:
The days in inventory increase from last year end was due to lower than expected net sales and inventory build primarily related to plant closures. However, the days in inventory for the quarter ended September 30, 2017 were favorable to the quarter ended June 30, 2017 by 3.4 days as a result of reduction in inventory levels during the period by the Company. The increase in the most current days in receivables compared to prior periods was driven by higher sales in the quarter ended September 30, 2017 compared to the prior three quarters.
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.
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MD&A | Accounting Estimates and Pronouncements | |
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ACCOUNTING ESTIMATES AND PRONOUNCEMENTS
CRITICAL ACCOUNTING ESTIMATES
The Consolidated Financial Statements included in the report include accounts of the company and all majority-owned subsidiaries. The preparation ofcondensed consolidated financial statements contained 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, thus, actual results could differ from these estimates. Please refer to the Critical Accounting Estimates section within MD&A of company's Annualthis Quarterly Report on Form 10-K10-Q.
CAPITAL EXPENDITURES
The company estimates that capital investments for 2022 could be approximately $5,000,000 compared to actual capital expenditures of $17,698,000 in 2021. The continued investment at this level relates primarily to the period ending December 31, 2016.new ERP system. The company believes that its balances of cash and cash equivalents and available borrowing capacity under its existing credit facilities should be sufficient to meet its operating cash requirements and fund capital expenditures (refer to "Liquidity and Capital Resources"). The Prior Credit Agreement limited the company's annual capital expenditures to $35,000,000. In July of 2022, the Prior Credit Agreement was amended and restated. Among the updates was a reduction of the annual capital expenditures limitation to $25,000,000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the company’s disclosure regarding recently issued accounting pronouncements, seerefer to Accounting Policies - Recent Accounting Pronouncements in the Notesnotes to the Consolidated Financial Statementscondensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.
CAPITAL EXPENDITURES
The company estimates that capital investments for 2022 could be approximately $5,000,000 compared to actual capital expenditures of $17,698,000 in 2021. The continued investment at this level relates primarily to the new ERP system. The company believes that its balances of cash and cash equivalents and available borrowing capacity under its existing credit facilities should be sufficient to meet its operating cash requirements and fund capital expenditures (refer to "Liquidity and Capital Resources"). The Prior Credit Agreement limited the company's annual capital expenditures to $35,000,000. In July of 2022, the Prior Credit Agreement was amended and restated. Among the updates was a reduction of the annual capital expenditures limitation to $25,000,000.
DIVIDEND POLICY
On May 21, 2020, the Board of Directors suspended the quarterly dividend on the company's Common Shares. The Board of Directors suspended the company's regular dividend
on the Class B Common Shares starting in the third quarter of 2018. Less than 4,000 Class B Common Shares remain outstanding and suspending the regular Class B dividend allows the company to save on the administrative costs and compliance expenses associated with that dividend. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis and would be eligible for any Common Share dividends declared following any such conversion.
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| MD&A | Cash Flows | |
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MD&A | Forward-Looking Statements | |
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CASH FLOWS
The improvement in cash provided by operating activities for the three and six months ended June 30, 2022 was driven primarily by the collection of accounts receivable and reduced inventory levels offset by lower accounts payable.
The year over year changes in cash flows related to investing activities was driven primarily by lower capital expenditures.
Cash flows used by financing activities in the first six months of 2022 included credit facility borrowings and repayments, $2,650,000 principal payment of 2022 Notes, as well as payment of $1,267,000 in financing costs ahead of financing transactions executed in the third quarter of 2022. The first six months of 2021 included the issuance of $125,000,000 principal amount of 2026 Notes, payment of $5,175,000 in financing costs, purchase of capped calls related to the 2026 Notes for $18,787,000, repurchase of $78,850,000 principal amount of 2022 Notes and repayment of $1,250,000 principal amount of the company's previously outstanding convertible notes due 2021 (the "2021 Notes"). Borrowings on credit facilities are under the asset-based-lending senior secured revolving credit facilities provided by the company's Prior Credit Agreement.
Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands USD) | 2Q22 | | 2Q21 | | YTD 2Q22 | | YTD 2Q21 |
| Net cash provided (used) by operating activities | $ | 756 | | | $ | (22,290) | | | $ | (26,942) | | | $ | (36,050) | |
| | | | | | | |
| Plus: Sales of property and equipment | — | | | — | | | 5 | | | 23 | |
| | | | | | | |
| Less: Purchases of property and equipment | (633) | | | (4,929) | | | (2,764) | | | (9,047) | |
| Free Cash Flow (usage) | $ | 123 | | | $ | (27,219) | | | $ | (29,701) | | | $ | (45,074) | |
| | | | | |
Free cash flow for the first six months 2022 and 2021 was primarily impacted by the same items that affected cash flows provided (used) by operating activities. Free cash flow is a non-GAAP financial measure that is comprised of net cash provided (used) by operating activities plus purchases of property and equipment less proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.).
Generally, the first half of the year is cash consumptive and impacted by significant disbursements related to annual customer rebate payments which normally occur in the first quarter of the year and earned employee bonuses historically paid in the first half of the year. In addition, investment in inventory is typically heavy in the first half of the year, particularly recently with efforts to mitigate the company's supply chain disruptions and position the company to fulfill shipments in the second half of the year and can be impacted by footprint rationalization projects.
The company's approximate cash conversion days at June 30, 2022, December 31, 2021 and June 30, 2021 were as follows:
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 improvement in days in receivables is impacted by customer mix and region. Decline in days in accounts receivable is increased levels of payments in the first six months of 2022.
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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| MD&A | Forward-Looking Statements | |
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FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “could,” “plan,” “intend,” “expect,” “continue,” “believe” and “anticipate,” as well as similar comments, denote forward-looking statements that are subject to inherent uncertainties that are difficult to predict. These include, for example, statements related to the company’s ability to address on-going supply chain challenges; sales and free cash flow trends; the impact of contingency plans and cost containment actions; the company’s liquidity and working capital expectations; the company’s future financial results; and similar statements. Actual results and events may differ significantly from those expressed or anticipated as a result of various risks and uncertainties, which include, but are not limitedincluding the availability and cost to the following:company of needed products, components or raw materials from the company’s suppliers, including delivery delays and production interruptions from pandemic-related supply chain challenges and supplier delivery holds resulting from past due payables; the duration and scope of the COVID-19 pandemic, the pace of resumption of access to healthcare, including clinics and elective care, and loosening of public health restrictions, or any reimposed restrictions on access to healthcare or tightening of public health restrictions, which could impact the demand for the company’s products; global shortages in, or increasing costs for, transportation and logistics services and capacity; actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic, or political or geopolitical crises such as Russia's invasion of Ukraine, and actions taken in response, on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth, including negative conditions attributable to inflationary economic conditions; the effects of steps the company has taken or will take to reduce operating costs; the ability of the company to sustain profitable sales growth, achieve anticipated improvements in segment operating performance, convert high inventory levels to cash or reduce its costs; lack of market acceptance of the company's new product innovations; potential adverse effects of revised product pricing and/or product surcharges on revenues or the demand for the company's products; circumstances or developments that may make the company unable to implement or realize the anticipated benefits, or that may increase the costs, of its current and planned business initiatives, in particular the key elements of its growth plans, such as its new product introductions, commercialization plans, additional investments in demonstration equipment, product distribution strategy in Europe, supply chain actions and global information technology outsourcing and ERP implementation activities; possible adverse effects on the company's liquidity, including (i) the company's ability to address future debt maturities or other obligations, including
additional debt that may be incurred in the future or (ii) the company's ability to access the remaining portion of the financing under the July 2022 financing transactions (as discussed in the notes to the condensed consolidated financial statements) in the event of a failure to satisfy one or more of the applicable closing conditions; increases in interest rates or the costs of borrowing; potential limitations on the company’s business activities from obligations in the company’s debt agreements; adverse changes in government and third-party payor reimbursement levels and practices; decreased availability or increased costs of materials which could increase the company’s cost of producing or acquiring the company’s products, including the adverse impacts of tariffs and increases in commodity costs or freight costs; consolidation of health care providers; increasing pricing pressures in the markets for the company's products; risks of failures in, or disruptions to, legacy IT systems; risks of cybersecurity attack, data breach or data loss and/or delays in or inability to recover or restore data and IT systems; adverse effects of the company’scompany's consent decree of injunction with the U.S. Food and Drug Administration (FDA), including but not limited to, compliance costs, inability to bid on or win certain contracts, inability to rebuild negatively impacted customer relationships, unabsorbed capacity utilization, including fixed costs and overhead; any circumstances or developments that might adversely impact the third-party expert auditor’sauditor's required audits of the company’scompany's quality systems at the facilities impacted by the consent decree, including any possible failure to comply with the consent decree or FDA regulations;regulations or the inability to adequately address the matters identified in the FDA Letters; regulatory proceedings or the company's failure to comply with regulatory requirements or receive regulatory clearance or approval for the company's products or operations in the United States or abroad; adverse effects of regulatory or governmental inspections of companythe company's facilities at any time and governmental warning letters or enforcement actions; circumstances or developments that may make the company unable to implement or realize the anticipated benefits, or that may increase the costs, of its current business initiatives; possible adverse effects on the company's liquidity that may result from delays in the implementation or realization of benefits of its current business initiatives; product liability or warranty claims; product recalls, including more extensive warranty or recall experience than expected; possible adverse effects of being leveraged, including interest rate or event of default risks; exchange rate fluctuations, particularly in light of the relative importance of the company's foreign operations to its overall financial performance and including the existing and potential impacts from the Brexit referendum; potential impacts of the United States administration’s policies, and any legislation or regulations that may result from those policies, and of new United States tax laws, rules, regulations or policies;performance; legal actions, including adverse judgments or settlements of litigation or claims in excess of available insurance limits; adverse changes in government and other third-party payor reimbursement levels and practices both in the U.S. and in other countries (such as, for example, more extensive pre-payment reviews and post-payment audits by payors, or the continuing impact of the Medicare National Competitive U.S. Bidding program); ineffective cost reduction and restructuring efforts or inability to realize anticipated cost savings or achieve desired efficiencies from such efforts; delays, disruptions or excessive costs incurred in facility closures or consolidations; tax rate fluctuations; additional tax expense or additional tax exposures, which could affect the company's future profitability and cash flow; inability to design, manufacture,
distribute and achieve market acceptance of new products with greater functionality or new product platforms that deliver the anticipated benefits; consolidation of health care providers; lower cost imports; uncollectible accounts receivable; difficulties in implementing/upgrading Enterprise Resource Planning systems; risk of cybersecurity attack, data breach or data loss and/or delays in or inability to recover or restore data and IT systems; risks inherent in managing and operating businesses in many different foreign jurisdictions; decreased availability or increased costs of materials which could increase the company's costs of producing or acquiring the company's products, including possible increases in commodity costs or freight costs; heightened vulnerability to a hostile takeover attempt or other shareholder activism; provisions of Ohio law or in the company's debt agreements, charter documents or other agreements that may prevent or delay a change in control, as well as the risks described elsewhere in this Quarterly Report on Form 10-Q, the company’s Annual Report on Form 10-K and from time to time in the company's reports as filed with the Securities and Exchange Commission. Except to the extent required by law, the company does not undertake and specifically declines any obligation to review or update any forward-looking statements or to publicly
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| MD&A | Forward-Looking Statements | |
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announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
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| Financial Statements | | |
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Financial Statements | | |
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated StatementStatements of Comprehensive Income (Loss) (unaudited)
| | | (In thousands, except per share data) | Three Months Ended September 30, | | Nine Months Ended September 30, | (In thousands, except per share data) | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net sales | $ | 250,906 |
| | $ | 268,145 |
| | $ | 716,146 |
| | $ | 800,734 |
| Net sales | $ | 189,017 | | | $ | 225,864 | | | $ | 390,005 | | | $ | 422,066 | |
| Cost of products sold | 180,166 |
| | 194,703 |
| | 515,239 |
| | 585,837 |
| Cost of products sold | 141,035 | | | 165,046 | | | 294,294 | | | 306,610 | |
| Gross Profit | 70,740 |
| | 73,442 |
| | 200,907 |
| | 214,897 |
| Gross Profit | 47,982 | | | 60,818 | | | 95,711 | | | 115,456 | |
| Selling, general and administrative expenses | 75,921 |
| | 77,705 |
| | 224,155 |
| | 229,261 |
| Selling, general and administrative expenses | 58,623 | | | 63,765 | | | 119,187 | | | 122,586 | |
| Gain on sale of business | — |
| | (7,386 | ) | | — |
| | (7,386 | ) | |
| | Charges related to restructuring activities | 703 |
| | 508 |
| | 8,973 |
| | 1,299 |
| Charges related to restructuring activities | 4,153 | | | 547 | | | 7,943 | | | 2,099 | |
| Operating Income (Loss) | (5,884 | ) | | 2,615 |
| | (32,221 | ) | | (8,277 | ) | |
| Net loss (gain) on convertible debt derivatives | 2,550 |
| | (1,192 | ) | | 2,700 |
| | (2,282 | ) | |
| | Operating Loss | | Operating Loss | (14,794) | | | (3,494) | | | (31,419) | | | (9,229) | |
| | Loss on debt extinguishment including debt finance charges and fees | | Loss on debt extinguishment including debt finance charges and fees | — | | | — | | | — | | | 709 | |
| Interest expense | 6,844 |
| | 4,481 |
| | 16,007 |
| | 11,228 |
| Interest expense | 6,230 | | | 6,084 | | | 12,482 | | | 11,815 | |
| Interest income | (137 | ) | | (79 | ) | | (274 | ) | | (207 | ) | Interest income | (1) | | | — | | | (1) | | | (1) | |
| Loss Before Income Taxes | (15,141 | ) | | (595 | ) | | (50,654 | ) | | (17,016 | ) | Loss Before Income Taxes | (21,023) | | | (9,578) | | | (43,900) | | | (21,752) | |
| Income tax provision | 3,450 |
| | 4,425 |
| | 8,225 |
| | 8,200 |
| Income tax provision | 920 | | | 1,120 | | | 2,240 | | | 2,990 | |
| | Net Loss | $ | (18,591 | ) | | $ | (5,020 | ) | | $ | (58,879 | ) | | $ | (25,216 | ) | Net Loss | $ | (21,943) | | | $ | (10,698) | | | $ | (46,140) | | | $ | (24,742) | |
| Dividends Declared per Common Share | $ | 0.0125 |
| | $ | 0.0125 |
| | $ | 0.0375 |
| | $ | 0.0375 |
| Dividends Declared per Common Share | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | Net Loss per Share—Basic | $ | (0.57 | ) | | $ | (0.15 | ) | | $ | (1.80 | ) | | $ | (0.78 | ) | Net Loss per Share—Basic | $ | (0.62) | | | $ | (0.31) | | | $ | (1.31) | | | $ | (0.71) | |
| Weighted Average Shares Outstanding—Basic | 32,867 |
| | 32,465 |
| | 32,725 |
| | 32,484 |
| Weighted Average Shares Outstanding—Basic | 35,634 | | | 34,969 | | | 35,340 | | | 34,732 | |
| Net Loss per Share—Assuming Dilution | $ | (0.57 | ) | | $ | (0.15 | ) | | $ | (1.80 | ) | | $ | (0.78 | ) | |
| | Loss per Share—Assuming Dilution | | Loss per Share—Assuming Dilution | $ | (0.62) | | | $ | (0.31) | | | $ | (1.31) | | | $ | (0.71) | |
| Weighted Average Shares Outstanding—Assuming Dilution | 33,372 |
| | 32,610 |
| | 33,086 |
| | 32,589 |
| Weighted Average Shares Outstanding—Assuming Dilution | 35,995 | | | 35,620 | | | 35,714 | | | 35,450 | |
| Net Loss | $ | (18,591 | ) | | $ | (5,020 | ) | | $ | (58,879 | ) | | $ | (25,216 | ) | Net Loss | $ | (21,943) | | | $ | (10,698) | | | $ | (46,140) | | | $ | (24,742) | |
| Other comprehensive income (loss): | | | | | | | | Other comprehensive income (loss): | |
| Foreign currency translation adjustments | 27,439 |
| | (3,408 | ) | | 54,699 |
| | 17,668 |
| Foreign currency translation adjustments | (26,545) | | | 7,038 | | | (32,887) | | | 12,715 | |
| Defined Benefit Plans: | | | | | | | | Defined Benefit Plans: | |
| Amortization of prior service costs and unrecognized gains | (168 | ) | | (333 | ) | | (889 | ) | | (529 | ) | |
| Amortization of prior service costs and unrecognized losses | | Amortization of prior service costs and unrecognized losses | 4,339 | | | (744) | | | 4,563 | | | (395) | |
| | Deferred tax adjustment resulting from defined benefit plan activity | 21 |
| | 87 |
| | 33 |
| | 60 |
| Deferred tax adjustment resulting from defined benefit plan activity | (38) | | | (5) | | | (85) | | | (63) | |
| Valuation reserve associated with defined benefit plan activity | (21 | ) | | (87 | ) | | (33 | ) | | (60 | ) | Valuation reserve associated with defined benefit plan activity | 38 | | | 5 | | | 85 | | | 63 | |
| Current period unrealized loss on cash flow hedges | (191 | ) | | 159 |
| | (1,467 | ) | | (1,235 | ) | |
| Deferred tax loss related to unrealized loss on cash flow hedges | 8 |
| | (29 | ) | | 113 |
| | 60 |
| |
| Current period gain (loss) on cash flow hedges | | Current period gain (loss) on cash flow hedges | 812 | | | 101 | | | 1,692 | | | (774) | |
| Deferred tax benefit (provision) related to gain on cash flow hedges | | Deferred tax benefit (provision) related to gain on cash flow hedges | (184) | | | 14 | | | (240) | | | 97 | |
| Other Comprehensive Income (Loss) | 27,088 |
| | (3,611 | ) | | 52,456 |
| | 15,964 |
| Other Comprehensive Income (Loss) | (21,578) | | | 6,409 | | | (26,872) | | | 11,643 | |
| Comprehensive Income (Loss) | $ | 8,497 |
| | $ | (8,631 | ) | | $ | (6,423 | ) | | $ | (9,252 | ) | |
| Comprehensive Loss | | Comprehensive Loss | $ | (43,521) | | | $ | (4,289) | | | $ | (73,012) | | | $ | (13,099) | |
| (Elements as a % of Net Sales) | | | | | | | | (Elements as a % of Net Sales) | | | | | | | |
| Net Sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | |
| Net sales | | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of products sold | 71.8 |
| | 72.6 |
| | 71.9 |
| | 73.2 |
| Cost of products sold | 74.6 | | | 73.1 | | | 75.5 | | | 72.6 | |
| Gross Profit | 28.2 |
| | 27.4 |
| | 28.1 |
| | 26.8 |
| Gross Profit | 25.4 | | | 26.9 | | | 24.5 | | | 27.4 | |
| Selling, general and administrative expenses | 30.3 |
| | 29.0 |
| | 31.3 |
| | 28.6 |
| Selling, general and administrative expenses | 31.0 | | | 28.2 | | | 30.6 | | | 29.0 | |
| Gain on sale of business | — |
| | (2.8 | ) | | — |
| | (0.9 | ) | |
| | Charges related to restructuring activities | 0.3 |
| | 0.2 |
| | 1.3 |
| | 0.2 |
| Charges related to restructuring activities | 2.2 | | | 0.2 | | | 2.0 | | | 0.5 | |
| Operating Gain (Loss) | (2.3 | ) | | 1.0 |
| | (4.5 | ) | | (1.0 | ) | |
| Net loss (gain) on convertible debt derivatives | 1.0 |
| | (0.4 | ) | | 0.4 |
| | (0.3 | ) | |
| | Operating Loss | | Operating Loss | (7.8) | | | (1.5) | | | (8.1) | | | (2.2) | |
| | Loss on debt extinguishment including debt finance charges and fees | | Loss on debt extinguishment including debt finance charges and fees | — | | | — | | | — | | | 0.2 | |
| Interest expense | 2.7 |
| | 1.7 |
| | 2.2 |
| | 1.4 |
| Interest expense | 3.3 | | | 2.7 | | | 3.2 | | | 2.8 | |
| Interest income | (0.1 | ) | | — |
| | — |
| | — |
| |
| | Loss Before Income Taxes | (6.0 | ) | | (0.2 | ) | | (7.1 | ) | | (2.1 | ) | Loss Before Income Taxes | (11.1) | | | (4.2) | | | (11.3) | | | (5.2) | |
| Income tax provision | 1.4 |
| | 1.7 |
| | 1.1 |
| | 1.0 |
| Income tax provision | 0.5 | | | 0.5 | | | 0.6 | | | 0.7 | |
| Net Loss | (7.4 | )% | | (1.9 | )% | | (8.2 | )% | | (3.1 | )% | Net Loss | (11.6) | % | | (4.7) | % | | (11.8) | % | | (5.9) | % |
See notes to condensed consolidated financial statements.
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| Financial Statements | | |
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Financial Statements | | |
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INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
| | | | September 30,
2017 | | December 31,
2016 | | (unaudited) | |
| | (In thousands) | | June 30,
2022 | | December 31,
2021 |
| Assets | | | | Assets | (In thousands) |
| | Current Assets | | | | Current Assets | |
| Cash and cash equivalents | $ | 155,964 |
| | $ | 124,234 |
| Cash and cash equivalents | $ | 43,909 | | | $ | 83,745 | |
| Trade receivables, net | 126,587 |
| | 116,307 |
| Trade receivables, net | 90,949 | | | 117,115 | |
| Installment receivables, net | 1,685 |
| | 1,368 |
| Installment receivables, net | 284 | | | 218 | |
| Inventories, net | 143,775 |
| | 135,644 |
| Inventories, net | 138,806 | | | 144,274 | |
| | Other current assets | 31,345 |
| | 31,519 |
| Other current assets | 43,097 | | | 40,036 | |
| | Total Current Assets | 459,356 |
| | 409,072 |
| Total Current Assets | 317,045 | | | 385,388 | |
| Other Assets | 87,099 |
| | 29,687 |
| Other Assets | 6,671 | | | 5,362 | |
| Intangibles | 30,882 |
| | 29,023 |
| |
| Intangibles, net | | Intangibles, net | 26,079 | | | 26,356 | |
| Property and Equipment, net | 76,746 |
| | 75,359 |
| Property and Equipment, net | 55,884 | | | 60,921 | |
| Finance Lease Assets, net | | Finance Lease Assets, net | 59,513 | | | 63,029 | |
| Operating Lease Assets, net | | Operating Lease Assets, net | 10,679 | | | 12,600 | |
| Goodwill | 401,291 |
| | 360,602 |
| Goodwill | 336,750 | | | 355,875 | |
| Total Assets | $ | 1,055,374 |
| | $ | 903,743 |
| Total Assets | $ | 812,621 | | | $ | 909,531 | |
| Liabilities and Shareholders’ Equity | | | | Liabilities and Shareholders’ Equity | | | |
| Current Liabilities | | | | Current Liabilities | |
| Accounts payable | $ | 80,445 |
| | $ | 88,236 |
| Accounts payable | $ | 111,562 | | | $ | 130,036 | |
| Accrued expenses | 114,012 |
| | 110,095 |
| Accrued expenses | 105,151 | | | 102,971 | |
| Current taxes payable | 4,957 |
| | 7,269 |
| Current taxes payable | 2,102 | | | 3,914 | |
| Short-term debt and current maturities of long-term obligations | 1,940 |
| | 15,261 |
| |
| Current portion of long-term debt | | Current portion of long-term debt | 2,161 | | | 3,107 | |
| Current portion of finance lease obligations | | Current portion of finance lease obligations | 3,085 | | | 3,009 | |
| Current portion of operating lease obligations | | Current portion of operating lease obligations | 3,551 | | | 4,217 | |
| | Total Current Liabilities | 201,354 |
| | 220,861 |
| Total Current Liabilities | 227,612 | | | 247,254 | |
| Long-Term Debt | 238,912 |
| | 146,088 |
| Long-Term Debt | 311,489 | | | 305,022 | |
| Finance Lease Long-Term Obligations | | Finance Lease Long-Term Obligations | 60,710 | | | 63,736 | |
| Operating Leases Long-Term Obligations | | Operating Leases Long-Term Obligations | 7,057 | | | 8,234 | |
| Other Long-Term Obligations | 179,083 |
| | 114,407 |
| Other Long-Term Obligations | 58,149 | | | 66,796 | |
| Shareholders’ Equity | | | | Shareholders’ Equity | |
| Preferred Shares (Authorized 300 shares; none outstanding) | — |
| | — |
| Preferred Shares (Authorized 300 shares; none outstanding) | — | | | — | |
| Common Shares (Authorized 100,000 shares; 36,548 and 35,318 issued and outstanding in 2017 and 2016, respectively)—no par | 9,281 |
| | 8,974 |
| |
| Class B Common Shares (Authorized 12,000 shares; 6 and 729 shares issued and outstanding in 2017 and 2016, respectively)—no par | 2 |
| | 183 |
| |
| Common Shares (Authorized 150,000 shares; 40,147 and 39,416 issued and outstanding at June 30, 2022 and December 31, 2021, respectively)—no par | | Common Shares (Authorized 150,000 shares; 40,147 and 39,416 issued and outstanding at June 30, 2022 and December 31, 2021, respectively)—no par | 10,132 | | | 9,977 | |
| Class B Common Shares (Authorized 12,000 shares; 4 and 4 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively)—no par | | Class B Common Shares (Authorized 12,000 shares; 4 and 4 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively)—no par | 2 | | | 2 | |
| Additional paid-in-capital | 288,507 |
| | 266,151 |
| Additional paid-in-capital | 278,788 | | | 276,665 | |
| Retained earnings | 206,065 |
| | 266,144 |
| |
| Retained earnings (accumulated deficit) | | Retained earnings (accumulated deficit) | (23,495) | | | 22,645 | |
| Accumulated other comprehensive income (loss) | 33,121 |
| | (19,335 | ) | Accumulated other comprehensive income (loss) | (9,884) | | | 16,988 | |
| Treasury shares (3,698 and 3,616 shares in 2017 and 2016, respectively) | (100,951 | ) | | (99,730 | ) | |
| Treasury Shares (4,535 and 4,397 shares at June 30, 2022 and December 31, 2021, respectively) | | Treasury Shares (4,535 and 4,397 shares at June 30, 2022 and December 31, 2021, respectively) | (107,939) | | | (107,788) | |
| Total Shareholders’ Equity | 436,025 |
| | 422,387 |
| Total Shareholders’ Equity | 147,604 | | | 218,489 | |
| Total Liabilities and Shareholders’ Equity | $ | 1,055,374 |
| | $ | 903,743 |
| Total Liabilities and Shareholders’ Equity | $ | 812,621 | | | $ | 909,531 | |
See notes to condensed consolidated financial statements.
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| Financial Statements | | |
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Financial Statements | | |
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INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated StatementStatements of Cash Flows (unaudited)
| | | | For the Nine Months Ended September 30, | | For the Six Months Ended June 30, | |
| | 2017 | | 2016 | | 2022 | | 2021 | |
| Operating Activities | (In thousands) | Operating Activities | (In thousands) |
| Net loss | $ | (58,879 | ) | | $ | (25,216 | ) | Net loss | $ | (46,140) | | | $ | (24,742) | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
| Gain on sale of business | — |
| | (7,386 | ) | |
| Adjustments to reconcile net loss to net cash used by operating activities: | | Adjustments to reconcile net loss to net cash used by operating activities: | | |
| | Depreciation and amortization | 10,958 |
| | 10,911 |
| Depreciation and amortization | 7,848 | | | 8,264 | | |
| Amortization of operating lease right of use assets | | Amortization of operating lease right of use assets | 2,572 | | | 3,201 | | |
| Provision for losses on trade and installment receivables | 1,187 |
| | 348 |
| Provision for losses on trade and installment receivables | 318 | | | 335 | | |
| Benefit for deferred income taxes | (806 | ) | | (301 | ) | |
| Provision for deferred income taxes | | Provision for deferred income taxes | 98 | | | 460 | | |
| Provision for other deferred liabilities | 537 |
| | 557 |
| Provision for other deferred liabilities | (589) | | | (65) | | |
| Provision for stock-based compensation | 6,629 |
| | 5,534 |
| |
| Loss (gain) on disposals of property and equipment | (87 | ) | | 51 |
| |
| Amortization of convertible debt discount | 6,094 |
| | 3,809 |
| |
| Provision for equity compensation | | Provision for equity compensation | 2,278 | | | 5,810 | | |
| Gain on disposals of property and equipment | | Gain on disposals of property and equipment | (38) | | | (175) | | |
| Loss on debt extinguishment including debt finance charges and fees | | Loss on debt extinguishment including debt finance charges and fees | — | | | 709 | | |
| | Convertible debt accretion | | Convertible debt accretion | 1,828 | | | 1,747 | | |
| | Amortization of debt fees | 1,597 |
| | 1,435 |
| Amortization of debt fees | 1,230 | | | 1,035 | | |
| Loss (gain) on convertible debt derivatives | 2,700 |
| | (2,282 | ) | |
| | Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | | |
| Trade receivables | (3,153 | ) | | 5,169 |
| Trade receivables | 22,503 | | | (10,388) | | |
| Installment sales contracts, net | (903 | ) | | (1,214 | ) | Installment sales contracts, net | 210 | | | 289 | | |
| Inventories | 930 |
| | (16,986 | ) | |
| Inventories, net | | Inventories, net | 512 | | | (27,082) | | |
| Other current assets | 2,351 |
| | 772 |
| Other current assets | (3,013) | | | 5,770 | | |
| Accounts payable | (12,491 | ) | | (8,017 | ) | Accounts payable | (14,929) | | | 22,872 | | |
| Accrued expenses | (7,775 | ) | | (12,165 | ) | Accrued expenses | 931 | | | (24,406) | | |
| Other long-term liabilities | (2,256 | ) | | (4,404 | ) | Other long-term liabilities | (2,561) | | | 316 | | |
| Net Cash Used by Operating Activities | (53,367 | ) | | (49,385 | ) | Net Cash Used by Operating Activities | (26,942) | | | (36,050) | | |
| Investing Activities | | | | Investing Activities | | |
| Purchases of property and equipment | (7,389 | ) | | (6,797 | ) | Purchases of property and equipment | (2,764) | | | (9,047) | | |
| Proceeds from sale of property and equipment | 211 |
| | 29 |
| Proceeds from sale of property and equipment | 5 | | | 23 | | |
| Proceeds from sale of business | — |
| | 13,829 |
| |
| | Change in other long-term assets | (239 | ) | | (172 | ) | Change in other long-term assets | (32) | | | (69) | | |
| Other | (85 | ) | | 78 |
| Other | 4 | | | — | | |
| Net Cash Provided (Used) by Investing Activities | (7,502 | ) | | 6,967 |
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| Net Cash Used by Investing Activities | | Net Cash Used by Investing Activities | (2,787) | | | (9,093) | | |
| Financing Activities | | | | Financing Activities | | |
| Proceeds from revolving lines of credit and long-term borrowings | 95,220 |
| | 121,976 |
| Proceeds from revolving lines of credit and long-term borrowings | 9,292 | | | 147,539 | | |
| Payments on revolving lines of credit and long-term borrowings | (15,914 | ) | | (2,555 | ) | |
| Proceeds from exercise of stock options | 1,761 |
| | 17 |
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| Repurchases of convertible debt, payments on revolving lines of credit and finance leases | | Repurchases of convertible debt, payments on revolving lines of credit and finance leases | (15,633) | | | (105,216) | | |
| | Payment of financing costs | (4,711 | ) | | (5,966 | ) | Payment of financing costs | (1,267) | | | (5,175) | | |
| Payment of dividends | (1,200 | ) | | (1,188 | ) | |
| Issuance of warrants | 14,100 |
| | 12,376 |
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| Purchase of treasury stock | (1,221 | ) | | (5,298 | ) | |
| Net Cash Provided by Financing Activities | 88,035 |
| | 119,362 |
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| | Purchases of capped calls | | Purchases of capped calls | — | | | (18,787) | | |
| | Purchases of treasury shares | | Purchases of treasury shares | (151) | | | (1,752) | | |
| Net Cash Used by Financing Activities | | Net Cash Used by Financing Activities | (7,759) | | | 16,609 | | |
| Effect of exchange rate changes on cash | 4,564 |
| | 1,428 |
| Effect of exchange rate changes on cash | (2,348) | | | 1,488 | | |
| Increase in cash and cash equivalents | 31,730 |
| | 78,372 |
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| Decrease in cash and cash equivalents | | Decrease in cash and cash equivalents | (39,836) | | | (27,046) | | |
| Cash and cash equivalents at beginning of year | 124,234 |
| | 60,055 |
| Cash and cash equivalents at beginning of year | 83,745 | | | 105,298 | | |
| Cash and cash equivalents at end of period | $ | 155,964 |
| | $ | 138,427 |
| Cash and cash equivalents at end of period | $ | 43,909 | | | $ | 78,252 | | |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity (unaudited)
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| (In thousands) | Common
Shares | | Class B
Shares | | Additional
Paid-in-
Capital | | Retained
Earnings (Accumulated Deficit) | | Accumulated Other
Comprehensive
Income (Loss) | | Treasury
Shares | | Total |
| March 31, 2022 Balance | $ | 9,977 | | | $ | 2 | | | $ | 276,975 | | | $ | (1,552) | | | $ | 11,694 | | | $ | (107,788) | | | $ | 189,308 | |
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| Performance awards | — | | | — | | | 26 | | | — | | | — | | | — | | | 26 | |
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| Restricted share awards | 155 | | | — | | | 1,787 | | | — | | | — | | | (151) | | | 1,791 | |
| Net loss | — | | | — | | | — | | | (21,943) | | | — | | | — | | | (21,943) | |
| Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (26,545) | | | — | | | (26,545) | |
| Unrealized gain on cash flow hedges | — | | | — | | | — | | | — | | | 628 | | | — | | | 628 | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | 4,339 | | | — | | | 4,339 | |
| Total comprehensive loss | | | | | | | | | | | | | (43,521) | |
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| June 30, 2022 Balance | $ | 10,132 | | | $ | 2 | | | $ | 278,788 | | | $ | (23,495) | | | $ | (9,884) | | | $ | (107,939) | | | $ | 147,604 | |
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| March 31, 2021 Balance | $ | 9,917 | | | $ | 2 | | | $ | 273,982 | | | $ | 54,164 | | | $ | 50,670 | | | $ | (106,034) | | | $ | 282,701 | |
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| Performance awards | 52 | | | — | | | 1,329 | | | — | | | — | | | (668) | | | 713 | |
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| Restricted share awards | 8 | | | — | | | 2,841 | | | — | | | — | | | (1,084) | | | 1,765 | |
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| Net loss | — | | | — | | | — | | | (10,698) | | | — | | | — | | | (10,698) | |
| Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 7,038 | | | — | | | 7,038 | |
| Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | 115 | | | — | | | 115 | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (744) | | | — | | | (744) | |
| Total comprehensive loss | | | | | | | | | | | | | (4,289) | |
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| June 30, 2021 Balance | $ | 9,977 | | | $ | 2 | | | $ | 278,152 | | | $ | 43,466 | | | $ | 57,079 | | | $ | (107,786) | | | $ | 280,890 | |
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| See notes to condensed consolidated financial statements. |
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| INVACARE CORPORATION AND SUBSIDIARIES |
| Condensed Consolidated Statement of Shareholders' Equity (unaudited) |
| | | | | | | | | | | | | |
| (In thousands) | Common
Shares | | Class B
Shares | | Additional
Paid-in-
Capital | | Retained
Earnings (Accumulated Deficit) | | Accumulated Other
Comprehensive
Income (Loss) | | Treasury Shares | | Total |
| January 1, 2022 Balance | $ | 9,977 | | | $ | 2 | | | $ | 276,665 | | | $ | 22,645 | | | $ | 16,988 | | | $ | (107,788) | | | $ | 218,489 | |
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| Performance awards | — | | | — | | | (319) | | | — | | | — | | | — | | | (319) | |
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| Restricted share awards | 155 | | | — | | | 2,442 | | | — | | | — | | | (151) | | | 2,446 | |
| Net loss | — | | | — | | | — | | | (46,140) | | | — | | | — | | | (46,140) | |
| Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (32,887) | | | — | | | (32,887) | |
| Unrealized gain on cash flow hedges | — | | | — | | | — | | | — | | | 1,452 | | | — | | | 1,452 | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | 4,563 | | | — | | | 4,563 | |
| Total comprehensive loss | | | | | | | | | | | | | (73,012) | |
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| June 30, 2022 Balance | $ | 10,132 | | | $ | 2 | | | $ | 278,788 | | | $ | (23,495) | | | $ | (9,884) | | | $ | (107,939) | | | $ | 147,604 | |
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| January 1, 2021 Balance | $ | 9,816 | | | $ | 2 | | | $ | 326,088 | | | $ | 58,538 | | | $ | 45,436 | | | $ | (106,034) | | | $ | 333,846 | |
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| Performance awards | 52 | | | — | | | 1,997 | | | — | | | — | | | (668) | | | 1,381 | |
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| Restricted share awards | 109 | | | — | | | 3,652 | | | — | | | — | | | (1,084) | | | 2,677 | |
| Net loss | — | | | — | | | — | | | (24,742) | | | — | | | — | | | (24,742) | |
| Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 12,715 | | | — | | | 12,715 | |
| Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | (677) | | | — | | | (677) | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (395) | | | — | | | (395) | |
| Total comprehensive loss | | | | | | | | | | | | | (13,099) | |
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| Adoption of ASU 2020-06 | — | | | — | | | (34,798) | | | 9,670 | | | — | | | — | | | (25,128) | |
| Purchase of capped calls | — | | | — | | | (18,787) | | | — | | | — | | | — | | | (18,787) | |
| June 30, 2021 Balance | $ | 9,977 | | | $ | 2 | | | $ | 278,152 | | | $ | 43,466 | | | $ | 57,079 | | | $ | (107,786) | | | $ | 280,890 | |
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See notes to condensed consolidated financial statements.
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| Notes to Financial Statements | Accounting Policies | |
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Accounting Policies
Principles of Consolidation:
The condensed consolidated financial statements include the accounts of the company and its wholly owned subsidiaries and include all adjustments, which were of a normal recurring nature, necessary to present fairly the financial position of the company as of SeptemberJune 30, 20172022 and the results of its operations and changes in its cash flow for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using an Augusta May 31 quarter end to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company's financial statements. All significant intercompany transactions are eliminated. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172022 are not necessarily indicative of the results to be expected for the full year.
Use of Estimates:
The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates.
Recent Accounting Pronouncements (Already Adopted):
In March 2016,2020, the FASB issued ASU 2016-09, "Compensation – Stock Compensation: Topic 718: Improvements to Employee Share-Based Payment Accounting.2020-04 "Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting," ASU 2016-09which is intended to simplify several aspects ofprovide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting for share-based payment transactions, includingto ease the income tax consequences, classification of awards as either equity or liabilities,financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and classificationother interbank offered rates to alternative reference rates if certain criteria are met. The guidance may be adopted in any period prior to the guidance expiration on the statement of cash flows. December 31, 2022.
The company adopted ASU 2016-09,2020-04 effective January 1, 2017, which2022 and the adoption did not have a material impact on the company's financial statements. Interest arrangements previously referring to LIBOR prior to adoption, now refer to a secured overnight finance rate (SOFR).
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 did not have a material impact on the company's financial statements.
Recent Accounting Pronouncements (Not Yet Adopted):
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 the new revenue standard retrospectively to each prior reporting period presented or retrospective with the cumulative effect of initially applying 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 permitted.
During 2017, the company completed an assessment of its contracts and related accounting. The Company concluded it has a product revenue stream for which revenue is recognized at a point in time and a service revenue stream for which revenue is principally recognized at a point in time with some service revenues recognized over time. Based on this review, the company does not expect this standard will have a material impact on the company's results of operations or cash flows in the periods after adoption. Pursuant to ASU 2014-09, revenues are recognized as control transfers to the customers, which is consistent with the current revenue recognition model and the current accounting for most of the company's contracts. The company expects to adopt the provisions of ASU 2014-09 on a modified retrospective basis through a cumulative effect adjustment to equity. The company will continue to evaluate the impact of ASU 2014-09, as well as any subsequent updates and clarifications, and the possible impact of the standard on any new contracts entered into by the company through the date of adoption.
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| Notes to Financial Statements | Current Assets | |
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Notes to Financial Statements | Accounting Policies | |
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Current Assets
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 is effective for fiscal periods beginning after December 15, 2018 and early adoption is permitted. The company is currently reviewing the impact of the adoption of ASU 2016-02 on the company's financial statements.
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 2016-09 on the company's financial statements.
In 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.
Reclassifications:
In 2016, the company redefined the measure by which it evaluates segment profit or loss to be segment operating profit (loss). The previous performance measure was earnings before income taxes. All prior periods presented were changed to reflect the new measure. During the first quarter of 2017, a subsidiary, formerly included in the Europe segment, transferred to the NA/HME segment as it is managed by the NA/HME segment manager effective January 1, 2017. The results for 2016 have been changed accordingly and for the three and nine months ended September 30, 2016, the change increased revenues from external customers by $1,300,000 and $3,738,000, respectively, and operating loss by $15,000 and $165,000, respectively, for NA/HME with an offsetting impact for Europe.
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Notes to Financial Statements | Divested Businesses | |
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Divested Businesses
Operations Held
Receivables consist of the following (in thousands):
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| June 30, 2022 | | December 31, 2021 |
| Accounts receivable, gross | $ | 113,612 | | | $ | 142,806 | |
| Customer rebate reserve | (10,696) | | | (12,267) | |
| Cash discount reserves | (7,746) | | | (9,179) | |
| Allowance for doubtful accounts | (3,261) | | | (3,642) | |
| Other, principally returns and allowances reserves | (960) | | | (603) | |
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| Accounts receivable, net | $ | 90,949 | | | $ | 117,115 | |
Reserves for Sale
On September 30, 2016,customer rebates and cash discounts are recorded as a reduction in revenue and netted against gross accounts receivable. Customer rebates in excess of a given customer's accounts receivable balance are classified in Accrued Expenses. Customer rebates and cash discounts are estimated based on the most likely amount principle as well as historical experience and anticipated performance. In addition, customers have the right to return product within the company’s normal terms policy, and as such, the company completedestimates the saleexpected returns based on an analysis of its subsidiary, Garden City Medical Inc, a Delaware corporationhistorical experience and wholly-owned subsidiary (“GCM”), dba PMI and Pinnacle Medsource, to Compass Health Brands Corp., a Delaware corporation (the “Purchaser”), pursuant to a Share Purchase Agreement. GCM sourced and distributed primarily lifestyle products under the brand ProBasics™ by PMI. GCM was part of the NA/HME segment of the company. The price paid to the company for GCM was $13,829,000 in cash, and net proceeds from the transaction were $12,729,000, net of expenses. The company recorded a pre-tax gain of $7,386,000 inadjusts revenue accordingly.
During the third quarter of 2016, which represented the excess of the net sales price over the book value of the assets and liabilities of GCM. The sale of GCM was dilutive to the company's results. The company utilized the net proceeds to fund operations. The company determined that the sale of GCM did not meet the criteria for classification as a discontinued operation in accordance with ASU 2014-08 but the "held for sale" criteria of ASC 360-10-45-9 were met and thus GCM was treated as held for sale.
With the sale of GCM,2021, the company entered into an agreement with the Purchaser for the Purchasera bank to buy, at cost, all ProBasics™ inventory capitalized on the balance sheets ofsell certain Invacare subsidiaries which was not sold as part of the GCM sale on September 30, 2016. The value of the inventory sold was approximately $2,400,000 which was transferred to the Purchasertrade receivables with governmental entity customers in the fourth quarter of 2016 and was paid by the Purchaser as of September 30, 2017.
During the third quarter of 2017, the company and the Purchaser agreed on the final purchase price of GCM. As a result, the company will pay the Purchaser approximately $667,000 in the fourth quarter of 2017. This payment amount is fully accrued by the company as of September 30, 2017.
Prior to 2017, the company had recorded expenses related toNordic region without recourse. Under ASC 860, the sale of all operations held forthe receivables qualify as a true sale including GCM, totaling $2,892,000, of which $1,700,000 has been paid out as of September 30, 2017.
Discontinued Operations
From 2012 through 2014, the company sold three businesses which were classified as discontinued operations. Prior to 2017, the company hadand not a secured borrowing. No gain or loss was recorded cumulative expenses related toon the sale of discontinued operations totaling $8,801,000, ofthe receivables. Bank charges, which $8,405,000 have been paidare recorded as of Septemberinterest expense attributable to the program, were immaterial for the six months ended June 30, 2017.2022.
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Notes to Financial Statements | Current Assets | |
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Current Assets
Receivables
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all the company’s receivables are due from health care, medical equipment providers and long-term care facilities predominantly located throughout the United States, Australia, Canada, New Zealand 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. Therefore,As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability.
The company's approach is to separate its receivables into good-standing and collection receivables. Good-standing
receivables are assigned to risk pools of high, medium and low. The risk pools are driven by the specifics associated with the geography of origination. Expected loss percentages are calculated and assigned to each risk pool, driven primarily by historical experience. The historical loss percentages are calculated for each risk pool and then judgmentally revised to consider current risk factors as well as consideration of the impact of forecasted events, as applicable. The expected loss percentages are then applied to receivables balances each period to determine the allowance for doubtful accounts.
In North America, excluding Canada, good-standing receivables are assigned to the low risk pool and assigned an expected loss percentage of 1.0% as these receivables are deemed to share the same risk profile and collections efforts are the same. Installment receivables in North America are characterized as collection receivables and thus reserves are based on specific analysis of each customer. In Canada, good-standing receivables are deemed low risk and assigned a loss percentage of 0.1%.
In Europe, expected losses are determined by each location in each region. Most locations have a majority of their receivables assigned to the low risk pool, which has an average expected loss percentage of 0.3%. About half of the locations have a portion of their receivables assigned as medium risk with an average expected loss percentage of 0.9%. Only a few locations have any receivables characterized as high risk and the average credit loss percentage for those locations is 3.4%. Collection risk is generally low as payment terms in certain key markets, such as Germany, are immediate and in many locations the ultimate customer is the government.
In the Asia Pacific region, receivables are characterized as low risk, which have an average expected loss percentage of 1.0%. Historical losses are low in this region where the use of credit insurance is often customary.
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| Notes to Financial Statements | Current Assets | |
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The movement in the trade receivables allowance for doubtful accounts was as follows (in thousands):
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| Six Ended
June 30, 2022 | | |
| Balance as of beginning of period | $ | 3,642 | | | |
| Current period provision | 318 | | | |
| Recoveries (direct write-offs), net | (699) | | | |
| Balance as of end of period | $ | 3,261 | | | |
The company did not make any material changes to the assignment of receivables to the different risk pools or to the expected loss reserves in the quarter. The company is monitoring the impacts of the COVID-19 pandemic and the possibility for an impact on collections, but to date this has not materially impacted 2022.
For collections receivables, the estimated allowance for uncollectible amounts ($6,559,000 at September 30, 2017 and $6,916,000 at December 31, 2016) is based primarily on management’s evaluation of the financial condition of specific customers. The company accounts for customer rebateseach customer. In addition, as a reductionresult of revenue and the related accounts receivable when products are sold in accordance with ASC 605. In addition, due to the company's financing arrangement with De Lage Landen, Inc. ("DLL"),DLL, a third-party financing company with which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishes reserves for specific customers as needed.
The company writes off uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. SeeRefer to Concentration of Credit Risk in the Notesnotes to the Consolidated Financial Statementscondensed consolidated financial statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the condensed consolidated balance sheet.sheets.
The company has recorded a contingent liability in the amount of $302,000 related to the contingent aspect of the company's guarantee associated with its arrangement with DLL. The contingent liability is recorded applying the same expected loss model used for the trade and installment receivables recorded on the company's books. Specifically, historical loss history is used to determine the expected loss percentage, which is then adjusted judgmentally to consider other factors, as needed.
The company’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 whichRepurchased 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 ofthese receivables are distinguished by geography and credit quality. The U.S. installmentThese receivables are the first class and represent installment receivables re-purchasedwere repurchased from DLL
because the customers were in default. Default with DLL is defined as a customer being delinquent by three3 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’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.reviewed. The company assesses the bad debt reserve levels based upon the status of the customer’s adherence to a legally negotiated payment schedule and the company’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’s consumer credit score 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’s financial statements 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.
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
Notes to Financial Statements | Current Assets | |
| | |
Installment receivables consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| Installment receivables | $ | 284 | | | $ | 393 | | | $ | 677 | | | $ | 218 | | | $ | 734 | | | $ | 952 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Allowance for doubtful accounts | — | | | — | | | — | | | — | | | — | | | — | |
| Installment receivables, net | $ | 284 | | | $ | 393 | | | $ | 677 | | | $ | 218 | | | $ | 734 | | | $ | 952 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Current | | Long- Term | | Total | | Current | | Long- Term | | Total |
| Installment receivables | $ | 2,828 |
| | $ | 2,288 |
| | $ | 5,116 |
| | $ | 2,027 |
| | $ | 2,685 |
| | $ | 4,712 |
|
| Less: Unearned interest | (37 | ) | | — |
| | (37 | ) | | (40 | ) | | — |
| | (40 | ) |
| | 2,791 |
| | 2,288 |
| | 5,079 |
| | 1,987 |
| | 2,685 |
| | 4,672 |
|
| Allowance for doubtful accounts | (1,106 | ) | | (1,903 | ) | | (3,009 | ) | | (619 | ) | | (2,219 | ) | | (2,838 | ) |
| Installment receivables, net | $ | 1,685 |
| | $ | 385 |
| | $ | 2,070 |
| | $ | 1,368 |
| | $ | 466 |
| | $ | 1,834 |
|
No Installment receivables were purchased from DLL during the ninesix months ended SeptemberJune 30, 2017 increased the gross installment receivables balance by $2,152,000.2022. No sales of
installment receivables were made by the company during the quarter.
The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | Year Ended December 31, 2021 |
| Balance as of beginning of period | $ | — | | | $ | 487 | |
| Current period provision (benefit) | — | | | (75) | |
| Direct write-offs charged against the allowance | — | | | (412) | |
| Balance as of end of period | $ | — | | | $ | — | |
|
| | | | | | | |
| | Nine Months Ended September 30, 2017 | | Year Ended December 31, 2016 |
| Balance as of beginning of period | $ | 2,838 |
| | $ | 2,792 |
|
| Current period provision | 717 |
| | 1,220 |
|
| Direct write-offs charged against the allowance | (546 | ) | | (1,174 | ) |
| Balance as of end of period | $ | 3,009 |
| | $ | 2,838 |
|
Installment receivables by class as of SeptemberJune 30, 20172022 consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Total
Installment
Receivables | | Unpaid
Principal
Balance | | Related
Allowance for
Doubtful
Accounts | | Interest
Income
Recognized |
| | | | | | | |
| | | | | | | |
| Asia Pacific | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 677 | | | 677 | | | — | | | — | |
| Total | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 677 | | | 677 | | | — | | | — | |
| Impaired installment receivables with a related allowance recorded | — | | | — | | | — | | | — | |
| Total installment receivables | $ | 677 | | | $ | 677 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| | Total Installment Receivables | | Unpaid Principal Balance | | Related Allowance for Doubtful Accounts | | Interest Income Recognized |
| U.S. | | | | | | | |
| Impaired installment receivables with a related allowance recorded | $ | 4,234 |
| | $ | 4,234 |
| | $ | 3,007 |
| | $ | — |
|
| Canada | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 880 |
| | 843 |
| | — |
| | 60 |
|
| Impaired installment receivables with a related allowance recorded | 2 |
| | 2 |
| | 2 |
| | — |
|
| Total Canadian installment receivables | 882 |
| | 845 |
| | 2 |
| | 60 |
|
| Total | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 880 |
| | 843 |
| | — |
| | 60 |
|
| Impaired installment receivables with a related allowance recorded | 4,236 |
| | 4,236 |
| | 3,009 |
| | — |
|
| Total installment receivables | $ | 5,116 |
| | $ | 5,079 |
| | $ | 3,009 |
| | $ | 60 |
|
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
Notes to Financial Statements | Current Assets | |
| | |
Installment receivables by class as of December 31, 20162021 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 | $ | 3,762 |
| | $ | 3,762 |
| | $ | 2,706 |
| | $ | — |
| |
| Canada | | | | | | | | |
| Non-Impaired installment receivables with no related allowance recorded | 818 |
| | 778 |
| | — |
| | 65 |
| |
| Impaired installment receivables with a related allowance recorded | 132 |
| | 132 |
| | 132 |
| | — |
| |
| Total Canadian installment receivables | 950 |
| | 910 |
| | 132 |
| | 65 |
| |
| | Asia Pacific | | Asia Pacific | | | | | | | |
| Non-impaired installment receivables with no related allowance recorded | | Non-impaired installment receivables with no related allowance recorded | 952 | | | 952 | | | — | | | — | |
| | Total | | | | | | | | Total | |
| Non-Impaired installment receivables with no related allowance recorded | 818 |
| | 778 |
| | — |
| | 65 |
| |
| Non-impaired installment receivables with no related allowance recorded | | Non-impaired installment receivables with no related allowance recorded | 952 | | | 952 | | | — | | | — | |
| Impaired installment receivables with a related allowance recorded | 3,894 |
| | 3,894 |
| | 2,838 |
| | — |
| Impaired installment receivables with a related allowance recorded | — | | | — | | | — | | | — | |
| Total installment receivables | $ | 4,712 |
| | $ | 4,672 |
| | $ | 2,838 |
| | $ | 65 |
| Total installment receivables | $ | 952 | | | $ | 952 | | | $ | — | | | $ | — | |
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 September 30, 2017, 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 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 Canadian installment receivables which were past due of 90 days or more as of September 30, 2017 and December 31, 2016 for which the
company is still accruing interest.
The aging of the company’s installment receivables was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Total | | | | Asia Pacific | | Total | | | | Asia Pacific |
| Current | $ | 655 | | | | | $ | 655 | | | $ | 952 | | | | | $ | 952 | |
| 0-30 days past due | 22 | | | | | 22 | | | — | | | | | — | |
| 31-60 days past due | — | | | | | — | | | — | | | | | — | |
| 61-90 days past due | — | | | | | — | | | — | | | | | — | |
| 90+ days past due | — | | | | | — | | | — | | | | | — | |
| $ | 677 | | | | | $ | 677 | | | $ | 952 | | | | | $ | 952 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Total | | U.S. | | Canada | | Total | | U.S. | | Canada |
| Current | $ | 873 |
| | $ | — |
| | $ | 873 |
| | $ | 832 |
| | $ | — |
| | $ | 832 |
|
| 0-30 Days Past Due | 7 |
| | — |
| | 7 |
| | 18 |
| | — |
| | 18 |
|
| 31-60 Days Past Due | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| 61-90 Days Past Due | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| 90+ Days Past Due | 4,236 |
| | 4,234 |
| | 2 |
| | 3,848 |
| | 3,762 |
| | 86 |
|
| | $ | 5,116 |
| | $ | 4,234 |
| | $ | 882 |
| | $ | 4,712 |
| | $ | 3,762 |
| | $ | 950 |
|
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
Notes to Financial Statements | Current Assets | |
| | |
Inventories, Net
Inventories
Inventories consist of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Raw materials | $ | 65,053 | | | $ | 69,371 | |
| Finished goods | 62,481 | | | 62,124 | |
| Work in process | 11,272 | | | 12,779 | |
| Inventories, net | $ | 138,806 | | | $ | 144,274 | |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Finished goods | $ | 69,662 |
| | $ | 68,701 |
|
| Raw materials | 63,240 |
| | 56,270 |
|
| Work in process | 10,873 |
| | 10,673 |
|
| Inventories, net | $ | 143,775 |
| | $ | 135,644 |
|
Other Current Assets
Other current assets consist of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Tax receivables principally value added taxes | $ | 26,894 | | | $ | 21,943 | |
| Prepaid insurance | 1,436 | | | 4,462 | |
| Prepaid inventory and freight | 2,138 | | | 2,394 | |
| Recoverable income taxes | 2,205 | | | 2,301 | |
| Derivatives (foreign currency forward exchange contracts) | 2,058 | | | 386 | |
| Receivable due from information technology provider | 898 | | | 612 | |
| Service contracts | 980 | | | 304 | |
| Deferred financing fees | 404 | | | 379 | |
| Prepaid and other current assets | 6,084 | | | 7,255 | |
| Other Current Assets | $ | 43,097 | | | $ | 40,036 | |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Value added tax receivables | $ | 15,556 |
| | $ | 14,336 |
|
| Prepaid insurance | 2,409 |
| | 2,761 |
|
| Service contracts | 1,924 |
| | 2,902 |
|
| Derivatives (foreign currency forward exchange contracts) | 1,238 |
| | 2,754 |
|
| Prepaid inventory | 511 |
| | 790 |
|
| Prepaid debt fees | 376 |
| | 489 |
|
| Recoverable income taxes | 202 |
| | 503 |
|
| Prepaid and other current assets | 9,129 |
| | 6,984 |
|
| Other Current Assets | $ | 31,345 |
| | $ | 31,519 |
|
| | | | | | | | |
| Notes to Financial Statements | Long-Term Assets | |
| | |
Notes to Financial Statements | Long-Term Assets | |
| | |
Long-Term Assets
Other long-term assets consist of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
| | | |
| Cash surrender value of life insurance policies | $ | 2,528 | | | $ | 2,481 | |
| Deferred financing fees | 2,052 | | | 409 | |
| Deferred income taxes | 1,535 | | | 1,540 | |
| Installment receivables | 393 | | | 734 | |
| Investments | 85 | | | 86 | |
| Other | 78 | | | 112 | |
| Other Long-Term Assets | $ | 6,671 | | | $ | 5,362 | |
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Convertible 2022 note hedge asset | $ | 41,660 |
| | $ | — |
|
| Convertible 2021 note hedge asset | 41,619 |
| | 25,471 |
|
| Cash surrender value of life insurance policies | 1,895 |
| | 1,824 |
|
| Deferred financing fees | 860 |
| | 793 |
|
| Installment receivables | 385 |
| | 466 |
|
| Deferred taxes | 470 |
| | 837 |
|
| Investments | 103 |
| | 108 |
|
| Other | 107 |
| | 188 |
|
| Other Long-Term Assets | $ | 87,099 |
| | $ | 29,687 |
|
During the quarter ended March 31, 2016, the company issued $150,000,000 principal amount of Convertible Senior Notes due 2021. During the quarter ended June 30, 2017, the company issued $120,000,000 principal amount of Convertible Senior Notes due 2022. As part of the 2016 and 2017 transactions, the company entered into the related 2021 and 2022 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.
Property and Equipment
Property and equipment consist of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Machinery and equipment | $ | 272,818 | | | $ | 278,347 | |
| Capitalized software | 30,921 | | | 30,448 | |
| Land, buildings and improvements | 25,873 | | | 27,299 | |
| Furniture and fixtures | 8,191 | | | 8,943 | |
| Leasehold improvements | 4,861 | | | 6,782 | |
| Property and Equipment, gross | 342,664 | | | 351,819 | |
| Accumulated depreciation | (286,780) | | | (290,898) | |
| Property and Equipment, net | $ | 55,884 | | | $ | 60,921 | |
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 fourth quarter of 2019, the company initiated the first stage of an Enterprise Resource Planning ("ERP") software implementation. Related to the ERP project, the company capitalized certain costs in accordance with ASC 350 as shown in capitalized software above. The net book value of capitalized software was $27,680,000 and $28,715,000 at June 30, 2022 and December 31, 2021, respectively. Depreciation expense related to capitalized software started in 2021 and was $833,000 and $1,510,000 for the three and six months ended June 30, 2022, respectively, compared to $413,000 and $665,000 for the three and six months ended June 30, 2021, respectively.
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Machinery and equipment | $ | 301,724 |
| | $ | 301,367 |
|
| Land, buildings and improvements | 78,868 |
| | 73,709 |
|
| Leasehold improvements | 12,426 |
| | 12,054 |
|
| Furniture and fixtures | 10,207 |
| | 10,100 |
|
| Property and Equipment, gross | 403,225 |
| | 397,230 |
|
| Less allowance for depreciation | (326,479 | ) | | (321,871 | ) |
| Property and Equipment, net | $ | 76,746 |
| | $ | 75,359 |
|
Unpaid purchases of property and equipment at June 30, 2022 and December 31, 2021 were $0 and $1,090,000, respectively and are excluded from purchases of property and equipment on the condensed consolidated statements of cash flows for the periods ending and are included in subsequent periods when paid.
| | | | | | | | |
| Notes to Financial Statements | Long-Term Assets | |
| | |
Goodwill
The change in goodwill from December 31, 20162021 to SeptemberJune 30, 20172022 was due to foreign currency translation.
|
| | |
Notes to Financial Statements | Long-Term Assets | |
| | |
In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is tested annually for impairment or whenever events or changes in circumstances indicate the carrying value of a reporting unit could be above its fair value.
A reporting unit is defined as an operating segment or one level below. The company has determined that its reporting units are North America, Europe and Asia Pacific.
Refer to Goodwill in the company's Annual Report on Form 10-K for the period ending December 31, 2021 for further disclosure regarding the company's impairment analysis review methodology.
Intangibles
The company's intangibles consist of the following (in thousands):
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2022 | | December 31, 2021 |
| | Historical Cost | | Accumulated Amortization | | Historical Cost | | Accumulated Amortization | | Historical
Cost | | Accumulated
Amortization | | Historical
Cost | | Accumulated
Amortization |
| Customer lists | $ | 54,402 |
| | $ | 51,481 |
| | $ | 49,362 |
| | $ | 45,797 |
| Customer lists | $ | 50,078 | | | $ | 50,078 | | | $ | 52,447 | | | $ | 52,447 | |
| Trademarks | 26,598 |
| | — |
| | 24,091 |
| | — |
| Trademarks | 22,961 | | | — | | | 24,137 | | | — | |
| Developed technology | 7,913 |
| | 6,576 |
| | 7,287 |
| | 5,969 |
| Developed technology | 7,342 | | | 6,952 | | | 7,652 | | | 7,149 | |
| Patents | 5,571 |
| | 5,562 |
| | 5,512 |
| | 5,487 |
| Patents | 5,522 | | | 5,522 | | | 5,543 | | | 5,543 | |
| License agreements | 1,199 |
| | 1,199 |
| | 1,126 |
| | 1,126 |
| License agreements | 4,019 | | | 1,300 | | | 2,905 | | | 1,196 | |
| Other | 1,162 |
| | 1,145 |
| | 1,162 |
| | 1,138 |
| Other | 1,149 | | | 1,140 | | | 1,147 | | | 1,140 | |
| Intangibles | $ | 96,845 |
| | $ | 65,963 |
| | $ | 88,540 |
| | $ | 59,517 |
| Intangibles | $ | 91,071 | | | $ | 64,992 | | | $ | 93,831 | | | $ | 67,475 | |
All of the company’s intangible assets have been assigned definite lives and continue to be amortized over their useful lives, except for trademarks shown above, which have indefinite lives.
The changes in intangible balances reflected on the balance sheet from December 31, 20162021 to SeptemberJune 30, 20172022 were primarily the result of foreign currency translation on historical cost and amortization.
accumulated amortization as well as new license agreements.
The company evaluates the carrying value of definite-lived assets annually in the fourth quarter and whenever events or circumstances indicate possible impairment.
Definite-lived assets are determined to be impaired if the future un-discountedundiscounted 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 intangible assets areis 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.
Amortization expense related to intangiblesintangible assets was $1,154,000$207,000 in the first ninesix months of 20172022 and is estimatedexpected to be $1,553,000$604,000 in 2017, $1,590,0002022, $619,000 in 2018, $1,361,0002023, $473,000 in 2019, $186,0002024,
$439,000 in 2020, $186,0002025, $437,000 in 20212026 and $186,000$311,000 in 2022.2027. Amortized intangiblesintangible assets are being amortized on a straight-line basis over remaining lives of 13 to 108 years with most of the intangibles being amortized over ana weighted average remaining life of approximately 46.0 years.
| | | | | | | | |
| Notes to Financial Statements | Current Liabilities | |
| | |
Notes to Financial Statements | Current Liabilities | |
| | |
Current Liabilities
Accrued Expenses
Accrued expenses consist of accruals for the following (in thousands):
| | | | | | | | June 30, 2022 | | December 31, 2021 |
| | September 30, 2017 | | December 31, 2016 | |
| Taxes other than income taxes, primarily value added taxes | | Taxes other than income taxes, primarily value added taxes | $ | 28,628 | | | $ | 23,217 | |
| Salaries and wages | $ | 35,162 |
| | $ | 32,959 |
| Salaries and wages | 20,350 | | | 24,012 | |
| Warranty cost | 23,116 |
| | 23,302 |
| |
| Taxes other than income taxes, primarily value added taxes | 21,340 |
| | 19,194 |
| |
| Warranty | | Warranty | 9,511 | | | 11,198 | |
| Professional | 4,817 |
| | 4,728 |
| Professional | 9,475 | | | 8,697 | |
| Freight | 4,248 |
| | 5,211 |
| Freight | 6,830 | | | 5,460 | |
| Derivative liabilities (foreign currency forward exchange contracts) | | Derivative liabilities (foreign currency forward exchange contracts) | 5,000 | | | 1,938 | |
| IT service contracts | | IT service contracts | 4,021 | | | 4,013 | |
| Interest | 3,973 |
| | 3,747 |
| Interest | 3,264 | | | 3,297 | |
| Severance | 2,814 |
| | 2,049 |
| Severance | 2,744 | | | 400 | |
| Product liability, current portion | 2,472 |
| | 3,996 |
| Product liability, current portion | 2,496 | | | 2,362 | |
| Deferred revenue | 1,899 |
| | 1,446 |
| Deferred revenue | 2,404 | | | 4,156 | |
| Derivative liabilities (foreign currency forward exchange contracts) | 1,865 |
| | 1,783 |
| |
| Rebates | | Rebates | 1,062 | | | 6,569 | |
| Insurance | 785 |
| | 742 |
| Insurance | 622 | | | 625 | |
| Supplemental executive retirement program liability | | Supplemental executive retirement program liability | 391 | | | 391 | |
| Rent | 638 |
| | 672 |
| Rent | 59 | | | 196 | |
| Marketing | 501 |
| | 356 |
| |
| Supplemental Executive Retirement Program liability | 391 |
| | 391 |
| |
| Other items, principally trade accruals | 9,991 |
| | 9,519 |
| Other items, principally trade accruals | 8,294 | | | 6,440 | |
| Accrued Expenses | $ | 114,012 |
| | $ | 110,095 |
| Accrued Expenses | $ | 105,151 | | | $ | 102,971 | |
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.
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 appropriately defer such revenue. The company continuously assesses the adequacy of its product warranty accrual and recordsmakes 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 actionsaction and recalls, which could warrantrequire additional warranty reserve provision.
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. Rebates are netted against gross accounts receivables. If rebates are in excess of such receivables, they are then classified as accrued expenses. The reduction in accrued rebates from December 31, 2021 to June 30, 2022 primarily relates to payments principally made in the first quarter each year, earned from the previous year.
| | | | | | | | |
| Notes to Financial Statements | Current Liabilities | |
| | |
The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):
| | | | | |
| Balance as of January 1, 2022 | $ | 11,198 | |
| Warranties provided during the period | 1,498 | |
| Settlements made during the period | (3,293) | |
| Changes in liability for pre-existing warranties during the period, including expirations | 108 | |
| Balance as of June 30, 2022 | $ | 9,511 | |
Warranty reserves are subject to adjustment in future periods as new developments change the company's estimate of the total cost.
|
| | | |
| Balance as of January 1, 2017 | $ | 23,302 |
|
| Warranties provided during the period | 7,268 |
|
| Settlements made during the period | (8,119 | ) |
| Changes in liability for pre-existing warranties during the period, including expirations | 665 |
|
| Balance as of September 30, 2017 | $ | 23,116 |
|
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| Notes to Financial Statements | Long-Term Liabilities | |
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Notes to Financial Statements | Long-Term Liabilities | |
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Long-Term Liabilities
Long-Term Debt
Debt consists of the following (in thousands):
| | | | | | | | June 30, 2022 | | December 31, 2021 | |
| | September 30, 2017 | | December 31, 2016 | |
| Convertible senior notes at 5.00%, due in February 2021 | $ | 120,483 |
| | $ | 115,159 |
| |
| | Convertible senior notes at 4.50%, due in June 2022 | 88,317 |
| | — |
| Convertible senior notes at 4.50%, due in June 2022 | — | | | 2,642 | | |
| Convertible senior subordinated debentures at 4.125%, due in February 2027 | — |
| | 13,039 |
| |
| Other notes and lease obligations | 32,052 |
| | 33,151 |
| |
| | Convertible senior notes Series I at 5.00%, due in November 2024 | | Convertible senior notes Series I at 5.00%, due in November 2024 | 72,274 | | | 72,140 | | |
| | Convertible senior notes Series II at 5.00%, due November 2024 | | Convertible senior notes Series II at 5.00%, due November 2024 | 80,248 | | | 78,251 | | |
| Convertible senior notes at 4.25%, due in March 2026 | | Convertible senior notes at 4.25%, due in March 2026 | 119,745 | | | 119,036 | | |
| Other obligations | | Other obligations | 41,383 | | | 36,060 | | |
| | 240,852 |
| | 161,349 |
| | 313,650 | | | 308,129 | | |
| Less current maturities of long-term debt | (1,940 | ) | | (15,261 | ) | Less current maturities of long-term debt | (2,161) | | | (3,107) | | |
| Long-Term Debt | $ | 238,912 |
| | $ | 146,088 |
| Long-Term Debt | $ | 311,489 | | | $ | 305,022 | | |
|
The company had outstanding letters of credit of $2,935,000 and $2,853,000 as of September 30, 2017 and December 31, 2016, respectively. There were no borrowings denominated in foreign currencies, excluding a portion of the company's capital leases, as of September 30, 2017 and December 31, 2016. As of September 30, 2017, the weighted average floating interest rate on all borrowings, excluding capital leases, was 4.87% compared to 4.85% as of December 31, 2016.
On September 30, 2015, the company entered into an Amended and Restated Revolving Credit and Security Agreement, which was subsequently amended and then amended and restated on July 26, 2022 (the “Credit“Prior Credit Agreement”) and which matureswas to mature on January 16, 2021.2024. The Prior Credit Agreement was entered into by and among the company, certain of the company’s direct and indirect U.S. and Canadian subsidiaries and certain of the company’s European subsidiaries, (together with the company, the “Borrowers”), certain other of the company’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”).Association. PNC is the administrative agent (the “Administrative“Prior Credit Agreement Administrative Agent”) and J.P. Morgan Europe Limited is the European agent (the “European Agent”) under the Prior Credit Agreement. In connection with entering into the company's Prior Credit Agreement, the company incurred fees which were capitalized and are being amortized as interest expense. As of June 30, 2022, debt fees yet to be amortized totaled $625,000.
U.S.The company had outstanding letters of credit of $3,392,000 and Canadian$3,450,000 as of June 30, 2022 and December 31, 2021, respectively. Outstanding letters of credit and other reserves impacting borrowing capacity were $4,015,000 and $2,585,000 as of June 30, 2022 and December 31, 2021, respectively. The company had outstanding borrowings of $25,950,000 under its North America Credit Facility as of June 30, 2022. The company had outstanding borrowings of $8,803,000 (€8,200,000) under its French Credit Facility and $4,412,000 (£3,500,000) under its UK Credit Facility as of June 30, 2022, together referred to as the European Credit Facility. The company had outstanding
borrowings of $22,150,000 under its North America Credit Facility as of December 31, 2021. The company had outstanding borrowings of $7,366,000 (€6,500,000) under its French Credit Facility and $5,986,000 (£4,500,000) under its UK Credit Facility as of December 31, 2021, together referred to as the European Credit Facility. The weighted average interest rate on all borrowings, excluding finance leases, was 4.5% for the six months ended June 30, 2022 and 4.5% for the year ended December 31, 2021.
North America Borrowers Credit Facility
For the company's U.S. and CanadianNorth America Borrowers, the Prior Credit Agreement providesprovided for an asset-based-lending senior secured revolving credit facility which is secured by substantially all the company’s U.S. and Canadian assets, other than real estate. The Prior Credit Agreement providesprovided the company and the other Borrowers with a credit facility in an aggregate principal amount of $100,000,000,$60,000,000, 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“North America Credit Facility”). Up to $25,000,000$20,000,000 of the U.S. and CanadianNorth America Credit Facility will bewas available for issuance of letters of credit. The aggregate principal amount of the U.S. and CanadianNorth America Credit Facility may becould have been increased by up to $25,000,000 to the extent requested by the company and agreed to by any Lenderlender or new financial institution approved by the Prior Credit Agreement Administrative Agent.
The aggregate borrowing availability under the U.S. and CanadianNorth America Credit Facility iswas determined based on a borrowing base formula. The aggregate usage under the U.S. and CanadianNorth America Credit Facility maycould not exceed an amount equal to the sum of
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| Notes to Financial Statements | Long-Term Liabilities | |
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(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%80% of the net orderly liquidation value of U.S. eligible machinery and equipment and (ii) $1,462,000$0 as of SeptemberJune 30, 20172022 (subject to reduction as provided in the Prior 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 CanadianNorth America Credit Facility, less (g) letters of credit issued and undrawn under the U.S. and CanadianNorth America Credit Facility, less (h) a $5,000,000$3,000,000 minimum availability reserve, less (i) other reserves required by the Prior Credit Agreement Administrative Agent, and in each case subject to the definitions and limitations in the Prior Credit Agreement. As of SeptemberJune 30, 2017,2022, the company was in compliance with all covenant requirementsrequirements. As of June 30, 2022, the company had gross borrowing base of $41,324,000 and hadnet borrowing capacity onavailability of $26,809,000 under the U.S. and CanadianNorth America Credit Facility under the Prior Credit Agreement, of $26,061,000, considering the minimum availability reserve, then-outstanding letters of credit, other reserves and the $11,250,000$7,500,000 dominion trigger amount described below. Borrowings under the U.S. and Canadian Credit Facility
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Notes to Financial Statements | Long-Term Liabilities | |
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are secured by substantially all of the company’s U.S. and Canadian assets, other than real estate.
Interest will accrue on outstanding indebtedness under the Prior Credit Agreement at the LIBORSOFR 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 CanadianNorth America Credit Facility are subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.
The Prior Credit Agreement containscontained customary representations, warranties and covenants. Exceptions to the operating covenants in the Prior 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 Prior Credit Agreement, as amended. The Prior Credit Agreement also containscontained a covenant requiring the company to maintain minimum availability under the U.S. and CanadianNorth America Credit Facility of not less than (i) 12.5% of the greater of (i)maximum amount that may be drawn under the North America Credit Facility for five (5) consecutive business days, or (ii) 11.25% of the maximum amount that may be drawn under the U.S. and CanadianNorth America 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 CanadianNorth America Credit Facility requiring the company to maintain borrowing capacity of not less than $11,250,000$7,500,000 on any business day or $12,500,000 forany 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 Prior Credit Agreement containscontained customary default provisions, with certain grace periods and exceptions, which provide thatfor 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 proceeds of the North America Credit Facility were used to finance the working capital and other business needs of the company. There were nowas $25,950,000 of outstanding borrowings outstanding under the U.S. and CanadianNorth America Credit Facility at Septemberon June 30, 2017.2022.
European Credit Facility
The Prior Credit Agreement also providesprovided for a revolving credit, letter of credit and swing line loan facility which gives the company and the 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 bewas 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 2021, together with the U.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. The aggregate borrowings of each of the European Borrowers under the European Credit Facility may not exceed an amount equal to (a) 85% of the European Borrower’s eligible accounts receivable, less (b) the European Borrower’s borrowings and swing line loans outstanding under the European Credit Facility, less (c) the European Borrower’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 Prior Credit Agreement. As of SeptemberJune 30, 2017,2022, the aggregategross borrowing availabilitybase to the European Borrowers under the European Credit Facility was approximately $16,633,000,$19,955,000 and the net borrowing availability was $13,205,000, considering the $3,000,000 minimum availability reserve and the $3,375,000a $3,750,000 dominion trigger amount described below. Borrowing availability is based on a prior month base in USD. Actual borrowings in GBP and EUR fluctuate in USD between date of borrowing and when translated for consolidated reporting.
The aggregate principal amount of the European Credit Facility may becould have been increased by up to $10,000,000 to the
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| Notes to Financial Statements | Long-Term Liabilities | |
| | |
extent requested by the company and agreed to by any Lenderlender or Lenders that wishwished to increase their lending participation or, if not agreed to by any Lender,lender, a new financial institution that agreesagreed to join the European Credit Facility and that iswas approved by the Prior Credit Agreement Administrative Agent and the European Agent.
Interest will accruewas accrued on outstanding indebtedness under the European Credit Facility at the LIBORSOFR rate, plus a margin ranging from 2.50% to 3.00%, or for swing line loans, at the overnight LIBORSOFR rate, plus a margin ranging from 2.50% to 3.00%, as selected by the company. The margin that will bewas adjusted quarterly based on utilization. Borrowings under the European Credit Facility arewere subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.
The European Credit Facility iswas secured by substantially all the personal property assets of the UK Borrower and its in-country subsidiaries, and all the receivables of the French Borrower and its in-country subsidiaries. The UK and French facilities (which comprisecomprised the European Credit Facility) arewere cross collateralized, and the US personal property assets previously pledged under the U.S. and CanadianNorth America Credit Facility also serveserved as collateral for the European Credit Facility.
The European Credit Facility iswas subject to customary representations, warranties and covenants generally consistent with those applicable to the U.S. and CanadianNorth America Credit Facility. Exceptions to the operating covenants in the Prior Credit Agreement provideprovided 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
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Notes to Financial Statements | Long-Term Liabilities | |
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indebtedness, all subject to limitations set forth in the Prior Credit Agreement. The Prior Credit Agreement also containscontained 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%12.5% of the maximum amount that may be drawn under the European Credit Facility for five (5) consecutive business days, or (ii) $3,000,00011.25% of the maximum amount that may be drawn under the European Credit Facility on any business day. The European Borrowers also arewere 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$3,750,000 on any business day or 12.50% of the maximum amount that may be drawn under the European Credit Facility$3,750,000 for five (5) consecutive business days in order to avoid triggering full control by an agent for the Lenderslenders of the European Borrower’s cash receipts for application to its obligations under the European Credit Facility.
The European Credit Facility iswas subject to customary default provisions, with certain grace periods and exceptions, consistent with those applicable to the U.S. and CanadianNorth America 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 bewere used to finance the working capital and other business needs of the company. There were noAs of June 30, 2022, the company had borrowings of $8,803,000 (€8,200,000) under its French Credit Facility and $4,412,000 (£3,500,000) under its UK Credit Facility as of June 30, 2022, together referred to as the European Credit Facility. The company had outstanding borrowings of $7,366,000 (€6,500,000) under its French Credit Facility and $5,986,000 (£4,500,000) under its UK Credit Facility as of December 31, 2021.
The company was in compliance with the Prior Credit Agreement covenants at June 30, 2022.
In January 2021, the Prior Credit Agreement was amended to provide for, among other things, the addition of the company's Netherlands subsidiary as a guarantor under the European Credit Facility, at September 30, 2017.amendments to the restrictive covenants in the Prior Credit Agreement to (1) increase the maximum amount of permitted miscellaneous indebtedness to $30,000,000 from $10,000,000 and (2) permit up to $9,000,000 of financing based on certain European public and government receivables, and terms that, upon the occurrence of certain events related to a transition from the use of LIBOR, permit the agent for the lenders to amend the Prior Credit Agreement to replace the LIBOR rate and/or the Euro rate with a benchmark replacement rate.
Convertible senior subordinated debentures due 2027
In 2007,March 2021, the Prior Credit Agreement was further amended to permit the issuance of the 2026 Notes and the capped call transactions entered into by the company issued $135,000,000 principal amount of 4.125% Convertible Senior Subordinated Debentures due 2027 (the "debentures"), of which $0 principal amount remains outstanding as of September 30, 2017. The holdersin connection with the issuance of the debentures exercised their right to require the company to repurchase all the debentures on February 1, 2017 at a price equal to 100% of the principal amount. The company satisfied the accreted value of the debentures using cash on February 2, 2017, and no debentures remained outstanding following that date.
The liability components of the debentures consisted of the following (in thousands):
|
| | | |
| | December 31, 2016 |
| Principal amount of liability component | $ | 13,350 |
|
| Unamortized discount | (311 | ) |
| Net carrying amount of liability component | $ | 13,039 |
|
The unamortized discount2026 Notes, as of December 31, 2016 was fully amortizedfurther discussed in the first quarter 2017 duesections below.
On December 29, 2021, the Prior Credit Agreement was further amended with the primary provisions to replace the references to the repurchaseLIBOR rate or Euro rate to a term secured overnight finance rate ("SOFR").
On July 26, 2022, the Prior Credit Agreement was amended and restated. Refer to the July 2022 Financings section at the end of all the debentures on February 1, 2017.this footnote.
Convertible senior notes due 20212022
In the firstsecond quarter of 2016,2017, the company issued $150,000,000$120,000,000 aggregate principal amount of 5.00%4.50% Convertible Senior Notes due 20212022 (the “2021 notes”“2022 Notes”) in a private offering to qualified institutional buyers pursuant to
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| Notes to Financial Statements | Long-Term Liabilities | |
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Rule 144A under the Securities Act. The 2021 notes2022 Notes bear interest at a rate of 5.00%4.50% per year payable semi-annually in arrears on February 15June 1 and August 15December 1 of each year, beginning August 15, 2016. The 2021 notes will mature on February 15, 2021, unless repurchased or converted in accordance with their terms prior to such date.December 1, 2017. Prior to August 15, 2020,December 1, 2021, the 2021 notes will be2022 Notes were 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 untilPrior to May 16, 2019, the 2022 Notes were convertible, subject to certain conditions, into cash only. On May 16, 2019, the company obtainsobtained shareholder approval under applicable New York Stock Exchange rules such that conversion of the 2021 notes will be convertible, subject to certain conditions, into cash. If the company obtains such shareholder approval, the 2021 notes2022 Notes may be settled in cash, the company’s common sharesCommon Shares or a combination of cash and the company’s common shares,Common Shares, at the company’s election. Exchange transactions were completed in the second quarter of 2020 and the repurchase of debt was completed in the first quarter of 2021, as further discussed below. The 2022 Notes matured on June 1, 2022. At maturity, $2,650,000 principal amount of the 2022 Notes were outstanding, which the company repaid in cash.
Holders of the 2022 Notes could convert their 2022 Notes at their option at any time prior to the close of business on the business day immediately preceding December 1, 2021 notes will haveonly under the rightfollowing circumstances: (1) during any fiscal quarter commencing after September 30, 2017 (and only during such fiscal quarter), if the last reported sale price of the company’s Common Shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter was greater than or equal to require130% of the company to repurchase allapplicable conversion price for the 2022 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of 2022 Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s Common Shares and the applicable conversion rate for the 2022 Notes on each such trading day; or some of their 2021 notes at 100% of their principal, plus any accrued and unpaid interest,(3) 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 at issuance was $34,480,000. The fair value of the convertible debt conversion liability at September 30, 2017 was $47,557,000 compared to $30,708,000 as of December 31, 2016. The company recognized losses of $15,330,000 and $16,849,000 for the three and nine months ended September 30, 2017, respectively, compared to gains of $7,732,000 and $13,579,000 for the three and nine months ended September 30, 2016, respectively, 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
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Notes to Financial Statements | Long-Term Liabilities | |
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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 assets at September 30, 2017 was $41,619,000 compared to $25,471,000 as of December 31, 2016. The company recognized gains of $14,189,000 and $16,148,000 for the three and nine months ended September 30, 2017, respectively, compared to losses of $6,540,000 and $11,297,000 for the three and nine months ended September 30, 2016, respectively, 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 $12,376,000.
The net proceeds from the offering of the 2021 notes were approximately $144,034,000, after deducting fees and offering expenses of $5,966,000. These debt issuance costs were capitalized and are being amortized as interest expense through February 2021. As of September 30, 2017, all $5,966,000 of these 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. Approximately $5,000,000 of the net proceeds from the offering were used to repurchase the company’s common shares from purchasers of 2021 notesspecified corporate events described 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):
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Principal amount of liability component | $ | 150,000 |
| | $150,000 |
| Unamortized discount | (25,473 | ) | | (29,919 | ) |
| Debt fees | (4,044 | ) | | (4,922 | ) |
| Net carrying amount of liability component | $ | 120,483 |
| | $ | 115,159 |
|
The unamortized discount of $25,473,000 is to be amortized through February 2021. The effective interest rate on the liability component was 11.1%. Non-cash interest expense of $1,518,000 and $4,446,000 was recognized for the three and nine months ended September 30, 2017, respectively, compared to $1,362,000 and $3,150,000 for the three and nine months ended September 30, 2016, respectively, in comparison to actual interest expense accrued of $1,875,000 and $5,625,000 for the three and nine months ended September 30, 2017, respectively, compared to $1,875,000 and $4,503,000 for the three and nine months ended September 30, 2016, respectively, based on the stated coupon rate of 5.0%. The 2021 notes were not convertible as of September 30, 2017 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, beginningIndenture. On or after 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 and the 2021 notes under applicable New York Stock Exchange rules, theNotes, holders could convert their 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,Notes, at the company’s election.option of the holder, regardless of the foregoing circumstances.
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Notes to Financial Statements | Long-Term Liabilities | |
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Holders of the 2022 notes will haveNotes had the right to require the company to repurchase all or some of their 2022 notesNotes 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 sharesCommon Shares per $1,000 principal amount of 2022 notesNotes (equivalent to an initial conversion price of approximately $16.23 per common share). The
Until the company evaluatedreceived shareholder approval on May 16, 2019 authorizing it to elect to settle future conversions of the terms of2022 Notes in common shares, the company separately accounted for 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. ThisThe derivative was capitalized on the balance sheet as a long-term liability and will be adjustedwith adjustment to reflect fair value each quarter.quarter until the change to the conversion features as a result of the shareholder approval received on May 16, 2019 resulted in the termination of the derivative. The fair value of the convertible debt conversion liability at issuance was $28,859,000. The fair value of the convertible debt conversion liability at September 30, 2017 was $47,738,000. The company recognized lossesa loss of $14,487,000 and $18,879,000 for the three and nine months ended September 30, 2017, respectively,$6,193,000 in 2019 related to the convertible debt conversion liability.
In connection with the offering of the 2022 notes,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 sharesCommon Shares that will initially underlie the 2022 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 2022 notes.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 bewere 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 September 30, 2017 was $41,660,000. The company recognized gains of $13,078,000 and $16,880,000 for the three and nine months ended September 30, 2017, respectively, 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,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 sharesCommon Shares and the company’s earnings per share to the extent that the price of the company’s common sharesCommon 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 stockshares and should be classified in shareholder'sshareholders' equity. The amount paid for the warrants and capitalized in shareholder'sshareholders' equity was $14,100,000.
All note hedge options relating to the 2022 Notes expired on June 1, 2022.
Warrants relating to the 2022 Notes outstanding on June 30, 2022 were 7,393,141. If exercised, one common share is issued upon exercise of each warrant, but may be
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adjusted under certain circumstances if the relevant share price exceeds the warrant strike price for the relevant measurement period at the time of exercise. Common Shares are reserved for issuance upon exercise of the remaining warrants relating to the 2022 Notes at two Common Shares per warrant. The warrants will begin to expire on September 1, 2022 and then partially expire on each trading day over the 220 trading day period following September 1, 2022.
The net proceeds from the offering of the 2022 notesNotes were approximately $115,289,000, after deducting fees and offering expenses of $4,711,000.$4,711,000, which were paid in 2017. These debt issuance costs were capitalized and are beingwere amortized as interest expense through June 2022. As of September 30, 2017, all of 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.
During the second quarter of 2020, the company entered into separate, privately negotiated agreements with certain holders of the company's previously outstanding convertible notes due 2021 (the "2021 Notes") and certain holders of its 2022 Notes to exchange $35,375,000 in aggregate principal amount of 2021 Notes and $38,500,000 in aggregate principal amount of 2022 Notes, for aggregate consideration of $73,875,000 in aggregate principal amount of new Series II 2024 Notes and $5,593,000 in cash.
During the first quarter of 2021, the company repurchased $78,850,000 in principal amount of 2022 Notes, resulting in a loss on debt extinguishment of $709,000.
The liability components of the 2022 notesNotes consist of the following (in thousands):
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| June 30, 2022 | | December 31, 2021 | | |
| Principal amount of liability component | $ | — | | | $ | 2,650 | | | |
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| Debt fees | — | | | (8) | | | |
| Net carrying amount of liability component | $ | — | | | $ | 2,642 | | | |
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| | | |
| | September 30, 2017 |
| Principal amount of liability component | $ | 120,000 |
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| Unamortized discount | (27,522 | ) |
| Debt fees | (4,161 | ) |
| Net carrying amount of liability component | $ | 88,317 |
|
The unamortized discount of $27,522,000 is to be amortized through June 2022. The effective interest rate on the liability component was 10.9%. Non-cash upon original issuance including consideration of the discount. Total interest expense subsequent to adoption of $1,125,000ASU 2020-06 includes coupon interest and $1,337,000amortization of debt fees. Interest expense of $20,000 and $50,000 was recognizedaccrued for the three and ninesix months ended SeptemberJune 30, 2017, respectively, in comparison2022 compared to actual interest expense accrued of $1,350,000$30,000 and $1,605,000$799,000 for the same periods respectively,three and six months ended June 30, 2021, based on the stated coupon rate of 4.5%. The effective interest rate of the 2022 notesNotes as of
June 30, 2022 was 5.4%. The 2022 Notes were not convertible as of SeptemberJune 30, 20172022, nor was the applicable conversion threshold met.
Convertible senior notes Series I due 2024
During the fourth quarter of 2019, the company entered into separate privately negotiated agreements with certain holders of its 2021 Notes to exchange $72,909,000 in aggregate principal amount of 2021 Notes for aggregate consideration of $72,909,000 in aggregate principal amount of new 5.00% Convertible Senior Exchange Notes due 2024 (the “Series I 2024 Notes”) of the company and $6,928,000 in cash.
The notes bear interest at a rate of 5.00% per year payable semi-annually in arrears on May 15 and November 15 of each year, beginning May 15, 2020. The notes will mature on November 15, 2024, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to May 15, 2024, the Series I 2024 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 Series I 2024 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.
Prior to the maturity of the Series I 2024 Notes, the company may, at its election, redeem for cash all or part of the Series I 2024 Notes if the last reported sale price of the company’s Common Shares equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the Series I 2024 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (subject to certain limited exceptions). No sinking fund is provided for the Series I 2024 Notes, which means the company is not required to redeem or retire the Series I 2024 Notes periodically.
Holders of the Series I 2024 Notes may convert their Series I 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the company’s Common Shares for at least 20 trading days (whether or not consecutive) during the period of 30
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consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Series I 2024 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of Series I 2024 Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s Common Shares and the applicable conversion rate for the Series I 2024 Notes on each such trading day; (3) upon the occurrence of specified corporate events described in the Indenture; or (4) if the company calls the Series I 2024 Notes for redemption pursuant to the terms of the Indenture. Holders of the Series I 2024 Notes will have the right to require the company to repurchase all or some of their Series I 2024 Notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 67.6819 Common Shares per $1,000 principal amount of Series I 2024 Notes (equivalent to an initial conversion price of approximately $14.78 per common share). On or after May 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity of the Series I 2024 Notes, holders may convert their Series I 2024 Notes, at the option of the holder, regardless of the foregoing circumstances.
A loss of $5,885,000 was recorded a part of the exchange transaction, which included the write-off of fees related to the portion of the 2021 Notes exchanged. Debt issuance costs of $1,394,000 were capitalized and are being amortized as interest expense through November 15, 2024. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
The liability components of the Series I 2024 Notes consist of the following (in thousands):
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| June 30, 2022 | | December 31, 2021 | | |
| Principal amount of liability component | $ | 72,909 | | | $ | 72,909 | | | |
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| Debt fees | (635) | | | (769) | | | |
| Net carrying amount of liability component | $ | 72,274 | | | $ | 72,140 | | | |
The effective interest rate on the liability component was 8.8% upon original issuance including consideration of the discount. Total interest expense subsequent to adoption of ASU 2020-06 includes coupon interest and amortization of debt fees. Interest expense of $912,000 and $1,823,000 was accrued for the three and six months ended June 30, 2022 compared to $911,000 and $1,822,000 for the three and six months ended June 30, 2021 based on the stated coupon rate
of 5.0%. The effective interest rate of the Series I 2024 Notes as of June 30, 2022 was 5.4%. The Series I 2024 Notes were not convertible as of June 30, 2022 nor was the applicable conversion threshold met.
Convertible senior notes Series II due 2024
During the second quarter of 2020, the company entered into separate, privately negotiated agreements with certain holders of its 2021 Notes and certain holders of its 2022 Notes to exchange $35,375,000 in aggregate principal amount of 2021 Notes and $38,500,000 in aggregate principal amount of 2022 Notes, for aggregate consideration of $73,875,000 in aggregate principal amount of new 5.00% Series II Convertible Senior Exchange Notes due 2024 (the “Series II 2024 Notes”) of the company and $5,593,000 in cash.
The Series II 2024 Notes bear interest at a rate of 5.00% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning November 15, 2020. The Series II 2024 Notes will mature on November 15, 2024, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to May 15, 2024, the Series II 2024 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 Series II 2024 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.
Prior to the maturity of the Series II 2024 Notes, the company may, at its election, redeem for cash all or part of the Series II 2024 Notes, if the last reported sale price of the company’s Common Shares equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption. The redemption price will be equal to 100% of the accreted principal amount of the Series II 2024 Notes to be redeemed, plus any accrued and unpaid interest, if any, on the original principal amount of the New Notes redeemed to, but excluding, the redemption date (subject to certain limited exceptions). No sinking fund is provided for the Series II 2024 Notes, which means the company is not required to redeem or retire the Series II 2024 Notes periodically.
Holders of the Series II 2024 Notes may convert their Series II 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending June 30, 2020 (and only during such calendar
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quarter), if the last reported sale price of the company’s Common Shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price for the Series II 2024 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of Series II 2024 Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s Common Shares and the applicable conversion rate for the Series II 2024 Notes on each such trading day; (3) upon the occurrence of specified corporate events described in the Indenture; or (4) if the company calls the Series II 2024 Notes for redemption pursuant to the terms of the Indenture. Holders of the Series II 2024 Notes will have the right to require the company to repurchase all or some of their Series II 2024 Notes at 100% of the accreted principal amount, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 67.6819 Common Shares per $1,000 principal amount of Series II 2024 Notes (equivalent to an initial conversion price of approximately $14.78 per common share). On or after May 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity of the Series II 2024 Notes, holders may convert their Series II 2024 Notes, at the option of the holder, regardless of the foregoing circumstances.
The principal amount of the Series II 2024 Notes also will accrete at a rate of approximately 4.7% per year commencing June 4, 2020, compounding on a semi-annual basis. The accreted portion of the principal is payable in cash upon maturity but does not bear interest and is not convertible into the company’s Common Shares. The total amount accreted as of June 30, 2022 was $7,175,000, of which $917,000 and $1,828,000 was for the three and six months ended June 30, 2022, respectively, compared to $877,000 and $1,747,000 for the three and six months ended June 30, 2021, respectively. Remaining accretion until maturity (at current principal) was $9,447,000 at June 30, 2022.
A loss of $6,599,000 was recorded a part of the exchange transaction, which included the write-off of fees related to portions of the 2021 Notes and 2022 Notes exchanged. Debt issuance costs of $1,505,000 were capitalized and are being amortized as interest expense through November 2024. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
The liability components of the Series II 2024 Notes consist of the following (in thousands):
| | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | | | |
| Principal amount of liability component - including accretion | $ | 81,051 | | | $ | 79,222 | | | | | |
| | | | | | | |
| Debt fees | (803) | | | (971) | | | | | |
| Net carrying amount of liability component | $ | 80,248 | | | $ | 78,251 | | | | | |
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The effective interest rate on the liability component was 9.0% upon original issuance including consideration of the discount. Total interest expense subsequent to adoption of ASU 2020-06 includes coupon interest, accretion and amortization of debt fees. Interest expense for accretion of $917,000 and $1,828,000 was recognized for the three and six months ended June 30, 2022 compared to $877,000 and $1,747,000 for the three and six months ended June 30, 2021. Interest expense of $924,000 and $1,847,000 were recognized for the three and six months ended June 30, 2022 compared to $924,000 and $1,847,000 for the three and six months ended June 30, 2021, based on the stated coupon rate of 5.0%. The effective interest rate of the Series II 2024 Notes as of June 30, 2022 including coupon interest, amortization of debt fees and accretion to maturity was 10.4%. The Series II 2024 Notes were not convertible as of June 30, 2022 nor was the applicable conversion threshold met.
Convertible senior notes due 2026
In the first quarter of 2021, the company issued $125,000,000 aggregate principal amount of 4.25% Convertible Senior Notes due 2026 (the “2026 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 4.25% per year payable semi-annually in arrears on March 15 and September 15 of each year, beginning September 15, 2021. The notes will mature on March 15, 2026, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to September 15, 2025, the 2026 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 2026 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.
The company may not redeem the 2026 Notes prior to March 20, 2024. The company may, at its election, redeem for cash all or part of the 2026 Notes, on or after March 20, 2024, if the last reported sale price of the company’s Common
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Shares equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (subject to certain limited exceptions). No sinking fund is provided for the 2026 Notes, which means the company is not required to redeem or retire the 2026 Notes periodically.
Holders of the 2026 Notes may convert their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding September 15, 2025 in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending June 30, 2021 (and only during such calendar quarter), if the last reported sale price of the company’s Common Shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price for the 2026 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of 2026 Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s Common Shares and the applicable conversion rate for the 2026 Notes on each such trading day; (3) upon the occurrence of specified corporate events described in the Indenture; or (4) if the company calls any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date. Holders of the 2026 Notes will have the right to require the company to repurchase all or some of their 2026 Notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 94.6096 Common Shares per $1,000 principal amount of 2026 notes (equivalent to an initial conversion price of approximately $10.57 per common share). On or after September 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity of the 2026 Notes, holders may convert their 2026 Notes, at the option of the holder, regardless of the foregoing circumstances.
Debt issuance costs of $7,305,000 were capitalized and are being amortized as interest expense through March 2026. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
The liability components of the 2026 Notes consist of the following (in thousands):
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| June 30, 2022 | | December 31, 2021 | | |
| Principal amount of liability component | $ | 125,000 | | | $ | 125,000 | | | |
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| Debt fees | (5,255) | | | (5,964) | | | |
| Net carrying amount of liability component | $ | 119,745 | | | $ | 119,036 | | | |
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Interest expense of $1,328,000 and $2,656,000 was accrued for the three and six months ended June 30, 2022 compared to $1,328,000 and $1,564,000 for the three and six months ended June 30, 2021 based on the stated coupon rate of 4.25%. The effective interest rate of the 2026 Notes as of June 30, 2022 was 5.4%. The 2026 Notes were not convertible as of June 30, 2022 nor was the applicable conversion threshold met.
In March 2021, in connection with the pricing of the 2026 Notes, the company entered into capped call transactions (the “Capped Call Transactions”) with certain option counterparties. The company used $18,787,000 of the net proceeds of the private offering of the 2026 Notes to pay the cost of the Capped Call Transactions with the offset recorded to additional paid-in-capital.
The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the 2026 Notes and/or offset any cash payments the company is required to make in excess of the principal amount of converted notes, as the case may be, in the event that the market price per share of the company’s Common Shares, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which is initially $10.57, corresponding to the initial conversion price of the 2026 Notes, subject to anti-dilution adjustments. If, however, the market price per company common share, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, which is initially $16.58 (subject to adjustments), there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Call Transactions. The Capped Call Transactions expire March 15, 2026, subject to earlier exercise. There were 125,000 capped call options related to the 2026 Notes outstanding on June 30, 2022.
The company will not be required to make any cash payments to the option counterparties upon the exercise of the options that are a part of the Capped Call Transactions, but the company will be entitled to receive from the option
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counterparties a number of company Common Shares, an amount of cash or a combination thereof generally based on the amount by which the market price per company common share, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions during the relevant valuation period under the Capped Call Transactions. However, if the market price per Company common share, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions during such valuation period, the number of company Common Shares and/or the amount of cash the company expects to receive upon exercise of the Capped Call Transactions will be capped based on the amount by which the cap price exceeds the strike price of the Capped Call Transactions.
For any conversions of the 2026 Notes prior to September 15, 2025, a corresponding portion of the relevant Capped Call Transactions may be terminated at the company’s option. Upon any such termination, the company expects to receive from the option counterparties a number of company Common Shares, or, if the company so elects, subject to certain conditions, an amount of cash, in each case, with a value equal to the fair value of such portion of the relevant Capped Call Transactions being terminated, as calculated in accordance with the terms of the relevant Capped Call Transaction.
The Capped Call Transactions are separate transactions, in each case, entered into by the company with the option counterparties, and are not part of the terms of the 2026 Notes and will not affect any holder’s rights under the 2026 Notes. Holders of the 2026 Notes will not have any rights with respect to the Capped Call Transactions.
In the second quarter of 2022, the company borrowed $2,000,000 against the cash surrender value of its life insurance policies which the company intends to repay in the next twelve months.
July 2022 Financings
Highbridge Loan Agreement
On July 26, 2022, the company entered into a Credit Agreement (the “Highbridge Loan Agreement”) with a certain fund managed by Highbridge Capital Management, LLC (“Highbridge”), as the lender (together with the other lenders from time to time party thereto, the “Lenders”), Cantor Fitzgerald Securities as administrative agent and GLAS Trust Corporation Limited, as collateral agent.
Pursuant to the Highbridge Loan Agreement, the company may borrow up to an aggregate of $104,500,000 principal amount of secured term loans, including $66,500,000 in initial secured term loans drawn at closing, $8,500,000 in additional secured term loans to be made in a single draw subject to satisfaction of certain conditions, another
$10,000,000 in additional secured term loans to be made in a single draw subject to satisfaction of certain further conditions and $19,500,000 in additional secured term loans to be made in a single draw subject to satisfaction of certain further conditions. The company expects to use the proceeds of the secured term loans for working capital and general corporate purposes and to pay fees and expenses in connection with the transactions described herein.
The secured term loan is scheduled to mature on July 26, 2026 and accrues interest at an initial annual rate of SOFR + 7.00% or a base rate plus 6.00% and after the second anniversary of closing at an annual rate of SOFR + 8.75% or a base rate plus 7.75%. The secured term loan is also subject to a springing maturity date of 91 days prior to the maturity date of certain convertible notes due November 2024 if more than $20,000,000 of such notes remain outstanding as of such date. The obligations under the Highbridge Loan Agreement are secured, initially, by substantially all assets of the company and certain subsidiaries of the company (subject to certain exceptions), subject to intercreditor agreements in connection with the ABL Credit Agreement and the 5.68% Notes Indentures, and are guaranteed by certain subsidiaries of the company in the United States, United Kingdom, Canada, France, the Netherlands and Luxembourg at the closing. Additional collateral owned by subsidiaries of the company in various jurisdictions will be added to the security for the secured term loan and additional subsidiaries of the company in various jurisdictions will guarantee the obligations in connection with the post-closing draws.
The company will have the right to prepay the secured term loan at any time, subject to a prepayment premium, which in case of a prepayment before the second anniversary of the closing date is equal to the greater of (i) 1.00% of the aggregate principal amount of the secured term loan so prepaid and (ii) the excess, if any of (A) the present value as of the date of repayment of all interest that would have accrued on the secured term loan being prepaid from such date through the second anniversary of the closing plus the present value as of such date of the principal amount of the secured term loan being prepaid assuming a prepayment date of the second anniversary of the closing over (B) the principal amount of such secured term loan being prepaid and, after the second anniversary of the closing is equal to 1.00% of the aggregate principal amount of the secured term loan so prepaid, as well as, in each case, an additional redemption fee equal to 3.00% of the aggregate principal amount of the secured term loan so prepaid.
The Highbridge Loan Agreement contains customary terms and covenants, including without limitation a financial covenant to maintain a minimum liquidity of $20,000,000 and negative covenants, such as limitations on indebtedness, liens, fundamental changes, asset sales, investments and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Highbridge Loan Agreement also
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contains customary events of default, after which the secured term loan may be due and payable immediately, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against the company and its subsidiaries, change in control and lien priority.
ABL Credit Agreement
On July 26, 2022, the company entered into a Second Amended and Restated Revolving Credit and Security Agreement (the “ABL Credit Agreement”), amending and restating the company’s existing Revolving Credit and Security Agreement, as amended (the “Prior Credit Agreement”). The ABL Credit Agreement was entered into by and among the company, certain of the company’s direct and indirect domestic and Canadian subsidiaries (together with the company, the “Borrowers”), certain other of the company’s direct and indirect domestic and Canadian subsidiaries (the “Guarantors”), and PNC Bank, National Association (“PNC”) and JPMorgan Chase Bank, N.A. (the “ABL Lenders”). PNC is the administrative agent (the “Administrative Agent”) under the ABL Credit Agreement.
The ABL Credit Agreement retains the existing asset-based lending senior secured revolving credit facility provided for the company and the domestic and Canadian Borrowers under the Prior Credit Agreement but extends the maturity date to January 16, 2026, reduces the maximum aggregate principal amount the company and the domestic and Canadian Borrowers may borrow to $35,000,000, limits the borrowing base thereunder to eligible domestic and Canadian accounts receivable and includes a minimum availability reserve of $3,000,000. Borrowings under the ABL Credit Agreement also are subject to a springing maturity date of 191 days prior to the maturity dates of certain convertible notes due 2024 and 2026, and 100 days prior to the maturity date of the secured term loan under the Highbridge Loan Agreement, if such notes or such term loan remain outstanding as of such respective dates. The ABL Credit Agreement also permits the loans made under the Highbridge Loan Agreement and terminates the European Credit Facility under the Prior Credit Agreement. In connection with the ABL Credit Agreement and the Highbridge Loan Agreement, the European Credit Facility under the Prior Credit Agreement was repaid in full and the liens securing the European Credit Facility under the Prior Credit Agreement were terminated and released.
Interest will accrue on outstanding indebtedness under the ABL Credit Agreement at an adjusted Term SOFR rate, plus a margin of 3.25%, or for swing line loans and prime rate revolving loans, at the overnight Prime rate, plus a margin of 2.25%.
The ABL Credit Agreement contains customary terms and covenants and negative covenants, such as limitations on indebtedness, liens, fundamental changes, asset sales, investments and other matters customarily restricted in such
agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The ABL Credit Agreement also contains customary events of default, after which the revolving loan may be due and payable immediately, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against the company and its subsidiaries, change in control and lien priority.
Proceeds from the secured term loan under the Highbridge Loan Agreement were used to repay in full outstanding borrowings under the Prior Credit Agreement.
Indentures and New Notes
On July 26, 2022, the company entered into exchange agreements with funds managed by Highbridge Capital Management LLC (such funds, collectively, the “Investors”) pursuant to which the Investors agreed to exchange, in a series of transactions, $5,000,000 in aggregate principal amount of the company’s existing 5.00% Series II 2024 Notes) and $55,300,000 in aggregate principal amount of the company’s existing 4.25% 2026 Notes for an aggregate combination of (i) 2,700,000 (the “Exchange Shares”) of the company’s common shares, without par value (the “Common Shares”), (ii) $20,739,000 in aggregate principal amount of the company’s new 5.68% Convertible Senior Secured Notes due 2026, Tranche I (the “Tranche I Notes”) issued pursuant to that certain indenture, dated as of July 26, 2022 (the “Tranche I Indenture”), by and among the company, the guarantors party thereto, Computershare Trust Company, N.A., as trustee (the “Trustee”), and GLAS Corporation Limited, as notes collateral agent (the “Collateral Agent”), (iii) $20,736,000 in aggregate principal amount of the company’s new 5.68% Convertible Senior Secured Notes due 2026, Tranche II (the “Tranche II Notes” and, together with the Tranche I Notes, the “New Notes”) issued pursuant to that certain indenture, dated as of July 26, 2022 (the “Tranche II Indenture” and, together with the Tranche I Indenture, the “Indentures”), by and among the company, the guarantors party thereto, the Trustee and the Collateral Agent, (iv) a cash payment equal to $4,500,000 and (v) accrued and unpaid interest on the Series II 2024 Notes and the 2026 Notes to, but excluding, the applicable Closing Date (as defined below) (the foregoing transactions, the “Exchange”). The Exchange will be consummated in multiple closings on multiple dates.
On July 26, 2022, $5,000,000 aggregate principal amount of Series II 2024 Notes and $41,475,000 aggregate principal amount of 2026 Notes were exchanged and retired and $15,553,000 aggregate principal amount of Tranche I Notes, $15,553,000 aggregate principal amount of Tranche II Notes and 2,700,000 Common Shares were issued to the Investors. Following the initial closing of the Exchange, $68,875,000 aggregate principal amount of 5.00% Series II 2024 Notes and
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| Notes to Financial Statements | Long-Term Liabilities | |
| | |
$83,525,000 aggregate principal amount of 4.25% 2026 Notes remain outstanding.
The New Notes are initially guaranteed by certain subsidiaries of the company in the United States, United Kingdom, Canada, France, the Netherlands and Luxembourg pursuant to separate guarantees (each, a “Guarantee”), and are secured on a pari passu basis by the same collateral that secures the Highbridge Loan Agreement. In addition, the company's subsidiaries that provide guarantees of the Highbridge Loan Agreement in connection with the post-closing draws will provide Guarantees of the New Notes.
Interest on the New Notes will be payable semi-annually in cash in arrears on January 1 and July 1 of each year, beginning on January 1, 2023, at a rate of 5.68% per year. The New Notes will mature on July 1, 2026, unless earlier converted, redeemed or repurchased in accordance with their terms. Holders of the New Notes have the right, at their option, at any time prior to the close of business on the second scheduled trading day immediately preceding July 1, 2026 (the maturity date), to convert any New Notes or portion thereof that is $1,000 or an integral multiple thereof, subject to certain conditions, into cash, Common Shares or a combination of cash and Common Shares at the company’s election (subject to, and in accordance with, the settlement provisions set forth the Indentures). The initial conversion rate for the (i) Tranche I Notes is 333.3333 Common Shares (subject to adjustment as provided for in the Tranche I Indenture) per $1,000 principal amount of the Tranche I Notes, which is equal to an initial conversion price of $3.00 per share, and (ii) Tranche II Notes is 222.222 Common Shares (subject to adjustment as provided for in the Tranche II Indenture) per $1,000 principal amount of the Tranche II Notes, which is equal to an initial conversion price of $4.50 per share. In addition, following certain corporate events as described in the Indentures that occur prior to the maturity date of the New Notes or if the company delivers a notice of redemption, the company will pay a make-whole premium by increasing the conversion rate for a holder who elects to convert its New Notes in connection with such a corporate event or notice of redemption, as the case may be, in certain circumstances, subject to adjustment as provided for and in accordance with the Indentures.
The company may not elect to redeem the New Notes prior to January 26, 2023. The company may redeem for cash all or any portion of the New Notes, at its option, on or after January 26, 2023 if the last reported sale price of the Common Shares exceeds 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the New Notes to be redeemed, plus any accrued and unpaid interest on such New Notes to, but excluding, the redemption date (subject to certain
conditions set forth the Indentures). No sinking fund is provided for the New Notes.
If the company undergoes a Fundamental Change (as defined in the Indenture), prior to the maturity date of the New Notes, holders of the New Notes will, subject to specified conditions, have the right, at their option, to require the company to repurchase for cash all or a portion of their New Notes at a repurchase price equal to 100% of the principal amount of the New Notes to be repurchased, plus any accrued and unpaid interest to, but not including, the Fundamental Change repurchase date.
The Indentures provide for customary events of default. In the case of an event of default with respect to the New Notes arising from specified events of bankruptcy or insolvency, all outstanding New Notes will become due and payable immediately without further action or notice. If any other event of default with respect to the New Notes under the Indentures occur or is continuing, the Trustee or holders of at least 25% in aggregate principal amount of the then outstanding New Notes may declare the principal amount of the New Notes to be immediately due and payable.
In certain circumstances if, at any time during the six-month period beginning on, and including, the date that is six months after the date of original issuance for any sub-tranche of the New Notes, the company fails to timely file certain documents or reports required under the Securities Exchange Act of 1934, as amended, or the New Notes are not otherwise freely tradable under Rule 144 by holders of the New Notes other than the company’s affiliates or holders that were affiliates at any time during the three months preceding, additional interest will accrue at a rate of up to 0.50% on the New Notes during the period in which its failure to file has occurred and is continuing or such New Notes are not otherwise freely tradable under Rule 144 by holders other than the company’s affiliates or holders that were affiliates at any time during the three months preceding until such failure is cured.
In addition, if, and for so long as, the restrictive legend on any sub-tranche of the New Notes has not been removed, any sub-tranche of the New Notes are assigned a restricted CUSIP number or any sub-tranche of the New Notes are not otherwise freely tradable under Rule 144 by holders other than the company’s affiliates or holders that were affiliates at any time during the three months preceding (without restrictions pursuant to U.S. securities laws or the terms of the Indentures or the New Notes) as of the 380th day after the date of original issuance of such sub-tranche of the New Notes, the company will pay additional interest at a rate of 0.50% on the New Notes during the period in which the New Notes remain so restricted.
The company may not issue Common Shares upon conversions of the New Notes, net of the 2,700,000 Common Shares issued in the Exchange, in excess of 19.99% of the company’s Common Shares outstanding on July 25, 2022;
| | | | | | | | |
| Notes to Financial Statements | Long-Term Liabilities | |
| | |
until the requisite approval under the applicable New York Stock Exchange rules by the company’s shareholders is obtained. The company intends to seek this approval at its 2023 Annual Meeting of Shareholders.
| | | | | | | | |
| Notes to Financial Statements | Long-Term Liabilities | |
| | |
Other Long-Term Obligations
Other long-term obligations consist of the following (in thousands):
| | | | | | | | June 30, 2022 | | December 31, 2021 |
| | September 30, 2017 | | December 31, 2016 | |
| Convertible 2022 debt conversion liability | $ | 47,738 |
| | $ | — |
| |
| Convertible 2021 debt conversion liability | 47,557 |
| | 30,708 |
| |
| Deferred income taxes | 32,767 |
| | 31,079 |
| Deferred income taxes | $ | 20,961 | | | $ | 21,664 | |
| Product liability | 14,255 |
| | 16,615 |
| Product liability | 11,644 | | | 11,342 | |
| Deferred compensation | | Deferred compensation | 5,384 | | | 6,174 | |
| Deferred gain on sale leaseback | | Deferred gain on sale leaseback | 5,005 | | | 5,174 | |
| Supplemental executive retirement plan liability | | Supplemental executive retirement plan liability | 4,833 | | | 5,106 | |
| Death benefit obligation plan | | Death benefit obligation plan | 3,654 | | | 4,568 | |
| Pension | 14,174 |
| | 13,258 |
| Pension | 3,109 | | | 7,814 | |
| Deferred gain on sale leaseback | 6,491 |
| | 6,703 |
| |
| Supplemental Executive Retirement Plan liability | 5,505 |
| | 5,612 |
| |
| Deferred compensation | 3,380 |
| | 3,593 |
| |
| Uncertain tax obligation including interest | 2,917 |
| | 3,150 |
| Uncertain tax obligation including interest | 3,093 | | | 3,171 | |
| Other | 4,299 |
| | 3,689 |
| Other | 466 | | | 1,783 | |
| Other Long-Term Obligations | $ | 179,083 |
| | $ | 114,407 |
| Other Long-Term Obligations | $ | 58,149 | | | $ | 66,796 | |
During the quarter ended March 31, 2016, the company issued $150,000,000 principal amount of 5.00% Convertible Senior Notes due 2021. During the quarter ended June 30, 2017, the company issued $120,000,000 principal amount of Convertible Senior Notes due 2022. Due to the 2016 and 2017 issuances, long-term liabilities representing the convertible debt conversion liabilities were recorded which are adjusted to reflect fair values quarterly. The amounts included in the above table represent the fair values of the conversion liabilities as of September 30, 2017 and December 31, 2016. See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.
On April 23, 2015, the company entered into a real estate sale leaseback transaction which resulted in the company recording 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 gaingains realized was $69,000were $82,000 and $205,000$163,000 for the three and ninesix months ended SeptemberJune 30, 2017,2022 respectively, compared to $67,000$79,000 and $198,000$157,000 for the three and ninesix months ended SeptemberJune 30, 2016,2021 respectively.
| | | | | | | | |
| Notes to Financial Statements | Long-Term Liabilities | |
| | |
Leases and Commitments
The company reviews new contracts to determine if the contracts include a lease. To the extent a lease agreement includes an extension option that is reasonably certain to be exercised, the company has recognized those amounts as part of the right-of-use assets and lease liabilities. The company combines lease and certain non-lease components, such as common area maintenance, in the calculation of the lease assets and related liabilities. As most lease agreements do not provide an implicit rate, the company uses an incremental borrowing rate (IBR) based on information available at commencement date in determining the present value of lease payments and to help classify the lease as operating or financing. The company calculates its IBR based on the secured rates of the company's recent debt issuances, the credit rating of the company, changes in currencies, lease repayment timing as well as other publicly available data.
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 is required to pay taxes and normal expenses associated with operating the facilities and equipment. As of June 30, 2022, the company is committed under non-cancelable leases, which have initial or remaining terms in excess of one year and expire on various dates through 2040.
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 was $2,275,000 and can increase annually over the 20-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 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, 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 finance 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 were 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 sheets.
Lease expenses for the three and six months ended June 30, 2022 and June 30, 2021, respectively, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Operating leases | | $ | 1,420 | | | $ | 1,819 | | | $ | 3,030 | | | $ | 3,781 | |
| Variable and short-term leases | | 631 | | | 1,010 | | | 1,345 | | | 2,061 | |
| Total operating leases | | $ | 2,051 | | | $ | 2,829 | | | $ | 4,375 | | | $ | 5,842 | |
| | | | | | | | |
| Finance lease interest cost | | $ | 1,079 | | | $ | 1,163 | | | $ | 2,162 | | | $ | 2,341 | |
| Finance lease depreciation | | 1,063 | | | 1,266 | | | 2,155 | | | 2,542 | |
| Total finance leases | | $ | 2,142 | | | $ | 2,429 | | | $ | 4,317 | | | $ | 4,883 | |
| | | | | | | | |
| | | | | | | | |
| Notes to Financial Statements | Equity CompensationLong-Term Liabilities | |
| | |
Future minimum operating and finance lease commitments, as of June 30, 2022, are as follows (in thousands):
| | | | | | | | | | | |
| Finance
Leases | | Operating Leases |
| 2022 | $ | 3,416 | | | $ | 2,325 | |
| 2023 | 6,772 | | | 2,990 | |
| 2024 | 6,716 | | | 2,254 | |
| 2025 | 6,620 | | | 1,798 | |
| 2026 | 6,508 | | | 1,104 | |
| Thereafter | 68,436 | | | 1,634 | |
| Total future minimum lease payments | 98,468 | | | 12,105 | |
| Amounts representing interest | (34,673) | | | (1,497) | |
| Present value of minimum lease payments | 63,795 | | | 10,608 | |
| Less: current maturities of lease obligations | (3,085) | | | (3,551) | |
| Long-term lease obligations | $ | 60,710 | | | $ | 7,057 | |
Supplemental cash flow amounts for the three and six months ended June 30, 2022 and June 30, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| Cash Activity: Cash paid in measurement of amounts for lease liabilities | | 2022 | | 2021 | | 2022 | | 2021 |
| Operating leases | | $ | 2,060 | | | $ | 2,897 | | | $ | 4,299 | | | $ | 5,917 | |
| Finance leases | | 1,839 | | | 2,102 | | | 3,668 | | | 4,211 | |
| Total | | $ | 3,899 | | | $ | 4,999 | | | $ | 7,967 | | | $ | 10,128 | |
| | | | | | | | |
| Non-Cash Activity: Right-of-use assets obtained in exchange for lease obligations | | 2022 | | 2021 | | 2022 | | 2021 |
| Operating leases | | $ | 449 | | | $ | 590 | | | $ | 1,165 | | | $ | 4,429 | |
| Finance leases | | 740 | | | 181 | | | 915 | | | 6,156 | |
| Total | | $ | 1,189 | | | $ | 771 | | | $ | 2,080 | | | $ | 10,585 | |
| | | | | | | | |
Weighted-average remaining lease terms and discount rates for finance and operating leases are as follows as of June 30, 2022 and December 31, 2021, respectively:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Weighted-average remaining lease term - finance leases | 15.2 years | | 15.8 years |
| Weighted-average remaining lease term - operating leases | 4.9 years | | 5.0 years |
| Weighted-average discount rate - finance leases | 6.42% | | 6.43% |
| Weighted-average discount rate - operating leases | 7.08% | | 7.10% |
| | | | | | | | |
| Notes to Financial Statements | Revenue | |
| | |
Revenue
The company has two revenue streams: products and services. Services include repair, refurbishment, preventive maintenance and rental of products. Services for the North America segment include maintenance and repair of products. Services for the Europe segment include repair, refurbishment and preventive maintenance services. Services in All Other, are in the Asia Pacific region, and include rental and repair of products.
The following tables disaggregate the company’s revenues by major source and by reportable segment for the three and six months ended June 30, 2022 and June 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
| | Product | | Service | | Total |
| Europe | | $ | 109,479 | | | $ | 3,289 | | | $ | 112,768 | |
| North America | | 68,525 | | | 193 | | | 68,718 | |
| | | | | | |
| All Other | | 6,305 | | | 1,226 | | | 7,531 | |
| Total | | $ | 184,309 | | | $ | 4,708 | | | $ | 189,017 | |
| % Split | | 98% | | 2% | | 100% |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 |
| | Product | | Service | | Total |
| Europe | | $ | 224,744 | | | $ | 6,103 | | | $ | 230,847 | |
| North America | | 143,708 | | | 329 | | | 144,037 | |
| | | | | | |
| All Other | | 12,687 | | | 2,434 | | | 15,121 | |
| Total | | $ | 381,139 | | | $ | 8,866 | | | $ | 390,005 | |
| % Split | | 98% | | 2% | | 100% |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 |
| | Product | | Service | | Total |
| Europe | | $ | 118,165 | | | $ | 3,131 | | | $ | 121,296 | |
| North America | | 95,985 | | | 262 | | | 96,247 | |
| | | | | | |
| All Other | | 7,044 | | | 1,277 | | | 8,321 | |
| Total | | $ | 221,194 | | | $ | 4,670 | | | $ | 225,864 | |
| % Split | | 98% | | 2% | | 100% |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 |
| | Product | | Service | | Total |
| Europe | | $ | 228,009 | | | $ | 6,062 | | | $ | 234,071 | |
| North America | | 171,687 | | | 534 | | | 172,221 | |
| | | | | | |
| All Other | | 13,222 | | | 2,552 | | | 15,774 | |
| Total | | $ | 412,918 | | | $ | 9,148 | | | $ | 422,066 | |
| % 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 products. While the company has a significant amount of contract types, the sales split by contract type is estimated as follows: general terms and conditions (30%), large national customers (23%), governments, principally pursuant to tender contracts (22%) and other customers including buying groups and independent customers (25%).
All product revenues 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. 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. Revenue is measured as the amount of consideration probable of not having a significant reversal of cumulative revenue recognized when related uncertainties are resolved. 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 products 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 (refer to “Receivables” and "Accrued
| | | | | | | | |
| Notes to Financial Statements | Revenue | |
| | |
Expenses" in the notes to the condensed 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 June 30, 2022 and December 31, 2021, the company had deferred revenue of $2,404,000 and $4,156,000, respectively, related to outstanding performance obligations with substantially all expected to be recognized as revenue within a year.
| | | | | | | | |
| Notes to Financial Statements | Equity Compensation | |
| | |
Equity Compensation
The company’s Common Shares have a $.25$0.25 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 ten10 votes per share carry a 10% lower cash dividend rate and, in general, can only be transferred to family 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.
On May 31, 2017, the company received notice that holders of 703,912 When Class B Common Shares had electedare transferred out of a familial relationship, they automatically convert to convert all their Class B Common Shares into Common Shares.
As of SeptemberJune 30, 2017, 6,3572022, 3,667 Class B Common Shares remained outstanding. The conversion substantially diminishedPrior conversions of Class B Common Shares have virtually eliminated the significance of the Company’scompany’s dual class voting structure, asstructure. As of SeptemberJune 30, 2017,2022, the holders of the Common Shares representrepresented approximately 99.9% of the Company’scompany’s total outstanding voting power.
Equity Compensation Plan
On May 16, 2013,17, 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 outstanding until they are exercised, vest, terminate or expire in accordance witheffect 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 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 canceledforfeited or forfeited may be added back toremain unpurchased or undistributed upon termination or expiration of the 2013awards will become available under the 2018 Plan for use in future awards. Any Common 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.
At September 30, 2017, an aggregate of 1,071,576 Common Shares underlie awards outstanding under the 2003 Plan, which shares may become available under the 2013 Plan to the extent such awards are forfeited or expire unexercised.
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. As of SeptemberJune 30, 2017, 1,417,721 common shares2022, 2,362,474 Common Shares were available for future issuance under the 20132018 Plan 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.
The 20132018 Plan provides that shares granted come from the company's authorized but unissued common sharesCommon Shares or treasury shares. In addition, the company's stock-based compensation plans allow employee participants to exchange shares for minimum withholding taxes, which results in the company acquiring treasury shares.
| | | | | | | | |
| Notes to Financial Statements | Equity Compensation | |
| | |
The amounts of equity-based compensation expense recognized as part of selling, general and administrativeSG&A expenses in All Other in business segment reporting were as follows (in thousands):
| | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2022 | | 2021 |
| Restricted stock and restricted stock units | $ | 2,597 | | | $ | 3,761 | |
| Performance shares and performance share units | (319) | | | 2,049 | |
| | | |
| Total stock-based compensation expense | $ | 2,278 | | | $ | 5,810 | |
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Restricted stock / units | $ | 4,244 |
| | $ | 4,085 |
|
| Performance shares / units | 1,620 |
| | 774 |
|
| Non-qualified and performance stock options | 765 |
| | 675 |
|
| Total stock-based compensation expense | $ | 6,629 |
| | $ | 5,534 |
|
As of SeptemberJune 30, 2017,2022, unrecognized compensation expense related to equity-based compensation arrangements granted under the company's 20132018 Plan and previous plans, which is related to non-vested options and shares,awards, was as follows (in thousands):
|
| | | |
| | September 30, 2017 |
| Restricted stock and restricted stock units | $ | 8,657 |
|
| Performance shares and performance share units | 7,514 |
|
| Non-qualified and performance stock options | 3,439 |
|
| Total unrecognized stock-based compensation expense | $ | 19,610 |
|
|
| | | | |
Notes to Financial Statements | Equity Compensation | June 30, 2022 |
| Restricted stock and restricted stock units | $ | 4,864 | |
| Performance shares and performance share units | 1,354 | |
| |
| Total unrecognized stock-based compensation expense | $ | 6,218 | |
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 "Stock Options" and(refer to "Performance Shares and Performance Share Units" below). No tax benefitbenefits for share-basedstock compensation waswere realized forduring the three and ninesix months ended SeptemberJune 30, 20172022 and 20162021, respectively, 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 have a term of ten years and were granted with an exercise price per share
equal to the fair market value of one of the company’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 two years.
The following table summarizes information about stock option activity for the ninesix months ended SeptemberJune 30, 2017:2022:
|
| | | | | | | |
| | September 30, 2017 | | Weighted Average Exercise Price |
| Options outstanding at January 1, 2017 | 2,542,732 |
| | $ | 21.19 |
|
| Granted | 756,420 |
| | 12.15 |
|
| Exercised | (127,450 | ) | | 13.82 |
|
| Canceled | (315,976 | ) | | 23.03 |
|
| Options outstanding at September 30, 2017 | 2,855,726 |
| | $ | 18.91 |
|
| Options exercise price range at September 30, 2017 | $ | 12.15 |
| to | $ | 33.36 |
|
| Options exercisable at September 30, 2017 | 2,097,286 |
| | |
| Shares available for grant at September 30, 2017* | 1,417,721 |
| | |
| | | | | | | | | | | |
| | | Weighted Average
Exercise Price |
| Options outstanding at January 1, 2022 | 750,159 | | | $ | 12.69 | |
| | | |
| | | |
| | | |
| Expired | (3,000) | | | 17.47 |
| Options outstanding at June 30, 2022 | 747,159 | | | $ | 12.67 | |
| Options exercise price range at June 30, 2022 | $ | 12.15 | | to | $ | 14.49 | |
| Options exercisable at June 30, 2022 | 747,159 | | | |
| Shares available for grant under the 2018 Plan at June 30, 2022* | 2,362,474 | | | |
________
| |
* | Shares available for grant as of September 30, 2017 reduced by net restricted stock and restricted stock unit award and performance share and performance share unit award activity of 2,478,362 shares and 2,124,222 shares, respectively. |
* Shares available for grant under the 2018 Plan as of June 30, 2022 are reduced by awards and increased by forfeitures or expirations. At June 30, 2022, an aggregate of 805,637 Common Shares underlie awards which were forfeited or expired unexercised under the 2003 and 2013 Plans and thus are available for future issuance under the 2018 Plan upon transfer.
The following table summarizes information about stock options outstanding at SeptemberJune 30, 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| Exercise Prices | Number
Outstanding at
June 30, 2022 | | Weighted Average
Remaining
Contractual Life (Years) | | Weighted Average
Exercise Price | | Number Exercisable at
June 30, 2022 | | Weighted Average
Exercise Price |
| $12.15 – $20.00 | 747,159 | | | 3.5 | | $ | 12.67 | | | 747,159 | | | $ | 12.67 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| Exercise Prices | Number Outstanding at September 30, 2017 | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable at September 30, 2017 | | Weighted Average Exercise Price |
| $ 12.15 – $20.00 | 1,294,541 |
| | 7.6 | | $ | 13.00 |
| | 536,101 |
| | $ | 14.19 |
|
| $ 20.01 – $25.00 | 824,151 |
| | 2.7 | | 22.21 |
| | 824,151 |
| | 22.21 |
|
| $ 25.01 – $30.00 | 732,538 |
| | 1.9 | | 25.55 |
| | 732,538 |
| | 25.55 |
|
| $ 30.01 – $33.36 | 4,496 |
| | 3.6 | | 33.36 |
| | 4,496 |
| | 33.36 |
|
| Total | 2,855,726 |
| | 4.7 | | $ | 18.91 |
| | 2,097,286 |
| | $ | 21.35 |
|
Pursuant to the plans, the Compensation Committee has established that grants may not be exercised within one year from the date granted52
| | | | | | | | |
| Notes to Financial Statements | Equity Compensation | |
| | |
The 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. All stock options issued in 2017 were performance-based and may vest after the conclusion of the 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 outstandingNo stock options were issued in 2014 and prior and were not performance-based.2022 or 2021.
For the stock options issued in 2014 and prior, 25% of such options vested one year following the issuance and provided a four-year vesting period whereby options vest in 25% installments in each year. Options granted with graded vesting were accounted for as single options.
|
| | |
Notes to Financial Statements | Equity Compensation | |
| | |
The fair value of options granted is estimated on the date of grant using a Black-Scholes option-pricing model. The calculated fair value of the 2017 performance option awards was $5.38 based on the following assumptions:
|
| | | |
| | 2017 |
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 | % |
Expected dividend yield was based on historical dividends. Expected stock price volatility percentage was calculated at the date of grant based on historical stock prices for a period commensurate with the expected life of the option. The assumed expected life and forfeiture percentages were based on the company's historical analysis of option history.
Restricted Stock and Restricted Stock Units
The following table summarizes information about restricted sharesstock and restricted sharestock units (primarily for non-U.S. recipients):
| | | | | | | | | | | |
| | | Weighted Average Fair Value |
| Stock / Units unvested at January 1, 2022 | 1,160,847 | | | $ | 8.17 | |
| Granted | 1,017,055 | | | 1.48 | |
| Vested | (549,774) | | | 8.43 | |
| Forfeited | (131,256) | | | 6.94 | |
Stock / Units unvested at
June 30, 2022 | 1,496,872 | | | $ | 3.64 | |
|
| | | | | | |
| | September 30, 2017 | | Weighted Average Fair Value |
Stock / Units unvested at January 1, 2017 | 878,356 |
| | $ | 15.87 |
|
| Granted | 493,412 |
| | 12.15 |
|
| Vested | (364,367 | ) | | 16.66 |
|
| Canceled | (134,398 | ) | | 13.80 |
|
Stock / Units unvested at September 30, 2017 | 873,003 |
| | $ | 13.75 |
|
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 stockawards 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.period as adjusted for forfeiture estimates.
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):
| | | | | | | | | | | |
| | | | Weighted Average Fair Value |
| Shares / Units unvested at January 1, 2022 | 972,288 | | | $ | 7.76 | |
| Granted | 460,187 | | | 1.48 | |
| | | |
| | | |
Shares / Units unvested at
June 30, 2022 | 1,432,475 | | | $ | 5.75 | |
|
| | | | | | |
| | September 30, 2017 | | Weighted Average Fair Value |
| Shares / Units unvested at January 1, 2017 | 309,468 |
| | $ | 14.58 |
|
| Granted | 336,694 |
| | 12.02 |
|
| Vested | — |
| | — |
|
| Canceled | (3,711 | ) | | 12.82 |
|
| Shares / Units unvested at September 30, 2017 | 642,451 |
| | $ | 13.25 |
|
During the ninesix months ended SeptemberJune 30, 2017,2022, performance shares and performance share units (for non-U.S. recipients) were granted as performancegranted. Performance awards withhave a three-yearthree 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 sharesCommon Shares upon vesting. The number of shares earned will be determined at the end of the three-year performance period based on achievement of performance criteria for January 1, 20172020 through December 31, 20192022, January 1, 2021 through December 31, 2023 and January 1, 2022 through December
31, 2024, respectively established by the Compensation Committee at the time of grant. Recipients will be entitled to receive a number of common sharesCommon 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 grant fair value is further updated each reporting period while variable accounting applies. 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.recognize the cumulative estimated achievement level of proportionate term of the award. Performance award compensation expense is generally expected to be recognized over three years. No performance awardThe company continues to recognize expense has been recognized for(benefit) related to the 2015 awards granted in 2020, 2021 and 2022 as it is not considered probable that the performance goals for those awards will be met. Expense is being recognized for the 2016 and 2017 awards.
| | | | | | | | |
| Notes to Financial Statements | Accumulated Other Comprehensive Income | |
| | |
Notes to Financial Statements | Accumulated Other Comprehensive Income | |
| | |
Accumulated Other Comprehensive Income (Loss) by Component
Changes in accumulated other comprehensive income (loss) ("OCI") for the three and nine months ended September 30, 2017 and September 30, 2016, respectively,(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| March 31, 2022 | | $ | 12,193 | | | $ | 2,553 | | | $ | (3,877) | | | $ | 825 | | | $ | 11,694 | |
| OCI before reclassifications | | (25,540) | | | (1,005) | | | 4,299 | | | 1,263 | | | (20,983) | |
| Amount reclassified from accumulated OCI | | — | | | — | | | 40 | | | (635) | | | (595) | |
| Net current-period OCI | | (25,540) | | | (1,005) | | | 4,339 | | | 628 | | | (21,578) | |
| June 30, 2022 | | $ | (13,347) | | | $ | 1,548 | | | $ | 462 | | | $ | 1,453 | | | $ | (9,884) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| December 31, 2021 | | $ | 18,961 | | | $ | 2,127 | | | $ | (4,101) | | | $ | 1 | | | $ | 16,988 | |
| OCI before reclassifications | | (32,308) | | | (579) | | | 4,617 | | | 2,138 | | | (26,132) | |
| Amount reclassified from accumulated OCI | | — | | | — | | | (54) | | | (686) | | | (740) | |
| Net current-period OCI | | (32,308) | | | (579) | | | 4,563 | | | 1,452 | | | (26,872) | |
| June 30, 2022 | | $ | (13,347) | | | $ | 1,548 | | | $ | 462 | | | $ | 1,453 | | | $ | (9,884) | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| March 31, 2021 | | $ | 53,131 | | | $ | 2,358 | | | $ | (3,325) | | | $ | (1,494) | | | $ | 50,670 | |
| OCI before reclassifications | | 7,250 | | | (212) | | | (701) | | | (369) | | | 5,968 | |
| Amount reclassified from accumulated OCI | | — | | | — | | | (43) | | | 484 | | | 441 | |
| Net current-period OCI | | 7,250 | | | (212) | | | (744) | | | 115 | | | 6,409 | |
| June 30, 2021 | | $ | 60,381 | | | $ | 2,146 | | | $ | (4,069) | | | $ | (1,379) | | | $ | 57,079 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| December 31, 2020 | | $ | 50,329 | | | $ | (517) | | | $ | (3,674) | | | $ | (702) | | | $ | 45,436 | |
| OCI before reclassifications | | 10,052 | | | 2,663 | | | (231) | | | (1,587) | | | 10,897 | |
| Amount reclassified from accumulated OCI | | — | | | — | | | (164) | | | 910 | | | 746 | |
| Net current-period OCI | | 10,052 | | | 2,663 | | | (395) | | | (677) | | | 11,643 | |
| June 30, 2021 | | $ | 60,381 | | | $ | 2,146 | | | $ | (4,069) | | | $ | (1,379) | | | $ | 57,079 | |
| | | | | | | | | | |
| | | | | | | | |
| Notes to Financial Statements | Accumulated Other Comprehensive Income | |
| | |
Reclassifications out of accumulated OCI were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| June 30, 2017 | | $ | 8,811 |
| | $ | 9,622 |
| | $ | (11,969 | ) | | $ | (431 | ) | | $ | 6,033 |
|
| OCI before reclassifications | | 33,795 |
| | (6,356 | ) | | (238 | ) | | (578 | ) | | 26,623 |
|
| Amount reclassified from accumulated OCI | | — |
| | — |
| | 70 |
| | 395 |
| | 465 |
|
| Net current-period OCI | | 33,795 |
| | (6,356 | ) | | (168 | ) | | (183 | ) | | 27,088 |
|
| September 30, 2017 | | $ | 42,606 |
| | $ | 3,266 |
| | $ | (12,137 | ) | | $ | (614 | ) | | $ | 33,121 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | $ | (26,199 | ) | | $ | 17,372 |
| | $ | (11,248 | ) | | $ | 740 |
| | $ | (19,335 | ) |
| OCI before reclassifications | | 68,805 |
| | (14,106 | ) | | (1,223 | ) | | (1,149 | ) | | 52,327 |
|
| Amount reclassified from accumulated OCI | | — |
| | — |
| | 334 |
| | (205 | ) | | 129 |
|
| Net current-period OCI | | 68,805 |
| | (14,106 | ) | | (889 | ) | | (1,354 | ) | | 52,456 |
|
| September 30, 2017 | | $ | 42,606 |
| | $ | 3,266 |
| | $ | (12,137 | ) | | $ | (614 | ) | | $ | 33,121 |
|
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2016 | | $ | 16,456 |
| | $ | 2,987 |
| | $ | (9,953 | ) | | $ | 698 |
| | $ | 10,188 |
|
| OCI before reclassifications | | (14,398 | ) | | 10,990 |
| | (563 | ) | | 828 |
| | (3,143 | ) |
| Amount reclassified from accumulated OCI | | — |
| | — |
| | 230 |
| | (698 | ) | | (468 | ) |
| Net current-period OCI | | (14,398 | ) | | 10,990 |
| | (333 | ) | | 130 |
| | (3,611 | ) |
| September 30, 2016 | | $ | 2,058 |
| | $ | 13,977 |
| | $ | (10,286 | ) | | $ | 828 |
| | $ | 6,577 |
|
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | $ | (5,744 | ) | | $ | 4,111 |
| | $ | (9,757 | ) | | $ | 2,003 |
| | $ | (9,387 | ) |
| OCI before reclassifications | | 7,802 |
| | 9,866 |
| | (835 | ) | | (103 | ) | | 16,730 |
|
| Amount reclassified from accumulated OCI | | — |
| | — |
| | 306 |
| | (1,072 | ) | | (766 | ) |
| Net current-period OCI | | 7,802 |
| | 9,866 |
| | (529 | ) | | (1,175 | ) | | 15,964 |
|
| September 30, 2016 | | $ | 2,058 |
| | $ | 13,977 |
| | $ | (10,286 | ) | | $ | 828 |
| | $ | 6,577 |
|
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount reclassified from OCI | | Amount reclassified from OCI | | Affected line item in the Statement of Comprehensive (Income) Loss |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
| Defined Benefit Plans | | | | | | | | | | |
| Service and interest costs | | $ | 40 | | | $ | (43) | | | $ | (54) | | | $ | (164) | | | Selling, general and administrative expenses |
| Tax | | — | | | — | | | — | | | — | | | Income taxes |
| Total after tax | | $ | 40 | | | $ | (43) | | | $ | (54) | | | $ | (164) | | | |
| | | | | | | | | | |
| Derivatives | | | | | | | | | | |
| Foreign currency forward contracts hedging sales | | $ | (30) | | | $ | 159 | | | $ | (57) | | | $ | 181 | | | Net sales |
| Foreign currency forward contracts hedging purchases | | (703) | | | 386 | | | (734) | | | 838 | | | Cost of products sold |
| | | | | | | | | | |
| Total loss (income) before tax | | (733) | | | 545 | | | (791) | | | 1,019 | | | |
| Tax | | 98 | | | (61) | | | 105 | | | (109) | | | Income taxes |
| Total after tax | | $ | (635) | | | $ | 484 | | | $ | (686) | | | $ | 910 | | | |
| | | | | | | | |
| Notes to Financial Statements | Charges Related to Restructuring Activities | |
| | |
Notes to Financial Statements | Accumulated Other Comprehensive Income | |
| | |
Reclassifications out of accumulated OCI for the three and nine months ended September 30, 2017 and September 30, 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | Amount reclassified from OCI | | Affected line item in the Statement of Comprehensive (Income) Loss |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | |
| | | 2017 | | 2016 | | 2017 | | 2016 | | |
| Defined Benefit Plans | | | | | |
| | | | |
| Service and interest costs | | $ | 70 |
| | $ | 230 |
| | $ | 334 |
| | $ | 306 |
| | Selling, General and Administrative |
| Tax | | — |
| | — |
| | — |
| | — |
| | Income Taxes |
| Total after tax | | $ | 70 |
| | $ | 230 |
| | $ | 334 |
| | $ | 306 |
| | |
| | | | | | | | | | | |
| Derivatives | | | | | | | | | | |
| Foreign currency forward contracts hedging sales | | $ | (399 | ) | | $ | (1,417 | ) | | $ | (165 | ) | | $ | (2,826 | ) | | Net Sales |
| Foreign currency forward contracts hedging purchases | | 837 |
| | 619 |
| | (35 | ) | | 1,576 |
| | Cost of Products Sold |
| Total loss (income) before tax | | 438 |
| | (798 | ) | | (200 | ) | | (1,250 | ) | | |
| Tax | | (43 | ) | | 100 |
| | (5 | ) | | 178 |
| | Income Taxes |
| Total after tax | | $ | 395 |
| | $ | (698 | ) | | $ | (205 | ) | | $ | (1,072 | ) | | |
|
| | |
Notes to Financial Statements | Charges Related to Restructuring Activities | |
| | |
Charges Related to Restructuring Activities
The company's restructuring charges were 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 affectaffected the company's customers (e.g. home health care providers) and continued pricing pressures faced by the company due to the outsourcing by competitors to lower cost locations. Restructuring decisions were also the result of reduced profitability in the NA/HME and Asia/Pacific segments. In addition, as a resulteach of the company's transformation strategy, additional restructuringsegments. Restructuring actions were incurred in 2016 andhave continued in 2017. The company expects any near-term cost savings from restructuring will be offset by other costs because of pressures on the business.into 2022.
For the ninesix months ended SeptemberJune 30, 2017,2022, severance and other charges totaled $8,973,000$7,943,000 which were related to severance in NA/HME ($5,441,000),North America of $3,202,000, Europe ($1,890,000)of $4,732,000 and Asia/Pacific ($1,083,000) as well as building lease termination costs in the NA/HME segment ($559,000). The NA/HME charges include the impactAll Other of the company's closure of its Suzhou, China, manufacturing facility, which is expected to generate approximately $4,000,000 in annualized pre-tax savings for the NA/HME segment.$9,000. Payments for the ninesix months ended SeptemberJune 30, 20172022 were $8,232,000$4,424,000 and the cash payments were funded with the company's cash on hand. The 2022 charges are expected to be paid out within 12 months.
For the six months ended June 30, 2021, charges totaled $2,099,000 which were related to North America of $853,000 and Europe of $1,246,000. In North America costs were incurred related to severance. The European charges were for severance costs $862,000 and contract terminations $384,000, primarily related to the closure of a German manufacturing facility. Payments for the six months ended June 30, 2021 were $6,824,000 and the cash payments were funded with company's cash on hand. Most of the 2017 charges are expected to be paid out within twelve months.
For the nine months ended September 30, 2016, charges totaled $1,299,000 which were related to severance in NA/HME ($808,000) and Asia/Pacific ($86,000) as well as building lease termination costs in the NA/HME segment ($405,000). Payments for the nine months ended September 30, 2016 were $2,190,000 and the cash payments were funded with company's cash on hand. Most of the 2016 charges have been paid out.
There have been no material changes in accrued balances related to the charges, either as a result of revisions to 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, Generalselling, general and Administrativeadministrative expenses, and to a lesser extent, Costscosts of Products Sold. However, in general, these savings have been more than offset by the general business decline, higher regulatory and compliance costs related to quality system improvements, and more recently, higher interest expense.products sold. To date, the company's liquidity has not been materially impacted. Please refersufficient to Charges Related to Restructuring Activities of company's Annual Report on Form 10-K for the period ending December 31, 2016 for disclosure of restructuring activity prior to 2017.absorb these charges and payments.
| | | | | | | | |
| Notes to Financial Statements | Charges Related to Restructuring Activities | |
| | |
Notes to Financial Statements | Charges Related to Restructuring Activities | |
| | |
A progression by reporting segment of the accruals recorded as a result of the restructuring for 2017the six months ended June 30, 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Severance | | | | | | Other | | Total |
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| December 31, 2021 Balances | | | | | | | | | |
| North America | $ | 482 | | | | | | | $ | — | | | $ | 482 | |
| | | | | | | | | |
| | | | | | | | | |
| Total | 482 | | | | | | | — | | | 482 | |
| Charges | | | | | | | | | |
| North America | 1,124 | | | | | | | 538 | | | 1,662 | |
| Europe | 2,119 | | | | | | | — | | | 2,119 | |
| All Other | 9 | | | | | | | | | 9 | |
| Total | 3,252 | | | | | | | 538 | | | 3,790 | |
| Payments | | | | | | | | | |
| North America | (422) | | | | | | | (538) | | | (960) | |
| Europe | (367) | | | | | | | — | | | (367) | |
| All Other | (9) | | | | | | | — | | | (9) | |
| Total | (798) | | | | | | | (538) | | | (1,336) | |
| March 31, 2022 Balances | | | | | | | | | |
| North America | 1,184 | | | | | | | — | | | 1,184 | |
| Europe | 1,752 | | | | | | | — | | | 1,752 | |
| | | | | | | | | |
| Total | $ | 2,936 | | | | | | | $ | — | | | $ | 2,936 | |
| | | | | | | | | |
| | | | | | | | | |
| Charges | | | | | | | | | |
| North America | $ | 542 | | | | | | | 998 | | | $ | 1,540 | |
| Europe | 1,288 | | | | | | | 1,325 | | | 2,613 | |
| | | | | | | | | |
| Total | 1,830 | | | | | | | 2,323 | | | 4,153 | |
| Payments | | | | | | | | | |
| North America | (768) | | | | | | | (442) | | | (1,210) | |
| Europe | (1,254) | | | | | | | (624) | | | (1,878) | |
| | | | | | | | | |
| Total | (2,022) | | | | | | | (1,066) | | | (3,088) | |
| June 30, 2022 Balances | | | | | | | | | |
| North America | 958 | | | | | | | 556 | | | 1,514 | |
| Europe | 1,786 | | | | | | | 701 | | | 2,487 | |
| | | | | | | | | |
| Total | $ | 2,744 | | | | | | | $ | 1,257 | | | $ | 4,001 | |
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| | Severance | | Contract Terminations | | Total |
| December 31, 2016 Balances | | | | | |
| NA/HME | $ | 783 |
| | $ | 120 |
| | $ | 903 |
|
| Other | 1,266 |
| | — |
| | 1,266 |
|
| Total | 2,049 |
| | 120 |
| | 2,169 |
|
| NA/HME charges | 2,095 |
| | 147 |
| | 2,242 |
|
| Europe charges | 690 |
| | — |
| | 690 |
|
| Asia/Pacific charges | 351 |
| | — |
| | 351 |
|
| Total charges | 3,136 |
| | 147 |
| | 3,283 |
|
| NA/HME payments | (1,488 | ) | | (96 | ) | | (1,584 | ) |
| Europe payments | (190 | ) | | — |
| | (190 | ) |
| Asia/Pacific payments | (228 | ) | | — |
| | (228 | ) |
| Other payments | (249 | ) | | — |
| | (249 | ) |
| Total payments | (2,155 | ) | | (96 | ) | | (2,251 | ) |
| March 31, 2017 Balances | | | | | |
| NA/HME | 1,390 |
| | 171 |
| | 1,561 |
|
| Europe | 500 |
| | — |
| | 500 |
|
| Asia/Pacific | 123 |
| | — |
| | 123 |
|
| Other | 1,017 |
| | — |
| | 1,017 |
|
| Total | 3,030 |
| | 171 |
| | 3,201 |
|
| NA/HME charges | 3,427 |
| | 501 |
| | 3,928 |
|
| Europe charges | 514 |
| | — |
| | 514 |
|
| Asia/Pacific charges | 545 |
| | — |
| | 545 |
|
| Total charges | 4,486 |
| | 501 |
| | 4,987 |
|
| NA/HME payments | (1,362 | ) | | (189 | ) | | (1,551 | ) |
| Europe payments | (340 | ) | | — |
| | (340 | ) |
| Asia/Pacific payments | (658 | ) | | — |
| | (658 | ) |
| Total payments | (2,360 | ) | | (189 | ) | | (2,549 | ) |
| June 30, 2017 Balances | | | | | |
| NA/HME | 3,455 |
| | 483 |
| | 3,938 |
|
| Europe | 674 |
| | — |
| | 674 |
|
| Asia/Pacific | 10 |
| | — |
| | 10 |
|
| Other | 1,017 |
| | — |
| | 1,017 |
|
| Total | 5,156 |
| | 483 |
| | 5,639 |
|
| NA/HME charge reversals | (81 | ) | | (89 | ) | | (170 | ) |
| Europe charges | 686 |
| | — |
| | 686 |
|
| Asia/Pacific charges | 187 |
| | — |
| | 187 |
|
| Total charges | 792 |
| | (89 | ) | | 703 |
|
| NA/HME payments | (2,032 | ) | | (298 | ) | | (2,330 | ) |
| Europe payments | (916 | ) | | — |
| | (916 | ) |
| Asia/Pacific payments | (186 | ) | | — |
| | (186 | ) |
| Total payments | (3,134 | ) | | (298 | ) | | (3,432 | ) |
| September 30, 2017 Balances | | | | | |
| NA/HME | 1,342 |
| | 96 |
| | 1,438 |
|
| Europe | 444 |
| | — |
| | 444 |
|
| Asia/Pacific | 11 |
| | — |
| | 11 |
|
| Other | 1,017 |
| | — |
| | 1,017 |
|
| Total | $ | 2,814 |
| | $ | 96 |
| | $ | 2,910 |
|
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| Notes to Financial Statements | Income Taxes | |
| | |
Notes to Financial Statements | Income Taxes | |
| | |
Income Taxes
The company had an effective tax rate of 22.8%4.4% and 16.2%5.1% on losses before income tax for the three and ninesix months ended SeptemberJune 30, 2017, respectively, and an effective tax rate of 743.7% and 48.2% for the three and nine months ended September 30, 2016,2022, respectively, compared to an expected benefit at the U.S. statutory rate of 35%21.0% on the pre-tax loss for each period. The company had an effective tax rate of 11.7% and 13.7% on losses before tax for the three and six months ended June 30, 2021, respectively, compared to an expected benefit of 21.0% on the pre-tax loss for each period. The company's effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 2016 was2021 were unfavorable as compared to the U.S. federal statutory rate, expected benefit, principally due to the negative impact of the company's inabilitycompany not being able to record tax benefits related to the significant losses in countries which had tax valuation allowances. The effective tax rate was reducedincreased for the three and six months ended June 30, 2022 and June 30, 2021 by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate lowerhigher than the U.S. statutory rate. During 2016, installment payments were made related to a previously disclosed liability for uncertain tax positions, including an accelerated payment of the balance of the installment obligation, in order to reduce interest costs.
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| Notes to Financial Statements | Net Income (Loss) Per Common Share | |
| | |
Notes to Financial Statements | Net Loss Per Common Share | |
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Net Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated.
| | | (In thousands except per share data) | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | (In thousands except per share data) | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2022 | | 2021 | | 2022 | | 2021 |
| Basic | | | | | | | | Basic | | | | | | | |
| Average common shares outstanding | 32,867 |
| | 32,465 |
| | 32,725 |
| | 32,484 |
| |
| Weighted average common shares outstanding | | Weighted average common shares outstanding | 35,634 | | | 34,969 | | | 35,340 | | | 34,732 | |
| | | | | | | | | | | |
| Net loss | $ | (18,591 | ) | | $ | (5,020 | ) | | $ | (58,879 | ) | | $ | (25,216 | ) | Net loss | $ | (21,943) | | | $ | (10,698) | | | $ | (46,140) | | | $ | (24,742) | |
| | | | | | | | | | | |
| Net loss per common share | $ | (0.57 | ) | | $ | (0.15 | ) | | $ | (1.80 | ) | | $ | (0.78 | ) | Net loss per common share | $ | (0.62) | | | $ | (0.31) | | | $ | (1.31) | | | $ | (0.71) | |
| | | | | | | | | |
| Diluted | | | | | | | | Diluted | |
| Average common shares outstanding | 32,867 |
| | 32,465 |
| | 32,725 |
| | 32,484 |
| |
| Stock options and awards | 505 |
| | 145 |
| | 361 |
| | 105 |
| |
| Average common shares assuming dilution | 33,372 |
| | 32,610 |
| | 33,086 |
| | 32,589 |
| |
| Weighted average common shares outstanding | | Weighted average common shares outstanding | 35,634 | | | 34,969 | | | 35,340 | | | 34,732 | |
| | Share options and awards | | Share options and awards | 361 | | | 651 | | | 374 | | | 718 | |
| Weighted average common shares assuming dilution | | Weighted average common shares assuming dilution | 35,995 | | | 35,620 | | | 35,714 | | | 35,450 | |
| | | | | | | | | | | |
| Net loss | $ | (18,591 | ) | | $ | (5,020 | ) | | $ | (58,879 | ) | | $ | (25,216 | ) | Net loss | $ | (21,943) | | | $ | (10,698) | | | $ | (46,140) | | | $ | (24,742) | |
| | | | | | | | | |
| | Net loss per common share * | $ | (0.57 | ) | | $ | (0.15 | ) | | $ | (1.80 | ) | | $ | (0.78 | ) | Net loss per common share * | $ | (0.62) | | | $ | (0.31) | | | $ | (1.31) | | | $ | (0.71) | |
________
* Net loss per common share assuming dilution calculated utilizing weighted average shares outstanding-basic for the periods in which there was a net loss.
At SeptemberFor the three and six months ended June 30, 2017, 988,926 and 1,301,2862022, shares associated with stock optionsequity compensation awards of 2,680,850 and 1,268,582, respectively, and for the three and six months ended June 30, 2021, shares associated with equity compensation awards of 1,058,264 and 1,056,714, respectively, were excluded from the weighted average common shares assuming dilution for the three and nine months ended Septemberas incremental shares were antidilutive.
At June 30, 2017, respectively, as they were anti-dilutive. At September 30, 2017,2022, the majority of the anti-dilutiveantidilutive incremental shares were awards granted at an exercise price of $25.79,above $12.14, which was higher than the average fair market value pricesprice of $14.27$1.32 and $13.14$1.73 for the three and ninesix months ended SeptemberJune 30, 2017, respectively.
2022. At SeptemberJune 30, 2016, 2,462,288 and 2,502,427 shares associated with stock options were excluded from the average common shares assuming dilution for the three and nine months ended September 30, 2016, respectively, as they were anti-dilutive. At September 30, 2016,2021, the majority of the anti-dilutiveantidilutive incremental shares were awards granted at an exercise price of $25.24,above $24.45, which was higher than the average fair market value pricesprice of $12.03$8.33 and $12.64$8.81 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2021.
For both the three and six months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 2016,2021, respectively, no shares were included in the common shares assuming dilution related to the company's issued warrants as the average market price of the company stockshares for these periods did not exceed the strike price of the warrants.
Further, upon adoption of ASU 2020-06, effective in 2021 for the company, use of the if-converted earnings per share method is required. However, no shares were included in the weighted average common shares assuming dilution for the three and six months ended June 30, 2022 and June 30, 2021 related to the company's convertible senior notes as conversion prices were above the company's average stock price for the periods and other requirements for the notes to be convertible to shares were not met.
| | | | | | | | |
| Notes to Financial Statements | Concentration of Credit Risk | |
| | |
Notes to Financial Statements | Concentration of Credit Risk | |
| | |
Concentration of Credit Risk
The company manufactures and distributes durable medical equipment to the home health care, retail and extended care markets. The company performs credit evaluations of its customers’ financial condition. The company utilizes De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide lease financing to Invacare's U.S. customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation of $1,326,000$1,019,000 at SeptemberJune 30, 20172022 to DLL for events of default under the contracts, which total $20,336,000$6,613,000 at SeptemberJune 30, 2017. 2022. Guarantees, ASC 460, requires the company to record a guarantee liability as it relates to the limited recourse obligation. As such, the company has recorded an immaterial liability for this guarantee obligation within other long-term obligations. The company's recourse is re-evaluatedreevaluated by DLL biannually, and DLL considers activity between the biannual dates and excludes any receivables purchased by the company from DLL. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with Receivables, ASC 310-10-05-4. Credit losses are provided for in the financial statements.
Substantially all the company’s receivables are due from health care, medical equipment providers and long-term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe.Europe or also direct from governmental entities in certain countries. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. The company has also seenChanges in these programs can have a significant shift in reimbursement to customers from managed care entities. Therefore,As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. In addition, reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain as well as the timing of reimbursement and, thus, affect the product mix, pricing and payment patterns of the company’s customers.
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| Notes to Financial Statements | Derivatives | |
| | |
Notes to Financial Statements | Derivatives | |
| | |
Derivatives
ASC 815 requires companies to recognize all derivative instruments in the condensed consolidated balance sheetsheets 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.
Cash Flow Hedging Strategy
The company uses derivative instruments in an attempt to manage its exposure to transactional foreign currency exchange risk and interest rate risk. Foreign forward exchange contracts are used to manage the price risk associated with forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months.
The company recognizes its derivative instruments as assets or liabilities in the condensed consolidated balance sheetsheets measured at fair value. A majorityAll of the company’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.
To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the condensed consolidated statementstatements of comprehensive income (loss). If it is later determined that a hedged forecasted transaction is unlikely to occur, any prospective gains or losses on the forward contracts would be recognized in earnings. The company does not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve months.
The company has historically not recognized any material amount of ineffectiveness related to forward contract cash flow hedges because the company generally limits its hedges to between 50% and 90% of total forecasted transactions for a given entity’s exposure to currency rate changes and the transactions hedged are recurring in nature. Furthermore, most of the hedged transactions are related to intercompany sales and purchases for which settlement occurs on a specific day each month. Forward contracts with a total notional amount in USD of $45,421,000$38,664,000 and $126,456,000$58,115,000 matured forduring the six months ended June 30, 2022 and June 30, 2021, respectively, compared to $27,998,000 and $31,448,000 during the three month ended June 30, 2022 and nine months ended SeptemberJune 30, 2017 compared to $59,663,000 and $171,889,000 matured for the three and nine months ended September 30, 2016,2021, respectively.
| | | | | | | | |
| Notes to Financial Statements | Derivatives | |
| | |
Notes to Financial Statements | Derivatives | |
| | |
Outstanding foreign currency forward exchange contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Notional
Amount | | Unrealized
Net Gain
(Loss) | | Notional
Amount | | Unrealized
Net Gain
(Loss) |
| | | | | | | |
| USD / EUR | 23,147 | | | 1,452 | | | — | | | — | |
| USD / CAD | 11,750 | | | (49) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| EUR / GBP | 9,353 | | | 181 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| EUR / NOK | 3,932 | | | 19 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| NOK / SEK | 2,313 | | | (16) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| USD / MXN | 2,209 | | | 106 | | | 23 | | | 1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| $ | 52,704 | | | $ | 1,693 | | | $ | 23 | | | $ | 1 | |
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Notional Amount | | Unrealized Net Gain (Loss) | | Notional Amount | | Unrealized Net Gain (Loss) |
| USD / AUD | $ | 4,341 |
| | $ | 16 |
| | $ | 5,841 |
| | $ | 316 |
|
| USD / CAD | 554 |
| | 53 |
| | 2,604 |
| | (18 | ) |
| USD / CNY | 954 |
| | 17 |
| | 11,252 |
| | (301 | ) |
| USD / CHF | 90 |
| | — |
| | 370 |
| | 15 |
|
| USD / EUR | 42,200 |
| | (1,403 | ) | | 60,387 |
| | 1,826 |
|
| USD / GBP | 1,645 |
| | (22 | ) | | 3,253 |
| | (75 | ) |
| USD / NZD | 6,930 |
| | 67 |
| | 9,650 |
| | (64 | ) |
| USD / SEK | 1,027 |
| | (112 | ) | | 4,923 |
| | 146 |
|
| USD / MXP | 1,517 |
| | 142 |
| | 6,148 |
| | (417 | ) |
| EUR / AUD | 139 |
| | 3 |
| | 506 |
| | 6 |
|
| EUR / GBP | 12,184 |
| | 398 |
| | 14,511 |
| | (686 | ) |
| EUR / NOK | 704 |
| | 1 |
| | 2,503 |
| | (25 | ) |
| EUR / NZD | 3,133 |
| | (9 | ) | | 3,777 |
| | 16 |
|
| GBP / AUD | 137 |
| | 8 |
| | 503 |
| | 34 |
|
| GBP / CHF | 135 |
| | (1 | ) | | 215 |
| | (10 | ) |
| GBP / SEK | 952 |
| | 74 |
| | 1,389 |
| | (42 | ) |
| CHF / DKK | 60 |
| | 4 |
| | 595 |
| | (2 | ) |
| DKK / SEK | 1,352 |
| | 56 |
| | 31,978 |
| | 49 |
|
| NOK / CHF | 349 |
| | (23 | ) | | 1,335 |
| �� | (13 | ) |
| NOK / SEK | 810 |
| | 40 |
| | 2,618 |
| | 21 |
|
| | $ | 79,213 |
| | $ | (691 | ) | | $ | 164,358 |
| | $ | 776 |
|
Derivatives Not Qualifying or Designated for Hedge Accounting Treatment
The company utilizes foreign currency forward contracts that are not designated as hedges in accordance with ASC 815. These contracts are entered into to eliminate the risk associated with the settlement of short-term intercompany trading receivables and payables between Invacare Corporation and its foreign subsidiaries. The currency forward contracts are entered into at the same time as the intercompany
receivables or payables are created so that upon settlement, the gain/loss on the settlement is offset by the gain/loss on the foreign currency forward contract. No material net gain or loss was realized by the company in 20172022 or 20162021 related to these contracts and the associated short-term intercompany trading receivables and payables.
|
| | |
Notes to Financial Statements | Derivatives | |
| | |
Foreign currency forward exchange contracts not qualifying or designated for hedge accounting treatment, as well as ineffective hedges, entered into in 20172022 and 2016,2021, respectively, and outstanding were as follows (in thousands USD):
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Notional
Amount | | Gain
(Loss) | | Notional
Amount | | Gain
(Loss) |
| USD / AUD | $ | 1,299 | | | $ | 1 | | | $ | 3,792 | | | $ | (57) | |
| USD / CAD | 19,084 | | | (10) | | | 14,556 | | | (24) | |
| | | | | | | |
| USD / EUR | 80,306 | | | (2,954) | | | 70,454 | | | (1,104) | |
| | | | | | | |
| USD / DKK | 12,352 | | | (714) | | | 10,850 | | | (257) | |
| USD / GBP | 3,717 | | | (63) | | | 4,028 | | | 32 | |
| | | | | | | |
| USD / NOK | 5,352 | | | (579) | | | 2,352 | | | (81) | |
| | | | | | | |
| USD / SEK | 2,152 | | | (196) | | | 2,344 | | | (131) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| EUR / GBP | 5,928 | | | 115 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| EUR / NOK | 5 | | | — | | | — | | | — | |
| AUD / NZD | 7,517 | | | (36) | | | 7,366 | | | (17) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| USD / THB | 4,270 | | | (46) | | | 4,500 | | | 86 | |
| | | | | | | |
| | | | | | | |
| EUR / SEK | 6,797 | | | (153) | | | — | | | — | |
| $ | 148,779 | | | $ | (4,635) | | | $ | 120,242 | | | $ | (1,553) | |
| | | | | | | | |
| Notes to Financial Statements | Derivatives | |
| | |
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Notional Amount | | Gain (Loss) | | Notional Amount | | Gain (Loss) |
| AUD / USD | $ | 12,300 |
| | $ | 122 |
| | $ | 5,800 |
| | $ | 204 |
|
| CNY / USD | 3,354 |
| | 56 |
| | 5,556 |
| | (24 | ) |
| EUR / USD | 2,145 |
| | (159 | ) | | — |
| | — |
|
| GBP / USD | 496 |
| | (18 | ) | | — |
| | — |
|
| NZD / USD | 4,000 |
| | 47 |
| | — |
| | — |
|
| DKK / CHF | 120 |
| | 7 |
| | — |
| | — |
|
| AUD / NZD | 2,602 |
| | 9 |
| | 3,264 |
| | 15 |
|
| EUR / NOK | 7 |
| | — |
| | — |
| | — |
|
| | $ | 25,024 |
| | $ | 64 |
| | $ | 14,620 |
| | $ | 195 |
|
The fair values of the company’s derivative instruments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | $ | 1,782 | | | $ | 89 | | | $ | 1 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | 276 | | | 4,911 | | | 385 | | | 1,938 | |
| Total derivatives | $ | 2,058 | | | $ | 5,000 | | | $ | 386 | | | $ | 1,938 | |
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | $ | 997 |
| | $ | 1,688 |
| | $ | 2,535 |
| | $ | 1,759 |
|
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | 241 |
| | 177 |
| | 219 |
| | 24 |
|
| Total derivatives | $ | 1,238 |
| | $ | 1,865 |
| | $ | 2,754 |
| | $ | 1,783 |
|
|
| | |
Notes to Financial Statements | Derivatives | |
| | |
The fair values of the company’s foreign currency forward exchange contract assets and liabilities are included in Other Current Assets and Accrued Expenses, respectively in the Consolidated Balance Sheets. condensed consolidated balance sheets.
The effect of derivative instruments on Accumulated Other Comprehensive Income (Loss) (OCI) and the Statementcondensed consolidated Statements of Comprehensive Income (Loss) andcomprehensive income (loss) was as follows (in thousands):
|
| | | | | | | | | | | |
Derivatives in ASC 815 cash flow hedge relationships | Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| Three months ended September 30, 2017 | | | | | |
| Foreign currency forward exchange contracts | $ | (578 | ) | | $ | (395 | ) | | $ | (121 | ) |
| Nine months ended September 30, 2017 | | | | | |
| Foreign currency forward exchange contracts | $ | (1,149 | ) | | $ | 205 |
| | $ | (114 | ) |
| Three months ended September 30 2016 | | | | | |
| Foreign currency forward exchange contracts | $ | 828 |
| | $ | 698 |
| | $ | 30 |
|
| Nine months ended September 30, 2016 | | | | | |
| Foreign currency forward exchange contracts | $ | (103 | ) | | $ | 1,072 |
| | $ | 72 |
|
| | | | | | |
Derivatives not designated as hedging instruments under ASC 815 | | | | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| Three months ended September 30, 2017 | | | | | |
| Foreign currency forward exchange contracts | | $ | (53 | ) |
| Nine months ended September 30, 2017 | | | | | |
| Foreign currency forward exchange contracts | | $ | 64 |
|
| Three months ended September 30, 2016 | | | | | |
| Foreign currency forward exchange contracts | | $ | 271 |
|
| Nine months ended September 30, 2016 | | | | | |
| Foreign currency forward exchange contracts | | $ | (106 | ) |
| | | | | | | | | | | | | | | | | |
Derivatives (foreign currency forward exchange contracts) in ASC 815 cash flow hedge
relationships | Amount of Gain
(Loss) Recognized in Accumulated OCI on Derivatives
(Effective Portion) | | Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective
Portion) | | Amount of Gain (Loss)
Recognized in Income on
Derivatives (Ineffective Portion and Amount Excluded from
Effectiveness Testing) |
| Three months ended June 30, 2022 | | | | | |
| Foreign currency forward exchange contracts | $ | 1,263 | | | $ | 635 | | | $ | 115 | |
| | | | | |
| | | | | |
| Six months ended June 30, 2022 | | | | | |
| Foreign currency forward exchange contracts | $ | 2,138 | | | $ | 686 | | | $ | 115 | |
| | | | | |
| | | | | |
| Three months ended June 30, 2021 | | | | | |
| Foreign currency forward exchange contracts | $ | (369) | | | $ | (484) | | | $ | (88) | |
| | | | | |
| | | | | |
| Six months ended June 30, 2021 | | | | | |
| Foreign currency forward exchange contracts | $ | (1,587) | | | $ | (910) | | | $ | (88) | |
| | | | | |
| | | | | |
| | | | | |
Derivatives (foreign currency forward exchange contracts) not designated as hedging
instruments under ASC 815 | | | | | Amount of Gain (Loss)
Recognized in Income on Derivatives |
| Three months ended June 30, 2022 | | | | | |
| Foreign currency forward exchange contracts | | $ | (5,237) | |
| Six months ended June 30, 2022 | | | | | |
| Foreign currency forward exchange contracts | | $ | (4,635) | |
| Three months ended June 30, 2021 | | | | | |
| Foreign currency forward exchange contracts | | $ | 264 | |
| Six months ended June 30, 2021 | | | | | |
| Foreign currency forward exchange contracts | | $ | (723) | |
The gains or losses recognized as the result of the settlement of cash flow hedge foreign currency forward contracts are recognized in net sales for hedges of inventory sales and in cost of productproducts sold for hedges of inventory purchases. For the three and ninesix months ended SeptemberJune 30, 2017,2022, net sales were increased by $399,000$30,000 and $165,000$57,000, while cost of productproducts sold was increased by $837,000 and decreased by $35,000$703,000 and $734,000 for a net pre-tax realized lossgains of $438,000$733,000 and gain of $200,000, $791,000,
respectively. For the three and ninesix months ended SeptemberJune 30, 2016,2021, net sales were increaseddecreased by $1,417,000$159,000 and $2,826,000$181,000 while cost of productproducts sold was increased by $619,000$386,000 and $1,576,000$838,000 for net realized pre-tax gainslosses of $798,000$545,000 and $1,250,000,$1,019,000, respectively.
A loss of $53,000$5,237,000 and gain of $64,000$4,635,000 was recognized in selling, general and administrative (SG&A) expenses for the
| | | | | | | | |
| Notes to Financial Statements | Derivatives | |
| | |
three and ninesix months ended SeptemberJune 30, 2017, respectively,2022 compared to a gain of $271,000$264,000 and a loss of $106,000$723,000 for the three and ninesix months ended SeptemberJune 30, 2016, respectively,2021 related to forward contracts not designated as hedging instruments thatinstruments. The forward contracts were entered into to offset gains/losses that were also recorded in SG&A expenses on intercompany trade receivables or payables. The gains/losses on the non-designated
hedging instruments were substantially offset by gains/losses on intercompany trade payables.
The company's derivative agreements provide the counterparties with a right of set off in the event of a default thatdefault. The right of set off would enable the counterparty to offset any net payment due by the counterparty to the company under the applicable agreement by any amount due by the company to the counterparty under any other agreement. For example, the terms of the agreement would permit a counterparty to a derivative contract that is also a lender under the company's Prior Credit Agreement and ABL Credit Agreement to reduce any derivative settlement amounts owed to the company under the derivative contract by any amounts owed to the counterparty by the company under the Prior Credit Agreement and ABL Credit Agreement. In addition, the agreements contain cross-default provisions that could trigger a default by the company under the agreement in the event of a default by the company under another agreement with the same counterparty. The company does not present any derivatives on a net basis in its financial statements, other than the conversion and bond hedge derivatives which are presented net on the Condensed Consolidated Statement of Comprehensive Income (Loss), and all derivative balances presented are subject to provisions that are similar to master netting agreements.
| | | | | | | | |
| Notes to Financial Statements | Fair Values | |
| | |
Notes to Financial Statements | Derivatives | |
| | |
Fair Values
During the first quarter of 2016, the company entered into privately negotiated convertible 2021 note hedges and 2021 warrants in connection with its sale of $150,000,000 in aggregate principal amount of the company’s 5.00% Convertible Senior Notes due 2021. The 2021 warrants, which increased paid in capital by $12,376,000, are clearly and closely related to the convertible 2021 notes and thus classified as equity. The 2021 note hedge asset and 2021 convertible debt conversion liability were recorded, based on initial fair values, as an asset of $27,975,000 and a liability of $34,480,000, respectively, and these fair values are updated quarterly with the offset to the income statement.
During the second quarter of 2017, the company entered into privately negotiated convertible 2022 note hedges and warrants in connection with its sale of $120,000,000 in aggregate principal amount of the company’s 4.50% Convertible Senior Notes due 2022. The 2022 warrants, which increased paid in capital by $14,100,000, are clearly and closely related to the convertible 2022 notes and thus classified as equity. The 2022 note hedge assets and 2022 convertible debt conversion liability were recorded, based on initial fair values, as an asset of $24,780,000 and a liability of $28,859,000, respectively, and these fair values are updated quarterly with the offset to the income statement. See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.
The fair values of the outstanding convertible note derivatives as of September 30, 2017 and their effect on the Statement of Comprehensive Income (Loss) were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | | | Gain (Loss) | | Gain (Loss) |
| | Fair Value | | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| Convertible 2021 debt conversion long-term liability | $ | (47,557 | ) | | $ | (15,330 | ) | | $ | 7,732 |
| | $ | (16,849 | ) | | $ | 13,579 |
|
| Convertible 2022 debt conversion long-term liability | (47,738 | ) | | (14,487 | ) | | — |
| | (18,879 | ) | | — |
|
| Convertible 2021 note hedge long-term asset | 41,619 |
| | 14,189 |
| | (6,540 | ) | | 16,148 |
| | (11,297 | ) |
| Convertible 2022 note hedge long-term asset | 41,660 |
| | 13,078 |
| | — |
| | 16,880 |
| | — |
|
| Net fair value and net gains (losses) on convertible debt derivatives | $ | (12,016 | ) | | $ | (2,550 | ) | | $ | 1,192 |
| | $ | (2,700 | ) | | $ | 2,282 |
|
The 2021 and 2022 convertible debt conversion liability amounts and the 2021 and 2022 note hedge asset amounts are included in Other Long-Term Obligations and Other Long-Term Assets, respectively, in the company's Consolidated Balance Sheets.
|
| | |
Notes to Financial Statements | Fair Values | |
| | |
Fair Values
Pursuant to ASC 820, the inputs used to derive the fair value of assets and liabilities are analyzed and assigned a level I, II or III priority, with level I being the highest and level III being the lowest in the hierarchy. Level I inputs are quoted prices in active markets for identical assets or liabilities.
Level II inputs are quoted prices for similar assets or liabilities in active markets:
quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level III inputs are based on valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The following table provides a summary of the company’s assets and liabilities that are measured on a recurring basis (in thousands):
|
| | | | | | | |
| | Basis for Fair Value Measurements at Reporting Date |
Quoted Prices in Active Markets for Identical Assets / (Liabilities) | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs |
| Level I | | Level II | | Level III |
| September 30, 2017 | | | | | |
| Forward exchange contracts—net | — | | $ | (627 | ) | | — |
| Convertible 2021 debt conversion liability | — | | (47,557 | ) | | — |
| Convertible 2021 note hedge asset | — | | 41,619 |
| | — |
| Convertible 2022 debt conversion liability | — | | (47,738 | ) | | — |
| Convertible 2022 note hedge asset | — | | 41,660 |
| | — |
| December 31, 2016 | | | | | |
| Forward exchange contracts—net | — | | $ | 971 |
| | — |
| Convertible 2021 debt conversion liability | — | | (30,708 | ) | | — |
| Convertible 2021 note hedge asset | — | | 25,471 |
| | — |
| | | | | | | | | | | | | | | | | | | |
| | | Basis for Fair Value Measurements at Reporting Date |
| | Quoted Prices in Active
Markets for Identical
Assets / (Liabilities) | | Significant Other
Observable
Inputs | | Significant Other
Unobservable
Inputs |
| | Level I | | Level II | | Level III |
| June 30, 2022 | | | | | | | |
| Forward exchange contracts—net | | | — | | $ | (2,942) | | | — |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| December 31, 2021 | | | | | | | |
| Forward exchange contracts—net | | | — | | $ | (1,552) | | | — |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The carrying values and fair values of the company’s financial instruments are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Cash and cash equivalents | $ | 155,964 |
| | $ | 155,964 |
| | $ | 124,234 |
| | $ | 124,234 |
|
| Other investments | 103 |
| | 103 |
| | 108 |
| | 108 |
|
| Installment receivables, net of reserves | 2,070 |
| | 2,070 |
| | 1,834 |
| | 1,834 |
|
| Long-term debt (including current maturities of long-term debt) * | (240,852 | ) | | (280,370 | ) | | (161,349 | ) | | (164,900 | ) |
| Convertible 2021 debt conversion liability in Other Long-Term Obligations | (47,557 | ) | | (47,557 | ) | | (30,708 | ) | | (30,708 | ) |
| Convertible 2021 note hedge in Other Long-Term Assets | 41,619 |
| | 41,619 |
| | 25,471 |
| | 25,471 |
|
| Convertible 2022 debt conversion liability in Other Long-Term Obligations | (47,738 | ) | | (47,738 | ) | | — |
| | — |
|
| Convertible 2022 note hedge in Other Long-Term Assets | 41,660 |
| | 41,660 |
| | — |
| | — |
|
| Forward contracts in Other Current Assets | 1,238 |
| | 1,238 |
| | 2,754 |
| | 2,754 |
|
| Forward contracts in Accrued Expenses | (1,865 | ) | | (1,865 | ) | | (1,783 | ) | | (1,783 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Cash and cash equivalents | $ | 43,909 | | | $ | 43,909 | | | $ | 83,745 | | | $ | 83,745 | |
| | | | | | | |
| | | | | | | |
| Forward contracts in Other current assets | 2,058 | | | 2,058 | | | 386 | | | 386 | |
| Forward contracts in Accrued expenses | (5,000) | | | (5,000) | | | (1,938) | | | (1,938) | |
| Total debt (including current maturities of long-term debt) * | (313,650) | | | (232,323) | | | (308,129) | | | (259,472) | |
| | | | | | | |
| 2022 Notes | — | | | — | | | (2,642) | | | (2,632) | |
| Series I 2024 Notes | (72,274) | | | (63,976) | | | (72,140) | | | (64,897) | |
| Series II 2024 Notes | (80,248) | | | (68,845) | | | (78,251) | | | (74,165) | |
| 2026 Notes | (119,745) | | | (58,119) | | | (119,036) | | | (81,718) | |
| Other | (41,383) | | | (41,383) | | | (36,060) | | | (36,060) | |
________
* The company's long-termtotal debt is shown net of discount and fees associated with the Convertible Senior Notesconvertible senior notes due 2021in 2022, 2024 and 20222026 on the company's condensed consolidated balance sheet.sheets. Accordingly, the fair values of the Convertible Senior Notesconvertible senior notes due 2021in 2022, 2024 and 20222026 are included in the long-term debt presented in this table isare also shown net of the discountfees. Total debt amounts exclude operating and fees.finance lease obligations.
| | | | | | | | |
| Notes to Financial Statements | Fair Values | |
| | |
Notes to Financial Statements | Fair Values | |
| | |
The company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:
Cash, cash equivalents: The carrying value reported in the balance sheet for cash, cash equivalents equals its fair value.
Other investments: The company has made other investments in a limited partnership, which is accounted for using the cost method, adjusted for any estimated declines in value. These investments were acquired in private placements and there is no quoted market price or stated rate of return. The company does not have the ability to easily sell the investment. The company completes an evaluation of the residual value related to such investments in the fourth quarter each year.
Installment receivables: The carrying value reported in the balance sheet for installment receivables approximates its fair value. The interest rates associated with these receivables have not varied significantly since inception. Management believes that after consideration of the credit risk, the net book value of the installment receivables approximates market value.
Long-term debt: Fair value for the company’s convertible debt is based on quoted market-based estimates as of the end of the period, while the revolving credit facility fair value is based upon an estimate of the market for similar borrowing arrangements. The fair values are deemed to be categorized as Level 2 in the fair value hierarchy.1.
Convertible debt derivatives: The fair values for the convertible debt conversion liability and note hedge derivatives are based on valuation models in which all the significant inputs are observable in active markets.
Forward contracts: Contracts: The company operates internationally, and as a result, is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany loans and third-party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized and accounted for as hedging instruments. The forward contracts are used to hedge the following currencies: AUD, CAD, CHF, CNY, DKK, EUR, GBP, MXP,MXN, NOK, NZD, SEK, THB, and USD. The company does not use derivative financial instruments for speculative purposes. Fair values for the company’s foreign exchange forward contracts are based on quoted market prices for contracts with similar maturities. The company’sfair values are deemed to be categorized as Level 2. The company's forward contracts are included in Other Current Assets or Accrued Expenses in the Consolidated Balance Sheets.condensed consolidated balance sheets.
Total debt: Fair value for the company’s convertible debt is based on quoted market-based estimates as of the end of the period, while the revolving credit facility fair value is based upon an estimate of the market for similar borrowing arrangements. The fair values are deemed to be categorized as Level 2 in the fair value hierarchy. Other total debt is primarily attributable to credit facilities borrowings where the carrying value reported in the balance approximates its fair value.
| | | | | | | | |
| Notes to Financial Statements | Business Segments | |
| | |
Notes to Financial Statements | Business Segments | |
| | |
Business Segments
The company operates in fourtwo primary business segments: North America/Home Medical Equipment (NA/HME), Institutional Products Group (IPG),America and Europe and Asia/Pacific. The NA/HME segment sellswith each of threeselling the company's primary product lines,categories, which includes:include: lifestyle, mobility and seating and respiratory therapy products. IPG sells long-term care medical equipment, health care furnishingsSales in Asia Pacific are reported in All Other and accessory products. Europe and Asia/Pacific sell product linesinclude products similar to NA/HMEthose sold in North America and IPG.Europe. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company’scompany's condensed consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element.
Segment performance is measured and resources are allocated based on a number of factors, with the primary profitincome or loss measure being segment operating profitincome (loss). Segment operating profitincome (loss) represents net sales less cost of products sold less selling general and administrative expenses. Segment operating profitincome (loss)
excludes unallocated corporate general and administrative expenses not allocated to the segments and intersegment sales and profit eliminations, which are included in All Other. In addition, segment operating profitincome (loss) further excludes charges related to restructuring activities, asset write-downsimpairment and gain on sale of business (as applicable). The previous performance measure was earnings before income taxes. With the issuance of convertible debt during 2016, this performance measure has not been utilized by the Chief Operating Decision Maker (CODM) as the interest expense incurred by the company is related to the company’s financing decision to issue convertible debt as compared to the operating decisions resulting from allocation of resources and segment operating income performance. In addition, in 2016, the company included an operating income line on the consolidated statement of comprehensive income (loss) to emphasize the CODM’s emphasis on operating income (loss).
As noted, thisThis performance measure, segment operating income (loss), is used by the CODMChief Operating Decision Maker (CODM) for purposes of making decisions about allocating resources to a segment and assessing its performance. In addition, this metric is reviewed by the company’scompany's Board of Directors regarding segment performance and is a key metric in the performance management assessment of the company's employees.
| | | | | | | | |
| Notes to Financial Statements | Business Segments | |
| | |
Notes to Financial Statements | Business Segments | |
| | |
The information by segment is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues from external customers | | | | | | | |
Europe (1) | $ | 143,281 |
| | $ | 141,738 |
| | $ | 391,274 |
| | $ | 399,504 |
|
NA/HME (1) | 79,516 |
| | 99,323 |
| | 241,467 |
| | 317,695 |
|
| IPG | 13,975 |
| | 15,343 |
| | 45,668 |
| | 49,702 |
|
| Asia/Pacific | 14,134 |
| | 11,741 |
| | 37,737 |
| | 33,833 |
|
| Consolidated | $ | 250,906 |
| | $ | 268,145 |
| | $ | 716,146 |
| | $ | 800,734 |
|
| Intersegment revenues | | | | | | | |
| Europe | $ | 4,013 |
| | $ | 3,240 |
| | $ | 11,426 |
| | $ | 10,292 |
|
| NA/HME | 19,334 |
| | 24,339 |
| | 62,479 |
| | 77,248 |
|
| IPG | 314 |
| | 998 |
| | 2,057 |
| | 2,201 |
|
| Asia/Pacific | 3,405 |
| | 4,663 |
| | 11,161 |
| | 14,802 |
|
| Consolidated | $ | 27,066 |
| | $ | 33,240 |
| | $ | 87,123 |
| | $ | 104,543 |
|
| Restructuring charges (reversals) before income taxes | | | | | | | |
| Europe | $ | 686 |
| | $ | — |
| | $ | 1,890 |
| | $ | — |
|
| NA/HME | (170 | ) | | 490 |
| | 6,000 |
| | 1,213 |
|
| Asia/Pacific | 187 |
| | 18 |
| | 1,083 |
| | 86 |
|
| Consolidated | $ | 703 |
| | $ | 508 |
| | $ | 8,973 |
| | $ | 1,299 |
|
| Operating income (loss) | | | | | | | |
Europe (1) | $ | 11,987 |
| | $ | 11,638 |
| | $ | 24,164 |
| | $ | 24,550 |
|
NA/HME (1) | (12,446 | ) | | (11,007 | ) | | (34,267 | ) | | (24,065 | ) |
| IPG | 1,202 |
| | 1,497 |
| | 4,572 |
| | 4,453 |
|
| Asia/Pacific | 387 |
| | (559 | ) | | (161 | ) | | (1,599 | ) |
All Other (2) | (6,311 | ) | | (5,832 | ) | | (17,556 | ) | | (17,703 | ) |
| Charge expense related to restructuring activities | (703 | ) | | (508 | ) | | (8,973 | ) | | (1,299 | ) |
| Gain on sale of business | — |
| | 7,386 |
| | — |
| | 7,386 |
|
| Consolidated operating income (loss) | (5,884 | ) | | 2,615 |
| | (32,221 | ) | | (8,277 | ) |
| Net gain (loss) on convertible derivatives | (2,550 | ) | | 1,192 |
| | (2,700 | ) | | 2,282 |
|
| Net Interest expense | (6,707 | ) | | (4,402 | ) | | (15,733 | ) | | (11,021 | ) |
| Loss before income taxes | $ | (15,141 | ) | | $ | (595 | ) | | $ | (50,654 | ) | | $ | (17,016 | ) |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues from external customers | | | | | | | |
| Europe | $ | 112,768 | | | $ | 121,296 | | | $ | 230,847 | | | $ | 234,071 | |
| North America | 68,718 | | | 96,247 | | | 144,037 | | | 172,221 | |
| | | | | | | |
| All Other (Asia Pacific) | 7,531 | | | 8,321 | | | 15,121 | | | 15,774 | |
| Consolidated | $ | 189,017 | | | $ | 225,864 | | | $ | 390,005 | | | $ | 422,066 | |
| Intersegment revenues | | | | | | | |
| Europe | $ | 4,129 | | | $ | 6,229 | | | $ | 8,564 | | | $ | 11,537 | |
| North America | 7,440 | | | 16,664 | | | 18,536 | | | 30,859 | |
| | | | | | | |
| | | | | | | |
| Consolidated | $ | 11,569 | | | $ | 22,893 | | | $ | 27,100 | | | $ | 42,396 | |
| Restructuring charges before income taxes | | | | | | | |
| Europe | $ | 2,613 | | | $ | 516 | | | $ | 4,732 | | | $ | 1,246 | |
| North America | 1,540 | | | 31 | | | 3,202 | | | 853 | |
| | | | | | | |
| | | | | | | |
| All Other | — | | | — | | | 9 | | | — | |
| Consolidated | $ | 4,153 | | | $ | 547 | | | $ | 7,943 | | | $ | 2,099 | |
| Operating income (loss) | | | | | | | |
| Europe | $ | 3,489 | | | $ | 4,992 | | | $ | 6,714 | | | $ | 8,824 | |
| North America | (6,264) | | | 1,590 | | | (14,600) | | | (785) | |
| All Other | (7,866) | | | (9,529) | | | (15,590) | | | (15,169) | |
| Charges related to restructuring activities | (4,153) | | | (547) | | | (7,943) | | | (2,099) | |
| | | | | | | |
| | | | | | | |
| Consolidated operating loss | (14,794) | | | (3,494) | | | (31,419) | | | (9,229) | |
| Loss on debt extinguishment including debt finance charges and associated fees | — | | | — | | | — | | | (709) | |
| Net interest expense | (6,229) | | | (6,084) | | | (12,481) | | | (11,814) | |
| Loss before income taxes | $ | (21,023) | | | $ | (9,578) | | | $ | (43,900) | | | $ | (21,752) | |
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(1)
Notes to Financial Statements | During the first quarter of 2017, a subsidiary, formerly included in the Europe segment, transferred to the NA/HME segment as it became managed by the NA/HME segment manager effective January 1, 2017. The results for 2016 have been changed accordingly and for the three and nine months ended September 30, 2016, the change increased revenues from external customers by $1,300,000 and $3,738,000, respectively, and operating loss by $15,000 and $165,000, respectively, for NA/HME with an offsetting impact for Europe.Business Segments |
| |
(2)
| Consists of un-allocated corporate SG&A costs and intercompany profits, which do not meet the quantitative criteria for determining reportable segments, and gain or loss on convertible debt derivatives. |
Net sales by product, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Europe | | | | | | | |
| Lifestyle | $ | 54,997 | | | $ | 61,647 | | | $ | 116,061 | | | $ | 119,945 | |
| Mobility and Seating | 47,830 | | | 51,903 | | | 95,232 | | | 96,125 | |
| Respiratory Therapy | 4,922 | | | 3,350 | | | 9,585 | | | 9,388 | |
| Other(1) | 5,019 | | | 4,396 | | | 9,969 | | | 8,613 | |
| $ | 112,768 | | | $ | 121,296 | | | $ | 230,847 | | | $ | 234,071 | |
| North America | | | | | | | |
| Lifestyle | $ | 33,836 | | | $ | 40,100 | | | $ | 68,137 | | | $ | 76,285 | |
| Mobility and Seating | 26,001 | | | 31,096 | | | 51,423 | | | 53,829 | |
| Respiratory Therapy | 8,688 | | | 24,789 | | | 24,148 | | | 41,573 | |
| | | | | | | |
| Other(1) | 193 | | | 262 | | | 329 | | | 534 | |
| $ | 68,718 | | | $ | 96,247 | | | $ | 144,037 | | | $ | 172,221 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| All Other (Asia Pacific) | | | | | | | |
| Mobility and Seating | $ | 2,857 | | | $ | 2,850 | | | $ | 5,683 | | | $ | 6,068 | |
| Lifestyle | 2,988 | | | 2,982 | | | 5,678 | | | 5,506 | |
| | | | | | | |
| Respiratory Therapy | 352 | | | 1,050 | | | 1,131 | | | 1,332 | |
| Other(1) | 1,334 | | | 1,439 | | | 2,629 | | | 2,868 | |
| $ | 7,531 | | | $ | 8,321 | | | $ | 15,121 | | | $ | 15,774 | |
| | | | | | | |
| Total Consolidated | $ | 189,017 | | | $ | 225,864 | | | $ | 390,005 | | | $ | 422,066 | |
________________________
(1)Includes various services, including repair services, equipment rentals and external contracting.
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| Notes to Financial Statements | Contingencies | |
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Contingencies
General
In the ordinary course of its business, the company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of the product liability lawsuits that the company faces in the United States have been referred to the company's captive insurance company and/or excess insurance carriers while all non-U.S. lawsuits have been referred to the company's commercial insurance carriers. All such lawsuits are generally contested vigorously. The coverage territory of the company's insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures.
As a medical device manufacturer, the company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, invoicing, documenting, developing, testing, manufacturing, labeling, promoting, distributing and other practices of health care suppliers and medical device manufacturers are all subject to government scrutiny. Most of the company's facilities are subject to inspection at any time by the FDA or similar medical device regulatory agencies in other jurisdictions. Violations of law or regulations can result in administrative, civil and criminal penalties and sanctions, which could have a material adverse effect on the company's business.
Medical Device Regulatory Matters
The FDA in the United States and comparable medical device regulatory authorities in other jurisdictions regulate virtually all aspects of the marketing, invoicing, documenting, development, testing, manufacturing, labeling, promotion, distribution and other practices regarding medical devices. The company and its products are subject to the laws and regulations of the FDA and other regulatory bodies in the various jurisdictions where the company's products are manufactured or sold. The company's failure to comply with the regulatory requirements of the FDA and other applicable medical device regulatory requirements can subject the company to administrative or judicially imposed sanctions or
enforcement actions. These sanctions include injunctions, consent decrees, warning letters, civil penalties, criminal penalties, product
seizure or detention, product recalls and total or partial suspension of production.
In December 2012, the company became subject to a consent decree of injunction filed by the FDA with respect to the company's Corporate facility and its Taylor Street manufacturing facility in Elyria, Ohio. The consent decree initially limited the company's (i) manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility ("Taylor Street products") , except in verified cases of medical necessity, (ii) design activities related to wheelchairs and power beds that take place at the impacted Elyria Ohio facilities and (iii) replacement, service and repair of products already in use from the Taylor Street manufacturing facility. Under the terms of the consent decree, in order to resume full operations, at the impacted facilities, the company had to successfully complete independent, third-party expert certification audits at the impacted Elyria facilities, comprised ofcomprising three distinct certification reports separately submitted to, and subject to acceptance by, the FDA. The last of these reports was accepted by the FDA during the second quarter of 2017, after which the company submittedFDA; submit its own report to the FDA,FDA; and successfully complete a reinspection by the FDA initiated a reinspection of the company’scompany's Corporate and Taylor Street facilities. At the conclusion of the inspection, the FDA issued its inspectional observations on Form 483, and the company timely filed its response.
On July 24, 2017, following its June 2017 reinspection of the Corporate and Taylor Street facilities, the FDA notified the company that it iswas in substantial compliance with the FDA's Quality System Regulation ("QSR")FDA Act, FDA regulations and the terms of the consent decree and, that the company iswas permitted to resume full operations at those facilities including the resumption of unrestricted sales of products made in those facilities.
The consent decree will continue in effect for at least five years from July 24, 2017, during which time the company's Corporate and Taylor Street facilities.
facilities must complete two semi-annual audits in the first year and then four annual audits in the next four years performed by an independent company-retained audit firm. The consent decree requires the company to undergo five years of audits by a third-party expert auditor selected by the company toaudit firm will determine whether the facilities areremain in continuous compliance with FDA's QSRthe Federal Food, Drug and Cosmetic Act ("FDA Act"), FDA regulations and the terms of the consent decree. The third-party expert willdecree and issue post audit reports contemporaneously to the CorporateFDA, and Taylor Street facilities’ activities every six months during the first year following the July 25, 2017 resumption of full operations and then every 12 months for the next four years thereafter. The FDA has the authority to inspect these facilities and any other FDA registered facility, at any time.
The FDA has continued to actively inspect the company’scompany's facilities, other than through the processes established under the consent decree. Recent inspections for which follow-up remains ongoing are summarized in the following paragraphs. The FDA has informed the company of further upcoming inspections to its facilities, and the company believes that additional inspections beyond those for which it has been notified will likely occur in the near future. Accordingly, the company expects that the FDA will, from time to time, inspect substantially all of the company's domestic and foreign FDA-registered facilities.
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| Notes to Financial Statements | Contingencies | |
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Notes to Financial Statements | Contingencies | |
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company's domestic and foreign FDA-registered operational facilities.
In November 2017, the2021, FDA inspectedconducted an inspection of the company’s Top End facility in Pinellas Park, FloridaCorporate and Taylor Street facilities from May 25 through June 24, 2021.At the close of the inspection, six FDA Form 483 observations were issued, itsand the company timely responded to FDA, has diligently taken actions to address FDA’s inspectional observations, and has provided FDA monthly updates on Form 483. The company intendsthe corrective actions taken to submit its responses to the agency in a timely manner.
In September 2017, Alber GmbH, a wholly owned subsidiary ofaddress these observations.On November 18, 2021, the company received a warning letter from the FDA. The warning letter requires completionFDA concerning certain of corrective actions to address the inspectional observations in the June 2021 FDA Form 483 observations following an inspection of Alber’s facility in Albstadt, Germany in May 2017. As a consequence ofrelated to the warning letter, Alber Twion Power Assist devices will not be imported intocomplaint handling process, the United States until all findings are corrected to FDA’s satisfaction. Althoughcorrective and preventive action (“CAPA”) process, and medical device reporting (“MDR”) associated with oxygen concentrators (the “Warning Letter”).On November 16, 2021, the company does not expect this action to havereceived a significant impact on its financial results, it takes FDA’s observations very seriously and is working diligently to address these observations and respond to FDA’s warning letter in a timely manner. The Albstadt facility was previously inspected by the FDA in August 2014.
In October 2014, the FDA inspected the company’s facility in Sanford, Florida and issued its inspectional observations on Form 483, and the company timely filed its response. The Sanford facility is the subject of a warningconsent decree non-compliance letter from the FDA issuedconcerning the same complaint and CAPA handling matters as in the Warning Letter observations but associated with the Taylor Street products (this letter, together with the Warning Letter, the “FDA Letters”). The company timely responded to the FDA Letters, has diligently taken actions to address FDA’s concerns, and has provided FDA with periodic updates on the corrective actions taken to address the matters in the FDA Letters. The company in December 2010 relatedremains committed to quality systems processes and procedures andresolving the FDA’s concerns; however, it is not possible to predict the outcome or timing of a resolution at this time. There can be no assurance that the FDA will be satisfied with the company’s responses to the FDA Letters, nor any assurance as to the timeframe that may be required for the company continues to work on addressingadequately address the FDA’s citations.concerns or whether the matters in the FDA Letters will result in an extension in the duration of the consent decree. As of the date of filing of the company’s Quarterly Report on Form 10-Q, there has been no impact on the Company’s ability to produce and market its products as a result of the FDA Letters.
Under the consent decree, the FDA has the authority to order the company to take a wide variety of actions if the FDA finds that the company is not in compliance with the consent decree, FDA Act or FDA regulations, including requiring the company to cease all operations relating to Taylor Street products. The FDA also can order the company to undertake a partial cessation of operations or a recall, issue a safety alert, public health advisory, or press release, or to take any other corrective action the FDA deems necessary with respect to Taylor Street products.
The FDA also has authority under the consent decree to assess liquidated damages of $15,000 per violation per day for any violations of the consent decree, FDA regulations or the FDA Act. The FDA also may assess liquidated damages for shipments of adulterated or misbranded devices in the amount of twice the sale price of any such adulterated or misbranded device. The liquidated damages, if assessed, are limited to a total of $7,000,000 for each calendar year. The authority to
assess liquidated damages is in addition to any other remedies otherwise available to the FDA, including civil money penalties.
The results of regulatory claims, proceedings, investigations, or litigation are difficult to predict. An unfavorable resolution or outcome of the FDA Letters, any other FDA warning letters or inspectional observations, or other FDA enforcement related to company facilities, could materially and adversely affect the company's business, financial condition, and results of operations.
The limitations previously imposed by the FDA consent decree negatively affected net sales in the NA/HMENorth America segment and, to a certain extent, the Asia/Asia Pacific segmentregion beginning in 2012. The limitations led to delays in new product introductions. Further, uncertainty regarding how long the limitations would be in effect limited the company’scompany's ability to renegotiate and bid on certain customer contracts and otherwise led to a decline in customer orders.
While the FDA did notifyAlthough the company on July 24, 2017 that it washas been permitted to resume full operations at the Corporate and Taylor Street facilities, the negative effect of the consent decree on customer orders and net sales in the NA/HMENorth America segment and Asia/Asia Pacific segmentsregion has been considerable, and it is uncertain as to whether, or how quickly, the company will be able to rebuild net sales to more typical historical levels, irrespective of market conditions. Accordingly, when compared to the company's 2010historic results, the previous limitations in the consent decree had, and
likely may continue to have, a material adverse effect on the company's business, financial condition and results of operations.
Separately, net sales in the NA/HME segment have likely been impacted by uncertainty on the part of the company's customers as they coped with prepayment reviews and post-payment audits by the Centers for Medicare and Medicaid Services ("CMS") and the impact of the National Competitive Bidding ("NCB") process. In addition, net sales in the NA/HME segment have and may continue to decline as a result of the company's strategic focus away from lower margin, less differentiated products as the company becomes more focused on its clinically complex products.
As described above, because the previous limitations on production imposed by the FDA consent decree were not permanent in nature, and partial production was allowed, the company does not anticipate any major repair, replacement or scrapping of its fixed assets at the Taylor Street manufacturing facility. Based on the company's expectations at the time of filing of this Quarterly Report on Form 10-Q with respect to the utilization of raw material and with respect to expected future cash flows from production at the Taylor Street manufacturing facility, the company concluded that there was no impairment in the value of the fixed assets related to the Taylor Street manufacturing facility at September 30, 2017.
The majority of the production from the Taylor Street facility is "made to order" customized wheelchairs for customers and, as a result, there was not a significant amount of finished goods inventory on hand at September 30, 2017, and the inventory is expected to be fully utilized. Accordingly, the company concluded that there was not an impairment of the work in process and finished goods at the Taylor Street facility at September 30, 2017. Further, based on its analysis of the raw material inventory at the Taylor Street facility and the company's receipt of FDA's notification that the company can resume full operations at the affected facilities, the company concluded that the value of the inventory was not excessive nor impaired at September 30, 2017.Warranty Matters
The company's warranty reserves are subject to adjustment in future periods based on historical analysis of warranty claims and as new developments occur that may change the company's estimates related to specific product recalls. SeeRefer to Current Liabilities in the Notesnotes to the Consolidated Financial Statementscondensed consolidated financial statements for the total provision amounts and a reconciliation of the changes in the warranty accrual.
Any of the above contingencies could have an adverse impact on the company's financial condition or results of operations.
For additional information regarding the consent decree, other regulatory matters, and risks and trends that may impact
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Notes to Financial Statements | Contingencies | |
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the company’s financial condition or results of operations, please see the following sections of company's Annual Report on Form 10-K for the year ended December 31, 2016: Item 1. Business - Government Regulation and Item 1A. Risk Factors (as updated by the risk factors included in Item 8.01 and Exhibit 99.2 of the Current Report on Form 8-K filed by the company on June 7, 2017); Item 3. Legal Proceedings; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook and - Liquidity and Capital Resources.
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Notes to Financial Statements | Market Risk and Controls | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the quarter ended September 30, 2017, there were no material changes to market risk information provided in the company's Annual Report on Form 10-K for the year ended December 31, 2016. Please refer to2021: Item 7A1. Business - Government Regulation and Item 1A. Risk Factors; Item 3. Legal Proceedings; and Item 7. Management's
| | | | | | | | |
| Notes to Financial Statements | Contingencies | |
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Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
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| Notes to Financial Statements | Market Risk and Controls | |
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Item 3. Quantitative and Qualitative Disclosures About Market RiskRisk.
The company is at times exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. Based on June 30, 2022 debt levels, a 1% change in interest rates would have no impact on annual 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-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-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's financial condition or results of company's Annual Reportoperations.
The company is party to the Prior Credit Agreement which was originally entered into on Form 10-KJanuary 16, 2015 and matures in January 2026, as extended by an amendment to the ABL Credit Agreement which became effective on July 26, 2022. Accordingly, while the company is exposed to increases in interest rates, its exposure to the volatility of the current market environment is currently limited until the ABL Credit Agreement expires. The ABL Credit Agreement and Highbridge Loan Agreement contain 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 period ending December 31, 2016.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.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2017,2022, an evaluation was performed, under the supervision and with the participation of the company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company’s disclosure controls and procedures were effective as of SeptemberJune 30, 2017,2022, 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’s rules and forms and (2) accumulated and communicated to the company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the company’s internal control over financial reporting that occurred during the company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
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| Part II | Other Information | |
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Part II | Other Information | |
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of its business, the company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of the product liability lawsuits that the company faces in the United States have been referred to the company's captive insurance company and/or excess insurance carriers while all non-U.S. lawsuits have been referred to the company's commercial insurance carriers. All such lawsuits are generally contested vigorously. The coverage territory of the company's insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. Management does not believe that the outcome of any of these actions will have a material adverse effect upon the company's business or financial condition.
In December 2012, the company reached agreement with the FDA on the terms ofbecame subject to a consent decree of injunction filed by the FDA in the U.S. District Court for the Northern District of Ohio with respect to the company's Corporate facility and its Taylor Street wheelchair manufacturing facility in Elyria, Ohio. A complaint and consent decree were filed in the U.S. District Court for the Northern District of Ohio, and on December 21, 2012, the Court approved the consent decree and it became effective. On July 24, 2017, following its reinspection of the Corporate and Taylor Street facilities, FDA notified the company received notice from FDA that the company successfully satisfied FDA’s requirements under the consent decree, that the company isit was in substantial compliance with the QSRFDA Act, FDA regulations and the terms of the consent decree and that the company iswas permitted to resume full operations at itsthose facilities, including the resumption of unrestricted sales of products made in those facilities.
The consent decree will continue in effect for at least five years from July 24, 2017, during which time the company's Corporate and Taylor Street manufacturing facility in Elyria, Ohio. The company is permittedfacilities must complete to produce and sell all products madetwo semi-annual audits in the Taylor Street facility withoutfirst year and then four annual audits in the previous restrictions which had beennext four years performed by a company-retained expert firm. The expert audit firm will determine whether the facilities remain in effect since December 21, 2012, undercontinuous compliance with the FDA Act, regulations and the terms of the consent decree.
Under the consent decree, theThe FDA has the authority to inspect the Corporate and Taylor Street facilities, and any other FDA registered facility, at any time. The FDA also has the authority to order the company to take a wide variety of actions if the FDA finds that the company is not in compliance with the consent decree, FDA Act or FDA regulations, including requiring the company to cease all operations relating to Taylor Street products. The FDA also can order the company to undertake a partial cessation of operations or a recall, issue a safety alert, public health advisory, or press release, or to take any other
corrective action the FDA deems necessary with respect to Taylor Street products.
The FDA also has authority under the consent decree to assess liquidated damages of $15,000 per violation per day for any violations of the consent decree, FDA regulationsAct or the federal Food, Drug, and Cosmetic Act.FDA regulations. The FDA also may assess liquidated damages for shipments of adulterated or misbranded devices except as permitted by the consent decree, in the amount of twice the sale price of any such adulterated or misbranded device. The liquidated damages, if assessed, are capped atlimited to a total of $7,000,000 for each calendar year. The authority to assess liquidated damages areis in addition to any other remedies otherwise available to the FDA, including civil money penalties.
In November 2021, the company received a Warning Letter from the FDA concerning certain of the June 2021 FDA Form 483 inspectional observations related to the complaint handling, CAPA and MDR processes, associated with oxygen concentrators. The company also received a consent decree non-compliance letter from the FDA concerning the same complaint and CAPA handling matters as in the Warning Letter but associated with the Taylor Street products. The company timely responded to the FDA Letters, has diligently taken actions to address FDA’s concerns, and has provided FDA with periodic updates on the corrective actions taken to address the matters in the FDA Letters. The company remains committed to resolving the FDA’s concerns; however, it is not possible to predict the outcome or timing of a resolution at this time. There can be no assurance that the FDA will be satisfied with the company’s responses to the FDA Letters, nor any assurance as to the timeframe that may be required for the company to adequately address the FDA’s concerns or whether the matters in the FDA Letters will result in an extension in the duration of the consent decree.
For additional information regarding the consent decree, please see the "Contingencies" note to the financial statements contained in ItemPart I of this Quarterly Report on Form 10-Q, the risk factors referred to in Part I, Item 1A of this Quarterly Report on Form 10-Q, and the following sections of the company's Annual Report on Form 10-K for the period ending December 31, 2016:2021 Item 1. Business - Government Regulation; Item 1A. Risk Factors (as updated by the risk factors included in Item 8.01 and Exhibit 99.2 of the Current Report on Form 8-K filed by the company on June 7, 2017);Factors; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook and - Liquidity and Capital Resources.
Item 1A. Risk Factors
In addition to the other informationExcept as set forth in this report, you should carefully considerbelow, there have been no material changes to the risk factors disclosed in Part 1, Item 1A, of the company’s Annual Report on Form 10-K for the fiscal periodyear ended December 31, 2016, as updated2021.
Restrictive covenants under the company’s new credit agreements and supersededthe indentures related to the company’s secured convertible notes may limit the manner in which the company operates.
The Highbridge Loan Agreement, the ABL Credit Agreement and the Indentures related to the company’s secured convertible notes due 2026 contain, and any future indebtedness the company incurs may contain, various negative covenants that restrict, among other things, the company’s indebtedness, liens, fundamental changes, asset sales, investments and other matters. In addition, the Highbridge Loan Agreement has a minimum liquidity requirement. The company’s obligations under the Highbridge Loan Agreement, the ABL Credit Agreement and the Indentures, collectively, are secured by the risk factors disclosed in Item 8.01substantially all of the company's Current Reportcompany’s assets. As a result, the company is limited in the manner in which it conducts its business and the company may be unable to engage in favorable business activities.
Servicing the company’s debt requires a significant amount of cash, and the company may not have sufficient cash flow from its business to pay its substantial debt.
The company’s ability to make scheduled payments of the principal of, to pay interest on Form 8-K filedor to refinance its indebtedness depends on June 7, 2017its future performance, which is subject to economic, financial, competitive and Exhibit 99.2 attached thereto.other factors beyond its control, including uncertainties related to the company’s supply chain. Pandemic-related supply chain challenges, as well as supplier delivery holds resulting from past due payables, have had, and may continue to have, the effect of interrupting production and negatively impacting the company’s ability to reduce its backlog and generate sales and cash flow. The company’s business may not generate cash flow from operations in the future sufficient to service its debt and make necessary capital expenditures. If the company is unable to generate such cash flow, it may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. The company’s ability to refinance its indebtedness will depend on the capital markets and its financial condition at such time. The company may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the company’s debt obligations.
Despite the company’s current debt levels, subject to certain conditions and limitations, it may still incur substantially more debt or take other actions which would intensify the risks discussed above.
Despite the company’s current consolidated debt levels, subject to certain conditions and limitations in the Highbridge Loan Agreement, the ABL Credit Agreement and the Indentures related to the company’s secured convertible notes, the company may be able to incur substantial additional debt in the future, some of which may be secured debt. If new debt is added to the company’s current debt levels, the related risks that the company faces could intensify.
| | | | | | | | |
| Part II | Other Information | |
| | |
Part II | Other Information | |
| | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to repurchases of common sharesCommon Shares made by the company during the three months ended SeptemberJune 30, 2017.2022.
|
| | | | | | | | | | | |
Period | Total Number
of Shares
Purchased (1)
| | Avg. Price Paid
Per Share $
| | Total Number
of Shares Purchased
as Part of Publicly
Announced Plans
or Programs
| | Maximum Number
of Shares That May
Yet Be Purchased Under the Plans or
Programs (2)
|
7/1/2017 | - | 7/31/2017 | — | | $ | — |
| | — | | 2,453,978 |
8/1/2017 | - | 8/31/2017 | — | | — |
| | — | | 2,453,978 |
9/1/2017 | - | 9/30/2017 | — | | — |
| | — | | 2,453,978 |
Total | | | — | | $ | — |
| | — | | 2,453,978 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number
of Shares
Purchased (1) | | Avg. Price Paid
Per Share $ | | Total Number
of Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum Number
of Shares That May
Yet Be Purchased Under the Plans or
Programs (2) |
| 4/1/2022 | - | 4/30/2022 | 137,940 | | $ | 1.09 | | | — | | 2,453,978 |
| 5/1/2022 | - | 5/31/2022 | 155 | | 0.94 | | | — | | 2,453,978 |
| 6/1/2022 | - | 6/30/2022 | — | | — | | | — | | 2,453,978 |
| Total | | | 138,095 | | $ | 1.09 | | | — | | 2,453,978 |
________
| |
(1) | No shares were repurchased between July 1, 2017 and September 30, 2017 or surrendered to the company by employees for minimum tax withholding purposes in conjunction with the vesting of restricted shares awarded to the employees or exercise of non-qualified options under the company's equity compensation plans. |
(1)All 138,095 were repurchased between April 1, 2022 and June 30, 2022 or were surrendered to the company by employees for minimum tax withholding purposes in conjunction with the vesting of restricted shares awarded to the employees or exercise of non-qualified options under the company's equity compensation plans.
| |
(2) | In 2001, the Board of Directors authorized the company to purchase up to 2,000,000 Common Shares, excluding any shares acquired from employees or directors as a result of the exercise of options or vesting of restricted shares pursuant to the company’s performance plans. The Board of Directors reaffirmed its authorization of this repurchase program on November 5, 2010, and on August 17, 2011 authorized an additional 2,046,500 shares for repurchase under the plan. To date, the company has purchased 1,592,522 shares under this program, with authorization remaining to purchase 2,453,978 shares. The company purchased no shares pursuant to this Board authorized program during the quarter ended September 30, 2017. |
(2)In 2001, the Board of Directors authorized the company to purchase up to 2,000,000 Common Shares, excluding any shares acquired from employees or directors as a result of the exercise of options or vesting of restricted shares pursuant to the company’s performance plans. The Board of Directors reaffirmed its authorization of this repurchase program on November 5, 2010, and on August 17, 2011 authorized an additional 2,046,500 shares for repurchase under the plan. To date, the company has purchased 1,592,522 shares under this program, with authorization remaining to purchase 2,453,978 shares. The company purchased no shares pursuant to this Board authorized program during the quarter ended June 30, 2022.
Under the terms of the company's Prior Credit Agreement and ABL Credit Agreement, repurchases of shares by the company generally are not permitted except in certain limited circumstances in connection with the vesting or exercise of employee equity compensation awards.
| | | | | | | | |
| Part II | Other Information | |
| | |
Part II | Other Information | |
| | |
Item 6. Exhibits
| | | | | |
Exhibit
No. | |
| |
Exhibit
| |
| Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (filed herewith). |
| Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (filed herewith). |
| 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 (furnished herewith). |
| 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 (furnished herewith). |
| 101.INS* | XBRL instance document |
| 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 |
| 104 | Cover page of the Quarterly Report on Form 10-Q formatted in Inline XBRL. |
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | | |
| | | | INVACARE CORPORATION |
| | INVACARE CORPORATION | |
| Date: | August 8, 2022 | By: | /s/ Kathleen P. Leneghan |
Date: | November 7, 2017 | By: | /s/ Robert K. GudbransonName: Kathleen P. Leneghan |
| | | Name: Robert K. Gudbranson |
| | | Title: Senior Vice President and Chief Financial Officer |
| | | (As Principal Financial and Accounting Officer and on behalf of the registrant) |
