UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[☒] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20202021
OR
[☐] 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 | 95-2680965 | |
| (State or other jurisdiction of
incorporation or organization) | (IRS Employer Identification No.) | |
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| One Invacare Way, | | 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 27, 2020,August 2, 2021, the registrant had 34,411,68835,004,368 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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About Invacare Corporation
Invacare Corporation (NYSE: IVC) ("Invacare" or the "company") is a leading manufacturer and distributor in its markets for medical equipment used in non-acute care settings. At its core, the company designs, manufactures and distributes medical devices that help people to move, breathe, rest and perform essential hygiene. The company provides clinically complex medical device solutions for congenital (e.g., cerebral palsy, muscular dystrophy, spina bifida), acquired (e.g., stroke, spinal cord injury, traumatic brain injury, post-acute recovery, pressure ulcers) and degenerative (e.g., ALS, multiple sclerosis, chronic obstructive pulmonary disease (COPD), age related, bariatric) conditions. The company's products are important parts of care for people with a wide range of challenges, from those who are active and heading to work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company sells its products principally to home medical equipment providers with retail and e-commerce channels, residential care operators, dealers and government health services in North America, Europe and Asia Pacific. For more information about the company and its products, visit the company's website at www.invacare.com. The contents of the company's website are not part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis presented below is concerned with material changes in financial condition and results of operations between the periods specified in the condensed consolidated balance sheets at SeptemberJune 30, 20202021 and December 31, 2019,2020, and in the condensed consolidated statement of comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019.2020. All comparisons
presented are with respect to the same period last year, unless otherwise stated. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A included in the company's Annual Report on Form 10-K for the year ended December 31, 2019.2020. 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 ofmore than 50 acquisitions made over the company's forty-year40+ year history. Some of these acquisitions have been combined into integrated operating units, while others have remained relatively independent.
COVID-19 Impact on Access to Healthcare and Global Supply Chain
The company continues to actively monitor the impact of the coronavirus (COVID-19), pandemic, which has negatively impacted the company’s business primarily by limiting access to healthcare and disrupting the global supply chain. These factors resulted in operational inefficiencies which in turn burdened profitability.
Demand for the company's products remains high as evidenced by a strong order book and elevated backlog. However, efficiently fulfilling orders during the second quarter continued to be challenging due to global supply chain and logistics disruptions. Invacare's products include a large number components, and these disruptions have delayed delivery of components required for final assembly and order fulfillment and impacted the efficiency of the manufacturing operations. Further, certain countries have reinstated various levels of shutdowns causing additional assembly and production delays that have also delayed order fulfillment. As a result, backlog has increased in all product categories from
December 31, 2020. The incremental backlog at the end of 2Q21 was comparable to the level at the end of 1Q21.
While public health restrictions remain, the company anticipates, as vaccination initiatives progress, healthcare access resumes, and more active lifestyles return during the summer months, higher net sales for the balance of 2021 with growth as compared to prior year.
Sales started to recover in the second and third quarters with regardquarter of 2021 as certain pandemic restrictions were lifted, but supply chain challenges continued to reduced net sales on a global basis year-over-year primarily related to mobility and seating products. In addition, we experienced a decrease inburden the year-to-date operating profit of the European segment as a result of a significant decline in net sales related to the pandemic.company's profitability. The company achieved sequential nethas opted not to impose more robust cost containment measures to offset the impact of reduced profitability. The company believes its human capital resources will be essential to facilitate anticipated sales growth inand profitability recovery for the third quarterremainder of 2020, primarily driven by the European segment, with the loosening of public health restrictions2021 and resumption of access to clinicsaddress current backlog and elective care facilities for its products. In addition, the company also anticipates sequential net sales growth in the fourth quarter of 2020. However, these anticipated net sales levels will remain at lower levels than the same periods in 2019. demand.
The extent to which the company’s operations will be further impacted by the pandemic will depend largely on future
developments, which remain highly uncertain and difficult to accurately predict, including, among other things, new information which may emerge concerning the severity of the pandemicpandemic; new and growing outbreaks of COVID-19 or new strains of COVID-19; actions by government authorities to contain COVID-19 or treat its impact, such as reimposed public health restrictions or restrictions on access to healthcare facilities.facilities; efforts to combat COVID-19, such as vaccine development and distribution; and global supply chain disruption which may impact access to components and products.
As an “essential” business making medical devices, the company has continued to operate in all of its facilities, having taken the recommended public health measures to ensure worker and workplace safety. The company continues to experience high demand globally for its respiratory products. These products are being deployed in the fight against the COVID-19 pandemic in expanded medical facilities to relieve the strain on hospital systems by providing more medical beds and access to purified oxygen needed in respiratory care. The company continues to work to increaseoptimize its capacity to produce these critical products and resolve global supply chain
challenges that are compounded by the effects of the pandemic. As a result, there are practical limits to the extent the company can increase output. In addition, the company continues to take steps to offset cost increases from pandemic-related supply chain disruptions.
The initial stages of the pandemic appropriately focused the provision of healthcare to urgent non-elective care, reducing access to clinicians and healthcare facilities on which other parts of the company’s business rely to engage with customers for product trials and fittings. As a result, and combined with various stay-at-home orders, the company experienced a global decline in quotes for mobility and seating products, and a resultant decline in orders starting primarily in the second quarter of 2020. In the third quarter of 2020, quotes and orders for mobility and seating products improved sequentially in the major marketsWhile the company serves. We expect that the higher quote volume received in the third quarter of 2020 will be converted to sales during the fourth quarter of 2020 and first quarter of 2021. While we believebelieves the decline in demand for mobility and seating productnet sales is
temporary in nature, the rebound of the business will depend on the continued restoration of access to healthcare and loosening of public health measures, and will be impacted by several items including government actions and policies related to the pandemic, and the magnitude of the pandemic.
The company continues to optimize its balance sheet for the current environment. In the third quarter of 2020, the company repurchased $24,466,000 aggregate principal amount of its 2021 Notes. Earlier in the year, the company entered into separate privately negotiated agreements with certain holders to exchange an aggregate of $73,875,000 of its 2021 and 2022 Notes into new 5% Series II Convertible Senior Exchange Notes (the "2024 Series II Notes") of the company. This transaction enhanced our financial flexibility in reducing short-term debt by extending a significant portion of our near-term convertible debt to November 2024. These actions, as well as other actions completed in the first half of 2020, for example completing the divestiture of Dynamic Controls and obtaining an unsecured loan under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, borrowing availability under the ABL revolver, and the anticipated generation of Adjusted EBITDA and free cash flow, should provide the company sufficient liquidity to manage the business and meet its obligations.
Strategy
The company had ahas committed to providing medical products that deliver the best clinical value; promote recovery, independence and active lifestyles; and support long-term conditions and palliative care. The company's strategy to be a leading provider of durable medical equipment to health care providers in global markets by providing the broadest portfolio available. This strategy has not kept pace with certain reimbursement changes, competitive dynamics and company-specific challenges. Since 2015, the company has made a major shift in its strategy. The company has since been aligningaligns its resources to produce products and solutions that assist customers and end-users with theirthe most clinically complex needs. By focusing the company's efforts to provide the best possible assistance and outcomes to the people and caregivers who use its products, the company aims to improve its financial condition for sustainable profit and growth. To execute this transformation,strategy, the company is undertaking a substantial multi-year transformationbusiness optimization plan.
TransformationBusiness Optimization Efforts
The company is executing a multi-year transformationstrategy to return the company to profitability by focusing its resources on products and solutions that provide greater healthcare value in clinically complex rehabilitation and post-acute care. The company's transformationbusiness optimization actions and growth plan balances innovative organic growth, product portfolio changes across all regions, and cost improvements in supply chain and administrative functions. Key elements of the enhanced transformation and growth plan are:
•Globally, continue to drive all business segments and product lines based on their potential to achieve a leading market position and to support profitability goals;
•In Europe, leverage centralized innovation and supply chain capabilities while reducing the cost and complexity of a legacy infrastructure;
•In North America, adjust the portfolio to consistently grow profitability amid cost increases by adding new products, reducing costs and continuing to improve customers' experience;
•In Asia Pacific, remain focused on sustainable growth and expansion in the southeast Asia region; and
•Take actions globally to reduce working capital and improve free cash flow.
As it navigates the uncertain business environment resulting from COVID-19, the company continues to allocate more resources to the business units experiencing increased demand and expects to continue taking actions to mitigate the potential negative financial and operational impacts on other parts of the company's business that have declined. In the medium-term, the company still expects to execute on its transformation,business optimization strategy, such as global IT modernization initiative which is expected to ultimately result in optimization of the previously announcedoperating structure.
Outlook
The company participates in growing durable healthcare markets and serves a persistent need for its products. The company will continue to improve operating efficiency, together with the lifting of public health restrictions and resolution of supply chain disruptions, to yield improved financial performance. As a result, the company continues to expect to grow revenue, profitability and improve its cash flow performance for the year. As approximately 95% of the company's revenues are generated in the Northern Hemisphere, the company expects sales growth for the remainder of the year assuming the expectation of healthcare access resuming, a return to more active lifestyles in the warmer months as the pandemic subsides and amplified by the adoption of new products and pent up demand from the prior year.
The company's earnings performance is expected to benefit from: (1) new product introductions with improved commercialization plans and additional investments in the sales force and demonstration equipment, which are expected to result in profitable incremental sales, as well as higher sales and margins on existing products; and (2) margin expansion expected as a result of efficiencies related to the plant consolidations in Germany; supply chain actions to expand gross profits, offset by higher freight and logistics costs, and the impact of U.S. tariff exclusions which expired on January 1, 2021. The company expects SG&A expense to be higher than 2020 levels but lower than 2019 levels as it adds back sales and marketing related spending to support sales growth and activity-based spending. Stock compensation expense is expected to be closer to 2019 levels. In addition, while the new IT system implementation is a key project for the company in North America during 2021, benefits related to
improved customer experience and efficiencies have not been considered in the guidance as a result of the anticipated timing to roll out the new system in North America.
Cash flow for 2021 has funded payments for severance costs related to the German plant consolidation and funding value added taxes and other taxes deferred from 2020 as a result of programs implemented by many jurisdictions as result of the global IT modernization initiative.pandemic. In addition, with the return to growth in 2Q21, the company has a significant investment in working capital including an increase of $20 million for accounts receivable which should be collected in 3Q21. In addition, inventory levels increased by $11 million during the quarter to mitigate supply chain disruptions and in preparation for the expected sequential sales growth in the latter half of the year. We anticipate this investment in working capital will convert to cash in the second half of 2021.
The company has historically generated negative cash flow performance during the first half of the year. This pattern has continued due to the timing of annual one-time payments such as customer rebates and employee bonuses earned during the prior year, and higher working capital usage from revenue growth and seasonal inventory increases. Quarterly cash flow was impacted by timing of sales growth which impacted accounts receivable collections. The company anticipates spending $20 million on capital expenditures in 2021.
The actions taken by the company earlier this year to optimize the balance sheet for the current environment, as well as the continued borrowing availability under the ABL revolving credit facilities, and the anticipated generation of Adjusted EBITDA and free cash flow, should provide the company sufficient liquidity to manage the business and meet its obligations.
Favorable Long-Term Demand
Ultimately, demand for the company's products and services is based on the need to provide care for people with certain conditions. The company's medical devices provide solutions for end-users and caregivers. Therefore, the demand for the company's medical equipment is largely driven by population growth and the incidence of certain conditions where treatment may be supplemented by the company's devices. The company also provides solutions to help equipment providers and residential care operators deliver cost-effective and high-quality care. The company believes that its commercial team, customer relationships, products and solutions, supply chain infrastructure, and strong research and development pipeline will create sustainable and favorable business potential.
RESULTS OF OPERATIONS - NET SALES
The company operates in two primary business segments: North America and Europe with each selling the company's primary product categories, which include: lifestyle, mobility and seating and respiratory therapy products. Sales in Asia Pacific are reported in All Other and include products similar to those sold in North America and Europe.
| | ($ in thousands USD) | ($ in thousands USD) | 3Q20* | 3Q19 | % Change
Fav/(Unfav) | Foreign Exchange % Impact | Divestiture % Impact | Constant Currency % Change
Fav/(Unfav) | ($ in thousands USD) | 2Q21* | 2Q20 | % Change
Fav/(Unfav) | Foreign Exchange % Impact | | Constant Currency % Change
Fav/(Unfav) |
| Europe | Europe | 116,285 | | 137,371 | | (15.3) | | 2.2 | | — | | (17.5) | | Europe | 121,296 | | 101,894 | | 19.0 | | 12.0 | | | 7.0 | |
| North America | North America | 88,055 | | 87,118 | | 1.1 | | (0.1) | | — | | 1.2 | | North America | 96,247 | | 86,569 | | 11.2 | | 1.1 | | | 10.1 | |
| All Other (Asia Pacific) | All Other (Asia Pacific) | 7,566 | | 11,285 | | (33.0) | | 3.2 | | (33.1) | | (3.1) | | All Other (Asia Pacific) | 8,321 | | 7,837 | | 6.2 | | 13.9 | | | (7.7) | |
| Consolidated | Consolidated | 211,906 | | 235,774 | | (10.1) | | 1.5 | | (1.6) | | (10.0) | | Consolidated | 225,864 | | 196,300 | | 15.1 | | 7.3 | | | 7.8 | |
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| | ($ in thousands USD) | ($ in thousands USD) | YTD 3Q20** | YTD 3Q19 | Reported % Change | Foreign Exchange % Impact | Divestiture % Impact | Constant Currency % Change
Fav/(Unfav) | ($ in thousands USD) | YTD 2Q21** | YTD 2Q20 | % Change
Fav/(Unfav) | Foreign Exchange % Impact | Divestiture % Impact | Constant Currency % Change
Fav/(Unfav) |
| Europe | Europe | 339,147 | | 396,206 | | (14.4) | | (1.1) | | — | | (13.3) | | Europe | 234,071 | | 222,862 | | 5.0 | | 9.8 | | — | | (4.8) | |
| North America | North America | 261,595 | | 262,915 | | (0.5) | | (0.2) | | — | | (0.3) | | North America | 172,221 | | 173,540 | | (0.8) | | 0.7 | | — | | (1.5) | |
| | All Other (Asia Pacific) | All Other (Asia Pacific) | 25,904 | | 35,930 | | (27.9) | | (3.5) | | (26.9) | | 2.5 | | All Other (Asia Pacific) | 15,774 | | 18,338 | | (14.0) | | 13.3 | | (15.3) | | (12.0) | |
| Consolidated | Consolidated | 626,646 | | 695,051 | | (9.8) | | (0.7) | | (1.4) | | (7.7) | | Consolidated | 422,066 | | 414,740 | | 1.8 | | 6.2 | | (0.7) | | (3.7) | |
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* Date format is quarter and year in each instance.
** YTD means the first ninesix months of the year in each instance.
The table above provides net sales change as reported and as adjusted to exclude the impact of foreign exchange translation and divestitures (constant currency net sales). “Constant currency net sales" is a non-Generally Accepted Accounting Principles ("GAAP") financial measure, which is defined as net sales excluding the impact of foreign currency translation and divestitures. The current year's functional currency net sales are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's sales to calculate the constant currency net sales change. For the divestiture impact, the company adjusted a portion of net sales as the Dynamic Controls business was divested as of March 7, 2020.
"Constant currency sequential net sales," as shown on the next page, is a non-GAAP Management believes this financial measure in which a given quarter's net sales are compared to the most recent quarter's net sales with each quarter's net sales translated at the foreign exchange rates for the most recent prior quarter. These amounts are then compared to the prior quarter's sales to calculate the constant currency sequential net sales change. Management believes that both financial measures provideprovides meaningful information for evaluating the core operating performance of the company.
Europe - The companConstant currency net sales decreased $24,030,000, or 17.5%y returned to growth in 3Q20 compared to 3Q19 as sales2Q21, but the global pandemic continued to be significantly impacted by the pandemic and with publicimpact sales across all segments in different ways. Public health restrictions in certain countries continuing
started to limitease and increase access to healthcare professionals and institutions needed for certain product selections. Global supply chain disruptions related to transportation and logistics, however, continued to delay receipt of components and limit conversion of orders to sales in the quarter. These measures loweredfactors impacted each of the regions in 2Q21. The company believes the global supply chain disruptions are temporary, and as these disruptions subside and access to healthcare returns, sales growth should continue for the remainder of the year.
Europe - Constant currency net sales increased $7,115,000, or 7.0% in 2Q21 compared to 2Q20 as sales started to recover from pandemic-related challenges led by increased sales in mobility and seating and lifestyle products, and were partially offset by growth in bed systems and respiratory products. The countries whichreflecting the company has a significant portionimproving restoration of the operations are France, Germany, UKaccess to healthcare and the Nordic countries.easing of public health restrictions. Constant currency net sales decreased 13.3% YTD 3Q202Q21 compared to YTD 3Q19 primarily due to2Q20. 1Q20 was not affected by the impact of the pandemic.
North America - Constant currency net sales for 3Q202Q21 increased $1,009,000$8,767,000 or 1.2%10.1% compared to 3Q19 driven2Q20 with increased sales across all product categories and led by respiratory products partially offset with declineswhich continued to benefit from pandemic demand and reduced backlog. Growth in sales of mobility and& seating and non-bed lifestyle products. Demand for mobility and seating and non-bed lifestyle products continued to be impacted by the pandemic, with public restrictions limitingproduct net sales reflected improved access to healthcare professionals and institutions to provide certain products. In addition, both power and manual wheelchair net sales declined given lower levels of quotes for these products in the early part of 2Q20, which would normally convert to sales in 3Q20. Due to higher quote levels in 3Q20, sales of mobility and seating products are expected to recover somewhat in 4Q20.institutions. Constant currency net sales decreased YTD 3Q20 or 0.3%2Q21 compared to YTD 3Q19 with mobility and seating and lifestyle products sales decreases largely offset by an increase in respiratory product sales.2Q20 primarily due to the impacts of the pandemic.
All Other - Constant currency net sales, which relate entirely to the Asia Pacific region, decreased $233,000$601,000 or 3.1%7.7% for 3Q202Q21 compared to 3Q19 driven by declines in mobility and seating products and service revenue partially offset by growth in lifestyle products.2Q20. Constant currency net sales increased 2.5%decreased 12.0% YTD 3Q202Q21 compared to YTD 3Q192Q20 primarily driven by increased sales inlower lifestyle products primarily mattress products.sales. Growth in the region was negatively impacted by delayed receipt of product to fulfill existing orders.
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| ($ in thousands USD) | 3Q20 at Reported Foreign Exchange Rates | Foreign Exchange Translation Impact | 3Q20 at 2Q20 Foreign Exchange Rates | 2Q20 at Reported Foreign Exchange Rates | Sequential Growth $ | Sequential Growth % |
| Europe | 116,285 | | (6,276) | | 110,009 | | 101,894 | | 8,115 | | 8.0 | |
| North America | 88,055 | | (342) | | 87,713 | | 86,569 | | 1,144 | | 1.3 | |
| All Other (Asia Pacific) | 7,566 | | (534) | | 7,032 | | 7,837 | | (805) | | (10.3) | |
| Consolidated | 211,906 | | (7,152) | | 204,754 | | 196,300 | | 8,454 | | 4.3 | % |
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The above table provides net sales at foreign currency exchange rates for the quarters ended September 30 and June 30, 2020, respectively, and net sales for the quarter ended September 30, 2020 translated at the foreign exchange rates for the quarter ended June 30, 2020 with each then compared to each other (constant currency sequential net sales).
Constant currency sequential net sales grew by 4.3% driven primarily by mobility and seating product sales in Europe due to increased access to healthcare professionals and institutions in certain countries.
Europe - Constant currency sequential net sales increased 8.0% driven by a 30.4% increase in mobility and seating products partially offset by lower sales of in lifestyle products, primarily bed and bed-related products, with respiratory product sales flat.
North America - Constant currency sequential net sales increased 1.3% primarily driven by growth in non-bed lifestyle products.
All Other -Constant currency sequential net sales declined 10.3% primarily due to lifestyle products.
Constant currency net sales of mobility and seating products, which comprise most of the company's clinically complex product portfolio, decreasedincreased to 40.2%37.3% of constant currency net sales in 3Q202Q21 from 44.5%35.0% in 3Q192Q20 and decreased to 38.9%36.7% YTD 3Q202Q21 from 42.2%37.7% YTD 3Q19.2Q20 where 1Q20 was not materially affected by the pandemic.
This decreaseThe increased mix percentage of mobility and seating products over the prior year quarter reflects the significant impacts of the pandemic limiting thebetter access to healthcare professionals and institutions needed for certain product selections, specifically forthe more complex configured products within the mobility and seating product and non-bed related lifestyle productsportfolio as well as higher pandemic related respiratory and bed and mattress products during 3Q20.restrictions had started to ease in 2Q21.
GROSS PROFIT
Gross profit increased $4,168,000 and gross profit as a percentage of net sales for 3Q20 decreased 402Q21 decreased 200 basis points to 28.3%26.9%, primarily attributable to unfavorable manufacturingoperating variances as a result of reduced net sales primarily in Europeand freight costs, partially offset by favorable sales mix including pricingproduct mix. Unfavorable operating variances in 2Q21 were the result of increased costs due to component shortages and favorable foreign exchange.transportation delays which impacted labor costs and efficiencies in several of our manufacturing and assembly locations in Europe and North America. The negative impacts of these cost increases, primarily the result of an inefficient workforce impacted by the timing of receipt of inventory, was approximately 160 basis points of gross margin.
Gross profit decreased $4,182,000 and gross profit as a percentage of net sales for YTD 3Q20 increased 802Q21 decreased 140 basis points to 28.7%27.4%, primarily attributable to the company's continuous improvement initiatives driving materialunfavorable operational variances and freight cost savings, favorable product mix, including pricing and reduced R&D expenseincreases, partially offset by unfavorable manufacturingfavorable product mix. Unfavorable operating variances and foreign exchange.
YTD 2Q21 were the result of increased costs due to component shortages and transportation delays which impacted labor costs and efficiencies in several of our manufacturing and assembly locations in Europe and North America.
Gross profit drivers by segment:
Europe - Gross profit as a percentage of netdollars for 2Q21 increased $5,652,000 from higher sales for 3Q20 decreased 2.3 percentage points and $8,103,000, compared to 3Q19 driven by lower sales, unfavorable manufacturing variances and sales mix partially offset by favorable foreign exchange.
2Q20. Gross profit as a percentage of net sales for YTD 3Q20 decreased 0.7 of a percentage point or a decrease of $17,434,000,was flat compared to YTD 3Q19. The decrease in gross2Q20. Gross profit was positively impacted by favorable product mix and favorable foreign currency offset by unfavorable operating variances and freight costs influenced by continued supply chain disruptions.
Gross profit dollars was driven by lower sales, unfavorable manufacturing variancesincreased $1,681,000 and foreign exchange.
North America - Grossgross profit as a percentage of net sales for 3Q20 increased 1.7 percentage points or $2,634,000, compared to 3Q19 driven by favorable sales mix including pricing, lower material and freight costs partially offset by unfavorable manufacturing variances and warranty costs.
Gross profit as a percentage of net salesdecreased 0.9% for YTD 3Q20 increased 1.9 percentage points, or $6,783,000,2Q21 compared to YTD 3Q19.2Q20. The increase in gross profit dollars was driven by favorable salesproduct mix including pricing, lower material, freight costsand foreign currency partially offset by increased warrantyunfavorable operating variances and higher freight costs including expediting costs.
All OtherNorth America - Gross profit dollars decreased $897,000 and gross profit as a percentage of net sales decreased 1.6% for Asia Pacific increased 6.22Q21 compared to 2Q20 driven by unfavorable operating variances and higher freight costs, including expediting costs, partially offset by favorable product mix.
Gross profit dollars decreased $4,783,000 and gross profit as a percentage points whileof net sales decreased 0.8% for YTD 2Q21 compared to YTD 2Q20. The decrease in gross profit dollars declined $1,227,000was driven by operating variances from lower net sales.
All Other - Asia Pacific gross profit dollars decreased $294,000 and gross profit as a percentage of net sales decreased 5.7% for 2Q21 compared to 2Q20 primarily driven by reducedlower net sales on higher margin products.
Asia Pacific gross profit dollars decreased $1,335,000 and gross profit as a percentage of net sales increased 1.7% for YTD 2Q21 compared to YTD 2Q20. The decrease in gross profit dollars was driven by the divestiture of the Dynamic Controls business as of March 7, 2020.
Gross profit as a percentage of net sales for Asia Pacific for YTD 3Q20 increased 5.9 percentage points while gross profit dollars declined $2,459,000 primarily attributable to the Dynamic Controls divestiture.
All Other also includes the impact of intercompany profit eliminations for the consolidated company of increased expense of $849,000 for 3Q20 as compared to 3Q19; and $1,318,000 for YTD 3Q20 as compared to YTD 3Q19. This is the result of increased inventory levels.company.
Gross profit as a percentage of net sales for 3Q20 decreased 60 basis points to 28.3%, attributable to unfavorable sales mix with a return to a more normal product acuity mix, unfavorable manufacturing variances partially offset by reduced material and R&D costs. Gross profit dollars increased primarily in the European segment as a result of sequential net sales growth primarily in mobility and seating products as public health restrictions eased.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
| | ($ in thousands USD) | ($ in thousands USD) | 3Q20 | 3Q19 | Reported Change | Foreign Exchange Impact | Divestiture % Impact | Constant Currency Change | ($ in thousands USD) | 2Q21 | 2Q20 | Reported Change | Foreign Exchange Impact | | Constant Currency Change |
| SG&A expenses - $ | SG&A expenses - $ | 55,530 | | 63,539 | | (8,009) | | (814) | | 1,020 | | (7,803) | | SG&A expenses - $ | 63,765 | | 57,404 | | 6,361 | | 3,371 | | | 2,990 | |
| SG&A expenses - % change | SG&A expenses - % change | | (12.6) | | 1.5 | | (1.6) | | (12.5) | | SG&A expenses - % change | | 11.1 | | 5.9 | | | 5.2 | |
| % to net sales | % to net sales | 26.2 | | 26.9 | | | | % to net sales | 28.2 | | 29.2 | | | | |
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| ($ in thousands USD) | YTD 3Q20 | YTD 3Q19 | Reported Change | Foreign Exchange Impact | Divestiture % Impact | Constant Currency Change |
| SG&A expenses - $ | 174,672 | | 197,035 | | (22,363) | | 364 | | 2,446 | | (19,553) | |
| SG&A expenses - % change | | | (11.3) | | (0.1) | | (1.2) | | (10.0) | |
| % to net sales | 27.9 | | 28.3 | | | | | |
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| ($ in thousands USD) | YTD 2Q21 | YTD 2Q20 | Reported Change | Foreign Exchange Impact | Divestiture Impact | Constant Currency Change |
| SG&A expenses - $ | 122,586 | | 119,142 | | 3,444 | | 6,376 | | (826) | | (2,106) | |
| SG&A expenses - % change | | | 2.9 | | 5.4 | | (0.7) | | (1.8) | |
| % to net sales | 29.0 | | 28.7 | | | | | |
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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 and divestitures (constant currency SG&A). “Constant currency SG&A" is a non-GAAP financial measure, which is defined as SG&A expenses excluding the impact of foreign currency translation and divestitures, which is referred to as "constantdivestitures. The current year's functional currency SG&A" decreased for 3Q20 and YTD 3Q20 expenses are translated using the prior year's foreign exchange rates. These amounts are then compared to the same periods last year primarily dueprior year's SG&A expenses to reduced employment costs and favorable foreigncalculate the constant currency transactions.SG&A expenses change. Management believes this financial measure provides meaningful information for evaluating the core operating performance of the company.
The divestiture impact is related to a portion of the SG&A expenses related to the Dynamic Controls business divested as ofon March 7, 2020.
In general,Constant currency SG&A increased for 2Q21 compared to the same period last year primarily due to higher sales and marketing expenses and commissions supporting higher net sales. 2Q20 expense for 3Q20 was impacted bylower given the negative impact of the pandemic on the business with focused effort to reduce all discretionary spending and includes the benefitalso a gain on sale of programs offered by European countries related to furloughs and reduced workhours as well as a continued general reductionbuilding of $971,000 in discretionary spending.2Q20.
Constant currency SG&A decreased for YTD 2Q21 compared to the same period last year primarily due to reduced 2Q21 employment costs and lower sales and marketing expenses partially offset by unfavorable foreign currency transactions. 2Q20 also benefited from a gain on the sale of a building of $971,000.
SG&A expense drivers by segment:
Europe - SG&A expenses for 3Q20 decreased $4,338,0002Q21 increased $2,834,000 or 14.8%10.9% compared to 3Q192Q20 with foreign currency translation increasing SG&A expenses by $819,000,$2,650,000, or 2.8%10.2%. Constant currency SG&A expenses increased $184,000, or 0.7%. 2Q20 also benefited from a gain on the sale of a building of $971,000.
SG&A expenses for YTD 2Q21 increased $1,881,000 or 3.4% compared to YTD 2Q20 with foreign currency translation increasing SG&A expenses by $5,187,000, or 9.4%. Constant currency SG&A expenses decreased $5,157,000,$3,306,000, or 17.6%6.0%. The decreased expense was primarily attributable to lower employment costs. Employment costs and favorable currency transactions.
SG&A expense for YTD 3Q20 decreased $11,440,000 or 12.5% compared to YTD 3Q19 with foreign currency translation decreasing SG&A expenses by $236,000, or 0.3%. Constant currency SG&A expenses decreased $11,204,000, or 12.2%. The decreased expense was primarily attributable to lower employment costs, favorable foreign currency transactions and lower sales and marketing spending.
North America - SG&A expenses for 3Q20 decreased $2,052,0002Q21 increased $2,324,000, or 8.5%11.2%, compared to 3Q192Q20 with foreign currency translation decreasingincreasing SG&A expenses by $69,000.$333,000, or 1.6%. Constant
currency SG&A expenses decreased $1,983,000,increased $1,991,000, or 8.2% driven9.6% primarily by employment,attributable to sales and marketing, commission and product liability costs.expense related to increased sales.
SG&A expenses for YTD 3Q202Q21 decreased $6,291,000$1,231,000 or 8.4%,2.6% compared to YTD 3Q192Q20 with foreign currency translation decreasingincreasing SG&A expenses by $111,000.$499,000, or 1.1%. Constant currency SG&A expenses decreased $6,180,000,$1,730,000, or 8.2% driven3.7%. The decreased expense was primarily byattributable to lower employment costs and consulting costs.sales and marketing expenses.
All Other - SG&A expenses for 3Q20 decreased by $1,619,0002Q21 increased $1,203,000 compared to 3Q192Q20 with foreign currency translation increasing SG&A expenses by $64,000 and divestitures decreasing SG&A expenses by $1,020,000.$388,000. Constant currency SG&A expenses increased by $663,000.$815,000. All Other includes SG&A related to the Asia Pacific businesses and non-allocated corporate costs. SG&A expenses related to non-allocated corporate costs for 3Q20 decreased 9.6%, or $645,000, compared to 3Q19 driven primarily by decreased consulting and employment costs partially offset by unfavorable foreign currency transactions. Related to the Asia Pacific businesses, constant currency SG&A expenses decreased $18,000, or 0.8%, due to reduced employment costs.
SG&A expense for YTD 3Q20 decreased by $4,632,000 compared to YTD 3Q19 with foreign currency translation decreasing SG&A expenses by $17,000 and divestitures decreasing SG&A expense by $2,446,000. Constant currency SG&A expenses decreased by $2,169,000. SG&A expenses related to non-allocated corporate costs for YTD 3Q20 increased 1.8%, or $350,000, compared to YTD 3Q19 driven primarily by increased equity compensation expense. Related to the Asia Pacific businesses constant currency SG&A expenses decreased $2,519,000, or 30.4%, due to reduced employment costs and foreign currency transactions.
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| ($ in thousands USD) | 3Q20 | 2Q20 | Reported Change | Foreign Exchange Impact | Constant Currency Change |
| SG&A expenses - $ | 55,530 | | 57,404 | | (1,874) | | (1,560) | | (3,434) | |
| SG&A expenses - % change | | | (3.3) | | (2.7) | | (6.0) | |
| % to net sales | 26.2 | | 29.2 | | | | |
The above table provides SG&A expenses at reported foreign currency exchange ratesrelated to Asia Pacific businesses for the quarters ended September 30, and June 30, 2020, respectively, and SG&A expenses excluding foreign currency impact for the quarter ended September 30, 2020 by applying foreign exchange rates for the quarter ended June 30, 2020 (constant currency sequential SG&A expenses).
Constant currency sequential SG&A expenses decreased for 3Q202Q21 increased 30.8% or $613,000, compared to 2Q20 driven primarily by increased facility and overhead costs attributable to expanding the market in the region and increased sales and marketing costs which were significantly limited in 2Q20 due to reducedthe pandemic. Corporate costs increased $202,000 due to higher employment costs, including stock compensation expense, and favorableexpense.
SG&A expenses for YTD 2Q21 increased $2,794,000 compared to YTD 2Q20 with foreign currency transactions.
In general,translation increasing SG&A expenses by $690,000 and divestitures decreasing SG&A expenses by $826,000. Constant currency SG&A expenses increased $2,930,000. The increased expense for 3Q20 includes the benefits offered by European countrieswas primarily attributable to higher employment costs and sales and marketing expenses.Constant currency SG&A expenses related to furloughsAsia Pacific businesses for YTD 2Q21 increased $2,334,000 or 90.9% compared to YTD 2Q20 driven primarily by costs to expand the market in the region and reduced work hours as well as a continued general reduction in discretionary spending, however at a reduced level from 2Q20.unfavorable foreign currency transactions. Corporate costs increased $596,000 due to higher employment costs, including stock compensation expense.
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| MD&A | Operating Income (Loss) | |
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OPERATING INCOME (LOSS)
| | ($ in thousands USD) | ($ in thousands USD) | 3Q20 | 3Q19 | $ Change | % Change | | YTD 3Q20 | YTD 3Q19 | $
Change | % Change | ($ in thousands USD) | 2Q21 | 2Q20 | $ Change | % Change | | YTD 2Q21 | YTD 2Q20 | $
Change | % Change |
| Europe | Europe | 7,600 | | 11,365 | | (3,765) | | (33.1) | | | 16,624 | | 22,617 | | (5,993) | | (26.5) | | Europe | 4,992 | | 2,174 | | 2,818 | | 129.6 | | | 8,824 | | 9,024 | | (200) | | (2.2) | |
| North America | North America | 2,992 | | (1,694) | | 4,686 | | 276.6 | | | 5,759 | | (7,316) | | 13,075 | | 178.7 | | North America | 1,590 | | 4,812 | | (3,222) | | (67.0) | | | (785) | | 2,767 | | (3,552) | | -- |
| | All Other | All Other | (6,082) | | (5,625) | | (457) | | (8.1) | | | (17,377) | | (18,230) | | 853 | | 4.7 | | All Other | (9,529) | | (7,740) | | (1,789) | | (23.1) | | | (15,169) | | (11,295) | | (3,874) | | (34.3) | |
| Gain on sale of business | Gain on sale of business | — | | — | | — | | — | | | 9,790 | | — | | 9,790 | | — | | Gain on sale of business | — | | 200 | | (200) | | (100.0) | | | — | | 9,790 | | (9,790) | | (100.0) | |
| Charges related to restructuring | Charges related to restructuring | (1,580) | | (1,628) | | 48 | | 2.9 | | | (4,657) | | (3,641) | | (1,016) | | (27.9) | | Charges related to restructuring | (547) | | (1,685) | | 1,138 | | 67.5 | | | (2,099) | | (3,077) | | 978 | | 31.8 | |
| Consolidated Operating Income (Loss) | Consolidated Operating Income (Loss) | 2,930 | | 2,418 | | 512 | | (21.2) | | | 10,139 | | (6,570) | | 16,709 | | 254.3 | | Consolidated Operating Income (Loss) | (3,494) | | (2,239) | | (1,255) | | (56.1) | | | (9,229) | | 7,209 | | (16,438) | | (228.0) | |
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For 3Q20,YTD 2Q21 consolidated operating income improved due(loss) declined compared to reduced SG&A expenses offsetting unfavorable gross profit on reduced net sales impacted by the pandemic. For YTD 3Q20, consolidated operating profitability improved significantly2Q20 due to a $9,790,000 gain from the divestituredivestiture of Dynamic Controls in the prior year period as well as reduced SG&A expenses offsetting lower gross profit on net sales declines impacted by the pandemic.and higher SG&A expenses.
Operating income (loss) by segment:
Europe - OperatingOperating income for 3Q20 declined2Q21 increased by $3,765,000,$2,818,000, or 33.1%129.6%, primarily due to a $8,103,000 decrease inhigher gross profit from 15.3% lower net salesimpacted by revenue growth partially offset by favorable foreign exchange translation and reducedhigher SG&A expenses. 2Q20 benefited from the sale of a building for a gain of $971,000.
Operating income for YTD 3Q202Q21 decreased $5,993,000$200,000 compared to YTD 3Q19 due to lower net sales and unfavorable foreign exchange partially offset by reduced SG&A expenses.
North America - Operating incomeloss for 3Q20 improved by $4,686,0002Q21 increased by $3,222,000, or 67.0%, primarily due to improvedhigher SG&A expenses and lower gross profit. Gross profit was negatively impacted by supply chain disruptions partially offset by net sales growth.
Operating loss for YTD 2Q21 was $785,000 compared to YTD 2Q20 operating income of $2,767,000 due to lower materialgross profit impacted by reduced sales and freightunfavorable costs as well as improved product mix and pricing and reducedassociated with supply chain disruptions partially offset by lower SG&A expenses. Operating income for YTD 3Q20 increased $13,075,000 compared to YTD 3Q19 driven primarily by margin improvements and reduced SG&A expenses.
All Other - Operating loss for All Other includes the operating incomeresults of the Asia Pacific businesses, offset byas well as unallocated SG&A expenses and intercompany eliminations. Operating loss increased $457,000$1,789,000, or 23.1%, primarily driven by divestiture of Dynamic Controls. lower gross profit from lower revenue and higher SG&A expenses in the Asia Pacific businesses.
Operating loss for YTD 3Q20 improved $853,0002Q21 increased $3,874,000 or 34.3% compared to YTD 3Q19 primarily2Q20 due to improved operating profithigher net SG&A
expenses including foreign currency transactions and stock compensation expense, lower revenues in the Asia Pacific business partially offset by increased equity compensation expenseregion and the divestiture of Dynamic Controls.
Charges Related to Restructuring Activities
Restructuring charges totaled $4,657,000were $547,000 for YTD 3Q202Q21 compared to $1,685,000 for 2Q20 and were principally related to severance costs. Restructuring charges were incurred in the Europe segment of $3,674,000,$516,000 and North America segment of $865,000, and All Other of $118,000.
Restructuring charges totaled $3,641,000were $2,099,000 for YTD 3Q192Q21 compared to $3,077,000 for YTD 2Q20 and were principally related to severance costs. Restructuring charges were incurred in the Europe segment of $1,903,000,$1,246,000 and North America segment of $1,539,000, and All Other of $199,000.were $853,000.
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MD&A | Operating Income (Loss) | |
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| ($ in thousands USD) | 3Q20 | 2Q20 | $ Change | % Change |
| Europe | 7,600 | | 2,174 | | 5,426 | | 249.6 | |
| North America | 2,992 | | 4,812 | | (1,820) | | 37.8 | |
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| All Other | (6,082) | | (7,740) | | 1,658 | | 21.4 | |
| Gain on sale of business | — | | 200 | | (200) | | (100.0) | |
| Charges related to restructuring | (1,580) | | (1,685) | | 105 | | 6.2 | |
| Consolidated Operating Income (Loss) | 2,930 | | (2,239) | | 5,169 | | 230.9 | |
Operating income improved sequentially driven by net sales growth and reduced SG&A expenses.
Operating income (loss) by segment:
Europe - Operating income for 3Q20 increased by $5,426,000, or 249.6%, primarily due to increased gross profit driven by increased net sales including favorable product mix due to higher sales of mobility and seating products and favorable foreign exchange partially offset by unfavorable manufacturing variances.
North America - Operating income for 3Q20 decreased by $1,820,000 primarily due to lower gross margin driven by a return to more normal acuity product mix as well as reduced bed and bed-related net sales which were higher in 2Q20 as a result of the pandemic.
All Other - Operating loss for All Other includes the operating income of the Asia Pacific businesses, offset by unallocated SG&A expenses and intercompany eliminations. Operating loss improved $1,658,000 primarily driven by reduced SG&A expense, primarily stock compensation expense, and lower gross margin in the Asia Pacific business as a result of lower sequential net sales.
OTHER ITEMS
Net Gain (Loss) on Convertible Debt Derivatives
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($ in thousands USD) | | Change in Fair Value Gain (Loss) |
| | 3Q19 | | YTD 3Q19 |
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Convertible Note Hedge Assets | | — | | | 9,600 | |
Convertible Debt Conversion Liabilities | | — | | | (8,403) | |
Net Gain on Convertible Debt Derivatives | | — | | | 1,197 | |
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The company recognized a net gain of $0 and $1,197,000 in 3Q19 and YTD 3Q19, respectively related to the fair value of convertible debt derivatives. As a result of the company’s receipt of shareholder approval authorizing the company to elect to settle future conversions of its convertible notes in common shares, 2Q19 was the last quarter for which the company recognized any gain or loss on the fair value of its note hedge assets and convertible debt conversion liabilities.
Loss on debt extinguishment including debt finance changes and fees
| | ($ in thousands USD) | ($ in thousands USD) | 3Q20 | 3Q19 | | ($ in thousands USD) | 2Q21 | 2Q20 | $ Change | % Change |
| Loss on debt extinguishment including debt finance fees | Loss on debt extinguishment including debt finance fees | 761 | | 280 | | | Loss on debt extinguishment including debt finance fees | — | | 6,599 | | (6,599) | | (100.0) | |
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| ($ in thousands USD) | YTD 2Q21 | YTD 2Q20 | $ Change | % Change |
| Loss on debt extinguishment including debt finance fees | 709 | | 6,599 | | (5,890) | | (89.3) | |
During the thirdfirst quarter of 2020,2021, the company repurchased and retired, $24,466,000at par plus accrued interest, $78,850,000 of its 20212022 Notes. The result of the transaction was a loss on debt extinguishment including debt and finance fees of $761,000.$709,000.
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| ($ in thousands USD) | YTD 3Q20 | YTD 3Q19 | | |
| Loss on debt extinguishment including debt finance fees | 7,360 | | 280 | | | |
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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 Notes(the "Series II Notes") of the company and $5,593,000 in cash.
The 2Q20 and 3Q20 transactions resulted inresult of the exchange was a YTD 3Q20 loss on debt extinguishment including debt and finance fees of $7,360,000.
Interest
| | ($ in thousands USD) | ($ in thousands USD) | 3Q20 | 3Q19 | $ Change | % Change | ($ in thousands USD) | 2Q21 | 2Q20 | $ Change | % Change |
| Interest expense | Interest expense | 7,402 | | 6,992 | | 410 | | 5.9 | | Interest expense | 6,084 | | 7,054 | | (970) | | (13.8) | |
| Interest income | Interest income | (7) | | (113) | | 106 | | (93.8) | | Interest income | — | | (23) | | 23 | | (100.0) | |
| | | ($ in thousands USD) | ($ in thousands USD) | YTD 3Q20 | YTD 3Q19 | $ Change | % Change | ($ in thousands USD) | YTD 2Q21 | YTD 2Q20 | $ Change | % Change |
| Interest expense | Interest expense | 21,132 | | 22,027 | | (895) | | (4.1) | | Interest expense | 11,815 | | 13,730 | | (1,915) | | (13.9) | |
| Interest income | Interest income | (90) | | (361) | | 271 | | (75.1) | | Interest income | (1) | | (83) | | 82 | | (98.8) | |
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The increasedecrease in interest expense for 3Q202Q21 YTD 2Q21 compared to the same period of prior year was primarily related to the additionadoption of financing leases.
The decrease inASU 2020-06 which eliminated interest expense for YTD 3Q20 comparedfrom convertible debt discount amortization upon adoption on January 1, 2021 offset by accretion from the Series II 2024 Notes which commenced in the second quarter of 2020. Refer to "Accounting Policies" in the Notes to the same period last year was primarily related to the repurchase and retirement
Condensed Consolidated Financial Statements for discussion of $16,000,000 in principal amount of 2021 Notes in 3Q19.adoption.
Income Taxes
The company had an effective tax rate of 39.2%11.7% and 26.8%13.7% on losses before tax for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, compared to an expected benefit of 21.0%21% on the pre-tax loss for each period. The company had an effective tax rate of 69.6%4.7% and 26.8%21.9% on losses before tax for the three and ninesix months ended and SeptemberJune 30, 2019,2020, respectively, compared to an expected benefit for the three and nine months ended September 30, 2019 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, 20202021 and SeptemberJune 30, 20192020 were unfavorable as compared to the U.S. federal statutory rate, expected benefit, principally due to the negative impact of the company not being able to record tax benefits related to the significant losses in countries which had tax valuation allowances. The effective tax rate was increased for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 20192020 by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate higher than the U.S. statutory rate, except for the gain on the disposition of Dynamic Controls which was not taxable locally for the three months ended March 31, 2020.. In addition, the company had accrued withholding taxes on earnings of its Chinese subsidiary based on the expectation of not permanently reinvesting those earnings. The sale of this entity, without such distribution resulted in the reversal of this accrual in the amount of $988,000 for the ninethree months ended September 30,March 31, 2020.
As a result of the COVID-19 pandemic and the global impact on business activity, various governments have provided programs to help offset the liquidity pressures and impact on society. The company has taken advantage of some of these programs and will continue to consider other programs as they are announced. To date, the company has determined it has benefited or will benefit by:from: 1) deferral of U.S. payroll tax related to employer portion of social security throughfrom 2020, to be paid over 2 years,years; 2) a U.S. business interest limitation increase from 30% to 50% of after-taxUS Federal adjusted taxable income for the 2019 and 2020 tax years; 3) the treatment of qualified improvement property as 15-year property in the U.S.,; 4) and the deferral of income and indirect tax payments over variousvarious periods in other countries around the world where the company operates. Such programs havehad resulted in tax deferrals totaling approximately $10,100,000 through September 30,$11,000,000 for the twelve months ended December 31, 2020 as a benefit to operating cash flows forflows. For 2Q21 and YTD 2Q21 approximately $700,000 and $3,500,000 was paid related to the period.tax deferrals from 2020.
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| MD&A | Liquidity and Capital Resources | |
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LIQUIDITY AND CAPITAL RESOURCES
The company continues to maintain an adequate liquidity position through its cash balances and bank lines of credit (see(refer to Long-Term Debt in the Notes to Condensed Consolidated Financial Statements included in this report). as described below.
Key balances on the company's balance sheet and related metrics:
| | ($ in thousands USD) | ($ in thousands USD) | September 30, 2020 | December 31, 2019 | $ Change | % Change | ($ in thousands USD) | June 30, 2021 | December 31, 2020 | $ Change | % Change |
| Cash and cash equivalents | Cash and cash equivalents | 86,825 | | 80,063 | | 6,762 | | 8.4 | | Cash and cash equivalents | 78,252 | | 105,298 | | (27,046) | | (25.7) | |
Working capital (1) | Working capital (1) | 145,850 | | 137,220 | | 8,630 | | 6.3 | | Working capital (1) | 138,793 | | 144,080 | | (5,287) | | (3.7) | |
Total debt (2) | Total debt (2) | 340,241 | | 283,256 | | 56,985 | | 20.1 | | Total debt (2) | 393,260 | | 339,928 | | 53,332 | | 15.7 | |
Long-term debt (2) | Long-term debt (2) | 332,827 | | 280,684 | | 52,143 | | 18.6 | | Long-term debt (2) | 376,670 | | 330,903 | | 45,767 | | 13.8 | |
| Total shareholders' equity | Total shareholders' equity | 330,489 | | 308,516 | | 21,973 | | 7.1 | | Total shareholders' equity | 280,890 | | 333,846 | | (52,956) | | (15.9) | |
Credit agreement gross borrowing availability (3) | 32,264 | | 34,516 | | (2,252) | | (6.5) | | |
Credit agreement borrowing availability (4) | | Credit agreement borrowing availability (4) | 37,751 | | 36,509 | | 1,242 | | 3.4 | |
(1) Current assets less current liabilities.
(2) Total debt and Long-term debt at gross carrying amounts which excludesinclude finance leases but exclude debt issuance costs recognized as a deduction from the carrying amount of debt liability and debt discounts in 2020 classified as debt or equity and includes long-term and total obligations for financingoperating leases.
(3)2Q21 reflects the adoption of ASU 2020-06 "Debt with Conversion and Other Options" on January 1, 2021 which reduced total shareholders' equity by $25,128,000 and purchase of capped calls, related to the 2026 notes issued in 1Q21, also reduced total shareholders' equity by $18,787,000.
(4) Reflects the combined availability of the company's North American and European asset-based revolving credit facilities as of Septemberbefore borrowings. At June 30, 2020. The change in borrowing availability is due to changes in the calculated borrowing base, primarily due to lower accounts receivable balances as a result of reduced net sales impacted by the pandemic. At September 30, 2020,2021, the company had drawn $23,700,000$13,916,000 of borrowings outstanding on the North AmericanEuropean credit facility and $8,460,000$19,000,000 of borrowings outstanding on the Europeanits North America credit facility. Outstanding borrowings are based on credit availability calculated on a month lag related to the European credit facility.
The company's cash and cash equivalents balances were $86,825,000$78,252,000 and $80,063,000$105,298,000 at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. The increasedecrease in cash in the first ninesix months of 20202021 is primarily attributable to borrowinguse from operating activities and cash used for continued investment in business improvement initiatives. In the first quarter of $32,160,000 on2021, the company issued $125,000,000 principal amount of 2026 Notes, paid $5,175,000 in financing costs through June 30, 2021, purchased capped calls related to the 2026 Notes for $18,787,000, repurchased $78,850,000 principal amount of 2022 Notes and repaid $1,250,000 principal amount of 2021 Notes. Cash used by operating activities was partially offset by credit facilities borrowings. The North America and Europe credit facilities under the company's credit agreement whichCredit Agreement provides for an asset-based-lending senior secured revolving credit facility; the proceeds of $14,563,000 from the sale of Dynamic Controls in March 2020; and an unsecured loan of $10,000,000 pursuant to sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act in May 2020. This increase in cash was primarily offset by cash used for continued investment in our transformation strategy and debt related payments.facilities.
In the third quarter of 2020, the company repurchased $24,466,000 aggregate principal amount of its 2021 Notes, resulting in a $761,000 loss on debt extinguishment.
In the second quarter of 2020, the company entered into separate privately negotiated agreements with certain holders of its 2021 and 2022 NotesRefer to exchange $35,375,000 in aggregate principal amount of the company's 2021 Notes and $38,500,000 in aggregate principal amount of the company's 2022 Notes, for $73,875,000 in aggregate principal amount of new 2024 Series II Notes approximately $5,593,000 in cash. Debt issuance costs of $1,518,000 were capitalized. These debt issuance costs are being amortized as interest expense through November 2024 of which $1,368,000 have yet to be amortized as of September 30, 2020. The fees paid in the second quarter totaled $1,307,000.
See "Long-Term Debt" in the Notes to the Condensed Consolidated Financial statements included in this report for a summary of the material terms of the Company's long-term indebtedness.
Debt repayments, acquisitions, divestitures, the timing of vendor payments, the timing of customer rebate payments, the granting of extended payment terms to significant national accounts and other activity can have a significant impact on the company's cash flow and borrowings outstanding such that the cash reported at the end of a given period may be materially different than cash levels during a given period.
While the company has cash balances in various jurisdictions around the world, there are no material restrictions regarding the use of such cash for dividends within the company, loans or other purposes.
The company's total debt outstanding, inclusive of the company's Convertible Senior Notesconvertible senior notes due 2021, 2022, and 2024 and financing2026 and finance lease obligations, increased by $56,985,000$53,332,000 to $340,241,000$393,260,000 at SeptemberJune 30, 20202021 from $283,256,000$339,928,000 as of December 31, 2019.2020. The increase is primarily driven by borrowing on the company's credit agreement issuance of $32,160,000, new financing leases in the third quarter$125,000,000 principal amount of 20202026 Notes offset by repayment of $1,250,000 principal amount of 2021 Notes and $10,000,000repurchase of l$78,850,000 principal amount of 2022 Notes.
oan proceeds obtained pursuant to the CARES Act. The CARES Act funds may be forgivable partially or in full, if certain conditions are met. While the company believes it has utilized the funds for forgivable eligible expenditures under the program, there is no certainty at this time that the loan will be forgiven.
The company may from time to time seek to retire or purchase its convertible
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MD&A | Liquidity and Capital Resources | |
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senior notes, in open market purchases, privately negotiated transactions or otherwise. Such purchases, if any, will depend on prevailing market conditions, the company’s liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
In addition during the second quarter of 2020, the company accessed government programs to bolster short-term liquidity including the temporary delay of direct and indirect tax payments, with repayment beginning later in the year and into 2021 and 2022. Such programs have deferred approximately $10,100,000 of payments through the third quarter of 2020.
See "Long-Term Debt" and "Leases and Commitments" in the Notes to Condensed Consolidated Financial Statements for more details regarding the company's convertible notes and credit facilities and lease liabilities, respectively.
The company is actively managing its business to maintain cash flow and liquidity. As discussed elsewhere in this report, the company has taken several defensive measures to enhance liquidity in response to the COVID-19 pandemic, including reducing expenses, managing capital expenditure, expenditures,
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| MD&A | Liquidity and Capital Resources | |
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suspending its cash dividend, borrowing substantially all of the amountsleveraging borrowings available under its credit facilities, raising capital and refinancing its near-term convertible debt, obtaining a loan pursuant to the CARES Act in the second quarter of 2020 and accessing other government programs in the US and Europe. The company has started making payments on payroll and value added tax deferrals from 2020 in the first and second quarters of 2021.
Based on the company's current expectations, the company believes that its cash flow from operations, cash and cash equivalent balances and available borrowing capacity under its credit facilitiesCredit Agreement should be sufficient to meet working capital needs, capital requirements and commitments for at least the next twelve months. Notwithstanding the company's expectations, if the company's operating results decrease as the result of pressures on the business due to, for example, prolonged, or worsening of, negative impacts of the impact of COVID-19 pandemic, 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, the company may require additional financing, or may be unable to comply with its obligations under the credit facilities, and its lenders could demand repayment of any amounts outstanding under the company's credit facilities. If additional financing is required, there can be no assurance that financing will be available on terms satisfactory to the company, if at all. As the company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the company’s customers and suppliers, the negative financial impact to the company’s results cannot be reasonably estimated, but could be material.
The company also has an agreement with De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide lease financing to the company's U.S. customers. Either party could terminate this agreement with 180 days notice or 90 days notice by DLL upon the occurrence of certain events. Should this agreement be terminated, the
company's borrowing needs under its credit facilities could increase.
While most of the company's debt has fixed interest, should interest rates increase, the company expects that it would be able to absorb modest rate increases without any material impact on its liquidity or capital resources. The weighted average interest rate on revolving credit borrowings, excluding capitalfinance leases, was 4.62% and 4.63%, respectively,4.5% for the three and ninesix months ended SeptemberJune 30, 20202021 and 4.78%4.6% for the year ended December 31, 2019. See2020. Refer to "Long-Term Debt" and "Leases and Commitments" in the Notes to the Condensed Consolidated Financial Statements for more details regarding the company's credit facilities.facilities and lease liabilities, respectively.
CAPITAL EXPENDITURES
The company estimates that capital investments for 20202021 could be approximately $23,000,000$20,000,000 compared to actual capital expenditures of $10,874,000$22,304,000 in 2019.2020. The anticipated increasecontinued investment at this level relates primarily to the company's investments to transform the company, including investments related to thenew ERP project and new products.system. The company believes that its balances of cash and cash equivalents and existing borrowing facilities will be sufficient to meet its operating cash requirements and fund capital expenditures (see(refer to "Liquidity and Capital Resources"). However, because the company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the company, the pandemic may cause delay or curtailment of the company’s planned capital expenditures. The Credit Agreement limits the company's annual capital expenditures to $35,000,000.
DIVIDEND POLICY
On May 21, 2020, the Board of Directors decided to suspendsuspended the quarterly dividend on the company's common sharesCommon Shares in light of the impacts of the COVID-19 pandemic on the business. The Board of Directors suspended the company's regular dividend on the Class B Common Shares starting in 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.
CASH FLOWS
The sincrease ignificant improvement in cash providedused by operating activities for the ninesix months ended SeptemberJune 30, 20202021 was driven primarily by reducedincreased working capital to support net losssales growth including increased accounts receivable of $10,388,000 and inventory of $27,082,000 partially offset by increased inventory.higher accounts payable. Inventories increased significantly as a resultto mitigate supply chain disruptions and in preparation for the expected sequential sales growth in the latter half of the pandemic and the company's long lead supply chain.year. This inventory should largely convert to cash overnet sales within the next few quarters if sales growth progresses as expected.two quarters. In addition, YTD 3Q20accrued expenses declined as result of payment of severance related to German manufacturing facility consolidation, customer rebate payments and payment of a portion of payroll and value added tax deferrals from 2020 of $3,500,000. 2Q20 operating cash flow benefited from deferrals of a total of $10,100,000 ofdeferred indirect and payroll taxes. Such deferrals will be substantially paid outtaxes of $9,900,000.
The year over the next four quarters.
Cashyear change in cash flows used byrelated to investing activities for the first nine months of 2020 were lower compared to cash flows used in the same period last year,was driven primarily by gross proceeds of
$14,563,000 $14,563,000 from the sale of Dynamic Controls in the first quarter of 2020. In addition,ERP-related implementation costs continued to be capitalized for the six months ended June 30, 2021. The company used $2,113,000 to purchase SAPnew ERP licenses related to its ERP implementation and capitalized other ERP-related implementation costs in the first ninesix months of 2020.
Cash flows provided by financing activities increased in the first ninesix 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 2021 Notes. Cash flows provided by financing activities were higher in the first six months of 2020 compared to the same period last year2021 driven primarily byfrom borrowing of $32,160,000 onon the North America and Europe credit facilityfacilities and CARES Act loan offset by cash paid related to convertible debt amend and extend transaction executed in the second quarter of 2020 of $6,900,000. Borrowings on credit facilities are under the company's credit agreementCredit Agreement which provides for an asset-based-lending senior secured revolving credit facility as wfacilities.ell as an unsecured CARES Act loan of $10,000,000. This was offset by cash paid of $24,466,000 to retire the majority of the company's outstanding 2021 Notes in the third quarter; and $6,900,000 of cash paid in connection with the exchange of 2021 and 2022 Notes for 2024 Series II Notes executed during the second quarter of 2020 for debt fees and payments to note holders.
Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
| | ($ in thousands USD) | ($ in thousands USD) | 3Q20 | | 3Q19 | | YTD 3Q20 | | YTD 3Q19 | ($ in thousands USD) | 2Q21 | | 2Q20 | | YTD 2Q21 | | YTD 2Q20 |
| Net cash provided (used) by operating activities | Net cash provided (used) by operating activities | 4,147 | | | 15,121 | | | 822 | | | (4,732) | | Net cash provided (used) by operating activities | (22,290) | | | 6,514 | | | (36,050) | | | (3,325) | |
| | Plus: Sales of property and equipment | Plus: Sales of property and equipment | 3 | | | 9 | | | 396 | | | 73 | | Plus: Sales of property and equipment | — | | | 389 | | | 23 | | | 393 | |
| | Less: Purchases of property and equipment | Less: Purchases of property and equipment | (5,945) | | | (2,856) | | | (16,824) | | | (7,177) | | Less: Purchases of property and equipment | (4,929) | | | (8,758) | | | (9,047) | | | (10,879) | |
| Free Cash Flow | (1,795) | | | 12,274 | | | (15,606) | | | (11,836) | | |
| Free Cash Flow (usage) | | Free Cash Flow (usage) | (27,219) | | | (1,855) | | | (45,074) | | | (13,811) | |
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Free cash flow for the first ninesix months 20202021 and 20192020 was primarily impacted by the same items that affected cash flows used by operating activities. Free cash flow is a non-GAAP financial measure that is comprised of net cash usedprovided (used) by operating activities plus purchases of property and equipment less proceeds from sales of property and equipment.
Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.).
Generally, the first half of the year is cash consumptive and impacted by significant disbursements related to annual customer rebate payments which normally occur in the first quarter of the year and earned employee bonuses historically paid in the second quarter of the year. In addition, investment in inventory is typically heavy in the first half of the year with planning around the company's supply chain to fulfill shipments in the second half of the year and can be impacted by footprint rationalization projects. The growth in inventory in the first half of 2021 was also impacted by supply chain and operations disruptions which prevented the completion and sale of products. As a result, historically,well, inventories increased to mitigate the impact from supply chain disruptions. Historically, the company realizes stronger cash flow in the second half of the year versus the first half of the year. Given the company's anticipation of net sales growth for 2021, seasonality of cash flow will also be impacted by working capital needed to support sales growth as realized in 2Q21 with higher accounts receivable balances. However, because the company cannot predict the duration or scope of the COVID-19 pandemic and its negative impact on the company’s cash flow,flows, these historic trends may not apply in 20202021 or beyond.
The company's approximate cash conversion days at SeptemberJune 30, 2020,2021, December 31, 20192020 and SeptemberJune 30, 20192020 were as follows:
For the quarter ended SeptemberJune 30, 2020,2021, days in inventory and days in accounts payable were both impacted by the business disruption due to the COVID-19 pandemic. As a result of the company's long lead timepandemic, including supply chain inventory level increased and accounts payable levelsdisruptions. Days in receivables were elevated forimpacted by timing of revenue recognized during the quarter ended September 30, 2020.quarter.
Days in receivables are equal to current quarter net current receivables divided by trailing four quarters of net sales multiplied by 365 days. Days in inventory and accounts
payable are equal to current quarter net inventory and accounts payable, respectively, divided by trailing four quarters of cost of sales multiplied by 365 days. Total cash conversion days are equal to days in receivables plus days in inventory less days in accounts payable.
The company provides a summary of days of cash conversion for the components of working capital so investors may see the rate at which cash is disbursed, collected and how quickly inventory is converted and sold.
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| MD&A | Accounting Estimates and Pronouncements | |
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ACCOUNTING ESTIMATES AND PRONOUNCEMENTS
CRITICAL ACCOUNTING ESTIMATES
The Condensed Consolidated Financial Statements included in the report include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Condensed Consolidated Financial Statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, thus, actual results could differ from these estimates. Please referRefer to the Critical Accounting Estimates section within MD&A of company's Annual Report on Form 10-K for the period ending December 31, 2019 as well as the revenue recognition and warranty disclosure below.2020.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the company’s disclosure regarding recently issued accounting pronouncements, see Accounting Policies - Recent Accounting Pronouncements in the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
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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. Forward-looking statements are those that describe future outcomes or expectations that are usually identified by wordsTerms such as “will,” “should,” “could,” “plan,” “intend,” “expect,” “continue,” “forecast,“believe” and “anticipate,” “believe,” and “anticipate” and include, for example,as well as similar comments, denote forward-looking statements relatedthat are subject to the expected effects on the company’s business of the COVID-19 pandemic; sales and free cash flow trends; the impact of contingency plans and SG&A and investment reductions; the company’s liquidity and working capital expectations; the company’s future financial results; and similar statements.inherent uncertainties that are difficult to predict. Actual results and events may differ materiallysignificantly from those expressed or anticipated as a result of various risks and uncertainties, includingwhich include, but are not limited to, the following: 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 healthcarehealth care or tightening of public health restrictions andwhich could impact on the demand for the company’s products; global shortages in, or increasing costs for, transportation and logistics services and capacity; the ability ofavailability and cost to the company to obtainof needed products, components or raw materials and components from its suppliers; actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the effects of steps the company takes to reduce operating costs; the inability of the company to sustain profitable sales growth, achieve anticipated improvements in segment operating performance, convert high inventory or accounts receivable levels to cash or reduce its costs to maintain competitive prices for its products; lack of market acceptance of the company's new product innovations; circumstances or developments that may make the company unable to implement or realize the anticipated benefits, or that may increase the costs, of its current and planned business initiatives, in particular the key elements of its enhanced transformation and growth plan such as its new product introductions, additional investments in sales force and demonstration equipment, plant consolidation in Germany, supply chain actions and global information technology outsourcing and ERP implementation activities, finance and accounting systems outsourcing and other outsourcing activities; possible adverse effects on the company's liquidity, including the company's ability to address future debt maturities, that may result from delays in the implementation of, any failure to realize benefits from, its current and planned business initiatives;maturities; adverse changes in government and other third-party payor reimbursement levels and practices both in the U.S.; and in other countries; consolidation of health care providers; increasing pricing pressures in the markets for the company's products; risks of failures in, or disruptions to, legacy IT systems; risks of cybersecurity attack, data breach or data loss and/or delays in or inability to recover or restore data and IT systems; adverse impactseffects of new tariffs or increases in commodity prices orthe company's consent decree of injunction with the U.S. Food and Drug Administration (FDA), including but not limited to, compliance costs, inability to rebuild negatively impacted customer relationships,
freight costs;unabsorbed capacity utilization, including fixed costs and overhead; any circumstances or developments that might adversely impact the third-party expert auditor's required audits of the company's quality systems at the facilities impacted by the consent decree, including any possible failure to comply with the consent decree or FDA regulations; regulatory proceedings or the company's failure to comply with regulatory requirements or receive regulatory clearance or approval for the company's products or operations;operations in the United States or abroad; adverse effects of regulatory or governmental inspections of the company'scompany facilities at any time and governmental investigations or enforcement actions; including the investigation of pricing practices at one of the company's former rentals businesses; product liability or warranty claims; product recalls, including more extensive warranty or recall experience than expected; possible adverse effects of being leveraged, including interest rate or event of default risks; exchange rate fluctuations, particularly in light of the relative importance of the company's foreign operations to its overall financial performance and including the existing and potential impacts from Brexit; legal actions, including adverse judgments or settlements of litigation or claims in excess of available insurance limits; tax rate fluctuations; additional tax expense or additional tax exposures, which could affect the company's future profitability and thosecash flow; uncollectible accounts receivable; risks inherent in managing and operating businesses in many different foreign jurisdictions; decreased availability or increased costs of materials which could increase the company's costs of producing or acquiring the company's products, including the adverse impacts of tariffs and increases in commodity costs or freight costs; heightened vulnerability to a hostile takeover attempt or other risks and uncertainties expressed in the cautionary statements and risk factorsshareholder activism; provisions of Ohio law or in the company's annual reportdebt agreements, charter documents or other agreements that may prevent or delay a change in control, as well as the risks describe in the Annual Report on Form 10-K quarterlyand from time to time in the company's reports on Form 10-Q and other filingsas filed with the Securities and Exchange Commission. The company may not be ableExcept to predict and may have little or no control over many factors or events that may influence its future results and, except asthe extent required by law, shall have nothe company does not undertake and specifically declines any obligation to review or update any forward-looking statements.statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Comprehensive Income (Loss) (unaudited)
| | (In thousands, except per share data) | (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, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Net sales | Net sales | $ | 211,906 | | | $ | 235,774 | | | $ | 626,646 | | | $ | 695,051 | | Net sales | $ | 225,864 | | | $ | 196,300 | | | $ | 422,066 | | | $ | 414,740 | |
| Cost of products sold | Cost of products sold | 151,866 | | | 168,189 | | | 446,968 | | | 500,945 | | Cost of products sold | 165,046 | | | 139,650 | | | 306,610 | | | 295,102 | |
| Gross Profit | Gross Profit | 60,040 | | | 67,585 | | | 179,678 | | | 194,106 | | Gross Profit | 60,818 | | | 56,650 | | | 115,456 | | | 119,638 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 55,530 | | | 63,539 | | | 174,672 | | | 197,035 | | Selling, general and administrative expenses | 63,765 | | | 57,404 | | | 122,586 | | | 119,142 | |
| Gain on sale of business | Gain on sale of business | 0 | | | 0 | | | (9,790) | | | 0 | | Gain on sale of business | 0 | | | (200) | | | 0 | | | (9,790) | |
| Charges related to restructuring activities | Charges related to restructuring activities | 1,580 | | | 1,628 | | | 4,657 | | | 3,641 | | Charges related to restructuring activities | 547 | | | 1,685 | | | 2,099 | | | 3,077 | |
| | Operating Income (Loss) | Operating Income (Loss) | 2,930 | | | 2,418 | | | 10,139 | | | (6,570) | | Operating Income (Loss) | (3,494) | | | (2,239) | | | (9,229) | | | 7,209 | |
| Net gain on convertible debt derivatives | 0 | | | 0 | | | 0 | | | (1,197) | | |
| | Loss on debt extinguishment including debt finance charges and fees | Loss on debt extinguishment including debt finance charges and fees | 761 | | | 280 | | | 7,360 | | | 280 | | Loss on debt extinguishment including debt finance charges and fees | 0 | | | 6,599 | | | 709 | | | 6,599 | |
| Interest expense | Interest expense | 7,402 | | | 6,992 | | | 21,132 | | | 22,027 | | Interest expense | 6,084 | | | 7,054 | | | 11,815 | | | 13,730 | |
| Interest income | Interest income | (7) | | | (113) | | | (90) | | | (361) | | Interest income | 0 | | | (23) | | | (1) | | | (83) | |
| Loss Before Income Taxes | Loss Before Income Taxes | (5,226) | | | (4,741) | | | (18,263) | | | (27,319) | | Loss Before Income Taxes | (9,578) | | | (15,869) | | | (21,752) | | | (13,037) | |
| Income tax provision | Income tax provision | 2,050 | | | 3,300 | | | 4,900 | | | 7,325 | | Income tax provision | 1,120 | | | 750 | | | 2,990 | | | 2,850 | |
| | Net Loss | Net Loss | $ | (7,276) | | | $ | (8,041) | | | $ | (23,163) | | | $ | (34,644) | | Net Loss | $ | (10,698) | | | $ | (16,619) | | | $ | (24,742) | | | $ | (15,887) | |
| Dividends Declared per Common Share | Dividends Declared per Common Share | $ | 0 | | | $ | 0.0125 | | | $ | 0.0125 | | | $ | 0.0375 | | Dividends Declared per Common Share | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0.0125 | |
| | Net Loss per Share—Basic | Net Loss per Share—Basic | $ | (0.21) | | | $ | (0.24) | | | $ | (0.68) | | | $ | (1.03) | | Net Loss per Share—Basic | $ | (0.31) | | | $ | (0.48) | | | $ | (0.71) | | | $ | (0.47) | |
| Weighted Average Shares Outstanding—Basic | Weighted Average Shares Outstanding—Basic | 34,419 | | | 33,660 | | | 34,213 | | | 33,571 | | Weighted Average Shares Outstanding—Basic | 34,969 | | | 34,437 | | | 34,732 | | | 34,111 | |
| | Net Loss per Share—Assuming Dilution | $ | (0.21) | | | $ | (0.24) | | | $ | (0.68) | | | $ | (1.03) | | |
| Loss per Share—Assuming Dilution | | Loss per Share—Assuming Dilution | $ | (0.31) | | | $ | (0.48) | | | $ | (0.71) | | | $ | (0.47) | |
| Weighted Average Shares Outstanding—Assuming Dilution | Weighted Average Shares Outstanding—Assuming Dilution | 34,530 | | | 33,668 | | | 34,313 | | | 33,581 | | Weighted Average Shares Outstanding—Assuming Dilution | 35,620 | | | 34,479 | | | 35,450 | | | 34,198 | |
| Net Loss | Net Loss | $ | (7,276) | | | $ | (8,041) | | | $ | (23,163) | | | $ | (34,644) | | Net Loss | $ | (10,698) | | | $ | (16,619) | | | $ | (24,742) | | | $ | (15,887) | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | 35,944 | | | (9,057) | | | 36,859 | | | (13,041) | | Foreign currency translation adjustments | 7,038 | | | 5,109 | | | 12,715 | | | 915 | |
| Defined Benefit Plans: | Defined Benefit Plans: | | Defined Benefit Plans: | |
| Amortization of prior service costs and unrecognized losses | Amortization of prior service costs and unrecognized losses | (193) | | | (201) | | | (362) | | | (276) | | Amortization of prior service costs and unrecognized losses | (744) | | | — | | | (395) | | | (169) | |
| | Deferred tax adjustment resulting from defined benefit plan activity | Deferred tax adjustment resulting from defined benefit plan activity | 9 | | | 38 | | | 25 | | | 54 | | Deferred tax adjustment resulting from defined benefit plan activity | (5) | | | (2) | | | (63) | | | 16 | |
| Valuation reserve associated with defined benefit plan activity | Valuation reserve associated with defined benefit plan activity | (9) | | | (38) | | | (25) | | | (54) | | Valuation reserve associated with defined benefit plan activity | 5 | | | 2 | | | 63 | | | (16) | |
| Current period (loss) gain on cash flow hedges | (2,047) | | | (315) | | | (1,159) | | | 861 | | |
| Current period gain (loss) on cash flow hedges | | Current period gain (loss) on cash flow hedges | 101 | | | 1,030 | | | (774) | | | 888 | |
| Deferred tax benefit (provision) related to gain on cash flow hedges | Deferred tax benefit (provision) related to gain on cash flow hedges | 285 | | | 12 | | | 171 | | | (127) | | Deferred tax benefit (provision) related to gain on cash flow hedges | 14 | | | (114) | | | 97 | | | (114) | |
| Other Comprehensive Income (Loss) | 33,989 | | | (9,561) | | | 35,509 | | | (12,583) | | |
| | Comprehensive Income (Loss) | $ | 26,713 | | | $ | (17,602) | | | $ | 12,346 | | | $ | (47,227) | | |
| Other Comprehensive Income | | Other Comprehensive Income | 6,409 | | | 6,025 | | | 11,643 | | | 1,520 | |
| Comprehensive Loss | | Comprehensive Loss | $ | (4,289) | | | $ | (10,594) | | | $ | (13,099) | | | $ | (14,367) | |
| (Elements as a % of Net Sales) | (Elements as a % of Net Sales) | | | | | | | | (Elements as a % of Net Sales) | | | | | | | |
| Net sales | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of products sold | Cost of products sold | 71.7 | | | 71.3 | | | 71.3 | | | 72.1 | | Cost of products sold | 73.1 | | | 71.1 | | | 72.6 | | | 71.2 | |
| Gross Profit | Gross Profit | 28.3 | | | 28.7 | | | 28.7 | | | 27.9 | | Gross Profit | 26.9 | | | 28.9 | | | 27.4 | | | 28.8 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 26.2 | | | 26.9 | | | 27.9 | | | 28.3 | | Selling, general and administrative expenses | 28.2 | | | 29.2 | | | 29.0 | | | 28.7 | |
| Gain on sale of business | Gain on sale of business | 0 | | | 0 | | | (1.6) | | | 0 | | Gain on sale of business | 0 | | | (0.1) | | | 0 | | | (2.4) | |
| Charges related to restructuring activities | Charges related to restructuring activities | 0.7 | | | 0.7 | | | 0.7 | | | 0.5 | | Charges related to restructuring activities | 0.2 | | | 0.9 | | | 0.5 | | | 0.7 | |
| Operating Income (Loss) | Operating Income (Loss) | 1.4 | | | 1.0 | | | 1.6 | | | (0.9) | | Operating Income (Loss) | (1.5) | | | (1.1) | | | (2.2) | | | 1.7 | |
| Net gain on convertible debt derivatives | 0 | | | 0 | | | 0 | | | (0.2) | | |
| | | Loss on debt extinguishment including debt finance charges and fees | Loss on debt extinguishment including debt finance charges and fees | 0.4 | | | 0.1 | | | 1.2 | | | 0.04 | | Loss on debt extinguishment including debt finance charges and fees | — | | | 3.4 | | | 0.2 | | | 1.6 | |
| Interest expense | Interest expense | 3.5 | | | 3.0 | | | 3.4 | | | 3.2 | | Interest expense | 2.7 | | | 3.6 | | | 2.8 | | | 3.3 | |
| Interest income | Interest income | 0 | | | 0 | | | 0 | | | (0.1) | | Interest income | 0 | | | 0 | | | 0 | | | 0 | |
| Loss Before Income Taxes | Loss Before Income Taxes | (2.5) | | | (2.0) | | | (2.9) | | | (3.9) | | Loss Before Income Taxes | (4.2) | | | (8.1) | | | (5.2) | | | (3.1) | |
| Income tax provision | Income tax provision | 1.0 | | | 1.4 | | | 0.8 | | | 1.1 | | Income tax provision | 0.5 | | | 0.4 | | | 0.7 | | | 0.7 | |
| Net Loss | Net Loss | (3.4) | % | | (3.4) | % | | (3.7) | % | | (5.0) | % | Net Loss | (4.7) | % | | (8.5) | % | | (5.9) | % | | (3.8) | % |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| | | | | | | | | | | |
| (unaudited) | | |
| June 30,
2021 | | December 31,
2020 |
| Assets | (In thousands) |
| | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 78,252 | | | $ | 105,298 | |
| Trade receivables, net | 120,710 | | | 108,588 | |
| Installment receivables, net | 176 | | | 379 | |
| Inventories, net | 144,543 | | | 115,484 | |
| | | |
| Other current assets | 40,000 | | | 44,717 | |
| | | |
| Total Current Assets | 383,681 | | | 374,466 | |
| Other Assets | 5,795 | | | 5,925 | |
| Intangibles, net | 28,312 | | | 27,763 | |
| Property and Equipment, net | 60,465 | | | 56,243 | |
| Finance Lease Assets, net | 68,529 | | | 64,031 | |
| Operating Lease Assets, net | 14,144 | | | 15,092 | |
| Goodwill | 412,922 | | | 402,461 | |
| Total Assets | $ | 973,848 | | | $ | 945,981 | |
| Liabilities and Shareholders’ Equity | | | |
| Current Liabilities | | | |
| Accounts payable | $ | 110,373 | | | $ | 85,424 | |
| Accrued expenses | 109,113 | | | 126,273 | |
| Current taxes payable | 3,459 | | | 3,359 | |
| Current portion of long-term debt | 13,134 | | | 5,612 | |
| Current portion of finance lease obligations | 3,438 | | | 3,405 | |
| Current portion of operating lease obligations | 5,371 | | | 6,313 | |
| | | |
| Total Current Liabilities | 244,888 | | | 230,386 | |
| Long-Term Debt | 299,473 | | | 239,441 | |
| Finance Lease Long-Term Obligations | 68,276 | | | 63,137 | |
| Operating Leases Long-Term Obligations | 8,598 | | | 8,697 | |
| Other Long-Term Obligations | 71,723 | | | 70,474 | |
| Shareholders’ Equity | | | |
| Preferred Shares (Authorized 300 shares; NaN outstanding) | 0 | | | 0 | |
| Common Shares (Authorized 150,000 shares; 39,401 and 38,613 issued and outstanding at June 30, 2021 and December 31, 2020, respectively)—no par | 9,977 | | | 9,816 | |
| Class B Common Shares (Authorized 12,000 shares; 4 and 4 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively)—no par | 2 | | | 2 | |
| Additional paid-in-capital | 278,152 | | | 326,088 | |
| Retained earnings | 43,466 | | | 58,538 | |
| Accumulated other comprehensive income | 57,079 | | | 45,436 | |
| Treasury Shares (4,397 and 4,184 shares at June 30, 2021 and December 31, 2020, respectively) | (107,786) | | | (106,034) | |
| Total Shareholders’ Equity | 280,890 | | | 333,846 | |
| Total Liabilities and Shareholders’ Equity | $ | 973,848 | | | $ | 945,981 | |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (unaudited)
| | | | | | | | | | | | | |
| For the Six Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Operating Activities | (In thousands) |
| Net loss | $ | (24,742) | | | $ | (15,887) | | | |
| Adjustments to reconcile net loss to net cash used by operating activities: | | | | | |
| Gain on sale of business | 0 | | | (9,790) | | | |
| | | | | |
| Depreciation and amortization | 8,264 | | | 6,660 | | | |
| Amortization of operating lease right of use assets | 3,201 | | | 3,589 | | | |
| Provision for losses on trade and installment receivables | 335 | | | 219 | | | |
| Provision (benefit) for deferred income taxes | 460 | | | (91) | | | |
| Provision (benefit) for other deferred liabilities | (65) | | | 493 | | | |
| Provision for equity compensation | 5,810 | | | 5,326 | | | |
| Gain on disposals of property and equipment | (175) | | | (978) | | | |
| Loss on debt extinguishment including debt finance charges and fees | 709 | | | 6,599 | | | |
| | | | | |
| | | | | |
| Convertible debt discount amortization and accretion | 1,747 | | | 5,594 | | | |
| | | | | |
| Amortization of debt fees | 1,035 | | | 942 | | | |
| | | | | |
| Changes in operating assets and liabilities: | | | | | |
| Trade receivables | (10,388) | | | 17,940 | | | |
| Installment sales contracts, net | 289 | | | 324 | | | |
| Inventories, net | (27,082) | | | (31,279) | | | |
| Other current assets | 5,770 | | | (7,393) | | | |
| Accounts payable | 22,872 | | | 22,011 | | | |
| Accrued expenses | (24,406) | | | (6,708) | | | |
| Other long-term liabilities | 316 | | | (896) | | | |
| Net Cash Used by Operating Activities | (36,050) | | | (3,325) | | | |
| Investing Activities | | | | | |
| Purchases of property and equipment | (9,047) | | | (10,879) | | | |
| Proceeds from sale of property and equipment | 23 | | | 393 | | | |
| | | | | |
| Proceeds from sale of business | 0 | | | 14,563 | | | |
| | | | | |
| Change in other long-term assets | (69) | | | 106 | | | |
| Other | 0 | | | (2,144) | | | |
| Net Cash Provided (Used) by Investing Activities | (9,093) | | | 2,039 | | | |
| Financing Activities | | | | | |
| Proceeds from revolving lines of credit and long-term borrowings | 147,539 | | | 41,937 | | | |
| Repurchases of convertible debt, payments on revolving lines of credit and finance leases | (105,216) | | | (8,616) | | | |
| | | | | |
| Payment of financing costs | (5,175) | | | (1,307) | | | |
| Payment of dividends | 0 | | | (414) | | | |
| Purchases of capped calls | (18,787) | | | 0 | | | |
| Payments to debt holders | 0 | | | (5,593) | | | |
| Purchases of treasury shares | (1,752) | | | (1,693) | | | |
| Net Cash Provided by Financing Activities | 16,609 | | | 24,314 | | | |
| Effect of exchange rate changes on cash | 1,488 | | | 1,101 | | | |
| Increase (decrease) in cash and cash equivalents | (27,046) | | | 24,129 | | | |
| Cash and cash equivalents at beginning of year | 105,298 | | | 80,063 | | | |
| Cash and cash equivalents at end of period | $ | 78,252 | | | $ | 104,192 | | | |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Assets | (In thousands) |
| | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 86,825 | | | $ | 80,063 | |
| Trade receivables, net | 108,957 | | | 116,669 | |
| Installment receivables, net | 261 | | | 736 | |
| Inventories, net | 145,452 | | | 120,500 | |
| | | |
| Other current assets | 37,635 | | | 37,909 | |
| | | |
| Total Current Assets | 379,130 | | | 355,877 | |
| Other Assets | 3,991 | | | 4,216 | |
| Intangibles | 27,770 | | | 26,447 | |
| Property and Equipment, net | 53,112 | | | 46,607 | |
| Financing Lease Assets, net | 65,108 | | | 26,900 | |
| Operating Lease Assets, net | 13,075 | | | 18,676 | |
| Goodwill | 401,665 | | | 373,403 | |
| Total Assets | $ | 943,851 | | | $ | 852,126 | |
| Liabilities and Shareholders’ Equity | | | |
| Current Liabilities | | | |
| Accounts payable | $ | 93,160 | | | $ | 88,003 | |
| Accrued expenses | 124,666 | | | 120,947 | |
| Current taxes payable | 2,197 | | | 345 | |
| Current portion of financing lease obligations | 3,352 | | | 2,514 | |
| Current portion of operating lease obligations | 5,843 | | | 6,790 | |
| Short-term debt and current maturities of long-term obligations | 4,062 | | | 58 | |
| | | |
| Total Current Liabilities | 233,280 | | | 218,657 | |
| Long-Term Debt | 238,202 | | | 219,464 | |
| Finance Lease Long-Term Obligations | 63,950 | | | 26,480 | |
| Operating Leases Long-Term Obligations | 7,182 | | | 12,060 | |
| Other Long-Term Obligations | 70,748 | | | 66,949 | |
| Shareholders’ Equity | | | |
| Preferred Shares (Authorized 300 shares; NaN outstanding) | 0 | | | 0 | |
| Common Shares (Authorized 150,000 shares; 38,596 and 37,609 issued and outstanding at September 30, 2020 and December 31, 2019, respectively)—no par | 9,815 | | | 9,588 | |
| Class B Common Shares (Authorized 12,000 shares; 6 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively)—no par | 2 | | | 2 | |
| Additional paid-in-capital | 324,409 | | | 312,650 | |
| Retained earnings | 63,655 | | | 87,475 | |
| Accumulated other comprehensive income | 38,637 | | | 3,128 | |
| Treasury Shares (4,184 and 3,953 shares at September 30, 2020 and December 31, 2019, respectively) | (106,029) | | | (104,327) | |
| Total Shareholders’ Equity | 330,489 | | | 308,516 | |
| Total Liabilities and Shareholders’ Equity | $ | 943,851 | | | $ | 852,126 | |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (unaudited)
| | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | |
| 2020 | | 2019 | | |
| Operating Activities | (In thousands) |
| Net loss | $ | (23,163) | | | $ | (34,644) | | | |
| Adjustments to reconcile net loss to net cash used by operating activities: | | | | | |
| Gain on sale of business | (9,790) | | | 0 | | | |
| | | | | |
| Depreciation and amortization | 10,360 | | | 11,800 | | | |
| Amortization of operating lease right of use assets | 5,284 | | | 6,927 | | | |
| Provision for losses on trade and installment receivables | 554 | | | 923 | | | |
| (Provision) benefit for deferred income taxes | 111 | | | (232) | | | |
| Provision for other deferred liabilities | 594 | | | 837 | | | |
| Provision for equity compensation | 6,965 | | | 5,873 | | | |
| Loss (gain) on disposals of property and equipment | (1,066) | | | 186 | | | |
| Loss on debt extinguishment including debt finance charges and fees | 7,360 | | | 280 | | | |
| | | | | |
| | | | | |
| Amortization of convertible debt discount | 8,629 | | | 9,429 | | | |
| Amortization of debt fees | 1,329 | | | 1,860 | | | |
| Gain on convertible debt derivatives | 0 | | | (1,197) | | | |
| Changes in operating assets and liabilities: | | | | | |
| Trade receivables | 6,160 | | | 1,501 | | | |
| Installment sales contracts, net | 532 | | | 405 | | | |
| Inventories, net | (22,021) | | | 3,173 | | | |
| Other current assets | 1,691 | | | (2,099) | | | |
| Accounts payable | 5,903 | | | (1,226) | | | |
| Accrued expenses | 1,616 | | | (7,749) | | | |
| Other long-term liabilities | (226) | | | (779) | | | |
| Net Cash Provided (Used) by Operating Activities | 822 | | | (4,732) | | | |
| Investing Activities | | | | | |
| Purchases of property and equipment | (16,824) | | | (7,177) | | | |
| Proceeds from sale of property and equipment | 396 | | | 73 | | | |
| | | | | |
| Proceeds from sale of business | 14,563 | | | 0 | | | |
| | | | | |
| Change in other long-term assets | 67 | | | (72) | | | |
| Other | (2,176) | | | 0 | | | |
| Net Cash Used by Investing Activities | (3,974) | | | (7,176) | | | |
| Financing Activities | | | | | |
| Proceeds from revolving lines of credit and long-term borrowings | 72,551 | | | 0 | | | |
| Repurchases of convertible debt, payments on revolving lines of credit and financing leases | (59,483) | | | (16,339) | | | |
| | | | | |
| Payment of financing costs | (1,307) | | | 0 | | | |
| Payment of dividends | (414) | | | (1,234) | | | |
| | | | | |
| Payments to debt holders | (5,593) | | | 0 | | | |
| Purchase of treasury shares | (1,702) | | | (860) | | | |
| Net Cash Provided (Used) by Financing Activities | 4,052 | | | (18,433) | | | |
| Effect of exchange rate changes on cash | 5,862 | | | (1,526) | | | |
| Increase (decrease) in cash and cash equivalents | 6,762 | | | (31,867) | | | |
| Cash and cash equivalents at beginning of year | 80,063 | | | 116,907 | | | |
| Cash and cash equivalents at end of period | $ | 86,825 | | | $ | 85,040 | | | |
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
| | (In thousands) | (In thousands) | Common
Shares | | Class B
Shares | | Additional
Paid-in-
Capital | | Retained
Earnings | | Accumulated Other
Comprehen-sive
Income | | Treasury
Shares | | Total | (In thousands) | Common
Shares | | Class B
Shares | | Additional
Paid-in-
Capital | | Retained
Earnings | | Accumulated Other
Comprehensive
Income (Loss) | | Treasury
Shares | | Total |
| June 30, 2020 Balance | $ | 9,815 | | | $ | 2 | | | $ | 322,770 | | | $ | 70,931 | | | $ | 4,648 | | | $ | (106,020) | | | $ | 302,146 | | |
| Exercise of share options | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| March 31, 2021 Balance | | March 31, 2021 Balance | $ | 9,917 | | | $ | 2 | | | $ | 273,982 | | | $ | 54,164 | | | $ | 50,670 | | | $ | (106,034) | | | $ | 282,701 | |
| | Performance awards | Performance awards | 0 | | | — | | | 818 | | | — | | | — | | | 0 | | | 818 | | Performance awards | 52 | | | — | | | 1,329 | | | — | | | — | | | (668) | | | 713 | |
| | Restricted share awards | Restricted share awards | 0 | | | — | | | 821 | | | — | | | — | | | (9) | | | 812 | | Restricted share awards | 8 | | | — | | | 2,841 | | | — | | | — | | | (1,084) | | | 1,765 | |
| Net loss | Net loss | — | | | — | | | — | | | (7,276) | | | — | | | — | | | (7,276) | | Net loss | — | | | — | | | — | | | (10,698) | | | — | | | — | | | (10,698) | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 35,944 | | | — | | | 35,944 | | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 7,038 | | | — | | | 7,038 | |
| Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | (1,762) | | | — | | | (1,762) | | |
| Unrealized gain on cash flow hedges | | Unrealized gain on cash flow hedges | — | | | — | | | — | | | — | | | 115 | | | — | | | 115 | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (193) | | | — | | | (193) | | Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (744) | | | — | | | (744) | |
| Total comprehensive income | Total comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 26,713 | | Total comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | (4,289) | |
| | September 30, 2020 Balance | $ | 9,815 | | | $ | 2 | | | $ | 324,409 | | | $ | 63,655 | | | $ | 38,637 | | | $ | (106,029) | | | $ | 330,489 | | |
| June 30, 2021 Balance | | June 30, 2021 Balance | $ | 9,977 | | | $ | 2 | | | $ | 278,152 | | | $ | 43,466 | | | $ | 57,079 | | | $ | (107,786) | | | $ | 280,890 | |
| | June 30, 2019 Balance | $ | 9,588 | | | $ | 2 | | | $ | 301,833 | | | $ | 115,025 | | | $ | 9,771 | | | $ | (104,293) | | | $ | 331,926 | | |
| March 31, 2020 Balance | | March 31, 2020 Balance | $ | 9,815 | | | $ | 2 | | | $ | 313,623 | | | $ | 87,550 | | | $ | (1,377) | | | $ | (105,101) | | | $ | 304,512 | |
| | Exercise of stock options | | Exercise of stock options | — | | | — | | | — | | | — | | | — | | | (347) | | | (347) | |
| Performance awards | | Performance awards | — | | | — | | | 1,282 | | | — | | | — | | | — | | | 1,282 | |
| | Performance awards | 0 | | | — | | | 649 | | | — | | | — | | | 0 | | | 649 | | |
| Non-qualified share options | — | | | — | | | 123 | | | — | | | — | | | — | | | 123 | | |
| Restricted share awards | Restricted share awards | 0 | | | — | | | 798 | | | — | | | — | | | 798 | | Restricted share awards | — | | | — | | | 2,844 | | | — | | | — | | | (572) | | | 2,272 | |
| | Net loss | Net loss | — | | | — | | | — | | | (8,041) | | | — | | | — | | | (8,041) | | Net loss | — | | | — | | | — | | | (16,619) | | | — | | | — | | | (16,619) | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (9,057) | | | — | | | (9,057) | | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 5,109 | | | — | | | 5,109 | |
| Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | (303) | | | — | | | (303) | | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (201) | | | — | | | (201) | | |
| Unrealized gain on cash flow hedges | | Unrealized gain on cash flow hedges | — | | | — | | | — | | | — | | | 916 | | | — | | | 916 | |
| | Total comprehensive loss | Total comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (17,602) | | Total comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (10,594) | |
| | Dividends | — | | | — | | | — | | | (415) | | | — | | | — | | | (415) | | |
| | September 30, 2019 Balance | $ | 9,588 | | | $ | 2 | | | $ | 303,403 | | | $ | 106,569 | | | $ | 210 | | | $ | (104,293) | | | $ | 315,479 | | |
| Exchange of convertible notes | | Exchange of convertible notes | — | | | — | | | 5,021 | | | — | | | — | | | — | | | 5,021 | |
| June 30, 2020 Balance | | June 30, 2020 Balance | $ | 9,815 | | | $ | 2 | | | $ | 322,770 | | | $ | 70,931 | | | $ | 4,648 | | | $ | (106,020) | | | $ | 302,146 | |
| See notes to condensed consolidated financial statements. | | |
| INVACARE CORPORATION AND SUBSIDIARIES | | Condensed Consolidated Statement of Shareholders' Equity (unaudited) | Condensed Consolidated Statement of Shareholders' Equity (unaudited) | Condensed Consolidated Statement of Shareholders' Equity (unaudited) |
| | (In thousands) | (In thousands) | Common
Shares | | Class B
Shares | | Additional
Paid-in-
Capital | | Retained
Earnings | | Accumulated Other
Comprehen-sive
Income | | Treasury Shares | | Total | (In thousands) | Common
Shares | | Class B
Shares | | Additional
Paid-in-
Capital | | Retained
Earnings | | Accumulated Other
Comprehensive
Income (Loss) | | Treasury Shares | | Total |
| January 1, 2021 Balance | | January 1, 2021 Balance | $ | 9,816 | | | $ | 2 | | | $ | 326,088 | | | $ | 58,538 | | | $ | 45,436 | | | $ | (106,034) | | | $ | 333,846 | |
| | Performance awards | | Performance awards | 52 | | | — | | | 1,997 | | | — | | | — | | | (668) | | | 1,381 | |
| | Restricted share awards | | Restricted share awards | 109 | | | — | | | 3,652 | | | — | | | — | | | (1,084) | | | 2,677 | |
| Net loss | | Net loss | — | | | — | | | — | | | (24,742) | | | — | | | — | | | (24,742) | |
| Foreign currency translation adjustments | | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 12,715 | | | — | | | 12,715 | |
| Unrealized loss on cash flow hedges | | Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | (677) | | | — | | | (677) | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | | Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (395) | | | — | | | (395) | |
| Total comprehensive loss | | Total comprehensive loss | | (13,099) | |
| | Adoption of ASU 2020-06 | | Adoption of ASU 2020-06 | — | | | — | | | (34,798) | | | 9,670 | | | — | | | — | | | (25,128) | |
| Purchase of capped calls | | Purchase of capped calls | $ | — | | | $ | — | | | (18,787) | | | $ | — | | | $ | — | | | $ | — | | | (18,787) | |
| June 30, 2021 Balance | | June 30, 2021 Balance | $ | 9,977 | | | $ | 2 | | | $ | 278,152 | | | $ | 43,466 | | | $ | 57,079 | | | $ | (107,786) | | | $ | 280,890 | |
| | January 1, 2020 Balance | January 1, 2020 Balance | $ | 9,588 | | | $ | 2 | | | $ | 312,650 | | | $ | 87,475 | | | $ | 3,128 | | | $ | (104,327) | | | $ | 308,516 | | January 1, 2020 Balance | $ | 9,588 | | | $ | 2 | | | $ | 312,650 | | | $ | 87,475 | | | $ | 3,128 | | | $ | (104,327) | | | $ | 308,516 | |
| Exercise of share options | Exercise of share options | 90 | | | — | | | (90) | | | — | | | — | | | (1,121) | | | (1,121) | | Exercise of share options | 90 | | | — | | | (90) | | | — | | | — | | | (1,121) | | | (1,121) | |
| Performance awards | Performance awards | — | | | — | | | 2,494 | | | — | | | — | | | 2,494 | | Performance awards | — | | | — | | | 1,676 | | | — | | | — | | | — | | | 1,676 | |
| | Restricted share awards | Restricted share awards | 137 | | | — | | | 4,334 | | | — | | | — | | | (581) | | | 3,890 | | Restricted share awards | 137 | | | — | | | 3,513 | | | — | | | — | | | (572) | | | 3,078 | |
| Net loss | Net loss | — | | | — | | | — | | | (23,163) | | | — | | | — | | | (23,163) | | Net loss | — | | | — | | | — | | | (15,887) | | | — | | | — | | | (15,887) | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 36,859 | | | — | | | 36,859 | | Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 915 | | | — | | | 915 | |
| Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | (988) | | | — | | | (988) | | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (362) | | | — | | | (362) | | |
| Total comprehensive income | | 12,346 | | |
| Exchange of convertible notes | — | | | — | | | 5,021 | | | — | | | — | | | — | | | 5,021 | | |
| Dividends | — | | | — | | | — | | | (414) | | | — | | | — | | | (414) | | |
| Adoption of credit loss standard | — | | | — | | | — | | | (243) | | | — | | | — | | | (243) | | |
| September 30, 2020 Balance | $ | 9,815 | | | $ | 2 | | | $ | 324,409 | | | $ | 63,655 | | | $ | 38,637 | | | $ | (106,029) | | | $ | 330,489 | | |
| | January 1, 2019 Balance | $ | 9,419 | | | $ | 2 | | | $ | 297,919 | | | $ | 142,447 | | | $ | 12,793 | | | $ | (103,433) | | | $ | 359,147 | | |
| | Performance awards | 29 | | | — | | | 1,619 | | | — | | | — | | | (348) | | | 1,300 | | |
| Non-qualified share options | — | | | — | | | 334 | | | — | | | — | | | 334 | | |
| Restricted share awards | 140 | | | — | | | 3,751 | | | — | | | — | | | (512) | | | 3,379 | | |
| Net loss | — | | | — | | | — | | | (34,644) | | | — | | | — | | | (34,644) | | |
| Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (13,041) | | | — | | | (13,041) | | |
| Unrealized gain on cash flow hedges | Unrealized gain on cash flow hedges | — | | | — | | | — | | | — | | | 734 | | | — | | | 734 | | Unrealized gain on cash flow hedges | — | | | — | | | — | | | — | | | 774 | | | — | | | 774 | |
| Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (276) | | | — | | | (276) | | Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits | — | | | — | | | — | | | — | | | (169) | | | — | | | (169) | |
| Total comprehensive loss | Total comprehensive loss | | (47,227) | | Total comprehensive loss | | (14,367) | |
| Convertible debt derivative adjustments | — | | | — | | | (220) | | | — | | | — | | | — | | | (220) | | |
| | Dividends | Dividends | — | | | — | | | — | | | (1,234) | | | — | | | — | | | (1,234) | | Dividends | — | | | — | | | — | | | (414) | | | — | | | — | | | (414) | |
| September 30, 2019 Balance | $ | 9,588 | | | $ | 2 | | | $ | 303,403 | | | $ | 106,569 | | | $ | 210 | | | $ | (104,293) | | | $ | 315,479 | | |
| Exchange of convertible notes | | Exchange of convertible notes | — | | | — | | | 5,021 | | | — | | | — | | | — | | | 5,021 | |
| Adoption of credit loss standard | | Adoption of credit loss standard | — | | | — | | | — | | | (243) | | | — | | | — | | | (243) | |
| June 30, 2020 Balance | | June 30, 2020 Balance | $ | 9,815 | | | $ | 2 | | | $ | 322,770 | | | $ | 70,931 | | | $ | 4,648 | | | $ | (106,020) | | | $ | 302,146 | |
|
See notes to condensed consolidated financial statements.
| | | | | | | | |
| Notes to Financial Statements | Accounting Policies | |
| | |
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, 20202021 and the results of its operations and changes in its cash flow for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, 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, 20202021 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 June 2016,August 2020, 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 are 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 company adopted ASU 2016-13, effective on January 1, 2020, which resulted in an increase for credit losses of $243,0002020-06 "Debt with the offsetting impact recorded to retained earnings.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - GoodwillConversion and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The guidanceOptions" (Subtopic 470-20) and Derivatives and Hedging Contracts 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 company adopted ASU 2017-04 as of January 1, 2020 with no impact to the company's financial statements upon adoption.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes,Entity's Own Equity (Subtopic 815-40)", which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature (CCF) and (2) convertible instrument with a beneficial conversion feature (BCF). As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.
The company adopted ASU 2020-06 effective January 1, 2021, using the modified retrospective method, which resulted in the removal of convertible debt discounts of $25,218,000,
adjustment of $34,798,000 to additional paid-in-capital and $9,670,000 adjustment to retained earnings. Convertible debt discounts prior to adoption of ASU 2020-06 were amortized over the convertible debt term through interest expense. Subsequent to adoption, convertible debt discounts are not applicable when accounting for debt as a single unit of account. Interest expense for the three and six months ended June 30, 2020 related to debt discount amortization (which was not recognized in 2021 due to adoption) were $2,608,000 or $0.08 per basic and diluted share and $5,340,000 or $0.16 per basic and diluted share, respectively. There was no impact of adoption on performance metrics used for short-term or long-term incentive compensation. Accretion specific to the Series II 2024 Notes was unaffected by adoption. Due to the valuation allowance, there was no net impact to income taxes by removing certainfor the adoption. Subsequent to adoption weighted average shares when calculating diluted earnings per share requires the application of the if-converted method for all convertible instruments.
Recent Accounting Pronouncements (Not Yet Adopted):
In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting," which is intended to provide temporary optional expedients an exceptions to the general principles in Topic 740. ASU 2019-12 removesU.S. GAAP guidance on contract modifications and hedge accounting to ease the following exceptions: 1) exceptionfinancial reporting burden related to the incremental approach for intraperiod tax allocation when there is a lossexpected market transition from continuing operationsthe London Interbank Offered Rate (LIBOR) and income or a gain from other items (for example, discontinued operations or other comprehensive income), 2) exceptioninterbank offered rates to alternative reference rates if certain criteria are met. The guidance may be adopted in any period prior to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign subsidiary becomes a subsidiary and 4) the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The ASU also simplifies other areas of Topic 740 by clarifying and amending existing guidance. The amendments in the ASU will be applied using different approaches dependingguidance expiration on what the specific amendments relate to.December 31, 2022. The company early adoptedis currently reviewing the impact of the adoption of ASU 2019-122020-04 but does not expect the adoption to have a material impact on a prospective basis as of January 1, 2020 with no impact to the company's financial statements upon adoption.statements.
| | | | | | | | |
| Notes to Financial Statements | Divested Businesses | |
| | |
Divested Businesses
On March 7, 2020, the company, completed the sale (the “Transaction”) of its indirect subsidiary, Dynamic Controls, a New Zealand incorporated unlimited company (“Dynamic Controls”), to Allied Motion Christchurch Limited, a New Zealand limited company (the “Purchaser”), pursuant to a Securities Purchase Agreement among the company, Invacare Holdings New Zealand, a New Zealand incorporated unlimited company, and the Purchaser, dated March 6, 2020 (the “Purchase Agreement”). Dynamic Controls iswas a producer of electronic control systems for powered medical mobility devices, including systems incorporating the LiNX™ technology platform. Dynamic Controls was a component of the All Other Segment.
Dynamic Controls iswas a supplier of power mobility products and respiratory components to the company as well as supplying power mobility products to external customers. Sales in 2020 through the date of disposition were $5,331,000, including intercompany sales of $2,532,000, compared to sales for the full year of 2019 of $30,261,000, including intercompany sales of $13,087,000. Income before income taxes was approximately $445,000 in 2020, through the date of disposition, compared to $853,000 in 2019, inclusive of intercompany profits on sales to the company.
The transaction was the result of considering options for the products sold by Dynamic Controls which resulted in selling the business to a third-party which can provide access to further technological innovations to further differentiate the company’s power mobility products.
The gross proceeds from the Transaction were $14,563,000, net of taxes and expenses. The company realized a pre-tax gain of $9,790,000 and recordedwith a remaining accrued expenses related to the salebalance of the business totaling $2,150,000, of which $1,789,000 have been paid$148,000 as of SeptemberJune 30, 2020.2021.
The Purchase Agreement contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, which are subject to certain exceptions, terms and limitations described further in the Purchase Agreement.
At the closing of the Transaction, the parties entered into a supply agreement pursuant to which Dynamic Controls will supply certain electronic components as required by the company for athe five-year period following the Transaction, including ongoing supply and support of the LiNX™ electronic control system with informatics technology, continued contract manufacturing of certain electronic components for the company’s respiratory products and
continued infrastructure and applications support for the
informatics solution for the company’s respiratory products. The estimated continued inflows and outflows following the disposal with the Purchaser are not expected to be material to the company.
The assets and liabilities of Dynamic Controls as of March 7, 2020 and December 31, 2019 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 7, 2020 | | December 31, 2019 |
| Trade receivables, net | $ | 4,129 | | | $ | 1,804 | |
| Inventories, net | 3,082 | | | 3,008 | |
| Other assets | 855 | | | 933 | |
| Property and equipment, net | 600 | | | 707 | |
| Operating lease assets, net | 2,127 | | | 1,870 | |
| Total assets | $ | 10,793 | | | $ | 8,322 | |
| | | |
| Accounts payable | $ | 4,692 | | | $ | 4,501 | |
| Accrued expenses | 2,473 | | | 2,108 | |
| Current taxes payable | 41 | | | 92 | |
| Current portion of operating lease obligations | 366 | | | 393 | |
| Long-term obligations | 1,019 | | | 1,754 | |
| Total liabilities | $ | 8,591 | | | $ | 8,848 | |
| | | | | | | |
| March 7, 2020 | | |
| Trade receivables, net | $ | 4,129 | | | |
| Inventories, net | 3,082 | | | |
| Other assets | 855 | | | |
| Property and equipment, net | 600 | | | |
| Operating lease assets, net | 2,127 | | | |
| Total assets | $ | 10,793 | | | |
| | | |
| Accounts payable | $ | 4,692 | | | |
| Accrued expenses | 2,473 | | | |
| Current taxes payable | 41 | | | |
| Current portion of operating lease obligations | 366 | | | |
| Long-term obligations | 1,019 | | | |
| Total liabilities | $ | 8,591 | | | |
Trade receivables as of March 7, 2020 includes receivables previously classified as intercompany related to product sold by Dynamic Controls to other Invacare entities.
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
Current Assets
Receivables
Receivables consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Accounts receivable, gross | Accounts receivable, gross | $ | 132,809 | | | $ | 141,732 | | Accounts receivable, gross | $ | 144,825 | | | $ | 131,055 | |
| Customer rebate reserve | Customer rebate reserve | (13,075) | | | (13,922) | | Customer rebate reserve | (10,967) | | | (10,730) | |
| Cash discount reserves | Cash discount reserves | (5,290) | | | (5,326) | | Cash discount reserves | (7,821) | | | (7,320) | |
| Allowance for doubtful accounts | Allowance for doubtful accounts | (4,697) | | | (4,804) | | Allowance for doubtful accounts | (4,463) | | | (4,031) | |
| Other, principally returns and allowances reserves | Other, principally returns and allowances reserves | (790) | | | (1,011) | | Other, principally returns and allowances reserves | (864) | | | (386) | |
| | Accounts receivable, net | Accounts receivable, net | $ | 108,957 | | | $ | 116,669 | | Accounts receivable, net | $ | 120,710 | | | $ | 108,588 | |
Reserves for customer rebates and cash discounts are recorded as a reduction in revenue and netted against gross accounts receivable. Customer rebates in excess of a given customer's accounts receivable balance are classified in Accrued Expenses. Customer rebates and cash discounts are estimated based on the most likely amount principle as well as historical experience and anticipated performance. In addition, customers have the right to return product within the company’s normal terms policy, and as such, the company estimates the expected returns based on an analysis of historical experience and adjusts revenue accordingly.
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all the company’s receivables are due from health care, medical equipment providers and long-term care facilities predominantly located throughout the United States, Australia, Canada, New Zealand China and Europe. A significant portion of products sold to providers, both foreign and domestic, are ultimately funded through government reimbursement programs such as Medicare and Medicaid in the U.S. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability.
The company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Statements" on January 1, 2020. Accordingly, the company is now applying an "expected loss" model that will generally require earlier recognition of allowances for losses for trade receivables. In addition, the company expects more variability in its allowance for doubtful accounts as it previously provided for bad debts based on a specific reserve methodology while the new expected loss methodology requires companies to provide for estimated losses beginning at the time of sale. The adoption of the new standard resulted in an increase in credit losses of $243,000 as
disclosed in the Condensed Consolidated Statement of Shareholders' Equity.
The company's approach is to separate its receivables into good-standing and collection receivables. Good-standing receivables are assigned to risk pools of high, medium and low. The risk pools are driven by the specifics associated with the geography of origination. Expected loss percentages are calculated and assigned to each risk pool, driven primarily by historical experience. The historical loss percentages are calculated for each risk pool and then judgmentally revised to consider current risk factors as well as consideration of the impact of forecasted events, as applicable. The expected loss percentages are then applied to receivables balances each period to determine the allowance for doubtful accounts.
In North America, excluding Canada, good-standing receivables are assigned to the low risk pool and assigned an expected loss percentage of 1.0% as these receivables are deemed to share the same risk profile and collections efforts are the same. Installment receivables in North America are characterized as collection receivables and thus reserves based on specific analysis of each customer. In Canada, good-standing receivables and installment receivables are deemed low risk and assigned a loss percentage of 0.2%.
In Europe, expected losses are determined by each location in each region. Most locations have a majority of their receivables assigned to the low risk pool, which has an average expected loss percentage of 0.3%0.5%. About half of the locations have a portion of their receivables assigned as medium risk with an average expected loss percentage of 0.9%1.0%. Only a few locations have any receivables characterized as high risk and the average credit loss percentage for those locations is 2.7%2.5%. Collection risk is generally low as payment terms in certain key markets, such as Germany, are immediate and in many locations the ultimate customer is the government.
In the Asia Pacific region, receivables are characterized as low risk, which have an average expected loss percentage of 0.3%. Historical losses are low in this region where the use of credit insurance is often customary.
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
The movement in the trade receivables allowance for doubtful accounts was as follows (in thousands):
| | | | | | | |
| | NineSix Months Ended
SeptemberJune 30, 20202021 | | |
| Balance as of beginning of period | $ | 4,8044,031 | | | |
| Current period provision | 522423 | | | |
Direct write-offs charged against the allowanceRecoveries (direct write-offs), net | (629)9 | | | |
| Balance as of end of period | $ | 4,6974,463 | | | |
The current period provision includes the immaterial impact of the adoption of ASU 2016-03. 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 2020.2021.
For collections receivables, the estimated allowance for uncollectible amounts is based primarily on management’s evaluation of the financial condition of each customer. In addition, as a result of the company's financing arrangement with DLL, a third-party financing company which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishes reserves for specific customers as needed.
The company writes off uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. See Concentration of Credit Risk in the Notes to the Condensed Consolidated Financial Statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the condensed consolidated balance sheet.
Upon adoption of ASU 2016-03, theThe company has recorded a new contingent liability in the amount of $306,000$334,000 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, prior to 2020, provided financing directly for its Canadian customers for which DLL is not an option, as DLL typically
provides financing to Canadian customers only on a limited basis. The installment receivables recorded on the books of the company represent a single portfolio segment of finance receivables to the independent provider channel and long-term care customers. The portfolio segment is comprised of two classes of receivables distinguished by geography and credit quality. The U.S.
installment receivables are the first class and represent installment receivables repurchased from DLL because the customers were in default. Default with DLL is defined as a customer being delinquent by 3 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 were typically financed for twelve months and historically have had a very low risk of default.
The estimated allowance for uncollectible amounts and evaluation 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. 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.
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
Installment receivables consist of the following (in thousands):
| | | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | | Current | | Long-
Term | | Total | | Current | | Long-
Term | | Total | | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| Installment receivables | Installment receivables | $ | 555 | | | $ | 228 | | | $ | 783 | | | $ | 1,192 | | | $ | 1,257 | | | $ | 2,449 | | Installment receivables | $ | 404 | | | $ | 1,048 | | | $ | 1,452 | | | $ | 704 | | | $ | 1,105 | | | $ | 1,809 | |
| Less: Unearned interest | (3) | | | 0 | | | (3) | | | (22) | | | 0 | | | (22) | | |
| | | 552 | | | 228 | | | 780 | | | 1,170 | | | 1,257 | | | 2,427 | | |
| Allowance for doubtful accounts | Allowance for doubtful accounts | (291) | | | (164) | | | (455) | | | (434) | | | (1,080) | | | (1,514) | | Allowance for doubtful accounts | (228) | | | (138) | | | (366) | | | (325) | | | (162) | | | (487) | |
| Installment receivables, net | Installment receivables, net | $ | 261 | | | $ | 64 | | | $ | 325 | | | $ | 736 | | | $ | 177 | | | $ | 913 | | Installment receivables, net | $ | 176 | | | $ | 910 | | | $ | 1,086 | | | $ | 379 | | | $ | 943 | | | $ | 1,322 | |
|
InstallmentNo installment receivables were purchased from DLL during the ninesix months ended SeptemberJune 30, 2020 increased the gross installment receivables balance by $343,000, which will be part of the company's 2020 class of installment receivables.2021. No sales of
installment receivables were made by the company
during the quarter. There was no impact on the allowance for doubtful accounts for installment receivables as a result of the adoption of ASU 2016-03 as the installment receivables in the U.S. are specifically reserved for by account and no adjustment was needed to the allowance for doubtful accounts for Canada installment receivables.
The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):
| | | | Nine Months Ended
September 30, 2020 | | Year Ended December 31, 2019 | | Six Months Ended
June 30, 2021 | | Year Ended December 31, 2020 |
| Balance as of beginning of period | Balance as of beginning of period | $ | 1,514 | | | $ | 1,542 | | Balance as of beginning of period | $ | 487 | | | $ | 1,514 | |
| Current period provision | 32 | | | 479 | | |
| Current period provision (benefit) | | Current period provision (benefit) | (88) | | | 66 | |
| Direct write-offs charged against the allowance | Direct write-offs charged against the allowance | (1,091) | | | (507) | | Direct write-offs charged against the allowance | (33) | | | (1,093) | |
| Balance as of end of period | Balance as of end of period | $ | 455 | | | $ | 1,514 | | Balance as of end of period | $ | 366 | | | $ | 487 | |
Installment receivables by class as of SeptemberJune 30, 20202021 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. | U.S. | | | | | | | | U.S. | | | | | | | |
| Impaired installment receivables with a related allowance recorded | Impaired installment receivables with a related allowance recorded | $ | 649 | | | $ | 649 | | | $ | 453 | | | $ | 0 | | Impaired installment receivables with a related allowance recorded | $ | 427 | | | $ | 427 | | | $ | 366 | | | $ | 0 | |
| Canada | | | | | | | | |
| Asia Pacific | | Asia Pacific | |
| Non-Impaired installment receivables with no related allowance recorded | Non-Impaired installment receivables with no related allowance recorded | 132 | | | 129 | | | 0 | | | 26 | | Non-Impaired installment receivables with no related allowance recorded | 1,025 | | | 1,025 | | | 0 | | | 0 | |
| Impaired installment receivables with a related allowance recorded | 2 | | | 2 | | | 2 | | | 0 | | |
| Total Canadian installment receivables | 134 | | | 131 | | | 2 | | | 26 | | |
| Total | Total | | | | | | | | Total | |
| Non-Impaired installment receivables with no related allowance recorded | Non-Impaired installment receivables with no related allowance recorded | 132 | | | 129 | | | 0 | | | 26 | | Non-Impaired installment receivables with no related allowance recorded | 1,025 | | | 1,025 | | | 0 | | | 0 | |
| Impaired installment receivables with a related allowance recorded | Impaired installment receivables with a related allowance recorded | 651 | | | 651 | | | 455 | | | 0 | | Impaired installment receivables with a related allowance recorded | 427 | | | 427 | | | 366 | | | 0 | |
| Total installment receivables | Total installment receivables | $ | 783 | | | $ | 780 | | | $ | 455 | | | $ | 26 | | Total installment receivables | $ | 1,452 | | | $ | 1,452 | | | $ | 366 | | | $ | 0 | |
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
Installment receivables by class as of December 31, 20192020 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. | U.S. | | | | | | | | U.S. | | | | | | | |
| Impaired installment receivables with a related allowance recorded | Impaired installment receivables with a related allowance recorded | $ | 1,762 | | | $ | 1,762 | | | $ | 1,497 | | | $ | 0 | | Impaired installment receivables with a related allowance recorded | $ | 615 | | | $ | 615 | | | $ | 487 | | | $ | 0 | |
| Asia Pacific | | Asia Pacific | |
| Non-impaired installment receivables with no related allowance recorded | | Non-impaired installment receivables with no related allowance recorded | 1,194 | | | 1,194 | | | 0 | | | 0 | |
| Canada | Canada | | | | | | | | Canada | |
| Non-Impaired installment receivables with no related allowance recorded | 670 | | | 648 | | | 0 | | | 92 | | |
| Impaired installment receivables with a related allowance recorded | 17 | | | 17 | | | 17 | | | 0 | | |
| Total Canadian installment receivables | 687 | | | 665 | | | 17 | | | 92 | | |
| Non-impaired installment receivables with no related allowance recorded | | Non-impaired installment receivables with no related allowance recorded | 0 | | | 0 | | | 0 | | | 29 | |
| Total | Total | | | | | | | | Total | |
| Non-Impaired installment receivables with no related allowance recorded | 670 | | | 648 | | | 0 | | | 92 | | |
| Non-impaired installment receivables with no related allowance recorded | | Non-impaired installment receivables with no related allowance recorded | 1,194 | | | 1,194 | | | 0 | | | 29 | |
| Impaired installment receivables with a related allowance recorded | Impaired installment receivables with a related allowance recorded | 1,779 | | | 1,779 | | | 1,514 | | | 0 | | Impaired installment receivables with a related allowance recorded | 615 | | | 615 | | | 487 | | | 0 | |
| Total installment receivables | Total installment receivables | $ | 2,449 | | | $ | 2,427 | | | $ | 1,514 | | | $ | 92 | | Total installment receivables | $ | 1,809 | | | $ | 1,809 | | | $ | 487 | | | $ | 29 | |
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.basis. As of SeptemberJune 30, 2020,2021, 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 December 31, 2019 for which the company was still accruing interest.
The aging of the company’s installment receivables was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Total | | U.S. | | Canada | | Total | | U.S. | | Canada |
| Current | $ | 132 | | | $ | 0 | | | $ | 132 | | | $ | 659 | | | $ | 0 | | | $ | 659 | |
| 0-30 Days Past Due | 0 | | | 0 | | | 0 | | | 2 | | | 0 | | | 2 | |
| 31-60 Days Past Due | 0 | | | 0 | | | 0 | | | 4 | | | 0 | | | 4 | |
| 61-90 Days Past Due | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 90+ Days Past Due | 651 | | | 649 | | | 2 | | | 1,784 | | | 1,762 | | | 22 | |
| $ | 783 | | | $ | 649 | | | $ | 134 | | | $ | 2,449 | | | $ | 1,762 | | | $ | 687 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Total | | U.S. | | Asia Pacific | | Total | | U.S. | | Asia Pacific |
| Current | $ | 1,025 | | | $ | 0 | | | $ | 1,025 | | | $ | 1,194 | | | $ | 0 | | | $ | 1,194 | |
| 0-30 days past due | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 31-60 days past due | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 61-90 days past due | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 90+ days past due | 427 | | | 427 | | | 0 | | | 615 | | | 615 | | | 0 | |
| $ | 1,452 | | | $ | 427 | | | $ | 1,025 | | | $ | 1,809 | | | $ | 615 | | | $ | 1,194 | |
| | | | | | | | |
| Notes to Financial Statements | Current Assets | |
| | |
Inventories, Net
Inventories consist of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Finished goods | $ | 68,599 | | | $ | 54,064 | |
| Raw materials | 66,093 | | | 54,638 | |
| Work in process | 10,760 | | | 11,798 | |
| Inventories, net | $ | 145,452 | | | $ | 120,500 | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Finished goods | $ | 64,553 | | | $ | 55,264 | |
| Raw materials | 66,746 | | | 51,174 | |
| Work in process | 13,244 | | | 9,046 | |
| Inventories, net | $ | 144,543 | | | $ | 115,484 | |
As a result of COVID-19 which significantly reduced net sales in the second quarter of 2020, and given the company's long lead-time supply chain, inventory levels increased
significantly. The company believes such inventory levels will be reduced over the next few quarters with sequential sales growth for the company.
Other Current Assets
Other current assets consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Tax receivables principally value added taxes | Tax receivables principally value added taxes | $ | 23,188 | | | $ | 16,049 | | Tax receivables principally value added taxes | $ | 24,077 | | | $ | 22,500 | |
| Prepaid inventory and freight | | Prepaid inventory and freight | 2,320 | | | 2,700 | |
| Receivable due from information technology provider | Receivable due from information technology provider | 2,402 | | | 6,262 | | Receivable due from information technology provider | 2,251 | | | 2,995 | |
| Prepaid inventory | 1,392 | | | 684 | | |
| Prepaid insurance | | Prepaid insurance | 1,238 | | | 3,963 | |
| Derivatives (foreign currency forward exchange contracts) | Derivatives (foreign currency forward exchange contracts) | 599 | | | 838 | | Derivatives (foreign currency forward exchange contracts) | 851 | | | 1,321 | |
| Recoverable income taxes | | Recoverable income taxes | 783 | | | 2,182 | |
| Service contracts | Service contracts | 446 | | | 2,013 | | Service contracts | 524 | | | 633 | |
| Prepaid insurance | 341 | | | 2,918 | | |
| Deferred financing fees | Deferred financing fees | 209 | | | 207 | | Deferred financing fees | 355 | | | 208 | |
| Prepaid social charges | 95 | | | 1,216 | | |
| Recoverable income taxes | 50 | | | 297 | | |
| Prepaid and other current assets | Prepaid and other current assets | 8,913 | | | 7,425 | | Prepaid and other current assets | 7,601 | | | 8,215 | |
| Other Current Assets | Other Current Assets | $ | 37,635 | | | $ | 37,909 | | Other Current Assets | $ | 40,000 | | | $ | 44,717 | |
In the fourth quarter of 2019, the company entered into an agreement to outsource substantially all of the company’s information technology ("IT") business service activities, including, among other things, support, rationalization and upgrading of the company’s legacy information technology systems and implementation of a global enterprise resource planning system. The agreement provides for reimbursement by the IT provider of IT expenses incurred by the company
which are shown as Receivable due from ITinformation technology provider above. The amount of pass through charges will diminish as IT expenses are recorded directly by the IT provider. In addition, a corresponding current payable is due to the ITinformation technology provider. SeeRefer to "Accrued Expenses" in the notes to the Condensed Consolidated Financial Statements included elsewhere in this report.
| | | | | | | | |
| Notes to Financial Statements | Long-Term Assets | |
| | |
Long-Term Assets
Other long-term assets consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | Cash surrender value of life insurance policies | Cash surrender value of life insurance policies | $ | 2,224 | | | $ | 2,124 | | Cash surrender value of life insurance policies | $ | 2,348 | | | $ | 2,327 | |
| Deferred income taxes | Deferred income taxes | 1,032 | | | 928 | | Deferred income taxes | 1,788 | | | 2,048 | |
| Installment receivables | | Installment receivables | 910 | | | 943 | |
| Deferred financing fees | Deferred financing fees | 461 | | | 602 | | Deferred financing fees | 553 | | | 411 | |
| Investments | Investments | 85 | | | 85 | | Investments | 84 | | | 85 | |
| Installment receivables | 64 | | | 177 | | |
| Other | Other | 125 | | | 300 | | Other | 112 | | | 111 | |
| Other Long-Term Assets | Other Long-Term Assets | $ | 3,991 | | | $ | 4,216 | | Other Long-Term Assets | $ | 5,795 | | | $ | 5,925 | |
Property and equipment consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Machinery and equipment | Machinery and equipment | $ | 291,902 | | | $ | 296,078 | | Machinery and equipment | $ | 296,543 | | | $ | 294,045 | |
| Land, buildings and improvements | Land, buildings and improvements | 28,088 | | | 33,054 | | Land, buildings and improvements | 29,144 | | | 28,509 | |
| Capitalized software | Capitalized software | 13,787 | | | 3,509 | | Capitalized software | 24,250 | | | 17,527 | |
| Furniture and fixtures | Furniture and fixtures | 9,866 | | | 9,898 | | Furniture and fixtures | 10,104 | | | 10,001 | |
| Leasehold improvements | Leasehold improvements | 8,087 | | | 9,023 | | Leasehold improvements | 8,371 | | | 8,194 | |
| Property and Equipment, gross | Property and Equipment, gross | 351,730 | | | 351,562 | | Property and Equipment, gross | 368,412 | | | 358,276 | |
| Accumulated depreciation | Accumulated depreciation | (298,618) | | | (304,955) | | Accumulated depreciation | (307,947) | | | (302,033) | |
| Property and Equipment, net | Property and Equipment, net | $ | 53,112 | | | $ | 46,607 | | Property and Equipment, net | $ | 60,465 | | | $ | 56,243 | |
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. As a result of the initiation of the ERP project, the company capitalized certain costs in accordance with ASC 350 as shown in capitalized software above.
In the third quarter of 2018, the company agreed to sell its Isny, Germany location with a net book value at the signing of the agreement of approximately $2,900,000, which is included in Land, buildings and improvements in the table above as of December 31, 2019. In accordance with the agreement, control transferred to the buyer in April 2020. The company recorded a gain on the transaction of $971,000.
| | | | | | | | |
| Notes to Financial Statements | Long-Term Assets | |
| | |
Goodwill
The change in goodwill from December 31, 20192020 to SeptemberJune 30, 20202021 was due to foreign currency translation.
In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is tested annually for impairment. The company first estimates the fair value of each reporting unit and compares the calculated fair value toimpairment or whenever events or changes in circumstances indicate the carrying value of eacha reporting unit. 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 / HME, Europe, Institutional Products Group and Asia Pacific.
In consideration of the negative impact of COVID-19 on the global economy, the company performed an interim test of
goodwill for impairment in the first quarter of 2020 and no impairment was recorded. For the second and third quarters of 2020, the company concluded that the facts and circumstances driving the conclusions from the first quarter review had not changed materially. While there was no indication of impairment in the second or third quarter of 2020 related to goodwill for the Europe or Institutional Products Group reporting units, a future potential impairment is possible for these reporting units should actual results differ materially from the company's current forecasted results or market inputs used to determine the discount rate change significantly. Please referRefer to Goodwill in the company's Annual Report on Form 10-K for the period ending December 31, 20192020 for further disclosure regarding the company's impairment analysis review methodology.
Intangibles
The company's intangibles consist of the following (in thousands):
| | | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | | Historical
Cost | | Accumulated
Amortization | | Historical
Cost | | Accumulated
Amortization | | Historical
Cost | | Accumulated
Amortization | | Historical
Cost | | Accumulated
Amortization |
| Customer lists | Customer lists | $ | 54,267 | | | $ | 54,267 | | | $ | 51,108 | | | $ | 51,108 | | Customer lists | $ | 55,911 | | | $ | 55,911 | | | $ | 54,502 | | | $ | 54,502 | |
| Trademarks | Trademarks | 25,019 | | | — | | | 23,479 | | | — | | Trademarks | 25,848 | | | — | | | 25,112 | | | — | |
| Developed technology | Developed technology | 7,918 | | | 7,150 | | | 7,483 | | | 6,642 | | Developed technology | 8,103 | | | 7,463 | | | 7,924 | | | 7,204 | |
| Patents | Patents | 5,514 | | | 5,514 | | | 5,521 | | | 5,521 | | Patents | 5,561 | | | 5,561 | | | 5,556 | | | 5,556 | |
| License agreements | License agreements | 2,864 | | | 891 | | | 2,884 | | | 770 | | License agreements | 2,919 | | | 1,105 | | | 2,899 | | | 979 | |
| Other | Other | 1,161 | | | 1,151 | | | 1,163 | | | 1,150 | | Other | 1,162 | | | 1,152 | | | 1,162 | | | 1,151 | |
| Intangibles | Intangibles | $ | 96,743 | | | $ | 68,973 | | | $ | 91,638 | | | $ | 65,191 | | Intangibles | $ | 99,504 | | | $ | 71,192 | | | $ | 97,155 | | | $ | 69,392 | |
All 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, 20192020 to SeptemberJune 30, 20202021 were the result of foreign currency translation on historical cost and accumulated amortization.
The company evaluates the carrying value of definite-lived assets annually in the fourth quarter and whenever events or circumstances indicate possible impairment. In consideration of the negative impact of COVID-19 on the global economy, the company performed a review of intangibles for impairment in the first quarter of 2020 and concluded there was no impairment to be recorded. For the second and third quarters of 2020, the company concluded that the facts and circumstances driving the conclusions from the first quarter review had not changed materially. Definite-lived assets are determined to be impaired if the future undiscounted cash flows expected to be generated by the asset are less than the carrying value. Actual impairment amounts for definite-
liveddefinite-lived assets are then calculated using a discounted cash flow calculation.
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 $276,000$203,000 in the first ninesix months of 20202021 and is expected to be $419,000 in 2020, $390,000$403,000 in 2021, $390,000$406,000 in 2022, $389,000$406,000 in 2023, $355,000$372,000 in 2024, $213,000 in 2025 and $212,000$211,000 in 2025.
2026. Amortized intangiblesintangible assets are being amortized on a straight-line basis over remaining lives of 14 to 109 years with most of the intangibles being amortized over ana weighted average remaining life of approximately 87 years.
| | | | | | | | |
| Notes to Financial Statements | Current Liabilities | |
| | |
Current Liabilities
Accrued Expenses
Accrued expenses consist of accruals for the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Salaries and wages | Salaries and wages | $ | 34,612 | | | $ | 29,725 | | Salaries and wages | $ | 29,357 | | | $ | 34,029 | |
| Taxes other than income taxes, primarily Value Added Taxes | 29,830 | | | 22,194 | | |
| Taxes other than income taxes, primarily value added taxes | | Taxes other than income taxes, primarily value added taxes | 30,584 | | | 32,710 | |
| Warranty | Warranty | 11,144 | | | 11,626 | | Warranty | 11,443 | | | 10,991 | |
| Professional | Professional | 8,481 | | | 6,869 | | Professional | 8,534 | | | 7,375 | |
| IT service contracts | | IT service contracts | 4,037 | | | 3,799 | |
| Deferred revenue | | Deferred revenue | 3,607 | | | 3,516 | |
| Interest | | Interest | 3,314 | | | 2,076 | |
| Derivative liabilities (foreign currency forward exchange contracts) | | Derivative liabilities (foreign currency forward exchange contracts) | 3,163 | | | 1,432 | |
| Freight | | Freight | 3,139 | | | 3,190 | |
| Product liability, current portion | | Product liability, current portion | 2,693 | | | 2,453 | |
| Severance | Severance | 5,988 | | | 7,023 | | Severance | 1,059 | | | 6,249 | |
| Interest | 4,663 | | | 3,608 | | |
| Rebates | 4,146 | | | 10,743 | | |
| IT service contracts | 3,790 | | | 6,125 | | |
| Freight | 3,710 | | | 3,744 | | |
| Deferred revenue | 3,436 | | | 3,173 | | |
| Derivative liabilities (foreign currency forward exchange contracts) | 2,824 | | | 905 | | |
| Product liability, current portion | 2,810 | | | 2,736 | | |
| Insurance | Insurance | 781 | | | 699 | | Insurance | 571 | | | 878 | |
| Rent | Rent | 568 | | | 415 | | Rent | 457 | | | 585 | |
| Supplemental Executive Retirement Program liability | 391 | | | 391 | | |
| Advance payment on sale of land & buildings | 0 | | | 3,471 | | |
| IT licenses | 0 | | | 2,114 | | |
| Supplemental executive retirement program liability | | Supplemental executive retirement program liability | 391 | | | 391 | |
| Rebates | | Rebates | 319 | | | 8,644 | |
| Other items, principally trade accruals | Other items, principally trade accruals | 7,492 | | | 5,386 | | Other items, principally trade accruals | 6,445 | | | 7,955 | |
| Accrued Expenses | Accrued Expenses | $ | 124,666 | | | $ | 120,947 | | Accrued Expenses | $ | 109,113 | | | $ | 126,273 | |
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 appropriateappropriately defer such revenue. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product field action and recalls, which could require 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, 20192020 to SeptemberJune 30, 20202021 primarily relates to payments principally made in the first quarter each year, earned from the previous year.
The reduction in accrued severance from December 31, 2020 to June 30, 2021 primarily relates to payments of restructuring costs with respect to the German manufacturing facility consolidation.
In the fourth quarter of 2019, the company entered into an agreement with an IT provider to outsource substantially all of the company’s information technology business service activities, including, among other things, support, rationalization and upgrading of the company’s legacy information technology systems and implementation of a global enterprise resource planning (“ERP”) system.ERP. Accrued expenses related to IT outsourcing are reflected in IT service contracts. Separately, the company entered into licenses for a new ERP system which are shown as IT licenses.
| | | | | | | | |
| 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, 20202021 | $ | 11,62610,991 | |
| Warranties provided during the period | 4,3113,616 | |
| Settlements made during the period | (5,926)(3,424) | |
| Changes in liability for pre-existing warranties during the period, including expirations | 1,133260 | |
Balance as of SeptemberJune 30, 20202021 | $ | 11,14411,443 | |
Warranty reserves are subject to adjustment in future periods as new developments change the company's estimate of the total cost. In the third quarter of 2020, warranty expense includes a provision of $768,000 for a product recall which was related to a component on a respiratory product, recorded in the North America segment.
| | | | | | | | |
| Notes to Financial Statements | Long-Term Liabilities | |
| | |
Long-Term DebtLiabilities
Long-Term Debt
Debt consists of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 | |
| | Convertible senior notes at 5.00%, due in February 2021 | Convertible senior notes at 5.00%, due in February 2021 | $ | 1,224 | | | $ | 56,628 | | Convertible senior notes at 5.00%, due in February 2021 | $ | 0 | | | $ | 1,242 | | |
| Convertible senior notes at 4.50%, due in June 2022 | Convertible senior notes at 4.50%, due in June 2022 | 72,652 | | | 101,815 | | Convertible senior notes at 4.50%, due in June 2022 | 2,632 | | | 73,869 | | |
| | Convertible senior notes Series I at 5.00%, due in November 2024 | Convertible senior notes Series I at 5.00%, due in November 2024 | 62,443 | | | 60,817 | | Convertible senior notes Series I at 5.00%, due in November 2024 | 72,006 | | | 62,984 | | |
| | Convertible senior notes Series II at 5.00%, due November 2024 | Convertible senior notes Series II at 5.00%, due November 2024 | 63,556 | | | 0 | | Convertible senior notes Series II at 5.00%, due November 2024 | 76,296 | | | 64,919 | | |
| Convertible senior notes at 4.25%, due in March 2026 | | Convertible senior notes at 4.25%, due in March 2026 | 118,121 | | | 0 | | |
| Other obligations | Other obligations | 42,389 | | | 262 | | Other obligations | 43,552 | | | 42,039 | | |
| | 242,264 | | | 219,522 | | | 312,607 | | | 245,053 | | |
| Less current maturities of long-term debt | Less current maturities of long-term debt | (4,062) | | | (58) | | Less current maturities of long-term debt | (13,134) | | | (5,612) | | |
| Long-Term Debt | Long-Term Debt | $ | 238,202 | | | $ | 219,464 | | Long-Term Debt | $ | 299,473 | | | $ | 239,441 | | |
|
On September 30, 2015, the company entered into an Amended and Restated Revolving Credit and Security Agreement, which was subsequently amended (the “Credit Agreement”) and which matures on January 16, 2024. The 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”). PNC is the administrative agent (the “Administrative Agent”) and J.P. Morgan Europe Limited is the European agent (the “European Agent”) under the Credit Agreement. In connection with entering into the company's Credit Agreement, the company incurred fees which were capitalized and are being amortized as interest expense. As of SeptemberJune 30, 2020,2021, debt fees yet to be amortized through January 2024 totaled $670,000.$908,000.
The company had outstanding letters of credit of $7,740,000$8,379,000 and $8,011,000$7,752,000 as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Outstanding letters of credit and other reserves impacting borrowing capacity were $7,653,000$7,651,000 and $8,827,000$7,616,000 as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. The company had $19,000,000 outstanding borrowings under its North America Credit Facility as of June 30, 2021. The company had outstanding borrowings of $23,700,000$8,803,000 (€7,200,000) under its U.S.French Credit Facility and Canadian$5,113,000 (£3,600,000) under its UK Credit Facility as of SeptemberJune 30, 2021, together referred to as
the European Credit Facility. The company had outstanding borrowings of $20,000,000 under its North America Credit Facility as of December 31, 2020. The company had outstanding borrowings of $6,322,000$7,636,000 (€5,300,000)6,400,000) under its French Credit Facility and $2,138,000$3,866,000 (£1,600,000)2,900,000) under its UK Credit Facility as of September 30,December 31, 2020, together referred to as the European Credit Facility. The company had no borrowings under the Credit Facilities as of December 31, 2019. The weighted average interest rate on all borrowings, excluding financingfinance leases, was 4.63%4.5% for the
nine six months ended SeptemberJune 30, 20202021 and 4.78%4.6% for the year ended December 31, 2019.2020.
U.S. and CanadianNorth America Borrowers Credit Facility
For the company's U.S. and CanadianNorth America Borrowers, the Credit Agreement provides 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 Credit Agreement provides the company and the other Borrowers with a credit facility in an aggregate principal amount of $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 $20,000,000 of the U.S. and CanadianNorth America Credit Facility will be available for issuance of letters of credit. The aggregate principal amount of the U.S. and CanadianNorth America Credit Facility may be increased by up to $25,000,000 to the extent requested by the company and agreed to by any Lender or new financial institution approved by the Administrative Agent.
The aggregate borrowing availability under the U.S. and CanadianNorth America Credit Facility is determined based on a borrowing base formula. The aggregate usage under the U.S. and Canadian North America
| | | | | | | | |
| Notes to Financial Statements | Long-Term Liabilities | |
| | |
Credit Facility may not exceed an amount equal to the sum of (a) 85% of eligible U.S. accounts receivable plus (b) the lesser of (i) 70% of eligible U.S. inventory and eligible foreign in-transit inventory and (ii) 85% of the net orderly liquidation value of eligible U.S. inventory and eligible foreign in-transit inventory (not to exceed $4,000,000), plus (c) the lesser of (i) 85%80% of the net orderly liquidation value of U.S. eligible machinery and equipment and (ii) $0 as of SeptemberJune 30, 20202021 (subject to reduction as provided in the 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
| | | | | | | | |
Notes to Financial Statements | Long-Term Liabilities | |
| | |
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 $3,000,000 minimum availability reserve, less (i) other reserves required by the Administrative Agent, and in each case subject to the definitions and limitations in the Credit Agreement. As of SeptemberJune 30, 2020,2021, the company was in compliance with all covenant requirements. As of SeptemberJune 30, 2020,2021, the company had gross borrowing base of $40,889,000 and net borrowing availability of $23,700,000$23,488,000 under the U.S. and CanadianNorth America Credit Facility under the Credit Agreement, considering the minimum availability reserve, then-outstanding letters of credit, other reserves and the $7,500,000$6,750,000 dominion trigger amount described below. Borrowings under the U.S. and CanadianNorth America Credit Facility 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 Credit Agreement at the LIBOR rate, plus a margin ranging from 2.25% to 2.75%, or at the alternate base rate, plus a margin ranging from 1.25% to 1.75%, as selected by the company. Borrowings under the U.S. and CanadianNorth America Credit Facility are subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.
The Credit Agreement contains customary representations, warranties and covenants. Exceptions to the operating covenants in the Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale and leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Credit Agreement, as amended. The Credit Agreement also contains a covenant requiring the company to maintain minimum availability under the U.S. and 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 Canadian Credit Facility for five (5) consecutive business days, or (ii) $6,000,000North American facility 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 $7,500,000$6,750,000 on any business day or any five consecutive days in order to avoid triggering full control by an agent for the Lenders of the company's cash receipts for application to the company’s obligations under the agreement.
The Credit Agreement contains customary default provisions, with certain grace periods and exceptions, which provide for 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 will be used to finance the working capital and other business needs of the company. There was $23,700,000$19,000,000 of outstanding borrowings under the U.S. and CanadianNorth America Credit Facility at Septemberon June 30, 2020.2021.
European Credit Facility
The Credit Agreement also provides 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 be available to each of Invacare Limited (the “UK Borrower”) and Invacare Poirier SAS (the “French Borrower” and, together with the UK Borrower, the “European Borrowers”). The European Credit Facility matures in January 2024, 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 Credit Agreement. As of SeptemberJune 30, 2020,2021, the gross borrowing availabilitybase to the European Borrowers under the European Credit Facility was $8,564,000,$20,638,000 and the net borrowing availability was $14,263,000, considering the $3,000,000 minimum availability reserve and the $3,750,000a $3,375,000 dominion trigger amount described below. Borrowing availability is based on a prior month base in USD. Actual borrowings in GBP and EUR
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fluctuate in USD between date of borrowing and when translated for consolidated reporting.
The aggregate principal amount of the European Credit Facility may be increased by up to $10,000,000 to the extent requested by the company and agreed to by any Lender or Lenders that wish to increase their lending participation or, if not agreed to by any Lender, a new financial institution that agrees to join the European Credit Facility and that is approved by the Administrative Agent and the European Agent.
Interest will accrue on outstanding indebtedness under the European Credit Facility at the LIBOR rate, plus a margin ranging from 2.50% to 3.00%, or for swing line loans, at the overnight LIBOR rate, plus a margin ranging from 2.50% to 3.00%, as selected by the company. The margin that will be adjusted quarterly based on utilization. Borrowings under the European Credit Facility are subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.
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The European Credit Facility is 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 comprise the European Credit Facility) are cross collateralized, and the US personal property assets previously pledged under the U.S. and Canadian Credit Facility also serve as collateral for the European Credit Facility.
The European Credit Facility is subject to customary representations, warranties and covenants generally consistent with those applicable to the U.S. and Canadian Credit Facility. Exceptions to the operating covenants in the Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale/leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Credit Agreement. The Credit Agreement also contains a covenant requiring the European Borrowers to maintain undrawn availability under the European Credit Facility of not less than the greater of (i) 11.25%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 are subject to cash dominion triggers under the European Credit Facility requiring the European Borrower to maintain borrowing capacity of not less than $3,750,000 on any business day or $3,375,000 for five consecutive business days in order to avoid triggering full control by an agent for the Lenders of the European Borrower’s cash receipts for application to its obligations under the European Credit Facility.
The European Credit Facility is subject to customary default provisions, with certain grace periods and exceptions, consistent with those applicable to the U.S. and Canadian Credit Facility, which provide that events of default include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, cross-default, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption in the operations of any material manufacturing facility for more than 10 consecutive days. The proceeds of the European Credit Facility will be used to finance the working capital and other business needs of the company. As of SeptemberJune 30, 2020,2021, the company had borrowings of $6,322,000$8,803,000 (€5,300,000)7,200,000) under its French Credit Facility and $2,138,000$5,113,000 (£1,600,000)3,600,000) under its UK Credit Facility as of SeptemberJune 30, 2020,2021, together referred to as the European Credit Facility.
In January 2021, the Credit Agreement was amended to provide for, among other things, the addition of the company's Netherlands subsidiary as a guarantor under the European revolving credit facility, amendments to the restrictive covenants in the 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 Credit Agreement to replace the LIBOR rate and/or the Euro rate with a benchmark replacement rate.
In March 2021, the Credit Agreement was further amended to permit the issuance of the 2026 Notes and the capped call transactions entered into by the company in connection with the issuance of the 2026 Notes, as further discussed in the sections below.
Convertible senior notes due 2021
In the first quarter of 2016, the company issued $150,000,000 aggregate principal amount of 5.00%
Convertible Senior Notes due 2021 (the “2021 notes”Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2021 notes bearNotes bore interest at a rate of 5.00% per year payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2016. The 2021 notes will matureNotes matured on February 15, 2021, unless repurchased or converted in accordance with their terms prior to such date. Prior to August 15, 2020, the 2021 notes 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 the2021. At maturity, date. Prior to May 16, 2019, the 2021 notes were convertible, subject to certain conditions, into cash only. On May 16, 2019, the company obtained shareholder approval under applicable New York Stock Exchange rules such that conversion of the 2021 notes may be settled in cash, the company’s common shares or a combination of cash and the company’s common shares, at the company’s election. At September 30, 2020, $1,250,000 aggregate principal amount of the 2021 Notes remained outstanding, following the repurchase of $16,000,000 aggregate principal amount of 2021 Notes for cashwere outstanding, which the company repaid in the third quarter of 2019, the exchange transactions completed in the fourth quarter of 2019 and the second quarter of 2020, as further discussed below, and the repurchases of $24,466,000 aggregate principal amount in the third quarter of 2020. The $24,466,000 repurchases in the third quarter of 2020, resulted in a $761,000 loss on debt extinguishment.cash.
Holders ofIn connection with the 2021 notes may convert their 2021 notes at their option at any time prior to the close of business on the business day immediately preceding August 15, 2020 only under the following circumstances: (1) during any fiscal quarter commencing after March 31, 2016 (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 is greater than or equal to 130% of the applicable conversion price for the 2021 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 2021 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 2021 notes on each such trading day; or (3) upon the occurrence of specified corporate events described in the Indenture. On or after August 15, 2020 until the close of business on the second scheduled trading day immediately preceding the maturityoffering of the 2021 Notes, holders may convert their 2021 Notes, at the option ofcompany entered into privately negotiated convertible note hedge transactions with two financial institutions (the “option counterparties”). The company evaluated the holder, regardless of the foregoing circumstances.note hedges
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Holders of the 2021 notes will have the right to require the company to repurchase all or some of their 2021 notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 60.0492 common shares per $1,000 principal amount of 2021 notes (equivalent to an initial conversion price of approximately $16.65 per common share). Until the company received shareholder approval on May 16, 2019 authorizing it to elect to settle future conversions of the 2021 Notes in common shares, the company separately accounted for the conversion features as a derivative. The derivative was capitalized on the balance sheet as a long-term liability with adjustment to reflect fair value each 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 $34,480,000. The company recognized a loss of $2,210,000 for the nine months ended September 30, 2019 related to the convertible debt conversion liability.
In connection with the offering of the 2021 notes, the company entered into privately negotiated convertible note hedge transactions with two financial institutions (the “option counterparties”). These transactions cover, subject to customary anti-dilution adjustments, the number of the company’s common shares that will initially underlie the 2021 notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the 2021 notes. The company evaluated the note hedges under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the note hedges should be accounted for as derivatives. These derivatives were capitalized on the balance sheet as long-term assets and will be adjusted to reflect fair value each quarter. The fair value of the convertible note hedge assets at issuance was $27,975,000. The company recognized a gain of $2,852,000 for the nine months ended September 30, 2019 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 meetmet 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 notesNotes were approximately $144,034,000, after deducting fees and offering expenses of $5,966,000, which were paid in 2016. These debt issuance costs were capitalized and are beingwere amortized as interest expense through February 2021. 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
During the third quarter of 2019, the company used an aggregate of $14,708,000 in cash to repurchase a total amount of $16,000,000 in principal amount of 2021 Notes. After recognizing expenses on unamortized fees and discounts associated with the repurchased 2021 Notes, the repurchases resulted in a net reduction of debt of $14,367,000 and a net loss on the repurchases of $280,000.
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 net proceedscompany and $6,928,000 in cash. Refer to "Convertible senior notes Series I due 2024" below for more information. As a result of the exchange transaction in the fourth quarter of 2019 and the repurchase of $16,000,000 in principal amount of 2021 Notes in the third quarter of 2019, a partial unwind of the note hedge options and
warrants entered into with the issuance of the 2021 Notes also occurred during the fourth quarter of 2019. Note hedge options outstanding related to the 2021 Notes were reduced from the offeringoriginal number of 300,000 to 138,182 and warrants relating to the 2021 Notes were usedreduced from the initial number of 9,007,380 to repurchase3,860,624. The partial unwind of the company’s common shares from purchasersnote hedge options and warrants resulted in no net impact to cash or paid in capital.
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.
During the third quarter of 2020, the company repurchased $24,466,000 aggregate principal amount of 2021 Notes, resulting in a $761,000 loss on debt extinguishment. As a result of the repurchase of 2021 Notes in the third quarter of 2020 and the exchange of 2021 Notes for new notes in the offering in privately negotiated transactions. A portionsecond quarter of 2020, a partial unwind of the net proceeds fromnote hedge options and warrants entered into with the offering were used to pay the costissuance of the convertible2021 Notes also occurred. The partial unwind of the note hedge transactions (after such cost is partially offset by the proceedsoptions and warrants resulted in no net impact to cash or paid-in-capital. Note hedge options outstanding relating to the company from2021 Notes were reduced 62,341 and subsequently expired on February 15, 2021. The warrants began to expire on May 15, 2021 and then partially expire on each trading day over the 220 trading day period following May 15, 2021. Warrants outstanding on June 30, 2021 were 2,698,318. If exercised, one Common Share is issuable upon exercise of each warrant, but may be adjusted to include additional Common Shares for each warrant under certain circumstances if the relevant share price exceeds the warrant transactions), with a net coststrike price for the relevant measurement period at the time of $15,600,000.exercise. Common Shares are reserved for issuance upon exercise of the remaining warrants relating to the 2021 Notes at two Common Shares per warrant.
The liability components of the 2021 notesNotes consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Principal amount of liability component | Principal amount of liability component | $ | 1,250 | | | $ | 61,091 | | Principal amount of liability component | $ | 0 | | | $ | 1,250 | |
| Unamortized discount | Unamortized discount | (22) | | | (3,916) | | Unamortized discount | 0 | | | (7) | |
| Debt fees | Debt fees | (4) | | | (547) | | Debt fees | 0 | | | (1) | |
| Net carrying amount of liability component | Net carrying amount of liability component | $ | 1,224 | | | $ | 56,628 | | Net carrying amount of liability component | $ | 0 | | | $ | 1,242 | |
The unamortized discount of $22,000 is to be amortized through February 2021. The effective interest rate on the liability component was 11.1%. Non-cash interest expense of $261,000 and $1,767,000 was recognized for the three and nine months ended September 30, 2020, respectively, compared to $1,444,000 and $5,391,000 for the three and nine months ended September 30, 2019, respectively. Actual interest expense accrued was $241,000 and $1,617,000 for the three and nine months ended September 30, 2020, respectively, compared to $1,834,000 and $5,584,000 for the three and nine months ended September 30, 2019, respectively, based on the stated coupon rate of 5.0%. The 2021 notes were not convertible as of September 30, 2020 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
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The unamortized discount was reduced to $0 upon adoption of ASU 2020-06, effective January 1, 2021. The effective interest rate on the liability component was 11.1% upon original issuance including consideration of the discount. Non-cash discount interest expense of $682,000 and $1,506,000 was recognized for the three and six months ended June 30, 2020. Interest expense of $0 and $8,000 was accrued for the three and six months ended June 30, 2021, compared to $631,000 and $1,376,000 for the three and six months ended June 30, 2020 based on the stated coupon rate of 5.0%.
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 notesNotes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year, beginning December 1, 2017. The 2022 notesNotes 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 notesNotes 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. Prior to May 16, 2019, the 2022 notesNotes were convertible, subject to certain conditions, into cash only. On May 16, 2019, the company obtained shareholder approval under applicable New York Stock Exchange rules such that conversion of the 2022 notesNotes 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. At SeptemberJune 30, 2020, $81,500,0002021, $2,650,000 aggregate principal amount of the 2022 Notes remained outstanding, following the exchange transactions completed in the second quarter of 2020 and the repurchase of debt completed in the first quarter of 2021, as further discussed below.
Holders of the 2022 notesNotes may convert their 2022 notesNotes at their option at any time prior to the close of business on the business day immediately preceding December 1, 2021 only under the following 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 Sharescommon 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 is greater than or equal to 130% of the applicable conversion price for the 2022 notesNotes 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 notesNotes 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 notesNotes on each such trading day; or (3) upon the occurrence of specified corporate events described in the Indenture. On or after December 1, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity of the 2022 Notes, holders may convert their 2022 Notes, at the option of the holder, regardless of the foregoing circumstances.
Holders of the 2022 notesNotes will have 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 shares per $1,000 principal amount of 2022 notesNotes (equivalent to an initial conversion price of approximately $16.23 per common share).
Until the company received shareholder approval on May 16, 2019 authorizing it to elect to settle future conversions of the 2022 Notes in common shares, the company separately accounted for the conversion features as a derivative. The derivative was capitalized on the balance sheet as a long-term liability with adjustment to reflect fair value each 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 company recognized a loss of $6,193,000 for the nine months ended September 30,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 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 company recognized a gain of $6,748,000 for the nine months ended September 30, 2019 related to the convertible note hedge asset.
The company entered into separate, privately negotiated warrant transactions with the option counterparty at a higher strike price relating to the same number of the company’s common shares, subject to customary anti-dilution adjustments, pursuant to which the company sold warrants to the option counterparties. The warrants could have a dilutive
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effect on the company’s outstanding common shares and the company’s earnings per share to the extent that the price of the company’s common shares exceeds the strike price of those warrants. The initial strike price of the warrants is $21.4375 per share and is subject to certain adjustments under the terms of the warrant transactions. The company evaluated the warrants under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the warrants meet the definition of a derivative, are indexed to the company's own shares and should be classified in shareholder's equity. The amount paid for the warrants and capitalized in shareholder's equity was $14,100,000.
There were 120,000 note hedge options relating to the 2022 Notes outstanding at June 30, 2021, but only 2,650 remained available for exercise. Note hedge options related to the 2022 Notes will expire on June 1, 2022.
Warrants relating to the 2022 Notes outstanding on June 30, 2021 were 7,393,141. If exercised, one common share is issuance upon exercise of each warrant, but may be adjusted under certain circumstances if the relevant share price exceeds the warrant strike price for 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
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expenses of $4,711,000, which were paid in 2017. These debt issuance costs were capitalized and are being amortized as interest expense through June 2022. 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 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 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 notes consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 | |
| Principal amount of liability component | Principal amount of liability component | $ | 81,500 | | | $ | 120,000 | | | Principal amount of liability component | $ | 2,650 | | | $ | 81,500 | | |
| Unamortized discount | Unamortized discount | (7,837) | | | (16,027) | | | Unamortized discount | 0 | | | (6,772) | | |
| Debt fees | Debt fees | (1,011) | | | (2,158) | | | Debt fees | (18) | | | (859) | | |
| Net carrying amount of liability component | Net carrying amount of liability component | $ | 72,652 | | | $ | 101,815 | | | Net carrying amount of liability component | $ | 2,632 | | | $ | 73,869 | | |
The unamortized discount was reduced to $0 upon adoption of $7,837,000 is to be amortized through June 2022.ASU 2020-06, effective January 1, 2021. The effective interest rate on the liability component was 10.9%. 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. Non-cash discount interest expense of $1,046,000$1,323,000 and $3,829,000$2,783,000 was recognized for the three and ninesix months ended SeptemberJune 30, 2020, respectively, compared to $1,320,0002020. Interest expense of $30,000 and $4,038,000$799,000 was accrued for the three and ninesix months ended SeptemberJune 30, 2019, respectively. Actual interest expense accrued of $917,0002021 compared to $1,220,000 and $3,487,000$2,570,000 for the three and ninesix months ended SeptemberJune 30, 2020 respectively, compared to $1,350,000 and $4,050,000 for the three and nine months ended September 30, 2019, respectively, based on the stated coupon rate of 4.5%. The effective interest rate of the 2022 notesNotes as of June 30, 2021 was 5.2%. The 2022 Notes were not convertible as of SeptemberJune 30, 20202021 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 “2024“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 notesNotes 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 2024 notesNotes may be settled in cash, the company’s common shares
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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 notesNotes may convert their Series I 2024 notesNotes 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 Sharescommon 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 or equal to 130% of the conversion price for the Series I 2024 notesNotes 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 notesNotes 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 Sharescommon shares and the applicable conversion rate for the Series I 2024 notesNotes 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 notesNotes will have the right to require the company to repurchase all or some of their Series I 2024 notesNotes 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 notesNotes (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.
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Notes to Financial Statements | Long-Term Liabilities | |
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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 noteNotes exchanged. Debt issuance costs of $1,394,000 were capitalized and are being amortized as interest expense through November 15.15, 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 notesNotes consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 | |
| Principal amount of liability component | Principal amount of liability component | $ | 72,909 | | | $ | 72,909 | | | Principal amount of liability component | $ | 72,909 | | | $ | 72,909 | | |
| Unamortized discount | Unamortized discount | (9,363) | | | (10,733) | | | Unamortized discount | 0 | | | (8,888) | | |
| Debt fees | Debt fees | (1,103) | | | (1,359) | | | Debt fees | (903) | | | (1,037) | | |
| Net carrying amount of liability component | Net carrying amount of liability component | $ | 62,443 | | | $ | 60,817 | | | Net carrying amount of liability component | $ | 72,006 | | | $ | 62,984 | | |
The unamortized discount was reduced to $0 upon adoption of $9,363,000 is to be amortized through November 15, 2024.ASU 2020-06, effective January 1, 2021. The effective interest rate on the liability component was 8.77%. upon original issuance including consideration of the discount. Total interest expense subsequent to adoption includes coupon interest and amortization of debt fees. Non-cash discount interest expense of $468,000$454,000 and $1,370,000$902,000 was recognized for the three and ninesix months ended SeptemberJune 30, 2020, respectively. Actual interest2020. Interest expense accrued $912,000of $911,000 and $2,735,000$1,822,000 was accrued for the three and ninesix months ended SeptemberJune 30, 2021 compared to $912,000 and $1,823,000 for the three and six months ended June 30, 2020 respectively, based on the stated coupon rate of 5.0%. The effective interest rate of the Series I 2024 notes as of June 30, 2021 was 5.4%. The Series I 2024 Notes were not convertible as of SeptemberJune 30, 20202021 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,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 notesSeries 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.
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| Notes to Financial Statements | Long-Term Liabilities | |
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The notesSeries 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 notes2024 Notes may convert their Series II notes2024 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 quarter), if the last reported sale price of the company’s Common Sharescommon 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 notes2024 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 notes2024 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 Sharescommon shares and the applicable conversion rate for the Series II notes2024 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 notes2024 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
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Notes to Financial Statements | Long-Term Liabilities | |
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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 SeptemberJune 30, 20202021 was $1,016,000.$3,560,000, of which $877,000 was for the three months ended June 30, 2021. Remaining accretion until maturity (at current principal) was $13,062,000 at June 30, 2021.
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 noteNotes exchanged. Debt issuance costs of $1,518,000$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, 2021 | | December 31, 2020 | | | | |
| Principal amount of liability component - including accretion | $ | 77,435 | | | $ | 75,688 | | | | | |
| Unamortized discount | 0 | | | (9,461) | | | | | |
| Debt fees | (1,139) | | | (1,308) | | | | | |
| Net carrying amount of liability component | $ | 76,296 | | | $ | 64,919 | | | | | |
| | | | | | | |
The unamortized discount was reduced to $0 upon adoption of ASU 2020-06, effective January 1, 2021. The effective interest rate on the liability component was 8.99% upon original issuance including consideration of the discount. Total interest expense subsequent to adoption includes coupon interest, accretion and amortization of debt fees. Interest expense for accretion of $877,000 and $1,747,000 was accrued for the three and six months ended June 30, 2021. Non-cash interest, including accretion, of $403,000 was recognized for the three and six months ended June 30, 2020. Interest expense of $277,000 was recognized for the three and six months ended June 30, 2020 compared to $924,000 and
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| Notes to Financial Statements | Long-Term Liabilities | |
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$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, 2021 including coupon interest, amortization of debt fees and accretion to maturity was 10.6%. The Series II 2024 Notes were not convertible as of June 30, 2021 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 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):
| | | | | | | | | |
| SeptemberJune 30, 20202021 | | | | |
Principal amount of liability component - including accretion | $ | 74,891125,000 | | | | | |
Unamortized discount | (9,967) | | | | | |
| Debt fees | (1,368)(6,879) | | | | | |
| Net carrying amount of liability component | $ | 63,556118,121 | | | | | |
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The unamortized discountInterest expense of $9,967,000 is to be amortized through November 15, 2024. The effective interest rate on the liability component$1,328,000 and $1,564,000 was 8.99%. Non-cash interest expense, including accretion, of $1,260,000 and $1,663,000 was recognizedaccrued for the three and ninesix months ended SeptemberJune 30, 2020, respectively. Actual interest expense accrued of $923,000 and $1,200,000 for the three and nine months ended September 30, 2020, respectively,2021 based on the stated coupon rate of 5.0%4.25%. The 2024 noteseffective interest rate of the 2026 Notes as of June 30, 2021 was 5.4%. The 2026 Notes were not convertible as of June 30, 20202021 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
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| Notes to Financial Statements | Long-Term Liabilities | |
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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, 2021.
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 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.
CARES Act Loan
On May 15, 2020 the company entered into an unsecured loan agreement in the aggregate amount of $10,000,000 pursuant to sections 1102 and 1106 of the Coronavirus Aid, Relief and Economic Security, "CARES," Act which was evidenced by a promissory note, dated May 13, 2020, and bears interest at a fixed rate of 1.00%, payable in monthly payments commencing on December 13, 2020.. Payments which were subsequently deferred to commence on March 13,in May 2021 under the program, have been deferred until the third quarter of 2021. This loan may be forgivable, partially or in full, if certain conditions are met, principally based on having been disbursed
for permissible purposes and based on average levels of employment over a designated period of time. No assurance can be given that the company will be granted forgiveness of the loan upon application in whole or in part. The company has recorded $2,816,000$10,000,000 of the amount borrowed in current maturities of long term debt.
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| Notes to Financial Statements | Long-Term Liabilities | |
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Other Long-Term Obligations
Other long-term obligations consist of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Deferred income taxes | Deferred income taxes | $ | 24,223 | | | $ | 23,376 | | Deferred income taxes | $ | 23,843 | | | $ | 23,234 | |
| Product liability | Product liability | 13,545 | | | 13,414 | | Product liability | 12,748 | | | 12,304 | |
| Pension | Pension | 7,586 | | | 7,006 | | Pension | 9,221 | | | 9,088 | |
| Deferred compensation | | Deferred compensation | 5,823 | | | 5,318 | |
| Deferred gain on sale leaseback | Deferred gain on sale leaseback | 5,582 | | | 5,819 | | Deferred gain on sale leaseback | 5,340 | | | 5,502 | |
| Deferred compensation | 5,318 | | | 5,354 | | |
| Supplemental Executive Retirement Plan liability | 5,245 | | | 5,433 | | |
| Supplemental executive retirement plan liability | | Supplemental executive retirement plan liability | 5,271 | | | 5,368 | |
| Death benefit obligation plan | | Death benefit obligation plan | 4,260 | | | 4,723 | |
| Uncertain tax obligation including interest | Uncertain tax obligation including interest | 2,660 | | | 2,612 | | Uncertain tax obligation including interest | 3,178 | | | 3,114 | |
| | Other | Other | 6,589 | | | 3,935 | | Other | 2,039 | | | 1,823 | |
| Other Long-Term Obligations | Other Long-Term Obligations | $ | 70,748 | | | $ | 66,949 | | Other Long-Term Obligations | $ | 71,723 | | | $ | 70,474 | |
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 gains realized were $77,000$79,000 and $228,000 for the$157,000 for the three and ninesix months ended SeptemberJune 30, 2020,2021 respectively, compared to $74,000$76,000 and $220,000$151,000 for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively.
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| Notes to Financial Statements | Leases and CommitmentsLong-Term Liabilities | |
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Leases and Commitments
The company reviews new contracts in accordance with ASU 2016-02, "Leases" 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 1one 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 SeptemberJune 30, 2020,2021, the company is committed under non-cancelable operating leases, which have initial or remaining terms in excess of one year and expire on various dates through 2035.2040.
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 permitted to sublet the properties; however, the properties are currently being utilized exclusively by the company and there is no current subletting. The company is required to adequately maintain each of the properties and any leasehold improvements will be amortized over the lesser of the lives of the improvements or the remaining lease lives, 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 capitalfinance 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 sheet. The gains realized were $77,000$79,000 and $228,000$157,000 for the three and ninesix months ended SeptemberJune 30, 2020, respectively,2021 compared to $74,000$76,000 and $220,000$151,000 for the three and ninesix months ended SeptemberJune 30, 2019, respectively.2020.
In December 2018, the company entered into a 20-year lease agreement in Germany. The lease commenced in July 2020. The lease increased the company's financingfinance lease obligationsobligation by $36,916,000.$36,916,000 and increased the finance lease expense compared to previous periods.
In December of 2020, the company entered into a 12.6-year lease agreement in Germany. The lease increased the company's finance lease obligation by $5,561,000 and increased the finance lease expense compared to previous periods.
Lease expenseexpenses for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, respectively, were as follows (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Operating leases | Operating leases | | $ | 1,926 | | | $ | 2,696 | | | $ | 6,210 | | | $ | 8,175 | | Operating leases | | $ | 1,819 | | | $ | 2,041 | | | $ | 3,781 | | | $ | 4,284 | |
| Variable and short-term leases | Variable and short-term leases | | 1,077 | | | 894 | | | 2,936 | | | 1,974 | | Variable and short-term leases | | 1,010 | | | 938 | | | 2,061 | | | 1,859 | |
| Total operating leases | Total operating leases | | $ | 3,003 | | | $ | 3,590 | | | $ | 9,146 | | | $ | 10,149 | | Total operating leases | | $ | 2,829 | | | $ | 2,979 | | | $ | 5,842 | | | $ | 6,143 | |
| | Finance lease interest cost | Finance lease interest cost | | $ | 829 | | | $ | 346 | | | $ | 1,483 | | | $ | 977 | | Finance lease interest cost | | $ | 1,163 | | | $ | 326 | | | $ | 2,341 | | | $ | 654 | |
| Finance lease depreciation | Finance lease depreciation | | 980 | | | 706 | | | 2,346 | | | 1,957 | | Finance lease depreciation | | 1,266 | | | 663 | | | 2,542 | | | 1,366 | |
| Total finance leases | Total finance leases | | $ | 1,809 | | | $ | 1,052 | | | $ | 3,829 | | | $ | 2,934 | | Total finance leases | | $ | 2,429 | | | $ | 989 | | | $ | 4,883 | | | $ | 2,020 | |
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| Notes to Financial Statements | Leases and CommitmentsLong-Term Liabilities | |
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Future minimum operating and finance lease commitments, as of SeptemberJune 30, 2020,2021, are as follows (in thousands):
| | | Finance
Leases | | Operating Leases | | Finance
Leases | | Operating Leases |
| 2020 | $ | 1,873 | | | $ | 1,842 | | |
| 2021 | 2021 | 7,416 | | | 6,027 | | 2021 | $ | 4,733 | | | $ | 3,860 | |
| 2022 | 2022 | 6,487 | | | 3,466 | | 2022 | 7,136 | | | 4,489 | |
| 2023 | 2023 | 6,421 | | | 1,407 | | 2023 | 7,035 | | | 2,330 | |
| 2024 | 2024 | 6,365 | | | 890 | | 2024 | 6,972 | | | 1,687 | |
| 2025 | | 2025 | 6,889 | | | 1,379 | |
| Thereafter | Thereafter | 84,251 | | | 786 | | Thereafter | 81,722 | | | 2,585 | |
| Total future minimum lease payments | Total future minimum lease payments | 112,813 | | | 14,418 | | Total future minimum lease payments | 114,487 | | | 16,330 | |
| Amounts representing interest | Amounts representing interest | (45,511) | | | (1,393) | | Amounts representing interest | (42,773) | | | (2,361) | |
| Present value of minimum lease payments | Present value of minimum lease payments | 67,302 | | | 13,025 | | Present value of minimum lease payments | 71,714 | | | 13,969 | |
| Less: current maturities of lease obligations | Less: current maturities of lease obligations | (3,352) | | | (5,843) | | Less: current maturities of lease obligations | (3,438) | | | (5,371) | |
| Long-term lease obligations | Long-term lease obligations | $ | 63,950 | | | $ | 7,182 | | Long-term lease obligations | $ | 68,276 | | | $ | 8,598 | |
Supplemental cash flow amounts for the ninesix months ended SeptemberJune 30, 20202021 were as follows (in thousands):
| | | | | | | | |
| Cash Activity: Cash paid in measurement of amounts for lease liabilities | | SeptemberJune 30, 20202021 |
Operating Leasesleases | | $ | 9,4075,917 | |
Financing LeasesFinance leases | | 3,4294,211 | |
| Total | | $ | 12,83610,128 | |
| | |
| Non-Cash Activity: Right-of-use assets obtained in exchange for lease obligations | | SeptemberJune 30, 20202021 |
Operating Leasesleases | | $ | 2,7894,429 | |
Financing LeasesFinance leases | | 39,9426,156 | |
| Total | | $ | 42,73110,585 | |
| | |
Weighted-average remaining lease terms and discount rates for finance and operating leases are as follows as of SeptemberJune 30, 2020:2021:
| | | | | |
| SeptemberJune 30, 20202021 |
| Weighted-average remaining lease term - finance leases | 17.216.3 years |
| Weighted-average remaining lease term - operating leases | 3.24.8 years |
| Weighted-average discount rate - finance leases | 6.32%6.50% |
| Weighted-average discount rate - operating leases | 7.74%7.3% |
| | | | | | | | |
| Notes to Financial Statements | Revenue | |
| | |
Revenue
The company has two revenue streams: products and services. Services include repair, refurbishment, preventive maintenance and rental of product. Services for the North America segment include maintenance and repair of product.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 product. products.
The following tables disaggregate the company’s revenues by major source and by reportable segment for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 20192020 (in thousands):
| | | Three Months Ended September 30, 2020 | | Three Months Ended June 30, 2021 |
| | Product | | Service | | Total | | Product | | Service | | Total |
| Europe | Europe | | $ | 113,043 | | | $ | 3,242 | | | $ | 116,285 | | Europe | | $ | 118,165 | | | $ | 3,131 | | | $ | 121,296 | |
| North America | North America | | 87,821 | | | 234 | | | 88,055 | | North America | | 95,985 | | | 262 | | | 96,247 | |
| | Other (Asia/Pacific) | | 6,428 | | | 1,138 | | | 7,566 | | |
| All Other | | All Other | | 7,044 | | | 1,277 | | | 8,321 | |
| Total | Total | | $ | 207,292 | | | $ | 4,614 | | | $ | 211,906 | | Total | | $ | 221,194 | | | $ | 4,670 | | | $ | 225,864 | |
| % Split | % Split | | 98% | | 2% | | 100% | % Split | | 98% | | 2% | | 100% |
|
| | | Nine Months Ended September 30, 2020 | | Six Months Ended June 30, 2021 |
| | Product | | Service | | Total | | Product | | Service | | Total |
| Europe | Europe | | $ | 329,943 | | | $ | 9,204 | | | $ | 339,147 | | Europe | | $ | 228,009 | | | $ | 6,062 | | | $ | 234,071 | |
| North America | North America | | 260,999 | | | 596 | | | 261,595 | | North America | | 171,687 | | | 534 | | | 172,221 | |
| | Other (Asia/Pacific) | | 22,565 | | | 3,339 | | | 25,904 | | |
| All Other | | All Other | | 13,222 | | | 2,552 | | | 15,774 | |
| Total | Total | | $ | 613,507 | | | $ | 13,139 | | | $ | 626,646 | | Total | | $ | 412,918 | | | $ | 9,148 | | | $ | 422,066 | |
| % Split | % Split | | 98% | | 2% | | 100% | % Split | | 98% | | 2% | | 100% |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | Product | | Service | | Total |
| Europe | | $ | 133,839 | | | $ | 3,532 | | | $ | 137,371 | |
| North America | | 86,761 | | | 357 | | | 87,118 | |
| | | | | | |
| Other (Asia/Pacific) | | 10,047 | | | 1,238 | | | 11,285 | |
| Total | | $ | 230,647 | | | $ | 5,127 | | | $ | 235,774 | |
| % Split | | 98% | | 2% | | 100% |
| | | Nine Months Ended September 30, 2019 | | Three Months Ended June 30, 2020 |
| | Product | | Service | | Total | | Product | | Service | | Total |
| Europe | Europe | | $ | 386,007 | | | $ | 10,199 | | | $ | 396,206 | | Europe | | $ | 99,215 | | | $ | 2,679 | | | $ | 101,894 | |
| North America | North America | | 261,707 | | | 1,208 | | | 262,915 | | North America | | 86,414 | | | 155 | | | 86,569 | |
| | Other (Asia/Pacific) | | 32,242 | | | 3,688 | | | 35,930 | | |
| All Other | | All Other | | 6,815 | | | 1,022 | | | 7,837 | |
| Total | Total | | $ | 679,956 | | | $ | 15,095 | | | $ | 695,051 | | Total | | $ | 192,444 | | | $ | 3,856 | | | $ | 196,300 | |
| % Split | % Split | | 98% | | 2% | | 100% | % Split | | 98% | | 2% | | 100% |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 |
| | Product | | Service | | Total |
| Europe | | $ | 216,900 | | | $ | 5,962 | | | $ | 222,862 | |
| North America | | 173,178 | | | 362 | | | 173,540 | |
| | | | | | |
| All Other | | 16,137 | | | 2,201 | | | 18,338 | |
| Total | | $ | 406,215 | | | $ | 8,525 | | | $ | 414,740 | |
| % Split | | 98% | | 2% | | 100% |
| | | | | | |
The company's revenues are principally related to the sale of products, approximately 98%, with the remaining 2% related to services including repair, refurbishment, preventive maintenance and rental of product.products. While the company has a significant amount of contract types, the sales split by contract type is as follows: general terms and conditions (31%(30%), large national customers (26%(30%), governments, principally pursuant to tender contracts (20%(21%) and other customers including buying groups and independent customers (23%(19%).
All product and substantially all service revenues are recognized at a point in time. The remaining service revenue, recognized over time, are reflected in the Europe segment and include multiple performance obligations. For such contracts, the company allocates revenue to each performance obligation based on its relative standalone selling price. The company generally determines the standalone selling price based on the expected cost-plus margin methodology.
Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the company’s products and services. Revenue is measured as the amount of consideration expected to be received in exchange for transferring product or providing services. The amount of consideration received and revenue recognized by the company can vary as a result of variable consideration terms included in the contracts related to customer rebates, cash discounts and return policies. Customer rebates and cash discounts are estimated based on the most likely amount principle and these estimates are based on historical experience and anticipated performance. In addition, customers have the right to return product within the company’s normal terms policy, and as such the company estimates the expected returns based on an analysis of historical experience. The company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed. The company generally does not expect that there will be significant changes to its estimates of variable consideration (see “Receivables” and "Accrued Expenses" in the Notes to the Condensed Consolidated
| | | | | | | | |
| Notes to Financial Statements | Revenue | |
| | |
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
| | | | | | | | |
Notes to Financial Statements | Revenue | |
| | |
are satisfied. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the company had deferred revenue of $3,436,000$3,607,000 and $3,173,000,$3,516,000, respectively, related to outstanding performance obligations.
| | | | | | | | |
| Notes to Financial Statements | Equity Compensation | |
| | |
Equity Compensation
The company’s Common Shares have a $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 10 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. When Class B Common Shares are transferred out of a familial relationship, they automatically convert to Common Shares. The Board of Directors suspended further dividends on the Common Shares and the Class B Common Shares.
As of SeptemberJune 30, 2020, 6,3572021, 3,667 Class B Common Shares remained outstanding. Prior conversions of Class B Common Shares have substantially diminished the significance ofvirtually eliminated the company’s dual class voting structure. As of SeptemberJune 30, 2020,2021, the holders of the Common Shares represented approximately 99.9% of the company’s total outstanding voting power.
Equity Compensation Plan
On May 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”) and all of the Common Shares that were forfeited or remained unpurchased or undistributed upon termination or expiration of awards under the 2013 Plan and under the Invacare Corporation 2003 Performance Plan (the “2003 Plan”), become available for issuance under the 2018 Plan. Awards granted previously under the 2013 Plan and 2003 Plan will remain in effect under their original terms.
The 2018 Plan uses a fungible share-counting method, under which each Common Share underlying an award of sharestock options or sharestock appreciation rights ("SAR") will count against the number of total shares available under the 2018 Plan as one share; and each Common Share underlying any award other than a sharestock option or a SAR will count against
the number of total shares available under the 2018 Plan as two shares. Shares underlying awards made under the 2003
Plan or 2013 Plan that are forfeited or remain unpurchased or undistributed upon termination or expiration of the awards will become available under the 2018 Plan for use in future awards. Any Common Shares that are added back to the 2018 Plan as the result of forfeiture, termination or expiration 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, as applicable. Each Common Share that is added back to the 2018 Plan due to a forfeiture, termination or expiration of an award granted under the 2003 Plan will be added back as one Common Share.
The Compensation and Management Development Committee of the Board (the “Compensation Committee”), in its discretion, may grant an award under the 2018 Plan to any director or employee of the company or an affiliate. As of SeptemberJune 30, 2020, 3,513,4682021, 3,394,164 Common Shares were available for future issuance under the 2018 Plan in connection with the following types of awards with respect to the company's Common Shares: incentive sharestock options, nonqualified sharestock options, SARs, restricted shares,stock, restricted sharestock units, unrestricted sharesstock 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 Common Shares authorizedavailable for future issuance under the 2018 Plan as of June 30, 2021 includes an additional 1,400,0002,500,000 Common Shares that were added pursuant to an amendment approved by shareholders at the company’s 20202021 annual shareholders meeting on May 21, 2020.20, 2021.
In the second quarter of 2020 the company transferred a total of 1,004,079 shares into the 2018 Plan from the 2003 and 2013 Plans. At SeptemberJune 30, 2020,2021, an aggregate of 328,274513,688 Common Shares underlie awards which were forfeited or expired unexercised under the 2003 and 2013 Plans and thus are available to be transferred intounder the 2018 Plan.
The 2018 Plan provides that shares granted come from the company's authorized but unissued Common Shares or treasury shares. In addition, the company's equitystock-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 SG&A expenses in All Other in business segmentssegment reporting were as follows (in thousands):
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2020 | | 2019 |
| Restricted share / units | $ | 4,471 | | | $ | 3,891 | |
| Performance shares / units | 2,494 | | | 1,648 | |
| Non-qualified and performance share options | 0 | | | 334 | |
| Total share-based compensation expense | $ | 6,965 | | | $ | 5,873 | |
| | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2021 | | 2020 |
| Restricted stock / units | $ | 3,761 | | | $ | 3,650 | |
| Performance shares / units | 2,049 | | | 1,676 | |
| | | |
| Total stock-based compensation expense | $ | 5,810 | | | $ | 5,326 | |
As of SeptemberJune 30, 2020,2021, unrecognized compensation expense related to equity-based compensation arrangements granted under the company's 2018 Plan and previous plans, which is related to non-vested options and shares, was as follows (in thousands):
| | | | | |
| SeptemberJune 30, 20202021 |
Restricted sharestock and restricted sharestock units | $ | 8,4438,922 | |
| Performance shares and performance share units | 11,1448,205 | |
| |
Total unrecognized share-basedstock-based compensation expense | $ | 19,58717,127 | |
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 "Share(refer to "Stock Options" and "Performance Shares and Performance Share Units" below). No tax benefits for share-basedstock compensation were realized during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, 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.
ShareStock Options
Generally, non-qualified sharestock 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. Share option awards granted in 2017 were performance-based awards and became exercisable based upon achievement of performance goals established by the Compensation Committee and achieved over the three-year period ended in 2019 and were 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 recognized the compensation expense over a weighted-average period of approximately two years.
The following table summarizes information about sharestock option activity for the ninesix months ended SeptemberJune 30, 2020:2021:
| | | | | | | | | | | |
| | | Weighted Average
Exercise Price |
| Options outstanding at January 1, 2020 | 1,441,202 | | | $ | 18.26 | |
| | | |
| | | |
| Canceled | (354,006) | | | 24.88 |
| Options outstanding at September 30, 2020 | 1,087,196 | | | $ | 16.12 | |
| Options exercise price range at September 30, 2020 | $ | 12.15 | | to | $ | 33.36 | |
| Options exercisable at September 30, 2020 | 1,087,196 | | | |
| Shares available for grant at September 30, 2020* | 3,513,468 | | | |
| | | | | | | | | | | |
| | | Weighted Average
Exercise Price |
| Options outstanding at January 1, 2021 | 1,081,804 | | | $ | 16.07 | |
| | | |
| | | |
| Forfeited | (42,696) | | | 18.74 |
| Options outstanding at June 30, 2021 | 1,039,108 | | | $ | 15.96 | |
| Options exercise price range at June 30, 2021 | $ | 12.15 | | to | $ | 24.45 | |
| Options exercisable at June 30, 2021 | 1,039,108 | | | |
| Shares available for grant at June 30, 2021* | 3,394,164 | | | |
________
* Shares available for grant under the 2018 Plan as of SeptemberJune 30, 20202021 reduced by net restricted sharestock and restricted sharestock unit award activity of 696,058 shares and performance share and performance share unit award activity of 1,859,0542,671,108 shares.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| Exercise Prices | Number
Outstanding at
June 30, 2021 | | Weighted Average
Remaining
Contractual Life (Years) | | Weighted Average
Exercise Price | | Number
Exercisable at June 30, 2021 | | Weighted Average
Exercise Price |
| $12.15 – $20.00 | 750,159 | | | 4.5 | | $ | 12.69 | | | 750,159 | | | $ | 12.69 | |
| $20.01 – $30.00 | 288,949 | | | 0.2 | | 24.45 | | | 288,949 | | | 24.45 | |
| | | | | | | | | |
| | | | | | | | | |
| Total | 1,039,108 | | | 3.3 | | $ | 15.96 | | | 1,039,108 | | | $ | 15.96 | |
| | | | | | | | |
| Notes to Financial Statements | Equity Compensation | |
| | |
The following table summarizes information about stock options outstanding at September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| Exercise Prices | Number
Outstanding at
September 30, 2020 | | Weighted Average
Remaining
Contractual Life (Years) | | Weighted Average
Exercise Price | | Number
Exercisable at
September 30, 2020 | | Weighted Average
Exercise Price |
| $12.15 – $20.00 | 777,159 | | | 5.1 | | $ | 12.74 | | | 777,159 | | | $ | 12.73 | |
| $20.01 – $25.00 | 300,149 | | | 0.9 | | 24.45 | | | 300,149 | | | 24.45 | |
| $25.01 – $30.00 | 5,392 | | | 0.2 | | 27.82 | | | 5,392 | | | 27.82 | |
| $30.01 – $33.36 | 4,496 | | | 0.6 | | 33.36 | | | 4,496 | | | 33.36 | |
| Total | 1,087,196 | | | 3.9 | | $ | 16.12 | | | 1,087,196 | | | $ | 16.12 | |
The 2018 Plan provides for a one-year minimum vesting period for sharestock options and, generally, options must be exercised within ten years from the date granted. No sharestock options were issued in 20202021 or 2019. The performance-based options issued in 2017 vested after the conclusion of the three-year performance period ending December 31, 2019.2020.
Restricted ShareStock and Restricted ShareStock Units
The following table summarizes information about restricted sharesstock and restricted sharestock units (primarily for non-U.S. recipients):
| | | | | | | | | | | |
| | | Weighted Average Fair Value |
Shares / Units unvested at
January 1, 2020 | 965,085 | | | $ | 11.32 | |
| Granted | 764,012 | | | 7.11 | |
| Vested | (452,922) | | | 11.47 | |
| Canceled | (94,993) | | | 10.19 | |
Shares / Units unvested at
September 30, 2020 | 1,181,182 | | | $ | 8.63 | |
| | | | | | | | | | | |
| | | Weighted Average Fair Value |
Stock / Units unvested at
January 1, 2021 | 1,145,058 | | | $ | 8.62 | |
| Granted | 647,743 | | | 8.46 | |
| Vested | (550,258) | | | 9.34 | |
| Forfeited | (32,864) | | | 8.64 | |
Stock / Units unvested at
June 30, 2021 | 1,209,679 | | | $ | 8.20 | |
The 2018 Plan provides for a one-year minimum vesting period for restricted share awards, the outstanding restricted share awards generally vest ratably over the three years after the award date. Unearned restricted sharestock 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.
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, 2020 | 753,272 | | | $ | 11.82 | |
| Granted | 523,329 | | | 7.08 | |
| | | |
| Canceled | (65,976) | | | 9.48 | |
Shares / Units unvested at
September 30, 2020 | 1,210,625 | | | $ | 9.90 | |
| | | | | | | | | | | |
| | | | Weighted Average Fair Value |
| Shares / Units unvested at January 1, 2021 | 1,026,785 | | | $ | 8.55 | |
| Granted | 471,819 | | | 8.49 | |
| | | |
| | | |
Shares / Units unvested at
June 30, 2021 | 1,498,604 | | | $ | 8.53 | |
During the ninesix months ended SeptemberJune 30, 2020,2021, performance shares and performance share units (for non-U.S. recipients) were granted as performance awards with a three-year 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, 2018 through December 31, 2020, January 1, 2019 through December 31, 2021, January 1, 2020 through December 31, 2022 and January 1,
2021 through December 31, 2023, respectively established by the Compensation Committee at the time of grant. Recipients will be entitled to receive a number of Common Shares equal to the number of performance shares that vest based upon the levels of achievement which may range between 0% and 150% of the target number of shares with the target being 100% of the initial grant.
The fair value of the performance awards is based on the sharestock 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
| | | | | | | | |
Notes to Financial Statements | Equity Compensation | |
| | |
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. Expense is being recognized forThe company continues to recognize expense related to the 2018,awards granted in 2019, 2020 and 2020 awards2021 as it is considered probable that the performance goals for those awards will be met.
| | | | | | | | |
| Notes to Financial Statements | Accumulated Other Comprehensive Income | |
| | |
Accumulated Other Comprehensive Income (Loss) by Component
Changes in accumulated other comprehensive income ("OCI") (in thousands):
| | | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| June 30, 2020 | | $ | 16,455 | | | $ | (9,133) | | | $ | (3,468) | | | $ | 794 | | | $ | 4,648 | | |
| March 31, 2021 | | March 31, 2021 | | $ | 53,131 | | | $ | 2,358 | | | $ | (3,325) | | | $ | (1,494) | | | $ | 50,670 | |
| OCI before reclassifications | OCI before reclassifications | | 35,231 | | | 713 | | | 281 | | | (2,501) | | | 33,724 | | OCI before reclassifications | | 7,250 | | | (212) | | | (701) | | | (369) | | | 5,968 | |
| Amount reclassified from accumulated OCI | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | (474) | | | 739 | | | 265 | | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | (43) | | | 484 | | | 441 | |
| Net current-period OCI | Net current-period OCI | | 35,231 | | | 713 | | | (193) | | | (1,762) | | | 33,989 | | Net current-period OCI | | 7,250 | | | (212) | | | (744) | | | 115 | | | 6,409 | |
| September 30, 2020 | | $ | 51,686 | | | $ | (8,420) | | | $ | (3,661) | | | $ | (968) | | | $ | 38,637 | | |
| June 30, 2021 | | June 30, 2021 | | $ | 60,381 | | | $ | 2,146 | | | $ | (4,069) | | | $ | (1,379) | | | $ | 57,079 | |
| | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| December 31, 2019 | | $ | 8,898 | | | $ | (2,491) | | | $ | (3,299) | | | $ | 20 | | | $ | 3,128 | | |
| December 31, 2020 | | December 31, 2020 | | $ | 50,329 | | | $ | (517) | | | $ | (3,674) | | | $ | (702) | | | $ | 45,436 | |
| OCI before reclassifications | OCI before reclassifications | | 42,788 | | | (5,929) | | | 122 | | | (1,340) | | | 35,641 | | OCI before reclassifications | | 10,052 | | | 2,663 | | | (231) | | | (1,587) | | | 10,897 | |
| Amount reclassified from accumulated OCI | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | (484) | | | 352 | | | (132) | | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | (164) | | | 910 | | | 746 | |
| Net current-period OCI | Net current-period OCI | | 42,788 | | | (5,929) | | | (362) | | | (988) | | | 35,509 | | Net current-period OCI | | 10,052 | | | 2,663 | | | (395) | | | (677) | | | 11,643 | |
| September 30, 2020 | | $ | 51,686 | | | $ | (8,420) | | | $ | (3,661) | | | $ | (968) | | | $ | 38,637 | | |
| June 30, 2021 | | June 30, 2021 | | $ | 60,381 | | | $ | 2,146 | | | $ | (4,069) | | | $ | (1,379) | | | $ | 57,079 | |
|
| | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| June 30, 2019 | | $ | 13,122 | | | $ | (2,200) | | | $ | (2,778) | | | $ | 1,627 | | | $ | 9,771 | | |
| March 31, 2020 | | March 31, 2020 | | $ | 10,562 | | | $ | (8,349) | | | $ | (3,468) | | | $ | (122) | | | $ | (1,377) | |
| OCI before reclassifications | OCI before reclassifications | | (5,729) | | | (3,328) | | | (504) | | | 557 | | | (9,004) | | OCI before reclassifications | | 5,893 | | | (784) | | | 439 | | | 1,422 | | | 6,970 | |
| Amount reclassified from accumulated OCI | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | 303 | | | (860) | | | (557) | | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | (439) | | | (506) | | | (945) | |
| Net current-period OCI | Net current-period OCI | | (5,729) | | | (3,328) | | | (201) | | | (303) | | | (9,561) | | Net current-period OCI | | 5,893 | | | (784) | | | 0 | | | 916 | | | 6,025 | |
| September 30, 2019 | | $ | 7,393 | | | $ | (5,528) | | | $ | (2,979) | | | $ | 1,324 | | | $ | 210 | | |
| June 30, 2020 | | June 30, 2020 | | $ | 16,455 | | | $ | (9,133) | | | $ | (3,468) | | | $ | 794 | | | $ | 4,648 | |
|
| | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total | | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
| December 31, 2018 | | $ | 12,244 | | | $ | 2,662 | | | $ | (2,703) | | | $ | 590 | | | $ | 12,793 | | |
| December 31, 2019 | | December 31, 2019 | | $ | 8,898 | | | $ | (2,491) | | | $ | (3,299) | | | $ | 20 | | | $ | 3,128 | |
| OCI before reclassifications | OCI before reclassifications | | (4,851) | | | (8,190) | | | (922) | | | 2,179 | | | (11,784) | | OCI before reclassifications | | 7,557 | | | (6,642) | | | (159) | | | 1,161 | | | 1,917 | |
| Amount reclassified from accumulated OCI | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | 646 | | | (1,445) | | | (799) | | Amount reclassified from accumulated OCI | | 0 | | | 0 | | | (10) | | | (387) | | | (397) | |
| Net current-period OCI | Net current-period OCI | | (4,851) | | | (8,190) | | | (276) | | | 734 | | | (12,583) | | Net current-period OCI | | 7,557 | | | (6,642) | | | (169) | | | 774 | | | 1,520 | |
| September 30, 2019 | | $ | 7,393 | | | $ | (5,528) | | | $ | (2,979) | | | $ | 1,324 | | | $ | 210 | | |
| June 30, 2020 | | June 30, 2020 | | $ | 16,455 | | | $ | (9,133) | | | $ | (3,468) | | | $ | 794 | | | $ | 4,648 | |
|
| | | | | | | | |
| Notes to Financial Statements | Accumulated Other Comprehensive Income | |
| | |
Reclassifications out of accumulated OCI were as follows (in thousands):
| | | Amount reclassified from OCI | | | | Affected line item in the Statement of Comprehensive (Income) Loss | | Amount reclassified from OCI | | 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, | | | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 | |
| Defined Benefit Plans | Defined Benefit Plans | | | | | | | | | | | Defined Benefit Plans | | | | | | | | | | |
| Service and interest costs | Service and interest costs | | $ | (474) | | | $ | 303 | | | $ | (484) | | | $ | 646 | | | Selling, general and administrative expenses | Service and interest costs | | $ | (43) | | | $ | (439) | | | $ | (164) | | | $ | (10) | | | Selling, general and administrative expenses |
| Tax | Tax | | 0 | | | 0 | | | 0 | | | 0 | | | Income tax provision | Tax | | 0 | | | 0 | | | 0 | | | 0 | | | Income tax provision |
| Total after tax | Total after tax | | $ | (474) | | | $ | 303 | | | $ | (484) | | | $ | 646 | | | Total after tax | | $ | (43) | | | $ | (439) | | | $ | (164) | | | $ | (10) | | |
| | Derivatives | Derivatives | | Derivatives | |
| Foreign currency forward contracts hedging sales | Foreign currency forward contracts hedging sales | | $ | (481) | | | $ | (197) | | | $ | (692) | | | $ | (189) | | | Net sales | Foreign currency forward contracts hedging sales | | $ | 159 | | | $ | (326) | | | $ | 181 | | | $ | (211) | | | Net sales |
| Foreign currency forward contracts hedging purchases | Foreign currency forward contracts hedging purchases | | 1,259 | | | (747) | | | 1,029 | | | (1,375) | | | Cost of products sold | Foreign currency forward contracts hedging purchases | | 386 | | | (265) | | | 838 | | | (230) | | | Cost of products sold |
| | Total loss (income) before tax | | 778 | | | (944) | | | 337 | | | (1,564) | | | |
| Total (income) loss before tax | | Total (income) loss before tax | | 545 | | | (591) | | | 1,019 | | | (441) | | |
| Tax | Tax | | (39) | | | 84 | | | 15 | | | 119 | | | Income tax provision (benefit) | Tax | | (61) | | | 85 | | | (109) | | | 54 | | | Income tax provision |
| Total after tax | Total after tax | | $ | 739 | | | $ | (860) | | | $ | 352 | | | $ | (1,445) | | | Total after tax | | $ | 484 | | | $ | (506) | | | $ | 910 | | | $ | (387) | | |
| | | | | | | | |
| 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 affect 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 North America and Asia Pacific. In addition, as a resulteach of the company's transformation strategy, additional restructuringsegments. Restructuring actions were implemented in 2017 and have continued into 2020.2021.
For the ninesix months ended SeptemberJune 30, 2020,2021, charges totaled $4,657,000$2,099,000 which were related to North America of $865,000,$853,000 and Europe of $3,674,000$1,246,000. In North America costs were incurred related to severance. The European charges were for severance costs of $862,000 and contract terminations of $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 the company's cash on hand. The 2021 charges are expected to be paid out within 24 months.
For the six months ended June 30, 2020, charges totaled $3,077,000 which were related to North America of $719,000, Europe of $2,240,000 and All Other of $118,000. In North America and All Other, costs were incurred related to severance. The European charges were for severance costs of $3,328,000$1,894,000 and contract terminations of $346,000 primarily related to the closure of a German manufacturing facility.$346,000. Payments for the ninesix months ended SeptemberJune 30, 2020 were $5,692,000 and the cash payments were funded with the company's cash on hand. The 2020 charges are expected to be paid out within twelve months.
For the nine months ended September 30, 2019, charges totaled $3,641,000 which were related to North America of
$1,539,000, Europe of $1,903,000 and All Other of $199,000. In North America, costs were incurred related to severance of $1,495,000 and contract terminations of $44,000. The European and All Other charges were for severance costs. Payments for the nine months ended September 30, 2019 were $4,152,000$4,086,000 and the cash payments were funded with company's cash on hand. Most of the 20192020 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.products sold. To date, the company's liquidity has not been materially impacted by the restructuring plans. Please refersufficient to Charges Related to Restructuring Activities of company's Annual Report on Form 10-K for the period ending December 31, 2019 for disclosure of restructuring activity prior to 2020.absorb these charges and payments.
| | | | | | | | |
| 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 the ninesix months ended SeptemberJune 30, 20202021 is as follows (in thousands):
| | | Severance | | | Contract Terminations | | | Total | | Severance | | | Contract Terminations | | | Total |
| | December 31, 2019 Balances | | | | | | | | |
| December 31, 2020 Balances | | December 31, 2020 Balances | | | | | | | |
| North America | North America | $ | 211 | | | | $ | 0 | | | | $ | 211 | | North America | $ | 179 | | | | $ | 0 | | | | $ | 179 | |
| Europe | Europe | 6,406 | | | | 4 | | | | 6,410 | | Europe | 5,904 | | | | 4 | | | | 5,908 | |
| All Other | All Other | 406 | | | | 0 | | | | 406 | | All Other | 166 | | | | 0 | | | | 166 | |
| Total | Total | 7,023 | | | | 4 | | | | 7,027 | | Total | 6,249 | | | | 4 | | | | 6,253 | |
| Charges | Charges | | | | | | | | Charges | | | | | | | |
| North America | North America | 691 | | | | 0 | | | | 691 | | North America | 822 | | | | 0 | | | | 822 | |
| Europe | Europe | 592 | | | | 73 | | | | 665 | | Europe | 454 | | | | 276 | | | | 730 | |
| All Other | All Other | 36 | | | | 0 | | | | 36 | | All Other | 0 | | | | 0 | | | | 0 | |
| Total | Total | 1,319 | | | | 73 | | | | 1,392 | | Total | 1,276 | | | | 276 | | | | 1,552 | |
| Payments | Payments | | | | | | Payments | | | | | |
| North America | North America | (562) | | | | 0 | | | | (562) | | North America | (236) | | | | 0 | | | | (236) | |
| Europe | Europe | (959) | | | | (73) | | | | (1,032) | | Europe | (6,047) | | | | 0 | | | | (6,047) | |
| All Other | All Other | (276) | | | | 0 | | | | (276) | | All Other | 0 | | | | 0 | | | | 0 | |
| Total | Total | (1,797) | | | | (73) | | | | (1,870) | | Total | (6,283) | | | | 0 | | | | (6,283) | |
| March 31, 2020 Balances | | | | | | |
| March 31, 2021 Balances | | March 31, 2021 Balances | | | | | |
| North America | North America | 340 | | | | 0 | | | | 340 | | North America | 765 | | | | 0 | | | | 765 | |
| Europe | Europe | 6,039 | | | | 4 | | | | 6,043 | | Europe | 311 | | | | 280 | | | | 591 | |
| All Other | All Other | 166 | | | | 0 | | | | 166 | | All Other | 166 | | | | 0 | | | | 166 | |
| Total | Total | $ | 6,545 | | | | $ | 4 | | | | $ | 6,549 | | Total | $ | 1,242 | | | | $ | 280 | | | | $ | 1,522 | |
| | Charges | Charges | | | | | | | | Charges | | | | | | | |
| North America | North America | $ | 28 | | | | $ | 0 | | | | $ | 28 | | North America | $ | 31 | | | | $ | 0 | | | | $ | 31 | |
| Europe | Europe | 1,302 | | | | 273 | | | | 1,575 | | Europe | 408 | | | | 108 | | | | 516 | |
| All Other | All Other | 82 | | | | 0 | | | | 82 | | All Other | 0 | | | | 0 | | | | 0 | |
| Total | Total | 1,412 | | | | 273 | | | | 1,685 | | Total | 439 | | | | 108 | | | | 547 | |
| Payments | Payments | | | | | | Payments | | | | | |
| North America | North America | (265) | | | | 0 | | | | (265) | | North America | (91) | | | | 0 | | | | (91) | |
| Europe | Europe | (1,596) | | | | (273) | | | | (1,869) | | Europe | (234) | | | | (198) | | | | (432) | |
| All Other | All Other | (82) | | | | 0 | | | | (82) | | All Other | (18) | | | | 0 | | | | (18) | |
| Total | Total | (1,943) | | | | (273) | | | | (2,216) | | Total | (343) | | | | (198) | | | | (541) | |
| June 30, 2020 Balances | | | | | | |
| June 30, 2021 Balances | | June 30, 2021 Balances | | | | | |
| North America | North America | 103 | | | | 0 | | | | 103 | | North America | 705 | | | | 0 | | | | 705 | |
| Europe | Europe | 5,745 | | | | 4 | | | | 5,749 | | Europe | 485 | | | | 190 | | | | 675 | |
| All Other | All Other | 166 | | | | 0 | | | | 166 | | All Other | 148 | | | | 0 | | | | 148 | |
| Total | Total | $ | 6,014 | | | | $ | 4 | | | | $ | 6,018 | | Total | $ | 1,338 | | | | $ | 190 | | | | $ | 1,528 | |
| Charges | | | | | | | | |
| North America | 146 | | | | 0 | | | | 146 | | |
| Europe | 1,434 | | | | 0 | | | | 1,434 | | |
| All Other | 0 | | | | 0 | | | | 0 | | |
| Total | 1,580 | | | | 0 | | | | 1,580 | | |
| Payments | | | | | | |
| North America | (151) | | | | 0 | | | | (151) | | |
| Europe | (1,455) | | | | 0 | | | | (1,455) | | |
| All Other | 0 | | | | 0 | | | | 0 | | |
| Total | (1,606) | | | | 0 | | | | (1,606) | | |
|
| | | | | | | | |
Notes to Financial Statements | Charges Related to Restructuring Activities | |
| | |
| | | | | | | | | | | | | | | | | | | | | |
| Severance | | | | Contract Terminations | | | | Total |
| September 30, 2020 Balances | | | | | | | | | |
| North America | 98 | | | | | 0 | | | | | 98 | |
| Europe | 5,724 | | | | | 4 | | | | | 5,728 | |
| All Other | 166 | | | | | 0 | | | | | 166 | |
| Total | $ | 5,988 | | | | | $ | 4 | | | | | $ | 5,992 | |
| | | | | | | | | |
| | | | | | | | |
| Notes to Financial Statements | Income Taxes | |
| | |
Income Taxes
The company had an effective tax rate of 39.2%11.7% and 26.8%13.7% on losses before tax for the three and ninesix months ended SeptemberJune 30, 2021, respectively, compared to an expected benefit of 21% on the pre-tax loss for each period. The company had an effective tax rate of 4.7% and 21.9% on losses before tax for the three and six months ended June 30, 2020, respectively, compared to an expected benefit of 21.0% on the pre-tax loss for each period. The company had an effective tax rate of 69.6% and 26.8% on losses before tax for the three and nine months ended and September 30, 2019, respectively, compared to an expected benefit for the three and nine months ended September 30, 2019 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, 20202021 and SeptemberJune 30, 20192020 were unfavorable as compared to the U.S. federal statutory rate, expected benefit, principally due to the negative impact of the company not being able to record tax benefits related to the significant losses in countries which had tax valuation allowances. The effective tax rate was increased for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 20192020 by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate higher than the U.S. statutory rate, except for the gain on the disposition of Dynamic Controls which was not taxable locally for the three months ended March 31, 2020. In addition, the company had accrued withholding taxes on earnings of its Chinese subsidiary based on the expectation of not permanently reinvesting those earnings. The sale of this entity, without such distribution resulted in the reversal of this accrual in the amount of $988,000 for the ninethree months ended September 30,March 31, 2020.
| | | | | | | | |
| Notes to Financial Statements | Net EarningsIncome (Loss) Per Common Share | |
| | |
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) | (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, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Basic | Basic | | | | | | | | Basic | | | | | | | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | 34,419 | | | 33,660 | | | 34,213 | | | 33,571 | | Weighted average common shares outstanding | 34,969 | | | 34,437 | | | 34,732 | | | 34,111 | |
| | | Net loss | Net loss | $ | (7,276) | | | $ | (8,041) | | | $ | (23,163) | | | $ | (34,644) | | Net loss | $ | (10,698) | | | $ | (16,619) | | | $ | (24,742) | | | $ | (15,887) | |
| | | Net loss per common share | Net loss per common share | $ | (0.21) | | | $ | (0.24) | | | $ | (0.68) | | | $ | (1.03) | | Net loss per common share | $ | (0.31) | | | $ | (0.48) | | | $ | (0.71) | | | $ | (0.47) | |
| | Diluted | Diluted | | Diluted | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | 34,419 | | | 33,660 | | | 34,213 | | | 33,571 | | Weighted average common shares outstanding | 34,969 | | | 34,437 | | | 34,732 | | | 34,111 | |
| | Share options and awards | Share options and awards | 111 | | | 8 | | | 100 | | | 10 | | Share options and awards | 651 | | | 42 | | | 718 | | | 87 | |
| Weighted average common shares assuming dilution | Weighted average common shares assuming dilution | 34,530 | | | 33,668 | | | 34,313 | | | 33,581 | | Weighted average common shares assuming dilution | 35,620 | | | 34,479 | | | 35,450 | | | 34,198 | |
| | | Net loss | Net loss | $ | (7,276) | | | $ | (8,041) | | | $ | (23,163) | | | $ | (34,644) | | Net loss | $ | (10,698) | | | $ | (16,619) | | | $ | (24,742) | | | $ | (15,887) | |
| | | Net loss per common share * | Net loss per common share * | $ | (0.21) | | | $ | (0.24) | | | $ | (0.68) | | | $ | (1.03) | | Net loss per common share * | $ | (0.31) | | | $ | (0.48) | | | $ | (0.71) | | | $ | (0.47) | |
________
* 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, 2020, 300,1492021, shares associated with equity compensation awards of 1,058,264 and 1,056,714, respectively, and for the three and six months June 30, 2020, shares optionsassociated with equity compensation awards of 3,140,624 and 2,035,968, respectively, were excluded from the weighted average common shares assuming dilution for the three and nine months ended Septemberas incremental shares were anti-dilutive.
At June 30, 2020 as they were anti-dilutive. At September 30, 2020,2021, the majority of the anti-dilutive incremental shares were awards granted at an exercise price ofabove $24.45, which was higher than the average fair market value price of $6.93$8.33 and $7.12$8.81 for the three and ninesix months ended SeptemberJune 30, 2020.
2021. At SeptemberJune 30, 2019, 326,799 shares associated with share options were excluded from the average common shares assuming dilution for the three and nine months ended September 30, 2019 as they were anti-dilutive. At September 30, 2019,2020, the majority of the anti-dilutive incremental shares were awards granted at an exercise price of $25.24,above $24.45 or above, which was higher than the average fair market value price of $5.61$6.69 and $6.43$7.22 for the three and ninesix months ended SeptemberJune 30, 2019.2020.
For the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, 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 shares 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 months and six months ended June 30, 2021 related to the company's convertible senior notes as conversion prices were above the company's average stock price for the period and other requirements for the notes to be convertible to shares were not met.
| | | | | | | | |
| 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 $2,682,000$1,323,000 at SeptemberJune 30, 20202021 to DLL for events of default under the contracts, which total $8,262,000$7,355,000 at SeptemberJune 30, 2020.2021. 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 a liability for this guarantee obligation within accrued expenses. The company's recourse is reevaluated by DLL biannually, 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 seen a significant shift in reimbursement to customers from managed care entities. 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.
| | | | | | | | |
| Notes to Financial Statements | Derivatives | |
| | |
Derivatives
ASC 815 requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated and qualifying as hedging instruments, the company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
Cash Flow Hedging Strategy
The company uses derivative instruments in an attempt to manage its exposure to transactional foreign currency exchange 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 consolidated balance sheet measured at fair value. A majority ofAll 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 statement 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 $155,783,000$58,115,000 and $110,373,000$97,763,000 matured for the ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, respectively.
| | | | | | | | |
| Notes to Financial Statements | Derivatives | |
| | |
Outstanding foreign currency forward exchange contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):
| | | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | | Notional
Amount | | Unrealized
Net Gain
(Loss) | | Notional
Amount | | Unrealized
Net Gain
(Loss) | | Notional
Amount | | Unrealized
Net Gain
(Loss) | | Notional
Amount | | Unrealized
Net Gain
(Loss) |
| USD / AUD | $ | 960 | | | $ | (41) | | | $ | 3,840 | | | $ | (106) | | |
| USD / CAD | 1,138 | | | (2) | | | 3,888 | | | 32 | | |
| | | USD / CHF | | USD / CHF | 726 | | | (6) | | | 1,675 | | | (11) | |
| USD / EUR | USD / EUR | 17,468 | | | (1,061) | | | 110,905 | | | 122 | | USD / EUR | 30,181 | | | (956) | | | 56,187 | | | (636) | |
| USD / GBP | USD / GBP | 387 | | | (11) | | | 3,972 | | | (8) | | USD / GBP | 1,288 | | | (90) | | | 2,467 | | | (19) | |
| USD / NZD | 290 | | | (13) | | | 2,760 | | | (166) | | |
| | USD / SEK | USD / SEK | 876 | | | (88) | | | 5,062 | | | (38) | | USD / SEK | 1,361 | | | (64) | | | 2,658 | | | (41) | |
| USD / MXN | USD / MXN | 3,901 | | | (58) | | | 6,763 | | | 346 | | USD / MXN | 1,649 | | | 237 | | | 2,230 | | | 334 | |
| | EUR / CAD | 915 | | | (42) | | | 4,151 | | | 24 | | |
| | EUR / CHF | EUR / CHF | 2,703 | | | (45) | | | 9,821 | | | 10 | | EUR / CHF | 2,418 | | | 40 | | | 5,037 | | | 10 | |
| | EUR / GBP | EUR / GBP | 6,325 | | | 178 | | | 29,824 | | | (216) | | EUR / GBP | 10,156 | | | (432) | | | 19,060 | | | 44 | |
| EUR / SEK | EUR / SEK | 2,330 | | | (72) | | | 9,493 | | | (46) | | EUR / SEK | 5,285 | | | (96) | | | 10,162 | | | (73) | |
| EUR / NOK | EUR / NOK | 1,490 | | | 14 | | | 5,797 | | | 15 | | EUR / NOK | 2,730 | | | (163) | | | 4,167 | | | (64) | |
| | AUD / NZD | | AUD / NZD | 166 | | | (3) | | | 781 | | | (13) | |
| | DKK / SEK | DKK / SEK | 1,402 | | | 40 | | | 5,936 | | | 24 | | DKK / SEK | 1,491 | | | 19 | | | 3,329 | | | 9 | |
| | NOK / SEK | NOK / SEK | 1,490 | | | 53 | | | 5,151 | | | 18 | | NOK / SEK | 1,561 | | | (82) | | | 3,431 | | | (50) | |
| AUD / THB | | AUD / THB | 0 | | | 0 | | | 4,963 | | | (221) | |
| NZD / THB | | NZD / THB | 338 | | | (23) | | | 1,755 | | | (55) | |
| USD / THB | | USD / THB | 0 | | | 0 | | | 4,152 | | | (56) | |
| EUR / THB | | EUR / THB | 257 | | | 12 | | | 1,332 | | | 18 | |
| GBP / THB | | GBP / THB | 163 | | | 18 | | | 842 | | | 10 | |
| | $ | 41,675 | | | $ | (1,148) | | | $ | 207,363 | | | $ | 11 | | | $ | 59,770 | | | $ | (1,589) | | | $ | 124,228 | | | $ | (814) | |
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 20202021 or 20192020 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 2020 and 2019, respectively, and outstanding were as follows (in thousands USD):
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | Notional
Amount | | Gain
(Loss) | | Notional
Amount | | Gain
(Loss) |
| AUD / USD | $ | 6,149 | | | $ | 96 | | | $ | 10,000 | | | $ | (94) | |
| CAD / USD | 8,321 | | | 88 | | | 8,000 | | | (50) | |
| | | | | | | |
| EUR / USD | 11,735 | | | (745) | | | 10,000 | | | 104 | |
| | | | | | | |
| DKK / USD | 15,081 | | | (137) | | | 0 | | | 0 | |
| GBP / USD | 650 | | | (18) | | | 7,000 | | | 40 | |
| | | | | | | |
| NOK / USD | 8,986 | | | (427) | | | 0 | | | 0 | |
| NZD / USD | 309 | | | (9) | | | 4,500 | | | (101) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| EUR / CAD | 130 | | | (6) | | | 0 | | | 0 | |
| EUR / GBP | 2,086 | | | 59 | | | 0 | | | 0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| AUD / NZD | 6,438 | | | 21 | | | 7,900 | | | 23 | |
| | | | | | | |
| EUR / NOK | 80 | | | 1 | | | 0 | | | 0 | |
| | | | | | | |
| $ | 59,965 | | | $ | (1,077) | | | $ | 47,400 | | | $ | (78) | |
The fair values of the company’s derivative instruments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | $ | 334 | | | $ | 1,482 | | | $ | 668 | | | $ | 657 | |
| | | | | | | |
| | | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | 265 | | | 1,342 | | | 170 | | | 248 | |
| Total derivatives | $ | 599 | | | $ | 2,824 | | | $ | 838 | | | $ | 905 | |
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 condensed consolidated balance sheets.
| | | | | | | | |
| 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 2021 and 2020, respectively, and outstanding were as follows (in thousands USD):
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| | Notional
Amount | | Gain
(Loss) | | Notional
Amount | | Gain
(Loss) |
| USD / AUD | $ | 5,810 | | | $ | 146 | | | $ | 6,046 | | | $ | (159) | |
| USD / CAD | 15,616 | | | (225) | | | 8,320 | | | 88 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| USD / DKK | 8,788 | | | (152) | | | 8,690 | | | 207 | |
| USD / GBP | 19,448 | | | (125) | | | 16,062 | | | 338 | |
| | | | | | | |
| USD / NOK | 9,617 | | | (340) | | | 9,053 | | | 264 | |
| | | | | | | |
| USD / SEK | 2,373 | | | 34 | | | 0 | | | 0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| AUD / NZD | 6,697 | | | 23 | | | 6,579 | | | (35) | |
| | | | | | | |
| | | | | | | |
| AUD / THB | 2,406 | | | (197) | | | 0 | | | 0 | |
| NZD / THB | 507 | | | (35) | | | 0 | | | 0 | |
| USD / THB | 2,076 | | | 108 | | | 0 | | | 0 | |
| EUR / THB | 382 | | | 18 | | | 0 | | | 0 | |
| GBP / THB | 240 | | | 22 | | | 0 | | | 0 | |
| | | | | | | |
| $ | 73,960 | | | $ | (723) | | | $ | 54,750 | | | $ | 703 | |
The fair values of the company’s derivative instruments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | $ | 325 | | | $ | 1,914 | | | $ | 424 | | | $ | 1,238 | |
| | | | | | | |
| | | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | |
| Foreign currency forward exchange contracts | 526 | | | 1,249 | | | 897 | | | 194 | |
| Total derivatives | $ | 851 | | | $ | 3,163 | | | $ | 1,321 | | | $ | 1,432 | |
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 Condensed Consolidated Balance Sheets.
The effect of derivative instruments on Accumulated Other Comprehensive Income (OCI) and the Condensed Statement of Comprehensive Income (Loss) and 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, 2020 | | | | | |
| Foreign currency forward exchange contracts | $ | (2,501) | | | $ | (739) | | | $ | (662) | |
| | | | | |
| | | | | |
| Nine months ended September 30, 2020 | | | | | |
| Foreign currency forward exchange contracts | $ | (1,340) | | | $ | (352) | | | $ | (718) | |
| | | | | |
| | | | | |
| Three months ended September 30, 2019 | | | | | |
| Foreign currency forward exchange contracts | $ | 557 | | | $ | 860 | | | $ | (2) | |
| | | | | |
| | | | | |
| Nine months ended September 30, 2019 | | | | | |
| Foreign currency forward exchange contracts | $ | 2,179 | | | $ | 1,445 | | | $ | 50 | |
| | | | | |
| | | | | |
| | | | | |
Derivatives not designated as hedging
instruments under ASC 815 | | | | | Amount of Gain (Loss)
Recognized in Income on Derivatives |
| Three months ended September 30, 2020 | | | | | |
| Foreign currency forward exchange contracts | | $ | (1,320) | |
| Nine months ended September 30, 2020 | | | | | |
| Foreign currency forward exchange contracts | | $ | (1,077) | |
| Three months ended September 30, 2019 | | | | | |
| Foreign currency forward exchange contracts | | $ | 317 | |
| Nine months ended September 30, 2019 | | | | | |
| Foreign currency forward exchange contracts | | $ | 103 | |
| | | | | | | | |
| Notes to Financial Statements | Derivatives | |
| | |
| | | | | | | | | | | | | | | | | |
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, 2021 | | | | | |
| Foreign currency forward exchange contracts | $ | (369) | | | $ | (484) | | | $ | (88) | |
| | | | | |
| | | | | |
| Six months ended June 30, 2021 | | | | | |
| Foreign currency forward exchange contracts | $ | (1,587) | | | $ | (910) | | | $ | (88) | |
| | | | | |
| | | | | |
| Three months ended June 30, 2020 | | | | | |
| Foreign currency forward exchange contracts | $ | 1,422 | | | $ | 506 | | | $ | (120) | |
| | | | | |
| | | | | |
| Six months ended June 30, 2020 | | | | | |
| Foreign currency forward exchange contracts | $ | 1,161 | | | $ | 387 | | | $ | (56) | |
| | | | | |
| | | | | |
| | | | | |
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, 2021 | | | | | |
| Foreign currency forward exchange contracts | | $ | 264 | |
| Six months ended June 30, 2021 | | | | | |
| Foreign currency forward exchange contracts | | $ | (723) | |
| Three months ended June 30, 2020 | | | | | |
| Foreign currency forward exchange contracts | | $ | 967 | |
| Six months ended June 30, 2020 | | | | | |
| Foreign currency forward exchange contracts | | $ | 243 | |
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, 2021, net sales were decreased by $159,000 and $181,000 while cost of products sold was increased by $386,000 and $838,000 for net pre-tax realized losses of $545,000 and $1,019,000, respectively. For the three and six months ended June 30, 2020, net sales were increased by $481,000$326,000 and $692,000$211,000 while cost of product sold was increased by $1,259,000 and $1,029,000 for net pre-tax realized loss of $778,000 and $337,000, respectively. For the three and nine months ended September 30, 2019, net sales were increased by $197,000 and $189,000 while cost of productproducts sold was decreased by $747,000$265,000 and $1,375,000$230,000 for net realized pre-tax gains of $944,000$591,000 and $1,564,000,$441,000, respectively.
LossesA gain of $1,320,000$264,000 and $1,077,000a loss of $723,000 were recognized in selling, general and administrative (SG&A) expenses for the three and ninesix months ended SeptemberJune 30, 20202021 compared to gains of $317,000$967,000 and $103,000$243,000 for the three and ninesix months ended SeptemberJune 30, 20192020 related to forward contracts not designated as hedging instruments. 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. 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 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 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 anypresents 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
| | | | | | | | |
Notes to Financial Statements | Derivatives | |
| | |
all derivative balances presented arefor those subject to provisions that are similar to master netting agreements.
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, 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, with the offset to the income statement. See "Long-Term Debt" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this report for more detail.
The fair values of the outstanding convertible note derivatives as of September 30, 2020 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, 2020 | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| Convertible 2021 debt conversion long-term liability | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (2,210) | |
| Convertible 2022 debt conversion long-term liability | 0 | | | 0 | | | 0 | | | 0 | | | (6,193) | |
| Convertible 2021 note hedge long-term asset | 0 | | | 0 | | | 0 | | | 0 | | | 2,852 | |
| Convertible 2022 note hedge long-term asset | 0 | | | 0 | | | 0 | | | 0 | | | 6,748 | |
| Net fair value and net gain on convertible debt derivatives | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,197 | |
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 condensed consolidated balance sheets. The 2019 year-to-date changes in the fair values of the convertible debt conversion liabilities and note hedge derivatives were significantly impacted by the change in the company's share price.
On May 16, 2019, the company received shareholder approval authorizing it to elect to settle future conversions of convertible notes in common shares. As a result of the shareholder approval, the note hedge assets and conversion liabilities may no longer be bifurcated and accounted for as separate derivatives and thus were eliminated together with a corresponding offset to additional paid-in-capital.
| | | | | | | | |
| 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 | | | 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 | | Quoted Prices in Active
Markets for Identical
Assets / (Liabilities) | | Significant Other
Observable
Inputs | | Significant Other
Unobservable
Inputs |
| Level I | | Level II | | Level III | | Level I | | Level II | | Level III |
| September 30, 2020 | | | | | | | |
| June 30, 2021 | | June 30, 2021 | | | | | | |
| Forward exchange contracts—net | Forward exchange contracts—net | | 0 | | $ | (2,225) | | | 0 | Forward exchange contracts—net | | 0 | | $ | (2,312) | | | 0 |
| | December 31, 2019 | | | |
| December 31, 2020 | | December 31, 2020 | | |
| Forward exchange contracts—net | Forward exchange contracts—net | | 0 | | $ | (67) | | | 0 | Forward exchange contracts—net | | 0 | | $ | (111) | | | 0 |
|
The carrying values and fair values of the company’s financial instruments are as follows (in thousands):
| | | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Cash and cash equivalents | Cash and cash equivalents | $ | 86,825 | | | $ | 86,825 | | | $ | 80,063 | | | $ | 80,063 | | Cash and cash equivalents | $ | 78,252 | | | $ | 78,252 | | | $ | 105,298 | | | $ | 105,298 | |
| Other investments | Other investments | 85 | | | 85 | | | 85 | | | 85 | | Other investments | 84 | | | 84 | | | 85 | | | 85 | |
| Installment receivables, net of reserves | Installment receivables, net of reserves | 325 | | | 325 | | | 913 | | | 913 | | Installment receivables, net of reserves | 1,086 | | | 1,086 | | | 1,322 | | | 1,322 | |
| Forward contracts in Other current assets | | Forward contracts in Other current assets | 851 | | | 851 | | | 1,321 | | | 1,321 | |
| Forward contracts in Accrued expenses | | Forward contracts in Accrued expenses | (3,163) | | | (3,163) | | | (1,432) | | | (1,432) | |
| Total debt (including current maturities of long-term debt) * | Total debt (including current maturities of long-term debt) * | (242,264) | | | (218,231) | | | (219,522) | | | (207,193) | | Total debt (including current maturities of long-term debt) * | (312,607) | | | (310,693) | | | (245,053) | | | (237,948) | |
| | Forward contracts in Other Current Assets | 599 | | | 599 | | | 838 | | | 838 | | |
| Forward contracts in Accrued Expenses | (2,824) | | | (2,824) | | | (905) | | | (905) | | |
| 2021 Notes | | 2021 Notes | 0 | | | 0 | | | (1,242) | | | (1,264) | |
| 2022 Notes | | 2022 Notes | (2,632) | | | (2,496) | | | (73,869) | | | (70,633) | |
| Series I 2024 Notes | | Series I 2024 Notes | (72,006) | | | (70,620) | | | (62,984) | | | (60,035) | |
| Series II 2024 Notes | | Series II 2024 Notes | (76,296) | | | (76,429) | | | (64,919) | | | (64,090) | |
| 2026 Notes | | 2026 Notes | (118,121) | | | (118,109) | | | 0 | | | 0 | |
| Other | | Other | (43,552) | | | (43,039) | | | (42,039) | | | (41,926) | |
________
* The company's total debt is shown net of discountapplicable discounts and fees associated with the Convertible Senior Notesconvertible senior notes due in 2021, 2022, 2024 and 20242026 on the company's condensed consolidated balance sheet. Accordingly, the fair values of the Convertible Senior Notesconvertible senior notes due in 2021, 2022, 2024 and 2024 are2026 included in the long-term debt presented in this table are also shown net of the discountdiscounts and fees. Discount balances applicable to the company's convertible senior notes were eliminated upon adoption of ASU 2020-06 on January 1, 2021, but are included in the balances above for the period prior to adoption. Refer to Long-Term Debt footnote for discount balances by convertible senior notes series. Total debt amounts excludeexcludes operating and financingfinance leases obligations.
| | | | | | | | |
| 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 an investment in a limited partnership, which is accounted for using the cost method, adjusted for any estimated declines in value. The investment was acquired in private placement 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 of 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.
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.
Forward 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, DKK, EUR, GBP, 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’s forward contracts are included in Other Current Assetscurrent assets or Accrued Expensesexpenses in the 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 and the CARES Act Loan which utilizes the fair value factor of the 2022 Notes to approximate fair value.
| | | | | | | | |
| Notes to Financial Statements | Business Segments | |
| | |
Business Segments
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. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company's 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
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 impairmentsimpairment and gain on sale of business (as applicable).
This performance measure, segment operating income (loss), is used by the Chief 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'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 | |
| | |
The information by segment is as follows (in thousands):
| | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues from external customers | Revenues from external customers | | | | | | | | Revenues from external customers | | | | | | | |
| Europe | Europe | $ | 116,285 | | | $ | 137,371 | | | $ | 339,147 | | | $ | 396,206 | | Europe | $ | 121,296 | | | $ | 101,894 | | | $ | 234,071 | | | $ | 222,862 | |
| North America | North America | 88,055 | | | 87,118 | | | 261,595 | | | 262,915 | | North America | 96,247 | | | 86,569 | | | 172,221 | | | 173,540 | |
| | All Other (Asia Pacific) | All Other (Asia Pacific) | 7,566 | | | 11,285 | | | 25,904 | | | 35,930 | | All Other (Asia Pacific) | 8,321 | | | 7,837 | | | 15,774 | | | 18,338 | |
| Consolidated | Consolidated | $ | 211,906 | | | $ | 235,774 | | | $ | 626,646 | | | $ | 695,051 | | Consolidated | $ | 225,864 | | | $ | 196,300 | | | $ | 422,066 | | | $ | 414,740 | |
| Intersegment revenues | Intersegment revenues | | | | | | | | Intersegment revenues | | | | | | | |
| Europe | Europe | $ | 6,027 | | | $ | 3,124 | | | $ | 14,438 | | | $ | 10,396 | | Europe | $ | 6,229 | | | $ | 4,185 | | | $ | 11,537 | | | $ | 8,411 | |
| North America | North America | 23,625 | | | 21,130 | | | 66,356 | | | 61,109 | | North America | 16,664 | | | 22,249 | | | 30,859 | | | 42,731 | |
| | All Other (Asia Pacific) | All Other (Asia Pacific) | 1,116 | | | 3,904 | | | 3,645 | | | 9,776 | | All Other (Asia Pacific) | 0 | | | 0 | | | 0 | | | 2,529 | |
| Consolidated | Consolidated | $ | 30,768 | | | $ | 28,158 | | | $ | 84,439 | | | $ | 81,281 | | Consolidated | $ | 22,893 | | | $ | 26,434 | | | $ | 42,396 | | | $ | 53,671 | |
| Restructuring charges before income taxes | Restructuring charges before income taxes | | | | | | | | Restructuring charges before income taxes | | | | | | | |
| Europe | Europe | $ | 1,434 | | | $ | 1,263 | | | $ | 3,674 | | | $ | 1,903 | | Europe | $ | 516 | | | $ | 1,575 | | | $ | 1,246 | | | $ | 2,240 | |
| North America | North America | 146 | | | 331 | | | 865 | | | 1,539 | | North America | 31 | | | 28 | | | 853 | | | 719 | |
| | All Other | All Other | 0 | | | 34 | | | 118 | | | 199 | | All Other | 0 | | | 82 | | | 0 | | | 118 | |
| Consolidated | Consolidated | $ | 1,580 | | | $ | 1,628 | | | $ | 4,657 | | | $ | 3,641 | | Consolidated | $ | 547 | | | $ | 1,685 | | | $ | 2,099 | | | $ | 3,077 | |
| Operating income (loss) | Operating income (loss) | | | | | | | | Operating income (loss) | | | | | | | |
| Europe | Europe | $ | 7,600 | | | $ | 11,365 | | | $ | 16,624 | | | $ | 22,617 | | Europe | $ | 4,992 | | | $ | 2,174 | | | $ | 8,824 | | | $ | 9,024 | |
| North America | North America | 2,992 | | | (1,694) | | | 5,759 | | | (7,316) | | North America | 1,590 | | | 4,812 | | | (785) | | | 2,767 | |
| | All Other | All Other | (6,082) | | | (5,625) | | | (17,377) | | | (18,230) | | All Other | (9,529) | | | (7,740) | | | (15,169) | | | (11,295) | |
| Charge expense related to restructuring activities | Charge expense related to restructuring activities | (1,580) | | | (1,628) | | | (4,657) | | | (3,641) | | Charge expense related to restructuring activities | (547) | | | (1,685) | | | (2,099) | | | (3,077) | |
| Gain on sale of business | Gain on sale of business | 0 | | | 0 | | | 9,790 | | | 0 | | Gain on sale of business | 0 | | | 200 | | | 0 | | | 9,790 | |
| Consolidated operating income (loss) | Consolidated operating income (loss) | 2,930 | | | 2,418 | | | 10,139 | | | (6,570) | | Consolidated operating income (loss) | (3,494) | | | (2,239) | | | (9,229) | | | 7,209 | |
| Net gain on convertible debt derivatives | 0 | | | 0 | | | 0 | | | 1,197 | | |
| | Loss on debt extinguishment including debt finance charges and associated fees | Loss on debt extinguishment including debt finance charges and associated fees | (761) | | | (280) | | | (7,360) | | | (280) | | Loss on debt extinguishment including debt finance charges and associated fees | 0 | | | (6,599) | | | (709) | | | (6,599) | |
| Net Interest expense | (7,395) | | | (6,879) | | | (21,042) | | | (21,666) | | |
| Net interest expense | | Net interest expense | (6,084) | | | (7,031) | | | (11,814) | | | (13,647) | |
| Loss before income taxes | Loss before income taxes | $ | (5,226) | | | $ | (4,741) | | | $ | (18,263) | | | $ | (27,319) | | Loss before income taxes | $ | (9,578) | | | $ | (15,869) | | | $ | (21,752) | | | $ | (13,037) | |
| |
| | | | | | | | |
| Notes to Financial Statements | Business Segments | |
| | |
Net sales by product, are as follows (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Europe | Europe | | | | | | | | Europe | | | | | | | |
| Lifestyle | Lifestyle | $ | 50,307 | | | $ | 59,403 | | | $ | 160,628 | | | $ | 182,103 | | Lifestyle | $ | 61,647 | | | $ | 52,018 | | | $ | 119,945 | | | $ | 110,321 | |
| Mobility and Seating | Mobility and Seating | 54,851 | | | 68,286 | | | 147,275 | | | 184,819 | | Mobility and Seating | 51,903 | | | 39,646 | | | 96,125 | | | 92,424 | |
| Respiratory Therapy | Respiratory Therapy | 6,070 | | | 4,919 | | | 16,680 | | | 14,875 | | Respiratory Therapy | 3,350 | | | 5,679 | | | 9,388 | | | 10,610 | |
| Other(1) | Other(1) | 5,057 | | | 4,763 | | | 14,564 | | | 14,409 | | Other(1) | 4,396 | | | 4,551 | | | 8,613 | | | 9,507 | |
| | $ | 116,285 | | | $ | 137,371 | | | $ | 339,147 | | | $ | 396,206 | | | $ | 121,296 | | | $ | 101,894 | | | $ | 234,071 | | | $ | 222,862 | |
| North America | North America | | | | | | | | North America | | | | | | | |
| Lifestyle | Lifestyle | $ | 41,845 | | | $ | 43,401 | | | $ | 124,888 | | | $ | 131,259 | | Lifestyle | $ | 40,100 | | | $ | 40,502 | | | $ | 76,285 | | | $ | 83,043 | |
| Mobility and Seating | Mobility and Seating | 26,572 | | | 31,252 | | | 82,485 | | | 89,638 | | Mobility and Seating | 31,096 | | | 26,339 | | | 53,829 | | | 55,913 | |
| Respiratory Therapy | Respiratory Therapy | 19,405 | | | 12,108 | | | 53,626 | | | 40,811 | | Respiratory Therapy | 24,789 | | | 19,572 | | | 41,573 | | | 34,221 | |
| | Other(1) | Other(1) | 233 | | | 357 | | | 596 | | | 1,207 | | Other(1) | 262 | | | 156 | | | 534 | | | 363 | |
| | $ | 88,055 | | | $ | 87,118 | | | $ | 261,595 | | | $ | 262,915 | | | $ | 96,247 | | | $ | 86,569 | | | $ | 172,221 | | | $ | 173,540 | |
| | All Other (Asia Pacific) | All Other (Asia Pacific) | | | | | | | | All Other (Asia Pacific) | | | | | | | |
| Mobility and Seating | Mobility and Seating | $ | 2,670 | | | $ | 6,645 | | | $ | 10,757 | | | $ | 21,986 | | Mobility and Seating | $ | 2,850 | | | $ | 2,652 | | | $ | 6,068 | | | $ | 8,087 | |
| Lifestyle | Lifestyle | 3,375 | | | 3,001 | | | 10,176 | | | 8,261 | | Lifestyle | 2,982 | | | 3,669 | | | 5,506 | | | 6,801 | |
| | Respiratory Therapy | Respiratory Therapy | 195 | | | 175 | | | 1,043 | | | 1,063 | | Respiratory Therapy | 1,050 | | | 315 | | | 1,332 | | | 848 | |
| Other(1) | Other(1) | 1,326 | | | 1,464 | | | 3,928 | | | 4,620 | | Other(1) | 1,439 | | | 1,201 | | | 2,868 | | | 2,602 | |
| | $ | 7,566 | | | $ | 11,285 | | | $ | 25,904 | | | $ | 35,930 | | | $ | 8,321 | | | $ | 7,837 | | | $ | 15,774 | | | $ | 18,338 | |
| | Total Consolidated | Total Consolidated | $ | 211,906 | | | $ | 235,774 | | | $ | 626,646 | | | $ | 695,051 | | Total Consolidated | $ | 225,864 | | | $ | 196,300 | | | $ | 422,066 | | | $ | 414,740 | |
________________________
(1)Includes various services, including repair services, equipment rentals and external contracting.
| | | | | | | | |
| Notes to Financial Statements | Contingencies | |
| | |
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 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, except in verified cases of medical necessity, (ii) design activities related to wheelchairs and power beds that take place at the impacted Elyria 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, the company had to successfully complete independent, third-party expert certification audits at the impacted Elyria facilities, comprising three distinct certification reports separately submitted to, and subject to acceptance by, the FDA; submit its own report to the FDA; and successfully complete a reinspection by the FDA of the company's Corporate and Taylor Street facilities.
On July 24, 2017, following its June 2017 reinspection of the Corporate and Taylor Street facilities, the FDA notified the company that it is in substantial compliance with the FDA Act, FDA regulations and the terms of the consent decree and, that the company was 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 must complete two semi-annual audits in the first year and then four annual audits in the next four years performed by a company-retained expert firm. The expert audit firm will determine whether the facilities remain in continuous compliance with the FDA Act, FDA regulations and the terms of the consent decree. 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's facilities, other than through the processes established under the consent decree. The company expects that the FDA will, from time to time, inspect substantially all the company's domestic and foreign FDA-registered facilities.
The results of regulatory claims, proceedings, investigations, or litigation are difficult to predict. AnIn June 2021, the FDA inspected the company's Corporate and Taylor Street facilities in Elyria and North Ridgeville,
| | | | | | | | |
| Notes to Financial Statements | Contingencies | |
| | |
Ohio and issued its observations on Form 843. The company has submitted its response to FDA in a timely manner.
The results of regulatory claims, proceedings, investigations, or litigation are difficult to predict. An unfavorable resolution or outcome of any 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 North America segment and, to a certain extent, the Asia Pacific region 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's ability to renegotiate and bid on certain customer contracts and otherwise led to a decline in customer orders.
Although the company has 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 North America segment and Asia Pacific region 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 2010 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.
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 Notes to the Condensed 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 the company’s financial condition or results of operations, please see the following sections of the company's Annual Report on Form 10-K for the year ended December 31, 2019:2020: Item 1. Business - Government Regulation and Item 1A. Risk Factors; Item 3. Legal Proceedings; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
| | | | | | | | |
| Notes to Financial Statements | Market Risk and Controls | |
| | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The company is at times exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. 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. While the company is exposed to increases in interest rates, including on borrowings under its Credit Agreement, its exposure to the volatility of the current market environment is currently limited until the Credit Agreement expires in 2024. Should the company be required to seek and obtain additional or alternative financing, such financing, if available, may require the company to pay substantially higher interest rates. As discussed elsewhere in this report, the COVID-19 pandemic has negatively impacted, and will continue to negatively impact the company’s business and results of operations. As we cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact to the company’s results cannot be reasonably estimated, but could be material.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2020,2021, 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, 2020,2021, 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 beenThe company is currently implementing a new enterprise resource planning (ERP) system. This project is a multi-year initiative and is intended to improve efficiency and effectiveness of certain financial and business transaction processes, as well as the underlying systems environment. These initiatives are not being implemented in response to any identified internal control deficiency or weakness. During the quarter ended June 30, 2021, the company continued its phased implementation of the new ERP.
Other than the ERP system implementation described above, no other changes in the company’s internal control over financial reporting thathave 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.
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 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 became subject to a consent decree of injunction filed by 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 manufacturing facility in Elyria, Ohio. On July 24, 2017, following its reinspection of the Corporate and Taylor Street facilities, FDA notified the company that it was in substantial compliance with the FDA Act, FDA regulations and the terms of the consent decree and that the company was 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 must complete to two semi-annual audits in the first year and then four annual audits in the next four years performed by a company-retained expert firm. The expert audit firm will determine whether the facilities remain in continuous compliance with the FDA Act, regulations and the terms of the consent decree.
FDA has the authority to inspect the Corporate and Taylor Street facilities, and any other FDA registered facility, at any time. 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.
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 Act or FDA regulations. 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 FDA, including civil money penalties.
For additional information regarding the consent decree, please see the "Contingencies" note to the financial statements contained in Part 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, 2019:2020: Item 1. Business - Government Regulation; Item 1A. Risk 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
The COVID-19 pandemic has disrupted, and may continue to disrupt, the company’s operations and could have a material adverse effect on the company’s business, financial condition and liquidity.
The company’s business could be materially and adversely affected by the outbreak of a widespread health epidemic. The present coronavirus (or COVID-19) pandemic has disrupted the company’s operations and affected the company’s business due to many factors, including imposition by government authorities of mandatory closures, work-from-home orders and social distancing protocols, and voluntary facility closures or other restrictions that could materially adversely affect the company’s ability to adequately staff and maintain its operations. Specifically, the company had experienced at least one mandatory temporary facility closure, and may experience in the future additional temporary facility closures in response to government mandates in certain jurisdictions in which the company operates and in response to positive diagnoses for COVID-19 in certain facilities for the safety of the company’s associates.
The COVID-19 pandemic has also disrupted the company’s operations and supply chain and could materially adversely impact its ability to secure raw materials, components and supplies for its facilities and to provide personal protective equipment for its employees. There may also be long-term effects on the company’s customers and in the economies of affected countries. The pandemic has caused temporary closure of, or restricted access to, health care provider facilities where the company's products are demonstrated, trialed, fitted and sold. Limitations on non-acute care due to the pandemic have delayed or reduced the ability for end users to gain access to the company's products.
The government actions to address the COVID-19 pandemic continue to change. As a result, the countries in which the company’s products are manufactured and distributed remain in varying stages of restrictions. Certain jurisdictions have had to re-establish restrictions due to a resurgence in COVID-19 cases. Additionally, although access to elective healthcare by patients and access to healthcare for many of the company’s customers has begun to be restored or increased, such access may be forced to be limited or closed if a resurgence of COVID-19 cases occurs. Even as government restrictions have been lifted and economies gradually reopened, the shape of the economic recovery remains uncertain and may continue to negatively impact the company's results of operations, cash flows and financial position in subsequent quarters. Given this current level of economic and operational uncertainty over the impacts of COVID-19, the ultimate financial impact cannot be reasonably estimated at this time.
The COVID-19 pandemic and similar issues in the future could have a material adverse effect on the company’s ability to operate, results of operations, financial condition and liquidity. In addition, public health restrictions and preventive measures the company may voluntarily put in place, could have a material adverse effect on the company's business for an indefinite period of time, such as the potential shut down of certain locations, decreased employee availability, border closures, among others. The company’s suppliers and customers may also face these and other challenges, which could lead to continued disruption in the company’s supply chain, as well as decreased customer demand for the company’s products. These issues may also materially affect the company’s future access to its sources of liquidity, particularly its cash flows from operations, financial condition and capitalization. Although these disruptions may continue to occur, the long-term economic impact and near-term financial impacts of such issues, may not be reasonably estimated due to the uncertainty of future developments.
In addition to the foregoing risk factor and the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Part II, Item 1A of the company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020 and the company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to repurchases of common shares made by the company during the three months ended SeptemberJune 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| 7/1/2020 | - | 7/31/2020 | — | | $ | — | | | — | | 2,453,978 |
| 8/1/2020 | - | 8/31/2020 | 1,284 | | 6.80 | | | — | | 2,453,978 |
| 9/1/2020 | - | 9/30/2020 | — | | — | | | — | | 2,453,978 |
| Total | | | 1,284 | | $ | 6.80 | | | — | | 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) |
| 4/1/2021 | - | 4/30/2021 | 80,280 | | $ | 8.32 | | | — | | 2,453,978 |
| 5/1/2021 | - | 5/31/2021 | 132,224 | | 8.20 | | | — | | 2,453,978 |
| 6/1/2021 | - | 6/30/2021 | — | | — | | | — | | 2,453,978 |
| Total | | | 212,504 | | $ | 8.25 | | | — | | 2,453,978 |
________
(1)All 1,284212,504 shares repurchased between JulyApril 1, 20202021 and SeptemberJune 30, 20202021 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 the exercise of non-qualified options by employees 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 SeptemberJune 30, 2020.2021.
Under the terms of the company's 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. SeeRefer to Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, regarding covenants of the company's senior credit facilities with respect to share purchases.
Item 5. Other Information
As previously disclosed in March 2020, the named executive officers in the company's most recent proxy statement filed with the SEC, agreed to defer payment of (i) 100% of their respective annual cash bonuses earned in 2019, (ii) 20% of their respective base salaries for April 2020, and (iii) any salary increase in 2020, in order to mitigate the financial and operational impacts of the COVID-19 pandemic. The aggregate amount of deferrals was approximately $2,200,000. The company expects to pay all of these deferred amounts during the fourth quarter of 2020.
Item 6. Exhibits
| | | | | |
Exhibit
No. | |
| Letter agreement, dated as of April 21, 2021, by and between the company and Rick Cassiday |
| 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 |
| | | |
| Date: | October 29, 2020August 4, 2021 | By: | /s/ Kathleen P. Leneghan |
| | | Name: Kathleen P. Leneghan |
| | | | Title: Senior Vice President and Chief Financial Officer |
| | | | (As Principal Financial and Accounting Officer and on behalf of the registrant) |
