INVACARE CORPORATION 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 atSeptember 30, 2022 andDecember 31, 2021 , and in the condensed consolidated statement of comprehensive income (loss) for the three and nine months endedSeptember 30, 2022 andSeptember 30, 2021 . All comparisons presented are with respect to the same period last year, unless otherwise stated. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A included in the company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . For some matters,SEC filings from prior periods may be useful sources of information. OVERVIEW OVERVIEWInvacare is a multi-national company with integrated capabilities to design, manufacture and distribute durable medical devices. The company makes products that help people move, 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 support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company operates in facilities inNorth America ,Europe andAsia Pacific , which are the result of dozens of acquisitions made over the company's forty-two-year history. Some of these acquisitions have been combined into integrated operating units, while others have remained relatively independent.
Supply Chain Impacts
Supply chain disruptions continue to negatively impact the company's business in 2022, impacting both input costs and availability of components, resulting in lower revenue and compressed gross margins. The company expects these issues will continue into 2023. While the company has implemented actions to mitigate the negative impact of higher input costs, including pricing actions, it is expected that there could continue to be a difference between the timing of when the benefits of mitigation actions are realized and when the cost inflation is incurred.
The company continues to experience elevated open orders across all product categories and regions. During the third quarter of 2022, the company continued to experience slower demand for respiratory products which we believe is influenced by reduction in pandemic-related demand. The company has, and continues to, experience availability issues
with components which has limited and may continue to limit the ability to increase output and meet demand across product categories. In addition, the company has continued to experience cost increases from higher input costs and supply chain disruptions. These disruptions and availability issues, from supply chain challenges and supplier delivery holds resulting from delayed payments, have resulted in intermittent production stoppages and difficulty in fulfilling orders to meet demand. This has contributed to the year-over-year decline in revenue experienced in the third quarter of 2022. The extent to which the company's operations will continue to be impacted by the supply chain disruptions will depend on component and product availability. Supply chain disruptions and inflation continue to negatively impact the global economy and have affected and may continue to affect the business including availability and cost of components and freight, which may continue to have a negative impact on the company and results of operations, if mitigation actions are not effective. Strategy The company remains committed to taking necessary and decisive action to increase shareholder value. With the change to senior management and the Board of Directors inAugust 2022 and after careful evaluation of strategic options, the company concluded that the lifestyle and mobility & seating businesses are core to restoring growth and profitability. As a result, the company has decided to discontinue the production of respiratory products. This will allow us to further streamline our operations and improve profitability by focusing resources on lifestyle and mobility & seating products, which continue to experience strong demand. The company will fulfill existing customer orders with inventory on hand and continue to operate its respiratory parts and service business, as well as meet all warranty and regulatory obligations. 1 --------------------------------------------------------------------------------
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The company's anticipated business optimization actions balance product
portfolio changes across all regions and cost improvements in supply chain and
administrative functions. Key elements of the global business optimization plans
are:
•Focus on lifestyle and mobility & seating product lines based on their potential to achieve a leading market position and to support profitability goals;
•Simplify the organization to leverage a reduced cost structure while allocating resources to the business units or product categories which deliver improved financial returns; •Product rationalization and discontinuance with consideration of cost increases incurred by the company and those anticipated to continue. Adjust the product portfolio to consistently grow profitability amid cost increases by adding new products, reducing costs and continuing to improve customer experiences; and
•Take actions globally to reduce working capital and improve free cash flow.
As it navigates the uncertain business environment, 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 business that have declined. The company intends to continue to make significant investments in its business improvement initiatives with a focus on improving profitability and free cash flow generation. As a result, the company may take actions which may reduce sales in certain areas, refocus resources away from less profitable activities, and look at its global infrastructure for opportunities to further optimize the business. As part of the company's efforts to streamline its operations and focus its resources on core product lines that provide the greatest value and financial returns, the company continuously evaluates opportunities and activities, including potential divestitures, which it considers from time to time, particularly if they involve businesses or assets outside of the company's primary areas of focus. Outlook The company participates in durable healthcare markets and serves a persistent need for its products. By continuing to drive for improved operating efficiency, the company seeks to grow revenue and profit, and improve its cash flow performance into the future. Cost pressures on the business due to supply chain disruptions and inflationary economic conditions are anticipated to continue into 2023. The company continues to see higher input costs related to freight and materials, increasing the challenges to schedule deliveries of key components, including electronic components. While the company has implemented actions to mitigate these cost increases, additional restructuring actions may be implemented to drive profit and improve cash flows. These actions are expected to include organization and supply chain changes, and a narrowing of the product portfolio for those items which no longer meet customer or business needs. These actions are anticipated to continue into 2023, and as a result, the company anticipates incurring additional costs related to its restructuring actions. The company has begun to realize the benefit of improved access to key materials and components as a result of the increased financial flexibility funded from the financing transactions completed in 3Q22. On a consolidated basis, the company expects to see sequential constant currency revenue growth in 4Q22. Profitability is also anticipated to improve sequentially driven by revenue growth, higher gross profit attributable to the increased effectiveness of pricing actions, operational efficiencies, and restructuring benefits partially offset by continued higher input costs, and unfavorable foreign exchange. Through the first two months of its fiscal 4Q22,Europe has achieved sequential revenue growth and is on pace to deliver sequential constant currency net sales improvement and profitability for the quarter. The company anticipates that it will incur additional restructuring charges in 4Q22 as it focuses on improving the profitability for the long-term. In addition, a portion of the additional liquidity from the Secured Term Loan inOctober 2022 is anticipated to be used to fund working capital in 4Q22 to fulfill open orders and increase revenues. The company's earnings performance in the future is expected to benefit from: (1) margin expansion if pricing actions are effective, favorable product mix results from product rationalization efforts and improved efficiencies in our operations offset our higher material and freight costs; and (2) restructuring actions. SG&A expense is anticipated to continue to be impacted by classification of IT costs as operating expenses as a result of a temporary pause in the ERP roll-out. The company continues to focus on executing its transformation plan to drive revenue growth and deliver significant improvement in financial performance to enhance long-term shareholder value.
Favorable Long-Term Demand
Ultimately, demand for the company's products and services is based on the need
to provide care for people with certain conditions. The company's medical
devices provide solutions for end-users and caregivers. Therefore, the demand
for the company's medical equipment is largely driven by population growth and
the incidence of certain conditions
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MD&A Overview
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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
favorable business potential.
July and
OnJuly 26, 2022 , the company entered into a senior secured term loan agreement (the "Secured Term Loan") with certain funds managed byHighbridge Capital Management LLC (the "Highbridge Loan Agreement") providing for an aggregate of up to$104.5 million . The company completed an initial drawdown of$66.5 million under the Highbridge Loan Agreement onJuly 26, 2022 . The company completed the first and second additional fundings onOctober 3, 2022 for a total of$18.5 million under the Highbridge Loan Agreement. The Secured Term Loan matures onJuly 26, 2026 (subject to a springing maturity date of 91 days prior to the scheduled maturity date of the 5.00% Convertible Senior Notes due 2024 and the 5.00% Series II Convertible Senior Notes due 2024 if the aggregate principal amount of such notes exceeds$20.0 million ) and accrues interest at an initial annual rate of SOFR plus 7.00% or a base rate plus 6.00% and after the second anniversary of the closing date at an annual rate of SOFR plus 8.75% or a base rate plus 7.75%. The company may draw the remaining$19.5 million under the Highbridge Loan Agreement subject to certain conditions. Concurrently with the entry into the Secured Term Loan Agreement, onJuly 26, 2022 , the company entered into agreements providing for the settlement of$5.0 million aggregate principal amount of the company's outstanding 5% Series II Convertible Senior Notes due 2024 and private exchange up to$55.3 million aggregate principal amount of its outstanding 4.25% Convertible Senior Notes due 2026 (the "2026 Notes"). The company completed the settlement of$5.0 million aggregate principal amount of the 2024 Notes and exchange of$41.5 million aggregate principal amount of the 2026 Notes onJuly 26, 2022 . This exchange was funded by$31.1 million aggregate principal amount of newly issued 5.68% Convertible Senior Secured Notes due 2026, 2.7 million Common Shares of the company, cash payment of$4.5 million , and cash equal to accrued and unpaid interest on the outstanding convertible notes exchanged in the transaction. As result of finalizing the debt transactions in 3Q22, the company recognized a net gain on debt extinguishment of$6.4 million related to the partial retirement of 2024 and 2026 convertible notes; and net gain on convertible debt derivatives of$1.0 million related to new Secured 2026 convertible notes. OnOctober 3, 2022 , the company exchanged the remaining$13.8 million aggregate principal amount of 2026 Notes for$10.4 million aggregate principal amount of Secured 2026
Notes in two incremental tranches. The Secured 2026 Notes pay interest at a
5.68% annual rate and mature on
In addition, onJuly 26, 2022 , the company amended its existing asset based lending credit facility to extend its maturity toJanuary 16, 2026 and reduce the maximum notional amount from$90 million to$35 million . Proceeds from the Secured Term Loan were used to repay in full outstanding borrowings under the asset based lending credit facility. Proceeds from the secured term loan are also anticipated to be used to fund working capital, restructuring actions and general corporate purposes. The company recognizes that the near-term external factors of inflation and supply chain challenges, as well as costs associated with restructuring actions, may require balance sheet action, including additional financing to support working capital requirements (refer to "Liquidity and Capital Resources"). The company will continue to take actions to optimize its business as required to operate in the present landscape.
Refer to Part I, Item 1-Long-Term Liabilities Long-Term Debt
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MD&A Net Sales
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RESULTS OF OPERATIONS - NET SALES
The company operates in two primary business segments: North America and Europe
with each selling the company's primary product categories, which include:
lifestyle, mobility and seating and respiratory therapy products. Sales in Asia
Pacific are reported in All Other and include products similar to those sold in
North America and Europe .
% Change Foreign Exchange Constant Currency % Change
($ in thousands USD) 3Q22* 3Q21 Fav/(Unfav) % Impact Fav/(Unfav)
Europe 97,487 127,026 (23.3) (11.8) (11.5)
North America 65,314 88,054 (25.8) (0.2) (25.6)
All Other (Asia Pacific) 7,607 9,120 (16.6) (8.8) (7.8)
Consolidated 170,408 224,200 (24.0) (7.1) (16.9)
% Change Foreign Exchange Constant Currency % Change
($ in thousands USD) YTD 3Q22** YTD 3Q21 Fav/(Unfav) % Impact Fav/(Unfav)
Europe 328,334 361,097 (9.1) (9.5) 0.4
North America 209,351 260,275 (19.6) (0.2) (19.4)
All Other (Asia Pacific) 22,728 24,894 (8.7) (7.7) (1.0)
Consolidated 560,413 646,266 (13.3) (5.7) (7.6)
* Date format is quarter and year in each instance. ** YTD means the first nine 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 (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. The current year's functional currency net
sales are translated using the prior year's foreign exchange rates. These
amounts are then compared to the prior year's sales to calculate the constant
currency net sales change.
Global supply chain challenges and availability limits due to past-due payables
to suppliers continued to delay receipt of components and limit conversion of
orders to sales, which continued to impact each of the regions in 3Q22 in
different ways.
The company continues to experience strong demand for its lifestyle and mobility
& seating products. Open orders related to lifestyle and mobility & seating
products was $80.5 million at the end of 3Q22 as compared to $60.5 million at
the end of 2021. Open orders remain elevated due to global component shortages,
primarily related to electronic components and other key input materials.
Europe - Constant currency net sales decreased $14,628,000 , or 11.5% in 3Q22
compared to 3Q21. Net sales in the quarter were impacted by supply chain
challenges. Constant currency net sales increased 0.4% YTD 3Q22 compared to YTD
3Q21 led by mobility and seating products.
North America - Constant currency net sales for 3Q22 decreased $22,560,000 or
25.6% compared to 3Q21 with decreases in all categories but primarily
attributable to lower respiratory sales as pandemic-related demand slowed.
Supply chain disruptions continued to burden order fulfillment in all product
categories. Constant currency net sales decreased 19.4% YTD 3Q22 compared to YTD
3Q21 primarily due to lower respiratory sales which had higher sales in prior
periods benefiting from pandemic-related demand.
All Other - Constant currency net sales, which relates entirely to the
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MD&A Gross Profit
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GROSS PROFIT
[[Image Removed: ivc-20220930_g2.jpg]]
Gross profit decreased $28,931,000 and gross profit as a percentage of net sales
for 3Q22 decreased 850 basis points to 18.4%. Inventory and purchasing
obligation charges related to the decision to exit the respiratory product line
burdened gross profit dollars $8,651,000 or 510 basis points in 3Q22. Excluding
these charges, gross profit decreased 340 basis points primarily attributable to
lower net sales impacting the efficiency of the operations, intermittent
production stoppages and unfavorable foreign currency translation. These were
partially offset by increased pricing across product portfolios, which continue
to lag higher costs as lower-priced orders are fulfilled.
[[Image Removed: ivc-20220930_g3.jpg]]
Gross profit decreased $48,676,000 and gross profit as a percentage of net sales
for YTD 3Q22 decreased 450 basis points to 22.7%. Inventory and purchasing
obligation charges related to the decision to exit the respiratory product line
burdened gross profit dollars $8,651,000 or 150 basis points in YTD 3Q22.
Excluding these charges, gross profit decreased primarily attributable to lower
sales impacting gross profit
dollars and unfavorable foreign currency translation. Increased pricing across
product portfolios continue to lag higher costs as lower-priced orders are
fulfilled.
Gross profit drivers by segment:
Europe - Gross profit dollars for 3Q22 decreased$13,761,000 compared to 3Q21. Gross profit as a percentage of net sales decreased 4.9% compared to 3Q21. Gross profit dollars were burdened primarily by lower sales, increased input costs and unfavorable foreign exchange. Inventory write downs related to the decision to exit the respiratory product line burdened gross profit dollars$916,000 or 90 basis points in 3Q22. Gross profit dollars decreased$21,272,000 and gross profit as a percentage of net sales decreased 3.2% for YTD 3Q22 compared to YTD 3Q21. The year-to-date gross profit was impacted by similar items as 3Q22.North America - Gross profit dollars decreased$15,424,000 and gross profit as a percentage of net sales decreased 12.0% for 3Q22 compared to 3Q21 driven primarily by lower net sales. The decrease in gross profit as a percentage of net sales was driven by lower sales in relation to fixed costs. Inventory and purchasing obligation charges related to the decision to exit the respiratory product line burdened gross profit dollars$7,679,000 and gross margin 1,080 basis points in 3Q22.
Gross profit dollars decreased
All Other -
All Other also includes the impact of intercompany profit eliminations for the consolidated company.
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MD&A SG&A
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
($ in thousands USD) 3Q22* 3Q21 Reported Change Foreign Exchange Impact Constant Currency Change
SG&A expenses - $ 55,365 56,135 (770) (3,282) 2,512
SG&A expenses - % change (1.4) (5.9) 4.5
% to net sales 32.5 25.0
($ in thousands USD) YTD 3Q22** YTD 3Q21 Reported Change Foreign Exchange Impact Constant Currency Change
SG&A expenses - $ 174,552 178,721 (4,169) (7,749) 3,580
SG&A expenses - % change (2.3) (4.3) 2.0
% to net sales 31.1 27.7
* Date format is quarter and year in each instance. ** YTD means the first nine months of the year in each instance.
The table above provides selling, general and administrative (SG&A) expenses change as reported and as adjusted to exclude the impact of foreign exchange translation (constant currency SG&A). "Constant currency SG&A" is a non-GAAP financial measure, which is defined as SG&A expenses excluding the impact of foreign currency translation. The current year's functional currency SG&A expenses are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's SG&A expenses to calculate the constant currency SG&A expenses change. Management believes this financial measure provides meaningful information for evaluating the core operating performance of the company. Constant currency SG&A increased$2,512,000 or 4.5% for 3Q22 compared to the same period last year. 3Q22 includes IT expenses being classified as operating costs as a result of the temporary pause in the ERP roll-out, similar to 1H22. In addition, the company incurred higher expense related to foreign currency transactions offset by lower employment costs. Constant currency SG&A increased$3,580,000 or 2.0% for YTD 3Q22 compared to the same period last year primarily due to increased IT costs partially offset by lower employment costs. 3Q22 YTD benefited from reduced stock compensation expense attributable to forfeitures, and to lowered performance projection and a lower trading price on the company's Common Shares in 2022 on outstanding equity awards to which variable accounting applies. In addition, the company incurred higher expense related to foreign currency transactions and lower employment costs.
SG&A expense drivers by segment:
Europe - SG&A expenses for 3Q22 decreased$1,620,000 or 6.2% compared to 3Q21 with foreign currency translation decreasing SG&A expenses by$2,950,000 , or 11.3%. Constant currency SG&A expenses increased$1,330,000 , or 5.1% primarily driven by foreign currency transactions losses and outside services. SG&A expenses for YTD 3Q22 decreased$7,021,000 or 8.5% compared to YTD 3Q21 with foreign currency translation decreasing SG&A expenses by$6,915,000 , or 8.4%. Constant currency SG&A expenses decreased$106,000 , or 0.1% primarily driven by foreign currency transactions losses and outside services.North America - SG&A expenses for 3Q22 decreased$1,940,000 , or 8.2%, compared to 3Q21. Constant currency SG&A expenses decreased$1,871,000 , or 7.9% primarily attributable to employment costs.
SG&A expenses for YTD 3Q22 decreased
All Other - SG&A expenses for 3Q22 increased$2,790,000 compared to 3Q21 with foreign currency translation decreasing SG&A expenses by$263,000 . Constant currency SG&A expenses increased by$3,053,000 . All Other includes SG&A related to theAsia Pacific businesses and non-allocated corporate costs. Constant currency SG&A expenses related toAsia Pacific businesses for 3Q22 decreased 23.3% or$798,000 , compared to 3Q21 driven primarily by favorable foreign currency transactions. Unallocated corporate costs increased primarily due to IT costs. 6 --------------------------------------------------------------------------------
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SG&A expenses for YTD 3Q22 increased $3,517,000 compared to YTD 3Q21 with
foreign currency translation decreasing SG&A expenses by $665,000 . Constant
currency SG&A expenses increased by $4,182,000 . Constant currency SG&A expenses
related to Asia Pacific businesses for YTD 3Q22 decreased 9.3% or $835,000 ,
compared to YTD 3Q21 driven primarily by favorable foreign currency
transactions. Unallocated corporate costs increased primarily due to IT costs
partially offset by lower stock compensation expense, as noted above.
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MD&A Operating Income (Loss)
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OPERATING INCOME (LOSS)
$
($ in thousands USD) 3Q22 3Q21 $ Change YTD 3Q22 YTD 3Q21 Change
Europe (2,588) 9,554 (12,142) 4,126 18,378 (14,252)
North America (15,007) (1,523) (13,484) (29,607) (2,308) (27,299)
All Other (6,391) (3,856) (2,535) (21,981) (19,025) (2,956)
Charges related to restructuring (8,440) (377) (8,063) (16,383) (2,476) (13,907)
Impairment of an intangible asset (1,012) - (1,012) (1,012) - (1,012)
Impairment of goodwill - (28,564) 28,564 - (28,564) 28,564
Consolidated Operating Income
(Loss) (33,438) (24,766) (8,672) (64,857) (33,995) (30,862)
For the quarter and year-to-date, consolidated operating loss increased compared
to last year due to lower net sales impacted lower gross profit, higher input
costs not fully mitigated by pricing actions and unfavorable foreign currency.
Operating income (loss) by segment:
Operating income for YTD 3Q22 decreased
North America - Operating loss for 3Q22 increased by$13,484,000 primarily due to lower gross profit dollars on lower sales and respiratory product line exit charges of$7,679,000 .
Operating loss for YTD 3Q22 was
All Other - Operating loss for All Other includes the operating results of theAsia Pacific businesses, as well as unallocated SG&A expenses and intercompany eliminations. Operating loss increased$2,535,000 primarily driven by increased IT expenses classified as operating expenses partially offset by lower employment costs.
Operating loss for YTD 3Q22 increased
Charges Related to Restructuring Activities
Restructuring charges were$8,440,000 for 3Q22 compared to$377,000 for 3Q21 which includes severance and other restructuring costs. Restructuring charges were incurred in theEurope segment of$5,034,000 ,North America segment of$2,332,000 , and All Other of$1,074,000 . Restructuring charges were$16,383,000 for YTD 3Q22 compared to$2,476,000 for YTD 3Q21 which includes severance and other restructuring costs. Restructuring charges were incurred in theEurope segment of$9,766,000 ,North America segment of$5,534,000 , and All Other of$1,083,000 . 8 --------------------------------------------------------------------------------
MD&A Other Items
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OTHER ITEMS
Impairment of an intangible asset
($ in thousands USD) 3Q22 3Q21 $ Change
Impairment of an intangible asset 1,012 - 1,012
($ in thousands USD) YTD 3Q22 YTD 3Q21 $ Change Impairment of an intangible asset 1,012 - 1,012 During the third quarter of 2022, the company recognized an intangible impairment charge in theNorth America segment of$1,012,000 related to a trademark with an indefinite life which the company determined it would no longer use. Impairment of goodwill ($ in thousands USD) 3Q22 3Q21 $ Change Impairment of goodwill - 28,564 (28,564) ($ in thousands USD) YTD 3Q22 YTD 3Q21 $ Change Impairment of goodwill - 28,564 (28,564) During the third quarter of 2021, the company's reporting units ofNorth America /HME and Institutional Products Group were merged into one reporting unit ofNorth America , consistent with the operating segment. Developments in the third quarter of 2021 and the completion of the reporting units merger were tied most closely to the actions of the company to implement components of a new ERP system which both changed the level of discrete financial information readily available and the go-forward manner in which the company assesses performance and allocates resources to theNorth America operating segment. The reporting unit change within theNorth America operating segment in the third quarter of 2021 was a triggering event and required the company to perform an interim goodwill impairment test. Based on the interim goodwill impairment test, the company concluded the carrying value of theNorth America reporting unit was above its fair value. That conclusion resulted in the recording of impairment of goodwill in the third quarter of 2021 of$28,564,000 . As a result of the goodwill impairment, the company recorded a reversal of deferred taxes related to the tax deductible goodwill previously deducted by the company, resulting in the company recognizing a tax benefit of$661,000 for the three months endedSeptember 30, 2021 .
Net gain on convertible debt derivatives
($ in thousands USD) 3Q22 3Q21 $ Change
Net gain on convertible debt derivatives (950) - (950)
($ in thousands USD) YTD 3Q22 YTD 3Q21 $
Change
Net gain on convertible debt derivatives (950) - (950)
The company recognized a net gain of
Net gain on debt extinguishment
($ in thousands USD) 3Q22 3Q21 $ Change
Net gain on debt extinguishment (6,398) (10,131) 3,733
($ in thousands USD) YTD 3Q22 YTD 3Q21 $ Change
Net gain on debt extinguishment (6,398) (9,422) 3,024
During the third quarter of 2022, the company entered into various transactions which included the amendment and restatement of asset-based lending facility, partial retirement of Series II 2024 Notes and partial exchange and retirement of 2026 Notes for new Secured 2026 Notes, a term loan and issuance of Common Shares as consideration for the transactions. The result of the transactions was a net gain on debt extinguishment including debt and finance fees of$6,398,000 . During the third quarter of 2021, the company applied for forgiveness of its CARES Act loan along with its accrued interest. The company received notification of approval of its debt forgiveness including accrued interest, in full, and the company recorded a gain on extinguishment of debt of$10,131,000 . During the first quarter of 2021, the company repurchased and retired, at par plus accrued interest,$78,850,000 of its 2022 Notes. The result of the transaction was a loss on debt extinguishment including debt and finance fees of$709,000 . Interest 9
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MD&A Other Items
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($ in thousands USD) 3Q22 3Q21 $ Change % Change
Interest expense 7,354 6,284 1,070 17.0
Interest income (10) - (10) (100.0)
($ in thousands USD) YTD 3Q22 YTD 3Q21 $ Change % Change
Interest expense 19,836 18,099 1,737 9.6
Interest income (11) (1) (10) 1,000.0
The increase in interest expense for 3Q22 and YTD 3Q22 compared to the same periods of prior year was primarily related to higher interest bearing debt for the full periods of 2022 compared to 2021.
Income Taxes
The company had an effective tax rate of 2.8% and 4.1% on losses before tax for the three and nine months endedSeptember 30, 2022 , respectively, compared to a statutory benefit of 21.0% on the pre-tax loss for each period. The company had an effective tax rate of 8.8% and 11.3% on losses before tax for the three and nine months endedSeptember 30, 2021 , respectively, compared to a statutory benefit of 21.0% on the pre-tax loss for each period. The company's effective tax rate for the three and nine months endedSeptember 30, 2022 andSeptember 30, 2021 were unfavorable as compared to theU.S. federal statutory rate, principally due to the negative impact of the company not being able to record tax benefits related to the significant losses in countries which had tax valuation allowances. The effective tax rate was increased for the three and nine months endedSeptember 30, 2022 andSeptember 30, 2021 by certain taxes outsidethe United States , excluding countries with tax valuation allowances, that were at an effective rate higher than theU.S. statutory rate. 10 --------------------------------------------------------------------------------
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, bank lines of credit and Secured Term Loan credit facility (refer
to Long-Term Debt in the notes to condensed consolidated financial statements
included in this report) as described below.
As described below, the company recently completed a series of strategic capital
markets transactions that altered its long-term debt and credit facility
borrowing structure. Key balances on the company's balance sheet and related
metrics prior to the October 2022 Financings are presented below:
($ in thousands USD) September 30, 2022 December 31, 2021 $ Change % Change
Cash and cash equivalents $ 45,439 $ 83,745 $ (38,306) (45.7)
Working capital (1) 72,142 138,134 (65,992) (47.8)
Total debt (2) 410,104 382,586 27,518 7.2
Long-term debt (2) 404,923 376,462 28,461 7.6
Total shareholders' equity 81,045 218,489 (137,444) (62.9)
ABL & Prior Credit Agreement borrowing
availability (3) 17,336 41,845 (24,509) (58.6)
(1) Current assets less current liabilities. (2) Total debt and Long-term debt include finance leases but exclude debt issuance costs and discount recognized as a deduction from the carrying amount of debt liability and operating leases. (3) Reflects the combined availability of the company's North American and prior European asset-based revolving credit facilities before borrowings. AtSeptember 30, 2022 , the company had$16,900,000 of borrowings outstanding on its North America Credit Facility. Outstanding borrowings are based on credit availability calculated on a month lag related to the prior European credit facility. The company's cash and cash equivalents balances were$45,439,000 and$83,745,000 atSeptember 30, 2022 andDecember 31, 2021 , respectively. The decrease in cash in the first nine months of 2022 is primarily attributable to use from operating activities and cash used for continued investment in business improvement initiatives. Cash used by operating activities was partially offset by credit facilities borrowings and additional debt from financing transactions inJuly 2022 . Refer to "Long-Term Debt" in the notes to the condensed consolidated financial statements included in this report for a summary of the material terms of the company's long-term indebtedness. Debt repayments, acquisitions, divestitures, the timing of vendor payments, the timing of customer rebate payments, the granting of extended payment terms to significant national accounts and other activity can have a significant impact on the company's cash flow and borrowings outstanding such that the cash reported at the end of a given period may be materially different than cash levels during a given period. While the company has cash balances in various jurisdictions around the world, there are no material restrictions regarding the use of such cash for dividends within the company, loans or other purposes. The company's total debt outstanding, inclusive of the company's convertible senior notes due 2022 (as ofDecember 31, 2021 ), 2024 and 2026, secured convertible senior notes due 2026, Secured Term Loan due 2026 and finance leases, increased by$27,518,000 to$410,104,000 atSeptember 30, 2022 from$382,586,000 as ofDecember 31, 2021 . The increase is primarily driven byJuly 2022 financing transactions which included a new term loan for$66,500,000 offset by retirement of$5,000,000 of 2024 convertible senior notes, exchange of$41,475,000 2026 convertible senior notes for$31,106,000 secured 2026 convertible senior notes and reduced asset-based lending facility balance by$18,602,000 . The increase in outstanding debt was also attributable to accretion on convertible senior notes due 2024, amortization of debt issuance costs and credit facility borrowings and payments,$2,000,000 debt borrowed against cash surrender value of insurance policies, offset by the repayment of$2,650,000 principal amount of 2022 Notes at maturity onJune 1, 2022 and finance lease payments.
InOctober 2022 , the company completed the first and second additional fundings under debt agreements entered into inJuly 2022 . Refer to "Long-Term Debt" / "October 2022 Financings" in the notes to the condensed consolidated financial statements included in this report for more information about theOctober 2022 financing transactions. 11
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MD&A Liquidity and Capital Resources
Table of Contents
Outlook
The company may incur additional financing in the future, which could include
substantial additional debt (including secured debt) or equity or equity-linked
financing. Although the terms of the agreements governing existing debt restrict
the company's ability to incur additional debt (including secured debt), such
restrictions are subject to several exceptions and qualifications and such
restrictions and qualifications may be waived or amended, and debt (including
secured debt) incurred in compliance with such restrictions and qualifications
(as they may be waived or amended) may be substantial.
The company may from time to time seek to repay or purchase, exchange or
otherwise retire its convertible notes or other debt obligations, in open market
transactions, privately negotiated transactions, tender offers, exchange offers,
pursuant to the term of debt or otherwise. The company may also incur additional
debt (including secured debt) or equity or equity-linked financing to fund such
transactions, refinance or restructure existing debt and/or exchange existing
debt for newly issued debt obligations or equity or equity-like securities. The
number of Common Shares or securities convertible into Common Shares that may be
issued in connection with such transactions may be material. Such transactions,
if any, will depend on prevailing market conditions, trading prices of debt from
time to time, the company's liquidity requirements and cash position,
contractual restrictions and other factors. The amount involved in any such
transactions, individually or in the aggregate, may be material. From time to
time the company engages in discussions with holders of its existing debt and
other potential financing sources regarding such transactions and the company
expects to continue to engage in such discussions. The company cannot provide
any assurance as to if or when it will consummate any such transactions or the
terms of any such transactions.
After consideration of various actions implemented during 2022, including
various restructuring actions that have reduced aspects of our cost structure
and price increases with our customers to substantially offset cost increases
experienced in 2021 and 2022, the company believes that its cash balances and
available borrowing capacity under its ABL Credit Agreement should be sufficient
to meet working capital needs, capital requirements, debt service obligations
and other commitments for at least the next twelve months. 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 pandemic, the
impact of the pandemic on the company's supply chain, or political or
geopolitical crises such the Russian war with Ukraine , and actions taken in
response on global and regional economies and economic activity, continued
supply chain challenges, limited supply availability resulting from past-due
payables, inflationary economic conditions, increases in interest rates on
floating-rate debt, currency fluctuations or regulatory issues,
or the company's failure to execute its business plans or if the company's
business improvement actions take longer than expected to materialize or
development of one or more of the other risks discussed in "Item 1A. Risk
Factors" of the company's Annual Report on Form 10-K and this Quarterly Report
on Form 10-Q, or if the conditions for subsequent draw under the Highbridge Loan
Agreement is not satisfied, the company may require additional financing, or may
be unable to comply with its obligations under the credit facilities or its
other obligations, and its lenders or creditors could demand repayment of any
amounts outstanding. If additional financing is required, there can be no
assurance that it will be available on terms satisfactory to the company, if at
all. The company also may evaluate and implement further changes to its
strategic goals and business plans, which may involve additional restructuring
of its operations. If and to the extent undertaken, any such restructuring may
be substantial and involve significant effort and expense, and the company can
make no assurances that such efforts, if undertaken, would be successful and
result in improvements to the company's business performance and financial
condition. Refer to "Item 1A. Risk Factors" in the company's Annual Report on
Form 10-K and this Quarterly Report on Form 10-Q for a further discussion of
risks applicable to the company's liquidity, capital resources and financial
condition.
The company also has an agreement with De Lage Landen, Inc. ("DLL"), a
third-party financing company, to provide lease financing to the company's U.S.
customers. Either party could terminate this agreement with 180 days' notice or
90 days' notice by DLL upon the occurrence of certain events. Should this
agreement be terminated, the company's borrowing needs under its credit
facilities could increase.
While 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 material impact on its liquidity or capital resources. An
increase of 1% to variable rate debt outstanding at September 30, 2022 would
increase interest expense $834,000 annually. The weighted average interest rate
on borrowings, excluding finance leases, was 5.8% for the three months and 5.0%
for the nine months ended September 30, 2022 , respectively, and 4.5% for the
year ended December 31, 2021 . This weighted average interest rate will increase
in the fourth quarter of the year as a result of the first and second additional
fundings completed in October 2022 . Refer to "Long-Term Debt" and "Leases and
Commitments" in the notes to the condensed consolidated financial statements for
more details regarding the company's credit facilities and lease liabilities,
respectively.
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MD&A Accounting Estimates and Pronouncements
Table of Contents
ACCOUNTING ESTIMATES AND PRONOUNCEMENTS
CRITICAL ACCOUNTING ESTIMATES
The condensed consolidated financial statements included in the report include
accounts of the company and all majority-owned subsidiaries. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions in
certain circumstances that affect amounts reported in the accompanying condensed
consolidated financial statements and related footnotes. In preparing the
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. However, application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and,
thus, actual results could differ from these estimates. Refer to the Critical
Accounting Estimates section within MD&A of company's Annual Report on Form 10-K
for the period ending December 31, 2021 .
Except as set forth below, there have been no significant changes to critical accounting policies and estimates included in the company's Annual Report.
Valuation of
Goodwill recorded represents the excess of the aggregate fair value of the consideration transferred for a business combination over the fair value of the assets acquired, net of liabilities assumed.Goodwill is subject to an annual impairment test and is tested more frequently if indicators of impairment are identified. An impairment would be recorded if an assessment determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment for impairment requires management to use significant judgment and estimates, including estimates of future revenue, net available cash flows, as well as a discount rate, and a terminal growth rate. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results are materially lower than originally estimated, it could result in a material impact to consolidated financial statements in future periods. Under the quantitative goodwill impairment test, if a reporting unit's carrying value exceeds its fair value, an impairment charge will be recorded based on that difference. To determine reporting unit fair value, management used the income approach. Under the income approach, projected future cash flows are discounted to reflect their relative risk. The cash flows used were consistent with those used in management's internal planning, and reflect actual business trends experienced as well as management's long-term business strategy for the reporting unit. The company concluded based on the results of the interim quantitative goodwill impairment assessment performed as ofSeptember 30, 2022 that goodwill was not impaired. The company assessed the results if the discount rate used were 100 basis points higher for the third quarter quantitative assessment and determined that there still would not be impairment of goodwill for theEurope reporting unit. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For the company's disclosure regarding recently issued accounting pronouncements, refer to Accounting Policies - Recent Accounting Pronouncements in the notes to the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. CAPITAL EXPENDITURES The company estimates that capital investments for 2022 to be approximately$5,000,000 compared to actual capital expenditures of$17,698,000 in 2021 which were elevated due to ERP system implementation activities. The company believes that its balances of cash and cash equivalents and available borrowing capacity under its existing credit facilities should be sufficient to meet its operating cash requirements and fund capital expenditures (refer to "Liquidity and Capital Resources"). The ABL Credit Agreement limits the company's annual capital expenditures to$25,000,000 . DIVIDEND POLICY OnMay 21, 2020 , the Board of Directors suspended the quarterly dividend on the company's Common Shares. The Board of Directors suspended the company's regular dividend on the Class B Common Shares starting in the third quarter of 2018. Less than 4,000 Class B Common Shares remain outstanding and suspending the regular Class B dividend allows the company to save on the administrative costs and compliance expenses associated with that dividend. Holders of ClassB 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. 13 --------------------------------------------------------------------------------
MD&A Cash Flows
Table of Contents
CASH FLOWS
[[Image Removed: ivc-20220930_g4.jpg]]
The increase in cash used by operating activities for the three and nine months
ended September 30, 2022 was driven primarily by funding of an operating loss
and accounts payable offset by accounts receivable collections and lower
inventory levels.
[[Image Removed: ivc-20220930_g5.jpg]]The year over year changes in cash flows related to investing activities was driven primarily by lower capital expenditures related to the ERP implementation.
[[Image Removed: ivc-20220930_g6.jpg]]
Cash flows provided by financing activities in the first nine months of 2022
included credit facility borrowings and repayments, repayment of $2,650,000
principal amount of 2022 Notes, additional debt borrowings of $66,500,000 under
the 2026 Term Loan, net of $2,000,000 of original issuance discount, offset by
ABL credit facility net payments and payment of $8,046,000 in financing costs
related to the financing transactions executed in the third quarter of 2022. The
first nine months of 2021 included the issuance of $125,000,000 principal amount
of 2026 Notes, payment of $5,175,000 in financing costs, purchase of capped
calls related to the 2026 Notes for $18,787,000 , repurchase of $78,850,000
principal amount of 2022 Notes and repayment of $1,250,000 principal amount of
the company's previously outstanding convertible notes due 2021 (the "2021
Notes"). Borrowings on credit facilities are under the asset-based-lending
senior secured revolving credit facilities.
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MD&A Cash Flows
Table of ContentsFree cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
($ in thousands USD) 3Q22 3Q21
YTD 3Q22 YTD 3Q21
Net cash used by operating activities
Plus: Sales of property and equipment - - 5 23
Less: Purchases of property and equipment (538) (5,350)
(3,302) (14,397) Free Cash Flow (usage)$ (20,470) $ (6,125) $ (50,171) $ (51,199) Free cash flow (usage) for the first nine months 2022 and 2021 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 provided (used) by operating activities less purchases of property and equipment plus proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.). Generally, the first half of the year is cash consumptive and impacted by significant disbursements related to annual customer rebate payments which normally occur in the first quarter of the year and earned employee bonuses historically paid in the first half of the year. In addition, investment in inventory is typically heavy in the first half of the year, particularly in 2022 and 2021 with efforts to mitigate the company's supply chain disruptions and position the company to fulfill shipments in the second half of the year and can be impacted by footprint rationalization projects. Semi-annual interest payments on debt from the July andOctober 2022 financing transactions start inJanuary 2023 .
In addition, a portion of the additional liquidity in
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MD&A Cash Flows
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The company's approximate cash conversion days at
[[Image Removed: ivc-20220930_g7.jpg]]
Days in receivables are equal to current quarter net current receivables divided
by trailing four quarters of net sales multiplied by 365 days. Days in inventory
and accounts payable are equal to current quarter net inventory and accounts
payable, respectively, divided by trailing four quarters of cost of sales
multiplied by 365 days. Total cash conversion days are equal to days in
receivables plus days in inventory less days in accounts payable.
The improvement in days in receivables is impacted by customer mix and region.
Decline in days in accounts receivable is due to increased levels of payments in
the first nine months of 2022.
The company provides a summary of days of cash conversion for the components of working capital so investors may see the rate at which cash is disbursed, collected and how quickly inventory is converted and sold.
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MD&A Forward-Looking Statements
Table of Contents
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 words such as "will," 'may,"
"should," "could," "plan," "intend," "expect," "continue," "forecast," "believe"
and "anticipate," as well as similar comments, denote forward-looking statements
that are subject to inherent uncertainties that are difficult to predict. These
include, for example, statements related to the company's ability to address
on-going supply chain challenges and component shortages; sales and free cash
flow trends; the impact of contingency plans and cost containment actions; the
company's intention to discontinue the production of respiratory products and
focus on lifestyle and mobility & seating products; the company's liquidity and
working capital expectations; the company's future financial results including
expectations as to consolidated and segment revenue, net sales and profitability
in 4Q22; the company's future business plans and similar statements. Actual
results and events may differ significantly from those expressed or anticipated
as a result of various risks and uncertainties, including the availability and
cost to the company of needed products, components or raw materials from the
company's suppliers, including delivery delays and production interruptions from
pandemic-related supply chain challenges and supplier delivery holds resulting
from past due payables; the duration and scope of the COVID-19 pandemic, the
pace of resumption of access to healthcare, including clinics and elective care,
and loosening of public health restrictions, or any reimposed restrictions on
access to healthcare or tightening of public health restrictions, which could
impact the demand for the company's products; global shortages in, or increasing
costs for, transportation and logistics services and capacity; actions that
governments, businesses and individuals take in response to the pandemic,
including mandatory business closures and restrictions on onsite commercial
interactions; the impact of the pandemic or political or geopolitical crises,
such as the Russian war with Ukraine , and actions taken in response, on global
and regional economies and economic activity; the pace of recovery when the
COVID-19 pandemic subsides; general economic uncertainty in key global markets
and a worsening of global economic conditions or low levels of economic growth,
including negative conditions attributable to inflationary economic conditions
and rising interest rates; the effects of steps the company has taken or will
take to reduce operating costs; the ability of the company to sustain profitable
sales growth, achieve anticipated improvements in segment operating performance,
convert high inventory levels to cash or reduce its costs; the ability of the
company to successfully improve output and convert order backlog into sales; the
ability of the company to successfully focus on lifestyle and mobility & seating
products; lack of market acceptance of the company's new product innovations;
potential adverse effects of revised product pricing and/or product surcharges
on revenues or the demand for the company's products; any failure to satisfy the
continued listing standards of the NYSE and delisting of the company's common
shares from the NYSE; circumstances or developments that may make the company
unable to implement or realize the anticipated benefits, or that may increase
the costs, of its current and planned business initiatives, in particular the
key elements of its growth plans, such as its new product introductions,
commercialization plans, additional investments in demonstration equipment,
product distribution strategy in Europe , supply chain actions and global
information technology outsourcing and ERP implementation activities; possible
adverse effects on the company's liquidity, including (i) the company's ability
to address future debt maturities or other obligations, including additional
debt that may be incurred in the future or (ii) the company's ability to access
the remaining portion of the financing under the July and October 2022 financing
transactions (as discussed in the notes to the condensed consolidated financial
statements) in the event of a failure to satisfy one or more of the applicable
closing conditions; increases in interest rates or the costs of borrowing;
potential limitations on the company's business activities from obligations in
the company's debt agreements; adverse changes in government and third-party
payor reimbursement levels and practices; decreased availability or increased
costs of materials which could increase the company's cost of producing or
acquiring the company's products, including the adverse impacts of tariffs and
increases in commodity costs or freight costs; consolidation of health care
providers; increasing pricing pressures in the markets for the company's
products; risks of failures in, or disruptions to, legacy IT systems; risks of
cybersecurity attack, data breach or data loss and/or delays in or inability to
recover or restore data and IT systems; adverse effects of the company's consent
decree of injunction with the U.S. Food and Drug Administration (FDA), including
but not limited to, compliance costs, inability to rebuild negatively impacted
customer relationships, unabsorbed capacity utilization, including fixed costs
and overhead; any circumstances or developments that might adversely impact the
third-party expert auditor's required audits of the company's quality systems at
the facilities impacted by the consent decree, including any possible failure to
comply with the consent decree or FDA regulations or the inability to adequately
address the matters identified in the FDA Letters; regulatory proceedings or the
company's failure to comply with regulatory requirements or receive regulatory
clearance or approval for the company's products or operations in the United
States or abroad; adverse effects of regulatory or governmental inspections of
the company's facilities at any time and governmental enforcement actions;
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; 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
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MD&A Forward-Looking Statements
Table of Contents
future profitability and cash flow; uncollectible accounts receivable; risks
inherent in managing and operating businesses in many different foreign
jurisdictions; heightened vulnerability to a hostile takeover attempt or other
shareholder activism; provisions of Ohio law or in the company's debt
agreements, charter documents or other agreements that may prevent or delay a
change in control, as well as the risks described elsewhere in this Quarterly
Report on Form 10-Q, the company's Annual Report on Form 10-K and from time to
time in the company's reports as filed with the Securities and Exchange
Commission . The company may not be able to predict and may have little or no
control over many factors or events that may influence its future results and,
except to the extent required by law, the company does not undertake and
specifically declines any obligation to review or update any forward-looking
statements or to publicly announce the results of any revisions to any of such
statements to reflect future events or developments or otherwise.
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Financial Statements
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