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, 2020 andDecember 31, 2019 , and in the condensed consolidated statement of comprehensive income (loss) for the three and nine months endedSeptember 30, 2020 andSeptember 30, 2019 . 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, 2019 . 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, 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 inNorth America ,Europe andAsia Pacific , which are the result of dozens of acquisitions made over the company's forty-year history. Some of these acquisitions have been combined into integrated operating units, while others have remained relatively independent. COVID-19 Impact The company continues to actively monitor the impact of the coronavirus (COVID-19), which negatively impacted the company's business in the second and third quarters with regard to reduced net sales on a global basis year-over-year primarily related to mobility and seating products. In addition, we experienced a decrease in the year-to-date operating profit of the European segment as a result of a significant decline in net sales related to the pandemic. The company achieved sequential net sales growth in the third quarter of 2020, primarily driven by the European segment, with the loosening of public health restrictions and resumption of access to clinics 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. The extent to which the company's operations will be impacted by the pandemic will depend largely on future developments, which remain highly uncertain and difficult to accurately predict, including, among other things new information which may emerge concerning the severity of the pandemic and 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. 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 increase its capacity to produce these critical products and resolve global supply chain challenges that are compounded by the effects of the pandemic. As a result, there are practical limits to the extent the company can increase output. In addition, the company continues to take steps to offset cost increases from pandemic-related supply chain disruptions. The initial stages of the pandemic appropriately focused the provision of healthcare to urgent non-elective care, reducing access to clinicians and healthcare facilities on which other parts of the company's business rely to engage with customers for product trials and fittings. As a result, and combined with various stay-at-home orders, the company experienced a global decline in quotes for mobility and seating products, and a resultant decline in orders 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 markets 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 believe the decline in demand for mobility and seating product is 1 --------------------------------------------------------------------------------
MD&A Overview
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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 a strategy to be a leading provider of durable medical equipment
to health care providers in global markets by providing the broadest portfolio
available. This strategy 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 aligning its
resources to produce products and solutions that assist customers and end-users
with their 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, the company is
undertaking a substantial multi-year transformation plan.
Transformation
The company is executing a multi-year transformation 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 transformation 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, such as the previously announced
German plant consolidation and the global IT modernization initiative.
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.
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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) 3Q20* 3Q19 Fav/(Unfav) % Impact Divestiture % Impact Fav/(Unfav)
Europe 116,285 137,371 (15.3) 2.2 - (17.5)
North America 88,055 87,118 1.1 (0.1) - 1.2
All Other (Asia Pacific) 7,566 11,285 (33.0) 3.2 (33.1) (3.1)
Consolidated 211,906 235,774 (10.1) 1.5 (1.6) (10.0)
Foreign Exchange Constant Currency % Change
($ in thousands USD) YTD 3Q20** YTD 3Q19 Reported % Change % Impact Divestiture % Impact Fav/(Unfav)
Europe 339,147 396,206 (14.4) (1.1) - (13.3)
North America 261,595 262,915 (0.5) (0.2) - (0.3)
All Other (Asia Pacific) 25,904 35,930 (27.9) (3.5) (26.9) 2.5
Consolidated 626,646 695,051 (9.8) (0.7) (1.4) (7.7)
* 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 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 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
provide meaningful information for evaluating the core operating performance of
the company.
Europe - Constant currency net sales decreased $24,030,000 , or 17.5% in 3Q20
compared to 3Q19 as sales continued to be significantly impacted by the pandemic
and with public health restrictions in certain countries continuing
to limit access to healthcare professionals and institutions needed for certain
product selections. These measures lowered sales for mobility and seating
products and were partially offset by growth in bed systems and respiratory
products. The countries which the company has a significant portion of the
operations are France , Germany , UK and the Nordic countries. Constant currency
net sales decreased 13.3% YTD 3Q20 compared to YTD 3Q19 primarily due to the
impact of the pandemic.
North America - Constant currency net sales for 3Q20 increased $1,009,000 or
1.2% compared to 3Q19 driven by respiratory products partially offset with
declines 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 limiting 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. Constant currency net sales
decreased YTD 3Q20 or 0.3% compared to YTD 3Q19 with mobility and seating and
lifestyle products sales decreases largely offset by an increase in respiratory
product sales.
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MD&A Net Sales
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All Other - Constant currency net sales, which relate entirely to the Asia
Pacific region, decreased $233,000 or 3.1% for 3Q20 compared to 3Q19 driven by
declines in mobility and seating products and service revenue partially offset
by growth in lifestyle products. Constant currency net sales increased 2.5% YTD
3Q20 compared to YTD 3Q19 primarily driven by increased sales in lifestyle
products, primarily mattress products.
3Q20 at Reported Foreign Exchange 3Q20 at 2Q20 Foreign 2Q20 at Reported
($ in thousands USD) Foreign Exchange Rates Translation Impact Exchange Rates 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 %
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.
All Other - Constant currency sequential net sales declined 10.3% primarily due to lifestyle products.
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MD&A Net Sales
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Constant currency net sales of mobility and seating products, which comprise
most of the company's clinically complex product portfolio, decreased to 40.2%
of net sales in 3Q20 from 44.5% in 3Q19 and decreased to 38.9% YTD 3Q20 from
42.2% YTD 3Q19.
This decrease reflects the significant impacts of the pandemic limiting the
access to healthcare professionals and institutions needed for certain product
selections, specifically for mobility and seating product and non-bed related
lifestyle products as well as higher pandemic related respiratory and bed and
mattress products during 3Q20.
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MD&A Gross Profit
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GROSS PROFIT
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Gross profit as a percentage of net sales for 3Q20 decreased 40 basis points to
28.3%, primarily attributable to unfavorable manufacturing variances as a result
of reduced net sales primarily in Europe partially offset by favorable sales mix
including pricing and favorable foreign exchange.
[[Image Removed: ivc-20200930_g4.jpg]]
Gross profit as a percentage of net sales for YTD 3Q20 increased 80 basis points
to 28.7%, attributable to the company's continuous improvement initiatives
driving material and freight cost savings, favorable product mix, including
pricing and reduced R&D expense partially offset by unfavorable manufacturing
variances and foreign exchange.
Gross profit drivers by segment:Europe - Gross profit as a percentage of net 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. 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 , compared to YTD 3Q19. The decrease in gross profit dollars was driven by lower sales, unfavorable manufacturing variances and foreign exchange.North America - Gross 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 sales for YTD 3Q20 increased 1.9 percentage points, or$6,783,000 , compared to YTD 3Q19. The increase in gross profit dollars was driven by favorable sales mix including pricing, lower material, freight costs partially offset by increased warranty costs. All Other - Gross profit as a percentage of net sales forAsia Pacific increased 6.2 percentage points while gross profit dollars declined$1,227,000 primarily driven by reduced sales and divestiture of theDynamic Controls business as ofMarch 7, 2020 . Gross profit as a percentage of net sales forAsia Pacific for YTD 3Q20 increased 5.9 percentage points while gross profit dollars declined$2,459,000 primarily attributable to theDynamic 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$1,318,000 for YTD 3Q20 as compared to YTD 3Q19. This is the result of increased inventory levels. 6 --------------------------------------------------------------------------------
MD&A Gross Profit
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Gross profit as a percentage of net sales for 3Q20 decreased 60 basis points to
28.3%, attributable to unfavorable sales mix with a return to a more normal
product acuity mix, unfavorable manufacturing variances partially offset by
reduced material and R&D costs. Gross profit dollars increased primarily in the
European segment as a result of sequential net sales growth primarily in
mobility and seating products as public health restrictions eased.
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MD&A SG&A
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
($ in thousands USD) 3Q20 3Q19 Reported Change Foreign Exchange Impact Divestiture % Impact Constant Currency Change
SG&A expenses - $ 55,530 63,539 (8,009) (814) 1,020 (7,803)
SG&A expenses - % change (12.6) 1.5 (1.6) (12.5)
% to net sales 26.2 26.9
($ 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
SG&A expenses excluding the impact of foreign currency translation and divestitures, which is referred to as "constant currency SG&A," decreased for 3Q20 and YTD 3Q20 compared to the same periods last year primarily due to reduced employment costs and favorable foreign currency transactions.
The divestiture impact is related to a portion of the SG&A expenses related to
the
In general, SG&A expense for 3Q20 was impacted by the pandemic and includes the benefit of programs offered by European countries related to furloughs and reduced workhours as well as a continued general reduction in discretionary spending.
SG&A expense drivers by segment:
Europe - SG&A expenses for 3Q20 decreased$4,338,000 or 14.8% compared to 3Q19 with foreign currency translation increasing SG&A expenses by$819,000 , or 2.8%. Constant currency SG&A expenses decreased$5,157,000 , or 17.6%. 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$2,052,000 or 8.5%, compared to 3Q19 with foreign currency translation decreasing SG&A expenses by$69,000 . Constant currency SG&A expenses decreased$1,983,000 , or 8.2% driven primarily by employment, sales and marketing and product liability costs. SG&A expenses for YTD 3Q20 decreased$6,291,000 or 8.4%, compared to YTD 3Q19 with foreign currency translation decreasing SG&A expenses by$111,000 . Constant currency SG&A expenses decreased$6,180,000 , or 8.2% driven primarily by employment and consulting costs. All Other - SG&A expenses for 3Q20 decreased by$1,619,000 compared to 3Q19 with foreign currency translation increasing SG&A expenses by$64,000 and divestitures decreasing SG&A expenses by$1,020,000 . Constant currency SG&A expenses increased by$663,000 . All Other includes SG&A related to theAsia 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 theAsia 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 theAsia Pacific businesses constant currency SG&A expenses decreased$2,519,000 , or 30.4%, due to reduced employment costs and foreign currency transactions. 8 --------------------------------------------------------------------------------
MD&A SG&A
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($ 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
rates 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 3Q20 compared to 2Q20
primarily due to reduced employment costs, including stock compensation expense,
and favorable foreign currency transactions.
In general, SG&A expense for 3Q20 includes the benefits offered by European
countries related to furloughs and reduced work hours as well as a continued
general reduction in discretionary spending, however at a reduced level from
2Q20.
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MD&A Operating Income (Loss)
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OPERATING INCOME (LOSS)
$
($ in thousands USD) 3Q20 3Q19 $ Change % Change YTD 3Q20 YTD 3Q19 Change % Change
Europe 7,600 11,365 (3,765) (33.1) 16,624 22,617 (5,993) (26.5)
North America 2,992 (1,694) 4,686 276.6 5,759 (7,316) 13,075 178.7
All Other (6,082) (5,625) (457) (8.1) (17,377) (18,230) 853 4.7
Gain on sale of business - - - - 9,790 - 9,790 -
Charges related to
restructuring (1,580) (1,628) 48 2.9 (4,657) (3,641) (1,016) (27.9)
Consolidated Operating
Income (Loss) 2,930 2,418 512 (21.2) 10,139 (6,570) 16,709 254.3
For 3Q20, consolidated operating income improved due to reduced SG&A expenses
offsetting unfavorable gross profit on reduced net sales impacted by the
pandemic. For YTD 3Q20, consolidated operating profitability improved
significantly due to a $9,790,000 gain from the divestiture of Dynamic Controls
as well as reduced SG&A expenses offsetting lower gross profit on net sales
declines impacted by the pandemic.
Operating income (loss) by segment:
Europe - Operating income for 3Q20 declined by $3,765,000 , or 33.1%, due to a
$8,103,000 decrease in gross profit from 15.3% lower net sales offset by
favorable foreign exchange translation and reduced SG&A expenses. Operating
income for YTD 3Q20 decreased $5,993,000 compared to YTD 3Q19 due to lower net
sales and unfavorable foreign exchange partially offset by reduced SG&A
expenses.
North America - Operating income for 3Q20 improved by $4,686,000 primarily due
to improved gross profit due to lower material and freight costs as well as
improved product mix and pricing and reduced 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 income of theAsia Pacific businesses, offset by unallocated SG&A expenses and intercompany eliminations. Operating loss increased$457,000 primarily driven by divestiture ofDynamic Controls . Operating loss for YTD 3Q20 improved$853,000 compared to YTD 3Q19 primarily due to improved operating profit in theAsia Pacific business partially offset by increased equity compensation expense and the divestiture ofDynamic Controls . Charges Related to Restructuring Activities Restructuring charges totaled$4,657,000 for YTD 3Q20 principally related to severance costs. Restructuring charges were incurred in theEurope segment of$3,674,000 ,North America segment of$865,000 , and All Other of$118,000 . Restructuring charges totaled$3,641,000 for YTD 3Q19 principally related to severance costs. Restructuring charges were incurred in theEurope segment of$1,903,000 ,North America segment of$1,539,000 , and All Other of$199,000 . 10
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