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INVACARE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/05/2021 | 04:31pm EDT
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 March 31, 2021 and December 31,
2020, and in the condensed consolidated statement of comprehensive income (loss)
for the three months ended March 31, 2021 and March 31, 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, 2020. For
some matters, SEC filings from prior periods may be useful sources of

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 more than 50
acquisitions made over the company's 40+ year history.
COVID-19 Impact on Access to Healthcare and Global Supply Chain
The company continues to actively monitor the coronavirus (COVID-19) pandemic,
which has negatively impacted the business primarily by limiting access to
healthcare and disrupting the global supply chain. As a result, and consistent
with expectations, the company realized lower net sales in 1Q21 compared to the
first quarter of the prior year period, which was not impacted by these factors.
The decline in net sales resulted in operational inefficiencies which in turn
resulted in reduced profitability.
Demand for the company's products remains high as evidenced by a strong order
book and elevated backlog. However, fulfilling orders during the first quarter
was 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.
Further, certain countries have reinstated shutdowns and stay-at-home orders
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.
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.
As a result of the company's view that the net sales decline during 1Q21 is
temporary, the company has opted not to impose more robust cost containment
measures to offset the impact of reduced net sales. The company believes its
human capital resources will be essential to facilitate anticipated sales
recovery for the remainder of 2021 and to address current backlog and
anticipated 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 pandemic; 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; 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 to provide 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
                                 MD&A   Overview

                                                             Table of Contents
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
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. While the company believes the
decline in net 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 first quarter of 2021, the company issued $125,000,000 aggregate
principal amount of 4.25% convertible senior notes due in 2026 (the "2026
Notes"), purchased related capped calls for the 2026 Notes to minimize potential
dilution from the 2026 Notes, repurchased $78,850,000 aggregate principal amount
of its 4.50% convertible senior notes due 2022 (the "2022 Notes") and settled
$1,250,000 aggregate principal amount of its 5.00% convertible senior notes due
2021 (the "2021 Notes") which matured during the quarter. Borrowings on the
company's asset-based lending (ABL) credit facilities were reduced in the first
quarter. These transactions enhanced financial flexibility in reducing near-term
debt with the proceeds of the new convertible notes maturing in March 2026.
These actions, 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.
The company has 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 aligns
its resources to produce products and solutions that assist customers and
end-users with the 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 strategy, the
company is undertaking a substantial multi-year business optimization plan.
Business Optimization Efforts
The company is executing a multi-year strategy 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 business 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 business optimization strategy, such as global IT
modernization initiative which is expected to ultimately result in optimization
of the operating structure.
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
                                 MD&A   Overview

                                                             Table of Contents
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 is expected to fund one-time payments for severance costs
related to the German plant consolidation and funding VAT and other taxes
deferred from 2020 as a result of programs implemented by many jurisdictions as
result of the pandemic. The company has historically generated negative cash
flow performance during the first half of the year. This pattern is expected to
continue due to the timing of annual one-time payments such as customer rebates
and employee bonuses earned during the prior year, and higher working capital
usage from seasonal inventory increases. Quarterly cash flow is anticipated to
be impacted by timing of sales growth which will impact accounts receivable
collections. The company anticipates spending $20,000,000 on capital
expenditures in 2021.
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.
                                 MD&A   Net Sales

                                                             Table of Contents
                       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)                        1Q21*            1Q20          Fav/(Unfav)         % Impact        Divestiture % Impact            Fav/(Unfav)
Europe                                      112,775          120,968            (6.8)               8.0                    -                       (14.8)
North America                                75,974           86,971           (12.6)               0.5                    -                       (13.1)
All Other (Asia Pacific)                      7,453           10,501           (29.0)              14.1                (26.7)                      (16.4)
Consolidated                                196,202          218,440           (10.2)               5.3                 (1.3)                      (14.2)

* Date format is quarter and 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. Management believes that this financial measure
provides meaningful information for evaluating the core operating performance of
the company.
The global pandemic continued to impact sales across all segments. Public health
restrictions limited access to healthcare professionals and institutions needed
for certain product selections and global supply chain disruptions related to
transportation and logistics delayed receipt of components and limited
conversion of orders to shipments in the quarter. These items impacted each of
the regions in 1Q21 and resulted in declines in net sales compared to the same
period last year. The company believes the global supply chain disruptions from
1Q21 are temporary, and as these disruptions subside and access to healthcare
increases, sales growth should return for the remainder of the year. In
addition, the pandemic did not impact 1Q20.
Europe - Constant currency net sales decreased $17,870,000, or 14.8% in 1Q21
compared to 1Q20 as sales continued to be significantly impacted by the
pandemic. Shutdown orders in certain countries contributed to decreases in sales
of mobility and seating products and lifestyle products, which was slightly
offset by growth in respiratory products. Shutdowns impacted the company's
operations to various degrees in France, Germany, UK and the Nordic countries.
North America - Constant currency net sales for 1Q21 decreased $11,391,000 or
13.1% compared to 1Q20 driven by declines in sales of mobility and seating and
non-bed lifestyle products which more than offset growth in respiratory
All Other - Constant currency net sales, which relate entirely to the Asia
Pacific region, decreased $1,263,000 or 16.4% for 1Q21 compared to 1Q20 driven
by declines in lifestyle products offset by growth in mobility and seating

                                 MD&A   Net Sales

                                                             Table of Contents
                     [[Image Removed: ivc-20210331_g2.jpg]]
Constant currency net sales of mobility and seating products, which comprise
most of the company's clinically complex product portfolio, decreased to 35.8%
of net sales in 1Q21 from 39.8% in 1Q20.

This decrease reflects the significant impacts of the pandemic, particularly
limited access to healthcare professionals and institutions needed for certain
product selections, specifically for mobility and seating products and non-bed
related lifestyle products. In addition, net sales in 1Q21 were impacted by
global supply chain disruptions impacting the availability of components.
                                MD&A   Gross Profit

                                                             Table of Contents

                                  GROSS PROFIT

                     [[Image Removed: ivc-20210331_g3.jpg]]
Gross profit as a percentage of net sales for 1Q21 decreased 100 basis points to
27.8%, primarily attributable to unfavorable manufacturing variances as a result
of reduced net sales. Gross profit was also impacted by unfavorable product mix.
Unfavorable manufacturing variances in 1Q21 were the result of both lower
volumes and increased costs due to component shortages and transportation delays
which impacted labor costs 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 net sales for 1Q21 decreased 1.6
percentage points and $3,972,000, compared to 1Q20 driven by lower net sales and
unfavorable manufacturing variances as a result of reduced net sales.
North America - Gross profit as a percentage of net sales for 1Q21 was flat
while gross profit dollars declined $3,887,000 compared to 1Q20 driven by lower
net sales and unfavorable manufacturing variances as a result of reduced net
All Other - Gross profit as a percentage of net sales for Asia Pacific increased
7.3 percentage points while gross profit dollars declined $1,040,000 compared to
1Q20 primarily driven by reduced sales and divestiture of the Dynamic Controls
business as of March 7, 2020.
All Other also includes the impact of intercompany profit eliminations for the
consolidated company.
                                    MD&A   SG&A

                                                             Table of Contents

($ in thousands USD)                               1Q21           1Q20        Reported Change    Foreign Exchange Impact    Divestiture % Impact    Constant Currency Change
SG&A expenses - $                                  58,821         61,738          (2,917)                  3,006                     (826)                   (5,097)
SG&A expenses - % change                                                            (4.7)                    5.0                     (1.3)                     (8.4)
% to net sales                                       30.0           28.3

The table above provides selling, general and administrative (SG&A) expense
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 and divestitures. 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 expense change. Management believes that
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 on March 7, 2020.

SG&A expenses, excluding the impact of foreign currency translation and
divestitures, which is referred to as "constant currency SG&A," decreased for
1Q21 compared to the same period last year primarily due to reduced employment
costs and lower sales and marketing expenses partially offset by unfavorable
foreign currency transactions.

SG&A expense drivers by segment:

Europe - SG&A expenses for 1Q21 decreased $953,000 or 3.3% compared to 1Q20 with
foreign currency translation increasing SG&A expenses by $2,537,000, or 8.8%.
Constant currency SG&A expenses decreased $3,490,000, or 12.1%. The decreased
expense was primarily attributable to lower employment costs and sales and
marketing expenses.

North America - SG&A expenses for 1Q21 decreased $3,557,000 or 13.6%, compared
to 1Q20 with foreign currency translation increasing SG&A expenses by $166,000.
Constant currency SG&A expenses decreased $3,723,000, or 14.3% driven primarily
by employment costs and sales and marketing expenses.

All Other - SG&A expenses for 1Q21 increased by $1,593,000 compared to 1Q20 with
foreign currency translation increasing SG&A expenses by $303,000 and
divestitures decreasing SG&A expenses by $826,000.
Constant currency SG&A expenses increased by $2,116,000. 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 1Q21 increased 7.4%, or
$397,000, compared to 1Q20 driven primarily by stock compensation expense.
Related to the Asia Pacific businesses, constant currency SG&A expenses
increased $1,719,000, due to foreign currency transactions.



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