[☒] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
[☐] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-15103
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)
One Invacare Way
(Address of principal executive offices)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Title of each class
Name of exchange on which registered
Common Shares, without par value
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ☐Accelerated filer☒ Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Exchange Act:
As of August 1, 2019, the registrant had 33,673,829 Common Shares and 6,357 Class B Common Shares outstanding.
Invacare Corporation (NYSE: IVC) ("Invacare" or the "company") is a leading manufacturer and distributor in its markets for medical equipment used in non-acute care settings. At its core, the company designs, manufactures and distributes medical devices that help people to move, breathe, rest and perform essential hygiene. The company provides clinically complex medical device solutions for congenital (e.g., cerebral palsy, muscular dystrophy, spina bifida), acquired (e.g., stroke, spinal cord injury, traumatic brain injury, post-acute recovery, pressure ulcers) and degenerative (e.g., ALS, multiple sclerosis, chronic obstructive pulmonary disease (COPD), age related, bariatric) conditions. The company's products are important parts of care for people with a wide range of challenges, from those who are active and heading to work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company sells its products principally to home medical equipment providers with retail and e-commerce channels, residential care operators, dealers and government health services in North America, Europe and Asia Pacific. For more information about the company and its products, visit the company's website at www.invacare.com. The contents of the company's website are not part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis presented below is concerned with material changes in financial condition and results of operations between the periods specified in the condensed consolidated balance sheets at June 30, 2019 and December 31, 2018, and in the condensed consolidated statement of comprehensive income (loss) for the three and six months endedJune 30, 2019 and June 30, 2018. 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 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, 2018 and for some matters, SEC filings from prior periods may be useful sources of information.
In the first quarter of 2019, the company reassessed the alignment of its reporting segments and concluded that the North America/Home Medical Equipment (NA/HME) and Institutional Products Group (IPG) segments should be combined into a single operating segment, now referred to as North America. This change better reflects how the company manages, allocates resources and assesses performance of the businesses contained in the new North America segment. Additionally, the company reassessed the activity of the businesses in its former Asia/Pacific segment and concluded that the Asia Pacific businesses should be reported as part of the All Other segment, since those businesses, individually and collectively, are not large enough relative to the company's overall business to merit disclosure as a separate reporting segment. The company believes that these changes provide improved transparency of the company’s business results to its shareholders, and better align with how the company manages its businesses. Segment results for 2018 have been reclassified to reflect the realignment of the company’s reporting segments and be comparable to the segment results for 2019.
Invacare is a multi-national company with integrated capabilities to design, manufacture and distribute durable medical devices. The company makes products that help people move, breathe, rest and perform essential hygiene, and with those products the company supports people with congenital, acquired and degenerative conditions. The company's products and solutions are important parts of care for people with a range of challenges, from those who are active and involved in work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company operates in facilities in North America, Europe and Asia Pacific, which are the result of dozens of acquisitions made over the company's nearly forty-year history. Some of these acquisitions have been combined into integrated operating units, while others remain relatively independent.
The company had a strategy to be a leading provider of durable medical equipment to 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 three-phase multi-year transformation plan.
The company is executing a multi-year transformation to shift to its new strategy. This is expected to yield better financial results from the application of the company's resources to products and solutions that provide greater healthcare value in clinically complex rehabilitation and post-acute care. The transformation is divided into the following three phases:
Phase One - Assess and Reorient
Increase commercial effectiveness;
Shift and narrow the product portfolio;
Focus innovation on clinically complex solutions;
Accelerate quality efforts on quality excellence; and
Lead in quality culture and operations excellence; and
Grow above market.
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. The company has engaged third-party experts to help assess, plan and support the execution of improvement opportunities, in an effort to ensure the best plans are adopted across the entire enterprise.
Key elements of the enhanced transformation and growth plan:
Re-evaluate all business segments and product lines for the potential to be profitable and to achieve a leading market position given evolving market dynamics;
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 support consistent profitable growth, drive faster innovation, and redesign business processes to lower cost and improve customers' experience;
In Asia Pacific, remain focused on sustainable growth and expansion in the southeast Asia region; and
Globally, take actions to reduce working capital and improve free cash flow.
The company intends to continue to make significant investments in its transformation, reduce sales in certain areas, refocus resources away from less accretive activities, and look at its global infrastructure for opportunities to drive efficiency.
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 favorable business potential.
The company continues to expect to achieve the earnings and free cash flow usage targets announced for 2019 and into 2020 with a combination of low single-digit sales growth, gross margin improvements and substantial cost reductions. Certain product lines may be discontinued to focus investment on higher margin profitable areas of growth. The company participates in growing markets and believes its long-term economic potential remains strong.
For 2019, the company anticipates net sales growth in Europe and North America mobility and seating products, which is anticipated to be offset by, the previously announced, expected year-over-year reduction in respiratory sales in North America impacted by market uncertainty due to recently implemented reimbursement changes. In addition, the company anticipates margin expansion as a result of cost improvement actions. These actions should contribute to improved earnings in 2019.
As a result of the successful implementation of strategic improvement initiatives, the company anticipates an improvement in free cash flow usage for 2019 as compared to 2018 driven by improvements in segment operating loss compared to 2018, and the benefit of converting the higher inventory levels at the end of 2018 to cash in 2019. It further assumes that these benefits will be partially offset by increased working capital to support growth, especially in North America mobility and seating products with an extended quote-to-cash cycle, higher capital expenditures, and cash needed to fund restructuring actions. The company has historically generated negative free cash flow during the first half of the year. This pattern continued in 2019 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. The absence of these payments and somewhat seasonally stronger sales in the second half of the year typically result in more favorable free cash flow in the second half of the year. The company expects capital expenditures of approximately $15,000,000 to $20,000,000 in 2019.
Furthermore, the company believes that a return to positive Adjusted EBITDA driven by operational performance and its balance sheet will support the company's transformation plans and enable the company to address future debt maturities.
The company operates in two primary business segments: North America and Europe with each selling the company's primary product categories, which include: lifestyle, mobility and seating and respiratory therapy products. Sales in Asia Pacific are reported in All Other and include products similar to those sold in North America and Europe.
($ in thousands USD)
Reported % Change
Foreign Exchange % Impact
Constant Currency % Change
All Other (Asia Pacific)
($ in thousands USD)
Reported % Change
Foreign Exchange % Impact
Constant Currency % Change
All Other (Asia/Pacific)
*Date format is quarter and year in each instance.
** YTD means the first six 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.
“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 prior quarter’s net sales with each quarter’s net sales translated at the foreign exchange rates for the quarter ended March 31, 2019. Management believes that both financial measures provide meaningful information for evaluating the core operating performance of the company.
Constant currency net sales performance drivers by segment:
Europe - Constant currency net sales increased in 2Q19 compared to 2Q18 driven by increases in mobility and seating partially offset by decreased sales of lifestyle and respiratory products. Constant currency YTD 2Q19 net sales increased compared to YTD 2Q18 due to increases in mobility and seating and lifestyle products partially offset by decreased sales of respiratory products.
North America - Constant currency net sales for 2Q19 decreased compared to 2Q18 primarily as as result of declines in respiratory product due to reimbursement changes, as anticipated. Constant currency respiratory product net sales declined $4.4 million for 2Q19 compared to 2Q18, impacted by reimbursement changes by Centers for Medicare and Medicaid Services, effective January 1, 2019. Lifestyle product constant currency net sales increased, partially offset by lower mobility and seating constant currency net sales. The YTD 2Q19 decrease in constant currency net sales compared to YTD 2Q2018 was driven primarily by decreased respiratory sales, which declined $12.1 million on a constant currency basis.
All Other - Constant currency net sales, which relate entirely to the Asia Pacific region, decreased for 2Q19 compared to 2Q18 driven by net sales decreases in mobility and seating and lifestyle product, partially offset by higher respiratory sales. The 2Q19 net sales were impacted by a slowdown in reimbursement in New Zealand as a result of the government's fiscal year end. The YTD 2Q19 constant currency net sales increase compared to the same period last year was driven by net sales increases in mobility and seating and respiratory products.
Constant currency net sales of mobility and seating products, which comprise most of the company's clinically complex product portfolio, increased to 43.1% in 2Q19 from 41.1% in 2Q18 and increased to 42.0% YTD19 from 39.7% in YTD18.
This increase reflects the company's continued transformation efforts, especially where the company has shifted the product portfolio and alignment of resources to focus on clinically complex solutions.
Gross profit dollars for 2Q19 decreased compared to 2Q18 principally due to reduced net sales and the negative impact of foreign exchange. Gross profit as a percentage of net sales was higher by 20 basis points compared to 2Q18 driven primarily by lower freight and material costs partially offset by unfavorable foreign exchange in Europe. The company was able to significantly mitigate the direct and indirect negative impact of tariffs instituted in second half of 2018. In 2Q19, increased costs influenced by the tariffs were approximately $400,000 in the North America segment.
Gross Profit dollars for YTD 2Q19 decreased compared to YTD 2Q18 principally due to due to reduced net sales and unfavorable foreign exchange. Gross profit as a percentage of net sales was lower by 20 basis points compared to the same period last year primarily due to unfavorable product mix and the negative impact of direct and indirect tariffs instituted in the second half of 2018, which increased costs by approximately $800,000.
Gross profit and gross margin drivers by segment:
Europe - Gross margin as a percentage of net sales for 2Q19decreased0.1 of a percentage point, while gross profit dollars decreased $1,856,000, compared to 2Q18. The decrease in gross profit dollars was driven primarily by unfavorable sales mix and unfavorable foreign exchange, both translation and transaction.
Gross margin as a percentage of net sales for YTD 2Q19 decreased0.6 of a percentage point, while gross profit dollars decreased $5,174,000, compared to the same period last year. The decrease in gross profit dollars was driven by unfavorable sales mix and unfavorable foreign exchange, both translation and transaction, partially offset by positive operational variances.
North America - Gross margin as a percentage of net sales for 2Q19increased1.5 percentage points, while gross profit dollars increased $18,000, compared to 2Q18. The slight increase in gross profit dollars was primarily due to favorable customer mix and lower freight costs, partially offset by lower sales volumes and the negative impact of tariffs and related material cost increases of approximately $400,000 in 2Q19.
Gross margin as a percentage of net sales for YTD 2Q19 increased1.4 percentage points, while gross profit dollars decreased $972,000, compared to YTD 2Q18. Gross margin improved despite the negative impact of tariffs and related material cost increases of approximately $800,000 in YTD 2Q19.
All Other - Gross margin, which primarily relates to the company's Asia Pacific businesses, decreased2.7 percentage points, as a percentage of net sales, and gross profit dollars decreased $441,000, compared to 2Q18. The decrease in gross profit dollars was primarily due to lower sales volumes.
Gross margin as a percentage of net sales for YTD 2Q19 decreased2.7 percentage points, while gross profit dollars decreased $1,196,000, compared to YTD 2Q18. The decrease in gross profit dollars was primarily due to unfavorable net sales mix and higher warranty expense.
SG&A expense excluding the impact of foreign currency translation, which is referred to as "constant currency SG&A", decreased for 2Q19 and YTD 2Q19 compared to the same periods last year primarily due to reduced employment costs and product liability expense. The reduction in SG&A expense was primarily driven by cost reduction actions implemented in 2018.
SG&A expense drivers by segment:
Europe - SG&A expenses for 2Q19decreased$2,156,000 or 6.2% compared to 2Q18 with foreign currency translation decreasing SG&A expenses by $2,299,000, or 6.6%. Constant currency SG&A expenses increased $143,000, or 0.4%. The increased expense was primarily attributable to unfavorable foreign currency transactions and higher consulting costs partially offset by decreased employment costs.
SG&A expenses for YTD 2Q19 decreased by 7.0%, or $4,661,000, compared to YTD 2Q18 with foreign currency translation decreasing SG&A expenses by $4,171,000, or 6.3%. Constant currency SG&A expenses decreased $490,000, or 0.7%. The decreased expense was primarily attributable to decreased employment costs partially offset by unfavorable foreign currency transactions.
North America - SG&A expenses for 2Q19decreased19.7%, or $5,994,000, compared to 2Q18 with foreign currency translation decreasing SG&A expenses by $115,000. Constant currency SG&A expenses decreased $5,879,000, or 19.4% driven primarily by decreased employment costs.
SG&A expenses for YTD 2Q19 decreased15.2%, or $9,147,000, compared to YTD 2Q18 with foreign currency translation decreasing SG&A expenses by $260,000. Constant currency SG&A expenses decreased $8,887,000, or 14.8% driven primarily by decreased employment costs.
All Other - SG&A expenses increased by $2,642,000 with foreign currency translation decreasing SG&A expenses by $257,000. All Other includes SG&A related to the Asia Pacific businesses and non-allocated corporate costs. Related to the Asia Pacific businesses, 2Q19 SG&A increased2.5%, or $95,000, compared to 2Q18 with foreign currency translation decreasing SG&A expenses $257,000, or 6.8%. Constant currency SG&A expenses increased $352,000, or 9.3%, due to higher sales & marketing and consulting costs. SG&A expenses, related to non-allocated corporate costs, for 2Q19increased50.4%, or $2,547,000, compared to 2Q18. The increase was driven primarily by increased stock compensation expense and consulting costs.
SG&A expenses for YTD 2Q19 increased$2,277,000 compared to YTD 2Q18 with foreign currency translation decreasing SG&A expenses $524,000. Related to the Asia Pacific businesses, YTD 2Q19 SG&A decreased2.1%, or $161,000, compared to 2Q18 with foreign currency translation decreasing SG&A expenses $524,000, or 6.9%. Constant currency SG&A expenses increased $363,000, or 4.8%, due to higher sales & marketing and consulting costs. SG&A expenses, related to non-allocated corporate costs, for 2Q19increased23.0%, or $2,438,000, compared to 2Q18. The increase was driven primarily by increased stock compensation expense and consulting costs.
For 2Q19 and YTD 2Q19, consolidated operating loss improved due to reduced SG&A expense partially offset by lower gross profit, higher restructuring costs, and unfavorable foreign exchange.
Operating income (loss) by segment:
Europe - Operating income for 2Q19 increased compared to 2Q18 principally due to constant currency net sales growth partially offset by unfavorable sales mix and unfavorable foreign exchange. The negative impact from foreign currency translation was $800,000. Operating income for YTD 2Q19 decreased compared to YTD 2Q18 as constant currency sales growth was offset by unfavorable sales mix and the negative impact of foreign currency translation of $1,500,000.
North America - Operating loss for 2Q19 and YTD 2Q19 improved compared to the same periods a year ago primarily due to improved gross margin and reduced SG&A expense. Gross margin improved despite the negative impact of tariffs and related material cost increases of approximately $400,000 in 2Q19 and $800,000 YTD 2Q19.
All Other - Operating loss for 2Q19 and YTD 2Q19 increased compared to the same periods a year ago driven by the decrease in net sales in the AsiaPacific region and increased stock compensation expense.
Charge Related to Restructuring Activities
Restructuring charges totaled $2,013,000 for YTD 2Q19 principally related to severance costs. Restructuring charges were incurred in the Europe ($640,000), North America ($1,208,000) and Other segment ($165,000).
Restructuring charges totaled $745,000 for YTD 2Q18 principally related to severance costs. Restructuring charges were incurred in Europe ($401,000), North America ($86,000) and Other ($258,000) segments.
The company recognized a net gain of $1,470,000 and $1,197,000 in 2Q19 and YTD 2Q19, respectively, compared to a net gain of $21,000 and $124,000 in 2Q18 and YTD 2Q18, respectively, related to the fair value of convertible debt derivatives. Due to shareholder approval to settle, or partially settle, convertible debt with common shares, this is the last quarter to fair value note hedge assets and convertible debt conversion liabilities. See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.
($ in thousands USD)
($ in thousands USD)
The increase in interest expense for 2Q19 and YTD 2Q19 compared to the same periods last year was primarily related to interest associated with leases.
The company had an effective tax rate of 19.5% and 17.8% on losses before tax from continuing operations for the three and six months endedJune 30, 2019, respectively, compared to an expected benefit of 21.0% on the continuing operations pre-tax loss for each period. The company had an effective tax rate of 21.9% and 21.0%for the three and six months endedJune 30, 2018, respectively, compared to an expected benefit of 21.0% on the continuing operations pre-tax loss for each period. The company's effective tax rate for each of the three and six months ended June 30, 2019 and June 30, 2018 were unfavorable as compared to the U.S. federal statutory rate expected benefit, principally due to the negative impact of the company not being able to record tax benefits related to the significant losses in countries which had tax valuation allowances. The effective tax rate was increased for the three and six months endedJune 30, 2019 and June 30, 2018 by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate higher than the U.S. statutory rate.
The company continues to maintain an adequate liquidity position through its cash balances and unused bank lines of credit (see Long-Term Debt in the Notes to Condensed Consolidated Financial Statements included in this report). Key balances on the company's balance sheet and related metrics:
($ in thousands USD)
June 30, 2019
December 31, 2018
Cash and cash equivalents
Working capital (1)
Total debt (2)
Long-term debt (2)
Total shareholders' equity
Credit agreement borrowing availability (3)
Current assets less current liabilities.
Long-term debt and Total debt include debt issuance costs recognized as a deduction from the carrying amount of debt liability and debt discounts classified as debt as well as long term lease obligations for both operating and financing leases.
Reflects the combined availability of the company's North American and European asset-based revolving credit facilities. The change in borrowing availability is due to changes in the calculated borrowing base.
The company's cash and cash equivalents balances were $89,511,000 and $116,907,000 at June 30, 2019 and December 31, 2018, respectively. The decrease in cash was the result of normal operations and continued investment in our transformation strategy.
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, except in China where the cash balance, as of June 30, 2019, was $411,000. The company continues the process of eliminating its operations there, which until completed, restricts access to certain cash balances.
The company's total debt outstanding, inclusive of the debt discount related to debentures included in equity as well as the debt discount and fees associated with the company's Convertible Senior Notes due 2021 and 2022, increased by $20,842,000 to $320,754,000 at June 30, 2019 from $299,912,000 as of December 31, 2018. As a result of implementing ASU 2016-02, "Leases" as of January 1, 2019, the company recorded operating lease liabilities which totaled $21,393,000 as of June 30, 2019. See "Long-Term Debt" and "Leases and Commitments" in the Notes to Condensed Consolidated Financial Statements for more details regarding the company's convertible notes and credit facilities and lease liabilities, respectively.
Based on the company's current expectations, the company believes that its cash balances and available borrowing capacity under its credit facilities should be sufficient to meet working capital needs, capital requirements, and commitments for at least
the next twelve months. Notwithstanding the company's expectations, if the company's operating results decrease as the result of pressures on the business due to, for example, currency fluctuations or regulatory issues or the company's failure to execute its business plans or if the company's transformation takes longer than expected, the company may require additional financing, or may be unable to comply with its obligations under the credit facilities, and its lenders could demand repayment of any amounts outstanding under the company's credit facilities.
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.
Should interest rates increase, the company expects that it would be able to absorb modest rate increases without any material impact on its liquidity or capital resources. The weighted average interest rate on revolving credit borrowings, excluding capital leases, was 4.78% for the for the three and six months endedJune 30, 2019 and for the year ended December 31, 2018.
See "Long-Term Debt" in the Notes to the Consolidated Financial Statements for more details regarding the company's credit facilities.
The company estimates that capital investments for 2019 could approximate between $15,000,000 and $20,000,000, compared to actual capital expenditures of $9,823,000 in 2018. The anticipated increase relates primarily to the company's investments to transform the company. The company believes that its balances of cash and cash equivalents and existing borrowing facilities will be sufficient to meet its operating cash requirements and fund required capital expenditures (see "Liquidity and Capital Resources"). The Credit Agreement limits the company's annual capital expenditures to $35,000,000. As of June 30, 2019, the company had no material capital expenditure commitments outstanding.
On May 16, 2019, the company's Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share to shareholders of record as of July 5, 2019, which was paid on July 22, 2019. The Board of Directors has suspended the company’s regular quarterly dividend on the Class B Common Shares. Fewer than 7,000 Class B Common Shares remain outstanding and suspending the regular Class B dividend allows the company to save on the administrative costs and compliance expenses associated with that dividend. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis and would be eligible for any Common Share dividends declared following any such conversion.
The cash used by operating activities for the six months ended June 30, 2019 was driven by a net loss, decreased payables and accrued liabilities and increased receivables, partially offset by reduced inventory. The decrease in cash used by operating activities in the first six months of 2019 compared to the same period last year was principally driven by a reduced net loss and reduced inventory.
Cash flows used by investing activities for the first six months of 2019 were comparable to the same period last year, driven by purchases of property, plant and equipment.
Cash flows used by financing activities increased in the first six months of 2019 compared to the same period last year driven primarily by higher payments on capital leases.
Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
($ in thousands USD)
Net cash used by operating activities
Plus: Sales of property and equipment
Less: Purchases of property and equipment
Free Cash Flow
Free cash flow for the first six months 2019 and 2018 was negatively impacted by the same items that affected cash flows used by operating activities. Free cash flow is a non-GAAP financial measure that is comprised of net cash used by operating activities plus purchases of property and equipment less proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and
its ability to repay debt or make future investments (including acquisitions, etc.).
Generally, the first half of the year is cash consumptive and impacted by significant disbursements related to annual customer rebate payments which normally occur in the first quarter of the year and, to lesser extent, into the second quarter of the year. In addition, the second quarter of the year represents the period annual employee bonuses are paid, if earned. Investment in inventory is historically heavy in the first half of the year with planning around the company's supply chain to fulfill shipments in the second half of the year and can be impacted by footprint rationalization projects. As a result, historically, the company realizes stronger cash flow in the second half of the year versus the first half of the year. On that basis and considering anticipated increased working capital investment as a result of anticipated sales growth in the second half of the year and higher capital expenditures, the company anticipates its cash flow seasonality for 2019 will be similar to 2018, with full year 2019 cash flow usage estimated to be at or below approximately $25 million.
The company's approximate cash conversion days at June 30, 2019, December 31, 2018 and June 30, 2018 are as follows:
The current quarter days in receivables were comparable to the same period a year ago while days in inventory for the quarter ended June 30, 2019 were favorable to the quarter ended June 30, 2018 due to better inventory management.
Days in receivables are equal to current quarter net current receivables divided by trailing four quarters of net sales multiplied by 365 days. Days in inventory and accounts payable are equal to current quarter net inventory and accounts payable, respectively, divided by trailing four quarters of cost of sales multiplied by 365
days. Total cash conversion days are equal to days in receivables plus days in inventory less days in accounts payable.
The company provides a summary of days of cash conversion for the components of working capital so investors may see the rate at which cash is disbursed, collected and how quickly inventory is converted and sold.
The 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 Consolidated Financial Statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, thus, actual results could differ from these estimates. Please refer to the Critical Accounting Estimates section within MD&A of company's Annual Report on Form 10-K for the period ending December 31, 2018 as well as the revenue recognition and warranty disclosure below.
The company recognizes revenues when control of the product or service is transferred to unaffiliated customers. Revenues from Contracts with Customers, ASC 606, provides guidance on the application of generally accepted accounting principles to revenue recognition issues. The company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP under ASC 606.
All of the company's product-related contracts, and a portion related to services, have a single performance obligation, which is the promise to transfer an individual good or service, with revenue recognized at a point in time. Certain service-related contracts contain multiple performance obligations that require the company to allocate the transaction price to each performance obligation. For such contracts, the company allocates revenue to each performance obligation based on its relative standalone selling price at inception of the contract. The company determined the standalone selling price based on the expected cost-plus margin methodology. Revenue related to the service contracts with multiple performance obligations is recognized over time. To the extent performance obligations are satisfied over time, the company defers revenue recognition until the performance obligations are satisfied.
The determination of when and how much revenue to recognize can require the use of significant judgment. Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the company's products and services to the customer.
Revenue is measured as the amount of consideration expected to be received in exchange for transferring the product or providing services. The amount of consideration received and recognized as revenue by the company can vary as a result of variable consideration terms included in the contracts such as customer rebates, cash discounts and return policies. Customer rebates and cash discounts are estimated based on the most likely amount principle and these estimates are based on historical experience and anticipated performance. Customers have the right to return product within the company's normal terms policy, and as such, the company estimates the expected returns based on an analysis of historical experience. The company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration the company expects to receive changes or when the consideration becomes fixed. The company generally does not expect that there will be significant changes to its estimates of variable consideration (see Receivables in the Notes to the Consolidated Financial Statements include elsewhere in this report).
Depending on the terms of the contract, the company may defer recognizing a portion of the revenue at the end of a given period as the result of title transfer terms that are based upon delivery and or acceptance which align with transfer of control of the company's products to its customers.
Sales are made only to customers with whom the company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.
The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns. The company's payment terms are for relatively short periods and thus do not contain any element of financing. Additionally, no contract costs are incurred that would require capitalization and amortization.
Sales, value-added, and other taxes the company collects concurrent with revenue producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Shipping and handling costs are included in cost of products sold.
The majority of the company's warranties are considered assurance-type warranties and continue to be recognized as expense when the products are sold (see Current Liabilities in the Notes to the Consolidated Financial Statements include elsewhere in this report). These warranties cover against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accruals and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could require additional warranty reserve provisions. See Accrued Expenses in the Notes to the Consolidated Financial Statements for a reconciliation of the changes in the warranty accrual. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. The company has established procedures to appropriately defer such revenue.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the company’s disclosure regarding recently issued accounting pronouncements, see Accounting Policies - Recent Accounting Pronouncements in the Notes to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
This Form 10-Q contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “could,” “plan,” “intend,” “expect,” “continue,” “believe” and “anticipate,” as well as similar comments, denote forward-looking statements that are subject to inherent uncertainties that are difficult to predict. Actual results and events may differ significantly from those expressed or anticipated as a result of risks and uncertainties, which include, but are not limited to, the following: 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; 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 company facilities at any time and governmental enforcement actions; including the investigation of pricing practices at one of the company's former rentals businesses; inability of the company to sustain profitable sales growth or reduce its costs to maintain competitive prices for its products; lack of market acceptance of the company's new product innovations; circumstances or developments that may make the company unable to implement or realize the anticipated benefits, or that may increase the costs, of its current business initiatives, including its enhanced transformation and growth plan; possible adverse effects on the company's liquidity that may result from delays in the implementation or realization of benefits of its current business initiatives, or from any requirement to settle repurchase rights of its outstanding convertible notes in cash; product liability or warranty claims; product recalls, including more extensive warranty or recall experience than expected; possible adverse effects of being leveraged, including interest rate or event of default risks; exchange rate fluctuations, particularly in light of the relative importance of the company's foreign operations to its overall financial performance and including the existing and potential impacts from the Brexit referendum; potential impacts of the United States administration's policies, and any legislation or regulations that may result from those policies, and of new United States tax laws, rules, regulations or policies; legal actions, including adverse judgments or settlements of litigation or claims in excess of available insurance limits; adverse changes in government and other third-party payor reimbursement levels and practices both in the U.S. and in other countries (such as, for example, more extensive pre-payment reviews and post-payment audits by payors, or the continuing impact of the U.S. Medicare National Competitive Bidding program); ineffective cost reduction
and restructuring efforts or inability to realize anticipated cost savings or achieve desired efficiencies from such efforts; delays, disruptions or excessive costs incurred in facility closures or consolidations; tax rate fluctuations; additional tax expense or additional tax exposures, which could affect the company's future profitability and cash flow; inability to design, manufacture, distribute and achieve market acceptance of new products with greater functionality or new product platforms that deliver the anticipated benefits at competitive prices; consolidation of health care providers; increasing pricing pressures in the markets for the company's products; lower cost imports; uncollectible accounts receivable; difficulties in implementing/upgrading Enterprise Resource Planning systems; risk of cybersecurity attack, data breach or data loss and/or delays in or inability to recover or restore data and IT systems; risks inherent in managing and operating businesses in many different foreign jurisdictions; decreased availability or increased costs of materials which could increase the company's costs of producing or acquiring the company's products, including the adverse impacts of new tariffs and possible increases in material costs or freight costs; heightened vulnerability to a hostile takeover attempt or other shareholder activism; provisions of Ohio law or in the company's debt agreements, charter documents or other agreements that may prevent or delay a change in control, as well as the risks described from time to time in the company's reports as filed with the Securities and Exchange Commission. Except to the extent required by law, the company does not undertake and specifically declines any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.