Company Quick10K Filing
Quick10K
Invacare
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$10.43 33 $346
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-13 Earnings, Exhibits
8-K 2018-11-26 Officers
8-K 2018-11-20 Exit Costs
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-11-01 Exit Costs
8-K 2018-10-09 Officers, Exhibits
8-K 2018-09-18 Officers
8-K 2018-09-10 Regulation FD
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-07-19 Officers, Exhibits
8-K 2018-05-17 Officers, Shareholder Vote, Regulation FD, Exhibits
8-K 2018-04-09 Regulation FD, Exhibits
8-K 2018-02-20 Officers, Regulation FD, Exhibits
8-K 2018-02-12 Exit Costs, Regulation FD, Exhibits
8-K 2018-02-07 Earnings, Exhibits
8-K 2018-01-11 Regulation FD
8-K 2018-01-03 Other Events
ZBH Zimmer Biomet Holdings
STE Steris
POOL Pool
WMGI Wright Medical Group
PKOH Park Ohio Holdings
LAWS Lawson Products
VIRC Virco Mfgoration
HDSN Hudson Technologies
IDSA Industrial Services of America
HSGX Histogenics
IVC 2018-09-30
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Part I. Financial Information
Item 1. Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II Other Information
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 q32018ivcex311.htm
EX-31.2 q32018ivcex312.htm
EX-32.1 q32018ivcex321.htm
EX-32.2 q32018ivcex322.htm

Invacare Earnings 2018-09-30

IVC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q32018ivc10-q.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to           
Commission File Number 001-15103
INVACARE CORPORATION
(Exact name of registrant as specified in its charter)

flatlogofinala15.jpg 
 
 
Ohio
95-2680965
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)
 
 
One Invacare Way, Elyria, Ohio
44035
(Address of principal executive offices)
(Zip Code)
(440) 329-6000
(Registrant's telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
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 x  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 x 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 x  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  x

As of November 2, 2018, the registrant had 33,194,680 Common Shares and 6,357 Class B Common Shares outstanding.

 
 
 
 
 




flatlogofinala13.jpg


Table of Contents
 
 
Item
Page
PART I: FINANCIAL INFORMATION
2
1
 
 
 
 
 
3
4
 
 
 
PART II: OTHER INFORMATION
1
1A
2
6
 

About Invacare Corporation

Invacare Corporation (NYSE: IVC) ("Invacare" or the "company") is a leading manufacturer and distributor in its markets for medical equipment used in non-acute care settings. At its core, the company designs, manufactures and distributes medical devices that help people to move, breathe, rest and perform essential hygiene. The company provides clinically complex medical device solutions for congenital (e.g., cerebral palsy, muscular dystrophy, spina bifida), acquired (e.g., stroke, spinal cord injury, traumatic brain injury, post-acute recovery, pressure ulcers) and degenerative (e.g., ALS, multiple sclerosis, chronic obstructive pulmonary disease (COPD), age related, bariatric) conditions. The company's products are important parts of care for people with a wide range of challenges, from those who are active and heading to work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company sells its products principally to home medical equipment providers with retail and e-commerce channels, residential care operators, dealers and government health services in North America, Europe and Asia/Pacific. For more information about the company and its products, visit the company's website at www.invacare.com. The contents of the company's website are not part of this Quarterly Report on Form 10-Q and are not incorporated by reference herein.




MD&A
Overview
 
 
 
 


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 September 30, 2018 and December 31, 2017, and in the condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2018 and September 30, 2017. 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, 2017 and for some matters, SEC filings from prior periods may be useful sources of information.

OVERVIEW


Invacare is a multi-national company with integrated capabilities to design, produce and distribute durable medical equipment. 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 go 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 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.

Strategy
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 had not kept pace with certain reimbursement changes, competitive dynamics and company-specific challenges in recent years. Since 2015, the company has made a major shift in its strategy. The company has since been aligning its resources to produce solutions that address clinically complex needs thereby increasing the value of the company's product offering. 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.

Transformation
The company has been executing a multi-year transformation to shift to its new strategy, especially in North America. 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 and excellence; and
Develop and expand talent.

Phase Two - Build and Align
Leverage commercial improvements;
Optimize the business for cost and efficiency;
Continue to improve quality systems;
Launch new clinical product platforms; and
Expand talent management and culture.

The company is currently in Phase Two of the transformation, focused primarily on North America, with gradual changes being undertaken in the Europe segment. By the end of this phase, the company expects growth in sales and gross profit, as well as an improvement in operating income and free cash flow. The company also is optimizing its infrastructure and improving efficiencies to streamline customer interactions and to reduce costs. The company expects Phase Two to extend through 2019 and to overlap with the beginning of Phase Three in certain areas.

Phase Three - Grow
Lead in quality culture and operations excellence; and
Grow above market.

By the end of phase three, the company expects continued improvements in net sales, operating margin, operating income and free cash flow.


1

MD&A
Overview
 
 
 
 

OUTLOOK
The company's pursuit of profitable sales growth and cost reductions is expected to lead to achieving its long-term operating income and EBITDA goals. While the company remains positive about the growth potential of its businesses, there is much more work to be done, especially in North America to accelerate the return to profitable growth and offset inflationary pressures driven by the effects of tariffs. The company will undertake additional actions to streamline operations, and resize and reshape the organization. For example, the company announced a reduction in force in North America on November 1, 2018 which is expected to yield annualized savings of $5.0 million.
In North America, the company's focus will be on continued growth in the mobility and seating product category and implementing a multi-channel approach to ambulatory oxygen products, lifestyle products and the IPG segment. The company anticipates positive constant currency net sales growth in the mobility and seating segment. However, further consolidation of healthcare customers could result in additional pricing pressure. The company expects the reimbursement changes announced by Centers for Medicare and Medicaid Services (CMS) on November 1, 2018, which will be effective January 1, 2019, could have a negative impact on net sales beyond the first quarter of 2019 as providers are cautious to invest in inventory before the impacts of the national competitive bidding changes are fully known and assess the regional markets they will pursue.
While the company realized slight constant currency net sales growth in the Europe segment in 3Q18, the segment may continue to experience reduced sales in 4Q18 as it shifts its product mix toward more clinically valued, higher-margin products. The company expects sales growth in Europe during 2019 as it realizes the benefit of new product introductions.
As noted last quarter, the company anticipates in the near-term an unfavorable impact on its results due to tariffs, increased freight costs, as well as increased commodity and material costs directly related to those same factors, particularly in consideration of new tariffs introduced in September 2018. The specific impact is difficult to estimate as the U.S. federal government's policy on tariffs continues to be implemented, and the company may not be able to fully offset any increases with internal actions such as alternative supply chain arrangements, price increases to customers and other actions. These higher costs may make the company's products less price-competitive in its markets. The company implemented a price increase in October for lifestyle and respiratory products and continues to absorb significant cost increases in complex rehab products. Based on the level of tariffs implemented through September, the company estimates an annual
 
unfavorable impact, if unmitigated, of between $5 to $7 million.



Given these pressures on the business, the company expects to be diligent in managing investments and SG&A expenses for the remainder of the year. Working capital needs are expected to expand as the business grows, especially in support of expected increases in mobility and seating sales, which require substantial working capital and demonstration units to be effective. Previously, the company guided that free cash flow usage for 2018 would be similar to 2017, however, the company believes that cash flow usage may increase given the headwinds described above, including the impact of tariffs, national competitive bidding uncertainty and increased inventory related to net sales declines, specifically in respiratory products, and to product transfers in Europe. The company will continue to take actions to minimize cash flow usage for the remainder of the year. Based on current expectations, the company believes its cash balances and available borrowing capacity should be sufficient to fund its transformation.
The company will continue to emphasize a culture of quality and operational excellence, profitable sales growth and the achievement of its long-term objectives.

2

MD&A
Net Sales
 
 
 
 

RESULTS OF OPERATION - NET SALES



The company operates in four primary business segments: NA/HME, IPG, Europe and Asia/Pacific. Both the NA/HME and IPG segments operate in the Americas. The NA/HME segment sells each of the three primary product categories, which includes: lifestyle, mobility and seating, and respiratory therapy products. IPG sells long-term care medical equipment, health care furnishings and accessory products. Europe and Asia/Pacific sell product categories similar to those of NA/HME and IPG.
($ in thousands USD)
3Q18*
3Q17
Reported % Change
Foreign Exchange % Impact
Constant Currency % Change
Europe
144,339

143,281

0.7

0.3

0.4

NA/HME
73,696

79,516

(7.3
)
(0.4
)
(6.9
)
IPG
15,148

13,975

8.4

(0.4
)
8.8

Asia/Pacific
11,376

14,134

(19.5
)
(6.5
)
(13.0
)
Consolidated
244,559

250,906

(2.5
)
(0.3
)
(2.2
)
 
 
 
 
 
 
($ in thousands USD)
YTD 3Q18
YTD 3Q17
Reported % Change
Foreign Exchange % Impact
Constant Currency % Change
Europe
414,549

391,274

5.9

7.3

(1.4
)
NA/HME
233,345

241,467

(3.4
)
0.1

(3.5
)
IPG
43,739

45,668

(4.2
)
0.1

(4.3
)
Asia/Pacific
36,138

37,737

(4.2
)
(1.2
)
(3.0
)
Consolidated
727,771

716,146

1.6

4.0

(2.4
)
 
 
 
 
 
 
*Date format is quarter and year in each instance. “YTD” means the first nine months of the year.
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” 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, 2018. 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 slightly in 3Q18 compared to 3Q17 driven by increases in mobility and seating sales partially offset by decreases in lifestyle and respiratory products. The company continues to apply its transformation strategy to this segment to focus more on clinically valued, higher-margin products. Constant currency
 
YTD 3Q18 net sales decreased compared to YTD 3Q17 as decreases in lifestyle and respiratory products were partially offset by mobility and seating increases.
North America/Home Medical Equipment (NA/HME) -
Constant currency net sales for 3Q18 decreased compared to 3Q17 driven by decreases in respiratory and lifestyle product sales which more than offset increases of 8.9% in mobility and seating products. Respiratory product sales decreased in all product categories compared to 3Q17. With the uncertainty regarding the impending reimbursement changes in the U.S. that will be effective January 1, 2019, the company believes providers were cautious to invest in inventory before the final determination on national competitive bidding is issued by the Centers for Medicare and Medicaid Services. The company believes such uncertainty and caution negatively impacted both respiratory and lifestyle product volumes in the NA/HME segment. The YTD 3Q18 decrease in constant currency net sales compared to the first nine months last year was driven by all product categories except for mobility and seating products.
Institutional Products Group (IPG) - Constant currency net sales 3Q18 increased compared to the same period last year primarily driven by increased sales of interior design projects and bed products. YTD 3Q18 net sales decreased compared to

3

MD&A
Net Sales
 
 
 
 

the same periods last year principally due to lower bed product sales which were negatively impacted by a 2Q18 supply disruption that was resolved by the end of 2Q18.
Asia/Pacific - Constant currency net sales decreased for 3Q18 and YTD 3Q18 compared to the same periods last year principally driven by decreased sales in institutional products, primarily beds in Australia, as well as decreases in mobility and seating and lifestyle products for the quarter only as mobility and seating sales increased on a year-to-date basis.
 
The following tables provide net sales at reported rates for the quarters ended September 30, June 30 and March 31, 2018, respectively, and net sales for the quarter ended September 30, and June 30, 2018, respectively, as translated at the foreign exchange rates for the quarter ended March 31, 2018 with each then compared to each other (constant currency sequential net sales). The company began this disclosure in 2017 to illustrate the effect of its transformation on its segments and continues to do so while the transformation continues, and this is useful.
 
3Q18 at Reported Foreign Exchange Rates
 
Foreign Exchange Translation Impact
 
3Q18 at
1Q18 Foreign Exchange Rates
 
2Q18 at 1Q18 Foreign Exchange Rates
 
Sequential Growth $
 
Sequential Growth %
Europe
$
144,339

 
$
6,552

 
$
150,891

 
$
139,093

 
$
11,798

 
8.5
 %
NA/HME
73,696

 
258

 
73,954

 
80,053

 
(6,099
)
 
(7.6
)
IPG
15,148

 
39

 
15,187

 
13,719

 
1,468

 
10.7

Asia Pacific
11,376

 
902

 
12,278

 
14,128

 
(1,850
)
 
(13.1
)
Consolidated
$
244,559

 
$
7,751

 
$
252,310

 
$
246,993

 
$
5,317

 
2.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
2Q18 at Reported Foreign Exchange Rates
 
Foreign Exchange Translation Impact
 
2Q18 at
1Q18 Foreign Exchange Rates
 
1Q18 at 1Q18 Foreign Exchange Rates
 
Sequential Growth $
 
Sequential Growth %
Europe
$
138,896

 
$
197

 
$
139,093

 
$
131,251

 
$
7,842

 
6.0
 %
NA/HME
79,867

 
186

 
80,053

 
79,794

 
259

 
0.3

IPG
13,704

 
15

 
13,719

 
14,887

 
(1,168
)
 
(7.8
)
Asia Pacific
13,685

 
443

 
14,128

 
11,066

 
3,062

 
27.7

Consolidated
$
246,152

 
$
841

 
$
246,993

 
$
236,998

 
$
9,995

 
4.2
 %
 
 
 
 
 
 
 
 
 
 
 
 


4

MD&A
Net Sales
 
 
 
 

chart-2639b6d1202456deaf1a01.jpg
The net sales amounts in the preceding table are converted at Q1 2018 foreign exchange rates so that the sequential change in net sales can be shown, excluding the impact of changes in foreign currency exchange rates.

Compared to 2Q18, Europe constant currency sequential net sales improved 8.5%, which reflects historical trends as the third quarter of the year is typically this segment's strongest quarter related to net sales. The sequential improvement from 1Q18 to 2Q18 for NA/HME and Asia Pacific did not continue in 3Q18 while IPG sales, driven by interior design projects and bed sales, continued to improve in 3Q18 vs the prior quarters of 2018.

Compared to 2Q18, NA/HME constant currency sequential net sales decreased 7.6% primarily due to lower respiratory product sales and to a lesser extent lifestyle products and slower
 
growth in mobility and seating sequential improvement. With the uncertainty regarding the impending reimbursement changes in the U.S. that will be effective January 1, 2019, the company believes providers were cautious to invest in inventory before the final determination on national competitive bidding is issued by the Centers for Medicare and Medicaid Services. The company believes such uncertainty and caution negatively impacted both respiratory and lifestyle product volumes in the NA/HME segment.

The IPG sequential increase was driven by increased sales of interior design projects and bed products

The Asia Pacific sequential decrease was driven by decreases in all product categories.

5

MD&A
Net Sales
 
 
 
 

chart-2bea1fae81ce53149f6a01.jpg
Net sales of mobility and seating products, which comprise most of the company's clinically complex product portfolio, increased to 43% from 40% for constant currency net sales by product for 3Q18 compared to 2Q18.


 
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.




6

MD&A
Gross Profit
 
 
 
 


GROSS PROFIT

chart-d7c84b7c455d53ed98aa01.jpg
Gross profit dollars for 3Q18 decreased compared to 3Q17 principally due to reduced net sales, unfavorable material costs, increased freight and R&D expense. NA/HME experienced significantly higher costs from materials sourced both internationally and domestically due to the indirect impact of tariffs of approximately $1,300,000 during the quarter. The tariff impact was significantly higher than the company's previous estimate. Gross profit as a percentage of net sales was lower by 140 basis points compared to 3Q17 primarily as a result of rising material costs associated with U.S. tariffs, higher freight costs incurred in NA/HME and Europe, and unfavorable operational variances in Europe.
chart-251b793dbdbc5b5988ca01.jpg
Gross profit dollars for YTD 3Q18 decreased compared to YTD 3Q17 principally due to higher freight costs and unfavorable purchase price variances which partially offset by favorable product mix and reduced warranty expense. Gross profit as a percentage of net sales was lower by 70 basis points compared to the same period last year primarily due to increased freight costs.
Gross profit and gross margin drivers by segment:
Europe - Gross margin as a percentage of net sales for 3Q18 decreased 0.3 of a percentage point, while gross profit dollars decreased $188,000, compared to 3Q17. The decrease in gross profit dollars was driven primarily by increased R&D expense and increased freight costs, primarily related to product
 
transfers associated with facility consolidation, partially offset by improved sales volumes and favorable product mix. Excluding the temporary impact of unfavorable manufacturing variances of approximately $500,000 related to the product transfers, gross margin would have shown year over year improvement.
Gross margin as a percentage of net sales for YTD 3Q18 decreased 0.3 of a percentage point, while gross profit dollars increased $5,838,000, compared to the same period last year. The increase in gross profit dollars was driven by favorable foreign currency partially offset by lower sales volume, unfavorable manufacturing variances, increased R&D and freight expense.
NA/HME - Gross margin as a percentage of net sales for 3Q18 decreased 4.7 percentage points, while gross profit dollars decreased $5,028,000, compared to 3Q17. The decrease in gross profit dollars was primarily due to lower sales volumes, unfavorable material cost and increased freight costs, both impacted by tariffs. The negative impact of tariffs and material costs impacted by tariffs was approximately $1,300,000 in 3Q18.
Gross margin as a percentage of net sales for YTD 3Q18 decreased 2.9 percentage points, while gross profit dollars decreased $8,806,000, compared to YTD 3Q17. The decrease in gross profit dollars was primarily due to net sales volume declines, increased material costs and freight costs, both impacted by tariffs.
IPG - Gross margin as a percentage of net sales for 3Q18 increased 0.2 of a percentage point, and gross profit dollars increased $299,000, compared to 3Q17. The increase in gross profit dollars was driven principally by an increase in sales and reduced warranty expense.
Gross margin as a percentage of net sales for YTD 3Q18 decreased 0.2 of a percentage point, and gross profit dollars decreased $994,000, compared to YTD 3Q17. The decrease in gross profit dollars was driven by lower net sales partially offset by reduced warranty expense.
Asia/Pacific - Gross margin as a percentage of net sales for 3Q18 decreased 1.2 percentage points, while gross profit dollars decreased $679,000, compared to 3Q17. The decrease in gross profit dollars was primarily due to a net sales decrease partially offset by reduced R&D expense.
Gross margin as a percentage of net sales for YTD 3Q18 increased 4.0 percentage points, while gross profit dollars increased $2,571,000, compared to YTD 3Q17. The increase in gross profit dollars was primarily due to reduced research and development expenses and favorable manufacturing variances.


7

MD&A
Gross Profit
 
 
 
 


chart-18d8c804f49654c0a0aa01.jpg
Sequential gross profit as a percentage of net sales and gross margin dollars decreased by 0.6 of a percentage point comparing 3Q18 to 2Q18 driven by material and freight costs as well as increased warranty expense. Sequential gross profit as a percentage of net sales increased for Europe and IPG but decreased for NA/HME and Asia/Pacific.


















chart-69b8b8e028245123b9fa01.jpg
Sequential quarterly gross profit dollars decreased
 
$1,757,000. The decrease in gross profit dollars was primarily attributable to the same items driving the gross margin percentage decrease, including the negative impact of direct tariffs and material costs impacted by tariffs indirectly of $1,300,000 in 3Q18.

8

MD&A
SG&A
 
 
 
 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

($ in thousands USD)
3Q18
3Q17
Reported Change
Foreign Exchange Impact
Constant Currency Change
SG&A Expenses - $
69,945

75,921

(5,976
)
605

(5,371
)
SG&A Expenses - % change
 
 
(7.9
)
(0.8
)
(7.1
)
% to net sales
28.6

30.3

 
 
 
($ in thousands USD)
YTD 3Q18
YTD 3Q17
Reported Change
Foreign Exchange Impact
Constant Currency Change
SG&A Expenses - $
214,972

224,155

(9,183
)
(6,053
)
(15,236
)
SG&A Expenses - % change
 
 
(4.1
)
2.7

(6.8
)
% to net sales
29.5

31.3

 
 
 

SG&A expense excluding the impact of foreign currency translation, which is referred to as "constant currency SG&A", decreased for 3Q18 and YTD 3Q18 compared to the same periods last year primarily due to reduced employment costs.

SG&A expense drivers by segment:

Europe - SG&A expenses for 3Q18 were unchanged compared to 3Q17 with foreign currency translation decreasing SG&A expenses by approximately $152,000, or 0.5%. Constant currency SG&A expenses increased $164,000, or 0.5%. The increased expense was primarily attributable to unfavorable foreign currency transactions and higher sales and marketing costs principally offset by lower employment costs.

SG&A expenses for YTD 3Q18 increased by 7.0%, or $6,449,000, compared to YTD 3Q17 with foreign currency translation increasing SG&A expenses by approximately $6,040,000, or 6.6%. Constant currency SG&A expenses increased $409,000, or 0.4%. The increased expense was primarily attributable to unfavorable foreign currency transactions and higher consulting and depreciation expense partially offset by lower employment costs.

NA/HME - SG&A expenses for 3Q18 decreased 14.5%, or $4,631,000, compared to 3Q17 with foreign currency translation decreasing SG&A expenses by approximately $154,000. Constant currency SG&A expenses decreased $4,477,000, or 14.0% driven primarily by decreased employment costs and favorable foreign currency transactions.

SG&A expenses for YTD 3Q18 decreased 14.2%, or $13,674,000, compared to YTD 3Q17 with foreign currency increasing SG&A expenses by approximately $163,000. Constant currency SG&A expenses decreased $13,837,000, or 14.4% driven primarily by decreased employment costs.

 

IPG - SG&A expenses for 3Q18 decreased 2.8%, or $74,000, compared to 3Q17 with foreign currency translation having an immaterial impact. Constant currency SG&A expenses decreased $70,000 or 2.7%. The decrease in expense was primarily related to lower employment costs.

SG&A expenses for YTD 3Q18 decreased 9.3%, or $759,000, compared to YTD 3Q17 with foreign currency translation having an immaterial impact. Constant currency SG&A expenses decreased $760,000 or 9.4%. The decrease in expense was primarily related to lower employment costs.

Asia/Pacific - SG&A expenses for 3Q18 decreased 7.3%, or $294,000, compared to 3Q17 with foreign currency translation decreasing SG&A expenses $295,000, or 7.3%. Constant currency SG&A expenses were flat as lower employment costs were offset by unfavorable foreign currency transactions.

SG&A expenses for YTD 3Q18 decreased 1.2%, or $133,000, compared to YTD 3Q17 with foreign currency translation decreasing SG&A expenses $151,000, or 1.0%. Constant currency SG&A expenses increased $18,000, or 0.2%. The slight increase in expense was primarily related to unfavorable foreign currency transactions principally offset by lower employment costs.

Other - SG&A expenses for 3Q18 decreased 16.8%, or $989,000, compared to 3Q17. SG&A expenses for YTD 3Q18 decreased 6.4%, or $1,066,000, compared to YTD 3Q17. Both the quarter and year-to-date decreases were driven primarily by decreased employment costs, including equity compensation expense.

9

MD&A
Operating Income (Loss)
 
 
 
 

OPERATING INCOME (LOSS)

($ in thousands USD)
3Q18
3Q17
$ Change
% Change
 
YTD 3Q18
YTD 3Q17
$ Change
% Change
Europe
11,788

11,987

(199
)
(1.7
)
 
23,553

24,164

(611
)
(2.5
)
NA/HME
(12,836
)
(12,446
)
(390
)
(3.1
)
 
(29,394
)
(34,267
)
4,873

14.2

IPG
1,575

1,202

373

31.0

 
4,336

4,572

(236
)
(5.2
)
Asia/Pacific
2

387

(385
)
99.5

 
2,544

(161
)
2,705

1,680.1

All Other
(4,885
)
(6,311
)
1,426

22.6

 
(16,559
)
(17,556
)
997

5.7

Charges related to restructuring
(920
)
(703
)
(217
)
(30.9
)
 
(1,665
)
(8,973
)
7,308

81.4

Consolidated Operating Loss
(5,276
)
(5,884
)
608

10.3

 
(17,185
)
(32,221
)
15,036

46.7

 
 
 
 
 
 
 
 
 
 

For 3Q18 and YTD 3Q18, consolidated operating loss improved with 3Q18 improvement driven by lower employee costs offset by reduced gross profit while YTD 3Q18 improvement was driven by reduced restructuring charges and lower employee costs partially offset by reduced gross profit.

Operating income (loss) by segment:
Europe - Operating income for 3Q18 decreased compared to 3Q17 principally due to unfavorable manufacturing variances, increased freight costs driven by product transfers associated with facility consolidation and higher R&D expense, partially offset by lower employment costs. Operating income for YTD 3Q18 decreased compared to YTD 3Q17 primarily driven by the same items noted for the quarter.

NA/HME - Operating loss for 3Q18 increased slightly compared to 3Q17 primarily related to lower sales and gross margin, partially offset by reduced SG&A expense, due largely to lower employment costs. 3Q18 operating loss includes the negative impact of tariffs and material costs impacted by tariffs of approximately $1,300,000. Operating loss for YTD 3Q18 decreased compared to YTD 3Q17 primarily due to reduced employment costs, R&D and warranty expense, partially offset by the negative impact of product mix and increased freight costs.

IPG - Operating income for 3Q18 improved compared to the same period last year principally due to an increase in sales and reduced warranty expense. Operating income for YTD 3Q18 compared to YTD 3Q17 decreased compared to the same period last year principally due to a decrease in sales partially offset by reduced warranty expense and employment costs.










 
Asia/Pacific - Operating income for 3Q18 decreased compared to 3Q17 as a result of a net sales decrease and negative impact of product mix partially offset by reduced R&D expense. Operating income for YTD 3Q18 increased compared to YTD 3Q17 driven by reduced R&D expense, lower manufacturing and employment costs partially offset by unfavorable foreign currency transactions.

All Other - Operating loss for 3Q18 improved compared to 3Q17 primarily due to reduced SG&A expense, driven by lower employment costs, and favorable intercompany profit in inventory eliminations. Operating loss for YTD 3Q18 improved compared to YTD 3Q17 primarily due to reduced SG&A expense, driven by lower equity compensation costs partially offset by higher consulting costs.

Charge Related to Restructuring Activities
Restructuring charges totaled $1,665,000 for YTD 3Q18 principally related to severance costs. Restructuring charges were incurred in the Europe ($1,170,000), Asia/Pacific ($268,000) and NA/HME ($227,000) segments.

Restructuring charges totaled $8,973,000 for YTD 3Q17 which related principally to severance and contract termination costs incurred in the NA/HME segment ($6,000,000) and severance in the Europe ($1,890,000) and Asia/Pacific ($1,083,000) segments. Significant charges were incurred YTD 3Q17 due to the company's decision to close one of its China locations. Most of the outstanding restructuring accruals at September 30, 2018 are expected to be paid out in the next twelve months.

10

MD&A
Other Items
 
 
 
 

OTHER ITEMS


Net Gain (Loss) on Convertible Debt Derivatives
($ in thousands USD)
Change in Fair Value - Gain (Loss)
 
3Q18
3Q17
YTD 3Q18
YTD 3Q17
 
 
 
 
 
Convertible Note Hedge Assets
(55,443
)
27,267

(39,690
)
33,028

Convertible Debt Conversion Liabilities
59,523

(29,817
)
43,894

(35,728
)
Net Gain (Loss) on Convertible Debt Derivatives
4,080

(2,550
)
4,204

(2,700
)
 
 
 
 
 

The company recognized net gains of $4,080,000 and $4,204,000 in 3Q18 and YTD 3Q18, respectively, compared to net losses of $2,550,000 and $2,700,000 in 3Q17 and YTD 3Q17, respectively, related to the fair value of convertible debt derivatives. See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.

Interest
($ in thousands USD)
3Q18
3Q17
$ Change
% Change
Interest Expense
7,115

6,844

271

4.0

Interest Income
(85
)
(137
)
52

(38.0
)
($ in thousands USD)
YTD 3Q18
YTD 3Q17
$ Change
% Change
Interest Expense
21,041

16,007

5,034

31.4
Interest Income
(470
)
(274
)
(196
)
71.5

The increase in interest expense for 3Q18 and YTD 3Q18 compared to the same periods last year was primarily related to interest on the convertible notes issued in the second quarter of 2017.

















 

Income Taxes

The company had an effective tax rate of 46.2% and 27.2% on losses before tax from continuing operations for 3Q18 and YTD 3Q18, respectively, compared to an expected benefit of 21.0% on the continuing operations pre-tax loss for each period. The rate for 3Q18 was impacted by net gain on convertible debt derivatives with no tax expense due to valuation reserve in the U.S. The company had an effective tax rate of 22.8% and 16.2% on losses before tax from continuing operations for 3Q17 and YTD 3Q17, respectively, compared to an expected benefit at the U.S. statutory rate of 35.0% on the continuing operations pre-tax loss for each period. The company's effective tax rate 3Q17 and YTD 3Q17 was 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 3Q18 and YTD 3Q18 and decreased for 3Q17 and YTD 3Q17 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 for 3Q18 and YTD 3Q18 and lower than the U.S. statutory rate for 3Q17 and YTD 3Q17. See "Income Taxes" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail.







11

MD&A
Liquidity and Capital Resources
 
 
 
 

LIQUIDITY AND CAPITAL RESOURCES


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)
September 30, 2018
December 31, 2017
$ Change
% Change
Cash and cash equivalents
118,268

176,528

(58,260
)
(33.0
)
Working capital (1)
209,520

238,850

(29,330
)
(12.3
)
Total debt (2)
299,806

301,415

(1,609
)
(0.5
)
Long-term debt (2)
298,225

299,375

(1,150
)
(0.4
)
Total shareholders' equity
369,932

423,294

(53,362
)
(12.6
)
Credit agreement borrowing availability (3)
36,039

39,949

(3,910
)
(9.8
)
(1) 
Current assets less current liabilities.
(2) 
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.
(3) 
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 $118,268,000 and $176,528,000 at September 30, 2018 and December 31, 2017, 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 September 30, 2018, was $12,163,000. 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, decreased by $1,609,000 to $299,806,000 at September 30, 2018 from $301,415,000 as of December 31, 2017. See "Long-Term Debt" in the Notes to Condensed Consolidated Financial Statements for more details regarding the company's convertible notes and credit facilities.

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.

While there is general concern about the potential for rising interest rates, the company expects that it will be able to absorb modest rate increases in the months ahead 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 nine months ended September 30, 2018 compared to 4.84% for the year ended December 31, 2017.

See "Long-Term Debt" in the Notes to the Consolidated Financial Statements for more details regarding the company's credit facilities.

12

MD&A
Liquidity and Capital Resources
 
 
 
 

CAPITAL EXPENDITURES

The company estimates that capital investments for 2018 could approximate between $10,000,000 and $15,000,000, compared to actual capital expenditures of $14,569,000 in 2017. The anticipated expenditures relate primarily to the company's planned investments to transform the company. The terms of the company's credit facilities limit the company's annual capital expenditures to $35,000,000. As of September 30, 2018, the company has material capital expenditure commitments outstanding, consisting primarily of computer systems contracts. See Item 7. Contractual Obligations of the company's Annual Report on Form 10-K for the year ended December 31, 2017.










































 
DIVIDEND POLICY

On August 30, 2018, the company's Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share to shareholders of record as of October 12, 2018, which was paid on October 26, 2018. 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.

13

MD&A
Cash Flows
 
 
 
 

CASH FLOWS

chart-f137e97f004c5ec3813a01.jpg
The cash used by operating activities for the nine months ended September 30, 2018 was driven by a net loss, decreased accrued expenses and increased inventory partially offset by reduced receivables and increased accounts payable. The decrease in cash used by operating activities in the first nine months of 2018 compared to the same period last year was principally driven by a reduced net loss partially offset by net changes in other working capital items.
chart-c9f704f4857a56e2ad5a01.jpg
The decrease in cash flows used by investing activities for the first nine months of 2018 as compared to the same period last year was primarily related to an advance payment received related to the sale of the company's Isny, Germany property and partially offset by increased purchases of property and equipment.
 
chart-89a5c91775d853af9dfa01.jpg
Cash flows used by financing activities in the first nine months of 2018 are primarily attributable to dividends and payments on capital leases. Cash flows provided by financing activities in the first nine months of 2017 reflect net proceeds received due to the issuance of the company's Convertible Senior Notes due 2022, including the net proceeds used for the related convertible note hedge and warrant transactions and payment of financing costs. These proceeds were partially offset by the repayment of $13,350,000 in aggregate principal amount of the company's convertible debentures due 2027 in the first quarter of 2017.

14

MD&A
Cash Flows
 
 
 
 

Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
 ($ in thousands USD)
3Q18
 
3Q17
 
YTD 3Q18
 
YTD 3Q17
Net cash used by operating activities
(2,444
)
 
(2,899
)
 
(49,542
)
 
(53,367
)
Plus:
 
 
 
 
 
 
 
Sales of property and equipment
1

 
21

 
38

 
211

Advance payment from sale of property
3,524

 

 
3,524

 

Less: Purchases of property and equipment
(3,587
)
 
(1,885
)
 
(7,814
)
 
(7,389
)
Free Cash Flow
(2,506
)
 
(4,763
)
 
(53,794
)
 
(60,545
)
 
 
 
 
 
 

Free cash flow for the first nine months 2018 and 2017 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, the company anticipates its cash flow usage and seasonality for 2018 will be similar to 2017.

The company's approximate cash conversion days at September 30, 2018, December 31, 2017 and September 30, 2017 are as follows:
chart-5249f26e83985c41a53.jpg
The decrease in the most current days in receivables compared to prior periods was driven by lower receivables in the quarter ended September 30, 2018 compared to the prior periods shown. The days in inventory increased from the seasonal low at December 31, 2017. The days in inventory for the quarter ended September 30, 2018 were favorable to the quarter ended September 30, 2017 due to better inventory velocity over the prior year.

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.

15

MD&A
Accounting Estimates and Pronouncements
 
 
 
 

ACCOUNTING ESTIMATES AND PRONOUNCEMENTS


CRITICAL ACCOUNTING ESTIMATES

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, 2017 as well as the revenue recognition and warranty disclosure below.

Revenue Recognition

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

16

MD&A
Accounting Estimates and Pronouncements
 
 
 
 

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.


17

MD&A
Forward-Looking Statements
 
 
 
 

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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; adverse effects of regulatory proceedings or the company's failure to comply with regulatory requirements or failure to receive regulatory clearance or approval for the company's products in the United States or abroad; adverse effects of regulatory or governmental inspections of company facilities at any time and governmental investigations or enforcement actions, including the investigation of pricing practices of one of the company’s former rentals businesses; 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; 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 conversions 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; adverse impacts of new tariffs or increases in commodity prices or freight costs; 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; consolidation of health care providers; lower cost imports; uncollectible accounts receivable; difficulties in implementing/upgrading Enterprise Resource Planning systems; risks 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 increases in commodity 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.

18

Financial Statements
 
 
 
 
 

Part I.    FINANCIAL INFORMATION
Item 1.    Financial Statements.

INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Comprehensive Income (Loss) (unaudited)
 (In thousands, except per share data)
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
244,559

 
$
250,906

 
$
727,771

 
$
716,146

Cost of products sold
178,970

 
180,166

 
528,319

 
515,239

Gross Profit
65,589

 
70,740

 
199,452

 
200,907

Selling, general and administrative expenses
69,945

 
75,921

 
214,972

 
224,155

Charges related to restructuring activities
920

 
703

 
1,665

 
8,973

Operating Loss
(5,276
)
 
(5,884
)
 
(17,185
)
 
(32,221
)
Net (gain) loss on convertible debt derivatives
(4,080
)
 
2,550

 
(4,204
)
 
2,700

Interest expense
7,115

 
6,844

 
21,041

 
16,007

Interest income
(85
)
 
(137
)
 
(470
)
 
(274
)
Loss Before Income Taxes
(8,226
)
 
(15,141
)
 
(33,552
)
 
(50,654
)
Income tax provision
3,800

 
3,450

 
9,125

 
8,225

Net Loss
$
(12,026
)
 
$
(18,591
)
 
$
(42,677
)
 
$
(58,879
)
Dividends Declared per Common Share
$
0.0125

 
$
0.0125

 
$
0.0375

 
$
0.0375

Net Loss per Share—Basic
$
(0.36
)
 
$
(0.57
)
 
$
(1.29
)
 
$
(1.80
)
Weighted Average Shares Outstanding—Basic
33,232

 
32,867

 
33,104

 
32,725

Net Loss per Share—Assuming Dilution
$
(0.36
)
 
$
(0.57
)
 
$
(1.29
)
 
$
(1.80
)
Weighted Average Shares Outstanding—Assuming Dilution
33,766

 
33,372

 
33,849

 
33,086

Net Loss
$
(12,026
)
 
$
(18,591
)
 
$
(42,677
)
 
$
(58,879
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(4,294
)
 
27,439

 
(15,916
)
 
54,699

Defined Benefit Plans:
 
 
 
 
 
 
 
Amortization of prior service costs and unrecognized gains (loss)
(98
)
 
(168
)
 
145

 
(889
)
Deferred tax adjustment resulting from defined benefit plan activity
(3
)
 
21

 
(52
)
 
33

Valuation reserve (reversal) associated with defined benefit plan activity
3

 
(21
)
 
52

 
(33
)
Current period unrealized gain (loss) on cash flow hedges
437

 
(191
)
 
2,156

 
(1,467
)
Deferred tax benefit (loss) related to unrealized gain (loss) on cash flow hedges
(20
)
 
8

 
(171
)
 
113

Other Comprehensive Income (Loss)
(3,975
)
 
27,088

 
(13,786
)
 
52,456

Comprehensive Income (Loss)
$
(16,001
)
 
$
8,497

 
$
(56,463
)
 
$
(6,423
)
(Elements as a % of Net Sales)
 
 
 
 
 
 
 
Net Sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of products sold
73.2

 
71.8

 
72.6

 
71.9

Gross Profit
26.8

 
28.2

 
27.4

 
28.1

Selling, general and administrative expenses
28.6

 
30.3

 
29.5

 
31.3

Charges related to restructuring activities
0.4

 
0.3

 
0.2

 
1.3

Operating Loss
(2.2
)
 
(2.3
)
 
(2.4
)
 
(4.5
)
Net gain (loss) on convertible debt derivatives
(1.7
)
 
1.0

 
(0.6
)
 
0.4

Interest expense
2.9

 
2.7

 
2.9

 
2.2

Interest income

 
(0.1
)
 
(0.1
)
 

Loss Before Income Taxes
(3.4
)
 
(6.0
)
 
(4.6
)
 
(7.1
)
Income tax provision
1.6

 
1.4

 
1.3

 
1.1

Net Loss
(4.9
)%
 
(7.4
)%
 
(5.9
)%
 
(8.2
)%
See notes to condensed consolidated financial statements.

19

Financial Statements
 
 
 
 
 

INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
 
 
September 30,
2018
 
December 31,
2017
 
(In thousands)
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
118,268

 
$
176,528

Trade receivables, net
115,051

 
125,615

Installment receivables, net
1,736

 
1,334

Inventories, net
141,764

 
121,933

Other current assets
32,324

 
31,504

Total Current Assets
409,143

 
456,914

Other Assets
57,941

 
97,576

Intangibles
28,236

 
30,244

Property and Equipment, net
76,251

 
80,016

Goodwill
391,287

 
401,283

Total Assets
$
962,858

 
$
1,066,033

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
97,068

 
$
90,566

Accrued expenses
98,473

 
118,697

Current taxes payable
2,501

 
6,761

Short-term debt and current maturities of long-term obligations
1,581

 
2,040

Total Current Liabilities
199,623

 
218,064

Long-Term Debt
250,414

 
241,405

Other Long-Term Obligations
142,889

 
183,270

Shareholders’ Equity
 
 
 
Preferred Shares (Authorized 300 shares; none outstanding)

 

Common Shares (Authorized 100,000 shares; 37,032 and 36,532 issued and outstanding at September 30, 2018 and December 31, 2017, respectively)—no par
9,418

 
9,304

Class B Common Shares (Authorized 12,000 shares; 6 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)—no par
2

 
2

Additional paid-in-capital
296,736

 
290,125

Retained earnings
144,102

 
187,999

Accumulated other comprehensive income (loss)
23,084

 
36,870

Treasury shares (3,837 and 3,701 shares at September 30, 2018 and December 31, 2017, respectively)
(103,410
)
 
(101,006
)
Total Shareholders’ Equity
369,932

 
423,294

Total Liabilities and Shareholders’ Equity
$
962,858

 
$
1,066,033


See notes to condensed consolidated financial statements.
 

20

Financial Statements
 
 
 
 
 

INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (unaudited)
 
 
For the Nine Months Ended September 30,
 
2018
 
2017
Operating Activities
(In thousands)
Net loss
$
(42,677
)
 
$
(58,879
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
Depreciation and amortization
11,979

 
10,958

Provision for losses on trade and installment receivables
1,607

 
1,187

Benefit for deferred income taxes
(212
)
 
(806
)
Provision for other deferred liabilities
47

 
537

Provision for equity compensation
4,099

 
6,629

Loss (gain) on disposals of property and equipment
22

 
(87
)
Amortization of convertible debt discount
8,588

 
6,094

Amortization of debt fees
1,869

 
1,597

(Gain) Loss on convertible debt derivatives
(4,204
)
 
2,700

Changes in operating assets and liabilities:
 
 
 
Trade receivables
6,015

 
(3,153
)
Installment sales contracts, net
(815
)
 
(903
)
Inventories
(23,066
)
 
930

Other current assets
(1,050
)
 
2,351

Accounts payable
8,093

 
(12,491
)
Accrued expenses
(19,853
)
 
(7,775
)
Other long-term liabilities
16

 
(2,256
)
Net Cash Used by Operating Activities
(49,542
)
 
(53,367
)
Investing Activities
 
 
 
Purchases of property and equipment
(7,814
)
 
(7,389
)
Proceeds from sale of property and equipment
38

 
211

Advance payment from sale of property
3,524

 

Change in other long-term assets
(588
)
 
(239
)
Other
11

 
(85
)
Net Cash Used by Investing Activities
(4,829
)
 
(7,502
)
Financing Activities
 
 
 
Proceeds from revolving lines of credit and long-term borrowings

 
95,220

Payments on revolving lines of credit and long-term borrowings
(1,081
)
 
(15,914
)
Proceeds from exercise of stock options
2,625

 
1,761

Payment of financing costs

 
(4,711
)
Payment of dividends
(1,220
)
 
(1,200
)
Issuance of warrants

 
14,100

Purchase of treasury stock
(2,404
)
 
(1,221
)
Net Cash (Used) Provided by Financing Activities
(2,080
)
 
88,035

Effect of exchange rate changes on cash
(1,809
)
 
4,564

Increase (decrease) in cash and cash equivalents
(58,260
)
 
31,730

Cash and cash equivalents at beginning of year
176,528

 
124,234

Cash and cash equivalents at end of period
$
118,268

 
$
155,964


See notes to condensed consolidated financial statements.

21

Notes to Financial Statements
Accounting Policies
 
 
 
 


Accounting Policies


Principles of Consolidation:  The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries and include all adjustments, which were of a normal recurring nature, necessary to present fairly the financial position of the company as of September 30, 2018 and the results of its operations and changes in its cash flow for the nine months ended September 30, 2018 and 2017, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using an August 31 quarter end to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company's financial statements. All significant intercompany transactions are eliminated. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates:  The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates.

Accounts Receivable: The company records accounts receivable when control of the product or service transfers to its unaffiliated customers, risk of loss is passed and title is transferred. The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of specific customers. The company records accounts receivable reserves for amounts that may become uncollectible in the future. The company writes off accounts receivable when it becomes apparent, based upon customer circumstances, that such amounts will not be collected and when legal remedies are exhausted.

Reserves for customer bonus and cash discounts are recorded as a reduction in revenue and netted against gross accounts receivable. Customer rebates in excess of a given customer's accounts receivable balance are classified in Accrued Expenses. Customer rebates and cash discounts are estimated based on the most likely amount principle as well as historical experience and anticipated performance. In addition, customers have the right to return product within the company’s normal terms policy, and as such the company estimates the expected returns based on an analysis of historical experience and adjusts revenue accordingly.




 

Recent Accounting Pronouncements (Already Adopted): 

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which replaces numerous requirements in U.S. GAAP and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. ASU 2014-09 requires a company to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance requires five steps to be applied: 1) identify the contract(s) with customers, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligation in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures, which are more comprehensive than previous revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flow.

Effective January 1, 2018, the company adopted the new accounting standard, and all the related amendments, on a modified retrospective basis, with no cumulative effect adjustment to equity needed. Upon adoption, the standard did not have a material impact on the company's results of operations or cash flows nor does the company expect it to have a material impact on future periods. Pursuant to ASU 2014-09, revenues are recognized as control transfers to the customers, which is consistent with the prior revenue recognition model and the prior accounting for the vast majority of the company's contracts. While the company does have a minor amount of service business for which revenue is recognized over time as compared to a point in time, the company’s process to estimate the amount of revenue to be recognized did not change as a result of the implementation of the new standard.


22

Notes to Financial Statements
Accounting Policies
 
 
 
 

Recent Accounting Pronouncements (Not Yet Adopted): 

In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases on their balance sheet while recognizing expense in a manner similar to existing accounting. The new accounting guidance is effective for fiscal periods beginning after December 15, 2018 and early adoption is permitted. The company continues to assess the impact of the adoption of ASU 2016-02 on the company's financial statements. While the company has not finalized its assessment of the impact of ASU 2016-02, the company does expect the standard to have a significant impact on the company's consolidated balance sheets as the company will be required to record assets and liabilities related to its operating leases. The standard is not expected to have a material impact on the company's results of operations or cash flows.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Statements." ASU 2016-13 requires a new credit loss standard for most financial assets and certain other instruments. For example, entities will be required to use an "expected loss" model that will generally require earlier recognition of allowances for losses for trade receivables. The standard also requires additional disclosures, including disclosures regarding how an entity tracks credit quality. The amendments in the pronouncement are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities may early adopt the amendments as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The company is currently reviewing the impact of the adoption of ASU 2016-13 on the company's financial statements.























 
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The guidance in ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The company is currently reviewing the impact of the adoption of ASU 2017-04 but does not expect the adoption to impact the company's financial statements.





23

Notes to Financial Statements
Divested Businesses
 
 
 
 

Divested Businesses


Operations Held for Sale

Prior to 2018, the company had recorded expenses related to the sale of all operations held for sale totaling $2,892,000, of which $2,366,000 has been paid out as of September 30, 2018.




























 
Discontinued Operations
From 2012 through 2014, the company sold three businesses which were classified as discontinued operations. Prior to 2018, the company had recorded cumulative expenses related to the sale of discontinued operations totaling $8,801,000, of which $8,405,000 have been paid as of September 30, 2018.


24

Notes to Financial Statements
Current Assets
 
 
 
 

Current Assets


Receivables

Receivables consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Accounts receivable, gross
$
142,252

 
$
154,966

Customer rebate reserve
(17,033
)
 
(18,747
)
Allowance for doubtful accounts
(5,034
)
 
(5,113
)
Cash discount reserves
(3,925
)
 
(4,252
)
Other, principally returns and allowances reserves
(1,209
)
 
(1,239
)
Accounts receivable, net
$
115,051

 
$
125,615


Reserves for customer bonus and cash discounts are recorded as a reduction in revenue and netted against gross accounts receivable. Customer rebates in excess of a given customer's accounts receivable balance are classified in Accrued Expenses. Customer rebates and cash discounts are estimated based on the most likely amount principle as well as historical experience and anticipated performance. In addition, customers have the right to return product within the company’s normal terms policy, and as such the company estimates the expected returns based on an analysis of historical experience and adjusts revenue accordingly. The decrease in customer rebates reserve from December 31, 2017 to September 30, 2018 was the result of rebate payments, the majority of which are paid in the first quarter of each year.

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all the company’s receivables are due from health care, medical equipment providers and long-term care facilities located throughout the United States, Australia, Canada, New Zealand, China and Europe. A significant portion of products sold to providers, both foreign and domestic, are ultimately funded through government reimbursement programs such as Medicare and Medicaid in the U.S. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability.

The estimated allowance for uncollectible amounts are based primarily on management’s evaluation of the financial condition of specific customers. In addition, as a result of the company's financing arrangement with DLL, a third-party financing company which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishes reserves for specific customers as needed. The company writes off
 
uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. See Concentration of Credit Risk in the Notes to the Consolidated Financial Statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the consolidated balance sheet.

The company’s U.S. customers electing to finance their purchases can do so using DLL. In addition, the company often provides financing directly for its Canadian customers for which DLL is not an option, as DLL typically provides financing to Canadian customers only on a limited basis. The installment receivables recorded on the books of the company represent a single portfolio segment of finance receivables to the independent provider channel and long-term care customers. The portfolio segment is comprised of two classes of receivables distinguished by geography and credit quality. The U.S. installment receivables are the first class and represent installment receivables re-purchased from DLL because the customers were in default. Default with DLL is defined as a customer being delinquent by three payments. The Canadian installment receivables represent the second class of installment receivables which were originally financed by the company because third party financing was not available to the HME providers. The Canadian installment receivables are typically financed for twelve months and historically have had a very low risk of default.

The estimated allowance for uncollectible amounts and evaluation for impairment for both classes of installment receivables is based on the company’s quarterly review of the financial condition of each individual customer with the allowance for doubtful accounts adjusted accordingly. Installments are individually and not collectively reviewed for impairment. The company assesses the bad debt reserve levels based upon the status of the customer’s adherence to a legally negotiated payment schedule and the company’s ability to enforce judgments, liens, etc.

For purposes of granting or extending credit, the company utilizes a scoring model to generate a composite score that considers each customer’s consumer credit score and or D&B credit rating, payment history, security collateral and time in business. Additional analysis is performed for most customers desiring credit greater than $250,000, which generally includes a detailed review of the customer’s financial statements as well as consideration of other factors such as exposure to changing reimbursement laws.


25

Notes to Financial Statements
Current Assets
 
 
 
 

Interest income is recognized on installment receivables based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments and is moved to collection, interest income is no longer recognized. Subsequent payments received once an account is put on non-accrual status are generally first applied to the principal balance and then to the interest. Accruing of interest on collection accounts would only be restarted if the account became current again.

 
All installment accounts are accounted for using the same methodology regardless of the duration of the installment agreements. When an account is placed in collection status, the company goes through a legal process for pursuing collection of outstanding amounts, the length of which typically approximates eighteen months. Any write-offs are made after the legal process has been completed. The company has not made any changes to either its accounting policies or methodology to estimate allowances for doubtful accounts in the last twelve months.
Installment receivables consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Current
 
Long-
Term
 
Total
 
Current
 
Long-
Term
 
Total
Installment receivables
$
2,234

 
$
2,697

 
$
4,931

 
$
2,415

 
$
2,076

 
$
4,491

Less: Unearned interest
(29
)
 

 
(29
)
 
(38
)
 

 
(38
)
 
2,205

 
2,697

 
4,902

 
2,377

 
2,076

 
4,453

Allowance for doubtful accounts
(469
)
 
(2,234
)
 
(2,703
)
 
(1,043
)
 
(1,601
)
 
(2,644
)
Installment receivables, net
$
1,736

 
$
463

 
$
2,199

 
$
1,334

 
$
475

 
$
1,809


Installment receivables purchased from DLL during the nine months ended September 30, 2018 increased the gross installment receivables balance by $1,295,000. No sales of installment receivables were made by the company during the quarter.

The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):
 
Nine Months Ended September 30, 2018
 
Year Ended December 31, 2017
Balance as of beginning of period
$
2,644

 
$
2,838

Current period provision (benefit)
399

 
1,001

Direct write-offs charged against the allowance
(340
)
 
(1,195
)
Balance as of end of period
$
2,703

 
$
2,644

 
Installment receivables by class as of September 30, 2018 consist of the following (in thousands):
 
Total
Installment
Receivables
 
Unpaid
Principal
Balance
 
Related
Allowance for
Doubtful
Accounts
 
Interest
Income
Recognized
U.S.
 
 
 
 
 
 
 
Impaired installment receivables with a related allowance recorded
$
4,087

 
$
4,087

 
$
2,703

 
$

Canada
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
844

 
815

 

 
99

Impaired installment receivables with a related allowance recorded

 

 

 

Total Canadian installment receivables
844

 
815

 

 
99

Total
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
844

 
815

 

 
99

Impaired installment receivables with a related allowance recorded
4,087

 
4,087

 
2,703

 

Total installment receivables
$
4,931

 
$
4,902

 
$
2,703

 
$
99


26

Notes to Financial Statements
Current Assets
 
 
 
 

Installment receivables by class as of December 31, 2017 consist of the following (in thousands):
 
Total
Installment
Receivables
 
Unpaid
Principal
Balance
 
Related
Allowance for
Doubtful
Accounts
 
Interest
Income
Recognized
U.S.
 
 
 
 
 
 
 
Impaired installment receivables with a related allowance recorded
$
3,566

 
$
3,566

 
$
2,642

 
$

Canada
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
923

 
885

 

 
74

Impaired installment receivables with a related allowance recorded
2

 
2

 
2

 

Total Canadian installment receivables
925

 
887

 
2

 
74

Total
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
923

 
885

 

 
74

Impaired installment receivables with a related allowance recorded
3,568

 
3,568

 
2,644

 

Total installment receivables
$
4,491

 
$
4,453

 
$
2,644

 
$
74


Installment receivables with a related allowance recorded as noted in the table above represent those installment receivables on a non-accrual basis in accordance with ASU 2010-20. As of September 30, 2018, the company had no U.S. installment receivables past due of 90 days or more for which the company is still accruing interest. Individually, all U.S. installment receivables are assigned a specific allowance for doubtful accounts based on management’s review when the
 
company does not expect to receive both the contractual principal and interest payments as specified in the loan agreement. In Canada, the company had an immaterial amount of Canadian installment receivables which were past due of 90 days or more as of December 31, 2017 for which the company was still accruing interest.


The aging of the company’s installment receivables was as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Total
 
U.S.
 
Canada
 
Total
 
U.S.
 
Canada
Current
$
836

 
$

 
$
836

 
$
916

 
$

 
$
916

0-30 Days Past Due
8

 

 
8

 
6

 

 
6

31-60 Days Past Due

 

 

 

 

 

61-90 Days Past Due

 

 

 

 

 

90+ Days Past Due
4,087

 
4,087

 

 
3,569

 
3,566

 
3

 
$
4,931

 
$
4,087

 
$
844

 
$
4,491

 
$
3,566

 
$
925



27

Notes to Financial Statements
Current Assets
 
 
 
 

Inventories

Inventories consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Finished goods
$
63,899

 
$
52,773

Raw materials
67,228

 
59,497

Work in process
10,637

 
9,663

Inventories, net
$
141,764

 
$
121,933


Other Current Assets

Other current assets consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Value added tax receivables
$
15,665

 
$
16,174

Service contracts
3,145

 
2,812

Derivatives (foreign currency forward exchange contracts)
1,400

 
730

Prepaid inventory
602

 
711

Prepaid insurance
547

 
2,647

Prepaid debt fees
394

 
397

Recoverable income taxes
387

 
341

Prepaid and other current assets
10,184

 
7,692

Other Current Assets
$
32,324

 
$
31,504



28

Notes to Financial Statements
Long-Term Assets
 
 
 
 

Long-Term Assets


Other Long-Term Assets
 


Other long-term assets consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Convertible 2022 note hedge asset
$
29,399

 
$
46,680

Convertible 2021 note hedge asset
24,506

 
46,915

Cash surrender value of life insurance policies
2,011

 
1,991

Deferred financing fees
499

 
787

Long-term installment receivables
463

 
475

Long-term deferred taxes
306

 
518

Investments
90

 
103

Other
667

 
107

Other Long-Term Assets
$
57,941

 
$
97,576


The year-to-date changes in the fair values of the note hedge assets during the year were significantly impacted by the change in the company's stock price.

Property and Equipment

Property and equipment consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Machinery and equipment
$
301,791

 
$
307,244

Land, buildings and improvements
77,805

 
78,522

Leasehold improvements
9,069

 
9,947

Furniture and fixtures
10,067

 
10,264

Property and Equipment, gross
398,732

 
405,977

Less allowance for depreciation
(322,481
)
 
(325,961
)
Property and Equipment, net
$
76,251

 
$
80,016


In the third quarter of 2018, the company agreed to sell its Isny, Germany location with a net book value at the signing of the agreement of approximately $2,900,000, which is included in Land, buildings and improvements in the table above. In accordance with the agreement, title will not transfer to the buyer until April 2020; however, the company received an advance payment of $3,524,000 representing a majority of the proceeds to be received, which is reflected in the investing section of the Consolidated Statement of Cash Flows and classified in Other Long-Term Obligation in the Consolidated Balance Sheets. The company will continue to depreciate the building and expects to record a gain on the transaction when completed in 2020.

Goodwill
The change in goodwill from December 31, 2017 to September 30, 2018 was due to foreign currency translation.


29

Notes to Financial Statements
Long-Term Assets
 
 
 
 

Intangibles

The company's intangibles consist of the following (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
Historical
Cost
 
Accumulated
Amortization
 
Historical
Cost
 
Accumulated
Amortization
Customer lists
$
53,172

 
$
51,733

 
$
54,516

 
$
51,957

Trademarks
25,661

 

 
26,372

 

Developed technology
7,748

 
6,630

 
7,925

 
6,636

Patents
5,531

 
5,527

 
5,566

 
5,559

License agreements
773

 
773

 
1,187

 
1,187

Other
1,162

 
1,148

 
1,162

 
1,145

Intangibles
$
94,047

 
$
65,811

 
$
96,728

 
$
66,484


All the company’s intangible assets have been assigned definite lives and continue to be amortized over their useful lives, except for trademarks shown above, which have indefinite lives. The changes in intangible balances reflected on the balance sheet from December 31, 2017 to September 30, 2018 were the result of foreign currency translation and amortization.

The company evaluates the carrying value of definite-lived assets whenever events or circumstances indicate possible impairment. Definite-lived assets are determined to be impaired if the future un-discounted cash flows expected to be generated by the asset are less than the carrying value. Actual impairment amounts for definite-lived assets are then calculated using a discounted cash flow calculation. The company reviews indefinite-lived assets for impairment annually in the fourth quarter of each year and whenever events or circumstances indicate possible impairment. Any impairment amounts for indefinite-lived assets are calculated as the difference between the future discounted cash flows expected to be generated by the asset less than the carrying value for the asset.

















 
Amortization expense related to intangibles was $1,238,000 in the first nine months of 2018 and is estimated to be $1,640,000 in 2018, $1,279,000 in 2019, $190,000 in 2020, $190,000 in 2021, $190,000 in 2022 and $190,000 in 2023. Amortized intangibles are being amortized on a straight-line basis over remaining lives of 1 to 10 years with most of the intangibles being amortized over an average remaining life of approximately 3 years.


30

Notes to Financial Statements
Current Liabilities
 
 
 
 

Current Liabilities


Accrued Expenses

Accrued expenses consist of accruals for the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Salaries and wages
$
27,974

 
$
33,390

Taxes other than income taxes, primarily Value Added Taxes
20,037

 
22,627

Warranty
18,179

 
22,468

Professional
6,392

 
5,203

Freight
4,169

 
4,002

Interest
3,383

 
3,919

Product liability, current portion
3,172

 
2,905

Deferred revenue
3,117

 
2,770

Severance
1,326

 
3,704

Insurance
911

 
645

Rent
636

 
808

Derivative liabilities (foreign currency forward exchange contracts)
487

 
2,120

Rebates
398

 
5,831

Supplemental Executive Retirement Program liability
391

 
391

Other items, principally trade accruals
7,901

 
7,914

Accrued Expenses
$
98,473

 
$
118,697


Depending on the terms of the contract, the company may defer the recognition of a portion of the revenue at the end of a reporting period to align with the transfer of control of the company’s products to the customer. In addition, to the extent performance obligations are satisfied over time, the company defers revenue recognition until the performance obligations are satisfied.

Accrued rebates relate to several volume incentive programs the company offers its customers. The company accounts for these rebates as a reduction of revenue when the products are sold in accordance with the guidance in ASC 605-50, Customer Payments and Incentives. Rebates are netted against gross accounts receivables unless in excess of such receivables and then classified as accrued expenses. The reduction in accrued rebates from December 31, 2017 to September 30, 2018 primarily relates to payments principally made in the first quarter each year.

Generally, the company's products are covered by warranties against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. In addition, the company has sold extended warranties that, while immaterial, require the
 

company to defer the revenue associated with those warranties until earned. The company has established procedures to appropriate defer such revenue.

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 field action and recalls, which could require additional warranty reserve provision.
The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):
Balance as of January 1, 2018
$
22,468

Warranties provided during the period
5,619

Settlements made during the period
(10,312
)
Changes in liability for pre-existing warranties during the period, including expirations
404

Balance as of September 30, 2018
$
18,179


Warranty reserves are subject to adjustment in future periods as new developments change the company's estimate of the total cost.

31

Notes to Financial Statements
Long-Term Liabilities
 
 
 
 

Long-Term Debt


Debt consists of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Convertible senior notes at 5.00%, due in February 2021
$
128,208

 
$
122,355

Convertible senior notes at 4.50%, due in June 2022
93,981

 
89,675

Other notes and lease obligations
29,806

 
31,415

 
251,995

 
243,445

Less current maturities of long-term debt
(1,581
)
 
(2,040
)
Long-Term Debt
$
250,414

 
$