Company Quick10K Filing
Quick10K
Invacare
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.89 34 $233
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
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
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-02 Exit Costs, Regulation FD, Exhibits
8-K 2019-06-19 Regulation FD
8-K 2019-05-16 Officers, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-04-12 Regulation FD, Exhibits
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
AMP Ameriprise Financial 19,130
ESRT Empire State Realty Trust 4,690
COHR Coherent 3,300
BRKS Brooks Automation 2,770
CLS Celestica 835
HT Hersha Hospitality Trust 732
ZIXI Zix 590
GVP GSE Systems 51
BKEP Blueknight Energy Partners 47
PLRM Pilgrim Bancshares 0
IVC 2019-03-31
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 q12019ivcex311.htm
EX-31.2 q12019ivcex312.htm
EX-32.1 q12019ivcex321.htm
EX-32.2 q12019ivcex322.htm

Invacare Earnings 2019-03-31

IVC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q12019ivc10-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 March 31, 2019
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)

flatlogofinala29.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
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Shares, without par value
IVC
New York Stock Exchange
As of May 2, 2019, the registrant had 33,758,629 Common Shares and 6,357 Class B Common Shares outstanding.

 
 
 
 
 




flatlogofinala28.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 March 31, 2019 and December 31, 2018, and in the condensed consolidated statement of comprehensive income (loss) for the three months ended March 31, 2019 and March 31, 2018. All comparisons presented are with respect to the same period last year, unless otherwise stated. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A included in the company's Annual Report on Form 10-K for the year ended December 31, 2018 and for some matters, SEC filings from prior periods may be useful sources of information.







 

In the first quarter of 2019, the company reassessed the alignment of its reporting segments and concluded that the North America/Home Medical Equipment (NA/HME) and Institutional Products Group (IPG) segments should be combined into a single operating segment, now referred to as North America. This change better reflects how the company manages, allocates resources and assesses performance of the businesses contained in the new North America segment. Additionally, the company reassessed the activity of the businesses in its former Asia/Pacific segment and concluded that the Asia Pacific businesses should now be reported as part of the All Other segment, since those businesses, individually and collectively, are not large enough relative to the company's overall business to merit disclosure as a separate reporting segment. The company expects that these changes will provide improved transparency of the company’s business results to its shareholders, and better align with how the company manages its businesses. Segment results for the first quarter of 2018 have been reclassified to reflect the realignment of the company’s reporting segments and be comparable to the segment results for the first quarter of 2019.
OVERVIEW


Invacare is a multi-national company with integrated capabilities to design, manufacture and distribute durable medical devices. The company makes products that help people move, breathe, rest and perform essential hygiene, and with those products the company supports people with congenital, acquired and degenerative conditions. The company's products and solutions are important parts of care for people with a range of challenges, from those who are active and involved in work or school each day and may need additional mobility or respiratory support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company operates in facilities in North America, Europe and Asia Pacific, which are the result of dozens of acquisitions made over the company's nearly forty-year history. Some of these acquisitions have been combined into integrated operating units, while others remain relatively independent.

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 has not kept pace with certain reimbursement changes, competitive dynamics and company-specific challenges. Since 2015, the company has made a major shift in its strategy. The company has since been aligning its resources to produce products and solutions that assist customers and end-users with their most clinically complex needs. By focusing the company's efforts to provide the best possible assistance and outcomes to the people and caregivers who use its
 
products, the company aims to improve its financial condition for sustainable profit and growth. To execute this transformation, the company is undertaking a substantial three-phase multi-year transformation plan.

Transformation
The company is executing a multi-year transformation to shift to its new strategy. This is expected to yield better financial results from the application of the company's resources to products and solutions that provide greater healthcare value in clinically complex rehabilitation and post-acute care. The transformation is divided into the following three phases:

Phase One - Assess and Reorient
Increase commercial effectiveness;
Shift and narrow the product portfolio;
Focus innovation on clinically complex solutions;
Accelerate quality efforts on quality excellence; and
Develop and expand talent.

Phase Two - Build and Align
Leverage commercial improvements;
Optimize the business for cost and efficiency;
Continue to improve quality systems;

1

MD&A
Overview
 
 
 
 

Launch new clinical product platforms; and
Expand talent management and culture.

Phase Three - Grow
Lead in quality culture and operations excellence; and
Grow above market.
The company's transformation and growth plan balances innovative organic growth, product portfolio changes across all regions, and cost improvements in supply chain and administrative functions. The company has engaged third-party experts to help assess, plan and support the execution of improvement opportunities, in an effort to ensure the best plans are adopted across the entire enterprise.
Key elements of the enhanced transformation and growth plan:
Re-evaluate all business segments and product lines for the potential to be profitable and to achieve a leading market position given evolving market dynamics;
In Europe, leverage centralized innovation and supply chain capabilities while reducing the cost and complexity of a legacy infrastructure;
In North America, adjust the portfolio to support consistent profitable growth, drive faster innovation, and redesign business processes to lower cost and improve customers' experience;
In Asia Pacific, remain focused on sustainable growth and expansion in the southeast Asia region; and
Globally, take actions to reduce working capital and improve free cash flow.

The company will continue to make significant investments in its transformation, reduce sales in certain areas, refocus resources away from less accretive activities, and look at its global infrastructure for opportunities to drive efficiency.

Favorable Long-term Demand

Ultimately, demand for the company's products and services is based on the need to provide care for people with certain conditions. The company's medical devices provide solutions for end-users and caregivers. Therefore, the demand for the company's medical equipment is largely driven by population growth and the incidence of certain conditions where treatment may be supplemented by the company's devices. The company also provides solutions to help equipment providers and residential care operators deliver cost-effective and high-quality care. The company believes that its commercial team, customer relationships, products and solutions, supply chain infrastructure,
 
and strong research and development pipeline will create favorable business potential.

OUTLOOK

The company continues to expect to achieve the earnings and free cash flow usage targets announced for 2019 and into 2020 with a combination of low single-digit sales growth, gross margin improvements and substantial cost reductions. Certain product lines may be discontinued to focus investment on higher margin profitable areas of growth. The company participates in growing markets and believes its long-term economic potential remains strong.

For 2019, the company anticipates net sales growth in Europe and North America mobility and seating products, which is anticipated to be offset by year-over-year reduction in respiratory sales in North America impacted by market uncertainty due to recently implemented reimbursement changes. In addition, the company anticipates margin expansion as a result of cost improvement actions. These actions should contribute to improved earnings in 2019.

The company anticipates an improvement in free cash flow usage for 2019 as compared to 2018 driven by improvements in segment operating loss compared to 2018, and the benefit of converting the higher inventory levels at end of 2018 to cash in 2019. It further assumes that these benefits will be partially offset by increased working capital to support growth, especially in North America mobility and seating products with an extended quote-to-cash cycle, higher capital expenditures, and cash needed to fund restructuring actions. The company has historically generated negative free cash flow during the first half of the year. This pattern is expected to continue due to the timing of annual one-time payments such as customer rebates and employee bonuses earned during the prior year, and higher working capital usage from seasonal inventory increases. The absence of these payments and somewhat seasonally stronger sales in the second half of the year typically result in more favorable free cash flow in the second half of the year. The company expects capital expenditures of approximately $15,000,000 to $20,000,000 in 2019.

Furthermore, the company believes that a return to positive Adjusted EBITDA driven by operational performance and its balance sheet will support the company's transformation plans and enable the company to address future debt maturities.

2

MD&A
Net Sales
 
 
 
 

RESULTS OF OPERATION - NET SALES



The company operates in two primary business segments: North America and Europe with each selling the company's primary product categories, which include: lifestyle, mobility and seating and respiratory therapy products. Sales in Asia Pacific are reported in All Other and include products similar to those sold in North America and Europe.
($ in thousands USD)
1Q19*
1Q18
Reported % Change
Foreign Exchange % Impact
Constant Currency % Change
Europe
124,844

131,314

(4.9
)
(6.8
)
1.9

North America
86,244

94,669

(8.9
)
(0.4
)
(8.5
)
All Other (Asia Pacific)
12,331

11,077

11.3

(8.6
)
19.9

Consolidated
223,419

237,060

(5.8
)
(4.4
)
(1.4
)
 
 
 
 
 
 
 
 
 
 
 
 
*Date format is quarter and year in each instance.

The table above provides net sales change as reported and as adjusted to exclude the impact of foreign exchange translation (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 1.9% in 1Q19 compared to 1Q18 driven by increases in mobility and seating and lifestyle sales partially offset by decrease sales of respiratory products.
North America - Constant currency net sales for 1Q19 decreased 8.5% compared to 1Q18. While mobility and seating sales increased slightly, respiratory product sales weighed on the segment as net sales declined $7.6 million for 1Q19 compared to 1Q18, impacted by reimbursement changes by CMS, as anticipated.
All Other - Constant currency net sales, which relate entirely to the Asia Pacific region, increased 19.9% for 1Q19 compared to 1Q18 driven by increases in all product categories, including particularly strong growth in mobility and seating products.

3

MD&A
Net Sales
 
 
 
 

The following tables provide net sales at reported rates for
1Q19 and 4Q18 and net sales for 1Q19 and 4Q18, 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).
 
1Q19 at Reported Foreign Exchange Rates
 
Foreign Exchange Translation Impact
 
1Q19 at
1Q18 Foreign Exchange Rates
 
4Q18 at 1Q18 Foreign Exchange Rates
 
Sequential Growth $
 
Sequential Growth %
Europe
$
124,844

 
$
8,788

 
$
133,632

 
$
152,482

 
$
(18,850
)
 
(12.4
)%
North America
86,244

 
407

 
86,651

 
87,856

 
(1,205
)
 
(1.4
)
All Other (Asia Pacific)
12,331

 
943

 
13,274

 
14,215

 
(941
)
 
(6.6
)
Consolidated
$
223,419

 
$
10,138

 
$
233,557

 
$
254,553

 
$
(20,996
)
 
(8.2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
4Q18 at Reported Foreign Exchange Rates
 
Foreign Exchange Translation Impact
 
4Q18 at
1Q18 Foreign Exchange Rates
Europe
$
143,969

 
$
8,513

 
$
152,482

North America
87,506

 
350

 
87,856

All Other (Asia Pacific)
13,101

 
1,114

 
14,215

Consolidated
$
244,576

 
$
9,977

 
$
254,553

 
 
 
 
 
 
chart-81727b3df5d4565ca46.jpg
The net sales amounts in the preceding table are converted at 1Q18 foreign exchange rates so that the sequential change in net sales can be shown, excluding the impact of changes in foreign currency exchange rates. The sequential change from 4Q18 to 1Q19 reflects the historical trend in which the company's
 
sales are generally stronger in the second half of the year. As such, the sequential sales metric is not an indication of progress of sales growth in first quarter of the year versus the fourth quarter of the preceding year.

4

MD&A
Net Sales
 
 
 
 

chart-d83ac273a8825dbb996.jpg
Net sales of mobility and seating products, which comprise most of the company's clinically complex product portfolio, increased to 40.3% from 37.9% for constant currency net sales by product for 1Q19 compared to 1Q18.


 
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.




5

MD&A
Gross Profit
 
 
 
 


GROSS PROFIT

chart-9679be3483785f4597f.jpg
Gross profit dollars for 1Q19 decreased compared to 1Q18 principally due to reduced net sales. Gross profit as a percentage of net sales was lower by 60 basis points compared to 1Q18 driven primarily by unfavorable sales mix and unfavorable foreign exchange in Europe. The company was able to significantly mitigate the direct and indirect negative impact of tariffs instituted in second half of 2018. In 1Q19, increased costs influenced by the tariffs were $400,000 in the North America segment.
 
Gross profit and gross margin drivers by segment:
Europe - Gross margin as a percentage of net sales for 1Q19 decreased one percentage point, while gross profit dollars decreased $3,318,000, compared to 1Q18. The decrease in gross profit dollars was driven primarily by unfavorable sales mix and unfavorable foreign exchange, both translation and transaction.
North America - Gross margin as a percentage of net sales for 1Q19 increased 1.2 percentage points, while gross profit dollars decreased $991,000, compared to 1Q18. The decrease in gross profit dollars was primarily due to lower sales volumes partially offset by favorable product mix and reduced warranty expense.
All Other - Gross margin, which primarily relates to the company's Asia Pacific businesses, decreased 2.8 percentage points, as a percentage of net sales, and gross profit dollars decreased $753,000, compared to 1Q18. The decrease in gross profit dollars was primarily due to higher warranty expense.
 
chart-f2dba8d42dff5e83938.jpg
Sequential gross profit as a percentage of net sales decreased by 0.4 of a percentage point comparing 4Q18 to 1Q19 driven by increased warranty and R&D expense.
chart-9f56197b247358ad88a.jpg
Sequential quarterly gross profit dollars decreased $6,769,000. The decrease in gross profit dollars was primarily attributable to margin impact from reduced net sales.

6

MD&A
SG&A
 
 
 
 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

($ in thousands USD)
1Q19
1Q18
Reported Change
Foreign Exchange Impact
Constant Currency Change
SG&A Expenses - $
65,241

71,264

(6,023
)
2,283

(3,740
)
SG&A Expenses - % change
 
 
(8.5
)
(3.3
)
(5.2
)
% to net sales
29.2

30.1

 
 
 

 
 
 
 
 
 
SG&A expense excluding the impact of foreign currency translation, which is referred to as "constant currency SG&A", decreased for 1Q19 compared to 1Q18 primarily due to reduced employment costs.

The reduction in SG&A expense was primarily driven by cost reduction actions implemented in 2018.

SG&A expense drivers by segment:

Europe - SG&A expenses for 1Q19 decreased $2,505,000 or 7.8% compared to 1Q18 with foreign currency translation decreasing SG&A expenses by approximately $1,873,000, or 5.8%. Constant currency SG&A expenses decreased $632,000, or 2.0%. The decreased expense was primarily attributable to lower employment costs partially offset by unfavorable foreign currency transactions.

North America - SG&A expenses for 1Q19 decreased 10.6%, or $3,153,000, compared to 1Q18 with foreign currency translation decreasing SG&A expenses by approximately $144,000. Constant currency SG&A expenses decreased $3,009,000, or 10.1% driven primarily by decreased employment and consulting costs.



















 


All Other - SG&A expenses decreased by $365,000 with foreign currency translation decreasing SG&A expenses by $266,000. All Other includes SG&A related to the Asia Pacific businesses and non-allocated corporate costs. Related to the Asia Pacific businesses, 1Q19 SG&A decreased 6.8%, or $256,000, compared to 1Q18 with foreign currency translation decreasing SG&A expenses $266,000, or 7.0%. Constant currency SG&A expenses increased slightly as a result of unfavorable foreign currency transactions partially offset by lower employment costs. SG&A expenses, related to non-allocated corporate costs, for 1Q19 decreased 2.0%, or $109,000, compared to 1Q18. The slight decrease was driven primarily by decreased employment costs including stock compensation expense principally offset by higher consulting costs.

7

MD&A
Operating Income (Loss)
 
 
 
 

OPERATING INCOME (LOSS)

($ in thousands USD)
1Q19
1Q18
$ Change
% Change
Europe
5,782

6,594

(812
)
(12.3
)
North America
(4,379
)
(6,540
)
2,161

33.0

All Other
(5,189
)
(4,801
)
(388
)
(8.1
)
Charges related to restructuring
(692
)
(401
)
(291
)
(72.6
)
Consolidated Operating Loss
(4,478
)
(5,148
)
670

13.0

 
 
 
 
 

For 1Q19, consolidated operating loss improved due to reduced SG&A, driven by lower employment costs, offset by reduced gross profit.

Operating income (loss) by segment:
Europe - Operating income for 1Q19 decreased compared to 1Q18 principally due to unfavorable sales mix and unfavorable foreign exchange partially offset by lower SG&A expenses driven primarily by lower employment costs, including the benefit from reduction in force actions implemented late last year.

North America - Operating loss for 1Q19 decreased compared to 1Q18 primarily due to improved gross margin and reduced SG&A expense, due largely to lower employment costs. Both gross margin and SG&A benefited from cost reductions. Gross margin improved despite the negative impact of tariffs and related material cost increases of approximately $0.4 million in 1Q19.

All Other - Operating loss for 1Q19 increased driven by a decrease in operating profit in the Asia Pacific businesses principally as a result of higher warranty expense, which was partially offset by reduced non-allocated corporate SG&A costs.



















 

Charge Related to Restructuring Activities
Restructuring charges totaled $692,000 in the first quarter 2019 principally related to severance costs. Restructuring charges were incurred in the Europe ($320,000) and North America ($553,000) segments partially offset by a charge reversal in the Other segment ($181,000).

Restructuring charges totaled $401,000 in the first quarter 2018 related to severance costs in Europe ($293,000), North America ($97,000) and Other ($11,000) segments.

8

MD&A
Other Items
 
 
 
 

OTHER ITEMS


Net Gain (Loss) on Convertible Debt Derivatives
($ in thousands USD)
Change in Fair Value - Gain (Loss)
 
1Q19
1Q18
Convertible Note Hedge Assets
15,126

4,286

Convertible Debt Conversion Liabilities
(15,399
)
(4,183
)
Net Gain (Loss) on Convertible Debt Derivatives
(273
)
103

 
 
 
The company recognized a net loss of $273,000 in 1Q19 and compared to a net gain of $103,000 in 1Q18 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)
1Q19
1Q18
$ Change
% Change
Interest Expense
7,314

6,962

352

5.1

Interest Income
(129
)
(249
)
120

(48.2
)
 
 
 
 
 
The increase in interest expense for 1Q19 compared to the same periods last year was primarily related to interest associated with leases.























 

Income Taxes

The company had an effective tax rate of 16.3% and 20.0% on losses before tax from continuing operations for the three months ended March 31, 2019 and 2018 compared to an expected benefit of 21.0% on the continuing operations pre-tax loss for each period. The company's effective tax rate for 1Q19 and 1Q18 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 1Q19 and 1Q18 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.







9

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)
March 31, 2019
December 31, 2018
$ Change
% Change
Cash and cash equivalents
91,926

116,907

(24,981
)
(21.4
)
Working capital (1)
185,692

199,202

(13,510
)
(6.8
)
Total debt (2)
323,576

299,912

23,664

7.9

Long-term debt (2)
313,145

297,802

15,343

5.2

Total shareholders' equity
350,542

359,147

(8,605
)
(2.4
)
Credit agreement borrowing availability (3)
29,585

33,362

(3,777
)
(11.3
)
(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 as well as long term lease obligations for both operating and financing leases.
(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 $91,926,000 and $116,907,000 at March 31, 2019 and December 31, 2018, respectively. The decrease in cash was the result of normal operations and continued investment in our transformation strategy.

Debt repayments, acquisitions, divestitures, the timing of vendor payments, the timing of customer rebate payments, the granting of extended payment terms to significant national accounts and other activity can have a significant impact on the company's cash flow and borrowings outstanding such that the cash reported at the end of a given period may be materially different than cash levels during a given period. While the company has cash balances in various jurisdictions around the world, there are no material restrictions regarding the use of such cash for dividends within the company, loans or other purposes, except in China where the cash balance, as of March 31, 2019, was $577,000. The company continues the process of eliminating its operations there, which until completed, restricts access to certain cash balances.

The company's total debt outstanding, inclusive of the debt discount related to debentures included in equity as well as the debt discount and fees associated with the company's Convertible Senior Notes due 2021 and 2022, increased by $23,664,000 to $323,576,000 at March 31, 2019 from $299,912,000 as of December 31, 2018. As a result of implementing ASU 2016-02, "Leases" as of January 1, 2019, the company recorded operating lease liabilities which totaled $23,667,000 as of March 31, 2019. See "Long-Term Debt" and "Leases and Commitments" in the Notes to Condensed Consolidated Financial Statements for more details regarding the company's convertible notes and credit facilities and lease liabilities, respectively.


 

Based on the company's current expectations, the company believes that its cash balances and available borrowing capacity under its credit facilities should be sufficient to meet working capital needs, capital requirements, and commitments for at least
the next twelve months. Notwithstanding the company's expectations, if the company's operating results decrease as the result of pressures on the business due to, for example, currency fluctuations or regulatory issues or the company's failure to execute its business plans or if the company's transformation takes longer than expected, the company may require additional financing, or may be unable to comply with its obligations under the credit facilities, and its lenders could demand repayment of any amounts outstanding under the company's credit facilities.

The company also has an agreement with De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide lease financing to the company's U.S. customers. Either party could terminate this agreement with 180 days' notice or 90 days' notice by DLL upon the occurrence of certain events. Should this agreement be terminated, the company's borrowing needs under its credit facilities could increase.

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 months ended March 31, 2019 and for the year ended December 31, 2018.

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

10

MD&A
Liquidity and Capital Resources
 
 
 
 

CAPITAL EXPENDITURES

The company estimates that capital investments for 2019 could approximate between $15,000,000 and $20,000,000, compared to actual capital expenditures of $9,823,000 in 2018. The anticipated increase relates primarily to the company's investments to transform the company. The company believes that its balances of cash and cash equivalents and existing borrowing facilities will be sufficient to meet its operating cash requirements and fund required capital expenditures (see "Liquidity and Capital Resources"). The Credit Agreement limits the company's annual capital expenditures to $35,000,000. As of March 31, 2019, the company has no material capital expenditure commitments outstanding.










































 
DIVIDEND POLICY

On February 21, 2019, the company's Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share to shareholders of record as of April 4, 2019, which was paid on April 18, 2019. The Board of Directors has suspended the company’s regular quarterly dividend on the Class B Common Shares. Fewer than 7,000 Class B Common Shares remain outstanding and suspending the regular Class B dividend allows the company to save on the administrative costs and compliance expenses associated with that dividend. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis and would be eligible for any Common Share dividends declared following any such conversion.

11

MD&A
Cash Flows
 
 
 
 

CASH FLOWS

chart-a51d1d5414d05cfb9a4.jpg
The cash used by operating activities for the three months ended March 31, 2019 was driven by a net loss, decreased accrued expenses and increased inventory partially offset by reduced receivables and accounts payable. The decrease in cash used by operating activities in the first three months of 2019 compared to the same period last year was principally driven by a reduced net loss.
chart-b1b54376319e5f99ac6.jpg
The decrease in cash flows used by investing activities for the first three months of 2018 as compared to the same period last year was primarily related decreased purchases of property and equipment.
 
chart-4503c77ffda65aa7ac9.jpg
Cash flows used by financing activities in the first three months of 2019 and 2018 are primarily attributable to dividends and payments on capital leases.

12

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)
1Q19
1Q18
Net cash used by operating activities
(22,588
)
(24,651
)
Plus: Sales of property and equipment
20

10

Less: Purchases of property and equipment
(1,812
)
(2,065
)
Free Cash Flow
(24,380
)
(26,706
)
 
 
Free cash flow for the first three months 2019 and 2018 was negatively impacted by the same items that affected cash flows used by operating activities. Free cash flow is a non-GAAP financial measure that is comprised of net cash used by operating activities plus purchases of property and equipment less proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.).
 
Generally, the first half of the year is cash consumptive and impacted by significant disbursements related to annual customer rebate payments which normally occur in the first quarter of the year and, to lesser extent, into the second quarter of the year. In addition, the second quarter of the year represents the period annual employee bonuses are paid, if earned. Investment in inventory is historically heavy in the first half of the year with planning around the company's supply chain to fulfill shipments in the second half of the year and can be impacted by footprint rationalization projects. As a result, historically, the company realizes stronger cash flow in the second half of the year versus the first half of the year. On that basis and considering anticipated increased working capital investment, the company anticipates its cash flow seasonality for 2019 will be similar to 2018, with full year 2019 cash flow usage estimated to be at or below approximately $25 million.

The company's approximate cash conversion days at March 31, 2019, December 31, 2018 and March 31, 2018 are as follows:
chart-13f3e5ccf73f5f7f994.jpg
The decrease in current days in receivables compared to prior periods was driven by lower receivables in the quarter ended March 31, 2019 compared to the prior periods shown. The days in inventory increased from December 31, 2018 as historically the company invests in inventory in the first half of the 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.

13

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, 2018 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 the contract are recognized as expense. Shipping and handling costs are included in cost of products sold.


14

MD&A
Accounting Estimates and Pronouncements
 
 
 
 

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.


15

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; regulatory proceedings or the company's failure to comply with regulatory requirements or receive regulatory clearance or approval for the company's products or operations in the United States or abroad; adverse effects of regulatory or governmental inspections of company facilities at any time and governmental enforcement actions; including the investigation of pricing practices at one of the company's former rentals businesses; circumstances or developments that may make the company unable to implement or realize the anticipated benefits, or that may increase the costs, of its current business initiatives, including its enhanced transformation and growth plan; possible adverse effects on the company's liquidity that may result from delays in the implementation or realization of benefits of its current business initiatives, or from any requirement to settle repurchase rights or 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; potential impacts of the United States administration's policies, and any legislation or regulations that may result from those policies, and of new United States tax laws, rules, regulations or policies; legal actions, including adverse judgments or settlements of litigation or claims in excess of available insurance limits; adverse changes in government and other third-party payor reimbursement levels and practices both in the U.S. and in other countries (such as, for example, more extensive pre-payment reviews and post-payment audits by payors, or the continuing impact of the U.S. Medicare National Competitive Bidding program); ineffective cost reduction and restructuring efforts or inability to realize anticipated cost savings or achieve desired efficiencies from such efforts; delays, disruptions or excessive costs incurred in facility closures or
 
consolidations; tax rate fluctuations; additional tax expense or additional tax exposures, which could affect the company's future profitability and cash flow; inability to design, manufacture, distribute and achieve market acceptance of new products with greater functionality or new product platforms that deliver the anticipated benefits at competitive prices; consolidation of health care providers; increasing pricing pressures in the markets for the company's products; lower cost imports; uncollectible accounts receivable; difficulties in implementing/upgrading Enterprise Resource Planning systems; risk of cybersecurity attack, data breach or data loss and/or delays in or inability to recover or restore data and IT systems; risks inherent in managing and operating businesses in many different foreign jurisdictions; decreased availability or increased costs of materials which could increase the company's costs of producing or acquiring the company's products, including the adverse impacts of new tariffs and possible increases in 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.

16

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 March 31,
 
2019
 
2018
Net sales
$
223,419

 
$
237,060

Cost of products sold
161,964

 
170,543

Gross Profit
61,455

 
66,517

Selling, general and administrative expenses
65,241

 
71,264

Charges related to restructuring activities
692

 
401

Operating Loss
(4,478
)
 
(5,148
)
Net (gain) loss on convertible debt derivatives
273

 
(103
)
Interest expense
7,314

 
6,962

Interest income
(129
)
 
(249
)
Loss Before Income Taxes
(11,936
)
 
(11,758
)
Income tax provision
1,950

 
2,350

Net Loss
$
(13,886
)
 
$
(14,108
)
Dividends Declared per Common Share
$
0.0125

 
$
0.0125

Net Loss per Share—Basic
$
(0.42
)
 
$
(0.43
)
Weighted Average Shares Outstanding—Basic
33,304

 
32,911

Net Loss per Share—Assuming Dilution
$
(0.42
)
 
$
(0.43
)
Weighted Average Shares Outstanding—Assuming Dilution
33,317

 
33,799

Net Loss
$
(13,886
)
 
$
(14,108
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
5,102

 
11,816

Defined Benefit Plans:
 
 
 
Amortization of prior service costs and unrecognized gains (loss)
26

 
(47
)
Deferred tax adjustment resulting from defined benefit plan activity
(6
)
 
(82
)
Valuation reserve associated with defined benefit plan activity
6

 
82

Current period loss on cash flow hedges
(509
)
 
(247
)
Deferred tax benefit related to loss on cash flow hedges
21

 
110

Other Comprehensive Income
4,640

 
11,632

Comprehensive Loss
$
(9,246
)
 
$
(2,476
)
(Elements as a % of Net Sales)
 
 
 
Net Sales
100.0
 %
 
100.0
 %
Cost of products sold
72.5

 
71.9

Gross Profit
27.5

 
28.1

Selling, general and administrative expenses
29.2

 
30.1

Charges related to restructuring activities
0.3

 
0.2

Operating Loss
(2.0
)
 
(2.2
)
Net loss on convertible debt derivatives
0.1

 

Interest expense
3.3

 
2.9

Interest income
(0.1
)
 
(0.1
)
Loss Before Income Taxes
(5.3
)
 
(5.0
)
Income tax provision
0.9

 
1.0

Net Loss
(6.2
)%
 
(6.0
)%
See notes to condensed consolidated financial statements.

17

Financial Statements
 
 
 
 
 

INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
 
March 31,
2019
 
December 31,
2018
 
(In thousands)
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
91,926

 
$
116,907

Trade receivables, net
117,188

 
119,743

Installment receivables, net
1,502

 
1,574

Inventories, net
130,437

 
128,123

Other current assets
35,560

 
31,063

Total Current Assets
376,613

 
397,410

Other Assets
21,294

 
6,360

Intangibles
26,407

 
26,506

Property and Equipment, net
45,260

 
45,984

Financing Lease Assets, net
27,995

 
28,322

Operating Lease Assets, net
23,420

 

Goodwill
384,157

 
381,273

Total Assets
$
905,146

 
$
885,855

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
88,149

 
$
92,469

Accrued expenses
90,263

 
99,867

Current taxes payable
2,078

 
3,762

Current portion of financing lease obligations
2,280

 
2,110

Current portion of operating lease obligations
8,151

 

Total Current Liabilities
190,921

 
198,208

Long-Term Debt
229,356

 
225,733

Finance Lease Long-term Obligations
27,629

 
27,802

Operating Leases Long-term Obligations
15,516

 

Other Long-Term Obligations
91,182

 
74,965

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

 

Common Shares (Authorized 100,000 shares; 37,661 and 37,010 issued and outstanding at March 31, 2019 and December 31, 2018, respectively)—no par
9,588

 
9,419

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
299,180

 
297,919

Retained earnings
128,153

 
142,447

Accumulated other comprehensive income (loss)
17,433

 
12,793

Treasury shares (3,879 and 3,841 shares at March 31, 2019 and December 31, 2018, respectively)
(103,814
)
 
(103,433
)
Total Shareholders’ Equity
350,542

 
359,147

Total Liabilities and Shareholders’ Equity
$
905,146

 
$
885,855

See notes to condensed consolidated financial statements.

18

Financial Statements
 
 
 
 
 

INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (unaudited)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
Operating Activities
(In thousands)
Net loss
$
(13,886
)
 
$
(14,108
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
Depreciation and amortization
3,898

 
4,111

Amortization operating lease right of use assets
2,172

 

Provision for losses on trade and installment receivables
185

 
201

Provision (benefit) for deferred income taxes
329

 
(3
)
Provision (benefit) for other deferred liabilities
234

 
(66
)
Provision for equity compensation
1,430

 
1,766

Loss on disposals of property and equipment
54

 
35

Amortization of convertible debt discount
3,099

 
2,786

Amortization of debt fees
615

 
620

Loss (Gain) on convertible debt derivatives
273

 
(103
)
Changes in operating assets and liabilities:
 
 
 
Trade receivables
3,535

 
(930
)
Installment sales contracts, net
13

 
141

Inventories
(1,588
)
 
(8,713
)
Other current assets
(3,957
)
 
(1,653
)
Accounts payable
(4,683
)
 
2,759

Accrued expenses
(12,794
)
 
(11,509
)
Other long-term liabilities
(1,517
)
 
15

Net Cash Used by Operating Activities
(22,588
)
 
(24,651
)
Investing Activities
 
 
 
Purchases of property and equipment
(1,812
)
 
(2,065
)
Proceeds from sale of property and equipment
20

 
10

Change in other long-term assets
(20
)
 
(228
)
Net Cash Used by Investing Activities
(1,812
)
 
(2,283
)
Financing Activities
 
 
 
Payments on revolving lines of credit, long-term borrowings and capital leases
(866
)
 
(393
)
Proceeds from exercise of stock options

 
1,410

Payment of dividends
(408
)
 
(403
)
Purchase of treasury stock
(381
)
 
(920
)
Net Cash Used by Financing Activities
(1,655
)
 
(306
)
Effect of exchange rate changes on cash
1,074

 
1,330

Decrease in cash and cash equivalents
(24,981
)
 
(25,910
)
Cash and cash equivalents at beginning of year
116,907

 
176,528

Cash and cash equivalents at end of period
$
91,926

 
$
150,618

See notes to condensed consolidated financial statements.

19

Financial Statements
 
 
 
 
 

INVACARE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(In thousands)
Common
Stock
 
Class B
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehen-sive
Earnings
 
Treasury
Stock
 
Total
January 1, 2018 Balance
$
9,304

 
$
2

 
$
290,125

 
$
187,999

 
$
36,870

 
$
(101,006
)
 
$
423,294

Exercise of stock options
26

 

 
1,385

 

 

 
(920
)
 
491

Performance awards

 

 
631

 

 

 

 
631

Non-qualified stock options

 

 
227

 

 

 

 
227

Restricted stock awards
65

 

 
843

 

 

 

 
908

Net loss

 

 

 
(14,108
)
 

 

 
(14,108
)
Foreign currency translation adjustments

 

 

 

 
11,816

 

 
11,816

Unrealized loss on cash flow hedges

 

 

 

 
(137
)
 

 
(137
)
Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits

 

 

 

 
(47
)
 

 
(47
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(2,476
)
Dividends

 

 

 
(403
)
 

 

 
(403
)
March 31, 2018 Balance
9,395

 
2

 
293,211

 
173,488

 
48,502

 
(101,926
)
 
422,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2019 Balance
9,419

 
2

 
297,919

 
142,447

 
12,793

 
(103,433
)
 
359,147

Performance awards
29

 

 
436

 

 

 
(348
)
 
117

Non-qualified stock options

 

 
124

 

 

 

 
124

Restricted stock awards
140

 

 
701

 

 

 
(33
)
 
808

Net loss

 

 

 
(13,886
)
 

 

 
(13,886
)
Foreign currency translation adjustments

 

 

 

 
5,102

 

 
5,102

Unrealized loss on cash flow hedges

 

 

 

 
(488
)
 

 
(488
)
Defined benefit plans: Amortization of prior service costs and unrecognized losses and credits

 

 

 

 
26

 

 
26

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(9,246
)
Dividends

 

 

 
(408
)
 

 

 
(408
)
March 31, 2019 Balance
$
9,588

 
$
2

 
$
299,180

 
$
128,153

 
$
17,433

 
$
(103,814
)
 
$
350,542

See notes to condensed consolidated financial statements.

20

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 March 31, 2019 and the results of its operations and changes in its cash flow for the three months ended March 31, 2019 and 2018, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using a February 28 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 months ended March 31, 2019 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.

Recent Accounting Pronouncements (Already 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 was effective for fiscal periods beginning after December 15, 2018 and early adoption was permitted. The company adopted ASU 2016-02, effective on January 1, 2019, using the optional transitional method in which periods prior to 2019 were not restated. The company elected to apply the package of practical expedients in which lease identification, classification and treatment of initial direct costs is retained, and will recognize right of use lease assets and liabilities for all leases regardless of lease term. The company has completed an assessment of its systems, data and processes related to implementing this standard and completed its information system design and solution development as well as the development of related internal controls. As a result of adoption of this standard, the company recorded $23,420,000 in operating lease right of use assets offset by lease liabilities on the company's consolidated balance sheets. The standard did not have a material impact on the company's results of operations or cash flows.





 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income,” which allows reclassification of certain tax effects created as a result of changing methodologies, laws and tax rates legislated in the Tax Cuts and Jobs Act of 2017 (the Act). This new standard allows for stranded income tax effects resulting from the Act to be reclassified into retained earnings to allow for their tax effect to reflect the appropriate tax rate.  Due to the full valuation allowance on our U.S. net deferred tax assets, a reclassification of stranded tax effects to retained earnings was not required.

Reclassifications: Finance lease assets and related long-term liabilities have been reclassified from Property and Equipment, net and Long-Term Debt, respectively, to Finance Lease Assets, net and Long-term Obligations - Financing Leases, respectively, in the Consolidated Balance Sheets as of December 31, 2018 to conform with the presentation for 2019.

In the first quarter of 2019, the company reassessed the alignment of its reporting segments and concluded that the North America/Home Medical Equipment (NA/HME) and Institutional Products Group (IPG) segments should be combined into a single operating segment, now referred to as North America. This change better reflects how the company manages, allocates resources and assesses performance of the businesses contained in the new North America segment. Additionally, the company reassessed the activity of the businesses in its former Asia/Pacific segment and concluded that the Asia Pacific businesses should now be reported as part of the All Other segment, since those businesses, individually and collectively, are not large enough relative to the company's overall business to merit disclosure as a separate reporting segment. The company expects that these changes will provide improved transparency of the company’s business results to its shareholders, and better align with how the company manages its businesses. Segment results for the first quarter of 2018 have been reclassified to reflect the realignment of the company’s reporting segments and be comparable to the segment results for the first quarter of 2019.


21

Notes to Financial Statements
Accounting Policies
 
 
 
 

Recent Accounting Pronouncements (Not Yet Adopted): 
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.

22

Notes to Financial Statements
Current Assets
 
 
 
 

Current Assets


Receivables

Receivables consist of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Accounts receivable, gross
$
138,577

 
$
146,482

Customer rebate reserve
(9,799
)
 
(15,452
)
Allowance for doubtful accounts
(4,969
)
 
(5,268
)
Cash discount reserves
(5,305
)
 
(4,777
)
Other, principally returns and allowances reserves
(1,316
)
 
(1,242
)
Accounts receivable, net
$
117,188

 
$
119,743


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, 2018 to March 31, 2019 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 is 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.


23

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):
 
March 31, 2019
 
December 31, 2018
 
Current
 
Long-
Term
 
Total
 
Current
 
Long-
Term
 
Total
Installment receivables
$
1,958

 
$
1,104

 
$
3,062

 
$
1,986

 
$
1,374

 
$
3,360

Less: Unearned interest
(25
)
 

 
(25
)
 
(22
)
 

 
(22
)
 
1,933

 
1,104

 
3,037

 
1,964

 
1,374

 
3,338

Allowance for doubtful accounts
(431
)
 
(1,051
)
 
(1,482
)
 
(390
)
 
(1,152
)
 
(1,542
)
Installment receivables, net
$
1,502

 
$
53

 
$
1,555

 
$
1,574

 
$
222

 
$
1,796


Installment receivables purchased from DLL during the three months ended March 31, 2019 increased the gross installment receivables balance by $89,000. 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):
 
Three Months Ended March 31, 2019
 
Year Ended December 31, 2018
Balance as of beginning of period
$
1,542

 
$
2,644

Current period provision (benefit)
241

 
550

Direct write-offs charged against the allowance
(301
)
 
(1,652
)
Balance as of end of period
$
1,482

 
$
1,542

 
Installment receivables by class as of March 31, 2019 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
$
2,350

 
$
2,350

 
$
1,482

 
$

Canada
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
712

 
687

 

 
38

Impaired installment receivables with a related allowance recorded

 

 

 

Total Canadian installment receivables
712

 
687

 

 
38

Total
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
712

 
687

 

 
38

Impaired installment receivables with a related allowance recorded
2,350

 
2,350

 
1,482

 

Total installment receivables
$
3,062

 
$
3,037

 
$
1,482

 
$
38


24

Notes to Financial Statements
Current Assets
 
 
 
 

Installment receivables by class as of December 31, 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
$
2,669

 
$
2,669

 
$
1,540

 
$

Canada
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
689

 
667

 

 
127

Impaired installment receivables with a related allowance recorded
2

 
2

 
2

 

Total Canadian installment receivables
691

 
669

 
2

 
127

Total
 
 
 
 
 
 
 
Non-Impaired installment receivables with no related allowance recorded
689

 
667

 

 
127

Impaired installment receivables with a related allowance recorded
2,671

 
2,671

 
1,542

 

Total installment receivables
$
3,360

 
$
3,338

 
$
1,542

 
$
127


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 March 31, 2019, 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, 2018 for which the company was still accruing interest.


The aging of the company’s installment receivables was as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Total
 
U.S.
 
Canada
 
Total
 
U.S.
 
Canada
Current
$
709

 
$

 
$
709

 
$
663

 
$

 
$
663

0-30 Days Past Due
3

 

 
3

 
11

 

 
11

31-60 Days Past Due

 

 

 
10

 

 
10

61-90 Days Past Due

 

 

 
6

 

 
6

90+ Days Past Due
2,350

 
2,350

 

 
2,670

 
2,669

 
1

 
$
3,062

 
$
2,350

 
$
712

 
$
3,360

 
$
2,669

 
$
691



25

Notes to Financial Statements
Current Assets
 
 
 
 

Inventories

Inventories consist of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Finished goods
$
56,116

 
$
55,120

Raw materials
64,042

 
62,766

Work in process
10,279

 
10,237

Inventories, net
$
130,437

 
$
128,123


Other Current Assets

Other current assets consist of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Value added tax receivables
$
20,515

 
$
16,372

Prepaid insurance
2,166

 
2,626

Service contracts
2,106

 
2,201

Derivatives (foreign currency forward exchange contracts)
1,166

 
1,020

Prepaid inventory
633

 
521

Recoverable income taxes
618

 
787

Prepaid debt fees
397

 
395

Prepaid and other current assets
7,959

 
7,141

Other Current Assets
$
35,560

 
$
31,063



26

Notes to Financial Statements
Long-Term Assets
 
 
 
 

Long-Term Assets


Other Long-Term Assets
 


Other long-term assets consist of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Convertible 2022 note hedge asset
$
10,684

 
$
2,062

Convertible 2021 note hedge asset
7,532

 
1,028

Cash surrender value of life insurance policies
1,974

 
1,948

Deferred financing fees
304

 
402

Long-term installment receivables
53

 
222

Long-term deferred taxes
401

 
352

Investments
90

 
90

Other
256

 
256

Other Long-Term Assets
$
21,294

 
$
6,360


As part of issuing debt, the company entered into related convertible note hedge derivatives which are included in Other Long-Term Assets, the value of which will be adjusted quarterly to reflect fair value. The fair values of the note hedge assets during the year are significantly impacted by changes in the company's stock price.

 

See "Long-Term Debt" in the notes to the Consolidated Financial Statements included elsewhere in this report for more detail regarding the company's issuance of convertible debt and the related convertible note hedge derivatives.


Property and Equipment
Property and equipment consist of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Machinery and equipment
$
299,752

 
$
301,039

Land, buildings and improvements
33,569

 
37,606

Leasehold improvements
8,995

 
8,847

Furniture and fixtures
9,860

 
9,898

Property and Equipment, gross
352,176

 
357,390

Less allowance for depreciation
(306,916
)
 
(311,406
)
Property and Equipment, net
$
45,260

 
$
45,984


Lease Assets
In the first quarter of 2019, the company recorded operating lease assets as a result of the adoption of ASU 2016-02. The company's operating lease assets, and financing lease asset, have been separately disclosed on the Consolidate Balance Sheets. Finance lease assets have been reclassified from Property and Equipment, net to Finance Lease Assets in the Consolidated Balance Sheets as of December 31, 2018 to conform with the presentation for 2019.

Goodwill
The change in goodwill from December 31, 2018 to March 31, 2019 was due to foreign currency translation. As part of the company's realignment of its reportable and operating segments, the company considered whether the reporting units used for purposes of assessing impairment of goodwill should be changed and concluded that no changes were necessary.

27

Notes to Financial Statements
Long-Term Assets
 
 
 
 

Intangibles

The company's intangibles consist of the following (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
Historical
Cost
 
Accumulated
Amortization
 
Historical
Cost
 
Accumulated
Amortization
Customer lists
$
52,311

 
$
51,590

 
$
51,828

 
$
50,768

Trademarks
24,666

 

 
24,385

 

Developed technology
7,660

 
6,655

 
7,608

 
6,563

Patents
5,511

 
5,511

 
5,500

 
5,497

License agreements
748

 
748

 
733

 
733

Other
1,162

 
1,147

 
1,162

 
1,149

Intangibles
$
92,058

 
$
65,651

 
$
91,216

 
$
64,710


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, 2018 to March 31, 2019 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 $392,000 in the first three months of 2019 and is estimated to be $1,254,000 in 2019, $186,000 in 2020, $186,000 in 2021, $186,000 in 2022, $186,000 in 2023 and $133,000 in 2024. Amortized intangibles are being amortized on a straight-line basis over remaining lives of 1 to 6 years with most of the intangibles being amortized over an average remaining life of approximately 2 years.


28

Notes to Financial Statements
Current Liabilities
 
 
 
 

Current Liabilities


Accrued Expenses

Accrued expenses consist of accruals for the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Salaries and wages
$
22,037

 
$
23,289

Taxes other than income taxes, primarily Value Added Taxes
21,905

 
23,197

Warranty
15,072

 
16,353

Professional
5,200

 
5,888

Freight
3,871

 
3,363

Deferred revenue
3,816

 
2,416

Interest
3,497

 
3,992

Product liability, current portion
2,818

 
2,728

Rebates
1,316

 
7,966

Severance
1,122

 
1,657

Derivative liabilities (foreign currency forward exchange contracts)
1,105

 
219

Insurance
776

 
738

Supplemental Executive Retirement Program liability
391

 
391

Rent
387

 
483

Other items, principally trade accruals
6,950

 
7,187

Accrued Expenses
$
90,263

 
$
99,867


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, 2018 to March 31, 2019 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, 2019
$
16,353

Warranties provided during the period
1,181

Settlements made during the period
(3,083
)
Changes in liability for pre-existing warranties during the period, including expirations
621

Balance as of March 31, 2019
$
15,072


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

29

Notes to Financial Statements
Long-Term Liabilities
 
 
 
 

Long-Term Debt


Debt consists of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Convertible senior notes at 5.00%, due in February 2021
$
132,345

 
$
130,260

Convertible senior notes at 4.50%, due in June 2022
97,011

 
95,473

Long-Term Debt
$
229,356

 
$
225,733


The company had outstanding letters of credit of $3,108,000 and $3,123,000 as of March 31, 2019 and December 31, 2018, respectively. There were no borrowings denominated in foreign currencies as of March 31, 2019 and December 31, 2018. The weighted average interest rate on all borrowings, excluding capital leases, was 4.78% for the three months ended March 31, 2019 and for the year ended December 31, 2018.

On September 30, 2015, the company entered into an Amended and Restated Revolving Credit and Security Agreement, which was subsequently amended (the “Credit Agreement”) and which matures on January 16, 2021. The Credit Agreement was entered into by and among the company, certain of the company’s direct and indirect U.S. and Canadian subsidiaries and certain of the company’s European subsidiaries (together with the company, the “Borrowers”), certain other of the company’s direct and indirect U.S., Canadian and European subsidiaries (the “Guarantors”), and PNC Bank, National Association (“PNC”), JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, KeyBank National Association, and Citizens Bank, National Association (the “Lenders”). PNC is the administrative agent (the “Administrative Agent”) and J.P. Morgan Europe Limited is the European agent (the “European Agent”) under the Credit Agreement. In connection with entering into the company's Credit Agreement, the company incurred fees which were capitalized and are being amortized as interest expense. As of March 31, 2019, debt fees yet to be amortized through January 2021 totaled $701,000.

U.S. and Canadian Borrowers Credit Facility

For the company's U.S. and Canadian Borrowers, the Credit Agreement provides for an asset-based-lending senior secured revolving credit facility which is secured by substantially all the company’s U.S. and Canadian assets, other than real estate. The Credit Agreement provides the company and the other Borrowers with a credit facility in an aggregate principal amount of
$100,000,000, subject to availability based on a borrowing base formula, under a senior secured revolving credit, letter of credit
and swing line loan facility (the “U.S. and Canadian Credit Facility”). Up to $25,000,000 of the U.S. and Canadian Credit Facility will be available for issuance of letters of credit. The aggregate principal amount of the U.S. and Canadian Credit
 

Facility may be increased by up to $25,000,000 to the extent requested by the company and agreed to by any Lender or new financial institution approved by the Administrative Agent.

The aggregate borrowing availability under the U.S. and Canadian Credit Facility is determined based on a borrowing base formula. The aggregate usage under the U.S. and Canadian Credit Facility may not exceed an amount equal to the sum of (a) 85% of eligible U.S. accounts receivable plus (b) the lesser of (i) 70% of eligible U.S. inventory and eligible foreign in-transit inventory and (ii) 85% of the net orderly liquidation value of eligible U.S. inventory and eligible foreign in-transit inventory (not to exceed $4,000,000), plus (c) the lesser of (i) 85% of the net orderly liquidation value of U.S. eligible machinery and equipment and (ii) $585,000 as of March 31, 2019 (subject to reduction as provided in the Credit Agreement), plus (d) 85% of eligible Canadian accounts receivable, plus (e) the lesser of (i) 70% of eligible Canadian inventory and (ii) 85% of the net orderly liquidation value of eligible Canadian inventory, less (f) swing loans outstanding under the U.S. and Canadian Credit Facility, less (g) letters of credit issued and undrawn under the U.S. and Canadian Credit Facility, less (h) a $5,000,000 minimum availability reserve, less (i) other reserves required by the Administrative Agent, and in each case subject to the definitions and limitations in the Credit Agreement. As of March 31, 2019, the company was in compliance with all covenant requirements and had borrowing capacity on the U.S. and Canadian Credit Facility under the Credit Agreement of $19,647,000, considering the minimum availability reserve, then-outstanding letters of credit, other reserves and the $11,250,000 dominion trigger amount described below. Borrowings under the U.S. and Canadian Credit Facility are secured by substantially all of the company’s U.S. and Canadian assets, other than real estate.

Interest will accrue on outstanding indebtedness under the Credit Agreement at the LIBOR rate, plus a margin ranging from 2.25% to 2.75%, or at the alternate base rate, plus a margin ranging from 1.25% to 1.75%, as selected by the company. Borrowings under the U.S. and Canadian Credit Facility are subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.


30

Notes to Financial Statements
Long-Term Liabilities
 
 
 
 

The Credit Agreement contains customary representations, warranties and covenants. Exceptions to the operating covenants in the Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale and leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Credit Agreement, as amended. The Credit Agreement also contains a covenant requiring the company to maintain minimum availability under the U.S. and Canadian Credit Facility of not less than the greater of (i) 11.25% of the maximum amount that may be drawn under the U.S. and Canadian Credit Facility for five (5) consecutive business days, or (ii) $5,000,000 on any business day. The company also is subject to dominion triggers under the U.S. and Canadian Credit Facility requiring the company to maintain borrowing capacity of not less than $11,250,000 on any business day or $12,500,000 for five consecutive days in order to avoid triggering full control by an agent for the lenders of the company's cash receipts for application to the company’s obligations under the agreement.

The Credit Agreement contains customary default provisions, with certain grace periods and exceptions, which provide that events of default that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than 10 consecutive days. There were no borrowings outstanding under the U.S. and Canadian Credit Facility at March 31, 2019.

European Credit Facility

The Credit Agreement also provides for a revolving credit, letter of credit and swing line loan facility which gives the company and the European Borrowers the ability to borrow up to an aggregate principal amount of $30,000,000, with a $5,000,000 sublimit for letters of credit and a $2,000,000 sublimit for swing line loans (the “European Credit Facility”). Up to $15,000,000 of the European Credit Facility will be available to each of Invacare Limited (the “UK Borrower”) and Invacare Poirier SAS (the “French Borrower” and, together with the UK Borrower, the “European Borrowers”). The European Credit Facility matures in January 2021, together with the U.S. and Canadian Credit Facility.

The aggregate borrowing availability for each European Borrower under the European Credit Facility is determined based on a borrowing base formula. The aggregate borrowings of each of the European Borrowers under the European Credit Facility may not exceed an amount equal to (a) 85% of the European Borrower’s eligible accounts receivable, less (b) the European Borrower’s borrowings and swing line loans outstanding under the European Credit Facility, less (c) the European Borrower’s letters of credit issued and undrawn under the European Credit
 
Facility, less (d) a $3,000,000 minimum availability reserve, less (e) other reserves required by the European Agent, and in each case subject to the definitions and limitations in the Credit Agreement. As of March 31, 2019, the aggregate borrowing availability to the European Borrowers under the European Credit Facility was approximately $9,938,000, considering the $3,000,000 minimum availability reserve and the $3,375,000 dominion trigger amount described below.

The aggregate principal amount of the European Credit Facility may be increased by up to $10,000,000 to the extent requested by the company and agreed to by any Lender or Lenders that wish to increase their lending participation or, if not agreed to by any Lender, a new financial institution that agrees to join the European Credit Facility and that is approved by the Administrative Agent and the European Agent.

Interest will accrue on outstanding indebtedness under the European Credit Facility at the LIBOR rate, plus a margin ranging from 2.50% to 3.00%, or for swing line loans, at the overnight LIBOR rate, plus a margin ranging from 2.50% to 3.00%, as selected by the company. The margin that will be adjusted quarterly based on utilization. Borrowings under the European Credit Facility are subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.

The European Credit Facility is secured by substantially all the personal property assets of the UK Borrower and its in-country subsidiaries, and all the receivables of the French Borrower and its in-country subsidiaries. The UK and French facilities (which comprise the European Credit Facility) are cross collateralized, and the US personal property assets previously pledged under the U.S. and Canadian Credit Facility also serve as collateral for the European Credit Facility.

The European Credit Facility is subject to customary representations, warranties and covenants generally consistent with those applicable to the U.S. and Canadian Credit Facility. Exceptions to the operating covenants in the Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale/leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Credit Agreement. The Credit Agreement also contains a covenant requiring the European Borrowers to maintain undrawn availability under the European Credit Facility of not less than the greater of (i) 11.25% of the maximum amount that may be drawn under the European Credit Facility for five (5) consecutive business days, or (ii) $3,000,000 on any business day. The European Borrowers also are subject to cash dominion triggers under the European Credit Facility requiring the European Borrower to maintain borrowing capacity of not less than $3,375,000 on any business day or 12.50% of the maximum amount that may be drawn under the European Credit Facility

31

Notes to Financial Statements
Long-Term Liabilities
 
 
 
 

for five (5) consecutive business days in order to avoid triggering full control by an agent for the Lenders of the European Borrower’s cash receipts for application to its obligations under the European Credit Facility.

The European Credit Facility is subject to customary default provisions, with certain grace periods and exceptions, consistent with those applicable to the U.S. and Canadian Credit Facility, which provide that events of default include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, cross-default, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption in the operations of any material manufacturing facility for more than 10 consecutive days.

The proceeds of the European Credit Facility will be used to finance the working capital and other business needs of the company. There were no borrowings outstanding under the European Credit Facility at March 31, 2019.

Convertible senior notes due 2021

In the first quarter of 2016, the company issued $150,000,000 aggregate principal amount of 5.00% Convertible Senior Notes due 2021 (the “2021 notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2021 notes bear interest at a rate of 5.00% per year payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2016. The 2021 notes will mature on February 15, 2021, unless repurchased or converted in accordance with their terms prior to such date. Prior to August 15, 2020, the 2021 notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Unless and until the company obtains shareholder approval under applicable New York Stock Exchange rules, the 2021 notes will be convertible, subject to certain conditions, into cash. If the company obtains such shareholder approval, the 2021 notes may be settled in cash, the company’s common shares or a combination of cash and the company’s common shares, at the company’s election. The company has submitted a proposal at its 2019 annual meeting for the purpose of obtaining such shareholder approval.

Holders of the 2021 notes may convert their 2021 notes at their option at any time prior to the close of business on the business day immediately preceding August 15, 2020 only under the following circumstances: (1) during any fiscal quarter commencing after March 31, 2016 (and only during such fiscal quarter), if the last reported sale price of the company’s Common Shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding
 
fiscal quarter is greater than or equal to 130% of the applicable conversion price for the 2021 notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of 2021 notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s Common Shares and the applicable conversion rate for the 2021 notes on each such trading day; or (3) upon the occurrence of specified corporate events described in the Indenture.

Holders of the 2021 notes will have the right to require the company to repurchase all or some of their 2021 notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 60.0492 common shares per $1,000 principal amount of 2021 notes (equivalent to an initial conversion price of approximately $16.65 per common share). The company evaluated the terms of the conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the features did require separate accounting as a derivative. This derivative was capitalized on the balance sheet as a long-term liability and will be adjusted to reflect fair value each quarter. The fair value of the convertible debt conversion liability at issuance was $34,480,000. The fair value of the convertible debt conversion liability at March 31, 2019 was $8,173,000 compared to $1,458,000 as of December 31, 2018. The company recognized a loss of $6,715,000 for the three months ended March 31, 2019 compared to a loss of $2,373,000 for the three months ended March 31, 2018 related to the convertible debt conversion liability.

In connection with the offering of the 2021 notes, the company entered into privately negotiated convertible note hedge transactions with two financial institutions (the “option counterparties”). These transactions cover, subject to customary anti-dilution adjustments, the number of the company’s common shares that will initially underlie the 2021 notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the 2021 notes. The company evaluated the note hedges under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the note hedges should be accounted for as derivatives. These derivatives were capitalized on the balance sheet as long-term assets and will be adjusted to reflect fair value each quarter. The fair value of the convertible note hedge assets at issuance was $27,975,000. The fair value of the convertible note hedge assets at March 31, 2019 was $7,532,000 compared to $1,028,000 as of December 31, 2018. The company recognized a gain of $6,504,000 for the three months ended March 31, 2019 compared to a gain of $2,047,000 for the three

32

Notes to Financial Statements
Long-Term Liabilities
 
 
 
 

months ended March 31, 2018 related to the convertible note hedge asset.

The company entered into separate, privately negotiated warrant transactions with the option counterparties at a higher strike price relating to the same number of the company’s common shares, subject to customary anti-dilution adjustments, pursuant to which the company sold warrants to the option counterparties. The warrants could have a dilutive effect on the company’s outstanding common shares and the company’s earnings per share to the extent that the price of the company’s common shares exceeds the strike price of those warrants. The initial strike price of the warrants is $22.4175 per share and is subject to certain adjustments under the terms of the warrant transactions. The company evaluated the warrants under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the warrants meet the definition of a derivative, are indexed to the company's own stock and should be classified in shareholder's equity. The amount paid for the warrants and capitalized in shareholder's equity was $12,376,000.

The net proceeds from the offering of the 2021 notes were approximately $144,034,000, after deducting fees and offering expenses of $5,966,000, which were paid in 2016. These debt issuance costs were capitalized and are being amortized as interest expense through February 2021. In accordance with ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, these debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability. Approximately $5,000,000 of the net proceeds from the offering were used to repurchase the company’s common shares from purchasers of 2021 notes in the offering in privately negotiated transactions. A portion of the net proceeds from the offering were used to pay the cost of the convertible note hedge transactions (after such cost is partially offset by the proceeds to the company from the warrant transactions), which net cost was $15,600,000.

The liability components of the 2021 notes consist of the following (in thousands):
 
March 31, 2019