Invacare Corporation Announces Financial Results for the First Quarter of 2013 and Updates Status Regarding Consent Decree
Invacare CorporationLara Mahoney, 440-329-6393
Invacare Corporation (NYSE: IVC) today announced its financial results for the quarter ended March 31, 2013.
On January 18, 2013, the Company completed the sale of Invacare Supply Group (ISG), its domestic medical supplies business. Accordingly, the financial information for all periods excludes the impact of the discontinued operations except for cash flow information which includes the results and impact of the sale of ISG. For more information, see the detailed condensed consolidated financial statements at the end of the release.
Commenting on Invacare's first quarter 2013 results, Gerald B. Blouch, President and Chief Executive Officer, stated, ''Our first quarter financial results were dramatically impacted by the Company's consent decree with the United States Food and Drug Administration (FDA), which limits the Company's ability to manufacture products at its Taylor Street facility in Elyria, Ohio. Principally as a result of this pressure on the Company's higher margin custom power wheelchair product category, adjusted earnings per share decreased to a loss of $0.36 in the first quarter of 2013 compared to adjusted earnings per shareof $0.15 in the first quarter of 2012. Organic net sales declined by 5.6% compared to the same period last year with a strong performance from Europe being more than offset by lower net sales for all other segments. The Company's free cash flow in the first quarter was negative $36.1 million, principally due to the net loss from continuing operations, but also due to a few one-time items associated with the sale of ISG (negative cash flow impact of approximately $16.0 million). In addition, free cash flow was negatively impacted by increased inventory related to weaker than expected sales (negative cash flow impact of $7.7 million).''
Commenting on the status of the FDA consent decree, Blouch said, ''I am pleased to report that we have made progress on the third-party certification audits at the Corporate and Taylor Street facilities. Earlier this month, the first two third-party certification audit reports were provided to the FDA for its review and approval. In these reports, the third-party expert certified that the Company's equipment and process validation procedures and its design control systems are compliant with the FDA's Quality System Regulation. The Company expects to receive the FDA's response within a few weeks based upon the terms of the consent decree. The third, most comprehensive certification audit is well underway, and we expect it to be completed before the end of the second quarter. After the FDA has reviewed this final certification report, it will conduct its own inspection before it authorizes the Company to resume full operations at the Corporate and Taylor Street facilities. We are making progress, and I am grateful to all of our associates for the time and energy that they are dedicating to quality systems compliance.''
Blouch continued, ''While there are many factors that are currently outside of our control, we are actively managing the business to best position the Company for the future. The Company has developed and started to implement a comprehensive cost reduction program. As part of that plan, the Company reduced its workforce at the Taylor Street facility earlier this month to more closely align it with current production volume. Other aggressive cost reduction initiatives will take place through general expense reduction and project delays. We expect these initiatives will stabilize the business and help drive us toward restoring positive free cash flow later in 2013. Our board and management team are committed to making the right decisions to ensure the Company is well-positioned to re-establish profitability and shareholder value when we emerge from the injunctive phase of the consent decree.''
In order to resume full operations at the Corporate and Taylor Street facilities in Elyria, Ohio, the consent decree requires that three certification audits must be completed by a third-party expert whose reports are then submitted to the FDA for review and approval. The Company is continuing to make progress on all three of the certification audits.
As the Company receives FDA approval on each of these certification audits, it will provide timely disclosure to its shareholders. Otherwise the Company plans to give an update in its next quarterly earnings release.
Loss per share on a GAAP basis for the first quarter of 2013 was $0.14 ($4.5 million net loss) as compared to earnings per share for the same period last year of $0.18 ($5.6 million net earnings). The net loss for the first quarter of 2013 was significantly impacted by lower net sales, reduced gross margin and charges related to restructuring of $0.06 per share ($1.8 million after-tax expense). Net earnings for the first quarter of 2012 were unfavorably impacted by charges related to restructuring of $0.01 per share ($0.4 million after-tax expense).
Adjusted net loss per share was $0.36 for the first quarter of 2013 as compared to adjusted net earnings per share of $0.15 for the first quarter of 2012. Adjusted net loss for the quarter was $11.6 million versus adjusted net earnings of $4.9 million for the first quarter of last year. The adjusted net loss for the quarter was primarily the result of lower net sales, reduced gross margin and increased SG&A expense partially offset by decreased interest expense.
Net sales for the quarter decreased 4.9% to $337.6 million versus $355.1 million for the same period last year. Organic net sales for the quarter decreased 5.6% over the same period last year as increases in Europe were more than offset by declines in all other segments. The largest decline in net sales was in the North America/Home Medical Equipment (HME) segment, primarily in mobility and seating products, principally due to the reduced order volume at the Company's Taylor Street manufacturing facility resulting from the FDA consent decree. The Company estimates that sales of product manufactured from the Taylor Street facility, which includes some products sold outside of the North America/HME segment, were approximately $17.0 million in the first quarter compared to $37.4 million in the first quarter of last year. Net sales by segment and for the consolidated company, as reported and as adjusted to exclude the impact of foreign currency translation comparing the quarter-end and year-to-date periods ended March 31, 2013 to March 31, 2012 are provided in a table accompanying this release.
Gross margin as a percentage of net sales for the first quarter was lower by 2.7 percentage points compared to last year's first quarter. The margin was negatively impacted principally by the North America/HME sales decline in custom power wheelchairs, which is one of the Company's higher margin product lines. In addition, the negative impact on order volume out of the Taylor Street manufacturing facility caused an unfavorable absorption of fixed costs for this facility. Gross margin also was negatively impacted by sales mix favoring lower margin products and customers and increased research and development costs.
SG&A expense increased 3.3% to $104.0 million in the first quarter compared to $100.7 million in the first quarter of last year. Foreign currency translation increased SG&A expense by 0.5 of a percentage point. Excluding the impact of foreign currency translation and increased regulatory and compliance costs related to quality system improvements ($1.4 million pre-tax expense), SG&A expense increased by 1.4% compared to the first quarter of last year primarily related to unfavorable foreign currency transactions, primarily in Europe, and increased associate costs, also primarily in Europe.
The Company incurred restructuring charges for the first quarter of $1.8 million after-tax, principally related to severance costs in the North America/HME, Asia/Pacific and Europe segments. These restructuring charges are excluded from adjusted earnings per share.
For the quarter ended March 31, 2013, North America/HME net sales decreased 13.6% to $152.2 million compared to $176.1 million in the same period last year. Organic net sales were down 13.6% compared to last year primarily driven by declines in mobility and seating and lifestyle products, partially offset by increased net sales in respiratory products. The sales decline in mobility and seating products was primarily driven by the impact of the consent decree with the FDA, which limits production at the Taylor Street manufacturing facility. Early in the first quarter, the flow of verification of medical necessity (VMN) documentation, as required by the consent decree to provide product from the Taylor Street facility, was in line with the Company's expectations. However, during the quarter the FDA provided the Company with feedback regarding its intent relating to the appropriate completion of the VMN documentation. As it better understood the FDA's expectations, the Company modified its VMN review processes, which resulted in a dramatic weakening of the acceptance rate of VMNs throughout the quarter. While the Company continues to ship orders and quotes that existed prior to the date of the consent decree, the number of new orders that were fulfilled in the first quarter of 2013 with the appropriate VMN documentation would have represented only 4.1% of Invacare's unit volume of domestic power wheelchair shipments from the Taylor Street facility in the same period last year. Loss before income taxes was $9.7 million, excluding restructuring charges of $1.7 million, as compared to earnings before income taxes of $5.8 million last year, excluding restructuring charges of $0.1 million, primarily as a result of volume declines, unfavorable sales mix favoring lower margin customers and lower margin products, unfavorable absorption of fixed costs at the Taylor Street manufacturing facility as a result of volume declines in mobility and seating products and increased associate costs related to quality system improvements.
IPG net sales for the first quarter decreased by 2.8% to $35.1 million compared to $36.1 million last year. Organic net sales decreased 2.7% driven primarily by declines in beds, safe patient handling equipment and therapeutic support surfaces partially offset by increases in interior design projects for long-term care facilities and dialysis chairs. Earnings before income taxes were $2.0 million, excluding restructuring charges of $0.2 million, compared to $3.4 million in the first quarter of last year. The decrease in earnings before income taxes was largely attributable to volume declines, increased research and development expenses and associate costs.
For the first quarter, European net sales increased 9.8% to $137.6 million versus $125.3 million for the first quarter of last year. Organic net sales for the quarter increased 7.9% primarily related to increases in net sales of lifestyle, respiratory and mobility and seating products. For the first quarter, earnings before income taxes increased to $6.0 million, excluding restructuring charges of $0.1 million, as compared to $5.8 million last year, excluding restructuring charges of $0.3 million. The increase in earnings before income taxes was largely attributable to volume increases, which were partially offset by an unfavorable sales mix favoring lower margin product lines and lower margin customers, increased SG&A expenses, primarily due to unfavorable foreign currency transactions and increased associate costs.
For the first quarter, Asia/Pacific net sales decreased 27.6% to $12.7 million versus $17.5 million last year. Organic net sales for the quarter decreased 27.8%. The Company's Australian distribution business experienced declines in mobility and seating and lifestyle products. The net sales decline in the Company's subsidiary which produces microprocessor controllers was primarily related to its sale of controllers and to its contract manufacturing business with companies outside of the healthcare industry. For the first quarter, loss before income taxes was $1.7 million, excluding restructuring charges of $0.5 million, as compared to loss before income taxes of $0.9 million last year, excluding restructuring charges of $0.1 million. The decrease in earnings before income taxes was primarily attributable to the Company's subsidiary which produces microprocessor controllers as a result of the volume declines. Earnings for the first quarter were favorable to last year for the Company's Australian and New Zealand distribution businesses as a result of a significant restructure to the business implemented in the fourth quarter of last year.
Total debt outstanding was $119.8 million as of March 31, 2013, as compared to $238.1 million as of December 31, 2012 (including the convertible debt discount, which reduced convertible debt and increased equity by $3.2 million as of March 31, 2013 and by $3.3 million as of December 31, 2012). The Company's total debt outstanding as of March 31, 2013 consisted of $99.4 million drawn on the revolving credit facility, $13.4 million in convertible debt and $7.0 million of other debt. The Company's debt levels have been reduced significantly as a result of the application of the $144.7 million in net proceeds from the sale of its medical supplies business, ISG, during the first quarter of 2013.
The Company reported negative $36.1 million of free cash flow in the first quarter of 2013 as compared to negative $2.5 million of free cash flow in the first quarter of 2012. The first quarter 2013 negative free cash flow was primarily driven by the net loss from continuing operations compared to earnings in the same period a year ago, a reduction in accounts payable (negative cash flow impact of $15.7 million) principally due to accelerated payments associated with the sale of ISG and increased inventory (negative cash flow impact of $7.7 million) due to weaker than anticipated sales. In addition, free cash flow was also negatively impacted by approximately $3.2 million of expenses paid as a result of the sale of ISG.
The Company's ratio of debt to adjusted EBITDA was 1.8 as of March 31, 2013, compared to 2.7 as of December 31, 2012 and 1.9 as of March 31, 2012.
Days sales outstanding were 50 days at the end of the first quarter of 2013, compared to 49 days as of December 31, 2012 and 51 days as of March 31, 2012. Inventory turns at the end of the first quarter of 2013 were 4.4, compared to 4.6 as of December 31, 2012 and 4.7 as of March 31, 2012.
Adjusted earnings (loss) per share (EPS) is a non-GAAP financial measure which is defined as adjusted net earnings (loss) divided by weighted average shares outstanding - assuming dilution. It should be noted that the Company's definition of Adjusted EPS may not be comparable to similar measures disclosed by other companies because not all companies and analysts calculate Adjusted EPS in the same manner. The Company believes that these types of exclusions are also recognized by the industry in which it operates as relevant in computing Adjusted EPS as a supplementary non-GAAP financial measure used by financial analysts and others in the Company's industry to meaningfully evaluate operating performance. This financial measure is reconciled to the related GAAP financial measure in the ''Reconciliation'' table included after the Condensed Consolidated Statement of Operations included in this press release.
Adjusted net earnings (loss) is a non-GAAP financial measure which is defined as net earnings (loss) from continuing operations excluding the impact of restructuring charges ($2.5 million pre-tax for the three months ended March 31, 2013 compared to $0.6 million pre-tax for the three months ended March 31, 2012), amortization of the convertible debt discount recorded in interest ($0.2 million pre-tax for the three months ended March 31, 2013 compared to $0.1 million pre-tax for the three months ended March 31, 2012) and changes in tax valuation allowances. This financial measure is reconciled to the related GAAP financial measure in the ''Reconciliation'' table included after the Condensed Consolidated Statement of Operations included in this press release.
Free cash flow is a non-GAAP financial measure which is defined as net cash used by operating activities, excluding net cash flow impact related to restructuring activities, less purchases of property and equipment, net of 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, for example, acquisitions). This financial measure is reconciled to the related GAAP financial measure in the ''Reconciliation'' table included after the Condensed Consolidated Balance Sheets included in this press release.
Adjusted EBITDA (adjusted earnings (loss) before interest, taxes, depreciation and amortization) is a non-GAAP financial measure which is defined as net earnings (loss) from continuing operations excluding the following: interest expense, income taxes (benefit), depreciation and amortization, as further adjusted to exclude restructuring charges as adjusted for debt covenant limitations regarding cash charges ($2.4 million for the three months ended March 31, 2013), amortization of the convertible debt discount (recorded in interest expense), bank fees and stock option expense. It should be noted that the Company's definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies and analysts calculate Adjusted EBITDA in the same manner. The Company believes that these types of exclusions are also recognized by the industry in which it operates as relevant in computing Adjusted EBITDA as a supplementary non-GAAP financial measure widely used by financial analysts and others in the Company's industry to meaningfully evaluate a company's future operating performance and cash flow. Moreover, the definition of Adjusted EBITDA as presented herein also may be useful in reflecting certain debt covenant measurements under the Company's senior secured credit facility, although, in particular, a larger acquisition during a given year may make it difficult to replicate the exact calculations for the covenants. In addition to these recognized purposes, the Company also uses EBITDA and Adjusted EBITDA to evaluate the Company's performance. This financial measure is reconciled to the related GAAP financial measure in the ''Reconciliation'' table included after the Condensed Consolidated Statement of Operations included in this press release.
As previously announced, the Company will host a conference call for investors and other interested parties today at 8:30 AM ET to discuss the Company's performance. Those wishing to participate in the live call should dial 1-888-498-8379, or +1-706-679-5239 for international callers, and enter meeting ID 34526733. A digital recording will be available two hours after completion of the conference call from April 25, 2013 to May 2, 2013. To access the recording, US/Canada callers should dial 1-855-859-2056, or +1-404-537-3406 for international callers, and enter the Conference ID 34526733.
Invacare Corporation (NYSE:IVC), headquartered in Elyria, Ohio, is the global leader in the manufacture and distribution of innovative home and long-term care medical products that promote recovery and active lifestyles. The Company has 5,800 associates and markets its products in approximately 80 countries around the world. For more information about the Company and its products, visit Invacare's website at .
* Net earnings (loss) per share assuming dilution calculated using weighted average shares outstanding - basic for periods in which there is a loss.
Adjusted EBITDA (earnings (loss) before interest, taxes, depreciation and amortization) is a non-GAAP financial measure which is defined as net earnings (loss) from continuing operations excluding the following: interest expense, income taxes, depreciation and amortization, as further adjusted to exclude restructuring charges, as adjusted for debt covenant limitations regarding cash charges, bank fees, stock option expense and amortization of the convertible debt discount (recorded in interest expense). It should be noted that the Company's definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies and analysts calculate Adjusted EBITDA in the same manner. The Company believes that these types of exclusions are also recognized by the industry in which it operates as relevant in computing Adjusted EBITDA as a supplementary non-GAAP financial measure widely used by financial analysts and others in the Company's industry to meaningfully evaluate a Company's future operating performance and cash flow. Moreover, the definition of Adjusted EBITDA as presented herein also may be useful in reflecting certain debt covenant measurements under the Company's senior secured credit facility, although, in particular, a larger acquisition during a given year may make it difficult to replicate the exact calculations for the covenants. In addition to these recognized purposes, the Company also uses EBITDA and Adjusted EBITDA to evaluate the Company's performance.
Adjusted Earnings (Loss) per share (EPS) is a non-GAAP financial measure which is defined as net earnings (loss) from continuing operations excluding the impact of restructuring charges, amortization of the convertible debt discount (recorded in interest expense) and changes in tax valuation allowances divided by weighted average shares outstanding - assuming dilution. It should be noted that the Company's definition of Adjusted EPS may not be comparable to similar measures disclosed by other companies because not all companies and analysts calculate Adjusted EPS in the same manner. The Company believes that these types of exclusions are also recognized by the industry in which it operates as relevant in computing Adjusted EPS as a supplementary non-GAAP financial measure used by financial analysts and others in the Company's industry to meaningfully evaluate operating performance.
* Net earnings (loss) per share assuming dilution calculated using weighted average shares outstanding - basic for periods in which there is a loss.
The Company operates in four primary business segments: North America / Home Medical Equipment (HME), Institutional Products Group, Europe and Asia/Pacific. The four reportable segments represent operating groups, which offer products to different geographic regions. Intersegment revenue for reportable segments was $29,054,000 and $43,443,000 for the three months ended March 31, 2013 and March 31, 2012, respectively.
The information by segment is as follows:
''All Other'' consists of unallocated corporate selling, general and administrative expenses, which do not meet the quantitative criteria for determining reportable segments. In addition, ''All Other'' earnings before income taxes includes loss on debt extinguishment including finance charges and associated fees.
The following table provides net sales from continuing operations as reported and as adjusted to exclude the impact of foreign currency translation comparing quarters ended March 31, 2013 to March 31, 2012:
*Adjusted net sales percent change equal to reported net sales change less impact of foreign currency translation.
Free cash flow is a non-GAAP financial measure that is comprised of net cash used by operating activities, excluding net cash flow impact related to restructuring activities less purchases of property and equipment, net of 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, for example, acquisitions).