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 atMarch 31, 2021 andDecember 31, 2020 , and in the condensed consolidated statement of comprehensive income (loss) for the three months endedMarch 31, 2021 andMarch 31, 2020 . All comparisons presented are with respect to the same period last year, unless otherwise stated. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes that appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A included in the company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . For some matters,SEC filings from prior periods may be useful sources of information. OVERVIEW OVERVIEWInvacare 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 inNorth America ,Europe andAsia Pacific , which are the result of more than 50 acquisitions made over the company's 40+ year history. COVID-19 Impact on Access to Healthcare and Global Supply Chain The company continues to actively monitor the coronavirus (COVID-19) pandemic, which has negatively impacted the business primarily by limiting access to healthcare and disrupting the global supply chain. As a result, and consistent with expectations, the company realized lower net sales in 1Q21 compared to the first quarter of the prior year period, which was not impacted by these factors. The decline in net sales resulted in operational inefficiencies which in turn resulted in reduced profitability. Demand for the company's products remains high as evidenced by a strong order book and elevated backlog. However, fulfilling orders during the first quarter was challenging due to global supply chain and logistics disruptions.Invacare's products include a large number components, and these disruptions have delayed delivery of components required for final assembly and order fulfillment. Further, certain countries have reinstated shutdowns and stay-at-home orders causing additional assembly and production delays that have also delayed order fulfillment. As a result, backlog has increased in all product categories fromDecember 31, 2020 . While public health restrictions remain, the company anticipates, as vaccination initiatives progress, healthcare access resumes, and more active lifestyles return during the summer months, higher net sales for the balance of 2021 with growth as compared to prior year. As a result of the company's view that the net sales decline during 1Q21 is temporary, the company has opted not to impose more robust cost containment measures to offset the impact of reduced net sales. The company believes its human capital resources will be essential to facilitate anticipated sales recovery for the remainder of 2021 and to address current backlog and anticipated demand. The extent to which the company's operations will be further impacted by the pandemic will depend largely on future developments, which remain highly uncertain and difficult to accurately predict, including, among other things, new information which may emerge concerning the severity of the pandemic; new and growing outbreaks of COVID-19 or new strains of COVID-19; actions by government authorities to contain COVID-19 or treat its impact, such as reimposed public health restrictions or restrictions on access to healthcare facilities; efforts to combat COVID-19, such as vaccine development and distribution; and global supply chain disruption which may impact access to components and products. As an "essential" business making medical devices, the company has continued to operate in all of its facilities, having taken the recommended public health measures to ensure worker and workplace safety. The company continues to experience high demand globally for its respiratory products. These products are being deployed in the fight against the COVID-19 pandemic to provide access to purified oxygen needed in respiratory care. The company continues to work to increase its capacity to produce these critical products and resolve global supply chain challenges that are compounded 1 --------------------------------------------------------------------------------
MD&A Overview Table of Contents by the effects of the pandemic. As a result, there are practical limits to the extent the company can increase output. In addition, the company continues to take steps to offset cost increases from pandemic-related supply chain disruptions. The initial stages of the pandemic appropriately focused the provision of healthcare to urgent non-elective care, reducing access to clinicians and healthcare facilities on which other parts of the company's business rely to engage with customers for product trials and fittings. As a result, and combined with various stay-at-home orders, the company experienced a global decline in quotes for mobility and seating products, and a resultant decline in orders starting primarily in the second quarter of 2020. While the company believes the decline in net sales is temporary in nature, the rebound of the business will depend on the continued restoration of access to healthcare and loosening of public health measures, and will be impacted by several items including government actions and policies related to the pandemic, and the magnitude of the pandemic. The company continues to optimize its balance sheet for the current environment. In the first quarter of 2021, the company issued$125,000,000 aggregate principal amount of 4.25% convertible senior notes due in 2026 (the "2026 Notes"), purchased related capped calls for the 2026 Notes to minimize potential dilution from the 2026 Notes, repurchased$78,850,000 aggregate principal amount of its 4.50% convertible senior notes due 2022 (the "2022 Notes") and settled$1,250,000 aggregate principal amount of its 5.00% convertible senior notes due 2021 (the "2021 Notes") which matured during the quarter. Borrowings on the company's asset-based lending (ABL) credit facilities were reduced in the first quarter. These transactions enhanced financial flexibility in reducing near-term debt with the proceeds of the new convertible notes maturing inMarch 2026 . These actions, as well as the continued borrowing availability under the ABL revolving credit facilities, and the anticipated generation of Adjusted EBITDA and free cash flow, should provide the company sufficient liquidity to manage the business and meet its obligations. Strategy The company has committed to providing medical products that deliver the best clinical value; promote recovery, independence and active lifestyles; and support long-term conditions and palliative care. The company's strategy aligns its resources to produce products and solutions that assist customers and end-users with the most clinically complex needs. By focusing the company's efforts to provide the best possible assistance and outcomes to the people and caregivers who use its products, the company aims to improve its financial condition for sustainable profit and growth. To execute this strategy, the company is undertaking a substantial multi-year business optimization plan. Business Optimization Efforts The company is executing a multi-year strategy to return the company to profitability by focusing its resources on products and solutions that provide greater healthcare value in clinically complex rehabilitation and post-acute care. The company's business optimization actions and growth plan balances innovative organic growth, product portfolio changes across all regions, and cost improvements in supply chain and administrative functions. Key elements of the enhanced transformation and growth plan are: •Globally, continue to drive all business segments and product lines based on their potential to achieve a leading market position and to support profitability goals; •In Europe, leverage centralized innovation and supply chain capabilities while reducing the cost and complexity of a legacy infrastructure; •In North America, adjust the portfolio to consistently grow profitability amid cost increases by adding new products, reducing costs and continuing to improve customers' experience; •In Asia Pacific, remain focused on sustainable growth and expansion in the southeastAsia region; and •Take actions globally to reduce working capital and improve free cash flow. As it navigates the uncertain business environment resulting from COVID-19, the company continues to allocate more resources to the business units experiencing increased demand and expects to continue taking actions to mitigate the potential negative financial and operational impacts on other parts of the company's business that have declined. In the medium-term, the company still expects to execute on its business optimization strategy, such as global IT modernization initiative which is expected to ultimately result in optimization of the operating structure. Outlook The company participates in growing durable healthcare markets and serves a persistent need for its products. The company will continue to improve operating efficiency, together with the lifting of public health restrictions and resolution of supply chain disruptions, to yield improved financial performance. As a result, the company continues to expect to grow revenue, profitability, and improve its cash flow performance for the year. As approximately 95% of the company's revenues are generated in the Northern Hemisphere, the company expects sales growth for the remainder of the year assuming the expectation of healthcare access resuming, a return to more active lifestyles in the 2 --------------------------------------------------------------------------------
MD&A Overview Table of Contents warmer months as the pandemic subsides, and amplified by the adoption of new products and pent up demand from the prior year. The company's earnings performance is expected to benefit from: (1) new product introductions with improved commercialization plans and additional investments in the sales force and demonstration equipment, which are expected to result in profitable incremental sales, as well as higher sales and margins on existing products; and (2) margin expansion expected as a result of efficiencies related to the plant consolidations inGermany ; supply chain actions to expand gross profits, offset by higher freight and logistics costs, and the impact ofU.S. tariff exclusions which expired onJanuary 1, 2021 . The company expects SG&A expense to be higher than 2020 levels but lower than 2019 levels as it adds back sales and marketing related spending to support sales growth and activity-based spending. Stock compensation expense is expected to be closer to 2019 levels. In addition, while the new IT system implementation is a key project for the company inNorth America during 2021, benefits related to improved customer experience and efficiencies have not been considered in the guidance as a result of the anticipated timing to roll out the new system inNorth America . Cash flow for 2021 is expected to fund one-time payments for severance costs related to the German plant consolidation and funding VAT and other taxes deferred from 2020 as a result of programs implemented by many jurisdictions as result of the pandemic. The company has historically generated negative cash flow performance during the first half of the year. This pattern is expected to continue due to the timing of annual one-time payments such as customer rebates and employee bonuses earned during the prior year, and higher working capital usage from seasonal inventory increases. Quarterly cash flow is anticipated to be impacted by timing of sales growth which will impact accounts receivable collections. The company anticipates spending$20,000,000 on capital expenditures in 2021. Favorable Long-Term Demand Ultimately, demand for the company's products and services is based on the need to provide care for people with certain conditions. The company's medical devices provide solutions for end-users and caregivers. Therefore, the demand for the company's medical equipment is largely driven by population growth and the incidence of certain conditions where treatment may be supplemented by the company's devices. The company also provides solutions to help equipment providers and residential care operators deliver cost-effective and high-quality care. The company believes that its commercial team, customer relationships, products and solutions, supply chain infrastructure, and strong research and development pipeline will create sustainable and favorable business potential. 3 --------------------------------------------------------------------------------
MD&A Net Sales Table of Contents RESULTS OF OPERATIONS - NET SALES The company operates in two primary business segments:North America andEurope with each selling the company's primary product categories, which include: lifestyle, mobility and seating and respiratory therapy products. Sales inAsia Pacific are reported in All Other and include products similar to those sold inNorth America andEurope . % Change Foreign Exchange Constant Currency % Change ($ in thousands USD) 1Q21* 1Q20 Fav/(Unfav) % Impact Divestiture % Impact Fav/(Unfav) Europe 112,775 120,968 (6.8) 8.0 - (14.8) North America 75,974 86,971 (12.6) 0.5 - (13.1) All Other (Asia Pacific) 7,453 10,501 (29.0) 14.1 (26.7) (16.4) Consolidated 196,202 218,440 (10.2) 5.3 (1.3) (14.2)
* Date format is quarter and year in each instance.
The table above provides net sales change as reported and as adjusted to exclude the impact of foreign exchange translation and divestitures (constant currency net sales). "Constant currency net sales" is a non-Generally Accepted Accounting Principles ("GAAP") financial measure, which is defined as net sales excluding the impact of foreign currency translation and divestitures. The current year's functional currency net sales are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's sales to calculate the constant currency net sales change. For the divestiture impact, the company adjusted a portion of net sales as theDynamic Controls business was divested as ofMarch 7, 2020 . Management believes that this financial measure provides meaningful information for evaluating the core operating performance of the company. The global pandemic continued to impact sales across all segments. Public health restrictions limited access to healthcare professionals and institutions needed for certain product selections and global supply chain disruptions related to transportation and logistics delayed receipt of components and limited conversion of orders to shipments in the quarter. These items impacted each of the regions in 1Q21 and resulted in declines in net sales compared to the same period last year. The company believes the global supply chain disruptions from 1Q21 are temporary, and as these disruptions subside and access to healthcare increases, sales growth should return for the remainder of the year. In addition, the pandemic did not impact 1Q20.Europe - Constant currency net sales decreased$17,870,000 , or 14.8% in 1Q21 compared to 1Q20 as sales continued to be significantly impacted by the pandemic. Shutdown orders in certain countries contributed to decreases in sales of mobility and seating products and lifestyle products, which was slightly offset by growth in respiratory products. Shutdowns impacted the company's operations to various degrees inFrance ,Germany ,UK and the Nordic countries.North America - Constant currency net sales for 1Q21 decreased$11,391,000 or 13.1% compared to 1Q20 driven by declines in sales of mobility and seating and non-bed lifestyle products which more than offset growth in respiratory products. All Other - Constant currency net sales, which relate entirely to theAsia Pacific region, decreased$1,263,000 or 16.4% for 1Q21 compared to 1Q20 driven by declines in lifestyle products offset by growth in mobility and seating products. 4
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MD&ANet Sales Table of Contents [[Image Removed: ivc-20210331_g2.jpg]] Constant currency net sales of mobility and seating products, which comprise most of the company's clinically complex product portfolio, decreased to 35.8% of net sales in 1Q21 from 39.8% in 1Q20. This decrease reflects the significant impacts of the pandemic, particularly limited access to healthcare professionals and institutions needed for certain product selections, specifically for mobility and seating products and non-bed related lifestyle products. In addition, net sales in 1Q21 were impacted by global supply chain disruptions impacting the availability of components. 5 --------------------------------------------------------------------------------
MD&A Gross Profit Table of Contents GROSS PROFIT [[Image Removed: ivc-20210331_g3.jpg]] Gross profit as a percentage of net sales for 1Q21 decreased 100 basis points to 27.8%, primarily attributable to unfavorable manufacturing variances as a result of reduced net sales. Gross profit was also impacted by unfavorable product mix. Unfavorable manufacturing variances in 1Q21 were the result of both lower volumes and increased costs due to component shortages and transportation delays which impacted labor costs in several of our manufacturing and assembly locations inEurope andNorth America . Gross profit drivers by segment:Europe - Gross profit as a percentage of net sales for 1Q21 decreased 1.6 percentage points and$3,972,000 , compared to 1Q20 driven by lower net sales and unfavorable manufacturing variances as a result of reduced net sales.North America - Gross profit as a percentage of net sales for 1Q21 was flat while gross profit dollars declined$3,887,000 compared to 1Q20 driven by lower net sales and unfavorable manufacturing variances as a result of reduced net sales. All Other - Gross profit as a percentage of net sales forAsia Pacific increased 7.3 percentage points while gross profit dollars declined$1,040,000 compared to 1Q20 primarily driven by reduced sales and divestiture of theDynamic Controls business as ofMarch 7, 2020 . All Other also includes the impact of intercompany profit eliminations for the consolidated company. 6 --------------------------------------------------------------------------------
MD&A SG&A Table of Contents SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ($ in thousands USD) 1Q21 1Q20 Reported Change Foreign Exchange Impact Divestiture % Impact Constant Currency Change SG&A expenses - $ 58,821 61,738 (2,917) 3,006 (826) (5,097) SG&A expenses - % change (4.7) 5.0 (1.3) (8.4) % to net sales 30.0 28.3 The table above provides selling, general and administrative (SG&A) expense change as reported and as adjusted to exclude the impact of foreign exchange translation (constant currency SG&A). "Constant currency SG&A" is a non-GAAP financial measure, which is defined as SG&A expenses excluding the impact of foreign currency translation and divestitures. The current year's functional currency SG&A expenses are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's SG&A expenses to calculate the constant currency SG&A expense change. Management believes that this financial measure provides meaningful information for evaluating the core operating performance of the company.
The divestiture impact is related to a portion of the SG&A expenses related to
the
SG&A expenses, excluding the impact of foreign currency translation and divestitures, which is referred to as "constant currency SG&A," decreased for 1Q21 compared to the same period last year primarily due to reduced employment costs and lower sales and marketing expenses partially offset by unfavorable foreign currency transactions.
SG&A expense drivers by segment:
Europe - SG&A expenses for 1Q21 decreased$953,000 or 3.3% compared to 1Q20 with foreign currency translation increasing SG&A expenses by$2,537,000 , or 8.8%. Constant currency SG&A expenses decreased$3,490,000 , or 12.1%. The decreased expense was primarily attributable to lower employment costs and sales and marketing expenses.North America - SG&A expenses for 1Q21 decreased$3,557,000 or 13.6%, compared to 1Q20 with foreign currency translation increasing SG&A expenses by$166,000 . Constant currency SG&A expenses decreased$3,723,000 , or 14.3% driven primarily by employment costs and sales and marketing expenses. All Other - SG&A expenses for 1Q21 increased by$1,593,000 compared to 1Q20 with foreign currency translation increasing SG&A expenses by$303,000 and divestitures decreasing SG&A expenses by$826,000 . Constant currency SG&A expenses increased by$2,116,000 . All Other includes SG&A related to theAsia Pacific businesses and non-allocated corporate costs. SG&A expenses related to non-allocated corporate costs for 1Q21 increased 7.4%, or$397,000 , compared to 1Q20 driven primarily by stock compensation expense. Related to theAsia Pacific businesses, constant currency SG&A expenses increased$1,719,000 , due to foreign currency transactions. 7
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