Invacare 2013 Annual Report Download - page 120

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-46
The majority of the production from the Taylor Street facility is "made to order" custom wheelchairs for customers and, as
a result, there was not a significant amount of finished goods inventory on hand at December 31, 2013, and the inventory is expected
to be fully utilized. Accordingly, the Company concluded that there was not an impairment of the work in process and finished
goods at the Taylor Street facility at December 31, 2013. Further, based on its analysis of the raw material inventory at the Taylor
Street facility and the Company's expectations at the time of filing of this Annual Report on Form 10-K with respect to the time
frame for completion of the third-party expert certification audits and FDA inspection, the Company concluded that the value of
the inventory was not excessive or impaired at December 31, 2013. However, if the Company's expectations regarding the impacts
of the limitations in the consent decree or the time frame for completion of the third-party expert certification audits and FDA
inspection were to change, the Company may, in future periods, conclude that an impairment exists with respect to its fixed assets
or inventory at the Taylor Street facility.
The North America/HME segment is the segment primarily impacted by the limitations in the FDA consent decree. However,
the Asia/Pacific segment also is negatively affected as a result of the consent decree due to the lower sales volume of microprocessor
controllers. During 2012, before the effective date of the consent decree, the Company started to experience decreases in net sales
in the North America/HME and Asia/Pacific segments. Those decreases were primarily related to delays in new product
introductions, uncertainty on the part of the Company's customers as they coped with prepayment reviews and post-payment audits
by the Centers for Medicare and Medicaid Services ("CMS") and contemplated their participation in the next round of National
Competitive Bidding ("NCB"), and, the Company believes, uncertainty regarding the resolution of the consent decree which limited
the Company's ability to renegotiate and bid on certain customer contracts and otherwise led to a decline in customer orders. The
negative effect of the consent decree on customer orders and net sales has been considerable, and the Company expects to experience
continued low levels in net sales as a result of the limitations imposed by the consent decree. The Company expects to continue
to experience lower levels of net sales in the North America/HME and Asia/Pacific segments at least until it has successfully
completed the previously-described third-party expert certification audit and FDA inspection and has received written notification
from the FDA that the Company may resume full operations at the Corporate and Taylor Street facilities. Even after the Company
is permitted to resume full operations at the affected facilities, it is uncertain as to whether, or how quickly, the Company will be
able to rebuild net sales to more typical historical levels, irrespective of market conditions. Accordingly, the limitations in the
consent decree had, and likely will continue to have, a material adverse effect on the Company's business, financial condition and
results of operations.
In 2013, the Company recorded an incremental warranty reserve of $7,264,000 pre-tax ($7,170,000 after-tax), which primarily
impacted the Asia/Pacific ($4,639,000) and the North America/HME ($2,625,000) segments. The warranty accrual related to the
power wheelchair joystick recall was increased during the fourth quarter of 2013 principally as a result of the commencement of
the recall in the quarter and the realization that the number of replacement units required was trending higher than the Company's
original estimates, which were based on historical experience related to previous recalls. The effect of this change in estimate
increased warranty expense by $3,402,000 ($3,308,000 after-tax) in the fourth quarter of 2013.
For additional information regarding the consent decree, please see the following sections of this Annual Report on Form
10-K: Item 1. Business - Government Regulation and Item 1A. Risk Factors ; Item 3. Legal Proceedings; and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Outlook and - Liquidity and Capital Resources.
In addition, in December 2010, the Company received a warning letter from the FDA related to quality system processes
and procedures at the Company's Sanford, Florida facility. The Company is executing a comprehensive quality systems remediation
plan that is intended to address all of the FDA's concerns in the warning letter. However, the results of regulatory claims, proceedings,
investigations, or litigation are difficult to predict. An unfavorable resolution or outcome of the FDA warning letter could materially
and adversely affect the Company's business, financial condition, and results of operations.
Any of the above contingencies could have an adverse impact on the Company's financial condition or results of operations.
Subsequent Event
On January 17, 2014, the Company received a claim for approximately $1,352,000 from the acquirer of ISG. The claim
alleges a breach of the purchase agreement, specifically that the inventories sold were not entirely useable or saleable in the ordinary
course of business. The Company believes this claim is without merit and intends to contest this claim vigorously. As of the date
of this filing, the Company is unable to estimate the outcome of this matter.
On January 31, 2014, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated
Credit Agreement”), by and among the Company, the other Borrowers party thereto, the Guarantors party thereto, the Lenders