Invacare 2014 Annual Report Download - page 118

INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-48
improve the functionality and capabilities of certain quality subsystems, most notably complaint handling and corrective and
preventative actions (CAPA). The Company has identified the root causes of the issues that need to be addressed in order to achieve
sustainable compliance and is working through quality implementation plans that will enable the Company to achieve the appropriate
solution. As of the date of this Annual Report on Form 10-K, the Company is making progress, but the Company still has work
to do, including process improvements for addressing complaint data, before the Company can verify the effectiveness of its
solutions and complete the third-party expert certification audit.
The Company cannot predict the timing or the outcome of the final expert certification audit. According to the consent decree,
once the expert's third certification audit is completed and the certification report is submitted to the FDA, as well as the Company’s
own report related to its compliance status, together with its responses to any observations in the certification report, the FDA will
inspect the Company's Corporate and Taylor Street facilities to determine whether they are in compliance with the FDA's QSR.
If the FDA is satisfied with the Company's compliance, the FDA will provide written notification that the Company is permitted
to resume full operations at the impacted facilities.
After resumption of full operations, the Company must undergo five years of audits by a third-party expert auditor to determine
whether the facilities are in continuous compliance with FDA's QSR and the consent decree. The auditor will inspect the Corporate
and Taylor Street facilities’ activities every six months during the first year following the resumption of full operations and then
every 12 months for the next four years thereafter.
As described above, because the limitations on production are expected to be temporary in nature, and partial production is
allowed, the Company does not anticipate any major repair, replacement or scrapping of its fixed assets at the Taylor Street
manufacturing facility. Based on the Company's expectations at the time of filing of this Annual Report on Form 10-K with respect
to the utilization of raw material inventory and with respect to expected future cash flows from production at the Taylor Street
manufacturing facility, the Company concluded that there is no impairment in the value of the fixed assets related to the Taylor
Street manufacturing facility at December 31, 2014.
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, 2014, 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, 2014. 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 impaired at December 31, 2014. 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.
Although the North America/HME segment is the segment primarily impacted by the limitations in the FDA consent decree,
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. The Company believes that those decreases were driven in large part by
the consent decree which has led to delays in new product introductions and to uncertainty regarding the timing of exiting 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. Separately, net sales in the North America/HME segment were likely impacted by 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").
The negative effect of the consent decree on customer orders and net sales in these segments has been considerable, and the
Company expects to continue to experience low 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, when compared to the Company's 2010 results, 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.