Invacare 2015 Annual Report Download - page 121

INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-49
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 not expected to be permanent 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 such raw material 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, 2015.
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, 2015, 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, 2015. 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 FDA's acceptance of the third-party expert certification audit and FDA inspection, the company concluded that the value
of the inventory was not excessive nor impaired at December 31, 2015. However, if the company's expectations regarding the
impacts of the limitations in the consent decree or the time frame for acceptance of the third-party expert certification audit 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, which continued beyond 2012,
were driven in large part by the consent decree which 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 National Competitive Bidding ("NCB")
process. 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 FDA re-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.
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.
The company's warranty reserves are subject to adjustment in future periods as new developments change the company's
estimate of the total cost of these matters. In 2015, the company's warranty expense includes reversals of $2,325,000 comprised
of $2,000,000 related the company's stationary oxygen concentrator recall, $250,000 related to the recall of a sieve bed component
and $75,000 related to the company's joystick recall, all of which impacted the North America/HME segment.
The company' recorded incremental warranty expense in 2014 totaling $11,493,000 for three specific product recalls. First,
an expense of $6,559,000 for a recall related to a component in a stationary oxygen concentrator that was manufactured in the
company’s facility in Suzhou, China, and sold globally. This expense was recorded in the European segment ($3,395,000) and
North America/HME segment ($3,164,000). Second, an expense of $2,057,000 for the recall of a sieve bed component used within
stationary oxygen concentrators manufactured in the company's Sanford, Florida facility during August 2014, which was recorded
in the North America/HME segment. Third, an incremental expense of $2,877,000 related to the company's joystick recall as a
result of higher than previously anticipated response rates from large customers in the U.S. and Canada and a product mix toward