Invacare 2015 Annual Report Download - page 47

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As the company continues to shift its strategic focus, it expects its financial results will continue to be pressured in 2016
as a result of its consent decree with the United States Food and Drug Administration (FDA) affecting operations at the Corporate
and Taylor Street facilities in Elyria, Ohio. The consent decree limits production at the Taylor Street manufacturing facility to
orders meeting certain documentation requirements. See Item 3, Legal Proceedings. Regarding products manufactured at the
Taylor Street facility, which have been impacted by the company's consent decree with the FDA and sold primarily in the North
America/HME segment, net sales were approximately $41,600,000 in 2015 compared to approximately $43,200,000 in 2014.
Even if the company receives the FDA notification that it may resume full operations at its Taylor Street facility, it is uncertain as
to whether, or how quickly the company would be able to rebuild net sales, irrespective of market conditions, to typical historical
levels such as when Taylor Street production accounted for approximately $172,000,000 and $147,000,000 in net sales in 2011
and 2012, respectively. The company ultimately expects a positive outcome from the company’s investments in quality
improvements, and it is optimistic about its ability to grow its results from the impacted facilities over time. Additionally, the
company sees opportunities to develop other complex rehabilitation solutions from its subsidiaries that also operate in this space.
As part of the company’s strategic priorities of establishing a quality culture and driving greater profit and cash, the company
will take steps to deepen the deployment of quality initiatives throughout the company and it will accelerate the transformation
and, it anticipates, the growth of its business. The company plans to continue investments in global quality improvements, which
it expects will be a competitive advantage. The company also expects to increase the size of its sales force and support it to be
more focused on clinically complex products, including complex rehabilitation technology, therapeutic support surfaces and wound
prevention, safe patient handling, respiratory therapy technology, and bariatric products. This change will require more training,
an expanded clinical staff and more investment in commercial and marketing activities to increase awareness and provide more
access to these products. The company expects its accounts receivable balance to increase throughout its transformation, as there
is a longer order-to-cash cycle on clinically complex products, which is likely to have a negative impact on cash flow. The company
may also explore streamlining its operations and better aligning its infrastructure to efficiently deliver an improved mix of clinically
complex products. The company will look for opportunities to invest in clinically differentiating technology and expertise. To
finance this transformation, grow related working capital, fund ongoing quality initiatives, and to support the company through
historic seasonal performance cycles and continued foreign currency pressure, the company completed the issuance in February
2016 of $130,000,000 aggregate principal amount of 5.00% convertible senior notes, which mature in 2021. See “Subsequent
Events” in the Notes to the Condensed Consolidated Financial Statements included in this Annual Report on Form 10-K.
On balance, the company sees opportunities to grow, continue its transformation and make progress against industry
headwinds and strong competition for long-term results. See “Contingencies” in the Notes to the Condensed Consolidated Financial
Statements and “Forward-Looking Statements” included in this Annual Report on Form 10-K.
DISCONTINUED AND DIVESTED OPERATIONS
On December 21, 2012, in order to focus on its core equipment product lines, the company entered into an agreement to sell
ISG and determined on that date that the "held for sale" criteria of ASC 360-10-45-9 were met. On January 18, 2013, the company
completed the sale of the ISG medical supplies business to AssuraMed, Inc. for a purchase price of $150,800,000 in cash, which
was subject to final post-closing adjustments. ISG had been operated on a stand-alone basis and reported as a reportable segment
of the company. The company recorded a gain of $59,402,000 pre-tax in 2013 which represented the excess of the net sales price
over the book value of the assets and liabilities of ISG, excluding cash. The sale of this business is dilutive to the company's results.
The company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the first quarter
of 2013. In 2013, the net sales of the discontinued operation of ISG were $18,498,000 and earnings before income taxes were
$402,000.
On August 6, 2013, the company sold Champion, its domestic medical recliner business for dialysis clinics, to Champion
Equity Holdings, LLC for $45,000,000 in cash, which was subject to final post-closing adjustments. Champion had been operated
on a stand-alone basis and reported as part of the IPG segment of the company. The company recorded a gain of $22,761,000 pre-
tax in the third quarter of 2013, which represented the excess of the net sales price over the book value of the assets and liabilities
of Champion. The sale of this business was dilutive to the company's results. The company utilized the proceeds from the sale to
reduce debt outstanding under its revolving credit facility in the third quarter of 2013. The gain recorded by the company reflects
the company's estimated final purchase adjustments. See "Discontinued Operations" in the Notes to the Condensed Financial
Statements included in this Form 10-K for the assets and liabilities sold.
In 2013, the net sales of the discontinued operation of Champion were $15,857,000 and earnings before income taxes were
$3,156,000. Results for Champion include an interest expense allocation from continuing operations to discontinued operations
of $449,000 in 2013, as proceeds from the sale were required to be utilized to pay down debt. The interest allocation was based
on the net proceeds assumed to pay down debt applying the company's average interest rates for the periods presented.