Item 10. Directors, Executive Officers and Corporate Governance.
Director Biographies and Qualifications
Below is certain biographical information regarding the company's Directors, as well as a discussion of the qualifications. Each of the individuals listed below has a wealth of knowledge, experience and expertise developed over a lifetime of achievement. In the discussion below, we have not detailed all of the numerous factors considered by the Board, but rather have highlighted the primary qualifications that led the Board to conclude that each of the following individuals should serve as a Director. The Board of Directors believes that the current Board composition reflects a group of individuals with relevant knowledge and experience that greatly benefits the company.
Edward F. Crawford and Steven H. Rosen were appointed as directors by the Board of Directors on August 22, 2022 pursuant to a cooperation agreement (the “Cooperation Agreement”) entered into on August 22, 2022. Additional information regarding the Cooperation Agreement is included in the Corporation’s Current Report on Form 8-K filed on August 24, 2022 and in Item 13 of this Annual Report on Form 10-K under the caption “Certain Relationships and Related Transactions.” There are no other arrangements or understandings pursuant to which any of the persons listed below were selected as directors.
Edward F. Crawford, age 84, was appointed as a Director of the company on August 22, 2022. Ambassador Crawford currently serves as a member of the Board of Park-Ohio Holdings Corp. (NASDAQ: PKOH), a public company based in Ohio and has previously served as its Chairman and Chief Executive Officer from 1998 until 2018 and as its President from 1997 to 2003. He currently serves as Chairman of the Board of Crawford United Corporation (OTC: CRAWA) since 2021 and previously has served as a director from 2012 to 2019. He has served as the U.S. Ambassador to Ireland from 2019 to 2021. Ambassador Crawford serves as a member of the Board of Advisors at Resilience Capital Partners LLC, a private equity firm. Ambassador Crawford has extensive experience in strategic planning and operations, as well as knowledge of public and private company strategy. Mr. Crawford has amassed extensive knowledge of public and private company strategies and operations and brings to the Board his experience in leading a variety of private enterprises for over 40 years.
Petra Danielsohn-Weil, PhD, age 63, has been a Director since May 2018. From 2014 until her retirement in August 2017, Ms. Danielsohn-Weil was the Regional
President for Pfizer Essential Health - Europe. Pfizer Essential Health is a producer of non-viral anti-infectives, biosimilars and sterile injectable medicines and is a business unit of Pfizer Inc. (NYSE:PFE), a research-based, global biopharmaceutical company. Ms. Danielsohn-Weil previously served in various general management, regional and global business unit executive roles in Europe and the United States for Pfizer from 2000 through 2014. Prior to that she served in various commercial and strategic leadership roles in Europe and the US for Warner-Lambert from 1988 until its acquisition by Pfizer in 2000. Since 2019, Ms. Danielsohn-Weil has been a member of the supervisory Board of Gruenenthal Pharma GmbH. Ms. Danielsohn-Weil has a wealth of executive experience leading biotech businesses in the European market, including in commercial development, business integration, research and development, sales, digital marketing, and implementing long-term strategic plans in a complex environment.
Marc M. Gibeley, age 58, has been a Director since November 2015. Mr. Gibeley has served as Chief Executive Officer and a Director of Nutritional Medicinals, LLC, a producer of organic whole food feeding tube formulas and meal replacements, since November 2018. Prior to that, Mr. Gibeley served as Chief Executive Officer and Director of Scientific Intake Ltd. Co., a medical device and digital healthcare company focused on weight management and the prevention of obesity related chronic diseases, from October 2016 to January 2018. Prior to that, Mr. Gibeley served as Head of Diabetes Care North America for Roche Holding AG (SIX: RO), a leading research-focused pharmaceuticals and diagnostics healthcare company from 2011 through 2016. Mr. Gibeley served as the President and Chief Executive Officer of WaveRx, a venture-backed diabetes neuropathy medical device company, from 2008 through 2011. Prior to joining WaveRx, Mr. Gibeley worked for several consumer packaged goods companies, including Procter & Gamble (NYSE: PG), Eastman Kodak (NYSE: KODK) and Kraft Foods (NASDAQ: KHC). Mr. Gibeley has extensive experience in leading and managing medical device companies that have undergone substantial changes and transformed to focus on marketing products directly to consumers. He has a wide range of management expertise, including in sales, marketing, finance, customer support and product launches, as well as in regulatory affairs, manufacturing, and operations and commercial development, which has been developed over a career in consumer products businesses at various stages of development.
Michael J. Merriman Jr., age 66, was appointed to the Board of Directors on August 28, 2022. Mr. Merriman Jr., previously served as a director of the company from 2014 to 2018 and chaired its Audit Committee. He has
served as an operating advisor of Resilience Capital Partners LLC, a private equity firm focused on principal investing in lower, middle-market underperforming and turnaround opportunities, from 2008 until 2017, and currently serves on the board of one of Resilience’s portfolio companies. Mr. Merriman Jr. is a director of Nordson Corporation (Nasdaq: NDSN), a manufacturer of products that dispense adhesives, coatings, sealants, biomaterials and other materials, and has served as Chairman of the Board since 2018. He also is a director of Regis Corporation (NYSE: RGS), a company that owns, franchises, and operates beauty salons, hair restoration centers and cosmetology education facilities, where he is chair of the audit committee and a member of the compensation committee. Mr. Merriman Jr. served as president and chief executive officer of Lamson & Sessions Co. (formerly, NYSE: LMS), a manufacturer of thermoplastic conduit, fittings and electrical switch and outlet boxes, from 2006 to 2007; and served as senior vice president and chief financial officer of American Greetings Corporation (formerly, NYSE: AM), a designer, manufacturer and seller of greeting cards and other social expression products, from 2005 until 2006. Mr. Merriman Jr. previously served as a director of OMNOVA Solutions Inc., a specialty chemical company, from 2008 until its sale in 2020. Mr. Merriman Jr. has deep experience and significant knowledge in executive management, strategy, corporate governance, acquisitions and divestitures, product development and investor relations, as well as significant finance, financial reporting and accounting expertise, all developed through Mr. Merriman Jr.’s prior experience as a public company chief executive officer and chief financial officer, as a certified public accountant, and as a public company director.
Clifford D. Nastas, age 60, has been a Director since May 2015. Mr. Nastas has served as Chief Executive Officer and President of Tempel Steel, an independent manufacturer of precision magnetic steel laminations for the motor, generator, auto and transformer industries, since May 2019. Mr. Nastas served as President and Chief Executive Officer of Radiac Abrasives Company, a manufacturer of conventional bonded and super abrasives in North America from January 2016 until December 2018. Since 2014, Mr. Nastas has been a Director of Dan T. Moore Company, Inc., a holding company of diverse advanced materials manufacturing and technology businesses and became co-chairman in 2016. Also, since 2014, Mr. Nastas has served as a Director of Shorr Packaging Corporation, an ESOP-owned company that distributes packaging supplies throughout North America. Mr. Nastas served as Chief Executive Officer and a Director of Material Sciences Corporation (formerly, Nasdaq: MASC), Elk Grove Village, Illinois, a publicly traded diversified industrial manufacturing company providing high-value coated metal, acoustical and lightweight composite solutions from 2005 until the
company was sold in March 2014. From 2001 to 2005, Mr. Nastas served in various capacities at Material Sciences, including as President and Chief Operating Officer. Prior to joining Material Sciences, Mr. Nastas served in various general management, sales, and manufacturing capacities with Honeywell International, formerly Allied Signal (NYSE: HON), Morris Township, New Jersey, Avery Dennison Corporation (NYSE: AVY), Glendale, California, and Ford Motor Company (NYSE: F), Dearborn, Michigan. Mr. Nastas has extensive business leadership and management expertise, which includes a broad range of experience in management, operations, sales, marketing, product development and engineering in a number of global businesses, including as the CEO of a publicly-traded company.
Geoff Purtill, age 57, was appointed a Director on December 9, 2022. He has been President and Chief Executive Officer of the company since November 2022 and had previously served as interim President and CEO beginning in August 2022. Previously, Mr. Purtill also served as the Senior Vice President and General Manager of the company's European and Asia Pacific businesses and has led the Global Strategy efforts. Mr. Purtill joined Invacare in 2010, and prior to that had various leadership roles in sales, category management and supply chain roles at Johnson & Johnson. Mr. Purtill was in the Australian Army for 14 years, where he started as an Electronics Technician and left as a Captain in the Intelligence Corps. Mr. Purtill graduated with an MBA (Exec) from the Australian Graduated School of Management in 2003. Mr. Purtill was appointed as a director primarily due to his role as Chief Executive Officer, as well as his considerable experience in managing and operating businesses, which provides the Board with management perspective that is valuable in overseeing the company’s business operations.
Steven H. Rosen, age 52, was appointed as a Director of the company on August 22, 2022. Since 2001, Mr. Rosen has served as the Co-Founder and Co-Chief Executive Officer of Resilience Capital Partners LLC, a Cleveland, Ohio based private equity firm where he has been involved with all aspects of the firm’s operations and strategic planning efforts and the developing and maintaining of relationships with investors and investment intermediaries. He has a wide range of experience in operations, strategic planning and assisting companies undergoing strategic transformation. Mr. Rosen serves as a director of Park-Ohio Holdings Corp (NASDAQ: PKOH), Crawford United Corporation (OTC: CRAWA) and AmFin Financial Corporation (OTC: ANFL). Mr. Rosen holds a Bachelors Degree from the University of Maryland and an MBA from the Weatherhead School of Management at Case Western Reserve University. Mr. Rosen brings to the Board an extensive background in mergers and acquisitions, financial analysis and consulting as well as contacts throughout the financial and investing field.
Aron I. Schwartz, age 52, was appointed as a Director on March 21, 2022. Mr. Schwartz is a Managing Partner at ACON Investments, LLC, a private equity firm based in Washington, D.C. Mr. Schwartz was previously a consultant to, and a Managing Director at, Avenue Capital, a global investment firm, from 2012 to 2014. Prior to that, from 1999 to 2011, he held various positions culminating in Managing Director of Fenway Partners, a middle market private equity firm. Since 2012, he has served on the board of directors and as chairman of the audit committee of CION Investment Corporation (NYSE: CION), a business development company that primarily provides senior secured loans to US middle-market companies. Mr. Schwartz previously served on the boards of various companies, including Melinta Therapeutics, Inc. (OTC: MLNTQ), a pharmaceutical development company from 2019 to 2020. Mr. Schwartz has a wide range of financial experience in managing and overseeing companies with operations in various industries, including companies undergoing strategic transformation.
Determination of Current Board Leadership Structure
The Board’s independent Directors bring experience, oversight and expertise from outside the company and industry, while the Chief Executive Officer brings company and industry-specific experience and expertise. One of the key responsibilities of the Board is to develop strategic direction and hold management accountable for the execution of strategy once it is developed. There is unified leadership and a focus on strategic development and execution and structure helps assure independent oversight of management.
Members of the Board Committees
The composition of the Board committees, as of April 14, 2023, is set forth below.
| | | | | | | | | | | | | | | | | | | | |
Director | Audit Committee | Nominating and Governance Committee | Compensation and Management Development Committee | Strategy and Operational Improvement Committee | Special Committee | Regulatory and Compliance Committee |
Edward F. Crawford | | Member | | Member | | |
Petra Danielsohn-Weil, PhD | | | Member | | Member | Chair |
Marc M. Gibeley | | | Chair | | Member | Member |
Clifford D. Nastas | | Chair | | Chair | Member | |
Michael J. Merriman Jr. (Chairman of the Board) | Member | Member | Member | Member | | |
Steven H. Rosen | Member | | Member | Member | | |
Aron I. Schwartz | Chair | | | Member | Chair | Member |
Geoffrey P. Purtill | | | | | Member | |
Principal Functions of the Board Committees
The Board has an Audit Committee; a Nominating and Governance Committee; a Compensation and Management Development Committee; a Strategy and Operational Improvement Committee; a Special Committee; and a Regulatory and Compliance Committee.
Audit Committee. The Audit Committee assists the Board in monitoring (i) the integrity of Invacare's financial statements, (ii) the independence, performance and qualifications of Invacare's internal and independent auditors, (iii) Invacare's compliance with legal and regulatory requirements related to the company's financial statements and accounting policies (iv) Invacare's risk assessment and management process. The specific functions and responsibilities of the Audit Committee are set forth in the Audit Committee Charter adopted by the Board of Directors, a copy of which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Audit Committee met four times during 2022.
The Board has determined that each member of the Audit Committee satisfies the current independence standards of Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended. The Board also has determined that Aron I. Schwartz, the Chair of the Audit Committee, Michael J. Merriman Jr. and Steven H. Rosen each qualifies as an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K. Mr. Merriman Jr. joined the Board of Directors on August 28, 2022 and the Audit Committee on December 8, 2022. Mr. Rosen joined the Board of Directors and the Audit Committee on August 22, 2022.
Nominating and Governance Committee. The Nominating and Governance Committee assists the Board (i) in identifying and recommending individuals qualified to become Directors and will consider all qualified
nominees recommended by shareholders, and (ii) on all matters relating to corporate governance of the company, including, but not limited to, the development and implementation of the company's corporate governance and ESG policies and guidelines. Each of the current members of the Nominating and Governance Committee is independent within the meaning of Invacare's Corporate Governance Guidelines. The Board of Directors has adopted a charter for the Nominating and Governance Committee, which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Nominating and Governance Committee met three times during 2022.
Compensation and Management Development Committee. The Compensation and Management Development Committee assists the Board in developing and implementing (i) executive compensation programs that are fair, equitable and aligned with the interests of shareholders and that are effective in the recruitment, retention and motivation of executive talent required to successfully meet Invacare's strategic objectives and (ii) a management succession plan that meets Invacare's present and future needs. Each of the current members of the Compensation and Management Development Committee is independent within the meaning of Invacare's Corporate Governance Guidelines. The Board of Directors has adopted a charter for the Compensation and Management Development Committee, which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Compensation and Management Development Committee met eight times during 2022. Mr. Rosen joined the Board of Directors and the Compensation and Management Development Committee on August 22, 2022. Mr. Merriman Jr. joined the Board of Directors on August 28, 2022, and the Compensation and Management Development Committee on November 17, 2022.
Regulatory and Compliance Committee. The Regulatory and Compliance Committee assists the Board in its oversight of the company's legal and regulatory compliance matters, including medical device regulatory compliance. Each of the current members of the Regulatory and Compliance Committee is independent within the meaning of Invacare's Corporate Governance Guidelines. The Board of Directors has adopted a charter for the Regulatory and Compliance Committee, which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Regulatory and Compliance Committee met four times during 2022.
Strategy and Operational Improvement Committee. The Strategy and Operational Improvement Committee was formed on August 22, 2022 and its responsibilities include: (i) conducting a comprehensive review and evaluation of the current corporate strategies of the company; (ii) assisting and advising the Board on corporate strategies and strategic alternatives; and (iii) from time to time as it determines appropriate, making recommendations to the Board regarding actions to be considered in furtherance of the committee’s purpose.
Special Committee. The Special Committee was formed on December 9, 2022 to evaluate and approve (i) strategic and/or financial options and transactions related to financing, restructuring, reorganization, recapitalization, divestiture, acquisition, and similar transactions and, if appropriate, authorizing financing to augment the company’s liquidity, balance sheet, capital allocation, or otherwise, and authorizing any bankruptcy filing and related proceedings in respect of the company and/or one or more of its subsidiaries (each of the foregoing and any combination of the foregoing, a “Restructuring Transaction”), and (ii) conflicts between the interests of the company, on the one hand, and the interests of certain creditors of the company and/or the interests of the company’s equity interests with representation on the Board, on the other.
Board Nominations and Shareholder Recommendations
There have been no material changes to the procedures by which shareholders may recommend nominees to the company’s Board of Directors since the last disclosure of those procedures in the company’s definitive proxy statement filed with the SEC in connection with its 2022 annual meeting of shareholders.
Corporate Governance Guidelines
The Board has adopted Corporate Governance Guidelines which contain principles that, along with the charters of the standing committees of the Board of Directors, provide the framework for Invacare's corporate
governance. Among other things, the Corporate Governance Guidelines establish principles relating to:
•responsibilities and functions of the Board of Directors, such as meeting, orientation and continuing education guidelines;
•the composition of the Board, including Director independence and other qualification requirements;
•responsibilities of the Chairman of the Board, the Chief Executive Officer and the Lead Independent Director, if any;
•the establishment and functioning of Board committees;
•executive sessions of non-management Directors;
•Chief Executive Officer succession planning;
•Board access to management, and evaluation of the Chief Executive Officer;
•communication and interaction by the Board with shareholders and other interested parties;
•share ownership guidelines for Directors and executive officers;
•engagement by an independent committee of the Board with shareholder proponents following a majority vote on a shareholder proposal; and
•periodic self-assessment by the Board and each Board committee.
A copy of the Corporate Governance Guidelines can be found on the company's website at www.invacare.com by clicking on the Investor Relations tab and then selecting the Corporate Governance link.
Delinquent Section 16(a) Reports
Under Section 16(a) of the Exchange Act, Directors, executive officers, and beneficial owners of more than 10% of the company's common shares are required to report their initial ownership of common shares and any subsequent changes in that ownership to the SEC. Due dates for the reports are specified by those laws, and the company is required to disclose any failure to timely file such reports during the year ended December 31, 2022. Based solely on written representations of the Directors and executive officers and on copies of the reports that they have filed with the SEC, it is the company's belief that all of its Directors and executive officers complied with all Section 16(a) filing requirements applicable to them with respect to transactions in the company's equity securities during 2022, except for a Form 3 related to the June 3,
2022 formation of a 10% ownership group filed by Crawford United Corporation, Edward F. Crawford and Matthew V. Crawford, which was filed on August 24, 2022. This late filing was due to an inadvertent error.
Codes of Ethics
The company has adopted a Code of Business Conduct and Ethics that applies to all Directors, officers and employees. The company has also adopted a separate Financial Code of Ethics that applies to its Chief Executive Officer (its principal executive officer), its Chief Financial Officer (its principal financial officer and principal accounting officer) and its controller or persons performing similar functions. Investors can find both codes on the company's website at www.invacare.com by clicking on the Investor Relations tab and then selecting the Corporate Governance link. The company will post any amendments to the codes, as well as any waivers that are required to be disclosed pursuant to the rules of the Securities and Exchange Commission, within four business days, on its website.
Employees have been notified that if they have any questions or concerns regarding financial integrity, legal or regulatory compliance, ethical business conduct, or activities that may be improper under the company’s Code of Business Conduct and Ethics, or otherwise have work related concerns, they are invited to speak with their supervisor, or any other member of management at any time. They also may report any concerns in writing to the Chief Executive Officer or the Chair of the Audit Committee, or submit a report to the company’s EthicsPoint ethics and compliance hotline reporting service, which is used to consolidate and summarize reports received. All EthicsPoint reports are reviewed by the Audit Committee.
The company’s EthicsPoint service is not intended to replace other communication channels already in place. However, if employees have a concern regarding a financial integrity, legal or regulatory compliance, or ethics related matter, or believe they cannot communicate effectively using existing internal channels, they may report the concern through the company’s EthicsPoint hotline reporting service by telephone or online at http://invacare.ethicspoint.com. Reports through EthicsPoint may be made anonymously and without reprisals for matters reported in good faith.
Director Compensation Program
The Compensation and Management Development Committee (the “Compensation Committee”) is responsible for reviewing and making recommendations to the Board regarding all matters pertaining to compensation paid to non-employee Directors for Board, committee and committee chair services. In making non-employee Director compensation recommendations, the Compensation Committee takes various factors into consideration, including, but not limited to, the responsibilities of Directors generally, as well as committee chairs, and the form and amount of compensation paid to Directors by comparable companies. The Director compensation program is intended to be equitable based on the work required of non-employee Directors serving a healthcare technology company of our size and scope, and to tie a significant portion of non-employee Directors’ compensation to shareholder interests through the grant of restricted stock units. The Compensation Committee periodically reviews non-employee Director compensation and such compensation may be adjusted in the future as appropriate based on our peer group information and company performance.
The company's 2022 Director compensation program provided that non-employee Directors were paid the following cash compensation:
| | | | | | | | | | | |
| Effective January 2022 | Effective April 2022 | Effective September 2022 |
Annual Cash Retainer | $ | 65,000 | | $ | 105,000 | | $ | 105,000 | |
Lead Independent Director Additional Fee | 20,000 | | 20,000 | | — | |
Non-Executive Chairman Fee | — | | — | | 40,000 | |
Committee Chair Additional Fees: | | | |
Audit | 15,000 | | 15,000 | | 15,000 | |
Compensation and Management Development | 15,000 | | 15,000 | | 15,000 | |
Regulatory and Compliance | 15,000 | | 15,000 | | 15,000 | |
Nominating and Governance | 10,000 | | 10,000 | | 10,000 | |
Special Committee* | — | | — | | 20,000 | |
Fee per meeting in excess of 24 meetings | 1,500 | | 1,500 | | 1,500 | |
* The Special Committee was formed in December 2022.
Additionally, in April 2022, each non-employee Director nominated at that time was granted a restricted stock unit award of 39,474 shares, which vests in full on May 15, 2023. In connection with their appointment to the Board in August 2022, Mr. Crawford and Mr. Rosen were granted restricted stock unit awards of 20,854 shares each. On November 21, 2022, Mr. Crawford and Mr. Rosen returned the awards for no consideration. On September 13, 2022, Mr. Merriman Jr. was granted 154,852 restricted stock unit awards which vest in full on November 15, 2023.
Fiscal 2022 Director Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Fees Earned or Paid in Cash ($) (2) | | | Stock Awards ($)(1) | | | | | | | | | | | Total ($) |
Susan H. Alexander | | 100,000 | | (3) | | 58,422 | | | | | | | | | | | | 158,422 | |
Julie A. Beck | | 75,372 | | (4) | | 58,422 | | | | | | | | | | | | 133,794 | |
Edward F. Crawford | | 11,128 | | (5) | | 19,984 | | | | | | | | | | | | 31,112 | |
Petra Danielsohn-Weil, PhD | | 86,500 | | (6) | | 58,422 | | | | | | | | | | | | 144,922 | |
Stephanie L. Fehr | | 73,872 | | (7) | | 58,422 | | | | | | | | | | | | 132,294 | |
Diana S. Ferguson | | 24,667 | | (8) | | — | | | | | | | | | | | | 24,667 | |
Marc M. Gibeley | | 107,250 | | (9) | | 58,422 | | | | | | | | | | | | 165,672 | |
C. Martin Harris, M.D. | | 72,167 | | (10) | | — | | | | | | | | | | | | 72,167 | |
Michael J. Merriman, Jr. | | 13,003 | | (11) | | 157,949 | | | | | | | | | | | | 170,952 | |
Clifford D. Nastas | | 104,040 | | (12) | | 58,422 | | | | | | | | | | | | 162,462 | |
Steven H. Rosen | | 11,128 | | (13) | | 19,984 | | | | | | | | | | | | 31,112 | |
Aron I. Schwartz | | 60,208 | | (14) | | 58,422 | | | | | | | | | | | | 118,630 | |
(1) The values reported in this column represent the dollar amount of expense, calculated in accordance with ASC 718, Compensation - Stock Compensation, to be recognized for financial statement purposes over the respective vesting periods with respect to all restricted stock units awarded to each Director during 2022. These time-based restricted stock units were granted pursuant to the Invacare Corporation 2018 Equity Compensation Plan, and are scheduled to vest in full on May 15, 2023 with the exception of the awards granted to Messrs. Crawford, Rosen and Merriman, Jr. which are scheduled to vest in full on November 15, 2023. Messrs. Crawford and Rosen subsequently forfeited their awards to the company without consideration. For a description of the assumptions made in computing the values reported in this column, see “Equity Compensation” in the Notes to Consolidated Financial Statements.
(2) Fees presented in the table above and discussed within the footnotes below include payments in 2022 which includes fees earned in the fourth quarter of 2021 and paid in the first quarter of 2022 and exclude fees earned in the fourth quarter of 2022 and paid in the first quarter of 2023.
(3) The fees for Ms. Alexander include an $85,000 pro-rata retainer, $15,000 for her service as Chair of the Regulatory and Compliance Committee. Ms. Alexander resigned from the Board on November 16, 2022 and forfeited the restricted stock units granted to her in 2022.
(4) The fees for Ms. Beck include a $73,872 pro-rata retainer and $1,500 for one meeting in excess of 24 in 2021. Ms. Beck resigned from the Board on August 22, 2022 and forfeited the restricted stock units granted in 2022.
(5) The fees for Mr. Crawford include a $11,128 pro-rata retainer. Mr. Crawford joined the Board on August 22, 2022.
(6) The fees for Ms. Danielsohn-Weil include an $85,000 retainer and $1,500 for one meeting in excess of 24 in 2021.
(7) The fees for Ms. Fehr include a $73,872 pro-rata retainer. Ms. Fehr resigned from the Board on August 22, 2022 and forfeited the restricted stock units granted in 2022.
(8) The fees for Ms. Ferguson include a $21,667 pro-rata retainer and $3,000 for two meetings in excess of 24 in 2021. Ms. Ferguson resigned from the Board on January 19, 2022.
(9) The fees for Mr. Gibeley include a $85,000 pro-rata retainer, $11,250 for his service as Chair of the Compensation and Management Development Committee which was pro-rated for the partial year and $7,500 for five meetings in excess of 24 in 2021.
(10) The fees for Dr. Harris include a $49,167 pro-rata retainer, $13,333 for his service as Lead Independent Director, $6,666 for his service as Chair of the Nominating and Governance Committee, $3,000 for two meetings in excess of 24 in 2021.
(11) The fees for Mr. Nastas include a $85,000 pro-rata retainer, $10,000 for his service as Chair of the Audit Committee, $3,333 for his service as Chair of the Nominating and Governance Committee and $5,707 for his service as Lead Independent Director.
(12) The fees for Mr. Merriman Jr. include a $9,416 pro-rata retainer and $3,587 for his services as Non-Executive Chairman. Mr. Merriman Jr. joined the Board on August 28, 2022.
(13) The fees for Mr. Rosen include a $11,128 pro-rata retainer. Mr. Rosen joined the Board on August 22, 2022.
(14) The fees for Mr. Schwartz include a $51,458 pro-rata retainer and $8,750 for his services as Chair Audit Committee. Mr. Schwartz joined the Board on March 21, 2022.
Outstanding Director Equity Awards at December 31, 2022
The following table shows outstanding equity awards held by each Director at December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Option Awards | | Stock Awards |
Name (3) | Number of Securities Underlying Unexercised Options Exercisable (#) | | | | Option Exercise Price ($) | Option Expiration Date | | Number of Shares or Units of Stock That Have not Vested (#) | | Market Value of Shares or Units of Stock That Have not Vested ($) |
Edward F. Crawford | | | | | | | | — | (1) | — |
Petra Danielsohn-Weil, PhD | | | | | | | | 39,474 | (2) | 16,579 |
Marc M. Gibeley | | | | | | | | 39,474 | (2) | 16,579 |
Clifford D. Nastas | | | | | | | | 39,474 | (2) | 16,579 |
Michael J. Merriman, Jr. | | | | | | | | 154,852 | (3) | 65,038 |
Steven H. Rosen | | | | | | | | — | (1) | — |
Aron I. Schwartz | | | | | | | | 39,474 | (2) | 16,579 |
(1) Mr. Crawford and Mr. Rosen were appointed to the Board on August 22, 2022. Both had received 24,671 restricted stock unit awards on August 22, 2022 and voluntarily returned those awards for no consideration on November 21, 2022.
(2) The restricted stock unit awards are scheduled to vest in full on May 15, 2023 after a one-year “cliff” vesting period.
(3) Mr. Merriman Jr. was appointed to the Board on August 28, 2022. He received 154,852 restricted stock unit awards on September 13, 2022 which are scheduled to vest in full on November 15, 2023.
Item 11. Executive Compensation.
The compensation provided to the company’s named executive officers for the fiscal year ended December 31, 2022 is detailed in the Summary Compensation Table and accompanying footnotes and narrative that follow. The company’s named executive officers for the year ended December 31, 2022 were:
•Geoffrey P. Purtill, President and Chief Executive Officer;
•Matthew E. Monaghan, former Chairman, President and Chief Executive Officer;
•Kathleen P. Leneghan, Senior Vice President and Chief Financial Officer; and
•Anthony C. LaPlaca, Senior Vice President, General Counsel, Chief Administrative Officer and Secretary.
The Compensation Committee is comprised of independent Directors and is responsible for approving and administrating the company’s executive compensation plans. Each year, the Compensation Committee reviews the compensation program and pay practices. This review includes determining whether the company’s compensation levels are competitive with its peer group and other similarly situated companies and whether any changes should be made to remain competitive and effective.
The Compensation Committee determines the principal components of compensation for the named executive officers each year and sets the performance goals for each performance-based compensation component. The Compensation Committee meets regularly throughout the year and reviews the company’s performance to date against the performance goals.
The Compensation Committee’s decisions to award compensation are based on its assessment of each executive’s performance during the year against a variety of factors which may include corporate and personal goals, leadership qualities, operational performance, business responsibilities, current compensation arrangements and long-term potential to enhance shareholder value. Among the factors which may be considered are financial and non-financial measures such as revenue, profit, cash flow, product innovations, individual achievements, and improvements that create value. To set executive target compensation, the company does not necessarily adhere to rigid formulae or react immediately to short-term changes in business performance.
In making its decisions, the Compensation Committee reviewed input from an independent compensation consultant, Pay Governance LLC, and from management, who provided the Compensation Committee with analysis and recommendations regarding base salary adjustments, payout levels under annual incentive plans and equity awards.
The company’s executive compensation is intended to:
•reward its executives for leading improvements that contribute to shareholder value with sustained financial and operating performance and leadership excellence;
•align the executives’ interests with those of the company’s shareholders;
•enable the company to attract needed talent in key positions; and
•encourage executives to remain with the company and continue making significant long-term contributions.
The company is a “smaller reporting company” as that term is used under the rules promulgated under the Securities Act, and as such the company has used the scaled compensation disclosure requirements applicable to smaller reporting companies in this Item 11.
Summary Compensation Table
The following table presents the total compensation for the years indicated for the named executive officers of the company.
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Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($)(1) | | | | Non- Equity Incentive Plan Compen- sation ($) | | Non-qualified Deferred Compen-sation Earnings ($)(2) | | All Other Compen-sation ($)(3) | | Total ($) |
Geoffrey P. Purtill | | 2022 | | 486,314 | | 52,456 | | 179,160 | | | | | | — | | 200,354 | (4) | 918,284 |
President and Chief Executive Officer | | | | | | | | | | | | | | | | | | |
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Matthew E. Monaghan | | 2022 | | 648,831 | | — | | 1,089,247 | | | | — | | — | | 5,716 | (5) | 1,743,794 |
Former Chairman, President and Chief Executive Officer | | 2021 | | 955,000 | | — | | 4,998,751 | | | | — | | — | | 39,485 | (5) | 5,993,236 |
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Kathleen P. Leneghan | | 2022 | | 484,100 | | — | | 276,516 | | | | — | | — | | 16,493 | (6) | 777,109 |
Senior Vice President and Chief Financial Officer | | 2021 | | 470,000 | | — | | 1,268,983 | | | | — | | — | | 15,862 | (6) | 1,754,845 |
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Anthony C. LaPlaca | | 2022 | | 475,417 | | — | | 77,160 | | | | — | | — | | 8,467 | (7) | 561,044 |
Senior Vice President, General Counsel, Chief Administrative Officer and Secretary | | 2021 | | 461,570 | | — | | 354,101 | | | | — | | — | | 6,077 | (7) | 821,748 |
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(1) The values reported in this column represent the aggregate grant date fair value, calculated in accordance with ASC 718, Compensation - Stock Compensation, of all restricted stock and performance shares awarded to each officer during the fiscal year. The value of performance share awards was estimated, as of the grant date, assuming that achievement of the performance targets would be 150% of target; however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. For a description of the assumptions made in computing the values reported in this column, refer to Equity Compensation in the Notes to Consolidated Financial Statements contained in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
(2) There were no changes in the present value of the accumulated benefit obligations to any named executive officer who participated in the SERP in 2022 or 2021. No above market or preferential earnings on nonqualified deferred compensation were earned by any named executive officer in 2022 or 2021.
(3) Compensation reported in this column includes (i) in the case of Mr. Monaghan, Ms. Leneghan, and Mr. LaPlaca, the value of company contributions made in each fiscal year on behalf of the officer to the Invacare Retirement Savings Plan and in the case of Mr. Purtill to the DC Plus Plan; (ii) in the case of Ms. Leneghan, amounts paid for life insurance premiums; (iii) in the case of Mr. Purtill, amounts paid for car allowances, housing allowance, family education, relocation, and (iv) in the case of Mr. LaPlaca, the incremental cost to the company of perquisites provided by the company, which include: an annual physical exam and health screening. Perquisites are valued on the basis of the aggregate incremental cost to the company of providing the perquisite to the applicable officer.
(4) Other compensation for Mr. Purtill includes in 2022, $52,456 bonus paid by the company, $79,129 contributed by the company to the DC Plus Plan, $57,701 paid by the company for housing allowance, $15,265 paid by the company for car allowance, $15,911 paid by the company for family education, and $32,348 paid by the company for relocation.
(5) Other compensation for Mr. Monaghan includes (i) in 2022, $5,716 contributed by the company to the Invacare Retirement Savings Plan; and (ii) in 2021, $34,310 paid by the company for life insurance premiums, $0 contributed by the company to the DC Plus Plan, $5,175 contributed by the company to the Invacare Retirement Savings Plan.
(6) Other compensation for Ms. Leneghan includes (i) in 2022, $10,442 paid by the company for life insurance premiums, $6,051 contributed by the company to the Invacare Retirement Savings Plan; and (ii) in 2021, $10,062 paid by the company for life insurance premiums, $0 contributed by the company to the Invacare Retirement Savings Plan,$5,800 contributed by the company to the DC Plus Plan.
(7) Other compensation for Mr. LaPlaca includes (i) in 2022, $5,943 contributed by the company to the Invacare Retirement Savings Plan and $2,524 paid by the company for an annual physical exam; and (i) in 2021, $5,800 contributed by the company to the Invacare Retirement Savings Plan and $277 contributed by the company to the DC Plus Plan.
Actual Annual Cash Incentive Awards for 2022
The eligibility for actual payouts under the annual cash bonus plan were computed based on the company’s actual corporate performance relative to the goals established under the plan for 2022, as outlined above. Because none of the requisite thresholds were met, no bonuses were paid to named executive officers for 2022. The non-payment of bonuses is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table above, and in the following table.
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| 2022 Target Award (% of Base Salary) | 2022 Actual Payout (% of Target) | 2022 Actual Payout Amount |
Mr. Purtill* | 75% | 0% | $0 |
Mr. Monaghan | 107.9% | 0% | $0 |
Ms. Leneghan | 75% | 0% | $0 |
Mr. LaPlaca | 75% | 0% | $0 |
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* 75% Europe results and 25% consolidated results.
Long-Term Incentive Plan
The company’s long-term equity compensation program for named executive officers, referred to as the “LTIP,” historically has included performance share awards, referred to as “performance shares,” and time-based restricted stock awards, referred to as “restricted stock.” In 2022, the program included restricted stock and performance unit awards, referred to as “performance units.” The program is intended to promote the company’s long-term success and increase shareholder value by further aligning the named executive officers’ total compensation with the interests of shareholders. Each share of restricted stock is one restricted common share of the company, and each vested performance share represents the right to receive one common share of the company. Each performance unit represents the right to receive $1.00 in cash.
The Compensation Committee approved a long-term equity compensation program with regular annual awards for 2022 having values weighted 70% in performance units and 30% in restricted stock for each of the named executive officers. This mix of equity awards was intended to enhance the performance-based incentives to increase shareholder value in the program by emphasizing awards tied to achieving long-term financial objectives that will support future value creation while managing shareholder dilution and compensation expense.
In making equity awards in 2022, the Compensation Committee reviewed information provided by Pay Governance regarding the median market value of long-term compensation awards, as well as median market value of total direct compensation. Equity award guidelines for the regular annual awards to named executive officers were generally developed around target grant values at 100% of the market median according to each executive’s salary and target cash compensation level, organizational level, reporting relationships and job responsibilities, to link executive compensation and the achievement of various long-term company goals.
The Compensation Committee considered each named executive officer’s performance and the company’s overall performance when determining the actual grant value of the 2022 awards of performance units and restricted stock of each named executive officer. The equity awards approximated the targeted range for each named executive officer.
Restricted Stock Granted in 2022
The restricted stock granted in 2022 was issued at no cost to the recipient and vests ratably over three years based on continued service by the recipient. To further enhance its retention value, the terms of the restricted stock allow the holder, subject to certain restrictions, to surrender a portion of the vested shares to the company to cover any minimum tax withholding obligation. The grants of restricted stock provide that the holders of that restricted stock will be entitled to receive cash dividends declared and paid by the company on the company’s outstanding common shares only to the extent vested at the time of the dividend.
Performance Shares Granted in 2022
The goals for performance shares granted in 2022 for the three-year performance period ending December 31, 2024, initially are based on a minimum average annual Gross Margin percentage (“Average Gross Margin Percentage”) over the first two years of the performance period. Meeting or exceeding the initial performance goal will qualify the performance share
awards to potentially vest at 100% of the target number of shares specified in the applicable award agreement. This 100% maximum is less than the 200% maximum used by others in the company's peer group and allows the company to better manage the use of equity plan shares. At the end of the performance period, the Compensation Committee will then compare the company's actual level of Adjusted EBITDA for the last year of the period to the specific performance goals to be established by the Compensation Committee for that period, to determine the portion, if any, of the performance shares initially awarded in 2022 that will actually be earned.
Performance Units Granted in 2022
Each recipient of a performance unit award a number of performance units that is based on the average daily closing price of the company’s common shares from October 1, 2024 through December 31, 2024. Under the terms of the awards, performance units will vest if the average daily closing price of the company’s common shares is $5.00 or more, up to a maximum number of units if the price is $15.00 or more. If and to the extent that performance units are determined by the Compensation Committee to have vested at the conclusion of the three-year performance period ending December 31, 2024, the receipt will be entitled to receive $1.00 in cash for every vested performance unit. Because vesting is contingent upon the average share price of the company's common stock for the fourth quarter of 2024, the company cannot predict the amount of performance units that may vest, if any, at the end of the performance period
Performance Shares Granted in 2021
The goals for performance shares granted in 2021 for the three-year performance period ending December 31, 2023, initially are based on a minimum average annual Gross Margin percentage (“Average Gross Margin Percentage”) over the first two years of the performance period. Meeting or exceeding the initial performance goal will qualify the performance share awards to potentially vest at 150% of the target number of shares specified in the applicable award agreement. This 150% maximum is less than the 200% maximum used by others in the company's peer group and allows the company to better manage the use of equity plan shares. At the end of the performance period, the Compensation Committee will then compare the company's actual level of Adjusted EBITDA for the last year of the period to the specific performance goals to be established by the Compensation Committee for that period, to determine the portion, if any, of the performance shares initially awarded in 2021 that will actually be earned.
Because the 2021 performance shares are based on the Average Gross Margin Percentage performance over the first two years and that metric was not met, the 2021 performance shares are not expected qualify for payout.
Results of Performance Shares Granted in 2020
The three-year performance period for performance shares granted in 2020 concluded on December 31, 2022. Like the performance shares granted to the named executive officers in prior years, the initial funding performance goal for the 2020-2022 cycle was based on a target for the Average Gross Margin percentage over the three-year performance period. Meeting or exceeding the initial performance goal would fund the performance share awards at 150% of target. At the end of the period, the Compensation Committee compared the company's actual level of Adjusted EBITDA to specific performance goals for each of the threshold, target and maximum levels of achievement established by the Compensation Committee, to determine the portion, if any, of the performance share awards granted in 2020 that were actually be earned.
The company's Gross Margin performance in 2020 and 2021 were above the average target level but the company did not achieve at least the threshold Adjusted EBITDA performance for 2022 in order for any awards to vest. Accordingly, no performance shares were earned under the 2020 awards, and the awards were forfeited by the recipients without vesting.
Retirement and Other Benefits
The company maintains the plans described below to provide U.S.-based executives the opportunity to address long-term financial and retirement planning with a degree of certainty and to provide financial stability in the event the executives are impacted by unforeseeable factors beyond their control.
The company maintains the Invacare Retirement Savings Plan, a qualified 401(k) defined contribution plan, for its eligible employees, to which the company has the discretion to make matching and quarterly contributions on behalf of participants, including each of the U.S.-based named executive officers. The amounts of the contributions made by the company to the Invacare Retirement Savings Plan on behalf of U.S.-based named executive officers are set forth in a footnote to the Summary Compensation Table and are consistent with the benefits provided to all other employees who participate in the plan, up to the regulatory limits imposed on the plan for highly compensated employees.
The company provides its highly compensated U.S. employees, including named executive officers, the opportunity to participate in the Deferred Compensation Plus Plan (“DC Plus Plan”), a non-qualified contributory savings plan, which allows the executives to defer compensation above the amount permitted to be contributed to the Invacare Retirement Savings Plan. Thus, the DC Plus Plan provides the executives with the opportunity to save additional pre-tax funds for retirement up to the amount that the executive otherwise would have been able to save under the Invacare Retirement Savings Plan but for the regulatory limits imposed on that plan for highly compensated employees. As a result, highly compensated employees are eligible to save for retirement at the same rate (based on percentage of compensation) as other employees. In addition to individual deferrals, the company has the discretion to provide matching contributions and additional quarterly contributions for participating executives which are similar in percentage to the company's contributions to employees who participate in the Invacare Retirement Savings Plan.
The company also provides a Supplemental Executive Retirement Plan, or “SERP,” to one of the named executive officers who was in his role prior to 2011, to supplement other savings plans offered by the company and to provide replacement compensation for the executive in retirement. The change in the present value of the accumulated benefit obligation to the named executive officer who participates in the SERP is set forth in the Summary Compensation Table. The terms of the SERP are further described below.
Effective July 1, 2011, the Compensation Committee, based on the recommendation of management, (1) reduced the discretionary quarterly contributions by the company for all participants in the Invacare Retirement Savings Plan and DC Plus Plan from 4% to 1% of total cash compensation and (2) suspended the contributions by the company for all participants in the SERP and reduced the interest accrual rate under the SERP from 6% to 0%. The reductions remain in effect indefinitely, until the company or, in the case of the SERP, the Compensation Committee determines to restore them. The Compensation Committee closed the SERP to new participants in 2011, so the only named executive officer participating in the SERP was Mr. LaPlaca.
Severance and Change of Control Benefits
Severance Benefits. The company has entered into agreements with each of the named executive officers that provide for the payment of certain severance benefits upon a termination of employment other than a termination following a change of control of the company. These agreements provide some level of income continuity should an executive’s employment be terminated without cause by the company, or, in the case of the Chief Executive Officer, by the executive for good reason. These agreements are further described below under Other Potential Post-Employment Compensation.
Change of Control Benefits. Each named executive officer also has entered into an agreement with the company that provides for certain benefits generally payable in the event of a termination following a change of control of the company. The company believes that these agreements help retain executives and provide for management continuity in the event of an actual or threatened change of control. They also help to ensure that the interests of executives remain aligned with shareholders’ interests during a time when their continued employment may be in jeopardy. Finally, they provide some level of income continuity should an executive’s employment be terminated without cause following a change of control. The “double-trigger” feature of the agreements provides for the payment and provision of certain benefits to the executive if there is a change of control of the company and a termination of the executive’s employment with the surviving entity within two years (three years in the case of Mr. LaPlaca, which includes a one-year retention benefit upon a change of control) after the change of control. These agreements are further described below under Other Potential Post-Employment Compensation.
Equity Awards
Each outstanding restricted stock, performance share, stock option, performance option, and performance unit award was awarded under either the 2018 Equity Compensation Plan, or its predecessor, the 2013 Equity Compensation Plan. Under the plans and the performance share, restricted stock, stock option, performance option and performance unit award agreements entered into in connection with the awards, the Compensation Committee may make certain adjustments to the awards and the awards may be terminated or amended, as further described below.
Vesting. Shares of restricted stock generally are scheduled to vest in annual one-third increments over a three-year period beginning on May 15 of the year following the year of grant. If the recipient’s employment terminates for any reason other than the recipient’s death, then he or she will forfeit the unvested restricted shares. If the recipient dies during the vesting period, then his or her estate (or designated beneficiary) will become vested in a prorated number of restricted shares.
Performance shares, performance options and performance units generally vest after a three-year performance period, based on the level of achievement of predetermined performance goals. The performance shares granted in 2021 may be earned in a range between 0% and 150% of the number of shares specified in the applicable award agreement, depending on the company’s performance for the performance period compared to the initial performance goal. Meeting or exceeding the initial performance goal will qualify the performance share awards at 150% of target, however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. The Compensation Committee determined to take this approach due to the difficulty of setting specific financial performance goals during the company’s business transformation. Performance goals for performance shares are based on gross margin percentage and Adjusted EBITDA. The performance units granted in 2022 may be earned if the average closing price of the company’s common shares for the fourth quarter of 2024 is at least $5.00 per share, up to a maximum amounts of units if the price equals or exceeds $15.00 per share. Recipients may be entitled to a prorated number of shares, based on actual performance, if their employment terminates during the performance period due to death, disability or retirement.
Dividends and Dividend Equivalents. Recipients are not entitled to receive any dividends that are paid with respect to the company’s common shares prior to the vesting of their restricted stock or performance shares and exercise of stock options or performance options. Following the vesting of the restricted stock or performance shares or exercise of stock options or
performance options, the recipient will become entitled to any dividends that are paid with respect to the vested portion of the shares underlying their restricted stock or performance shares after the applicable vesting date or the portion of shares exercised under their stock options or performance options after the applicable exercise date.
Adjustments. In the event of a recapitalization, stock dividend, stock split, reverse stock split, distribution to shareholders (other than cash dividends), or a similar transaction, the Compensation Committee will adjust, in any manner that it deems equitable, the number and class of shares that may be issued under the plans and the number and class of shares applicable to outstanding awards.
Termination of Awards. The Compensation Committee may cancel any awards if, without the company's prior written consent, the participant (1) renders services for an organization, or engages in a business, that is (in the judgment of the Compensation Committee) in competition with the company, or (2) discloses to anyone outside of the company or uses for any purpose other than the company's business, any confidential information relating to the company.
Amendment of Awards. The Compensation Committee may, subject to certain restrictions, amend the terms of any award under the plans, including to waive, in whole or in part, any restrictions or conditions applicable to any award. The Compensation Committee may not amend an award in a manner that impairs the rights of any participant without his or her consent, or to reprice any stock options or stock appreciation rights at a lower exercise price, unless in accordance with an adjustment in the context of certain corporate transactions described in “Adjustments” above.
In the event of a change of control of the company (as defined under the plans), the restricted shares, performance shares, stock options, performance options and performance units will continue under their original vesting or performance schedule if the awards are assumed or replaced by the new entity. If, however, the awards are not assumed by the new entity, then, upon the change of control, the restricted stock and stock options will fully vest and the performance shares, performance options and performance units will vest on a pro-rated basis as if a target level of performance was achieved. If the recipient’s employment is terminated without cause or by the recipient for good reason (as both terms are defined in the plans) following a change of control, then he or she will fully vest in the restricted shares and stock options and vest in the target number of performance shares, performance options and performance units.
Clawback. If the Board of Directors or any appropriate Board committee has determined that fraud or
intentional misconduct by a participant in the 2018 Equity Compensation Plan or the 2013 Equity Compensation Plan (together, the “Equity Plans”) was a significant contributing factor to the company having to restate all or a portion of its financial statement(s), the Board or such committee may take actions it deems necessary, in its discretion, to remedy the misconduct and to prevent its recurrence. In determining what remedies to pursue, the Board or appropriate committee would take into account all relevant factors, including whether the restatement was the result of fraud or intentional misconduct. The Equity Plans provide that the Board may, to the extent permitted by applicable law, in appropriate cases, require reimbursement of any bonus or incentive compensation paid to the participant for any fiscal period commencing on or after January 1, 2008, if and to the extent that, (1) the amount of incentive compensation was calculated based upon the achievement of certain financial results that were subsequently reduced due to a restatement, (2) the participant engaged in any fraud or intentional misconduct that significantly contributed to the need for the restatement, and (c) the amount of the bonus or incentive compensation that would have been awarded to the participant had the financial results been properly reported would have been lower than the amount actually awarded. In addition, the Board may terminate the participant’s employment, authorize legal action, or take such other action to enforce the participant’s obligations to the company as it may deem appropriate.
2018 Equity Compensation Plan
The Invacare Corporation 2018 Equity Compensation Plan (the “2018 Equity Plan”) is the company’s shareholder-approved equity compensation plan and is the successor to the company’s 2013 Equity Compensation Plan (the “2013 Equity Plan”) and the company's 2003 Performance Plan. Under the 2018 Equity Plan, Directors and employees of the company and its affiliates may be granted the following types of awards with respect to the company’s common shares: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, and performance shares. The maximum number of company common shares, without par value, available for issuance under the 2018 Equity Plan will not exceed the sum of the following: 8,700,000 shares plus any shares covered by an outstanding award made under the 2013 Equity Plan or the company’s 2003 Performance Plan that are forfeited or remain unpurchased or undistributed upon termination or expiration of the award. As of December 31, 2022, there were 5,285,644 shares available for issuance under the 2018 Equity Plan inclusive of 1,363,107 aggregate shares under the company’s 2013 Equity Plan and 2003 Performance Plan which can be transferred into and made available for use under the 2018 Equity Plan.
Executive Incentive Bonus Plan
The Executive Incentive Bonus Plan was approved and adopted by the shareholders of the company on May 25, 2005 and was reapproved by the shareholders of the company on May 20, 2010 and again on May 14, 2015.
Purpose. The Executive Incentive Bonus Plan is intended to provide an incentive to the company’s executive officers to improve the company’s inherent value, operating results and to enable the company to recruit and retain key officers by making the company’s overall compensation program competitive with compensation programs of other companies with which the company competes for executive talent.
Administration. The plan is administered by the Compensation Committee, which generally has the authority to determine the manner in which the Executive Incentive Bonus Plan will operate, to interpret the provisions of the plan and to make all determinations under the plan.
Eligibility and Participation. All officers of the company are eligible to be selected to participate in the Executive Incentive Bonus Plan. The Compensation Committee has the discretion to select those officers who will participate in the plan in any given year. A participant must be employed by the company on the payment date in order to receive a bonus payment under the Executive Incentive Bonus Plan, unless the officer’s employment is terminated prior to the payment date as a result of death, disability, or retirement, in which case the officer may receive a prorated payment. In 2022, there were seven participants in the Executive Incentive Bonus Plan, including the named executive officers.
Awards under the Executive Incentive Bonus Plan. Awards under the plan are designed to ensure that the compensation of the company’s officers is commensurate with their responsibilities and contribution to the success of the company based on market levels indicated by compensation data obtained from time to time by the company or the independent consultant engaged by the Compensation Committee. For each calendar year or other predetermined performance period, the Compensation Committee will establish a target bonus for each eligible officer, which is payable based on the level(s) of achievement of a specified performance goal(s) for the performance period. When making final payout determinations, the Compensation Committee may exercise negative discretion to award less than the maximum potential cash bonus amount.
Performance Goals. The performance goal(s) for each performance period will provide for a targeted level or levels of performance using one or more of the following predetermined measurements: return on equity;
earnings per share; net income; pre-tax income; operating income; revenue; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; cash flow; free cash flow; economic profit; total earnings; earnings growth; return on capital; operating measures (including, but not limited to, operating margin and/or operating costs); return on assets; return on net assets; return on capital; return on invested capital; increase in the fair market value of the shares; or total shareholder return. For 2022, the bonus opportunity was based upon satisfaction of established bonus targets.
The performance goal for a performance period is established in writing by the Compensation Committee during the first 90 days of the year. During this same time period, the Compensation Committee may adjust or modify the calculation of a performance goal for the performance period in order to prevent the dilution or enlargement of the rights of participants (1) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development; (2) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the company, or the financial statements of the company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles or business conditions; and (3) in view of the Compensation Committee’s assessment of the company’s business strategy, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant by the Compensation Committee. The Compensation Committee may establish various levels of bonus depending upon relative performance toward a performance goal.
The target bonus payable to any officer for a performance period is a specified percentage of the officer’s compensation for the performance period, but in no event will the bonus payable to any officer for a performance period exceed $5,000,000.
In the event of a change in control of the company, the amount payable to each eligible participant in the plan at the time of such change in control would be equal to the greater of (1) the target bonus that would have been paid if
the performance goal for the calendar year in which the change in control occurs had been achieved, or (2) the bonus that would have been paid to the participant if the performance goal that was actually achieved during the portion of the calendar year which occurs prior to the change in control is annualized for the entire calendar year.
Clawback. If the Board of Directors or any appropriate committee has determined that any fraud or intentional misconduct by a participant in the Executive Incentive Bonus Plan was a significant contributing factor to the company having to restate all or a portion of its financial statement(s), the Board or committee may take, in its discretion, such actions as it deems necessary to remedy the misconduct and prevent its recurrence. In determining what remedies to pursue, the Board or committee will take into account all relevant factors, including whether the restatement was the result of fraud or intentional misconduct. The Board may, to the extent permitted by applicable law, in all appropriate cases, require reimbursement of any bonus or incentive compensation paid to the participant for any fiscal period commencing on or after January 1, 2008 if and to the extent that (1) the amount of incentive compensation was calculated based upon the achievement of certain financial results that were subsequently reduced due to a restatement, (2) the participant engaged in any fraud or intentional misconduct that significantly contributed to the need for the restatement, and (3) the amount of the bonus or incentive compensation that would have been awarded to the participant had the financial results been properly reported would have been lower than the amount actually awarded. In addition, the Board may terminate the participant’s employment, authorize legal action, or take such other action to enforce the participant’s obligations to the company as it may deem appropriate in view of all the facts surrounding the particular case.
Amendment and Termination. The company reserves the right, exercisable by the Compensation Committee, to amend the Executive Incentive Bonus Plan at any time and in any respect, or to terminate the plan in whole or in part at any time and for any reason.
Outstanding Equity Awards held by the named executive officers at December 31, 2022
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| Option Awards | | Stock Awards | |
Name | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Underlying Unexercised Options Unexercisable (#) | | | Option Exercise Price ($) | Option Expiration Date | | Number of Shares or Units of Stock That Have not Vested (#) | | Market Value of Shares or Units of Stock That Have not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have not Vested (#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have not Vested ($) | |
Geoffrey P. Purtill | 5,000 | | | | 14.49 | 03/18/23 | | | | | | | | |
| 17,611 | | | | 12.15 | 03/16/27 | | | | | | | | |
| | | | | | | | 1,425 | (1) | 599 | | | | |
| | | | | | | | 2,680 | (2) | 1,126 | | | | |
| | | | | | | | | | | 14,063 | (6) | 5,906 | |
| | | | | | | | 5,000 | (3) | 2,100 | | | | |
| | | | | | | | 20,854 | (4) | 8,759 | | | | |
| | | | | | | | | | | 20,854 | (7) | 8,759 | |
| | | | | | | | 100,000 | (5) | 42,000 | | | | |
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Kathleen P. Leneghan | 8,000 | | | | 14.49 | 03/18/23 | | | | | | | | |
| | | | | | | | 11,281 | (1) | 4,738 | | | | |
| | | | | | | | 22,148 | (2) | 9,302 | | | | |
| | | | | | | | | | | 116,243 | (6) | 48,822 | |
| | | | | | | | 74,734 | (3) | 31,388 | | | | |
| | | | | | | | | | | 74,734 | (7) | 31,388 | |
Anthony C. LaPlaca | 13,500 | | | | 14.49 | 03/18/23 | | | | | | | | |
| 44,963 | | | | 12.15 | 03/16/27 | | | | | | | | |
| | | | | | | | 3,385 | (1) | 1,422 | | | | |
| | | | | | | | 6,180 | (2) | 2,596 | | | | |
| | | | | | | | | | | 32,438 | (6) | 13,624 | |
| | | | | | | | 20,854 | (3) | 8,759 | | | | |
| | | | | | | | | | | 20,854 | (7) | 8,759 | |
(1) The restricted share award vests in equal annual increments over three years beginning on May 15, 2021.
(2) The restricted share award vests in equal annual increments over three years beginning on May 15, 2022.
(3) The restricted share award vests in equal annual increments over three years beginning on February 20, 2022.
(4) The restricted share award vests in equal annual increments over three years beginning on May 15, 2023.
(5) The restricted share award vests in equal annual increments over three years beginning on November 15, 2023.
(6) The performance share award has a three-year performance period with payout based on achievement of certain performance goals. The number of shares earned will be determined following the performance period ending December 31, 2023. The number of shares reported in the table is based on achievement of 150% of target, which is the amount of shares to be qualified under the award if the performance goal is achieved, however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. Refer to the description in “Performance Shares Granted in 2021.”
(7) The performance share award has a three-year performance period with payout based upon achievement of certain performance goals. The number of shares earned will be determined following the performance period ending December 31, 2024. The number of shares reported in the table is based on achievement of 100% of target, which is the amount of shares to be qualified under the award if the initial performance goal is achieved, however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. Refer to the description in “Performance Shares Granted in 2022.”
Supplemental Executive Retirement Plan
In 1995, the company established the Supplemental Executive Retirement Plan for certain executive officers to supplement other savings plans offered by the company to provide a specific level of replacement compensation for retirement. In order to comply with Section 409A of the Code, the Supplemental Executive Retirement Plan was amended and restated, effective as of December 31, 2008, as the Invacare Corporation Cash Balance Supplemental Executive Retirement Plan (the “SERP”).
Prior to amendment, the SERP provided for an annual benefit equal to 50% of a participant's annual base salary and target bonus on the April 1 immediately preceding or coincident with the date of termination. The benefit was reduced if the participant had less than 15 years of service with the company. As amended, the SERP provides a benefit stated as a hypothetical account balance. Current participants, who were participants in the SERP prior to amendment, receive annual credits in the amount and for a maximum number of years as specified in their participation agreements. For such participants, the annual credits, together with annual interest credits, were structured with the intent to result in a benefit at normal retirement age that is substantially equivalent to the benefit that would have been provided at normal retirement age under the SERP prior to amendment. Future participants would receive annual credits that are a specified percentage (ranging from 8% to 35%, based on age at date of entry) of their annual base salary and target bonus for each year of employment, plus annual interest credits. The annual credits for such participants would not be made for any year in which the participant's account balance at June 30 is equal to or greater than 3.65 times that year's base salary and target bonus. Effective July 1, 2011, the Compensation Committee suspended the contributions by the company to the SERP and closed the plan to new participants.
Normal retirement age is age 65 or attainment of age 62 with 15 years of service with the company. Annual interest credits at the established interest crediting rate would continue as long as the participant retains an account under the SERP. The interest crediting rate was initially set at 6% per year, compounded annually, and may be changed from time to time by the Compensation Committee. Effective July 1, 2011, the Compensation Committee reduced the interest crediting rate to 0%. A participant will vest in his or her benefit in 20% increments over 5 years; however, payment of a participant's benefit generally will be made no earlier than normal retirement age, even if a participant terminates employment with a vested benefit prior to reaching normal retirement age. Also, retirement benefits generally are delayed until at least the later of the seventh month or the January after termination of employment. Upon entry into the SERP, a participant can make an election to receive his or her benefit, when it is ultimately paid, either in the form of a lump sum payment
or in annual installments over a period not to exceed 25 years.
Notwithstanding the foregoing, if a participant's employment is terminated within two years following a “change of control” (as such term is defined in the SERP), the participant's account will become fully vested. In addition, his or her account will be credited with such additional amount to the extent necessary to bring the balance of the account to an amount equal to 3.65 times the greater of base salary plus target bonus for the year of termination or the preceding year, discounted from normal retirement age to the date of termination of employment (if earlier) at an interest crediting rate of 6% compounded annually. Payment of the benefit to such participant shall be made six months after termination of employment. Furthermore, if a participant dies prior to distribution of his or her benefits, a lump sum payment of the greater of his account balance or his base salary and target bonus at the time of death will be paid to his beneficiary within 30 days after death. If a participant's employment is terminated by reason of “disability” (as defined in the SERP), the participant will be entitled to an enhanced retirement benefit of not less than 3.65 times base salary plus target bonus, prorated for less than 15 years of service.
The SERP is a nonqualified plan and, thus, the benefits accrued under this plan would be subject to the claims of the company's general creditors if the company were to file for bankruptcy. The benefits will be paid (1) from an irrevocable grantor trust which has been partially funded from the company's general funds or (2) directly from the company's general funds.
DC Plus Plan
The DC Plus Plan is a non-qualified contributory savings plan for highly compensated employees. The program is offered to allow participants to defer compensation above the amount allowed in the Invacare Retirement Savings Plan, the company's qualified retirement plan, and to provide participants with additional pre-tax savings opportunities. The DC Plus Plan was adopted, effective January 1, 2005, in order to address the requirements of Section 409A of the Code.
The DC Plus Plan allows participants to defer all or any portion of their annual cash bonus compensation and up to 50% of their salary into the plan. The company has the discretion to provide matching contribution credits on amounts deferred, in accordance with the matching contribution percentage formula provided under the Retirement Savings Plan. The company also has the discretion to provide for quarterly contribution credits on amounts of compensation in excess of the qualified plan compensation limit, in accordance with the quarterly contribution formula under the Retirement Savings Plan. For 2021, if the participant deferred at least 3% of
compensation to the DC Plus Plan, the match was 2% of compensation deferred under the DC Plus Plan. During 2021, quarterly contributions were 1% of compensation in excess of the qualified plan compensation limit, without regard to the amount of deferrals made under the DC Plus Plan for any quarter in which a contribution was made to the qualified plan.
Participants may allocate contributions among an array of funds representing a full range of risk/return profiles, including company common shares reflected in phantom share units. Employee deferrals and contributions by the company for the benefit of each employee are credited with earnings, gains or losses based on the performance of investment funds selected by the employee. Participants do not have any direct interest in or ownership of the funds. Participants' contributions are always 100% vested and employer contributions vest according to a five-year graduated scale.
Distributions under the DC Plus Plan may be made only upon termination of the participant's employment, death, or hardship, or at the time specified by the participant at the time of deferral in accordance with the terms of the plan. All distributions under the DC Plus Plan are in the form of cash. Distributions due to termination of employment are made within 90 days after termination of employment (or the seventh month after termination of employment in the case of key employees (as that term is defined in the Code)). Distributions are paid in the form of a lump sum, except that a participant may elect to have payment made in annual installments over a period of up to 15 years if termination occurs after retirement age (age 55 with 10 years of service) and the account is over a minimum amount. Elections to participate in the DC Plus Plan must be made by the employee in accordance with the requirements of the plan and applicable law.
Other Potential Post-Employment Compensation
Severance and Change of Control Benefits
Upon termination of employment for certain reasons (other than a termination following a change of control of the company) severance benefits may be paid to certain of the named executive officers.
Severance Arrangements
Agreement with Mr. Purtill. Mr. Purtill has an employment agreement with Invacare International GmbH, the company’s Swiss subsidiary (as amended from time to time, the “Purtill Employment Agreement”). Under the Purtill Employment Agreement, in the event the company terminates Mr. Purtill’s employment for any reason other than “for cause” (as defined in the Purtill Employment Agreement), he will be entitled to a six month notice
period in which he will receive his base salary and continuation of other benefits including health care. Additionally, upon such termination, the company, in its discretion and conditioned upon Mr. Purtill signing a release of claims, would provide Mr. Purtill with a severance benefit of base salary continuation for a period of three to six months plus executive outplacement services.
Agreement with Ms. Leneghan. The company entered into an offer letter agreement with Ms. Leneghan in connection with her employment in February 2018 which provides that, upon a termination of employment by the company other than for “cause” (as defined in Ms. Leneghan’s offer letter agreement), Ms. Leneghan will be entitled to a severance benefit in the amount equal to 12 months of her base salary in effect at the time of termination.
Agreement with Mr. LaPlaca. The company entered into an offer letter agreement with Mr. LaPlaca in connection with his employment in April 2008 which provides that, upon a termination of employment by the company other than for cause, Mr. LaPlaca will be entitled to continuation of his then-applicable base salary for one year, to receive a pro rata portion of his target bonus for the year in which his employment ends based on the date of termination, and to continuation of health insurance benefits until the earlier of the end of the severance period or such time as Mr. LaPlaca obtains employment that provides such coverage.
Technical Information and Non-Competition Agreements
The company also has entered into technical information and non-competition agreements with each of the named executive officers, and an employment agreement in the case of Mr. Purtill, which contain provisions requiring each executive to maintain the confidentiality of non-public company information during and after his or her employment and to assign to the company any rights that he or she may have in any intellectual property developed in the course of his employment. The agreements also contain provisions which restrict each executive's ability to engage in any business that is competitive with the company's business, or to solicit company employees, customers or suppliers for a period of two years following the date of termination of his employment, or in the case of Mr. Purtill, for a period of year following termination of his employment.
Change of Control Agreements
The company has entered into change of control agreements with its executive officers, including each of the named executive officers. The change of control agreements continue through December 31 of each year
and are automatically extended in one-year increments unless the company gives prior notice of termination at least one year in advance. These agreements are intended to ensure the continuity of management and the continued dedication of the executives during any period of uncertainty caused by the possible threat of a takeover. Except for certain benefits under the agreement with Mr. LaPlaca described below, the company's change of control agreements are so-called “double trigger” agreements in that they do not provide for benefits unless there is both a change of control of the company and an executive is terminated without cause (as defined in the agreement) or resigns for good reason (as defined in the agreement) within two years after the change in control, or, in the case of Mr. LaPlaca, within three years after the change of control.
Agreements with Mr. Purtill and Ms. Leneghan. If there is a change of control of the company and the executive is terminated without cause (as defined in the agreement) or resigns for good reason (as defined in the agreement) at any time during the two-year period following a change of control under the conditions set forth in the agreement, each of them will receive the following:
•a lump sum amount equal to two times the sum of (a) his or her highest annual base salary paid by the company since the effective date of the agreement; and (y) the average of the annual bonuses earned by him or her with respect to the three fiscal years preceding the change of control;
•a lump sum amount equal to 24 times the current monthly COBRA premium rate in effect as of the termination date;
•immediate vesting of his or her rights under the DC Plus Plan;
•accelerated vesting of all outstanding unvested stock options and restricted stock; and
•accelerated vesting of all outstanding performance share awards, as if all applicable performance goals had been achieved at their target levels as of the termination date.
The agreements further provide for accelerated vesting of stock options, restricted stock and performance share awards upon a change of control, if the awards are not assumed by the acquiring company in the change of control. The company’s equity compensation plans provide for the accelerated vesting of these awards; however, under the change of control agreements, each of them would have the right to receive the accelerated vesting to the extent it is not otherwise provided for under the plan at the time of the change of control. The agreements further provide that all vested options will continue to be exercisable for two years after termination (unless the option earlier expires by its
terms). Finally, the agreements generally provide that they will automatically terminate upon a termination of employment prior to a change of control. However, if Mr. Purtill or Ms. Leneghan are involuntarily terminated or terminates employment for good reason within the six months before, and primarily in anticipation of, a change of control, then effective as of the date of the change of control, he or she would be vested in and entitled to receive the same benefits to which he or she would have been entitled to if his or her termination of employment had occurred after the change of control.
The change of control agreements with Mr. Purtill and Ms. Leneghan also contain a so-called “best pay” provision which provides that if any payment or benefit the executive would receive under the agreement, when combined with any other payment or benefit executive receives in connection with the termination of employment, would, be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, then such payment will be either (i) the full amount of such payment or (ii) such lesser amount (with cash payments being reduced before stock option compensation) as would result in no portion of the payment being subject to the excise tax, whichever of the foregoing amounts results in the executive’s receipt of a greater amount, on an after-tax basis.
Agreement with Mr. LaPlaca. Under the agreement with Mr. LaPlaca entered into in December 2008, in the event that there is a change of control of the company (as defined in the agreement), and either (a) Mr. LaPlaca continues to be employed by the company on the first anniversary of the change of control, or (b) his employment is involuntarily terminated for any reason other than cause (as defined in the agreement), death or disability, or he terminates his employment for good reason (as defined in the agreement), within one year after the change of control, then Mr. LaPlaca is entitled to receive a payment equal to the sum of (x) the highest annual base salary paid by the company to Mr. LaPlaca since the effective date of the agreement; and (y) the higher of Mr. LaPlaca's target bonus in the year in which the change of control occurs or the target bonus in the preceding year (such sum being hereinafter referred to as “Base Compensation”).
In addition, if Mr. LaPlaca is terminated without cause (as defined in the agreement) or resigns for good reason (as defined in the agreement) at any time during the three-year period following a change of control under the conditions set forth in the agreements, Mr. LaPlaca will receive, in addition to the Base Payment noted above, the following:
•a lump sum amount equal to two times Mr. LaPlaca's Base Compensation;
•a lump sum amount equal to three times the greatest contribution made by the company to each of the Invacare Retirement Savings Plan and the DC Plus Plan on behalf of Mr. LaPlaca for any year in the three years prior to the change of control, as well as a lump sum payment equal to the unvested portion of Mr. LaPlaca's account under the Invacare Retirement Savings Plan;
•a lump sum amount equal to the sum of the contributions and interest that were scheduled under Mr. LaPlaca's participation agreement under the SERP to be added to Mr. LaPlaca's account under the SERP during the three-year period immediately following the date of termination of employment if Mr. LaPlaca had continued to be employed by the company for three years after termination of employment;
•continuing coverage under the company's health, life and disability insurance programs (including those available only to executives and those generally available to employees of the company) for three years after termination of employment;
•a lump sum payment as necessary to “gross up,” on an after-tax basis, Mr. LaPlaca's compensation for all excise taxes and any penalties and interest imposed by Sections 4999 and 409A of the Code; and
•accelerated vesting of of all outstanding unvested stock options and restricted stock.
The DC Plus Plan provides for immediate vesting of the executive’s rights under the plan upon a change of control. The company's equity compensation plans provide for accelerated vesting of outstanding unvested stock options, restricted stock, performance shares and performance options if the executive’s employment is terminated without cause or by the executive for good reason within two years after a change of control, unless awards granted under the plan are not assumed by the acquiring company, in which case the vesting of all outstanding awards will be accelerated upon the change of control.
The change of control agreements also provide for these benefits (other than accelerated vesting of performance shares in the case of Mr. LaPlaca) if the executive is terminated without cause or resigns for good reason within two years (three years in the case of Mr. LaPlaca) after the change of control. Accordingly, the executive would have the right to receive the accelerated vesting of these benefits (other than accelerated vesting of performance shares in the case of Mr. LaPlaca) under the change of control agreements upon a qualifying termination of employment if they were not otherwise
provided for under the plans at the time of the change of control, as a result of the Board determining not to accelerate vesting or due to an amendment in the terms of the plans. The change of control agreements further provide that all vested options will continue to be exercisable for two years after termination (unless the option earlier expires by its terms). Finally, the change of control agreements generally provide that the agreements will automatically terminate upon a termination of employment prior to a change of control. However, if an executive is involuntarily terminated or terminates employment for good reason (as defined in the agreement) within the six months before, and primarily in anticipation of, a change of control, then effective as of the date of the change of control, the executive will be vested in and entitled to receive the same benefits to which he would have been entitled to if his termination of employment had occurred after the change of control.
Other Post-Termination Benefits
The company maintains other plans and arrangements for its named executive officers which provide for post-employment benefits upon the retirement or death of the executives, as further described below.
Retirement Plans
Only Mr. LaPlaca, who was in his position prior to 2011, participates in the SERP, which the Compensation Committee closed to new participants in 2011. The SERP is described above and the present value of the accumulated benefits of Mr. LaPlaca under the SERP was $448,961 at December 31, 2022. All of the named executive officers other than Mr. Purtill are eligible to participate in the DC Plus Plan.
Death Benefit Only Plan
The company maintains a Death Benefit Only Plan (“DBO Plan”) for certain of its senior executives. Mr. LaPlaca and Ms. Leneghan are the only named executive officers who are participants. Under the DBO Plan, subject to certain limitations, if a participant dies while employed by the company and prior to attaining age 65, his or her designated beneficiary will receive a benefit equal to three times the executive's highest annual base salary plus target bonus as in effect on the April 1st preceding or coincident with his or her death. If a participant dies while employed after attaining age 65, or dies after his or her employment with the company is terminated following a change of control of the company, a payment equal to his or her highest annual base salary plus target bonus as in effect on the April 1st preceding or coincident with such event will be payable on behalf of the participant. The company may, in its discretion, pay an additional amount in order to “gross up” the participant for some or all of the income taxes that may result from the benefits described above.
Upon a change of control of the company, the company's obligations under the DBO Plan will be binding on any successor to the company and the foregoing benefits would be payable to a participant under the DBO Plan in accordance with the terms described above upon the death of the participant following the change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
NYSE Delisting Proceedings
On February 1, 2023, the company was notified by the staff of NYSE Regulation, Inc. (“NYSE Regulation”) that it had suspended trading in the company's common shares on the New York Stock Exchange (“NYSE”) and determined to commence proceedings to delist the company’s common shares from the NYSE. NYSE Regulation reached its decision that the company is no longer suitable for listing pursuant to NYSE Listed company Manual Section 802.01D after the company filed the Chapter 11 Cases referenced in Item 1. Business - Bankruptcy. The company's common shares were subsequently delisted from the NYSE effective February 16, 2023.
Following delisting from the NYSE, the company's common shares commenced trading in the OTC Pink Open Market under the symbol “IVCRQ”. The OTC Pink Open Market is a significantly more limited market than the NYSE, and quotation on the OTC Pink Open Market likely results in a less liquid market for existing and potential holders of the common shares to trade the company’s common shares and could further depress the trading price of the common shares. The company can provide no assurance that its common shares will continue to trade on this market, whether broker-dealers will continue to provide public quotes of the common shares on this market, or whether the trading volume of the common shares will be sufficient to provide for an efficient trading market.
Equity Compensation Plan Information
The following table provides information as of December 31, 2022 about our common shares that may be issued upon the exercise of options, warrants and rights granted under all of our existing equity compensation plans, including the Invacare Corporation 2018 Equity Compensation Plan.
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| | Column (a) | | | Column (b) | | Column (c) | |
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
Equity compensation plans approved by security holders | | 189,689 | | | $13.43 | | 5,285,644 | (1) |
Equity compensation plans not approved by security holders | | 416 | (2) | | — | | — | |
Total | | 190,105 | | | $13.43 | | 5,285,644 | |
(1) Represents shares available under the Invacare Corporation 2018 Equity Compensation Plan. This amount reflects the balance after reduction of (i) an aggregate of 1,061,867 shares underlying restricted share and restricted share unit awards outstanding at December 31, 2022 and (ii) an aggregate of 318,071 shares underlying performance share and performance share unit awards outstanding at December 31, 2022. Performance shares and performance share unit awards outstanding assumes awards at targets. For purposes of the number of shares available for future issuance, performance share and units awards assume achievement of maximum targets, even though the actual payout under such awards may be less than the 150% award maximum. Performance share and performance share unit awards and restricted share and restricted share unit awards granted under the 2018 Equity Plan and 2013 Equity Plan reduce the number of securities remaining at a rate of 2 shares for each full value share awarded. An aggregate of 1,363,107 shares underlying awards are available under the 2013 Equity Plan and 2003 Performance Plan at December 31, 2022. Shares underlying awards outstanding under the 2013 Equity Plan and 2003 Performance Plan may become available under the 2018 Equity Plan to the extent such awards are forfeited or expire unexercised.
(2) Represents phantom share units in the DC Plus Plan or a predecessor plan, which were allocated to participants' accounts at their discretion as their investment choice.
Share Ownership and Voting Power of Principal Holders other than Management
The following table shows, as of March 17, 2023, the beneficial share ownership of each person or group known by Invacare to beneficially own more than 5% of either class of common shares of Invacare:
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Name and business address of beneficial owner | | Common Shares Beneficially Owned | | | | Percentage of Total Voting Power Beneficially Owned |
| Number of Shares | | Percentage of Outstanding Shares | | | | | |
Charles Schwab Investment Management, Inc | | 3,575,752 | | 9.5% | | | | | | 9.5% |
211 Main Street | | | | | | | | | | |
San Francisco, CA 94105 (1)(2) | | | | | | | | | | |
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Azurite Management LLC (together its investment group) | | 3,775,433 | | 9.9% | | | | | | 9.9% |
25101 Chagrin Blvd, Suite 350 | | | | | | | | | | |
Cleveland, OH 44122 (1)(3) | | | | | | | | | | |
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First Manhattan Co. LLC | | 3,000,000 | | 8.0% | | | | | | 8.0% |
399 Park Avenue | | | | | | | | | | |
New York, NY 10022 (1)(4) | | | | | | | | | | |
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Renaissance Technologies LLC | | 1,841,441 | | 5.3% | | | | | | 5.3% |
800 Third Avenue | | | | | | | | | | |
New York, NY 10022 (1)(5) | | | | | | | | | | |
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(1) The number of common shares beneficially owned is based upon a Schedule 13D or 13D/A, or Schedule 13G or 13G/A, filed by the holder with the SEC to reflect share ownership as of December 31, 2022, provided that the ownership percentages have been calculated by the company based on the company's issued and outstanding shares as of March 17, 2023. The referenced Schedule 13D or 13D/A, or Schedule 13G or 13G/A, filing dates were: February 3, 2023 for Charles Schwab Investment, Management, Inc, November 22, 2022 for Azurite Management LLC, February 13, 2023 for First Manhattan Co. LLC and February 14, 2023 for Renaissance Technologies LLC.
(2) Based on a Schedule 13G filed on February 3, 2023, by Charles Schwab Investment Management, Inc, which has sole voting power and sole dispositive power over 3,575,752 shares.
(3) Based on a Schedule 13D/A filed on November 22, 2022 by Azurite Management LLC, Steven H. Rosen, Crawford United Corporation, Edward F. Crawford and Matthew V. Crawford (collectively, the “Reporting Persons”). The Reporting Persons comprise a group within the meaning of Section 13(d)(3) of the Exchange Act. Mr. Rosen and Azurite disclaim beneficial ownership over the 110,200 Common Shares owned by Crawford United and Messrs. Crawford, and Crawford United and Messrs. Crawford disclaim beneficial ownership over the 3,665,233 Common Shares owned by Mr. Rosen and Azurite. However, as a group, the Reporting Persons may be deemed to collectively beneficially own 3,775,433 Common Shares, which represent 9.999% of the company’s outstanding Common Shares and 9.990% of the company’s total voting power. Azurite is the owner of record of 3,665,233 Common Shares. Mr. Rosen, in his capacity as the sole manager of Azurite, has the ability to indirectly control the decisions of Azurite regarding the vote and disposition of securities held by Azurite, and as such may be deemed to have indirect beneficial ownership of the 3,665,233 Common Shares held by Azurite. Crawford United is the owner of record of 110,200 Common Shares. Messrs. Crawford, in their capacity as holders of a majority of the voting power of Crawford United and as two of six members of Crawford United’s board of directors (of which Mr. Rosen is also a member), share the ability to indirectly control the decisions of Crawford United regarding the vote and disposition of securities held by Crawford United, and as such may be deemed to have indirect beneficial ownership of the 110,200 Common Shares held by Crawford United.
(4) Based on a Schedule 13G filed on February 14, 2023, by First Manhattan Co. LLC, which has sole voting power over 1,500,000 shares, shared voting power over 1,500,000 shares, sole dispositive power over 1,500,000 and shared dispositive power over 1,500,000 shares.
(5) Based on a Schedule 13G/A filed on February 13, 2023, by Renaissance Technologies LLC, which has sole voting power and dispositive power over 1,521,569 shares.
Share Ownership and Voting Power of Invacare's Directors and Executive Officers
The following table sets forth, as of March 17, 2023, the beneficial share ownership of all Directors and our named executive officers, and all Directors and executive officers as a group:
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Name of beneficial owner | | Common Shares Beneficially Owned | | | | Percentage of Total Voting Power Beneficially Owned(1) |
| Number of Shares | | Percentage of Outstanding Shares | | | | | |
Edward F. Crawford (2), (3) | | 110,200 | | | <1% | | | | | | <1% |
Petra Danielsohn-Weil, PhD (2) | | 91,936 | | | <1% | | | | | | <1% |
Marc M. Gibeley (2) | | 109,465 | | | <1% | | | | | | <1% |
Anthony C. LaPlaca (2) | | 116,120 | | | <1% | | | | | | <1% |
Kathleen P. Leneghan (2) | | 236,352 | | | <1% | | | | | | <1% |
Michael J. Merriman, Jr. (2) | | 154,852 | | | <1% | | | | | | <1% |
Clifford D. Nastas (2) | | 125,592 | | | <1% | | | | | | <1% |
Geoffrey P. Purtill (2) | | 156,086 | | | <1% | | | | | | <1% |
Steven H. Rosen (2), (4) | | 3,665,233 | | | 9.7% | | | | | | 9.7% |
Aron I. Schwartz (2) | | 39,474 | | | <1% | | | | | | <1% |
All executive officers and Directors as a group (10 persons) (2) | | 4,805,310 | | | 12.6% | | | | | | 12.6% |
(1) None of the Directors, Director nominees or executive officers beneficially owned Class B common shares as of March 17, 2023. All holders of Class B common shares are entitled to ten votes per share and are entitled to convert any or all of their Class B common shares to common shares at any time, on a share-for-share basis. In addition, Invacare may not issue any additional Class B common shares unless the issuance is in connection with share dividends on, or share splits of, Class B common shares.
(2) The common shares beneficially owned by Invacare's executive officers and Directors as a group include an aggregate of 4,805,310 common shares which may be acquired upon the exercise of stock options during the 60 days following March 17, 2023. For the purpose of calculating the percentage of outstanding common shares and voting power beneficially owned by each of Invacare's executive officers and Directors, and all of them as a group, common shares which they had the right to acquire upon the exercise of stock options within 60 days of March 17, 2023 are considered to be outstanding. The number of common shares that may be acquired upon the exercise of such stock options for the noted individuals is as follows: Mr. Purtill, 22,611 shares; Mr. LaPlaca, 71,933 shares; and Ms. Leneghan, 16,000 shares.
(3) Common shares are owned by Crawford United Corporation where Mr. Crawford serves on the board of directors and shares the ability to indirectly control the decisions of Crawford United Corporation regarding the vote and disposition of securities held by Crawford United Corporation. Mr. Crawford and Crawford United Corporation are members of a group within the meaning of Section 13(d)(3) of the Exchange Act. See footnote (3) to the preceding table “Share Ownership and Voting Power of Principal Holders other than Management.”
(4) Common shares are owned by Azurite Management LLC where Mr. Rosen, in his capacity of sole manager, has the ability to indirectly control the decisions of Azurite Management LLC. Mr. Rosen and Azurite Management LLC are members of a group within the meaning of Section 13(d)(3) of the Exchange Act. See footnote (3) to the preceding table “Share Ownership and Voting Power of Principal Holders other than Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
To be considered independent, the Board of Directors must determine that a non-employee Director does not have a direct or indirect material relationship with Invacare. The Board of Directors has adopted the following guidelines (set forth in the Corporate Governance Guidelines, a copy of which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link) to assist it in making such determinations:
A non-employee Director will be considered independent if he or she, at any time that is considered relevant:
(i) has not been employed by the company or its affiliates;
(ii) has not had an immediate family member who has been employed by the company or its affiliates as an executive officer;
(iii) has not received, and has not had an immediate family member who has received, more than such annual amount of direct compensation from the company as may be considered relevant from time to time, other than Director and committee fees and pension or other forms of deferred compensation for prior service (provided such deferred compensation is not in any way contingent on continued service);
(iv) is not a partner of the company's present internal or external auditor;
(v) does not have an immediate family member who is a partner of Invacare's present internal or external auditor;
(vi) has not been a partner or employee of a present or former internal or external auditor of Invacare who worked on Invacare's audit;
(vii) does not have an immediate family member who has been a partner or employee of a present or former internal or external auditor of Invacare who worked on Invacare's audit;
(viii) has not been employed, and does not have an immediate family member who has been employed, as an executive officer of another company where any of Invacare's present executives
serve on that company's compensation committee; and
(ix) has not been an executive officer or an employee of another company, and does not have an immediate family member who has been an executive officer of another company, that does business with Invacare and makes payments to, or receives payments from, Invacare for property or services in an amount that, in any one of the three last fiscal years, exceeds the greater of $1 million or 2% of such other company's consolidated gross revenues.
Additionally, the following commercial and charitable relationships will be considered immaterial relationships and a non-employee Director will be considered independent if he or she does not have any of the relationships described in clauses (i) - (ix) above, and:
(A) is not an executive officer of another company, and does not have an immediate family member who is an executive officer of another company, that is indebted to the company, or to which Invacare is indebted, where the total amount of either company's indebtedness to the other is more than 5% of the total consolidated assets of the other company and exceeds $100,000 in the aggregate; and
(B) does not serve, and does not have an immediate family member who serves, as an officer, Director or trustee of a foundation, university, charitable or other not for profit organization, and Invacare's, or Invacare foundation's, annual discretionary charitable contributions (any matching of employee charitable contributions will not be included in the amount of contributions for this purpose) to the organization, in the aggregate, are more than 5% percent of that organization's total annual revenues (or charitable receipts in the event such organization does not generate revenues).
In the event that a non-employee Director has a relationship of the type described in clauses (A) or (B) in the immediately preceding paragraph that falls outside of the “safe harbor” thresholds set forth in such clauses (A) and (B), or if the Director had any such relationship during the prior three years that fell outside of such “safe harbor” thresholds, then in any such case, the Board of Directors annually shall determine whether the relationship is material or not, and therefore, whether the Director would be independent or not. If any relationship does not meet the categorical standards of immateriality set forth in clauses (i) and (ii) in the immediately preceding paragraph, Invacare will explain in its next proxy statement the basis for any Board of Directors determination that such relationship is immaterial.
In addition, any Director serving on the Audit Committee of Invacare may not be considered independent if he or she directly or indirectly receives any compensation from Invacare other than Director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not in any way contingent on continued service).
The Board examined the transactions and relationships between Invacare and its affiliates and each of the Directors, any of their immediate family members and their applicable affiliates. Based on this review, the Board affirmatively determined that each of the Directors, other than Mr. Purtill, is independent and does not have any direct or indirect material relationship with Invacare pursuant to the categorical standards set forth in Invacare's Corporate Governance Guidelines.
Certain Relationships and Related Transactions
The company has adopted a written policy for the review of transactions with related persons. The policy generally requires review, approval or ratification of transactions involving amounts exceeding $120,000 in which the company is a participant and in which a Director, Director nominee, executive officer, or a significant shareholder of the company, or an immediate family member of any of the foregoing persons, has a direct or indirect material interest. These transactions must be reported for review by the Nominating and Governance Committee. Following review, the Nominating and Governance Committee determines whether to approve or ratify these transactions, taking into account, among other factors it deems appropriate, whether they are on terms no less favorable to the company than those available with other unaffiliated parties and the extent of the related person's interest in the transaction. The Chairman of the Nominating and Governance Committee has the authority to approve or ratify any related party transaction in which the aggregate amount involved is expected to be less than $1,000,000. The policy provides for standing pre-approval of certain related party transactions, even if the amounts involved exceed $120,000, including certain transactions involving: compensation paid to executive officers and Directors of the company; other companies or charitable organizations where the amounts involved do not exceed the greater of $1,000,000 or 2% of the organization's total annual revenues or receipts; proportional benefits to all shareholders; rates or charges determined by competitive bids; services as a common or contract carrier or public utility; and banking-related services.
Azurite Cooperation Agreement
On August 22, 2022, the company entered into a Cooperation Agreement, which was amended on
November 21, 2022 (as amended, the “Cooperation Agreement”) with Azurite Management LLC, Steven H. Rosen, Crawford United Corporation, Edward F. Crawford and Matthew V. Crawford (collectively, “Azurite”).
On August 22, 2022, two directors of the company resigned from the board of directors of the company (the “Board”) and, pursuant to the Cooperation Agreement, and subject to the conditions set forth therein, the Board appointed Steven H. Rosen and Ambassador Edward F. Crawford to serve as directors of the company (each, a “Designee” and, together, the “Designees”) and certain Board committees. The company also agreed that, subject to the conditions set forth in the Cooperation Agreement, the Board will nominate each Designee for election to the Board at the company’s 2023 Annual Meeting of Shareholders (the “2023 Annual Meeting”). If, prior to the Expiration Date (as defined below), a Designee is unable or unwilling to serve, resigns, is removed, or otherwise ceases to be a director, then Azurite shall designate a replacement director who is reasonably acceptable to the Board.
In addition, the company agreed to form a Strategy and Operational Improvement Committee of the Board (the “Strategy Committee”), which is comprised of five (5) members, including the Designees, until at least the Expiration Date, subject to certain exceptions. The company also shall not (i) increase the size of the Board to more than ten (10) directors or (ii) classify the Board without the prior written consent of Azurite.
The foregoing obligations of the company will terminate with respect to both Designees if Azurite and its affiliates collectively do not own at least 3,600,000 shares of the common stock of the company. Unless otherwise provided in the Cooperation Agreement, the obligations of the company described above will terminate (i) the day after the company’s 2024 Annual Meeting of Shareholders or (ii) such earlier time as the company’s obligations terminate with respect to both Designees as described above (the “Expiration Date”).
Under the Cooperation Agreement, at any meeting of the shareholders held during the Cooperation Period, Azurite has agreed to vote or cause to be voted, all of the company’s common shares that Azurite or its controlling or controlled affiliates has the right to vote (i) in favor of directors nominated and recommended by the Board, (ii) against any shareholder nominations for directors that are not approved and recommended by the Board, (iii) against any proposals or resolutions to remove any member of the Board and (iv) and in accordance with the Board’s recommendation on all other proposals or business except with respect to an Extraordinary Transaction (as defined below), subject to certain limited exceptions.
Pursuant to the Cooperation Agreement, Azurite is subject to certain standstill provisions (the “Standstill”) during the Cooperation Period, which prohibit Azurite from, among other things, (i) offering to acquire, agreeing to acquire or acquiring rights to acquire, directly or indirectly, any voting securities of the company which would result in the ownership or control of, or other beneficial ownership interest, in excess of 9.995% of the then-outstanding total voting power represented by all shares of capital stock of the company (the “Ownership Threshold”); (ii) (A) calling or seeking to call, alone or in concert with others, a meeting of the company’s shareholders, (B) seeking, alone or in concert with others, election or appointment to, or representation on, the Board or nominate or propose the nomination of, or recommend the nomination of, any candidate to the Board, except as provided in the Cooperation Agreement, (C) seeking, alone or in concert with others, the removal of any member of the Board or (D) conducting a referendum of shareholders of the company; (iii) making a request for any shareholder list or other books and records of the company or any of its subsidiaries; (iv) making any public proposal, public announcement or public request with respect to, (A) any change in the number, terms or identity of directors of the company or the filling of any vacancies on the Board other than as provided in the Cooperation Agreement, (B) any change in the business, capitalization, capital allocation policy or dividend policy of the company or sale, spinoff, splitoff or other similar separation of one or more business units, (C) any other change to the Board or the company’s management or corporate or governance structure, (D) any waiver, amendment or modification to the company’s organizational documents, (E) causing the common shares to be delisted from, or to cease to be authorized to be quoted on, any securities exchange, or (F) causing the common shares to become eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act; (v) engaging in any solicitation of proxies with respect to the election or removal of directors of the company or any other matter or proposal relating to the company or becoming a participant in any such solicitation of proxies; (vi) making or submitting to the company or any of its affiliates any proposal for, or offer of (with or without conditions), either alone or in concert with others, any tender offer, exchange offer, merger, consolidation, acquisition, sale of all or substantially all assets or sale, spinoff, splitoff or other similar separation of one or more business units, business combination, recapitalization, restructuring, liquidation, dissolution or similar extraordinary transaction involving the company (including its subsidiaries and joint ventures or any of their respective securities or assets) (each, an “Extraordinary Transaction”) either publicly or in a manner that would reasonably require public disclosure by the company or Azurite; (vii) forming, joining or acting in concert with any “group” as defined in Section 13(d)(3) of the Exchange Act, with respect to any voting securities of the company, other than
solely with affiliates of Azurite; (viii) entering into a voting trust, arrangement or agreement with respect to any voting securities of the company, or subjecting any voting securities to any voting trust, arrangement or agreement, subject to certain exceptions; (ix) engaging in any short sale or any purchase, sale, or grant of any option, warrant, convertible security, or other similar right with respect to any security that derives any significant part of its value from a decline in the market price of any of the securities of the company and would result in Azurite ceasing to have a “net long position” in the company equivalent to its percentage beneficial ownership of the voting power of the then outstanding common shares; (x) selling, offering, or agreeing to sell, all or substantially all, voting rights decoupled from the underlying common shares; (xi) instituting, soliciting or joining as a party in any litigation or other proceeding against the company or any of its subsidiaries or any of its or their respective current or former directors or officers; (xii) entering into any negotiations, agreements, or understandings with any third party to take any action that Azurite is prohibited from taking pursuant to the Standstill; or (xiii) making any request or submitting any proposal to amend or waive the terms of the Cooperation Agreement, in each case publicly or which would reasonably be expected to result in a public announcement or disclosure of such request or proposal.
Azurite’s obligations under the Standstill terminate upon the earliest of the following: (i) the delivery of notice by Azurite at any time after the one year anniversary date of the Cooperation Agreement, that the Designees have resigned from the Board and all of their other respective positions with the company and that Azurite is terminating the Cooperation Period, (ii) any uncured material breach by the company of its obligations with respect to the appointment and nomination of the Designees or replacement directors designated by Azurite, formation of the Strategy Committee and size and structure of the Board; (iii) the company’s entry into (x) a definitive written agreement with respect to any Extraordinary Transaction that, if consummated, would result in the acquisition by any person or group of more than 50% of the voting securities of the company or assets having an aggregate value exceeding 50% of the aggregate enterprise value of the company or (y) one or more definitive written agreements providing for a transaction or series of related transactions which would in the aggregate result in the company issuing to one or more third parties at least 19.9% of the common shares outstanding immediately prior to such issuance(s) during the Cooperation Period (provided that securities issued as consideration for (or in connection with) the acquisition of the assets, securities and/or business(es) of another person by the company or one or more of its subsidiaries or upon exercise or conversion of currently outstanding options or convertible securities of the company shall not be counted toward this clause (y)); and (iv) the commencement of any tender or exchange
offer (by any person or group other than Azurite or their affiliates) which, if consummated, would constitute an Extraordinary Transaction that would result in the acquisition by any person or group of more than 50% of the voting securities of the company, where the company files with the SEC a Schedule 14D-9 (or amendment thereto) that does not recommend that its shareholders reject such tender or exchange offer.
Each of the parties also agreed to mutual non-disparagement obligations until (i) the Expiration Date or (ii) such earlier time as the restrictions in the Standstill terminate (jointly referred to as the “Cooperation Period” provided that the Cooperation Period shall not end earlier than the first anniversary of the date of the Cooperation Agreement. Azurite’s obligations under the Cooperation Agreement terminate at the end of the Cooperation Period. The company’s obligations under the Cooperation Agreement terminate on the Expiration Date.
Separation Agreement with Matthew E. Monaghan
On December 5, 2022, the company and Matthew E. Monaghan, the company’s former Chairman, President and Chief Executive Officer, entered into a Separation Agreement and General Release with respect to the termination of his employment with the company effective August 28, 2022 (the “Separation Agreement”) and Mr. Monaghan resigned as a director of the company without any disagreement or dispute with the company or its Board of Directors.
Subject to the effectiveness of a general release of claims in accordance with the Separation Agreement (the “Release”), he is entitled to payment of the equivalent of 12 months of his regular monthly pay as of the date of separation, less applicable taxes and withholdings, paid over the six-month period from January 2023 through June 2023 on a semi-monthly basis consistent with the company’s regular payroll practices.
The Separation Agreement also provides that Mr. Monaghan is entitled to continuation of coverage under the company’s health insurance plan pursuant to COBRA, for which the company will pay all premiums (following effectiveness of the Release) retroactive to the date of separation through August 31, 2023 or such earlier time as Mr. Monaghan obtains new health insurance coverage. Upon effectiveness of the Release, certain unvested time-based restricted stock of the company held by Mr. Monaghan will continue to vest through May 15, 2023 in accordance with its terms, and the portion of such stock that would have remained unvested as of May 16, 2023 will be immediately forfeited.
Pursuant to the Separation Agreement, Mr. Monaghan agreed to certain restrictive covenants,
including among others, non-competition, non-interference and non-recruitment obligations, effective through August 31, 2023. Mr. Monaghan further agreed to provide certain transition assistance as reasonably required by the company for up to 12 hours per month until August 31, 2023
Item 14. Principal Accountant Fees and Services.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FEES AND SERVICES
Independent Registered Public Accounting Firm and Fees
Fees for services rendered by Ernst & Young LLP in 2022 and 2021 were:
| | | | | | | | | | | |
| 2022 | | 2021 |
Audit Fees | $ | 3,178,000 | | | $ | 3,145,000 | |
Audit-Related Fees | 250,542 | | | 434,700 | |
Total Audit and Audit-Related Fees | 3,428,542 | | | 3,579,700 | |
Tax Fees | | | |
Tax Compliance Services | 463,400 | | | 577,600 | |
Tax Advisory Services | 175,100 | | | 449,100 | |
Total Tax Fees | 638,500 | | | 1,026,700 | |
All Other Fees | — | | | 425,000 | |
Total Fees | $ | 4,067,042 | | | $ | 5,031,400 | |
| | | |
Audit Fees. Fees for audit services include fees associated with the audit of the company's annual financial statements and review of the company's quarterly financial statements, including fees for statutory audits that are required domestically and internationally and fees related to the completion and delivery of the auditors' attestation report on internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act. Audit fees also include fees associated with providing consents and review of documents filed with the SEC, other services in connection with statutory and regulatory filings or engagements, as well as accounting consultations billed as audit consultations and other accounting and financial reporting consultation and research work necessary to comply with generally accepted auditing standards.
Audit-Related Fees. Fees for audit-related services principally include fees associated with accounting consultations, audits in connection with proposed or completed acquisitions and other accounting advisory assistance.
Tax Fees. Fees for tax services include fees associated with tax compliance, advice and planning services.
All Other. Fees for permissible advisory services that are not contained in the above categories.
Pre-Approval Policies and Procedures
The Audit Committee has adopted a policy that requires advance approval for all audit, audit-related, tax services, and other services performed by the company's independent registered public accounting firm. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it. During 2022, no services were provided to the company by Ernst & Young LLP other than in accordance with the pre-approval policies and procedures described above.
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
The following financial statement schedule of the company is included in Part II, Item 8:
Schedule II—Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits.
Refer to Exhibit Index of this Annual Report on Form 10-K.
Item 16. Form 10-K Summary.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized as of April 14, 2023.
| | | | | | | | |
| INVACARE CORPORATION |
| | |
| By: | /s/ GEOFFREY P. PURTILL |
| | Geoffrey P. Purtill |
| | President and Chief Executive Officer |
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended December 31, 2022.
| | | | | | | | | | | |
Official Exhibit No. | Description | | Reference |
| Securities Purchase Agreement among Allied Motion Christchurch Limited, Invacare Holdings New Zealand and Invacare Corporation, dated March 6, 2020. (Pursuant to Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to supplementally furnish to the Securities and Exchange Commission upon request any omitted schedule or exhibit to the agreement.) | | (A) |
| Asset Purchase Agreement with Ventec Life Systems, Inc. and the company, dated January 30, 2023 | | (HHH) |
| Second Amended and Restated Articles of Incorporation | | (B) |
| Second Amended and Restated Code of Regulations, as amended | | (C) |
| Amendment No. 1 to the Second Amended and Restated Articles of Incorporation | | (D) |
| Indenture, dated as of June 14, 2017, by and between Invacare Corporation and Wells Fargo Bank, National Association (including the form of the 4.50% Convertible Senior Notes due 2022). | | (E) |
| Indenture, dated as of November 19, 2019, by and between Invacare Corporation and Wells Fargo Bank, N.A., as Trustee (including the form of the 5.00% Convertible Senior Exchange Notes due 2024). | | (F) |
| Indenture, dated as of June 4, 2020, by and between Invacare Corporation and Wells Fargo Bank, N.A., as Trustee (including the form of the 5.00% Series II Convertible Senior Exchange Notes due 2024). | | (G) |
| Indenture, dated as of March 16, 2021, by and between Invacare Corporation and Wells Fargo Bank, N.A., as Trustee (including the form of the 4.25% Convertible Senior Exchange Notes due 2026). | | (H) |
| Description of Securities Registered Under the Exchange Act. | | (I) |
| Indenture, dated as of July 26, 2022, by and between Invacare Corporation and Computershare Trust Company, N.A., as Trustee (including the form of the 5.68% Convertible Senior Secured Notes due 2026, Tranche I and form of Guarantee). | | (YY) |
| Indenture, dated as of July 26, 2022, by and between Invacare Corporation and Computershare Trust Company, N.A., as Trustee (including the form of the 5.68% Convertible Senior Secured Notes due 2026, Tranche II and form of Guarantee). | | (YY) |
| Resale Registration Rights Agreement, dated as of July 26, 2022, by and between Highbridge Tactical Credit Master Fund, L.P. and Highbridge Convertible Dislocation Fund, L.P. | | (YY) |
| First Supplemental Indenture to 5.68% Convertible Senior Secured Notes due 2026, Tranche I, dated as of October 3, 2022. | | (BBB) |
| First Supplemental Indenture to 5.68% Convertible Senior Secured Notes due 2026, Tranche II, dated as of October 3, 2022. | | (BBB) |
| Credit Agreement, dated as of July 26, 2022, by and between Cantor Fitzgerald Securities, as Administrative Agent, and GLAS Trust Corporation Limited, as Collateral Agent. | | (YY) |
| Second Amended and Restated Revolving Credit and Security Agreement, dated as of July 26, 2022, by and between PNC Bank, National Association as a Lender and Agent and The other Lenders Party Hereto with PNC Capital Markets LLC as Lead Arranger and Bookrunner. | | (YY) |
| Amendment Agreement and Joinder to Foreign Guarantee Agreement, dated as of October 3, 2022. | | (YY) |
| Amendment No. 1 to Credit Agreement and Joinder to Foreign Guarantee Agreement, dated as of October 3, 2022,. by and among Invacare Corporation, the lenders party thereto, Cantor Fitzgerald Securities, as administrative agent, and GLAS Trust Corporation Limited, as collateral agent. | | (BBB) |
| Amendment Agreement, dated as of December 23, 2022, by and among Invacare Corporation, the lenders party thereto and Cantor Fitzgerald Securities, as administrative agent. | | (FFF) |
| Restructuring Support Agreement, dated as of January 31, 2023, by and among the Company Parties and the Consenting Stakeholders | | (HHH) |
| | | | | | | | | | | |
Official Exhibit No. | Description | | Reference |
| First Amended and Restated Backstop Commitment Agreement, dated as of March 29, 2023, by and among the Invacare Corporation, the company parties listed in schedule 1 thereto, and the backstop party thereto. | | ** |
| Superpriority Secured Debtor-In-Possession Credit Agreement, dated February 2, 2023. | | (III) |
| Debtor-In-Possession Revolving Credit and Security Agreement, dated February 2, 2023. | | (III) |
| Retention Bonus Letter Agreement Swiss Form | | (GGG)* |
| Retention Bonus Letter Agreement US Form | | (GGG)* |
| Cooperation Agreement, dated as of August 22, 2022, by and among Azurite Management LLC | | (ZZ) |
| Amendment No. 1 to Cooperation Agreement, dated as of November 21, 2022, by and among Azurite Management LLC. | | (CCC) |
| Invacare Retirement Savings Plan, effective January 1, 2001, as amended | | (J)* |
| Invacare Corporation 401(K) Plus Benefit Equalization Plan, effective January 1, 2003, as amended and restated | | (J)* |
| Invacare Corporation Deferred Compensation Plus Plan, effective January 1, 2005, as amended August 19, 2009 and on November 23, 2010 | | (K)* |
| Amendment No. 3 to Invacare Corporation Deferred Compensation Plus Plan, effective November 18, 2011 | | (L)* |
| Invacare Corporation Death Benefit Only Plan, effective January 1, 2005, as amended | | (J)* |
| Cash Balance Supplemental Executive Retirement Plan, as amended and restated, effective December 31, 2008 | | (M)* |
| Amendment No. 1 to the Cash Balance Supplemental Executive Retirement Plan, effective August 19, 2009 | | (WW)* |
| Form of Participation Agreement, for current participants in the Cash Balance Supplemental Executive Retirement Plan, as of December 31, 2008, entered into by and between the company and certain participants and a schedule of all such agreements with participants | | (O)* |
| Invacare Corporation Amended and Restated 2003 Performance Plan | | (N)* |
| Form of Director Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
| Form of Director Deferred Option Award under Invacare Corporation 2003 Performance Plan | | (K)* |
| Form of Restricted Stock Award under Invacare Corporation 2003 Performance Plan | | (L)* |
| Form of Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
| Form of Executive Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
| Form of Switzerland Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
| Form of Switzerland Executive Stock Option Award under Invacare Corporation 2003 Performance Plan | | (J)* |
| Invacare Corporation 2013 Equity Compensation Plan | | (P)* |
| Amendment No. 1 to the Invacare Corporation 2013 Equity Compensation Plan | | (S)* |
| Form of Executive Stock Option Award under the Invacare Corporation 2013 Equity Compensation Plan | | (R)* |
| Form of Stock Option Award under the Invacare Corporation 2013 Equity Compensation Plan | | (R)* |
| Form of Executive Stock Option Award for Swiss Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (R)* |
| Form of Stock Option Award for Swiss Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (R)* |
| Form of Director Restricted Stock Award under the Invacare Corporation 2013 Equity Compensation Plan | | (R)* |
| | | | | | | | | | | |
Official Exhibit No. | Description | | Reference |
| Form of Restricted Stock Award under the Invacare Corporation 2013 Equity Compensation Plan | | (R)* |
| Form of Performance Share Award Agreement under the Invacare Corporation 2013 Equity Compensation Plan | | (S)* |
| Form of Restricted Stock Award Agreement for Employees under the Invacare Corporation 2013 Equity Compensation Plan | | (T)* |
| Form of Director Restricted Stock Unit under the Invacare Corporation 2013 Equity Compensation Plan | | (U)* |
| Invacare Corporation Executive Incentive Bonus Plan, as amended and restated | | (Q)* |
| Employment Agreement, dated as of March 27, 2020, by and between the company and Matthew E. Monaghan. | | (Y)* |
| Letter Agreement, dated as of February 20, 2018, by and between Invacare Corporation and Kathleen P. Leneghan. | | (Z)* |
| Letter agreement, dated as of July 31, 2008, by and between the company and Anthony C. LaPlaca. | | (O)* |
| Separation Agreement, dated as of November 29, 2022, by and between the company and Rick A. Cassiday | | * |
| Separation Agreement and General Release, dated December 5, 2022, by and between the company and Matthew E. Monaghan. | | (DDD)* |
| Amended and Restated Employment Agreement, dated as of March 3, 2022, between Invacare International GmbH and Geoffrey P. Purtill. | | (EEE)* |
| Letter agreement, dated as of September 13, 2022, by and between the company and Geoffrey P. Purtill. | | (AAA)* |
| Letter agreement, dated as of November 21, 2022, by and between the company and Geoffrey P. Purtill. | | ** |
| Employment Agreement, dated as of September 16, 2020, between Invacare International GmbH and Cintia Ferreira. | | ** |
| Letter agreement, dated as of January 3, 2023, between Corporation and Cintia Ferreira. | | ** |
| Change of Control Agreement, dated as of December 31, 2008, by and between the company and Anthony C. LaPlaca. | | (AA)* |
| Form of Change of Control Agreement entered into by and between the company and certain of its executive officers and schedule of all such agreements with certain executive officers. | | * |
| Technical Information & Non-Competition Agreement, dated April 1, 2015, entered into by and between the company and Matthew E. Monaghan. | | (O)* |
| Technical Information & Non-Competition Agreement entered into by and between the company and certain of its executive officers and schedule of all such agreements with executive officers. | | (BB)* |
| Indemnity Agreement, dated April 1, 2015, entered into by and between the company and Matthew E. Monaghan. | | (O)* |
| Form of Indemnity Agreement entered into by and between the company and its directors and certain of its executive officers and schedule of all such agreements with directors and executive. | | * |
| Director Compensation Schedule | | * |
| 2012 Non-employee Directors Deferred Compensation Plan, effective January 1, 2012, Amended and Restated as of November 17, 2016 | | (U)* |
| Purchase and Sale Agreement, dated as of February 24, 2015, by and between the company and Industrial Realty Group, LLC. | | (CC) |
| Form of Lease Agreement by and among the company and the affiliates of Industrial Realty Group, LLC named therein. | | (CC) |
| Promissory Note dated May 13, 2020, between Invacare Corporation and Key Bank National Association. | | (OO) |
| | | | | | | | | | | |
Official Exhibit No. | Description | | Reference |
| Form of Performance-Based Stock Option Award under Invacare Corporation 2013 Equity Compensation Plan. | | (PP)* |
| Base Call Option Transaction Confirmation, dated June 8, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | (E) |
| Base Warrants Confirmation, dated June 8, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | (E) |
| Additional Call Option Transaction Confirmation, dated June 9, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | (E) |
| Additional Warrants Confirmation, dated June 9, 2017, between Goldman Sachs & Co. LLC and Invacare Corporation. | | (E) |
| Invacare Corporation 2018 Equity Compensation Plan | | (QQ) |
| Amendment No. 1 to Invacare Corporation 2018 Equity Compensation Plan | | (D)* |
| Amendment No. 2 to Invacare Corporation 2018 Equity Compensation Plan | | (RR)* |
| Amendment No. 3 to Invacare Corporation 2018 Equity Compensation Plan | | (SS)* |
| Form of Restricted Stock Award under Invacare Corporation 2018 Equity Compensation Plan | | (TT)* |
| Form of Restricted Stock Unit Award under Invacare Corporation 2018 Equity Compensation Plan | | (TT)* |
| Form of Director Restricted Stock Unit Award under Invacare Corporation 2018 Equity Compensation Plan | | (TT)* |
| Form of Performance Award under Invacare Corporation 2018 Equity Compensation Plan | | (TT)* |
| Form of Performance Unit Award under Invacare Corporation 2018 Equity Compensation Plan | | (TT)* |
| Form of Performance Unit Award under Invacare Corporation 2018 Equity Compensation Plan | | (XX)* |
| Omnibus Amendment | | (BB)* |
| Master Information Technology Services Agreement by and between Invacare Corporation and Birlasoft Solutions, Inc. effective October 1, 2019. | | (UU) |
| Subsidiaries of the company | | |
| Consent of Independent Registered Public Accounting Firm | | |
| Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | |
| Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | |
| Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | |
| Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | |
| Consent Decree of Permanent Injunction, as filed with the U.S. District Court for the Northern District of Ohio on December 20, 2012. | | (VV) |
101.INS** | Inline XBRL instance document | | |
101.SCH** | Inline XBRL taxonomy extension schema | | |
101.CAL** | Inline XBRL taxonomy extension calculation linkbase | | |
101.DEF** | Inline XBRL taxonomy extension definition linkbase | | |
101.LAB** | Inline XBRL taxonomy extension label linkbase | | |
101.PRE** | Inline XBRL taxonomy extension presentation linkbase | | |
104 | Cover Page Interactive Data File - The cover page from the company's Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL (included in Exhibit 101). | | |
________________________
* Management contract, compensatory plan or arrangement
** Filed herewith
(A)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated March 9, 2020, which Exhibit is incorporated herein by reference.
(B)Reference is made to Exhibit 3(a) of the company report on Form 10-K for the fiscal year ended December 31, 2008, which Exhibit is incorporated herein by reference.
(C)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated February 13, 2014, which Exhibit is incorporated herein by reference.
(D)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 16, 2019, which Exhibit is incorporated herein by reference.
(E)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated June 14, 2017, which Exhibit is incorporated herein by reference.
(F)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated November 13, 2019, which Exhibit is incorporated herein by reference.
(G)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated June 4, 2020, which Exhibit is incorporated herein by reference.
(H)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated March 16, 2021, which Exhibit is incorporated herein by reference.
(I)Reference is made to the appropriate Exhibit of the company report on Form 10-K, for the fiscal year ended December 31, 2019, which Exhibit is incorporated herein by reference.
(J)Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2007, which Exhibit is incorporated herein by reference.
(K)Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2010, which Exhibit is incorporated herein by reference.
(L)Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2011, which Exhibit is incorporated herein by reference.
(M)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 31, 2008, which Exhibit is incorporated herein by reference.
(N)Reference is made to Exhibit 10.2 of the company report on Form 8-K, dated May 28, 2009, which Exhibit is incorporated herein by reference.
(O)Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2015, which Exhibit is incorporated herein by reference.
(P)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 21, 2013, which Exhibit is incorporated herein by reference.
(Q)Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 15, 2015, which Exhibit is incorporated herein by reference.
(R)Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended September 30, 2013, which Exhibit is incorporated herein by reference.
(S)Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated March 7, 2014, which Exhibit is incorporated herein by reference.
(T)Reference is made to Exhibit 10.2 of the company report on Form 8-K, dated March 7, 2014, which Exhibit is incorporated herein by reference.
(U)Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2016, which Exhibit is incorporated herein by reference.
(V)Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2020, which Exhibit is incorporated herein by reference.
(W)Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the fiscal quarter ended June 30, 2021, which Exhibit is incorporated herein by reference.
(X)Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the fiscal quarter ended September 30, 2021, which Exhibit is incorporated herein by reference.
(Y)Reference is made to Exhibit 99.1 of the company report on Form 8-K, dated March 27, 2020, which Exhibit is incorporated herein by reference.
(Z)Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated February 23, 2018, which Exhibit is incorporated herein by reference.
(AA) Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2017, which Exhibit is incorporated herein by reference.
(BB) Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2018, which Exhibit is incorporated herein by reference.
(CC) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated April 23, 2015, which Exhibit is incorporated herein by reference.
(DD) Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated September 30, 2015, which Exhibit is incorporated herein by reference.
(EE) Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated February 16, 2016, which Exhibit is incorporated herein by reference.
(FF) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated November 30, 2016, which Exhibit is incorporated herein by reference.
(GG) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated June 7, 2017, which Exhibit is incorporated herein by reference.
(HH) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated November 14, 2019, which Exhibit is incorporated herein by reference.
(II) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated June 1, 2020, which Exhibit is incorporated herein by reference.
(JJ) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated January 21, 2021, which Exhibit is incorporated herein by reference.
(KK) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated March 10, 2021, which Exhibit is incorporated herein by reference.
(LL) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated February 23, 2016, which Exhibit is incorporated herein by reference.
(MM) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated March 7, 2016, which Exhibit is incorporated herein by reference.
(NN) Reference is made to the appropriate Exhibit of the company report on Form 10-K, for the fiscal year ended December 31, 2020, which Exhibit is incorporated herein by reference.
(OO) Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended June 30, 2020, which Exhibit is incorporated herein by reference.
(PP) Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended March 31, 2017, which Exhibit is incorporated herein by reference.
(QQ) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 18, 2018, which Exhibit is incorporated herein by reference.
(RR) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 21, 2020, which Exhibit is incorporated herein by reference.
(SS) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated May 21, 2021, which Exhibit is incorporated herein by reference.
(TT) Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended June 30, 2018, which Exhibit is incorporated herein by reference.
(UU) Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended September 30, 2019, which Exhibit is incorporated herein by reference.
(VV) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 20, 2012, which Exhibit is incorporated herein by reference.
(WW) Reference is made to the appropriate Exhibit of the company report on Form 10-Q, for the fiscal quarter ended September 30, 2009, which Exhibit is incorporated herein by reference.
(XX) Reference is made to the appropriate Exhibit of the company report on Form 10-Q , for the fiscal quarter ended March 31, 2022, which Exhibit is incorporated by reference.
(YY) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated July 26, 2022, which Exhibit is incorporated herein by reference.
(ZZ) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated August 22, 2022, which Exhibit is incorporated herein by reference.
(AAA) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated September 15, 2022, which Exhibit is incorporated herein by reference.
(BBB) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated October 3, 2022, which Exhibit is incorporated herein by reference.
(CCC) Reference is made to the appropriate Exhibit of the company report on Form 8-K/A, dated November 22, 2022, which Exhibit is incorporated herein by reference.
(DDD) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 9, 2022, which Exhibit is incorporated herein by reference.
(EEE) Reference is made to the appropriate Exhibit of the company report on Form 10-K, for the fiscal year ended December 31, 2021, which Exhibit is incorporated herein by reference.
(FFF) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated December 27, 2022, which Exhibit is incorporated herein by reference.
(GGG) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated January 31, 2023, which Exhibit is incorporated herein by reference.
(HHH) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated February 1, 2023, which Exhibit is incorporated herein by reference.
(III) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated February 3, 2023, which Exhibit is incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of April 14, 2023.
| | | | | | | | |
| | |
Signature | | Title |
| |
/s/ GEOFFREY P. PURTILL | | Director, President and Chief Executive Officer (Principal Executive Officer) |
Geoffrey P. Purtill | |
| | |
/s/ KATHLEEN P. LENEGHAN | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
Kathleen P. Leneghan | |
| | |
/s/ MICHAEL J. MERRIMAN, JR. | | Chair of the Board |
Michael J. Merriman, Jr. | |
| | |
/s/ EDWARD F. CRAWFORD | | Director |
Edward F. Crawford | |
| | |
/s/ PETRA DANIELSOHN-WEIL, PhD | | Director |
Petra Danielsohn-Weil, PhD | |
| | |
/s/ MARC M. GIBELEY | | Director |
Marc M. Gibeley | |
| | |
/s/ CLIFFORD D. NASTAS | | Director |
Clifford D. Nastas | |
| | |
/s/ STEVEN H. ROSEN | | Director |
Steven H. Rosen | |
| | |
/s/ ARON I. SCHWARTZ | | Director |
Aron I. Schwartz | |
| | | | | | | | |
Report of Independent Registered Public Accounting Firm | | |
| | |
| | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Invacare Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Invacare Corporation and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the Accounting Policies and Subsequent Events notes to the consolidated financial statements, on January 31, 2023, Invacare Corporation and certain of its direct U.S. subsidiaries filed petitions for reorganization under Chapter 11 of title 11 of the Bankruptcy Code and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management's plans regarding these matters are also described in the Accounting Policies and Subsequent Events notes. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Adoption of ASU No. 2020-06
As discussed in the Accounting Policies note to the consolidated financial statements, the Company changed its method of accounting for convertible instruments in 2021 due to the adoption of ASU No. 2020-06, Debt-Debt with Conversion and Other options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 8815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
| | | | | | | | |
| | Report of Independent Registered Public Accounting Firm |
| | |
| | |
| | | | | |
| Valuation of Goodwill |
Description of the matter | At December 31, 2022, the carrying amount of the Company’s goodwill was $326.3 million. As discussed in the Accounting Policies and Long-Term Assets - Goodwill notes to the consolidated financial statements, goodwill is assessed for impairment at the reporting unit level at least annually or whenever events or changes in circumstances indicate its carrying value may not be recoverable. |
| |
| Auditing management’s goodwill impairment assessment was complex and judgmental due to the significant estimation required to determine the fair value of a reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as projected future cash flows of the reporting unit and the weighted average cost of capital used in the valuation process to discount future cash flows, which are affected by expectations about future market or economic conditions and the planned business and operating strategies. |
| |
How we addressed the matter in our audit | To test the estimated fair value of the reporting unit, our audit procedures included, among others, assessing the valuation methodologies, testing the significant assumptions used to develop the projected financial information, and testing the underlying data used by the Company in its analysis. We compared the projected financial information developed by management to current industry and economic trends as well as to the historical performance of the reporting unit and evaluated the expected impacts of the Company’s operating strategies and initiatives on the significant assumptions. We also performed analyses to evaluate the sensitivity of the fair value of the reporting unit resulting from changes in the significant assumptions. In addition, we evaluated the reasonableness of management’s reconciliation of the fair value of the reporting unit to the market capitalization of the Company. In addition, we involved our internal valuation specialists to assist in our evaluation of the methodologies applied and assumptions used by management. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1984.
Cleveland, Ohio
April 14, 2023
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Financial Statements | | |
Consolidated Statements of Comprehensive Income (Loss) | | |
| | |
INVACARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands, except per share data) |
Net sales | $ | 741,733 | | | $ | 872,457 | | | $ | 850,689 | |
Cost of products sold | 566,340 | | | 633,351 | | | 605,437 | |
Gross Profit | 175,393 | | | 239,106 | | | 245,252 | |
Selling, general and administrative expenses | 226,780 | | | 232,242 | | | 236,357 | |
Gain on sale of business | — | | | — | | | (9,790) | |
Charges related to restructuring activities | 25,820 | | | 2,534 | | | 7,358 | |
Impairment of goodwill | — | | | 28,564 | | | — | |
Impairment of intangible assets | 3,259 | | | — | | | — | |
Operating Income (Loss) | (80,466) | | | (24,234) | | | 11,327 | |
Net gain on convertible debt derivatives | (1,510) | | | — | | | — | |
Loss (gain) on debt extinguishment including debt finance charges and fees | (9,419) | | | (9,422) | | | 7,360 | |
Interest expense | 28,520 | | | 24,307 | | | 28,499 | |
Interest income | (56) | | | (1) | | | (93) | |
Loss Before Income Taxes | (98,001) | | | (39,118) | | | (24,439) | |
Income tax provision | 3,070 | | | 6,445 | | | 3,841 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net Loss | $ | (101,071) | | | $ | (45,563) | | | $ | (28,280) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net Loss per Share—Basic | $ | (2.77) | | | $ | (1.31) | | | $ | (0.83) | |
Weighted Average Shares Outstanding—Basic | 36,517 | | | 34,875 | | | 34,266 | |
| | | | | |
| | | | | |
| | | | | |
Net Loss per Share—Assuming Dilution | $ | (2.77) | | | $ | (1.31) | | | $ | (0.83) | |
Weighted Average Shares Outstanding—Assuming Dilution | 36,629 | | | 35,274 | | | 34,375 | |
| | | | | |
| | | | | |
Net Loss | $ | (101,071) | | | $ | (45,563) | | | $ | (28,280) | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments | (48,197) | | | (28,724) | | | 43,405 | |
Defined benefit plans: | | | | | |
Amortization of prior service costs and unrecognized losses | 6,487 | | | (427) | | | (375) | |
| | | | | |
Deferred tax adjustment resulting from defined benefit plan activity | (197) | | | (39) | | | 55 | |
Valuation reserve associated with defined benefit plan activity | 197 | | | 39 | | | (55) | |
Current period gain (loss) on cash flow hedges | (1) | | | 815 | | | (825) | |
Deferred tax benefit (expense) related to gain (loss) on cash flow hedges | — | | | (112) | | | 103 | |
Other Comprehensive Income (Loss) | (41,711) | | | (28,448) | | | 42,308 | |
Comprehensive Income (Loss) | $ | (142,782) | | | $ | (74,011) | | | $ | 14,028 | |
See notes to consolidated financial statements.
| | | | | | | | |
| | Financial Statements |
| | Balance Sheets |
| | |
Current Assets
Receivables
Receivables as of December 31, 2022 and 2021 consist of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Accounts receivable, gross | $ | 112,659 | | | $ | 142,806 | |
Customer rebate reserve | (11,569) | | | (12,267) | |
Allowance for doubtful accounts | (3,279) | | | (3,642) | |
Cash discount reserves | (8,756) | | | (9,179) | |
Other, principally returns and allowances reserves | (1,103) | | | (603) | |
| | | |
Accounts receivable, net | $ | 87,952 | | | $ | 117,115 | |
Reserves for customer rebates and cash discounts are recorded as a reduction in revenue and netted against gross accounts receivable. Customer rebates in excess of a given customer's accounts receivable balance are classified in Accrued Expenses. Customer rebates and cash discounts are estimated based on the most likely amount principle as well as historical experience and anticipated performance. In addition, customers have the right to return product within the company’s normal terms policy, and as such, the company estimates the expected returns based on an analysis of historical experience and adjusts revenue accordingly.
During the third quarter of 2021, the company entered into an agreement with a bank to sell certain trade receivables with governmental entity customers in the Nordic region without recourse. Under ASC 860, the sale of the receivables qualify as a true sale and not a secured borrowing. No gain or loss was recorded on the sale of the receivables. Bank charges, which are recorded as interest expense, attributable to the program were immaterial for the years ended December 31, 2022 and 2021.
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all the company’s receivables are due from health care, medical equipment providers and long-term care facilities predominantly located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to providers, both foreign and domestic, are ultimately funded through government reimbursement programs such as Medicare and Medicaid in the U.S. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability.
The company adopted ASU 2016-13, “Measurement of Credit Losses on Financial Statements” on January 1, 2020. Accordingly, the company is now applying an
"expected loss” model that will generally require earlier recognition of allowances for losses for trade receivables. In addition, the company expects more variability in its allowance for doubtful accounts as it previously provided for bad debts based on a specific reserve methodology while the new expected loss methodology requires companies to provide for estimated losses beginning at the time of sale. The adoption of the new standard resulted in an increase in credit losses and adjustment to retained earnings of $243,000 which is reflected in the Consolidated Statement of Shareholders' Equity.
The company's approach is to separate its receivables into good-standing and collection receivables. Good-standing receivables are assigned to risk pools of high, medium and low. The risk pools are driven by the specifics associated with the geography of origination. Expected loss percentages are calculated and assigned to each risk pool, driven primarily by historical experience. The historical loss percentages are calculated for each risk pool and then judgmentally revised to consider current risk factors as well as consideration of the impact of forecasted events, as applicable. The expected loss percentages are then applied to receivables balances each period to determine the allowance for doubtful accounts.
In North America, excluding Canada, good-standing receivables are assigned to the low risk pool and assigned an expected loss percentage of 1.0% as these receivables are deemed to share the same risk profile and collections efforts are the same. Installment receivables in North America are characterized as collection receivables and thus reserves are based on specific analysis of each customer. In Canada, good-standing receivables are deemed low risk and assigned a loss percentage of 0.1%.
In Europe, expected losses are determined by each location in each country. Most locations have a majority of their receivables assigned to the low risk pool, which has an average expected loss percentage of 0.3%. About half of the locations have a portion of their receivables assigned as medium risk with an average expected loss percentage of 0.8%. Only a few locations have any receivables characterized as high risk and the average credit loss percentage for those locations is 2.7%. Collection risk is generally low as payment terms in certain key markets, such as Germany, are immediate and in many locations the ultimate customer is the government.
In the Asia Pacific region, receivables are characterized as low risk, which have an average expected loss percentage of 1.0%. Historical losses are low in this region where the use of credit insurance is often customary.
| | | | | | | | |
Notes to Financial Statements | | |
Current Assets | | |
| | |
The movement in the trade receivables allowance for
doubtful accounts was as follows (in thousands):
| | | | | |
| 2022 |
Balance as of beginning of period | $ | 3,642 | |
Current period provision | 862 | |
Recoveries (direct write-offs), net | (1,225) | |
Balance as of end of period | $ | 3,279 | |
The company did not make any material changes to the assignment of receivables to the different risk pools or to the expected loss reserves in the year.
For collections receivables, the estimated allowance for uncollectible amounts is based primarily on management’s evaluation of the financial condition of each customer. In addition, as a result of the company's financing arrangement with DLL, a third-party financing company which the company has worked with since 2000, management monitors the collection status of these contracts in accordance with the company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishes reserves for specific customers as needed.
The company writes off uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. Refer to Concentration of Credit Risk in the Notes to the Consolidated Financial Statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the consolidated balance sheet.
The company has recorded a contingent liability in the amount of $333,000 related to the contingent aspect of the company's guarantee associated with its arrangement with DLL. The contingent liability is recorded applying the same expected loss model used for the trade and installment receivables recorded on the company's books. Specifically, historical loss history is used to determine the expected loss percentage, which is then adjusted judgmentally to consider other factors, as needed.
The company’s U.S. customers electing to finance their purchases can do so using DLL. Repurchased DLL receivables recorded on the books of the company represent a single portfolio segment of receivables to the independent provider channel and long-term care customers. The portfolio segment of these receivables are distinguished by geography and credit quality. These receivables were repurchased from DLL because the customers were in default. Default with DLL is defined as a customer being delinquent by three payments.
The estimated allowance for uncollectible amounts and evaluation for both classes of installment receivables is based on the company’s quarterly review of the financial condition of each individual customer with the allowance for doubtful accounts adjusted accordingly. Installments are individually and not collectively reviewed. The company assesses the bad debt reserve levels based upon the status of the customer’s adherence to a legally negotiated payment schedule and the company’s ability to enforce judgments, liens, etc.
For purposes of granting or extending credit, the company utilizes a scoring model to generate a composite score that considers each customer’s consumer credit score and/or D&B credit rating, payment history, security collateral and time in business. Additional analysis is performed for most customers desiring credit greater than $250,000, which generally includes a detailed review of the customer’s financial statements as well as consideration of other factors such as exposure to changing reimbursement laws.
Interest income is recognized on installment receivables based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments and is moved to collection, interest income is no longer recognized. Subsequent payments received once an account is put on non-accrual status are generally first applied to the principal balance and then to the interest. Accruing of interest on collection accounts would only be restarted if the account became current again.
All installment accounts are accounted for using the same methodology regardless of the duration of the installment agreements. When an account is placed in collection status, the company goes through a legal process for pursuing collection of outstanding amounts, the length of which typically approximates eighteen months. Any write-offs are made after the legal process has been completed.
| | | | | | | | |
| | Notes to Financial Statements |
| | Current Assets |
| | |
| | |
Installment receivables as of December 31, 2022 and 2021 consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Current | | Long- Term | | Total | | Current | | Long- Term | | Total |
Installment receivables | $ | 311 | | | $ | 266 | | | $ | 577 | | | $ | 218 | | | $ | 734 | | | $ | 952 | |
| | | | | | | | | | | |
Less: Unearned interest | — | | | — | | | — | | | — | | | — | | | — | |
| 311 | | | 266 | | | 577 | | | 218 | | | 734 | | | 952 | |
Allowance for doubtful accounts | — | | | — | | | — | | | — | | | — | | | — | |
Installment receivables, net | $ | 311 | | | $ | 266 | | | $ | 577 | | | $ | 218 | | | $ | 734 | | | $ | 952 | |
No sales of installment receivables were made by the company during the year.
The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance as of beginning of period | $ | — | | | $ | 487 | |
Current period provision (benefit) | — | | | (75) | |
Direct write-offs charged against the allowance | — | | | (412) | |
Balance as of end of period | $ | — | | | $ | — | |
Installment receivables by class as of December 31, 2022 consist of the following (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Total Installment Receivables | | Unpaid Principal Balance | | Related Allowance for Doubtful Accounts | | Interest Income Recognized |
| | | | | | | |
| | | | | | | |
Asia Pacific | | | | | | | |
Non-impaired installment receivables with no related allowance recorded | 577 | | | 577 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Total | | | | | | | |
Non-impaired installment receivables with no related allowance recorded | 577 | | | 577 | | | — | | | — | |
Impaired installment receivables with a related allowance recorded | — | | | — | | | — | | | — | |
Total installment receivables | $ | 577 | | | $ | 577 | | | $ | — | | | $ | — | |
| | | | | | | | |
Notes to Financial Statements | | |
Current Assets | | |
| | |
Installment receivables by class as of December 31, 2021 consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Installment Receivables | | Unpaid Principal Balance | | Related Allowance for Doubtful Accounts | | Interest Income Recognized |
| | | | | | | |
| | | | | | | |
Asia Pacific | | | | | | | |
Non-impaired installment receivables with no related allowance recorded | 952 | | | 952 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total | | | | | | | |
Non-impaired installment receivables with no related allowance recorded | 952 | | | 952 | | | — | | | — | |
Impaired installment receivables with a related allowance recorded | — | | | — | | | — | | | — | |
Total installment receivables | $ | 952 | | | $ | 952 | | | $ | — | | | $ | — | |
Installment receivables with a related allowance recorded as noted in the table above represent those installment receivables on a non-accrual basis. As of December 31, 2022, the company had no U.S. installment receivables past due of 90 days or more for which the company is still accruing interest. Individually, all U.S.
installment receivables are assigned a specific allowance for doubtful accounts based on management's review when the company does not expect to receive both the contractual principal and interest payments as specified in the loan agreement.
The aging of the company's installment receivables was as follows as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Total | | U.S. | | Asia Pacific | | Total | | U.S. | | Canada |
Current | $ | 533 | | | $ | — | | | $ | 533 | | | $ | 952 | | | $ | — | | | $ | 952 | |
0-30 days past due | 44 | | | — | | | 44 | | | — | | | — | | | — | |
31-60 days past due | — | | | — | | | — | | | — | | | — | | | — | |
61-90 days past due | — | | | — | | | — | | | — | | | — | | | — | |
90+ days past due | — | | | — | | | — | | | — | | | — | | | — | |
| $ | 577 | | | $ | — | | | $ | 577 | | | $ | 952 | | | $ | — | | | $ | 952 | |
| | | | | | | | |
| | Notes to Financial Statements |
| | Current Assets |
| | |
Inventories, Net
Inventories, net as of December 31, 2022 and 2021 consist of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Raw materials | $ | 57,174 | | | $ | 69,371 | |
Finished goods | 45,476 | | | 62,124 | |
Work in process | 9,911 | | | 12,779 | |
Inventories, net | $ | 112,561 | | | $ | 144,274 | |
In the third quarter of 2022, with the decision to exit the respiratory products business, the company recorded a charge to gross margin totaling $8,651,000, with $5,387,000 increasing the inventory reserve and $3,264,000 for purchase obligations. No significant adjustments were recorded to adjust this estimate in the fourth quarter of 2022.
Other current assets as of December 31, 2022 and 2021 consist of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Tax receivables principally value added taxes | $ | 22,946 | | | $ | 21,943 | |
Prepaid insurance | 1,223 | | | 4,462 | |
Prepaid inventory and freight | 3,077 | | | 2,394 | |
Recoverable income taxes | 1,990 | | | 2,301 | |
Service contracts | 1,366 | | | 304 | |
Derivatives (foreign currency forward contracts) | 1,117 | | | 386 | |
Receivable due from information technology provider | 934 | | | 612 | |
Prepaid debt fees | 339 | | | 379 | |
Prepaid and other current assets | 6,710 | | | 7,255 | |
Other Current Assets | $ | 39,702 | | | $ | 40,036 | |
| | | | | | | | |
Notes to Financial Statements | | |
Long-Term Assets | | |
| | |
Long-Term Assets
Other long-term assets as of December 31, 2022 and 2021 consist of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| | | |
Cash surrender value of life insurance policies | 2,686 | | | 2,481 | |
Deferred income taxes | 1,102 | | | 1,540 | |
Deferred financing fees | 733 | | | 409 | |
Installment receivables | 266 | | | 734 | |
Investments | 85 | | | 86 | |
Other | 287 | | | 112 | |
Other Long-Term Assets | $ | 5,159 | | | $ | 5,362 | |
Property and Equipment
Property and equipment as of December 31, 2022 and 2021 consist of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Machinery and equipment | $ | 269,835 | | | $ | 278,347 | |
Capitalized software | 30,923 | | | 30,448 | |
Land, buildings and improvements | 25,095 | | | 27,299 | |
Furniture and fixtures | 8,053 | | | 8,943 | |
Leasehold improvements | 4,802 | | | 6,782 | |
Property and Equipment, gross | 338,708 | | | 351,819 | |
Accumulated depreciation | (287,175) | | | (290,898) | |
Property and Equipment, net | $ | 51,533 | | | $ | 60,921 | |
Machinery and equipment includes demonstration units placed in provider locations which are depreciated to their estimated recoverable values over their estimated useful lives.
In 2019, the company initiated the first stage of an Enterprise Resource Planning (“ERP”) software implementation. Related to the ERP project, the company capitalized certain costs in accordance with ASC 350 as shown in capitalized software above. The net book value of capitalized software was $26,015,000 and $28,715,000 at December 31, 2022 and 2021, respectively. Depreciation expense related to capitalized software started in 2021, subsequent to the first stage implementation of the ERP and was $3,176,000 and $1,733,000 for the year ended December 31, 2022 and 2021, respectively.
Unpaid purchases of property and equipment at December 31, 2022 and 2021 were $0 and $1,090,000, respectively and are excluded from purchases of property and equipment on the consolidated statements of cash flows for those periods ending and are included in subsequent periods when paid.
| | | | | | | | |
| | Notes to Financial Statements |
| | Long-Term Assets |
| | |
The carrying amount of goodwill by reporting unit is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| North America | | Europe | | Consolidated |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance at December 31, 2020 | $ | 28,485 | | | $ | 373,976 | | | $ | 402,461 | |
Foreign currency translation adjustments | 79 | | | (18,101) | | | (18,022) | |
Impairment of goodwill | (28,564) | | | — | | | (28,564) | |
Balance at December 31, 2021 | — | | | 355,875 | | | 355,875 | |
Foreign currency translation adjustments | — | | | (29,594) | | | (29,594) | |
Balance at December 31, 2022 | $ | — | | | $ | 326,281 | | | $ | 326,281 | |
In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is assessed for impairment. The company first estimates the fair value of each reporting unit and compares the calculated fair value to the carrying value of each reporting unit. A reporting unit is defined as an operating segment or one level below. The company had determined that its reporting units are North America, Europe and Asia Pacific.
During the third quarter of 2021, the company's reporting units of North America / HME and Institutional Products Group merged into one reporting unit of North America, consistent with the operating segment. Developments in 2021 and the conclusion of the reporting units merger were tied mostly to actions of the company to implement components of a new ERP system which changed both the level of discrete financial information readily available and the go-forward manner in which the company assesses performance and allocates resources to the North America operating segment.
The reporting unit change within the North America operating segment in the third quarter of 2021 was a triggering event and required the company to perform an interim goodwill impairment assessment. Based on the interim goodwill impairment assessment, the company concluded that the carrying value of the North America reporting unit was above its fair value. That conclusion resulted in the recording of impairment of goodwill in the third quarter of 2021 of $28,564,000.
The company completed the interim test in the third quarter of 2021 consistent with the process of its annual impairment assessment in the fourth quarter of each year.
During the third quarter of 2022, a continued decline in the share price of the company's common shares caused the company's market capitalization to fall below the carrying value of shareholders' equity. Further, inputs used in estimating the weighted average cost of capital (“WACC”) had moved unfavorably to increase the WACC used in a discounted cash flows model. The combination of
these and other developments were identified as a triggering event and the company proceeded with a quantitative goodwill impairment assessment of its Europe reporting unit (the only reporting unit with goodwill).
An interim quantitative goodwill impairment assessment was performed as of September 30, 2022, utilizing a discounted cash flows methodology. Key assumptions used in the discounted cash flow analysis included, but were not limited to, a WACC of approximately 14.51%, terminal growth rates and financial projections of performance and cash flows. Components of the WACC include quoted rates for 20-year debt of potential acquirer companies with similar credit risk and the cost of equity based on the 20-year treasury rate for the risk free rate, a market risk premium, an industry average beta and a small cap stock adjustment. The assumptions are based on a market participant's point of view and thus these inputs are deemed Level III inputs in regard to the fair value hierarchy. The WACC used in the 2021 annual assessment was 11.19% and was 11.27% in 2020. The WACC used has a significant impact in the outcome of the discounted cash flow methodology utilized in the company's impairment assessment as a higher WACC would decrease fair value estimates.
The company also utilized an Enterprise Value (“EV”) to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) method to compute the fair value of reporting units which considers potential acquirers and their EV to EBITDA multiples adjusted by an estimated premium. The EV method is used to corroborate fair values but more weight is placed on the discounted cash flow method results.
The company concluded based on the results of the interim quantitative goodwill impairment assessment performed as of September 30, 2022 that goodwill was not impaired in Europe. The company typically completes an annual impairment assessment in the fourth quarter of each year or whenever events or changes in circumstances indicate the carrying value could be below a reporting
| | | | | | | | |
Notes to Financial Statements | | |
Long-Term Assets | | |
| | |
unit's fair value. The assessment results as of September 30, 2022 were not materially different from the company's historic valuation fourth quarter valuation date as of October 1st. Through the fourth quarter of 2022, the company monitored for triggers which could negatively impact components to calculations from the interim impairment assessment and could suggest additional risk of impairment as of December 31, 2022. Inputs to the WACC and other factors in the quantitative assessment did not move materially unfavorably to warrant an update to the quantitative assessment as of December 31, 2022.
While there was no impairment in 2022 related to goodwill for the Europe reporting unit, a future potential impairment is possible for Europe should actual results differ materially from forecasted results used in the valuation analysis. The valuation of goodwill can differ materially if financial projections or market inputs used to determine the WACC change significantly. For instance, higher interest rates or greater stock price volatility would increase the WACC and thus increase the chance of impairment. Assumptions used in the quantitative assessment require significant judgements and estimates which are inherently uncertain. If actual results are materially lower than estimates, it could result in a material impact on the consolidated financial statements in future periods. In addition, business changes impacting the company's assessment of reporting units could also have a material impact on impairment assessment results.
There is no goodwill in the North America or Asia Pacific reporting units at December 31, 2022.
As part of the company's assessment of goodwill for impairment, the company also considers the potential for impairment of any intangible assets and other long-lived assets. Refer to Other Long-Term Assets, Property and Equipment and Intangibles in the Notes to the Consolidated Financial Statements.
| | | | | | | | |
| | Notes to Financial Statements |
| | Long-Term Assets |
| | |
The company's intangibles consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Historical Cost | | Accumulated Amortization | | Historical Cost | | Accumulated Amortization |
Customer lists | $ | 48,515 | | | $ | 48,515 | | | $ | 52,447 | | | $ | 52,447 | |
Trademarks | 18,867 | | | — | | | 24,137 | | | — | |
Developed technology | 7,154 | | | 6,859 | | | 7,652 | | | 7,149 | |
Patents | 4,092 | | | 4,092 | | | 5,543 | | | 5,543 | |
License agreements | 3,981 | | | 1,480 | | | 2,905 | | | 1,196 | |
Other | 1,148 | | | 1,142 | | | 1,147 | | | 1,140 | |
Intangibles | $ | 83,757 | | | $ | 62,088 | | | $ | 93,831 | | | $ | 67,475 | |
All of the company's intangible assets have been assigned definite lives and continue to be amortized over their useful lives, except for trademarks shown above, which have indefinite lives.
The changes in intangible asset balances reflected on the balance sheet from December 31, 2021 to December 31, 2022 were the result of foreign currency translation on historical cost and accumulated amortization as well as impairment of certain trademarks discussed below.
The company evaluates the carrying value of definite-lived assets annually in the fourth quarter and whenever events or circumstances indicate possible impairment.
Definite-lived assets are determined to be impaired if the future undiscounted cash flows expected to be generated by the asset are less than the carrying value. Actual impairment amounts for definite-lived assets are then calculated using a discounted cash flow calculation.
Any impairment for indefinite-lived intangible assets is calculated as the difference between the future discounted cash flows expected to be generated by the asset less than the carrying value for the asset.
Amortization expense related to intangible assets was $507,000, $404,000 and $377,000 for 2022, 2021 and 2020, respectively. Estimated amortization expense for each of the next five years is expected to be $611,000 for 2023, $562,000 in 2024, $439,000 in 2025, $437,000 in 2026 and $311,000 in 2027. Amortized intangible assets are being amortized on a straight-line basis over remaining lives of 2 to 7 years with a weighted average remaining life of approximately 5.6 years.
During the third quarter of 2022, the company recognized an intangible impairment charge in the North America segment of $1,012,000 related to a trademark
with an indefinite life the company determined it would no longer use.
During the fourth quarter of 2022, the company recognized intangible assets impairment charges in the Europe segment of $2,247,000 related to trademarks with an indefinite life the company determined had reduced future use due to product rationalization.
The fair values of the trademarks were calculated using a relief from royalty payment methodology which requires applying an estimated market royalty rate to forecasted net sales and discounting the resulting cash flows to determine fair value.
| | | | | | | | |
Notes to Financial Statements | | Table of Contents |
Current Liabilities | | |
| | |
Current Liabilities
Accrued Expenses
Accrued expenses as of December 31, 2022 and 2021 consisted of accruals for the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Taxes other than income taxes, primarily value added taxes | $ | 27,106 | | | $ | 24,012 | |
Salaries and wages | 19,307 | | | 23,217 | |
Professional | 11,267 | | | 8,697 | |
Warranty | 7,981 | | | 11,198 | |
Interest | 6,900 | | | 3,297 | |
IT service contracts | 5,581 | | | 4,013 | |
Rebates | 4,923 | | | 6,569 | |
Freight | 4,542 | | | 5,460 | |
Product line exit obligations | 3,743 | | | — | |
Severance | 3,472 | | | 400 | |
Deferred revenue | 2,279 | | | 4,156 | |
Product liability, current portion | 2,125 | | | 2,362 | |
Insurance | 951 | | | 625 | |
Supplemental Executive Retirement Program liability Plan (SERP) | 391 | | | 391 | |
Derivatives (foreign currency forward exchange contracts) | 137 | | | 1,938 | |
| | | |
Other items, principally trade accruals | 5,386 | | | 6,636 | |
Accrued Expenses | $ | 106,091 | | | $ | 102,971 | |
Generally, the company's products are covered by warranties against defects in material and workmanship for various periods depending on the product from the date of sales to the customer. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. The company has established procedures to appropriately defer such revenue. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product field action and recalls, which could require additional warranty reserve provision.
Accrued rebates relate to several volume incentive programs the company offers its customers. The company accounts for these rebates as a reduction of revenue when the products are sold. Rebates are netted against gross accounts receivables. If rebates are in excess of such receivables, they are then classified as accrued expenses.
| | | | | | | | |
Table of Contents | | Notes to Financial Statements |
| | Current Liabilities |
| | |
The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance as of January 1 | $ | 11,198 | | | $ | 10,991 | |
Warranties provided during the period | 2,202 | | | 6,361 | |
Settlements made during the period | (5,577) | | | (6,718) | |
Changes in liability for pre-existing warranties during the period, including expirations | 158 | | | 564 | |
Balance as of December 31 | $ | 7,981 | | | $ | 11,198 | |
Warranty reserves are subject to adjustment in future periods as new developments change the company's estimate of the total cost.
| | | | | | | | |
Notes to Financial Statements | | Table of Contents |
Long-Term Liabilities | | |
| | |
Long-Term Liabilities
Long-Term Debt
Debt as of December 31, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| | | |
Convertible senior notes at 4.50%, due in June 2022 | $ | — | | | $ | 2,642 | |
Convertible senior notes Series I at 5.00%, due in November 2024 | 72,408 | | | 72,140 | |
Convertible senior notes Series II at 5.00%, due in November 2024 | 76,719 | | | 78,251 | |
Convertible senior notes at 4.25%, due in March 2026 | 67,665 | | | 119,036 | |
Secured convertible senior notes at 5.68%, due in July 2026 | 37,240 | | | — | |
Term loan, due in July 2026 | 82,808 | | | — | |
Other obligations | 17,401 | | | 36,060 | |
| 354,241 | | | 308,129 | |
Less current maturities of long-term debt | (154) | | | (3,107) | |
Long-Term Debt | $ | 354,087 | | | $ | 305,022 | |
On September 30, 2015, the company entered into an Amended and Restated Revolving Credit and Security Agreement, which was subsequently amended (the “Prior Credit Agreement”) and which was to mature on January 16, 2024. The Prior Credit Agreement was entered into by and among the company, certain of the company’s direct and indirect U.S. and Canadian subsidiaries and certain of the company’s European subsidiaries, certain other of the company’s direct and indirect U.S., Canadian and European subsidiaries, and PNC Bank, National Association (“PNC”), JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, KeyBank National Association, and Citizens Bank, National Association. PNC is the administrative agent (the “Prior Credit Agreement Administrative Agent”) and J.P. Morgan Europe Limited is the European agent (the “European Agent”) under the Prior Credit Agreement. As discussed further below, the Prior Credit Agreement was amended and restated (the “ABL Credit Agreement”) on July 26, 2022.
The company had outstanding letters of credit of $4,229,000 and $3,450,000 as of December 31, 2022 and 2021, respectively. Outstanding letters of credit and other reserves impacting borrowing capacity were $3,654,000 and $2,585,000 as of December 31, 2022 and 2021, respectively.
The company had outstanding borrowings of $15,220,000 under its ABL Credit Agreement as of December 31, 2022. The company had outstanding borrowings of $22,150,000 under its North America Credit Facility under the Prior Credit Agreement as of December 31, 2021. The company had outstanding borrowings of $7,366,000 (€6,500,000) under its French Credit Facility and $5,986,000 (£4,500,000) under its UK Credit Facility under its Prior Credit Agreement as of December 31, 2021,
together referred to as the European Credit Facility. No borrowings were outstanding under the European Credit Facility as of December 31, 2022 as it was terminated in July 2022.
North America Borrowers Credit Facility
For the company's North America Borrowers, the Prior Credit Agreement provided for an asset-based-lending senior secured revolving credit facility which was secured by substantially all the company's U.S. and Canadian assets, other than real estate. The Prior Credit Agreement provided the company and the other Borrowers with a credit facility in an aggregate principal amount of $60,000,000, subject to availability based on a borrowing base formula, under a senior secured revolving credit, letter of credit and swing line loan facility (the “North America Credit Facility”). Up to $20,000,000 of the North America Credit Facility was available for issuance of letters of credit. The aggregate principal amount of the North America Credit Facility could have been increased by up to $25,000,000 to the extent requested by the company and agreed to by any Lender or new financial institution approved by the Prior Credit Agreement Administrative Agent.
The aggregate borrowing availability under the North America Credit Facility was determined based on a borrowing base formula. The aggregate usage under the North America Credit Facility could not exceed an amount equal to the sum of (a) 85% of eligible U.S. accounts receivable plus (b) the lesser of (i) 70% of eligible U.S. inventory and eligible foreign in-transit inventory and (ii) 85% of the net orderly liquidation value of eligible U.S. inventory and eligible foreign in-transit inventory (not to exceed $4,000,000), plus (c) the lesser of (i) 80% of the net
| | | | | | | | |
Table of Contents | | Notes to Financial Statements |
| | Long-Term Liabilities |
| | |
orderly liquidation value of U.S. eligible machinery and equipment and (ii) $0 as of December 31, 2022 (subject to reduction as provided in the Prior Credit Agreement), plus (d) 85% of eligible Canadian accounts receivable, plus (e) the lesser of (i) 70% of eligible Canadian inventory and (ii) 85% of the net orderly liquidation value of eligible Canadian inventory, less (f) swing loans outstanding under the North America Credit Facility, less (g) letters of credit issued and undrawn under the North America Credit Facility, less (h) a $3,000,000 minimum availability reserve, less (i) other reserves required by the Prior Credit Administrative Agent, and in each case subject to the definitions and limitations in the Prior Credit Agreement.
Interest accrued on outstanding indebtedness under the Prior Credit Agreement at the SOFR rate, plus a margin ranging from 2.25% to 2.75%, or at the alternate base rate, plus a margin ranging from 1.25% to 1.75%, as selected by the company. Borrowings under the North American Credit Facility were subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.
The Prior Credit Agreement contained customary representations, warranties and covenants. Exceptions to the operating covenants in the Prior Credit Agreement provide the company with flexibility to, among other things, enter into or undertake certain sale and leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Prior Credit Agreement, as amended. The Prior Credit Agreement also contained a covenant requiring the company to maintain minimum availability under the North America Credit Facility of not less than (i) 12.5% of the maximum amount that may be drawn under the North America Credit Facility for five (5) consecutive business days, or (ii) 11.25% of the maximum amount that may be drawn under the North America Credit Facility on any business day. The company also was subject to dominion triggers under the North America Credit Facility requiring the company to maintain borrowing capacity of not less than $7,500,000 on any business day or any five consecutive days in order to avoid triggering full control by an agent for the lenders of the company's cash receipts for application to the company's obligations under the agreement.
The Prior Credit Agreement contained customary default provisions, with certain grace periods and exceptions, which provide for events of default that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than 10 consecutive days. The North American Credit Facility was terminated on July 26, 2022.
European Credit Facility
The Prior Credit Agreement also provided for a revolving credit, letter of credit and swing line loan facility which gives the company and the European Borrowers the ability to borrow up to an aggregate principal amount of $30,000,000, with a $5,000,000 sublimit for letters of credit and a $2,000,000 sublimit for swing line loans (the “European Credit Facility”). Up to $15,000,000 of the European Credit Facility will be available to each of Invacare Limited (the “UK Borrower”) and Invacare Poirier SAS (the “French Borrower” and, together with the UK Borrower, the “European Borrowers”). The European Credit Facility was terminated on July 26, 2022.
The aggregate borrowing availability for each European Borrower under the European Credit Facility is determined based on a borrowing base formula. The aggregate borrowings of each of the European Borrowers under the European Credit Facility may not exceed an amount equal to (a) 85% of the European Borrower's eligible accounts receivable, less (b) the European Borrower's borrowings and swing line loans outstanding under the European Credit Facility, less (c) the European Borrower's letters of credit issued and undrawn under the European Credit Facility, less (d) a $3,000,000 minimum availability reserve, less (e) other reserves required by the European Agent, and in each case subject to the definitions and limitations in the Prior Credit Agreement.
Interest accrued on outstanding indebtedness under the European Credit Facility at the SOFR rate, plus a margin ranging from 2.50% to 3.00%, or for swing line loans, at the overnight SOFR rate, plus a margin ranging from 2.50% to 3.00%, as selected by the company. The margin was adjusted quarterly based on utilization. Borrowings under the European Credit Facility were subject to commitment fees of 0.25% or 0.375% per year, depending on utilization.
The European Credit Facility was secured by substantially all the personal property assets of the UK Borrower and its in-country subsidiaries, and all the receivables of the French Borrower and its in-country subsidiaries. The UK and French facilities (which comprise the European Credit Facility) were cross collateralized, and the US personal property assets previously pledged under the North America Credit Facility also served as collateral for the European Credit Facility.
The European Credit Facility was subject to customary representations, warranties and covenants generally consistent with those applicable to the North America Credit Facility. Exceptions to the operating covenants in the Prior Credit Agreement provided the company with flexibility to, among other things, enter into or undertake
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certain sale/leaseback transactions, dispositions of assets, additional credit facilities, sales of receivables, additional indebtedness and intercompany indebtedness, all subject to limitations set forth in the Prior Credit Agreement. The Prior Credit Agreement also contained a covenant requiring the European Borrowers to maintain undrawn availability under the European Credit Facility of not less than (i) 12.5% of the maximum amount that may be drawn under the European Credit Facility for five (5) consecutive business days, or (ii) 11.25% of the maximum amount that may be drawn under the European Credit Facility on any business day. The European Borrowers also were subject to cash dominion triggers under the European Credit Facility requiring the European Borrower to maintain borrowing capacity of not less than $3,750,000 on any business day or $3,750,000 for five consecutive business days in order to avoid triggering full control by an agent for the Lenders of the European Borrower's cash receipts for application to its obligations under the European Credit Facility.
The European Credit Facility was subject to customary default provisions, with certain grace periods and exceptions, consistent with those applicable to the North America Credit Facility, which provide that events of default include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, cross-default, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption in the operations of any material manufacturing facility for more than 10 consecutive days. The proceeds of the European Credit Facility were used to finance the working capital and other business needs of the company. The company had outstanding borrowings of $7,366,000 (€6,500,000) under its French Credit Facility and $5,986,000 (£4,500,000) under its UK Credit Facility as of December 31, 2021.
In January 2021, the Prior Credit Agreement was amended to provide for, among other things, the addition of the company's Netherlands subsidiary as a guarantor under the European Credit Facility, amendments to the restrictive covenants in the Prior Credit Agreement to (1) increase the maximum amount of permitted miscellaneous indebtedness to $30,000,000 from $10,000,000 and (2) permit up to $9,000,000 of financing based on certain European public and government receivables, and terms that, upon the occurrence of certain events related to a transition from the use of LIBOR, permit the agent for the lenders to amend the Prior Credit Agreement to replace the LIBOR rate and/or the Euro rate with a benchmark replacement rate.
In March 2021, the Prior Credit Agreement was further amended to permit the issuance of the 2026 Notes and the capped call transactions entered into by the company in connection with the issuance of the 2026 Notes, as further discussed in the sections below.
On December 29, 2021, the Prior Credit Agreement was further amended with the primary provisions to replace the references to the LIBOR rate or Euro rate to a term secured overnight finance rate (“SOFR”).
ABL Credit Agreement
On July 26, 2022, the company entered into a Second Amended and Restated Revolving Credit and Security Agreement (the “ABL Credit Agreement”), amending and restating the company’s existing Revolving Credit and Security Agreement, as amended (the “Prior Credit Agreement”). The ABL Credit Agreement was entered into by and among the company, certain of the company’s direct and indirect domestic and Canadian subsidiaries (together with the company, the “Borrowers”), certain other of the company’s direct and indirect domestic and Canadian subsidiaries (the “Guarantors”), and PNC Bank, National Association (“PNC”) and JPMorgan Chase Bank, N.A. (the “ABL Lenders”). PNC is the administrative agent (the “Administrative Agent”) under the ABL Credit Agreement.
The ABL Credit Agreement retained the existing asset-based lending senior secured revolving credit facility provided for the company and the domestic and Canadian Borrowers under the Prior Credit Agreement but extended the maturity date to January 16, 2026, reduced the maximum aggregate principal amount the company and the domestic and Canadian Borrowers could borrow to $35,000,000, limited the borrowing base thereunder to eligible domestic and Canadian accounts receivable and included a minimum availability reserve of $3,000,000. Borrowings under the ABL Credit Agreement were subject to a springing maturity date of 191 days prior to the maturity dates of certain convertible notes due 2024 and 2026, and 100 days prior to the maturity date of the Secured Term Loan under the Highbridge Loan Agreement, if such notes or such term loan remain outstanding as of such respective dates. The ABL Credit Agreement also permitted the loans made under the Highbridge Loan Agreement and terminated the European Credit Facility under the Prior Credit Agreement. In connection with the ABL Credit Agreement and the Highbridge Loan Agreement, the European Credit Facility under the Prior Credit Agreement was repaid in full and the liens securing the European Credit Facility under the Prior Credit Agreement were terminated and released.
The aggregate borrowing availability under the ABL Credit Agreement was determined based on a borrowing base formula. As of December 31, 2022, the company had gross borrowing base of $29,817,000 and net borrowing availability of $15,288,000 under the ABL Credit Agreement, considering the minimum availability reserve, then-outstanding letters of credit, other reserves and the $4,375,000 dominion trigger amount.
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Interest accrued on outstanding indebtedness under the ABL Credit Agreement at an adjusted Term SOFR rate, plus a margin of 3.25%, or for swing line loans and prime rate revolving loans, at the overnight Prime rate, plus a margin of 2.25%.
The ABL Credit Agreement contained customary terms and covenants and negative covenants, such as limitations on indebtedness, liens, fundamental changes, asset sales, investments and other matters customarily restricted in such agreements. Most of these restrictions were subject to certain minimum thresholds and exceptions. The ABL Credit Agreement also contained customary events of default, after which the revolving loan may be due and payable immediately, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against the company and its subsidiaries, change in control and lien priority.
Proceeds from the Secured Term Loan under the Highbridge Loan Agreement were used to repay in full outstanding borrowings under the Prior Credit Agreement. Refer to the Term Loan due 2026 section below.
In connection with entering into the company's Prior Credit Agreement and the ABL Credit Agreement, the company incurred fees which were capitalized and were being amortized as interest expense. As of December 31, 2022, debt fees yet to be amortized totaled $1,011,000.
The company was in compliance with the ABL Credit Agreement covenants at December 31, 2022.
Convertible senior notes due 2022
In the second quarter of 2017, the company issued $120,000,000 aggregate principal amount of 4.50% Convertible Senior Notes due 2022 (the “2022 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year, beginning December 1, 2017. The 2022 Notes matured on June 1, 2022. At maturity, $2,650,000 principal amount of the 2022 Notes remained outstanding, which the company repaid in cash.
In connection with the offering of the 2022 Notes, the company entered into privately negotiated convertible note hedge transactions with one financial institution (the “option counterparty”). These transactions cover, subject to customary anti-dilution adjustments, the number of the company's common shares that will initially underlie the 2022 Notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the 2022 Notes. The company
evaluated the note hedges under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the note hedges should be accounted for as derivatives. These derivatives were capitalized on the balance sheet as long-term assets and were adjusted to reflect fair value each quarter. All note hedge options relating to the 2022 Notes expired on June 1, 2022.
The company entered into separate, privately negotiated warrant transactions with the option counterparty at a higher strike price relating to the same number of the company's common shares, subject to customary anti-dilution adjustments, pursuant to which the company sold warrants to the option counterparties. The warrants could have a dilutive effect on the company's outstanding common shares and the company's earnings per share to the extent that the price of the company's common shares exceeds the strike price of those warrants. The initial strike price of the warrants was $21.4375 per share and were subject to certain adjustments under the terms of the warrant transactions. The company evaluated the warrants under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that the warrants met the definition of a derivative, were indexed to the company's own shares and should be classified in shareholder's equity. The amount paid for the warrants and capitalized in shareholder's equity was $14,100,000.
Warrants relating to the 2022 Notes outstanding on December 31, 2022 were 4,215,212. If exercised, one common share is issued upon exercise of each warrant, but may be adjusted under certain circumstances if the relevant share price exceeds the warrant strike price for the relevant measurement period at the time of exercise. Common shares are reserved for issuance upon exercise of the remaining warrants relating to the 2022 Notes at two common shares per warrant. The warrants began to expire on September 1, 2022 and partially expire on each trading day over the 220 trading day period following September 1, 2022.
The net proceeds from the offering of the 2022 Notes were approximately $115,289,000, after deducting fees and offering expenses of $4,711,000, which were paid in 2017. These debt issuance costs were capitalized and were being amortized as interest expense through June 2022. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability. A portion of the net proceeds from the offering were used to pay the cost of the convertible note hedge transactions (after such cost is partially offset by the proceeds to the company from the warrant transactions), which net cost was $10,680,000.
During the second quarter of 2020, the company entered into separate, privately negotiated agreements with
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certain holders of the company's previously outstanding convertible notes due 2021 (the “2021 Notes”) and certain holders of its 2022 Notes to exchange $35,375,000 in aggregate principal amount of 2021 Notes and $38,500,000 in aggregate principal amount of 2022 Notes, for aggregate consideration of $73,875,000 in aggregate principal amount of new Series II 2024 Notes and $5,593,000 in cash.
During the first quarter of 2021, the company repurchased $78,850,000 in principal amount of 2022 Notes, resulting in a loss on debt extinguishment of $709,000.
The liability components of the 2022 Notes consist of the following (in thousands):
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| December 31, 2022 | | December 31, 2021 |
Principal amount of liability component | $ | — | | | $ | 2,650 | |
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Debt fees | — | | | (8) | |
Net carrying amount of liability component | $ | — | | | $ | 2,642 | |
The effective interest rate on the liability component was 10.9% upon original issuance including consideration of the discount. Total interest expense subsequent to adoption of ASU 2020-06 includes coupon interest and amortization of debt fees. Interest expense of $50,000 and $859,000 was accrued for the 2022 and 2021 periods, respectively, based on the stated coupon rate of 4.5%.
Convertible senior notes Series I due 2024
During the fourth quarter of 2019, the company entered into separate privately negotiated agreements with certain holders of its 2021 Notes to exchange $72,909,000 in aggregate principal amount of 2021 Notes for aggregate consideration of $72,909,000 in aggregate principal amount of new 5.00% Convertible Senior Notes due 2024 (the “Series I 2024 Notes”) of the company and $6,928,000 in cash.
The notes bear interest at a rate of 5.00% per year payable semi-annually in arrears on May 15 and November 15 of each year, beginning May 15, 2020. The notes will mature on November 15, 2024, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to May 15, 2024, the Series I 2024 Notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Series I 2024 Notes may be settled in cash, the company’s common shares or a combination of cash and the company’s common shares, at the company’s election.
Prior to the maturity of the Series I 2024 Notes, the company may, at its election, redeem for cash all or part of the Series I 2024 Notes if the last reported sale price of the company’s common shares equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the Series I 2024 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (subject to certain limited exceptions). No sinking fund is provided for the Series I 2024 Notes, which means the company is not required to redeem or retire the Series I 2024 Notes periodically.
Holders of the Series I 2024 Notes may convert their Series I 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the company’s common shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Series I 2024 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of Series I 2024 Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s common shares and the applicable conversion rate for the Series I 2024 Notes on each such trading day; (3) upon the occurrence of specified corporate events described in the Indenture; or (4) if the company calls the Series I 2024 Notes for redemption pursuant to the terms of the Indenture. Holders of the Series I 2024 Notes will have the right to require the company to repurchase all or some of their Series I 2024 Notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 67.6819 common shares per $1,000 principal amount of Series I 2024 Notes (equivalent to an initial conversion price of approximately $14.78 per common share). On or after May 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity of the Series I 2024 Notes, holders may convert their Series I 2024 Notes, at the option of the holder, regardless of the foregoing circumstances.
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A loss of $5,885,000 was recorded a part of the exchange transaction, which included the write-off of fees related to the portion of the 2021 Notes exchanged. Debt issuance costs of $1,338,000 were capitalized and are being amortized as interest expense through November 15, 2024. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
The liability components of the Series I 2024 Notes consist of the following (in thousands):
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| December 31, 2022 | | | | December 31, 2021 | |
Principal amount of liability component | $ | 72,909 | | | | | $ | 72,909 | | |
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Debt fees | (501) | | | | | (769) | | |
Net carrying amount of liability component | $ | 72,408 | | | | | $ | 72,140 | | |
The effective interest rate on the liability component was 8.8% upon original issuance including consideration of the discount. Total interest expense subsequent to adoption of ASU 2020-06 includes coupon interest and amortization of debt fees. Interest expense of $3,645,000 and $3,645,000 was accrued in 2022 and 2021, respectively, based on the stated coupon rate of 5.0%. The effective interest rate of the Series I 2024 Notes as of December 31, 2022 was 5.4%. The Series I 2024 Notes were not convertible as of December 31, 2022, nor was the applicable conversion threshold met.
The company was in compliance with the Series I 2024 Notes covenants at December 31, 2022.
Convertible senior notes Series II due 2024
During the second quarter of 2020, the company entered into separate, privately negotiated agreements with certain holders of its 2021 Notes and certain holders of its 2022 Notes to exchange $35,375,000 in aggregate principal amount of 2021 Notes and $38,500,000 in aggregate principal amount of 2022 Notes, for aggregate consideration of $73,875,000 in aggregate principal amount of new 5.00% Series II Convertible Senior Notes due 2024 (the “Series II 2024 Notes”) of the company and $5,593,000 in cash.
The Series II 2024 Notes bear interest at a rate of 5.00% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning November 15, 2020. The Series II 2024 Notes will mature on November 15, 2024, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to May 15, 2024, the Series II 2024 Notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the
close of business on the second scheduled trading day immediately preceding the maturity date. The Series II 2024 Notes may be settled in cash, the company’s common shares or a combination of cash and the company’s common shares, at the company’s election.
Prior to the maturity of the Series II 2024 Notes, the company may, at its election, redeem for cash all or part of the Series II 2024 Notes, if the last reported sale price of the company’s common shares equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption. The redemption price will be equal to 100% of the accreted principal amount of the Series II 2024 Notes to be redeemed, plus any accrued and unpaid interest, if any, on the original principal amount of the New Notes redeemed to, but excluding, the redemption date (subject to certain limited exceptions). No sinking fund is provided for the Series II 2024 Notes, which means the company is not required to redeem or retire the Series II 2024 Notes periodically.
Holders of the Series II 2024 Notes may convert their Series II 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the company’s common shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price for the Series II 2024 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of Series II 2024 Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s common shares and the applicable conversion rate for the Series II 2024 Notes on each such trading day; (3) upon the occurrence of specified corporate events described in the Indenture; or (4) if the company calls the Series II 2024 Notes for redemption pursuant to the terms of the Indenture. Holders of the Series II 2024 Notes will have the right to require the company to repurchase all or some of their Series II 2024 Notes at 100% of the accreted principal amount, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 67.6819 common shares per $1,000 principal amount of Series II 2024 Notes (equivalent to an initial conversion
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price of approximately $14.78 per common share). On or after May 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity of the Series II 2024 Notes, holders may convert their Series II 2024 Notes, at the option of the holder, regardless of the foregoing circumstances.
The principal amount of the Series II 2024 Notes also will accrete at a rate of approximately 4.7% per year commencing June 4, 2020, compounding on a semi-annual basis. The accreted portion of the principal is payable in cash upon maturity but does not bear interest and is not convertible into the company’s common shares. The total amount accreted as of December 31, 2022 was $8,434,000 and $5,347,000 as of December 31, 2021. Remaining accretion until maturity (at current principal) was $8,188,000 as of December 31, 2022.
A loss of $6,599,000 was recorded a part of the exchange transaction, which included the write-off of fees related to portions of the 2021 Notes and 2022 Notes exchanged. Debt issuance costs of $1,505,000 were capitalized and are being amortized as interest expense through November 2024. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
In the third quarter of 2022, $5,000,000 aggregate principal amount of Series II 2024 Notes were retired as part of the Secured 2026 Notes and Secured Term Loan transactions discussed below.
The liability components of the Series II 2024 Notes consist of the following (in thousands):
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| December 31, 2022 | | December 31, 2021 | | | | |
Principal amount of liability component - including accretion | $ | 77,309 | | | $ | 79,222 | | | | | |
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Debt fees | (590) | | | (971) | | | | | |
Net carrying amount of liability component | $ | 76,719 | | | $ | 78,251 | | | | | |
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The effective interest rate on the liability component was 9.0% upon original issuance including consideration of the discount. Total interest expense subsequent to adoption includes coupon interest, accretion and amortization of debt fees. Non-cash interest expense, including accretion, of $3,590,000 and $3,534,000 was recognized in 2022 and 2021, respectively. Interest expense of $3,507,000 and $3,693,000 was accrued in 2022 and 2021, respectively based on the stated coupon rate of 5.0%. The effective interest rate of the Series II 2024 Notes as of December 31, 2022 including coupon interest, amortization of debt fees and accretion to maturity was 10.4%. The Series II 2024 Notes were not convertible
as of December 31, 2022 nor was the applicable conversion threshold met.
The company was in compliance with the Series II 2024 Notes covenants at December 31, 2022.
Convertible senior notes due 2026
In the first quarter of 2021, the company issued $125,000,000 aggregate principal amount of 4.25% Convertible Senior Notes due 2026 (the “2026 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act.
The notes bear interest at a rate of 4.25% per year payable semi-annually in arrears on March 15 and September 15 of each year, beginning September 15, 2021. The notes will mature on March 15, 2026, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to September 15, 2025, the 2026 Notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The 2026 Notes may be settled in cash, the company’s common shares or a combination of cash and the company’s common shares, at the company’s election.
The company may not redeem the 2026 Notes prior to March 20, 2024. The company may, at its election, redeem for cash all or part of the 2026 Notes, on or after March 20, 2024, if the last reported sale price of the company’s common shares equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date (subject to certain limited exceptions). No sinking fund is provided for the 2026 Notes, which means the company is not required to redeem or retire the 2026 Notes periodically.
Holders of the 2026 Notes may convert their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding September 15, 2025 in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending June 30, 2021 (and only during such calendar quarter), if the last reported sale price of the company’s common shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of
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the immediately preceding calendar quarter is greater than 130% of the conversion price for the 2026 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of 2026 Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the company’s common shares and the applicable conversion rate for the 2026 Notes on each such trading day; (3) upon the occurrence of specified corporate events described in the Indenture; or (4) if the company calls any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date. Holders of the 2026 Notes will have the right to require the company to repurchase all or some of their 2026 Notes at 100% of their principal, plus any accrued and unpaid interest, upon the occurrence of certain fundamental changes. The initial conversion rate is 94.6096 common shares per $1,000 principal amount of 2026 notes (equivalent to an initial conversion price of approximately $10.57 per common share). On or after September 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity of the 2026 Notes, holders may convert their 2026 Notes, at the option of the holder, regardless of the foregoing circumstances.
Debt issuance costs of $5,697,000 were capitalized and are being amortized as interest expense through March 2026. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
The liability components of the 2026 Notes consist of the following (in thousands):
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| December 31, 2022 | | December 31, 2021 | | | | |
Principal amount of liability component | $ | 69,700 | | | $ | 125,000 | | | | | |
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Debt fees | (2,035) | | | (5,964) | | | | | |
Net carrying amount of liability component | $ | 67,665 | | | $ | 119,036 | | | | | |
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Interest expense of $4,467,000 and $4,220,000 was accrued for the twelve months ended December 31, 2022 and December 31, 2021, respectively, based on the stated coupon rate of 4.25%. The effective interest rate of the 2026 Notes as of December 31, 2022 was 4.1%. The 2026 Notes were not convertible as of December 31, 2022 nor was the applicable conversion threshold met.
In the third quarter of 2022, $41,475,000 aggregate principal amount of 2026 Notes were exchanged and retired as part of the Secured 2026 Notes and Secured
Term Loan transactions discussed below. In the fourth quarter of 2022, additional $13,825,000 aggregate principal amount of 2026 Notes were exchanged and retired.
The company was in compliance with the 2026 Notes covenants at December 31, 2022.
In March 2021, in connection with the pricing of the 2026 Notes, the company entered into capped call transactions (the “Capped Call Transactions”) with certain option counterparties. The company used $18,787,000 of the net proceeds of the private offering of the 2026 Notes to pay the cost of the Capped Call Transactions with the offset recorded to additional paid-in-capital.
The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the 2026 Notes and/or offset any cash payments the company is required to make in excess of the principal amount of converted notes, as the case may be, in the event that the market price per share of the company’s common shares, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which is initially $10.57, corresponding to the initial conversion price of the 2026 Notes, subject to anti-dilution adjustments. If, however, the market price per company common share, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, which is initially $16.58 (subject to adjustments), there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Call Transactions. The Capped Call Transactions expire March 15, 2026, subject to earlier exercise. There were 125,000 capped call options related to the 2026 Notes outstanding on December 31, 2022.
The company will not be required to make any cash payments to the option counterparties upon the exercise of the options that are a part of the Capped Call Transactions, but the company will be entitled to receive from the option counterparties a number of company common shares, an amount of cash or a combination thereof generally based on the amount by which the market price per company common share, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions during the relevant valuation period under the Capped Call Transactions. However, if the market price per company common share, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions during such valuation period, the number of company common shares and/or the amount of cash the company expects to receive upon exercise of the Capped Call Transactions will be capped based on the amount by which the cap price exceeds the strike price of the Capped Call Transactions.
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For any conversions of the 2026 Notes prior to September 15, 2025, a corresponding portion of the relevant Capped Call Transactions may be terminated at the company’s option. Upon any such termination, the company expects to receive from the option counterparties a number of company common shares, or, if the company so elects, subject to certain conditions, an amount of cash, in each case, with a value equal to the fair value of such portion of the relevant Capped Call Transactions being terminated, as calculated in accordance with the terms of the relevant Capped Call Transaction.
The Capped Call Transactions are separate transactions, in each case, entered into by the company with the option counterparties, and are not part of the terms of the 2026 Notes and will not affect any holder’s rights under the 2026 Notes. Holders of the 2026 Notes will not have any rights with respect to the Capped Call Transactions.
Secured convertible senior notes due 2026
In the third quarter of 2022, the company issued an aggregate $31,106,000 (split equally between two separate tranches (“Tranche I Notes” and “Tranche II Notes” or “Indentures”) in aggregate principal amount of 5.68% Secured Convertible Senior Notes due 2026 (the “Secured 2026 Notes”) in a private offering. This was in exchange for $41,475,000 aggregate principal amount of 2026 Notes which were retired. In October 2022, additional principal amount of Secured 2026 Notes were issued aggregating to $20,739,000 and $20,736,000 in aggregate principal amount of Tranche I Notes and Tranche II Notes, respectively, in exchange for $13,825,000 of 2026 Notes. The exchanged 2026 Notes and settlement of the Series II 2024 Notes in third quarter of 2022 (discussed above) resulted in a net gain on extinguishment of debt of $6,398,000.
The Secured 2026 Notes are initially guaranteed by certain subsidiaries of the company in the United States, United Kingdom, Canada, France, the Netherlands and Luxembourg pursuant to separate guarantees (each, a “Guarantee”), and are secured on a pari passu basis by the same collateral that secures the Highbridge Loan Agreement (discussed below). In addition, the company's subsidiaries that provide guarantees of the Highbridge Loan Agreement in connection with the post-closing draws provided Guarantees of the Secured 2026 Notes.
Interest on the Secured 2026 Notes will be payable semi-annually in cash in arrears on January 1 and July 1 of each year, beginning on January 1, 2023, at a rate of 5.68% per year. The Secured 2026 Notes will mature on July 1, 2026, unless earlier converted, redeemed or repurchased in accordance with their terms. Holders of the Secured 2026 Notes have the right, at their option, at any time prior to the
close of business on the second scheduled trading day immediately preceding July 1, 2026 (the maturity date), to convert any Secured 2026 Notes or portion thereof that is $1,000 or an integral multiple thereof, subject to certain conditions, into cash, common shares or a combination of cash and common shares at the company’s election (subject to, and in accordance with, the settlement provisions set forth the Indentures). The initial conversion rate for the (i) Tranche I Notes is 333.3333 common shares (subject to adjustment as provided for in the Tranche I Indenture) per $1,000 principal amount of the Tranche I Notes, which is equal to an initial conversion price of $3.00 per share, and (ii) Tranche II Notes is 222.222 common shares (subject to adjustment as provided for in the Tranche II Indenture) per $1,000 principal amount of the Tranche II Notes, which is equal to an initial conversion price of $4.50 per share. In addition, following certain corporate events as described in the Indentures that occur prior to the maturity date of the Secured 2026 Notes or if the company delivers a notice of redemption, the company will pay a make-whole premium by increasing the conversion rate for a holder who elects to convert its Secured 2026 Notes in connection with such a corporate event or notice of redemption, as the case may be, in certain circumstances, subject to adjustment as provided for and in accordance with the Indentures. These features are bifurcated driving convertible derivative liability.
The company may not elect to redeem the Secured 2026 Notes prior to January 26, 2023. The company may redeem for cash all or any portion of the Secured 2026 Notes, at its option, on or after January 26, 2023 if the last reported sale price of the common shares exceeds 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the Secured 2026 Notes to be redeemed, plus any accrued and unpaid interest on such Secured 2026 Notes to, but excluding, the redemption date (subject to certain conditions set forth the Indentures). No sinking fund is provided for the Secured 2026 Notes.
If the company undergoes a Fundamental Change (as defined in the Indentures), prior to the maturity date of the Secured 2026 Notes, holders of the Secured 2026 Notes will, subject to specified conditions, have the right, at their option, to require the company to repurchase for cash all or a portion of their Secured 2026 Notes at a repurchase price equal to 100% of the principal amount of the Secured 2026 Notes to be repurchased, plus any accrued and unpaid interest to, but not including, the Fundamental Change repurchase date.
The Indentures provide for customary events of default. In the case of an event of default with respect to the Secured 2026 Notes arising from specified events of bankruptcy or insolvency, all outstanding Secured 2026
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Table of Contents | | Notes to Financial Statements |
| | Long-Term Liabilities |
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Notes will become due and payable immediately without further action or notice. If any other event of default with respect to the Secured 2026 Notes under the Indentures occur or is continuing, the Trustee or holders of at least 25% in aggregate principal amount of the then outstanding Secured 2026 Notes may declare the principal amount of the Secured 2026 Notes to be immediately due and payable.
In certain circumstances if, at any time during the six-month period beginning on, and including, the date that is six months after the date of original issuance for any sub-tranche of the Secured 2026 Notes, the company fails to timely file certain documents or reports required under the Securities Exchange Act of 1934, as amended, or the Secured 2026 Notes are not otherwise freely tradable under Rule 144 by holders of the Secured 2026 Notes other than the company’s affiliates or holders that were affiliates at any time during the three months preceding, additional interest will accrue at a rate of up to 0.50% on the Secured 2026 Notes during the period in which its failure to file has occurred and is continuing or such Secured 2026 Notes are not otherwise freely tradable under Rule 144 by holders other than the company’s affiliates or holders that were affiliates at any time during the three months preceding until such failure is cured.
In addition, if, and for so long as, the restrictive legend on any sub-tranche of the Secured 2026 Notes has not been removed, any sub-tranche of the Secured 2026 Notes are assigned a restricted CUSIP number or any sub-tranche of the Secured 2026 Notes are not otherwise freely tradable under Rule 144 by holders other than the company’s affiliates or holders that were affiliates at any time during the three months preceding (without restrictions pursuant to U.S. securities laws or the terms of the Indentures or the Secured 2026 Notes) as of the 380th day after the date of original issuance of such sub-tranche of the Secured 2026 Notes, the company will pay additional interest at a rate of 0.50% on the Secured 2026 Notes during the period in which the Secured 2026 Notes remain so restricted.
The company may not issue common shares upon conversions of the Secured 2026 Notes, net of the 2,700,000 common shares issued in the Exchange, in excess of 19.99% of the company’s common Shares outstanding on July 25, 2022; until the requisite approval under the applicable New York Stock Exchange rules by the company’s shareholders is obtained. Prior to the Bankruptcy petition on January 31, 2023, the company intended to seek this approval at its 2023 Annual Meeting of Shareholders.
Debt issuance costs of $3,099,000 were capitalized and are being amortized as interest expense through July 2026. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
The liability components of the Secured 2026 Notes consist of the following (in thousands):
| | | | | | | | | |
| December 31, 2022 | | | | |
Principal amount of liability component | $ | 41,475 | | | | | |
Unamortized discount | (1,447) | | | | | |
Debt fees | (2,788) | | | | | |
Net carrying amount of liability component | $ | 37,240 | | | | | |
| | | | | |
Interest expense of $905,000 was accrued for the twelve months ended December 31, 2022 based on the stated coupon rate of 5.68%. Non-cash interest expense of $148,000 was recognized in 2022. The effective interest rate of the Secured 2026 Notes as of December 31, 2022 was 10.1%. The Secured 2026 Notes were not convertible as of December 31, 2022 nor was the applicable conversion threshold met.
The company was in compliance with the Secured 2026 Notes covenants at December 31, 2022.
Secured Term Loan due 2026
On July 26, 2022, the company entered into a credit agreement (the “Highbridge Loan Agreement” or “Secured Term Loan”) with a certain fund managed by Highbridge Capital Management, LLC (“Highbridge”), as the lender (together with the other lenders from time to time party thereto, the “Lenders”), Cantor Fitzgerald Securities as administrative agent and GLAS Trust Corporation Limited, as collateral agent.
Pursuant to the Highbridge Loan Agreement, the company may borrow up to an aggregate of $104,500,000 principal amount of Secured Term Loan, including $66,500,000 with $2,000,000 original issuance discount in initial Secured Term Loans drawn at closing, $8,500,000 in additional Secured Term Loans principal to be made in a single draw subject to satisfaction of certain conditions, another $10,000,000 in additional Secured Term Loan principal to be made in a single draw subject to satisfaction of certain further conditions and $19,500,000 in additional Secured Term Loan principal to be made subject to satisfaction of certain further conditions.
The Secured Term Loan was scheduled to mature on July 26, 2026 and accrued interest at an initial annual rate of SOFR plus 7.00% or a base rate plus 6.00% and after the second anniversary of closing at an annual rate of SOFR plus 8.75% or a base rate plus 7.75%. The Secured Term Loan was also subject to a springing maturity date of 91 days prior to the maturity date of certain convertible notes due November 2024 if more than $20,000,000 of such notes remain outstanding as of such date. The obligations under the Highbridge Loan Agreement are secured, initially, by substantially all assets of the company and certain subsidiaries of the company (subject to certain
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Notes to Financial Statements | | |
Long-Term Liabilities | | |
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exceptions), subject to intercreditor agreements in connection with the ABL Credit Agreement and the 5.68% Indentures, and are guaranteed by certain subsidiaries of the company in the United States, United Kingdom, Canada, France, the Netherlands and Luxembourg at the closing. Additional collateral owned by subsidiaries of the company in various jurisdictions have been added to the security for the Secured Term Loan and additional subsidiaries of the company in various jurisdictions have been added to guarantee the obligations in connection with the post-closing draws.
The company has the right to prepay the Secured Term Loan at any time, subject to a prepayment premium, which (x) in case of a prepayment before the second anniversary of the closing date is equal to the greater of (i) 1.00% of the aggregate principal amount of the Secured Term Loan so prepaid and (ii) the excess, if any of (A) the present value as of the date of repayment of all interest that would have accrued on the Secured Term Loan being prepaid from such date through the second anniversary of the closing plus the present value as of such date of the principal amount of the Secured Term Loan being prepaid assuming a prepayment date of the second anniversary of the closing over (B) the principal amount of such Secured Term Loan being prepaid and (y), after the second anniversary of the closing and prior to the third anniversary of the closing is equal to 1.00% of the aggregate principal amount of the Secured Term Loan so prepaid, as well as, in each case of (x) and (y), an additional redemption fee equal to 3.00% of the aggregate principal amount of the Secured Term Loan so prepaid.
The Highbridge Loan Agreement contained customary terms and covenants, including without limitation a financial covenant to maintain a minimum liquidity of $20,000,000 and negative covenants, such as limitations on indebtedness, liens, fundamental changes, asset sales, investments and other matters customarily restricted in such agreements. Most of these restrictions were subject to certain minimum thresholds and exceptions. The Highbridge Loan Agreement also contained customary events of default, after which the Secured Term Loan may be due and payable immediately, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against the company and its subsidiaries, change in control and lien priority.
Debt issuance costs of $6,480,000 were capitalized and are being amortized as interest expense through July 2026. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability.
On October 3, 2022, the company consummated additional draws of an aggregate of $18,500,000 under the Highbridge Loan Agreement. Further, the company issued $5,186,000 in aggregate principal amount of additional
5.68% Tranche I Notes and $5,183,000 in aggregate principal amount of additional 5.68% Tranche II Notes of the Secured 2026 Notes in exchange for $13,825,000 of 2026 Notes which were retired resulting in a net gain on extinguishment of debt of $3,021,000. Following these transactions, $69,700,000 aggregate principal amount of 2026 Notes remained outstanding.
On December 23, 2022, the company entered into an amendment under the Highbridge Loan Agreement (the “Amended Highbridge Loan Agreement”) and consummated an additional draw of an aggregate principal amount of $5,500,000 of principal (the “Additional Draw”). Additional commitments of $14,000,000 remained available under the Amended Highbridge Loan Agreement, subject to satisfaction of certain conditions set forth therein at December 31, 2022.
The liability components of the Secured Term Loan consist of the following (in thousands):
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| December 31, 2022 | | | | |
Principal amount of liability component | $ | 90,500 | | | | | |
Unamortized original issuance discount | (1,846) | | | | | |
Debt fees | (5,846) | | | | | |
Net carrying amount of liability component | $ | 82,808 | | | | | |
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Interest expense of $3,352,000 was accrued for the year ended December 31, 2022 based on the stated coupon rate of 5.68%. Non-cash interest expense of $153,000 was recognized in 2022. The effective interest rate of the 2026 Notes as of December 31, 2022 was 14.4%.
The company was in compliance with the Secured Term Loan covenants at December 31, 2022.
As part of the transactions for the closing of the Term Loan, exchange of 2026 Notes for Secured 2026 Notes and retirement of $5,000,000 of Series II 2024 Notes in the third quarter of 2022, 2,700,000 common shares were issued. These transactions resulted in a net gain on extinguishment of debt of $6,398,000.
The weighted average interest rate on all borrowings, excluding finance leases, was 5.3% for the year ended December 31, 2022 and 4.5% for the year ended December 31, 2021.
Other
In the second quarter of 2022, the company borrowed $2,000,000 against the cash surrender value of its life insurance policies.
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Table of Contents | | Notes to Financial Statements |
| | Long-Term Liabilities |
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CARES Act Loan
On May 15, 2020, the company entered into an unsecured loan agreement in the aggregate amount of $10,000,000 pursuant to sections 1102 and 1106 of the Coronavirus Aid, Relief and Economic Security, “CARES” Act which was evidenced by a promissory note, dated May 13, 2020, and would bear interest at a fixed rate of 1.00%. This loan may be forgivable, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and based on average levels of employment over a designated period of time. At the time of the loan, no assurance could be given that the company would be granted forgiveness of the loan in whole or in part. Originally, payments were to commence in December 2020.
In the third quarter of 2021, the company applied for forgiveness of the CARES Act debt along with its accrued
interest. The company received notification of approval of its debt forgiveness inclusive of accrued interest, in full, and as a result, the company recorded a gain on extinguishment of debt of $10,131,000.
The aggregate minimum maturities of long-term debt (excluding finance leases) for each of the next five years are as follows: $154,000 in 2023, $150,245,000 in 2024, $0 in 2025, $216,895,000 in 2026, and $0 in 2027. Interest paid on all borrowings was $18,309,000, $17,243,000 and $16,909,000 in 2022, 2021 and 2020, respectively.
Other Long-Term Obligations
Other long-term obligations as of December 31, 2022 and 2021 consist of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Deferred income taxes | $ | 18,771 | | | $ | 21,664 | |
Product liability | 10,438 | | | 11,342 | |
Deferred compensation | 4,970 | | | 6,174 | |
Deferred gain on sale leaseback | 4,834 | | | 5,174 | |
Supplemental Executive Retirement Plan liability | 4,383 | | | 5,106 | |
Uncertain tax obligation including interest | 2,891 | | | 3,171 | |
Death benefit obligation plan | 2,533 | | | 4,568 | |
Pension | 1,019 | | | 7,814 | |
Secured Convertible 2026 debt conversion liability | 85 | | | — | |
Other | 478 | | | 1,783 | |
Other Long-Term Obligations | $ | 50,402 | | | $ | 66,796 | |
The Secured Convertible 2026 debt conversion liability amounts included in the above table represent the fair values of the conversion liabilities.
On April 23, 2015, the company entered into a real estate sales leaseback transaction which resulted in the recording of an initial deferred gain of $7,414,000, the majority of which is included in Other Long-Term Obligations and will be recognized over the 20-year life of the leases. The gain realized was $328,000 and $317,000 for December 31, 2022 and 2021, respectively.
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Notes to Financial Statements | | |
Long-Term Liabilities | | |
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Leases and Commitments
The company reviews new contracts to determine if the contracts include a lease. To the extent a lease agreement includes an extension option that is reasonably certain to be exercised, the company has recognized those amounts as part of the right-of-use assets and lease liabilities. The company does not combine lease and certain non-lease components, such as common area maintenance, in the calculation of the lease assets and related liabilities. As most lease agreements do not provide an implicit rate, the company uses an incremental borrowing rate (IBR) based on information available at commencement date in determining the present value of lease payments and to help classify the lease as operating or financing. The company calculates its IBR based on the secured rates of the company's recent debt issuances, the credit rating of the company, changes in currencies, lease repayment timing as well as other publicly available data.
The company leases a portion of its facilities, transportation equipment, data processing equipment and certain other equipment. These leases have terms from 1 to 20 years and provide for renewal options. Generally, the company is required to pay taxes and normal expenses associated with operating the facilities and equipment. As of December 31, 2022, the company is committed under non-cancelable leases, which have initial or remaining terms in excess of one year and expire on various dates through 2040.
On April 23, 2015, the company sold and leased back, under four separate lease agreements, four properties located in Ohio and one property in Florida for net proceeds of $23,000,000, which were used to reduce debt under the North America Credit Facility. The initial total annual rent for the properties was $2,275,000 and can increase annually over the 20-year term of the leases based on the applicable geographical consumer price index (CPI). Each of the four lease agreements contains three 10-year renewals with the rent for each option term based on the greater of the then-current fair market rent for each property or the then- current rate and increasing annually by the applicable CPI. Under the terms of the lease agreements, the company is responsible for all taxes, insurance and utilities. The company is required to adequately maintain each of the properties and any leasehold improvements will be amortized over the lesser of the lives of the improvements or the remaining lease lives, consistent with any other company leases.
In connection with the transaction, the requirements for sale lease-back accounting were met. Accordingly, the company recorded the sale of the properties, removed the related property and equipment from the company's balance sheet, recognized an initial deferred gain of $7,414,000 and an immediate loss of $257,000 related to
one property and recorded new lease liabilities. Specifically, the company recorded four finance leases totaling $32,339,000 and one operating lease related to leased land, which was not a material component of the transaction. The gains on the sales of the properties were required to be deferred and recognized over the life of the leases as the property sold is being leased back. The deferred gain is classified under Other Long-Term Obligations on the consolidated balance sheet. The gains realized were $328,000, $317,000, and $305,000 in 2022, 2021, and 2020 respectively.
In July of 2020, the company entered into a 19.75-year lease agreement in Germany. The lease increased the company's finance lease obligation by $38,704,000 and increased the finance lease expense compared to previous periods.
Lease expenses for the year ended December 31, 2022, December 31, 2021, December 31, 2020, respectively, were as follows (in thousands):
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| | 2022 | | 2021 | | 2020 |
Operating leases | | $ | 5,712 | | | $ | 7,394 | | | $ | 8,138 | |
Variable and short-term leases | | 2,549 | | | 3,541 | | | 3,968 | |
Total operating leases | | $ | 8,261 | | | $ | 10,935 | | | $ | 12,106 | |
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Finance lease interest cost | | $ | 4,256 | | | $ | 4,601 | | | $ | 2,544 | |
Finance lease depreciation | | 4,246 | | | 4,996 | | | 3,479 | |
Total finance leases | | $ | 8,502 | | | $ | 9,597 | | | $ | 6,023 | |
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Table of Contents | | Notes to Financial Statements |
| | Long-Term Liabilities |
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Future minimum operating and finance lease commitments, as of December 31, 2022, are as follows (in thousands):
| | | | | | | | | | | |
| Finance Leases | | Operating Leases |
2023 | $ | 6,828 | | | $ | 4,181 | |
2024 | 6,764 | | | 3,085 | |
2025 | 6,667 | | | 2,482 | |
2026 | 6,554 | | | 1,303 | |
2027 | 6,441 | | | 395 | |
Thereafter | 62,531 | | | 1,341 | |
Total future minimum lease payments | 95,785 | | | 12,787 | |
Amounts representing interest | (34,685) | | | (2,108) | |
Present value of minimum lease payments | 61,100 | | | 10,679 | |
Less: current maturities of lease obligations | (3,106) | | | (3,420) | |
Long-term lease obligations | $ | 57,994 | | | $ | 7,259 | |
Supplemental cash flow amounts for the year ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively, were as follows (in thousands):
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Cash Activity: Cash paid in measurement of amounts for lease liabilities | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Operating leases | | $ | 7,618 | | | $ | 11,089 | | | $ | 12,527 | |
Finance leases | | 7,260 | | | 8,166 | | | 5,316 | |
Total | | $ | 14,878 | | | $ | 19,255 | | | $ | 17,843 | |
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Non-Cash Activity: Right-of-use assets obtained in exchange for lease obligations | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Operating leases | | $ | 4,652 | | | $ | 7,491 | | | $ | 6,155 | |
Finance leases | | 969 | | | 6,572 | | | 40,078 | |
Total | | $ | 5,621 | | | $ | 14,063 | | | $ | 46,233 | |
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Weighted-average remaining lease terms and discount rates for finance and operating leases are as follows as of December 31, 2022 and December 31, 2021, respectively,:
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| December 31, 2022 | | December 31, 2021 |
Weighted-average remaining lease term - finance leases | 14.8 years | | 15.8 years |
Weighted-average remaining lease term - operating leases | 4.6 years | | 5.0 years |
Weighted-average discount rate - finance leases | 3.74% | | 6.43% |
Weighted-average discount rate - operating leases | 9.36% | | 7.1% |
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Notes to Financial Statements | | |
Retirement and Benefit Plans | | |
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Retirement and Benefit Plans
Substantially all full-time salaried and hourly domestic employees are included in the Invacare Retirement Savings Plan sponsored by the company. The company makes matching cash contributions up to 66.7% of employees' contributions up to 3% of compensation. The company also may make quarterly contributions to this Plan equal to a percentage of qualified wages. The company may make discretionary contributions to the domestic plans based on an annual resolution of the Board of Directors. Contribution expense for the Invacare Retirement Savings Plan in 2022, 2021 and 2020 was $845,000, $1,022,000 and $1,214,000, respectively.
The company sponsors a Deferred Compensation Plus Plan covering certain employees, which provides for elective deferrals and the company retirement deferrals so that the total retirement deferrals equal amounts that would have contributed to the company's principal retirement plans if it were not for limitations imposed by income tax regulations.
The company sponsors a non-qualified defined benefit Supplemental Executive Retirement Plan (SERP) for certain key executives. Effective December 31, 2008, the SERP was amended, in part to comply with IRS Section 409A. As a result of the amendment, the plan became a defined benefit cash balance plan for the non-retired participants and thus, payments by the company since December 31, 2008 have been based upon a cash balance formula with interest credited at a rate determined annually by the Compensation and Management Development Committee of the Board of Directors. In 2022, 2021 and 2020, respectively, interest was credited at 0% for active participants in the SERP. The plan continues to be unfunded with individual hypothetical accounts maintained for each participant.
The SERP projected benefit obligation related to this unfunded plan was $4,774,000 and $5,497,000 at December 31, 2022 and December 31, 2021, respectively, and the accumulated benefit obligation was $4,774,000 and $5,497,000 at December 31, 2022 and December 31, 2021, respectively. The assumed discount rate, relevant for three participants unaffected by the plan conversion, as well as the Death Benefit Only plan discussed below was 5.02% and 2.83% for 2022 and 2021, respectively, based upon the discount rate on high-quality fixed-income investments without adjustment. The retirement age was 67 for 2022 and 2021, respectively. The mortality assumptions used for 2022 and 2021 were based upon the Pri-2012 White Collar Mortality for Males and Females projected using Scale MP-2021 and the Pri.A-2012 White Collar Fully Generational Mortality Table projected using Scale MP-2021, respectively.
SERP income for 2022 was $332,000, compared to SERP expense in 2021 and 2020 of $129,000 and $326,000, respectively. The expense was composed of interest income in 2022 of $541,000, and interest expense in 2021 and 2020 of $4,000 and $213,000, respectively, with the remaining non-interest expense related to service costs, prior service costs and other gains/losses. Benefit payments in 2022, 2021 and 2020 were $391,000 in each year.
The company also sponsors a Death Benefit Only Plan (DBO) for certain key executives that provides a benefit equal to three times the participant's final target earnings should the participant's death occur while an employee and a benefit equal to one time the participant's final earnings upon the participant's death if a participant dies after his or her employment with the company is terminated following a change in control of the company. Income for the plan in 2022 was $1,099,000, driven by an increase in the discount rate and participant turnover, compared to expense in 2021 and 2020 of $30,000, and $640,000, respectively. The 2022 and 2021 amounts included service and accrual adjustment income of $1,274,000 and $68,000, respectively, compared to 2020 amounts which included service and accrual adjustment expense of $569,000, with the remaining activity in each year related to interest costs. There were no benefit payments in 2022, 2021 and 2020. The projected benefit obligations for the plan were calculated using an assumed future salary increase of 3.25% at December 31, 2022 and 2021, respectively. In conjunction with the company's DBO, the company has invested in life insurance policies related to certain employees to help satisfy the DBO obligations.
In Europe, the company maintains a defined benefit plan in Switzerland. The statutory pension plan is maintained with a private insurance company and, in accordance with Swiss law, the plan functions as a defined contribution plan whereby employee and employer contributions are defined as a percentage of individual salary depending on the age of the employee and a guaranteed interest rate, which is annually defined by the Swiss Pension Fund. Under U.S. GAAP, the plan is treated as defined benefit plan. Income for 2022 and 2021 for the European plan was $633,000 and $823,000, respectively, compared to expense of $1,678,000 in 2020.
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Table of Contents | | Notes to Financial Statements |
| | Revenue |
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Revenue
The company has two revenue streams: products and services. Services include repair, refurbishment, preventive maintenance and rental of products. Services for the North America (N.A.) segment include maintenance and repair of products. Services for the Europe segment include repair, refurbishment and preventive maintenance services. Services in All Other, are in the Asia Pacific region, and include rental and repair of products.
The following tables disaggregate the company's revenues by major source and by reportable segment for the year ended December 31, 2022 and December 31, 2021 (in thousands):
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| | 2022 |
| | Products | | Service | | Total |
Europe | | $ | 422,440 | | | $ | 11,932 | | | $ | 434,372 | |
N.A. | | 275,508 | | | 1,383 | | | 276,891 | |
| | | | | | |
All Other | | 25,592 | | | 4,878 | | | 30,470 | |
Total | | $ | 723,540 | | | $ | 18,193 | | | $ | 741,733 | |
% Split | | 98% | | 2% | | 100% |
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| | 2021 |
| | Products | | Service | | Total |
Europe | | $ | 486,190 | | | $ | 12,928 | | | $ | 499,118 | |
N.A. | | 340,269 | | | 711 | | | 340,980 | |
| | | | | | |
All Other | | 27,221 | | | 5,138 | | | 32,359 | |
Total | | $ | 853,680 | | | $ | 18,777 | | | $ | 872,457 | |
% Split | | 98% | | 2% | | 100% |
The company's revenues are principally related to the sale of products, approximately 98%, with the remaining 2% related to services including repair, refurbishment, preventive maintenance and rental of products. While the company has a significant amount of contract types, the sales split by contract type is estimated as follows: general terms and conditions (25%), large national customers (20%), governments, principally pursuant to tender contracts (23%) and other customers including buying groups and independent customers (32%).
All product revenues and substantially all service revenues are recognized at a point in time. The remaining service revenue, recognized over time, are reflected in the Europe segment and include multiple performance obligations. For such contracts, the company allocates revenue to each performance obligation based on its relative standalone selling price. The company generally determines the standalone selling price based on the expected cost-plus margin methodology.
Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the company's products and services. The amount of consideration received and revenue recognized by the company can vary as a result of variable consideration terms included in the contracts related to customer rebates, cash discounts and return policies. Revenue is measured as the amount of consideration probable of not having a significant reversal of cumulative revenue recognized when related uncertainties are resolved. Customer rebates and cash discounts are estimated based on the most likely amount principle and these estimates are based on historical experience and anticipated performance. In addition, customers have the right to return products within the company's normal terms policy, and as such the company estimates the expected returns based on an analysis of historical experience. The company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed. The company generally does not expect that there will be significant changes to its estimates of variable consideration (refer to “Receivables” and “Accrued Expenses” in the Notes to the Consolidated Financial Statements include elsewhere in this report for more detail).
Depending on the terms of the contract, the company may defer the recognition of a portion of the revenue at the end of a reporting period to align with transfer of control of the company's products to the customer. In addition, to the extent performance obligations are satisfied over time, the company defers revenue recognition until the performance obligations are satisfied. As of December 31, 2022 and December 31, 2021, the company had deferred revenue of $2,279,000 and $4,156,000, respectively, related to outstanding performance obligations.
| | | | | | | | |
Notes to Financial Statements | | |
Equity Compensation | | |
| | |
Equity Compensation
The company's common shares have a $0.25 stated value. The common shares and the Class B common shares generally have identical rights, terms and conditions and vote together as a single class on most issues, except that the Class B common shares have ten votes per share and, in general, can only be transferred to family members or for estate planning purposes. Holders of Class B common shares are entitled to convert their shares into common shares at any time on a share-for-share basis. When Class B common shares are transferred out of a familial relationship, they automatically convert to common shares.
As of December 31, 2022, 3,667 Class B common shares remained outstanding. Prior conversions of Class B common shares have virtually eliminated the company's dual class voting structure. As of December 31, 2022, the holders of the common shares represented approximately 99.9% of the company's total outstanding voting power.
Equity Compensation Plan
On May 17, 2018, the shareholders of the company approved the Invacare Corporation 2018 Equity Compensation Plan (the “2018 Plan”), which was adopted on March 27, 2018 by the company's Board of Directors (the “Board”). The company's Board adopted the 2018 Plan in order to authorize additional Common Shares for grant as equity compensation, and to reflect changes to Section 162(m) of the Internal Revenue Code (the “Code”) resulting from the U.S. Tax Cuts and Jobs Act of 2017.
Following shareholder approval of the 2018 Plan, all of the common shares then-remaining available for issuance under the Invacare Corporation 2013 Equity Compensation Plan (the “2013 Plan”) and all of the common shares that were forfeited or remained unpurchased or undistributed upon termination or expiration of awards under the 2013 Plan and under the Invacare Corporation 2003 Performance Plan (the “2003 Plan”), become available for issuance under the 2018 Plan. Awards granted previously under the 2013 Plan and 2003 Plan will remain in effect under their original terms.
The 2018 Plan uses a fungible share-counting method, under which each common share underlying an award of stock options or stock appreciation rights (“SAR”) will count against the number of total shares available under the 2018 Plan as one share; and each common share underlying any award other than a stock option or a SAR will count against the number of total shares available under the 2018 Plan as two shares. Shares underlying awards made under the 2003 Plan or 2013 Plan that are forfeited or remain unpurchased or undistributed upon termination or expiration of the awards will become
available under the 2018 Plan for use in future awards. Any common shares that are added back to the 2018 Plan as the result of forfeiture, termination or expiration of an award granted under the 2018 Plan or the 2013 Plan will be added back in the same manner such shares were originally counted against the total number of shares available under the 2018 Plan or 2013 Plan, as applicable. Each common share that is added back to the 2018 Plan due to a forfeiture, termination or expiration of an award granted under the 2003 Plan will be added back as one common share.
The Compensation and Management Development Committee of the Board (the “Compensation Committee”), in its discretion, may grant an award under the 2018 Plan to any director or employee of the company or an affiliate. As of December 31, 2022, common shares of 5,285,644 were available for future issuance under the 2018 Plan in connection with the following types of awards with respect to the company's common shares: incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, unrestricted stock and performance shares. The Compensation Committee also may grant performance units that are payable in cash. The Compensation Committee has the authority to determine which participants will receive awards, the amount of the awards and the other terms and conditions of the awards.
The 2018 Plan provides that shares granted come from the company's authorized but unissued common shares or treasury shares. In addition, the company's stock-based compensation plans allow employee participants to exchange shares for minimum withholding taxes, which results in the company acquiring treasury shares. Under these provisions, the company acquired approximately 139,000 treasury shares for $151,000 in 2022, 213,000 shares for $1,754,000 in 2021 and 231,000 shares for $1,707,000 in 2020.
| | | | | | | | |
| | Notes to Financial Statements |
| | Equity Compensation |
| | |
The amounts of equity-based compensation expense (income) recognized as part of SG&A expenses in All Other in business segment reporting were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
Restricted stock / units | 2,924 | | | 5,450 | | | 5,332 | |
Performance shares / units | (844) | | | (1,127) | | | 3,313 | |
Total stock-based compensation expense | $ | 2,080 | | | $ | 4,323 | | | $ | 8,645 | |
As of December 31, 2022, unrecognized compensation expense related to equity-based compensation arrangements granted under the company's 2018 Plan and previous plans, which is related to non-vested shares, was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
Restricted stock and restricted stock units | 2,146 | | | 6,866 | | | 7,489 | |
Performance shares and performance share units | 75 | | | 1,746 | | | 7,260 | |
Total unrecognized stock-based compensation expense | $ | 2,221 | | | $ | 8,612 | | | $ | 14,749 | |
Total unrecognized compensation cost will be adjusted for future changes in actual and estimated forfeitures and for updated vesting assumptions for the performance share awards (refer to “Stock Options” and “Performance Shares and Performance Share Units” below). No tax benefits for stock compensation were realized during 2022, 2021 and 2020 due to a valuation allowance against deferred tax assets. In accordance with ASC 718, any tax benefits resulting from tax deductions in excess of the compensation expense recognized is classified as a component of financing cash flows.
Stock Options
Generally, non-qualified stock option awards have a term of ten years and were granted with an exercise price per share equal to the fair market value of the company's common shares on the date of grant.
The following table summarizes information about stock option activity for the three years ended 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Weighted Average Exercise Price | | 2021 | | Weighted Average Exercise Price | | 2020 | | Weighted Average Exercise Price |
Options outstanding at January 1 | 750,159 | | | $ | 12.69 | | | 1,081,804 | | | $ | 16.07 | | | 1,441,202 | | | $ | 18.26 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Forfeited | (560,470) | | | 12.44 | | (331,645) | | | 23.71 | | | (359,398) | | | 24.84 | |
Options outstanding at December 31 | 189,689 | | | $ | 13.43 | | | 750,159 | | | $ | 12.69 | | | 1,081,804 | | | $ | 16.07 | |
Options exercise price range at December 31 | $ | 12.15 | | | | | $ 12.15 | | | | $ 12.15 | | |
| to | | | | to | | | | to | | |
| $ | 14.49 | | | | | $ | 17.47 | | | | | $ | 33.36 | | | |
Options exercisable at December 31 | 189,689 | | | | | 750,159 | | | | | 1,081,804 | | | |
Shares available for grant at December 31* | 5,285,644 | | | | | 3,475,496 | | | | | 3,540,534 | | | |
________________________
* Shares available for grant under the 2018 Plan as of December 31, 2022 reduced by awards and increased by forfeitures or expirations. At December 31, 2022, an aggregate of 1,363,107 common shares underlie awards which were forfeited or expired unexercised under the 2003 and 2013 Plans and thus are available for future issuance under the 2018 Plan upon transfer.
| | | | | | | | |
Notes to Financial Statements | | |
Equity Compensation | | |
| | |
The following table summarizes information about stock options outstanding at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
Exercise Prices | Number Outstanding At 12/31/22 | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable At 12/31/22 | | Weighted Average Exercise Price |
$12.15 – $20.00 | 189,689 | | | 2.0 | | $ | 13.43 | | | 189,689 | | | $ | 13.43 | |
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The 2018 Plan provides for a one-year minimum vesting period for stock options and, generally, options must be exercised within ten years from the date granted. No stock options were issued in 2022, 2021 or 2020.
Restricted Stock and Restricted Stock Units
The following table summarizes information about restricted stock and restricted stock units (primarily for non-U.S. recipients):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Weighted Average Fair Value | | 2021 | Weighted Average Fair Value | | 2020 | Weighted Average Fair Value |
Stock / Units unvested at January 1 | 1,160,847 | | $ | 8.17 | | | 1,145,058 | | $ | 8.62 | | | 965,085 | | $ | 11.32 | |
Granted | 1,341,019 | | 1.22 | | | 652,743 | | 8.42 | | | 764,012 | | 7.11 | |
Vested | (803,550) | | 5.94 | | | (558,424) | | 9.33 | | | (475,113) | | 11.39 | |
Forfeited | (636,449) | | 4.40 | | | (78,530) | | 8.44 | | | (108,926) | | 9.90 | |
Stock / Units unvested at December 31 | 1,061,867 | | $ | 2.75 | | | 1,160,847 | | $ | 8.17 | | | 1,145,058 | | $ | 8.62 | |
| | | | | | | | |
The restricted stock awards generally vest ratably over the three years after the award date. Unearned restricted stock compensation, determined as the market value of the shares at the date of grant, is being amortized on a straight-line basis over the vesting period as adjusted for forfeiture estimates.
Performance Shares and Performance Share Units
The following table summarizes information about performance shares and performance share units (primarily for non-U.S. recipients):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Weighted Average Fair Value | | 2021 | | Weighted Average Fair Value | | 2020 | | Weighted Average Fair Value |
Shares / Units unvested at January 1 | 972,288 | | | $ | 7.76 | | | 1,026,785 | | | $ | 8.55 | | | 753,272 | | | $ | 11.82 | |
Granted | 460,187 | | | 1.48 | | | 471,819 | | | 8.49 | | | 523,329 | | | 7.82 | |
Vested | — | | | — | | | — | | | — | | | (183,840) | | | 17.48 | |
Forfeited | (1,114,404) | | | 5.92 | | | (526,316) | | | 9.25 | | | (65,976) | | | 9.48 | |
Shares / Units unvested at December 31 | 318,071 | | | $ | 5.15 | | | 972,288 | | | $ | 7.76 | | | 1,026,785 | | | $ | 8.55 | |
| | | | | | | | | | | |
During 2022, 2021 and 2020, the performance shares and performance share units (for non-U.S. recipients) were granted. Performance awards have a three-year performance period with payouts based on achievement of certain performance goals. The awards are classified as equity awards as they will be settled in common shares
upon vesting. The number of shares earned will be determined at the end of the three-year performance period based on achievement of performance criteria for January 1, 2020 through December 31 2022, January 1, 2021 through December 31 2023 and January 1, 2022 through December 31, 2024, respectively, established by the
| | | | | | | | |
| | Notes to Financial Statements |
| | Equity Compensation |
| | |
Compensation Committee at the time of grant. Recipients will be entitled to receive a number of common shares equal to the number of performance shares that vest based upon the levels of achievement which may range between 0% and 150% of the target number of shares with the target being 100% of the initial grant.
The fair value of the performance awards is based on the stock price on the date of grant discounted for the estimated value of dividends foregone as the awards are not eligible for dividends except to the extent vested. The grant fair value is further updated each reporting period while variable accounting applies. The company assesses the probability that the performance targets will be met with expense recognized whenever it is probable that at least the minimum performance criteria will be achieved. Depending upon the company's assessment of the probability of achievement of the goals, the company may not recognize any expense associated with performance awards in a given period, may reverse prior expense recorded or record additional expense to recognize the cumulative estimated achievement level of proportionate term of the award. Performance award compensation expense is generally expected to be recognized over three years. The company continued to recognize expense (benefit) related to the awards granted in 2020, 2021 and 2022 based on probability of performance goals for those awards being met.
| | | | | | | | |
Notes to Financial Statements | | |
Accumulated Other Comprehensive Income (Loss) | | |
| | |
Accumulated Other Comprehensive Income (Loss) by Component
Changes in accumulated other comprehensive income (loss) (“OCI”) during the year ended December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
December 31, 2021 | | $ | 18,961 | | | $ | 2,127 | | | $ | (4,101) | | | $ | 1 | | | $ | 16,988 | |
OCI before reclassifications | | (42,840) | | | (5,357) | | | 6,953 | | | 3,483 | | | (37,761) | |
Amount reclassified from accumulated OCI | | — | | | — | | | (466) | | | (3,484) | | | (3,950) | |
Net current-period OCI | | (42,840) | | | (5,357) | | | 6,487 | | | (1) | | | (41,711) | |
December 31, 2022 | | $ | (23,879) | | | $ | (3,230) | | | $ | 2,386 | | | $ | — | | | $ | (24,723) | |
Changes in OCI during the year ended December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency | | Long-Term Notes | | Defined Benefit Plans | | Derivatives | | Total |
December 31, 2020 | | $ | 50,329 | | | $ | (517) | | | $ | (3,674) | | | $ | (702) | | | $ | 45,436 | |
| | | | | | | | | | |
OCI before reclassifications | | (31,368) | | | 2,644 | | | (457) | | | (557) | | | (29,738) | |
Amount reclassified from accumulated OCI | | — | | | — | | | 30 | | | 1,260 | | | 1,290 | |
Net current-period OCI | | (31,368) | | | 2,644 | | | (427) | | | 703 | | | (28,448) | |
| | | | | | | | | | |
December 31, 2021 | | $ | 18,961 | | | $ | 2,127 | | | $ | (4,101) | | | $ | 1 | | | $ | 16,988 | |
Reclassifications out of accumulated OCI for the year ended December 31, 2022 and December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Amount reclassified from OCI | | Affected line item in the Statement of Comprehensive (Income) Loss |
| | 2022 | | 2021 | | |
Defined Benefit Plans: | | | | | | |
Service and interest costs | | $ | (466) | | | $ | 30 | | | Selling, general and administrative |
Tax | | — | | | — | | | Income taxes |
Total after tax | | $ | (466) | | | $ | 30 | | | |
| | | | | | |
Derivatives: | | | | | | |
Foreign currency forward contracts hedging sales | | $ | (137) | | | $ | 1,058 | | | Net sales |
Foreign currency forward contracts hedging purchases | | (3,610) | | | 428 | | | Cost of products sold |
| | | | | | |
Total loss (income) before tax | | (3,747) | | | 1,486 | | | |
Tax | | 263 | | | (226) | | | Income taxes |
Total after tax | | $ | (3,484) | | | $ | 1,260 | | | |
| | | | | | | | |
| | Notes to Financial Statements |
| | Capital Stock |
| | |
Capital Stock
Capital stock activity for 2022, 2021 and 2020 consisted of the following (in thousands of shares):
| | | | | | | | | | | | | | | | | |
| Common Stock Shares | | Class B Shares | | Treasury Shares |
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December 31, 2020 Balance | 38,613 | | | 4 | | | (4,184) | |
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Restricted and performance stock awards | 803 | | | — | | | (213) | |
December 31, 2021 Balance | 39,416 | | | 4 | | | (4,397) | |
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Restricted and performance stock awards | 424 | | | — | | | (139) | |
Issuance of common shares | 2,700 | | | — | | | — | |
December 31, 2022 Balance | 42,540 | | | 4 | | | (4,536) | |
Restricted stock and restricted stock unit awards of 636,449, 78,530 and 108,926 shares were forfeited in 2022, 2021 and 2020, respectively.
On July 26, 2022, as part of the transactions for the closing of the Secured Term Loan and exchange of the 2026 Notes for Secured 2026 Notes, 2,700,000 common shares were issued.
| | | | | | | | |
Notes to Financial Statements | | |
Charges Related to Restructuring | | |
| | |
Charges Related to Restructuring Activities
The company's restructuring charges were originally necessitated primarily by continued declines in Medicare and Medicaid reimbursement by the U.S. government, as well as similar healthcare reimbursement pressures abroad, which negatively affected the company's customers (e.g. home health care providers) and continued pricing pressures faced by the company due to the outsourcing by competitors to lower cost locations. Restructuring decisions were also the result of reduced profitability in each of the segments. Restructuring actions have continued into 2022.
Charges for the year ended December 31, 2022 totaled $25,820,000 which were related to North America ($10,646,000), Europe ($13,918,000) and All Other ($1,256,000). Charges were related to severance costs and other restructuring costs (primarily advisory professional fees). The accrual balance at December 31, 2022 is expected to be paid out within 12 months.
Charges for the year ended December 31, 2021 totaled $2,534,000 which were related to North America ($964,000), Europe ($1,560,000) and All Other ($10,000). The North America and All Other costs were for severance
costs. The European charges were incurred related to severance ($886,000) and lease termination costs of ($674,000) related to the closure of a German manufacturing facility.
Charges for the year ended December 31, 2020 totaled $7,358,000 which were related to North America ($1,306,000), Europe ($5,934,000) and All Other ($118,000). The North America and All Other costs were for severance costs. The European charges were incurred related to severance ($5,588,000) and lease termination costs ($346,000) primarily related to the closure of a German Manufacturing facility.
There have been no material changes in accrued balances related to the charges, either as a result of revisions to the plans or changes in estimates. In addition, the savings anticipated as a result of the company's restructuring plans have been or are expected to be achieved, primarily resulting in reduced salary and benefit costs principally impacting selling, general and administrative expenses, and to a lesser extent, costs of products sold. To date, the company's liquidity has been sufficient to absorb these charges and payments.
A progression by reporting segment of the accruals recorded as a result of the restructuring is as follows (in thousands):
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| Severance | | | | Other | | | | Total |
January 1, 2020 Balance | | | | | | | | | |
North America | 211 | | | | | — | | | | | 211 | |
Europe | 6,406 | | | | | 4 | | | | | 6,410 | |
All Other | 406 | | | | | — | | | | | 406 | |
Total | 7,023 | | | | | 4 | | | | | 7,027 | |
Charges | | | | | | | | | |
North America | 1,306 | | | | | — | | | | | 1,306 |
Europe | 5,588 | | | | | 346 | | | | 5,934 |
All Other | 118 | | | | | — | | | | | 118 |
Total | 7,012 | | | | 346 | | | | 7,358 |
Payments | | | | | | | | | |
North America | (1,338) | | | | | — | | | | | (1,338) | |
Europe | (6,090) | | | | | (346) | | | | | (6,436) | |
All Other | (358) | | | | | — | | | | | (358) | |
Total | (7,786) | | | | | (346) | | | | | (8,132) | |
December 31, 2020 Balance | | | | | | | | | |
North America | 179 | | | | | — | | | | | 179 | |
Europe | 5,904 | | | | | 4 | | | | | 5,908 | |
All Other | 166 | | | | | — | | | | | 166 | |
Total | 6,249 | | | | | 4 | | | | | 6,253 | |
| | | | | | | | |
| | Notes to Financial Statements |
| | Charges Related to Restructuring |
| | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Severance | | | | Other | | | | Total |
Charges | | | | | | | | | |
North America | 964 | | | | | — | | | | | 964 | |
Europe | 886 | | | | | 674 | | | | | 1,560 | |
All Other | 10 | | | | | — | | | | | 10 | |
Total | 1,860 | | | | | 674 | | | | | 2,534 | |
Payments | | | | | | | | | |
North America | (661) | | | | | — | | | | | (661) | |
Europe | (6,790) | | | | | (678) | | | | | (7,468) | |
All Other | (176) | | | | | — | | | | | (176) | |
Total | (7,627) | | | | | (678) | | | | | (8,305) | |
December 31, 2021 Balance | | | | | | | | | |
North America | 482 | | | | | — | | | | | 482 | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | 482 | | | | | $ | — | | | | | $ | 482 | |
Charges | | | | | | | | | |
North America | 2,472 | | | | | 8,174 | | | | | 10,646 | |
Europe | 5,359 | | | | | 8,559 | | | | | 13,918 | |
All Other | 1,256 | | | | | — | | | | | 1,256 | |
Total | $ | 9,087 | | | | | $ | 16,733 | | | | | $ | 25,820 | |
Payments | | | | | | | | | |
North America | (1,987) | | | | | (5,148) | | | | | (7,135) | |
Europe | (4,045) | | | | | (7,066) | | | | | (11,111) | |
All Other | (65) | | | | | — | | | | | (65) | |
Total | $ | (6,097) | | | | | $ | (12,214) | | | | | $ | (18,311) | |
December 31, 2022 Balance | | | | | | | | | |
North America | 967 | | | | | 3,026 | | | | | 3,993 | |
Europe | 1,314 | | | | | 1,493 | | | | | 2,807 | |
All Other | 1,191 | | | | | — | | | | | 1,191 | |
Total | $ | 3,472 | | | | | $ | 4,519 | | | | | $ | 7,991 | |
| | | | | | | | | |
| | | | | | | | |
Notes to Financial Statements | | |
Income Taxes | | |
| | |
Income Taxes
Earnings (loss) before income taxes consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Domestic | $ | (95,070) | | | $ | (53,916) | | | $ | (42,213) | |
Foreign | (2,931) | | | 14,798 | | | 17,774 | |
| $ | (98,001) | | | $ | (39,118) | | | $ | (24,439) | |
The company has provided for income taxes (benefits) as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | 362 | | | $ | 85 | | | $ | 45 | |
State | (105) | | | (12) | | | (180) | |
Foreign | 3,054 | | | 6,596 | | | 6,168 | |
| 3,311 | | | 6,669 | | | 6,033 | |
Deferred: | | | | | |
Federal | — | | | (662) | | | (26) | |
State | — | | | — | | | — | |
Foreign | (241) | | | 438 | | | (2,166) | |
| (241) | | | (224) | | | (2,192) | |
Income Taxes | $ | 3,070 | | | $ | 6,445 | | | $ | 3,841 | |
The 2021 deferred federal benefit results from the goodwill impairment the company recorded, a reversal of deferred taxes related to the tax-deductible goodwill previously deducted by the company, resulting in the company recognizing a tax benefit of $662,000.
The company has historically considered the undistributed earnings of the company's foreign subsidiaries to be indefinitely reinvested, and, accordingly, no taxes have been provided on such earnings (other than earnings from the company's Chinese subsidiary which was sold in March 2020 as part of the sale of the Dynamic business). The company reversed withholding taxes in the amount of $988,000 which were previously provided as a result of the company position that the earnings from the Chinese subsidiary were not permanently reinvested. The sale of the business occurred without dividends paid from this subsidiary. The company continues to evaluate its plans for reinvestment or repatriation of unremitted
foreign. As a result of U.S. tax reform legislation, distributions of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. Undistributed profits of non-U.S. subsidiaries of approximately $38,702,000 are considered indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not practicable.
The company regularly reviews its cash positions and its determination of permanent reinvestment of foreign earnings. If the company determines all or a portion of such foreign earnings are no longer indefinitely reinvested, the company may be subject to additional foreign withholding taxes and U.S. state income taxes.
| | | | | | | | |
| | Notes to Financial Statements |
| | Income Taxes |
| | |
A reconciliation to the effective income tax rate from the federal statutory rate is as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Statutory federal income tax rate (benefit) | (21.0) | % | | (21.0) | % | | (21.0) | % |
State and local income taxes, net of federal income tax benefit | (0.1) | | | — | | | (0.6) | |
Non-taxable disposition of subsidiaries | — | | | — | | | (11.2) | |
| | | | | |
Expiring foreign tax credits | 0.2 | | | 1.7 | | | 16.5 | |
Foreign taxes at other than the federal statutory rate | 1.0 | | | 3.9 | | | 8.8 | |
Federal and foreign valuation allowances | 21.3 | | | 20.4 | | | (4.3) | |
| | | | | |
Withholding taxes | — | | | 0.1 | | | 0.1 | |
Unremitted earnings | — | | | — | | | (4.0) | |
| | | | | |
| | | | | |
| | | | | |
Debt repurchase | — | | | — | | | 3.2 | |
| | | | | |
Foreign branch activity | 1.0 | | | 4.0 | | | 19.3 | |
Uncertain tax positions | — | | | 0.6 | | | 2.9 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Nontaxable loan forgiveness | — | | | (5.4) | | | — | |
Foreign goodwill write-off | — | | | 9.0 | | | — | |
Other, net | 0.7 | | | 3.2 | | | 6.0 | |
Effective federal income tax rate | 3.1 | % | | 16.5 | % | | 15.7 | % |
At December 31, 2022, total deferred tax assets were $221,178,000, total deferred tax liabilities were $40,050,000 and the tax valuation allowances total was $198,797,000 for a net deferred income tax liability of $17,669,000 compared to total deferred tax assets of $200,042,000, total deferred tax liabilities of $43,936,000 and a tax valuation allowances total of $176,230,000 for a net deferred income tax liability of $20,124,000 at December 31, 2021. The company recorded a valuation allowance for its U.S. and certain foreign country net deferred tax assets where it is or is projected to be in a three-year cumulative loss.
| | | | | | | | |
Notes to Financial Statements | | |
Income Taxes | | |
| | |
Significant components of long-term deferred income tax assets and liabilities at December 31, 2022 and 2021 are as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Bad debt | $ | 483 | | | $ | 387 | |
Warranty | 1,011 | | | 1,426 | |
Other accrued expenses and reserves | 398 | | | 484 | |
Inventory | 4,625 | | | 3,624 | |
Goodwill and intangibles | (17,556) | | | (19,910) | |
Convertible debt | 3,327 | | | 5,193 | |
Fixed assets | (22,494) | | | (24,026) | |
Compensation and benefits | 3,432 | | | 4,271 | |
Loss and credit carryforwards | 149,853 | | | 127,397 | |
Product liability | 870 | | | 1,596 | |
State and local taxes | 37,584 | | | 34,794 | |
Valuation allowances | (198,797) | | | (176,230) | |
Lease liability | 17,496 | | | 19,649 | |
Other, net | 2,099 | | | 1,221 | |
| | | |
| | | |
Net Deferred Income Taxes | $ | (17,669) | | | $ | (20,124) | |
The company made net payments for income taxes of $3,999,000, $6,877,000, and $4,377,000 during the years ended December 31, 2022, 2021 and 2020, respectively.
The company has a federal domestic net operating loss carryforward of $465,473,000 of which $276,315,000
expires between 2034 and 2037 and the remaining are non-expiring; domestic interest carryforward of $133,697,000 which is non-expiring and federal tax credit carryforwards of $11,028,000 of which $9,071,000 expires between 2024 and 2027, and $1,957,000 expires beginning 2031.
At December 31, 2022, the company also had $690,125,000 of domestic state and local tax loss carryforwards, of which $124,958,000 expire between 2023 and 2026, $361,184,000 expire between 2027 and 2036 and $156,384,000 expire after 2036 and $47,599,000 have an unlimited carryforward.
At December 31, 2022, the company had foreign federal tax loss carryforwards of approximately $60,463,000 of which $12,899,000 expire between 2023 and 2026, $20,080,000 expire after 2027 and the remaining are non-expiring all of which are offset by valuation allowances, except for $2,511,000. Additionally, the company had foreign local tax loss carryforwards of $18,376,000 expiring after 2027 subject to valuation allowance.
As of December 31, 2022 and 2021, the company had a liability for uncertain tax positions, excluding interest and penalties of $2,368,000 and $2,646,000, respectively. The total liabilities associated with unrecognized tax benefits that, if recognized, would impact the effective tax rates were $2,368,000 and $2,646,000 at December 31, 2022 and 2021, respectively.
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance at beginning of year | $ | 3,149 | | | $ | 3,262 | |
Additions to: | | | |
Positions taken during the current year | 13 | | | 238 | |
Positions taken during a prior year | — | | | 3 | |
Exchange rate impact | — | | | — | |
Deductions due to: | | | |
Exchange rate impact | (139) | | | (66) | |
Positions taken during a prior year | (11) | | | (76) | |
| | | |
Lapse of statute of limitations | (216) | | | (212) | |
Balance at end of year | $ | 2,796 | | | $ | 3,149 | |
The company recognizes interest and penalties associated with uncertain tax positions in income tax expense. During 2022, 2021 and 2020 the expense (benefit) for interest and penalties was $(2,000), $15,000 and $(20,000), respectively. The company had approximately $523,000 and $525,000 of accrued interest
and penalties as of December 31, 2022 and 2021, respectively.
The company and its subsidiaries file income tax returns in the U.S. and certain foreign jurisdictions. The company is subject to U.S. federal income tax examinations for calendar years 2019 to 2022 with limited
| | | | | | | | |
| | Notes to Financial Statements |
| | Income Taxes |
| | |
exceptions, and is subject to various U.S. state income tax examinations for 2018 to 2022. With regards to foreign income tax jurisdictions, the company is generally subject to examinations for the periods 2016 to 2022.
| | | | | | | | |
Notes to Financial Statements | | |
Net Loss per Common Share | | |
| | |
Net Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (In thousands, except per share data) |
Basic | | | | | |
Weighted average common shares outstanding | 36,517 | | | 34,875 | | | 34,266 | |
| | | | | |
| | | | | |
| | | | | |
Net loss | $ | (101,071) | | | $ | (45,563) | | | $ | (28,280) | |
| | | | | |
| | | | | |
| | | | | |
Net loss per common share | $ | (2.77) | | | $ | (1.31) | | | $ | (0.83) | |
Diluted | | | | | |
Weighted average common shares outstanding | 36,517 | | | 34,875 | | | 34,266 | |
| | | | | |
Stock options and awards | 112 | | | 399 | | | 109 | |
Weighted average common shares assuming dilution | 36,629 | | | 35,274 | | | 34,375 | |
| | | | | |
| | | | | |
| | | | | |
Net loss | $ | (101,071) | | | $ | (45,563) | | | $ | (28,280) | |
| | | | | |
| | | | | |
| | | | | |
Net loss per common share * | $ | (2.77) | | | $ | (1.31) | | | $ | (0.83) | |
* Net loss per share assuming dilution calculated utilizing weighted average shares outstanding - basic for the periods in which there was a net loss.
At December 31, 2022, 2021 and 2020, incremental shares associated with equity compensation plans of 817,295, 1,414,155 and 2,275,832, respectively, were excluded from the average common shares assuming dilution, as they were anti-dilutive.
At December 31, 2022, the majority of the anti-dilutive shares were granted at an exercise price above $12.14, which was higher than the average fair market value price of $1.26 for 2022. In 2021, the majority of the anti-dilutive shares were granted at an exercise price above $12.14, which was higher than the average fair market value price of $7.13 for 2021. In 2020, the majority of the anti-dilutive shares were granted at an exercise price above $12.14, which was higher than the average fair market value price of $7.42 for 2020.
For 2022, 2021 and 2020 the diluted net loss per share calculation, all the shares associated with stock options were anti-dilutive because of the company's loss.
For 2022, 2021 and 2020, no shares were included in the common shares assuming dilution related to the company's issued warrants as the average market price of the company stock for these periods did not exceed the strike price of the warrants.
Further, upon adoption of ASU 2020-06, effective in 2021 for the company, use of the if-converted earnings per share method is required. However, no shares were included in the weighted average common shares assuming dilution for 2022 or 2021 related to the company's convertible senior notes as conversion prices were above the company's average stock price for the periods and other requirements for the notes to be convertible to shares were not met.
| | | | | | | | |
| | Notes to Financial Statements |
| | Concentration of Credit Risk |
| | |
Concentration of Credit Risk
The company manufactures and distributes durable medical equipment to the home health care, retail and extended care markets. The company performs credit evaluations of its customers' financial condition. The company utilizes De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide lease financing to Invacare's U.S. customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation of $2,573,000 at December 31, 2022 to DLL for events of default under the contracts, which total $8,074,000 at December 31, 2022. Guarantees, ASC 460, requires the company to record a guarantee liability as it relates to the limited recourse obligation. As such, the company has recorded an immaterial liability for this guarantee obligation within other long-term obligations. The company's recourse is reevaluated by DLL biannually, considers activity between the biannual dates and excludes any receivables purchased by the company from DLL. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with Receivables, ASC 310-10-05-4. Credit losses are provided for in the financial statements.
Substantially all the company's receivables are due from health care, medical equipment providers and long-term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe or also direct from governmental entities in certain countries. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. Changes in these programs can have a significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. In addition, reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain as well as the timing of reimbursement and, thus, affect the product mix, pricing and payment patterns of the company's customers.
The company's top 10 customers accounted for approximately 21.6% of 2022 net sales. The loss of business of one or more of these customers may have a significant impact on the company, although no single customer accounted for more than 6.6% of the company's 2022 net sales. Providers who are part of a buying group generally make individual purchasing decisions and are invoiced directly by the company.
| | | | | | | | |
Notes to Financial Statements | | |
Derivatives | | |
| | |
Derivatives
ASC 815 requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated and qualifying as hedging instruments, the company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
Cash Flow Hedging Strategy
The company uses derivative instruments in an attempt to manage its exposure to transactional foreign currency exchange risk. Foreign forward exchange contracts are used to manage the price risk associated with forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months.
The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. All of the company's derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change.
To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of comprehensive income (loss). If it is later determined that a hedged forecasted transaction is unlikely to occur, any prospective gains or losses on the forward contracts would be recognized in earnings. The company does not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve months.
The company has historically not recognized any material amount of ineffectiveness related to forward contract cash flow hedges because the company generally limits its hedges to between 50% and 90% of total forecasted transactions for a given entity's exposure to currency rate changes and the transactions hedged are recurring in nature. Furthermore, most of the hedged transactions are related to intercompany sales and purchases for which settlement occurs on a specific day each month. Forward contracts with a total notional amount in USD of $95,160,000 and $122,624,000 matured during the twelve months ended December 31, 2022 and 2021, respectively.
| | | | | | | | |
| | Notes to Financial Statements |
| | Derivatives |
| | |
Outstanding foreign currency forward exchange contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Notional Amount | | Unrealized Net Gain (Loss) | | Notional Amount | | Unrealized Net Gain (Loss) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
USD / MXN | — | | | — | | | 23 | | | 1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| $ | — | | | $ | — | | | $ | 23 | | | $ | 1 | |
Derivatives Not Qualifying or Designated for Hedge Accounting Treatment
The company utilizes foreign currency forward contracts that are not designated as hedges in accordance with ASC 815. These contracts are entered into to eliminate the risk associated with the settlement of short-term intercompany trading receivables and payables between Invacare Corporation and its foreign subsidiaries. The currency forward contracts are entered into at the same time as the intercompany receivables or payables are created so that upon settlement, the gain/loss on the settlement is offset by the gain/loss on the foreign currency forward contract. No material net gain or loss was realized by the company in 2022 or 2021 related to these contracts and the associated short-term intercompany trading receivables and payables.
| | | | | | | | |
Notes to Financial Statements | | |
Derivatives | | |
| | |
Foreign currency forward exchange contracts not qualifying or designated for hedge accounting treatment, as well as ineffective hedges, entered into in 2022 and 2021, respectively, and outstanding were as follows (in thousands USD):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Notional Amount | | Gain (Loss) | | Notional Amount | | Gain (Loss) |
USD / AUD | $ | — | | | $ | — | | | $ | 3,792 | | | $ | (57) | |
USD / CAD | — | | | — | | | 14,556 | | | $ | (24) | |
| | | | | | | |
USD / EUR | 60,964 | | | 980 | | | 70,454 | | | (1,104) | |
| | | | | | | |
USD / DKK | — | | | — | | | 10,850 | | | (257) | |
USD / GBP | — | | | — | | | 4,028 | | | 32 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
AUD / NZD | — | | | — | | | 7,366 | | | (17) | |
USD / NOK | — | | | — | | | 2,352 | | | (81) | |
USD / SEK | — | | | — | | | 2,344 | | | (131) | |
USD / THB | — | | | — | | | 4,500 | | | 86 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| $ | 60,964 | | | $ | 980 | | | $ | 120,242 | | | $ | (1,553) | |
The fair values of the company's derivative instruments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Assets | | Liabilities | | Assets | | Liabilities |
Derivatives designated as hedging instruments under ASC 815 | | | | | | | |
Foreign currency forward exchange contracts | $ | — | | | $ | — | | | $ | 1 | | | $ | — | |
| | | | | | | |
Derivatives not designated as hedging instruments under ASC 815 | | | | | | | |
Foreign currency forward exchange contracts | 1,117 | | | 137 | | | 385 | | | 1,938 | |
Total derivatives | $ | 1,117 | | | $ | 137 | | | $ | 386 | | | $ | 1,938 | |
The fair values of the company's foreign currency forward exchange contract assets and liabilities are included in Other Current Assets and Accrued Expenses, respectively in the Consolidated Balance Sheets.
The effect of derivative instruments on Accumulated Other Comprehensive Income (OCI) and the Consolidated Statements of Comprehensive Income (Loss) was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
Derivatives (foreign currency forward exchange contracts) in ASC 815 cash flow hedge relationships | Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| | | | | |
Year ended December 31, 2022 | $ | 3,483 | | | $ | 3,484 | | | $ | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Year ended December 31, 2021 | $ | (557) | | | $ | (1,260) | | | $ | — | |
| | | | | |
| | | | | |
| | | | | |
Derivatives (foreign currency forward exchange contracts) not designated as hedging instruments under ASC 815 | Amount of Gain (Loss) Recognized in Income on Derivatives | | | | |
| | | | | |
Year ended December 31, 2022 | $ | 980 | | | | | |
Year ended December 31, 2021 | $ | (1,553) | | | | | |
| | | | | | | | |
| | Notes to Financial Statements |
| | Derivatives |
| | |
The gains or losses recognized as the result of the settlement of cash flow hedge foreign currency forward contracts are recognized in net sales for hedges of inventory sales and in cost of products sold for hedges of inventory purchases. In 2022, net sales were increased by $137,000 and cost of products sold was decreased by $3,610,000 for a net pre-tax realized gain of $3,747,000. In 2021, net sales were decreased by $1,058,000 and cost of products sold was increased by $428,000 for a net pre-tax realized loss of $1,486,000. In 2020, net sales were increased by $1,359,000 and cost of products sold was increased by $2,826,000 for a net realized pre-tax loss of $1,467,000.
A gain of $980,000 in 2022, a loss of $1,553,000 in 2021 and a gain of $703,000 in 2020 were recognized in selling, general and administrative (SG&A) expenses related to forward contracts not designated as hedging instruments. The forward contracts were entered into to offset gains/losses that were also recorded in SG&A expenses on intercompany trade receivables or payables. The gains/losses on the non-designated hedging instruments were substantially offset by gains/losses on intercompany trade payables.
The company's derivative agreements provide the counterparties with a right of set off in the event of a default. The right of set off would enable the counterparty to offset any net payment due by the counterparty to the
company under the applicable agreement by any amount due by the company to the counterparty under any other agreement. For example, the terms of the agreement would permit a counterparty to a derivative contract that is also a lender under the company's Prior Credit Agreement and ABL Credit Agreement to reduce any derivative settlement amounts owed to the company under the derivative contract by any amounts owed to the counterparty by the company under the Prior Credit Agreement and ABL Credit Agreement. In addition, the agreements contain cross-default provisions that could trigger a default by the company under the agreement in the event of a default by the company under another agreement with the same counterparty.
Subsequent to year-end, as a result of the Debtors filing for bankruptcy, any outstanding cash flow hedges were required to be settled and the company is not able to enter into such transactions while in Bankruptcy.
During 2022, the company entered into privately negotiated Secured Convertible 2026 Notes of $41,475,000 in aggregate principal amount. Convertible debt conversion liabilities of $1,595,000 were recorded based on initial fair values and these fair values are updated quarterly with the offset to the income statement. Refer to “Long-Term Debt” in the notes to the consolidated financial statements for more detail.
The fair values of the outstanding convertible note derivatives as of December 31, 2022 and their effect on the Statement of Comprehensive Income (Loss) were as follows (in thousands): | | | | | | | | | | | | | |
| | | |
| Fair Value | | Gain |
| | | | | |
Secured Convertible 2026 Notes conversion long-term liability | $ | 85 | | | $ | 1,510 | | | |
| | | | | |
The Secured Convertible 2026 Notes conversion long-term liability amounts are included in Other Long-Term Obligations in the company's consolidated balance sheets.
| | | | | | | | |
Notes to Financial Statements | | |
Fair Values | | |
| | |
Fair Values
Pursuant to ASC 820, the inputs used to derive the fair value of assets and liabilities are analyzed and assigned a level I, II or III priority, with level I being the highest and level III being the lowest in the hierarchy. Level I inputs are quoted prices in active markets for identical assets or liabilities.
Level II inputs are quoted prices for similar assets or liabilities in active markets: quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level III inputs are based on valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The following table provides a summary of the company's assets and liabilities that are measured on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Basis for Fair Value Measurements at Reporting Date |
| | Quoted Prices in Active Markets for Identical Assets / (Liabilities) | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs |
| | Level I | | Level II | | Level III |
December 31, 2022 | | | | | | | |
Forward exchange contracts—net | | | — | | | $ | 980 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Secured convertible 2026 debt conversion liability | | | — | | | (85) | | | — | |
December 31, 2021 | | | | | | | |
Forward exchange contracts—net | | | — | | | $ | (1,552) | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The carrying and fair values of the company's financial instruments at December 31, 2022 and 2021 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Cash and cash equivalents | $ | 58,792 | | | $ | 58,792 | | | $ | 83,745 | | | $ | 83,745 | |
| | | | | | | |
| | | | | | | |
Forward contracts in Other Current Assets | 1,117 | | | 1,117 | | | 386 | | | 386 | |
Forward contracts in Accrued Expenses | (137) | | | (137) | | | (1,938) | | | (1,938) | |
Total debt (including current maturities of long-term debt) * | (354,241) | | | (278,027) | | | (308,129) | | | (259,472) | |
| | | | | | | |
2022 Notes | — | | | — | | | (2,642) | | | (2,632) | |
Series I 2024 Notes | (72,408) | | | (62,460) | | | (72,140) | | | (64,897) | |
Series II 2024 Notes | (76,719) | | | (64,678) | | | (78,251) | | | (74,165) | |
2026 Notes | (67,665) | | | (32,276) | | | (119,036) | | | (81,718) | |
2026 Secured Notes | (37,240) | | | (34,341) | | | — | | | — | |
2026 Term Loan | (82,808) | | | (66,871) | | | — | | | — | |
Other | (17,401) | | | (17,401) | | | (36,060) | | | (36,060) | |
Secured Convertible 2026 debt conversion liability in Other Long-Term Obligations | (85) | | | (85) | | | — | | | — | |
________
* The company's total debt is shown net of discount and fees associated with the convertible senior notes and term loan due in 2022, 2024 and 2026 on the company's consolidated balance sheets. Accordingly, the fair values due in 2022, 2024 and 2026 are included in the long-term debt presented in this table are also shown net of the discount and fees. Total debt amounts exclude operating and finance lease obligations.
| | | | | | | | |
| | Notes to Financial Statements |
| | Fair Values |
| | |
The company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:
Cash, cash equivalents: The carrying values reported in the balance sheet for cash, cash equivalents equal their fair values. The fair values are deemed to be categorized as Level 1.
Forward Contracts: The company operates internationally, and as a result, is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany loans and third-party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized and accounted for as hedging instruments. The forward contracts are used to hedge the following currencies: AUD, CAD, DKK, EUR, GBP, MXN, NOK, NZD, SEK, THB, and USD. The company does not use derivative financial instruments for speculative purposes. Fair values for the company’s foreign exchange forward contracts are based on quoted market prices for contracts with similar maturities. The fair values are deemed to be categorized as Level 2. The company's forward contracts are included in Other Current Assets or Accrued Expenses in the condensed consolidated balance sheets.
Total debt: Fair value for the company’s convertible debt other than the 2026 Secured Notes and Secured Term Loan is based on quoted market-based estimates as of the end of the period, while the revolving credit facility fair value is based on an estimate of the market for similar borrowing arrangements. The fair values are deemed to be categorized as Level 2 in the fair value hierarchy. The 2026 Secured Notes and Secured Term Loan fair values are based on valuation models in which significant inputs are observable in active markets. The fair values are deemed to be categorized as Level 2. Other total debt is primarily attributable to credit facilities borrowings where the carrying value reported in the balance approximates its fair value.
Convertible debt derivative: The fair value for the convertible debt conversion liability is based on valuation models in which significant inputs are observable in active markets. The fair values are deemed to be categorized as Level 2.
| | | | | | | | |
Notes to Financial Statements | | |
Business Segments | | |
| | |
Business Segments
The company operates in two primary business segments: North America and Europe with each selling the company's primary product categories, which include: lifestyle and mobility and seating products. Sales in Asia Pacific are reported in All Other and include products similar to those sold in North America and Europe. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company's consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element.
Segment performance is measured and resources are allocated based on a number of factors, with the primary income or loss measure being segment operating income (loss). Segment operating income (loss) represents net sales less cost of products sold less selling general and administrative expenses. Segment operating income (loss)
excludes unallocated corporate general and administrative expenses not allocated to the segments and intersegment sales and profit eliminations, which are included in All Other. In addition, segment operating income (loss) further excludes charges related to restructuring activities, asset impairments and gain (loss) on sale of business (as applicable).
This performance measure, segment operating income (loss), is used by the Chief Operating Decision Maker (CODM) for purposes of making decisions about allocating resources to a segment and assessing its performance. In addition, this metric is reviewed by the company's Board of Directors regarding segment performance and is a key metric in the performance management assessment of the company's employees.
The information by segment is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Revenues from external customers | | | | | |
Europe (1) | $ | 434,372 | | | $ | 499,118 | | | $ | 468,041 | |
North America (2) | 276,891 | | | 340,980 | | | 348,307 | |
All Other (Asia Pacific) | 30,470 | | | 32,359 | | | 34,341 | |
Consolidated | $ | 741,733 | | | $ | 872,457 | | | $ | 850,689 | |
Intersegment revenues | | | | | |
Europe | $ | 14,708 | | | $ | 21,864 | | | $ | 17,384 | |
North America | 32,229 | | | 56,681 | | | 80,748 | |
| | | | | |
All Other (Asia Pacific) | — | | | — | | | 2,528 | |
Consolidated | $ | 46,937 | | | $ | 78,545 | | | $ | 100,660 | |
| | | | | |
Restructuring charges before income taxes | | | | | |
Europe | $ | 13,918 | | | $ | 1,560 | | | $ | 5,934 | |
North America | 10,646 | | | 964 | | | 1,306 | |
All Other | 1,256 | | | 10 | | | 118 | |
Consolidated | $ | 25,820 | | | $ | 2,534 | | | $ | 7,358 | |
| | | | | |
| | | | | |
Depreciation and amortization | | | | | |
Europe | $ | 6,513 | | | $ | 8,557 | | | $ | 7,615 | |
North America | 8,427 | | | 7,623 | | | 6,013 | |
| | | | | |
| | | | | |
All Other (3) | 551 | | | 641 | | | 689 | |
| | | | | |
Consolidated | $ | 15,491 | | | $ | 16,821 | | | $ | 14,317 | |
| | | | | |
| | | | | |
| | | | | |
Net interest expense | | | | | |
Europe | $ | 483 | | | $ | 2,790 | | | $ | 1,884 | |
North America | 27,773 | | | 21,764 | | | 26,510 | |
| | | | | |
All Other | 208 | | | (248) | | | 12 | |
Consolidated | $ | 28,464 | | | $ | 24,306 | | | $ | 28,406 | |
Operating income (loss) | | | | | |
Europe | $ | 13,413 | | | $ | 33,769 | | | $ | 22,682 | |
| | | | | | | | |
| | Notes to Financial Statements |
| | Business Segments |
| | |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
North America | (34,197) | | | (1,928) | | | 9,449 | |
| | | | | |
| | | | | |
All Other (3) | (30,603) | | | (24,977) | | | (23,236) | |
Charges related to restructuring activities | (25,820) | | | (2,534) | | | (7,358) | |
Gain on sale of business | — | | | — | | | 9,790 | |
Impairment of goodwill | — | | | (28,564) | | | — | |
Impairment of intangible assets | (3,259) | | | — | | | — | |
Consolidated operating income (loss) | (80,466) | | | (24,234) | | | 11,327 | |
Net gain on convertible derivatives | 1,510 | | | — | | | — | |
Gain (loss) on debt extinguishment including debt finance charges and fees | 9,419 | | | 9,422 | | | (7,360) | |
Net interest expense | (28,464) | | | (24,306) | | | (28,406) | |
Loss before income taxes | $ | (98,001) | | | $ | (39,118) | | | $ | (24,439) | |
Assets | | | | | |
Europe | $ | 575,632 | | | $ | 675,051 | | | $ | 705,314 | |
North America | 170,997 | | | 205,998 | | | 207,347 | |
| | | | | |
| | | | | |
All Other | 24,340 | | | 28,482 | | | 33,320 | |
| | | | | |
Consolidated | $ | 770,969 | | | $ | 909,531 | | | $ | 945,981 | |
Long-lived assets | | | | | |
Europe (4) | $ | 404,433 | | | $ | 450,026 | | | $ | 472,599 | |
North America (5) | 61,738 | | | 68,240 | | | 92,195 | |
| | | | | |
| | | | | |
All Other | 5,480 | | | 5,877 | | | 6,721 | |
| | | | | |
Consolidated | $ | 471,651 | | | $ | 524,143 | | | $ | 571,515 | |
Expenditures for assets | | | | | |
Europe | $ | 727 | | | $ | 2,419 | | | $ | 5,221 | |
North America (6) | 2,530 | | | 14,055 | | | 16,473 | |
| | | | | |
| | | | | |
All Other | 521 | | | 1,224 | | | 610 | |
| | | | | |
Consolidated | $ | 3,778 | | | $ | 17,698 | | | $ | 22,304 | |
________________________
(1) Europe's commissionaire structure reflects the majority of revenues to external customers through Switzerland.
(2) Revenues from external customers for the United States were $256,888,000, $312,805,000 and $316,687,000 for 2022, 2021 and 2020, respectively.
(3) Consists of unallocated corporate SG&A costs and intercompany profits, which do not meet the quantitative criteria for determining reportable segments, and operating profit (loss related to the company's Asia Pacific business).
(4) Property and Equipment net book value within France were $6,136,000, $7,342,000 and $8,452,000 and Germany were $3,376,000, $4,119,000 and $5,904,000 at the end of 2022, 2021 and 2020, respectively.
(5) Property and Equipment net book value within the United States were $33,901,000, $38,411,000 and $27,882,000 at the end of 2022, 2021 and 2020, respectively.
(6) 2021 and 2020 expenditures for assets primarily driven by the company's ERP project.
| | | | | | | | |
Notes to Financial Statements | | |
Business Segments | | |
| | |
Net sales by product category, are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Europe | | | | | |
Lifestyle | $ | 216,325 | | | $ | 248,325 | | | $ | 222,668 | |
Mobility and Seating | 186,153 | | | 214,398 | | | 200,687 | |
Respiratory Therapy | 14,003 | | | 19,348 | | | 24,786 | |
Other (1) | 17,891 | | | 17,047 | | | 19,900 | |
| $ | 434,372 | | | $ | 499,118 | | | $ | 468,041 | |
North America | | | | | |
Lifestyle | $ | 135,615 | | | $ | 148,369 | | | $ | 165,267 | |
Mobility and Seating | 99,116 | | | 110,998 | | | 109,923 | |
Respiratory Therapy | 41,083 | | | 80,903 | | | 72,285 | |
Other (1) | 1,077 | | | 710 | | | 832 | |
| $ | 276,891 | | | $ | 340,980 | | | $ | 348,307 | |
| | | | | |
| | | | | |
| | | | | |
All Other (Asia Pacific) | | | | | |
Mobility and Seating | $ | 11,917 | | | $ | 12,112 | | | $ | 14,150 | |
Lifestyle | 11,221 | | | 11,438 | | | 13,503 | |
| | | | | |
Respiratory Therapy | 2,049 | | | 3,101 | | | 1,383 | |
Other (1) | 5,283 | | | 5,708 | | | 5,305 | |
| $ | 30,470 | | | $ | 32,359 | | | $ | 34,341 | |
| | | | | |
Total Consolidated | $ | 741,733 | | | $ | 872,457 | | | $ | 850,689 | |
________________________
(1)Includes various services, including repair services, equipment rentals and external contracting.
| | | | | | | | |
| | Notes to Financial Statements |
| | Contingencies |
| | |
Contingencies
General
In the ordinary course of its business, the company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All the product liability lawsuits that were asserted against the company in the United States prior to January 31, 2023 had been referred to the company's captive insurance company, Invatection Insurance Company (“Invatection”), and/or excess insurance carriers. All non-U.S. lawsuits have been referred to the company's commercial insurance carriers. All such lawsuits are generally contested vigorously. The coverage territory of the company's insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. On January 31, 2023, the company entered into a Commutation and Release Agreement with Invatection pursuant to which, among other things, the company assumed all outstanding insured claims and cancelled the captive insurance policy. The company will self-insure product liability claims for the first $10 million per claim beyond which the company has commercial excess liability insurance coverage.
As a medical device manufacturer, the company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, invoicing, documenting, developing, testing, manufacturing, labeling, promoting, distributing and other practices of health care suppliers and medical device manufacturers are all subject to government scrutiny. Most of the company's facilities are subject to inspection at any time by the FDA or similar medical device regulatory agencies in other jurisdictions. Violations of law or regulations can result in administrative, civil and criminal penalties and sanctions, which could have a material adverse effect on the company's business.
Medical Device Regulatory Matters
The FDA in the United States and comparable medical device regulatory authorities in other jurisdictions regulate virtually all aspects of the marketing, invoicing, documenting, development, testing, manufacturing, labeling, promotion, distribution and other practices
regarding medical devices. The company and its products are subject to the laws and regulations of the FDA and other regulatory bodies in the various jurisdictions where the company's products are manufactured or sold. The company's failure to comply with the regulatory requirements of the FDA and other applicable medical device regulatory requirements can subject the company to administrative or judicially imposed sanctions or enforcement actions. These sanctions include injunctions, consent decrees, warning letters, civil penalties, criminal penalties, product seizure or detention, product recalls and total or partial suspension of production.
In December 2012, the company became subject to a consent decree of injunction filed by the FDA with respect to the company's Corporate facility and its Taylor Street manufacturing facility in Elyria, Ohio. The consent decree initially limited the company's (i) manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility (“Taylor Street products”) , except in verified cases of medical necessity, (ii) design activities related to wheelchairs and power beds that take place at the impacted Elyria facilities and (iii) replacement, service and repair of products already in use from the Taylor Street manufacturing facility. Under the terms of the consent decree, in order to resume full operations, the company had to successfully complete independent, third-party expert certification audits at the impacted Elyria facilities, comprising three distinct certification reports separately submitted to, and subject to acceptance by, the FDA; submit its own report to the FDA; and successfully complete a reinspection by the FDA of the company's Corporate and Taylor Street facilities.
On July 24, 2017, following its June 2017 reinspection of the Corporate and Taylor Street facilities, the FDA notified the company that it was in substantial compliance with the FDA Act, FDA regulations and the terms of the consent decree and, that the company was permitted to resume full operations at those facilities including the resumption of unrestricted sales of products made in those facilities.
Since July 24, 2017, an independent company-retained audit firm conducted two semi-annual audits in the first year and then four annual audits in the next four years of the company's headquarters and Taylor Street facilities, as required under the consent decree. The expert audit firm determined that the facilities remained in continuous compliance with the Federal Food, Drug and Cosmetic Act (“FDA Act”), FDA regulations and the terms of the consent decree and issued post-audit reports contemporaneously to the FDA. The FDA has the authority
| | | | | | | | |
Notes to Financial Statements | | |
Contingencies | | |
| | |
to inspect these facilities and any other FDA registered facility, at any time.
The FDA has continued to actively inspect the company's facilities, other than through the processes established under the consent decree. The company expects that the FDA will, from time to time, inspect substantially all the company's domestic and foreign FDA-registered facilities.
In 2021, FDA conducted an inspection of the company’s Corporate and Taylor Street facilities from May 25 through June 24, 2021. At the close of the inspection, six FDA Form 483 observations were issued, and the company timely responded to FDA, has diligently taken actions to address FDA’s inspectional observations, and has provided FDA monthly updates on the corrective actions taken to address these observations. On November 18, 2021, the company received a warning letter from the FDA concerning certain of the inspectional observations in the June 2021 FDA Form 483 related to the complaint handling process, the corrective and preventive action (“CAPA”) process, and medical device reporting (“MDR”) associated with oxygen concentrators (the “Warning Letter”). On November 16, 2021, the company received a consent decree non-compliance letter from the FDA concerning the same complaint and CAPA handling matters as in the Warning Letter observations but associated with the Taylor Street products (this letter, together with the Warning Letter, the “FDA Letters”). The company timely responded to the FDA Letters, has diligently taken actions to address FDA’s concerns, and has provided FDA with periodic updates on the corrective actions taken to address the matters in the FDA Letters. The company remains committed to resolving the FDA’s concerns; however, it is not possible to predict the outcome or timing of a resolution at this time. There can be no assurance that the FDA will be satisfied with the company’s responses to the FDA Letters, nor any assurance as to the timeframe that may be required for the company to adequately address the FDA’s concerns or whether the matters in the FDA Letters will result in an extension in the duration of the consent decree. As of the date of filing of the company’s Annual Report on Form 10-K, there has been no impact on the company’s ability to produce and market its products as a result of the FDA Letters.
The FDA conducted an inspection at the company’s Alber GmbH facility in Albstadt, Germany from December 12 through December 15, 2022. At the completion of the inspection, the FDA issued no findings or observations.
The FDA conducted an inspection at the company’s Corporate and Taylor Street facilities from March 1 through March 30, 2023. At the conclusion of the
inspection, two FDA Form 483 observations were issued. The company intends to timely respond to the FDA and address the observations.
Under the consent decree, the FDA has the authority to order the company to take a wide variety of actions if the FDA finds that the company is not in compliance with the consent decree, FDA Act or FDA regulations, including requiring the company to cease all operations relating to Taylor Street products. The FDA also can order the company to undertake a partial cessation of operations or a recall, issue a safety alert, public health advisory, or press release, or to take any other corrective action the FDA deems necessary with respect to Taylor Street products.
The FDA also has authority under the consent decree to assess liquidated damages of $15,000 per violation per day for any violations of the consent decree, FDA regulations or the FDA Act. The FDA also may assess liquidated damages for shipments of adulterated or misbranded devices in the amount of twice the sale price of any such adulterated or misbranded device. The liquidated damages, if assessed, are limited to a total of $7,000,000 for each calendar year. The authority to assess liquidated damages is in addition to any other remedies otherwise available to the FDA, including civil money penalties.
The results of regulatory claims, proceedings, investigations, or litigation are difficult to predict. An unfavorable resolution or outcome of the FDA Letters, any other FDA warning letters or inspectional observations, or other FDA enforcement related to company facilities, could materially and adversely affect the company's business, financial condition, and results of operations.
The limitations previously imposed by the FDA consent decree negatively affected net sales in the North America segment and, to a certain extent, the Asia Pacific region beginning in 2012. The limitations led to delays in new product introductions. Further, uncertainty regarding how long the limitations would be in effect limited the company's ability to renegotiate and bid on certain customer contracts and otherwise led to a decline in customer orders.
Although the company has been permitted to resume full operations at the Corporate and Taylor Street facilities, the negative effect of the consent decree on customer orders and net sales in the North America segment and Asia Pacific region has been considerable, and 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 historic results, the previous limitations in the consent decree had, and likely may continue to have, a material adverse effect on the
| | | | | | | | |
| | Notes to Financial Statements |
| | Contingencies |
| | |
company's business, financial condition and results of operations.
Warranty Matters
The company's warranty reserves are subject to adjustment in future periods based on historical analysis of warranty claims and as new developments occur that may change the company's estimates related to specific product recalls. Refer to Current Liabilities in the Notes to the Consolidated Financial Statements for the total provision amounts and a reconciliation of the changes in the warranty accrual.
Any of the above contingencies could have an adverse impact on the company's financial condition or results of operations.
| | | | | | | | |
Notes to Financial Statements | | |
Subsequent Events | | |
| | |
Subsequent Events (Unaudited)
Divestitures
On January 30, 2023, the company completed the sale of its respiratory business assets (the “Transaction”) to Ventec Life Systems, Inc, a Delaware corporation and subsidiary of React Health, LLC (the “Purchaser”), pursuant to an Asset Purchase Agreement dated as of January 30, 2023 (the “Purchase Agreement”). The purchase price paid by the Purchaser in the Transaction was $11,925,644 in cash payable at closing.
The Purchase Agreement contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, which are subject to certain exceptions, terms and limitations described further in the Purchase Agreement. The company agreed to non-competition obligations with respect to respiratory products for a five-year period following the Transaction, which are more fully described in the Purchase Agreement. In addition, the company entered into a supply agreement and a transition services agreement with the Purchaser to provide for, among other matters, the ongoing parts and service and support for the warranty and non-warranty service of respiratory products in the field.
On January 27, 2023, the company completed the sale of its Top End™® sports and recreational wheelchair and handcycle business to Top End Sports, LLC.
Termination of Information Technology Services Agreement
Effective October 1, 2019, the company entered into a Master Information Technology Services Agreement (the “Master Services Agreement”) with Birlasoft Solutions Inc. and certain of its affiliates (collectively, “Birlasoft”), which are part of The CK Birla Group, to outsource substantially all of the company's information technology business service activities, including, among other things, support, rationalization and upgrading of the company's legacy information technology systems and implementation of a global enterprise resource planning system and eCommerce platform. On January 27, 2023, the company terminated the Master Services Agreement following Birlasoft's breach of the Master Services Agreement, including but not limited to Birlasoft's failure to meet transformation milestones, failure to provide services, and breach of representations, warranties and covenants in the Master Services Agreement.
Bankruptcy
On January 31, 2023 (the “Petition Date”), the company and two of its U.S. subsidiaries (collectively, the “Debtors” or “Company Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors obtained joint administration of their chapter 11 cases under the caption In re Invacare Corporation, et al., Case No. 23-90068 (CML) (the “Chapter 11 Cases”).
The Debtors continue to operate their business and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure ordinary course operations, the Company Parties obtained approval from the Bankruptcy Court for certain “first day” motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date.
Restructuring Support Agreement
On January 31, 2023, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement” or “RSA”) with certain prepetition stakeholders (the “Consenting Stakeholders”). The Consenting Stakeholders represent holders of at least a majority of the aggregate principal amount of the Company Parties’ debt obligations under various debt agreements. Under the RSA, the Consenting Stakeholders have agreed, subject to certain terms and conditions, to support a financial restructuring (the “Restructuring”) of the existing debt of, existing equity interests in, and certain other obligations of the Debtors. The Restructuring Support Agreement contemplated: (a) the Debtors’ entry into the $70 million debtor-in-possession term loan facility, (b) the Debtors’ entry into the $17.4 million debtor-in-possession ABL facility; (c) the consummation of a rights offering, backstopped by members of the Ad Hoc Committee of Noteholders (the “Backstop Parties”) pursuant to a certain Backstop Commitment Agreement (the “Backstop Commitment Agreement”); (d) issuance of the new common equity; (e) exit takeback financing in the form of an Exit Term Loan Facility and Exit Secured Convertible Notes, and (f) as necessary, exit financing in the form of the Exit NA ABL Facility and Exit EMEA ABL Facility.
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| | Notes to Financial Statements |
| | Subsequent Events |
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Chapter 11 Plan
Since the Petition Date, the Debtors have developed the Restructuring Support Agreement into a chapter 11 plan of reorganization (as may be modified, amended, or supplemented from time to time, the “Plan”). The Plan, among other plan treatment, contemplates the following:
•Each holder of an allowed term loan claim shall receive (i) with respect to allowed term loan claims representing principal amounts owed, its pro rata share of the exit term loan facility and (ii) with respect to allowed term loan claims representing principal amounts owed, its pro rata share of the exit term loan facility and (ii) with respect to all other allowed term loan claims, payment in full in cash.
•Each holder of an allowed secured notes claim shall receive (i) with respect to allowed secured notes claims representing principal amounts owed, its pro rata share of the exit secured convertible notes and (ii) with respect to all other allowed secured notes claims, payment in full in cash; provided that, if applicable pursuant to and in accordance with the Plan, such holder will also receive its pro rata share of the applicable portion of the excess new money in cash.
•Each holder of an allowed unsecured notes claim shall receive (i) the unsecured noteholder rights, in accordance with the rights offering procedures; (ii) with respect to any residual unsecured notes claims, its share (on a pro rata basis with other holders of allowed unsecured notes claims and holders of allowed general unsecured claims that select the class 6 equity option) of 100% of the new common equity after the distribution of the new common equity on account of the backstop commitment premium (subject to dilution on account of the exit secured convertible notes, the new convertible preferred equity, the backstop commitment premium, and the management incentive plan); (iii) and the distributions in respect of its litigation trust interests, to the extent provided in the Plan.
•Each holder of an allowed general unsecured claim shall receive its pro rata either (x) (i) if such holder of an allowed general unsecured claim does not elect to receive the class 6 equity option, the general unsecured claims cash settlement and (ii) its pro rata share of the distributions in respect of its litigation trust interests, to the extent provided in the Plan; or (y) if such holder of an allowed general unsecured claim elects to receive the class 6 equity option in lieu of the general unsecured creditors cash settlement, its share (on a pro rata basis with holders of allowed unsecured notes claims in
respect of their residual unsecured notes claims and other holders of allowed general unsecured claims that select the class 6 equity option) of 100% of the new common equity after the distribution of the new common equity on account of the backstop commitment premium (subject to dilution on account of the exit secured convertible notes, the new convertible preferred equity, and the management incentive plan); and (z) its pro rata share of the distributions in respect of its litigation trust interests, to the extent provided in the Plan.
•All existing equity interests shall be discharged, cancelled, released, and extinguished without any distribution, and will be of no further force or effect, and each holder of an existing equity interest shall not receive or retain any distribution, property, or other value on account of such existing equity interest.
Although the company intends to pursue the Restructuring in accordance with the terms set forth in the Plan, there can be no assurance that the company will be successful in completing a restructuring or any other similar transaction on the terms set forth in the Plan, on different terms or at all.
DIP Credit Agreements
The company and certain lenders (the “DIP Parties”) have agreed to a superpriority, senior secured and priming debtor-in-possession term loan credit facility in an aggregate principal amount of $70 million subject to the terms and conditions set forth in the superpriority secured credit agreement dated as of February 2, 2023 (the “Term DIP Credit Agreement”) and a superpriority senior secured and priming debtor-in-possession asset-based revolving facility in an aggregate amount of $17.4 million subject to the terms and conditions set forth in the debtor-in-possession revolving credit and security agreement dated as of February 2, 2023 (the “ABL DIP Credit Agreement” and together with the Term DIP Credit Agreement, the “DIP Credit Agreements”).
The DIP Credit Agreements include conditions precedent, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. Cash flow hedges are precluded under the DIP Credit Agreements. The proceeds of all or a portion of the proposed DIP Credit Agreements may be used for, among other things, post-petition working capital for the company and its subsidiaries, payment of costs to administer the Chapter 11 Cases, payment of expenses and fees of the transactions contemplated by the Chapter 11 Cases, payment of court-approved adequate protection obligations under the DIP Credit Agreements, and payment of other costs in an approved budget and
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Notes to Financial Statements | | |
Subsequent Events | | |
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other such purposes permitted under the DIP Credit Agreements.
The foregoing description of the RSA and the DIP Credit Agreements is not complete and is qualified in its entirety by reference to each of the Restructuring Support Agreement and each DIP Credit Agreement, which were filed on February 1, 2023 on the Current Report on Form 8-K, February 3, 2023 on the Current Report on Form 8-K, as applicable. Additionally, the foregoing description of the Backstop Commitment Agreement is not complete and is qualified in its entirety by reference to the Backstop Commitment Agreement filed in this Annual Report on Form 10-K.
The company cannot predict the ultimate outcome of its Chapter 11 Cases at this time or the satisfaction of any of the RSA milestones yet to come. For the duration of the company’s Chapter 11 Cases, the company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process. As a result of these risks and uncertainties, the amount and composition of the company’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of the company’s operations, properties and liquidity and capital resources included in this annual report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process.
In addition, related to the bankruptcy filing, on January 31, 2023, the company entered into a Commutation and Release Agreement with Invatection Insurance Company pursuant to which, among other things, the company assumed all outstanding insured claims and cancelled the captive insurance policy. The company will self-insure product liability claims for the first $10 million per claim beyond which the company has commercial excess liability insurance coverage.
Exiting Sanford, Florida Production and Distribution Facility
On April 5, 2023, the company announced the decision to close its Sanford, Florida production and distribution facility, effective at the end of September 2023. The manufacturing and distribution activities currently conducted at the Sanford facility will be performed at other company locations or by third parties. The consolidation is expected to impact approximately 90 associates in Florida. This decision is supportive of the company’s transformation efforts and is part of the company’s long-term plan to increase enterprise value by targeting significant contributions from cost reduction activities in North America.
The company expects to incur pre-tax cash restructuring charges of approximately $1.7 million in the North America segment, of which $0.9 million is expected to be incurred for severance and transition assistance and $0.8 million recognized for other closure-related costs. The charges are anticipated to be expensed in the second and third quarters of 2023, with the majority of cash payments expected to be made in third quarter of 2023, aligned with the planned timing for the exit of the facility.
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| | Notes to Financial Statements |
| | Interim Financial Information |
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Interim Financial Information (Unaudited)
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(In thousands, except per share data) | QUARTER ENDED |
2022 | March 31, | | June 30, | | September 30, | | December 31, |
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Net sales | $ | 200,988 | | | $ | 189,017 | | | $ | 170,408 | | | $ | 181,320 | |
Gross profit | 47,729 | | | 47,982 | | | 31,379 | | | 48,303 | |
Income (Loss) before income taxes | (22,877) | | | (21,023) | | | (33,434) | | | (20,667) | |
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Net income (loss) | (24,197) | | | (21,943) | | | (34,354) | | | (20,577) | |
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Net income (loss) per share—basic | (0.69) | | | (0.62) | | | (0.92) | | | (0.54) | |
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Net income (loss) per share—assuming dilution * | (0.69) | | | (0.62) | | | (0.92) | | | (0.54) | |
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2021 | March 31, | | June 30, | | September 30, | | December 31, |
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Net sales | $ | 196,202 | | | $ | 225,864 | | | $ | 224,200 | | | $ | 226,191 | |
Gross profit | 54,638 | | | 60,818 | | | 60,310 | | | 63,340 | |
Income (Loss) from before income taxes | (12,174) | | | (9,578) | | | (20,919) | | | 3,553 | |
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Net income (loss) | (14,044) | | | (10,698) | | | (22,759) | | | 1,938 | |
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Net income (loss) per share—basic | (0.41) | | | (0.31) | | | (0.65) | | | 0.06 | |
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Net income (loss) per share—assuming dilution * | (0.41) | | | (0.31) | | | (0.65) | | | 0.05 | |
* Net earnings (loss) per share assuming dilution calculated utilizing weighted average shares outstanding - basic in periods in which there is a net loss.
The description of significant items affecting each quarter presented are detailed below.
Loss and loss per share for the quarter ended March 31, 2022, reflects restructuring charges of $3,790,000 ($3,525,000 after tax or $0.10 per share assuming dilution).
Loss and loss per share for the quarter ended June 30, 2022, reflects restructuring charges of $4,153,000 ($3,889,000 after tax or $0.11 per share assuming dilution).
Loss and loss per share for the quarter ended September 30, 2022, reflects restructuring charges of $8,440,000 ($8,383,000 after tax or $0.22 per share assuming dilution), net gain on debt extinguishment including debt finance charges and fees of $6,398,000 ($6,398,000 after tax or $0.17 per share assuming dilution), impairment on a North America trademark of $1,012,000 ($729,000 after tax or $0.02 per share assuming dilution) and gain on convertible debt derivatives of $950,000 ($950,000 after tax or $0.03 per share assuming dilution).
Loss and loss per share for the quarter ended December 31, 2022, reflects restructuring charges of $9,437,000 ($9,129,000 after tax or $0.24 per share assuming dilution), gain on debt extinguishment including debt finance charges and fees of $3,021,000 ($3,021,000 after tax or $0.08 per share assuming dilution), impairment on Europe trademarks of $2,247,000 ($1,605,000 after tax or $0.04 per share assuming dilution) and gain on
convertible debt derivatives of $560,000 ($560,000 after tax or $0.01 per share assuming dilution).
Loss and loss per share for the quarter ended March 31, 2021, reflects restructuring charges of $1,552,000 ($1,376,000 after tax or $0.04 per share assuming dilution) and loss on debt extinguishment including debt finance charges and fees of $709,000 ($709,000 after tax or $0.02 per share assuming dilution).
Loss and loss per share for the quarter ended June 30, 2021, reflects restructuring charges of $547,000 ($413,000 after tax or $0.01 per share assuming dilution).
Loss and loss per share for the quarter ended September 30, 2021, reflects restructuring charges of $377,000 ($277,000 after tax or $0.01 per share assuming dilution), gain on debt extinguishment for forgiveness of the CARES Act debt along with its accrued interest of $10,131,000 ($10,131,000 after tax or $0.29 per share assuming dilution), and impairment of goodwill of $28,564,000 ($27,903,000 after tax or $0.80 per share assuming dilution).
Income and income per share for the quarter ended December 31, 2021, reflects benefits of lower selling, general and administrative expenses, specifically performance bonus and stock compensation expense for performance awards.
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Schedule II - Valuation and Qualifying Accounts | | |
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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| COL A. | | COL B. | | COL C. | | COL D. |
| Balance At Beginning of Period | | Charged To Cost And Expenses | | Additions (Deductions) Described Below | | Balance At End of Period |
| | | (In thousands) | | |
Year Ended December 31, 2022 | | | | | | | |
Deducted from asset accounts— | | | | | | | |
Allowance for doubtful accounts | 3,642 | | | 862 | | | (1,225) | | (A) | 3,279 | |
Inventory obsolescence reserve | 19,201 | | | 7,574 | | | (2,202) | | (B)(E) | 24,573 | |
Tax valuation allowances | 176,230 | | | 21,025 | | | 1,542 | | (C) | 198,797 | |
Accrued warranty cost | 11,198 | | | 2,360 | | | (5,577) | | (B) | 7,981 | |
Accrued product liability | 13,704 | | | 1,478 | | | (2,619) | | (D) | 12,563 | |
Year Ended December 31, 2021 | | | | | | | |
Deducted from asset accounts— | | | | | | | |
Allowance for doubtful accounts | $ | 4,518 | | | $ | (16) | | | $ | (860) | | (A) | $ | 3,642 | |
Inventory obsolescence reserve | 20,665 | | | 2,389 | | | (3,853) | | (B) | 19,201 | |
Tax valuation allowances | 163,298 | | | 10,311 | | | 2,621 | | (C) | 176,230 | |
Accrued warranty cost | 10,991 | | | 6,925 | | | (6,718) | | (B) | 11,198 | |
Accrued product liability | 14,757 | | | 1,084 | | | (2,137) | | (D) | 13,704 | |
Year Ended December 31, 2020 | | | | | | | |
Deducted from asset accounts— | | | | | | | |
Allowance for doubtful accounts | $ | 6,318 | | | $ | 427 | | | $ | (2,227) | | (A) | $ | 4,518 | |
Inventory obsolescence reserve | 18,178 | | | 3,304 | | | (817) | | (B) | 20,665 | |
Tax valuation allowances | 162,790 | | | (701) | | | 1,209 | | (C) | 163,298 | |
Accrued warranty cost | 11,626 | | | 7,408 | | | (8,043) | | (B) | 10,991 | |
Accrued product liability | 16,150 | | | 1,139 | | | (2,532) | | (D) | 14,757 | |
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________________________
Note (A)—Uncollectible accounts written off, net of recoveries and net of foreign currency translation adjustment.
Note (B)—Amounts written off or payments incurred, net of foreign currency translation adjustment.
Note (C)—Other activity not affecting federal or foreign tax expense, net of foreign currency translation adjustment.
Note (D)—Losses paid and loss adjustments, net of foreign currency translation adjustment.
Note (E)—2022 ending inventory reserve includes charges related to the respiratory product line.
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