IVC
#Thank you, <UNK> and good morning.
I will begin today's call by reviewing the consolidated financial results for the Company's fourth quarter ended December 31, 2015.
During this period, we made measurable progress towards turning around the business, building on our quality culture, and generating profitable growth.
Our continued focus on working capital yielded free cash flow of $29.2 million during the quarter, which led to free cash flow of $13.9 million for the full year.
In the fourth quarter of 2015, gross margin, which is an important measure as we shift our sales focus to more clinically complex products, was higher as a percentage of net sales from continuing operations by 0.7 percentage points, compared to the prior year's fourth quarter.
Excluding the benefit of warranty accrual reversals in 2015, and the impact of the divested rentals businesses from 2014, gross margin for the fourth quarter 2015 was higher by 1.1 percentage points, compared to the prior year's fourth quarter.
This increase was driven by favorable sales mix, partially offset by unfavorable foreign exchange.
Constant currency SG&A expense decreased $5.3 million or by 6% compared to the fourth quarter of the prior year.
This decrease was driven by the sale of the rentals businesses in the third quarter of 2015, which lowered SG&A by $6 million, and by favorable product liability expense.
Excluding these items, SG&A increased primarily due to employment costs and the write-off of cost associated with a cancelled legacy software program due to a change in IT strategy.
Better gross margin and lower SG&A expense were drivers of an improvement in adjusted net loss per share to $0.06 for the fourth quarter of 2015, compared to an adjusted net loss per share of $0.12 for the fourth quarter of 2014.
Importantly, the company generated adjusted operating income of $2.3 million and reported operating income of $1.3 million during the quarter.
For the consolidated company and normalizing for the divested rentals businesses, constant currency net sales decreased 1.7% for the fourth quarter compared to the same period in the prior year.
Increases in Europe and Asia Pacific segments were offset by larger net sales decline in the North America/HME and IPG segments.
I will now turn the call over to our <UNK>, <UNK> <UNK> to discuss the performance of the segments and additional financial results for the fourth quarter.
Thanks, <UNK>.
All the references to earnings or losses before income tax exclude restructuring costs.
In the fourth quarter 2015, constant currency net sales for the Europe segment increased 1.2%, principally due to increased sales of mobility and seating and respiratory products, which were partially offset by the decline in sales of Lifestyle products.
Earnings before income taxes decreased by $3 million compared to last year.
The decrease in earnings before income taxes was largely due to unfavorable foreign exchange and a reduced gross margin, which was driven in part by negative sales mix.
For the fourth quarter 2015, constant currency net sales for the North America/HME segment decreased 6.3% as increased sales of mobility and seating products were more than offset by declines in sales of respiratory and lifestyle products.
Loss before income taxes for the fourth quarter in North America/HME segment was reduced by $2.6 million compared to the same period prior year.
The improvement was related to a higher gross margin, primarily related to the benefit from warranty accruals, lower manufacturing costs, and favorable sales mix.
These benefits were partially offset by increased SG&A expense primarily related to the write-off of costs associated with the cancelled legacy software program and to higher employment costs.
The increased SG&A expense was partially offset by the lower product liability costs.
Excluding the net sales impact of the divested rentals businesses, constant currency net sales for the IPG segment decreased 3.5% driven by reduced sales and therapeutic support surfaces and interior design projects.
Excluding the intangible impairment charges of $4.8 million in the fourth quarter of 2014, earnings before income taxes increased $0.7 million in the fourth quarter compared to the same period prior year.
This improvement was primarily related to the divestiture of the rentals businesses, which generated a loss before income taxes in the fourth quarter 2014.
In the fourth quarter, Asia-Pacific constant currency net sales increased 10.8% due to volume increases at the company subsidiary that produces microprocessor controllers and the company's distribution businesses in Australia and New Zealand.
For the fourth quarter loss before income taxes was reduced by $1.3 million compared to the prior year's fourth quarter.
The reduction in loss before income taxes was due to volume increases and improved gross margin driven by lower manufacturing and freight costs.
Total debt outstanding, which includes the convertible debt discount described in the release, was $48.3 million as of December 31, 2015.
The company's total debt outstanding consisted of $13.4 million in convertible debt and $34.9 million of other debt principally capital lease liabilities.
During the fourth quarter, borrowings on the revolving credit facility ranged from a high of $8.9 million to a low of zero with an ending balance of zero.
As of December 31, 2015, the available borrowing capacity on the company's credit agreement was $38.2 million for the US-Canada portion and $15.2 million for the European portion.
As of December 31, 2015, days sales outstanding were 42 days, which was historically the lowest DSO performance for the company.
This compares to 45 days as of December 31, 2014.
Inventory turns were 5 as of December 31, 2015, compared to 4.9 as of December 31, 2014.
On December 21, 2015, the company entered into a payment plan with the tax authority in Europe related to a previously disclosed and contested tax audit involving financial years prior to 2012 in current taxes payable.
Based on year and exchange rates, the company's aggregate payment obligation was approximately $10.9 million, including approximately $0.6 million of interest that will accrue during 2016.
The payment plan provides for 12 monthly installments over the course of the calendar year 2016 with interest paid as part of the final payment.
I'll now turn the call back over to <UNK> for a few closing comments.
We then can address questions.
Thank you, <UNK>.
As you can see from the fourth quarter financial results, we're making progress towards our priority of generating profitable growth.
In 2015, we started to gain traction in the transformation of our United States sales force from a generalist team to one more focused on clinically complex products.
This will be an ongoing effort in 2016 with expanded investment, more resources, and ongoing training.
Also in 2016, we expect the European results to continue to be negatively impacted by foreign currency pressures.
In the North America/HME segment, we expect ongoing turbulence as reimbursement reductions associated with the world rollout of national competitive bidding continue through the first half of this year.
We believe that the rural areas comprise the remaining 50% of Medicare spending on durable medical equipment that had not been influenced by NCB in rounds 1 and 2.
Combining these factors with the historical seasonal sales weakness that typically influences our first quarters, we know substantial work remains ahead of us.
We are also making progress with our enterprise-wide quality culture, most notably at our corporate headquarters in Taylor Street manufacturing facility in Elyria, Ohio, which are currently under a consent decree with the FDA.
We have responded to the FDA regarding the previously disclosed Form 43 observations from the agency's inspection of the company's compliance with the first two certifications of the consent decree.
We are incorporating our responses to the agency's observations in our ongoing quality systems improvements.
In addition, on February 9, 2016, the independent expert auditor issued its certification report for the third phase of the consent decree indicating our substantial compliance to the FDA's quality system regulation.
This report was submitted to the FDA this week.
According to the terms of the consent decree, we must submit our own report to the FDA regarding our compliance status, together with our written responses to any observations in the expert's report.
If and when the FDA accepts the reports of both the expert and the Company, we expect the agency to re-inspect the impacted facilities.
We cannot predict the FDA's acceptance of these reports nor the amount of any remaining work that may be needed to meet the FDA's requirements.
So while receipt of this third expert certification report is an important milestone, it is only one step forward in our ongoing journey towards an enhanced quality culture.
To accelerate the next phase of this journey, in January, we welcomed John Watkins as our new Senior Vice President, Quality Assurance and Regulatory Affairs.
John is transitioning into the role from Doug Uelmen, who joined Invacare in 2011 and who will be leaving the company in March 2016.
John has an expansive career in quality and regulatory functions driving substantial improvements in complex situations in building efficient and effective systems.
His experience includes leadership roles in a number of medical device manufacturers including Welch Allyn, Boston Scientific, and Zimmer Biomet.
Earlier in his career, John spent 21 years as a pilot in United States Air Force both in active duty and the reserves.
I want to thank Doug Uelmen for bringing the company to this important transition point of receiving the expert's third certification report.
Doug led the renovation of several key quality prophecies and the expansion of the company's quality and regulatory resources and expertise.
I continue to be excited by Invacare's potential and I want to thank our associates for their hard work and commitment in 2015, as we launched many important changes within the company.
I'm looking forward to more progress in 2016.
Thank you for your time and attention on today's call.
We'll now open the phone lines for questions.
Thanks for the question.
It's an important set of details and probably worth clarifying.
There are two elements that are required in this phase of progress of the consent decree.
We need to have a qualified expert render substantial compliance opinion, which has been done, that's the same expert reviews before.
That report needs to be submitted to the FDA and accepted by the FDA, and that's potentially two steps.
We've submitted it to the FDA, but as we had seen in the prior two certifications, there is the opportunity for clarifying questions or things like that that the FDA may require before it actually accepts that report.
So, we're not through that phase yet, we simply submitted it to the FDA.
In addition, the second part of moving forward is the submission of the company's own report substantiating the steps we've taken which lead us to believe that we're ready for another re-inspection.
We will submit that report and the FDA has to accept it.
There is also potential for clarifying questions for the rejection of this, I suppose.
Once they accept both of those, then the 30-day clock starts during which the FDA can begin its re-inspection.
Beyond that though, there is no constraint on timing, we can't predict how long the audit might take or whether the audit will be successful first time through.
So I think as we look back to the prior rollout of NCB, we do as we've always done and disclosed before we're sure to look at the receivables accounts and bad debt credit exposures we have as a number of businesses face a significant reduction in reimbursement, so that's a potential headwind.
We've had good success historically, but this could change again, so we're watchful for that.
In addition, it's an opportunity for us to collaborate with customers in solutions that help them save cost, and we always talk to them about things like HomeFill, which avoid the delivery charges and network expenses that our customers may have by more traditional methods of providing respiratory care.
So it's an opportunity, but there are also some challenges of 50% reduction in reimbursement revenues, you can imagine, very significant for many of our providers.
Sure, be glad to do that.
A couple of things, one, if you look at the DSOs, we were actually very proud of our DSO number last year when we hit 45 days at the end of 2014.
But having said that, the team did even better this year and that was really a global effort ---+ Europe, North America, and Asia-Pacific ---+ a lot of focus on the fact that we can move a little bit better on DSOs, move a little bit better on customers that makes a big difference.
So again 45 was a nominal year last year, but at 42 days, this year did very, very well.
So, I want to emphasize first that was really proactive management.
The other thing that helped us a little bit is organically constant currency net sales for the fourth quarter were down 1.7%, if we're doing a good job of collecting and the sales aren't growing that helps this too, obviously that could go the other way as we expect to grow over time.
But for this particular quarter that was a benefit.
So I think first, I'd say receivables very, very strong.
The other thing I would emphasize is that in a difficult environment only from the vantage point that we weren't blowing through the sales numbers, the team on the manufacturing and sourcing side did a very good job of controlling inventory.
So again, we managed to get back to five times turns, I don't think any of us would emphasize that ---+ would claim that that's world-class, but that's good improvement and particularly in an environment where we had a little bit of mix in terms of sales, we're doing better and the mobility and seating for instance in North America, but struggled a bit on the lifestyle and respiratory.
So, trying to manage that through and have the right product and not bring in more products, again the team did a good job on that front.
So, I'd say we did well in both of those fronts, but generally a good focus throughout the free cash flow statement.
I'd emphasize for you that from our vantage point, again, the goal is always to improve off that number.
I think there's always could be timing issues, but I think if we're thinking more medium term, I don't think any of us are perceiving the five as where we want to be.
That's something we should improve off of.
But I think (multiple speakers) a little color to that, some of the underlying changes that were made are definitely sustainable, we're looking at raw and finished goods transformation.
So these are just (inaudible) year-end goal.
Good point.
Well, I don't want to put the cart before the horse here since it is a constructive ongoing dialog with the FDA, which you can imagine that along and parallel with the third-party certification report, we've been preparing this.
So, it shouldn't be too long, but I wouldn't want to surprise the FDA with what we submit.
So, there's a dialog that goes along with that.
It's a great question and we evaluate a lot of things along the way every day and weekend whether it's right for disclosure or not.
There are probably two parts to this, it's an important milestone that reflects a lot of work that the company has done to improve its quality systems, but we understand that it's only one little step in a long journey and a lot of improvement that's going to continue for a long time.
But in parallel, you could imagine that in this type of work, there are many people involved in the local facilities, probably hundreds and so from a Reg FD standpoint, it becomes increasingly difficult for us to keep all those people engaged and informed, but then not have it get out into the public in an unusual way.
So, we chose to disclose at this time, so everybody has got transparency to what's going on.
In the future, we'll continue to examine those same kind of factors.
We have various versions of market share and I don't know that any of them are anchored well enough to really talk about in the marketplace, also we're the only public company in this space.
So, we're challenged by that dynamic.
We have good products in power mobility, still have clinically unique technology that comes out of our Taylor Street facility you can see from our report, we're still selling robustly from Taylor Street and then as we've mentioned previously, we have the ROVI motion product that came out earlier in 2015.
We're having good results with that.
They're both positioned, so they can each win in the marketplace.
So, I think generally we're increasing, but to actually anchor it to a market share, gain is difficult for us.
I continue to look at our European business that has really good leadership and unfettered access to the full portfolio of products.
I think the composition of the European markets in total represents essentially what North America looks like if you compare the government VA channel private pay, Medicare, Medicaid payment and when I look at those results, I think you can estimate what a model might look like for the whole company.
Yes, I guess I'd say the following.
First I would emphasize again, I think we have a really good team there, it's been in place for a long time.
If you look back historically, we've had two different acquisitions.
We've had a combination of, I'll call them internally Invacare grown and then people from two different acquisitions within Europe sizable acquisitions over the last 15 years.
So that's given us quite a good team and the team that's been in place, I think a lot of that you mentioned the 3.5% organic growth for the 12 months.
Fourth quarter, it was 1.2% for many, many quarters.
They've delivered good growth.
We would expect that to continue if we're looking out longer term.
I think a lot of it is in the marketplace doing well with the products we have.
I think we've mentioned before that we take ---+ they have a new product with the base that's made in North America that they sell throughout Europe with their own seating that is done very well in terms of that capability.
So, there's been some new products, but our goal is to give the more new products over time, but again between management, their position in the marketplace fighting every day, the team has delivered organic growth for quite a while.
And I think they have a nice mix of products, and teams that products are typically planned or sub-business based and then the commercial teams are by country, they've got a really good dynamic of seeing what works in the dynamics of one country and figuring out how to apply that in other countries, they work really well together.
So I'm not sure to what level of or what amount of time we can spend getting into the details of each of the form 483 observations.
I'll say, on one hand, they're not trivial.
On the other hand, I'll say the FDA issues about 4,700 Form 483s each year and these are serious and ordinary at the same time and we are building plans to make sure we accommodate improvements that the FDA has outlined, very good audit work done by the FDA as you can hope for in an engagement like that and we're taking those very seriously going forward.
In terms of resolution to Form 483 observations, the process typically is the FDA leaves behind the Form 483, which are the local inspector's observations.
A company typically has 15 business days to respond, we took the opportunity to respond.
And then in parallel, the government prepares its own report and then there's the opportunity for a dialog and going forward.
There isn't typically a succinct closure process with Form 483 observations, as I'm sure you know.
Those audits were going on in parallel.
Yes, the 483 was the response of the ---+ it was the inspector's observations of their own audit and at the same time, the independent expert within the building doing its audit and they had produced its report.
If you recall, the FDA's audit scope was primarily certification one and certification two of the consent decree.
It won't be terribly material.
It will help us on the IPG business but it won't be anything that you'd see dramatically differently over the course of quarters, not a big impact of course from the beginning.
Just to clarify, during the course of the year, we had a variety of payments to the four senior executives, that was a combined for the year $24.7 million and that was in there.
Additionally, just for clarity purposes, what also was in there was the benefit from the sale leaseback transaction, which was $23 million.
So, again $24.7 million during the course the year as a combined payment out for earned benefits for the four senior executives and then additionally we did get $23 million through the PP&E through our sale-leaseback transactions.
So, net-net they're pretty close, but $24.7 million was the (multiple speakers).
That is correct.
We'll say $1.7 million, yes.
Thank you, <UNK> and thank you everyone for your time and attention today on the call.
<UNK>, <UNK>, and I are available for any follow-up questions.
Have a good day.
