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Text: Today we will be reviewing our third quarter 2021 financial results and providing investors with an update on our full-year outlook.
Further information can be found on our SEC filings.
Actual future results may differ materially from those expressed in our statements today due to various uncertainties.
Starting on slide three, I'm pleased to announce that we achieved constant currency net sales growth of 2.9% with increases in all key product categories despite continuing global supply chain challenges.
Revenue growth was led by solid performance in Europe and Asia-Pacific and North America realized growth in mobility & seating and respiratory products appeared with strong new order intake, we continue to experience higher than typical backlog levels across all product categories compared to pre-pandemic levels, which is expected to drive sequential sales growth in the fourth quarter.
As always, we're working diligently to maximize our throughput and improve our service levels to better support our customers' needs.
Turning to gross profit, we've benefited from sales growth and favorable sales mix with higher gross profit on lower percentage of sales.
Gross margin was impacted by previously disclosed changes to input costs ahead of offsetting price adjustments.
We view these challenges as transitory and during the quarter we undertook actions to address them which I'll discuss more in detail in the next slide.
To support existing levels of demand and expected sales growth, free cash flow usage increased as a result of greater investment in working capital, specifically inventory, which Kathy will discuss later.
Overall, our third quarter sales results were in line with expectations with solid revenue growth year-over-year in all major product categories.
Turning to slide four, we expect to finish the year on a strong note, while we anticipate global supply chain challenges to persist in the near-term, the disruptions are generally more predictable, and the actions we've taken should mitigate some of the remaining uncertainty.
In addition, our customers continue to demonstrate strong demand for our products even though access to healthcare has not fully rebounded from pre-pandemic levels.
As mentioned previously, we're taking action to mitigate the supply chain challenges which impacted sales and gross margins.
For example, we expanded our network of freight providers for more timely shipments, we found ways to improve staffing levels to increase throughput, and we have further increased inventory to mitigate supply chain uncertainties.
In addition, we continue to adjust price and freight charges were applicable to offset the substantially higher material and logistics costs we continue to experience.
Well still early in the fourth quarter, we're seeing positive signs that our actions should be effective.
As we work through these near-term challenges, we're also marching forward with the next phase of our IT modernization Initiative in North America.
I'm pleased to share that the program took a big step forward following the launch of our new e-commerce platform, which has features to enhance the customers experience and to improve the ease of doing business with Invacare.
In 2022, we expect to launch the next phase in North America, which will focus on driving operational efficiencies, lowering costs and improving working capital management.
Turning to sales, demand remains strong and we continue to see solid order rates in all regions and product categories.
As we grow revenue, our order backlog has also continued to increase.
In the third quarter, product availability in our targeted inventory strategy were key factors in driving strong sales growth in both Europe and Asia-Pacific.
Specific material shortages, limited some of lifestyle product availability in North America balancing overall results.
All things taken together, we expect fourth quarter will improve in all key metrics with sequential constant currency net sales growth, driving substantially higher profitability and free cash flow.
We believe the progress we have made sets us up for a strong finish to the year and continued improvement in 2022.
Turning to slide six, reported net sales increased 5.8% and constant currency net sales increased 2.9% in line with our quarterly guidance, and driven by growth in all key product categories, sales growth was the result of continued strong order intake, and the conversion of a portion of the excess backlog from the second quarter of 2021.
Gross profit increased $300,000 and benefited from net sales growth and favorable sales mix.
However, gross profit as a percentage of sales declined 140 basis points.
As previously discussed, gross margin continued to be impacted by global supply chain related challenges and labor shortages resulting in elevated manufacturing costs for the quarter.
We expect many actions we have undertaken to mitigate these higher costs to become effective and benefit margins in the fourth quarter of '21.
Constant currency SG&A expense decreased primarily related to lower employee related costs, including stock compensation expense.
To drive profitability, we continue to align commercial expenses with net sales growth and monitor all discretionary spending.
Operating loss excluding the goodwill impairment charge was $3.8 million, an improvement of $900,000 from the third quarter of 2020.
This improvement was driven by sales growth and lower restructuring costs.
In the third quarter of '21, the company recorded a one-time non-cash charge related to an impairment for Goodwill of $28.6 million.
The company's reporting units for Goodwill assessment North America HMV, and the Institutional Products Group merged into one reporting unit as a result of changes to the operating structure of the North America business and the implementation of a new enterprise resource planning system at the end of the quarter.
This change was considered a triggering event and required the company to perform an interim goodwill impairment test.
Adjusted EBITDA was $18.1 million, an increase of $8.3 million primarily attributable to $10.1 million of CARES Act benefit, and net sales growth partially offset by higher supply chain costs.
Excluding the CARES Act benefits, adjusted EBITDA for the third quarter was $8 million.
Note that the CARES Act benefit was and is not considered in the company's full-year 2021 guidance for adjusted EBITDA.
Free cash flow usage for the quarter reflects an investment in working capital, including $10.1 million of additional inventory as compared to the second quarter of '21.
As previously disclosed, the company increased inventory levels to mitigate supply chain disruptions and to prepare for expected sequential sales growth in the fourth quarter.
We anticipate that inventory levels and accounts receivable will remain elevated at year-end and convert to cash over the next few quarters.
Turning to slide seven, reported net sales in all key product lines improved despite supply chain challenges, which continued to limit the conversion of orders to revenue.
We continue to see strong demand in all product categories and in all regions, which resulted in excess order backlog that was higher than typical compared to pre-pandemic levels and similar to the end of the second quarter.
We're working diligently to reduce the excess backlog and return our service levels back to more normal lead times.
On a consolidated basis, constant currency net sales of Lifestyle products grew 5.2% driven by exceptionally strong sales of manual wheelchairs and hygiene products in Europe.
Mobility & seating products also achieved constant currency net sales growth in North America and Asia Pacific.
In addition, we continue to see elevated demand for respiratory products globally related to the pandemic.
Turning to slide eight, Europe constant currency net sales increased 4.5% driven by more than 17% growth in lifestyle products as a result of heightened demand for products that were readily available, demonstrating the importance of our targeted inventory strategy.
While respiratory demand remained strong, fulfilling that demand has been hindered by the availability of components to complete orders.
Gross profit increased $3.2 million, and gross margin increased 20 basis points driven by net sales growth and favorable product mix partially offset by higher freight costs and supply chain disruptions.
As Matt mentioned, we have taken actions to mitigate the impact of these additional costs and expect to see benefits starting in the fourth quarter.
Operating income benefited from SG&A leverage and increased by $2 million, driven by higher gross profit from revenue growth.
Turning to slide nine, North America constant currency net sales decreased slightly, a 7% increase in mobility & seating and an over 6% increase in respiratory products was more than offset by lower sales of lifestyle products.
Higher sales of mobility & seating products was driven by power wheelchairs and power add-on products.
The lifestyle product category was impacted by supply chain issues limiting the availability of materials and components in particular for bed.
In addition, access to institutional and government customers' remains limited compared to pre-pandemic level.
That said, overall, we continue to see increased customer interest in all products and strong order intake.
Gross profits declined by $2.8 million and gross margin declined 80 basis points due to unfavorable operating variances as a result of supply chain challenges, partially offset by favorable product mix.
Operating loss of $1.5 million was impacted by reduced gross profit and higher SG&A expense, the latter of which came primarily as a result of spending supporting revenue growth.
As noted the goodwill impairment charge previously discussed is not included in the operating results for North America.
Turning to slide 10, constant currency net sales in the Asia Pacific region increased 17%, driven by significantly higher sales of respiratory products, and an over 15% increase in mobility & seating products.
Sales rebounded in the Asia Pacific region as a result of receiving products delayed from the second quarter, which had been impacted by global shipping issues.
Operating loss improved by $2.2 million, driven primarily by lower corporate SG&A expense, including reduced stock compensation expense.
This was partially offset by lower profitability in the Asia Pacific region impacted by higher material and freight costs as well as higher SG&A expense.
Moving to slide 11, as of September 30, 2021, the company had total debt of $318 million, excluding financing and operating lease obligations, and $74 million of cash on the balance sheet.
Lower cash balances are primarily related to higher levels of working capital, which we anticipate will remain elevated through the end of the year.
As part of the company's strategy to mitigate supply chain challenges and to prepare for expected sales growth, the company added $10.1 million of incremental inventory in the quarter, which is expected to convert to cash over the next few quarters.
In the third quarter of 2021, the company received forgiveness of its CARES Act that obligation of $10.1 million of principal and accrued interest.
Turning to slide 12, we are reaffirming our full-year guidance for 2021 consisting of constant currency net sales growth in the range of minus 1% to positive 2%.
Adjusted EBITDA in the range of $30 million to $37 million, and free cash flow usage in the range of $10 million to $20 million.
As previously mentioned, full-year adjusted EBITDA guidance does not include the CARES Act benefit recognized in the third quarter.
For the fourth quarter, the company anticipates sequential improvement and constant currency net sales growth driven by continued strong order intake and the conversion of a portion of its elevated backlog into revenues.
We expect the actions we have taken to support sales growth and manage near-term supply chain challenges will drive sales growth, favorable sales mix and expand gross margin.
As a result, adjusted EBITDA and free cash flow are expected to improve materially.
Turning to slide 13.
We're pleased that our third quarter results reflect constant currency net sales growth.
We anticipate the actions we have taken will enable us to finish the year on a strong note and instill confidence that we will achieve our full-year guidance.
Looking further ahead, I'm confident that the durable benefits from our recent actions and our capable team will allow us to drive sustainable profitable growth in 2022 and beyond.
We'll now take questions.

user
full year 2021 financial guidance reaffirmed.

assistant