Invacare's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Invacare Corporation (IVC)

Invacare Corporation (NYSE:IVC)

Q4 2013 Earnings Conference Call

February 06, 2014 08:30 a.m. ET

Executives

Gerry Blouch – President & CEO

Rob Gudbranson – SVP & CFO

Analysts

Bob Labick – CJS Securities

Jim Sidoti – Sidoti & Company

Matthias Daniel – Prosight Capital

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Invacare 2013 Fourth Quarter and Year End Conference Call.

I will begin with the customary Safe Harbor statement that this conference call may include statements regarding anticipated and future developments that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that describe future outcomes or expectations that are usually identified by words such as should, could, plan, intend, expect, continue, forecast, believe and anticipate and include for example any statements made regarding the company’s future results.

Actual results may differ materially as a result of inherent uncertainties and risks including the risk factors described in the company’s Form 10-K and other filings with the Securities and Exchange Commission and in the company’s earnings release. The company may not be able to predict and may have little or no control over the factors or events that may influence its financial results.

Also of note, except for free cash flow, the financial information for all periods excludes the impact of the discontinued operations. Discontinued operations include Invacare Supply Group, the company’s former domestic medical supplies business that was divested on January 18, 2013 and Champion Manufacturing, Inc., the company’s former domestic medical recliner business for dialysis clinics and was divested on August 6, 2013. Champion was a part of the Institutional Products Group segment.

On today’s call, the management team will focus on highlights from the company’s fourth quarter and full year 2013 results. For additional details, please refer to the earnings press release that was issued earlier today. In particular, I would refer investors to the company’s earnings release to review the definition of free cash flow and some of the adjusted earnings items which will be mentioned during the call. You can find the release and access the company’s SEC filings at www.invacare.com.

Before I turn the call over to Invacare’s President and Chief Executive Officer, Mr. Gerry Blouch, I would like to remind you that all phone lines have been placed on mute for the first part of the call. After the management’s overview, we will open the call to questions. This conference is being recorded on Thursday, February 6, 2014.

I would like to turn the call over to Mr. Gerry Blouch, President and Chief Executive Officer. Mr. Blouch, you may now begin.

Gerry Blouch

Thank you, Sheila. With me on today’s call is Rob Gudbranson, Invacare’s Chief Financial Officer. We will discuss – as we will discuss we faced many challenges during 2013 but through ours [ph], our European business segment delivered excellent overall performance and I want to publicly thank the European associates for generating strong improved year-over-year growth and profitability.

In 2013, organic net sales for the European segment increased 4.4% and earnings before income taxes improved by $8.5 million compared to the prior year. Unfortunately the excellent performance in Europe was more than offset by the financial results of our remaining three business segments, which struggled primarily as a result of the three issues, first, the company's consent decree with the United States Food and Drug Administration which limits sales and productions from our Taylor Street power wheelchair manufacturing facility; the second, the lack of significant new product introductions over the past two years as a result of our focus on quality systems remediation and limitations initially imposed by the consent decree; and finally, unfavorable sales mix, favourably lower margin products and lower margin customers. Primarily as a result of these actors, financial performance for the full year resulted in an adjusted net loss per share of $1.20 compared to an adjusted net earnings per share of $0.22 in 2012.

Organic net sales for the year decreased by 6.3% compared to last year. Despite these, we achieved positive free cash flow of $6.3 million during the year. Using the net proceeds from the successful divestitures of the Invacare Supply Group and Champion Manufacturing during the year as well as free cash flow from operations, we reduced total debt outstanding by $190.1 million to $48 million as of December 31, 2013.

I will now cover more detail on the consolidated results for continuing operations for the fourth quarter. The fourth quarter 2013 adjusted net loss per share was $0.19 as compared to an adjusted net loss per share of $0.10 in the fourth quarter of 2012. The adjusted net loss for the quarter was negatively impacted primarily by lower net sales and reduced gross margins. This is partially offset by reduced SG&A and interest expense.

Organic net sales for the fourth quarter decreased 6.6% over the same period last year as increases for the European business segment were offset by declines in all of the other three segments. Gross margin as a percentage of net sales from continuing operations for the fourth quarter was lower by 1.7 percentage points as compared to last year’s fourth quarter.

Gross margins for the fourth quarter included an incremental warranty expense accrual for power wheelchair joystick recall, the accrual of $3.4 million pre-tax which represents 1 percentage point. The joystick recall was launched in October. Thus far the customer response to the recall are expected to experience [ph] VAT rate was established based upon our prior experience. This expense was recorded in the North American HME and Asia Pacific reporting segments. We will continue to monitor the recall closely and reserve the specific [ph] adjustments as appropriate.

Gross margin was also negatively impacted by the North American HME sales decline in custom power wheelchair which historically is one of the company’s higher margin product lines and unfavorable sales mix for lower margin customers. Gross margins for the quarter improved as a result of an amendment to our VAT filing in Europe, the benefit recognized was $1.4 million or four-tenths of a percent.

Excluding the impact of foreign currency translation, expense decreased by 8.9% compared to the fourth quarter – I am sorry, SG&A expense decreased 8.9% as compared to the fourth quarter primarily as a result of reduction in regulatory and compliance costs as well as reduced associate costs – Thanks Rob.

With that, Rob will now review additional financial highlights for the fourth quarter.

Rob Gudbranson

Thanks, Gerry. All the references to earnings before tax exclude restructuring costs and the intangible impairment charges. For the quarter ended December 31st 2013 organic net sales for the North American HME segment decreased by 12.1% compared to last year, driven by declines in mobility and seating and lifestyle products. These were partially offset by increases in respiratory products, which were driven primarily by a large order of Invacare HomeFill Oxygen Systems by a national account. The sales decline in mobility and seating products was primarily driven by the impact from the FDA consent decree which limits sales of previously disclosed mobility products from the Taylor Street manufacturing facility, to product having properly completely verification of medical necessity documentation.

Loss before income taxes for the North American HME segment increased $9.1 million compared to the fourth quarter of 2012 primarily as a result of volume decline, unfavorable sales mix towards lower margin customers and lower margin products and higher warranty expense primarily due to the joystick recall. These factors were partially offset by reduced regulatory and compliance costs as well as lower associated costs.

Organic net sales for the Institutional Products Group decreased 18.1% driven by declines in all product categories, partially due to delays in new product introductions and strong net sales for interior design projects that occurred in the fourth quarter of 2012 that did not repeat in the current quarter.

Earnings before income taxes decreased by $1 million compared to the fourth quarter of last year as volume declines and increased depreciation expense were partially offset by favorable product mix towards higher-margin products and by decreased freight and research and development expenses.

European organic net sales for the quarter increased 2.8%, principally due to increases in lifestyle and mobility and seating products. These increases were partially offset by a decline in respiratory products. Earnings before income taxes increased $4.7 million compared to last year. The increase in earnings before income taxes was largely attributable to higher net sales volumes and reduced purchasing and freight costs, partially offset by increased SG&A related to associate costs and unfavorable foreign currency transactions.

The fourth quarter of 2013 also benefited by the $1.4 million related to amended VAT filing. In the fourth quarter, Asia Pacific organic net sales decreased 13.2%. The decline was in the company subsidiary which produces microprocessor controllers and was primarily related to its decision to exit the contract manufacturing business for companies outside the healthcare industry.

Also the company's Australia and New Zealand distribution businesses experienced a net decline in sales primarily in lifestyle and mobility and seating products. For the fourth quarter, loss before income taxes was reduced by $0.3 million compared to last year's fourth quarter. The reduced loss before income taxes is primarily attributable to lower G&A expense, primarily associate costs as a result of the company's restructuring efforts, partially offset by higher warranty expense due to the joystick recall and by reduced sales volumes.

Total debt outstanding, which includes the convertible debt discount as described in the release was $48 million as of December 31, 2013. The company’s total debt consisted of $28.1 million drawn on the revolving credit facility, $13.4 million in convertible debt and $6.5 million of other debt.

As more fully described in our February 3 press release and the SEC filing, the company has successfully amended its credit agreement. The amendment increases the company's maximum leverage ratio for the first three quarters of 2014 compared with the prior credit agreement. In calculating the company’s EBITDA for purposes of determining the ratios, the credit agreement also allows the company to add back to EBITDA up to $20 million of one-time cash restructuring charges, representing an incremental increase of $5 million from the prior credit terms.

In order to align this debt capacity and related costs with the anticipated needs, the company also has reduced its revolving credit facility to $100 million from $250 million through the 2015 maturity date of the facility. I would like to thank our lenders for their support in completing this amendment.

I will now turn the call over to Gerry for a few closing comments. We can then address questions.

Gerry Blouch

Thank you, Rob. I would like to take a few – moments to update you on the progress relating to the consent decree covering our corporate and Taylor Street manufacturing facility in Elyria, Ohio. Throughout 2013 we continued to make progress on demonstrating our quality systems improvements to our third-party expert auditor, and we received the FDA's acceptance on two of the three required third-party certification reports earlier in 2013.

During the final expert certification audit, the auditor indicated that some additional work was required updated, complained and list the new processes before the final and most comprehensive certificate report to be completed and provide it to the FDA. I would refer you to our December 3 press release where we discuss this in greater detail.

Since that meeting with auditor in December, thoroughly and purposefully executing our action plan related to the requirements. As previously stated, we expected that the third party expert will return at the end of February to re-commence the final audit. We are unable to predict the timing and outcome of the audit but – our priority is to resume production at Taylor Street manufacturing facility in Elyria, Ohio, and we are working hard to demonstrate our quality system compliance to the third party expert and ultimately to the FDA. We appreciate the ongoing support of our associates, customers and shareholders, as we work through this process.

Despite these short term challenges, I continue to be encouraged by the fundamental strength of the market in which Invacare participates. Trend is improving, the aging population, the growing prevalence of chronic diseases and co-morbidities as well as policy initiatives associated with the healthcare reform are expected to contribute to growing demand for our products. Public policy is shifting to support transition to patient care from acute care to long term care. The Affordable Act will drive shorter length of stay and reduced patient re-admissions which should result in more patients spending more time and lower costs home spending, such as homes care and long term care.

I might refer you to the latest edition of Health Affairs, and there is a great article that gives a synopsis study of approximately 150 [indiscernible] on these issues. As shared with many of you before home care is the tri-sets [ph] of healthcare. Patients prefer to be at home, with better clinical outcomes at home and home care is more cost effective than institutional care.

But the volume of patients coming into the home channel is increasing, the channel itself is evolving as domestic home medical equipment provider adjusts their business model to handle increased pressure from pre and post period audit as well as national competition bidding.

Since July 1, 2013, we have been closely monitoring the rollout of the second round of national competitive bidding which expanded to 91 additional MSAs.

It’s hard for us to measure the direct impact of national competitive bidding on sales but we do not have – as we do not have zip code visibility to our customers’ revenues or Medicare fulfilment statement. While we expect some market realignment and temporary dislocation, this will stabilize and home care will be a major contributor to driving down healthcare costs and more patient care will continue to migrate to this channel.

We have seen an increase in sales of HomeFill oxygen business which we believe demonstrate that providers are actively seeking opportunities to reduce costs and transform their business model while improving patient care. Excluding the one substantial order mentioned by Rob for HomeFill oxygen business, we estimate that sales in the 91 competitive MSAs were slightly weaker than MSAs outside of those markets. Continued uncertainty as the industry realigns and adjusts itself to small big winners and contracts.

We are confident after we emerge from remediation process, we will continue to strengthen our product portfolio to serve the needs of the market with innovative and cost-effective solutions. On behalf of the company I appreciate your time and attention during this call. We will now open up the phone lines to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Bob Labick with CJS Securities.

Bob Labick – CJS Securities

Good morning, congratulations on another excellent free cash flow quarter.

Gerry Blouch

Thanks Bob.

Bob Labick – CJS Securities

First question, I just want to start with the cash flow. Obviously very good cash flow, debt paid down a lot and you are still very comfortable versus your covenants that you just amended your credit facility and I was hoping you could talk a little bit about that and the thought process behind that, it looks like you see safe, is this more – because of the seasonality of working capital in the first half, are you signalling something or is this just to be conservative and stay ahead of anything that might happen.

Rob Gudbranson

Bob, I will take a shot at and Gerry can add some comments too. Last May we reset some position with the banks. We had – at that point – our fourth amendment to the credit agreement and we really were looking to get two things. One, we wanted to have a little flexibility on the covenant cloud [ph] and we – the banks for some support on non-operating expense, that would be excluded from the EBITDA calculation, which allows us to – where needed resize the business and make some good decisions in the short-term that don’t necessarily hurt the covenant calculation.

We ended up not meeting that -- leverage ratio changes, as we did well in terms of selling the Champion business and as you pointed out cash flow. But I would point out to you and to the investors, these are very sensitive calculation as the EBITDA has declined from the performance – the difficult performance of the business particularly North American HME. It does not take a big movement to change the leverage ratio pretty dramatically. So again we want to make sure that in the Fifth Amendment to have both those things again, some flexibility for three quarters and the leverage ratio and then additionally the banks who are supportive in putting another 5 million back into the non-operating expense basket that would be excluded from the EBITDA calculation.

So I think all those things together and then maybe building a little on what we said, and we are clearly not giving guidance but it’s not atypical historically that we see some pressure in the first quarter on our cash flow, again I don’t want to get into whether that will be true for 2014 but historically first quarter is a tough quarter.

Bob Labick – CJS Securities

Great. Thank you for that. And just moving over to globalization, [indiscernible] us the update on the audit, you expect it by the end of this quarter. But then the timing beyond that is still out of your control. So I was just wondering is there anything that you can do on globalization – before the consent decree is listed, so where does that stand on timing?

Gerry Blouch

Our Ferlin [ph], I suspect your last time was – how do you feel about the $100 million – so I will start with that. You usually start with that. I am very confident the $100 million – as we said we are focused like a laser and exiting the adjusted phase of the consent decree. That globalization project is a global leaning of the medical device businesses and it leverages on global ID product line, reducing FTUs, addressing new stuff. So it’s kind of all – against the timing of exiting the injunctive phase of the consent decree. So we are actively – tune of and refine – refine the projects just to keep the fresh and circumstances change [indiscernible] and as soon as we know when we are going to be – obviously we are going to announce it out of the injunctive phase of the consent decree, we will be giving more color on the timing.

Bob Labick – CJS Securities

Okay, great. Skipping over to Europe, and as you mentioned, you had a fantastic year there. Particularly in the second half, margins were pretty even adjusting for the value added tax in Q4, could you talk a little about the drivers of the success in Europe and give us – without giving guidance give us some sense of an outlook there if the strength can continue?

Gerry Blouch

Give us the sense of the outlook without giving guidance – it’s a very strong business, a mature, accomplished management team. So it starts with people, good people and great products and – in the people in the ten years excellence and so we’ve got – we’ve got a great team. And we continue to make improvement on products, cost, pricing and IT systems so that they are running a tight business and continuously improve.

Rob Gudbranson

Bob, I will just add one thing, which I couldn’t agree more with Gerry. I think we’ve got a very good management team over there with a lot of history and they also realize this is a time that we are counting on them to perform well. I would just point out that one of the things that – helped us in the year would be time effected, they did grow the sales line and they did improve the profit was the Europe was quite strong. So that’s just a factor that I won’t even pretend to be able to predict where it goes from there going forward but that’s just a factor for investors to keep in mind.

Bob Labick – CJS Securities

Okay, great and then last question I wanted to ask, you highlighted another strong sales in HomeFill, that’s been doing very well in North America. Can you talk a little bit about I guess attributes of HomeFill and why that has the success it has of late and if there’s other opportunities for second products in different category, at similar attributes and you can gain some market share on those?

Gerry Blouch

Great question. The attributes – it’s a double win, it’s a product which is great for patients and great for providers. So it’s – that’s the challenging part is it’s a more expensive upfront capital investment, but that is eligible, it’s not desirable because it reduces the payback on an investment is huge, reduction of all the infrastructure required and buyouts involved to transfer [ph] down in a government approved facility into smaller tanks to deliver those things to patients and the interesting thing is that is some of the big moves are being undertaken by businesses that have been taken over by venture capitalists and these are tough minded numbers fore and they have run the numbers and they see the value and they are putting the money on the line because it enhances the patient outcome, it enhances great patient benefits. And so it’s unique, it’s best in class, we created the class.

But the other part of your question, I think the general theme in dealing with competitive bidding is the fleet cost -- we increased – product reprice – products that are rented – over 5, 10 years, so our products are known for reliability, durability, leanabilty, variability and the safer, when we get pressure on pricing and products, our team is total life time watched – and so it’s safe $10 on a product which is a $200 product or 5% for a product that lasts a third as long is a bad investment. And that’s what we deliver to our customers and that’s what we preach to our customers. You’ve got to change your business model. Now desperate people do desperate things, it’s always the market for a cheap and cheaper product but where we – that’s our theme, products selling products and portfolio and product philosophy that give you the best total lifetime costs.

Bob Labick – CJS Securities

Great, thanks very much.

Gerry Blouch

Thank you Bob.

Operator

We’ll go next to Jim Sidoti with Sidoti & Company.

Jim Sidoti – Sidoti & Company

Good morning. Can you hear me?

Gerry Blouch

Hey Jim, yeah.

Jim Sidoti – Sidoti & Company

Great, great. A few questions to start with that – this last audit. You said that you expect the third-party to be back in the building later this month. Can you just give us a sense of – what’s involved at this point -- do they have to start from scratch or do they start from where they left off in the fall?

Gerry Blouch

The number one focus – first of all, they are independent auditor, so they can do what they think is right. And there is no fixed protocol, there is no pre-agreed audit plan. Part of the value an audit is response – but clearly the key focus is on those things which they felt were just not sufficient shape to justify a clean opinion of a public company. And that’s a certainly a complaint systems and the risk review system. So that will be – that will clearly be the main focus of where else that goes, the only thing we track is if they didn’t do anything else.

Jim Sidoti – Sidoti & Company

And then if we look at the results in the quarter, I just want to be clear – the pro forma results include the charge for the recall. So excluding that, had you not had the recall, you would have shown an operating profit in the quarter, is that right?

Rob Gudbranson

I guess it’s a couple things, Jim. We had the benefit of the VATs, we called that out separately. We shouldn’t just be calling out something that would hurt us. It’s important to tell investors things that should help us. So that you can bet those too and then say what the impact would have been on the adjusted operating income. I think the other thing is just as part of the normal year and process we always do, for instance, we count our inventory, make sure our inventory is in good shape in for the fourth quarter. We always reserve for that and there is some benefits from there that came through too. So there are other things that should help but those would be the big two items that we adjust for.

Jim Sidoti – Sidoti & Company

Okay. And then moving to Asia, it looks like you are anniversarying the changes you made there to restructure. Do you expect that business to turn to a profit going forward?

Rob Gudbranson

The expectation is a trend – it’s a clear trend we established in 2013 should continue. The moving part here, Jim, just to make clear let’s put the two businesses up, I think that the management team over in what we call the Australia and New Zealand distribution business, they did a restructuring, they removed a lot of personnel. They are showing progress which is why we show progress in the whole segment. I’d also point out that the team in our micro-processor control division also made some tough decisions and exited a portion of the business that really didn’t make sense going forward.

So they are making some progress too in terms of making that decision. Obviously they are very driven by making microprocessor controllers for HME, for the power wheelchair market. And so we really need to add to turn for there really to be a turn in that piece of the business too. So that would be the only thing I would add to Gerry’s comment.

Jim Sidoti – Sidoti & Company

Thanks Rob. And then on the restructured debt, can you let us know what the interest rate on the debt is at this point?

Rob Gudbranson

Yes, it’s approximately LIBOR plus 2.25 and LIBOR as you know is very low.

Jim Sidoti – Sidoti & Company

Okay. And how does that compare to before you restructured?

Rob Gudbranson

It’s pretty much the same – the same spread that we had before from the May [ph].

Jim Sidoti – Sidoti & Company

Okay. And then the last question on competitive bidding, are there any other products other than your respiratory products that will be impacted by competitive bidding?

Gerry Blouch

There were 10 products – 10 or 11 products, some which we don’t deal with. There was six, seven products – Laura can give you the list that were representative of us.And Jim, we do show those on the IR presentations that you can see that in the back.

Jim Sidoti – Sidoti and Company

Okay. And can you just give me a sense on what percent of revenue of those seven products accounted for in 2013?

Gerry Blouch

We put in the third quarter 10-Q a breakdown of the logic for how we put that together. So I would refer you to that, it’s in the outlook section, I believe, and I would like to investors to read that, so they see the logic of how we built it up.

To be clear – it’s our customers that are affected by competitive bidding and the best we can ever do since we don’t have visibility to their revenue sources, their reimbursement sources, the best we can do is use – kind of common industry accepted principles and how much of Medicare and how much is Medicaid, how much is product day, how much is cash, so that it’s a – so we assemble the pieces as Rob said that reach to that, but it’s a lag.

Jim Sidoti – Sidoti & Company

Okay. Thank you.

Operator

(Operator Instructions). We’ll go next to Matt Daniel with Prosight Capital.

Matthias Daniel – Prosight Capital

Hi guys. Good morning.

Gerry Blouch

Hi Matt. Good morning.

Matthias Daniel – Prosight Capital

I guess start off, can you talk about what the remediation spend was in the quarter?

Rob Gudbranson

Yes, we can. We have adjusted our corporate QARA, I think it was right around 4.6 million and last quarter for the quarter it’s about 8.3 million. So there was pretty – as we mentioned earlier, it’s a pretty substantial decrease in terms of that sum.

Matthias Daniel – Prosight Capital

Okay. And then how do you think the stickiness of that spend going forward?

Gerry Blouch

There will be – two, three factors, of course we are in a sprint to the finish. So we are kind of in a sustainable level. I wouldn’t expect it until we get up on the expense [ph] that you’d see any further material declines from what – fourth quarter perhaps even a little bit more but the fact that going forward – once we get going forward, meaning once we get out of – come out of the injunctive phase of the consent decree, we will – the intensity level was going down, they are all the chapter and just kind of think it, we created comparative source of this – then we had to realign, retrain, realign the paper flow and the documentations through those post fees and catch up, there is certain level of retrospective remediation.

So that there is a both sector as you implement and fine tune those, that will be the others. So we will be working on, and then we have to learn a lot, the FDA expects you to use continuous improvement, it’s just like six, eight months. So we are enhancing the process. So we’ve got improvement, the surge factor, the debugging or working through the procedure. But then as we said that we have already begun and we will accelerate extending those procedures lonely through our FDA registered site. So we’ve got a tail on standardizing but the big move is the initial investment in the procedures, the implementation of procedures and debugging those processes. And we’ve allowed that, we should see once we are out from the consent decree, with healthy level of reduction.

Matthias Daniel – Prosight Capital

Okay. Then can you speak around how much of that current spend is consultants or third party spend that will go away over time?

Rob Gudbranson

Matt, I’d probably say the following. We really need to get beyond the third party audit and get through the FDA. And then I think we will have a lot better visibility to that. But I think we really need to clear that and understand how clean the processes are, whether we have to add any more. Clearly as Gerry said, we are going to work hard to make sure that spend is proper, it’s the right spend, it’s lean, but right now that’s just very hard to give color.

Matthias Daniel – Prosight Capital

Okay. And then this was the second quarter in a row where you had a large one time order of HomeFill product by a national account. I guess I was just curious as to – if you expect us to continue each quarter and then to what extent the large orders are sold at discount to the customers?

Gerry Blouch

The order realized early in the year – the business each quarter bumped one black order, that was expected to roll out over the -- into the third quarter, and a little bit into the fourth quarter. So it’s the same order – fulfilment of that order. So it’s one of a kind, there isn’t any one customer who has the capacity or appetite for that month.

Matthias Daniel – Prosight Capital

Okay. If we try to back that out, is there anyway you can speak to the magnitude of that order in Q3 and Q4?

Gerry Blouch

I’d love to, but our customer prefers not to have a lot of publicity.

Matthias Daniel – Prosight Capital

And then moving on to Europe, in the fourth quarter the European division reported growth of 6%, 3.2% of this was from foreign currency translation, but you called out the strength of the euro is primarily – I was just curious if we will reach some point in 2014 where we anniversary the effect of the stronger euro?

Rob Gudbranson

Couple things, one, during the quarter we grew in Europe, reported was 6% and the organic was up 2.8%. I would be glad to tell you sort of what the range was on the euro over time just to give you a sense of the euro and that’s not the only currency for Europe. I should emphasize we have sterling, we have all the Nordic currencies and we have Swiss franc, there are other currencies that may be using the euro is just an indicator for big portion of the business. In fourth quarter 2012 it was about -- average in that quarter about 29 and in fourth quarter this year it was about 35. So it’s quite a big move there. During this year it was 130 in Q1, 130 in Q2, 132 in Q3, 135 in Q4. And so I guess I started saying you can make your own view on how you think things to go forward. And between the GDP and the euro, we typically say that might be two-thirds, maybe a little bit more of the profitability in our European business. But again that’s trying to predict where currency will go. I think I will just give you an indication of what we saw in the past.

Matthias Daniel – Prosight Capital

Okay. And moving on to this competitive bidding, I think you used the words, realignment and dislocation that you are seeing with your customer base. Just curious what you are hearing if you can comment on what you are hearing from providers about inventory in the channel?

Gerry Blouch

I would say the better use of the – was the trade show we had several brokers there buying and selling inventory, which they had never seen in the past. We know it’s there, we know it’s happening. But I wouldn’t know how to give you color but it’s a common kind of something. I think the point – it was a massive project – implementation of any massive project it’s going to have some confusion and chaos which has happened and the industry will get through that, including pre and post audit, as they enhance their systems and protocols to get right there at the right time to have a smooth delivery of product for patients being discharged. The key thing is the underlying drivers, the patient population, [indiscernible] and policy shift, getting that pay for procedure policy – the pay for procedure is going to follow that perhaps people in the distribution to a protocol that encourages and rewards moving patients to lower cost settings, and with lower re-admissions.

Rob Gudbranson

The only thing I would add just for fairly background, I think Gerry hit the important business points just from our vantage point we make this clear in all our communications on national competitive bidding. The biggest issue for us is to keep a very close eye as best we can on the accounts receivable exposure. We are the biggest creditor in the industry and we have very good team to do that and it’s a combination of both our financial services credit team and our sales team. We are doing our best to make sure we don’t have exposure to those accounts as there is a flow patient. But that’s an ongoing issue we are going to have to keep close eye on, the longer we get into the competitive bidding.

Matthias Daniel – Prosight Capital

So follow up on Gerry’s comment, you mentioned the brokers selling product, does that mean providers were selling excess inventory to other providers?

Gerry Blouch

Yes, they are moving product sideways. They are moving products from people who have too much, and for any reason largely because of competitive bidding, I would assume that’s the biggest single event affecting the industry moving that from people who haven’t and don’t, can’t use it to people who don’t have it and need it. And so the economic terms the pipeline is shrinking. And in case you got a massive validation of providers. That’s a temporary thing, that will work its way. That will work its way out.

Matthias Daniel – Prosight Capital

Okay then lastly on the orders – maybe I will be a little tough on it here. Your timeline flips around getting the final – third and final auditor reports to the FDA that was originally at the end of June 2013, and then sort of mid-November. Now it appears you are not giving a target. Can you speak to why that’s happened and why you are perhaps not giving a new target now?

Gerry Blouch

Making a new target – we demonstrated our inability to frame on the variable that affected the timing. There is a number of issues. The availability of auditors, the pool of auditors that hasn’t expanded usefully to accommodate the expansion of the reports and actions by the FDA. Anything as complex as this is difficult to predict, the outcomes and the opinion of the third party, there is no FDA label, it’s a broad guideline on what you should accomplish, how you view that is up to the discretion of the individual company. So there is a fair amount of ambiguity and greater bias to the process. So we have learned through that, we continue to get better and we continue to march forward.

Matthias Daniel – Prosight Capital

Okay. Thanks guys.

Operator

And there are no further questions in the queue at this time. I would like to turn the conference back over to Mr. Blouch for any additional or closing comments.

Gerry Blouch

Thank you very much for your time and attention. We appreciate your support, then again if you have any further questions, Rob, Laura and I will be available at your convenience. Have a great day.

Operator

And that concludes today’s conference. We thank you for your participation.

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Invacare Corporation (IVC): Q4 EPS of $-0.19 misses by $0.01. Revenue of $334.98M (-5.6% Y/Y) misses by $1.22M.