Description

Invacare is a healthcare products company specializing in need-based products such as manual and powered wheelchairs, respiratory products and care beds. IVC is now a ~$38MM market cap company and should end the 2022 year with a TEV of around $290MM and liquidity greater than $130MM post the latest convertible exchanges and debt raises. The past twelve months have been a very challenging period for the company as the nasty combination of supply chain challenges and inflation has weighed on IVC’s profitability. The performance has led to an activist joining the Board and the recent ouster of its CEO. The stock was in the high single digits less than a year ago as profitability progress in North America was taking hold, but now sits at $1. Demand remains strong (high backlog) but management struggled to execute in the face of these headwinds. At the same time, there were a couple of other issues that weighed on the stock, which I don’t think reflect the inherent value. The stock is an interesting risk reward here and should be a multi-bagger in the next two years. I think all options are on the table right now, including the sale of the European segment which is worth substantially more than the TEV.

What happened?

1)  In early September of last year, the company lowered guidance due to the supply chain/freight impacts. Adjusted EBITDA guidance dropped from $45MM to the mid $30s and the stock dropped 35% from the $8+ zone to the mid $5s. The stock drifted even lower during October as tax loss selling and the $5 stock price threshold for certain fund investors weighed.

2)  In early November the company was then booted from the S&P 600. The stock was in the mid-high $4s at the time but fell over a period of weeks to the low/mid $3s. Around a 30% drop.

3)  In late November, it was disclosed that the company received an FDA warning letter. The warning was related to how IVC handles complaints. Subsequently, several competitors received similar warnings. The letter caused another 15-30% chop from the $3.25/$3.50 zone to the mid $2s.

4)  They reported Q4 results which were below mgmt guidance and consensus and guided Q1 (their least important quarter) worse than expectations.

5)  Q1 results came in better than expected and guidance for the year was reiterated.  

6)  In May, Azurite/Resilience Capital Partners filed a 13D.

7)  In July, the company raised a new secured credit facility and convertible debt exchange which improved liquidity.

8)  Q2 results were worse than expected and guidance was pulled for 2022 due to continued supply chain pressures. The company said that 100% of the revenue miss for the quarter was due to the supply chain.

9)  Azurite and IVC announce a Cooperation Agreement and the company formed a Strategy and Operational Improvement Committee.

10)  Last week, the CEO was fired and the SVP of EMEA has been named interim CEO.

11)  The stock now sits at $1.00.

That is a truly gross recap. Clearly, the last 12 months have been a nightmare for the company as the supply chain issues have significantly weighed. The European segment performance throughout all this has been generally solid while North America went from being profitable to turning negative again. The rest of 2022 will remain challenging for IVC, but sentiment is awful (and rightly so). The supply chain is a problem that will linger in the near-term and pushes out the bigger earnings potential to the right but is being mitigated by price increases which were successfully put in place and by new and higher margin products. Many of these products are winning industry awards. Demand remains strong and the freight and component environment is starting to normalize. At one point, the company was paying over $30K for a container to get materials, a rate even more dramatic than what the charts below show. The company struggled to source steel and even basic safety stickers. The headwinds are becoming less of an issue. The Baltic Dry Goods Index has plunged as world trade is drying up and the situation is improving.

The S&P 600 boot weighed heavily on the stock, but I don’t believe this should permanently impact the value of Invacare. The FDA letter, while not ideal, was quickly addressed and should be publicly cleared in short order. Complaint handling processes were changed and the back and forth/communication with the FDA (according to the company) has been very positive. Other diligence on the matter indicates this is a very minor issue for the industry and IVC.

Due to the issues noted above, leverage is extremely high. The new debt agreements decently improved the liquidity situation though and they have a solid runway to right the ship until late 2024 maturities. The cash balance, available ABL ($30MM-$40MM) and a turnaround should enable the debt to be favorably dealt with at that time. Adjusted EBITDA has the potential to get above $70MM with better execution and a normal operating environment.

An investment at current prices is a multi-year option on a unique company (one of three global competitors) in an essential industry (wheelchairs aren’t going away) that is facing 1) temporary exogenous factors (supply chain issues), (2) self-inflicted but solvable issues (turnaround/modernization of the US business, FDA compliance issue) and (3) extreme high leverage. The leverage is manageable and the issues are fixable, which would lead to a multi-bagger in the stock. Alternatively, they could separate and sell the European business, while giving away/shutting down the US business, for a healthy premium to today’s stock price. Barring an unexpected exogenous factor that affects the company in such a way that the currently manageable leverage becomes unmanageable, downside should be protected by the value of the assets. 

There are a decent number of positive catalysts from here…

- In early January, the stock price largely ignored rumors of a potential sale. In my view, a sale for some or parts (Europe) is a real possibility. Europe could be easily separated, has been a steady performer in the past and is worth more than the TEV of the entire company.

-  Non-European assets could be separated/sold as well.

- The supply chain continues to normalize.

- Inflationary pressures subside as many commodities are well below peak levels but there is still a lot more room to fall.

- IVC gets an all clear from the FDA. This should happen in the next few months.

- As operations improve, IVC could use some of its cash to buy in some of its low-priced debt.

- Cost savings initiatives are ramped up. There is $40-$50MM of gross margin opportunity and SG&A has come down from 2016/2017 levels but remains too high after plateauing the last few years. There is a good $20MM plus of SG&A that should be ripped out of this business in the coming year with a sharper pencil. I believe the new Board/leadership is more willing to take aggressive action here.

Catalyst

See above list