Invacare Corporation
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Invacare 2017 Third Quarter Conference Call and Webcast. After the management’s overview, we will open the call to questions. Investors and analysts interested in asking questions will need to dial in as questions cannot be submitted via the webcast. For the first part of the call, all phone lines have been placed on mute. This conference is being recorded today, Wednesday, November 08, 2017. I would now turn the call over to Lara Mahoney, Invacare's Vice President of Investor Relations and Corporate Communications.

[Lara Mahoney:]

Thank you, Alan. Joining me on today's call from Invacare are Matthew Monaghan, Chairman, President and Chief Executive Officer; and Rob Gudbranson, Senior Vice President and Chief Financial Officer. Today, we will be reviewing our third quarter 2017 financial results and providing investors with an update on our transformation. To help investors follow along, we have created slides to accompany this webcast. For those dialing in, you can find the link to our webcast on www.invacare.com\investorrelations. On our Investor Relations page, you will also find a copy of the webcast slide presentation that we will refer to during today's call. Before Matt begins, I would like to note that during today's call, we will make forward-looking statements about the Company that by their nature address matters that are uncertain. Actual future results may differ materially from those expressed in our statements today due to various uncertainties and I refer you to the cautionary statements included on the second page of our webcast slides and in our third quarter earnings release. For an explanation of the items considered to be non-GAAP financial information that will be discussed on today’s call, such as free cash flow, constant currency net sales, constant currency sequential net sales, adjusted earnings and loss and EBITDA, please see the explanatory note in the appendix of our webcast slides and in the related reconciliations in the earnings releases posted on our website. Also, please note that the Company completed the divestiture of Garden City Medial Inc. in the third quarter of 2016. Garden City Medial is included in the 2016 results that will be discussed on the call, unless otherwise noted. With that, I will now turn the call over to Matt Monaghan.

[Matthew Monaghan:]

Thank you, Lara, and good morning. With a meaningful progress in the number of key area this quarter we are pleased to give an update. As Lara mentioned, our Company is undertaking a comprehensive transformation that is essential to reinvigorating the growth and profitability of our business. In mid-2015, we made substantial changes to our company’s strategy to focus on our stronger technical competency in clinically complex products. Since making this change, we have focused our resources on providing clinical solutions for complex rehabilitation and post-acute care and have decreased the company’s emphasis on products with less sustainable value. This leverage is the best of what Invacare has long done and eliminates the less accretive part of the business, focusing our resources on patient centric solutions to significant healthcare needs. Our transformation program has three phases as you will see on Slide 3, beginning in 2015 and taking us through the next several years. This is a basic crawl, walk, run kind of program. The Phase I, we defined our strategy begin to reorient our business specifically in North America. Phase II has been focused on realigning our infrastructure with our new sales level and mix of products, while also leveraging the North America commercial shift. Throughout August, we continue to focus on creating a culture of quality excellence as a number one priority. In the second half of 2015 and throughout 2016, we did much of the heavy lifting of Phase I in North America. We retained and attracted new talent to our sales force. We have a pipeline of great new products and programs that are starting to grow and our commitment to culture of quality excellence has led us to satisfying FDAs requirements under the consent decree, at our Corporate and Taylor Street manufacturing facility in Elyria, Ohio. As a result, the [indiscernible] Power Wheelchair from the Taylor Street facility without restrictions effective since late July. Now, well into Phase II of our transformation, we have moved forward in the consent decree. We are seeing growth in new products, we are making consistent progress in reshaping our business for costs and efficiency and we have completed the portfolio in sales reductions in North America HME. As a result, third quarter constant currency sequential net sales in North America HME grew 1.6%, compared to the second quarter of 2017 driven by mobility and seating and lifestyle products. This indicates that we have reached the turn in the North America HME business, where our transformation work has been most significant. Primarily as a result of new product offerings and increased commercial effectiveness. On Slide 4, you see the results of third quarter 2017 compared to the key financial indicators of Phase I and Phase II that we referred to in prior presentation. Briefly, we have expected reduced sales that as we ship less accretive products, increased gross margin as a percentage of net sales indicate mix shift, temporarily higher SG&A and negative cash flow in the early phases before gross profit dollars increased SG&A comes down and cash flow improves. Compared to the third quarter last year, consolidated constant currency net sales decreased 4.5% excluding of the Garden City Medical business that was divested in September 2016. The constant currency net sales increased in the Asia Pacific sale was more than offset by the declines in Europe, North America HME and IPG. Compared to the third quarter last year, gross profit decreased $2.7 million to $70.7 million with the Garden City Medical divestiture accounting for $1.6 million of the decline. Gross margin as a percent of net sales increased 80 basis points to 28.2% driven by the strategic mix shift towards mobility and seating product and reduced freight costs. Gross margin continues to be an important measure that we are monitoring to ensure commercial end product effectiveness. Excluding the divested Garden City Medical business and impact of foreign exchange, SG&A decreased $1.4 million or 1.9% primarily driven by reduced legal and employment cost partially offset by increased bad debt expense. Free cash flow in the third quarter of 2017 was negative $4.8 million. The Company’s focus on working capital led to the $17.7 million improvement in free cash flow compared to the second quarter of 2017. EBITDA in the third quarter was negative $2.2 million compared to negative $1.1 million in the third quarter of 2016. The decrease in EBITDA was driven by lower net sales compared to the second quarter of 2017, EBITDA improved by $9.8 million. While I’m moving on the Slide, adjusted net loss per share was $0.41 compared to a loss of $0.37 for the third quarter of 2016. The increase in adjusted net loss was driven by lower net sales. The company incurred net interest expense of $6.7 million in the third quarter of 2017 compared to $4.4 million in the third quarter of 2016. The increase in interest expense was primarily due to the issuance of convertible notes in the second quarter of 2017. We are also measuring constant currency sequential net sales which we believe gives us a more timely financial measure for both evaluating our core operating performance as we work through the transformation and indicating a major inflection point in recovery of our business. This measure removes the effect of discontinued products and the shutting of less accretive products throughout the year. On Slide 5, you can see the sequential comparison of reported net sales as we move through this transformation. You can see the flattening in the sale declined that has been largely the result of intended sale reduction of less accretive products. In the third quarter, constant currency sequential net sales increased 3.7% compared to the second quarter of 2017. The constant currency sequential net sale was driven by Europe, North America HME, and the Asia Pacific segments. Importantly, North America HME grew 1.6% driven by mobility and seating and lifestyles product. If we do need to corner, we want to compare what we have done to what we said we would do, so we continue to par the recent quarter with the prior quarter since the transition started in 2015. You will see this on Slide 6 of the presentation, this is [indiscernible] ratio page. On the page, we show that sequential and year-over-year trends. Again we see the third quarter net sales decrease as we discussed, year-over-year net sales continue to decline in North America where the transformation is more significant. This is a mix of consequences from the transformation and continued weakness in the respiratory business and mid product mixture. Sequentially, North America HME net sales increased in the quarter at levels even better than we expected. We have confidence in continued improvement. The gross margin as a percent of net sales we are looking for improvement from mix shift. In the third quarter, we once again saw this metric improving. Gross profit dollars as we have talked about over time are somewhat variable that’s result of the titrating, the business we are decreasing and the business we are building back. Constant currency SG&A excluding the divested Garden City Medial business was favorable during the quarter as we are managing expenses. We will continue to make investments in the business as appropriate. And free cash flow negative but the significant improvement compared to the prior two quarters as a result of inventory reductions and seasonal improvement. As we have discussed Invacare in the midst of the significant renovation of our business. We are introducing new products, we are seeing effectiveness in North America HME commercial team and we are beginning to grow mobility and seating as a result of new products and our ability to sell clearly from the industry manufacturing facility. I’ll now turn the call over to Rob Gudbranson our CFO to discuss the performance of the segments and additional financial results for the quarter.

[Robert Gudbranson:]

Thanks Matt. Turning to Slide 7, all comparisons are with respect to the same quarter last year unless otherwise noted. For the third quarter of 2017, European constant currency net sales decreased 0.5%. The slight decline was primarily driven by decreases in respiratory products partially offset by increases in mobility and seating products. In the third quarter our operating income increased by approximately $0.3 million principally due to favorable sales mix and favorable foreign currency partially offset by unfavorable manufacturing variances and increased SG&A expense. Gross margin as a percent of net sales in gross profit dollars both increased compared to the third quarter last year. For the third quarter, North America HME constant currency net sales excluding the divested Garden City Medical business, decreased 12.9%. The decrease in constant currency net sales compared to the third quarter of 2016 was driven by lower sales of lifestyle and respiratory products and to a lesser extent mobility and seating products. Operating loss increased by $1.4 million, primarily related to the net sales decline in unfavorable manufacturing variances partially offset by reduced freight, R&D, SG&A expense and favorable sales mix. Gross margin as a percent of net sales increased while gross profit dollar decreased compared to the third quarter last year. Constant currency net sales in the IPG segment decreased by 9.1% driven by declines in all product categories. Operating income declined $0.3 million principally due to the net sales decline and increased warranty expense partially offset by reduce SG&A expense. Gross margin as a percent of net sales increased, while gross profit dollar decreased compared to the same period last year. For the third quarter of 2017, Asia-Pacific constant currency net sales increased 17.9%. For the third quarter, operating income improved by $0.9 million compared to the third quarter of 2016 reporting positive $0.4 million of operating income as a result of increased net sales, favorable sales mix and reduce SG&A and R&D expenses. Gross margin as a percent of net sales and gross profit dollar both increased compared to the same period last year. Turning to Slide 8, total debt outstanding as of September 30, 2017 was $302.1 million, which was comprised of $270 million in convertible debt and $32.1 million of other debt principally lease liabilities. The company had zero drawn on its revolving credit facilities with availability of $42.7 million as of September 30, 2017. The company’s cash balances were $156 million as of September 30, 2017 compared to $124.2 million as of December 31, 2016. The company’s cash balances increased due to the net proceeds from the issuance of convertible debt in June of 2017 which was partially offset by cash used by operations. At the end of the third quarter, day sales and receivables were 49 days up from 41 days as of December 31, 2016 and 43 days as of September 30, 2016. At the end of the third quarter, days in inventory were 76 days compared to 65 days as of December 31, 2016. The days in inventory for the quarter ended September 30, 2017 were favorable to the quarter ended June 30, 2017 by 3.4 days. The reduction in inventory [indiscernible] cash flow benefit of $14 million in the third quarter. I'll now turn the call over to Matt for additional comments. We can then address questions.

[Matthew Monaghan:]

Thank you, Rob. As you can see on Slide 9, we highlighted the essential themes of our Phase II objectives. First, we continue to make progress on our quality systems and culture of quality excellence. In July, we announced progress with quality excellence in a consent decree since then we are able to saw power wheelchairs freely from Taylor Street manufacturing facility in Elyria, Ohio. Providers, clinicians and consumers are welcoming us back into the marketplace and we are pleased to see momentum building in our Invacare line of custom power wheelchairs from the Taylor Street facility. Even though we have had some major milestones and quality remained our number one priority. Over the next five years, we will have ongoing third-party audits at our corporate and Taylor Street facilities as required by the consent decree. In September, we announced that we received a warning letter at our Alber subsidiary in Albstadt, Germany. We are working to address the findings there and continue to make improvements in all our facilities around the world. Also in Phase II, we continue to launch new products. New critical product platforms are an important component of our transformation and we are seeing consistent cadence of valued products coming from our innovation pipeline. In 2017, we have launched 10 new products. Most recently, we expanded our Healthcare Informatics offering with the launch of the enhanced Invacare Platinum mobile Oxygen concentrator with connectivity. This is the company’s second application of product Informatics following the launch of the Link Technology on the new Invacare TBX SC-2 power wheelchair in August this year. Continuing to our Phase II objectives, we remain focused on commercial output. North America HME had its first quarter of sequential growth as we discussed earlier. We expect ITG to follow but that will take time. Also, we will gradually begin to apply the transformation to the Europe segment which may slightly reduce the segment’s net sales as its shifts product makes towards more clinically valued higher margin products. Also in Phase II, we are continuing to make progress and reshaping the business for cost and efficiency. In 2017, we have announced actions expected to yield $14.9 million in annualized sales. These actions will help us optimize our infrastructure reduced costs. For example, in June we announced the closure of our Suzhou, China, manufacturing facility, which continue to wind down during the third quarter. Product manufacturing at the Suzhou facility would transferred Invacare facilities closer to our regional Europe and North America customers. In July, we announced the upcoming transfer of manual wheelchair production from our Dio Sweden facility to our Fondettes, France facility. This move allows us to leverage our manual wheelchair center of excellence in France and focus the Sweden facility as serving the specific needs of our Nordic customers. Further, we are continuing to take action to be more efficient with lower costs through the rest of our business. We must grow sales in order to leverage these costs improvements and see the benefits in net income. The scope of our commercial transformation significant, we are pleased with the progress in our new product pipeline and infrastructure realignment and we look forward to results of our commercial acceptance. As we progress through our transformation, we will expand the scope of what we are doing to include a heavier emphasis on sales, reducing costs and improving efficiency. Our priorities remain emphasizing the culture of quality excellence and achieving our long-term earnings potential. We remain confident in the earnings potential of the business and our ability to get there with the current mix of business. We appreciate the continued support of our shareholders and associates through this process. Before we open the phone lines for questions, I would like to take a moment to recognize Rob Gudbranson. Last week, we announced that Rob will be leading the company after nine years as the CFO of Invacare’s new opportunity. I appreciate Rob’s support as the finest partner during my transition as CEO and really early stages of our transformation. He has ensured our balance sheet had remained strong and has led us through two convertible debt transactions. Rob on behalf of everyone in Invacare and our Board of Directors. Thank you for your commitments to Invacare with your financial leadership and welcome to the new role. As we noted in last week’s release. Rob will remain with the company’s through November 26th, we will be launching a search to identify a successor and we are working through those details now. In the meantime, we are fortunate to have Kathy Leneghan, Invacare’s longstanding Vice President and Corporate Controller, who will assume the role as Interim CFO. Kathy has been with Invacare for 27 years serving various financial roles in North America and Europe. She has served as Vice President and Corporate Controller since 2003. Prior to join in Invacare, Kathy was an Audit Manager in Ernst & Young LLP. I have full confidence in her ability to lead the finance operations and we expect a smooth transition. With that, we would like to thank you for taking the time for being on today’s call. We will now booking phone lines for questions. Alan.

[Operator:]

[Operator Instructions]. And we will take our first question from Bob Labick with CJS Securities.

[Robert Labick:]

Good morning. Hi, first, I just wanted to start and also my best wishes to Rob, I have really enjoyed working with you and appreciate all your help over the years.

[Robert Gudbranson:]

Bob, I very much enjoyed the time with you too, I’m glad you are covering the company.

[Robert Labick:]

Thanks and since you are leaving, I was wondering, don’t tell Matt, but if you could give us some guidance before you go that would be helpful in terms of earnings?

[Robert Gudbranson:]

I’ll differ to our Chairman, CEO and President.

[Robert Labick:]

Just on the business now. Obviously you announced a nice exciting new product in respiratory with the connectivity and links and such. Can you just expand on that product? Is there anything like it out in the market? Is it out there yet, has there been an initial feedback, what is the go-to-market strategy and is it U.S., Europe. Just give us more on that product, it sounds pretty exciting?

[Matthew Monaghan:]

Yes. We are very exciting about that. That is the growth platform, important factor in the marketplace. We see a lot of excitement around battery powered portable action concentrators. Invacare has been in that market for a long time with larger products and we are happy to have a very competitive product in output, weight, noise, great battery life, great user interface and now with the wireless Informatics platform, which we think gives a lot of benefits to users. So they can know more about their unit, easier access to provider input, online help documents and things like that and then for provider its essential for us to help providers be as effected as they can be and we think it’s essential and important for providers to know what's going on with their asset, online help and other things like that. we are excited to have the platform for growth. And I think Bob as you know from second quarter and third quarter with the launch of the TSX SC-2 at Links where we are applying the company’s internal technology to be able to develop this kind of platform. We are excited about the future that this brings. Success in healthcare is always about the same or better outcomes for the same or fewer dollars for everyone involved in the healthcare chain and we believe Informatics that help end users, providers and clinicians is good for everybody. So we are excited about expanding that in our platform.

[Robert Gudbranson:]

And Bob, I would just add from my vantage point. we are talking about the product we would be using globally so it would be Europe and North America and I would emphasize to this as it adds on to the Links capability we have already talked about. So it’s an important progress for the company and glad you asked it.

[Robert Labick:]

Great. And then just moving on you spoke rather on your last slide a little bit in terms of the cost savings. Can you tell us how much of the cost savings are now seen in the P&L and how much more should be seen I guess over the next year or so and if there is additional opportunity for cost savings going forward?

[Robert Gudbranson:]

So Bob, let me take a shot at that and we can add to it additionally. When we talked about Suzhou I think we indicated that the annualized savings is about $4 million and we begun with it sort of in Q4 of this year. So that going in the 2018, I think we will see more benefit from that with clearly some benefit in Q4. Then we talked about the movement in Europe of the chairs [indiscernible] I think our annualized savings in that is about $1.6 million and we think that will be done in Q1 of 2018 is what we said I think is the time. So those are some nice benefits there. I think the key for us is to show the gross profit dollars stabilizing for the company and growing by getting the top-line going so that we get some of those benefits as appose to necessarily seeing them offset some pressure on the business. So I think with Taylor Street now being able to go for full production and some other improvements, those are the important things we have to show investors, but those are the two most important reductions in terms of both footprint and people that we have gone through, we take those seriously. I think we will always continue to look at that depending on how the business is doing.

[Matthew Monaghan:]

And then your question about your future opportunities, our objective is to be the company in this industry that’s easier to do business with and as a result of that I’m sure we will be streamlining efficiencies that will result in lower costs. But as Rob mentioned, despite having all these cost savings, we need the sales leverage to see those in net income, so those are real savings that we expect to be materially externally visible as we grow the top-line contribution margin.

[Robert Labick:]

Okay, great. And then last one, obviously saw some nice sequential growth in the mobility and seating in North American HME in general. So I apologize I missed the very beginning of the call, so can you just discuss the kind of reception so far with the new TDX SC-2 without the consent decree, you have get a couple of months under your belt so far and just how the process of ramping up is going, is it reaching your expectations and I know you have the nice outlook for continued sequential growth next quarters. So is that based on orders you have received right now or what's the kind of visibility on that?

[Matthew Monaghan:]

Thanks for the question, Bob. I think we were right on the center of the target in terms of great functionality in that product as we have discussed on other calls earlier in the year. We don’t want to leave investors to expect external growth from that until 2018. We have talked about this very long cycle of core to cash, core to sales. We are having great commercial engagement. We have great clinical engagement, end users are really very enthusiastic about the product, but it’s a long-cycle product and we expect that to grow overtime nicely.

[Lara Mahoney:]

And the great news is, I mean the increases that we are seeing sequentially are also driven by the other mobility and seating products that we have launched, the investments we have made in the commercial sales force becoming more effective. So well, the Taylor Street products and TBX SC-2 is very important to our future success, so what we are seeing so far is just what we have invested in the products we have launched already.

[Robert Labick:]

Very good. Thank you so much.

[Matthew Monaghan:]

Thanks Bob.

[Operator:]

And we will take our next question from Matthew Mishan with KeyBanc.

[Matthew Mishan:]

Hey good morning Matt, Rob, Lara. Hey I just want to start with the Europe. Has the plan change in the European mix started yet or is the moderation, the constant currency last two quarters driven by a change in the underlying fundamentals?

[Matthew Monaghan:]

No change in the underlying fundamentals. We have a very solid business in Europe. I think there is great alignment between our products and our company need those that making really durable product that can be reused and reused and a lot of the European healthcare programs see that as a benefit to total costs of care for the populations. Actual purchase price may not be the lowest that’s available, but due to the durability and reusability of products in that category we have very good business there, but as we expand our portfolio of clinically complex products, we want to make sure the Europeans are taking advantage of all those in their marketplaces. And a simple part of it is just making space in the commercial programs in Europe to train on these, engage with customers on these and get those out there. And we do that by shifting mix away from some of the lower margin, less strategic businesses there, but fundamentally nothing different in the European marketplace. Rob, if you want to comment?

[Robert Gudbranson:]

No. I think really Matt, I think the other thing I would just say is just reiterated what we have said in the call. They were down 0.5% constant currency sales with some pressure on respiratory a little bit on lifestyles. But they grew and mobility and seating, which is where we ultimately want to see and grow. And I guess, the other thing I would just throw out there is that if I look at the operating margin for Europe from second quarter or third quarter going from 5.5% to 8.4%. So 8.4% clearly always want to improve, but that was a strong quarter and I want to make sure to recognize the European for what was a really good quarter.

[Matthew Mishan:]

Just a follow-up to that question. Could you give any sense of the size and the timing of the potential mix shift?

[Matthew Monaghan:]

Well, a couple of factors. We will guide you today specifically on that. This is voluntary and very different than the North American program. North American program was a substantial transformation over a relative short period of time in the significant. Europe is totally different magnitude. This will, bubble around zero mark for a little bit, but nothing close to North American always looking for the right kind of mix shift as we do that.

[Matthew Mishan:]

Okay. And then back to North America HME. The language in the release is a little bit more positive on the 4Q improvement versus 4Q stabilization. What gives you confidence in that improvement? Have you seen the order book build in the TBX? Did you get a large order for the PFCs? What is drive in the confidence in the sequential improvement?

[Matthew Monaghan:]

Well, I think we have good commercial effectiveness that we are seeing. Some of its visible in book of business, not all of our business has a backlog that’s very long. I want to make sure people understand as third quarter in some context. So as we have talked about previously we were thinking we would have flat this to fourth quarter, a couple of quarters to reflect a flat bottom to rebound and we had a little bit better third quarter than we expected. What I want people not to expect is to say well that’s a V-shaped recovery and all of a sudden we are on this rapid trajectory. There are going to be a couple of quarters with the inertia that we have got a move, but I have a lot confidence in the North America commercial team. The backlog we have the commercial interest in the product, it’s not all literally in the backlog, but tremendous amount of engagements and I think fourth quarter should be decent and I think [indiscernible] of North America HME. IPG is little behind that because we started three quarters later and the capital expense kind of cycling in that business so everything in the America was going to turn quite rapidly, but I think the ship is pointing in a different direction in each of these.

[Matthew Mishan:]

Alright and then last question on the portable oxygen concentrators, is there a way for you to give s a sense of what the baseline level of sales are for those, what percentage of respiratory and then how many sales people have you allocated for the PSC this year and then what's the plan for next?

[Matthew Monaghan:]

Well, easy starting point was roughly zero at the beginning of the year, because it was a new product launch and as we talked about there is a fairly judicious cycle of evaluation that our customers go through, their engaging is at high level, training at lower level, typically by small group in these products to evaluate over a period of time that might be 90 days or longer, if they get their evaluation committees back together, look at the features and performance and then they make purchasing decisions on that basis, so that overall cycle time seek for while. This really can get out in the marketplace in earnest until the end of fourth quarter roughly, so we are just of couple of quarters in getting that out and importantly we are ahead of the default cycle and we are very excited about our Informatics platform, because we think it does a lot for end users to be comfortable with the product, understand what it is doing, see some others about it, interact with the world around them including their providers more readily and then everything we can do to make providers more effective is important to us. So there are some great features in that group for that too and I expect coming into default season we will see a good uptake on portable oxygen concentrator. Beyond that, we hope really break that out as a specific product segment, but we look forward to that to helping us participated in the industry mix shift, which has led to some of our respiratory softness over the last few quarters.

[Matthew Mishan:]

Okay. Thank you very much and best of luck to Rob on his next endowers.

[Robert Gudbranson:]

Thank you very much Matt.

[Matthew Monaghan:]

Thanks Matt.

[Operator:]

And we will take our next question from Blevin Brown with Stephens, Inc.

[Blevin Brown:]

Hey guys, thanks for taking my question and congrats on the - And Bob Chris and I we are sorry to see you go, but we wish you best in the future. Just a couple of quick questions from me. One, so you guys are talking - Matt, you just mentioned that the 3Q was a bit stronger than the plan kind of call for that you would expect some flattening over the next couple of quarters. So I just want to make sure that we are thinking about the cadence right particularly when it comes to margin and SG&A expense. Could you maybe talk to some of the puts and takes there through the remainder of 2017 and the beginning of 2018 in regards to SG&A spend and maybe how the margins will kind of play through a little bit?

[Matthew Monaghan:]

Yes, Sure. Thanks for the question Blevin. So we are looking into the future in third and fourth quarter. One of the core questions was when we see a bottom in North America HME and we were guiding to expectations that quarter three sequentially to quarter four will be flat, reflecting couple of quarters that are kind of flattening out bottom of the turnaround and then presumably growth beyond that. We had expected maybe third quarter would be close to flat, compared to second quarter down a little or up. And we hadn’t committed to that, did turn out to be up somewhat. We look forward to growth. Margins, we have long wanted to see gross margin improve as a percent of sales and in most quarters we have seen that except for the third and fourth quarter last year due to the significant sales takedown that was accelerated then. So just generally, we expect relatively consistent gross margin improvement overtime as a percent of sales. And when we committee SG&A is going to come down. Now I want to make sure people don’t think on one hand that, because third quarter was already better sequentially that was a V-shaped kind of super bowl bounce. Now it’s all upside. I’m expecting a couple of quarters of relatively flat to sort of maybe moderate growth, but this isn’t off to the raises here yet on revenue growth. And then on SG&A, although we are committed to getting it down, don’t take ruler and go from this down, straight down to our 10th quarter mid-20% run rate. We are going to have some ups and downs along the way. We are very closely watching headcount and other forms of SG&A spending. So overtime, we definitely expect to see improvements, but it’s early days and it’s not going to be a linear extrapolation to be quite yet on SG&A.

[Blevin Brown:]

Great, hats very helpful. And then just one other question on mobility and seating particularly on the Taylor Street facility. Obviously you guys are not going to see revenue coming from the consent decree action here for a couple of more quarters. But could you kind of give us a sense of that cost related to that plan. Are we going to see an increase in costs related to Taylor Street, ahead of that revenue as you guys build out the sales force infrastructure and kind of how will that play through over the next few quarters?

[Matthew Monaghan:]

So principally the facility is ready to go and it’s really just about adding direct labor at this point. The company has done a nice job renovating the facility, obviously in preparation for FDA examination which led to moving forward in the consent decree in the third quarter. But beyond that no, we have the fiscal infrastructure, we have the tooling. The overhead is relatively scale down as much as it can be. So it’s really just add direct labor at this point. I don’t know Rob if you want to.

[Robert Gudbranson:]

The only thing I would share, which we share before is for the Taylor Street plan and for our dynamic controls plan. So we have seen a little bit of unabsorbed overhead at right around 1.1 million this past quarter, last year same quarter its about 1.3 million. So I mean, we are headed the right way, I would read that. I think the answer is, what you may have to ask some direct labor, but that should usually pay for itself, I think the key is to start leading into that unabsorbed overhead and perform better on that front. And since I am talking [indiscernible] and I appreciate your comments and glad to having you in [indiscernible] .

[Blevin Brown:]

Thank you. One last question for me. You guys have launched 10 new products this year, you have the Links sounds like great product. And I’m just trying to get a sense of what that cadence looks like into next year. Could you guys give us any kind of sense or any specific products that you would call out in terms of the 2018 pipeline?

[Matthew Monaghan:]

We don’t typically talk about big product launches in the future for obvious competitive and other reasons. We do expect similar cadence in R&D spending as a percent of sales and if you look back at the last 2.5 years really till June 2015, we have had a very consistent cadence of meaningful new products coming out in all of our industry segment, mobility the respiratory business, post acute care so that should continue. And I think importantly as we put Informatics on more components of our business, those are platforms for as us grow and as you or I would expect in our consumer lives the way that functionality on electronic informatics expense generally, but that’s a new vector for us for growth.

[Blevin Brown:]

Great and thanks for taking the questions guys.

[Matthew Monaghan:]

Okay, thanks Blevin.

[Operator:]

And we will take our next question from Matthew Mishan with KeyBanc.

[Matthew Mishan:]

I just have one last question. Matt, how are you thinking about guidance for 2018, are you planning to give it on the fourth quarter call?

[Matthew Monaghan:]

Yes, I wanted to help you and other analysts actually portray what we are doing and be clear there has been a tremendous number of big moving parts in the past and we are getting through many of those. I think when we get to the end of the fourth quarter we will look out there, there is maybe something between nothing and just the tenth quarter or long-term view that we get our heads around [indiscernible] provided to feedback of others in terms of what will make that useful. So that’s definitely on our mind, we will see how it goes at the end of fourth quarter and [indiscernible].

[Matthew Mishan:]

Alright. Thank you.

[Matthew Monaghan:]

Thank you.

[Operator:]

And we will take our next question from Jim Sidoti with Sidoti & Company.

[James Sidoti:]

Good morning. Can you hear me. Alright sorry if I’m asking things you have already talked about, I was bouncing around a little bit this morning. But first congratulations to Rob and all the best, I hope everything will settle for you, it’s been very good working with you in the past.

[Robert Gudbranson:]

Thank you, Jim. I feel the same way.

[James Sidoti:]

In terms of the quarter, was there any impact from the Hurricanes in the quarter to your facility in Florida?

[Matthew Monaghan:]

No. I wouldn’t say in any material fashion. Unfortunately, it’s an opportunity for us to step in and help people who have lost equipment and are need and things like that, but I would say no nothing material.

[James Sidoti:]

Then on the balance sheet, goodwill is roughly $360 million since 2016 or so it jumps up to $400 million this quarter and jump up last quarter, so is something going on there?

[Robert Gudbranson:]

Jim, good question. It’s just related to currency, so we have had strengthened currencies overseas, Europe is primarily where we have goodwill that goes up on the balance sheet, but it’s not anything other than the movement of that FX?

[James Sidoti:]

Okay, alright. And then you talked the transition in Europe to the more clinically complex products similar what you have been doing here in the U.S., how long do you think that will take?

[Matthew Monaghan:]

Good question. Its different in different markets, some markets, we are in the marketplace and with annual or multiyear tenders, so that will stretch it out over longer period of time. Some markets are like the U.S. daily sales and monthly opportunities and it’s voluntary, its much milder than what we do in North America. But I think we will continue to see this transformation probably for three or four years on very slight basis, but that doesn’t mean that the top-line will be suppressed for that launch. We are looking for that level of margin improvement over that period of time as we make those differences. I think the emphasis on top-line softness a little above or little below constant currency, zero line for few quarters is probably realistic and then longer term to keep the margin moving forward.

[James Sidoti:]

Okay. Thank you.

[Matthew Monaghan:]

Yes, thanks Jim.

[Operator:]

[Operator Instructions]

[Matthew Monaghan:]

Okay. Thank you to all participation today for your time and attention on the call. We have had a lot of positives to build on as we complete 2017 we are committed to doing that. Rob, Lara and I will be available for follow-up questions today. Have a good day. Thank you.

[Lara Mahoney:]

Thank you.

[Robert Gudbranson:]

Thank you.

[Operator:]

And ladies and gentlemen that does conclude today’s conference. I would like to thank everyone for their participation. You may now disconnect.