UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 001-15103
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Invacare Corporation
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(Exact name of registrant as specified in its charter)
Ohio 95-2680965
------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)
One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
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(Address of principal executive offices) (Zip Code)
(440) 329-6000
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the
"Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
One). Large accelerated filer X Accelerated filer Non-accelerated filer
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
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As of May 7, 2007, the company had 30,864,771 Common Shares and 1,111,565 Class
B Common Shares outstanding.
INVACARE CORPORATION
INDEX
Part I. FINANCIAL INFORMATION: Page No.
------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2007 and December 31, 2006.........................3
Condensed Consolidated Statement of Earnings -
Three Months Ended March 31, 2007 and 2006...................4
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2007 and 2006...................5
Notes to Condensed Consolidated Financial
Statements - March 31, 2007..................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............21
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........32
Item 4. Controls and Procedures..............................................32
Part II. OTHER INFORMATION:
---------------------------
Item 1A. Risk Factors.........................................................32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........32
Item 6. Exhibits.............................................................33
SIGNATURES....................................................................33
2
Part I. FINANCIAL INFORMATION
Item 1... Financial Statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, December 31,
2007 2006
---- ----
(unaudited)
ASSETS (In thousands)
------
CURRENT ASSETS
..........Cash and cash equivalents $ 56,904 $82,203
..........Marketable securities 270 190
..........Trade receivables, net 248,000 261,606
..........Installment receivables, net 8,451 7,097
..........Inventories, net 206,555 201,756
..........Deferred income taxes 13,616 13,512
..........Other current assets 76,493 89,394
------- -------
.......... TOTAL CURRENT ASSETS 610,289 655,758
OTHER ASSETS 85,871 67,443
OTHER INTANGIBLES 100,476 102,876
PROPERTY AND EQUIPMENT, NET 168,835 173,945
GOODWILL 493,226 490,429
------- -------
.......... TOTAL ASSETS $1,458,697 $1,490,451
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
..........Accounts payable $147,418 $163,041
..........Accrued expenses 119,907 147,776
..........Accrued income taxes 3,312 12,916
..........Short-term debt and current maturities of
long-term obligations 5,158 124,243
------- -------
.......... TOTAL CURRENT LIABILITIES 275,795 447,976
LONG-TERM DEBT 596,741 448,883
OTHER LONG-TERM OBLIGATIONS 114,461 108,228
SHAREHOLDERS' EQUITY
..........Preferred shares - -
..........Common shares 8,013 8,013
..........Class B common shares 278 278
..........Additional paid-in-capital 144,324 143,714
..........Retained earnings 258,845 276,750
..........Accumulated other comprehensive earnings 102,819 99,188
..........Treasury shares (42,579) (42,579)
------- -------
.......... TOTAL SHAREHOLDERS' EQUITY 471,700 485,364
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,458,697 $1,490,451
========= =========
See notes to condensed consolidated financial statements.
3
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Earnings - (unaudited)
Three Months Ended
(In thousands except per share data) March 31,
2007 2006
------- -------
Net sales $374,905 $361,704
Cost of products sold 275,849 260,408
------- -------
Gross profit 99,056 101,296
Selling, general and administrative expense 87,766 83,607
Charge related to restructuring activities 3,152 3,157
Charges, interest and fees associated with debt refinancing 13,373 -
Interest expense 10,343 7,695
Interest income (474) (600)
------- -------
Earnings (loss) before Income Taxes (15,104) 7,437
Income taxes 2,400 2,230
------- -------
NET EARNINGS (LOSS) $ (17,504) $ 5,207
======= =======
DIVIDENDS DECLARED PER
COMMON SHARE 0.0125 0.0125
======= =======
Net Earnings (loss) per Share - Basic $ (0.55) $ 0.16
======= =======
Weighted Average Shares Outstanding - Basic 31,827 31,731
======= =======
Net Earnings (loss) per Share - Assuming Dilution $ (0.55) $ 0.16
======= =======
Weighted Average Shares Outstanding -
Assuming Dilution 31,827 32,190
======= =======
See notes to condensed consolidated financial statements.
4
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - (unaudited)
Three Months Ended
March 31,
2007 2006
------- -------
OPERATING ACTIVITIES (In thousands)
Net earnings (loss) $ (17,504) $5,207
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Debt finance charges, interest and fees associated with debt
refinancing 13,373 -
Depreciation and amortization 11,074 9,813
Provision for losses on trade and installment receivables 1,799 1,794
Provision for other deferred liabilities 919 1,222
Provision for deferred income taxes 581 667
Gain on disposals of property and equipment 30 269
Changes in operating assets and liabilities:
Trade receivables 12,511 2,440
Installment sales contracts, net (3,916) (253)
Inventories (4,423) (4,985)
Other current assets 15,074 4,201
Accounts payable (15,493) (2,091)
Accrued expenses (29,894) (9,854)
Other deferred liabilities (2,474) 99
------- -------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (18,343) 8,529
INVESTING ACTIVITIES
Purchases of property and equipment (3,750) (5,009)
Proceeds from sale of property and equipment 423 33
Other long term assets 1,080 (523)
Other (1,214) (159)
------- -------
NET CASH USED FOR INVESTING ACTIVITIES (3,461) (5,658)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit, securitization facility and
long-term borrowings 510,316 145,155
Payments on revolving lines of credit, securitization facility and
long-term debt and capital lease obligations (494,419) (162,007)
Proceeds from exercise of stock options - 1,343
Payment of Financing Costs (19,784) -
Payment of dividends (399) (397)
------- -------
NET CASH USED BY FINANCING ACTIVITIES (4,286) (15,906)
Effect of exchange rate changes on cash 791 (1,177)
------- -------
Decrease in cash and cash equivalents (25,299) (14,212)
Cash and cash equivalents at beginning of period 82,203 25,624
------- -------
Cash and cash equivalents at end of period $ 56,904 $ 11,412
======= =======
See notes to condensed consolidated financial statements.
5
INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
March 31, 2007
Nature of Operations - Invacare Corporation is the world's leading manufacturer
and distributor in the $8.0 billion worldwide market for medical equipment used
in the home based upon our distribution channels, breadth of product line and
net sales. The company designs, manufactures and distributes an extensive line
of health care products for the non-acute care environment, including the home
health care, retail and extended care markets.
Principles of Consolidation - The consolidated financial statements include the
accounts of the company, its majority owned subsidiaries and a variable interest
entity for which the company is the primary beneficiary. Certain foreign
subsidiaries, represented by the European segment, are consolidated using a
February 28 quarter end in order to meet filing deadlines. No material
subsequent events have occurred related to the European segment, which would
require disclosure or adjustment to the company's financial statements. All
significant intercompany transactions are eliminated.
Reclassifications - Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the presentation used for the
period ended March 31, 2007.
Use of Estimates - The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States,
which require management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results may differ from these estimates.
Business Segments - The company operates in five primary business segments:
North America / Home Medical Equipment ("NA/HME"), Invacare Supply Group,
Institutional Products Group, Europe and Asia/Pacific. The five reportable
segments represent operating groups, which offer products to different
geographic regions.
The NA/HME segment sells each of three primary product lines, which includes:
standard, rehab and respiratory products. Invacare Supply Group sells branded
medical supplies including ostomy, incontinence, diabetic, wound care, urology
and miscellaneous home medical product as well as home medical equipment aids
for daily living. The Institutional Products Group sells health care furnishings
including beds, case goods and patient handling equipment for the long-term care
market as well as accessory products. Europe and Asia/Pacific sell the same
product lines with the exception of distributed products. Each business segment
may sell to the home health care, retail and extended care markets.
The company evaluates performance and allocates resources based on profit or
loss from operations before income taxes for each reportable segment. The
accounting policies of each segment are the same as those described in the
summary of significant accounting policies for the company's consolidated
financial statements. Intersegment sales and transfers are based on the costs to
manufacture plus a reasonable profit element. Therefore, intercompany profit or
6
loss on intersegment sales and transfers is not considered in evaluating segment
performance.
The information by segment is as follows (in thousands):
Three Months Ended
March 31,
2007 2006
------- -------
Revenues from external customers
North America / HME $161,532 $171,694
Invacare Supply Group 61,676 55,085
Institutional Products Group 23,724 23,196
Europe 107,030 95,546
Asia/Pacific 20,943 16,183
------- -------
Consolidated $374,905 $361,704
======== ========
Intersegment Revenues
North America $11,291 $13,608
Invacare Supply Group 86 13
Institutional Products Group - 464
Europe 2,408 2,769
Asia/Pacific 6,089 8,026
------- -------
Consolidated $19,874 $24,880
======== ========
Restructuring charges before income taxes
North America / HME $2,430 $2,806
Invacare Supply Group 43 -
Institutional Products Group 4 25
Europe 786 338
Asia/Pacific 6 284
------- -------
Consolidated $3,269 $ 3,453
======== ========
Charges, interest and fees associated with debt
refinancing before income taxes
All Other $13,373 $ -
======== ========
Earnings (loss) before income taxes
North America / HME $ (2,908) $6,278
Invacare Supply Group 1,055 1,339
Institutional Products Group 595 1,553
Europe 3,924 3,692
Asia/Pacific (1,110) (1,398)
All Other (16,660) (4,027)
------- -------
Consolidated $(15,104) $ 7,437
======== ========
7
"All Other" consists of unallocated corporate selling, general and
administrative costs and intercompany profits, which do not meet the
quantitative criteria for determining reportable segments. In addition, the
"All Other" earnings (loss) before income taxes for the first quarter 2007
includes debt finance charges, interest and fees associated with debt
refinancing.
Net Earnings Per Common Share - The following table sets forth the computation
of basic and diluted net earnings per common share for the periods indicated.
Three Months Ended
March 31,
2007 2006
------- -------
Basic
Average common shares outstanding 31,827 31,731
Net earnings (loss) $(17,504) $5,207
Net earnings (loss) per common share $ (.55) $ .16
Diluted
Average common shares outstanding 31,827 31,731
Stock options and awards - 459
------- -------
Average common shares assuming dilution 31,827 32,190
Net earnings (loss) $(17,504) $ 5,207
Net earnings (loss) per common share $ (.55) $ .16
At March 31, 2007, all of the company's shares associated with stock options
were anti-dilutive because of the company's net loss in the quarter. At March
31, 2006, 2,336,431 shares were excluded from the average common shares assuming
dilution as they were anti-dilutive. For the three months ended March 31, 2006,
the majority of the anti-dilutive shares were granted at exercise prices of
$41.87 which was higher than the average fair market value prices of $32.13.
Concentration of Credit Risk - The company manufactures and distributes durable
medical equipment and supplies to the home health care, retail and extended care
markets. The company performs credit evaluations of its customers' financial
condition. Prior to December 2000, the company financed equipment to certain
customers for periods ranging from 6 to 39 months. In December 2000, Invacare
entered into an agreement with De Lage Landen, Inc. ("DLL"), a third party
financing company, to provide the majority of future lease financing to
Invacare's customers. The DLL agreement provides for direct leasing between DLL
and the Invacare customer. The company retains a limited recourse obligation
($42,358,000 at March 31, 2007) to DLL for events of default under the contracts
(total balance outstanding of $107,558,000 at March 31, 2007). FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires
the company to record a guarantee liability as it relates to the limited
recourse obligation. As such, the company has recorded a liability for this
guarantee obligation within accrued expenses. The company monitors the
collections status of these contracts and has provided amounts for estimated
losses in its allowances for doubtful accounts in accordance with SFAS No. 5,
Accounting for Contingencies. Credit losses are provided for in the financial
statements.
8
Substantially all of the company's receivables are due from health care, medical
equipment dealers and long term care facilities located throughout the United
States, Australia, Canada, New Zealand and Europe. A significant portion of
products sold to dealers, both foreign and domestic, is ultimately funded
through government reimbursement programs such as Medicare and Medicaid. In
addition, the company has also seen a significant shift in reimbursement to
customers from managed care entities. As a consequence, changes in these
programs can have an adverse impact on dealer liquidity and profitability. In
addition, reimbursement guidelines in the home health care industry have a
substantial impact on the nature and type of equipment an end user can obtain as
well as the timing of reimbursement and, thus, affect the product mix, pricing
and payment patterns of the company's customers.
Goodwill and Other Intangibles - The change in goodwill reflected on the balance
sheet from December 31, 2006 to March 31, 2007 was entirely the result of
currency translation.
All of the company's other intangible assets have definite lives and are
amortized over their useful lives, except for $33,051,000 related to trademarks,
which have indefinite lives.
As of March 31, 2007 and December 31, 2006, other intangibles consisted of the
following (in thousands):
March 31, 2007 December 31, 2006
-------------- -----------------
Historical Accumulated Historical Accumulated
Cost Amortization Cost Amortization
Customer lists $71,137 $16,036 $71,106 $14,373
Trademarks 33,051 - 33,034 --
License agreements 4,533 4,202 4,489 3,821
Developed technology 6,814 1,058 6,819 940
Patents 6,652 3,982 6,631 3,869
Other 8,013 4,446 8,005 4,205
------- ------- ------- -------
$130,200 $29,724 $130,084 $27,208
======= ======= ======== =======
Amortization expense related to other intangibles was $2,178,000 in the first
quarter of 2007 and is estimated to be $8,343,000 in 2008, $8,040,000 in 2009,
$7,874,000 in 2010, $7,459,000 in 2011 and $7,087,000 in 2012.
Investment in Affiliated Company - FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which was revised in December 2003,
requires consolidation of an entity if the company is subject to a majority of
the risk of loss from the variable interest entity's (VIE) activities or
entitled to receive a majority of the entity's residual returns, or both. A
company that consolidates a VIE is known as the primary beneficiary of that
entity.
The company consolidates NeuroControl whose product is focused on the treatment
of post-stroke shoulder pain in the United States. Certain of the company's
officers and directors (or their affiliates) have small minority equity
ownership positions in NeuroControl. Based on the provisions of FIN 46 and the
company's analysis, the company determined that it was the primary beneficiary
of this VIE as of January 1, 2005 due to the company's board of directors'
approval of additional funding in 2005. Accordingly, the company has
consolidated this investment on a prospective basis since January 1, 2005 and
recorded an intangible asset for patented technology of $7,003,000. The other
beneficial interest holders have no recourse against the company.
9
In the fourth quarter of 2006, the company's board of directors made a decision
to no longer fund the cash needs of NeuroControl, to commence a liquidation
process and cease operations as it was decided that the additional investment
necessary to commercialize the business was not in the best interest of the
company. Therefore, funding of this investment ceased on December 31, 2006. As a
result of this decision, the company established a valuation reserve related to
the NeuroControl intangible asset of $5,601,000 to fully reserve against the
patented technology intangible as it was deemed to be impaired.
Accounting for Stock-Based Compensation - Effective January 1, 2006, the company
adopted SFAS No. 123R using the modified prospective application method. Under
the modified prospective method, compensation cost was recognized for the twelve
months ended December 31, 2006 for: 1) all stock-based payments granted
subsequent to January 1, 2006 based upon the grant-date fair value calculated in
accordance with SFAS No. 123R, and 2) all stock-based payments granted prior to,
but not vested as of, January 1, 2006 based upon grant-date fair value as
calculated for previously presented pro forma footnote disclosures in accordance
with the original provisions of SFAS No. 123, Accounting for Stock Based
Compensation. The amounts of stock-based compensation expense recognized were as
follows (in thousands):
Three Months Ended
March 31,
2007 2006
------- -------
Stock-based compensation expense recognized as part of Selling,
general and administrative expense $ 610 $ 268
The 2007 and 2006 amounts above reflect compensation expense related to
restricted stock awards and nonqualified stock options awarded under the 2003
Performance Plan. Stock-based compensation is not allocated to the business
segments, but is reported as part of All Other as shown in the company's
Business Segment Note to the Consolidated Financial Statements.
Stock Incentive Plans - The 2003 Performance Plan (the "2003 Plan") allows the
Compensation, Management Development and Corporate Governance Committee of the
Board of Directors (the "Committee") to grant up to 3,800,000 Common Shares in
connection with incentive stock options, non-qualified stock options, stock
appreciation rights and stock awards (including the use of restricted stock).
The Committee has the authority to determine which employees and directors will
receive awards, the amount of the awards and the other terms and conditions of
the awards. During the first three months of 2007, the Committee granted 5,500
non-qualified stock options for a term of ten years at the fair market value of
the company's Common Shares on the date of grant under the 2003 Plan.
There were no restricted stock awards granted in the first three months of 2007
without cost to the recipients. Under the terms of the restricted stock awards,
all of the shares granted vest ratably over the four years after the award date.
Compensation expense of $353,000 was recognized in the first three months of
2007 and as of March 31, 2007, restricted stock awards totaling 147,085 were not
yet vested.
10
Stock option activity during the three months ended March 31, 2007 was as
follows:
Weighted Average
2007 Exercise Price
--------- ----------------
Options outstanding at January 1 4,724,651 $30.68
Granted 5,500 21.99
Exercised - -
Canceled (329,382) 28.31
------- ------
Options outstanding at March 31 4,400,769 $30.85
========= ======
Options price range at March 31 $16.03 to
$47.80
Options exercisable at March 31 3,910,742
Options available for grant at March 31* 1,837,008
* Options available for grant as of March 31, 2007 reduced by net restricted
stock award activity of 241,649.
The following table summarizes information about stock options outstanding at
March 31, 2007:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted
Number Outstanding Average Remaining Weighted Average Number Exercisable Weighted Average
Exercise Prices At 3/31/07 Contractual Life Exercise Price At 3/31/07 Exercise Price
--------------- ---------- ---------------- --------------- --------------- --------------
$16.03 - $23.69 1,768,828 4.0 years $22.20 1,340,001 $22.10
$24.43 - $36.40 1,222,476 4.9 $30.99 1,161,276 $30.98
$37.70 - $47.80 1,409,465 7.5 $41.59 1,409,465 $41.59
--------- --- ------ --------- ------
Total 4,400,769 5.5 $30.85 3,910,742 $31.76
========= =========
The stock options awarded provided a four-year vesting period whereby options
vest equally in each year. Options granted with graded vesting are accounted for
as single options.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2007
-----
Expected dividend yield 2.47%
Expected stock price volatility 28.7%
Risk-free interest rate 4.70%
Expected life (years) 3.9
The assumed expected life used is based on the company's historical analysis of
option history. The expected volatility used is also based on actual historical
volatility, and expected dividend yield used is based on historical dividends as
the company has no current intention of changing its dividend policy.
11
The weighted-average fair value of options granted during the first three months
of 2007 was $6.18. The 2003 Plan provides that shares granted come from the
company's authorized but unissued Common Shares or treasury shares. In addition,
the company's stock-based compensation plans allow participants to exchange
shares for withholding taxes, which results in the company acquiring treasury
shares.
As of March 31, 2007, there was $16,558,000 of total unrecognized compensation
cost from stock-based compensation arrangements granted under the company's
plans, which is related to non-vested shares, and includes $3,306,000 related to
restricted stock awards. The company expects the compensation expense to be
recognized over a weighted-average period of approximately 2 years.
Warranty Costs - Generally, the company's products are covered by warranties
against defects in material and workmanship for periods up to six years from the
date of sale to the customer. Certain components carry a lifetime warranty. A
provision for estimated warranty cost is recorded at the time of sale based upon
actual experience. The company continuously assesses the adequacy of its product
warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company's warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty reserves were
necessary in the first quarter of 2007.
The following is a reconciliation of the changes in accrued warranty costs for
the reporting period (in thousands):
Balance as of January 1, 2007 $ 15,165
Warranties provided during the period 3,062
Settlements made during the period (2,917)
Changes in liability for pre-existing warranties during
the period, including expirations 220
-------
Balance as of March 31, 2007 $ 15,530
=======
Charge Related to Restructuring Activities - Previously, the company announced
multi-year cost reductions and profit improvement actions, which included:
reducing global headcount, outsourcing improvements utilizing the company's
China manufacturing capability and third parties, shifting substantial resources
from product development to manufacturing cost reduction activities and product
rationalization, reducing freight exposure through freight auctions and changing
the freight policy, general expense reductions, and exiting four facilities.
The restructuring was necessitated by the continued decline in reimbursement by
the U.S. government as well as similar reimbursement pressures abroad and
continued pricing pressures faced by the company as a result of outsourcing by
competitors to lower cost locations.
To date, the company has made substantial progress on its restructuring
activities, including exiting four facilities and eliminating approximately 650
positions through March 31, 2007, including 50 positions in the first quarter of
2007. Restructuring charges of $3,269,000 and $3,453,000 were incurred in the
first quarters of 2007 and 2006, respectively, of which $117,000 and $296,000,
respectively, were recorded in cost of products sold as it relates to inventory
markdowns and the remaining charge amount is included on the Charge Related to
Restructuring Activities in the Condensed Consolidated Statement of Earnings as
part of operations. There have been no material changes in accrued balances
12
related to the charge, either as a result of revisions in the plan or changes in
estimates, and the company expects to utilize the accruals recorded through
March 31, 2007 during 2007.
A progression of the accruals by segment recorded as a result of the
restructuring is as follows (in thousands):
Balance at Balance at
12/31/06 Accruals Payments 3/31/07
-------- -------- -------- -------
North America/HME
Severance $ 1,359 $ 2,430 $ (1,888) $ 1,901
Contract terminations 557 (111) (52) 394
Product line discontinuance 2,037 111 (2,148) -
------- ------- ------- -------
Total $ 3,953 $ 2,430 $ (4,088) $ 2,295
======= ======= ======= =======
Invacare Supply Group
Severance $ 166 $ 43 $ (115) $ 94
======= ======= ======= =======
Institutional Products Group
Severance $ - $ 4 $ - $ 4
======= ======= ======= =======
Europe
Severance $ 3,734 $ 210 $ (1,296) $ 2,648
Product line discontinuance - 6 (6) -
Other - 570 (570) -
------- ------- ------- -------
Total $ 3,734 $ 786 $ (1,872) $2,648
======= ======= ======= =======
Asia/Pacific
Contract terminations $ 122 $ 6 $ (5) $ 123
======= ======= ======= =======
Consolidated
Severance $ 5,259 $ 2,687 $ (3,299) $ 4,647
Contract terminations 679 (105) (57) 517
Product line discontinuance 2,037 117 (2,154) -
Other - 570 (570) -
------- ------- ------- -------
Total $ 7,975 $ 3,269 $ (6,080) $ 5,164
======= ======= ======= =======
Comprehensive Earnings (loss) - Total comprehensive earnings were as follows (in
thousands):
Three Months Ended
March 31,
2007 2006
---- ----
Net earnings (loss) $ (17,504) $ 5,207
Foreign currency translation gain (loss) 3,858 (788)
Unrealized gain on available for sale securities 51 22
SERP/DBO amortization of prior service costs and unrecognized losses 943 -
Current period unrealized gain (loss) on cash flow hedges (1,221) 1,083
------- -----
Total comprehensive earnings (loss) $ (13,873) $5,524
====== =====
13
Inventories - Inventories determined under the first in, first out method
consist of the following components (in thousands):
March 31, December 31,
2007 2006
------- -------
Raw materials $ 65,933 $66,718
Work in process 19,302 16,715
Finished goods 121,320 118,323
------- -------
$206,555 $201,756
======= =======
Property and Equipment - Property and equipment consist of the following (in
thousands):
March 31, December 31,
2007 2006
------- -------
Machinery and equipment $276,903 $276,062
Land, buildings and improvements 87,045 86,544
Furniture and fixtures 27,344 29,609
Leasehold improvements 15,848 15,943
------- -------
407,140 408,158
Less allowance for depreciation (238,305) (234,213)
------- -------
$168,835 $173,945
======= =======
Financing Arrangements - As previously disclosed, the company completed certain
refinancing transactions in February 2007. The company entered into a Credit
Agreement which provides for a $400 million senior secured credit facility
consisting of a 6-year $250 million term loan facility and a five-year $150
million revolving credit facility with interest at LIBOR plus 2.25%. The
company's obligations under the Credit Agreement are secured by substantially
all of the company's assets, subject to certain exceptions, and are guaranteed
by our material domestic subsidiaries, with certain obligations also guaranteed
by our material foreign subsidiaries. The Credit Agreement contains a number of
customary restrictive covenants, affirmative covenants and events of default,
and financial covenants that require the company to maintain a maximum leverage
ratio, a minimum interest coverage ratio, and a minimum fixed charge coverage
ratio.
The company also consummated the issuance and sale of $135 million aggregate
principal amount of convertible subordinated debentures (the "debentures"). The
net proceeds to the company from the offering, after deducting the initial gross
spread payable by the company, were approximately $132.3 million. The debentures
are unsecured senior subordinated obligations of the company, guaranteed by
substantially all of the company's domestic subsidiaries and pay interest at
4.125% per annum on each February 1 and August 1. The debentures are convertible
into common shares of the company under certain conditions.
In addition, the company also consummated the issuance and sale of $175 million
aggregate principal amount of 9 3/4% Senior Notes due 2015 (the "senior notes").
The company's net proceeds from the offering of senior notes, after deducting
the initial note purchasers' discount and the estimated offering expenses
payable by the company, were approximately $167 million. The senior notes are
unsecured senior obligations of the company, guaranteed by substantially all of
our domestic subsidiaries.
14
The company used the net proceeds from the offerings of the senior notes and the
debentures, together with initial borrowings under the Credit Agreement to repay
outstanding indebtedness and related expenses and repayment costs aggregating
$568 million. In addition, as a result of the refinancing, during the first
quarter the company incurred $33.1 million in costs comprised of: debt issuance
costs related to the new debt structure of $19.7 million, which the company has
capitalized over the respective lives of the debt instruments; one-time
make-whole payments to the holders of previously outstanding senior notes and
incremental interest totaling $10.9 million; and write-off of costs previously
capitalized related to the old debt structure of $2.5 million.
The company estimates that the weighted average interest rate of the new
facilities and securities combined is approximately 7.3% versus the year-end
2006 weighted average interest rate of approximately 5.9%.
In connection with the issuance of the debentures and the senior notes, the
company agreed to use commercially reasonable efforts to 1) file a resale
registration statement with respect to the debentures and an exchange offer
registration statement with respect to the senior notes within 90 days of the
closing of each agreement, 2) to cause the resale registration statement to be
declared effective within 210 days of the issuance of the debentures and cause
the exchange offer registration statement to be declared effective within 180
days of the issuance of the senior notes and consummate the exchange offer
within 210 days of the issuance of the notes, and 3) maintain the effectiveness
of the resale registration statement until the debentures have been disposed of
in accordance with the registration statement, are transferred in compliance
with Rule 144 under the Securities Act or are transferable pursuant to Rule
144(k) under the Securities Act, cease to be outstanding or are otherwise
disposed of or transferred and new securities not subject to transfer
restrictions under the Securities Act have been delivered by the company.
If the company does not comply with its registration obligations with respect to
the debentures, the company will be obligated to pay additional annual interest
of .25% of the principal amount of the debentures to and including the 90th day
following the default and, thereafter, additional annual interest of .50% until
such time as the default is cured. Similarly, if the company does not comply
with its registration obligations with respect to the senior notes, the company
will be obligated to pay additional annual interest of .25% of the principal
amount of the senior notes to and including the 90th day following the default
and, thereafter, an additional .25% of annual interest for each subsequent
90-day period during which the registration default continues, up to a maximum
of 1.0% annually.
On April 23, 2007, the company filed its S-3 and S-4 registration statements
within the 90 days of the issue dates of the convertible debentures and senior
notes and fully expects to meet the registration requirements.
Acquisitions - In the first three months of 2007, the company made no
acquisitions. On September 9, 2004 the company acquired 100% of the shares of WP
Domus GmbH (Domus), a European-based holding company that manufactures several
complementary product lines to Invacare's product lines, including power add-on
products, bath lifts and walking aids, from WP Domus LLC. Domus has three
divisions: Alber, Aquatec and Dolomite.
In accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination, the company previously recorded accruals
for severance and exit costs for facility closures and contract terminations.
15
A progression of the accruals recorded in the purchase price allocation is as
follows (in thousands):
Exit of Sales Agency
Severance Product Lines Terminations
--------- ------------- ------------
Balance at 1/1/05 $ 561 $ - $ -
Additional accruals 4,445 897 612
Payments (1,957) - (612)
------- ------- -------
Balance at 12/31/05 3,049 897 -
Adjustments (1,285) (897) -
Payments (566) - -
------- ------- -------
Balance at 12/31/06 1,198 - -
Adjustments (1) - -
Payments - - -
------- ------- -------
Balance at 3/31/07 $ 1,197 $ - $ -
======= ======= =======
The adjustments for the quarter ended March 31, 2007 represent the impact of
currency translation. The company anticipates all of the remaining reserves to
be utilized in 2007 with any amounts not utilized adjusted to goodwill.
Income Taxes - The company had an effective tax rate of (15.9%) for the three
month period ended March 31, 2007 compared with 30.0% for the same period a year
ago. The company's effective tax rate differs from the U.S. federal statutory
rate primarily due to losses with no corresponding tax benefits and a valuation
reserve recorded against domestic deferred tax assets reduced by tax credits and
earnings abroad being taxed at rates lower than the U.S. federal statutory rate.
The change in the effective rate for the three-month period ended March 31, 2007
compared to the three-month period ended March 31, 2006 is primarily due to
domestic losses without benefit as a result of valuation reserves.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes
recognition and measurement of a tax position taken or expected to be taken in a
tax return as well as guidance regarding derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition.
The company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation the company did not recognize an adjustment in the liability
for unrecognized income tax benefits. As of the adoption date the company had
$8.8 million of unrecognized tax benefits, all of which would affect our
effective tax rate if recognized.
The company continues to recognize interest and penalties related to uncertain
tax positions in income tax expense. As of the adoption date the company had $2
million of accrued interest related to uncertain tax positions.
The company files tax returns in numerous jurisdictions around the world. Most
tax returns for years after 2002 are open for examination, including the
domestic return, and in certain circumstances selective returns in earlier years
are also open for examination.
16
SUPPLEMENTAL GUARANTOR INFORMATION
Effective February 12, 2007, substantially all of the domestic subsidiaries (the
"Guarantor Subsidiaries") of the company became guarantors of the indebtedness
of Invacare Corporation under its 9 3/4% Senior Notes due 2015 (the "Senior
Notes") with an aggregate principal amount of $175,000,000 and under its 4.125%
Convertible Senior Subordinated Debentures due 2027 (the "Debentures") with an
aggregate principal amount of $135,000,000. The majority of the company's
subsidiaries are not guaranteeing the indebtedness of the Senior Notes or
Debentures (the "Non-Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries has fully and unconditionally guaranteed, on a joint and several
basis, to pay principal, premium, and interest related to the Senior Notes and
to the Debentures and each of the Guarantor Subsidiaries are directly or
indirectly wholly-owned subsidiaries of the company.
Presented below are the consolidating condensed financial statements of Invacare
Corporation (Parent), its combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for
using the equity method. The company does not believe that separate financial
statements of the Guarantor Subsidiaries are material to investors and
accordingly, separate financial statements and other disclosures related to the
Guarantor Subsidiaries are not presented.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Combined Combined
Three month period ended The Company Guarantor Non-Guarantor
March 31, 2007 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------ ------------ -----
Net sales $ 75,452 $ 158,954 $ 154,380 $ (13,881) $ 374,905
Cost of products sold 60,063 127,509 102,240 (13,963) 275,849
------- ------- ------- ------- -------
Gross Profit 15,389 31,445 52,140 82 99,056
Selling, general and administrative expenses 25,221 27,724 34,821 - 87,766
Charge related to restructuring activities 2,295 43 814 - 3,152
Debt finance charges, interest and fees associated
with debt refinancing 13,342 - 31 - 13,373
Income (loss) from equity investee 14,734 3,623 (3,155) (15,202) -
Interest expense - net 6,639 424 2,806 - 9,869
------- ------- ------- ------- -------
Earnings (loss) before Income Taxes (17,374) 6,877 10,513 (15,120) (15,104)
Income taxes 130 225 2,045 - 2,400
------- ------- ------- ------- -------
Net Earnings (loss) $ (17,504) $ 6,652 $ 8,468 $ (15,120) $ (17,504)
======= ======= ======= ======= =======
Three month period ended
March 31, 2006 (in thousands)
Net sales $ 85,521 $ 155,890 $ 138,910 $ (18,617) $ 361,704
Cost of products sold 63,798 121,402 93,865 (18,657) 260,408
------- ------- ------- ------- -------
Gross Profit 21,723 34,488 45,045 40 101,296
Selling, general and administrative expenses 26,163 23,185 34,259 - 83,607
Charge related to restructuring activities 1,742 18 1,397 - 3,157
Income (loss) from equity investee 13,247 3,870 257 (17,374) -
Interest expense - net 3,144 2,540 1,411 - 7,095
------- ------- ------- ------- -------
Earnings (loss) before Income Taxes 3,921 12,615 8,235 (17,334) 7,437
Income taxes (benefit) (1,286) - 3,516 - 2,230
------- ------- ------- ------- -------
Net Earnings (loss) $ 5,207 $ 12,615 $ 4,719 $ (17,334) $ 5,207
======= ======= ======= ======= =======
17
CONSOLIDATING CONDENSED BALANCE SHEETS
Combined Combined Combined
The Company Guarantor Non-Guarantor
March 31, 2007 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------ ------------ -----
Assets
Current Assets
Cash and cash equivalents $ 22,596 $ 3,259 $ 31,049 $ - $ 56,904
Marketable securities 270 - - - 270
Trade receivables, net 94,988 53,946 102,666 (3,600) 248,000
Installment receivables, net - 6,461 1,990 - 8,451
Inventories, net 77,414 35,917 94,683 (1,459) 206,555
Deferred income taxes 4,313 394 8,909 - 13,616
Other current assets 26,434 11,598 38,461 - 76,493
------- ------- ------- ------- -------
Total Current Assets 226,015 111,575 277,758 (5,059) 610,289
Investment in subsidiaries 1,256,803 599,764 - (1,856,567) -
Intercompany advances, net 361,881 798,776 39,927 (1,200,584) -
Other Assets 49,725 17,232 1,927 - 68,884
Other Intangibles 17,701 12,680 87,082 - 117,463
Property and Equipment, net 62,885 11,181 94,769 - 168,835
Goodwill - 23,541 469,685 - 493,226
------- ------- ------- ------- -------
Total Assets $1,975,010 $ 1,574,749 $971,148 $(3,062,210) $1,458,697
========= ========= ========= ========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 78,195 $ 13,992 $ 55,231 $ - $ 147,418
Accrued expenses 28,880 17,020 77,607 (3,600) 119,907
Accrued income taxes 2,487 21 804 - 3,312
Short-term debt and current maturities of
long-term obligations 4,273 - 885 - 5,158
------- ------- ------- ------- -------
Total Current Liabilities 113,835 31,033 134,527 (3,600) 275,795
Long-Term Debt 554,775 49 41,917 - 596,741
Other Long-Term Obligations 59,801 2,040 52,620 - 114,461
Intercompany advances, net 774,899 339,873 85,812 (1,200,584) -
Total Shareholders' Equity 471,700 1,201,754 656,272 (1,858,026) 471,700
------- ------- ------- ------- -------
Total Liabilities and Shareholders' Equity $1,975,010 $1,574,749 $971,148 $(3,062,210) $1,458,697
========= ========= ========= ========= =========
18
Combined Combined Combined
The Company Guarantor Non-Guarantor
December 31, 2006 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------ ------------ -----
Assets
Current Assets
Cash and cash equivalents $ 35,918 $ 2,202 $44,083 $ - $82,203
Marketable securities 190 - - - 190
Trade receivables, net 651 15,888 248,667 (3,600) 261,606
Installment receivables, net - 5,513 1,584 - 7,097
Inventories, net 77,201 37,511 88,585 (1,541) 201,756
Deferred income taxes 4,223 393 8,896 - 13,512
Other current assets 26,353 8,764 55,477 (1,200) 89,394
------- ------- ------- ------- -------
Total Current Assets 144,536 70,271 447,292 (6,341) 655,758
Investment in subsidiaries 1,293,046 607,559 - (1,900,605) -
Intercompany advances, net 354,660 850,121 110,935 (1,315,716) -
Other Assets 49,346 15,566 1,434 - 66,346
Other Intangibles 2,113 13,150 88,710 - 103,973
Property and Equipment, net 65,016 11,550 97,379 - 173,945
Goodwill - 23,541 466,888 - 490,429
------- ------- ------- ------- -------
Total Assets 1,908,717 $1,591,758 $1,212,638 $(3,222,662) $1,490,451
========= ========= ========= ========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $89,818 $12,095 $61,128 $ - $ 163,041
Accrued expenses 34,611 17,405 100,560 (4,800) 147,776
Accrued income taxes 10,021 26 2,869 - 12,916
Short-term debt and current maturities of long-term
obligations 51,773 - 72,470 - 124,243
------- ------- ------- ------- -------
Total Current Liabilities 186,223 29,526 237,027 (4,800) 447,976
Long-Term Debt 321,263 70 127,550 - 448,883
Other Long-Term Obligations 53,044 2,040 53,144 - 108,228
Intercompany advances, net 862,823 370,452 82,441 (1,315,716) -
Total Shareholders' Equity 485,364 1,189,670 712,476 (1,902,146) 485,364
------- ------- ------- ------- -------
Total Liabilities and Shareholders' Equity $1,908,717 $1,591,758 1,212,638 $(3,222,662) $ 1,490,451
========= ========= ========= ========= =========
19
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Combined Combined
Three month period ended The Company Guarantor Non-Guarantor
March 31, 2007 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------ ------------ -----
Net Cash Provided by Operating Activities $(162,862) $1,366 $143,153 $ - $(18,343)
Investing Activities
Purchases of property and equipment (653) (287) (2,810) - (3,750)
Proceeds from sale of property and equipment - - 423 - 423
Increase in other long-term assets 1,080 - - - 1,080
Other (3,133) (1) 1,920 - (1,214)
------- ------- ------- ------- -------
Net Cash Used for Investing Activities (2,706) (288) (467) - (3,461)
Financing Activities
Proceeds from revolving lines of credit,
securitization facility and long-term
borrowings 580,569 - (70,253) - 510,316
Payments on revolving lines of credit,
securitization facility and
long-term borrowings (408,140) (21) (86,258) - (494,419)
Payment of dividends (399) - - - (399)
Payment of financing costs (19,784) - - - (19,784)
------- ------- ------- ------- -------
Net Cash Provided by Financing Activities 152,246 (21) (156,511) - (4,286)
Effect of exchange rate changes on cash - - 791 - 791
Increase (decrease) in cash and cash equivalents (13,322) 1,057 (13,034) - (25,299)
Cash and cash equivalents at beginning of period 35,918 2,202 44,083 - 82,203
------- ------- ------- ------- -------
Cash and cash equivalents at end of period $22,596 $3,259 $31,049 $ - $56,904
========= ========= ========= ========= =========
Three month period ended
March 31, 2006 (in thousands)
Net Cash Provided by Operating Activities $3,738 $1,863 $2,928 $ - $8,529
Investing Activities
Purchases of property and equipment (2,590) (193) (2,226) - (5,009)
Proceeds from sale of property and equipment - - 33 - 33
Increase (decrease) in other investments (7,871) (3,000) - 10,856 (15)
Increase in other long-term assets (523) - - - (523)
Other (180) - 36 - (144)
------- ------- ------- ------- -------
Net Cash Required for Investing Activities (11,164) (3,193) (2,157) 10,856 (5,658)
Financing Activities
Proceeds from revolving lines of credit,
securitization facility and long-term
borrowings 129,641 - 15,514 - 145,155
Payments on revolving lines of credit,
securitization facility and long-term
borrowings (124,794) (76) (37,137) - (162,007)
Proceeds from exercise of stock options 1,343 - - - 1,343
Payment of dividends (397) - - - (397)
Capital contributions - 3,020 7,836 (10,856) -
------- ------- ------- ------- -------
Net Cash Provided by Financing Activities 5,793 2,944 (13,787) (10,856) (15,906)
Effect of exchange rate changes on cash - - (1,177) - (1,177)
Increase (decrease) in cash and cash equivalents (1,633) 1,614 (14,193) - (14,212)
Cash and cash equivalents at beginning of period 7,270 1,046 17,308 - 25,624
------- ------- ------- ------- -------
Cash and cash equivalents at end of period $5,637 $2,660 $3,115 $ - $11,412
========= ========= ========= ========= =========
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and in our Current Report on
Form 8-K as furnished to the Securities and Exchange Commission on May 1, 2007.
OUTLOOK
The company continues to execute the numerous cost reduction initiatives
previously communicated and as described further below. The company believes
that the implementation of these initiatives will improve the company's
operating margin and result in approximately $38 million of realized savings in
2007, including the $7 million already realized in the first quarter. The
company anticipates restructuring charges of approximately $20 million in 2007
relating to these actions. Annualized savings from these initiatives implemented
by the end of 2007 should approximate $56 million thereafter. The core
initiatives are as follows:
o Product line simplification. The company plans to simplify its product
lines and pricing processes to reduce costs and improve service
levels.
o Improvement of gross margins and reduction of fixed costs through
further product and sub-assembly outsourcing. The company expects to
accelerate its outsourcing of commodity products and sub-assemblies.
Asian sourcing is planned to double over the next three years.
o Rationalization of facilities. Today, Invacare's primary manufacturing
facilities consist of fourteen integrated fabrication plants and two
assembly plants worldwide. Invacare will continue in its strategy to
move from integrated fabrication plants to assembly plants worldwide.
The company is finalizing plans to close and/or consolidate several
locations worldwide beginning this year through 2009.
o Standardization of product platforms. To further simplify and reduce
production costs, as well as to leverage development and tooling
investment, the company has begun the process of standardizing some of
its product platforms globally.
Cost reduction remains the company's top priority. The competitive pricing
conditions driven by reimbursement changes in the U.S. remain and Invacare
expects approximately $30 million in net sales reductions in 2007 from the lower
pricing. The company expects that the $38 million of cost reductions, which are
heavily weighted to the second half of the year, will offset these impacts and
result in improved profitability in the second half of the year. The company
anticipates second quarter earnings to be sequentially improved from first
quarter earnings excluding restructuring charges and debt finance costs
associated with the company's debt refinancing which was completed during the
quarter ended March 31, 2007. However, the company also anticipates second
quarter earnings to be lower than second quarter earnings last year, excluding
restructuring charges. For fiscal year 2007, the company expects growth in net
sales of between 0% and 2%, excluding the impact of acquisitions and foreign
currency; and anticipates operating cash flows of between $65 million and $75
million and net purchases of property, plant and equipment of approximately $25
million. The full year earnings are expected to be consistent with the
21
previously announced guidance by the company in a press release issued on May 1,
2007.
As previously communicated, Medicare officially announced earlier this month the
10 Metropolitan Statistical Area test sites for U.S. competitive bidding.
Implementation has already begun with the scheduled effective date for
competitive bid pricing in April 2008. Invacare has once again demonstrated its
industry leadership by sponsorship of the Tanner Hobson bill introduced in the
U.S. House of Representatives. This bill would ensure the continued
participation of small providers in the supply chain of home medical products.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended March 31, 2007 were $374,905,000, compared
to $361,704,000 for the same period a year ago, representing a 4% increase.
Foreign currency translation increased net sales by two percentage points while
acquisitions increased net sales by one percentage point.
The company continued to be impacted during the quarter by the previously
disclosed Medicare reimbursement changes in the U.S. related to power mobility
devices which were effective in the fourth quarter of 2006. These changes
significantly impacted the net sales of the company's North America/HME
Operation as further described below.
North American/HME Operations
North American/HME (NA/HME) net sales decreased 6% for the quarter to
$161,532,000 as compared to $171,694,000 for the same period a year ago while
foreign currency and acquisitions did not impact results for the quarter. These
sales consist of Rehab (power wheelchairs, custom manual wheelchairs, personal
mobility and seating and positioning), Standard (manual wheelchairs, personal
care, home care beds, low air loss therapy and patient transport) and
Respiratory (oxygen concentrators, HomeFillTM transfilling systems, sleep apnea
products, aerosol therapy and associated respiratory products). The decrease for
the quarter was principally due to net sales decreases in Rehab and Respiratory
products.
Rehab product line net sales declined by 9% due to Medicare reimbursement
changes which drove competitive price reductions and a continued shift away from
high-end options that normally drive higher average selling prices and margins.
Standard product line net sales increased less than 1% and were driven by
increased volumes, particularly in manual wheelchairs and patient aids,
partially offset by pricing reductions. Respiratory product line net sales
declined 13% due to lower pricing and reduced volumes on oxygen concentrators
resulting from the loss of one customer and continued asset management programs
by providers along with pricing declines in concentrators. However, HomeFillTM
II oxygen system net sales increased for the quarter by 38% due to increased
purchases from national and smaller providers. The company's HomeFill technology
was granted increased reimbursement by Medicare late in 2006 with the change
effective January 1, 2007. This improved reimbursement has further enhanced the
cost advantage this technology offers our customers. As previously announced, a
large national respiratory provider has launched a large-scale implementation in
the first quarter of 2007.
22
Invacare Supply Group (ISG) Operations
ISG net sales for the quarter increased 12% to $61,676,000 compared to
$55,085,000 last year driven by volume increases primarily in diabetic and
incontinence products lines.
Institutional Products Group (IPG) Operations
IPG net sales for the quarter increased by 2% to $23,724,000 compared to
$23,196,000 last year due to increased volumes in its core bed products, along
with increases in other offerings such as seating products.
European Operations
European net sales increased 12% for the quarter to $107,030,000 as compared to
$95,546,000 for the same period a year ago, with foreign currency accounting for
eight percentage points of the net sales increase, while acquisitions did not
impact results for the quarter. There was strong sales performance in most of
the regions.
Asia/Pacific Operations
The company's Asia/Pacific operations consist of Invacare Australia, which
imports and distributes the Invacare range of products and manufactures and
distributes the Rollerchair range of custom power wheelchairs and Pro Med lifts,
DecPac ramps and Australian Healthcare Equipment beds, furniture and pressure
care products; Dynamic Controls, a New Zealand manufacturer of electronic
operating components used in power wheelchairs and scooters; Invacare New
Zealand, a distributor of a wide range of home medical equipment; and Invacare
Asia Sales, which imports and distributes home medical equipment to the Asia
markets.
Asia/Pacific net sales increased 29% in the quarter to $20,943,000 from
$16,183,000 in the first quarter of 2006 with acquisitions accounting for
twenty-five percentage points of the net sales increase and foreign currency
accounting for five percentage points of the net sales increase. Performance in
this region continues to be negatively impacted by U.S. reimbursement
uncertainty in the consumer power wheelchair market, resulting in decreased
sales of microprocessor controllers by Invacare's New Zealand subsidiary.
GROSS PROFIT
Gross margin as a percentage of net sales for the first quarter was lower by 1.6
percentage points compared to last year's first quarter primarily due to
competitive pricing pressures in the U.S. and an unfavorable change in product
mix away from high- end options in the U.S. Rehab business. Excluding
restructuring charges, the margin percentage also declined by 1.6 percentage
points. As compared to the fourth quarter of last year, gross margins as a
percentage of sales improved by .7 of a percentage point driven by the cost
reduction initiatives. Excluding restructuring charges, the margin percentage
improved by .2 of a percentage point.
Comparing gross margins as a percentage of net sales in the first quarter of
2007 to the first quarter of 2006, NA/HME margins declined to 28.1% compared
with 31.5%, principally due to reduced volumes of higher margin product, largely
as a result of government reimbursement uncertainties primarily in Rehab and
23
Respiratory products and to a lesser extent by pricing reductions in Standard
products. ISG gross margins decreased by .6 of a percentage point due to sales
increases in lower margin products (diabetic and incontinence). IPG gross
margins declined by .8 of a percentage point primarily due to increased new
product development investments, higher freight and reduced manufacturing
absorption. The company has announced the closure of its case good manufacturing
facility in St. Louis with consolidation of these activities into the company's
other existing manufacturing locations. European gross margin as a percentage of
net sales decreased by .8 of a percentage point due to pricing reductions and
increased freight costs partially offset by continued cost reduction activities.
Asia/Pacific gross margin increased by 9.7 percentage points, largely due to
cost reductions initiatives in the region as well as higher than average margins
achieved by the businesses acquired in the fourth quarter of last year.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense as a percentage of net
sales for the three months ended March 31, 2007 was 23.4% compared to 23.1% for
the same period a year ago. The dollar increase was $4,159,000, or 5.0% for the
first quarter of the year. Acquisitions increased the first three months
expenses by $1,402,000, while foreign currency translation increased these
expenses by $1,922,000 in the quarter compared to the same period a year ago.
Excluding the impact of foreign currency translation and acquisitions, selling,
general and administrative expense increased 1.0% for the quarter compared to
the same period a year ago.
North American/HME SG&A cost increased $481,000, or .9%, for the quarter
compared to the same period a year ago. Acquisitions did not impact spending
while foreign currency translation decreased costs by approximately 0.1%. The
increase in spending was primarily attributable to higher distribution and
commission costs, the amortization of bank fees related to the company's debt
refinancing, and higher stock option expense in the first quarter of 2007
compared to the first quarter of 2006, which had lower expense due to the
acceleration of vesting for most stock options at the end of 2005.
Invacare Supply Group SG&A expense increased $511,000, or 9.2% for the quarter
compared to the same period a year ago due to higher spending incurred to drive
future growth.
Institutional Products Group SG&A expense increased $496,000, or 14.1%, for the
quarter compared to the same period a year ago due to an increase in sales and
marketing spending.
European SG&A expense increased $1,660,000, or 6.4%, for the quarter compared to
the same period a year ago. While acquisitions did not impact the results,
foreign currency translation increased SG&A by $1,769,000 or 6.8%.
Asia/Pacific SG&A expense increased $2,018,000, or 55.3%, for the quarter
compared to the same period a year ago. For the quarter, foreign currency
translation increased SG&A expense by $218,000, or 6.0%, while acquisitions
contributed $1,403,000 or 38.5%. SG&A expense excluding acquisitions and foreign
currency translation increased $398,000 or 10.9%.
CHARGE RELATED TO RESTRUCTURING ACTIVITIES
Previously, the company announced multi-year cost reductions and profit
improvement actions, which included: reducing global headcount, outsourcing
improvements utilizing the company's China manufacturing capability and third
parties, shifting substantial resources from product development to
24
manufacturing cost reduction activities and product rationalization, reducing
freight exposure through freight auctions and changing the freight policy,
general expense reductions, and exiting four facilities.
The restructuring was necessitated by the continued decline in reimbursement by
the U.S. government as well as similar reimbursement pressures abroad and
continued pricing pressures faced by the company as a result of outsourcing by
competitors to lower cost locations.
To date, the company has made substantial progress on its restructuring
activities, including exiting four facilities and eliminating approximately 650
positions through March 31, 2007, including 50 positions in the first quarter of
2007. Restructuring charges of $3,269,000 were incurred in the first quarter of
2007, of which $117,000 is recorded in cost of products sold as it relates to
inventory markdowns and the remaining charge amount is included on the Charge
Related to Restructuring Activities in the Condensed Consolidated Statement of
Earnings as part of operations.
The restructuring charges included charges of $2,430,000 in North America/HME,
$43,000 in the Invacare Supply Group, $4,000 in the Institutional Products
Group, $786,000 in Europe and $6,000 in Asia/Pacific. Of the total charge
incurred to date, $5,164,000 remained unpaid as of March 31, 2007 with
$2,295,000 unpaid related to NA/HME; $94,000 unpaid related to ISG; $4,000
unpaid related to IPG; $2,648,000 unpaid related to Europe; and $123,000 unpaid
related to Asia Pacific. There have been no material changes in accrued balances
related to the charge, either as a result of revisions in the plan or changes in
estimates, and the company expects to utilize the accruals recorded through
March 31, 2007 during 2007. With additional actions to be undertaken during the
remainder of 2007, the company anticipates recognizing restructuring charges of
approximately $20,000,000 for the year pre-tax.
CHARGES, INTEREST AND FEES ASSOCIATED WITH DEBT REFINANCING
As a result of the company's refinancing completed in the first quarter, the
company incurred one-time make whole payments to the previous holders of senior
notes and incremental interest totaling $10,900,00 and wrote-off costs
previously capitalized related to the old debt structure of $2,500,000.
INTEREST
Interest expense increased $2,648,000 for the first quarter of 2007 compared to
the same period last year, primarily due to increases in interest rates and
higher debt levels. Interest income for the first quarter of 2007 decreased
$126,000, compared to the same period last year, primarily due to extended
financing terms provided to our customers.
INCOME TAXES
The company had an effective tax rate of (15.9%) for the three-month period
compared with 30.0% for the same period a year ago. The effective tax rate
declined due to a change in estimate in the mix of earnings and permanent
deductions. The company's effective tax rate differs from the U.S. federal
statutory rate primarily due to losses with no corresponding tax benefits and a
valuation reserve recorded against domestic deferred tax assets reduced by tax
credits and earnings abroad being taxed at rates lower than the U.S. federal
statutory rate. The change in the effective rate for the three-month period
ended March 31, 2007 compared to the three-month period ended March 31, 2006 is
primarily due to domestic losses without benefit as a result of valuation
reserves.
25
LIQUIDITY AND CAPITAL RESOURCES
The company's reported level of debt increased by $28,773,000 from December 31,
2006 to $601,899,000 at March 31, 2007, as the company completed its debt
refinancing transactions in February 2007.
The company's borrowing arrangements contain covenants with respect to maximum
amount of debt, minimum loan commitments, interest coverage, net worth, dividend
payments, working capital, and funded debt to capitalization, as defined in the
company's bank agreements and agreements with its note holders. As of March 31,
2007, the company was in compliance with all covenant requirements. Under the
most restrictive covenant of the company's borrowing arrangements, the company
has the capacity to borrow up to an additional $90,900,000 as of March 31, 2007.
CAPITAL EXPENDITURES
The company had no individually material capital expenditure commitments
outstanding as of March 31, 2007. The company estimates that capital investments
for 2007 will approximate $25,000,000 as compared to $21,789,000 in 2006. The
company believes that its balances of cash and cash equivalents, together with
funds generated from operations and existing borrowing facilities will be
sufficient to meet its operating cash requirements and to fund required capital
expenditures for the foreseeable future.
CASH FLOWS
Cash flows used by operating activities were $18,343,000 for the first three
months of 2007 compared to cash provided of $8,529,000 in the first three months
of 2006. The decrease in operating cash flows for the first three months of 2007
compared to the same period a year ago was primarily the result of lower
earnings along with declines in payables and accrued expenses as the balances at
the end of 2006 were higher than normal due to the company's refinancing efforts
which were then in process. In addition, accelerated interest payments were made
in the first quarter of 2007 as a result of the debt refinancing which
negatively impacted operating cash flows.
Cash used for investing activities was $3,461,000 for the first three months of
2007 compared to $5,658,000 in the first three months of 2006. The decrease in
cash used for investing activities is primarily the result of a decrease in the
purchases of property, plant and equipment in the first three months of 2007
compared to the first three months of 2006.
Cash required by financing activities was $4,286,000 for the first three months
of 2007 compared to $15,906,000 in the first three months of 2006. Financing
activities for the first three months of 2007 were impacted by the new debt
recapitalization, which increased debt levels, but also resulted in the payment
of associated financing costs.
During the first three months of 2007, the company used free cash flow of
$17,299,000 compared to generating free cash flow of $6,330,000 in the first
three months of 2006. The decrease was primarily attributable to the same items
as noted above which impacted operating cash flows. Free cash flow is a non-GAAP
financial measure that is comprised of net cash provided by operating
activities, excluding net cash impact related to restructuring activities, less
net purchases of property and equipment, net of proceeds from sales of property
and equipment. Management believes that this financial measure provides
26
meaningful information for evaluating the overall financial performance of the
company and its ability to repay debt or make future investments (including, for
example, acquisitions). However, it should be noted that the company's
definition of free cash flow may not be comparable to similar measures disclosed
by other companies because not all companies calculate free cash flow in the
same manner.
The non-GAAP financial measure is reconciled to the GAAP measure as follows (in
thousands):
Three Months Ended
March 31,
2007 2006
------ ------
Net cash (used) provided by operating activities $(18,343) $ 8,529
Net cash impact related to restructuring activities 4,371 2,777
Less: Purchases of property and equipment - net (3,327) (4,976)
------- -------
Free Cash Flow $(17,299) $ 6,330
======= =======
DIVIDEND POLICY
On February 9, 2007, the company's Board of Directors declared a quarterly cash
dividend of $0.0125 per Common Share to shareholders of record as of April 3,
2007, which was paid on April 11, 2007. At the current rate, the cash dividend
will amount to $0.05 per Common Share on an annual basis.
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements included in this Quarterly Report on Form
10-Q includes accounts of the company, all majority-owned subsidiaries and a
variable interest entity for which the company is the primary beneficiary. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying Consolidated Financial Statements and related footnotes. In
preparing the financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
The following critical accounting policies, among others, affect the more
significant judgments and estimates used in preparation of the company's
consolidated financial statements.
Revenue Recognition
Invacare's revenues are recognized when products are shipped to unaffiliated
customers. The SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition," as updated by SAB No. 104, provides guidance on the application of
generally accepted accounting principles (GAAP) to selected revenue recognition
issues. The company has concluded that its revenue recognition policy is
appropriate and in accordance with GAAP and SAB No. 101.
Sales are only made to customers with whom the company believes collection is
reasonably assured based upon a credit analysis, which may include obtaining a
credit application, a signed security agreement, personal guarantee and/or a
cross corporate guarantee depending on the credit history of the customer.
27
Credit lines are established for new customers after an evaluation of their
credit report and/or other relevant financial information. Existing credit lines
are regularly reviewed and adjusted with consideration given to any outstanding
past due amounts.
The company offers discounts and rebates, which are accounted for as reductions
to revenue in the period in which the sale is recognized. Discounts offered
include: cash discounts for prompt payment, base and trade discounts based on
contract level for specific classes of customers. Volume discounts and rebates
are given based on large purchases and the achievement of certain sales volumes.
Product returns are accounted for as a reduction to reported sales with
estimates recorded for anticipated returns at the time of sale. The company does
not sell any goods on consignment.
Distributed products sold by the company are accounted for in accordance with
Emerging Issues Task Force, or "EITF" No. 99-19 Reporting Revenue Gross as a
Principal versus Net as an Agent. The company records distributed product sales
gross as a principal since the company takes title to the products and has the
risks of loss for collections, delivery and returns.
Product sales that give rise to installment receivables are recorded at the time
of sale when the risks and rewards of ownership are transferred. In December
2000, the company entered into an agreement with DLL, a third party financing
company, to provide the majority of future lease financing to Invacare
customers. As such, interest income is recognized based on the terms of the
installment agreements. Installment accounts are monitored and if a customer
defaults on payments, interest income is no longer recognized. All installment
accounts are accounted for using the same methodology, regardless of duration of
the installment agreements.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. Substantially all of the company's receivables are
due from health care, medical equipment dealers and long term care facilities
located throughout the United States, Australia, Canada, New Zealand and Europe.
A significant portion of products sold to dealers, both foreign and domestic, is
ultimately funded through government reimbursement programs such as Medicare and
Medicaid. As a consequence, changes in these programs can have an adverse impact
on dealer liquidity and profitability. The estimated allowance for uncollectible
amounts is based primarily on management's evaluation of the financial condition
of the customer. In addition, as a result of the third party financing
arrangement with DLL, management monitors the collection status of these
contracts in accordance with the company's limited recourse obligations and
provides amounts necessary for estimated losses in the allowance for doubtful
accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost determined by
the first-in, first-out method. Inventories have been reduced by an allowance
for excess and obsolete inventories. The estimated allowance is based on
management's review of inventories on hand compared to estimated future usage
and sales. A provision for excess and obsolete inventory is recorded as needed
based upon the discontinuation of products, redesigning of existing products,
new product introductions, market changes and safety issues. Both raw materials
and finished goods are reserved for on the balance sheet.
In general, we review inventory turns as an indicator of obsolescence or slow
moving product as well as the impact of new product introductions. Depending on
the situation, the individual item may be partially or fully reserved for. No
inventory that was reserved for has been sold at prices above their new cost
28
basis. The company continues to increase its overseas sourcing efforts, increase
its emphasis on the development and introduction of new products, and decrease
the cycle time to bring new product offerings to market. These initiatives are
sources of inventory obsolescence for both raw material and finished goods.
Goodwill, Intangible and Other Long-Lived Assets
Property, equipment, intangibles and certain other long-lived assets are
amortized over their useful lives. Useful lives are based on management's
estimates of the period that the assets will generate revenue. Under SFAS No.
142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed
to have indefinite lives are subject to annual impairment tests. Furthermore,
goodwill and other long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The company completes its annual impairment tests in the
fourth quarter of each year. Interest rates have a significant impact upon the
discounted cash flow methodology utilized in its annual impairment testing.
Increasing interest rates decrease the fair value estimates used in our testing.
Product Liability
The company's captive insurance company, Invatection Insurance Co., currently
has a policy year that runs from September 1 to August 31 and insures annual
policy losses of $10,000,000 per occurrence and $13,000,000 in the aggregate of
the company's North American product liability exposure. The company also has
additional layers of external insurance coverage insuring up to $75,000,000 in
annual aggregate losses arising from individual claims anywhere in the world
that exceed the captive insurance company policy limits or the limits of the
company's per country foreign liability limits, as applicable. There can be no
assurance that Invacare's current insurance levels will continue to be adequate
or available at affordable rates.
Product liability reserves are recorded for individual claims based upon
historical experience, industry expertise and indications from the third-party
actuary. Additional reserves, in excess of the specific individual case
reserves, are provided for incurred but not reported claims based upon
third-party actuarial valuations at the time such valuations are conducted.
Historical claims experience and other assumptions are taken into consideration
by the third-party actuary to estimate the ultimate reserves. For example, the
actuarial analysis assumes that historical loss experience is an indicator of
future experience, that the distribution of exposures by geographic area and
nature of operations for ongoing operations is expected to be very similar to
historical operations with no dramatic changes and that the government indices
used to trend losses and exposures are appropriate. Estimates made are adjusted
on a regular basis and can be impacted by actual loss award settlements on
claims. While actuarial analysis is used to help determine adequate reserves,
the company accepts responsibility for the determination and recording of
adequate reserves in accordance with accepted loss reserving standards and
practices.
Warranty
Generally, the company's products are covered from the date of sale to the
customer by warranties against defects in material and workmanship for various
periods depending on the product. Certain components carry a lifetime warranty.
A provision for estimated warranty cost is recorded at the time of sale based
upon actual experience. The company continuously assesses the adequacy of its
product warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company's warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty reserves were
29
necessary in the current year. See Current Liabilities in the Notes to the
Consolidated Financial Statements included in this report for a reconciliation
of the changes in the warranty accrual.
Accounting for Stock-Based Compensation
Effective January 1, 2006, the company adopted Statement of Financial Accounting
Standard No. 123 (Revised 2004), Share Based Payment ("SFAS 123R") using the
modified prospective application method. Under the modified prospective method,
compensation cost was recognized for: (1) all stock-based payments granted
subsequent to January 1, 2006 based upon the grant-date fair value calculated in
accordance with SFAS 123R, and (2) all stock-based payments granted prior to,
but not vested as of, January 1, 2006 based upon grant-date fair value
previously calculated for previously presented pro forma footnote disclosures in
accordance with the original provisions of SFAS No. 123, Accounting for Stock
Based Compensation.
Upon adoption of SFAS 123R, the company did not make any other modifications to
the terms of any previously granted options. However, the terms of new awards
granted have been modified so that the vesting periods are deemed to be
substantive for those who may be retiree eligible. No changes were made
regarding the valuation methodologies or assumptions used to determine the fair
value of options granted and the company continues to use a Black-Scholes
valuation model. As of March 31, 2007, there was $16,558,000 of total
unrecognized compensation cost from stock-based compensation arrangements
granted under the plans, which is related to non-vested shares, and includes
$3,306,000 related to restricted stock awards. The company expects the
compensation expense to be recognized over a weighted-average period of
approximately two years.
The majority of the options awarded have been granted at exercise prices equal
to the market value of the underlying stock on the date of grant and restricted
stock awards granted without cost to the recipients are expensed on a
straight-line basis over the vesting periods.
Income Taxes
As part of the process of preparing its financial statements, the company is
required to estimate income taxes in various jurisdictions. The process requires
estimating the company's current tax exposure, including assessing the risks
associated with tax audits, as well as estimating temporary differences due to
the different treatment of items for tax and accounting policies. The temporary
differences are reported as deferred tax assets and or liabilities. The company
also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be
established. In the event that actual results differ from its estimates, the
company's provision for income taxes could be materially impacted.
The company does not believe that there is a substantial likelihood that
materially different amounts would be reported related to its critical
accounting policies.
RECENTLY ADOPTED ACCOUNTING POLICIES
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes
recognition and measurement of a tax position taken or expected to be taken in a
tax return as well as guidance regarding derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition.
30
The company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation the company did not recognize an adjustment in the liability
for unrecognized income tax benefits. As of the adoption date the company had
$8.8 million of unrecognized tax benefits, all of which would affect our
effective tax rate if recognized.
The company continues to recognize interest and penalties related to uncertain
tax positions in income tax expense. As of the adoption date the company had $2
million of accrued interest related to uncertain tax positions.
The company files tax returns in numerous jurisdictions around the world. Most
tax returns for years after 2002 are open for examination, including the
domestic return, and in certain circumstances selective returns in earlier years
are also open for examination.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The company uses
interest swap agreements to mitigate its exposure to interest rate fluctuations.
Based on March 31, 2007 debt levels, a 1% change in interest rates would impact
interest expense by approximately $2,801,000. Additionally, the company operates
internationally and, as a result, is exposed to foreign currency fluctuations.
Specifically, the exposure results from intercompany loans and third party sales
or payments. In an attempt to reduce this exposure, foreign currency forward
contracts are utilized. The company does not believe that any potential loss
related to these financial instruments would have a material adverse effect on
the company's financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of the
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995. Terms such as "will," "should," "plan," "intend," "expect," "continue,"
"forecast", "believe," "anticipate" and "seek," as well as similar comments, are
forward-looking in nature. Actual results and events may differ significantly
from those expressed or anticipated as a result of risks and uncertainties which
include, but are not limited to, the following: possible adverse effects of
being substantially leveraged, which could impact our ability to raise capital,
limit our ability to react to changes in the economy or our industry or expose
us to interest rate risks; changes in government and other third-party payor
reimbursement levels and practices; consolidation of health care customers and
our competitors; ineffective cost reduction and restructuring efforts; inability
to design, manufacture, distribute and achieve market acceptance of new products
with higher functionality and lower costs; extensive government regulation of
our products; lower cost imports; increased freight costs; failure to comply
with regulatory requirements or receive regulatory clearance or approval for our
products or operations in the United States or abroad; potential product
recalls; uncollectible accounts receivable; difficulties in implementing a new
Enterprise Resource Planning system; legal actions or regulatory proceedings and
governmental investigations; product liability claims; inadequate patents or
other intellectual property protection; incorrect assumptions concerning
demographic trends that impact the market for our products; provisions in our
bank credit agreements or other debt instruments that may prevent or delay a
change in control; the loss of the services of our key management and personnel;
decreased availability or increased costs of raw materials could increase our
costs of producing our products; inability to acquire strategic acquisition
candidates because of limited financing alternatives; risks inherent in managing
and operating businesses in many different foreign jurisdictions; exchange rate
31
fluctuations, as well as the risks described from time to time in Invacare's
reports as filed with the Securities and Exchange Commission. Except to the
extent required by law, we do not undertake and specifically decline any
obligation to review or update any forward-looking statements or to publicly
announce the results of any revisions to any of such statements to reflect
future events or developments or otherwise.
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
The information called for by this item is provided under the same caption under
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 4. Controls and Procedures.
As of March 31, 2007, an evaluation was performed, under the supervision and
with the participation of the company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that
evaluation, the company's management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the company's disclosure controls and
procedures were effective as of March 31, 2007, in ensuring that information
required to be disclosed by the company in the reports it files and submits
under the Exchange Act is (1) recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms and (2)
accumulated and communicated to the company's management, including the Chief
Executive Officer and the Chief Financial Officer, as appropriate to allow for
timely decisions regarding required disclosure. There were no changes in the
company's internal control over financial reporting that occurred during the
company's most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
Part II. OTHER INFORMATION
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should
carefully consider the risk factors disclosed in Item 1A of the company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) During the quarter ended March 31, 2007, there were no common shares
surrendered to the company by employees for tax withholding purposes in
conjunction with the vesting of restricted shares held by the employees under
the company's 2003 Performance Plan.
On August 17, 2001, the Board of Directors authorized the company to purchase up
to 2,000,000 Common Shares. To date, the company has purchased 637,100 shares
with authorization remaining to purchase 1,362,900 more shares. The company
purchased no shares pursuant to this Board authorized program during the first
quarter of 2007.
32
Item 6. Exhibits.
Exhibit No.
-------------
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a)
Certification (filed herewith).
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a)
Certification (filed herewith).
32.1 Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVACARE CORPORATION
By: /s/ Gregory C. Thompson
-----------------------------------------
Gregory C. Thompson
Chief Financial Officer
(As Principal Financial and Accounting Officer
and on behalf of the registrant)
Date: May 9, 2007
33