UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31, 2007
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or
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period
from to
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Commission
file number 1-15103
INVACARE
CORPORATION
(Exact
name of Registrant as specified in its charter)
Ohio
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95-2680965
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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One
Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (440) 329-6000
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
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Name of Exchange on which
Registered
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Common
Shares, without par value
Rights
to Purchase Preferred Shares, without par value
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New
York Stock Exchange
New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined by Rule 405 of the
Securities Act. Yes £ No R
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes £ No R
Indicate by check mark whether the
Registrant (1) has filed all reports to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 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 the filing requirements for the past
90 days. Yes R No £
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £
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.
Large accelerated
filer R Accelerated filer £ Non-accelerated filer £
Indicate by check mark whether the
registrant is a shell company (as defined by Rule 12b-2 of the
Act). Yes £ No R
As of
June 30, 2007, the aggregate market value of the 28,037,040 Common Shares
of the Registrant held by non-affiliates was $547,843,762 and the aggregate
market value of the 30,991 Class B Common Shares of the Registrant held by
non-affiliates was $605,564. While the Class B Common Shares are not listed
for public trading on any exchange or market system, shares of that class are
convertible into Common Shares at any time on a share-for-share basis. The
market values indicated were calculated based upon the last sale price of the
Common Shares as reported by The New York Stock Exchange on June 30, 2007,
which was $19.54. For purposes of this information, the 2,814,361 Common Shares
and 1,080,174 Class B Common Shares which were held by Executive Officers
and Directors of the Registrant were deemed to be the Common Shares and
Class B Common Shares held by affiliates.
As of
February 22, 2008, 30,925,670 Common Shares and 1,110,565 Class B
Common Shares were outstanding.
Documents
Incorporated By Reference
Portions
of the Registrant’s definitive Proxy Statement to be filed in connection with
its 2008 Annual Meeting of Shareholders are incorporated by reference into
Part III (Items 10, 11, 12, 13 and 14) of this
report.
Except as
otherwise stated, the information contained in this Annual Report on
Form 10-K is as of December 31, 2007.
INVACARE CORPORATION
GENERAL
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 its 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.
The company continuously revises and expands its product lines to meet changing
market demands and currently offers numerous product lines. The company sells
its products principally to over 25,000 home health care and medical equipment
providers, distributors and government locations in the United States,
Australia, Canada, Europe, New Zealand and Asia. Invacare’s products are sold
through its worldwide distribution network by its sales force, telesales
associates and various organizations of independent manufacturers’
representatives and distributors. The company also distributes medical equipment
and disposable medical supplies manufactured by others.
Invacare is committed to design,
manufacture and deliver the best value in medical products, which promote
recovery and active lifestyles for people requiring home and other non-acute
health care. Invacare pursues this vision by:
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designing and
developing innovative and technologically superior
products;
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ensuring
continued focus on our primary market — the non-acute health care
market;
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marketing our
broad range of products;
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providing the
industry’s most professional and cost-effective sales, customer service
and distribution
organization;
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supplying
superior and innovative provider support and aggressive product line
extensions;
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building a strong
referral base among health care
professionals;
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continuously
advancing and recruiting top management
candidates;
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empowering all
employees;
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providing a
performance-based reward
environment; and
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continually
striving for total quality throughout the
organization.
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When the company was acquired in
December 1979 by a group of investors, including some of its current officers
and Directors, it had $19.5 million in net sales and a limited product line
of standard wheelchairs and patient aids. In 2007, Invacare reached
approximately $1.6 billion in net sales, representing a 17% compound
average sales growth rate since 1979, and currently is the leading company in
each of the following major, non-acute, medical equipment categories: power and
manual wheelchairs, home care bed systems and home oxygen
systems.
The company’s executive offices are
located at One Invacare Way, Elyria, Ohio, 44036 and its telephone number
is (440) 329-6000. In this report, “Invacare” and the “company” refer to
Invacare Corporation and, unless the context otherwise indicates, its
consolidated subsidiaries.
THE HOME MEDICAL EQUIPMENT
INDUSTRY
North America Market
The home medical equipment market
includes home health care products, physical rehabilitation products and other
non-disposable products used for the recovery and long-term care of patients.
The company believes that demand for domestic home medical equipment products
will continue to grow during the next decade and beyond as a result of several
factors, including:
Growth in Population
over Age 65. Globally, overall life
expectancy continues to increase. Recent reports from the U.S. Department
of Health and Human Services (DHHS) state that the average life expectancy in
the United States for men and women who reach the age of 65 is now 82 and 85,
respectively. Furthermore, life expectancy in the United States at birth is now
an average of 78 for men and women together, a record high. The DHHS also
reports that people age 65 or older represent the vast majority of home
health care patients and will increase from 12% of the population in 2005 to 21%
of the population by the year 2050.
Treatment
Trends. The
company believes that many medical professionals and patients prefer home health
care over institutional care because home health care results in greater patient
independence, increased patient responsibility and improved responsiveness to
treatment. Further, health care professionals, public payors and private payors
appear to favor home care as a cost effective, clinically appropriate
alternative to facility-based care. Recent surveys show that approximately 70%
of adults would rather recover from an accident or illness in their home, while
approximately 90% of the population aged 65 and over showed a preference for
home-based, long-term care. In addition, the number of hospital beds
per capita has fallen over the past twenty-five years in the United States, from
4.4 beds per 1,000 population in 1980 to 2.7 in 2005, a trend which is expected
to continue. This decline has coincided with the reduction in average
length of stays in hospitals.
Technological
Trends. Technological advances have
made medical equipment increasingly adaptable for use in the home. Current
hospital procedures often allow for earlier patient discharge, thereby
lengthening recuperation periods outside of the traditional institutional
setting. In addition, continuing medical advances prolong the lives of adults
and children, thus increasing the demand for home medical care
equipment.
Health Care Cost
Containment Trends. In 2005, health care
expenditures in the United States totaled $2.0 trillion dollars or approximately
16% of the GDP, the highest among industrialized countries, and were paid by
private health insurers (36%), the federal government (34%), state and local
governments (11%), consumers (15%) and other private funds (4%). In 2014, the
nation’s health care spending is projected to increase to $4.1 trillion, growing
at an average annual rate of 6.9%. Over this same period, spending on health
care is expected to increase to approximately 19.6% of GDP. The rising cost of
health care has caused many payors of health care expenses to look for ways to
contain costs. The company believes that home health care and home medical
equipment will play a significant role in reducing health care
costs.
Society’s
Mainstreaming of People with Disabilities. People with disabilities are
increasingly a part of the fabric of society, in part due to the 1991 Americans
with Disabilities Act, or the “ADA.” This legislation provides mainstream
opportunities to people with disabilities. The ADA imposes requirements on
certain components of society to make reasonable accommodations to integrate
people with disabilities into the community and the
workplace.
Distribution
Channels. The
changing home health care market continues to provide new ways of reaching the
end user. The distribution network for products has expanded to include not only
specialized home health care providers and extended care facilities but retail
drug stores, surgical supply houses, rental, hospital and HMO-based stores, home
health agencies, mass merchandisers, direct sales and the
Internet.
Europe/Asia/Pacific
Market
The company believes that, while many of
the market factors influencing demand in the U.S. are also present in
Europe and Asia/Pacific — aging of the population, technological trends and
society’s acceptance of people with disabilities — each of the markets of
Europe and in Asia/Pacific have distinctive characteristics. The health care
industry is more heavily socialized and, therefore, is more influenced by
government regulation and fiscal policy. Variations in product specifications,
regulatory approval processes, distribution requirements and reimbursement
policies require the company to tailor its approach. Management believes that as
the European markets become more homogenous and the company continues to refine
its distribution channels, the company can more effectively penetrate these
markets. Likewise, the company expects to increase its sales in the highly
fragmented Australian, New Zealand and Asian markets.
The company is directly affected by
government regulation and reimbursement policies in virtually every country in
which the company operates. In the United States, the growth of health care
costs has increased at rates in excess of the rate of inflation and as a
percentage of GDP for several decades. A number of efforts to control the
federal deficit have impacted reimbursement levels for government sponsored
health care programs, and private insurance companies and state Medicaid
programs peg their reimbursement levels to Medicare.
Similar efforts are being undertaken in
other countries, including for example Germany. Reimbursement guidelines in the
home health care industry have a substantial impact on the nature and type of
equipment an end-user can obtain and, thus, affect the product mix, pricing and
payment patterns of our customers who are medical equipment providers. The
company believes its strong market position and technical expertise will allow
it to respond to ongoing regulatory changes. However, the issues described above
will likely continue to have significant impacts on the pricing of the company’s
products.
GEOGRAPHICAL SEGMENTS AND PRODUCT
CATEGORIES
North America
North America includes: North
America/Home Medical Equipment (NA/HME), Invacare Supply Group (ISG) and
Institutional Products Group (IPG).
North America/HME
This segment includes: Rehab, Standard
and Respiratory product lines as discussed below.
REHAB PRODUCTS
Power
Wheelchairs. Invacare manufactures a
complete line of power wheelchairs for individuals who require independent
powered mobility. The range includes products that can be significantly
customized to meet an individual’s specific needs, as well as products that are
inherently versatile and meet a broad range of individual requirements. Power
wheelchair lines are marketed under the Invacare® Storm Series® and TDX™ brand names and include a full
range of powered mobility products. The Storm Series® TDX™ line of power wheelchairs offer an
unprecedented combination of power, stability and maneuverability. The
Pronto® Series Power Wheelchairs with
SureStep™ feature center-wheel drive performance for exceptional maneuverability
and intuitive driving. Power tilt and recline systems are offered as
well.
Custom Manual
Wheelchairs. Invacare manufactures and
markets a range of custom manual wheelchairs for everyday, sports and
recreational uses. These lightweight chairs are marketed under the
Invacare® and Invacare Top End® brand names. The chairs provide mobility
for people with moderate to severe disabilities in their everyday activities as
well as for use in various sports such as basketball, racing and
tennis.
Personal
Mobility. Invacare manufactures the
AT’m portable power wheelchair for consumers needing light duty powered mobility
with the ability to quickly disassemble and be transported even in a compact or
mid-sized vehicle. In addition, Invacare distributes two portable, compact
scooters for consumers needing powered mobility and capable of operating a
tiller. The Lynx model scooters are available in three-wheel and four-wheel
versions.
Seating and
Positioning Products. Invacare markets seat
cushions, back supports and accessories under three series.
Invacare® Absolute™ Series provides simple seating
solutions for comfort, fit and function. Invacare InTouch™ Series includes
versatile modular seating, providing optimal rehab solutions. Invacare PinDot™
Series offers custom seating solutions personalized for the most challenged
clients. The company also has a product line of seating products and wheelchairs
for the pediatric market.
STANDARD PRODUCTS
Manual
Wheelchairs. Invacare’s manual
wheelchairs are sold for use inside and outside the home, institutional
settings, or public places. Our clients include people who are chronically or
temporarily disabled and require basic mobility performance with little or no
frame modification. Examples of our manual wheelchair lines, which are marketed
under the Invacare® brand name, include the 9000 and
Tracer® product lines. These lines offer
wheelchairs that are designed to accommodate the diverse capabilities and unique
needs of the individual from petite to bariatric sizes.
Personal
Care. Invacare
manufactures and/or distributes a full line of personal care products, including
ambulatory aids such as crutches, canes, walkers and wheeled walkers. This
category also features the Value Line Rollator, one of the latest Value Line
products. Value Line products are products that are cost-effective, easy to use
and contain the features and benefits that providers, clinicians and individuals
require. Also available are safety aids such as tub transfer benches, shower
chairs and grab bars, and patient care products such as commodes and other
toilet assist aids.
Home Care
Beds. Invacare
manufactures and distributes a wide variety of manual, semi-electric and fully
electric beds for home use under the Invacare® brand name. Home care bed accessories
include bedside rails, mattresses, overbed tables, trapeze bars and traction
equipment. Also available are new bariatric beds and accompanying accessories to
serve the special needs of bariatric patients.
Low Air Loss Therapy
Products. Invacare manufactures and/or
distributes a complete line of mattress overlays and replacement products, under
the Invacare® brand name. These products, which use
air flotation to redistribute weight and move moisture away from patients,
assist in the total care of those who are immobile and spend a great deal of
time in bed.
Patient
Transport. Invacare manufactures and/or
distributes products needed to assist in transferring individuals from surface
to surface (bed to chair) or transporting from room to room. Designed for use in
the home and institutional settings, these products include patient lifts and
slings, and a new series of mobile, multi-functional
recliners.
RESPIRATORY PRODUCTS
Invacare manufactures and/or distributes
home respiratory products, including: oxygen concentrators, HomeFill™ oxygen
transfilling systems, sleep apnea products, aerosol therapy and other
respiratory products. The company’s home respiratory products are marketed
predominantly under the Invacare® brand name. The Invacare® HomeFill™ II Oxygen Compressor enables
people to safely and easily make compressed oxygen in their home and store it in
cylinders for future use.
OTHER PRODUCTS
Invacare also manufactures markets and
distributes many accessory products, including spare parts, wheelchair cushions,
arm rests, wheels and respiratory parts. In some cases, the company’s accessory
items are built to be interchangeable so that they can be used to replace parts
on products manufactured by others.
Invacare Supply
Group
Invacare distributes numerous lines of
branded medical supplies including ostomy, incontinence, diabetic, interals,
wound care, urology and miscellaneous home medical products, as well as home
medical equipment aids for daily living. Invacare Supply Group (ISG) also sells
through the retail market.
Institutional Products
Group
Invacare, operating as Institutional
Products Group (IPG), is a manufacturer and distributor of health care
furnishings including beds, case goods and patient handling equipment for the
long-term care markets, specialty clinical recliners for dialysis and oncology
clinics and certain other home medical equipment and accessory
products.
Asia/Pacific
The company’s Asia/Pacific operations
consist of Invacare Australia, which distributes the Invacare range of products
which includes: manual and power wheelchairs, lifts, ramps, 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, which imports and distributes home medical equipment to the Asian
markets.
Europe
The company’s European operations
operate as a “common market” company with sales throughout Europe. The European
operations currently sell a line of products providing room for growth as
Invacare continues to broaden its product line offerings to more closely
resemble those of its North American operations.
Most wheelchair products sold in Europe
are designed locally to meet specific market requirements. The company
manufactures and/or assembles both manual and power wheelchair products at the
following European facilities: Invacare UK Ltd. in the United Kingdom, Invacare
Poirier S.A.S. in France, Invacare (Deutschland) GmbH in Germany, and Ulrich
Alber GmbH in Germany. Manual wheelchair products are also manufactured and/or
assembled at Invacare Portugal, Kuschall AG in Switzerland (the Kuschall range),
and Invacare Rea AB in Sweden, beds and patient lifts at EC-Hong A/S in Denmark
and personal care products at Aquatec GmbH in Germany and Dolomite AB in Sweden.
Oxygen products such as concentrators and homefill are imported from Invacare
U.S. or China operations.
For information relating to net sales by
product group, see Business Segments in the Notes to the Consolidated Financial
Statements included in this report.
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.
COMPETITION
North America and
Asia/Pacific
The home medical equipment market is
highly competitive and Invacare products face significant competition from other
well-established manufacturers. The company believes that its success in
increasing market share is dependent on providing value to the customer based on
the quality, performance and price of the company products, the range of
products offered, the technical expertise of the sales force, the effectiveness
of the company distribution system, the strength of the dealer and distributor
network and the availability of prompt and reliable service for its products.
Various manufacturers, from time to time, have instituted price-cutting programs
in an effort to gain market share and may do so again in the
future.
Europe
As a result of the differences
encountered in the European marketplace, competition generally varies from one
country to another. The company typically encounters one or two strong
competitors in each country, some of them becoming regional leaders in specific
product lines.
MARKETING AND
DISTRIBUTION
North America and
Asia/Pacific
Invacare’s products are marketed in the
United States and Asia/Pacific primarily to providers who in turn sell or rent
these products directly to consumers within the non-acute care setting.
Invacare’s primary customer is the home medical equipment (HME) provider. The
company also employs a “pull-through” marketing strategy to medical
professionals, including physical and occupational therapists, who refer their
patients to HME providers to obtain specific types of home medical equipment, as
well as to consumers, who express a product or brand
preference.
Invacare’s domestic sales and marketing
organization consists primarily of a home care sales force, which markets and
sells Invacare® branded products to HME providers. Each member of Invacare’s
home care sales force functions as a Territory Business Manager (TBM) and
handles all product and service needs for an account, thus saving customers’
valuable time. The TBM also provides training and servicing information to
providers, as well as product literature, point-of-sale materials and other
advertising and merchandising aids. In Canada, products are sold by a sales
force and distributed through regional distribution centers in Quebec to health
care providers throughout Canada.
The Inside Sales Department provides
increased sales coverage of smaller accounts and complements the efforts of the
field sales force. Inside Sales offers cost-effective sales coverage through a
targeted telesales effort, and has delivered solid sales growth since its
existence.
The company’s Technical Education
department offers education programs that continue to place emphasis on
improving the productivity of repair technicians. The Service Referral Network
includes numerous providers who honor the company’s product warranties
regardless of where the product was purchased. This network of servicing
providers seeks to ensure that all consumers using Invacare products receive
quality service and support that is consistent with the Invacare brand
promise.
The company sells distributed products,
primarily soft goods and disposable medical supplies, through ISG. ISG products
include ostomy, incontinence, wound care and diabetic supplies, as well as other
soft goods and disposables. ISG markets its products through field account
managers, inside telesales, a customer service department and the Internet.
Additionally, ISG entered the long-term care market on a regional basis and
markets to those nursing homes utilizing a direct outside sales force. ISG also
markets a Home Delivery Program to home medical equipment providers through
which ISG drop ships supplies in the provider’s name to the customer’s address.
Thus, providers have no products to stock, no minimum order requirements and
delivery is made within 24 to 48 hours nationwide.
In 2007, Invacare ended its relationship
with Arnold Palmer, its national spokesperson, as part of the company’s
cost-cutting initiatives. Moving forward, Invacare, through the company’s co-op
advertising program, developed new direct response television commercials
designed to generate demand for Invacare Power Chairs and the HomeFill Oxygen
System sold by the home medical equipment provider in the U.S. The Company’s
North America HME Division also introduced a new marketing and advertising
campaign, “Impossible Stops Here.” The goal of this new campaign is for
providers to believe that if they align themselves with Invacare – the only
company that has the right products, the right programs, and the right services
– they will survive today’s seemingly impossible industry
conditions. This theme has been incorporated into all trade
advertising and marketing ventures. It also was the central theme of
the 2007 Medtrade booth. Impossible Stops Here does not replace “Yes, You
Can®.” “Yes, You Can” continues to be Invacare’s global tagline, and
it remains steadfast in the new HME ads and indicative of the company’s “can do”
attitude.
The company continues to improve
performance and usability on www.invacare.com. In 2008, the company will focus
on the implementation of a new website platform and web interface for
Invacare.com/Invacare.ca, and Invacare Pro. The goal will be to create a more
usable web presence, concentrating on a customer-centric approach that will
allow the company to field a user interface that more closely represents
customer needs.
Also in 2007, the company continued its
strategic advertising campaign in key trade publications that reach the
providers of home medical equipment. The company also contributed extensively to
editorial coverage in trade publications concerning the products the company
manufactures and our representatives attended numerous trade shows and
conferences on a national and regional basis in which Invacare products were
displayed to providers, health care professionals and
consumers.
The company continues to generate
greater consumer awareness of its products. This was evidenced by the company’s
sponsorship of a variety of wheelchair sporting events and support of various
philanthropic causes benefiting the consumers of our products. For the
fourteenth consecutive year, Invacare continued as a National Corporate Partner
with Easter Seals, one of the most recognized charities in the United States
that meets the needs of both children and adults with various types of
disabilities. The company also continued its sponsorships of individual
wheelchair athletes and teams, including several of the top-ranked male and
female racers, hand cyclists, and wheelchair tennis players in the world. In
addition, Invacare was the title sponsor for the ninth year in a row of the
Invacare World Team Cup of Wheelchair Tennis Tournament, which took place in
June in Sweden. The company also continued its support of disabled veterans
through its sponsorship of the 27th National Veterans Wheelchair Games, the
largest annual wheelchair sports event in the world. The games bring a
competitive and recreational sports experience to military service veterans who
use wheelchairs for their mobility needs due to spinal cord injury, neurological
conditions or amputation.
Europe
The company’s European operations
consist primarily of manufacturing, marketing and distribution operations in
Western Europe and export sales activities through local distributors elsewhere
in the world. The company has a sales force and where appropriate, distribution
centers, in the United Kingdom, France, Germany, Belgium, Portugal, Spain,
Italy, Denmark, Sweden, Switzerland, Austria, Norway and the Netherlands, and
sells through distributors elsewhere in Europe. In markets where the company has
its own sales force, product sales are typically made through dealers of medical
equipment and, in certain markets, directly to government agencies. In 2007, the
continued consolidation of big buying groups tending to develop their business
on a European scale has confirmed itself. As a result, Invacare is generalizing
the application of pan-European pricing policies.
The company’s top 10 customers accounted
for approximately 10% of 2007 net sales. The loss of business of one or
more of these customers or buying groups may have a significant impact on the
company, although no single customer accounted for more than 3% of the company’s
2007 net sales. Providers who are part of a buying group generally make
individual purchasing decisions and are invoiced directly by the
company.
PRODUCT LIABILITY
COSTS
The company’s captive insurance company,
Invatection Insurance Company, 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.
PRODUCT DEVELOPMENT AND
ENGINEERING
Invacare is committed to continuously
improving its existing product lines in a focused manner. In 2007, new product
development continued to be a focus as part of Invacare’s strategy to gain
market share and maintain a competitive advantage along with beginning to
globally standardize certain product platforms. To this end, the company
introduced several new products and product enhancements. The following are some
of the most significant 2007 product developments:
North America/HME
The TDX® Spree, the latest addition to the new TDX
Series of power wheelchairs, gives children access to areas that were not
previously reachable. It also ensures a smooth ride in everyday terrain. Its
center-wheel drive technology gives the driver intuitive
maneuverability. Other distinguishing features include standard
five-inch elevating seat, low starting seat-to-floor height of 14 and a 1/2
inches, transport tie-downs and an option of a manual or power
tilt.
The Pronto® M51™
power wheelchair with Formula™ CG Powered Tilt offers a full 55-degrees of tilt with a
300 lb. weight capacity that helps to enhance comfort through positioning and
pressure relief. True center-wheel drive offers intuitive driving while
SureStep® technology allows for smooth, stable
driving over thresholds and transitions up to two-inches in
height.
The Invacare®
Intouch™ Propel™ back is a
new general purpose back that is extremely lightweight and comfortable.
Installation is easy with little hardware required. Also, the rigid shell
coupled with a soft contoured foam cushion provides gentle support and
facilitates postural symmetry.
The Lynx™
L-3X compact scooter
is a compact, yet powerful
scooter that has all of the comforts of a larger scooter, including more travel
range, foot space and comfort for a variety of consumers.
The Perfecto2™
oxygen concentrator is the
smallest, lightest, quietest and most energy efficient 5-liter concentrator ever
produced by Invacare. It is 75% quieter, 25% more energy efficient, 17% lighter
and 33% smaller than the Platinum XL concentrator.
The new line of HomeFill® Post Valve
cylinders gives portable
oxygen patients more choices and flexibility than ever before. The new cylinders
expand Invacare’s line of HomeFill cylinders, which already includes integrated
continuous flow regulators and integrated pneumatic conservers, thereby meeting
the needs of a variety of ambulatory oxygen patients.
The much anticipated XPO2™ portable
concentrator recently
received 510(K) clearance and is expected to be ready to launch in the first
quarter of 2008. The XPO2, named for its extreme portability, is
a small, lightweight, durable portable concentrator that is also clinically
robust. It will offer a pulse dose oxygen delivery system with settings from one
to five, and weigh a mere six pounds.
The Invacare aerosol therapy product
line is expanding to better meet both patient and provider needs. New to the
line is the Invacare® select
aerosol compressor, a
simple, yet effective and reliable unit that will be economically priced and
packaged with a disposable nebulizer. The select aerosol compressor joins the
popular Stratos™ Compact
aerosol compressor– now
featuring a smaller footprint and reusable nebulizer – and the Stratos™ Portable
Plus that now has a higher
flow compressor that can drive a standard nebulizer.
Invacare Standard Products will launch a
new line of Therapeutic Support
Surfaces (TSS). This line includes the
Invacare® Solace™
Foam and Invacare® MicroAir™
Powered TSS Products. These
products represent the first time that a complete line of TSS products has been
available nationwide under a single trusted brand name. The products offer
unique improvements resulting in a line that blends technology with
comfort.
The Invacare® Knee
Rollator is a great
alternative for those who experience discomfort when using
crutches. The Knee Rollator features a comfortable knee pad for
resting the injured limb, and it is easily maneuverable with its five-inch front
swivel wheels.
The new Veranda™ standard
wheelchairs have been
designed with durability and value in mind to maximize the provider's return on
their investment. Available with a choice of removable or permanent arm styles
and a choice of front riggings, the Veranda wheelchairs accommodate the needs of
the market. These economical wheelchairs are practical, yet sleek, with powder
coated steel frames and durable nylon upholstery.
Asia/Pacific
Asia/Pacific continued various range
extensions and design improvements to products during 2007 as well as new
scooter controllers such as the controllers for Invacare’s MK6i™ product
range.
Europe
During 2007, Europe introduced fourteen
new products. The following are some of the most significant 2007
product developments:
Action Vertic®
is a new manually driven
wheelchair featuring an electrically driven standing device. In fact, the
wheelchair has been designed for active users who want to combine active drive
and when needed, be able to stand up being supported by the standing
device.
Action 3 Junior®
is a lightweight, foldable
pediatric wheelchair designed for children aged between 3 and 15 years. Action 3
Junior® has been developed to match the individual needs of the child and can
grow as they grow. As a child’s needs change, the Action 3 Junior® offers a
large range of options to accompany the child in their development to provide
the necessary clinical support.
Rea® Azalea™
Tall is specially designed
to meet the needs of tall users who require a “Tilt in Space Wheelchair” with a
longer seat support. Adapted from the Rea® Azalea™, the Rea® Azalea™ Tall boasts
all the advantages of a reliable, tilting wheelchair and offers a unique
weight-shifting mechanism.
Kuschall’s R-33
is a new high active
wheelchair based on K-Series’ concept with either an integrated central
suspension or a fixed seat support, depending on the customer’s
needs.
The Invacare® Rea Spin
x™ is a lightweight
foldable wheelchair for the middle active segment. The wheelchair features an
inbuilt postural frame with a fully adjustable seat for ergonomic seating
posture for the user. The wheelchair is made of lightweight materials and is
equipped with a dual folding mechanism to allow transportation with
ease.
Invacare® Leo™
is a 4-wheel scooter
designed for all those that value their independence and wish to get out and
about unaided. Safety is a key feature of the Invacare® Leo™, but this does not
detract from its stylish and sporty looks. Invacare® Leo™ offers users the
freedom and confidence to enjoy their essential daily outings and leisure
excursions.
Invacare® Lynx™
is the portable micro
scooter which eases your way to independency. The Invacare® Lynx™ helps to
accomplish daily activities effortlessly. Thanks to its micro proportions and
its light weight, it fits easily in the trunk of a car and is straightforward to
dismantle.
The Invacare® twilight™
Mask designed by
patients for patients is the ideal mask for users that require nasal ventilation
with CPAP or BiPAP and offers optimum compliance for those suffering from sleep
and breathing disorders. This uniquely comfortable design offers an innovative,
multi-patented mask that not only maximizes comfort and ease of use but also has
effective sealing and total stability. The Twilight™ is available in three
sizes. Each mask can be easily altered to comfortably fit the face, thanks to an
adjustable forehead support.
Alber’s Quix Q10
is the first auxiliary
drive for manual wheelchairs that can steer with a handlebar like a bike. This
makes it extremely simple to operate and highly maneuverable. It is a power
add-on drive with tiller control and is easy to handle because of the new handle
bar, fits to almost every wheelchair, driving range up to 15 km (9.4 miles),
very swift for indoor use, easy to dismantle and ideal for
transporting.
An “electronic spare part list” has been
introduced across the European Invacare after sales service departments, which
improves product spare part selection and improves customer
service.
MANUFACTURING AND
SUPPLIERS
The company’s objective is to continue
to reduce costs through facility consolidation and headcount reductions along
with reducing fixed costs through transitioning to more assembly operations
while maintaining the highest quality supply chain in the industry. The company
seeks to achieve this objective through a strategic combination of Invacare
manufacturing facilities, contract manufacturing facilities, and key suppliers.
The operational strategy further supports the marketing strategy with flexible
providers of new and modified products that respond to the demands of the
market.
The supply chain is focused on providing
custom, configured, made-to-order products from facilities close to the
customers in each of its major markets. As strategic choices are made globally,
those facilities that remain in higher-cost regions of North America and Europe
will be very focused factories that provide these specific competitive
advantages to the marketing and sales teams.
The company continues to place specific
emphasis on shifting production over the next few years to Asian sourcing
opportunities, including China and India, which is a component of the company’s
multi-year manufacturing and distribution strategy and supports the company-wide
cost reduction goals. Access to sourcing opportunities has been facilitated by
our establishment of a full test and design engineering facility in our location
in Suzhou, China. In Asia, Invacare manufactures products with intellectual
property and high value add margins that serve local market opportunities
through our wholly owned factory in Suzhou, Jiangsu Province, China. The Suzhou
facility supplies products to the major regions of the world served by Invacare:
North America, Europe and Asia/Pacific.
Best practices in lean manufacturing are
used throughout the operations to eliminate waste, shorten lead times, optimize
inventory, improve productivity, drive quality and engage supply chain
associates in the definition and implementation of needed
change.
The company purchases raw materials,
components, sub-assemblies, and finished goods from a variety of suppliers
globally. The company’s Hong Kong-based Asian sourcing and purchasing office has
proven to be a significant asset to our supply chain through its development and
management of suppliers across Asia. Where appropriate, Invacare utilizes
contracts with suppliers in all regions to increase the guarantees of delivery,
cost, quality and responsiveness. In those situations where contracts are not
advantageous, Invacare works to manage multiple sources of supply and
relationships that provide increased flexibility to the supply
chain.
North America
The company has focused its factories in
North America on the final assembly of powered mobility and custom manual
wheelchairs, the fully integrated manufacture of homecare and institutional care
beds, the final assembly of respiratory products and the integrated component
fabrication, painting, and final assembly of a variety of standard manual
wheelchairs and commodes. The company operates four major factories located in
Elyria, Ohio; Sanford, Florida; London, Ontario and Reynosa,
Mexico.
Asia/Pacific
The company continues to aggressively
integrate its operations in Australia to maximize the leverage of operational
efficiencies.
Europe
The company has eleven manufacturing
facilities spread throughout Europe with a capability to manufacture patient
aid, wheelchair, powered mobility, bath safety, beds and patient transport
products. The European manufacturing and logistics facilities are focused on
accelerating opportunities for streamlining to gain significant synergies in
cost and quality over the next few years.
GOVERNMENT
REGULATION
The company is directly affected by
government regulation and reimbursement policies in virtually every country in
which it operates. Government regulations and health care policy differ from
country to country, and within some countries (most notably the U.S., European
Union, Australia, Canada and increasingly Asia), from state to state or province
to province. Changes in regulations and health care policy take place frequently
and can impact the size, growth potential and profitability of products sold in
each market.
In the U.S., the growth
of health care costs has increased at rates in excess of the rate of inflation
and as a percentage of GDP for several decades. A number of efforts to control
the federal deficit have impacted reimbursement levels for government sponsored
health care programs and private insurance companies often imitate changes made
in federal programs. Reimbursement guidelines in the home health care industry
have a substantial impact on the nature and type of equipment an end user can
obtain and thus, affect the product mix, pricing and payment patterns of the
company’s customers who are the HME providers.
The company continues its pro-active
efforts to shape public policy that impacts home and community-based, non-acute
health care. The company is currently very active with federal legislation and
regulatory policy makers. Invacare believes that these efforts give the company
a competitive advantage in two ways. First, customers frequently express
appreciation for our efforts on behalf of the entire industry. Second, sometimes
the company has the ability to anticipate and plan for changes in public policy,
unlike most other HME manufacturers who must react to change after it
occurs.
The Safe Medical Devices Act of 1990 and
Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetics Act of
1938 (the “Acts”) provide for regulation by the United States Food and Drug
Administration (the “FDA”) of the manufacture and sale of medical devices. Under
the Acts, medical devices are classified as Class I, Class II or
Class III devices. The company’s principal products are designated as
Class I or Class II devices. In general, Class I devices must
comply with labeling and record keeping requirements and are subject to other
general controls. In addition to general controls, certain Class II devices
must comply with product design and manufacturing controls established by the
FDA. Domestic and foreign
manufacturers of medical devices
distributed commercially in the U.S. are subject to periodic inspections by
the FDA. Furthermore, state, local and foreign governments have adopted
regulations relating to the design, manufacture and marketing of health care
products. During the past two years, the company was inspected by the FDA
at eight domestic and foreign locations, with no adverse inspectional
findings noted. In addition, the management systems of all locations required to
meet ISO 13485 requirements for Canada, Europe and other foreign markets were
inspected during 2007 and found to be certifiable.
From time to time, the company may
undertake voluntary recalls or field corrective actions of our products to
maintain ongoing customer relationships and to enhance its reputation for
adhering to high standards of quality and safety. None of the company’s actions
has been classified by the FDA as high risk (Class I). The company continues to
strengthen its programs to better ensure compliance with applicable regulations,
particularly those which could have a material adverse effect on the
company.
The company occasionally sponsors
clinical studies, usually involving its respiratory or sleep products. These
studies have historically been non-significant risk studies with human subjects.
Effective December 27, 2007, such studies, their protocols, participant criteria
and all results, must be registered in the Clinical Registry managed by the
National Institutes of Health and available to the public via the Internet,
according to a new law that was part of the FDA Amendments Act signed September
27, 2007 (Public Law 110-85).
Although there are a number of
reimbursement related issues in most of the countries in which Invacare
competes, the issues of primary importance are currently in the United States.
There are two critical issues for Invacare: eligibility for reimbursement for
power wheelchairs for elderly patients and the provisions of the 2003
legislation related to prescription drug coverage under Medicare. With regard to
power wheelchairs, the Centers for Medicare and Medicaid Services, or “CMS,”
implemented in late 2006 a series of changes to the eligibility, documentation,
codes and payment rules that has impacted the predictability and access to this
benefit. Invacare and the home care industry are working hard to convince the
CMS and the Bush administration to make pragmatic changes that are consistent
with industry practices, to afford seniors appropriate access to their home
medical equipment. With regard to the 2003 legislation, CMS is now implementing
a "competitive acquisition" program in ten large metropolitan areas, beginning
July 1, 2008. An additional 70 metropolitan areas also will
participate in this program, beginning sometime in 2009. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
In 2009, the competitive bidding program
will be extended to 70 of the largest metropolitan regions. In early 2006,
Congress passed the Deficit Reduction Act which includes payment cuts to home
oxygen that will take effect in January 2009.
Although none of these
changes are beneficial to the home care industry, the company believes that it
can still grow and thrive in this environment. The home care industry has not
received any cost-of-living adjustments over the last few years and will try to
respond with improved productivity to address the lack of support from Congress.
In addition, the company’s new products (for example, the HomeFill™ low-cost
oxygen delivery system), can help address the cuts the home care provider has to
endure. Moreover, effective January 1, 2007, Medicare provided for increased
payment for this new technology which further enhances the cost advantages this
technology offers. The company will continue to focus on developing
products that help the provider improve profitability. Additionally, the
company plans to accelerate our activities in China to make sure that the
company is one of the lowest cost manufacturers and distributors to the home
care provider.
BACKLOG
The company generally manufactures most
of its products to meet near-term demands by shipping from stock or by building
to order based on the specialty nature of certain products. Therefore, the
company does not have substantial backlog of orders of any particular product
nor does it believe that backlog is a significant factor for its
business.
EMPLOYEES
As of December 31, 2007, the
company had approximately 5,700 employees.
FOREIGN OPERATIONS AND EXPORT
SALES
The company also markets its products
for export to other foreign countries. In 2007, the company had product sales in
over 80 countries worldwide. For information relating to net sales, operating
income and identifiable assets of the company’s foreign operations, see Business
Segments in the Notes to the Consolidated Financial
Statements.
AVAILABLE
INFORMATION
The company files Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and any amendments thereto, as well as proxy statements and other
documents with the Securities and Exchange Commission (SEC). The public may read
and copy any material that the company files with the SEC at the SEC’s Public
Reference Room located at 100 F Street, NE, Washington D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains a website, www.sec.gov, which contains all reports, proxy
statements and other information filed by the company with the
SEC.
Additionally, Invacare’s filings with
the SEC are available on or through the company’s website, www.invacare.com, as soon as reasonably practicable
after they are filed electronically with, or furnished to, the SEC. Copies of
the company’s filings also can be requested, free of charge, by writing to:
Shareholder Relations Department, Invacare Corporation, One Invacare Way, P.O.
Box 4028, Elyria, OH 44036-2125.
FORWARD-LOOKING
INFORMATION
This Form 10-K 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 or
event of default risks; changes in government and other third-party payor
reimbursement levels and practices; consolidation of health care providers and
our competitors; loss of key health care providers; 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 of Ohio law or in our debt agreements, our
shareholder rights plan or our charter documents 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 which 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
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.
The company’s business, operations and
financial condition are subject to various risks and uncertainties. You should
carefully consider the risks and uncertainties described below, together with
all of the other information in this annual report on Form 10-K and in the
company’s other filings with the SEC, before making any investment decision with
respect to the company’s securities. The risks and uncertainties described below
may not be the only ones the company faces. Additional risks and uncertainties
not presently known by the company or that the company currently deems
immaterial may also affect the company’s business. If any of these known or
unknown risks or uncertainties actually occur or develop, the company’s
business, financial condition, results of operations and future growth prospects
could change.
Changes in government and other
third-party payor reimbursement levels and practices have negatively impacted
and could continue to negatively impact the company’s revenues and
profitability.
The company’s products are sold through
a network of medical equipment and home health care providers, extended care
facilities, hospital and HMO-based stores, and other providers. Many of these
providers (the company’s customers) are reimbursed for the products and services
provided to their customers and patients by third-party payors, such as
government programs, including Medicare and Medicaid, private insurance plans
and managed care programs. Many of these programs set maximum reimbursement
levels for some of the products sold by the company in the United States. If
third-party payors deny coverage, make the reimbursement process or
documentation requirements more uncertain or further reduce their current levels
of reimbursement (i.e., beyond the reductions described below), or if the
company’s costs of production increase faster than increases in reimbursement
levels, the company may be unable to sell the affected product(s) through its
distribution channels on a profitable basis.
Reduced government reimbursement levels
and changes in reimbursement policies have in the past added, and could continue
to add, significant pressure to the company’s revenues and profitability.
Effective November 15, 2006, the CMS reduced the maximum reimbursement
amount for power wheelchairs under Medicare by up to 28%, and implemented a
series of other administrative changes that makes it more difficult for
customers to provide power wheelchairs. Additionally, the Deficit Reduction Act
of 2005 includes payment cuts for home oxygen equipment that will take effect in
January 2009.
Largely as a consequence of the
announced reimbursement reductions and the uncertainty created thereby, North
American net sales were lower in 2007 and 2006 as compared to 2005 and
Asia/Pacific sales were also negatively impacted as the U.S. reimbursement
uncertainty in the power wheelchair market resulted in decreased sales of
microprocessor controllers by the company’s Dynamic Controls subsidiary. Sales
of respiratory products were particularly affected by the changes. Small and
independent provider sales declined as these dealers slowed their purchases of
the company’s HomeFill™ oxygen system product line, in part, until they had a
clearer view of future oxygen reimbursement levels. Furthermore, a study issued
by the Office of Inspector General or “OIG,” in September 2006 suggested that
$3.2 billion in savings could be achieved over five years by reducing the
reimbursed rental period from three years (the reimbursement period under
current law) to 13 months.
During
2007, the U.S. House of Representatives and U.S. Senate each drafted Medicare
provisions that were not passed into law. The House package included
a proposal to reduce the home oxygen rental cap to 18 months, with an exemption
for new technology such as Invacare’s Homefill system and portable oxygen
concentrators. The Senate package would have made payment cuts to
traditional home oxygen equipment, but would have retained current payment
levels for new oxygen technology such as the Homefill system and portable oxygen
concentrators. While it is unclear whether Congress will pass a
Medicare bill this year, we expect Congress to continue consideration of these
proposals in 2008. The uncertainty created by these announcements may
negatively impact the home oxygen equipment
market.
Similar trends and concerns are
occurring in state Medicaid programs. These recent changes to reimbursement
policies, and any additional unfavorable reimbursement policies or budgetary
cuts that may be adopted, could adversely affect the demand for the company’s
products by customers who depend on reimbursement by the government-funded
programs. The percentage of the company’s overall sales that are dependent on
Medicare or other insurance programs may increase as the portion of the
U.S. population over age 65 continues to grow, making the company more
vulnerable to reimbursement level reductions by these organizations. Reduced
government reimbursement levels also could result in reduced private payor
reimbursement levels because some third-party payors may index their
reimbursement schedules to Medicare fee schedules. Reductions in reimbursement
levels also may affect the profitability of the company’s customers and
ultimately force some customers without strong financial resources to go out of
business. The reductions announced recently may be so dramatic that some of the
company’s customers may not be able to adapt quickly enough to survive. The
company is the industry’s largest creditor and an increase in bankruptcies in
the company’s customer base could have an adverse effect on the company’s
financial results.
Medicare will institute a new
competitive bidding program for various items in ten large metropolitan areas
beginning July 1, 2008. This program is designed to reduce Medicare payment
levels for items that the Medicare program spends the most money on under the
home medical equipment benefit, including oxygen and power wheelchairs. This new
program will eliminate some providers from the competitive bidding markets,
because only those providers who are chosen to participate (based largely on
price) will be able to provide beneficiaries with items included in the bid.
Medicare will be expanding the program to an additional 70 metropolitan areas in
2009. In addition, in 2009, Medicare has the authority to apply bid rates from
bidding areas in non-bid areas. The competitive bidding program will result in
reduced payment levels, that will vary by product category and by metropolitan
area, and will depend in large part upon the level of bids the company’s
customers submit in an effort to ensure they become approved contract suppliers.
It is difficult to predict the specific reductions in payment levels that will
result from this process.
Outside the United States, reimbursement
systems vary significantly by country. Many foreign markets have
government-managed health care systems that govern reimbursement for new home
health care products. The ability of hospitals and other providers supported by
such systems to purchase the company’s products is dependent, in part, upon
public budgetary constraints. Canada and Germany and other European countries,
for example, have tightened reimbursement rates and other countries may follow.
If adequate levels of reimbursement from third-party payors outside of the
United States are not obtained, international sales of the company’s products
may decline, which could adversely affect the company’s net sales and would have
a material adverse effect on the company’s business, financial condition and
results of operations.
The impact of all the changes discussed
above is uncertain and could have a material adverse effect on the company’s
business, financial condition and results of operations.
The consolidation of health care
customers and the company’s competitors could result in a loss of customers or
in additional competitive pricing pressures.
Numerous initiatives and reforms
instituted by legislators, regulators and third-party payors to reduce home
medical equipment costs have resulted in a consolidation trend in the home
medical equipment industry as well as among the company’s customers, including
home health care providers. Some of the company’s competitors have been lowering
the purchase prices of their products in an effort to attract customers. This in
turn has resulted in greater pricing pressures, including pressure to offer
customers more competitive pricing terms, and the exclusion of certain suppliers
from important market segments as group purchasing organizations, independent
delivery networks and large single accounts continue to consolidate purchasing
decisions for some of the company’s customers. Further consolidation could
result in a loss of customers, including increased collectibility risks, or in
increased competitive pricing pressures.
The industry in which the company
operates is highly competitive and some of the company’s competitors may be
larger and may have greater financial resources than the company
does.
The home medical equipment market is
highly competitive and the company’s products face significant competition from
other well-established manufacturers. Any increase in competition may cause the
company to lose market share or compel the company to reduce prices to remain
competitive, which could materially adversely affect the company’s results of
operations.
If the company’s cost reduction efforts
are ineffective, the company’s revenues and profitability could be negatively
impacted.
In
response to the reductions in Medicare power wheelchair and oxygen reimbursement
levels and other governmental and third party payor pricing pressures and
competitive pricing pressures, the company initiated cost reduction efforts and
continues to implement further reductions. The company may not be successful in
achieving the operating efficiencies and operating cost reductions
expected from these efforts, including the estimated cost savings described
above, and the company may experience business disruptions associated with the
restructuring and cost reduction activities, including the restructuring
activities previously announced and, in particular, the company’s facility
consolidations initiated in connection with these activities. These efforts may
not produce the full efficiency and cost reduction benefits that the company
expects. Further, these benefits may be realized later than expected, and the
costs of implementing these measures may be greater than anticipated. If these
measures are not successful, the company intends to undertake additional cost
reduction efforts, which could result in future charges. Moreover, the company’s
ability to achieve other strategic goals and business plans and the company’s
financial performance may be adversely affected and the company could experience
business disruptions with customers and elsewhere if the company’s cost
reduction and restructuring efforts prove
ineffective.
The company’s success depends on the
company’s ability to design, manufacture, distribute and achieve market
acceptance of new products with higher functionality and lower
costs.
The company sells products to customers primarily in markets that are characterized by
technological change, product innovation and evolving industry standards and in
which product price is increasingly the primary consideration in customers’
purchasing decisions. The company is continually engaged in product development
and improvement programs. The company must continue to design and improve
innovative products, effectively distribute and achieve market acceptance of
those products, and reduce the costs of producing the company’s products, in
order to compete successfully with the company’s competitors. If competitors’
product development capabilities become more effective than the company’s
product development capabilities, if competitors’ new or improved products are
accepted by the market before the company’s products or if competitors are able
to produce products at a lower cost and thus offer products for sale at a
lower price, the company’s business, financial condition and results of
operation could be adversely affected.
The company is subject to extensive
government regulation, and if the company fails to comply with applicable laws
or regulations, the company could suffer severe criminal or civil sanctions or
be required to make significant changes to the company’s operations that could
have a material adverse effect on the company’s results of
operations.
The company sells its products
principally to medical equipment and home health care providers who resell or
rent those products to consumers. Many of those providers (the company’s
customers) are reimbursed for the Invacare® products sold to their customers and
patients by third-party payors, including Medicare and Medicaid. The federal
government and all states and countries in which we operate regulate many
aspects of the company’s business. As a health care manufacturer, the company is
subject to extensive government regulation, including numerous laws directed at
preventing fraud and abuse and laws regulating reimbursement under various
government programs. The marketing, invoicing, documenting and other practices
of health care suppliers and manufacturers are all subject to government
scrutiny. Government agencies periodically open investigations and obtain
information from health care suppliers and manufacturers pursuant to the legal
process. Violations of law or regulations can result in severe criminal, civil
and administrative penalties and sanctions, including disqualification from
Medicare and other reimbursement programs, which could have a material adverse
effect on the company’s business. The company has established policies and
procedures that the company believes are sufficient to ensure that the company
will operate in substantial compliance with these laws and
regulations.
The company received a subpoena in 2006
from the U.S. Department of Justice seeking documents relating to three
long-standing and well-known promotional and rebate programs maintained by the
company. The company believes the programs described in the subpoena are in
compliance with all applicable laws and the company is cooperating fully with
the government investigation which is currently being conducted out of
Washington, D.C. There can be no assurance that the company’s business or
financial condition will not be adversely affected by the government
investigation.
Health care is an area of rapid
regulatory change. Changes in the law and new interpretations of existing laws
may affect permissible activities, the costs associated with doing business, and
reimbursement amounts paid by federal, state and other third-party payors. The
company cannot predict the future of federal, state and local regulation or
legislation, including Medicare and Medicaid statutes and regulations, or
possible changes in health care policies in any country in which the company
conducts business. Future legislation and regulatory changes could have a
material adverse effect on the company’s business.
The company’s research and development
and manufacturing processes are subject to federal, state, local and foreign
environmental requirements.
The
company’s research and development and manufacturing processes are subject to
federal, state, local and foreign environmental requirements, including
requirements governing the discharge of pollutants into the air or water, the
use, handling, storage and disposal of hazardous substances and the
responsibility to investigate and cleanup of contaminated sites. Under some of
these laws, the company could also be held responsible for costs relating to any
contamination at the company’s past or present facilities and at third-party
waste disposal sites. These could include costs relating to contamination that
did not result from any violation of law and, in some circumstances,
contamination that the company did not cause. The company may incur
significant expenses
relating to the failure to comply with environmental laws. The enactment of
stricter laws or regulations, the stricter interpretation of existing laws and
regulations or the requirement to undertake the investigation or remediation of
currently unknown environmental contamination at the company’s own or third
party sites may require the company to make additional expenditures, which could
be material.
Lower cost imports could negatively
impact the company’s profitability.
Lower cost imports sourced from Asia may
negatively impact the company’s sales volumes. Competition from these products
may force the company to lower our prices, cutting into the company’s profit
margins and reducing the company’s overall profitability. Asian goods had a
particularly strong negative impact on the company’s sales of Standard Products
(this category includes products such as manual wheelchairs, canes, walkers and
bath aids) during 2006 and 2007.
The company’s failure to comply with
regulatory requirements or receive regulatory clearance or approval for the
company’s products or operations in the United States or abroad could adversely
affect the company’s business.
The company’s medical devices are
subject to extensive regulation in the United States by the Food and Drug
Administration, or the “FDA,” and by similar governmental authorities in the
foreign countries where the company does business. The FDA regulates virtually
all aspects of a medical device’s development, testing, manufacturing, labeling,
promotion, distribution and marketing. In addition, the company is required to
file reports with the FDA if the company’s products cause, or contribute to,
death or serious injury, or if they malfunction and would be likely to cause, or
contribute to, death or serious injury if the malfunction were to recur. In
general, unless an exemption applies, the company’s wheelchair and respiratory
medical devices must receive a pre-marketing clearance from the FDA before they
can be marketed in the United States. The FDA also regulates the export of
medical devices to foreign countries. The company cannot be assured that any of
the company’s devices, to the extent required, will be cleared by the FDA
through the pre-market clearance process or that the FDA will provide export
certificates that are necessary to export certain of the company’s
products.
Additionally, the company may be
required to obtain pre-marketing clearances to market modifications to the
company’s existing products or market its existing products for new indications.
The FDA requires device manufacturers themselves to make and document a
determination of whether or not a modification requires a new clearance;
however, the FDA can review and disagree with a manufacturer’s decision. The
company has applied for, and received, a number of such clearances in the past.
The company may not be successful in receiving clearances in the future or the
FDA may not agree with the company’s decisions not to seek clearances for any
particular device modification. The FDA may require a clearance for any past or
future modification or a new indication for the company’s existing products.
Such submissions may require the submission of additional data and may be time
consuming and costly, and may not ultimately be cleared by the
FDA.
If the FDA requires the company to
obtain pre-marketing clearances for any modification to a previously cleared
device, the company may be required to cease manufacturing and marketing the
modified device or to recall the modified device until the company obtains FDA
clearance and the company may be subject to significant regulatory fines or
penalties. In addition, the FDA may not clear these submissions in a timely
manner, if at all. The FDA also may change its policies, adopt additional
regulations or revise existing regulations, each of which could prevent or delay
pre-market clearance of the company’s devices, or could impact the company’s
ability to market a device that was previously cleared. Any of the foregoing
could adversely affect the company’s business.
The company’s failure to comply with the
regulatory requirements of the FDA and other applicable U.S. regulatory
requirements may subject the company to administrative or judicially imposed
sanctions. These sanctions include warning letters, civil penalties, criminal
penalties, injunctions, product seizure or detention, product recalls and total
or partial suspension of production.
In many of the foreign countries in
which the company markets its products, the company is subject to extensive
regulations that are similar to those of the FDA, including those in Europe. The
regulation of the company’s products in Europe falls primarily within the
European Economic Area, which consists of the 27 member states of the
European Union, as well as Iceland, Liechtenstein and Norway. Only medical
devices that comply with certain conformity requirements of the Medical Device
Directive are allowed to be marketed within the European Economic Area. In
addition, the national health or social security organizations of certain
foreign countries, including those outside Europe, require the company’s
products to be qualified before they can be marketed in those countries. Failure
to receive or delays in the receipt of, relevant foreign qualifications in the
European Economic Area or other foreign countries could have a material adverse
effect on the company’s business.
The company’s products are subject to
recalls, which could harm the company’s reputation and
business.
The
company is subject to ongoing medical device reporting regulations that require
the company to report to the FDA or similar governmental authorities in other
countries if the company’s products cause, or contribute to, death or serious
injury, or if they malfunction and would be likely to cause, or contribute to,
death or serious injury if the malfunction were to recur. The FDA
and similar
governmental authorities in other countries have the authority to require the
company to do a field correction or recall the company’s products in the event
of material deficiencies or defects in design or manufacturing. In addition, in
light of a deficiency, defect in design or manufacturing or defect in labeling,
the company may voluntarily elect to recall or correct the company’s products. A
government mandated or voluntary recall/field correction by the company could
occur as a result of component failures, manufacturing errors or design defects,
including defects in labeling. Any recall/field correction would divert
managerial and financial resources and could harm the company’s reputation with
its customers, product users and the health care professionals that use,
prescribe and recommend the company’s products. The company could have product
recalls or field actions that result in significant costs to the company in the
future, and these actions could have a material adverse effect on the company’s
business.
The company’s reported results may be
adversely affected by increases in reserves for uncollectible accounts
receivable.
The company has a large balance of
accounts receivable and has established a reserve for the portion of such
accounts receivable that the company estimates will not be collected because of
the company’s customers’ non-payment. The reserve is based on historical trends
and current relationships with the company’s customers and providers. Changes in
the company’s collection rates can result from a number of factors, including
turnover in personnel, changes in the payment policies or practices of payors or
changes in industry rates or pace of reimbursement. As a result of recent
changes in Medicare reimbursement regulations, specifically changes to the
qualification processes and reimbursement levels of consumer power wheelchairs
and custom power wheelchairs, the business viability of several of the company’s
customers has become questionable. The company’s reserve for uncollectible
receivables has fluctuated in the past and will continue to fluctuate in the
future. Changes in rates of collection or fluctuations, even if they are small
in absolute terms, could require the company to increase its reserve for
uncollectible receivables beyond its current level. The company has reviewed the
accounts receivables associated with many of its customers that are most exposed
to these issues. As part of the company’s 2006 financial results, the company
recorded an incremental accounts receivable reserve of $26.8 million and
continues to closely monitor collections and the credit-worthiness of the
company’s customers. Total provision for bad debt for the company in
2006 was $37.7 million. In addition, during 2007, the company
provided for an additional bad debt reserve of $11.9
million.
Difficulties in implementing a new
Enterprise Resource Planning system have disrupted the company’s
business.
During the fourth quarter of 2005, the
company implemented the second phase of the company’s Enterprise Resource
Planning, or “ERP,” system. Primarily as a result of the complexities and
business process changes associated with this implementation, the company
encountered a number of issues related to the start-up of the system, including
difficulties in processing orders, customer disruptions and the loss of some
business. While the company believes that the difficulties associated with
implementing and stabilizing the company’s ERP system were temporary and have
been addressed, there can be no assurance that the company will not experience
additional ongoing disruptions or inefficiencies in the company’s business
operations as a result of this new system implementation, the final phases of
which are to be completed in 2008 or 2009.
The company may be adversely affected by
legal actions or regulatory proceedings.
The company may be subject to claims,
litigation or other liabilities as a result of injuries caused by allegedly
defective products, acquisitions the company has completed or in the
intellectual property area. Any such claims or litigation against the company,
regardless of the merits, could result in substantial costs and could harm the
company’s business. Intellectual property litigation or claims also could
require the company to:
|
•
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cease
manufacturing and selling any of the company’s products that incorporate
the challenged intellectual
property;
|
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•
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obtain
a license from the holder of the infringed intellectual property right
alleged to have been infringed, which license may not be available on
commercially reasonable terms, if at
all; or
|
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•
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redesign
or rename the company’s products, which may not be possible, and could be
costly and time consuming.
|
The results of legal proceedings are
difficult to predict and the company cannot provide any assurance that an action
or proceeding will not be commenced against the company, or that the company
will prevail in any such action or proceeding. An unfavorable resolution of any
legal action or proceeding could materially and adversely affect the company’s
business, results of operations, liquidity or financial
condition.
Product liability claims may harm the
company’s business, particularly if the number of claims increases significantly
or the company’s product liability insurance proves
inadequate.
The manufacture and sale of home health
care devices and related products exposes the company to a significant risk of
product liability claims. From time to time, the company has been, and is
currently, subject to a number of product liability claims alleging that the use
of the company’s products has resulted in serious injury or even
death.
Even if the company is successful in
defending against any liability claims, these claims could nevertheless distract
the company’s management, result in substantial costs, harm the company’s
reputation, adversely affect the sales of all the company’s products and
otherwise harm the company’s business. If there is a significant increase in the
number of product liability claims, the company’s business could be adversely
affected.
The company’s captive insurance company,
Invatection Insurance Company, 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 the company’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 a 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
are adjusted on a regular basis and can be impacted by actual loss awards or
settlements on claims. While actuarial analysis is used to help determine
adequate reserves, the company is responsible for the determination and
recording of adequate reserves in accordance with accepted loss reserving
standards and practices.
In addition, as a result of a product
liability claim or if the company’s products are alleged to be defective, the
company may have to recall some of its products, which could result in
significant costs to the company and harm the company’s business
reputation.
If the company’s patents and other
intellectual property rights do not adequately protect the company’s products,
the company may lose market share to its competitors and may not be able to
operate the company’s business profitably.
The company relies on a combination of
patents, trade secrets and trademarks to establish and protect the company’s
intellectual property rights in its products and the processes for the
development, manufacture and marketing of the company’s
products.
The company uses non-patented
proprietary know-how, trade secrets, undisclosed internal processes and other
proprietary information and currently employs various methods to protect this
proprietary information, including confidentiality agreements, invention
assignment agreements and proprietary information agreements with vendors,
employees, independent sales agents, distributors, consultants, and others.
However, these agreements may be breached. The FDA or another governmental
agency may require the disclosure of this information in order for the company
to have the right to market a product. Trade secrets, know-how and other
unpatented proprietary technology may also otherwise become known to or
independently developed by the company’s competitors.
In addition, the company also holds U.S.
and foreign patents relating to a number of its components and products and has
patent applications pending with respect to other components and products. The
company also applies for additional patents in the ordinary course of its
business, as the company deems appropriate. However, these precautions offer
only limited protection, and the company’s proprietary information may become
known to, or be independently developed by, competitors, or the company’s
proprietary rights in intellectual property may be challenged, any of which
could have a material adverse effect on the company’s business, financial
condition and results of operations. Additionally, the company cannot assure
that its existing or future patents, if any, will afford the company adequate
protection or any competitive advantage, that any future patent applications
will result in issued patents or that the company’s patents will not be
circumvented, invalidated or declared unenforceable.
Any proceedings before the
U.S. Patent and Trademark Office could result in adverse decisions as to
the priority of the company’s inventions and the narrowing or invalidation of
claims in issued patents. The company could also incur substantial costs in any
proceeding. In addition, the laws of some of the countries in which the
company’s products are or may be sold may not protect the company’s products and
intellectual property to the same extent as U.S. laws, if at all. The
company may also be unable to protect the company’s rights in trade secrets and
unpatented proprietary technology in these countries.
In addition, the company holds patent
and other intellectual property licenses from third parties for some of its
products and on technologies that are necessary in the design and manufacture of
some of the company’s products. The loss of these licenses could prevent the
company from, or could cause additional disruption or expense in, manufacturing,
marketing and selling these products, which could harm the company’s
business.
The company’s operating results and
financial condition could be adversely affected if the company becomes involved
in litigation regarding its patents or other intellectual property
rights.
Litigation involving patents and other
intellectual property rights is common in the company’s industry, and companies
in the company’s industry have used intellectual property litigation in an
attempt to gain a competitive advantage. The company currently is, and in the
future may become, a party to lawsuits involving patents or other intellectual
property. Litigation is costly and time consuming. If the company loses any of
these proceedings, a court or a similar foreign governing body could invalidate
or render unenforceable the company’s owned or licensed patents, require the
company to pay significant damages, seek licenses and/or pay ongoing royalties
to third parties, require the company to redesign its products, or prevent the
company from manufacturing, using or selling its products, any of which would
have an adverse effect on the company’s results of operations and financial
condition. The company has brought, and may in the future also bring, actions
against third parties for an infringement of the company’s intellectual property
rights. The company may not succeed in these actions. The defense and
prosecution of intellectual property suits, proceedings before the
U.S. Patent and Trademark Office or its foreign equivalents and related
legal and administrative proceedings are both costly and time consuming.
Protracted litigation to defend or prosecute the company’s intellectual property
rights could seriously detract from the time the company’s management would
otherwise devote to running its business. Intellectual property litigation
relating to the company’s products could cause its customers or potential
customers to defer or limit their purchase or use of the affected products until
resolution of the litigation.
The company’s business strategy relies
on certain assumptions concerning demographic trends that impact the market for
its products. If these assumptions prove to be incorrect, demand for the
company’s products may be lower than expected.
The company’s ability to achieve its
business objectives is subject to a variety of factors, including the relative
increase in the aging of the general population. The company believes that these
trends will increase the need for its products. The projected demand for the
company’s products could materially differ from actual demand if the company’s
assumptions regarding these trends and acceptance of its products by health care
professionals and patients prove to be incorrect or do not materialize. If the
company’s assumptions regarding these factors prove to be incorrect, the company
may not be able to successfully implement the company’s business strategy, which
could adversely affect the company’s results of operations. In addition, the
perceived benefits of these trends may be offset by competitive or business
factors, such as the introduction of new products by the company’s competitors
or the emergence of other countervailing trends.
The loss of the services of the
company’s key management and personnel could adversely affect its ability to
operate the company’s business.
The company’s future success will
depend, in part, upon the continued service of key managerial, research and
development staff and sales and technical personnel. In addition, the company’s
future success will depend on its ability to continue to attract and retain
other highly qualified personnel. The company may not be successful in retaining
its current personnel or in hiring or retaining qualified personnel in the
future. The company’s failure to do so could have a material adverse effect on
the company’s business. These executive officers have substantial experience and
expertise in the company’s industry. The company’s future success depends, to a
significant extent, on the abilities and efforts of its executive officers and
other members of its management team. If the company loses the services of any
of its management team, the company’s business may be adversely
affected.
The company’s Chief Executive Officer
and certain members of management own shares representing a substantial
percentage of the company’s voting power and their interests may differ from
other shareholders.
The company has two classes of common
stock. The Common Shares have one vote per share and the Class B Common
Shares have 10 votes per share. As of January 1, 2008 the company’s
chairman and CEO, Mr. A. Malachi Mixon, III, and certain members of
management beneficially own up to approximately 34% of the combined voting power
of the company’s Common Shares and Class B Common Shares and could
influence the outcome of any corporate transaction or other matter submitted to
the shareholders for approval, including mergers, consolidations and the sale of
all or substantially all of the company’s assets. They will also have the power
to influence or make more difficult a change in control. The interests of
Mr. Mixon and his relatives may differ from the interests of the other
shareholders and they may take actions with which some shareholders may
disagree. Mr. Mixon, however, is committed to the long-term interests
of all shareholders.
Decreased availability or increased
costs of raw materials could increase the company’s costs of producing its
products.
The company purchases raw materials,
fabricated components and services from a variety of suppliers. Raw materials
such as plastics, steel, and aluminum are considered key raw materials. Where
appropriate, the company employs contracts with its suppliers, both domestic and
international. In those situations in which contracts are not advantageous, the
company believes that its relationships with their suppliers are satisfactory
and that alternative sources of supply are readily available. From time to time,
however, the prices and availability of these raw materials fluctuate due to
global market demands, which could impair the company’s ability to procure
necessary materials, or increase the cost of these materials. Inflationary and
other increases in costs of these raw materials have occurred in the past and
may recur from time to time. In addition, freight costs associated with shipping
and receiving product and sales are impacted by fluctuations in the cost of oil
and gas. A reduction in the supply or increase in the cost of those raw
materials could impact the company’s ability to manufacture its products and
could increase the cost of production. As an example, the increased inflation in
China has and will probably continue to impact the faster appreciation of the
Yuan as well as have an unfavorable impact on the cost of key commodities, such
as steel and aluminum. These impacts can have a negative impact on the
profits of the company if these increases cannot be passed onto our
customers.
Since the company’s ability to obtain
further financing may be limited, the company may be unable to acquire strategic
acquisition candidates.
The company’s plans include identifying,
acquiring, and integrating other strategic businesses. There are various reasons
for the company to acquire businesses or product lines, including providing new
products or new manufacturing and service capabilities, to add new customers, to
increase penetration with existing customers, and to expand into new geographic
markets. The company’s ability to successfully grow through acquisitions depends
upon its ability to identify, negotiate, complete and integrate suitable
acquisitions and to obtain any necessary financing. The costs of acquiring other
businesses could increase if competition for acquisition candidates increases.
If the company is unable to obtain the necessary financing, it may miss
opportunities to grow its business through strategic
acquisitions.
Additionally,
the success of the company’s acquisition strategy is subject to other risks and
costs, including the following:
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the
company’s ability to realize operating efficiencies, synergies, or other
benefits expected from an acquisition, and possible delays in realizing
the benefits of the acquired company or
products;
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diversion
of management’s time and attention from other business
concerns;
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difficulties
in retaining key employees of the acquired businesses who are necessary to
manage these businesses;
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•
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difficulties
in maintaining uniform standards, controls, procedures and policies
throughout acquired
companies;
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adverse
effects on existing business relationships with suppliers or
customers;
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the
risks associated with the assumption of contingent or undisclosed
liabilities of acquisition
targets; and
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ability
to generate future cash flows or the availability of
financing.
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In
addition, an acquisition could materially impair the company’s operating results
by causing the company to incur debt or requiring the amortization of
acquisition expenses and acquired assets.
The
company is subject to certain risks inherent in managing and operating
businesses in many different foreign jurisdictions.
The
company has significant international operations, including operations in
Australia, New Zealand, Asia and Europe. There are risks inherent in operating
and selling products internationally, including:
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difficulties
in enforcing agreements and collecting receivables through certain foreign
legal systems;
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•
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foreign
customers who may have longer payment cycles than customers in the United
States;
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tax
rates in certain foreign countries that may exceed those in the United
States and foreign earnings that may be subject to withholding
requirements;
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the
imposition of tariffs, exchange controls or other trade restrictions
including transfer pricing restrictions when products produced in one
country are sold to an affiliated entity in another
country;
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general
economic and political conditions in countries where the company operates
or where end users of the company’s products
reside;
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difficulties
associated with managing a large organization spread throughout various
countries;
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difficulties
in enforcing intellectual property rights and weaker intellectual property
rights protection in some
countries;
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required
compliance with a variety of foreign laws and
regulations;
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different
regulatory environments and reimbursement
systems; and
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differing
consumer product
preferences.
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The company’s revenues and profits are
subject to exchange rate fluctuations that could adversely affect its results of
operations or financial position.
Currency exchange rates are subject to
fluctuation due to, among other things, changes in local, regional or global
economic conditions, the imposition of currency exchange restrictions and
unexpected changes in regulatory or taxation environments. The functional
currency of the company’s subsidiaries outside the United States is the
predominant currency used by the subsidiaries to transact business. Through the
company’s international operations, the company is exposed to foreign currency
fluctuations, and changes in exchange rates can have a significant impact on net
sales and elements of cost.
The company uses forward contracts to
help reduce its exposure to exchange rate variation risk. Despite the company’s
efforts to mitigate these risks, however, the company’s revenues and
profitability may be materially adversely affected by exchange rate
fluctuations. The company also 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, but those efforts may not adequately protect the company from
significant interest rate risks.
Certain provisions of the company’s debt
agreements, its charter documents, its shareholder rights plan and Ohio law
could delay or prevent the sale of the company.
Provisions of the company’s debt
agreements, its charter documents, its shareholder rights plan and Ohio law may
make it more difficult for a third party to acquire, or attempt to acquire,
control of the company even if a change in control would result in the purchase
of shares of the company at a premium to market price. In addition,
these provisions may limit the ability of shareholders of the company to approve
transactions that they may deem to be in their best
interest.
Item 1B. Unresolved Staff
Comments.
None
The company owns or leases its
warehouses, offices and manufacturing facilities and believes that these
facilities are well maintained, adequately insured and suitable for their
present and intended uses. Information concerning certain leased facilities of
the company as of December 31, 2007 is set forth in Leases and Commitments
in the Notes to the Consolidated Financial Statements of the company included in
this report and in the table below:
North American/HME
Operations
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Square
Feet
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Ownership
Or
Expiration
Date of
Lease
|
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Use
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Manufacturing and
Offices
|
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Manufacturing, Warehouse and
Offices
|
North American/HME
Operations
|
|
Ownership
Or Expiration
Date of
Lease
|
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Manufacturing, Warehouse and
Offices
|
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Manufacturing, Warehouses and
Offices
|
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Manufacturing and
Offices
|
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Manufacturing and
Offices
|
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Manufacturing, Warehouse and
Offices
|
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Manufacturing and
Offices
|
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Manufacturing and
Offices
|
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Manufacturing, Warehouse and
Offices
|
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Manufacturing and
Offices
|
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Manufacturing and
Offices
|
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Manufacturing and
Offices
|
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Manufacturing and
Offices
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Manufacturing and
Offices
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Rancho Cucamonga,
California
|
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Elkhart,
Indiana
|
43,268
|
October
2009
|
Two (5 yr.)
|
Manufacturing, Warehouses and
Offices
|
London,
Ontario
|
103,200
|
Own
|
—
|
Manufacturing and
Offices
|
London,
Ontario
|
5,648
|
Month to
Month
|
—
|
Warehouse
|
Overland,
Missouri
|
7,500
|
Month to
Month
|
None
|
Offices
|
Asia/Pacific
Operations
|
|
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Adelaide,
Australia
|
9,601
|
December
2010
|
One (3 yr.)
|
Manufacturing, Warehouse and
Offices
|
Auckland, New
Zealand
|
30,518
|
September 2008
|
Two (3 yr.)
|
Manufacturing, Warehouse and
Offices
|
Brisbane,
Australia
|
2,640
|
December 2008
|
One (3 yr.)
|
Warehouse and
Offices
|
Broadview,
Australia
|
16,146
|
October
2011
|
One (5 yr.)
|
Manufacturing, Warehouse and
Offices
|
Christchurch, New
Zealand
|
15,683
|
December 2014
|
Two (6 yr.)
|
Offices
|
Christchurch, New
Zealand
|
80,213
|
December 2008
|
One (3 yr.)
|
Manufacturing, Warehouse and
Offices
|
Melbourne,
Australia
|
16,006
|
December
2012
|
One (5 yr.)
|
Manufacturing, Warehouse and
Offices
|
Newtown,
Australia
|
721
|
March 2008
|
One (1 yr.)
|
Retail
|
North Olmsted,
Ohio
|
2,280
|
October
2008
|
One (3yr.)
|
Offices
|
Southport,
Australia
|
1,119
|
Month to
Month
|
One (3 yr.)
|
Retail
|
Stafford,
Australia
|
2,906
|
May 2008
|
Open
|
Warehouse
|
Asia/Pacific
Operations
|
Square
Feet
|
Ownership
Or Expiration
Date of
Lease
|
Renewal
Options
|
Use
|
Suzhou,
China
|
41,290
|
June 2010
|
—
|
Manufacturing and
Offices
|
Sydney,
Australia
|
42,477
|
February
2009
|
Two (3 yr.)
|
Warehouse and
Offices
|
Taipei,
Taiwan
|
2,153
|
June 2008
|
—
|
Offices
|
Taipei,
Taiwan
|
845
|
July
2008
|
—
|
Offices
|
Windsor,
Australia
|
20,312
|
October
2008
|
Open
|
Manufacturing, Warehouse and
Offices
|
Windsor,
Australia
|
883
|
October
2008
|
Open
|
Manufacturing
|
Windsor,
Australia
|
1,119
|
March 2008
|
Open
|
Manufacturing
|
Windsor,
Australia
|
3,014
|
October
2008
|
Open
|
Retail
|
Windsor,
Australia
|
3,498
|
March 2008
|
Open
|
Warehouse
|
Worcester, United
Kingdom
|
15,865
|
June 2013
|
Two (6 yr.)
|
Warehouse and
Offices
|
European
Operations
|
|
|
|
|
Albstadt,
Germany
|
78,494
|
February
2018
|
Two (5 yr.)
|
Manufacturing, Warehouse and
Offices
|
Anderstorp,
Sweden
|
47,560
|
Own
|
—
|
Manufacturing, Warehouse and
Offices
|
Bergen,
Norway
|
1,076
|
April 2009
|
One (5 yr.)
|
Warehouse and
Offices
|
Bridgend,
Wales
|
131,522
|
Own
|
—
|
Manufacturing, Warehouse and
Offices
|
Brondby,
Denmark
|
8,342
|
June 2008
|
One (1 yr.)
|
Warehouse and
Offices
|
Cardiff,
Wales
|
31,000
|
December 2011
|
One (5 yr.)
|
Warehouse and
Offices
|
Dio, Sweden
|
107,600
|
Own
|
—
|
Manufacturing, Warehouse and
Offices
|
Dublin,
Ireland
|
5,000
|
December 2024
|
Three (5
yr.)
|
Warehouse and
Offices
|
Ede, The
Netherlands
|
12,917
|
May 2009
|
One (5 yr.)
|
Warehouse
|
Ede, The
Netherlands
|
4,628
|
November 2011
|
One (5 yr.)
|
Offices
|
Ede, The
Netherlands
|
4,628
|
May 2011
|
One (5 yr.)
|
Offices
|
Fondettes,
France
|
122,915
|
Own
|
—
|
Manufacturing
|
Fondettes,
France
|
109,706
|
Own
|
—
|
Warehouse and
Offices
|
Girona,
Spain
|
13,600
|
November
2011
|
One (1 yr.)
|
Warehouse and
Offices
|
Gland,
Switzerland
|
5,533
|
September 2008
|
One (5 yr.)
|
Offices
|
Gland,
Switzerland
|
1,292
|
September 2008
|
One (4 yr.)
|
Offices
|
Goteberg,
Sweden
|
7,500
|
June 2009
|
One (3 yr.)
|
Warehouse and
Offices
|
Hong,
Denmark
|
155,541
|
Own
|
—
|
Manufacturing, Warehouse and
Offices
|
Isny,
Germany
|
40,000
|
Own
|
—
|
Manufacturing, Warehouses and
Offices
|
Isny,
Germany
|
885
|
November
2009
|
None
|
Warehouse
|
Landskrona,
Sweden
|
3,099
|
April 2008
|
One (3 yr.)
|
Warehouse
|
Loppem,
Belgium
|
17,539
|
March 2009
|
One (3 yr.)
|
Warehouse and
Offices
|
Mondsee,
Austria
|
2,153
|
March 2008
|
One (3 yr.)
|
Warehouse and
Offices
|
Oporto,
Portugal
|
27,800
|
Own
|
—
|
Manufacturing, Warehouse and
Offices
|
Oskarshamn,
Sweden
|
3,551
|
December 2008
|
One (1 yr.)
|
Warehouse
|
Oslo,
Norway
|
36,414
|
August 2011
|
None
|
Warehouse and
Offices
|
Porta Westfalica,
Germany
|
134,563
|
October
2021
|
After 17
yrs
|
Manufacturing, Warehouse and
Offices
|
Spanga,
Sweden
|
3,228
|
June 2010
|
One (3 yr.)
|
Warehouse and
Offices
|
Spanga,
Sweden
|
16,140
|
Own
|
—
|
Warehouse and
Offices
|
St. Cyr sur Loire,
France
|
538
|
Own
|
—
|
Offices
|
Thiene,
Italy
|
21,520
|
Own
|
—
|
Warehouse and
Offices
|
Tours,
France
|
6,626
|
Own
|
—
|
Warehouse and
Offices
|
Trondheim,
Norway
|
3,229
|
November 2010
|
One (3 yr.)
|
Services and
Offices
|
Witterswil,
Switzerland
|
40,328
|
March 2015
|
One (5 yr.)
|
Manufacturing, Warehouse, and
Offices
|
Witterswil,
Switzerland
|
1,954
|
February 2009
|
—
|
Warehouse
|
In the ordinary course of its business,
Invacare is a defendant in a number of lawsuits, primarily product liability
actions in which various plaintiffs seek damages for injuries allegedly caused
by defective products. All of the product liability lawsuits have been referred
to the company’s insurance carriers and generally are contested vigorously. The
coverage territory of the company’s insurance is worldwide with the exception of
those countries with respect to which, at the time the product is sold for use
or at the time a claim is made, the U.S. government has suspended or
prohibited diplomatic or trade relations. Management does not believe that the
outcome of any of these actions will have a material adverse effect upon the
company’s business or financial condition.
The company received a subpoena in 2006
from the U.S. Department of Justice seeking documents relating to three
long-standing and well-known promotional and rebate programs maintained by the
company. The company believes that the programs described in the subpoena are in
compliance with all applicable laws and the company has cooperated fully with
the government investigation. The company has had no communication
with the U.S, Department of Justice concerning this matter in over a
year.
During the fourth quarter of 2007, no
matter was submitted to a vote of the company’s security
holders.
The following table sets forth the names
of the executive officers of Invacare, each of whom serves at the pleasure of
the Board of Directors, as well as certain other
information.
Name
|
Age
|
Position
|
A. Malachi
Mixon, III
|
67
|
Chairman of the Board of Directors
and Chief Executive Officer
|
Gerald B.
Blouch
|
61
|
President, Chief Operating Officer
and Director**
|
Gregory C.
Thompson
|
52
|
Senior Vice President and Chief
Financial Officer**
|
Dale C.
LaPorte
|
66
|
Senior Vice President —
Business Development, General Counsel and
Secretary
|
Joseph B.
Richey, II
|
71
|
President — Invacare
Technologies, Senior Vice President — Electronics and Design
Engineering and Director
|
Louis F.J.
Slangen
|
60
|
Senior Vice President —
Global Market Development
|
Joseph S.
Usaj
|
56
|
Senior Vice President — Human
Resources
|
____________
*
|
The description
of executive officers is included pursuant to Instruction 3 to
Section (b) of Item 401 of
Regulation S-K.
|
**
|
As previously
announced, Mr. Thompson has resigned from his employment with the company,
effective as of March 1, 2008, for another
opportunity. Effective March 1, 2008, Mr. Blouch will assume
the additional responsibilities of acting Chief Financial
Officer.
|
A. Malachi
Mixon, III has been a director since 1979. Mr. Mixon has been Chief
Executive Officer since 1979 and Chairman of the Board since 1983 and also
served as President until 1996, when Gerald B. Blouch, Chief Operating Officer,
was elected President. Mr. Mixon serves as a director of The
Sherwin-Williams Company (NYSE), Cleveland, Ohio, a manufacturer and distributor
of coatings and related products. Mr. Mixon also serves as Chairman of the Board
of Trustees of The Cleveland Clinic Foundation, Cleveland, Ohio, one of the
world’s leading academic medical centers.
Gerald B. Blouch has been President and
a director of Invacare since November 1996. Mr. Blouch has been Chief
Operating Officer since December 1994 and Chairman — Invacare International
since December 1993. Previously, Mr. Blouch was President — Homecare
Division from March 1994 to December 1994 and Senior Vice President —
Homecare Division from September 1992 to March 1994. Mr. Blouch served as
Chief Financial Officer of Invacare from May 1990 to May 1993 and Treasurer of
Invacare from March 1991 to May 1993.
Gregory C. Thompson was named Senior
Vice President and Chief Financial Officer in November 2002. Before coming to
Invacare, Mr. Thompson served as Senior Vice President and Chief Financial
Officer of Sensormatic Electronics Corporation, a global manufacturer of
electronic security products, from October 2000 to January 2002 and was Vice
President and Controller from February 1997 to October 2000. Previously,
Mr. Thompson was Vice President and Corporate Controller for Wang
Laboratories from August 1994 to February 1997 and Assistant Corporate
Controller from October 1990 to August 1994.
Dale C. LaPorte has been Senior Vice
President for Business Development, General Counsel and Secretary since
January 1, 2006. Previously, Mr. LaPorte was a partner in the law firm
of Calfee, Halter & Griswold LLP from 1974 to 2005. He served as
Chairman of that firm from 2000 through 2004.
Joseph B. Richey, II has been a
director since 1980 and in September 1992 was named President — Invacare
Technologies and Senior Vice President — Electronics and Design
Engineering. Previously, Mr. Richey was Senior Vice President of Product
Development from July 1984 to September 1992 and Senior Vice President and
General Manager of North American Operations from September 1989 to September
1992. Mr. Richey also serves as a director of Steris Corporation (NYSE),
Cleveland, Ohio, a manufacturer and distributor of medical sterilizing equipment
and is a member of the Board of Trustees for Case Western Reserve University and
The Cleveland Clinic Foundation.
Louis F. J. Slangen was named Senior
Vice President — Global Market Development in June 2004. Previously,
Mr. Slangen was Senior Vice President — Sales & Marketing
from December 1994 to June 2004 and from September 1989 to December 1994 was
Vice President — Sales and Marketing. Mr. Slangen was previously
President — Rehab Division from March 1994 to December 1994 and Vice
President and General Manager — Rehab Division from September 1992 to March
1994.
Joseph S. Usaj has been the Senior Vice
President — Human Resources since May 2004. Before coming to Invacare,
Mr. Usaj served as Vice President — Human Resources for Ferro
Corporation, a global manufacturer of performance materials in the electronics,
automotive, consumer products and pharmaceutical industries, from August 2002 to
December 2003. Previously, Mr. Usaj was Vice President — Human
Resources for Phillips Medical Systems from 1998 to 2002.
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Invacare’s Common Shares, without par
value, trade on the New York Stock Exchange (NYSE) under the symbol “IVC.”
Ownership of the company’s Class B Common Shares (which are not listed on
NYSE) cannot be transferred, except, in general, to family members. Class B
Common Shares may be converted into Common Shares at any time on a
share-for-share basis. The number of record holders of the company Common Shares
and Class B Common Shares at February 22, 2008 was 3,707 and 24,
respectively. The closing sale price for the Common Shares on February 22,
2008 as reported by NYSE was $24.27. The prices set forth below do not include
retail markups, markdowns or commissions.
The range of high and low quarterly
prices of the Common Shares and dividends in each of the two most recent fiscal
years were as follows:
|
|
2007
|
|
|
2006
|
|
Quarter
Ended:
|
|
High
|
|
|
Low
|
|
|
Cash Dividends
Declared
|
|
|
High
|
|
|
Low
|
|
|
Cash Dividends
Declared
|
|
December 31
|
|
$
|
27.48
|
|
|
$
|
23.18
|
|
|
$
|
0.0125
|
|
|
$
|
25.27
|
|
|
$
|
21.39
|
|
|
$
|
0.0125
|
|
September 30
|
|
|
25.51
|
|
|
|
18.00
|
|
|
|
0.0125
|
|
|
|
25.59
|
|
|
|
20.18
|
|
|
|
0.0125
|
|
June 30
|
|
|
19.32
|
|
|
|
17.35
|
|
|
|
0.0125
|
|
|
|
31.16
|
|
|
|
24.84
|
|
|
|
0.0125
|
|
March 31
|
|
|
24.45
|
|
|
|
17.42
|
|
|
|
0.0125
|
|
|
|
35.12
|
|
|
|
30.32
|
|
|
|
0.0125
|
|
During 2007 and 2006, the Board of
Directors also declared dividends of $0.045 per Class B Common Share. For
information regarding limitations on the payment of dividends in the company
loan and note agreements, see Long Term Debt in the Notes to the Consolidated
Financial Statements included in this report. The Common Shares are entitled to
receive cash dividends at a rate of at least 110% of cash dividends paid on the
Class B Common Shares.
SHAREHOLDER RETURN PERFORMANCE
GRAPH
The following graph compares the yearly
cumulative total return on Invacare’s common shares against the yearly
cumulative total return of the companies listed on the Standard &
Poor’s 500 Stock Index, the Russell 2000 Stock Index and the S&P Healthcare
Equipment & Supplies Index*.
*
|
The S&P Healthcare
Equipment & Supplies Index is a capitalization-weighted average
index comprised of health care companies in the S&P 500
Index.
|
The graph assumes $100 invested on
December 31, 2002 in the common shares of Invacare Corporation, S&P 500
Index, Russell 2000 Index and the S&P Healthcare Equipment &
Supplies Index, including reinvestment of dividends, through December 31,
2007.
The following table presents information
with respect to repurchases of common shares made by the company during the
three months ended December 31, 2007. All of the repurchased shares were
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.
Period
|
|
Total Number
of
Shares
Purchased
|
|
|
Average Price
Paid Per
Share
|
|
|
Total Number of
Shares
Purchased as Part
of
Publicly
Announced
Plans or
Programs
|
|
|
Maximum Number
of Shares That May
Yet
Be Purchased
Under
the Plans or
Programs
|
|
10/1/2007-10/31/07
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
11/1/2007-
11/30/07
|
|
|
6,226
|
|
|
|
25.46
|
|
|
|
—
|
|
|
|
—
|
|
12/1/2007-12/31/07
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
6,226
|
|
|
$
|
25.46
|
|
|
|
—
|
|
|
|
—
|
|
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 2007.
The selected consolidated financial data
set forth below with respect to the company’s consolidated statements of
operations, cash flows and shareholders’ equity for the fiscal years ended
December 31, 2007, 2006 and 2005, and the consolidated balance sheets as of
December 31, 2007 and 2006 are derived from the Consolidated Financial
Statements included elsewhere in this Form 10-K. The consolidated
statements of earnings, cash flows and shareholders’ equity data for the fiscal
years ended December 31, 2004 and 2003 and consolidated balance sheet data for
the fiscal years ended December 31, 2005, 2004 and 2003 are derived from
the company’s previously filed Consolidated Financial Statements. The data set
forth below should be read in conjunction with Item 7 — “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the company’s Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
|
|
|
2007 *
|
|
|
|
2006 **
|
|
|
|
2005 ***
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share
and ratio data)
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (loss) per
Share — Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (loss) per
Share — Assuming Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per Common
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per Class B Common
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Beginning Shareholders’
Equity %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________
*
|
Reflects restructuring charge of
$11,408 ($10,478 after tax or $.33 per share assuming dilution),
$13,408 expense related to finance charges, interest and fees associated
with the company’s previously reported debt covenant violations ($13,408
after tax or $.42 per share assuming
dilution).
|
**
|
Reflects restructuring charge of
$21,250 ($18,700 after tax or $.59 per share assuming dilution),
$3,745 expense related to finance charges, interest and fees associated
with the company’s previously reported debt covenant violations ($3,300
after tax or $.10 per share assuming dilution), $26,775 expense
related to accounts receivable collectibility issues arising primarily
from Medicare reimbursement reductions for power wheelchairs announced on
November 15, 2006 ($26,775 after tax or $.84 per share assuming
dilution), $300,417 expense for an impairment charge related to the
write-down of goodwill and other intangible assets ($300,417 after tax or
$9.45 per share assuming dilution).
|
***
|
Reflects restructuring charge of
$7,533 ($5,160 after tax or $0.16 per share assuming
dilution).
|
The comparability of the Selected
Financial Data provided in the above table is limited as acquisitions made, in
particular the Domus acquisition in 2004, materially impacted the company’s
reported results. See Acquisitions in the Notes to the Consolidated Financial
Statements as provided in the company’s Form 10-K for the year ended
December 31, 2004.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
OUTLOOK
Cost reduction initiatives were the
company’s primary focus during 2007 and will continue to be a priority in
2008. The successful implementation of the 2007 cost reductions
improved the company’s operating margin by approximately $40
million. These initiatives included:
·
Product line rationalization;
·
Expanded outsourcing;
·
Rationalization of facilities;
·
Supply chain simplification / rationalization; and
·
Organization and infrastructure rationalization.
The incremental annualized savings from
these initiatives should improve the company’s operating margins in 2008 by
approximately $15 million. In addition, the company has identified
new cost reduction initiatives which should result in additional savings in 2008
of at least $20 million. However, it is anticipated that the benefit
to operating margins realized from these initiatives will be tempered by
continuing reimbursement uncertainties, primarily the implementation of
competitive bidding in the U.S., and continued global pricing pressures in the
industry.
With these factors in mind, the company
anticipates organic net sales growth of 4% to 5%, excluding the impact from
acquisitions and foreign currency translation adjustments. Earnings
and cash flow for 2008 are expected to be consistent with the guidance provided
in the company’s January 30, 2008 press release. In addition,
quarterly earnings before taxes are expected to improve in each quarter of 2008
when compared to the same periods of 2007, with the majority of the earnings
growth occurring in the second half of the year.
RESULTS OF
OPERATIONS
2007 Versus 2006
Charge
Related to Restructuring Activities. The company achieved its
cost reduction and profit improvement initiatives established at the beginning
of 2007, which included: product line rationalization, expanded
outsourcing, rationalization of facilities, supply chain simplification and
rationalization and organization infrastructure rationalization. The
benefits achieved from the cost reduction initiatives, principally related to
product sourcing savings, headcount reductions and manufacturing consolidation,
totaled $40 million for 2007, which was slightly better than the company’s
expectations. However, as expected, a significant portion of this
benefit was offset by continued pricing pressures and product mix shift toward
lower margin product, primarily in the U.S., as a result of Medicare related
reimbursement changes.
Restructuring charges of $11,408,000
were incurred during 2007 of which $1,817,000 is recorded in cost of goods sold,
since it relates to inventory markdowns and the remaining charge amount is
included in the Charge Related to Restructuring Activities in the Consolidated
Statement of Operations. The costs incurred during 2007 were
principally for severance, product line discontinuation and costs associated
with facility closures.
Net
Sales. Consolidated net sales for
2007 increased 7.0% for the year, to $1,602,237,000 from $1,498,035,000 in 2006.
Acquisitions accounted for a one percentage point increase in net sales while
foreign currency translation increased net sales by three percentage points. The
remaining increase was primarily driven by sales increases in the European and
Invacare Supply Group (ISG) segments. European net sales growth
resulted from volume increases in most regions, while ISG growth was mainly
due to home delivery program sales to large providers and volume increases in
diabetic, incontinence and enterals product
lines.
North America/Home Medical
Equipment
NA/HME net sales declined 1.2% in 2007
versus the prior year to $668,305,000 from $676,326,000 with foreign currency
translation and acquisitions increasing net sales by one percentage point and
less then one percentage point, respectively. 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,
HomeFill™ transfilling systems, sleep apnea, aerosol therapy and other
respiratory) products. Standard product line net sales improved by 1.9% in 2007,
driven by increased volumes in manual wheelchairs and beds, partially offset by
pricing reductions. Rehab product line net sales declined by
2.3% in 2007, primarily driven by volume declines in consumer power product
line, primarily with national providers, along with competitive pricing
reductions implemented in late 2006 due to Medicare reimbursement changes for
custom and consumer power wheelchairs. Respiratory product line sales
declined by 9.0% in 2007 primarily attributable to reduced unit volumes of
oxygen concentrators resulting from the loss of one large national provider,
continued inventory utilization programs by providers and pricing declines in
concentrators. However, HomeFill® oxygen system net sales increased
for the year by 30.4% due to increased purchases by two national
providers.
Invacare Supply
Group
ISG net sales increased 12.6% in 2007
over the prior year to $256,993,000 from $228,236,000. Acquisitions and foreign
currency translation had no impact on the sales increase. These sales consist of
ostomy, incontinence, diabetic, wound care and other medical supply product. The
increase is primarily attributable due to home delivery program sales to large
providers and volume increases in diabetic, incontinence and enterals product
lines.
Institutional Products
Group
IPG net sales decreased 4.7% in 2007
over the prior year to $89,026,000 from $93,455,000. Foreign currency
translation increased net sales by one percentage point while acquisitions had
no impact net sales. These sales consist of bed, furniture, home medical
equipment, and bathing equipment products sold into the long-term care market.
The decrease is primarily attributable reduced purchasing by a national
account.
Europe
European net sales increased 15.7% in
2007 compared to the prior year to $498,109,000 from $430,427,000 with foreign
currency translation increasing net sales by eight percentage points. Net sales
were strong in most of the regions as sales volumes increased with growth in
Standard, Rehab and Respiratory product lines.
Asia/Pacific
Asia/Pacific net sales increased 29.0%
in 2007 from the prior year to $89,804,000 from $69,591,000. Acquisitions
increased net sales by nineteen percentage points and foreign currency
translation increased net sales by thirteen percentage points. Performance in
this region continues to be negatively impacted by U.S. reimbursement
uncertainty in the consumer power wheelchair market. This has
resulted in decreased sales of microprocessor controllers by Invacare’s New
Zealand subsidiary, along with negative foreign currency impacts as Asia/Pacific
transacts a substantial amount of its business with customers outside of their
region in various currencies other than their functional currencies. As a
result, changes in exchange rates, particularly with the Euro and
U.S. Dollar, can have a significant impact on sales and cost of
sales.
Gross
Profit. Consolidated gross
profit as a percentage of net sales was 27.9% in 2007 as compared to 27.8% in
2006. The improvement in margin was primarily attributable to the company
benefiting from cost reduction initiatives which was offset by continued
competitive pricing pressures and increased freight costs. Margins
also benefited by .2 of a percentage point from the impact of insurance and
asset recoveries related to an embezzlement at one of the company’s foreign
locations which the company disclosed earlier in the year. The
situation was investigated by local authorities and the company’s internal audit
department and a forensic audit was performed. As a result of the
investigation, it was determined that the company’s internal controls were
circumvented by collusion. The company was able to recover its loss
through the receipt of $5,000,0000 received under an employee dishonesty
insurance policy as well as asset recoveries from the individuals involved
during the fourth quarter of 2007.
NA/HME gross profit as a percentage of
net sales was 30.7% in 2007 versus 29.7% in 2006. The improvement was primarily
attributable to cost reduction initiatives and the favorable impact from
insurance and asset recoveries related to an embezzlement as noted
above. These benefits were partially offset by increases in freight
costs and pricing reductions.
ISG gross profit as a
percentage of net sales declined .5 of a percentage point from the prior year.
The decline was primarily attributable to
continued unfavorable product mix toward lower margin product —diabetic and
incontinence products, and an unfavorable customer mix toward larger providers
who historically have lower margins.
IPG gross profit as a percentage of net
sales decreased 2.2 percentage points in 2007 from the prior year. The
decrease in margin is attributable to volume decreases, unfavorable foreign
currency exchange rate movement of the Canadian dollar and incremental costs
related to new product introductions.
Gross profit in Europe as a percentage
of net sales declined 1.4 percentage points in 2007 from the prior year.
The decrease was primarily attributable shift away from higher margin product,
increased freight and duty costs, partially offset by the impact of cost
reduction activities.
Gross profit in Asia/Pacific as a
percentage of net sales improved by 5.6 percentage points in 2007 from the prior
year. The increase was largely due to cost reduction activities and favorable
impact from acquisitions finalized in the fourth quarter of
2006.
Selling,
General and Administrative. Consolidated selling,
general and administrative expenses as a percentage of net sales were 22.9% in
2007 and 24.9% in 2006. The overall dollar decrease was $7,000,000 or 1.9%, with
foreign currency translation increasing expenses by $10,249,000 or three
percentage points and acquisitions increasing expenses by approximately
$4,845,000 or one percentage point. Excluding acquisitions and foreign currency
translation impact, selling, general and administrative (SG&A) expenses
decreased $22,094,000 or 5.9%. The decrease is primarily attributable to an
incremental account receivable reserve of $26,775,000 recognized in the NA/HME
segment in 2006, with no such incremental reserve in 2007.
Selling, general and administrative
expenses excluding acquisitions, foreign currency translation and the
incremental accounts receivable reserve in 2006 increased $4,681,000 in 2007 or
1.3% primarily as a result of additional bonus expense, bad debt expense and
legal and professional expenses related to the embezzlement noted above. These
increases were offset by a one-time gain of $3,981,000 resulting from debt
cancellation related to a development stage company which the company
consolidated as a variable interest entity in accordance with the provisions of
FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46).
Selling, general and administrative
expenses for NA/HME decreased 12.9% or $27,230,000 in 2007 compared to 2006.
Foreign currency translation increased expense by $942,000 while acquisitions
increased expense by approximately $313,000. The SG&A expense decrease is
primarily attributable to an incremental account receivable reserve of
$26,775,000 recognized in 2006, with no such incremental reserve recorded in
2007. The remaining decrease in expense is $455,000 or
0.2%. The decline in expense is the result of cost reduction
activities offset by increases in bonus expense, bad debt expense and legal and
professional expenses related to the embezzlement noted
above.
Selling, general and administrative
expenses for ISG increased by 12.5% or $2,858,000 in 2007 compared to 2006. The
increase is attributable to higher distribution costs associated with increased
sales volumes.
Selling general and administrative
expenses for IPG increased by 5.9% or $836,000 compared to
2006. Foreign currency translation increased selling, general and
administrative expense by approximately one percentage point or
$132,000. The remaining increase in expense of $704,000 is
due to investments in sales and marketing programs to drive growth and
unfavorable currency transaction effects due to the strengthening of the
Canadian dollar.
European selling, general and
administrative expenses increased by 9.6% or $10,329,000 in 2007 compared to
2006. Foreign currency translation increased selling, general and administrative
expense by approximately $6,975,000. The remaining increase in expense of
$3,354,000 or 3.1% was primarily due to higher distribution costs and investment
in marketing programs to drive sale growth.
Asia/Pacific selling, general and
administrative expenses increased 34.8% or $6,207,000 in 2007 compared to 2006.
Acquisitions increased selling, general and administrative expense by
approximately $4,532,000 and foreign currency translation increased expense by
$2,200,000. Excluding acquisitions and foreign currency translation impact,
SG&A decreased $525,000 or 2.9% as a result of cost reduction
activities.
Asset
write-downs related to goodwill and other intangibles. The company undertakes its
annual impairment test of goodwill and intangible assets in accordance with
SFAS No. 142, Goodwill and Other
Intangible Assets, in
connection with the preparation of its fourth quarter results each year. No
impairments were recognized in 2007. However, as a result of the
reduced profitability of its NA/HME operating segment, and uncertainty
associated with future market conditions, the company recorded an impairment
charge of $294,656,000 related to goodwill and $160,000 related to intangible
assets of this segment in 2006. In addition, an impairment charge of
$5,601,000 was recorded related to the intangible related to NeuroControl, a
consolidated variable interest entity, which is included in Other in the segment
disclosure.
Debt
Finance Charges, Interest and Fees Associated with Debt Refinancing. In February 2007, the
company completed its refinancing efforts which resulted in 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 issuance and sale of $135
million aggregate principal amount of 4.125% convertible senior subordinated
debentures due 2027 and the issuance and sale of $175 million aggregate
principal amount of 9.75% Senior Notes due 2015. The company incurred
$13,408,000 in 2007 and $3,745,000 in 2006 for debt finance charges, interest
and fees associated with the debt refinancing.
Interest. Interest expense increased
to $44,309,000 in 2007 from $34,084,000 in 2006, representing a 30% increase.
This increase was attributable to increased borrowing rates as a result of the
company’s refinancing. Interest income in 2007 was $2,340,000, which was lower
than the prior year amount of $2,775,000 primarily due to favorable finance
terms provided to customers.
Income
Taxes. The
company had an effective tax rate of 91.8% in 2007 and 2.7% in 2006. The
company’s effective tax rate is higher than the expected rate at the
U.S. federal statutory rate primarily due to domestic and certain foreign
losses with no corresponding tax benefits due to a valuation allowance recorded
against domestic and certain foreign deferred tax assets, partially offset by
earnings abroad being taxed at rates lower than the U.S. federal statutory
rate including in 2007 a benefit of $7,820,000 related to a tax rate change in
Germany and corresponding reduction of the company’s net German deferred tax
liability. The increase in the effective rate in 2007 compared to 2006 is
primarily due to the losses without tax benefit.
Research
and Development. The company continues to
invest in research and development activities to maintain its competitive
advantage. The company dedicates funds to applied research activities to ensure
that new and enhanced design concepts are available to its businesses. Research
and development expenditures, which are included in costs of products sold,
increased to $22,491,000 in 2007 from $22,146,000 in 2006. The expenditures, as
a percentage of net sales, were 1.4% and 1.5% in 2007 and 2006,
respectively.
2006 Versus 2005
Charge
Related to Restructuring Activities. The company progressed with
the restructuring initiatives that it began in 2005 to drive cost reductions and
improve profitability which was necessitated by the continued decline in
reimbursement for medical equipment by U.S. government programs 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.
The cost reduction and profit
improvement actions included: reduction in personnel, outsourcing improvements
utilizing the company’s China manufacturing capability and third parties,
shifting 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 facilities.
The company made substantial progress on
its restructuring activities, including exiting four facilities and eliminating
approximately 600 positions through December 31, 2006, including 300
positions during 2006. Restructuring charges of $21,250,000 were incurred during
2006 of which $3,973,000 was recorded in cost of products sold, since it relates
to inventory markdowns, and the remaining charge amount was included in the
Charge Related to Restructuring Activities in the Consolidated Statement of
Operations. The costs incurred during 2006 were principally for severance,
product line discontinuation and costs associated with facility closures. There
were 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
utilized the accruals recorded as of December 31, 2006 during
2007.
Net
Sales. Consolidated net sales for
2006 decreased 2.1% for the year, to $1,498,035,000 from $1,529,732,000 in 2005.
Acquisitions accounted for a one percentage point increase in net sales while
foreign currency translation had less than a one percentage point impact. The
overall decline was primarily driven by sales declines in the NA/HME and
Asia/Pacific segments.
North America/Home Medical
Equipment
NA/HME net sales declined 4.3% in 2006
versus the prior year to $676,326,000 from $706,555,000 with acquisitions and
foreign currency translation each increasing net sales by one percentage point.
Rehab product line net sales declined by .7% in 2006, primarily driven by the
significant reimbursement changes in the U.S. market during the year.
Standard product line net sales declined by 4.7% in 2006, driven by continued
pricing pressures for these products which were somewhat offset by increased
volumes. Respiratory product line sales declined by 11.1% in 2006 primarily
attributable to lower pricing on oxygen concentrators, changes during the year
regarding reimbursement for Respiratory product which hampered volumes, and
reduced purchases from national and independent providers for HomeFill™ II
oxygen systems.
Invacare Supply
Group
ISG net sales increased 3.3% in 2006
over the prior year to $228,236,000 from $220,908,000. Acquisitions and foreign
currency translation had no impact on the sales increase. The increase was
primarily attributable to volume increases in the diabetic and incontinence
product lines as well as increased volumes into the Retail market
channel.
Institutional Products
Group
IPG net sales increased 9.4% in 2006
over the prior year to $93,455,000 from $85,415,000. Acquisitions and foreign
currency translation had no impact on the sales increase. The increase was
primarily attributable to higher volumes in its core bed products as well as
increases in bathing equipment.
Europe
European net sales declined .4% in 2006
compared to the prior year to $430,427,000 from $432,142,000 with acquisitions
increasing net sales one percentage point and foreign currency translation
decreasing net sales by one percentage point. Strong sales performance in most
of the regions was offset by continued weakness in the German market related to
reimbursement policy.
Asia/Pacific
Asia/Pacific net sales declined 17.8% in
2006 from the prior year to $69,591,000 from $84,712,000. Acquisitions increased
net sales by five percentage points and foreign currency translation decreased
net sales by four percentage points. Performance in this region was 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 and reduced volumes in the company’s Australian
distribution business. In addition, the Asia/Pacific segment transacted a
substantial amount of its business with customers outside of their region in
various currencies other than their functional currencies. As a result, changes
in exchange rates, particularly with the Euro and U.S. Dollar, have a
significant impact on sales and cost of sales.
Gross
Profit. Consolidated gross
profit as a percentage of net sales was 27.8% in 2006 versus 29.2% in 2005. The
margin decline was primarily attributable to continued reimbursement issues and
competitive pricing pressures as well as inventory write-downs related to
restructuring, increased freight costs and lower manufacturing volumes. The
decline was partially offset by cost reduction initiatives.
NA/HME gross profit as a percentage of
net sales was 29.7% in 2006 versus 33.8% in 2005. The decline was primarily
attributable to pricing reductions experienced in Rehab, Standard and
Respiratory product lines, inventory write-downs related to restructuring,
reduced volumes as a result of reimbursement changes in Rehab and Respiratory
product lines, and increased freight costs, all of which were partially offset
by continued cost reduction efforts.
ISG gross profit as a percentage of net
sales declined .7 of a percentage point from the prior year. The decline was
primarily attributable to inventory write-downs related to restructuring and an
unfavorable product mix toward lower margin product, including diabetic and
incontinence products.
IPG gross profit as a percentage of net
sales increased 1.9 percentage points in 2006 from the prior year. The
increase in margin was attributable to volume increases and continued cost
reduction activities.
Gross profit in Europe as a percentage
of net sales improved 2.2 percentage points in 2006 from the prior year.
The increase was primarily attributable to cost reduction
activities.
Gross profit in Asia/Pacific as a
percentage of net sales declined by .6 of a percentage point in 2006 from the
prior year. The decrease was largely due to inventory write-downs related to
restructuring.
Selling,
General and Administrative. Consolidated selling,
general and administrative expenses as a percentage of net sales were 24.9% in
2006 and 22.4% in 2005. The overall increase was $31,807,000 or 9.3%, with
acquisitions increasing selling, general and administrative costs by
approximately $3,750,000 or one percentage point and foreign currency
translation decreasing expenses by $2,424,000 or one percentage point. Excluding
acquisitions and foreign currency translation impact, SG&A increased
$30,481,000 or 8.9%. The primary driver of the increase is attributable to an
incremental reserve against accounts receivable of $26,775,000 in the NA/HME
segment as described below.
During 2006, Medicare proposed several
significant changes to durable medical equipment and oxygen reimbursement, which
dramatically impacted the company’s results and the profitability of our
U.S. customers. The many changes to reimbursement, which were finalized in
the fourth quarter of 2006, added complexity and uncertainty to the claims
process and have eroded our customers’ ability to provide quality solutions. As
a result of these changes in reimbursement, the company performed a review of
its customers most vulnerable to changes in the reimbursement for power mobility
products and, as part of its 2006 fourth quarter financial results, the company
recorded an incremental reserve against accounts receivable of $26,775,000. In
response to these regulatory changes, the company has implemented tighter credit
policies and continues to work with certain customers in an effort to help them
reduce costs and improve their financial viability.
Selling, general and administrative
expenses excluding acquisitions, foreign currency translation and the
incremental reserve against accounts receivable increased $3,706,000 in 2006 or
1% primarily as a result of increased information technology and distribution
costs.
Selling, general and administrative
expenses for NA/HME increased 17.7% or $31,699,000 in 2006 compared to 2005.
Acquisitions increased selling, general and administrative expense by
approximately $1,656,000 and foreign currency translation increased expense by
$1,082,000. Selling, general and administrative expense also increased
$26,775,000 attributable to the incremental reserve recorded for accounts
receivable discussed above. The remaining increase in expense is $2,186,000 or
1.2%.
Selling, general and administrative
expenses for ISG increased by 8.1% or $1,711,000 in 2006 compared to 2005. The
increase was attributable to an increase in distribution and sales and marketing
expenses. Selling general and administrative expenses for IPG increased by 3.4%
or $463,000 compared to 2005. The increase was attributable to increased product
liability and advertising expenses.
European selling, general and
administrative expenses decreased by 1.5% or $1,620,000 in 2006 compared to
2005. Acquisitions increased selling, general and administrative expense by
approximately $594,000 and foreign currency translation decreased expense by
$2,647,000. The remaining increase in expense of $433,000 or .4% was primarily
due to higher distribution costs.
Asia/Pacific selling, general and
administrative expenses decreased 2.4% or $446,000 in 2006 compared to 2005.
Acquisitions increased selling, general and administrative expense by
approximately $1,500,000 and foreign currency translation decreased expense by
$859,000. The remaining decline in expense of $1,087,000 or 5.9% is attributable
to reduced cost structure.
Asset
write-downs related to goodwill and other intangibles. The company undertakes its
annual impairment test of goodwill and intangible assets in accordance with
SFAS No. 142, Goodwill and Other
Intangible Assets, in
connection with the preparation of its fourth quarter results each year. As a
result of the reduced profitability of its NA/HME operating segment, and
uncertainty associated with future market conditions, the company recorded an
impairment charge related to goodwill and intangible assets of this segment of
$300,417,000 in 2006.
The impairment of goodwill in the NA/HME
operating segment was primarily the result of reduced government reimbursement
levels and changes in reimbursement policies, which negatively affected revenues
and profitability in the NA/HME operating segment. During 2006, changes
announced by the Centers for Medicare and Medicaid Services, or “CMS,” affected
eligibility, documentation, codes, and payment rules relating to power
wheelchairs. These changes impacted the predictability of reimbursement of
expenses for and access to power wheelchairs, created uncertainty in the market
place, and thus had a negative impact on NA/HME’s revenues and related earnings.
Effective November 15, 2006, CMS reduced the maximum reimbursement amount
for power wheelchairs under Medicare by up to 28%. The reduced reimbursement
levels have caused and continue to cause consumers to choose less expensive
versions of the company’s power wheelchairs.
NA/HME sales of respiratory products
were also negatively affected by the changes in 2006. Small and independent
provider sales declined as these dealers slowed their purchases of the company’s
HomeFill™ oxygen system product line, in part, until they had a clearer view of
future oxygen reimbursement levels. Furthermore, a study issued by the Office of
Inspector General or “OIG,” in September 2006 suggested that $3.2 billion
in savings could be achieved over five years by reducing the reimbursed rental
period from three years (the reimbursement period under current law) to
13 months. The uncertainty created by these announcements continues to
negatively impact the home oxygen equipment market, particularly for those
providers considering changing to the HomeFill™ oxygen
system.
Medicare will also institute a new
competitive bidding program for various items in ten of the largest metropolitan
areas to be effective in 2008. This program is designed to reduce Medicare
payment levels for items that the Medicare program spends the most money on
under the home medical equipment benefit. This new program will likely eliminate
some providers from the competitive bidding markets, because only those
providers who are chosen to participate (based largely on price) will be able to
provide beneficiaries with items included in the bid. Medicare will be expanding
the program to an additional 80 metropolitan areas in 2009.
The impact of the above reimbursement
changes were taken into consideration in reviewing the profitability of the
company’s NA/HME operating segment and in evaluating impairment of goodwill and
other intangibles.
Interest. Interest expense increased
to $34,084,000 in 2006 from $27,246,000 in 2005, representing a 25% increase.
This increase was attributable to increased borrowing rates. Interest income in
2006 was $2,775,000, which was higher than the prior year amount of $1,683,000
primarily due to a decrease in interest received associated with financing
provided to customers.
Income
Taxes. The
company had an effective tax rate of 2.7% in 2006 and 31.5% in 2005. The
company’s effective tax rate was higher than the expected benefit at the
U.S. federal statutory rate primarily due to losses with no corresponding
tax benefits due to 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. In 2005, the company had pretax
earnings and benefited from foreign earnings taxed at less than the U.S.
statutory rate.
Research
and Development. Research and development
expenditures, which are included in costs of products sold, decreased to
$22,146,000 in 2006 from $23,247,000 in 2005. The expenditures, as a percentage
of net sales, were 1.5% in 2006 and 2005.
INFLATION
Although the company cannot determine
the precise effects of inflation, management believes that inflation does
continue to have an influence on the cost of materials, salaries and benefits,
utilities and outside services. The company attempts to minimize or offset the
effects through increased sales volume, capital expenditure programs designed to
improve productivity, alternative sourcing of material and other cost control
measures. In 2007, 2006 and 2005, the company was able to offset the majority of
the impact of price increases from suppliers by productivity improvements and
other cost reduction activities.
LIQUIDITY AND CAPITAL
RESOURCES
The company continues to maintain an
adequate liquidity position through its unused bank lines of credit (see
Long-Term Debt in the Notes to Consolidated Financial Statements) included in
this report and working capital management.
Total debt outstanding was
$537,852,000 million at the end of 2007 down from $573,126,000 at the end
of 2006, resulting in a debt-to-total-capitalization of 49.3% for 2007 versus
54.1% at the end of 2006. The debt-to-capitalization ratio improvement was
driven by the company’s debt reduction during 2007.
On February 12, 2007, the company
completed the refinancing of its existing indebtedness and put in place a
long-term capital structure. The new financing program provides the company with
total capacity of approximately $710 million, the net proceeds of which
were utilized to refinance substantially all of the company’s existing
indebtedness and pay related fees and expenses (the “Refinancing”). As part of
the refinancing, the company entered into a $400 million senior secured
credit facility consisting of a $250 million term loan facility and a
$150 million revolving credit facility. The company’s obligations under the
new senior secured credit facility are secured by substantially all of the
company’s assets and are guaranteed by its material domestic subsidiaries, with
certain obligations also guaranteed by its material foreign subsidiaries.
Borrowings under the new senior secured credit facility will generally bear
interest at LIBOR plus a margin of 2.25%, including an initial facility fee of
0.50% per annum on the facility.
The company also completed the sale of
$175 million principal amount of its 9.75% Senior Notes due 2015. The
notes are unsecured senior obligations of the company guaranteed by
substantially all of the company’s domestic subsidiaries, and pay interest at
9.75% per annum on each February 15 and August 15. The net proceeds to
the company from the offering of the notes were approximately
$167 million.
Also, as part of the refinancing, the
company completed the sale of $135 million principal amount of its 4.125%
Convertible Senior Subordinated Debentures due 2027. The debentures are
unsecured senior subordinated obligations of the company guaranteed by
substantially all of the company’s domestic subsidiaries, pay interest at
4.125% per annum on each February 1 and August 1, and are convertible
upon satisfaction of certain conditions into cash, common shares of the company,
or a combination of cash and common shares of the company, subject to certain
conditions. The initial conversion rate is 40.3323 shares per $1,000
principal amount of debentures, which represents an initial conversion price of
approximately $24.79 per share. The debentures are redeemable at the
company’s option, subject to specified conditions, on or after February 6,
2012 through and including February 1, 2017, and at the company’s option
after February 1, 2017. On February 1, 2017 and 2022 and upon the
occurrence of certain circumstances, holders have the right to require the
company to repurchase all or some of their debentures. The net proceeds to the
company from the offering of the debentures were approximately
$132.3 million.
The company’s borrowing arrangements
contain covenants with respect to, among other items, 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 agreement with its note holders. The company is currently in
compliance with all covenant requirements. Under the most restrictive covenant
of the company’s borrowing arrangements as of December 31, 2007, the company had
the capacity to borrow up to an additional $130,512,000 via the company’s
revolving credit facility; provided that this capacity is limited for the
purpose of funding acquisitions by the company. The company’s
borrowing arrangements impose restrictions regarding the establishment of
intercompany loans and thus cash transfers. Those restrictions can
have a negative impact the company’s ability to meet liquidity needs,
particularly in the United States.
While there is general concern about the
potential for rising interest rates, the company believes that its exposure to
interest rate fluctuations is manageable given that portions of the company’s
debt are at fixed rates for extended periods of time, the company has the
ability to utilize swaps to exchange variable rate debt to fixed rate debt, if
needed, and the company’s free cash flow should allow it to absorb any modest
rate increases in the months ahead without any material impact on its liquidity
or capital resources. As of December 31, 2007, the weighted average
floating interest rate on borrowings was 7.22%.
CAPITAL EXPENDITURES
There are no individually material
capital expenditure commitments outstanding as of December 31, 2007. The
company estimates that capital investments for 2008 could approximate
$25,000,000, compared to actual capital expenditures of $20,068,000 in 2007. 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 fund required capital
expenditures for the foreseeable future.
CASH FLOWS
Cash flows provided by operating
activities were $79,100,000 in 2007, compared to $62,454,000 in the previous
year. The increase is due primarily to the collection of a tax receivable of
$11,800,000 and $5,000,000 in insurance proceeds received on an embezzlement
claim, as previously disclosed. Operating cash flows also benefited from
improved accounts receivable and inventory management, which were offset by
reduced accounts payable and accrued expenses. The payables and accrued expense
balances at the end of 2006 were higher than normal because the company’s
refinancing efforts were in process.
Cash flows used for investing activities
were $22,058,000 in 2007, compared to $34,446,000 in 2006. The decrease in cash
used was primarily attributable to lower acquisition costs compared to 2006 and
a reduction in purchases of property and equipment and related proceeds for sale
of assets as compared to the prior year.
Cash flows required by financing
activities in 2007 were $79,545,000, compared to cash flows provided of
$27,224,000 in 2006. Cash flows required by financing activities were much
higher in 2007 as a result of the payment of debt financing costs related to the
company’s refinancing and reduction of debt outstanding by utilization of cash
on hand and cash flow generation.
During 2007, the company generated free
cash flow of $72,539,000 compared to free cash flow of $52,898,000 in 2006. The
increase is due primarily to the collection of a tax receivable of $11,800,000
and $5,000,000 in insurance proceeds received on an embezzlement
claim. Operating cash flows also benefited from improved accounts
receivable and inventory management, which were offset by lower accounts payable
and accrued expenses. The payables and accrued expense balances at the end of
2006 were higher than normal because the company’s refinancing efforts were in
process. 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 meaningful information for evaluating the overall
financial performance of the company and its ability to repay debt or make
future investments (including acquisitions, etc.). The non-GAAP financial
measure is reconciled to the GAAP measure as follows (in
thousands):
|
|
Twelve Months
Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Net cash provided by operating
activities
|
|
$
|
79,100
|
|
|
$
|
62,454
|
|
Plus: Net Cash impact related to
restructuring activities
|
|
|
13,006
|
|
|
|
9,935
|
|
Less: Purchases of property and
equipment — net
|
|
|
(19,567
|
)
|
|
|
(19,491
|
)
|
Free Cash
Flow
|
|
$
|
72,539
|
|
|
$
|
52,898
|
|
CONTRACTUAL
OBLIGATIONS
|
|
Payments due by
period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
|
(In
thousands)
|
|
Long-term debt
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Facility
|
|
$
|
266,600
|
|
|
$
|
31,727
|
*
|
|
$
|
31,762
|
|
|
$
|
30,145
|
|
|
$
|
172,966
|
|
9.75% Senior Notes due
2015
|
|
|
296,571
|
|
|
|
17,063
|
|
|
|
34,125
|
|
|
|
34,125
|
|
|
|
211,258
|
|
4.125% Convertible Senior
Subordinated Debentures due 2027
|
|
|
241,504
|
|
|
|
5,569
|
|
|
|
11,138
|
|
|
|
11,138
|
|
|
|
213,659
|
|
Operating lease
obligations
|
|
|
49,601
|
|
|
|
20,361
|
|
|
|
19,007
|
|
|
|
5,144
|
|
|
|
5,089
|
|
Capital lease
obligations
|
|
|
18,786
|
|
|
|
2,021
|
|
|
|
3,516
|
|
|
|
3,074
|
|
|
|
10,175
|
|
Purchase obligations (primarily
computer systems contracts)
|
|
|
1,033
|
|
|
|
400
|
|
|
|
633
|
|
|
|
—
|
|
|
|
—
|
|
Product liability
|
|
|
21,136
|
|
|
|
3,556
|
|
|
|
8,447
|
|
|
|
3,999
|
|
|
|
5,134
|
|
SERP
|
|
|
33,920
|
|
|
|
424
|
|
|
|
2,074
|
|
|
|
2,074
|
|
|
|
29,348
|
|
Other, principally deferred
compensation
|
|
|
10,464
|
|
|
|
473
|
|
|
|
1,374
|
|
|
|
285
|
|
|
|
8,332
|
|
Total
|
|
$
|
939,615
|
|
|
$
|
81,594
|
|
|
$
|
112,076
|
|
|
$
|
89,984
|
|
|
$
|
655,961
|
|
* Includes an estimated additional
payment of $13,572,000 as required by the company’s credit facility based upon
“excess cash flow” (as defined in the agreement). While additional
payments may be required based on excess cash flow, the above table does not
include any additional such payments beyond the estimated payment for
2008.
“Other” includes an estimated
payment of $321,000 in less than 1 year and $959,000 in years 1-3 for
liabilities recorded for uncertain tax positions. The table does not
include any other payments related to liabilities recorded for uncertain tax
positions as the company can not make a reasonably reliable estimate as to any
other payments. See Income Taxes in the Notes to the Consolidated
Financial Statements included in this report.
DIVIDEND POLICY
It is the company’s policy to pay a
nominal dividend in order for its stock to be more attractive to a broader range
of investors. The current annual dividend rate remains at $0.05 per Common
Share and $0.045 per Class B Common Share. It is not anticipated that
this will change materially as the company continues to have available
significant growth opportunities through internal development and acquisitions.
For 2007, dividends of $0.05 per Common Share and $0.045 per
Class B Common Share were declared and paid.
CRITICAL ACCOUNTING
POLICIES
The Consolidated Financial Statements
included in the report include 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 these 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 our 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. Shipping and
handling costs are included in cost of goods sold.
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. 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. The company utilizes 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 our 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, management
monitors the collection status of these contracts in accordance with our limited
recourse obligations and provides amounts necessary for estimated losses in the
allowance for doubtful accounts. See Concentration of Credit Risk in
the Notes to the Consolidated Financial Statements in this
report.
In 2006, the company recorded an
incremental accounts receivable reserve of $26,775,000 due to the increased
collectibility risk to the company resulting from changes in Medicare
reimbursement regulations, specifically changes to the qualification processes
and reimbursement levels of power wheelchairs. The company has reviewed the
accounts receivables associated with many of the company’s customers that are
most exposed to these issues. The company is also working with certain of its
customers in an effort to help them reduce costs and improve their
profitability. In addition, the company has also implemented tighter credit
policies with many of these accounts.
In 2007, the company continued to
closely monitor the credit-worthiness of its customers and adhere to tighter
credit policies. Due to delays in the implementation of various
government reimbursement policies initiated in 2007, there still remains
significant uncertainly as to the impact that those changes will have on the
company’s customers.
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, the company reviews
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 basis. The company
continues to increase its overseas sourcing efforts, increase its emphasis on
the development and introduction of new product, 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. As a result of
reduced profitability in the NA/HME operating segment and uncertainty associated
with future market conditions, the company recorded impairment charges in 2006
related to goodwill and an intangible in this segment of $294,656,000 and
$160,000, respectively, while an impairment charge of $5,601,000 was recorded
related to the intangible recorded associated with NeuroControl, which is part
of Other in the segment disclosure. No impairment was recognized in
2007. The discount rates used have a significant impact upon the
discounted cash flow methodology utilized in our annual impairment testing as
higher discount rates decrease the fair value estimates used in our
testing.
The company utilizes a discounted cash
flow method model to analyze reporting units for impairment in which the company
forecasts income statement and balance sheet amounts based on assumptions
regarding future sales growth, profitability, inventory turns, days’ sales
outstanding, etc. to forecast future cash flows. The cash flows are
discounted using a weighted average cost of capital discount rate where the cost
of debt is based on quoted rates for 20-year debt of companies of similar credit
risk and the cost of equity is based upon the 20-year treasury rate for the risk
free rate, a market risk premium, the industry average beta, a small cap stock
adjustment and company specific risk premiums. The assumptions used
are based on a market participant’s point of view and yielded a discount rate of
9.25% in 2007 compared to 8.85% in 2006. While no impairment was
indicated in 2007 for any reporting units, a future potential impairment is
possible for any or the company’s reporting units should actual results differ
materially from forecasted results.
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 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 December 31, 2007,
there was $9,570,000 of total unrecognized compensation cost from stock-based
compensation arrangements granted under the plans, which is related to
non-vested shares, and includes $3,904,000 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. 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 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.
ACCOUNTING CHANGES
In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, or “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. Upon adoption,
the company did not recognize an adjustment in the liability for unrecognized
income tax benefits. The company continues to recognize interest and
penalties related to uncertain tax positions in income tax
expense.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In September, 2006, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 157, Fair Value
Measurements, which creates
a framework for measuring fair value, clarifies the definition of fair value and
expands the disclosures regarding fair value measurements. Statement
No. 157 does not require any new fair value measurements and is effective for
fiscal years beginning after November 15, 2007, thus January 1, 2008. The
company adopted the new standard as of the effective date and currently does not
believe the adoption will have a material impact on the company’s financial
position or future results as the company is already performing its goodwill and
intangible valuation calculations and estimating the fair value of the company’s
financial instruments using methodology which is principally consistent with
Statement No. 157.
On September 5, 2007, the FASB exposed
for comment FASB Staff Position APB 14-a (FSP APB 14-a) to provide clarification
of the accounting for convertible debt that can be settled in cash upon
conversion. The FASB believes this clarification is needed because
the current accounting being applied for convertible debt does not fully reflect
the true economic impact on the issuer since the conversion option is not
captured as a borrowing cost and its full dilutive effect is not included in
earnings per share. The proposed FSP would require separate
accounting for the liability and equity components of the convertible debt in a
manner that would reflect Invacare’s nonconvertible debt borrowing
rate. The company would be required to bifurcate a component of its
convertible debt as a component of stockholders’ equity and accrete the
resulting debt discount as interest expense. The comment period
regarding the exposure draft ended October 15, 2007 and the exposure draft is
currently being redeliberated by the FASB. Should the proposed FSP become
effective as drafted, the change could materially impact the company’s interest
expense and earnings per share. The most recent proposed effective
date was January 1, 2008 with retrospective application required for all periods
presented and no grandfathering for existing instruments.
In December 2007, the FASB issued
SFAS No. 141R, Business
Combinations (SFAS 141(R)),
which changes the accounting for business acquisitions. SFAS 141(R)
requires the acquiring entity in a business combination to recognize all the
assets acquired and liabilities assumed in the transaction and establishes
principles and requirements as to how an acquirer should recognize and measure
in its financial statements the assets acquired, liabilities assumed, any
non-controlling interest and goodwill acquired. SFAS 141(R) also
requires expanded disclosure regarding the nature and financial effects of a
business combination. SFAS 141(R) is effective for the company
beginning January 1, 2009 and the company is currently evaluating the future
impacts and disclosures of this standard.
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 December 31, 2007 debt
levels, a 1% change in interest rates would impact interest expense by
approximately $620,000. 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.
Item 8. Financial Statements and Supplementary
Data.
Reference is made to the Report of
Independent Registered Public Accounting Firm, Consolidated Balance Sheets,
Consolidated Statement of Operations, Consolidated Statement of Cash Flows,
Consolidated Statement of Shareholders’ Equity, Notes to Consolidated Financial
Statements and Financial Statement Schedule, which appear on pages FS-1 to FS-43 of this Annual Report on
Form 10-K.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
(a) Evaluation of
Disclosure Controls and Procedures
As of December 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 December 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.
(b) Management’s Report
on Internal Control Over Financial Reporting
Management is responsible for
establishing and maintaining a system of adequate internal control over
financial reporting that provides reasonable assurance that assets are
safeguarded and that transactions are authorized, recorded and reported
properly. The system includes self-monitoring mechanisms; regular testing by the
company’s internal auditors; a Code of Conduct; written policies and procedures;
and a careful selection and training of employees. Actions are taken to correct
deficiencies as they are identified. An effective internal control system, no
matter how well designed, has inherent limitations — including the
possibility of the circumvention or overriding of controls — and therefore
can provide only reasonable assurance that errors and fraud that can be material
to the financial statements are prevented or would be detected on a timely
basis. Further, because of changes in conditions, internal control system
effectiveness may vary over time.
Management’s assessment of the
effectiveness of the company’s internal control over financial reporting is
based on the Internal Control — Integrated Framework published by the
Committee of Sponsoring Organizations of the Treadway
Commission.
In management’s opinion, internal
control over financial reporting is effective as of December 31,
2007.
The company’s independent registered
public accounting firm, Ernst & Young LLP, audited the company’s
internal control over financial reporting and, based on that audit, issued an
attestation report regarding the company’s internal control over financial
reporting, which is included in this Annual Report on
Form 10-K.
(c) Changes in Internal
Control Over Financial Reporting
There have been no changes in the
company’s internal control over financial reporting that occurred during our
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the company’s internal control over financial
reporting.
None.
Item 10. Directors and Executive Officers of the
Registrant.
Information required by Item 10 as
to the executive officers of the company is included in Part I of this
Annual Report on Form 10-K. The other information required by Item 10
as to the directors of the company, the Audit Committee, the audit committee
financial expert, the procedures for recommending nominees to the Board of
Directors, compliance with Section 16(a) of the Exchange Act and corporate
governance is incorporated herein by reference to the information set forth
under the captions “Election of Directors,” “Corporate Governance,” and
“Section 16(a) Beneficial Ownership Compliance” in the company’s definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders.
We submitted the New York Stock Exchange
(“NYSE”) Section 12(a) Annual CEO Certification as to our compliance with
the NYSE corporate governance listing standards to the NYSE in June 2007. In
addition, we have filed the certifications of our Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 regarding the quality of our public disclosures as exhibits to this
Annual Report on Form 10-K.
The information required by Item 11
is incorporated by reference to the information set forth under the captions
“Executive Compensation” and “Corporate Governance” in the company’s definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders.
Item. 12. Security Ownership of Certain
Beneficial Owners and Management.
The information required by Item 12
is incorporated by reference to the information set forth under the caption
“Share Ownership of Principal Holders and Management” in the company’s
definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders.
Information regarding the securities
authorized for issuance under the company’s equity compensation plans is
incorporated by reference to the information set forth under the captions
“Compensation of Executive Officers” and “Compensation of Directors” in the
company’s definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related
Transactions.
The information required by Item 13
is incorporated by reference to the information set forth under the caption
“Certain Relationships and Related Transactions” in the company’s definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders.
Item 14. Principal Accounting Fees and
Services.
The information required by Item 14
is incorporated by reference to the information set forth under the caption
“Independent Auditors” and “Pre-Approval Policies and Procedures” in the
company’s definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders.
Item 15. Exhibits and Financial Statement
Schedules.
(a)(1) Financial
Statements.
The following financial statements of
the company are included in Part II, Item 8:
Consolidated Statement of
Operations — years ended December 31, 2007, 2006 and
2005
Consolidated Balance Sheet —
December 31, 2007 and 2006
Consolidated Statement of Cash
Flows — years ended December 31, 2007, 2006 and
2005
Consolidated Statement of Shareholders’
Equity — years ended December 31, 2007, 2006 and
2005
Notes to Consolidated Financial
Statements
(a)(2) Financial Statement
Schedules.
The following financial statement
schedule of the company is included in Part II,
Item 8:
Schedule II — Valuation and
Qualifying Accounts
All other schedules have been omitted
because they are not applicable or not required, or because the required
information is included in the Consolidated Financial Statements or notes
thereto.
(a)(3) Exhibits.
See Exhibit Index at page number
I-52 of this Report on Form 10-K.
Pursuant to the requirements of
Section 13 or 15(d) 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 as of February 28, 2008.
INVACARE CORPORATION
By: /s/ A.
Malachi Mixon, III
A. Malachi
Mixon, III
Chairman of the Board of
Directors
and Chief Executive
Officer
Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated as of February 28, 2008.
Signature
|
Title
|
|
|
/s/ A. Malachi Mixon,
III
|
Chairman of the Board of Directors
and Chief Executive
|
A. Malachi Mixon,
III
|
Officer (Principal Executive
Officer)
|
|
|
/s/ Gerald B.
Blouch
|
President, Chief Operating Officer
and Director
|
Gerald B.
Blouch
|
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/s/ Gregory C.
Thompson
|
Senior Vice President, Chief
Financial Officer
|
Gregory C.
Thompson
|
(Principal Financial and
Accounting Officer)
|
|
|
/s/ James C.
Boland
|
Director
|
James C.
Boland
|
|
|
|
/s/ Michael F.
Delaney
|
Director
|
Michael F.
Delaney
|
|
|
|
/s/ C. Martin Harris,
M.D.
|
Director
|
C. Martin Harris,
M.D.
|
|
|
|
/s/ Bernadine P.
Healy, M.D
|
Director
|
Bernadine P.
Healy, M.D
|
|
|
|
/s/ John R.
Kasich
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Director
|
John R.
Kasich
|
|
|
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/s/ Dan T. Moore,
III
|
Director
|
Dan T. Moore,
III
|
|
|
|
/s/ Joseph B.
Richey, II
|
President – Invacare Technologies,
Senior Vice President –
|
Joseph B.
Richey, II
|
Electronics and Design Engineering
and Director
|
|
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/s/ William M.
Weber
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Director
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William M.
Weber
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|
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/s/ James L.
Jones
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Director
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James L.
Jones
|
|
INVACARE CORPORATION
Report on Form 10-K for the fiscal
year ended December 31, 2007.
Exhibit Index
Official
Exhibit No.
|
Description
|
Sequential
Page No.
|
|
Sale and Purchase Agreement
Regarding the Sale and Purchase of All Shares in WP Domus GmbH by and
among WP Domus LLC, Mr. Peter Schultz and Mr. Wilhelm Kaiser,
Invacare GmbH & Co. KG and Invacare Corporation dated as of
July 31, 2004
|
|
|
Guarantee Letter Agreement of
Warburg, Pincus Ventures, L.P. and Warburg, Pincus International, L.P.
dated as of September 9, 2004
|
|
|
Amended and Restated Articles of
Incorporation, as last amended May 25, 2007
|
|
|
Code of Regulations, as amended on
May 22, 1996
|
|
|
Specimen Share Certificate for
Common Shares
|
|
|
Specimen Share Certificate for
Class B Common Shares
|
|
|
Rights agreement between Invacare
Corporation and National City Bank dated as of July 8,
2005
|
|
|
Indenture, dated as of
February 12, 2007, by and among Invacare Corporation, the Guarantors
named therein and Wells Fargo Bank, N.A., as trustee (including the Form
of 4.125% Convertible Senior Subordinated Debenture due 2027 and related
Guarantee attached as Exhibit A)
|
|
|
Indenture, dated as of
February 12, 2007, by and among Invacare Corporation, the Guarantors
named therein and Wells Fargo Bank, N.A., as trustee (including the Form
of 9.75% Senior Note due 2015 and related Guarantee attached as
Exhibit A).
|
|
|
1992 Non-Employee Directors Stock
Option Plan adopted in May 1992
|
|
|
Deferred Compensation Plan for
Non-Employee Directors, adopted in May 1992
|
|
|
Invacare Corporation 1994
Performance Plan approved January 28,
1994
|
|
|
Amendment No. 1 to the
Invacare Corporation 1994 Performance Plan approved May 28,
1998
|
|
|
Amendment No. 2 to the
Invacare Corporation 1994 Performance Plan approved May 24,
2000
|
|
|
Amendment No. 3 to the
Invacare Corporation 1994 Performance Plan approved March 13,
2003
|
|
|
Invacare Retirement Savings Plan,
effective January 1, 2001 as amended
|
|
|
Agreement entered into by and
between the company and Chief Operating
Officer
|
|
|
Invacare Corporation 401(K) Plus
Benefit Equalization Plan, effective January 1, 2003, as
amended and restated
|
|
|
Invacare Corporation Amended and
Restated 2003 Performance Plan
|
|
|
Form of Change of Control
Agreement entered into by and between the company and certain of its
executive officers and Schedule of all such agreements with current
executive officers
|
|
|
Form of Indemnity Agreement
entered into by and between the company and certain of its Directors and
executive officers and Schedule of all such Agreements with Directors and
executive officers
|
|
|
Employment Letter Agreement
entered into by and between the company and Chief Financial
Officer
|
|
|
Invacare Corporation Deferred
Compensation Plus Plan, effective January 1, 2005, as
amended
|
|
|
Invacare Corporation Death Benefit
Only Plan, effective January 1, 2005, as
amended
|
|
|
A. Malachi Mixon, III 10b5-1
Plan, effective February 14, 2005
|
|
|
Gerald B. Blouch 10b5-1 Plan,
effective February 22, 2005
|
|
|
Gregory C. Thompson 10b5-1 Plan,
effective February 21, 2005
|
|
|
Supplemental Executive Retirement
Plan (As amended and restated effective February 1,
2000)
|
|
|
Form of Director Stock Option
Award under Invacare Corporation 1994 Performance
Plan
|
|
|
Form of Director Stock Option
Award under Invacare Corporation 2003 Performance
Plan
|
|
|
|
|
|
Form of Director Deferred Option
Award under Invacare Corporation 2003 Performance
Plan
|
|
|
Form of Restricted Stock Option
Award under Invacare Corporation 2003 Performance
Plan
|
|
|
Form of Stock Option Award under
Invacare Corporation 2003 Performance Plan
|
|
|
Form of Executive Stock Option
Award under Invacare Corporation 2003 Performance
Plan
|
|
|
Form of Switzerland Stock Option
Award under Invacare Corporation 2003 Performance
Plan
|
|
|
Form of Switzerland Executive
Stock Option Award under Invacare Corporation 2003 Performance
Plan
|
|
|
Director Compensation
Schedule
|
|
|
Invacare Corporation Executive
Incentive Bonus Plan, effective as of January 1,
2005
|
|
|
Receivables Purchase Agreement,
dated as of September 30, 2005, among Invacare Receivables
Corporation, as Seller, Invacare Corporation, as Servicer, Park Avenue
Receivables company, LLC and JPMorgan Chase Bank, N.A., as
Agent
|
|
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Note Purchase Agreement dated
as of April 27, 2006, by and among Invacare Corporation and the
various purchasers named therein, relating to $150,000,000
6.15% Senior Notes Due April 27,
2016.
|
|
|
Amendment #1, dated as of
September 28, 2006, to the Receivables Purchase Agreement, dated as
of September 30, 2005, by and among Invacare Receivables Corporation,
as Seller, Invacare Corporation, as Servicer, Park Avenue Receivables
company, LLC and JPMorgan Chase Bank, N.A., as
Agent
|
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Omnibus Waiver, Amendment and
Reaffirmation of Performance Undertaking dated as of November 14,
2006 to Receivables Purchase Agreement, dated as of September 30,
2005, among Invacare Receivables Corporation, as Seller, Invacare
Corporation, as Servicer, Park Avenue Receivables company, LLC and
JPMorgan Chase Bank, N.A., as Agent
|
|
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Waiver and Amendment dated as of
November 14, 2006 to Note Purchase Agreement dated as of
April 27, 2006, by and among Invacare Corporation and the various
purchasers named therein, relating to $150,000,000 6.15% Senior Notes
Due April 27, 2016.
|
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|
Second Omnibus Waiver, Amendment
and Reaffirmation of Performance Undertaking dated as of November 14,
2006 to Receivables Purchase Agreement, dated as of September 30,
2005, among Invacare Receivables Corporation, as Seller, Invacare
Corporation, as Servicer, Park Avenue Receivables company, LLC and
JPMorgan Chase Bank, N.A., as Agent
|
|
|
Second Waiver and Amendment dated
as of November 14, 2006 to Note Purchase Agreement dated as of
April 27, 2006, by and among Invacare Corporation and the various
purchasers named therein, relating to $150,000,000 6.15% Senior Notes
Due April 27, 2016.
|
|
|
Credit Agreement, dated
February 12, 2007, by and among Invacare Corporation, the Facility
Guarantors named therein, the lenders named therein, Banc of America
Securities LLC and KeyBank National Association as joint lead arrangers
for the term loan facility, and National City Bank and KeyBank National
Association as joint lead arrangers for the revolving loan
facility.
|
|
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Purchase Agreement by and among
Invacare Corporation, the Subsidiary Guarantors named therein, and the
Initial Purchasers named therein dated as of February 5,
2007.
|
|
|
Purchase Agreement by and among
Invacare Corporation, the Subsidiary Guarantors named therein, and the
Initial Purchasers named therein dated as of February 7,
2007.
|
|
|
Amendment No. 1 to the Invacare
Corporation 2003 Performance Plan
|
|
|
Gerald B. Blouch, Brian Ellacott,
Dale C. LaPorte, Gregory C. Thompson, Joseph S. Usaj and Carl Will 10b5-1
Plan, effective August 2007
|
|
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Doug Harper, A. Malachi Mixon,
III, Joseph B. Richey II, Louis F. J. Slangen and Chris Yessayan 10b5-1
Plan, effective August 2007
|
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A. Malachi Mixon, III Retirement
Benefit Agreement
|
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|
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Letter re: Change in Accounting
Principles
|
|
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Subsidiaries of the
company
|
|
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Consent of Independent Registered
Public Accounting Firm
|
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Certification of the Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
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Certification of the Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
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
|
|
|
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
|
|
__________
*
|
Management contract, compensatory
plan or arrangement
|
**
|
Filed
herewith.
|
(A)
|
Reference is made to the
appropriate Exhibit to the company report on Form 8-K, dated
September 9, 2004, which Exhibit is incorporated herein by
reference
|
|
|
(B)
|
Reference is made to the
appropriate Exhibit of the company report on Form S-8, dated
March 30, 2001, which Exhibit is incorporated herein by
reference.
|
|
|
(C)
|
Reference is made to the
appropriate Exhibit of the company report on Form 10-K for the fiscal
year ended December 31, 2002, which Exhibit is incorporated herein by
reference.
|
|
|
(D)
|
Reference is made to the
appropriate Exhibit of the company report on Form 10-Q for the
quarter ended March 31, 2003, which Exhibit is incorporated herein by
reference.
|
|
|
(E)
|
Reference is made to
Exhibit 10.1 of the company report on Form 10-Q for the quarter ended
June 30, 2007.
|
|
|
(F)
|
Reference is made to the
appropriate Exhibit of the company report on Form 10-K for the fiscal
year ended December 31, 2004, which Exhibit is incorporated herein by
reference.
|
|
|
(G)
|
Reference is made to the
appropriate Exhibit of the company report on Form 8-K, dated
July 8, 2005, which is incorporated herein by
reference.
|
|
|
(H)
|
Reference is made to the
appropriate Exhibit to Appendix A to the company Definitive Proxy
Statement on Schedule 14A dated April 8, 2005, which is incorporated
herein by reference.
|
|
|
(I)
|
Reference is made to the
appropriate Exhibit of the company report on Form 8-K, dated
September 29, 2005, which is incorporated herein by
reference.
|
|
|
(J)
|
Reference is made to the
appropriate Exhibit of the company report on Form 8-K, dated
April 27, 2006, which is incorporated herein by
reference.
|
|
|
(K)
|
Reference is made to the
appropriate Exhibit of the company report on Form 8-K, dated
November 14, 2006, which is incorporated herein by
reference.
|
|
|
(L)
|
Reference is made to the
appropriate Exhibit of the company report on Form 8-K, dated
December 15, 2006, which is incorporated herein by
reference.
|
|
|
(M)
|
Reference is made to the
appropriate Exhibit of the company report on Form 10-K for the fiscal
year ended December 31, 2005, which Exhibit is incorporated herein by
reference.
|
|
|
(N)
|
Reference is made to the
appropriate Exhibit of the company report on Form 8-K, dated
February 5, 2007, which is incorporated herein by
reference.
|
|
|
(O)
|
Reference is made to the
appropriate Exhibit of the company report on Form 8-K, dated
February 12, 2007, which is incorporated herein by
reference.
|
|
|
(P)
|
Reference is made to the
appropriate Exhibit of the company report on Form 10-Q, dated June
30, 2007, which is incorporated herein by
reference.
|
|
|
(Q)
|
Reference is made to the
appropriate Exhibit of the company report on Form 10-Q, dated
September 30, 2007, which is incorporated herein by
reference.
|
|
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(R)
|
Reference is made to Exhibit 4.5
of Invacare Corporation Form S-8 filed on October 17, 2003, which is
incorporated herein by
reference.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Shareholders and Board of
Directors
Invacare Corporation
We have audited the accompanying
consolidated balance sheets of Invacare Corporation and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated statements of
operations, cash flows and shareholders’ equity for each of the three years in
the period ended December 31, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15 (a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Invacare Corporation and subsidiaries at
December 31, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U. S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Accounting Policies
in the notes to the
consolidated financial statements, the Company adopted the provisions of SFAS
No. 123(R), Share Based
Payment, effective January
1, 2006; the provisions of SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R), effective December 31, 2006; and the
provisions of SAB No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements,
applying the one-time special transition provisions, in
2006.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
Invacare Corporation’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 28,
2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG
LLP
Cleveland, Ohio
February 28,
2008
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Shareholders and Board of
Directors
Invacare Corporation
We have audited Invacare Corporation’s
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Invacare Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Invacare Corporation
maintained, in all material aspects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Invacare Corporation and subsidiaries as of
December 31, 2007 and 2006 and the related consolidated statements of
operations, cash flows and shareholders’ equity for each of the three years in
the period ended December 31, 2007 of Invacare Corporation, and the
financial statement schedule for the three years in the period ended
December 31, 2007 and our report dated February 28, 2008 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG
LLP
Cleveland, Ohio
February 28,
2008
CONSOLIDATED STATEMENT OF
OPERATIONS
INVACARE CORPORATION AND
SUBSIDIARIES
|
|
Years Ended
December 31,
|
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|
2007
|
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2006
|
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2005
|
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(In thousands,
except per share data)
|
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Selling, general and
administrative expenses
|
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Charges related to restructuring
activities
|
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Debt finance charges, interest and
fees associated with debt refinancing
|
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Asset write-downs related to
goodwill and other intangibles
|
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Earnings (loss) before Income
Taxes
|
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Net Earnings (loss) per
Share — Basic
|
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Weighted Average
Shares Outstanding — Basic
|
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Net Earnings (loss) per
Share — Assuming Dilution
|
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Weighted Average
Shares Outstanding — Assuming
Dilution
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See notes to consolidated financial
statements.
CONSOLIDATED BALANCE
SHEETS
INVACARE CORPORATION AND
SUBSIDIARIES
|
|
December 31,
2007
|
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|
December 31,
2006
|
|
|
|
(In
thousands)
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment receivables,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current
maturities of long-term obligations
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares (Authorized
300 shares; none outstanding)
|
|
|
|
|
|
|
|
|
Common Shares (Authorized
100,000 shares; 32,126 and 32,051 issued in 2007 and 2006,
respectively) — no par
|
|
|
|
|
|
|
|
|
Class B Common Shares
(Authorized 12,000 shares; 1,112, issued and outstanding in 2007 and
2006) — no par
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
earnings
|
|
|
|
|
|
|
|
|
Treasury shares (1,200 and
1,186 shares in 2007 and 2006,
respectively)
|
|
|
|
|
|
|
|
|
Total Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH
FLOWS
INVACARE CORPORATION AND
SUBSIDIARIES
|
|
Years Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net
earnings (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses on trade and
installment receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for deferred income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for other deferred
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposals of property and
equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt finance charges, interest and
fees associated with debt refinancing
|
|
|
|
|
|
|
|
|
|
|
|
|
Write down of goodwill and
intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment sales contracts,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and
equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash
acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in other
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in other
long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used for Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines of
credit, securitization facility and long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on revolving lines of
credit, securitization facility and long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of financing
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’
EQUITY
INVACARE CORPORATION AND
SUBSIDIARIES
(In
thousands)
|
|
Common
Stock
|
|
|
Class B
Stock
|
|
Additional
Paid-in-
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated Other
Comprehensive
Earnings
(Loss)
|
|
|
Unearned
Compen-sation
|
|
|
Treasury
Stock
|
|
|
Total
|
|
January 1, 2005
Balance
|
$
|
7,803
|
|
$
|
278
|
$
|
124,798
|
|
$
|
550,753
|
|
$
|
104,629
|
|
$
|
(1,557
|
)
|
$
|
(32,261
|
)
|
$
|
754,443
|
|
Exercise of stock options,
including tax benefit
|
|
117
|
|
|
|
|
14,133
|
|
|
|
|
|
|
|
|
|
|
|
(6,004
|
)
|
|
8,246
|
|
Restricted stock
awards
|
|
5
|
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
(1,016
|
)
|
|
|
|
|
—
|
|
Restricted stock award
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881
|
|
|
|
|
|
881
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
|
48,852
|
|
|
|
|
|
|
|
|
|
|
|
48,852
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,176
|
)
|
|
|
|
|
|
|
|
(56,176
|
)
|
Unrealized losses on cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,008
|
)
|
|
|
|
|
|
|
|
(1,008
|
)
|
Marketable securities holding
gain
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
35
|
|
Total comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,297
|
)
|
Dividends
|
|
|
|
|
|
|
|
|
|
(1,580
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,580
|
)
|
December 31, 2005
Balance
|
|
7,925
|
|
|
278
|
|
139,942
|
|
|
598,025
|
|
|
47,480
|
|
|
(1,692
|
)
|
|
(38,265
|
)
|
|
753,693
|
|
Cumulative effect adjustment,
adoption of SAB 108, net of tax
|
|
|
|
|
|
|
|
|
|
(1,912
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,912
|
)
|
Adjustment upon adoption of
FAS 123R
|
|
|
|
|
|
|
(1,692
|
)
|
|
|
|
|
|
|
|
1,692
|
|
|
|
|
|
—
|
|
Exercise of stock
options
|
|
59
|
|
|
|
|
4,911
|
|
|
|
|
|
|
|
|
|
|
|
(4,314
|
)
|
|
656
|
|
Non-qualified stock option
expense
|
|
|
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512
|
|
Restricted stock
awards
|
|
29
|
|
|
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,075
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
(317,774
|
)
|
|
|
|
|
|
|
|
|
|
|
(317,774
|
)
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
64,386
|
|
|
|
|
|
|
|
|
64,386
|
|
Unrealized gains on cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
2,303
|
|
|
|
|
|
|
|
|
2,303
|
|
Marketable securities holding
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
(41
|
)
|
Total comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(251,126
|
)
|
Adjustment to initially apply
FASB Statement No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,940
|
)
|
|
|
|
|
|
|
|
(14,940
|
)
|
Dividends
|
|
|
|
|
|
|
|
|
|
(1,589
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,589
|
)
|
December 31, 2006
Balance
|
|
8,013
|
|
|
278
|
|
144,719
|
|
|
276,750
|
|
|
99,188
|
|
|
—
|
|
|
(42,579
|
)
|
|
486,369
|
|
Exercise of stock
options
|
|
1
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Non-qualified stock option
expense
|
|
|
|
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,232
|
|
Restricted stock
awards
|
|
20
|
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
(298
|
)
|
|
1,024
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
|
1,190
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
66,373
|
|
|
|
|
|
|
|
|
66,373
|
|
Unrealized loss on cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,334
|
)
|
|
|
|
|
|
|
|
(3,334
|
)
|
Defined benefit plans amortization
of prior service costs and unrecognized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
2,701
|
|
|
|
|
|
|
|
|
2,701
|
|
Marketable securities holding
gain
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
41
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,971
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
(1,596
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,596
|
)
|
December 31, 2007
Balance
|
$
|
8,034
|
|
$
|
278
|
$
|
147,295
|
|
$
|
276,344
|
|
$
|
164,969
|
|
$
|
—
|
|
$
|
(42,877
|
)
|
$
|
554,043
|
|
See notes to consolidated financial
statements.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Accounting Policies
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 November 30 fiscal year 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: The company reclassified
$1,005,000 from other long-term obligations to additional paid-in-capital as of
January 1, 2005 to properly reflect deferred compensation on the Consolidated
Balance Sheet and Consolidated Statement of Shareholders’
Equity. Certain lines of the Consolidated Statement of Cash Flows
were also reclassified in 2006 and 2005 to conform to the presentation for 2007,
including the proper presentation of the provision for stock option and award
expense, and the changes increased net operating cash flows by $717,000 and
$881,000, respectively, for 2006 and 2005. Reclassifications were
made to the company’s segment disclosures including reclassification of segment
earnings (loss) before income tax amounts for 2006 and 2005 to be consistent
with 2007 presentation of including the impact of the consolidated variable
interest entity in “Other” versus “NA/HME.” The reclassification
decreased the loss in NA/HME and increased the loss in Other by $10,394,000 in
2006 and increased the earnings in NA/HME and the loss in Other in 2005 by
$1,087,000.
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.
Marketable
Securities: Marketable securities
consist of short-term investments in repurchase agreements, government and
corporate securities, certificates of deposit and equity securities. Marketable
securities with original maturities of less than three months are treated as
cash equivalents. The company has classified its marketable securities as
available for sale. The securities are carried at their fair value and net
unrealized holding gains and losses, net of tax, are carried as a component of
accumulated other comprehensive earnings (loss).
Inventories: Inventories are stated at
the lower of cost or market with cost determined by the first-in, first-out
method. Market costs are based on the lower of replacement cost or estimated net
realizable value. 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.
Property and
Equipment: Property and equipment are
stated on the basis of cost. The company principally uses the straight-line
method of depreciation for financial reporting purposes based on annual rates
sufficient to amortize the cost of the assets over their estimated useful lives.
Machinery and equipment as well as furniture and fixtures are generally
depreciated using lives of 3 to 10 years, while buildings and improvements are
depreciated using lives of 3 to 40 years. Accelerated methods of depreciation
are used for federal income tax purposes. Expenditures for maintenance and
repairs are charged to expense as incurred.
Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. The asset would be considered impaired when the
future net undiscounted cash flows generated by the asset are less than its
carrying value. An impairment loss would be recognized based on the amount by
which the carrying value of the asset exceeds its fair
value.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Accounting Policies –
Continued
Goodwill and Other
Intangibles: In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets,
(“SFAS No. 142”) goodwill is subject to annual impairment testing. For
purposes of the impairment test, the fair value of each reporting unit is
estimated by forecasting cash flows and discounting those cash flows using
appropriate discount rates. The fair values are then compared to the carrying
value of the net assets of each reporting unit. No impairments were recognized
in 2007. As a result of reduced profitability in the NA/HME operating segment
and uncertainty associated with future market conditions, in 2006 the company
recorded impairment charges related to goodwill and an intangible asset in this
segment of $294,656,000 and $160,000, respectively, in addition, an impairment
charge of $5,601,000 was recorded related to the intangible asset recorded
associated with NeuroControl, which is included in Other in the segment
disclosure, at December 31, 2006.
Accrued Warranty
Cost: Generally,
the company’s products are covered by warranties against defects in material and
workmanship for various periods depending on the product 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 current year. See Current Liabilities in the Notes to the
Consolidated Financial Statements for a reconciliation of the changes in the
warranty accrual.
Product Liability
Cost: 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 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.
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 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. 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.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Accounting Policies –
Continued
Distributed products sold by the company
are accounted for in accordance with Emerging Issues Task Force (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. The company has an agreement with a third
party financing company to provide the majority of future installment 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.
Research and
Development: Research and development
costs are expensed as incurred and included in cost of products sold. The
company’s annual expenditures for product development and engineering were
approximately $22,491,000, $22,146,000, and $23,247,000 for 2007, 2006, and
2005, respectively.
Advertising: Advertising costs are
expensed as incurred and included in selling, general and administrative
expenses. The company has a co-op advertising program in which the company
reimburses customers up to 50% of their costs of qualifying advertising
expenditures. Invacare product and brand logos must appear in all advertising.
Invacare requires customers to submit proof of advertising with their claims for
reimbursement. The company’s cost of the program is included in SG&A expense
in the consolidated statement of operations at the time the liability is
estimated. Reimbursement is made on an annual basis and within 3 months of
submission and approval of the documentation. The company receives monthly
reporting from those in the program of their qualified advertising dollars spent
and accrues based upon information received. Advertising expenses amounted to
$17,529,000, $20,869,000 and $26,621,000 for 2007, 2006 and 2005, respectively,
the majority of which is incurred for advertising in the United
States.
Stock-Based
Compensation Plans: Prior to the company’s
adoption of Statement of Financial Accounting Standard No. 123 (Revised
2004), Share Based Payment
(“SFAS 123R”), the
company accounted for options under its stock-based compensation plans using the
intrinsic value method proscribed in Accounting Principles Board Opinion (APBO)
No. 25, Accounting for Stock
Issued to Employees, and
related Interpretations. Only compensation cost related to restricted stock
awards granted without cost was reflected in net earnings, as all other options
awarded were granted at exercise prices equal to the market value of the
underlying stock on the date of grant.
Effective January 1, 2006, the
company adopted SFAS No. 123R using the modified prospective
application method. Under the modified prospective method, compensation cost has
been recognized since January 1, 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):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Stock-based compensation expense
recognized as part of selling, general and administrative
expense
|
|
$
|
2,554
|
|
|
$
|
1,587
|
|
|
$
|
881
|
|
The 2007 and 2006 amounts above reflect
compensation expense related to restricted stock awards and nonqualified stock
options awarded under the 2003 Performance Plan. The 2005 amount reflects
compensation expense recognized for restricted stock awards only, before
SFAS No. 123R was adopted. 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.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Accounting Policies –
Continued
Pursuant to the modified prospective
application method, results for periods prior to January 1, 2006 have not
been restated to reflect the effects of adopting SFAS No. 123R. The
pro forma information below is presented for comparative purposes, as required
by SFAS No. 148, Accounting for
Stock-Based Compensation —Transition and Disclosure, an amendment of FASB
Statement No. 123, to
illustrate the pro forma effect on net earnings and related earnings per share
for 2005, as if the company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation for 2005 (in
thousands):
|
|
2005
|
|
Net earnings, as
reported
|
|
$
|
48,852
|
|
Add: Stock-based compensation
expense included in reported earnings, net of tax
($308)
|
|
|
573
|
|
Deduct: Total stock-based
compensation expense determined under fair value-based method for all
awards, net of tax ($7,993)
|
|
|
(14,845
|
)
|
Adjusted net
earnings
|
|
$
|
34,580
|
|
Net earnings per
share:
|
|
|
|
|
Basic — as
reported
|
|
$
|
1.55
|
|
Basic — as adjusted for
stock-based compensation expense
|
|
$
|
1.10
|
|
Diluted — as
reported
|
|
$
|
1.51
|
|
Diluted — as adjusted for
stock-based compensation expense
|
|
$
|
1.07
|
|
On December 21, 2005, the company’s
Board of Directors, based on the recommendation of the Compensation, Management
Development and Corporate Governance Committee, approved the acceleration of the
vesting for substantially all of our unvested stock options, which were then
underwater. The Board of Directors decided to approve the acceleration of the
vesting of these stock options primarily to partially offset certain reductions
in other benefits made by the company and to provide additional incentive to
those employees critical to our cost reduction efforts.
The decision, which was effective as of
December 21, 2005, accelerated the vesting for a total of 1,368,307 options
on the company’s common shares, including 646,100 shares underlying options
held by the company’s named executive officers. The stock options accelerated
equated to 29% of the company’s total outstanding stock options. Vesting was not
accelerated for the restricted stock awards granted under the company’s
stock-based compensation plans and no other modifications were made to the
awards that were accelerated. The exercise prices of the accelerated options,
all of which were underwater, were unchanged by the acceleration of the vesting
schedules. All of the company’s outstanding unvested options under our
stock-based compensation plans which were accelerated, had exercise prices
ranging from $30.91 to $47.80 which were greater than our stock market price of
$30.75 as of the effective date of the acceleration.
Income
Taxes: The
company uses the liability method in measuring the provision for income taxes
and recognizing deferred tax assets and liabilities on the balance sheet. The
liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting bases of assets and liabilities. Undistributed earnings of
the company’s foreign subsidiaries are considered to be indefinitely reinvested
and, accordingly, no provision for income taxes has been provided for unremitted
earnings of foreign subsidiaries. The amount of the unrecognized deferred tax
liability for temporary differences related to investments in foreign
subsidiaries that are permanently reinvested is not practically
determinable.
Derivative
Instruments: The
company recognizes its derivative instruments as assets or liabilities in the
consolidated balance sheet measured at fair value. A majority of the company’s
derivative instruments are designated and qualify as cash flow hedges.
Accordingly, the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the fair value of the hedged
item, if any, is recognized in current earnings during the period of
change.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Accounting Policies –
Continued
The company is a party to interest rate
swap agreements that qualify as cash flow hedges and effectively convert
floating-rate debt to fixed-rate debt, so the company can avoid the risk of
changes in market interest rates. Until the company refinanced its
debt in February 2007, the company was also a party to interest rate swap
agreements that qualified as fair value hedges and effectively converted
fixed-rate debt to floating-rate debt, so the company could avoid paying higher
than market interest rates. The company recognized net losses of
$394,000 and $696,000 in 2007 and 2006, respectively, and a net gain of
$1,230,000 in 2005 related to its swap agreements, which is reflected in
interest expense on the consolidated statement of
operations.
To protect against increases/decreases
in forecasted foreign currency cash flows resulting from inventory
purchases/sales over the next year, the company utilizes cash flow hedges to
hedge portions of its forecasted purchases/sales denominated in foreign
currencies. The company recognized a net gain of $451,000 in 2007 and net losses
of $240,000 and $280,000 in 2006 and 2005, respectively, on foreign currency
cash flow hedges. The gains and losses are included in cost of products sold and
selling, general and administrative expenses on the consolidated statement of
operations.
The company recognized no gain or loss
related to hedge ineffectiveness or discontinued cash flow hedges. If it is
later determined that a hedged forecasted transaction is unlikely to occur, any
gains or losses on the forward contracts would be reclassified from other
comprehensive income into earnings. The company does not expect this to occur
during the next twelve months. The company has historically not
recognized any ineffectiveness related to forward contract cash flow hedges
because the company generally limits it hedges to 60% of total forecasted
transactions for a given entity’s exposure to currency rate changes and the
transactions hedged are recurring in nature.
Foreign Currency
Translation: The
functional currency of the company’s subsidiaries outside the United States is
the applicable local currency. The assets and liabilities of the company’s
foreign subsidiaries are translated into U.S. dollars at year-end exchange
rates. Revenues and expenses are translated at weighted average exchange rates.
Gains and losses resulting from translation are included in accumulated other
comprehensive earnings (loss).
Net Earnings Per
Share: Basic
earnings per share are computed based on the weighted-average number of Common
Shares and Class B Common Shares outstanding during the year. Diluted
earnings per share are computed based on the weighted-average number of Common
Shares and Class B Common Shares outstanding plus the effects of dilutive
stock options and awards outstanding during the year.
Defined Benefit
Plans: In
September 2006, the Financial Accounting Standards Board “FASB” issued
SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R), or “FAS 158.” FAS 158 requires plan
sponsors to recognize the funded status of their defined benefit postretirement
benefit plans in the consolidated balance sheet, measure the fair value of plan
assets and benefit obligations as of the balance sheet date and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income. The company adopted the provisions of FAS 158 on
December 31, 2006. The adoption required the company to recognize the
funded status (i.e., the difference between the fair value of plan assets and
the projected benefit obligations) of our postretirement benefit plan in the
December 31, 2006 balance sheet, with a corresponding adjustment of
$14,940,000 to accumulated other comprehensive income on a pre-tax and after-tax
basis. The adoption of FAS 158 did not affect the company’s consolidated
statement of operations for the year ended December 31, 2006, or for any
prior period presented.
In 2006, the company determined that the
reported December 31, 2005 accumulated benefit for the company’s
non-qualified defined benefit Supplemental Executive Retirement Plan (SERP) was
understated by $2,941,000 ($1,912,000 after-tax), or $0.06 per share, as
the result of accounting errors in which recorded expense in prior years was
netted by SERP benefit payments. The company assessed the error amounts
considering SEC Staff Accounting Bulletin No. 99,
Materiality, as well as SEC
Staff Accounting Bulletin No. 108, Considering the
Effects ofPrior Year Misstatements When Quantifying Misstatements in Current
Year FinancialStatements,
or “SAB 108.” The error was not material to any prior period reported
financial statements, but was material in the current year. Accordingly, the
company recorded the correction of the understatement of expense as an
adjustment to beginning 2006 retained earnings pursuant to the special
transition provision detailed in SAB 108.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Accounting Policies –
Continued
Recent Accounting
Pronouncements: In June 2006, the FASB
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, or “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. Upon adoption,
the company did not recognize an adjustment in the liability for unrecognized
income tax benefits. The company continues to recognize interest and
penalties related to uncertain tax positions in income tax
expense.
In September, 2006, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 157 (FAS 157),
Fair
Value Measurements, which
creates a framework for measuring fair value, clarifies the definition of fair
value and expands the disclosures regarding fair value
measurements. FAS 157 does not require any new fair value
measurements and is effective for fiscal years beginning after November 15,
2007, thus January 1, 2008. The company adopted the new standard as of the
effective date and currently does not believe the adoption will have a material
impact on the company’s financial position or future results as the company is
already performing its goodwill and intangible valuation calculations and
estimating the fair value of the company’s financial instruments using
methodology which is principally consistent with Statement No. 157. The company
continues to study the impact that FAS 157 will have on future disclosures of
the fair values for investments, accounts receivable and debt as shown in the
Fair Values of Financial Instruments footnote disclosure.
In December 2007, the FASB issued
SFAS 141(R), Business
Combinations (SFAS 141R),
which changes the accounting for business acquisitions. SFAS 141(R)
requires the acquiring entity in a business combination to recognize all the
assets acquired and liabilities assumed in the transaction and establishes
principles and requirements as to how an acquirer should recognize and measure
in its financial statements the assets acquired, liabilities assumed, any
non-controlling interest and goodwill acquired. SFAS 141(R) also
requires expanded disclosure regarding the nature and financial effects of a
business combination. SFAS 141(R) is effective for the company
beginning January 1, 2009 and the company is currently evaluating the future
impacts and disclosures of this standard.
On September 5, 2007, the FASB exposed
for comment FASB Staff Position APB 14-a (FSP APB 14-a) to provide clarification
of the accounting for convertible debt that can be settled in cash upon
conversion. The FASB believes this clarification is needed because
the current accounting being applied for convertible debt does not fully reflect
the true economic impact on the issuer since the conversion option is not
captured as a borrowing cost and its full dilutive effect is not included in
earnings per share. The proposed FSP would require separate
accounting for the liability and equity components of the convertible debt in a
manner that would reflect Invacare’s nonconvertible debt borrowing
rate. The company would be required to bifurcate a component of its
convertible debt as a component of stockholders’ equity and accrete the
resulting debt discount as interest expense. The comment period
regarding the exposure draft ended October 15, 2007 and the exposure draft is
currently being redeliberated by the FASB. Should the proposed FSP become
effective as drafted, the change may materially impact the company’s interest
expense and earnings per share. The most recent proposed effective
date was January 1, 2008 with retrospective application required for all periods
presented and no grandfathering for existing instruments.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Receivables
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. In addition,
the company has 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. The estimated allowance
for uncollectible amounts ($39,135,000 in 2007 and $35,591,000 in 2006) is
based primarily on management’s evaluation of the financial condition of the
customer. The company’s allowance for uncollectible accounts contemplates the
increased collectibility risk resulting from changes in Medicare reimbursement
regulations, specifically changes to the qualification processes and
reimbursement levels of power wheelchairs. The company has reviewed the accounts
receivables associated with many of its customers that are most exposed to these
issues. The company is also working with certain of its customers in an effort
to help them reduce costs, including product line consolidations and
introduction of simplified pricing. In addition, the company has also
implementing tighter credit policies with many of these
accounts.
Until February 2007, the company
utilized a 364-day $100 million accounts receivable securitization facility
which was entered into on September 30, 2005. The Receivables Purchase
Agreement (the “Receivables Agreement”), provided for, among other things, the
transfer from time to time by Invacare and certain of its subsidiaries of
ownership interests of certain domestic accounts receivable on a revolving basis
to the bank conduit, an asset-backed issuer of commercial paper, and/or the
financial institutions named in the Receivables Agreement. Pursuant to the
Receivables Agreement, the company and certain of its subsidiaries from time to
time could transfer accounts receivable to Invacare Receivables Corporation
(IRC), a special purpose entity and subsidiary of Invacare. IRC would then
transfer interests in the receivables to the Conduit and/or the financial
institutions named in the Receivables Agreement and receives funds from the
conduit and/or the financial institutions raised through the issuance of
commercial paper (in its own name) by the conduit and/or the financial
institutions.
In accordance with U.S. Generally
Accepted Accounting Principles (GAAP), Invacare accounted for the transaction as
a secured borrowing. Borrowings under the facility were effectively repaid as
receivables were collected, with new borrowings created as additional
receivables were sold. As of December 31, 2006, Invacare had $71,750,000 in
borrowings pursuant to the securitization facility at a borrowing rate of
approximately 6.1% in 2006. The debt is reflected on the short-term debt and
current maturities of long-term obligations line of the consolidated balance
sheet at December 31, 2006. In February 2007, the accounts
receivable securitization facility was terminated and thus the company has no
borrowings outstanding as of December 31, 2007 associated with the
facility.
Installment receivables as of
December 31, 2007 and 2006 consist of the following (in
thousands):
|
|
2007
|
|
|
2006
|
|
|
|
Current
|
|
|
Long-
Term
|
|
|
Total
|
|
|
Current
|
|
|
Long-
Term
|
|
|
Total
|
|
Installment
receivables
|
|
$
|
4,404
|
|
|
$
|
30,560
|
|
|
$
|
34,964
|
|
|
$
|
9,077
|
|
|
$
|
18,991
|
|
|
$
|
28,068
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
interest
|
|
|
(100
|
)
|
|
|
(3,176
|
)
|
|
|
(3,276
|
)
|
|
|
(1,401
|
)
|
|
|
(1,738
|
)
|
|
|
(3,139
|
)
|
Allowance for doubtful
accounts
|
|
|
(247
|
)
|
|
|
(3,578
|
)
|
|
|
(3,825
|
)
|
|
|
(579
|
)
|
|
|
(1,463
|
)
|
|
|
(2,042
|
)
|
|
|
$
|
4,057
|
|
|
$
|
23,806
|
|
|
$
|
27,863
|
|
|
$
|
7,097
|
|
|
$
|
15,790
|
|
|
$
|
22,887
|
|
The increase in the allowance for
doubtful accounts in 2007 was the result of additional provisions for doubtful
accounts.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Receivables –
Continued
In addition, as a result of the
company’s third party financing arrangement, 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. See Concentration of Credit Risk in the Notes to the
Consolidated Financial Statements for a description of the financing
arrangement. Long-term installment receivables are included in “Other Assets” on
the consolidated balance sheet.
Inventories
Inventories as of December 31, 2007
and 2006 consist of the following (in thousands):
|
|
2007
|
|
|
2006
|
|
Finished
goods
|
|
$
|
116,808
|
|
|
$
|
118,323
|
|
Raw
materials
|
|
|
63,815
|
|
|
|
66,718
|
|
Work in
process
|
|
|
14,981
|
|
|
|
16,715
|
|
|
|
$
|
195,604
|
|
|
$
|
201,756
|
|
Other Current Assets
Other current assets as of
December 31, 2007 and 2006 consist of the following (in
thousands):
|
|
2007
|
|
|
2006
|
|
Value added taxes
receivable
|
|
$
|
22,808
|
|
|
$
|
43,264
|
|
Recoverable income
taxes
|
|
|
11,219
|
|
|
|
19,024
|
|
Prepaids and other current
assets
|
|
|
28,321
|
|
|
|
27,106
|
|
|
|
$
|
62,348
|
|
|
$
|
89,394
|
|
Property and
Equipment
Property and equipment as of
December 31, 2007 and 2006 consist of the following (in
thousands):
|
|
2007
|
|
|
2006
|
|
Machinery and
equipment
|
|
$
|
308,904
|
|
|
$
|
276,062
|
|
Land, buildings and
improvements
|
|
|
97,478
|
|
|
|
86,544
|
|
Furniture and
fixtures
|
|
|
33,204
|
|
|
|
29,609
|
|
Leasehold
improvements
|
|
|
16,390
|
|
|
|
15,943
|
|
|
|
|
455,976
|
|
|
|
408,158
|
|
Less allowance for
depreciation
|
|
|
(286,600
|
)
|
|
|
(234,213
|
)
|
|
|
$
|
169,376
|
|
|
$
|
173,945
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Acquisitions
On November 27, 2007, Invacare
Corporation acquired RoadRunner Mobility, Inc., a Texas corporation and a
leading repairer of power wheelchairs supporting the equipment service needs of
the Medicare beneficiary through a national network of service centers and
service technicians for $5,496,000 in cash. The company’s results of
operations include the impact of RoadRunner Mobility, Inc. since the date of the
acquisition.
In 2006, Invacare Corporation acquired
two businesses, which were individually immaterial and in the aggregate, at a
total cost of $15,296,000, which was paid in cash. The company
acquired Home Health Equipment Pty Ltd, an Australian based company, and leading
supplier of medical equipment in South Australia, providing high quality
equipment and service to institutions and individual clients selling the full
range of rehabilitation, mobility and continuing care products. In
addition, the company acquired Morris Surgical Pty Ltd, an Australian based
company, and a leading supplier of medical equipment in Queensland, providing
high quality equipment and service to institutions and individual clients
selling the full range of rehabilitation, mobility, continuing care products as
well as niche and made to order products.
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. The
acquisition allowed the company to expand its product line and reach new
markets. The final purchase price was $226,806,000, including acquisition costs
of $4,116,000, which was paid in cash.
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. A progression of the accruals recorded in the purchase price
allocation is as follows (in thousands):
|
|
Severance
|
|
|
Exit of
Product
Lines
|
|
|
Sales Agency
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
|
|
|
(972
|
)
|
|
|
—
|
|
|
|
—
|
|
Payments
|
|
|
(226
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance at
12/31/07
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The adjustments represent reversals to
goodwill for accruals not utilized.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Goodwill
The carrying amount of goodwill by
operating segment is as follows (in thousands):
|
|
North
America /
HME
|
|
Invacare
Supply
Group
|
|
Institutional
Products
Group
|
|
Europe
|
|
Asia/Pacific
|
|
Consolidated
|
|
Balance at January 1,
2006
|
|
$
|
331,938
|
|
$
|
—
|
|
$
|
—
|
|
$
|
367,151
|
|
$
|
21,784
|
|
$
|
720,873
|
|
Acquisitions
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,081
|
|
|
8,081
|
|
Foreign currency translation
adjustments
|
|
|
4,366
|
|
|
—
|
|
|
—
|
|
|
51,983
|
|
|
1,964
|
|
|
58,313
|
|
Purchase accounting
adjustments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,182
|
)
|
|
—
|
|
|
(2,182
|
)
|
Re-allocation
|
|
|
(41,648
|
)
|
|
23,541
|
|
|
18,107
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Impairment
charge
|
|
|
(294,656
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(294,656
|
)
|
Balance at December 31,
2006
|
|
|
—
|
|
|
23,541
|
|
|
18,107
|
|
|
416,952
|
|
|
31,829
|
|
|
490,429
|
|
Acquisitions
|
|
|
2,822
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,822
|
|
Foreign currency translation
adjustments
|
|
|
—
|
|
|
—
|
|
|
3,318
|
|
|
42,155
|
|
|
5,431
|
|
|
50,904
|
|
Purchase accounting
adjustments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(972
|
)
|
|
—
|
|
|
(972
|
)
|
Balance at December 31,
2007
|
|
$
|
2,822
|
|
$
|
23,541
|
|
$
|
21,425
|
|
$
|
458,135
|
|
$
|
37,260
|
|
$
|
543,183
|
|
As a result of the RoadRunner Mobility,
Inc. acquisition in 2007, additional goodwill of $2,822,000 was recorded, which
is deductible for tax purposes. In the fourth quarter of 2006, the company
expanded its number of reporting segments from three to five due to
organizational changes within the former North American geographic operating
segment in line with how the chief operating decision maker assesses performance
and makes resource allocation decisions. Accordingly, under the
provisions of SFAS No. 142, the company reallocated the goodwill related to the
former North American reporting unit to the three new reporting units which
comprise the North America geographic region.
In accordance with
SFAS No. 142, goodwill is subject to annual impairment testing. For
purposes of Step I of the impairment test, the fair value of each reporting unit
is estimated by forecasting cash flows and discounting those cash flows using
appropriate discount rates. The fair values are then compared to the carrying
value of the net assets of each reporting unit. Step II of the impairment
test requires a more detailed assessment of the fair values associated with the
net assets of a reporting unit that fails the Step I test, including a review
for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (“SFAS 144”).
The company utilizes a discounted cash
flow method model to analyze reporting units for impairment in which the company
forecasts income statement and balance sheet amounts based on assumptions
regarding future sales growth, profitability, inventory turns and days’ sales
outstanding to forecast future cash flows. The cash flows are
discounted using a weighted average cost of capital discount rate where the cost
of debt is based on quoted rates for 20-year debt of company’s of similar credit
risk and the cost of equity is based upon the 20-year treasury rate for the risk
free rate, a market risk premium, the industry average beta, a small cap stock
adjustment and company specific risk premiums. The assumptions used
are based on a market participant’s point of view and yielded a discount rate of
9.25% in 2007 compared to 8.85% in 2006. While no impairment was
indicated in 2007 for any reporting units, a future potential impairment is
possible for any or the company’s reporting units should actual results differ
materially from forecasted results.
No impairment was evident based on the
company’s 2007 fourth quarter review. An impairment charge related to
goodwill in the North America/HME segment of $294,656,000 was recorded in the
fourth quarter of 2006 as a result of reduced profitability in the NA/HME
operating segment and uncertainty associated with future market
conditions. As part of the impairment analysis in 2006, the company
compared the forecasted un-discounted cash flows for each facility in the North
America/HME segment to the carrying value of the net assets associated with a
given facility, which calculated no impairment of any other long-lived assets
pursuant to SFAS No. 144.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Goodwill – Continued
The 2006 impairment of goodwill in the
NA/HME operating segment was primarily the result of reduced government
reimbursement levels and changes in reimbursement policies, which negatively
affected revenues and profitability in the NA/HME operating segment. The changes
announced by the Centers for Medicare and Medicaid Services, or “CMS,” affected
eligibility, documentation, codes, and payment rules relating to power
wheelchairs impacted the predictability of reimbursement of expenses for and
access to power wheelchairs and created uncertainty in the market place, thus
decreasing purchases. Effective November 15, 2006, the CMS reduced the
maximum reimbursement amount for power wheelchairs under Medicare by up to 28%.
The reduced reimbursement levels may cause consumers to choose less expensive
versions of the company’s power wheelchairs.
NA/HME sales of respiratory products
were also negatively affected by the changes in 2006. Small and independent
provider sales declined as these dealers slowed their purchases of the company’s
HomeFill™ oxygen system product line, in part, until they had a clearer view of
future oxygen reimbursement levels. Furthermore, a study issued by the Office of
Inspector General or “OIG,” in September 2006 suggested that $3.2 billion
in savings could be achieved over five years by reducing the reimbursed rental
period from three years (the reimbursement period under current law) to
thirteen months. The uncertainty created by these announcements continues
to negatively impact the home oxygen equipment market, particularly for those
providers considering changing to the HomeFill™ oxygen
system.
Other Intangibles
All of the company’s other intangible
assets have definite lives and continue to be amortized over their useful lives,
except for $36,505,000 related to trademarks, which have indefinite lives. The
changes in intangible balances reflected on the balance sheet from December 31,
2006 to December 31, 2007 were primarily the result of foreign currency
translation. The company’s intangibles consist of the following (in
thousands):
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
Customer
Lists
|
|
$
|
77,329
|
|
|
$
|
21,238
|
|
|
$
|
71,106
|
|
|
$
|
14,373
|
|
Trademarks
|
|
|
36,505
|
|
|
|
—
|
|
|
|
33,034
|
|
|
|
—
|
|
License
agreements
|
|
|
4,559
|
|
|
|
4,335
|
|
|
|
4,489
|
|
|
|
3,821
|
|
Developed
Technology
|
|
|
7,316
|
|
|
|
1,425
|
|
|
|
6,819
|
|
|
|
940
|
|
Patents
|
|
|
6,909
|
|
|
|
4,313
|
|
|
|
6,631
|
|
|
|
3,869
|
|
Other
|
|
|
8,650
|
|
|
|
5,221
|
|
|
|
8,005
|
|
|
|
4,205
|
|
|
|
$
|
141,268
|
|
|
$
|
36,532
|
|
|
$
|
130,084
|
|
|
$
|
27,208
|
|
Intangibles recorded as the result of an
acquisition during 2007 were as follows (in thousands):
|
|
Fair Value
|
|
Weighted
Average
Amortization
Period
|
Customer
lists
|
|
$
|
1,600
|
|
10 years
|
Other
|
|
|
100
|
|
5 years
|
Total
|
|
$
|
1,700
|
|
|
Amortization expense related to other
intangibles was $8,985,000 and $9,311,000 for 2007 and 2006, respectively.
Estimated amortization expense for each of the next five years is expected to be
$8,640,000 for 2008, $8,315,000 in 2009, $8,173,000 in 2010, $7,750,000 in 2011
and $7,674,000 in 2012. Amortized intangibles are being amortized on
a straight-line basis for periods from 3 to 20 years with the majority of the
intangibles being amortized over a life of between 10 and 13
years.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Other Intangibles –
Continued
In accordance with
SFAS No. 142, the company reviews intangibles for impairment. For
purposes of the impairment test, the fair value of each unamortized intangible
is estimated by forecasting cash flows and discounting those cash flows using
appropriate discount rates. The fair values are then compared to the carrying
value of the intangible. For amortized intangibles, the forecasted undiscounted
cash flows were compared to the carrying value, and if impairment results, the
impairment is measured based on the estimated fair value of the intangibles. As
a result of the company’s 2007 intangible impairment review, there was no
impairment to any intangible assets. As a result of the company’s 2006
intangible impairment review, an impairment charge of $160,000 was recorded
associated with a trade name, which is part of the NA/HME segment and a charge
of $5,601,000 was recorded related to the intangible recorded associated with
NeuroControl, which is included in Other in the segment disclosure. See
Investment in Affiliated Company in the Notes to the Consolidated Financial
Statements included in this report below. The company has recorded a material
amount of intangibles as the result of acquisitions which may become impaired if
performance assumptions, primarily related to sales and operating cash flows
estimates, made at the time of originally valuing the intangibles are not
achieved.
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.
Until the fourth quarter of 2007, the
company consolidated NeuroControl, a company 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 had 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.
In the fourth quarter of 2006, the
company’s board of directors made a decision to no longer fund the cash needs
of NeuroControl. Based upon that decision, NeuroControl’s directors
decided to commence a liquidation process and cease operations. 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. In the fourth
quarter of 2007, the company recognized a one-time gain of $3,981,000 due to the
cancellation of debt owed by NeuroControl to two third parties. As of
December 31, 2007, all operations of NeuroControl had
ceased.
Current Liabilities
Accrued expenses as of December 31,
2007 and 2006 consist of the following (in thousands):
|
|
2007
|
|
|
2006
|
|
Accrued salaries and
wages
|
|
$
|
41,851
|
|
|
$
|
31,970
|
|
Accrued taxes other than income
taxes, primarily Value Added Taxes
|
|
|
29,721
|
|
|
|
43,899
|
|
Accrued warranty
cost
|
|
|
16,616
|
|
|
|
15,165
|
|
Accrued
interest
|
|
|
11,926
|
|
|
|
10,893
|
|
Accrued
freight
|
|
|
10,036
|
|
|
|
4,278
|
|
Accrued
rebates
|
|
|
7,420
|
|
|
|
8,356
|
|
Accrued legal and
professional
|
|
|
3,927
|
|
|
|
8,222
|
|
Accrued product liability, current
portion
|
|
|
3,556
|
|
|
|
3,296
|
|
Accrued
insurance
|
|
|
2,071
|
|
|
|
2,258
|
|
Accrued
severance
|
|
|
1,224
|
|
|
|
6,457
|
|
Accrued derivative
liability
|
|
|
78
|
|
|
|
435
|
|
Other accrued items, principally
trade accruals
|
|
|
17,532
|
|
|
|
12,547
|
|
|
|
$
|
145,958
|
|
|
$
|
147,776
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Current Liabilities –
Continued
Accrued rebates relate to several volume
incentive programs the company offers its customers. The company accounts for
these rebates as a reduction of revenue when the products are sold in accordance
with the guidance in EITF No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products). The
company has experienced significant pricing pressure in the U.S. market for
standard products in recent years and has partially reduced prices to our
customers in the form of a volume rebate such that the rebates would typically
apply only if customers increased their standard product purchases from the
company.
Changes
in accrued warranty costs were as follows (in thousands):
|
|
2007
|
|
|
2006
|
|
Balance as of January
1
|
|
$
|
15,165
|
|
|
$
|
15,583
|
|
Warranties provided during the
period
|
|
|
10,253
|
|
|
|
9,175
|
|
Settlements made during the
period
|
|
|
(9,538
|
)
|
|
|
(10,252
|
)
|
Changes in liability for
pre-existing warranties during the period, including
expirations
|
|
|
736
|
|
|
|
659
|
|
Balance as of
December 31
|
|
$
|
16,616
|
|
|
$
|
15,165
|
|
Long-Term Debt
Debt as of December 31, 2007 and
2006 consist of the following (in thousands):
|
|
2007
|
|
|
2006
|
|
$250,000,000 term loan facility at
2.25% above local interbank offered rates (LIBOR), expires February 12,
2013
|
|
$
|
197,500
|
|
|
$
|
-
|
|
$150,000,000 revolving credit
facility at 2.25% above LIBOR, expires February 12,
2012
|
|
|
19,488
|
|
|
|
-
|
|
$175,000,000 senior notes at
9.75%, due in February 2015
|
|
|
172,896
|
|
|
|
-
|
|
$135,000,000 convertible senior
subordinated debentures at 4.125%, due in February
2027
|
|
|
135,000
|
|
|
|
-
|
|
Revolving credit agreement
($500,000,000 multi-currency), at 0.675% to 1.40% above LIBOR, expires
January 14, 2010, repaid February 12, 2007
|
|
|
-
|
|
|
|
157,465
|
|
$80,000,000 senior notes at 6.71%,
due in February 2008, repaid February 12, 2007
|
|
|
-
|
|
|
|
80,000
|
|
$50,000,000 senior notes at 3.97%,
due in October 2007, repaid February 12, 2007
|
|
|
-
|
|
|
|
49,565
|
|
$30,000,000 senior notes at 4.74%,
due in October 2009, repaid February 12, 2007
|
|
|
-
|
|
|
|
30,000
|
|
$20,000,000 senior notes at 5.05%,
due in October 2010, repaid February 12, 2007
|
|
|
-
|
|
|
|
20,000
|
|
$150,000,000 senior notes at
6.15%, due in April 2016, repaid February 12, 2007
|
|
|
-
|
|
|
|
150,000
|
|
Short-term borrowings secured by
accounts receivable, repaid February 12, 2007
|
|
|
-
|
|
|
|
71,750
|
|
Other notes and lease
obligations
|
|
|
12,968
|
|
|
|
14,346
|
|
|
|
|
537,852
|
|
|
|
573,126
|
|
Less short-term borrowings secured
by accounts receivable
|
|
|
-
|
|
|
|
(71,750
|
)
|
Less current maturities of
long-term debt
|
|
|
(24,510
|
)
|
|
|
(52,493
|
)
|
|
|
$
|
513,342
|
|
|
$
|
448,883
|
|
The 2006 carrying values of the senior
notes have been adjusted by the gains/losses on the swaps accounted for as fair
value hedges.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Long-Term Debt –
Continued
On February 12, 2007, the company
completed a new financing program which provides the company with total capacity
of approximately $710 million, the net proceeds of which were used to
refinance substantially all of the company’s then existing indebtedness and pay
related fees and expenses. The refinancing was made necessary, in
part, because on November 6, 2006, the company determined that it was in
violation of a financial covenant contained in three Note Purchase
Agreements between the company and various institutional lenders (the
“Note Purchase Agreements”). The Note Purchase Agreements related to
an aggregate principal amount of $330 million in long-term debt of the
company. The financial covenant limited the ratio of consolidated debt to
consolidated operating cash flow. The company believed the limit was exceeded as
a result of borrowings by the company in early October, 2006 under its
$500 million credit facility dated January 14, 2005 with various banks
(the “Credit Facility”). The violation of the covenant under the
Note Purchase Agreements also may have constituted a default under both the
Credit Facility and the company’s separate $100 million trade receivables
securitization facility (collectively, all of these loan facilities are referred
to as the “Loan Facilities”). The company obtained the necessary waivers of
the covenants that were violated.
As part of the new financing, the
company entered into a $400,000,000 senior secured credit facility consisting of
a $250,000,000 term loan facility and a $150,000,000 revolving credit facility.
The company’s obligations under the new senior secured credit facility are
secured by substantially all of the company’s assets and are guaranteed by its
material domestic subsidiaries, with certain obligations also guaranteed by its
material foreign subsidiaries. Borrowings under the new senior secured credit
facility will generally bear interest at LIBOR plus a margin of 2.25%, including
an initial facility fee of 0.50% per annum on the
facility.
The company also completed the sale of
$175,000,000 principal amount of its 9.75% Senior Notes due 2015 to
qualified institutional buyers pursuant to Rule 144A and to
non-U.S. persons outside the United States in reliance on Regulation S
under the Securities Act of 1933, as amended (the “Securities Act”). The notes
are unsecured senior obligations of the company guaranteed by substantially all
of the company’s domestic subsidiaries, and pay interest at 9.75% per annum
on each February 15 and August 15. The net proceeds to the company from the
offering of the notes, after deducting the initial purchasers’ discount and the
estimated offering expenses payable by the company, were approximately
$167,000,000.
Also, as part of the refinancing, the
company completed the sale of $135,000,000 principal amount of its Convertible
Senior Subordinated Debentures due 2027 to qualified institutional buyers
pursuant to Rule 144A under the Securities Act. The debentures are
unsecured senior subordinated obligations of the company guaranteed by
substantially all of the company’s domestic subsidiaries, pay interest at
4.125% per annum on each February 1 and August 1, and are convertible
upon satisfaction of certain conditions into cash, common shares of the company,
or a combination of cash and common shares of the company, subject to certain
conditions, and at the company’s discretion. The company intends to settle any
conversion with cash; therefore, no convertible debt effect is included in the
company’s weighted average shares outstanding for the purpose of determining the
company’s reported Net Earnings (loss) per Share – Assuming Dilution. The
initial conversion rate is 40.3323 shares per $1,000 principal amount of
debentures, which represents an initial conversion price of approximately
$24.79 per share. Holders of the debentures can not convert the debt to
common stock unless the company’s common stock price is at a level in excess of
$32.23, a 30% premium to the conversion price for at least 20 trading days
during a period of 30 consecutive trading days preceding the date on which the
notice of conversion is given. The debentures are redeemable at the company’s
option, subject to specified conditions, on or after February 6, 2012
through and including February 1, 2017, and at the company’s option after
February 1, 2017. On February 1, 2017 and 2022 and upon the occurrence
of certain circumstances, holders have the right to require the company to
repurchase all or some of their debentures. The company evaluated the terms of
the call, redemption and conversion features under the applicable accounting
literature, including SFAS 133, Accounting for
Derivative Instruments and Hedging Activitiesand EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company’s Own Stock,
and determined that the features did not require separate accounting as
derivatives. The net proceeds to the company from the offering of the
debentures, after deducting the initial purchasers’ discount and the estimated
offering expenses payable by the company, were approximately
$132,300,000.
The notes, debentures and common shares
issuable upon conversion of the debentures have been registered under the
Securities Act.
On April 27, 2006, the company
consummated a Senior Notes offering for $150 million at a fixed rate of
6.15% due April 27, 2016. The proceeds were used to reduce debt outstanding
under the company’s $500 million revolving credit
facility. The Senior Notes were repaid in full as part of the
refinancing completed on February 12, 2007.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Long-Term Debt –
Continued
On March 31, 2006, the company and
the other parties to its $500 million Credit Agreement dated as of
January 12, 2005, entered into certain amendments to the Agreement which
among other things: (i) amended the definitions of Adjusted EBITDA and EBIT
under the Credit Agreement to clarify the treatment of restructuring costs under
the Credit Agreement, and (ii) amended the definition of Consolidated
Interest Expense under the Credit Agreement to exclude any interest accrued
under any Trade Receivables Securitization Transaction permitted pursuant to
Section 5.2(n) of the Credit Agreement. The debt outstanding
related to the $500 million Credit Agreement was repaid in full as part of
the refinancing completed on February 12, 2007.
On January 14, 2005, the company
entered into a $450,000,000 multi-currency, long-term revolving credit agreement
which was increased on April 4, 2005 by $50,000,000 to an aggregate amount
of $500,000,000 and expires on January 14, 2010. The facility provided that
Invacare, could, upon consent of its lenders, increase the amount of the
facility by an additional $50,000,000. The agreement replaced the $325,000,000
multi-currency, long-term revolving credit agreement entered into in 2001 and a
$100,000,000 bridge agreement entered into in 2004. The debt
outstanding related to the $450,000,000 multi-currency, long-term revolving
credit agreement was repaid in full as part of the refinancing completed on
February 12, 2007.
Borrowings denominated in foreign
currencies aggregated $19,488,000 at December 31, 2007 and $115,964,000 at
December 31, 2006. As of December 31, 2007 and 2006, the weighted
average floating interest rate on borrowings was 7.22% and 5.90%,
respectively.
The company’s borrowing arrangements
contain covenants with respect to, among other items, 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 agreement with its note holders. The company is in
compliance with all covenant requirements. Under the most restrictive covenant
of the company’s borrowing arrangements as of December 31, 2007, the company had
the capacity to borrow up to an additional $130,512,000.
In July 2007, the company entered into
cash flow hedges that exchanged the LIBOR variable rate on $125,000,000 of term
loan debt for a fixed rate of 5.0525% and in November exchanged the LIBOR
variable on $30,000,000 of term loan debt for a fixed rate of 3.95%. In December
2006, $50,000,000 in fair value hedge swaps that exchanged fixed rates for
floating rates were de-designated as hedges as the associated debt was to be
paid off as part of the company’s refinancing, which was completed in February
2007. In August 2006, $50,000,000 in fair value hedge swaps were also
terminated. All losses associated with the terminations of fair value
hedge swaps were amortized over the remaining life of the previously hedged debt
using the effective yield method.
The aggregate minimum maturities of
long-term debt for each of the next five years are as follows: $24,510,000 in
2008, $3,351,000 in 2009, $3,030,000 in 2010, $3,074,000 in 2011, and $3,147,000
in 2012. The 2008 payment amount includes estimated additional mandatory payment
of $13,572,000 as required by the company’s credit facility based upon excess
cash flow as defined in the agreement. Interest paid on borrowings
was $42,053,000, $28,723,000 and $29,017,000 in 2007, 2006 and 2005,
respectively.
Other Long-Term
Obligations
Other long-term obligations as of
December 31, 2007 and 2006 consist of the following (in
thousands):
|
|
2007
|
|
|
2006
|
|
Supplemental Executive Retirement
Plan liability
|
|
$
|
33,496
|
|
|
$
|
33,251
|
|
Product
liability
|
|
|
17,580
|
|
|
|
19,335
|
|
Deferred income
taxes
|
|
|
28,824
|
|
|
|
34,593
|
|
Other, principally deferred
compensation
|
|
|
26,146
|
|
|
|
20,044
|
|
Total long-term
obligations
|
|
$
|
106,046
|
|
|
$
|
107,223
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Leases and
Commitments
The company leases a portion of its
facilities, transportation equipment, data processing equipment and certain
other equipment. These leases have terms from 1 to 20 years and provide for
renewal options. Generally, the company is required to pay taxes and normal
expenses of operating the facilities and equipment. As of December 31,
2007, the company is committed under non-cancelable operating leases, which have
initial or remaining terms in excess of one year and expire on various dates
through 2024. Lease expenses were approximately $22,229,000 in 2007, $21,302,000
in 2006, and $18,718,000 in 2005.
The amount of buildings
and equipment capitalized in connection with capital leases was $16,595,000 and
$17,072,000 at December 31, 2007 and 2006, respectively. At
December 31, 2007 and 2006, accumulated amortization was $3,789,000 and
$5,461,000, respectively. Future minimum
operating and capital lease commitments as of December 31, 2007, are as
follow (in thousands):
Year
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
2008
|
|
$
|
2,021
|
|
|
$
|
20,361
|
|
2009
|
|
|
1,942
|
|
|
|
12,179
|
|
2010
|
|
|
1,574
|
|
|
|
6,828
|
|
2011
|
|
|
1,537
|
|
|
|
3,514
|
|
2012
|
|
|
1,537
|
|
|
|
1,630
|
|
Thereafter
|
|
|
10,175
|
|
|
|
5,089
|
|
Total future minimum lease
payments
|
|
|
18,786
|
|
|
$
|
49,601
|
|
Amounts representing
interest
|
|
|
(5,980
|
)
|
|
|
|
|
Present value of minimum lease
payments
|
|
$
|
12,806
|
|
|
|
|
|
Retirement and Benefit
Plans
Substantially all full-time salaried and
hourly domestic employees are included in the Invacare Retirement Savings Plan
sponsored by the company. The company makes matching cash contributions up to
66.7% of employees’ contributions up to 3% of compensation, quarterly
contributions based upon 4% of qualified wages and may make discretionary
contributions to the domestic plans based on an annual resolution of the Board
of Directors.
The company sponsors a Deferred
Compensation Plus Plan covering certain employees, which provides for elective
deferrals and the company retirement deferrals so that the total retirement
deferrals equal amounts that would have contributed to the company’s principal
retirement plans if it were not for limitation imposed by income tax
regulations. Contribution expense for the above plans in 2007, 2006 and 2005 was
$5,455,000, $5,514,000, and $5,811,000, respectively.
The company also sponsors a
non-qualified defined benefit Supplemental Executive Retirement Plan (SERP) for
certain key executives. The projected benefit obligation related to this
unfunded plan was $33,920,000 and $33,676,000 at December 31, 2007 and
2006, respectively, and the accumulated benefit obligation was $22,842,000 and
$20,236,000 at December 31, 2007 and 2006, respectively. The
projected benefit obligations were calculated using salary increases of 4% and
5% at December 31, 2007 and 2006, respectively. The assumed discount rate for
2007 was 6.0% based upon the discount rate on high-quality fixed-income
investments without adjustment and the comparable rate was 6.75% for 2006. The
retirement age was 65 for both 2007 and 2006. The salary increase rate was
decreased to recognize the fact that salary increases have decreased over the
last few years, while the discount rate was adjusted to give effect to current
market data. Expense for the plan in 2007, 2006 and 2005 was
$3,031,000, $2,861,000, and $2,439,000, respectively of which $1,520,000,
$1,407,000 and $1,278,000 was related to interest cost with the remaining
portion related to service costs, prior service costs and other gains/losses.
Benefit payments in 2007, 2006 and 2005 were $424,000, $952,000 and $424,000,
respectively.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Retirement
and Benefit Plans –
Continued
In 2005, the company began sponsoring a
Death Benefit Only Plan for certain key executives that provides a benefit equal
to three times the participant’s final earnings should the participant’s death
occur while an employee and a benefit equal to one times the participant’s final
earnings upon the participant’s death after normal retirement or
post-employment. Expense for the plan in 2007, 2006 and 2005 was
$281,000, $252,000, and $209,000, respectively of which $254,000, $221,000 and
$209,000 was related to service cost with the remaining portion related to
interest costs. There were no benefit payments in 2007, 2006 or
2005.
Accumulated other comprehensive income
associated with the SERP and Death Benefit Only Plan (Defined Benefit
Plans) was $12,239,000 and $14,940,000 as of December 31, 2007 and 2006,
respectively for a net change of $2,701,000 as $3,312,000 in net periodic
benefit costs was recognized during the year offset by a net increase in the
projected benefit obligations related to the Defined Benefit Plans of
$611,000. Amortization of prior service costs and unrecognized losses
associated with the Defined Benefit Plans is expected to be approximately
$2,313,000 in 2008.
In conjunction with these non-qualified
plans, the company has invested in life insurance policies related to certain
employees to satisfy these future obligations. The current cash surrender value
of these policies approximates the current benefit obligations. In addition, the
projected policy benefits exceed the projected benefit
obligations.
Shareholders’ Equity
Transactions
The company’s Common Shares have a
$.25 stated value. The Common Shares and the Class B Common Shares
generally have identical rights, terms and conditions and vote together as a
single class on most issues, except that the Class B Common Shares have ten
votes per share, carry a 10% lower cash dividend rate and, in general, can only
be transferred to family members. Holders of Class B Common Shares are
entitled to convert their shares into Common Shares at any time on a
share-for-share basis.
The 2003 Performance Plan (the “2003
Plan”) allows the Compensation 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 1994 Performance Plan (the
“1994 Plan”), as amended, expired in 2004 and allowed the Compensation Committee
of the Board of Directors (the “Committee”) to grant up to 5,500,000 Common
Shares. 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 2007 and 2006, the Committee granted 503,096
and 522,152, respectively, in 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 stock appreciation rights outstanding
at December 31, 2007, 2006 or 2005.
Restricted stock awards for 80,320,
115,932 and 21,304 shares were granted in years 2007, 2006 and 2005 without cost
to the recipients. The restricted stock awards vest ratably over the four years
after the award date. At December 31, 2007 and 2006, there were 175,294 and
147,085 shares, respectively for restricted stock awards that were unvested.
Unearned restricted stock compensation of $3,904,000 in 2007, $3,512,000 in 2006
and $1,016,000 in 2005, determined as the market value of the shares at the date
of grant, is being amortized on a straight-line basis over the vesting period.
Compensation expense of $1,322,000, $1,075,000 and $881,000 was recognized in
2007, 2006 and 2005, respectively, related to restricted stock awards granted
since 2001.
The 2003 Plan and the 1994 Performance
Plan have provisions that allow employees to exchange mature shares to pay the
exercise price and surrender shares for the options to cover the minimum tax
withholding obligation. Under these provisions, the company acquired treasury
shares of approximately 14,000 for $298,000 in 2007, 128,000 for $4,314,000 in
2006 and 124,000 for $6,004,000 in 2005.
On December 21, 2005, the Board of
Directors of Invacare Corporation, based on the recommendation of the
Compensation, Management Development and Corporate Governance Committee (the
“Committee”), approved the acceleration of the vesting for substantially all of
the company’s unvested stock options which were granted under the 1994 Plan, as
amended, and the 2003 Plan, which were then underwater. The Board of Directors
decided to approve the acceleration of the vesting of the company’s stock
options primarily to partially offset the recent reductions in other benefits
made by the company and to provide additional incentive to those critical to the
company’s current cost reduction efforts.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Shareholders’
Equity Transactions –
Continued
The decision, which was effective as of
December 21, 2005, accelerated the vesting for a total of 1,368,307 of the
company’s common shares; including 646,100 shares underlying options held
by the company’s named executive officers. The stock options accelerated equate
to 29% of the company’s total outstanding stock options. Vesting was not
accelerated for the restricted awards granted under the Plans and no other
modifications were made to the awards that were accelerated. The exercise prices
of the accelerated options, all of which were underwater, were unchanged by the
acceleration of the vesting schedules.
All of the company’s outstanding
unvested options under the Plans, which were accelerated, had exercise prices
ranging from $30.91 to $47.80 which were greater than the company’s stock market
price of $30.75 as of the effective date of the acceleration. As of
December 31, 2007, an aggregate of 43,569,375 Common Shares were reserved
for issuance upon the conversion of Class B Common Shares and future rights
(as defined below), the exercise or grant of stock options or other awards under
the company’s equity incentive plans and the conversion of the convertible
debentures that were issued as part of the company’s Refinancing completed in
February 2007.
The following table summarizes
information about stock option activity form the three years ended December 31,
2007, 2006 and 2005:
|
|
2007
|
|
|
Weighted
Average
Exercise
Price
|
|
|
2006
|
|
|
Weighted
Average
Exercise
Price
|
|
|
2005
|
|
|
Weighted
Average
Exercise
Price
|
|
Options outstanding at
January 1
|
|
|
4,724,651
|
|
|
$
|
30.68
|
|
|
|
4,776,162
|
|
|
$
|
31.57
|
|
|
|
4,638,405
|
|
|
$
|
29.81
|
|
Granted
|
|
|
503,096
|
|
|
|
23.26
|
|
|
|
522,152
|
|
|
|
23.87
|
|
|
|
614,962
|
|
|
|
41.59
|
|
Exercised
|
|
|
(1,875
|
)
|
|
|
23.32
|
|
|
|
(231,448
|
)
|
|
|
24.61
|
|
|
|
(356,676
|
)
|
|
|
23.39
|
|
Canceled
|
|
|
(492,907
|
)
|
|
|
29.45
|
|
|
|
(342,215
|
)
|
|
|
36.83
|
|
|
|
(120,529
|
)
|
|
|
37.17
|
|
Options outstanding
at
December 31
|
|
|
4,732,965
|
|
|
$
|
30.02
|
|
|
|
4,724,651
|
|
|
$
|
30.68
|
|
|
|
4,776,162
|
|
|
$
|
31.57
|
|
Options price range
at
December 31
|
|
$
|
16.03 to
|
|
|
|
|
|
|
$
|
16.03 to
|
|
|
|
|
|
|
$
|
16.03 to
|
|
|
|
|
|
|
|
$
|
47.80
|
|
|
|
|
|
|
$
|
47.80
|
|
|
|
|
|
|
$
|
47.80
|
|
|
|
|
|
Options exercisable
at
December 31
|
|
|
3,895,458
|
|
|
|
|
|
|
|
4,216,624
|
|
|
|
|
|
|
|
4,745,435
|
|
|
|
|
|
Options available for grant at
December 31*
|
|
|
1,354,431
|
|
|
|
|
|
|
|
1,784,033
|
|
|
|
|
|
|
|
454,142
|
|
|
|
|
|
__________
*
|
Options available for grant as of
December 31, 2007 reduced by net restricted stock award activity of
213,298.
|
The following table summarizes
information about stock options outstanding at December 31,
2007:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Prices
|
|
|
Number
Outstanding
At
12/31/07
|
|
|
Weighted Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
At
12/31/07
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Shareholders’
Equity Transactions –
Continued
The company had utilized the
disclosure-only provisions of SFAS No. 123 through December 31,
2005. Accordingly, no compensation cost was recognized for the stock option
plans, except the expense recorded related to the 132,017 restricted stock
awards granted in years 2001 through 2005.
The plans provide 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. Pursuant to the plans, the Committee has
established that the majority of the 2007 grants may not be exercised within one
year from the date granted and options must be exercised within ten years from
the date granted. Accordingly, the assumption regarding the stock options issued
in 2007, 2006 and 2005 was that 25% of such options vested in the year following
issuance. The stock options awarded during such years provided a four-year
vesting period whereby options vest equally in each year. The 2007 and 2006
expense and 2005 pro forma disclosure may be adjusted for forfeitures of awards
that will not vest because service or employment requirements have not been
met.
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
|
|
|
2006
|
|
|
2005
|
|
Expected dividend
yield
|
|
|
.20
|
%
|
|
|
.93
|
%
|
|
|
.67
|
%
|
Expected stock price
volatility
|
|
|
29.2
|
%
|
|
|
29.5
|
%
|
|
|
26.7
|
%
|
Risk-free interest
rate
|
|
|
4.31
|
%
|
|
|
4.71
|
%
|
|
|
4.38
|
%
|
Expected life
(years)
|
|
|
3.9
|
|
|
|
4.4
|
|
|
|
5.6
|
|
Forfeiture
percentage
|
|
|
8.0
|
%
|
|
|
16.5
|
%
|
|
|
-
|
|
Expected stock price volatility is
calculated at each date of grant based on historical stock prices for a period
of time commensurate with the expected life of the option. The weighted-average
fair value of options granted during 2007, 2006 and 2005, based upon an expected
exercise year of 2010, was $7.01, $7.87 and $12.41, respectively. The
weighted-average remaining contractual life of options outstanding at
December 31, 2007, 2006 and 2005 was 5.0, 5.3 and 5.7 years,
respectively. The weighted-average contractual life of options exercisable at
December 31, 2007 was 4.2 years. The total intrinsic value of stock
awards exercised in 2007, 2006 and 2005 was $3,000, $1,792,170 and $7,401,047,
respectively. As of December 31, 2007, the intrinsic value of all options
outstanding and of all options exercisable was $6,170,000 and $4,475,000,
respectively.
The exercise of stock awards in 2007,
2006 and 2005 resulted in cash received by the company totaling $44,000,
$2,364,000 and $3,742,000 for each period, respectively and tax benefits of $0,
$0 and $4,545,000, respectively. The total fair value of awards
vested during 2007, 2006 and 2005 was $975,000, $0, and $15,341,000,
respectively with 2005 vesting amount reflecting the company’s decision to
accelerate vesting for substantially all of the company’s then unvested stock
options that were below fair market value on December 21, 2005. The
vesting amount in 2006 was zero as vesting occurs 25% annually, thus none of the
2006 grants vested during 2006 and there were no previous grants to vest due to
the acceleration in 2005.
As of December 31, 2007, there was
$9,570,000 of total unrecognized compensation cost from stock-based compensation
arrangements granted under the plans, which is related to non-vested options and
shares, which includes $3,904,000 related to restricted stock awards. The
company expects the compensation expense to be recognized over a
weighted-average period of approximately 2 years. Prior to the adoption of
SFAS 123R, the company presented all tax benefit deductions resulting from
the exercise of stock options as a component of operating cash flows in the
Consolidated Statement of Cash Flows. In accordance with SFAS 123R, tax
benefits resulting from tax deductions in excess of the compensation expense
recognized for those options is classified as a component of financing cash
flows.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Shareholders’
Equity Transactions –
Continued
Effective July 8,
2005, the company adopted a new Rights Agreement to replace the company’s
previous shareholder rights plan, which expired on July 7, 2005. In order
to implement the new Rights Agreement, the Board of Directors declared a
dividend of one Right for each outstanding share of the company’s Common Shares
and Class B Common Shares to shareholders of record at the close of
business on July 19, 2005. Each Right entitles the registered holder to
purchase from the company one one-thousandth of a Series A Participating
Serial Preferred Share, without par value, at a Purchase Price of $180.00 in
cash, subject to adjustment. The Rights will not become exercisable until after
a person (an “Acquiring Party”) has acquired, or obtained the right to acquire,
or commences a tender offer to acquire, shares representing 30% or more of the
company’s outstanding voting power, subject to deferral by the Board of
Directors. After the Rights become exercisable, under certain circumstances, the
Rights may be exercisable to purchase Common Shares of the company, or common
shares of an acquiring company, at a price equal to the exercise price of the
Right divided by 50% of the then current market price per Common Share or
acquiring company common share, as the case may be. The Rights will expire on
July 18, 2015 unless previously redeemed or exchanged by the company. The
company may redeem and terminate the Rights in whole, but not in part, at a
price of $0.001 per Right at any time prior to 10 days following a
public announcement that an Acquiring Party has acquired
beneficial ownership of shares representing 30% or more of the company’s
outstanding voting power, and in certain other circumstances described in the
Rights Agreement.
Capital Stock
Capital stock activity for 2007, 2006
and 2005 consisted of the following (in thousands of
shares):
|
|
Common Stock
Shares
|
|
|
Class B
Shares
|
|
|
Treasury
Shares
|
|
January 1, 2005
Balance
|
|
|
31,209
|
|
|
|
1,112
|
|
|
|
(934
|
)
|
Exercise of stock
options
|
|
|
465
|
|
|
|
—
|
|
|
|
(124
|
)
|
Stock
awards
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
December 31, 2005
Balance
|
|
|
31,695
|
|
|
|
1,112
|
|
|
|
(1,058
|
)
|
Exercise of stock
options
|
|
|
240
|
|
|
|
—
|
|
|
|
(128
|
)
|
Stock
awards
|
|
|
116
|
|
|
|
—
|
|
|
|
—
|
|
December 31, 2006
Balance
|
|
|
32,051
|
|
|
|
1,112
|
|
|
|
(1,186
|
)
|
Exercise of stock
options
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
Stock
awards
|
|
|
73
|
|
|
|
—
|
|
|
|
(14
|
)
|
December 31, 2007
Balance
|
|
|
32,126
|
|
|
|
1,112
|
|
|
|
(1,200
|
)
|
Stock awards for 8,000 shares were
cancelled in 2007. Stock option exercises in 2006 include deferred
share activity, which increased common shares by 9,000 shares and treasury
shares by 4,000 shares. Stock option exercises in 2005 include deferred
share activity, which increased common shares by 108,000 shares and
treasury shares by 14,000 shares.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Other Comprehensive Earnings
(Loss)
The components of other comprehensive
earnings (loss) are as follows (in thousands):
|
Currency
Translation
Adjustments
|
|
Unrealized
Gain
(Loss) on
Available-for-Sale
Securities
|
|
|
Defined
Benefit
Plans
|
|
Unrealized
Gain
(Loss) on
Derivative
Financial
Instruments
|
|
Total
|
|
Balance at January 1,
2005
|
$
|
104,470
|
|
$
|
666
|
|
|
|
|
$
|
(507
|
)
|
$
|
104,629
|
|
Foreign currency translation
adjustments
|
|
(56,176
|
)
|
|
|
|
|
|
|
|
|
|
|
(56,176
|
)
|
Unrealized gain on available for
sale securities
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
54
|
|
Deferred tax liability relating to
unrealized gain on available for sale securities
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
(19
|
)
|
Current period unrealized loss on
cash flow hedges, net of reclassifications
|
|
|
|
|
|
|
|
|
|
|
(1,551
|
)
|
|
(1,551
|
)
|
Deferred tax benefit relating to
unrealized loss on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
543
|
|
|
543
|
|
Balance at December 31,
2005
|
|
48,294
|
|
|
701
|
|
|
|
|
|
(1,515
|
)
|
|
47,480
|
|
Foreign currency translation
adjustments
|
|
64,386
|
|
|
|
|
|
|
|
|
|
|
|
64,386
|
|
Unrealized loss on available for
sale securities
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
(63
|
)
|
Deferred tax benefit relating to
unrealized loss on available for sale securities
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
22
|
|
Adjustment to initially apply FASB
Statement No. 158
|
|
|
|
|
|
|
|
|
(14,940
|
)
|
|
|
|
|
(14,940
|
)
|
Deferred tax benefit resulting
from adjustment to initially apply FASB Statement
No. 158
|
|
|
|
|
|
|
|
|
5,229
|
|
|
|
|
|
5,229
|
|
Valuation reserve resulting from
adjustment to initially apply FASB Statement
No. 158
|
|
|
|
|
|
|
|
|
(5,229
|
)
|
|
|
|
|
(5,229
|
)
|
Current period unrealized gain on
cash flow hedges, net of reclassifications
|
|
|
|
|
|
|
|
|
|
|
|
3,543
|
|
|
3,543
|
|
Deferred tax liability relating to
unrealized gain on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
(1,240
|
)
|
|
(1,240
|
)
|
Balance at December 31,
2006
|
|
112,680
|
|
|
660
|
|
|
|
(14,940
|
)
|
|
788
|
|
|
99,188
|
|
Foreign currency translation
adjustments
|
|
66,373
|
|
|
|
|
|
|
|
|
|
|
|
|
66,373
|
|
Unrealized gain on available for
sale securities
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
63
|
|
Deferred tax liability relating to
unrealized gain on available for sale securities
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
(22
|
)
|
Defined benefit plan amortization
of prior service costs and unrecognized losses
|
|
|
|
|
|
|
|
|
2,701
|
|
|
|
|
|
2,701
|
|
Deferred tax expense resulting
from Defined benefit plan amortization of prior service costs and
unrecognized losses
|
|
|
|
|
|
|
|
|
(945
|
)
|
|
|
|
|
(945
|
)
|
Valuation reserve reduction
resulting from amortization of prior service costs and unrecognized losses
related to Defined benefit plans
|
|
|
|
|
|
|
|
|
945
|
|
|
|
|
|
945
|
|
Current period unrealized loss on
cash flow hedges, net of reclassifications
|
|
|
|
|
|
|
|
|
|
|
|
(3,786
|
)
|
|
(3,786
|
)
|
Deferred tax benefits relating to
unrealized loss on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
452
|
|
|
452
|
|
Balance at December 31,
2007
|
$
|
179,053
|
|
$
|
701
|
|
|
$
|
(12,239
|
)
|
$
|
(2,546
|
)
|
$
|
164,969
|
|
A net gain of $450,000 in 2007 and net losses of $240,000 and $283,000 were reclassified into
earnings related to derivative instruments designated and qualifying as cash
flow hedges in 2007, 2006 and 2005, respectively.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Charges Related to Restructuring
Activities
On
July 28, 2005, 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 facilities and eliminating positions through December 31,
2007, which resulted in restructuring charges of $11,408,000, $21,250,000 and
$7,533,000 in 2007, 2006 and 2005, respectively, of which $1,817,000, $3,973,000
and $238,000, respectively is recorded in cost of products sold as it relates to
inventory markdowns. 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 as of
December 31, 2007 during 2008. A
progression by reporting segment of the accruals recorded as a result of the
restructuring is as follows (in thousands):
|
|
Balance at
1/1/06
|
|
|
Accruals
|
|
|
Payments
|
|
|
Balance at
12/31/06
|
|
|
Accruals
|
|
|
Payments
|
|
|
Balance at
12/31/07
|
|
North
America/HME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
2,130
|
|
|
$
|
5,549
|
|
|
$
|
(6,320
|
)
|
|
$
|
1,359
|
|
|
$
|
3,705
|
|
|
$
|
(4,362
|
)
|
|
$
|
702
|
|
Product line
discontinuance
|
|
|
—
|
|
|
|
2,719
|
|
|
|
(682
|
)
|
|
|
2,037
|
|
|
|
178
|
|
|
|
(2,183
|
)
|
|
|
32
|
|
Contract
terminations
|
|
|
—
|
|
|
|
1,346
|
|
|
|
(789
|
)
|
|
|
557
|
|
|
|
(19
|
)
|
|
|
(172
|
)
|
|
|
366
|
|
Total
|
|
$
|
2,130
|
|
|
$
|
9,614
|
|
|
$
|
(7,791
|
)
|
|
$
|
3,953
|
|
|
$
|
3,864
|
|
|
$
|
(6,717
|
)
|
|
$
|
1,100
|
|
Invacare Supply
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
112
|
|
|
$
|
457
|
|
|
$
|
(403
|
)
|
|
$
|
166
|
|
|
$
|
67
|
|
|
$
|
(228
|
)
|
|
$
|
5
|
|
Product line
discontinuance
|
|
|
—
|
|
|
|
552
|
|
|
|
(552
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Contract
terminations
|
|
|
165
|
|
|
|
—
|
|
|
|
(165
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
277
|
|
|
$
|
1,009
|
|
|
$
|
(1,120
|
)
|
|
$
|
166
|
|
|
$
|
67
|
|
|
$
|
(228
|
)
|
|
$
|
5
|
|
Institutional Products
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
(19
|
)
|
|
$
|
—
|
|
Contract
terminations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98
|
|
|
|
(98
|
)
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
(55
|
)
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
172
|
|
|
$
|
(172
|
)
|
|
$
|
—
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
799
|
|
|
$
|
5,208
|
|
|
$
|
(2,273
|
)
|
|
$
|
3,734
|
|
|
$
|
862
|
|
|
$
|
(4,591
|
)
|
|
$
|
5
|
|
Product line
discontinuance
|
|
|
—
|
|
|
|
455
|
|
|
|
(455
|
)
|
|
|
—
|
|
|
|
386
|
|
|
|
(386
|
)
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
2,995
|
|
|
|
(2,995
|
)
|
|
|
—
|
|
|
|
3,247
|
|
|
|
(3,202
|
)
|
|
|
45
|
|
Total
|
|
$
|
799
|
|
|
$
|
8,658
|
|
|
$
|
(5,723
|
)
|
|
$
|
3,734
|
|
|
$
|
4,495
|
|
|
$
|
(8,179
|
)
|
|
$
|
50
|
|
Asia/Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
63
|
|
|
$
|
621
|
|
|
$
|
(684
|
)
|
|
$
|
—
|
|
|
$
|
1,258
|
|
|
$
|
(746
|
)
|
|
$
|
512
|
|
Product line
discontinuance
|
|
|
—
|
|
|
|
557
|
|
|
|
(557
|
)
|
|
|
—
|
|
|
|
1,253
|
|
|
|
(1,253
|
)
|
|
|
—
|
|
Contract
terminations
|
|
|
—
|
|
|
|
745
|
|
|
|
(623
|
)
|
|
|
122
|
|
|
|
299
|
|
|
|
(382
|
)
|
|
|
39
|
|
Other
|
|
|
—
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
63
|
|
|
$
|
1,931
|
|
|
$
|
(1,872
|
)
|
|
$
|
122
|
|
|
$
|
2,810
|
|
|
$
|
(2,381
|
)
|
|
$
|
551
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
3,104
|
|
|
$
|
11,873
|
|
|
$
|
(9,718
|
)
|
|
$
|
5,259
|
|
|
$
|
5,911
|
|
|
$
|
(9,946
|
)
|
|
$
|
1,224
|
|
Product line
discontinuance
|
|
|
—
|
|
|
|
4,283
|
|
|
|
(2,246
|
)
|
|
|
2,037
|
|
|
|
1,817
|
|
|
|
(3,822
|
)
|
|
|
32
|
|
Contract
terminations
|
|
|
165
|
|
|
|
2,091
|
|
|
|
(1,577
|
)
|
|
|
679
|
|
|
|
378
|
|
|
|
(652
|
)
|
|
|
405
|
|
Other
|
|
|
—
|
|
|
|
3,003
|
|
|
|
(3,003
|
)
|
|
|
—
|
|
|
|
3,302
|
|
|
|
(3,257
|
)
|
|
|
45
|
|
Total
|
|
$
|
3,269
|
|
|
$
|
21,250
|
|
|
$
|
(16,544
|
)
|
|
$
|
7,975
|
|
|
$
|
11,408
|
|
|
$
|
(17,677
|
)
|
|
$
|
1,706
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Income Taxes
Earnings (loss) before income taxes
consist of the following (in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Domestic
|
|
$
|
(40,369
|
)
|
|
$
|
(349,144
|
)
|
|
$
|
18,605
|
|
Foreign
|
|
|
54,859
|
|
|
|
39,620
|
|
|
|
52,697
|
|
|
|
$
|
14,490
|
|
|
$
|
(309,524
|
)
|
|
$
|
71,302
|
|
The company has provided for income
taxes (benefits) as follows (in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,340
|
)
|
|
$
|
(12,815
|
)
|
|
$
|
9,475
|
|
State
|
|
|
1,430
|
|
|
|
750
|
|
|
|
600
|
|
Foreign
|
|
|
8,180
|
|
|
|
16,030
|
|
|
|
12,475
|
|
|
|
|
7,270
|
|
|
|
3,965
|
|
|
|
22,550
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,230
|
|
|
|
11,695
|
|
|
|
(2,225
|
)
|
Foreign
|
|
|
2,800
|
|
|
|
(7,410
|
)
|
|
|
2,125
|
|
|
|
|
6,030
|
|
|
|
4,285
|
|
|
|
(100
|
)
|
Income
Taxes
|
|
$
|
13,300
|
|
|
$
|
8,250
|
|
|
$
|
22,450
|
|
A reconciliation to the effective income
tax rate from the federal statutory rate follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statutory federal income tax
rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
State and local income taxes, net
of federal income tax benefit
|
|
|
6.4
|
|
|
|
0.2
|
|
|
|
0.5
|
|
Tax credits
|
|
|
(37.9
|
)
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
Foreign taxes at less than the
federal statutory rate excluding valuation
allowances
|
|
|
(92.4
|
)
|
|
|
(2.0
|
)
|
|
|
(5.2
|
)
|
Asset write-downs related to
goodwill and other intangibles, without tax benefit
|
|
|
—
|
|
|
|
30.2
|
|
|
|
—
|
|
Federal and foreign valuation
allowance
|
|
|
176.2
|
|
|
|
9.3
|
|
|
|
—
|
|
Variable interest entity
without tax
|
|
|
(12.3
|
)
|
|
|
.9
|
|
|
|
.5
|
|
Withholding
taxes
|
|
|
9.0
|
|
|
|
.5
|
|
|
|
1.0
|
|
Compensation
|
|
|
10.4
|
|
|
|
—
|
|
|
|
.3
|
|
Foreign branch
activity
|
|
|
(20.3
|
)
|
|
|
(1.1
|
)
|
|
|
(.9
|
)
|
Other, net
|
|
|
17.7
|
|
|
|
(.2
|
)
|
|
|
1.1
|
|
|
|
|
91.8
|
%
|
|
|
2.7
|
%
|
|
|
31.5
|
%
|
Included in 2007 foreign deferred tax expense is
a $7,820,000 benefit related to a tax rate change in Germany corresponding to
the reduction of the company’s net German deferred tax
liability.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Income Taxes –
Continued
Significant components of deferred
income tax assets and liabilities at December 31, 2007 and 2006 are as
follows (in thousands):
|
|
2007
|
|
|
2006
|
|
Current deferred income tax assets
(liabilities), net:
|
|
|
|
|
|
|
Loss
carryforwards
|
|
$
|
2,345
|
|
|
$
|
7,375
|
|
Bad debt
|
|
|
13,575
|
|
|
|
14,006
|
|
Warranty
|
|
|
3,837
|
|
|
|
3,365
|
|
State and local
taxes
|
|
|
(1,441
|
)
|
|
|
3,154
|
|
Other accrued expenses and
reserves
|
|
|
1,759
|
|
|
|
2,645
|
|
Inventory
|
|
|
2,557
|
|
|
|
2,337
|
|
Compensation and
benefits
|
|
|
3,228
|
|
|
|
3,079
|
|
Product
liability
|
|
|
292
|
|
|
|
292
|
|
Valuation
allowance
|
|
|
(25,446
|
)
|
|
|
(22,552
|
)
|
Other, net
|
|
|
1,772
|
|
|
|
(189
|
)
|
|
|
$
|
2,478
|
|
|
$
|
13,512
|
|
Long-term deferred income tax
assets (liabilities), net:
|
|
|
|
|
|
|
|
|
Goodwill &
intangibles
|
|
|
(25,329
|
)
|
|
|
(29,480
|
)
|
Fixed
assets
|
|
|
(13,441
|
)
|
|
|
(18,289
|
)
|
Compensation and
benefits
|
|
|
15,943
|
|
|
|
16,541
|
|
Loss and credit
carryforwards
|
|
|
39,374
|
|
|
|
6,453
|
|
Product
liability
|
|
|
4,511
|
|
|
|
4,715
|
|
State and local
taxes
|
|
|
16,128
|
|
|
|
10,619
|
|
Valuation
allowance
|
|
|
(64,276
|
)
|
|
|
(27,721
|
)
|
Other, net
|
|
|
(1,734
|
)
|
|
|
2,569
|
|
|
|
$
|
(28,824
|
)
|
|
$
|
(34,593
|
)
|
Net Deferred Income
Taxes
|
|
$
|
(26,346
|
)
|
|
$
|
(21,081
|
)
|
At December 31, 2007, the company
had domestic federal loss carryforwards of $26,880,000 which expire in 2027,
domestic charitable contribution carryforwards of $680,000 which expire in 2011
and 2012, federal foreign tax loss carryforwards of approximately $43,400,000 of
which $32,500,000 are non-expiring, $5,850,000 expire in 2012, and $5,050,000
expire in 2013. The loss carryforward amounts include $10,600,000 of remaining
federal foreign loss carryforwards associated with 2004 acquisitions. At
December 31, 2007 the company also had a $12,960,000 domestic capital loss
carryforward of which $8,960,000 expires in 2011 and $4,000,000 expires in 2012
and $350,200,000 of domestic state and local tax loss carryforwards, of which
$170,100,000 expire between 2008 and 2011, $66,100,000 expire between 2012 and
2021 and $114,000,000 expire after 2021, all of which are fully offset by
valuation allowances. The company has domestic federal tax credit carryforwards
of $10,775,000 of which $8,575,000 expire between 2014 and 2017 and $2,200,000
expire between 2025 and 2027. The company made income tax payments of
$1,060,000, $14,370,000 and $10,435,000 during the years ended December 31,
2007, 2006 and 2005, respectively. The company recorded a valuation allowance
for its domestic net deferred tax assets due to the domestic loss recognized in
2006 and 2007 and based upon near term domestic projections. During
2007, the company also recorded valuation allowances for certain foreign country
net deferred tax assets where recent performance results in a three year
cumulative loss and near term projections indicate it is more likely than not
that the deferred tax assets will not be realized.
The company adopted the provisions of
FIN 48 on January 1, 2007. As of December 31, 2007 and
2006, the company had a liability for uncertain tax positions, excluding
interest and penalties of $8,085,000 and $8,875,000,
respectively. The company does not believe there will be a material
change in its unrecognized tax positions over the next twelve
months.
The total liabilities associated with
unrecognized tax benefits that, if recognized, would impact the effective tax
rates were $8,085,000 and $8,875,000 at December 31, 2007 and 2006,
respectively.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Income Taxes –
Continued
A reconciliation of the beginning and
ending balance of unrecognized tax benefits is as follows (in
thousands):
Balance at January 1,
2007
|
|
$
|
8,785
|
|
Additions
to:
|
|
|
|
|
Positions taken during the current
year
|
|
|
236
|
|
Positions taken during a prior
year
|
|
|
338
|
|
Deductions due
to:
|
|
|
|
|
Positions taken during the current
year
|
|
|
(3
|
)
|
Positions taken during a prior
year
|
|
|
(37
|
)
|
Settlements with taxing
authorities
|
|
|
(966
|
)
|
Lapse of statute of
limitations
|
|
|
(268
|
)
|
Balance at December 31,
2007
|
|
$
|
8,085
|
|
The Company recognizes interest and
penalties associated with uncertain tax positions in income tax
expense. During 2007, 2006 and 2005 the provision for interest and
penalties was $840,000, $150,000 and $250,000, respectively. The
Company had approximately $2,865,000 and $2,025,000 of accrued interest and
penalties as of December 31, 2007 and 2006, respectively.
The company and its subsidiaries file
income tax returns in the U.S. and certain foreign jurisdictions. The company is
subject to U.S. federal income tax examinations for calendar years ending 2003
to 2007, and is subject to various U.S. state income tax examinations for
similar periods. With regards to foreign income tax jurisdictions, the company
is generally subject to examinations for the periods 2002 to
2007.
Net Earnings Per Common
Share
The following table sets forth the
computation of basic and diluted net earnings per common
share.
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except per share
data)
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Average common shares
outstanding
|
|
|
31,840
|
|
|
|
31,789
|
|
|
|
31,555
|
|
Net earnings
(loss)
|
|
$
|
1,190
|
|
|
$
|
(317,774
|
)
|
|
$
|
48,852
|
|
Net earnings (loss) per common
share
|
|
$
|
.04
|
|
|
$
|
(10.00
|
)
|
|
$
|
1.55
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares
outstanding
|
|
|
31,840
|
|
|
|
31,789
|
|
|
|
31,555
|
|
Stock
options
|
|
|
87
|
|
|
|
—
|
|
|
|
897
|
|
Average common shares assuming
dilution
|
|
|
31,927
|
|
|
|
31,789
|
|
|
|
32,452
|
|
Net earnings
(loss)
|
|
$
|
1,190
|
|
|
$
|
(317,774
|
)
|
|
$
|
48,852
|
|
Net earnings (loss) per common
share
|
|
$
|
.04
|
|
|
$
|
(10.00
|
)
|
|
$
|
1.51
|
|
At December 31, 2007, 2006, and
2005, 4,232,589, 4,724,651 and 813,191 shares associated with stock options,
respectively were excluded from the average common shares assuming dilution, as
they were anti-dilutive. In 2007, the majority of the anti-dilutive shares were
granted at an exercise price of $23.71, which was higher than the average fair
market value price of $21.35 for 2007. In 2006, all of the shares associated
with stock options were anti-dilutive because of the company’s loss. In 2005,
the majority of the anti-dilutive shares were granted at an exercise price of
$41.87, which was higher than the average fair market value price of $41.46 for
2005.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
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 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
($32,795,000 at December 31, 2007) to DLL for events of default under
the contracts (total balance outstanding of $94,945,000 at December 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.
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.
Fair Values of Financial
Instruments
The company in estimating its fair value
disclosures for financial instruments used the following methods and
assumptions:
Cash, cash
equivalents and marketable securities: The carrying amount reported
in the balance sheet for cash, cash equivalents and marketable securities
approximates its fair value.
Installment
receivables: The
carrying amount reported in the balance sheet for installment receivables
approximates its fair value. The interest rates associated with these
receivables have not varied significantly since inception. Management believes
that after consideration of the credit risk, the net book value of the
installment receivables approximates market value.
Long-term
debt: Fair
values for the company’s senior notes and convertible debt are based on quoted
market prices as of December 31, 2007, while the term loan and revolving credit
facility fair values are based upon the company’s estimate of the market for
similar borrowing arrangements.
Interest Rate
Swaps: The
company is a party to interest rate swap agreements, which are entered into in
the normal course of business, to reduce exposure to fluctuations in interest
rates. The agreements are with major financial institutions, which are expected
to fully perform under the terms of the agreements thereby mitigating the credit
risk from the transactions. The agreements are contracts to exchange floating
rate payments for fixed rate payments without the exchange of the underlying
notional amounts. The notional amounts of such agreements are used to measure
interest to be paid or received and do not represent the amount of exposure to
credit loss. The amounts to be paid or received under the interest rate swap
agreements are accrued consistent with the terms of the agreements and market
interest rates. Fair value for the company’s interest rate swaps are based on
independent pricing models.
Other
investments: The
company has made other investments in limited partnerships and non-marketable
equity securities, which are accounted for using the cost method, adjusted for
any estimated declines in value. These investments were acquired in private
placements and there are no quoted market prices or stated rates of
return.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Fair
Values of Financial Instruments –
Continued
The carrying amounts and fair values of
the company’s financial instruments at December 31, 2007 and 2006 are as
follows (in thousands):
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Cash and cash
equivalents
|
|
$
|
62,200
|
|
|
$
|
62,200
|
|
|
$
|
82,203
|
|
|
$
|
82,203
|
|
Marketable
securities
|
|
|
255
|
|
|
|
255
|
|
|
|
190
|
|
|
|
190
|
|
Other
investments
|
|
|
8,605
|
|
|
|
8,605
|
|
|
|
8,461
|
|
|
|
8,461
|
|
Installment
receivables
|
|
|
27,863
|
|
|
|
27,863
|
|
|
|
22,887
|
|
|
|
22,887
|
|
Long-term debt (including
short-term borrowings secured by accounts receivable and current
maturities of long-term debt)
|
|
|
537,852
|
|
|
|
556,743
|
|
|
|
573,126
|
|
|
|
583,856
|
|
Interest rate
swaps
|
|
|
(2,495
|
)
|
|
|
(2,495
|
)
|
|
|
(435
|
)
|
|
|
(435
|
)
|
Forward
contracts
|
|
|
(78
|
)
|
|
|
(78
|
)
|
|
|
1,213
|
|
|
|
1,213
|
|
Forward
Contracts: The
company operates internationally and as a result is exposed to foreign currency
fluctuations. Specifically, the exposure includes intercompany loans and third
party sales or payments. In an attempt to reduce this exposure, foreign currency
forward contracts are utilized and accounted for as hedging instruments. The
forward contracts in 2007 and 2006 were entered into to as hedges of the
following currencies: AUD, GBP, CAD, CHF, DKK, EUR, NOK, NZD, SEK and USD. The
company does not use derivative financial instruments for speculative purposes.
Fair values for the company’s foreign exchange forward contracts are based on
quoted market prices for contracts with similar
maturities.
The gains and losses that result from
the majority of the forward contracts are deferred and recognized when the
offsetting gains and losses for the identified transactions are recognized. The
company recognized a gain of $451,000 in 2007 and losses of $240,000 and
$280,000 in 2006 and 2005, respectively, which were recognized in cost of
products sold and selling, general and administrative
expenses.
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 NA/HME segment sells each of three
primary product lines, which includes: standard, rehab and respiratory products.
Invacare Supply Group sells distributed product and the Institutional Products
Group sells health care furnishings and accessory products. Europe and
Asia/Pacific sell the same product lines with the exception of distributed
products. Each business segment sells 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 loss on intersegment sales and
transfers is not considered in evaluating segment
performance.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Business Segments –
Continued
The information by segment is as follows
(in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues from external
customers
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
668,305
|
|
|
$
|
676,326
|
|
|
$
|
706,555
|
|
Invacare Supply
Group
|
|
|
256,993
|
|
|
|
228,236
|
|
|
|
220,908
|
|
Institutional Products
Group
|
|
|
89,026
|
|
|
|
93,455
|
|
|
|
85,415
|
|
Europe
|
|
|
498,109
|
|
|
|
430,427
|
|
|
|
432,142
|
|
Asia/Pacific
|
|
|
89,804
|
|
|
|
69,591
|
|
|
|
84,712
|
|
Consolidated
|
|
$
|
1,602,237
|
|
|
$
|
1,498,035
|
|
|
$
|
1,529,732
|
|
Intersegment
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
47,698
|
|
|
$
|
51,081
|
|
|
$
|
46,048
|
|
Invacare Supply
Group
|
|
|
265
|
|
|
|
102
|
|
|
|
26
|
|
Institutional Products
Group
|
|
|
1,151
|
|
|
|
—
|
|
|
|
2,305
|
|
Europe
|
|
|
10,394
|
|
|
|
12,599
|
|
|
|
12,019
|
|
Asia/Pacific
|
|
|
29,793
|
|
|
|
39,757
|
|
|
|
36,576
|
|
Consolidated
|
|
$
|
89,301
|
|
|
$
|
103,539
|
|
|
$
|
96,974
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
20,109
|
|
|
$
|
18,433
|
|
|
$
|
18,266
|
|
Invacare Supply
Group
|
|
|
375
|
|
|
|
383
|
|
|
|
448
|
|
Institutional Products
Group
|
|
|
1,818
|
|
|
|
1,888
|
|
|
|
1,867
|
|
Europe
|
|
|
15,904
|
|
|
|
14,533
|
|
|
|
15,100
|
|
Asia/Pacific
|
|
|
5,494
|
|
|
|
4,645
|
|
|
|
4,829
|
|
All
Other (1)
|
|
|
17
|
|
|
|
10
|
|
|
|
14
|
|
Consolidated
|
|
$
|
43,717
|
|
|
$
|
39,892
|
|
|
$
|
40,524
|
|
Net interest expense
(income)
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
24,620
|
|
|
$
|
16,530
|
|
|
$
|
13,299
|
|
Invacare Supply
Group
|
|
|
3,443
|
|
|
|
3,158
|
|
|
|
2,447
|
|
Institutional Products
Group
|
|
|
4,377
|
|
|
|
3,852
|
|
|
|
1,620
|
|
Europe
|
|
|
8,808
|
|
|
|
8,398
|
|
|
|
8,628
|
|
Asia/Pacific
|
|
|
721
|
|
|
|
(629
|
)
|
|
|
(431
|
)
|
Consolidated
|
|
$
|
41,969
|
|
|
$
|
31,309
|
|
|
$
|
25,563
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Business Segments –
Continued
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Earnings (loss) before income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
10,793
|
|
|
$
|
(310,162
|
)
|
|
$
|
54,390
|
|
Invacare Supply
Group
|
|
|
3,198
|
|
|
|
3,291
|
|
|
|
6,428
|
|
Institutional Products
Group
|
|
|
801
|
|
|
|
4,789
|
|
|
|
5,747
|
|
Europe
|
|
|
36,170
|
|
|
|
26,077
|
|
|
|
29,255
|
|
Asia/Pacific
|
|
|
(6,750
|
)
|
|
|
(7,318
|
)
|
|
|
(4,418
|
)
|
All
Other (1)
|
|
|
(29,722
|
)
|
|
|
(26,201
|
)
|
|
|
(20,100
|
)
|
Consolidated
|
|
$
|
14,490
|
|
|
$
|
(309,524
|
)
|
|
$
|
71,302
|
|
Assets
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
385,532
|
|
|
$
|
430,121
|
|
|
$
|
719,366
|
|
Invacare Supply
Group
|
|
|
88,106
|
|
|
|
90,086
|
|
|
|
81,895
|
|
Institutional Products
Group
|
|
|
44,806
|
|
|
|
43,918
|
|
|
|
44,372
|
|
Europe
|
|
|
804,677
|
|
|
|
751,502
|
|
|
|
671,642
|
|
Asia/Pacific
|
|
|
104,297
|
|
|
|
98,737
|
|
|
|
74,101
|
|
All
Other (1)
|
|
|
72,624
|
|
|
|
76,087
|
|
|
|
55,396
|
|
Consolidated
|
|
$
|
1,500,042
|
|
|
$
|
1,490,451
|
|
|
$
|
1,646,772
|
|
Long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
119,866
|
|
|
$
|
101,464
|
|
|
$
|
403,758
|
|
Invacare Supply
Group
|
|
|
24,853
|
|
|
|
25,163
|
|
|
|
24,712
|
|
Institutional Products
Group
|
|
|
34,880
|
|
|
|
31,374
|
|
|
|
32,457
|
|
Europe
|
|
|
610,074
|
|
|
|
563,479
|
|
|
|
508,196
|
|
Asia/Pacific
|
|
|
56,024
|
|
|
|
50,760
|
|
|
|
38,866
|
|
All
Other (1)
|
|
|
63,260
|
|
|
|
62,453
|
|
|
|
44,317
|
|
Consolidated
|
|
$
|
908,957
|
|
|
$
|
834,693
|
|
|
$
|
1,052,306
|
|
Expenditures for
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America/HME
|
|
$
|
7,138
|
|
|
$
|
9,478
|
|
|
$
|
19,242
|
|
Invacare Supply
Group
|
|
|
148
|
|
|
|
853
|
|
|
|
338
|
|
Institutional Products
Group
|
|
|
813
|
|
|
|
828
|
|
|
|
427
|
|
Europe
|
|
|
7,669
|
|
|
|
8,041
|
|
|
|
5,470
|
|
Asia/Pacific
|
|
|
4,272
|
|
|
|
2,559
|
|
|
|
5,438
|
|
All
Other (1)
|
|
|
28
|
|
|
|
30
|
|
|
|
9
|
|
Consolidated
|
|
$
|
20,068
|
|
|
$
|
21,789
|
|
|
$
|
30,924
|
|
__________
(1)
|
Consists of un-allocated 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 includes
debt finance charges, interest and fees associated with debt refinancing
and the gain (loss) associated with a consolidated variable interest
entity.
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Business Segments –
Continued
Net sales by product, are as follows (in
thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
North
America/HME
|
|
|
|
|
|
|
|
|
|
Rehab
|
|
$
|
268,756
|
|
|
$
|
272,517
|
|
|
$
|
274,417
|
|
Standard
|
|
|
242,186
|
|
|
|
239,540
|
|
|
|
251,331
|
|
Respiratory
|
|
|
128,654
|
|
|
|
141,531
|
|
|
|
159,300
|
|
Other
|
|
|
28,709
|
|
|
|
22,738
|
|
|
|
21,507
|
|
|
|
$
|
668,305
|
|
|
$
|
676,326
|
|
|
$
|
706,555
|
|
Invacare Supply
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
256,993
|
|
|
$
|
228,236
|
|
|
$
|
220,908
|
|
Institutional Products
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Care
|
|
$
|
89,026
|
|
|
$
|
93,455
|
|
|
$
|
85,415
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
|
$
|
291,574
|
|
|
$
|
252,335
|
|
|
$
|
263,121
|
|
Rehab
|
|
|
195,182
|
|
|
|
170,138
|
|
|
|
161,082
|
|
Respiratory
|
|
|
11,353
|
|
|
|
7,954
|
|
|
|
7,939
|
|
|
|
$
|
498,109
|
|
|
$
|
430,427
|
|
|
$
|
432,142
|
|
Asia/Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehab
|
|
$
|
41,310
|
|
|
$
|
39,027
|
|
|
$
|
47,730
|
|
Standard
|
|
|
20,655
|
|
|
|
13,070
|
|
|
|
10,125
|
|
Respiratory
|
|
|
8,980
|
|
|
|
7,111
|
|
|
|
8,304
|
|
Other
|
|
|
18,859
|
|
|
|
10,383
|
|
|
|
18,553
|
|
|
|
$
|
89,804
|
|
|
$
|
69,591
|
|
|
$
|
84,712
|
|
Total
Consolidated
|
|
$
|
1,602,237
|
|
|
$
|
1,498,035
|
|
|
$
|
1,529,732
|
|
No single customer accounted for more
than 3% of the company’s sales.
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 9.75% 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.
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Supplemental Guarantor Information –
Continued
CONSOLIDATING CONDENSED STATEMENTS OF
OPERATIONS
(in
thousands)
Year ended December 31,
2007
|
|
The Company
(Parent)
|
|
|
Combined Guarantor
Subsidiaries
|
|
|
Combined Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge related to restructuring
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges, interest and fees
associated with debt refinancing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from equity
investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge related to restructuring
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges, interest and fees
associated with debt refinancing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset write-downs related to
goodwill and other intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from equity
investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge related to restructuring
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from equity
investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Supplemental Guarantor Information –
Continued
CONSOLIDATING CONDENSED BALANCE
SHEETS
(in
thousands)
December 31,
2007
|
|
The Company
(Parent)
|
|
|
Combined Guarantor
Subsidiaries
|
|
|
Combined Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
27,133
|
|
|
$
|
1,773
|
|
|
$
|
33,294
|
|
|
$
|
-
|
|
|
$
|
62,200
|
|
Marketable
securities
|
|
|
255
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
255
|
|
Trade receivables,
net
|
|
|
93,533
|
|
|
|
52,996
|
|
|
|
121,431
|
|
|
|
(3,817
|
)
|
|
|
264,143
|
|
Installment receivables,
net
|
|
|
-
|
|
|
|
1,841
|
|
|
|
2,216
|
|
|
|
-
|
|
|
|
4,057
|
|
Inventories,
net
|
|
|
69,123
|
|
|
|
34,115
|
|
|
|
93,895
|
|
|
|
(1,529
|
)
|
|
|
195,604
|
|
Deferred income
taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,478
|
|
|
|
-
|
|
|
|
2,478
|
|
Other current
assets
|
|
|
20,693
|
|
|
|
6,489
|
|
|
|
36,438
|
|
|
|
(1,272
|
)
|
|
|
62,348
|
|
Total Current
Assets
|
|
|
210,737
|
|
|
|
97,214
|
|
|
|
289,752
|
|
|
|
(6,618
|
)
|
|
|
591,085
|
|
Investment in
subsidiaries
|
|
|
1,393,220
|
|
|
|
640,178
|
|
|
|
-
|
|
|
|
(2,033,398
|
)
|
|
|
-
|
|
Intercompany advances,
net
|
|
|
250,765
|
|
|
|
824,519
|
|
|
|
43,460
|
|
|
|
(1,118,744
|
)
|
|
|
-
|
|
Other
Assets
|
|
|
66,616
|
|
|
|
23,482
|
|
|
|
1,564
|
|
|
|
-
|
|
|
|
91,662
|
|
Other
Intangibles
|
|
|
934
|
|
|
|
11,315
|
|
|
|
92,487
|
|
|
|
-
|
|
|
|
104,736
|
|
Property and Equipment,
net
|
|
|
57,984
|
|
|
|
10,231
|
|
|
|
101,161
|
|
|
|
-
|
|
|
|
169,376
|
|
Goodwill
|
|
|
-
|
|
|
|
23,531
|
|
|
|
519,652
|
|
|
|
-
|
|
|
|
543,183
|
|
Total
Assets
|
|
$
|
1,980,256
|
|
|
$
|
1,630,470
|
|
|
$
|
1,048,076
|
|
|
$
|
(3,158,760
|
)
|
|
$
|
1,500,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
68,786
|
|
|
$
|
12,516
|
|
|
$
|
68,868
|
|
|
$
|
-
|
|
|
$
|
150,170
|
|
Accrued
expenses
|
|
|
48,332
|
|
|
|
18,284
|
|
|
|
84,431
|
|
|
|
(5,089
|
)
|
|
|
145,958
|
|
Accrued income
taxes
|
|
|
500
|
|
|
|
-
|
|
|
|
5,473
|
|
|
|
-
|
|
|
|
5,973
|
|
Short-term debt and current
maturities of long-term obligations
|
|
|
23,500
|
|
|
|
-
|
|
|
|
1,010
|
|
|
|
-
|
|
|
|
24,510
|
|
Total Current
Liabilities
|
|
|
141,118
|
|
|
|
30,800
|
|
|
|
159,782
|
|
|
|
(5,089
|
)
|
|
|
326,611
|
|
Long-Term
Debt
|
|
|
481,896
|
|
|
|
7
|
|
|
|
31,439
|
|
|
|
-
|
|
|
|
513,342
|
|
Other Long-Term
Obligations
|
|
|
61,370
|
|
|
|
-
|
|
|
|
44,676
|
|
|
|
-
|
|
|
|
106,046
|
|
Intercompany advances,
net
|
|
|
741,829
|
|
|
|
326,028
|
|
|
|
50,887
|
|
|
|
(1,118,744
|
)
|
|
|
-
|
|
Total Shareholders’
Equity
|
|
|
554,043
|
|
|
|
1,273,635
|
|
|
|
761,292
|
|
|
|
(2,034,927
|
)
|
|
|
554,043
|
|
Total Liabilities and
Shareholders’ Equity
|
|
$
|
1,980,256
|
|
|
$
|
1,630,470
|
|
|
$
|
1,048,076
|
|
|
$
|
(3,158,760
|
)
|
|
$
|
1,500,042
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Supplemental Guarantor Information –
Continued
CONSOLIDATING CONDENSED BALANCE
SHEETS
(in thousands)
December 31,
2006
|
|
The Company
(Parent)
|
|
|
Combined Guarantor
Subsidiaries
|
|
|
Combined Non-Guarantor
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
|
|
|
50,443
|
|
|
|
15,566
|
|
|
|
1,434
|
|
|
|
-
|
|
|
|
67,443
|
|
Other
Intangibles
|
|
|
1,016
|
|
|
|
13,150
|
|
|
|
88,710
|
|
|
|
-
|
|
|
|
102,876
|
|
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
|
|
|
52,039
|
|
|
|
2,040
|
|
|
|
53,144
|
|
|
|
-
|
|
|
|
107,223
|
|
Intercompany advances,
net
|
|
|
862,823
|
|
|
|
370,452
|
|
|
|
82,441
|
|
|
|
(1,315,716
|
)
|
|
|
-
|
|
Total Shareholders’
Equity
|
|
|
486,369
|
|
|
|
1,189,670
|
|
|
|
712,476
|
|
|
|
(1,902,146
|
)
|
|
|
486,369
|
|
Total Liabilities and
Shareholders’ Equity
|
|
$
|
1,908,717
|
|
|
$
|
1,591,758
|
|
|
$
|
1,212,638
|
|
|
$
|
(3,222,662
|
)
|
|
$
|
1,490,451
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Supplemental Guarantor Information –
Continued
CONSOLIDATING CONDENSED STATEMENTS OF
CASH FLOWS
(in thousands)
Year ended December 31,
2007
|
|
The Company
(Parent)
|
|
|
Combined Guarantor
Subsidiaries
|
|
|
Combined Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net Cash Provided (Used) by
Operating Activities
|
|
$
|
(27,319
|
)
|
|
$
|
921
|
|
|
$
|
99,498
|
|
|
$
|
6,000
|
|
|
$
|
79,100
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(4,090
|
)
|
|
|
(1,350
|
)
|
|
|
(14,628
|
)
|
|
|
-
|
|
|
|
(20,068
|
)
|
Proceeds from sale of property and
equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
501
|
|
|
|
-
|
|
|
|
501
|
|
Business acquisitions, net of cash
acquired
|
|
|
(5,496
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,496
|
)
|
Decrease in other
investments
|
|
|
155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
155
|
|
Decrease in other long-term
assets
|
|
|
1,446
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,446
|
|
Other
|
|
|
1,404
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,404
|
|
Net Cash Used for Investing
Activities
|
|
|
(6,581
|
)
|
|
|
(1,350
|
)
|
|
|
(14,127
|
)
|
|
|
-
|
|
|
|
(22,058
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines
of credit, securitization facility and long-term
borrowings
|
|
|
648,071
|
|
|
|
-
|
|
|
|
50,930
|
|
|
|
-
|
|
|
|
699,001
|
|
Payments on revolving lines of
credit, securitization facility and long-term
borrowings
|
|
|
(598,412
|
)
|
|
|
-
|
|
|
|
(155,590
|
)
|
|
|
-
|
|
|
|
(754,002
|
)
|
Proceeds from exercise of stock
options
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
Payment of
dividends
|
|
|
(1,596
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,596
|
)
|
Payment of financing
costs
|
|
|
(22,992
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,992
|
)
|
Capital
contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
(6,000
|
)
|
|
|
-
|
|
Net Cash Provided (Used) by
Financing Activities
|
|
|
25,115
|
|
|
|
-
|
|
|
|
(98,660
|
)
|
|
|
(6,000
|
)
|
|
|
(79,545
|
)
|
Effect of exchange rate changes on
cash
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
-
|
|
|
|
2,500
|
|
Decrease in cash and cash
equivalents
|
|
|
(8,785
|
)
|
|
|
(429
|
)
|
|
|
(10,789
|
)
|
|
|
-
|
|
|
|
(20,003
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
35,918
|
|
|
|
2,202
|
|
|
|
44,083
|
|
|
|
-
|
|
|
|
82,203
|
|
Cash and cash equivalents at end
of year
|
|
$
|
27,133
|
|
|
$
|
1,773
|
|
|
$
|
33,294
|
|
|
$
|
-
|
|
|
$
|
62,200
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Supplemental Guarantor Information –
Continued
CONSOLIDATING CONDENSED STATEMENTS OF
CASH FLOWS
(in thousands)
Year ended December 31,
2006
|
|
The Company
(Parent)
|
|
|
Combined Guarantor
Subsidiaries
|
|
|
Combined Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net Cash Provided (Used) by
Operating Activities
|
|
$
|
(15,229
|
)
|
|
$
|
21,057
|
|
|
$
|
73,996
|
|
|
$
|
(17,370
|
)
|
|
$
|
62,454
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(6,974
|
)
|
|
|
(2,440
|
)
|
|
|
(12,375
|
)
|
|
|
-
|
|
|
|
(21,789
|
)
|
Proceeds from sale of property and
equipment
|
|
|
-
|
|
|
|
11
|
|
|
|
2,287
|
|
|
|
-
|
|
|
|
2,298
|
|
Business acquisitions, net of cash
acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,296
|
)
|
|
|
-
|
|
|
|
(15,296
|
)
|
(Increase) decrease in other
investments
|
|
|
(7,604
|
)
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
10,856
|
|
|
|
252
|
|
Increase in other long-term
assets
|
|
|
(850
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(850
|
)
|
Other
|
|
|
673
|
|
|
|
-
|
|
|
|
266
|
|
|
|
-
|
|
|
|
939
|
|
Net Cash Used for Investing
Activities
|
|
|
(14,755
|
)
|
|
|
(5,429
|
)
|
|
|
(25,118
|
)
|
|
|
10,856
|
|
|
|
(34,446
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines
of credit, securitization facility and long-term
borrowings
|
|
|
593,876
|
|
|
|
-
|
|
|
|
278,673
|
|
|
|
-
|
|
|
|
872,549
|
|
Payments on revolving lines of
credit, securitization facility and long-term
borrowings
|
|
|
(536,019
|
)
|
|
|
(122
|
)
|
|
|
(309,959
|
)
|
|
|
-
|
|
|
|
(846,100
|
)
|
Proceeds from exercise of stock
options
|
|
|
2,364
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,364
|
|
Payment of
dividends
|
|
|
(1,589
|
)
|
|
|
(17,370
|
)
|
|
|
-
|
|
|
|
17,370
|
|
|
|
(1,589
|
)
|
Capital
contributions
|
|
|
-
|
|
|
|
3,020
|
|
|
|
7,836
|
|
|
|
(10,856
|
)
|
|
|
-
|
|
Net Cash Provided (Used) by
Financing Activities
|
|
|
58,632
|
|
|
|
(14,472
|
)
|
|
|
(23,450
|
)
|
|
|
6,514
|
|
|
|
27,224
|
|
Effect of exchange rate changes on
cash
|
|
|
-
|
|
|
|
-
|
|
|
|
1,347
|
|
|
|
-
|
|
|
|
1,347
|
|
Increase in cash and cash
equivalents
|
|
|
28,648
|
|
|
|
1,156
|
|
|
|
26,775
|
|
|
|
-
|
|
|
|
56,579
|
|
Cash and cash equivalents at
beginning of year
|
|
|
7,270
|
|
|
|
1,046
|
|
|
|
17,308
|
|
|
|
-
|
|
|
|
25,624
|
|
Cash and cash equivalents at end
of year
|
|
$
|
35,918
|
|
|
$
|
2,202
|
|
|
$
|
44,083
|
|
|
$
|
-
|
|
|
$
|
82,203
|
|
INVACARE CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Supplemental Guarantor Information –
Continued
CONSOLIDATING CONDENSED STATEMENTS OF
CASH FLOWS
(in thousands)
Year ended December 31,
2005
|
|
The Company
(Parent)
|
|
|
Combined Guarantor
Subsidiaries
|
|
|
Combined Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net Cash Provided (Used) by
Operating Activities
|
|
$
|
166,253
|
|
|
$
|
(2,878
|
)
|
|
$
|
(85,250
|
)
|
|
$
|
-
|
|
|
$
|
78,125
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(17,646
|
)
|
|
|
(2,019
|
)
|
|
|
(11,259
|
)
|
|
|
-
|
|
|
|
(30,924
|
)
|
Proceeds from sale of property and
equipment
|
|
|
51
|
|
|
|
4,680
|
|
|
|
634
|
|
|
|
-
|
|
|
|
5,365
|
|
Business acquisitions, net of cash
acquired
|
|
|
(23,233
|
)
|
|
|
-
|
|
|
|
(34,983
|
)
|
|
|
-
|
|
|
|
(58,216
|
)
|
(Increase) decrease in other
investments
|
|
|
(70,694
|
)
|
|
|
(70,650
|
)
|
|
|
-
|
|
|
|
141,300
|
|
|
|
(44
|
)
|
Increase in other long-term
assets
|
|
|
(966
|
)
|
|
|
(14
|
)
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
(1,013
|
)
|
Other
|
|
|
(1,579
|
)
|
|
|
-
|
|
|
|
(323
|
)
|
|
|
-
|
|
|
|
(1,902
|
)
|
Net Cash Used for Investing
Activities
|
|
|
(114,067
|
)
|
|
|
(68,003
|
)
|
|
|
(45,964
|
)
|
|
|
141,300
|
|
|
|
(86,734
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines
of credit, securitization facility and long-term
borrowings
|
|
|
489,232
|
|
|
|
-
|
|
|
|
306,841
|
|
|
|
-
|
|
|
|
796,073
|
|
Payments on revolving lines of
credit, securitization facility and long-term
borrowings
|
|
|
(543,094
|
)
|
|
|
(178
|
)
|
|
|
(253,347
|
)
|
|
|
-
|
|
|
|
(796,619
|
)
|
Proceeds from exercise of stock
options
|
|
|
3,742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,742
|
|
Payment of
dividends
|
|
|
(1,580
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,580
|
)
|
Capital
contributions
|
|
|
-
|
|
|
|
70,650
|
|
|
|
70,650
|
|
|
|
(141,300
|
)
|
|
|
-
|
|
Net Cash Provided (Used) by
Financing Activities
|
|
|
(51,700
|
)
|
|
|
70,472
|
|
|
|
124,144
|
|
|
|
(141,300
|
)
|
|
|
1,616
|
|
Effect of exchange rate changes on
cash
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
486
|
|
|
|
(409
|
)
|
|
|
(7,020
|
)
|
|
|
-
|
|
|
|
(6,943
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
6,784
|
|
|
|
1,455
|
|
|
|
24,328
|
|
|
|
-
|
|
|
|
32,567
|
|
Cash and cash equivalents at end
of year
|
|
$
|
7,270
|
|
|
$
|
1,046
|
|
|
$
|
17,308
|
|
|
$
|
-
|
|
|
$
|
25,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim Financial Information
(unaudited)
|
|
QUARTER ENDED
(In thousands, except per share
data)
|
|
2007
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Net sales
|
|
$
|
374,905
|
|
|
$
|
393,267
|
|
|
$
|
407,303
|
|
|
$
|
426,762
|
|
Gross
profit
|
|
|
99,056
|
|
|
|
109,946
|
|
|
|
115,451
|
|
|
|
121,851
|
|
Earnings (loss) before income
taxes
|
|
|
(15,104
|
)
|
|
|
3,179
|
|
|
|
9,039
|
|
|
|
17,376
|
|
Net earnings
(loss)
|
|
|
(17,504
|
)
|
|
|
54
|
|
|
|
11,639
|
|
|
|
7,001
|
|
Net earnings (loss) per
share — basic
|
|
|
(0.55
|
)
|
|
|
.00
|
|
|
|
.37
|
|
|
|
.22
|
|
Net earnings (loss) per
share — assuming dilution
|
|
|
(0.55
|
)
|
|
|
.00
|
|
|
|
.36
|
|
|
|
.22
|
|
2006
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Net sales
|
|
$
|
361,704
|
|
|
$
|
371,764
|
|
|
$
|
379,462
|
|
|
$
|
385,105
|
|
Gross
profit
|
|
|
101,296
|
|
|
|
105,565
|
|
|
|
111,065
|
|
|
|
99,144
|
|
Earnings (loss) before income
taxes
|
|
|
7,437
|
|
|
|
6,848
|
|
|
|
12,193
|
|
|
|
(336,002
|
)
|
Net earnings
(loss)
|
|
|
5,207
|
|
|
|
4,953
|
|
|
|
9,693
|
|
|
|
(337,627
|
)
|
Net earnings (loss) per
share — basic
|
|
|
.16
|
|
|
|
.16
|
|
|
|
.31
|
|
|
|
(10.61
|
)
|
Net earnings (loss) per
share — assuming dilution
|
|
|
.16
|
|
|
|
.15
|
|
|
|
.30
|
|
|
|
(10.61
|
)
|
INVACARE CORPORATION AND
SUBSIDIARIES
SCHEDULE II — VALUATION AND
QUALIFYING ACCOUNTS
|
|
COL A.
|
|
|
COL B.
|
|
|
COL C.
|
|
|
COL D.
|
|
|
|
Balance At
Beginning of
Period
|
|
|
Charged To
Cost And
Expenses
|
|
|
Additions
(Deductions)
Describe
|
|
|
Balance
At End of
Period
|
|
|
|
(In
thousands)
|
|
Year Ended December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset
accounts —
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
37,633
|
|
|
$
|
11,927
|
|
|
$
|
(6,600
|
)
|
(A)
|
$
|
42,960
|
|
Inventory obsolescence
reserve
|
|
|
12,143
|
|
|
|
5,998
|
|
|
|
(5,640
|
)
|
(B)
|
|
12,501
|
|
Investments and related notes
receivable
|
|
|
8,339
|
|
|
|
—
|
|
|
|
(8,339
|
)
|
(D)
|
|
—
|
|
Tax valuation
allowances
|
|
|
50,273
|
|
|
|
25,537
|
|
|
|
13,912
|
|
(E)
|
|
89,722
|
|
Accrued warranty
cost
|
|
|
15,165
|
|
|
|
10,989
|
|
|
|
(9,538
|
)
|
(B)
|
|
16,616
|
|
Accrued product
liability
|
|
|
22,631
|
|
|
|
8,360
|
|
|
|
(9,855
|
)
|
(C)
|
|
21,136
|
|
Year Ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset
accounts —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
23,094
|
|
|
$
|
37,711
|
|
|
$
|
(23,172
|
)
|
(A)
|
$
|
37,633
|
|
Inventory obsolescence
reserve
|
|
|
8,591
|
|
|
|
5,325
|
|
|
|
(1,773
|
)
|
(B)
|
|
12,143
|
|
Investments and related notes
receivable
|
|
|
8,339
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,339
|
|
Tax valuation
allowances
|
|
|
7,100
|
|
|
|
28,785
|
|
|
|
14,388
|
|
(E)
|
|
50,273
|
|
Accrued warranty
cost
|
|
|
15,583
|
|
|
|
9,834
|
|
|
|
(10,252
|
)
|
(B)
|
|
15,165
|
|
Accrued product
liability
|
|
|
20,949
|
|
|
|
6,813
|
|
|
|
(5,131
|
)
|
(C)
|
|
22,631
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset
accounts —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
15,576
|
|
|
$
|
14,168
|
|
|
$
|
(6,650
|
)
|
(A)
|
$
|
23,094
|
|
Inventory obsolescence
reserve
|
|
|
9,532
|
|
|
|
4,378
|
|
|
|
(5,319
|
)
|
(B)
|
|
8,591
|
|
Investments and related notes
receivable
|
|
|
29,540
|
|
|
|
—
|
|
|
|
(21,201
|
)
|
(D)
|
|
8,339
|
|
Tax valuation
allowances
|
|
|
7,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,100
|
|
Accrued warranty
cost
|
|
|
13,998
|
|
|
|
10,516
|
|
|
|
(8,931
|
)
|
(B)
|
|
15,583
|
|
Accrued product
liability
|
|
|
17,045
|
|
|
|
8,780
|
|
|
|
(4,876
|
)
|
(A)
|
|
20,949
|
|
Note (A) — Uncollectible accounts
written off, net of recoveries.
Note (B) — Amounts written off or
payments incurred.
Note (C) — Loss and loss
adjustment.
Note (D) — Elimination of allowance
for investments no longer reported in the consolidated balance
sheet.
Note (E) — Other activity not
affecting federal or foreign tax expense.