q308tenq.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2008
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission
File Number 001-15103
INVACARE
CORPORATION
(Exact
name of registrant as specified in its charter)
Ohio
|
95-2680965
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer Identification No)
|
|
|
One
Invacare Way, P.O. Box 4028, Elyria, Ohio
|
44036
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(440)
329-6000
|
(Registrant's
telephone number, including area code)
|
|
_____________________________________________________________
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the
“Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
X No__
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act (Check One). Large accelerated filer X
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company) Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No X
As of
November 1, 2008, the registrant had 31,036,813 Common Shares and 1,109,685
Class B Common Shares outstanding.
INVACARE
CORPORATION
INDEX
|
FINANCIAL
INFORMATION
|
Item
1.
|
Financial
Statements.
|
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
September
30, 2008
|
|
|
December
31,
2007
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
(In
thousands)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
2,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
606,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
67,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
158,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,463,825
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
140,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
income taxes
|
|
|
4,116
|
|
|
|
|
|
Short-term
debt and current maturities of long-term obligations
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
295,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
504,178
|
|
|
|
|
|
OTHER
LONG-TERM OBLIGATIONS
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
8,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
155,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive earnings
|
|
|
147,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
559,464
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
thousands except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
related to restructuring activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges,
interest and fees associated with debt refinancing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(753
|
)
|
|
|
(552
|
)
|
|
|
(2,343
|
)
|
|
|
(1,549
|
)
|
Earnings
(loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
|
3,925
|
|
|
|
(2,600
|
)
|
|
|
10,265
|
|
|
|
2,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
DECLARED PER COMMON SHARE
|
|
|
.0125
|
|
|
|
.0125
|
|
|
|
.0375
|
|
|
|
.0375
|
|
Net
earnings (loss) per share – basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
31,908
|
|
|
|
31,844
|
|
|
|
31,896
|
|
|
|
31,836
|
|
Net
earnings (loss) per share – assuming dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - assuming dilution
|
|
|
32,031
|
|
|
|
31,958
|
|
|
|
31,977
|
|
|
|
31,836
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
OPERATING
ACTIVITIES
|
|
(In thousands)
|
|
Net
earnings (loss)
|
|
$
|
21,011
|
|
|
$
|
(5,811
|
)
|
Adjustments
to reconcile net earnings (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Debt
finance charges, interest and fees associated with debt
refinancing
|
|
|
-
|
|
|
|
13,403
|
|
Depreciation
and amortization
|
|
|
33,305
|
|
|
|
32,409
|
|
Provision
for losses on trade and installment receivables
|
|
|
10,576
|
|
|
|
7,312
|
|
Provision
for other deferred liabilities
|
|
|
2,313
|
|
|
|
2,311
|
|
Provision
(benefit) for deferred income taxes
|
|
|
619
|
|
|
|
(7,317
|
)
|
Provision
for stock-based compensation
|
|
|
2,173
|
|
|
|
1,787
|
|
Gain
(loss) on disposals of property and equipment
|
|
|
(110
|
)
|
|
|
464
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(26,799
|
)
|
|
|
(5,948
|
)
|
Installment
sales contracts, net
|
|
|
(3,082
|
)
|
|
|
(6,057
|
)
|
Inventories
|
|
|
(18,047
|
)
|
|
|
1,895
|
|
Other
current assets
|
|
|
4,436
|
|
|
|
32,749
|
|
Accounts
payable
|
|
|
(8,002
|
)
|
|
|
(13,751
|
)
|
Accrued
expenses
|
|
|
785
|
|
|
|
(22,355
|
)
|
Other
deferred liabilities
|
|
|
(3,544
|
)
|
|
|
(679
|
)
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
15,634
|
|
|
|
30,412
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(15,007
|
)
|
|
|
(13,715
|
)
|
Proceeds
from sale of property and equipment
|
|
|
58
|
|
|
|
477
|
|
Other
long term assets
|
|
|
4,470
|
|
|
|
(417
|
)
|
Business
acquisitions, net of cash acquired
|
|
|
(2,152
|
)
|
|
|
-
|
|
Other
|
|
|
1,348
|
|
|
|
658
|
|
NET
CASH USED FOR INVESTING ACTIVITIES
|
|
|
(11,283
|
)
|
|
|
(12,997
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from revolving lines of credit, securitization facility and long-term
borrowings
|
|
|
266,054
|
|
|
|
603,252
|
|
Payments on revolving lines of credit, securitization facility and
long-term debt and capital
lease obligations
|
|
|
(294,448
|
)
|
|
|
(620,015
|
)
|
Proceeds
from exercise of stock options
|
|
|
834
|
|
|
|
-
|
|
Payment
of financing costs
|
|
|
-
|
|
|
|
(20,615
|
)
|
Payment
of dividends
|
|
|
(1,199
|
)
|
|
|
(1,196
|
)
|
NET
CASH USED BY FINANCING ACTIVITIES
|
|
|
(28,759
|
)
|
|
|
(38,574
|
)
|
Effect
of exchange rate changes on cash
|
|
|
(412)
|
|
|
|
2,606
|
|
Decrease
in cash and cash equivalents
|
|
|
(24,820
|
)
|
|
|
(18,553
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
62,200
|
|
|
|
82,203
|
|
Cash
and cash equivalents at end of period
|
|
$
|
37,380
|
|
|
$
|
63,650
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
Financial
Statements
(Unaudited)
September
30, 2008
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 was the primary beneficiary in 2007 and includes all
adjustments, which were of a normal recurring nature, necessary to present
fairly the financial position of the company as September 30, 2008, the results
of its operations for the nine months ended September 30, 2008 and 2007,
respectively, and changes in its cash flows for the nine months ended September
30, 2008 and 2007, respectively. Certain foreign subsidiaries,
represented by the European segment, are consolidated using an August 31 quarter
end in order to meet filing deadlines. No material subsequent events have
occurred related to the European segment, which would require disclosure or
adjustment to the company’s financial statements. The results of operations for
the nine months ended September 30, 2008 are not necessarily indicative of the
results to be expected for the full year. All significant intercompany
transactions are eliminated.
Reclassifications - Certain
reclassifications have been made to the prior years’ consolidated financial
statements to conform to the presentation used for the period ended September
30, 2008, including the proper presentation of the provision for stock option
and award expense on the Consolidated Statement of Cash Flows, which had no net
effect on operating cash flows for the quarter ended September 30,
2007.
Use of Estimates - The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from
these estimates.
Business Segments - The
company operates in five primary business segments: North America /
Home Medical Equipment (NA/HME), Invacare Supply Group, Institutional Products
Group, Europe and Asia/Pacific.
The
NA/HME segment 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 products, aerosol therapy and associated respiratory products) product
lines.
Invacare
Supply Group distributes numerous lines of branded medical supplies including
ostomy, incontinence, diabetic, interals, wound care and urology products as
well as home medical equipment, including aids for daily living.
Institutional
Products Group is a manufacturer and distributor of healthcare 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.
The
Asia/Pacific segment consists 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 manufacturer of electronic operating components used in power
wheelchairs, scooters and other products; 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
sells a wide range of product lines, which continues to broaden and more closely
resemble those of NA/HME. Each business segment may sell to the home
health care, retail and extended care markets.
The
company evaluates performance and allocates resources based on profit or loss
from operations before income taxes for each reportable segment. The accounting
policies of each segment are the same as those described in the summary of
significant accounting policies for the company’s consolidated financial
statements. Intersegment sales and transfers are based on the costs to
manufacture plus a reasonable profit element. Therefore, intercompany profit or
loss on intersegment sales and transfers is not considered in evaluating segment
performance.
The
information by segment is as follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
191,218
|
|
|
$
|
167,861
|
|
|
$
|
554,162
|
|
|
$
|
496,225
|
|
Invacare
Supply Group
|
|
|
67,604
|
|
|
|
64,068
|
|
|
|
197,383
|
|
|
|
188,440
|
|
Institutional
Products Group
|
|
|
26,320
|
|
|
|
20,144
|
|
|
|
74,794
|
|
|
|
65,133
|
|
Europe
|
|
|
151,478
|
|
|
|
132,665
|
|
|
|
423,458
|
|
|
|
358,908
|
|
Asia/Pacific
|
|
|
25,216
|
|
|
|
22,565
|
|
|
|
75,469
|
|
|
|
66,769
|
|
Consolidated
|
|
$
|
461,836
|
|
|
$
|
407,303
|
|
|
$
|
1,325,266
|
|
|
$
|
1,175,475
|
|
Intersegment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
15,456
|
|
|
$
|
12,530
|
|
|
$
|
43,843
|
|
|
$
|
34,919
|
|
Invacare
Supply Group
|
|
|
189
|
|
|
|
89
|
|
|
|
424
|
|
|
|
210
|
|
Institutional
Products Group
|
|
|
694
|
|
|
|
255
|
|
|
|
2,077
|
|
|
|
255
|
|
Europe
|
|
|
2,549
|
|
|
|
2,856
|
|
|
|
9,688
|
|
|
|
7,760
|
|
Asia/Pacific
|
|
|
8,499
|
|
|
|
7,762
|
|
|
|
24,369
|
|
|
|
21,260
|
|
Consolidated
|
|
$
|
27,387
|
|
|
$
|
23,492
|
|
|
$
|
80,401
|
|
|
$
|
64,404
|
|
Charge
related to restructuring before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
(153
|
)
|
|
$
|
810
|
|
|
$
|
100
|
|
|
$
|
3,621
|
|
Invacare
Supply Group
|
|
|
1,598
|
|
|
|
31
|
|
|
|
1,598
|
|
|
|
45
|
|
Institutional
Products Group
|
|
|
-
|
|
|
|
163
|
|
|
|
115
|
|
|
|
172
|
|
Europe
|
|
|
213
|
|
|
|
1,123
|
|
|
|
996
|
|
|
|
3,064
|
|
Asia/Pacific
|
|
|
223
|
|
|
|
1,242
|
|
|
|
513
|
|
|
|
1,525
|
|
Consolidated
|
|
$
|
1,881
|
|
|
$
|
3,369
|
|
|
$
|
3,322
|
|
|
$
|
8,427
|
|
Earnings
(loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
6,380
|
|
|
$
|
3,295
|
|
|
$
|
18,812
|
|
|
$
|
3,178
|
|
Invacare
Supply Group
|
|
|
(323
|
)
|
|
|
806
|
|
|
|
470
|
|
|
|
2,417
|
|
Institutional
Products Group
|
|
|
1,654
|
|
|
|
(724
|
)
|
|
|
3,023
|
|
|
|
(41
|
)
|
Europe
|
|
|
14,012
|
|
|
|
12,847
|
|
|
|
28,167
|
|
|
|
23,367
|
|
Asia/Pacific
|
|
|
(54
|
)
|
|
|
(1,771
|
)
|
|
|
352
|
|
|
|
(3,790
|
)
|
All
Other *
|
|
|
(6,083
|
)
|
|
|
(5,414
|
)
|
|
|
(19,548
|
)
|
|
|
(28,017
|
)
|
Consolidated
|
|
$
|
15,586
|
|
|
$
|
9,039
|
|
|
$
|
31,276
|
|
|
$
|
(2,886
|
)
|
“All Other” consists of unallocated
corporate selling, general and administrative costs, which do not meet the
quantitative criteria for determining reportable segments. In
addition, the “All Other” earnings (loss) before income taxes for the first nine
months of 2007 includes charges, interest and fees associated with debt
refinancing.
Net Earnings Per Common Share
- The following table sets forth the computation of basic and diluted net
earnings (loss) per common share for the periods indicated (amounts in
thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands, except per share
data)
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
31,908
|
|
|
|
31,844
|
|
|
|
31,896
|
|
|
|
31,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares assuming dilution
|
|
|
32,031
|
|
|
|
31,958
|
|
|
|
31,977
|
|
|
|
31,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$
|
11,661
|
|
|
$
|
11,639
|
|
|
$
|
21,011
|
|
|
$
|
(5,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per common share
|
|
$
|
.36
|
|
|
$
|
.36
|
|
|
$
|
.66
|
|
|
$
|
(.18
|
)
|
At
September 30, 2008, 2,881,198 and 4,299,531 shares were excluded from the
average common shares assuming dilution for the three and nine months ended
September 30, 2008, respectively, as they were anti-dilutive. At
September 30, 2007, 4,178,612 shares were excluded from the average common
shares assuming dilution for the three months ended September 30, 2007 as they
were anti-dilutive while all of the company’s shares associated with stock
options were anti-dilutive for the nine months ended September 30, 2007 because
of the company’s net loss in the first nine months of 2007. For the
three and nine months ended September 30, 2008, 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 prices of $23.71 and $22.27,
respectively. For the three months ended September 30, 2007, the majority of the
anti-dilutive shares were granted at exercise prices of $41.87 which was higher
than the average fair market value prices of $21.92.
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. In December 2000,
Invacare entered into an agreement with De Lage Landen, Inc. (“DLL”), a third
party financing company, to provide the majority of future lease financing to
Invacare’s North America customers. The DLL agreement provides for direct
leasing between DLL and the Invacare customer. The company retains a recourse
obligation of $32,583,000 at September 30, 2008 to DLL for events of
default under the contracts, which total $91,842,000 at September 30, 2008. 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 of $850,000 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
providers and long term care facilities located throughout the United States,
Australia, Canada, New Zealand and Europe. A significant portion of products
sold to dealers, both foreign and domestic, is ultimately funded through
government reimbursement programs such as Medicare and Medicaid. In addition,
the company has also seen a significant shift in reimbursement to customers from
managed care entities. As a consequence, changes in these programs can have an
adverse impact on dealer liquidity and profitability. In addition, reimbursement
guidelines in the home health care industry have a substantial impact on the
nature and type of equipment an end user can obtain as well as the timing of
reimbursement and, thus, affect the product mix, pricing and payment patterns of
the company’s customers.
Goodwill and Other Intangibles
- The change in goodwill reflected on the balance sheet from December 31,
2007 to September 30, 2008 was the result of foreign currency translation and
the acquisition by the NA/HME segment of Naylor Medical Sales & Rentals,
Inc., which increased goodwill by $1,221,000 and is deductible for tax
purposes. As a result of the acquisition, the company also recorded
$100,000 for a non-compete agreement and $200,000 for a customer
list.
All of
the company’s other intangible assets have definite lives and are amortized over
their useful lives, except for $35,596,000 related to trademarks, which have
indefinite lives.
As of
September 30, 2008 and December 31, 2007, other intangibles consisted of the
following (in thousands):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
35,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
|
7,336
|
|
|
|
1,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
8,767
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to other intangibles was $7,265,000 in the first nine months of
2008 and is estimated to be $9,301,000 in 2009, $8,814,000 in 2010, $8,465,000
in 2011, $8,040,000 in 2012 and $7,181,000 in 2013.
Accounting for Stock-Based
Compensation - Effective January 1, 2006, the company adopted
SFAS No. 123R using the modified prospective application method. Under
the modified prospective method, compensation cost has been 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 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):
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Stock-based
compensation expense recognized as part of selling, general and
administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2008
and 2007 amounts above reflect compensation expense related to restricted stock
awards and nonqualified stock options awarded under the 2003 Performance
Plan. Stock-based compensation is not allocated to the business
segments, but is reported as part of “All Other” as shown in the company’s
Business Segment Note to the Consolidated Financial Statements.
Stock Incentive Plans - The
2003 Performance Plan (the “2003 Plan”) allows the Compensation, Management
Development and Corporate Governance Committee of the Board of Directors (the
“Committee”) to grant up to 3,800,000 Common Shares in connection with incentive
stock options, non-qualified stock options, stock appreciation rights and stock
awards (including the use of restricted stock). The Committee has the
authority to determine which employees and directors will receive awards, the
amount of the awards and the other terms and conditions of the
awards. During the first nine months of 2008, the Committee granted
655,452 non-qualified stock options for a term of ten years at the market value
of the company’s Common Shares on the date of grant under the 2003
Plan.
Under the
terms of the company’s outstanding restricted stock awards, all of the shares
granted vest ratably over the four years after the grant
date. Compensation expense of $873,000 was recognized in the first
nine months of 2008 compared to $948,000 in the first nine months of 2007 and as
of September 30, 2008, outstanding restricted stock awards totaling 238,012 were
not yet vested. Restricted stock awards totaling 93,800 were granted
in the first nine months of 2008.
Stock
option activity during the nine months ended September 30, 2008 was as
follows:
|
|
|
|
|
|
|
Options
outstanding at January 1
|
|
|
|
|
|
|
|
|
Granted
|
|
|
655,452
|
|
|
|
25.60
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(257,974
|
)
|
|
|
34.54
|
|
Options
outstanding at September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
price range at September 30
|
|
|
|
|
|
|
|
|
|
|
$
|
47.80
|
|
|
|
|
|
Options
exercisable at September 30
|
|
|
|
|
|
|
|
|
Options
available for grant at September 30*
|
|
|
778,850
|
|
|
|
|
|
* Options
available for grant as of September 30, 2008 reduced by net restricted stock
award activity of 288,763.
The
following table summarizes information about stock options outstanding at
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
Outstanding
|
|
|
Average
Remaining
|
|
|
Weighted
Average
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24.43
- $36.40
|
|
|
|
1,705,323
|
|
|
|
5.8
|
|
|
$
|
29.07
|
|
|
|
1,041,551
|
|
|
$
|
30.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
4,887,086
|
|
|
|
5.2
|
|
|
$
|
29.50
|
|
|
|
3,656,802
|
|
|
$
|
31.14
|
|
The stock
options awarded become exercisable over a four-year vesting period whereby
options vest in equal installments each year. Options granted with
graded vesting are accounted for as single options. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
Expected
stock price volatility
|
|
|
31.5
|
%
|
|
|
|
|
|
Expected
life (years)
|
|
|
3.7
|
|
The
assumed expected life is based on the company’s historical analysis of option
history. The expected stock price volatility is also based on actual
historical volatility, and expected dividend yield is based on historical
dividends as the company has no current intention of changing its dividend
policy.
The
weighted-average fair value of options granted during the first nine months of
2008 was $7.03. The 2003 Plan provides that shares granted come from the
company’s authorized but unissued Common Shares or treasury
shares. In addition, the company’s stock-based compensation plans
allow participants to exchange shares for payment of withholding taxes, which
results in the company acquiring treasury shares.
As of
September 30, 2008 there was $13,461,000 of total unrecognized compensation cost
from stock-based compensation arrangements granted under the company’s plans,
which is related to non-vested shares and includes $4,920,000 related to
restricted stock awards. The company expects the compensation expense
to be recognized over approximately 4 years.
Warranty Costs - Generally,
the company’s products are covered by warranties against defects in material and
workmanship for periods of up to six years from the date of sale to the
customer. Certain components carry a lifetime warranty. A
provision for estimated warranty cost is recorded at the time of sale based upon
actual experience. The company continuously assesses the adequacy of
its product warranty accrual and makes adjustments as
needed. Historical analysis is primarily used to determine the
company’s warranty reserves. Claims history is reviewed and
provisions are adjusted as needed. However, the company does consider
other events, such as a product recall, which could warrant additional warranty
reserve provision. No material adjustments to warranty reserves based
on other events were necessary in the first nine months of 2008.
The
following is a reconciliation of the changes in accrued warranty costs for the
reporting period (in thousands):
Balance
as of January 1, 2008
|
|
|
|
|
Warranties
provided during the period
|
|
|
9,044
|
|
Settlements
made during the period
|
|
|
|
|
Changes
in liability for pre-existing warranties during the period, including
expirations
|
|
|
649
|
|
Balance
as of September 30, 2008
|
|
|
|
|
Charges Related to Restructuring
Activities - Previously, the company announced multi-year cost reductions
and profit improvement actions, which included: reducing global headcount,
outsourcing improvements utilizing the company’s China manufacturing capability
and third parties, shifting substantial resources from product development to
manufacturing cost reduction activities and product rationalization, reducing
freight exposure through freight auctions and changing the freight policy,
general expense reductions and exiting manufacturing and distribution
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 manufacturing and distribution facilities and eliminating
positions, which resulted in restructuring charges of $3,322,000 and $8,427,000
incurred in the first nine months of 2008 and 2007, respectively, of which
$1,669,000 and $620,000, respectively, were recorded in cost of products sold as
it relates to inventory markdowns and the remaining charge amount is included on
the Charge Related to Restructuring Activities in the Condensed Consolidated
Statement of Operations as part of operations. There have been no
material changes in accrued balances related to the charge, either as a result
of revisions in the plan or changes in estimates, and the company expects to
utilize the accruals recorded through September 30, 2008 during
2008.
A
progression of the accruals by segment recorded as a result of the restructuring
is as follows (in thousands):
|
|
Balance
at
12/31/06
|
|
|
Accruals
(Reversals)
|
|
|
Payments
|
|
|
Balance
at
12/31/07
|
|
|
Accruals
|
|
|
Payments
|
|
|
Balance
at
9/30/08
|
|
North America/HME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Products
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
Product
line discontinuance
|
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|
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|
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|
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|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Earnings (loss)
- Total comprehensive earnings (loss) were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
(57,500
|
)
|
|
|
(1,613
|
)
|
|
|
(19,714
|
)
|
|
|
24,137
|
|
Unrealized
gain (loss) on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP/DBO
amortization of prior service costs and unrecognized
losses
|
|
|
647
|
|
|
|
443
|
|
|
|
1,746
|
|
|
|
1,847
|
|
Current
period unrealized gain (loss) on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive earnings (loss)
|
|
$
|
(43,835
|
)
|
|
$
|
15,013
|
|
|
$
|
3,812
|
|
|
$
|
18,362
|
|
Receivables - On May 12, 2008,
the company initiated foreclosure proceedings against the assets of a customer
which is in default with respect to amounts due the company. On
September 26, 2008, the court issued a foreclosure order, which allowed the
company to receive $2,400,000 of the amount owed to Invacare. As of
September 30, 2008, the company had gross receivables and other payments due
from the customer of approximately $22,800,000, of which, 96% is specifically
reserved for by the company’s bad debt allowance. While there can be
no assurance of the ultimate settlement of the amount owed the company, based on
an evaluation of existing bad debt reserves and estimated values assigned to the
assets to be potentially liquidated, the company believes it has
adequate bad debt reserves to cover its exposure on this account.
Inventories - Inventories
determined under the first in, first out method consist of the following
components (in thousands):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
|
70,263
|
|
|
|
63,815
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208,439
|
|
|
$
|
195,604
|
|
Property and Equipment -
Property and equipment consist of the following (in
thousands):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Land,
buildings and improvements
|
|
|
100,209
|
|
|
|
97,478
|
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
|
16,748
|
|
|
|
16,390
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for depreciation
|
|
|
(315,633
|
)
|
|
|
(286,600
|
)
|
|
|
|
|
|
|
|
|
|
Acquisitions– In the second
quarter of 2008, the company acquired Naylor Medical Sales & Rentals, Inc.,
a rental business operating primarily in Kentucky, Tennessee and Arkansas for
$2,152,000.
Income Taxes - The
company had an effective tax rate of 25.2% and 32.8% on earnings before tax
compared to an expected rate at the U.S. statutory rate of 35% for the three and
nine month periods ended September 30, 2008. For the three and nine
month periods ended September 30, 2007, the company had an effective
rate of (28.8%) and 101.4% compared to an expected U.S. statutory rate for the
quarter and benefit for the nine month period of 35%. The company's
effective tax rate for the three and nine months ended September 30, 2008 was
lower than the U.S. federal statutory rate due to foreign taxes at rates lower
than the U.S. statutory rate. In addition, the company did not
recognize tax benefits in countries which had tax valuation
allowances. The company's effective tax rate for the three and nine
months ended September 30, 2007 were less and greater than the U.S. statutory
tax rate, respectively due to three main items: a net benefit
recorded in the third quarter of 2007 of $6,300,000 principally related to a tax
rate change in Germany resulting in the reduction of deferred tax liabilities,
the benefit of foreign taxes at rates lower than the U.S. statutory rate and the
negative impact of not recognizing tax benefits in countries which had valuation
allowances.
Fair Value Measurements
- 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. The company adopted the new standard, to the extent
required, as of January 1, 2008 and the adoption had no material impact on the
company’s financial position, results of operations or cash
flows. The application of FAS 157 for non-financial assets and
non-financial liabilities that are recognized or disclosed at fair value on a
nonrecurring basis was deferred until January 1, 2009 and the company is
currently assessing the impact on its non-financial assets and non-financial
liabilities measured at fair value on a nonrecurring basis.
Pursuant
to FAS 157, the inputs used to derive the fair value of assets and liabilities
are analyzed and assigned a level I, II or III priority, with level I being the
highest and level III being the lowest in the hierarchy. Level I inputs are
quoted prices in active markets for identical assets or
liabilities. Level II inputs are quoted prices for similar assets or
liabilities in active markets: quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in
which all significant inputs are observable in active markets. Level
III inputs are based on valuations derived from valuation techniques in which
one or more significant inputs are observable.
The
following table provides a summary of the company’s assets and liabilities that
are measured on a recurring basis (in thousands).
|
|
|
|
|
Basis
for Fair Value Measurements at Reporting Date
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets /
(Liabilities)
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Other Unobservable Inputs
|
|
|
|
September
30, 2008
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
Exchange Contracts
|
|
|
259
|
|
|
|
-
|
|
|
|
259
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Total
|
|
$
|
(1,473
|
)
|
|
$
|
153
|
|
|
$
|
(1,626
|
)
|
|
$
|
-
|
|
Marketable
Securities: The company’s marketable securities are recorded
based on quoted prices in active markets multiplied by the number of shares
owned without any adjustments for transactional costs or other costs that may be
incurred to sell the securities.
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 pricing models in which all
significant inputs, such as interest rates and yield curves, are observable in
active markets. The company believes that the fair values reported
would not be materially different from the amounts that would be realized upon
settlement.
The gains
and losses that result from the company’s current cash flow hedge interest rate
swaps are recognized as part of interest expense. Swap assets are
recorded in either Other Current Assets or Other Assets, while swap liabilities
are recorded in Accrued Expenses or Other Long-Term Obligations in the Condensed
Consolidated Balance Sheets.
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 are used to hedge
the following currencies: AUD, GBP, CAD, CHF, CNY, 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. Gains or losses recognized as the result
of the settlement of forward contracts are recognized in cost of products sold
for hedges of inventory transactions or selling, general and administrative
expenses for other hedged transactions. The company’s forward
contracts are included in Other Current Assets or Accrued Expenses in the
Condensed Consolidated Balance Sheets.
Recently Issued Accounting
Pronouncements - On May 9, 2008, the FASB issued FASB Staff Position
APB 14-1 (FSP APB 14-1) to provide clarification of the accounting for
convertible debt that can be settled in cash upon conversion. The
FASB believed this clarification was needed because the 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 FSP
requires 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 will have to bifurcate a component of its
convertible debt as a component of stockholders’ equity and accrete the
resulting debt discount as interest expense. It is currently
estimated that the adoption FSP APB 14-1 will increase reported interest expense
and decrease net earnings by $2,904,000 and $3,695,000 for 2007 and 2008,
respectively. The effective date is January 1, 2009 with
retrospective application required for all periods presented and no
grandfathering for existing instruments.
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 ¾% Senior Notes due 2015
(the “Senior Notes”) with an aggregate principal amount of $175,000,000 and
under its 4.125% Convertible Senior Subordinated Debentures due 2027 (the
“Debentures”) with an aggregate principal amount of $135,000,000. The
majority of the company’s subsidiaries are not guaranteeing the indebtedness of
the Senior Notes or Debentures (the “Non-Guarantor
Subsidiaries”). Each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, to pay principal,
premium, and interest related to the Senior Notes and to the Debentures and each
of the Guarantor Subsidiaries are directly or indirectly wholly-owned
subsidiaries of the company.
Presented
below are the consolidating condensed financial statements of Invacare
Corporation (Parent), its combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for
using the equity method. The company does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors and
accordingly, separate financial statements and other disclosures related to the
Guarantor Subsidiaries are not presented.
CONSOLIDATING
CONDENSED STATEMENTS OF OPERATIONS
(in
thousands)
Three
month period ended September 30, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net
sales
|
|
$
|
100,366
|
|
|
$
|
169,877
|
|
|
$
|
210,841
|
|
|
$
|
(19,248
|
)
|
|
$
|
461,836
|
|
Cost
of products sold
|
|
|
74,605
|
|
|
|
136,829
|
|
|
|
138,637
|
|
|
|
(19,166
|
)
|
|
|
330,905
|
|
Gross
Profit
|
|
|
25,761
|
|
|
|
33,048
|
|
|
|
72,204
|
|
|
|
(82
|
)
|
|
|
130,931
|
|
Selling,
general and administrative expenses
|
|
|
29,717
|
|
|
|
34,062
|
|
|
|
42,402
|
|
|
|
-
|
|
|
|
106,181
|
|
Charge
related to restructuring activities
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
438
|
|
|
|
-
|
|
|
|
283
|
|
Income
(loss) from equity investee
|
|
|
22,561
|
|
|
|
12,097
|
|
|
|
16,205
|
|
|
|
(50,863
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
7,088
|
|
|
|
(451
|
)
|
|
|
2,244
|
|
|
|
-
|
|
|
|
8,881
|
|
Earnings
(loss) before Income Taxes
|
|
|
11,672
|
|
|
|
11,534
|
|
|
|
43,325
|
|
|
|
(50,945
|
)
|
|
|
15,586
|
|
Income
taxes
|
|
|
11
|
|
|
|
300
|
|
|
|
3,614
|
|
|
|
-
|
|
|
|
3,925
|
|
Net
Earnings (loss)
|
|
$
|
11,661
|
|
|
$
|
11,234
|
|
|
$
|
39,711
|
|
|
$
|
(50,945
|
)
|
|
$
|
11,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
month period ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
89,270
|
|
|
$
|
150,919
|
|
|
$
|
183,218
|
|
|
$
|
(16,104
|
)
|
|
$
|
407,303
|
|
Cost
of products sold
|
|
|
68,328
|
|
|
|
120,868
|
|
|
|
118,794
|
|
|
|
(16,138
|
)
|
|
|
291,852
|
|
Gross
Profit
|
|
|
20,942
|
|
|
|
30,051
|
|
|
|
64,424
|
|
|
|
34
|
|
|
|
115,451
|
|
Selling,
general and administrative expenses
|
|
|
27,404
|
|
|
|
30,866
|
|
|
|
34,266
|
|
|
|
-
|
|
|
|
92,536
|
|
Charge
related to restructuring activities
|
|
|
603
|
|
|
|
31
|
|
|
|
2,360
|
|
|
|
-
|
|
|
|
2,994
|
|
Charges,
interest and fees associated with debt refinancing
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
22
|
|
Income
(loss) from equity investee
|
|
|
26,747
|
|
|
|
12,019
|
|
|
|
13,789
|
|
|
|
(52,555
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
7,123
|
|
|
|
107
|
|
|
|
3,630
|
|
|
|
-
|
|
|
|
10,860
|
|
Earnings
(loss) before Income Taxes
|
|
|
12,564
|
|
|
|
11,066
|
|
|
|
37,930
|
|
|
|
(52,521
|
)
|
|
|
9,039
|
|
Income
taxes (benefit)
|
|
|
925
|
|
|
|
315
|
|
|
|
(3,840
|
)
|
|
|
-
|
|
|
|
(2,600
|
)
|
Net
Earnings (loss)
|
|
$
|
11,639
|
|
|
$
|
10,751
|
|
|
$
|
41,770
|
|
|
$
|
(52,521
|
)
|
|
$
|
11,639
|
|
CONSOLIDATING
CONDENSED STATEMENTS OF OPERATIONS
(in
thousands)
Nine
month period ended September 30, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net
sales
|
|
$
|
272,946
|
|
|
$
|
509,923
|
|
|
$
|
599,262
|
|
|
$
|
(56,865
|
)
|
|
$
|
1,325,266
|
|
Cost
of products sold
|
|
|
204,993
|
|
|
|
409,707
|
|
|
|
399,078
|
|
|
|
(56,824
|
)
|
|
|
956,954
|
|
Gross
Profit
|
|
|
67,953
|
|
|
|
100,216
|
|
|
|
200,184
|
|
|
|
(41
|
)
|
|
|
368,312
|
|
Selling,
general and administrative expenses
|
|
|
87,256
|
|
|
|
93,193
|
|
|
|
127,947
|
|
|
|
-
|
|
|
|
308,396
|
|
Charge
related to restructuring activities
|
|
|
100
|
|
|
|
-
|
|
|
|
1,553
|
|
|
|
-
|
|
|
|
1,653
|
|
Income
(loss) from equity investee
|
|
|
61,570
|
|
|
|
31,448
|
|
|
|
8,750
|
|
|
|
(101,768
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
20,306
|
|
|
|
(1,124
|
)
|
|
|
7,805
|
|
|
|
-
|
|
|
|
26,987
|
|
Earnings
(loss) before Income Taxes
|
|
|
21,861
|
|
|
|
39,595
|
|
|
|
71,629
|
|
|
|
(101,809
|
)
|
|
|
31,276
|
|
Income
taxes
|
|
|
850
|
|
|
|
900
|
|
|
|
8,515
|
|
|
|
-
|
|
|
|
10,265
|
|
Net
Earnings (loss)
|
|
$
|
21,011
|
|
|
$
|
38,695
|
|
|
$
|
63,114
|
|
|
$
|
(101,809
|
)
|
|
$
|
21,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
month period ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
245,880
|
|
|
$
|
466,451
|
|
|
$
|
507,547
|
|
|
$
|
(44,403
|
)
|
|
$
|
1,175,475
|
|
Cost
of products sold
|
|
|
190,907
|
|
|
|
371,534
|
|
|
|
333,152
|
|
|
|
(44,571
|
)
|
|
|
851,022
|
|
Gross
Profit
|
|
|
54,973
|
|
|
|
94,917
|
|
|
|
174,395
|
|
|
|
168
|
|
|
|
324,453
|
|
Selling,
general and administrative expenses
|
|
|
81,829
|
|
|
|
83,937
|
|
|
|
108,387
|
|
|
|
-
|
|
|
|
274,153
|
|
Charge
related to restructuring activities
|
|
|
3,053
|
|
|
|
45
|
|
|
|
4,709
|
|
|
|
-
|
|
|
|
7,807
|
|
Debt
finance charges, interest and fees associated with debt
refinancing
|
|
|
13,329
|
|
|
|
-
|
|
|
|
74
|
|
|
|
-
|
|
|
|
13,403
|
|
Income
(loss) from equity investee
|
|
|
59,822
|
|
|
|
23,019
|
|
|
|
9,501
|
|
|
|
(92,342
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
21,014
|
|
|
|
851
|
|
|
|
10,111
|
|
|
|
-
|
|
|
|
31,976
|
|
Earnings
(loss) before Income Taxes
|
|
|
(4,430
|
)
|
|
|
33,103
|
|
|
|
60,615
|
|
|
|
(92,174
|
)
|
|
|
(2,886
|
)
|
Income
taxes
|
|
|
1,381
|
|
|
|
855
|
|
|
|
689
|
|
|
|
-
|
|
|
|
2,925
|
|
Net
Earnings (loss)
|
|
$
|
(5,811
|
)
|
|
$
|
32,248
|
|
|
$
|
59,926
|
|
|
$
|
(92,174
|
)
|
|
$
|
(5,811
|
)
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
September
30, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
779
|
|
|
|
2,652
|
|
|
|
-
|
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,366
|
|
|
|
-
|
|
|
|
2,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
193,383
|
|
|
|
105,994
|
|
|
|
316,160
|
|
|
|
(9,337
|
)
|
|
|
606,200
|
|
Investment
in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
208,795
|
|
|
|
854,116
|
|
|
|
47,493
|
|
|
|
(1,110,404
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangibles
|
|
|
1,123
|
|
|
|
10,055
|
|
|
|
85,012
|
|
|
|
-
|
|
|
|
96,190
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
24,294
|
|
|
|
511,143
|
|
|
|
-
|
|
|
|
535,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
44,547
|
|
|
|
20,525
|
|
|
|
89,591
|
|
|
|
(7,755
|
)
|
|
|
146,908
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt and current maturities of long-
term obligations
|
|
|
24,344
|
|
|
|
-
|
|
|
|
656
|
|
|
|
-
|
|
|
|
25,000
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
471,734
|
|
|
|
-
|
|
|
|
11,444
|
|
|
|
-
|
|
|
|
483,178
|
|
Other
Long-Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
721,808
|
|
|
|
346,483
|
|
|
|
42,113
|
|
|
|
(1,110,404
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,950,473
|
|
|
$
|
1,683,312
|
|
|
$
|
1,056,803
|
|
|
$
|
(3,226,763
|
)
|
|
$
|
1,463,825
|
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
December
31, 2007
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
255
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
1,841
|
|
|
|
2,216
|
|
|
|
-
|
|
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,478
|
|
|
|
-
|
|
|
|
2,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
210,737
|
|
|
|
97,214
|
|
|
|
289,752
|
|
|
|
(6,618
|
)
|
|
|
591,085
|
|
Investment
in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
250,765
|
|
|
|
824,519
|
|
|
|
43,460
|
|
|
|
(1,118,744
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangibles
|
|
|
934
|
|
|
|
11,315
|
|
|
|
92,487
|
|
|
|
-
|
|
|
|
104,736
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
23,531
|
|
|
|
519,652
|
|
|
|
-
|
|
|
|
543,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
48,332
|
|
|
|
18,284
|
|
|
|
84,431
|
|
|
|
(5,089
|
)
|
|
|
145,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt and current maturities of long-
term obligations
|
|
|
23,500
|
|
|
|
-
|
|
|
|
1,010
|
|
|
|
-
|
|
|
|
24,510
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
481,896
|
|
|
|
7
|
|
|
|
31,439
|
|
|
|
-
|
|
|
|
513,342
|
|
Other
Long-Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
741,829
|
|
|
|
326,028
|
|
|
|
50,887
|
|
|
|
(1,118,744
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,980,256
|
|
|
$
|
1,630,470
|
|
|
$
|
1,048,076
|
|
|
$
|
(3,158,760
|
)
|
|
$
|
1,500,042
|
|
CONSOLIDATING
CONDENSED STATEMENTS OF CASH FLOWS
(in
thousands)
Nine
month period ended September 30, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
$
|
(13,939
|
)
|
|
$
|
2,340
|
|
|
$
|
27,233
|
|
|
$
|
-
|
|
|
$
|
15,634
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,292
|
)
|
|
|
(916
|
)
|
|
|
(10,799
|
)
|
|
|
-
|
|
|
|
(15,007
|
)
|
Proceeds
from sale of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
58
|
|
Increase
in other long-term assets
|
|
|
4,470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,470
|
|
Business
acquisitions, net of cash acquired
|
|
|
-
|
|
|
|
(2,152
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,152
|
)
|
Other
|
|
|
(1,499
|
)
|
|
|
1,521
|
|
|
|
1,326
|
|
|
|
-
|
|
|
|
1,348
|
|
Net
Cash Used for Investing Activities
|
|
|
(321
|
)
|
|
|
(1,547
|
)
|
|
|
(9,415
|
)
|
|
|
-
|
|
|
|
(11,283
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
revolving lines of credit and long-
term
borrowings
|
|
|
243,919
|
|
|
|
-
|
|
|
|
22,135
|
|
|
|
-
|
|
|
|
266,054
|
|
Payments
on revolving lines of credit and long-
term
borrowings
|
|
|
(252,096
|
)
|
|
|
-
|
|
|
|
(42,352
|
)
|
|
|
-
|
|
|
|
(294,448
|
)
|
Proceeds
from exercise of stock options
|
|
|
834
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
834
|
|
Payment
of dividends
|
|
|
(1,199
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,199
|
)
|
Net
Cash Used by Financing Activities
|
|
|
(8,542
|
)
|
|
|
-
|
|
|
|
(20,217
|
)
|
|
|
-
|
|
|
|
(28,759
|
)
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
(412
|
)
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(22,802
|
)
|
|
|
793
|
|
|
|
(2,811
|
)
|
|
|
-
|
|
|
|
(24,820
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
27,133
|
|
|
|
1,773
|
|
|
|
33,294
|
|
|
|
-
|
|
|
|
62,200
|
|
Cash
and cash equivalents at end of period
|
|
$
|
4,331
|
|
|
$
|
2,566
|
|
|
$
|
30,483
|
|
|
$
|
-
|
|
|
$
|
37,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
month period ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
$
|
(99,833
|
)
|
|
$
|
1,603
|
|
|
$
|
128,642
|
|
|
$
|
-
|
|
|
$
|
30,412
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,919
|
)
|
|
|
(1,078
|
)
|
|
|
(9,718
|
)
|
|
|
-
|
|
|
|
(13,715
|
)
|
Proceeds
from sale of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
477
|
|
|
|
-
|
|
|
|
477
|
|
Increase
in other long-term assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(417
|
)
|
|
|
-
|
|
|
|
(417
|
)
|
Other
|
|
|
657
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
658
|
|
Net
Cash Used for Investing Activities
|
|
|
(2,262
|
)
|
|
|
(1,078
|
)
|
|
|
(9,657
|
)
|
|
|
-
|
|
|
|
(12,997
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
revolving lines of credit,
securitization
facility and long-term borrowings
|
|
|
586,084
|
|
|
|
-
|
|
|
|
17,168
|
|
|
|
-
|
|
|
|
603,252
|
|
Payments
on revolving lines of credit,
securitization
facility and long-term borrowings
|
|
|
(487,050
|
)
|
|
|
-
|
|
|
|
(132,965
|
)
|
|
|
-
|
|
|
|
(620,015
|
)
|
Payment
of dividends
|
|
|
(1,196
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,196
|
)
|
Payment
of financing costs
|
|
|
(20,615
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,615
|
)
|
Net
Cash Provided (Used) by Financing Activities
|
|
|
77,223
|
|
|
|
-
|
|
|
|
(115,797
|
)
|
|
|
-
|
|
|
|
(38,574
|
)
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
2,606
|
|
|
|
-
|
|
|
|
2,606
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(24,872
|
)
|
|
|
525
|
|
|
|
5,794
|
|
|
|
-
|
|
|
|
(18,553
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
35,918
|
|
|
|
2,202
|
|
|
|
44,083
|
|
|
|
-
|
|
|
|
82,203
|
|
Cash
and cash equivalents at end of period
|
|
$
|
11,046
|
|
|
$
|
2,727
|
|
|
$
|
49,877
|
|
|
$
|
-
|
|
|
$
|
63,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations.
|
The
following discussion and analysis should be read in conjunction with the
company’s Condensed Consolidated Financial Statements and related notes thereto
included elsewhere in this Quarterly Report on Form 10-Q and in the company’s
Current Report on Form 8-K as furnished to the Securities and Exchange
Commission on October 23, 2008.
OUTLOOK
Although
the global financial crisis will impact all businesses, including the company’s,
demand for home medical products and services should remain
strong. Additionally, the company’s cash flow continues to improve
sequentially and existing credit availability of $123 million puts Invacare in a
strong position to continue to grow in the current environment. The
likely adverse trend in the short term is the sudden strengthening of the U.S.
dollar, which will cause the translation of overseas profits into lower U.S.
dollar results, all other factors being equal. Looking at risks over
the medium term, the company will remain judicious in its extension of credit to
customers, since it is uncertain what potential impact the credit crisis will
have on Invacare’s customers’ funding sources.
During
the third quarter, the company continued to experience reimbursement and pricing
pressures, particularly in Germany. Late in the third quarter, French
health care authorities reduced reimbursement for beds and other select
product. As previously communicated, the Centers for Medicare and
Medicaid Services (CMS) announced U.S. reimbursement cuts of 9.5% for those
product categories which were included in phase one of the now delayed National
Competitive Bidding (NCB) program. While these U.S. cuts are not
effective until January 2009, the HME (Home Medical Equipment) industry may be
cautious in its buying patterns with such changes. In addition, while
the company has implemented numerous cost reduction programs to increase
profitability during the year, the benefits from these programs have been
hampered by rising commodity costs in the first nine months. Although
some commodity costs are now falling, the company has largely locked in costs
for commodities in the fourth quarter.
With the
factors above in mind, for fiscal year 2008, the company expects organic growth
in net sales of between 6% and 7%, excluding the impact from acquisitions and
foreign currency translation adjustments. Operating cash flows are
estimated to be $57 million to $62 million with net purchases of property, plant
and equipment of up to approximately $22 million. The full year
earnings are expected to be consistent with the guidance furnished in the
company’s press release on October 23, 2008.
RESULTS OF
OPERATIONS
NET
SALES
Net sales
for the three months ended September 30, 2008 were $461,836,000, compared to
$407,303,000 for the same period a year ago, representing a 13.4%
increase. Organic sales growth was 9.3% as foreign currency
translation increased net sales by four percentage points while acquisitions
increased net sales by less than one percentage point for the three month
period. The positive sales growth was driven by improved performance
in all segments, particularly North America/Home Medical Equipment (NA/HME) and
Institutional Products Group (IPG). For the nine months ended
September 30, 2008, net sales increased 12.7% to $1,325,266,000 compared to
$1,175,475,000 for the same period a year ago. Organic sales growth
was 7.7% as foreign currency translation increased net sales by five percentage
points while acquisitions increased net sales by less than one percentage point
for the nine month period. The positive sales growth was driven
primarily by performance in NA/HME and Europe.
North American/Home Medical
Equipment (NA/HME)
NA/HME
net sales increased 13.9% for the quarter to $191,218,000 as compared to
$167,861,000 for the same period a year ago. The increase for the
quarter was driven primarily by sales increases in all principal product
lines. For the first nine months of 2008, net sales increased 11.7%
to $554,162,000 as compared to $496,225,000 for the same period a year
ago. Foreign currency and acquisitions combined to increase net sales
by slightly more than a percentage point for the quarter and two percentage
points for the first nine months ended September 30,
2008.
Rehab
product line net sales increased by 2.2% compared to the third quarter last
year, despite volume declines in the consumer power product line caused by the
company’s previous decision to terminate sales to a large national account.
Excluding consumer power products, Rehab product line net sales
increased 7.6% compared to the third quarter last year, driven by volume
increases in custom power and custom manual wheelchairs.
Standard product line net sales for the third quarter increased
21.7% compared to the third quarter of last year, driven by increased
volumes in manual wheelchairs and patient aids. Respiratory product
line net sales increased 20.6%, driven by volume increases in oxygen
concentrators and HomeFill®, with strong purchases by national
providers.
Invacare Supply Group
(ISG)
ISG net
sales for the quarter increased 5.5% to $67,604,000 compared to $64,068,000 last
year driven by growth in home delivery program sales, increased volumes with
larger providers, and growth in urological, incontinence and infusion product
lines. For the first nine months of 2008, net sales increased 4.7% to
$197,383,000 as compared to $188,440,000 for the same period a year
ago.
Institutional Products Group
(IPG)
IPG net
sales increased by 30.7% to $26,320,000 compared to $20,144,000 last
year. Foreign currency translation increased net sales by less than
one percentage point. The net sales increase was driven by new products
introduced late last year including beds, therapeutic support surfaces and
clinical recliners along with strong sales in durable medical equipment (DME)
and bathing products. For the first nine months of 2008, net sales
increased 14.8% to $74,794,000 as compared to $65,133,000 for the same period a
year ago. Foreign currency translation increased net sales by two
percentage points for the first nine months of 2008.
Europe
European
net sales increased 14.2% for the quarter to $151,478,000 as compared to
$132,665,000 for the same period a year ago. Foreign currency translation
increased net sales by eleven percentage points for the quarter. Net
sales performance continues to be strong in most regions, especially the United
Kingdom as a result of new product introductions including
HomeFill®. However, business performance in Germany continues to be
negatively impacted by reimbursement and pricing pressures in the market
place. European net sales for the first nine months of 2008 increased
18.0% to $423,458,000 as compared to $358,908,000 for the same period a year
ago. Foreign currency translation increased net sales by twelve
percentage points in the first nine months of 2008.
Asia/Pacific
Asia/Pacific
net sales increased 11.7% for the quarter to $25,216,000 as compared to
$22,565,000 for the same period a year ago with foreign currency
decreasing net sales by one percentage point. The net sales
improvement was the result of volume increases in the company’s distribution
business in Australia and at the company’s subsidiary which manufactures
microprocessor controllers. For the first nine months of the year, net sales
increased 13.0% to $75,469,000 as compared to $66,769,000 for the same period a
year ago with foreign currency translation increasing net sales by seven
percentage points.
GROSS
PROFIT
Gross
profit as a percentage of net sales for the three and nine-month periods ended
September 30, 2008 was 28.4% and 27.8%, respectively, compared to 28.3% and
27.6%, respectively, in the same periods last year. Gross margin as
a percentage of net sales for the third quarter was higher by .1 percentage
points compared to last year’s third quarter primarily due to increased volumes,
price increases and cost reduction activities which were largely offset by
increased commodity costs as well as unfavorable product mix in
Europe.
For the
first nine months of the year, NA/HME gross margin as a percentage of net sales
increased to 30.4% compared with 29.9% in the same period last year, primarily
due to increased volumes, price increases and cost reduction initiatives
partially offset by commodity cost increases and discounts associated with
higher sales to national providers in respiratory products. ISG gross
margin decreased by 1.2 percentage points due to higher freight costs, discounts
associated with sales to larger providers and charges related to inventory
markdowns which were partially offset by freight recovery
programs. IPG gross margin increased by .8 of a percentage point
primarily due to price increases. In Europe, gross margin as a
percentage of net sales declined by 1.7 percentage points primarily due to
higher freight costs, unfavorable product mix toward lower margin products, and
unfavorable foreign currency impact from the weakness of the British Pound as
compared to the Euro. Gross margin as a percentage of net sales in
Asia/Pacific increased by 7.6 percentage points, largely due to cost reduction
activities and increased volumes.
SELLING, GENERAL AND
ADMINISTRATIVE
Selling,
general and administrative (“SG&A”) expense as a percentage of net sales for
the three and nine months ended September 30, 2008 was 23.0% and 23.3%,
respectively, compared to 22.7% and 23.3%, respectively, for the same periods a
year ago. The dollar increases were $13,645,000 and $34,243,000, or
14.7% and 12.5%, respectively, for the quarter and first nine months of the
year, as compared to the same periods a year ago. Acquisitions
increased these expenses by $925,000 in the quarter and $2,276,000 in the first
nine months of the year, while foreign currency translation increased these
expenses by $3,975,000 in the quarter and $14,389,000 in the first nine months
of the year compared to the same periods a year ago. Excluding the
impact of foreign currency translation and acquisitions, SG&A expense
increased 9.5% for the quarter and 6.4% for the first nine months of 2008 as
compared to the same periods a year ago. The increase in SG&A
expense is primarily attributable to increased variable costs attributed with
increased sales volume, including wages, commissions, bonus and bad
debt.
North
American/HME SG&A cost increased $6,325,000, or 13.5%, for the quarter and
$13,203,000, or 9.5%, in the first nine months of 2008 compared to the same
periods a year ago. For the quarter, foreign currency translation
increased SG&A by $22,000 or .0% while acquisitions increased SG&A by
$925,000 or 2.0%. For the first nine months of 2008, foreign currency
translation increased SG&A by $969,000 or .7% while acquisitions increased
SG&A by $2,276,000 or 1.6%. Excluding the impact of foreign
currency translation and acquisitions, SG&A increased by 11.4% for the
quarter and 7.2% year to date.
Invacare
Supply Group SG&A expense increased $402,000, or 6.4%, for the quarter and
increased by $847,000, or 4.5%, in the first nine months of 2008 compared to the
same periods a year ago. The year to date increase is primarily due
to higher distribution costs associated with increased sales
volumes.
Institutional
Products Group SG&A expense increased $187,000, or 5.1%, for the quarter and
$221,000, or 1.9%, in the first nine months of 2008 compared to the same periods
a year ago. Foreign currency translation decreased SG&A by $6,000
or .2% for the quarter and increased SG&A $130,000 or 1.1% for the first
nine months of the year.
European
SG&A cost increased $5,409,000, or 18.4%, for the quarter and $15,357,000,
or 17.7%, for the first nine months of 2008 compared to the same periods a year
ago. For the quarter, foreign currency translation increased SG&A
by $3,894,000, or 13.2%. For the first nine months of 2008, foreign
currency translation increased SG&A by $11,616,000, or 13.4%,
respectively. Excluding the impact of foreign currency translation,
the year-to-date increase in expense is primarily due to higher sales and
marketing costs for people and programs to drive future sales
growth.
Asia/Pacific
SG&A cost increased $1,322,000, or 21.7%, for the quarter and $4,615,000, or
26.4%, in the first nine months of the year compared to the same periods a year
ago. For the quarter, foreign currency translation increased SG&A
expense by $65,000, or 1.1%. For the first nine months of 2008,
foreign currency translation increased SG&A by $1,674,000, or
9.6%. Excluding the impact of foreign currency translation, SG&A
expense increased 20.6% and 16.8% for the quarter and first nine months of 2008,
respectively as compared to last year due to higher sales and marketing costs
for people and programs to drive future sales growth.
CHARGE RELATED TO
RESTRUCTURING ACTIVITIES
Previously,
the company announced multi-year cost reductions and profit improvement actions,
which included: reducing global headcount, outsourcing improvements utilizing
the company’s China manufacturing capability and third parties, shifting
substantial resources from product development to manufacturing cost reduction
activities and product rationalization, reducing freight exposure through
freight auctions and changing the freight policy, general expense reductions and
exiting manufacturing and distribution facilities.
The
restructuring was necessitated by the continued decline in reimbursement,
continued pricing pressures faced by the company as a result of outsourcing by
competitors to lower cost locations and commodity cost increases for steel,
aluminum and fuel.
Restructuring
charges of $3,322,000 were incurred in the first nine months of 2008, of which
$1,669,000 are recorded as “cost of products sold” as it relates to inventory
markdowns and the remaining charge amount of $1,653,000 is reflected as “charge
related to restructuring activities” in the Condensed Consolidated Statement of
Operations included in Item 1 – Financial Statements of this
report.
The
restructuring charges included $100,000 in NA/HME, $1,598,000 in ISG, $115,000
in IPG, $996,000 in Europe and $513,000 in Asia/Pacific. Of the total
charges incurred to date, $2,115,000 remained unpaid as of September 30, 2008
with $403,000 unpaid related to NA/HME; and $1,598,000 unpaid related to ISG;
and $114,000 unpaid related to Europe. There have been no material
changes in accrued balances related to the charge, either as a result of
revisions in the plan or changes in estimates, and the company expects to
utilize the accruals recorded through September 30, 2008 during
2008. With additional actions to be undertaken during the remainder
of 2008, the company anticipates recognizing pre-tax restructuring charges of
approximately $5,500,000 for the year.
CHARGES, INTEREST AND FEES
ASSOCIATED WITH DEBT REFINANCING
As a
result of the company’s refinancing completed in the first quarter of 2007, the
company incurred in the quarter ended March 31, 2007 one-time make whole
payments to the holders of previously outstanding senior notes and incremental
interest totaling $10,900,000 and wrote-off previously capitalized costs of
$2,500,000 related to the old debt structure.
INTEREST
Interest
expense decreased $1,778,000 and $4,195,000 for the third quarter and first nine
months of 2008, respectively, compared to the same periods last year due to
lower debt levels. Interest income for the third quarter and first
nine months of 2008 increased $201,000 and $794,000, respectively, compared to
the same periods last year, primarily due to interest on higher average foreign
cash balances.
INCOME
TAXES
The
company had an effective tax rate of 25.2% and 32.8% on earnings before tax
compared to an expected rate at the U.S. statutory rate of 35% for the three and
nine month periods ended September 30, 2008. For the three and nine
month periods ended September 30, 2007, the company had an effective
rate of (28.8%) and 101.4% compared to an expected U.S. statutory rate for the
quarter and benefit for the nine month period of 35%. The company's
effective tax rate for the three and nine months ended September 30, 2008 was
lower than the U.S. federal statutory rate due to foreign taxes at rates lower
than the U.S. statutory rate. In addition, the company did not
recognize tax benefits in countries which had tax valuation
allowances. The company's effective tax rate for the three and nine
months ended September 30, 2007 were less and greater than the U.S. statutory
tax rate, respectively due to three main items: a benefit recorded in
the third quarter of 2007 of $6,300,000 principally related to a tax rate change
in Germany resulting in the reduction of deferred tax liabilities, the benefit
of foreign taxes at rates lower than the U.S. statutory rate and the negative
impact of not recognizing tax benefits in countries which had valuation
allowances.
LIQUIDITY AND CAPITAL
RESOURCES
The
company’s reported level of debt decreased by $29,674,000 from December 31, 2007
to $508,178,000 at September 30, 2008, as a result of positive cash flow in the
third quarter and increased earnings. As compared to June 30, 2008,
reported debt decreased by $18,015,000. The
debt-to-total-capitalization ratio was 47.6% at September 30, 2008 as compared
to 46.6% at June 30, 2008. The increase in debt-to-total-capitalization
ratio was due to lower shareholders’ equity resulting from foreign currency
translation, particularly for the European segment, as the U.S. Dollar
strengthened at the end of the third quarter.
The
company’s cash and cash equivalents were $37,380,000 at September 30, 2008, down
from $62,200,000 at the end of the year. The cash was primarily
utilized to pay annual bonus payments, required interest payments on debt
outstanding and additional payments to reduce the company’s debt
outstanding.
The
company’s borrowing arrangements contain covenants with respect to maximum
amount of debt, minimum loan commitments, interest coverage, net worth, dividend
payments, working capital, and funded debt to capitalization, as defined in the
company’s bank agreements and agreements with its note holders. As of
September 30, 2008, the company was in compliance with all covenant
requirements. Under the most restrictive covenant of the company’s
borrowing arrangements as of September 30, 2008, the company had the capacity to
borrow up to an additional $123,400,000.
CAPITAL
EXPENDITURES
The
company had no individually material capital expenditure commitments outstanding
as of September 30, 2008. The company estimates that capital investments for
2008 will approximate up to $22,000,000 as compared to $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 to fund required capital expenditures for the foreseeable
future. However, if the current credit crisis and economic downturn
were to continue to worsen such that the company was unable to access existing
borrowing facilities or that funds generated from operations were significantly
curtailed, it could impair the company’s ability to fund capital expenditures or
meet its operating cash requirements.
CASH
FLOWS
Cash
flows provided by operating activities were $15,634,000 for the first nine
months of 2008 compared to $30,412,000 in the first nine months of
2007. The decrease in operating cash flows for the first nine months
of 2008 compared to the same period a year ago was principally due to an
increase in accounts receivable due to higher sales levels and an inventory
increase driven by the need to support stronger than expected organic sales
growth. In addition, the third quarter of 2007 also benefitted from a
greater reduction in recoverable income taxes compared to the third quarter of
2008.
Cash used
for investing activities was $11,283,000 for the first nine months of 2008
compared to $12,997,000 used in the first nine months of 2007. The
cash used for investing activities in 2008 was primarily for purchases of
property, plant and equipment and an acquisition partially offset by cash
receipts on company-owned life insurance policies.
Cash used
by financing activities was $28,759,000 for the first nine months of 2008
compared to cash required of $38,574,000 in the first nine months of
2007. The first nine months of 2007 financing cash flow included
$20,615,000 of financing cost payments as a result of the company refinancing
which was completed in the first quarter of 2007.
During
the first nine months of 2008, the company generated free cash flow of
$3,394,000 as compared to $28,125,000 generated by the company in the first nine
months of 2007. The decrease was primarily attributable to the same
items as noted above which impacted operating cash flows. Free cash
flow is a non-GAAP financial measure that is comprised of net cash provided by
operating activities, excluding net cash impact related to restructuring
activities, less net purchases of property and equipment, net of proceeds from
sales of property and equipment. Management believes that this
financial measure provides meaningful information for evaluating the overall
financial performance of the company and its ability to repay debt or make
future investments (including, for example, acquisitions). However,
it should be noted that the company’s definition of free cash flow may not be
comparable to similar measures disclosed by other companies because not all
companies calculate free cash flow in the same manner.
The
non-GAAP financial measure is reconciled to the GAAP measure as follows (in
thousands):
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
|
Net
cash impact related to restructuring activities
|
|
|
2,709
|
|
|
|
10,951
|
|
Less: Purchases
of property and equipment - net
|
|
|
|
|
|
|
|
|
Free
Cash Flow
|
|
$
|
3,394
|
|
|
$
|
28,125
|
|
DIVIDEND
POLICY
On August
20, 2008, the company’s Board of Directors declared a quarterly cash dividend of
$0.0125 per Common Share to shareholders of record as of October 3, 2008, which
was paid on October 10, 2008. At the current rate, the cash dividend
will amount to $0.05 per Common Share on an annual basis.
CRITICAL ACCOUNTING
POLICIES
The
Consolidated Financial Statements included in this Quarterly Report on Form 10-Q
include accounts of the company, all majority-owned subsidiaries and a variable
interest entity for which the company was the primary beneficiary in 2007. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying Consolidated Financial Statements and related footnotes. In
preparing the financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
The
following critical accounting policies, among others, affect the more
significant judgments and estimates used in preparation of the company’s
consolidated financial statements.
Revenue
Recognition
Invacare’s
revenues are recognized when products are shipped to unaffiliated customers. The
SEC’s Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition,” as
updated by SAB No. 104, provides guidance on the application of
generally accepted accounting principles (GAAP) to selected revenue
recognition issues. The company has concluded that its revenue recognition
policy is appropriate and in accordance with GAAP and
SAB No. 101. Shipping and handling costs are included in
cost of goods sold.
Sales are
made only 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. In December 2000, the
company entered into an agreement with DLL, a third party financing company, to
provide the majority of future lease financing to Invacare customers. As such,
interest income is recognized based on the terms of the installment agreements.
Installment accounts are monitored and if a customer defaults on payments,
interest income is no longer recognized. All installment accounts are accounted
for using the same methodology, regardless of duration of the installment
agreements.
Allowance for Uncollectible
Accounts Receivable
Accounts
receivable are reduced by an allowance for amounts that may become uncollectible
in the future. Substantially all of the company’s receivables are due from
health care, medical equipment dealers and long term care facilities located
throughout the United States, Australia, Canada, New Zealand and Europe. A
significant portion of products sold to dealers, both foreign and domestic, is
ultimately funded through government reimbursement programs such as Medicare and
Medicaid. As a consequence, changes in these programs can have an adverse impact
on dealer liquidity and profitability. The estimated allowance for uncollectible
amounts is based primarily on management’s evaluation of the financial condition
of the customer. In addition, as a result of the third party financing
arrangement, 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.
The
company continues to closely monitor the credit-worthiness of its customers and
adhere to tight credit policies. Due to delays in the implementation
of various government reimbursement policies, including national competitive
bidding, there still remains significant uncertainty 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, Invacare 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 company may partially or fully reserve for the
individual item. The company continues to increase its overseas sourcing
efforts, increase its emphasis on the development and introduction of new
products, and decrease the cycle time to bring new product offerings to market.
These initiatives are sources of inventory obsolescence for both raw material
and finished goods.
Goodwill, Intangible and
Other Long-Lived Assets
Property,
equipment, intangibles and certain other long-lived assets are amortized over
their useful lives. Useful lives are based on management’s estimates of the
period that the assets will generate revenue. Under SFAS No. 142,
Goodwill and Other Intangible
Assets, goodwill and intangible assets deemed to have indefinite lives
are subject to annual impairment tests. Furthermore, goodwill and other
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The company completes its annual impairment tests in the fourth
quarter of each year. 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. 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 Warranty Costs in the Notes to the Condensed
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 since the adoption of SFAS 123R have been modified, as compared to the
terms of the awards granted prior to the adoption of SFAS 123R, 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 September 30, 2008,
there was $13,461,000 of total unrecognized compensation cost from stock-based
compensation arrangements granted under the company’s plans, which is related to
non-vested shares, and includes $4,920,000 related to restricted stock
awards. The company expects the compensation expense to be recognized
over approximately four 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 its estimates, the
company’s provision for income taxes could be materially impacted.
The
company does not believe that there is a substantial likelihood that materially
different amounts would be reported related to its critical accounting
policies.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
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. The company adopted the new standard as of January 1, 2008
and the adoption had no material impact on the company’s financial position,
results of operations or cash flows.
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.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (SFAS 161). SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for the company beginning January 1, 2009 and
the company is currently evaluating the effect that adoption will have on its
2009 financial statements.
On April
25, 2008, the FASB issued FASB Staff Position FAS 142-3 (FSP FAS 142-3), Determination of the Useful Life of
Intangible Assets, to amend the factors that should be considered in
developing renewal and extension assumptions used to determine the useful life
of a recognized intangible asset under FASB Statement No. 142 (FAS 142), Goodwill and Other Intangible
Assets. FSP FAS 142-3 is intended to improve the consistency
between the useful life of a recognizable intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
Statement No. 141, Business
Combinations. FSP FAS 142-3 is effective for the company
beginning January 1, 2009 and the company is currently evaluating the effect
that adoption will have on its 2009 financial statements.
On May 9,
2008, the FASB issued FASB Staff Position APB 14-1 (FSP APB 14-1) to provide
clarification of the accounting for convertible debt that can be settled in cash
upon conversion. The FASB believed this clarification was needed
because the 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 FSP requires 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
will have to bifurcate a component of its convertible debt as a component of
stockholders’ equity and accrete the resulting debt discount as interest
expense. It is currently estimated that the adoption FSP APB 14-1
will increase reported interest expense and decrease net earnings by $2,904,000
and $3,695,000 for 2007 and 2008, respectively. The effective date is
January 1, 2009 with required historical application for all periods presented
and no grandfathering for existing instruments.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The company uses
interest swap agreements to mitigate its exposure to interest rate fluctuations.
Based on September 30, 2008 debt levels, a 1% change in interest rates would
impact interest expense by approximately $326,000. Additionally, the company
operates internationally and, as a result, is exposed to foreign currency
fluctuations. Specifically, the exposure results from intercompany loans and
third party sales or payments. In an attempt to reduce this exposure, foreign
currency forward contracts are utilized. The company does not believe that any
potential loss related to these financial instruments would have a material
adverse effect on the company’s financial condition or results of
operations.
FORWARD-LOOKING
STATEMENTS
This Form 10-Q contains forward-looking statements
within the meaning of the “Safe Harbor” provisions of the Private
Securities Litigation Reform Act of 1995. Terms such as “will,” “should,”
“plan,” “intend,” “expect,” “continue,” “forecast”, “believe,” “anticipate” and
“seek,” as well as similar comments, are forward-looking in nature. Actual
results and events may differ significantly from those expressed or anticipated
as a result of risks and uncertainties which include, but are not limited to,
the following: possible adverse effects of being substantially leveraged, which
could impact our ability to raise capital, limit our ability to react to changes
in the economy or our industry or expose us to interest rate or event of default
risks; changes in government and other third-party payor reimbursement levels
and practices, including the Medicare Improvements for Patients and Providers
Act of 2008; 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; the uncertain
impact on our providers, suppliers and on the demand for our products of the
recent economic downturn and general volatility in the credit and stock markets;
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; possible adverse effects of the global credit crisis, 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.
|
Quantitative and Qualitative
Disclosures About Market
Risk.
|
The
information called for by this item is provided under the same caption under
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
As of
September 30, 2008, 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 September 30, 2008, in ensuring that information required to be
disclosed by the company in the reports it files and submits under the Exchange
Act is (1) recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms and (2) accumulated
and communicated to the company’s management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate to allow for timely
decisions regarding required disclosure. There were no changes in the
company’s internal control over financial reporting that occurred during the
company’s most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the company’s internal control over
financial reporting.
In
addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed in Item 1A of the company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2007. The
information presented below updates, and should be read in conjunction with, the
risk factors and information disclosed in the company’s Annual Report on Form
10-K.
As is the
case for many companies operating in the current economic environment, the
company is exposed to a number of risks arising out of the global credit
crisis. These risks include the possibility that: one or more of the
lenders participating in the company’s revolving credit facility may be unable
or unwilling to extend credit to the company; the third party company that
provides lease financing to the company’s customers may refuse or be unable to
fulfill its financing obligations or extend credit to the company’s customers;
one or more customers of the company may be unable to pay for purchases of the
company’s products on a timely basis; one or more key suppliers may be unable or
unwilling to provide critical goods or services to the company; and one or more
of the counterparties to the company’s hedging arrangements may be unable to
fulfill its obligations to the company. Although the company has
taken actions in an effort to mitigate these risks, during periods of economic
downturn, the company’s exposure to these risks increases. Events of
this nature may adversely affect the company’s liquidity or sales and revenues,
and therefore have an adverse effect on the company’s business and results of
operations.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds.
|
(c)
|
The
following table presents information with respect to repurchases of common
shares made by the company during the three months ended September 30,
2008. In the quarter ended September 30, 2008, no shares were repurchased
and 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
|
|
7/1/2008-7/31/08
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
8/1/2008-8/31/08
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
9/1/2008-9/30/08
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
On August
17, 2001, the Board of Directors authorized the company to purchase up to
2,000,000 Common Shares. To date, the company has purchased
637,100 shares with authorization remaining to purchase 1,362,900 more
shares. The company purchased no shares pursuant to this Board
authorized program during the first nine months of 2008.
Exhibit
No.
|
|
|
|
31.1
|
|
Chief
Executive Officer Rule 13a-14(a)/15d-14(a) Certification (filed
herewith).
|
|
|
|
Chief
Financial Officer Rule 13a-14(a)/15d-14(a) Certification
(filed herewith).
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
|
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
INVACARE
CORPORATION
|
|
|
|
|
|
Date:
November 6, 2008
|
By:
|
/s/ Robert K. Gudbranson
|
|
|
|
Name:
Robert K. Gudbranson
|
|
|
|
Title:
Chief Financial Officer
|
|
|
|
(As
Principal Financial and Accounting Officer and on behalf of the
registrant)
|
|