q10910q.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 March 31, 2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files) Yes
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 May
4, 2009, the registrant had 31,025,638 Common Shares and 1,109,685 Class B
Common Shares outstanding.
INVACARE
CORPORATION
|
FINANCIAL
INFORMATION
|
|
Financial
Statements.
|
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
March
31, 2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
(In
thousands)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
4,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
1,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
538,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
58,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
136,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,287,876
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
123,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
income taxes
|
|
|
1,097
|
|
|
|
|
|
Short-term
debt and current maturities of long-term obligations
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
289,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
379,441
|
|
|
|
|
|
OTHER
LONG-TERM OBLIGATIONS
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
8,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
216,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive earnings
|
|
|
44,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
529,388
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
Three
Months Ended
March
31,
|
|
(In
thousands except per share data)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
|
|
|
|
|
|
Charge
related to restructuring activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(441
|
)
|
|
|
(698
|
)
|
Earnings
before income taxes
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
DECLARED PER COMMON SHARE
|
|
|
.0125
|
|
|
|
.0125
|
|
Net
earnings per share – basic
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
31,931
|
|
|
|
31,875
|
|
Net
earnings per share – assuming dilution
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - assuming dilution
|
|
|
31,933
|
|
|
|
31,995
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
OPERATING
ACTIVITIES
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net
cash used by operating activities:
|
|
|
|
|
|
|
|
|
Amortization
of convertible debt discount
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,728
|
|
|
|
11,008
|
|
Provision
for losses on trade and installment receivables
|
|
|
|
|
|
|
|
|
Provision
for other deferred liabilities
|
|
|
702
|
|
|
|
750
|
|
Benefit
for deferred income taxes
|
|
|
|
|
|
|
|
|
Provision
for stock-based compensation
|
|
|
|
|
|
|
|
|
Loss
on disposals of property and equipment
|
|
|
203
|
|
|
|
111
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(1,564
|
)
|
|
|
(11,797
|
)
|
Installment
sales contracts, net
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(4,612
|
)
|
|
|
(10,030
|
)
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
3,952
|
|
|
|
9,962
|
|
|
|
|
|
|
|
|
|
|
Other
deferred liabilities
|
|
|
(205
|
)
|
|
|
(1,550
|
)
|
NET
CASH USED BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,171
|
)
|
|
|
(6,539
|
)
|
Proceeds
from sale of property and equipment
|
|
|
|
|
|
|
|
|
Other
long term assets
|
|
|
(162
|
)
|
|
|
4,588
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED FOR INVESTING ACTIVITIES
|
|
|
(3,361
|
)
|
|
|
(2,254
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from revolving lines of credit and long-term
borrowings
|
|
|
|
|
|
|
|
|
Payments
on revolving lines of credit and long-term debt and capital lease
obligations
|
|
|
(108,678
|
)
|
|
|
(96,571
|
)
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
|
|
|
(12,835
|
)
|
|
|
913
|
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(18,889
|
)
|
|
|
(19,175
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
28,627
|
|
|
$
|
43,025
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
Financial
Statements
(Unaudited)
March 31,
2009
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
and its wholly owned subsidiaries and includes all adjustments, which were of a
normal recurring nature, necessary to present fairly the financial position of
the company as March 31, 2009, the results of its operations for the three
months ended March 31, 2009 and 2008, respectively, and changes in its cash
flows for the three months ended March 31, 2009 and 2008,
respectively. Certain foreign subsidiaries, represented by the
European segment, are consolidated using a February 28 quarter end in order to
meet filing deadlines. No material subsequent events have occurred related to
the European segment, which would require disclosure or adjustment to the
company’s financial statements. The results of operations for the three months
ended March 31, 2009 are not necessarily indicative of the results to be
expected for the full year. All significant intercompany transactions are
eliminated.
Adoption of new Accounting
Standard - 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. FSP APB 14-1 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. Accordingly, the
company had to bifurcate a component of its convertible debt as a component of
stockholders’ equity ($59,012,000 as of retrospective adoption date of February
12, 2007) and will accrete the resulting debt discount as interest
expense. The company adopted FSP APB 14-1 effective January 1, 2009
and, as a result, reported interest expense increased and net earnings decreased
by $992,000 ($0.03 per share) and $884,000 ($0.03 per share) for the quarters
ended March 31, 2009 and 2008, respectively and by $3,695,000 ($0.12 per share)
and $2,904,000 ($0.09 per share) for the years 2008 and 2007,
respectively. The cumulative effect on retained earnings as of
January 1, 2008, as a result of the adoption of FSP APB 14-1, was a reduction of
$2,904,000. FSP APB 14-1 required retrospective application upon
adoption and accordingly, amounts for 2008 and 2007 will be restated in the 2009
financial statements. Certain reclassifications have been made to the prior
years’ consolidated financial statements to conform to the presentation used for
the period ended March 31, 2009 as the adoption of FSP APB 14-1 required the
company to restate debt, equity and earnings as a result of the reclassification
of convertible debt to equity and associated amortization of the convertible
debt discount which is reflected in interest expense.
Reclassifications - Certain
segment reclassifications have been made to the prior years’ consolidated
financial statements to conform to the presentation used for the period ended
March 31, 2009 as management changed how it views segment earnings.
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 sells each of three primary product lines, which includes:
standard, rehab and respiratory products. Invacare Supply Group sells
distributed product and the Institutional Products Group sells health care
furnishings and accessory products. Europe and Asia/Pacific sell the same
product lines with the exception of distributed products. Each business segment
sells to the home health care, retail and extended care
markets.
Invacare
distributes numerous lines of branded medical supplies including ostomy,
incontinence, diabetic, interals, wound care and urology products as wells as
home medical equipment, including aids for daily living. Invacare Supply Group
(ISG) also sells through the retail market.
Invacare,
operating as Institutional Products Group (IPG), 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
company’s Asia/Pacific operations consist of Invacare Australia, which
distributes the Invacare range of products which includes: manual and power
wheelchairs, lifts, ramps, beds, furniture and pressure care products; Dynamic
Controls, a 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.
The
company’s European operations operate as a “common market” company with sales
throughout Europe. The European operations currently sell a line of products
providing room for growth as Invacare continues to broaden its product line
offerings to more closely resemble those of its North American
operations.
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.
Earnings
(loss) before income tax amounts for 2008 have been restated to reflect the
amortization of the convertible debt discount recorded as a result of the
company’s adoption of FSP APB 14-1. As a result of the restatement,
earnings before income taxes decreased by $884,000 for NA/HME and the
consolidated company for the first quarter of 2008. In addition, effective
January 1, 2009, segment earnings before income taxes have been changed to
reflect how management currently views earnings before income taxes for the
segments. Specifically, Asia/Pacific earnings before income taxes now
includes profit on intercompany sales with an offsetting adjustment to All Other
and NA/HME now includes a greater allocation of interest expense with an
offsetting reduction for Europe. The prior year has been reclassified
to conform to the current year presentation. The information by segment is
as follows (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invacare
Supply Group
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
14,230
|
|
|
$
|
13,077
|
|
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
871
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
Asia/Pacific
|
|
|
8,335
|
|
|
|
8,191
|
|
|
|
|
|
|
|
|
|
|
Charge
related to restructuring before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invacare
Supply Group
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
|
|
|
|
|
|
Earnings
(loss) before income taxes
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
4,719
|
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
2,482
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
Asia/Pacific
|
|
|
275
|
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
|
|
|
|
|
|
|
|
|
“All
Other” consists of un-allocated corporate selling, general and
administrative costs, which do not meet the quantitative criteria for
determining
reportable segments.
|
Net Earnings Per Common Share
- The following table sets forth the computation of basic and diluted net
earnings per common share for the periods indicated (amounts in thousands,
except per share amounts).
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Basic
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
31,931
|
|
|
|
31,875
|
|
|
|
|
|
|
|
|
|
|
Average
common shares assuming dilution
|
|
|
31,933
|
|
|
|
31,995
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
2,397
|
|
|
$
|
2,209
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share
|
|
$
|
.08
|
|
|
$
|
.07
|
|
At March
31, 2009, 4,498,538 shares associated with stock options were excluded from the
average common shares assuming dilution for the three months ended March 31,
2009 as they were anti-dilutive. For the three months ended March
31, 2009, the majority of the anti-dilutive shares were granted at exercise
prices of $25.79 which was higher than the average fair market value prices of
$16.56. At March 31, 2008, 2,948,133 shares associated with
stock options were excluded from the average common shares assuming dilution for
the three months ended March 31, 2008 as they were anti-dilutive.
For the three months ended March 31, 2008, 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 $23.75.
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 $35,424,000 at March 31, 2009 to DLL for
events of default under the contracts, which total $99,819,000 at March 31,
2009. 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 a recorded a liability of $831,000 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,
2008 to March 31, 2009 was entirely the result of foreign currency
translation.
All of
the company’s other intangible assets have definite lives and are amortized over
their useful lives, except for $30,476,000 related to trademarks, which have
indefinite lives.
As of
March 31, 2009 and December 31, 2008, other intangibles consisted of the
following (in thousands):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
30,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
|
6,692
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
8,857
|
|
|
|
6,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to other intangibles was $2,048,000 in the first three months of
2009 and is estimated to be $8,459,000 in 2010, $8,080,000 in 2011, $7,324,000
in 2012, $6,601,000 in 2013 and $6,000,000 in 2014.
Accounting for Stock-Based
Compensation - The company accounts for share based compensation
under the provisions of Statement of Financial Accounting Standard No. 123
(Revised 2004), Share Based
Payment (“SFAS 123R”). The company has not made
any modifications to the terms of any previously granted options and no changes
have been made regarding the valuation methodologies or assumptions used to
determine the fair value of options granted since 2005 and the company continues
to use a Black-Scholes valuation model. The amounts of stock-based compensation
expense recognized were as follows (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense recognized as part of selling, general and
administrative expense
|
|
|
|
|
|
|
|
|
The 2009
and 2008 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 and Management
Development Committee of the Board of Directors (the “Committee”) to grant up to
3,800,000 Common Shares in connection with incentive stock options,
non-qualified stock options, stock appreciation rights and stock awards
(including the use of restricted stock). The Committee has the
authority to determine which employees and directors will receive awards, the
amount of the awards and the other terms and conditions of the
awards. During the first three months of 2009, the Committee granted
8,858 non-qualified stock options with a term of ten years at the fair market
value of the company’s Common Shares on the date of grant under the 2003
Plan.
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 $464,000 was recognized related to
restricted stock awards in the first three months of 2009 and as of March 31,
2009, outstanding restricted stock awards totaling 200,067 were not yet
vested.
Stock
option activity during the three months ended March 31, 2009 was as
follows:
|
|
2009
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstanding at January 1
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,858
|
|
|
|
18.62
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(350,131
|
)
|
|
|
24.31
|
|
Options
outstanding at March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
price range at March 31
|
|
|
|
|
|
|
|
|
|
|
$
|
47.80
|
|
|
|
|
|
Options
exercisable at March 31
|
|
|
|
|
|
|
|
|
Options
available for grant at March 31*
|
|
|
822,380
|
|
|
|
|
|
* Options
available for grant as of March 31, 2009 are reduced by net restricted stock
award activity of 287,263 shares.
The
following table summarizes information about stock options outstanding at March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
Outstanding
|
|
|
Average
Remaining
|
|
|
Weighted
Average
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
|
|
Exercise
Prices
|
|
|
At
3/31/09
|
|
|
Contractual
Life
|
|
|
Exercise
Price
|
|
|
At
3/31/09
|
|
|
Exercise
Price
|
|
$
|
10.70
- $16.03
|
|
|
|
32,822
|
|
|
|
2.6
years
|
|
|
$
|
12.23
|
|
|
|
8,680
|
|
|
$
|
16.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25.13
- $36.40
|
|
|
|
1,653,884
|
|
|
|
5.2
|
|
|
$
|
29.03
|
|
|
|
1,028,562
|
|
|
$
|
30.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
4,569,274
|
|
|
|
5.0
|
|
|
$
|
29.71
|
|
|
|
3,371,390
|
|
|
$
|
31.68
|
|
When stock options are awarded, they
generally 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 assumptions for expected dividend yield, expected stock price
volatility, risk-free interest rate and expected life. 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 2003
Plan provides that shares granted come from the company’s authorized but
unissued Common Shares or treasury shares. In addition, the company’s
stock-based compensation plans allow participants to exchange shares for
withholding taxes, which results in the company acquiring treasury
shares.
As of
March 31, 2009, there was $11,357,000 of total unrecognized compensation cost
from stock-based compensation arrangements granted under the company’s plans,
which is related to non-vested options and shares, and includes $3,936,000
related to restricted stock awards. The company expects the
compensation expense to be recognized over approximately four
years.
Warranty Costs - Generally,
the company’s products are covered by warranties against defects in material and
workmanship for various periods depending on the product from the date of sale
to the customer. Certain components carry a lifetime warranty. A provision for
estimated warranty cost is recorded at the time of sale based upon actual
experience. The company continuously assesses the adequacy of its product
warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company’s warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty
reserves based on other events were necessary in the first three months of
2009.
The
following is a reconciliation of the changes in accrued warranty costs for the
reporting period (in thousands):
Balance
as of January 1, 2009
|
|
|
|
|
Warranties
provided during the period
|
|
|
3,306
|
|
Settlements
made during the period
|
|
|
|
|
Changes
in liability for pre-existing warranties during the period, including
expirations
|
|
|
881
|
|
Balance
as of March 31, 2009
|
|
|
|
|
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 four facilities. The restructuring
was necessitated by the continued decline in reimbursement by the
U.S. government as well as similar reimbursement pressures abroad and
continued pricing pressures faced by the company as a result of outsourcing by
competitors to lower cost locations.
To date,
the company has made substantial progress on its restructuring activities,
including exiting manufacturing and distribution facilities and eliminating
positions, which resulted in restructuring charges of $776,000 and $522,000
incurred in the first three months of 2009 and 2008, respectively, of which $0
and $11,000, 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 March 31, 2009 during 2009.
A
progression of the accruals by segment recorded as a result of the restructuring
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Product
Line
Discontinuance
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
January
1, 2006 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
$
|
2,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,130
|
|
ISG
|
|
|
112
|
|
|
|
—
|
|
|
|
165
|
|
|
|
—
|
|
|
|
277
|
|
Europe
|
|
|
799
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
799
|
|
Asia/Pacific
|
|
|
63
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63
|
|
Total
|
|
$
|
3,104
|
|
|
$
|
—
|
|
|
$
|
165
|
|
|
$
|
—
|
|
|
$
|
3,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
5,549
|
|
|
|
2,719
|
|
|
|
1,346
|
|
|
|
—
|
|
|
|
9,614
|
|
ISG
|
|
|
457
|
|
|
|
552
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,009
|
|
IPG
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
Europe
|
|
|
5,208
|
|
|
|
455
|
|
|
|
—
|
|
|
|
2,995
|
|
|
|
8,658
|
|
Asia/Pacific
|
|
|
621
|
|
|
|
557
|
|
|
|
745
|
|
|
|
8
|
|
|
|
1,931
|
|
Total
|
|
$
|
11,873
|
|
|
$
|
4,283
|
|
|
$
|
2,091
|
|
|
$
|
3,003
|
|
|
$
|
21,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(6,320
|
)
|
|
|
(682
|
)
|
|
|
(789
|
)
|
|
|
—
|
|
|
|
(7,791
|
)
|
ISG
|
|
|
(403
|
)
|
|
|
(552
|
)
|
|
|
(165
|
)
|
|
|
—
|
|
|
|
(1,120
|
)
|
IPG
|
|
|
(38
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(38
|
)
|
Europe
|
|
|
(2,273
|
)
|
|
|
(455
|
)
|
|
|
—
|
|
|
|
(2,995
|
)
|
|
|
(5,723
|
)
|
Asia/Pacific
|
|
|
(684
|
)
|
|
|
(557
|
)
|
|
|
(623
|
)
|
|
|
(8
|
)
|
|
|
(1,872
|
)
|
Total
|
|
$
|
(9,718
|
)
|
|
$
|
(2,246
|
)
|
|
$
|
(1,577
|
)
|
|
$
|
(3,003
|
)
|
|
$
|
(16,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Product
Line
Discontinuance
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
December 31,
2006 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
1,359
|
|
|
|
2,037
|
|
|
|
557
|
|
|
|
—
|
|
|
|
3,953
|
|
ISG
|
|
|
166
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166
|
|
Europe
|
|
|
3,734
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,734
|
|
Asia/Pacific
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
|
|
—
|
|
|
|
122
|
|
Total
|
|
$
|
5,259
|
|
|
$
|
2,037
|
|
|
$
|
679
|
|
|
$
|
—
|
|
|
$
|
7,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
3,705
|
|
|
|
178
|
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
3,864
|
|
ISG
|
|
|
67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67
|
|
IPG
|
|
|
19
|
|
|
|
—
|
|
|
|
98
|
|
|
|
55
|
|
|
|
172
|
|
Europe
|
|
|
862
|
|
|
|
386
|
|
|
|
—
|
|
|
|
3,247
|
|
|
|
4,495
|
|
Asia/Pacific
|
|
|
1,258
|
|
|
|
1,253
|
|
|
|
299
|
|
|
|
—
|
|
|
|
2,810
|
|
Total
|
|
$
|
5,911
|
|
|
$
|
1,817
|
|
|
$
|
378
|
|
|
$
|
3,302
|
|
|
$
|
11,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(4,362
|
)
|
|
|
(2,183
|
)
|
|
|
(172
|
)
|
|
|
—
|
|
|
|
(6,717
|
)
|
ISG
|
|
|
(228
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(228
|
)
|
IPG
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
(98
|
)
|
|
|
(55
|
)
|
|
|
(172
|
)
|
Europe
|
|
|
(4,591
|
)
|
|
|
(386
|
)
|
|
|
—
|
|
|
|
(3,202
|
)
|
|
|
(8,179
|
)
|
Asia/Pacific
|
|
|
(746
|
)
|
|
|
(1,253
|
)
|
|
|
(382
|
)
|
|
|
—
|
|
|
|
(2,381
|
)
|
Total
|
|
$
|
(9,946
|
)
|
|
$
|
(3,822
|
)
|
|
$
|
(652
|
)
|
|
$
|
(3,257
|
)
|
|
$
|
(17,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
702
|
|
|
|
32
|
|
|
|
366
|
|
|
|
—
|
|
|
|
1,100
|
|
ISG
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
Europe
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
50
|
|
Asia/Pacific
|
|
|
512
|
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
|
|
551
|
|
Total
|
|
$
|
1,224
|
|
|
$
|
32
|
|
|
$
|
405
|
|
|
$
|
45
|
|
|
$
|
1,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
217
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
202
|
|
ISG
|
|
|
—
|
|
|
|
1,598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,598
|
|
IPG
|
|
|
—
|
|
|
|
—
|
|
|
|
115
|
|
|
|
—
|
|
|
|
115
|
|
Europe
|
|
|
1,371
|
|
|
|
208
|
|
|
|
—
|
|
|
|
649
|
|
|
|
2,228
|
|
Asia/Pacific
|
|
|
522
|
|
|
|
11
|
|
|
|
90
|
|
|
|
—
|
|
|
|
623
|
|
Total
|
|
$
|
2,110
|
|
|
$
|
1,817
|
|
|
$
|
190
|
|
|
$
|
649
|
|
|
$
|
4,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(693
|
)
|
|
|
(31
|
)
|
|
|
(195
|
)
|
|
|
—
|
|
|
|
(919
|
)
|
ISG
|
|
|
(5
|
)
|
|
|
(1,598
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,603
|
)
|
IPG
|
|
|
—
|
|
|
|
—
|
|
|
|
(115
|
)
|
|
|
—
|
|
|
|
(115
|
)
|
Europe
|
|
|
(829
|
)
|
|
|
(208
|
)
|
|
|
—
|
|
|
|
(574
|
)
|
|
|
(1,611
|
)
|
Asia/Pacific
|
|
|
(1,034
|
)
|
|
|
(11
|
)
|
|
|
(129
|
)
|
|
|
—
|
|
|
|
(1,174
|
)
|
Total
|
|
$
|
(2,561
|
)
|
|
$
|
(1,848
|
)
|
|
$
|
(439
|
)
|
|
$
|
(574
|
)
|
|
$
|
(5,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Product
Line
Discontinuance
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
December 31,
2008 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
226
|
|
|
|
1
|
|
|
|
156
|
|
|
|
—
|
|
|
|
383
|
|
Europe
|
|
|
547
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120
|
|
|
|
667
|
|
Total
|
|
$
|
773
|
|
|
$
|
1
|
|
|
$
|
156
|
|
|
$
|
120
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
218
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
IPG
|
|
|
171
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
171
|
|
Europe
|
|
|
134
|
|
|
|
—
|
|
|
|
—
|
|
|
|
152
|
|
|
|
286
|
|
Asia/Pacific
|
|
|
91
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
101
|
|
Total
|
|
$
|
614
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
152
|
|
|
$
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(318
|
)
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(349
|
)
|
IPG
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Europe
|
|
|
(550
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(181
|
)
|
|
|
(731
|
)
|
Asia/Pacific
|
|
|
(91
|
)
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
(101
|
)
|
Total
|
|
$
|
(969
|
)
|
|
$
|
—
|
|
|
$
|
(41
|
)
|
|
$
|
(181
|
)
|
|
$
|
(1,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
126
|
|
|
|
1
|
|
|
|
125
|
|
|
|
—
|
|
|
|
252
|
|
IPG
|
|
|
161
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
161
|
|
Europe
|
|
|
131
|
|
|
|
—
|
|
|
|
—
|
|
|
|
91
|
|
|
|
222
|
|
Total
|
|
$
|
418
|
|
|
$
|
1
|
|
|
$
|
125
|
|
|
$
|
91
|
|
|
$
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Earnings (loss)
- Total comprehensive earnings were as follows (in
thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
(8,797
|
)
|
|
|
23,611
|
|
Unrealized
gain (loss) on available for sale securities
|
|
|
|
|
|
|
|
|
SERP/DBO
amortization of prior service costs and unrecognized
losses
|
|
|
59
|
|
|
|
549
|
|
Current
period unrealized gain (loss) on cash flow hedges
|
|
|
|
|
|
|
|
|
Total
comprehensive earnings
|
|
$
|
(4,052
|
)
|
|
$
|
23,767
|
|
Inventories - Inventories determined under the
first in, first out method consist of the following components (in
thousands):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
|
64,988
|
|
|
|
64,493
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
181,498
|
|
|
$
|
178,737
|
|
Property and Equipment -
Property and equipment consist of the following (in
thousands):
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
Land,
buildings and improvements
|
|
|
87,836
|
|
|
|
90,410
|
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
|
15,568
|
|
|
|
15,720
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for depreciation
|
|
|
(297,900
|
)
|
|
|
(296,191
|
)
|
|
|
|
|
|
|
|
|
|
Acquisitions - In the first three months of
2009, the company made no acquisitions. In October 2008, Invacare
Corporation purchased a billing company operating as Homecare Collection
Services (HCS) for $6,268,000. Pursuant to the HCS purchase agreement, the
company agreed to pay contingent consideration based upon earnings before
interest, taxes and depreciation over the three years subsequent to the
acquisition up to a maximum of $3,000,000. When the contingency related to the
acquisition is settled, any additional consideration paid will increase the
respective purchase price and reported goodwill.
Derivatives - 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. The company adopted SFAS 161 effective January 1,
2009.
Financial
Accounting Standards Board (FASB) Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended (FAS 133R), requires
companies to recognize all derivative instruments in the consolidated balance
sheet as either assets or liabilities at fair value. The accounting
for changes in fair value of a derivative is dependent upon whether or not the
derivative has been designated and qualifies for hedge accounting treatment and
the type of hedging relationship. For derivatives designated and
qualifying as hedging instruments, the company must designate the hedging
instrument, based upon the exposure being hedged, as a fair value hedge, cash
flow hedge, or a hedge of a net investment in a foreign operation.
Cash Flow Hedging
Strategy
The
company uses derivative instruments in an attempt to manage its exposure to
commodity price risk, foreign currency exchange risk and interest rate
risk. Foreign exchange contracts are used to manage the price risk
associated with forecasted sales denominated in foreign currencies and the price
risk associated with forecasted purchases of inventory over the next twelve
months. Interest rate swaps are utilized to manage interest rate risk
associated with the company’s fixed and floating-rate borrowings.
The
company recognizes its derivative instruments as assets or liabilities in the
consolidated balance sheet measured at fair value. A majority of the company’s
derivative instruments are designated and qualify as cash flow hedges.
Accordingly, the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the fair value of the hedged
item, if any, is recognized in current earnings during the period of
change.
The
company is a party to interest rate swap agreements that qualify as cash flow
hedges and effectively convert floating-rate debt to fixed-rate debt, so the
company can avoid the risk of changes in market interest rates. The gains
and or losses on interest rate swaps are reflected in interest expense on the
consolidated statement of operations. As of March 31, 2009,
approximately 27% of the company’s debt had its interest payments designated as
the hedged forecasted transactions to interest rate swap
agreements.
To
protect against increases/decreases in forecasted foreign currency cash flows
resulting from inventory purchases/sales over the next year, the company
utilizes foreign currency forward contracts to hedge portions of its forecasted
purchases/sales denominated in foreign currencies. The gains and losses are
included in cost of products sold and selling, general and administrative
expenses on the consolidated statement of operations. If it is later
determined that a hedged forecasted transaction is unlikely to occur, any gains
or losses on the forward contracts would be reclassified from other
comprehensive income into earnings. The company does not expect this to occur
during the next twelve months.
The
company has historically not recognized any ineffectiveness related to forward
contract cash flow hedges because the company generally limits it hedges to
between 60% and 90% of total forecasted transactions for a given entity’s
exposure to currency rate changes and the transactions hedged are recurring in
nature. Forward contracts with a total notional amount in USD of
$29,032,000 matured during the quarter ended March 31, 2009.
As of
March 31, 2009, foreign exchange forward contracts qualifying and designated for
hedge accounting treatment were as follows (in thousands USD):
|
|
Notional
Amount
|
|
|
Unrealized
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
USD
/ CAD
|
|
|
38,252
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
USD
/ GBP
|
|
|
7,522
|
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
USD
/ SEK
|
|
|
3,610
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
EUR
/ CHF
|
|
|
3,812
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
EUR
/ SEK
|
|
|
8,334
|
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
GBP
/ CHF
|
|
|
715
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
NOK
/ CHF
|
|
|
2,288
|
|
|
|
35
|
|
NOK
/ SEK
|
|
|
926
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
Fair Value Hedging
Strategy
In 2009
and 2008, the company did not utilize any derivatives designated as fair value
hedges. However, the company has in the past utilized fair value
hedges in the form of forward contracts to manage the foreign exchange risk
associated with certain firm commitments and has entered into interest rate
swaps to effectively convert fixed-rate debt to floating-rate debt in an attempt
to avoid paying higher than market interest rates. For derivative
instruments designated and qualifying as fair value hedges, the gain or loss on
the derivative instrument as well as the offsetting gain loss on the hedged item
associated with the hedged risk are recognized in the same line item associated
with the hedged item in earnings.
Derivatives Not Qualifying
or Designated for Hedge Accounting Treatment
The
company utilizes foreign currency forward or option contracts that do not
qualify for hedge accounting treatment in an attempt to manage the risk
associated with the conversion of earnings in foreign currencies into U.S.
Dollars. While these derivative instruments do not qualify for hedge
accounting treatment in accordance with FAS 133R, these derivatives do provide
the company with a means to manage the risk associated with currency
translation. These instruments are recorded at fair value in the
consolidated balance sheet and any gains or losses are recorded as part of
earnings in the current period. No such contracts were outstanding
and there was no material gain or loss recorded by the company for the quarter
ended March 31, 2009 related to any derivatives not qualifying for hedge
accounting treatment.
The
company also utilizes foreign currency forward contracts that are not designated
as hedges in accordance with FAS 133R although they could qualify for hedge
accounting treatment. These contracts are entered into to eliminate
the risk associated with the settlement of short-term intercompany trading
receivables and payables between Invacare Corporation and its foreign
subsidiaries. The currency forward contracts are entered into at the
same time the intercompany receivables or payables are created so that upon
settlement the gain / loss on the settlement is offset by the gain / loss on the
foreign currency forward contract.
As of
March 31, 2009, foreign exchange forward contracts not qualifying or designated
for hedge accounting treatment entered into in the first quarter of 2009 and
outstanding were as follows (in thousands USD):
|
|
Notional
Amount
|
|
|
Unrealized
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
DKK
/ USD
|
|
|
2,572
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
GBP
/ USD
|
|
|
4,359
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
NOK
/ USD
|
|
|
2,314
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2009, the fair values of the company’s derivative instruments were as
follows (in thousands):
|
|
Assets
|
|
|
Liabilities
|
|
Derivatives
designated as hedging instruments under FAS 133R
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
|
|
-
|
|
|
|
1,645
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under FAS 133R
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
$
|
3,672
|
|
|
$
|
3,366
|
|
The fair
values of the company’s foreign currency forward assets and liabilities are
included in Other Current Assets and Accrued Expenses, respectively in the
Consolidated Balance Sheets. 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 Consolidated Balance
Sheets. For the quarter ended March 31, 2009, the swap liabilities
are recorded in Accrued Expenses as they are short-term
liabilities.
The
effect of derivative instruments on the Statement of Operations for the quarter
ended March 31, 2009 was as follows (in thousands):
Derivatives
in FAS 133R cash flow hedge relationships
|
|
Amount
of Gain (Loss) Recognized in OCI on Derivatives (Effective
Portion)
|
|
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
Amount
of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
Foreign
currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
|
|
2,245
|
|
|
|
(1,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under FAS 133R
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative
|
|
Foreign
currency forward contracts
|
|
|
|
|
The gains
or losses recognized as the result of the settlement of cash flow hedge foreign
currency forward contracts are recognized in net sales for hedges of inventory
sales or cost of product sold for hedges of inventory purchases. For
the quarter ended March 31, 2009, net sales were reduced by $116,000 and cost of
product sold was reduced by $70,000 for a net realized loss of
$45,000. The $1,153,000 loss related to interest rate swap agreements
was recorded in interest expense for the period. There was an
immaterial amount reported in interest expense due to ineffectiveness related to
the interest rate swap contracts. The $669,000 gain recognized on
foreign currency forward contracts not designated as hedging instruments was
recognized in selling, general and administrative (SG&A) expenses for the
period and was principally offset by a loss of $645,000 also recorded in
SG&A expenses on the intercompany trade payables for which the derivatives
were entered into to offset.
Fair Value Measurements
- The Company adopted Financial Accounting Standards Board (FASB)
Statement No. 157 (FAS 157), Fair Value Measurements, as
of January 1, 2008 for assets and liabilities measured at fair value on a
recurring basis and the adoption had no material impact on the company’s
financial position, results of operations or cash flows. For assets and
liabilities measured at fair value on a nonrecurring basis, such as goodwill and
intangibles, the company elected to adopt as of January 1, 2009 the
provisions of FAS 157 as allowed pursuant to FASB Staff Position 157-2, Effective Date of FASB Statement
No. 157. The adoption of FAS 157 for assets and liabilities measured
at fair value on a nonrecurring basis had no material impact on the company’s
financial position, results of operations or cash flows.
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
|
|
|
|
March
31, 2009
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
Exchange Contracts
|
|
|
1,951
|
|
|
$
|
-
|
|
|
|
1,951
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Total
|
|
$
|
398
|
|
|
$
|
92
|
|
|
$
|
306
|
|
|
$
|
-
|
|
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.
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, CAD, CHF, CNY, DKK, EUR, GBP, 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.
Income Taxes - The
Company had an effective tax rate of 46.1% and 54.0% on earnings before tax
compared to an expected rate at the US statutory rate of 35% for the three month
period ended March 31, 2009 and 2008, respectively. The company’s
effective tax rate for the three month period ended March 31, 2009 and 2008 was
higher than the U.S. federal statutory rate as a result of the company not being
able to record tax benefits related to losses in countries which had tax
valuation allowances, while normal tax expense was recognized in countries
without tax allowances.
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 March 31, 2009
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
64,686
|
|
|
|
142,013
|
|
|
|
100,228
|
|
|
|
(17,400
|
)
|
|
|
289,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
28,859
|
|
|
|
28,944
|
|
|
|
36,330
|
|
|
|
-
|
|
|
|
94,133
|
|
Charge
related to restructuring activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
7,485
|
|
|
|
(233
|
)
|
|
|
1,860
|
|
|
|
-
|
|
|
|
9,112
|
|
Earnings
(loss) before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
360
|
|
|
|
100
|
|
|
|
1,590
|
|
|
|
-
|
|
|
|
2,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
month period ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,258
|
|
|
|
135,694
|
|
|
|
123,689
|
|
|
|
(17,571
|
)
|
|
|
303,070
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
26,952
|
|
|
|
28,937
|
|
|
|
41,806
|
|
|
|
-
|
|
|
|
97,695
|
|
Charge
related to restructuring activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges,
interest and fees associated with debt refinancing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income
(loss) from equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
7,677
|
|
|
|
(318
|
)
|
|
|
2,844
|
|
|
|
-
|
|
|
|
10,203
|
|
Earnings
(loss) before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
|
415
|
|
|
|
300
|
|
|
|
1,875
|
|
|
|
-
|
|
|
|
2,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
March
31, 2009
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
92
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
1,407
|
|
|
|
2,648
|
|
|
|
-
|
|
|
|
4,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,786
|
|
|
|
-
|
|
|
|
1,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
189,928
|
|
|
|
107,088
|
|
|
|
246,481
|
|
|
|
(4,808
|
)
|
|
|
538,689
|
|
Investment
in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
173,301
|
|
|
|
865,734
|
|
|
|
79,995
|
|
|
|
(1,119,030
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangibles
|
|
|
2,504
|
|
|
|
9,297
|
|
|
|
69,936
|
|
|
|
-
|
|
|
|
81,737
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,975
|
|
|
|
24,634
|
|
|
|
442,374
|
|
|
|
-
|
|
|
|
471,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
36,376
|
|
|
|
23,729
|
|
|
|
74,124
|
|
|
|
(3,231
|
)
|
|
|
130,998
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current
maturities of long-term obligations
|
|
|
33,725
|
|
|
|
-
|
|
|
|
775
|
|
|
|
-
|
|
|
|
34,500
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
370,220
|
|
|
|
-
|
|
|
|
9,221
|
|
|
|
-
|
|
|
|
379,441
|
|
Other
Long-Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
748,261
|
|
|
|
358,001
|
|
|
|
12,768
|
|
|
|
(1,119,030
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,834,306
|
|
|
$
|
1,705,626
|
|
|
$
|
915,713
|
|
|
$
|
(3,167,769
|
)
|
|
$
|
1,287,876
|
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
December
31, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
1,559
|
|
|
|
2,708
|
|
|
|
-
|
|
|
|
4,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,051
|
|
|
|
-
|
|
|
|
2,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
190,406
|
|
|
|
103,558
|
|
|
|
264,322
|
|
|
|
(7,228
|
)
|
|
|
551,058
|
|
Investment
in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
191,209
|
|
|
|
844,433
|
|
|
|
66,851
|
|
|
|
(1,102,493
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangibles
|
|
|
2,778
|
|
|
|
9,722
|
|
|
|
72,266
|
|
|
|
-
|
|
|
|
84,766
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,975
|
|
|
|
24,293
|
|
|
|
445,418
|
|
|
|
-
|
|
|
|
474,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
50,034
|
|
|
|
24,208
|
|
|
|
75,186
|
|
|
|
(5,816
|
)
|
|
|
143,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current
maturities of long-term obligations
|
|
|
17,793
|
|
|
|
-
|
|
|
|
906
|
|
|
|
-
|
|
|
|
18,699
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
398,328
|
|
|
|
|
|
|
|
9,379
|
|
|
|
-
|
|
|
|
407,707
|
|
Other
Long-Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
741,590
|
|
|
|
335,125
|
|
|
|
25,778
|
|
|
|
(1,102,493
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,846,256
|
|
|
$
|
1,680,332
|
|
|
$
|
931,217
|
|
|
$
|
(3,143,332
|
)
|
|
$
|
1,314,473
|
|
CONSOLIDATING
CONDENSED STATEMENTS OF CASH FLOWS
(in
thousands)
Three
month period ended March 31, 2009
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
$
|
7,362
|
|
|
$
|
84
|
|
|
$
|
(9,960
|
)
|
|
$
|
-
|
|
|
$
|
(2,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(929
|
)
|
|
|
(520
|
)
|
|
|
(1,722
|
)
|
|
|
-
|
|
|
|
(3,171
|
)
|
Proceeds
from sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in other long-term assets
|
|
|
(40
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
(162
|
)
|
Other
|
|
|
(373
|
)
|
|
|
341
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(43
|
)
|
Net
Cash Used for Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines of credit and long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on revolving lines of credit and long-term borrowings
|
|
|
(108,390
|
)
|
|
|
-
|
|
|
|
(288
|
)
|
|
|
-
|
|
|
|
(108,678
|
)
|
Payment
of dividends
|
|
|
(400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(400
|
)
|
Net
Cash Used by Financing Activities
|
|
|
(12,547
|
)
|
|
|
-
|
|
|
|
(288
|
)
|
|
|
-
|
|
|
|
(12,835
|
)
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(6,527
|
)
|
|
|
(217
|
)
|
|
|
(12,145
|
)
|
|
|
-
|
|
|
|
(18,889
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
4,393
|
|
|
$
|
2,067
|
|
|
$
|
22,167
|
|
|
$
|
-
|
|
|
$
|
28,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
month period ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
$
|
(25,103
|
)
|
|
$
|
1,172
|
|
|
$
|
5,476
|
|
|
$
|
-
|
|
|
$
|
(18,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,561
|
)
|
|
|
(392
|
)
|
|
|
(4,586
|
)
|
|
|
-
|
|
|
|
(6,539
|
)
|
Proceeds
from sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in other long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(329
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(329
|
)
|
Net
Cash Used for Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines of credit and long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on revolving lines of credit and long-term borrowings
|
|
|
(87,974
|
)
|
|
|
-
|
|
|
|
(8,597
|
)
|
|
|
-
|
|
|
|
(96,571
|
)
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
of dividends
|
|
|
(399
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(399
|
|
Net
Cash Provided (Used) by Financing Activities
|
|
|
(503
|
)
|
|
|
-
|
|
|
|
1,416
|
|
|
|
-
|
|
|
|
913
|
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(22,908
|
)
|
|
|
780
|
|
|
|
2,953
|
|
|
|
-
|
|
|
|
(19,175
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
4,225
|
|
|
$
|
2,553
|
|
|
$
|
36,247
|
|
|
$
|
-
|
|
|
$
|
43,025
|
|
|
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 April 23, 2009.
OUTLOOK
The
company’s first quarter earnings were in line with internal planning on a
consolidated basis, with the NA/HME region outperforming and the Asia/Pacific
region underperforming the Company’s expectations along with portions of
Europe. Pricing and reimbursement pressures continue in
Germany. Reimbursement pressures also remain in France where payments
from nursing homes for beds and certain wheelchairs will likely limit sales
growth. For the Australian distribution business, sales growth will
likely continue to be impacted by slow purchases by long term care
facilities. For the IPG business, the Obama administration’s budget
supporting state Medicaid programs may help nursing homes pursue expenditures
that have been deferred.
In the
NA/HME region, the company did not see a meaningful impact from the previously
announced Medicare reimbursement cuts of 9.5% for those product categories which
had been included in phase one of the then delayed National Competitive Bidding
program or from the limit of 36 months of rental payments for home
oxygen. As the year progresses, there may be more influence from the
reimbursement changes; however, Invacare’s respiratory products (for example,
the low cost HomeFill® oxygen
delivery system) can help our customers offset the impact of Medicare
cuts. Overall, the Company continues to expect a strong
performance from NA/HME for the year and all divisions to benefit from lower
commodity costs compared to the first quarter, as the company continues the
recovery toward more normal profit margins which have been earned in the
past. Organic sales growth, earnings and cash flow for 2009 are
expected, as of the date of this filing, to be consistent with the guidance
provided in the Company’s April 23, 2009 press release.
RESULTS OF
OPERATIONS
NET
SALES
Net sales
for the quarter decreased 4.4% to $397,995,000 versus $416,278,000 for the first
quarter last year. Foreign currency translation decreased net sales
by seven percentage points and acquisitions increased net sales by less than a
percentage point. Organic net sales for the quarter grew 2.1% over the same
period last year driven primarily by organic net sales performance in NA/HME,
which grew 7.1%. while European net sales for the quarter decreased
by 14.0%, organic net sales grew 0.6%.
North American/Home Medical
Equipment (NA/HME)
NA/HME
net sales increased 6.2% for the quarter to $186,703,000 as compared to
$175,781,000 for the same period a year ago, driven by sales increases in
Respiratory, Standard and Rehab product lines. Foreign currency
decreased net sales by two percentage points while acquisitions increased net
sales by less than one percentage point. The increase for the
quarter was principally due to net sales increases in each of the segment’s
major product categories.
Rehab
product line net sales increased by 2.6% compared to the first quarter last year
despite declines in the consumer power product line. Excluding
consumer power products, Rehab product line net sales increased 5.8% compared to
the first quarter of last year, driven by volume increases in custom power and
custom manual wheelchairs. Standard product line net sales for
the first quarter increased 11.1% compared to the first quarter of last
year, driven by increased volumes in manual wheelchairs, patient aids and
beds. Respiratory product line net sales increased 14.3%, driven by
volume increases in oxygen concentrators and strong purchases by national
accounts.
Invacare Supply Group
(ISG)
ISG net
sales for the quarter increased less than one percent to $65,313,000 compared to
$65,256,000 for the first quarter last year driven by an increase in home
delivery program sales which were largely offset by decreased sales volumes with
larger providers.
Institutional Products Group
(IPG)
IPG net
sales for the quarter decreased by 10.0% to $22,774,000 compared to $25,297,000
for the first quarter last year. Foreign currency translation
decreased net sales by three percentage points for the
quarter. Excluding currency, the net sales decrease was experienced
across most product categories along with a decrease in sales to national
accounts. Expenditures by nursing home customers have been
constrained in the current economic environment in part due to budgetary
pressures in state Medicaid programs.
Europe
European
net sales decreased 14.0% for the quarter to $108,387,000 as compared to
$126,003,000 for the same period a year ago. Foreign currency translation
decreased net sales by fifteen percentage points. Net sales
performance continued to be strong in most countries; however, business
performance in Germany continued to be negatively impacted by pricing and
reimbursement pressures in the market place.
Asia/Pacific
Asia/Pacific
net sales decreased 38.1% for the quarter to $14,818,000 as compared to
$23,941,000 for the same period a year ago. Foreign currency
decreased net sales by twenty seven percentage points. Net sales
performance was disappointing in the company’s Australian distribution business
and at the company’s subsidiary which manufactures microprocessor
controllers. The distribution business had lower sales due in large
part to long term care facilities which have deferred purchases, while the
subsidiary manufacturing controllers had customers who lowered inventory levels
in response to the economic environment.
GROSS
PROFIT
Gross
profit as a percentage of net sales for the three month period ended March 31,
2009 was 27.3% compared to 27.2% in the same period last year. The
gross margin improvement was the result of increased volumes, cost
reduction activities, price increases and reduced freight costs which were
largely offset by an unfavorable product mix, commodity cost increases and
unfavorable foreign currency impact from the weakness of the Euro as compared to
the U.S. dollar and the British pound as compared to the Euro.
For the
first three months of the year, NA/HME margins as a percentage of net sales
increased to 31.2% compared with 30.5% in the same period last year primarily
due to cost reduction activities and pricing increases implemented in the second
half of 2008 offset by commodity cost increases. ISG gross margins
increased by less than one percentage point due to benefits from freight
recovery programs. IPG gross margin increased by 6.9 percentage
points primarily due to benefits from freight recovery programs and
favorable foreign currency impact from the movement of the Canadian
dollar. In Europe, gross margin as a percentage of net sales declined
by 1.5 percentage points primarily due to an unfavorable sales mix away from
higher margin product and unfavorable foreign currency impact from the weakness
of the British pound as compared to the Euro and the Euro as compared to the
U.S. dollar. Gross margin, as a percentage of net sales in
Asia/Pacific, decreased by 5.4 percentage points, primarily due to unfavorable
foreign currency impact due to the strengthening of the U.S.
dollar.
SELLING, GENERAL AND
ADMINISTRATIVE
Selling,
general and administrative (“SG&A”) expense as a percentage of net sales for
the three months ended March 31, 2009 was 23.7% compared to 23.5% for the same
period a year ago. SG&A expense decreased by $3,562,000 or
3.6% for the quarter ended March 31, 2009 compared to the first quarter of last
year. Acquisitions increased these expenses by $662,000 in the
quarter while foreign currency translation decreased these expenses by
$7,268,000 in the quarter compared to the same period a year
ago. Excluding the impact of foreign currency translation and
acquisitions, SG&A expense increased 3.1% for the quarter compared to the
same period a year ago. The increase in SG&A expense is attributable
to increased bad debt expense, in addition to higher sales and marketing costs
in anticipation of future sales growth.
NA/HME
SG&A expense increased $2,487,000, or 5.2%, for the quarter compared to the
same period a year ago. Foreign currency translation decreased
SG&A by $864,000 while acquisitions increased SG&A by
$662,000. Excluding foreign currency translation and acquisitions,
SG&A expense increased by $2,689,000 or 5.7% primarily attributable to
increased bad debt expense, stock option expense, employee benefit expenses and
higher sales and marketing costs in anticipation of future sales
growth.
ISG
SG&A expense decreased $44,000, or 0.7%, for the quarter compared to the
same period a year ago.
IPG
SG&A expense decreased $502,000, or 12.7%, for the quarter compared to the
same period a year ago. Foreign currency translation decreased
SG&A by $31,000. The decrease in expense for the first three
months of 2009 is primarily attributable to cost reduction activities and
favorable currency transactions.
European
SG&A expense decreased $4,335,000, or 13.4%, for the quarter compared to the
same period a year ago. For the quarter, foreign currency translation
decreased SG&A by $3,790,000, or 11.7%. Excluding the impact of
foreign currency translation, the decrease in expense is primarily due to cost
reduction activities.
Asia/Pacific
SG&A expense decreased $1,168,000, or 16.1%, for the quarter compared to the
same period a year ago. For the quarter, foreign currency translation
decreased SG&A expense by $2,583,000, or 35.6%. Excluding the
impact of foreign currency translation, SG&A expense increased 19.5% as
compared to last year, primarily due to increases in sales and marketing costs
for people and marketing programs to drive future sales growth and unfavorable
foreign currency transactions.
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 $776,000 were incurred in the first three months of 2009, none of
which was recorded in cost of products sold, since none related to
inventory markdowns. The entire charge amount is included on the
Charge Related to Restructuring Activities in the Condensed Consolidated
Statement of Operations as part of operations.
The
restructuring charges included $218,000 in NA/HME, $171,000 in IPG, $286,000 in
Europe and $101,000 in Asia/Pacific. Of the total charges incurred to
date, $635,000 remained unpaid as of March 31, 2009 with $252,000 unpaid related
to NA/HME; $161,000 unpaid related to IPG; and $222,000 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
March 31, 2009 during 2009. With additional actions to be undertaken
during the remainder of 2009, the company anticipates recognizing pre-tax
restructuring charges of approximately $5,000,000 for the year.
INTEREST
Interest
expense decreased $1,348,000 for the first quarter of 2009 compared to the same
period last year due to lower debt levels. Interest income for the
first quarter of 2009 decreased $257,000 compared to the same period last year,
primarily due to interest on lower average foreign cash balances.
INCOME
TAXES
The
Company had an effective tax rate of 46.1% and 54.0% on earnings before tax
compared to an expected rate at the US statutory rate of 35% for the three month
period ended March 31, 2009 and 2008, respectively. The Company’s
effective tax rate for the three month period ended March 31, 2009 and 2008 was
higher than the U.S. federal statutory rate as a result of the company not being
able to record tax benefits related to losses in countries which had tax
valuation allowances, while normal tax expense was recognized in countries
without tax allowances.
LIQUIDITY AND CAPITAL
RESOURCES
The
company’s reported level of debt decreased by $13,457,000 from December 31, 2008
to $465,363,000 at March 31, 2009, excluding the impact of adoption of FSP APB
14-1, as a result of improved utilization of the company’s cash. The
company’s balance sheet reflects the adoption of FSP APB 14-1. As a result of
adopting FSP APB 14-1, the company recorded a debt discount, which reduced debt
and increased equity by $51,422,000 and $52,414,000 as of March 31, 2009
and December 31, 2008, respectively.
The
company’s cash and cash equivalents were $28,627,000 at March 31, 2009, down
from $47,516,000 at the end of the year. The cash was primarily
utilized to pay down debt.
The
company’s borrowing arrangements contain covenants with respect to maximum
amount of debt, minimum loan commitments, interest coverage, net worth, dividend
payments, working capital, and funded debt to capitalization, as defined in the
company’s bank agreements and agreements with its note holders. As of
March 31, 2009, the company was in compliance with all covenant
requirements. Under the most restrictive covenant of the company’s
borrowing arrangements as of March 31, 2009, the company had the capacity to
borrow up to an additional $146,400,000.
CAPITAL
EXPENDITURES
The
company had no individually material capital expenditure commitments outstanding
as of March 31, 2009. The company estimates that capital investments for 2009
could approximate $20,000,000 to $22,000,000 as compared to $19,957,000 in
2008. The company believes that its balances of cash and cash
equivalents, together with funds generated from operations and existing
borrowing facilities will be sufficient to meet its operating cash requirements
and to fund required capital expenditures for the foreseeable
future.
CASH
FLOWS
Cash
flows used by operating activities were $2,514,000 for the first three months of
2009 compared to $18,455,000 used in the first three months of
2008. Operating cash flows for the first three months of 2009 were
significantly improved compared to the same period a year ago even though net
earnings in the first quarter of 2009 were basically flat to the prior
year. This improvement was the result of higher accounts receivable
collections and improved inventory management compared to the first quarter of
2008.
Cash used
for investing activities was $3,361,000 for the first three months of 2009
compared to $2,254,000 used in the first three months of 2008. Cash
used for investing activities for the first three months of 2008 includes a
benefit of cash received from company-owned life insurance
policies. In addition, purchases of property, plant and equipment in
the first three months of 2009 were less than in the first three months of
2008.
Cash used
by financing activities was $12,835,000 for the first three months of 2009
compared to cash provided of $913,000 in the first three months of 2008 and
reflects the company’s utilization of cash to pay down debt.
During
the first three months of 2009, the company used free cash flow of $4,530,000
compared to free cash flow of $23,890,000 used by the company in the first three
months of 2008. The increase 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):
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash used by operating activities
|
|
|
|
|
|
|
|
|
Net
cash impact related to restructuring activities
|
|
|
1,140
|
|
|
|
1,078
|
|
Less: Purchases
of property and equipment - net
|
|
|
|
|
|
|
|
|
Free
Cash Flow
|
|
$
|
(4,530
|
)
|
|
$
|
(23,890
|
)
|
DIVIDEND
POLICY
On
February 12, 2009, the company’s Board of Directors declared a quarterly cash
dividend of $0.0125 per Common Share to shareholders of record as of April 6,
2009, which was paid on April 14, 2009. 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 and all wholly-owned subsidiaries. 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.
Invacare
has 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 for events of
default under the contracts. The company monitors the collections status of
these contracts and has provided amounts for estimated losses in its allowances
for doubtful accounts.
Inventories and Related
Allowance for Obsolete and Excess Inventory
Inventories
are stated at the lower of cost or market with cost determined by the first-in,
first-out method. Inventories have been reduced by an allowance for excess
and obsolete inventories. The estimated allowance is based on management’s
review of inventories on hand compared to estimated future usage and
sales. A provision for excess and obsolete inventory is recorded as needed
based upon the discontinuation of products, redesigning of existing products,
new product introductions, market changes and safety issues. Both raw
materials and finished goods are reserved for on the balance sheet.
In
general, 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. The assumptions used are based on a market participant’s
point of view and yielded a discount rate of 8.90% to 9.90% in 2008 compared to
9.25% to 10.25% in 2007. The discount rate has fluctuated in the last 3
years by less than 50 basis points. If the discount rate used were 50 basis
points higher for the 2008 impairment analysis, the company would still not have
an impairment for any of the reporting units.
While
there was no indication of impairment in 2008 related to goodwill or intangibles
for any reporting units, a future potential impairment is possible for any of
the company’s reporting units should actual results differ materially from
forecasted results used in the valuation analysis. Furthermore, the company’s
annual valuation of goodwill can differ materially if the market inputs used to
determine the discount rate change significantly. For instance, higher interest
rates or greater stock price volatility would increase the discount rate and
thus increase the chance of impairment.
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
The
company accounts for share based compensation under the provisions of Statement
of Financial Accounting Standard No. 123 (Revised 2004), Share Based Payment
(“SFAS 123R”). The company has not made
any modifications to the terms of any previously granted options and no changes
have been made regarding the valuation methodologies or assumptions used to
determine the fair value of options granted since 2005 and the company continues
to use a Black-Scholes valuation model. As of March 31, 2009, there was
$11,357,000 of total unrecognized compensation cost from stock-based
compensation arrangements granted under the plans, which is related to
non-vested options and shares, and includes $3,936,000 related to restricted
stock awards. The company expects the compensation expense to be recognized over
a weighted-average period of approximately two years.
The
majority of the options awarded have been granted at exercise prices equal to
the market value of the underlying stock on the date of grant. Restricted stock
awards granted without cost to the recipients are expensed on a straight-line
basis over the vesting periods.
Income
Taxes
As part
of the process of preparing its financial statements, the company is required to
estimate income taxes in various jurisdictions. The process requires estimating
the company’s current tax exposure, including assessing the risks associated
with tax audits, as well as estimating temporary differences due to the
different treatment of items for tax and accounting policies. The temporary
differences are reported as deferred tax assets and or liabilities. The company
also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be
established. In the event that actual results differ from its estimates, the
company’s provision for income taxes could be materially impacted.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS
141R), which changed the accounting for business acquisitions. SFAS 141R
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 141R also requires
expanded disclosure regarding the nature and financial effects of a business
combination. The company adopted SFAS 141R as of January 1, 2009 and
the adoption had no material impact on the company’s financial position, results
of operations or cash flows. SFAS 141R could have a material impact on the
company’s financial statements in future periods if the company completes
significant acquisitions in the future.
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. The company adopted SFAS 161 effective January 1, 2009 and the
adoption had no material impact on the company’s financial position, results of
operations or cash flows.
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. FSP APB 14-1 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. Accordingly, the
company had to bifurcate a component of its convertible debt as a component of
stockholders’ equity ($59,012,000 as of retrospective adoption date of February
12, 2007) and will accrete the resulting debt discount as interest
expense. The company adopted FSP APB 14-1 effective January 1, 2009
and, as a result, reported interest expense increased and net earnings decreased
by $992,000 ($0.03 per share) and $884,000 ($0.03 per share) for the quarters
ended March 31, 2009 and 2008, respectively and by $3,695,000 ($0.12 per share)
and $2,904,000 ($0.09 per share) for the years 2008 and 2007,
respectively. FSP APB 14-1 required retrospective application upon
adoption and accordingly, amounts for 2008 and 2007 will be restated in the 2009
financial statements.
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 March 31, 2009 debt levels, a 1% change in interest rates would impact
interest expense by approximately $216,000. 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; adverse changes in government and
other third-party payor reimbursement levels and practices; consolidation of
health care providers and our competitors; loss of key health care providers;
ineffective cost reduction and restructuring efforts; inability to design,
manufacture, distribute and achieve market acceptance of new products with
higher functionality and lower costs; extensive government regulation of our
products; lower cost imports; increased freight costs; failure to comply with
regulatory requirements or receive regulatory clearance or approval for our
products or operations in the United States or abroad; potential product
recalls; uncollectible accounts receivable; the uncertain impact on our
providers, on our suppliers and on the demand for our products of the recent
global economic downturn and general volatility in the credit and stock
markets; difficulties in implementing an 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; increased
security concerns and potential business interruption risks associated with
political and/or social unrest in foreign countries where the company’s
facilities or assets are located; exchange rate and tax rate fluctuations, as
well as the risks described from time to time in Invacare’s reports as filed
with the Securities and Exchange Commission. Except to the extent required by
law, we do not undertake and specifically decline any obligation to review or
update any forward-looking statements or to publicly announce the results of any
revisions to any of such statements to reflect future events or developments or
otherwise.
|
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
March 31, 2009, an evaluation was performed, under the supervision and with the
participation of the company’s management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company’s
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the company’s disclosure controls and procedures were effective
as of March 31, 2009, 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, 2008.
|
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 March 31, 2009.
In the quarter ended March 31, 2009, 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
|
|
1/1/2009-1/31/09
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
2/1/2009-2/28/09
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
3/1/2009-3/31/09
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
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:
May 7, 2009
|
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)
|
|