q10810q.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, 2008
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission
File Number 001-15103
INVACARE
CORPORATION
(Exact
name of registrant as specified in its charter)
Ohio
|
95-2680965
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer Identification No)
|
|
|
One
Invacare Way, P.O. Box 4028, Elyria, Ohio
|
44036
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(440)
329-6000
|
(Registrant's
telephone number, including area code)
|
|
_____________________________________________________________
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the
“Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
X No__
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act (Check One). Large accelerated filer X
Accelerated filer
Non-accelerated filer (Do not
check if a smaller reporting company) Smaller reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No X
As of May
1, 2008, the registrant had 30,965,784 Common Shares and 1,110,565 Class B
Common Shares outstanding.
INVACARE
CORPORATION
INDEX
Condensed
Consolidated Balance Sheets
|
|
March
31, 2008
|
|
|
December
31,
2007
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
(In
thousands)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
4,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
600,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
86,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
171,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,523,323
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
161,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
income taxes
|
|
|
4,195
|
|
|
|
|
|
Short-term
debt and current maturities of long-term obligations
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
337,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
498,721
|
|
|
|
|
|
OTHER
LONG-TERM OBLIGATIONS
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
8,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
153,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive earnings
|
|
|
186,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
579,694
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
See notes
to condensed consolidated financial statements.
Condensed
Consolidated Statement of Operations - (unaudited)
|
|
Three
Months Ended
March
31,
|
|
(In
thousands except per share data)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
|
|
|
|
275,849
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
|
|
|
|
87,766
|
|
Charge
related to restructuring activities
|
|
|
|
|
|
|
|
|
Charges,
interest and fees associated with debt refinancing
|
|
|
-
|
|
|
|
13,373
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(698
|
)
|
|
|
(474
|
)
|
Earnings
(loss) before income taxes
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
DECLARED PER COMMON SHARE
|
|
|
.0125
|
|
|
|
.0125
|
|
Net
earnings (loss) per share – basic
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
31,875
|
|
|
|
31,827
|
|
Net
earnings (loss) per share – assuming dilution
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - assuming dilution
|
|
|
31,995
|
|
|
|
31,827
|
|
See notes
to condensed consolidated financial statements.
Condensed
Consolidated Statement of Cash Flows - (unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
OPERATING
ACTIVITIES
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net earnings (loss) to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Debt
finance charges, interest and fees associated with debt
refinancing
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,008
|
|
|
|
11,074
|
|
Provision
for losses on trade and installment receivables
|
|
|
|
|
|
|
|
|
Provision
for other deferred liabilities
|
|
|
750
|
|
|
|
919
|
|
Provision
(benefit) for deferred income taxes
|
|
|
|
|
|
|
|
|
Provision
for stock-based compensation
|
|
|
|
|
|
|
|
|
Loss
on disposals of property and equipment
|
|
|
111
|
|
|
|
30
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(11,797
|
)
|
|
|
12,511
|
|
Installment
sales contracts, net
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(10,030
|
)
|
|
|
(4,423
|
)
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
9,962
|
|
|
|
(15,493
|
)
|
|
|
|
|
|
|
|
|
|
Other
deferred liabilities
|
|
|
(1,550
|
)
|
|
|
(2,474
|
)
|
NET
CASH USED BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(6,539
|
)
|
|
|
(3,750
|
)
|
Proceeds
from sale of property and equipment
|
|
|
|
|
|
|
|
|
Other
long term assets
|
|
|
4,588
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED FOR INVESTING ACTIVITIES
|
|
|
(2,254
|
)
|
|
|
(3,461
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from revolving lines of credit, securitization facility and long-term
borrowings
|
|
|
|
|
|
|
|
|
Payments
on revolving lines of credit, securitization facility and long-term debt
and capital lease obligations
|
|
|
(96,571
|
)
|
|
|
(494,419
|
)
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
|
|
|
Payment
of financing costs
|
|
|
-
|
|
|
|
(19,784
|
)
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
|
|
|
913
|
|
|
|
(4,286
|
)
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(19,175
|
)
|
|
|
(25,299
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
43,025
|
|
|
$
|
56,904
|
|
See notes
to condensed consolidated financial statements.
Notes to
Condensed Consolidated
Financial
Statements
(Unaudited)
March 31,
2008
Nature of Operations -
Invacare Corporation is the world’s leading manufacturer and distributor
in the $8.0 billion worldwide market for medical equipment used in the home
based upon our distribution channels, breadth of product line and net sales. The
company designs, manufactures and distributes an extensive line of health care
products for the non-acute care environment, including the home health care,
retail and extended care markets.
Principles of Consolidation -
The consolidated financial statements include the accounts of the
company, its majority owned subsidiaries and a variable interest entity for
which the company was the primary beneficiary in 2007 and includes all
adjustments, which were of a normal recurring nature, necessary to present
fairly the financial position of the company as March 31, 2008, the results of
its operations for the three months ended March 31, 2008 and 2007, respectively,
and changes in its cash flows for the three months ended March 31, 2008 and
2007, respectively. Certain foreign subsidiaries, represented by the
European segment, are consolidated using a February 29 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, 2008 are not necessarily indicative of the results to be
expected for the full year. All significant intercompany transactions are
eliminated.
Reclassifications - Certain
reclassifications have been made to the prior years’ consolidated financial
statements to conform to the presentation used for the period ended March 31,
2008, including the proper presentation of the provision for stock option and
award expense on the Consolidated Statement of Cash Flows, which had no net
effect on operating cash flows for the quarter ended March 31,
2007.
Use of Estimates - The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from
these estimates.
Business Segments - The
company operates in five primary business segments: North America /
Home Medical Equipment (NA/HME), Invacare Supply Group, Institutional Products
Group, Europe and Asia/Pacific.
The
NA/HME segment sales consist of Rehab (power wheelchairs, custom manual
wheelchairs, personal mobility and seating and positioning), Standard (manual
wheelchairs, personal care, home care beds, low air loss therapy and patient
transport) and Respiratory (oxygen concentrators, HomeFill® transfilling systems, sleep
apnea products, aerosol therapy and associated respiratory products) product
lines.
Invacare
Supply Group distributes numerous lines of branded medical supplies including
ostomy, incontinence, diabetic, interals, wound care and urology products as
well as home medical equipment, including aids for daily living.
Institutional
Products Group is a manufacturer and distributor of healthcare furnishings
including beds, case goods and patient handling equipment for the long-term care
markets, specialty clinical recliners for dialysis and oncology clinics and
certain other home medical equipment and accessory products.
The
Asia/Pacific segment consists of Invacare Australia, which distributes the
Invacare range of products which includes: manual and power
wheelchairs, lifts, ramps, beds, furniture and pressure care products; Dynamic
Controls, a manufacturer of electronic operating components used in power
wheelchairs, scooters and other products; Invacare New Zealand, a distributor of
a wide range of home medical equipment; and Invacare Asia, which imports and
distributes home medical equipment to the Asian markets.
Europe
sells a wide range of product lines, which continues to broaden and more closely
resemble those of NA/HME. Each business segment may sell to the home
health care, retail and extended care markets.
The
company evaluates performance and allocates resources based on profit or loss
from operations before income taxes for each reportable segment. The accounting
policies of each segment are the same as those described in the summary of
significant accounting policies for the company’s consolidated financial
statements. Intersegment sales and transfers are based on the costs to
manufacture plus a reasonable profit element. Therefore, intercompany profit or
loss on intersegment sales and transfers is not considered in evaluating segment
performance.
The
information by segment is as follows (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invacare
Supply Group
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
13,077
|
|
|
$
|
11,291
|
|
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
655
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Asia/Pacific
|
|
|
8,191
|
|
|
|
6,089
|
|
|
|
|
|
|
|
|
|
|
Charge
related to restructuring before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invacare
Supply Group
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
|
|
|
|
|
|
Earnings
(loss) before income taxes
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
4,825
|
|
|
$
|
(2,708
|
)
|
|
|
|
|
|
|
|
|
|
Institutional
Products Group
|
|
|
998
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Asia/Pacific
|
|
|
(476
|
)
|
|
|
(1,110
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
|
|
|
|
|
)
|
|
“All Other” consists of
unallocated corporate selling, general and administrative costs, which do
not meet the quantitative criteria for determining reportable
segments. In addition, the “All Other” earnings (loss) before
income taxes for the first three months of 2007 includes charges, interest
and fees associated with debt
refinancing.
|
Net Earnings Per Common Share
- The following table sets forth the computation of basic and diluted net
earnings per common share for the periods indicated (amounts in thousands,
except per share amounts).
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
31,875
|
|
|
|
31,827
|
|
|
|
|
|
|
|
|
|
|
Average
common shares assuming dilution
|
|
|
31,995
|
|
|
|
31,827
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$
|
3,093
|
|
|
$
|
(17,504
|
)
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per common share
|
|
$
|
.10
|
|
|
$
|
(.55
|
)
|
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. At March 31, 2007, all of the company’s shares
associated with stock options were excluded from the average common shares
assuming dilution as they were anti-dilutive.
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 customers. The DLL agreement provides for direct leasing between DLL
and the Invacare customer. The company retains a recourse obligation of
$47,524,000 at March 31, 2008 to DLL for events of default under the
contracts, which total $90,965,000 at March 31, 2008. FASB Interpretation
No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, requires the company to record a
guarantee liability as it relates to the limited recourse obligation. As such,
the company has a recorded a liability of $1,029,000 for this guarantee
obligation within accrued expenses. The company monitors the collections status
of these contracts and has provided amounts for estimated losses in its
allowances for doubtful accounts in accordance with SFAS No. 5, Accounting for Contingencies.
Credit losses are provided for in the financial statements.
Substantially
all of the company’s receivables are due from health care, medical equipment
providers and long term care facilities located throughout the United States,
Australia, Canada, New Zealand and Europe. A significant portion of products
sold to dealers, both foreign and domestic, is ultimately funded through
government reimbursement programs such as Medicare and Medicaid. In addition,
the company has also seen a significant shift in reimbursement to customers from
managed care entities. As a consequence, changes in these programs can have an
adverse impact on dealer liquidity and profitability. In addition, reimbursement
guidelines in the home health care industry have a substantial impact on the
nature and type of equipment an end user can obtain as well as the timing of
reimbursement and, thus, affect the product mix, pricing and payment patterns of
the company’s customers.
Goodwill and Other Intangibles
- The change in goodwill reflected on the balance sheet from December 31,
2007 to March 31, 2008 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 $37,085,000 related to trademarks, which have
indefinite lives.
As of
March 31, 2008 and December 31, 2007, other intangibles consisted of the
following (in thousands):
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
37,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
|
7,508
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
8,689
|
|
|
|
5,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to other intangibles was $2,361,000 in the first three months of
2008 and is estimated to be $9,011,000 in 2009, $8,555,000 in 2010, $8,232,000
in 2011, $7,815,000 in 2012 and $7,167,000 in 2013.
Investment in Affiliated Company
- FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), which was revised in December 2003, requires
consolidation of an entity if the company is subject to a majority of the risk
of loss from the variable interest entity’s (VIE) activities or entitled to
receive a majority of the entity’s residual returns, or both. A company that
consolidates a VIE is known as the primary beneficiary of that
entity.
Until the
end of 2007, the company consolidated NeuroControl, a company whose product
focused on the treatment of post-stroke shoulder pain in the United States.
Certain of the company’s officers and directors (or their affiliates) have small
minority equity ownership positions in NeuroControl. Based on the provisions of
FIN 46 and the company’s analysis, the company had consolidated this
investment on a prospective basis since January 1, 2005 and recorded an
intangible asset for patented technology of $7,003,000. The other beneficial
interest holders have no recourse against the company.
In the
fourth quarter of 2006, the company’s board of directors made a decision to no
longer fund the cash needs of NeuroControl. Based upon that decision,
NeuroControl’s directors decided to commence a liquidation process and cease
operations. Therefore, funding of this investment ceased on December 31,
2006. As a result of this decision, the company established a valuation reserve
related to the NeuroControl intangible asset of $5,601,000 to fully reserve
against the patented technology intangible as it was deemed to be impaired. In
the fourth quarter of 2007, the company recognized a one-time gain of $3,981,000
due to the cancellation of debt owed by NeuroControl to two third
parties. As of December 31, 2007, all operations of NeuroControl had
ceased.
Accounting for Stock-Based
Compensation - Effective January 1, 2006, the company adopted
SFAS No. 123R using the modified prospective application method. Under
the modified prospective method, compensation has been recognized for:
1) all stock-based payments granted subsequent to January 1, 2006
based upon the grant-date fair value calculated in accordance with
SFAS No. 123R, and 2) all stock-based payments granted prior to,
but not vested as of, January 1, 2006 based upon grant-date fair value as
calculated for previously presented pro forma footnote disclosures in accordance
with the original provisions of SFAS No. 123, Accounting for Stock Based
Compensation. The amounts of stock-based compensation expense recognized
were as follows (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense recognized as part of selling, general and
administrative expense
|
|
|
|
|
|
|
|
|
The 2008
and 2007 amounts above reflect compensation expense related to restricted stock
awards and nonqualified stock options awarded under the 2003 Performance
Plan. Stock-based compensation is not allocated to the business
segments, but is reported as part of All Other as shown in the company’s
Business Segment Note to the Consolidated Financial Statements.
Stock Incentive Plans - The
2003 Performance Plan (the “2003 Plan”) allows the Compensation, Management
Development and Corporate Governance Committee of the Board of Directors (the
“Committee”) to grant up to 3,800,000 Common Shares in connection with incentive
stock options, non-qualified stock options, stock appreciation rights and stock
awards (including the use of restricted stock). The Committee has the
authority to determine which employees and directors will receive awards, the
amount of the awards and the other terms and conditions of the
awards. During the first three months of 2008, the Committee did not
grant any non-qualified stock options, which generally are granted for a term of
ten years at the fair market value of the company’s Common Shares on the date of
grant under the 2003 Plan.
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 $246,000 was recognized related to
restricted stock awards in the first three months of 2008 and as of March 31,
2008, outstanding restricted stock awards totaling 163,659 were not yet
vested.
Stock
option activity during the three months ended March 31, 2008 was as
follows:
|
|
2008
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstanding at January 1
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(74,512
|
)
|
|
|
30.55
|
|
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*
|
|
|
1,417,765
|
|
|
|
|
|
* Options
available for grant as of March 31, 2008 are reduced by net restricted stock
award activity of 194,962.
The
following table summarizes information about stock options outstanding at March
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
Outstanding
|
|
|
Average
Remaining
|
|
|
Weighted
Average
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
|
|
Exercise
Prices
|
|
|
At
3/31/08
|
|
|
Contractual
Life
|
|
|
Exercise
Price
|
|
|
At
3/31/08
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24.43
- $36.40
|
|
|
|
1,165,771
|
|
|
|
4.0
|
|
|
$
|
31.08
|
|
|
|
1,124,296
|
|
|
$
|
31.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
4,415,096
|
|
|
|
5.0
|
|
|
$
|
30.36
|
|
|
|
3,637,571
|
|
|
$
|
31.83
|
|
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, 2008, there was $8,353,000 of total unrecognized compensation cost
from stock-based compensation arrangements granted under the company’s plans,
which is related to non-vested shares, and includes $3,382,000 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 periods of up to six years from the date of sale to the
customer. Certain components carry a lifetime warranty. A
provision for estimated warranty cost is recorded at the time of sale based upon
actual experience. The company continuously assesses the adequacy of
its product warranty accrual and makes adjustments as
needed. Historical analysis is primarily used to determine the
company’s warranty reserves. Claims history is reviewed and
provisions are adjusted as needed. However, the company does consider
other events, such as a product recall, which could warrant additional warranty
reserve provision. No material adjustments to warranty reserves based
on other events were necessary in the first three months of 2008.
The
following is a reconciliation of the changes in accrued warranty costs for the
reporting period (in thousands):
Balance
as of January 1, 2008
|
|
|
|
|
Warranties
provided during the period
|
|
|
3,308
|
|
Settlements
made during the period
|
|
|
|
|
Changes
in liability for pre-existing warranties during the period, including
expirations
|
|
|
238
|
|
Balance
as of March 31, 2008
|
|
|
|
|
Charges Related to Restructuring
Activities - Previously, the company announced multi-year cost reductions
and profit improvement actions, which included: reducing global headcount,
outsourcing improvements utilizing the company’s China manufacturing capability
and third parties, shifting substantial resources from product development to
manufacturing cost reduction activities and product rationalization, reducing
freight exposure through freight auctions and changing the freight policy,
general expense reductions and exiting manufacturing and distribution
facilities. The restructuring was necessitated by the continued
decline in reimbursement by the U.S. government as well as similar
reimbursement pressures abroad and continued pricing pressures faced by the
company as a result of outsourcing by competitors to lower cost
locations.
To date,
the company has made substantial progress on its restructuring activities,
including exiting manufacturing and distribution facilities and eliminating
positions, which resulted in restructuring charges of $522,000 and $3,269,000
incurred in the first three months of 2008 and 2007, respectively, of which
$11,000 and $117,000, 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, 2008 during 2008.
A
progression of the accruals by segment recorded as a result of the restructuring
is as follows (in thousands):
|
|
Balance at
12/31/06
|
|
|
Accruals
(Reversals)
|
|
|
Payments
|
|
|
Balance
at
12/31/07
|
|
|
Accruals
|
|
|
Payments
|
|
|
Balance
at
3/31/08
|
|
North America/HME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
Institutional Products
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
line discontinuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Earnings (loss)
- Total comprehensive earnings were as follows (in
thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
23,611
|
|
|
|
3,858
|
|
Unrealized
gain (loss) on available for sale securities
|
|
|
|
|
|
|
|
|
SERP/DBO
amortization of prior service costs and unrecognized
losses
|
|
|
549
|
|
|
|
943
|
|
Current
period unrealized (loss) on cash flow hedges
|
|
|
|
|
|
|
|
|
Total
comprehensive earnings
|
|
$
|
24,651
|
|
|
$
|
(13,873
|
)
|
Inventories - Inventories determined under the
first in, first out method consist of the following components (in
thousands):
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
|
69,692
|
|
|
|
63,815
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208,586
|
|
|
$
|
195,604
|
|
Property and Equipment -
Property and equipment consist of the following (in
thousands):
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Land,
buildings and improvements
|
|
|
99,933
|
|
|
|
97,478
|
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
|
17,183
|
|
|
|
16,390
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for depreciation
|
|
|
(302,096
|
)
|
|
|
(286,600
|
)
|
|
|
|
|
|
|
|
|
|
Acquisitions– In the first
three months of 2008, the company made no acquisitions.
On
September 9, 2004 the company acquired 100% of the shares of WP Domus GmbH
(Domus), a European-based holding company that manufactures several
complementary product lines to Invacare’s product lines, including power add-on
products, bath lifts and walking aids, from WP Domus LLC. Domus has three
divisions: Alber, Aquatec and Dolomite. In accordance with EITF Issue
No. 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination, the
company previously recorded accruals for severance and exit costs for facility
closures and contract terminations.
A
progression of the accruals recorded in the purchase price allocation is as
follows (in thousands):
|
|
Severance
|
|
|
Exit
of
Product
Lines
|
|
|
Sales
Agency
Terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
(972
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at 12/31/07
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The adjustments represent reversals to
goodwill for accruals not utilized.
Income Taxes - The
company had an effective tax rate of 45.6% on earnings before tax compared to an
expected rate at the US statutory rate of 35% for the three month period ended
March 31, 2008, and an effective rate of 15.9% compared to an expected benefit
of 35% at the US statutory rate on the loss before tax for the three month
period ended March 31, 2007. The company’s effective tax rate for the
three month period ended March 31, 2008 and 2007 was higher than the U.S.
federal statutory rate or benefit 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.
Fair Value Measurements - In September, 2006,
the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157
(FAS 157), Fair Value
Measurements, which creates a framework for measuring fair value,
clarifies the definition of fair value and expands the disclosures regarding
fair value measurements. FAS 157 does not require any new fair value
measurements. The company adopted the new standard, to the extent
required, as of January 1, 2008 and the adoption had no material impact on the
company’s financial position, results of operations or cash
flows. The application of FAS 157 for non-financial assets and
non-financial liabilities that are recognized or disclosed at fair value on a
nonrecurring basis was deferred until January 1, 2009 and the company is
currently assessing the impact on its non-financial assets and non-financial
liabilities measured at fair value on a nonrecurring basis.
Pursuant
to FAS 157, the inputs used to derive the fair value of assets and liabilities
are analyzed and assigned a level I, II or III priority, with level I being the
highest and level III being the lowest in the hierarchy. Level I inputs are
quoted prices in active markets for identical assets or
liabilities. Level II inputs are quoted prices for similar assets or
liabilities in active markets: quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in
which all significant inputs are observable in active markets. Level
III inputs are based on valuations derived from valuation techniques in which
one or more significant inputs are observable.
The
following table provides a summary of the company’s assets and liabilities that
are measured on a recurring basis (in thousands).
|
|
|
|
|
Basis
for Fair Value Measurements at Reporting Date
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets /
(Liabilities)
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Other Unobservable Inputs
|
|
|
|
March
31, 2008
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
Exchange Contracts
|
|
$
|
(355
|
)
|
|
$
|
-
|
|
|
$
|
(355
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Total
|
|
$
|
(5,050
|
)
|
|
$
|
162
|
|
|
$
|
(5,212
|
)
|
|
$
|
-
|
|
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 independent pricing models in which
all significant inputs, such as interest rates and yield curves, are observable
in active markets. The company believes that the fair values reported
would not be materially different from the amounts that would be realized upon
settlement.
The gains
and losses that result from the company’s current cash flow hedge interest rate
swaps are recognized as part of interest expense. Swap assets are
recorded in either Other Current Assets or Other Assets, while swap liabilities
are recorded in Accrued Expenses or Other Long-Term Obligations in the Condensed
Consolidated Balance Sheets.
Forward
Contracts: The company operates internationally and as a
result is exposed to foreign currency fluctuations. Specifically, the exposure
includes intercompany loans and third party sales or payments. In an attempt to
reduce this exposure, foreign currency forward contracts are utilized and
accounted for as hedging instruments. The forward contracts are used to hedge
the following currencies: AUD, GBP, CAD, CHF, DKK, EUR, NOK, NZD, SEK and USD.
The company does not use derivative financial instruments for speculative
purposes. Fair values for the company’s foreign exchange forward contracts are
based on quoted market prices for contracts with similar
maturities.
The gains
and losses that result from the majority of the forward contracts are deferred
and recognized when the offsetting gains and losses for the identified
transactions are recognized. Gains or losses recognized as the result
of the settlement of forward contracts are recognized in cost of products sold
for hedges of inventory transactions or selling, general and administrative
expenses for other hedged transactions. The company’s forward
contracts are included in Other Current Assets or Accrued Expenses in the
Condensed Consolidated Balance Sheets.
Subsequent Event
- On April 30, 2008, the company issued a demand notice for
payment from a customer for amounts due or past due. The customer has
10 days to respond to the notice. Possible responses to the notice by
the customer include payment of the receivable, voluntary liquidation or filing
for bankruptcy or receivership. If the customer does not make payment
or pursue legal protection, the company intends to consider foreclosing on the
customer’s assets after expiration of the 10-day period. As of March
31, 2008, the company had gross receivables outstanding from the customer of
approximately $24.6 million, of which 82% of these receivables are covered by
the company’s bad debt allowance. While there can be no assurance of
the ultimate outcome, based on an evaluation of existing bad debt reserves and
estimated values assigned to the assets to be potentially liquidated, which is
based on the information available as of this filing, the company believes it
has adequate bad debt reserves to cover its exposure on this
account.
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, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
61,258
|
|
|
|
135,694
|
|
|
|
123,689
|
|
|
|
(17,571
|
)
|
|
|
303,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
6,793
|
|
|
|
(318
|
)
|
|
|
2,844
|
|
|
|
-
|
|
|
|
9,319
|
|
Earnings
(loss) before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
415
|
|
|
|
300
|
|
|
|
1,875
|
|
|
|
-
|
|
|
|
2,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
month period ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
75,452
|
|
|
$
|
158,954
|
|
|
$
|
154,380
|
|
|
$
|
(13,881
|
)
|
|
$
|
374,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
15,389
|
|
|
|
31,445
|
|
|
|
52,140
|
|
|
|
82
|
|
|
|
99,056
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
related to restructuring activities
|
|
|
2,295
|
|
|
|
43
|
|
|
|
814
|
|
|
|
-
|
|
|
|
3,152
|
|
Charges,
interest and fees associated with debt refinancing
|
|
|
13,342
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
13,373
|
|
Income
(loss) from equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
6,639
|
|
|
|
424
|
|
|
|
2,806
|
|
|
|
-
|
|
|
|
9,869
|
|
Earnings
(loss) before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
|
130
|
|
|
|
225
|
|
|
|
2,045
|
|
|
|
-
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
March
31, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
2,000
|
|
|
|
2,328
|
|
|
|
-
|
|
|
|
4,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,499
|
|
|
|
-
|
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
190,828
|
|
|
|
101,485
|
|
|
|
313,716
|
|
|
|
(5,232
|
)
|
|
|
600,797
|
|
Investment
in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
232,260
|
|
|
|
827,450
|
|
|
|
45,330
|
|
|
|
(1,105,040
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangibles
|
|
|
1,015
|
|
|
|
10,894
|
|
|
|
92,590
|
|
|
|
-
|
|
|
|
104,499
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
23,541
|
|
|
|
536,735
|
|
|
|
-
|
|
|
|
560,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
33,894
|
|
|
|
18,857
|
|
|
|
82,830
|
|
|
|
(3,817
|
)
|
|
|
131,764
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current
maturities of long-term obligations
|
|
|
39,057
|
|
|
|
-
|
|
|
|
943
|
|
|
|
-
|
|
|
|
40,000
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
465,203
|
|
|
|
-
|
|
|
|
33,518
|
|
|
|
-
|
|
|
|
498,721
|
|
Other
Long-Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
724,158
|
|
|
|
329,833
|
|
|
|
51,049
|
|
|
|
(1,105,040
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,972,401
|
|
|
$
|
1,645,407
|
|
|
$
|
1,094,332
|
|
|
$
|
(3,188,817
|
)
|
|
$
|
1,523,323
|
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
December
31, 2007
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
255
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
1,841
|
|
|
|
2,216
|
|
|
|
-
|
|
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,478
|
|
|
|
-
|
|
|
|
2,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
210,737
|
|
|
|
97,214
|
|
|
|
289,752
|
|
|
|
(6,618
|
)
|
|
|
591,085
|
|
Investment
in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
250,765
|
|
|
|
824,519
|
|
|
|
43,460
|
|
|
|
(1,118,744
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangibles
|
|
|
934
|
|
|
|
11,315
|
|
|
|
92,487
|
|
|
|
-
|
|
|
|
104,736
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
23,531
|
|
|
|
519,652
|
|
|
|
-
|
|
|
|
543,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
48,332
|
|
|
|
18,284
|
|
|
|
84,431
|
|
|
|
(5,089
|
)
|
|
|
145,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current
maturities of long-term obligations
|
|
|
23,500
|
|
|
|
-
|
|
|
|
1,010
|
|
|
|
-
|
|
|
|
24,510
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
481,896
|
|
|
|
7
|
|
|
|
31,439
|
|
|
|
-
|
|
|
|
513,342
|
|
Other
Long-Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
advances, net
|
|
|
741,829
|
|
|
|
326,028
|
|
|
|
50,887
|
|
|
|
(1,118,744
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,980,256
|
|
|
$
|
1,630,470
|
|
|
$
|
1,048,076
|
|
|
$
|
(3,158,760
|
)
|
|
$
|
1,500,042
|
|
CONSOLIDATING
CONDENSED STATEMENTS OF CASH FLOWS
(in
thousands)
Three
month period ended March 31, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
month period ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
$
|
(162,862
|
)
|
|
$
|
1,366
|
|
|
$
|
143,153
|
|
|
$
|
-
|
|
|
$
|
(18,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(653
|
)
|
|
|
(287
|
)
|
|
|
(2,810
|
)
|
|
|
-
|
|
|
|
(3,750
|
)
|
Proceeds
from sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in other long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(3,133
|
)
|
|
|
(1
|
)
|
|
|
1,920
|
|
|
|
-
|
|
|
|
(1,214
|
)
|
Net
Cash Used for Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines of credit, securitization facility and
long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on revolving lines of credit, securitization facility and long-term
borrowings
|
|
|
(336,390
|
)
|
|
|
(21
|
)
|
|
|
(158,008
|
)
|
|
|
-
|
|
|
|
(494,419
|
)
|
Payment
of dividends
|
|
|
(399
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(399
|
)
|
Payment
of financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Financing Activities
|
|
|
152,246
|
|
|
|
(21
|
)
|
|
|
(156,511
|
)
|
|
|
-
|
|
|
|
(4,286
|
)
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(13,322
|
)
|
|
|
1,057
|
|
|
|
(13,034
|
)
|
|
|
-
|
|
|
|
(25,299
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
22,596
|
|
|
$
|
3,259
|
|
|
$
|
31,049
|
|
|
$
|
-
|
|
|
$
|
56,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 24, 2008.
OUTLOOK
Cost
reduction continues to be a primary focus for the company in 2008, which
includes the following initiatives: product line simplification; expanded
outsourcing; rationalization of facilities; supply chain simplification; and
organization and infrastructure consolidation. The company is on
track with its 2008 cost reduction initiatives which are expected to result in
2008 savings of at least $20 million. However, it is anticipated that
the benefit to operating margins realized from these initiatives will be
tempered by continuing reimbursement uncertainties, primarily the implementation
of competitive bidding in the U.S., as well as global commodity cost increases.
In order to address the rising commodity costs, North America/HME has planned a
price increase for July 1st. The
company anticipates restructuring charges of approximately $5 million in 2008
($.5 million of which has occurred through the first three months of the year)
relating to these actions.
With the
$3.7 million of cost savings achieved during the first quarter through cost
reduction activities, the company remains confident in its cost reduction
objectives and the company has begun to refine its plans for structural cost
reductions to support the company’s 2008 plans. For fiscal year 2008,
the company expects organic growth in net sales of between 4% and 5%, excluding
the impact from acquisitions and foreign currency translation adjustments, and
operating cash flows of $65 million to $75 million and net purchases of
property, plant and equipment of up to approximately $25 million. The
full year earnings are expected to be consistent with the
guidance furnished in the company’s press release on April 24,
2008.
RESULTS OF
OPERATIONS
NET
SALES
Net sales
for the three months ended March 31, 2008 were $416,278,000, compared to
$374,905,000 for the same period a year ago, representing a 11%
increase. Organic sales growth was 5.8% as foreign currency
translation increased net sales by five percentage points while acquisitions
increased net sales by less than one percentage point for the three month
period. The positive sales growth was achieved in each of the
company’s operating segments, except Asia/Pacific, whose sales were unchanged
compared to the first quarter of 2007.
North American/Home Medical
Equipment (NA/HME)
NA/HME
net sales increased 9% for the quarter to $175,781,000 as compared to
$161,763,000 for the same period a year ago. Foreign currency and
acquisitions both increased net sales by 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 6% compared to the first quarter last year
despite volume declines in the consumer power product line, principally due to
the company’s decision to terminate sales to a large national account.
Excluding consumer power products, Rehab product line net sales
increased 10% compared to the first quarter of last year, driven by volume
increases in custom power and custom manual wheelchairs as well as seating
and positioning products. Standard product line net sales for
the first quarter increased 10% compared to the first quarter of last year,
driven by increased volumes in manual wheelchairs, patient aids and beds, while
pricing was stable. Respiratory product line net sales increased 3%,
driven by volume increases in oxygen concentrators and strong purchases by
national accounts. These benefits were partially offset by pricing
declines and 3% lower net sales of HomeFill® oxygen
systems which were in line with plan for the first quarter.
Invacare Supply Group
(ISG)
ISG net
sales for the quarter increased 6% to $65,256,000 compared to $61,676,000 last
year driven by an increase in home delivery program sales and increased sales
volumes with larger providers.
Institutional Products Group
(IPG)
IPG net
sales for the quarter increased by 8% to $25,297,000 as compared to $23,493,000
last year was primarily driven by increases experienced across most product
categories along with an increase in national account sales. Foreign
currency translation increased net sales by four percentage points for the
quarter.
Europe
European
net sales increased 18% for the quarter to $126,003,000 as compared to
$107,030,000 for the same period a year ago. Foreign currency translation
increased net sales by eleven percentage points for the quarter. Net
sales performance continues to be strong in most regions.
Asia/Pacific
Asia/Pacific
net sales increased 14% for the quarter to $23,941,000 as compared to
$20,943,000 for the same period a year ago. Foreign currency
translation accounted for the entire fourteen percentage point increase in net
sales. Performance in this region was positively impacted by volume
increases in the company’s distribution businesses in the region and at the
company’s subsidiary which manufactures microprocessor controllers.
GROSS
PROFIT
Gross
profit as a percentage of net sales for the three month period ended March 31,
2008 was 27.2% compared to 26.4% in the same period last year. Gross
margin as a percentage of net sales for the first quarter was higher by .8
percentage points compared to last year’s first quarter primarily due to cost
reduction activities, partially offset by increased freight costs and commodity
costs such as steel, aluminum and fuel.
For the
first three months of the year, NA/HME margins as a percentage of net sales
increased to 30.5% compared with 28.2% in the same period last year primarily
due to cost reduction activities and favorable product mix towards Rehab
products, partially offset by increased freight costs and higher commodity costs
such as steel, aluminum and fuel. ISG gross margins decreased by 1
percentage point due to an unfavorable sales mix toward large providers and
home delivery program sales. IPG gross margin declined by 1
percentage point primarily due to lower margins achieved on new beds introduced
in the fourth quarter of last year. In Europe, gross margin as a
percentage of net sales declined by two percentage points primarily due an
unfavorable sales mix away from higher margin product and higher freight
costs. Gross margin, as a percentage of net sales in Asia/Pacific,
increased year to date by 6.8 percentage points, largely due to cost reduction
activities and increased volumes.
SELLING, GENERAL AND
ADMINISTRATIVE
Selling,
general and administrative (“SG&A”) expense as a percentage of net sales for
the three months ended March 31, 2008 was 23.5% compared to 23.4% for the same
period a year ago. SG&A expense increased by $9,929,000 or
11.3% for the quarter ended March 31, 2008 compared to the first quarter of last
year. Acquisitions increased these expenses by $571,000 in the
quarter while foreign currency translation increased these expenses by
$4,677,000 in the quarter compared to the same period a year
ago. Excluding the impact of foreign currency translation and
acquisitions, SG&A expense increased 5.3% for the quarter compared to the
same period a year ago. The increase in SG&A expense is attributable
to higher sales and marketing costs in anticipation of future sales growth, and
greater commission costs associated with increased sales volumes.
NA/HME
SG&A expense increased $3,097,000, or 7.0%, for the quarter compared to the
same period a year ago. Foreign currency translation and acquisitions
each increased SG&A by one percentage point. The increase in
spending was primarily attributable to higher sales and marketing costs in
anticipation of future sales growth, and greater commission costs associated
with increased sales volumes.
ISG
SG&A expense increased $557,000, or 9.2%, for the quarter compared to the
same period a year ago due to higher distribution costs associated with
increased sales volumes.
IPG
SG&A expense decreased $67,000, or 1.7%, for the quarter compared to the
same period a year ago. Foreign currency translation decreased
SG&A by less than one percentage point for the quarter. The
slight decrease in expense for the first three months of 2008 is primarily
attributable to favorable currency transactions.
European
SG&A expense increased $4,741,000, or 17.1%, for the quarter compared to the
same period a year ago. For the quarter, foreign currency translation
increased SG&A by $3,099,000, or 11.2%. Excluding the impact of
foreign currency translation, the increases in expense is primarily due to
higher sales and marketing costs for people and programs to drive future sales
growth.
Asia/Pacific
SG&A expense increased $1,601,000, or 28.3%, for the quarter compared to the
same period a year ago. For the quarter, foreign currency translation
increased SG&A expense by $920,000, or 16.2%. Excluding the
impact of acquisitions and foreign currency translation, SG&A expense
increased 12.0% as compared to last year, primarily due to increases in sales
and marketing costs for people and marketing programs to drive future sales
growth.
CHARGE RELATED TO
RESTRUCTURING ACTIVITIES
Previously,
the company announced multi-year cost reductions and profit improvement actions,
which included: reducing global headcount, outsourcing improvements utilizing
the company’s China manufacturing capability and third parties, shifting
substantial resources from product development to manufacturing cost reduction
activities and product rationalization, reducing freight exposure through
freight auctions and changing the freight policy, general expense reductions and
exiting manufacturing and distribution facilities.
The
restructuring was necessitated by the continued decline in reimbursement,
continued pricing pressures faced by the company as a result of outsourcing by
competitors to lower cost locations and commodity cost increases for steel,
aluminum and fuel.
Restructuring
charges of $522,000 were incurred in the first three months of 2008, of which
$11,000 are 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.
The
restructuring charges included $226,000 in NA/HME, $226,000 in Europe and
$70,000 in Asia/Pacific. Of the total charges incurred to date,
$1,070,000 remained unpaid as of March 31, 2008 with $940,000 unpaid related to
NA/HME; $86,000 unpaid related to Europe; and $44,000 unpaid related to
Asia/Pacific. There have been no material changes in accrued balances
related to the charge, either as a result of revisions in the plan or changes in
estimates, and the company expects to utilize the accruals recorded through
March 31, 2008 during 2008. With additional actions to be undertaken
during the remainder of 2008, the company anticipates recognizing pre-tax
restructuring charges of approximately $5,000,000 for the year.
CHARGES, INTEREST AND FEES
ASSOCIATED WITH DEBT REFINANCING
As a
result of the company’s refinancing completed in the first quarter of 2007, the
company incurred in the quarter ended March 31, 2007 one-time make whole
payments to the holders of previously outstanding senior notes and incremental
interest totaling $10,900,000 and wrote-off previously capitalized costs of
$2,500,000 related to the old debt structure.
INTEREST
Interest
expense decreased $326,000 for the first quarter of 2008 compared to the same
period last year due to lower debt levels. Interest income for the
first quarter of 2008 increased $224,000 compared to the same period last year,
primarily due to interest on higher average foreign cash balances.
INCOME
TAXES
The
company had an effective tax rate of 45.6% on earnings before tax compared to an
expected rate at the US statutory rate of 35% for the three month period ended
March 31, 2008, and an effective rate of 15.9% compared to an expected benefit
of 35% at the US statutory rate on the loss before tax for the three month
period ended March 31, 2007. The company’s effective tax rate for the
three month period ended March 31, 2008 and 2007 was higher than the U.S.
federal statutory rate or benefit 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 increased by $869,000 from December 31, 2007 to
$538,721,000 at March 31, 2008, as a result of negative cash flow for the
period. The debt-to-total-capitalization ratio was 48.2% at March 31,
2008 as compared to 49.3% at the end of last year.
The
company’s cash and cash equivalents were $43,025,000 at March 31, 2008, down
from $62,200,000 at the end of the year. The cash was primarily
utilized to pay both annual bonus payments and the timing of interest payments
related to the company’s debt structure.
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, 2008, the company was in compliance with all covenant
requirements. Under the most restrictive covenant of the company’s
borrowing arrangements as of March 31, 2008, the company had the capacity to
borrow up to an additional $110,600,000.
CAPITAL
EXPENDITURES
The
company had no individually material capital expenditure commitments outstanding
as of March 31, 2008. The company estimates that capital investments for 2008
will approximate up to $25,000,000 as compared to $20,068,000 in
2007. The company believes that its balances of cash and cash
equivalents, together with funds generated from operations and existing
borrowing facilities will be sufficient to meet its operating cash requirements
and to fund required capital expenditures for the foreseeable
future.
CASH
FLOWS
Cash
flows used by operating activities were $18,455,000 for the first three months
of 2008 compared to $18,343,000 used in the first three months of
2007. Operating cash flows for the first three months of 2008 were
flat compared to the same period a year ago as the significant improvement in
net earnings in the first quarter of 2008 was offset primarily by a reduction in
accruals of which approximately $15 million related to both annual bonus
payments (earned in 2007) and interest payments related to the company’s debt
structure finalized in the first quarter of last year. In addition,
receivables and inventories were both a drain on cash flow during the quarter by
approximately $11.8 million and $10.0 million, respectively. The
receivables increase is primarily due to higher than planned sales, particularly
in March, which won’t be collected until late in the second quarter as well as
year-end 2007 collections of receivables were higher than
normal. Inventories increased in the quarter primarily in the Europe
and Asia Pacific segments to support future sales initiatives.
Cash used
for investing activities was $2,254,000 for the first three months of 2008
compared to $3,461,000 used in the first three months of 2007. The
decrease in cash used for investing activities is primarily the result of cash
receipts on company-owned life insurance policies in the current year offset by
an increase in the purchases of property, plant and equipment in the first three
months of 2008 compared to the first three months of 2007.
Cash
provided by financing activities was $913,000 for the first three months of 2008
compared to cash required of $4,286,000 in the first three months of
2007. The first quarter of 2007 financing cash flow included
$19,784,000 of financing cost payments as a result of the company refinancing
which was completed in the first quarter of 2007.
During
the first three months of 2008, the company used free cash flow of $23,890,000
compared to free cash flow of $17,299,000 used by the company in the first three
months of 2007. The decrease was primarily attributable to the same
items as noted above which impacted operating cash flows. Free cash
flow is a non-GAAP financial measure that is comprised of net cash provided by
operating activities, excluding net cash impact related to restructuring
activities, less net purchases of property and equipment, net of proceeds from
sales of property and equipment. Management believes that this
financial measure provides meaningful information for evaluating the overall
financial performance of the company and its ability to repay debt or make
future investments (including, for example, acquisitions). However,
it should be noted that the company’s definition of free cash flow may not be
comparable to similar measures disclosed by other companies because not all
companies calculate free cash flow in the same manner.
The
non-GAAP financial measure is reconciled to the GAAP measure as follows (in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
cash used by operating activities
|
|
|
|
|
|
|
|
|
Net
cash impact related to restructuring activities
|
|
|
1,078
|
|
|
|
4,371
|
|
Less: Purchases
of property and equipment - net
|
|
|
|
|
|
|
|
|
Free
Cash Flow
|
|
$
|
(23,890
|
)
|
|
$
|
(17,299
|
)
|
DIVIDEND
POLICY
On
February 7, 2008, the company’s Board of Directors declared a quarterly cash
dividend of $0.0125 per Common Share to shareholders of record as of April 3,
2008, which was paid on April 11, 2008. At the current rate, the cash
dividend will amount to $0.05 per Common Share on an annual basis.
CRITICAL ACCOUNTING
POLICIES
The
Consolidated Financial Statements included in this Quarterly Report on Form 10-Q
include accounts of the company, all majority-owned subsidiaries and a variable
interest entity for which the company was the primary beneficiary in 2007. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying Consolidated Financial Statements and related footnotes. In
preparing the financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
The
following critical accounting policies, among others, affect the more
significant judgments and estimates used in preparation of the company’s
consolidated financial statements.
Revenue
Recognition
Invacare’s
revenues are recognized when products are shipped to unaffiliated customers. The
SEC’s Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition,” as
updated by SAB No. 104, provides guidance on the application of
generally accepted accounting principles (GAAP) to selected revenue
recognition issues. The company has concluded that its revenue recognition
policy is appropriate and in accordance with GAAP and
SAB No. 101. Shipping and handling costs are included in
cost of goods sold.
Sales are
made only to customers with whom the company believes collection is reasonably
assured based upon a credit analysis, which may include obtaining a credit
application, a signed security agreement, personal guarantee and/or a cross
corporate guarantee depending on the credit history of the customer. Credit
lines are established for new customers after an evaluation of their credit
report and/or other relevant financial information. Existing credit lines are
regularly reviewed and adjusted with consideration given to any outstanding past
due amounts.
The
company offers discounts and rebates, which are accounted for as reductions to
revenue in the period in which the sale is recognized. Discounts offered
include: cash discounts for prompt payment, base and trade discounts based on
contract level for specific classes of customers. Volume discounts and rebates
are given based on large purchases and the achievement of certain sales volumes.
Product returns are accounted for as a reduction to reported sales with
estimates recorded for anticipated returns at the time of sale. The company does
not sell any goods on consignment.
Distributed
products sold by the company are accounted for in accordance with Emerging
Issues Task Force, or “EITF” No. 99-19 Reporting Revenue Gross as a
Principal versus Net as an Agent. The company records
distributed product sales gross as a principal since the company takes title to
the products and has the risks of loss for collections, delivery and
returns.
Product
sales that give rise to installment receivables are recorded at the time of sale
when the risks and rewards of ownership are transferred. In December 2000, the
company entered into an agreement with DLL, a third party financing company, to
provide the majority of future lease financing to Invacare customers. As such,
interest income is recognized based on the terms of the installment agreements.
Installment accounts are monitored and if a customer defaults on payments,
interest income is no longer recognized. All installment accounts are accounted
for using the same methodology, regardless of duration of the installment
agreements.
Allowance for Uncollectible
Accounts Receivable
Accounts
receivable are reduced by an allowance for amounts that may become uncollectible
in the future. Substantially all of the company’s receivables are due from
health care, medical equipment dealers and long term care facilities located
throughout the United States, Australia, Canada, New Zealand and Europe. A
significant portion of products sold to dealers, both foreign and domestic, is
ultimately funded through government reimbursement programs such as Medicare and
Medicaid. As a consequence, changes in these programs can have an adverse impact
on dealer liquidity and profitability. The estimated allowance for uncollectible
amounts is based primarily on management’s evaluation of the financial condition
of the customer. In addition, as a result of the third party financing
arrangement, management monitors the collection status of these contracts in
accordance with the company’s limited recourse obligations and provides amounts
necessary for estimated losses in the allowance for doubtful
accounts.
In 2006,
the company recorded an incremental accounts receivable reserve of $26,775,000
due to the increased collectibility risk to the company resulting from changes
in Medicare reimbursement regulations, specifically changes to the qualification
processes and reimbursement levels of power wheelchairs. The company has
reviewed the accounts receivables associated with many of the company’s
customers that are most exposed to these issues. The company is also working
with certain of its customers in an effort to help them reduce costs and improve
their profitability. In addition, the company has also implemented tighter
credit policies with many of these accounts.
The
company continues to closely monitor the credit-worthiness of its customers and
adhere to tight credit policies. Due to delays in the implementation
of various government reimbursement policies, including national competitive
bidding, there still remains significant uncertainty as to the impact that those
changes will have on the company’s customers.
Inventories and Related
Allowance for Obsolete and Excess Inventory
Inventories
are stated at the lower of cost or market with cost determined by the first-in,
first-out method. Inventories have been reduced by an allowance for
excess and obsolete inventories. The estimated allowance is based on
management’s review of inventories on hand compared to estimated future usage
and sales. A provision for excess and obsolete inventory is recorded
as needed based upon the discontinuation of products, redesigning of existing
products, new product introductions, market changes and safety
issues. Both raw materials and finished goods are reserved for on the
balance sheet.
In
general, Invacare reviews inventory turns as an indicator of obsolescence or
slow moving product as well as the impact of new product introductions.
Depending on the situation, the company may partially or fully reserve for the
individual item. The company continues to increase its overseas sourcing
efforts, increase its emphasis on the development and introduction of new
products, and decrease the cycle time to bring new product offerings to market.
These initiatives are sources of inventory obsolescence for both raw material
and finished goods.
Goodwill, Intangible and
Other Long-Lived Assets
Property,
equipment, intangibles and certain other long-lived assets are amortized over
their useful lives. Useful lives are based on management’s estimates of the
period that the assets will generate revenue. Under SFAS No. 142,
Goodwill and Other Intangible
Assets, goodwill and intangible assets deemed to have indefinite lives
are subject to annual impairment tests. Furthermore, goodwill and other
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The company completes its annual impairment tests in the fourth
quarter of each year. The discount rates used have a significant
impact upon the discounted cash flow methodology utilized in our annual
impairment testing as higher discount rates decrease the fair value estimates
used in our testing.
The
company utilizes a discounted cash flow method model to analyze reporting units
for impairment in which the company forecasts income statement and balance sheet
amounts based on assumptions regarding future sales growth, profitability,
inventory turns, days’ sales outstanding, etc. to forecast future cash
flows. The cash flows are discounted using a weighted average cost of
capital discount rate where the cost of debt is based on quoted rates for
20-year debt of companies of similar credit risk and the cost of equity is based
upon the 20-year treasury rate for the risk free rate, a market risk premium,
the industry average beta, a small cap stock adjustment and company specific
risk premiums. While no impairment was indicated in 2007 for any reporting
units, a future potential impairment is possible for any or the company’s
reporting units should actual results differ materially from forecasted
results.
Product
Liability
The
company’s captive insurance company, Invatection Insurance Co., currently has a
policy year that runs from September 1 to August 31 and insures annual
policy losses of $10,000,000 per occurrence and $13,000,000 in the
aggregate of the company’s North American product liability exposure. The
company also has additional layers of external insurance coverage insuring up to
$75,000,000 in annual aggregate losses arising from individual claims anywhere
in the world that exceed the captive insurance company policy limits or the
limits of the company’s per country foreign liability limits, as applicable.
There can be no assurance that Invacare’s current insurance levels will continue
to be adequate or available at affordable rates.
Product
liability reserves are recorded for individual claims based upon historical
experience, industry expertise and indications from the third-party actuary.
Additional reserves, in excess of the specific individual case reserves, are
provided for incurred but not reported claims based upon third-party actuarial
valuations at the time such valuations are conducted. Historical claims
experience and other assumptions are taken into consideration by the third-party
actuary to estimate the ultimate reserves. For example, the actuarial analysis
assumes that historical loss experience is an indicator of future experience,
that the distribution of exposures by geographic area and nature of operations
for ongoing operations is expected to be very similar to historical operations
with no dramatic changes and that the government indices used to trend losses
and exposures are appropriate. Estimates made are adjusted on a regular basis
and can be impacted by actual loss award settlements on claims. While actuarial
analysis is used to help determine adequate reserves, the company accepts
responsibility for the determination and recording of adequate reserves in
accordance with accepted loss reserving standards and practices.
Warranty
Generally,
the company’s products are covered from the date of sale to the customer by
warranties against defects in material and workmanship for various periods
depending on the product. Certain components carry a lifetime warranty. A
provision for estimated warranty cost is recorded at the time of sale based upon
actual experience. The company continuously assesses the adequacy of its product
warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company’s warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty reserves were
necessary in the current year. See Warranty Costs in the Notes to the Condensed
Consolidated Financial Statements included in this report for a reconciliation
of the changes in the warranty accrual.
Accounting for Stock-Based
Compensation
Effective
January 1, 2006, the company adopted Statement of Financial Accounting
Standard No. 123 (Revised 2004), Share Based Payment
(“SFAS 123R”) using the modified prospective application method. Under the
modified prospective method, compensation cost was recognized for: (1) all
stock-based payments granted subsequent to January 1, 2006 based upon the
grant-date fair value calculated in accordance with SFAS 123R, and
(2) all stock-based payments granted prior to, but not vested as of,
January 1, 2006 based upon grant-date fair value previously calculated for
previously presented pro forma footnote disclosures in accordance with the
original provisions of SFAS No. 123, Accounting for Stock Based
Compensation.
Upon
adoption of SFAS 123R, the company did not make any other modifications to
the terms of any previously granted options. However, the terms of new awards
granted since the adoption of SFAS 123R have been modified, as compared to the
terms of the awards granted prior to the adoption of SFAS 123R, so
that the vesting periods are deemed to be substantive for those who may be
retiree eligible. No changes were made regarding the valuation methodologies or
assumptions used to determine the fair value of options granted and the company
continues to use a Black-Scholes valuation model. As of March 31, 2008, there
was $8,353,000 of total unrecognized compensation cost from stock-based
compensation arrangements granted under the company’s plans, which is related to
non-vested shares, and includes $3,382,000 related to restricted stock
awards. The company expects the compensation expense to be recognized
over approximately four years.
The
majority of the options awarded have been granted at exercise prices equal to
the market value of the underlying stock on the date of
grant. Restricted stock awards granted without cost to the recipients
are expensed on a straight-line basis over the vesting periods.
Income
Taxes
As part
of the process of preparing its financial statements, the company is required to
estimate income taxes in various jurisdictions. The process requires estimating
the company’s current tax exposure, including assessing the risks associated
with tax audits, as well as estimating temporary differences due to the
different treatment of items for tax and accounting policies. The temporary
differences are reported as deferred tax assets and or liabilities. The company
also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be
established. In the event that actual results differ from its estimates, the
company’s provision for income taxes could be materially
impacted.
The
company does not believe that there is a substantial likelihood that materially
different amounts would be reported related to its critical accounting
policies.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In
September, 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157 (FAS 157), Fair Value Measurements,
which creates a framework for measuring fair value, clarifies the definition of
fair value and expands the disclosures regarding fair value
measurements. FAS 157 does not require any new fair value
measurements. The company adopted the new standard as of January 1, 2008
and the adoption had no material impact on the company’s financial position,
results of operations or cash flows.
In
December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS
141R), which changes the accounting for business acquisitions. SFAS 141(R)
requires the acquiring entity in a business combination to recognize all the
assets acquired and liabilities assumed in the transaction and establishes
principles and requirements as to how an acquirer should recognize and measure
in its financial statements the assets acquired, liabilities assumed, any
non-controlling interest and goodwill acquired. SFAS 141(R) also
requires expanded disclosure regarding the nature and financial effects of a
business combination. SFAS 141(R) is effective for the company
beginning January 1, 2009 and the company is currently evaluating the future
impacts and disclosures of this standard.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (SFAS 161). SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for the company beginning January 1, 2009 and
the company is currently evaluating the effect that adoption will have on
its 2009 financial statements.
On
September 5, 2007, the FASB exposed for comment FASB Staff Position APB 14-a
(FSP APB 14-a) to provide clarification of the accounting for convertible debt
that can be settled in cash upon conversion. The FASB believes this
clarification is needed because the current accounting being applied for
convertible debt does not fully reflect the true economic impact on the issuer
since the conversion option is not captured as a borrowing cost and its full
dilutive effect is not included in earnings per share. The proposed
FSP would require separate accounting for the liability and equity components of
the convertible debt in a manner that would reflect Invacare’s nonconvertible
debt borrowing rate. The company would be required to bifurcate a
component of its convertible debt as a component of stockholders’ equity and
accrete the resulting debt discount as interest expense. The FASB
recently reaffirmed the proposed FASB Staff Position (FSP) and is planning to
vote by ballot and then issue the final FSP. Should the proposed FSP
become effective as drafted, the change may materially impact the company’s
interest expense and earnings per share. The most recent proposed
effective date was January 1, 2009 with retrospective application required for
all periods presented and no grandfathering for existing
instruments.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The company uses
interest swap agreements to mitigate its exposure to interest rate fluctuations.
Based on March 31, 2008 debt levels, a 1% change in interest rates would impact
interest expense by approximately $622,000. Additionally, the company operates
internationally and, as a result, is exposed to foreign currency fluctuations.
Specifically, the exposure results from intercompany loans and third party sales
or payments. In an attempt to reduce this exposure, foreign currency forward
contracts are utilized. The company does not believe that any potential loss
related to these financial instruments would have a material adverse effect on
the company’s financial condition or results of operations.
FORWARD-LOOKING
STATEMENTS
This Form
10-Q contains forward-looking statements within the meaning of the “Safe Harbor”
provisions of the Private Securities Litigation Reform Act of 1995. Terms such
as “will,” “should,” “plan,” “intend,” “expect,” “continue,” “forecast”,
“believe,” “anticipate” and “seek,” as well as similar comments, are
forward-looking in nature. Actual results and events may differ significantly
from those expressed or anticipated as a result of risks and uncertainties which
include, but are not limited to, the following: possible adverse effects of
being substantially leveraged, which could impact our ability to raise capital,
limit our ability to react to changes in the economy or our industry or expose
us to interest rate or event of default risks; changes in government and other
third-party payor reimbursement levels and practices, including further pricing
pressures from competitive bidding; 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; in ability to achieve market acceptance of changes in pricing of our
products; extensive government regulation of our products; lower cost imports;
increased freight costs; failure to comply with regulatory requirements or
receive regulatory clearance or approval for our products or operations in the
United States or abroad; potential product recalls; uncollectible accounts
receivable; difficulties in implementing a new Enterprise Resource Planning
system; legal actions or regulatory proceedings and governmental investigations;
product liability claims; inadequate patents or other intellectual property
protection; incorrect assumptions concerning demographic trends that impact the
market for our products; provisions of Ohio law or in our debt agreements, our
shareholder rights plan or our charter documents that may prevent or delay a
change in control; the loss of the services of our key management and personnel;
decreased availability or increased costs of raw materials which could increase
our costs of producing our products; inability to acquire strategic acquisition
candidates because of limited financing alternatives; risks inherent in managing
and operating businesses in many different foreign jurisdictions; exchange rate
fluctuations, as well as the risks described from time to time in Invacare’s
reports as filed with the Securities and Exchange Commission. Except to the
extent required by law, we do not undertake and specifically decline any
obligation to review or update any forward-looking statements or to publicly
announce the results of any revisions to any of such statements to reflect
future events or developments or otherwise.
|
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, 2008, an evaluation was performed, under the supervision and with the
participation of the company’s management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company’s
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the company’s disclosure controls and procedures were effective
as of March 31, 2008, in ensuring that information required to be disclosed by
the company in the reports it files and submits under the Exchange Act is
(1) recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms and (2) accumulated and
communicated to the company’s management, including the Chief Executive Officer
and the Chief Financial Officer, as appropriate to allow for timely decisions
regarding required disclosure. There were no changes in the company’s
internal control over financial reporting that occurred during the company’s
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the company’s internal control over financial
reporting.
In
addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed in Item 1A of the company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds.
|
(c) During the
quarter ended March 31, 2008, there were no common shares surrendered to the
company by employees for tax withholding purposes in conjunction with the
vesting of restricted shares held by the employees under the company’s 2003
Performance Plan.
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 6, 2008
|
By:
|
/s/
Robert K. Gudbranson
|
|
|
|
Name:
Robert K. Gudbranson
|
|
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|
Title:
Chief Financial Officer
|
|
|
|
(As
Principal Financial and Accounting Officer and on behalf of the
registrant)
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