UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2009
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission
File Number 001-15103
INVACARE
CORPORATION
(Exact
name of registrant as specified in its charter)
Ohio
|
95-2680965
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer Identification No)
|
|
|
One
Invacare Way, P.O. Box 4028, Elyria, Ohio
|
44036
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(440)
329-6000
|
(Registrant's
telephone number, including area code)
|
|
_____________________________________________________________
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the
“Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
X No__
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files) Yes
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act (Check One). Large accelerated filer X
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company) Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No X
As of
November 4, 2009, the registrant had 31,195,416 Common Shares and 1,109,685
Class B Common Shares outstanding.
INVACARE
CORPORATION
|
FINANCIAL
INFORMATION
|
|
Financial
Statements.
|
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
(In
thousands)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
27,821
|
|
|
$
|
47,516
|
|
Marketable
securities
|
|
|
316
|
|
|
|
72
|
|
Trade
receivables, net
|
|
|
259,223
|
|
|
|
266,483
|
|
Installment
receivables, net
|
|
|
3,820
|
|
|
|
4,267
|
|
Inventories,
net
|
|
|
183,426
|
|
|
|
178,737
|
|
Deferred
income taxes
|
|
|
2,310
|
|
|
|
2,051
|
|
Other
current assets
|
|
|
47,398
|
|
|
|
51,932
|
|
TOTAL
CURRENT ASSETS
|
|
|
524,314
|
|
|
|
551,058
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
57,521
|
|
|
|
60,451
|
|
OTHER
INTANGIBLES
|
|
|
86,026
|
|
|
|
84,766
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
139,573
|
|
|
|
143,512
|
|
GOODWILL
|
|
|
534,365
|
|
|
|
474,686
|
|
TOTAL
ASSETS
|
|
$
|
1,341,799
|
|
|
$
|
1,314,473
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
135,083
|
|
|
$
|
119,633
|
|
Accrued
expenses
|
|
|
128,279
|
|
|
|
143,612
|
|
Accrued
income taxes
|
|
|
2,383
|
|
|
|
3,054
|
|
Short-term
debt and current maturities of long-term obligations
|
|
|
2,800
|
|
|
|
18,699
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
268,545
|
|
|
|
284,998
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
320,696
|
|
|
|
407,707
|
|
OTHER
LONG-TERM OBLIGATIONS
|
|
|
95,076
|
|
|
|
88,826
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
shares
|
|
|
-
|
|
|
|
-
|
|
Common
shares
|
|
|
8,231
|
|
|
|
8,119
|
|
Class
B common shares
|
|
|
278
|
|
|
|
278
|
|
Additional
paid-in-capital
|
|
|
224,938
|
|
|
|
215,279
|
|
Retained
earnings
|
|
|
329,031
|
|
|
|
306,698
|
|
Accumulated
other comprehensive earnings
|
|
|
148,946
|
|
|
|
50,789
|
|
Treasury
shares
|
|
|
(53,942
|
)
|
|
|
(48,221
|
)
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
657,482
|
|
|
|
532,942
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
1,341,799
|
|
|
$
|
1,314,473
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
thousands except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$
|
434,031
|
|
|
$
|
461,836
|
|
|
$
|
1,244,567
|
|
|
$
|
1,325,266
|
|
Cost
of products sold
|
|
|
302,577
|
|
|
|
330,905
|
|
|
|
886,590
|
|
|
|
956,954
|
|
Gross
profit
|
|
|
131,454
|
|
|
|
130,931
|
|
|
|
357,977
|
|
|
|
368,312
|
|
Selling,
general and administrative expense
|
|
|
104,344
|
|
|
|
106,181
|
|
|
|
296,416
|
|
|
|
308,396
|
|
Charge
related to restructuring activities
|
|
|
1,857
|
|
|
|
283
|
|
|
|
3,757
|
|
|
|
1,653
|
|
Interest
expense
|
|
|
7,760
|
|
|
|
10,570
|
|
|
|
26,096
|
|
|
|
32,060
|
|
Interest
income
|
|
|
(283
|
)
|
|
|
(753
|
)
|
|
|
(1,076
|
)
|
|
|
(2,343
|
)
|
Earnings
before income taxes
|
|
|
17,776
|
|
|
|
14,650
|
|
|
|
32,784
|
|
|
|
28,546
|
|
Income
taxes
|
|
|
4,300
|
|
|
|
3,925
|
|
|
|
9,250
|
|
|
|
10,265
|
|
NET
EARNINGS
|
|
$
|
13,476
|
|
|
$
|
10,725
|
|
|
$
|
23,534
|
|
|
$
|
18,281
|
|
DIVIDENDS
DECLARED PER COMMON SHARE
|
|
|
.0125
|
|
|
|
.0125
|
|
|
|
.0375
|
|
|
|
.0375
|
|
Net
earnings per share – basic
|
|
$
|
0.42
|
|
|
$
|
0.34
|
|
|
$
|
0.74
|
|
|
$
|
0.57
|
|
Weighted
average shares outstanding - basic
|
|
|
31,970
|
|
|
|
31,908
|
|
|
|
31,945
|
|
|
|
31,896
|
|
Net
earnings per share – assuming dilution
|
|
$
|
0.42
|
|
|
$
|
0.33
|
|
|
$
|
0.74
|
|
|
$
|
0.57
|
|
Weighted
average shares outstanding - assuming dilution
|
|
|
32,004
|
|
|
|
32,031
|
|
|
|
31,952
|
|
|
|
31,977
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
OPERATING
ACTIVITIES
|
|
(In thousands)
|
|
Net
earnings
|
|
$
|
23,534
|
|
|
$
|
18,281
|
|
Adjustments
to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Amortization
of convertible debt discount
|
|
|
3,062
|
|
|
|
2,730
|
|
Depreciation
and amortization
|
|
|
29,852
|
|
|
|
33,305
|
|
Provision
for losses on trade and installment receivables
|
|
|
14,157
|
|
|
|
10,576
|
|
Provision
for other deferred liabilities
|
|
|
1,976
|
|
|
|
2,313
|
|
Provision
for deferred income taxes
|
|
|
460
|
|
|
|
619
|
|
Provision
for stock-based compensation
|
|
|
3,310
|
|
|
|
2,173
|
|
Loss
(gain) on disposals of property and equipment
|
|
|
379
|
|
|
|
(110
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
9,782
|
|
|
|
(26,799
|
)
|
Installment
sales contracts, net
|
|
|
(2,821
|
)
|
|
|
(3,082
|
)
|
Inventories
|
|
|
6,131
|
|
|
|
(18,047
|
)
|
Other
current assets
|
|
|
9,257
|
|
|
|
4,436
|
|
Accounts
payable
|
|
|
9,613
|
|
|
|
(8,002
|
)
|
Accrued
expenses
|
|
|
(22,585
|
)
|
|
|
785
|
|
Other
deferred liabilities
|
|
|
(100
|
)
|
|
|
(3,544
|
)
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
86,007
|
|
|
|
15,634
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(10,516
|
)
|
|
|
(15,007
|
)
|
Proceeds
from sale of property and equipment
|
|
|
1,111
|
|
|
|
58
|
|
Other
long term assets
|
|
|
(461
|
)
|
|
|
4,470
|
|
Business
acquisitions, net of cash acquired
|
|
|
-
|
|
|
|
(2,152
|
)
|
Other
|
|
|
(270
|
)
|
|
|
1,348
|
|
NET
CASH USED FOR INVESTING ACTIVITIES
|
|
|
(10,136
|
)
|
|
|
(11,283
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from revolving lines of credit and long-term borrowings
|
|
|
274,420
|
|
|
|
266,054
|
|
Payments
on revolving lines of credit, long-term borrowings and capital lease
obligations
|
|
|
(373,335
|
)
|
|
|
(294,448
|
)
|
Proceeds
from exercise of stock options
|
|
|
1,001
|
|
|
|
834
|
|
Payment
of dividends
|
|
|
(1,201
|
)
|
|
|
(1,199
|
)
|
NET
CASH USED BY FINANCING ACTIVITIES
|
|
|
(99,115
|
)
|
|
|
(28,759
|
)
|
Effect
of exchange rate changes on cash
|
|
|
3,549
|
|
|
|
(412
|
)
|
Decrease
in cash and cash equivalents
|
|
|
(19,695
|
)
|
|
|
(24,820
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
47,516
|
|
|
|
62,200
|
|
Cash
and cash equivalents at end of period
|
|
$
|
27,821
|
|
|
$
|
37,380
|
|
See notes
to condensed consolidated financial statements.
INVACARE
CORPORATION AND SUBSIDIARIES
Financial
Statements
(Unaudited)
September
30, 2009
Nature of Operations -
Invacare Corporation is the world’s leading manufacturer and distributor
in the $8.0 billion worldwide market for medical equipment used in the home
based upon our distribution channels, breadth of product line and net sales. The
company designs, manufactures and distributes an extensive line of health care
products for the non-acute care environment, including the home health care,
retail and extended care markets.
Principles of Consolidation -
The consolidated financial statements include the accounts of the company
and its wholly owned subsidiaries and include all adjustments, which were of a
normal recurring nature, necessary to present fairly the financial position of
the company as of September 30, 2009, the results of its operations for the
three and nine months ended September 30, 2009 and 2008, respectively, and
changes in its cash flows for the nine months ended September 30, 2009 and 2008,
respectively. Certain foreign subsidiaries, represented by the
European segment, are consolidated using an August 31 quarter end in order to
meet filing deadlines. No material subsequent events have occurred related to
the European segment, which would require disclosure or adjustment to the
company’s financial statements. The results of operations for the three and nine
months ended September 30, 2009 are not necessarily indicative of the results to
be expected for the full year. All significant intercompany transactions
are eliminated.
Adoption of new Accounting Standard -
In June 2009, the Financial Accounting Standards Board (“FASB”) issued
ASC 105 which modifies the Generally Accepted Accounting Principles (“GAAP”)
hierarchy by establishing only two levels of GAAP, authoritative and
nonauthoritative accounting literature. Effective July 2009, the FASB Accounting
Standards Codification (“ASC”), also known collectively as the “Codification,”
is considered the single source of authoritative U.S. accounting and reporting
standards, except for additional authoritative rules and interpretive releases
issued by the SEC. Nonauthoritative guidance and literature would include,
among other things, FASB Concepts Statements, American Institute of Certified
Public Accountants Issue Papers and Technical Practice Aids and accounting
textbooks. The Codification was developed to organize GAAP pronouncements by
topic so that users can more easily access authoritative accounting
guidance. It is organized by topic, subtopic, section, and paragraph, each
of which is identified by a numerical designation. This statement
applies beginning in third quarter 2009. All accounting references
have been updated, and therefore SFAS references have been replaced with ASC
references.
In May
2009, Subsequent Events,
ASC 855, was issued that provides authoritative guidance regarding
subsequent events as this guidance was previously only addressed in auditing
literature. The company adopted ASC 855 effective June 30, 2009 and the adoption
had no material impact on the company’s financial position, results of
operations or cash flows. The company has evaluated subsequent events
through, November 5, 2009, the date of filing of this report with the Securities
and Exchange Commission.
On
May 9, 2008, Convertible
Debt, ASC 470-20, was issued that provides clarification of the
accounting for convertible debt that can be settled in cash upon
conversion. The FASB believed this clarification was needed because the
accounting that was being applied for convertible debt prior to ASC 470-20 did
not fully reflect the true economic impact on the issuer since the conversion
option was not captured as a borrowing cost and its full dilutive effect was not
included in earnings per share. ASC 470-20 requires separate accounting
for the liability and equity components of the convertible debt in a manner that
would reflect Invacare’s nonconvertible debt borrowing rate. Accordingly,
the company had to bifurcate a component of its convertible debt as a component
of stockholders’ equity ($59,012,000 as of the retrospective adoption date of
February 12, 2007) and will accrete the resulting debt discount as interest
expense. The company adopted ASC 470-20 effective January 1, 2009 and,
as a result, reported interest expense increased and net earnings decreased by
$1,050,000 ($0.03 per share) and $936,000 ($0.03 per share) for the quarters
ended September 30, 2009 and 2008, respectively; by $3,062,000 ($0.10 per share)
and $2,730,000 ($0.09 per share) for the nine month periods ended September 30,
2009 and 2008, respectively and by $3,695,000 ($0.12 per share) and $2,904,000
($0.09 per share) for the years 2008 and 2007, respectively. ASC
470-20 required retrospective application upon adoption and accordingly, amounts
for 2008 and 2007 are being and will continue to be restated in the 2009
financial statements.
Reclassifications - Certain
segment reclassifications have been made to the prior years’ consolidated
financial statements to conform to the presentation used for the three and nine
month periods ended September 30, 2009 as management changed how it views
segment earnings.
Use of Estimates - The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates.
Business Segments
- The company operates in
five primary business segments: North America / Home Medical
Equipment (NA/HME), Invacare Supply Group (ISG), Institutional Products Group
(IPG), Europe and Asia/Pacific. The NA/HME segment sells each of three
primary product lines, which includes: standard, rehab and respiratory products.
Invacare Supply Group sells distributed product and the Institutional Products
Group sells health care furnishings and accessory products. Europe and
Asia/Pacific sell all of the same product lines with the exception of
distributed products. Each business segment sells to the home health care,
retail and extended care markets.
Invacare
distributes numerous lines of branded medical supplies including ostomy,
incontinence, diabetic, interals, wound care and urology products as wells as
home medical equipment, including aids for daily living. ISG also
sells through the retail market.
Invacare,
operating as IPG, is a manufacturer and distributor of healthcare furnishings
including beds, case goods and patient handling equipment for the long-term care
markets, specialty clinical recliners for dialysis and oncology clinics and
certain other home medical equipment and accessory products. The
company’s Asia/Pacific operations consist of Invacare Australia, which
distributes the Invacare range of products which includes: manual and power
wheelchairs, lifts, ramps, beds, furniture and pressure care products; Dynamic
Controls, which manufactures electronic operating components used in power
wheelchairs, scooters and other products; Invacare New Zealand, which
distributes a wide range of home medical equipment; and Invacare Asia, which
imports and distributes home medical equipment to the Asian
markets.
The company’s European operations
operate as a “common market” company with sales throughout Europe. The European
operations currently sell a line of products providing room for growth as
Invacare continues to broaden its product line offerings to more closely
resemble those of its North American operations. The company evaluates performance and
allocates resources based on profit or loss from operations before income taxes
for each reportable segment. The accounting policies of each segment are the
same as those described in the summary of significant accounting policies for
the company’s consolidated financial statements. Intersegment sales and
transfers are based on the costs to manufacture plus a reasonable profit
element.
Earnings
(loss) before income tax amounts for 2008 have been restated to reflect the
amortization of the convertible debt discount recorded as a result of the
company’s adoption of ASC 470-20. As a result of the restatement,
earnings before income taxes decreased by $1,050,000 and $3,062,000 for NA/HME
and the consolidated company for the three and nine months ended September 30,
2009, respectively, and decreased by $936,000 and $2,730,000 for NA/HME and the
consolidated company for the three and nine months ended September 30, 2008,
respectively. In addition, effective January 1, 2009, segment
earnings before income taxes have been changed to reflect how management
currently views earnings before income taxes for the
segments. Specifically, Asia/Pacific earnings before income taxes now
includes profit on intercompany sales with an offsetting adjustment to All Other
and NA/HME now includes a greater allocation of interest expense with an
offsetting reduction for Europe. The prior year has been reclassified
to conform to the current year presentation.
The
information by segment is as follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
185,072
|
|
|
$
|
191,218
|
|
|
$
|
559,851
|
|
|
$
|
554,162
|
|
Invacare
Supply Group
|
|
|
70,825
|
|
|
|
67,604
|
|
|
|
204,688
|
|
|
|
197,383
|
|
Institutional
Products Group
|
|
|
23,462
|
|
|
|
26,320
|
|
|
|
67,469
|
|
|
|
74,794
|
|
Europe
|
|
|
134,604
|
|
|
|
151,478
|
|
|
|
360,209
|
|
|
|
423,458
|
|
Asia/Pacific
|
|
|
20,068
|
|
|
|
25,216
|
|
|
|
52,350
|
|
|
|
75,469
|
|
Consolidated
|
|
$
|
434,031
|
|
|
$
|
461,836
|
|
|
$
|
1,244,567
|
|
|
$
|
1,325,266
|
|
Intersegment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
21,775
|
|
|
$
|
15,456
|
|
|
$
|
50,459
|
|
|
$
|
43,843
|
|
Invacare
Supply Group
|
|
|
16
|
|
|
|
189
|
|
|
|
214
|
|
|
|
424
|
|
Institutional
Products Group
|
|
|
561
|
|
|
|
694
|
|
|
|
1,711
|
|
|
|
2,077
|
|
Europe
|
|
|
2,868
|
|
|
|
2,549
|
|
|
|
6,719
|
|
|
|
9,688
|
|
Asia/Pacific
|
|
|
7,331
|
|
|
|
8,499
|
|
|
|
22,724
|
|
|
|
24,369
|
|
Consolidated
|
|
$
|
32,551
|
|
|
$
|
27,387
|
|
|
$
|
81,827
|
|
|
$
|
80,401
|
|
Charge
related to restructuring before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
(80
|
)
|
|
$
|
(153
|
)
|
|
$
|
255
|
|
|
$
|
102
|
|
Invacare
Supply Group
|
|
|
60
|
|
|
|
1,598
|
|
|
|
60
|
|
|
|
1,598
|
|
Institutional
Products Group
|
|
|
-
|
|
|
|
-
|
|
|
|
171
|
|
|
|
115
|
|
Europe
|
|
|
1,810
|
|
|
|
213
|
|
|
|
2,434
|
|
|
|
996
|
|
Asia/Pacific
|
|
|
365
|
|
|
|
223
|
|
|
|
1,135
|
|
|
|
511
|
|
Consolidated
|
|
$
|
2,155
|
|
|
$
|
1,881
|
|
|
$
|
4,055
|
|
|
$
|
3,322
|
|
Earnings
(loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America / HME
|
|
$
|
9,679
|
|
|
$
|
3,720
|
|
|
$
|
24,986
|
|
|
$
|
10,905
|
|
Invacare
Supply Group
|
|
|
1,567
|
|
|
|
(323
|
)
|
|
|
3,442
|
|
|
|
470
|
|
Institutional
Products Group
|
|
|
3,629
|
|
|
|
1,654
|
|
|
|
6,721
|
|
|
|
3,023
|
|
Europe
|
|
|
12,372
|
|
|
|
15,736
|
|
|
|
23,393
|
|
|
|
33,344
|
|
Asia/Pacific
|
|
|
468
|
|
|
|
2,565
|
|
|
|
131
|
|
|
|
6,788
|
|
All
Other *
|
|
|
(9,939
|
)
|
|
|
(8,702
|
)
|
|
|
(25,889
|
)
|
|
|
(25,984
|
)
|
Consolidated
|
|
$
|
17,776
|
|
|
$
|
14,650
|
|
|
$
|
32,784
|
|
|
$
|
28,546
|
|
|
“All
Other” consists of un-allocated corporate selling, general and
administrative costs, which do not meet the quantitative criteria for
determining reportable
segments.
|
Net Earnings Per Common Share
- The following table sets forth the computation of basic and diluted net
earnings per common share for the periods indicated (amounts in thousands,
except per share amounts).
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands, except per share
data)
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
31,970
|
|
|
|
31,908
|
|
|
|
31,945
|
|
|
|
31,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
13,476
|
|
|
$
|
10,725
|
|
|
$
|
23,534
|
|
|
$
|
18,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share
|
|
$
|
0.42
|
|
|
$
|
0.34
|
|
|
$
|
0.74
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
31,970
|
|
|
|
31,908
|
|
|
|
31,945
|
|
|
|
31,896
|
|
Stock
options and awards
|
|
|
34
|
|
|
|
123
|
|
|
|
7
|
|
|
|
81
|
|
Average
common shares assuming dilution
|
|
|
32,004
|
|
|
|
32,031
|
|
|
|
31,952
|
|
|
|
31,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
13,476
|
|
|
$
|
10,725
|
|
|
$
|
23,534
|
|
|
$
|
18,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share
|
|
$
|
0.42
|
|
|
$
|
0.33
|
|
|
$
|
0.74
|
|
|
$
|
0.57
|
|
At
September 30, 2009, 4,436,375 and 4,778,393 shares were excluded from the
average common shares assuming dilution for the three and nine months ended
September 30, 2009, respectively, as they were anti-dilutive. At
September 30, 2008, 2,881,198 and 4,299,531 shares were excluded from the
average common shares assuming dilution for the three and nine months ended
September 30, 2008, respectively, as they were anti-dilutive. For the
three and nine months ended September 30, 2009, the majority of the
anti-dilutive shares were granted at an exercise price of $41.87 which was
higher than the average fair market value prices of $20.41 and $17.87,
respectively. For the three and nine months ended September 30, 2008, the
majority of the anti-dilutive shares were granted at an exercise price of $41.87
which was higher than the average fair market value prices of $23.71 and $22.27,
respectively.
Concentration of Credit Risk
- The company manufactures and distributes durable medical equipment
and supplies to the home health care, retail and extended care markets. The
company performs credit evaluations of its customers’ financial condition. Prior
to December 2000, the company financed equipment to certain customers. In
December 2000, Invacare entered into an agreement with De Lage Landen, Inc.
(“DLL”), a third party financing company, to provide the majority of future
lease financing to Invacare’s North America customers. The DLL agreement
provides for direct leasing between DLL and the Invacare customer. The company
retains a recourse obligation of $29,234,000 at September 30, 2009 to DLL
for events of default under the contracts, which total $82,107,000 at September
30, 2009. Guarantees,
ASC 460, 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 $768,000 for this guarantee obligation within other long-term
obligations. 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 Receivables, ASC 310-10-05-4.
Credit losses are provided for in the financial statements.
Substantially
all of the company’s receivables are due from health care, medical equipment
providers and long term care facilities located throughout the United States,
Australia, Canada, New Zealand and Europe. A significant portion of products
sold to dealers, both foreign and domestic, is ultimately funded through
government reimbursement programs such as Medicare and Medicaid. In addition,
the company has also seen a significant shift in reimbursement to customers from
managed care entities. As a consequence, changes in these programs can have an
adverse impact on dealer liquidity and profitability. In addition, reimbursement
guidelines in the home health care industry have a substantial impact on the
nature and type of equipment an end user can obtain as well as the timing of
reimbursement and, thus, affect the product mix, pricing and payment patterns of
the company’s customers.
Goodwill and Other Intangibles
- The change in goodwill reflected on the balance sheet from December 31,
2008 to September 30, 2009 was entirely the result of foreign currency
translation.
All of
the company’s other intangible assets have definite lives and are amortized over
their useful lives, except for $34,548,000 related to trademarks, which have
indefinite lives.
As of
September 30, 2009 and December 31, 2008, other intangibles consisted of the
following (in thousands):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
Customer
lists
|
|
$
|
78,118
|
|
|
$
|
34,512
|
|
|
$
|
72,155
|
|
|
$
|
28,526
|
|
Trademarks
|
|
|
34,548
|
|
|
|
—
|
|
|
|
30,934
|
|
|
|
—
|
|
License
agreements
|
|
|
4,323
|
|
|
|
4,015
|
|
|
|
5,494
|
|
|
|
4,688
|
|
Developed
technology
|
|
|
7,207
|
|
|
|
2,305
|
|
|
|
6,698
|
|
|
|
1,942
|
|
Patents
|
|
|
7,868
|
|
|
|
6,178
|
|
|
|
6,761
|
|
|
|
4,790
|
|
Other
|
|
|
5,874
|
|
|
|
4,902
|
|
|
|
8,890
|
|
|
|
6,220
|
|
|
|
$
|
137,938
|
|
|
$
|
51,912
|
|
|
$
|
130,932
|
|
|
$
|
46,166
|
|
Amortization
expense related to other intangibles was $6,445,000 in the first nine months of
2009 and is estimated to be $8,578,000 in 2010, $8,170,000 in 2011, $7,633,000
in 2012, $6,803,000 in 2013 and $6,473,000 in 2014.
Accounting for Stock-Based
Compensation - The company accounts for share based compensation
under the provisions of the Compensation – Stock
Compensation, ASC 718. The company has not made
any modifications to the terms of any previously granted options and no changes
have been made regarding the valuation methodologies or assumptions used to
determine the fair value of options granted since 2005 and the company continues
to use a Black-Scholes valuation model. The amounts of stock-based compensation
expense recognized were as follows (in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Stock-based
compensation expense recognized as part of selling, general and
administrative expense
|
|
$
|
1,528
|
|
|
$
|
894
|
|
|
$
|
3,310
|
|
|
$
|
2,173
|
|
The 2009
and 2008 amounts above reflect compensation expense related to restricted stock
awards and nonqualified stock options awarded under the 2003 Performance
Plan. Stock-based compensation is not allocated to the business
segments, but is reported as part of All Other as shown in the company’s
Business Segment Note to the Consolidated Financial Statements.
Stock Incentive Plans - The
2003 Performance Plan, as amended (the “2003 Plan”), allows the Compensation and
Management Development Committee of the Board of Directors (the “Committee”) to
grant up to 6,800,000 Common Shares in connection with incentive stock options,
non-qualified stock options, stock appreciation rights and stock awards
(including the use of restricted stock), which includes the addition of
3,000,000 Common Shares authorized for issuance under the 2003 Plan, as approved
by the Company’s shareholders on May 21, 2009. The Committee has the
authority to determine which employees and directors will receive awards, the
amount of the awards and the other terms and conditions of the
awards. During the first nine months of 2009, the Committee granted
738,708 non-qualified stock options under the 2003 Plan with a term of ten
years, each with an exercise price equal to the fair market value of the
company’s Common Shares on the date of grant.
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 $1,238,000 was recognized related to
restricted stock awards in the first nine months of 2009 and as of September 30,
2009, outstanding restricted stock awards totaling 302,026 were not yet
vested. Restricted stock awards totaling 125,840 were granted in the
first nine months of 2009.
Stock
option activity during the nine months ended September 30, 2009 was as
follows:
|
|
2009
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstanding at January 1
|
|
|
4,910,547
|
|
|
$
|
29.38
|
|
Granted
|
|
|
738,708
|
|
|
|
20.73
|
|
Exercised
|
|
|
(346,163
|
)
|
|
|
18.63
|
|
Cancelled
|
|
|
(421,595
|
)
|
|
|
23.16
|
|
Options
outstanding at September 30
|
|
|
4,881,497
|
|
|
$
|
29.10
|
|
|
|
|
|
|
|
|
|
|
Options
price range at September 30
|
|
$
|
10.70
to
|
|
|
|
|
|
|
|
$
|
47.80
|
|
|
|
|
|
Options
exercisable at September 30
|
|
|
3,325,662
|
|
|
|
|
|
Options
available for grant at September 30*
|
|
|
3,036,340
|
|
|
|
|
|
* Options
available for grant as of September 30, 2009 are reduced by net restricted stock
award activity of 400,278 shares.
The
following table summarizes information about stock options outstanding at
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
Outstanding
|
|
|
Average
Remaining
|
|
|
Weighted
Average
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
|
|
Exercise
Prices
|
|
|
At
9/30/09
|
|
|
Contractual
Life
|
|
|
Exercise
Price
|
|
|
At
9/30/09
|
|
|
Exercise
Price
|
|
$
|
10.70
- $16.03
|
|
|
|
25,195
|
|
|
|
2.7
years
|
|
|
$
|
11.08
|
|
|
|
1,053
|
|
|
$
|
16.03
|
|
$
|
16.26
- $23.71
|
|
|
|
2,015,469
|
|
|
6.8
|
|
|
$
|
21.91
|
|
|
|
943,113
|
|
|
$
|
22.81
|
|
$
|
24.43
- $36.40
|
|
|
|
1,635,409
|
|
|
|
4.7
|
|
|
$
|
29.05
|
|
|
|
1,176,072
|
|
|
$
|
30.28
|
|
$
|
37.70
- $47.80
|
|
|
|
1,205,424
|
|
|
|
4.9
|
|
|
$
|
41.57
|
|
|
|
1,205,424
|
|
|
$
|
41.57
|
|
Total
|
|
|
|
4,881,497
|
|
|
|
5.6
|
|
|
$
|
29.10
|
|
|
|
3,325,662
|
|
|
$
|
32.25
|
|
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
September 30, 2009, there was $16,077,000 of total unrecognized compensation
cost from stock-based compensation arrangements granted under the company’s
plans, which is related to non-vested options and shares, and includes
$5,534,000 related to restricted stock awards. The company expects
the compensation expense to be recognized over approximately four
years.
Warranty Costs - Generally,
the company’s products are covered by warranties against defects in material and
workmanship for various periods depending on the product from the date of sale
to the customer. Certain components carry a lifetime warranty. A provision for
estimated warranty cost is recorded at the time of sale based upon actual
experience. The company continuously assesses the adequacy of its product
warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company’s warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty
reserves based on other events were necessary in the first nine months of
2009.
The
following is a reconciliation of the changes in accrued warranty costs for the
reporting period (in thousands):
Balance
as of January 1, 2009
|
|
$
|
16,798
|
|
Warranties
provided during the period
|
|
|
9,317
|
|
Settlements
made during the period
|
|
|
(7,055
|
)
|
Changes
in liability for pre-existing warranties during the period, including
expirations
|
|
|
1,722
|
|
Balance
as of September 30, 2009
|
|
$
|
20,782
|
|
Charges Related to Restructuring
Activities – In 2005, the company announced multi-year cost reductions
and profit improvement actions, which included: reducing global headcount,
outsourcing improvements utilizing the company’s China manufacturing capability
and third parties, shifting substantial resources from product development to
manufacturing cost reduction activities and product rationalization, reducing
freight exposure through freight auctions and changing the freight policy and
general expense reductions. 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 $4,055,000 and $3,322,000
incurred in the first nine months of 2009 and 2008, respectively, of which
$298,000 and $1,669,000, respectively, were recorded in cost of products sold as
it relates to inventory markdowns and the remaining charge amount is included on
the Charge Related to Restructuring Activities in the Condensed Consolidated
Statement of Operations as part of operations. There have been no
material changes in accrued balances related to the charge, either as a result
of revisions in the plan or changes in estimates, and the company expects to
utilize the accruals recorded through September 30, 2009 during
2009.
A
progression of the accruals by segment recorded as a result of the restructuring
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Product
Line
Discontinuance
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
January
1, 2006 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
$
|
2,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,130
|
|
ISG
|
|
|
112
|
|
|
|
—
|
|
|
|
165
|
|
|
|
—
|
|
|
|
277
|
|
Europe
|
|
|
799
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
799
|
|
Asia/Pacific
|
|
|
63
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63
|
|
Total
|
|
$
|
3,104
|
|
|
$
|
—
|
|
|
$
|
165
|
|
|
$
|
—
|
|
|
$
|
3,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
5,549
|
|
|
|
2,719
|
|
|
|
1,346
|
|
|
|
—
|
|
|
|
9,614
|
|
ISG
|
|
|
457
|
|
|
|
552
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,009
|
|
IPG
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
Europe
|
|
|
5,208
|
|
|
|
455
|
|
|
|
—
|
|
|
|
2,995
|
|
|
|
8,658
|
|
Asia/Pacific
|
|
|
621
|
|
|
|
557
|
|
|
|
745
|
|
|
|
8
|
|
|
|
1,931
|
|
Total
|
|
$
|
11,873
|
|
|
$
|
4,283
|
|
|
$
|
2,091
|
|
|
$
|
3,003
|
|
|
$
|
21,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(6,320
|
)
|
|
|
(682
|
)
|
|
|
(789
|
)
|
|
|
—
|
|
|
|
(7,791
|
)
|
ISG
|
|
|
(403
|
)
|
|
|
(552
|
)
|
|
|
(165
|
)
|
|
|
—
|
|
|
|
(1,120
|
)
|
IPG
|
|
|
(38
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(38
|
)
|
Europe
|
|
|
(2,273
|
)
|
|
|
(455
|
)
|
|
|
—
|
|
|
|
(2,995
|
)
|
|
|
(5,723
|
)
|
Asia/Pacific
|
|
|
(684
|
)
|
|
|
(557
|
)
|
|
|
(623
|
)
|
|
|
(8
|
)
|
|
|
(1,872
|
)
|
Total
|
|
$
|
(9,718
|
)
|
|
$
|
(2,246
|
)
|
|
$
|
(1,577
|
)
|
|
$
|
(3,003
|
)
|
|
$
|
(16,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Product
Line
Discontinuance
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
December 31,
2006 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
1,359
|
|
|
|
2,037
|
|
|
|
557
|
|
|
|
—
|
|
|
|
3,953
|
|
ISG
|
|
|
166
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166
|
|
Europe
|
|
|
3,734
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,734
|
|
Asia/Pacific
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
|
|
—
|
|
|
|
122
|
|
Total
|
|
$
|
5,259
|
|
|
$
|
2,037
|
|
|
$
|
679
|
|
|
$
|
—
|
|
|
$
|
7,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
3,705
|
|
|
|
178
|
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
3,864
|
|
ISG
|
|
|
67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67
|
|
IPG
|
|
|
19
|
|
|
|
—
|
|
|
|
98
|
|
|
|
55
|
|
|
|
172
|
|
Europe
|
|
|
862
|
|
|
|
386
|
|
|
|
—
|
|
|
|
3,247
|
|
|
|
4,495
|
|
Asia/Pacific
|
|
|
1,258
|
|
|
|
1,253
|
|
|
|
299
|
|
|
|
—
|
|
|
|
2,810
|
|
Total
|
|
$
|
5,911
|
|
|
$
|
1,817
|
|
|
$
|
378
|
|
|
$
|
3,302
|
|
|
$
|
11,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(4,362
|
)
|
|
|
(2,183
|
)
|
|
|
(172
|
)
|
|
|
—
|
|
|
|
(6,717
|
)
|
ISG
|
|
|
(228
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(228
|
)
|
IPG
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
(98
|
)
|
|
|
(55
|
)
|
|
|
(172
|
)
|
Europe
|
|
|
(4,591
|
)
|
|
|
(386
|
)
|
|
|
—
|
|
|
|
(3,202
|
)
|
|
|
(8,179
|
)
|
Asia/Pacific
|
|
|
(746
|
)
|
|
|
(1,253
|
)
|
|
|
(382
|
)
|
|
|
—
|
|
|
|
(2,381
|
)
|
Total
|
|
$
|
(9,946
|
)
|
|
$
|
(3,822
|
)
|
|
$
|
(652
|
)
|
|
$
|
(3,257
|
)
|
|
$
|
(17,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
702
|
|
|
|
32
|
|
|
|
366
|
|
|
|
—
|
|
|
|
1,100
|
|
ISG
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
Europe
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
50
|
|
Asia/Pacific
|
|
|
512
|
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
|
|
551
|
|
Total
|
|
$
|
1,224
|
|
|
$
|
32
|
|
|
$
|
405
|
|
|
$
|
45
|
|
|
$
|
1,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
217
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
202
|
|
ISG
|
|
|
—
|
|
|
|
1,598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,598
|
|
IPG
|
|
|
—
|
|
|
|
—
|
|
|
|
115
|
|
|
|
—
|
|
|
|
115
|
|
Europe
|
|
|
1,371
|
|
|
|
208
|
|
|
|
—
|
|
|
|
649
|
|
|
|
2,228
|
|
Asia/Pacific
|
|
|
522
|
|
|
|
11
|
|
|
|
90
|
|
|
|
—
|
|
|
|
623
|
|
Total
|
|
$
|
2,110
|
|
|
$
|
1,817
|
|
|
$
|
190
|
|
|
$
|
649
|
|
|
$
|
4,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(693
|
)
|
|
|
(31
|
)
|
|
|
(195
|
)
|
|
|
—
|
|
|
|
(919
|
)
|
ISG
|
|
|
(5
|
)
|
|
|
(1,598
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,603
|
)
|
IPG
|
|
|
—
|
|
|
|
—
|
|
|
|
(115
|
)
|
|
|
—
|
|
|
|
(115
|
)
|
Europe
|
|
|
(829
|
)
|
|
|
(208
|
)
|
|
|
—
|
|
|
|
(574
|
)
|
|
|
(1,611
|
)
|
Asia/Pacific
|
|
|
(1,034
|
)
|
|
|
(11
|
)
|
|
|
(129
|
)
|
|
|
—
|
|
|
|
(1,174
|
)
|
Total
|
|
$
|
(2,561
|
)
|
|
$
|
(1,848
|
)
|
|
$
|
(439
|
)
|
|
$
|
(574
|
)
|
|
$
|
(5,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Product
Line
Discontinuance
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
December 31,
2008 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
226
|
|
|
|
1
|
|
|
|
156
|
|
|
|
—
|
|
|
|
383
|
|
Europe
|
|
|
547
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120
|
|
|
|
667
|
|
Total
|
|
$
|
773
|
|
|
$
|
1
|
|
|
$
|
156
|
|
|
$
|
120
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
255
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
255
|
|
ISG
|
|
|
60
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
IPG
|
|
|
171
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
171
|
|
Europe
|
|
|
986
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,448
|
|
|
|
2,434
|
|
Asia/Pacific
|
|
|
1,105
|
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
1,135
|
|
Total
|
|
$
|
2,577
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
1,448
|
|
|
$
|
4,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
(481
|
)
|
|
|
—
|
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
(531
|
)
|
ISG
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(60
|
)
|
IPG
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(56
|
)
|
Europe
|
|
|
(887
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(927
|
)
|
|
|
(1,814
|
)
|
Asia/Pacific
|
|
|
(1,105
|
)
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
(1,135
|
)
|
Total
|
|
$
|
(2,589
|
)
|
|
$
|
—
|
|
|
$
|
(80
|
)
|
|
$
|
(927
|
)
|
|
$
|
(3,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2009 Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA/HME
|
|
|
—
|
|
|
|
1
|
|
|
|
106
|
|
|
|
—
|
|
|
|
107
|
|
IPG
|
|
|
115
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
115
|
|
Europe
|
|
|
646
|
|
|
|
—
|
|
|
|
—
|
|
|
|
641
|
|
|
|
1,287
|
|
Asia/Pacific
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
761
|
|
|
$
|
1
|
|
|
$
|
106
|
|
|
$
|
641
|
|
|
$
|
1,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Earnings - Total comprehensive earnings were as follows (in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net
earnings
|
|
$
|
13,476
|
|
|
$
|
10,725
|
|
|
$
|
23,534
|
|
|
$
|
18,281
|
|
Foreign
currency translation gain (loss)
|
|
|
22,544
|
|
|
|
(57,500
|
)
|
|
|
94,494
|
|
|
|
(19,714
|
)
|
Unrealized
gain (loss) on available for sale securities
|
|
|
115
|
|
|
|
19
|
|
|
|
162
|
|
|
|
(60
|
)
|
SERP/DBO
amortization of prior service costs and unrecognized
losses
|
|
|
249
|
|
|
|
647
|
|
|
|
440
|
|
|
|
1,746
|
|
Current
period unrealized gain on cash flow hedges
|
|
|
1,124
|
|
|
|
1,338
|
|
|
|
3,061
|
|
|
|
829
|
|
Total
comprehensive earnings (loss)
|
|
$
|
37,508
|
|
|
$
|
(44,771
|
)
|
|
$
|
121,691
|
|
|
$
|
1,082
|
|
Inventories - Inventories
determined under the first in, first out method consist of the following
components (in thousands):
|
|
September
30,
2009
|
|
|
December
31, 2008
|
|
Finished
goods
|
|
$
|
114,568
|
|
|
$
|
99,486
|
|
Raw
Materials
|
|
|
57,929
|
|
|
|
64,493
|
|
Work
in Process
|
|
|
10,929
|
|
|
|
14,758
|
|
|
|
$
|
183,426
|
|
|
$
|
178,737
|
|
Property and Equipment -
Property and equipment consist of the following (in
thousands):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Machinery
and equipment
|
|
$
|
323,086
|
|
|
$
|
308,532
|
|
Land,
buildings and improvements
|
|
|
95,353
|
|
|
|
90,410
|
|
Furniture
and fixtures
|
|
|
26,549
|
|
|
|
25,041
|
|
Leasehold
improvements
|
|
|
14,473
|
|
|
|
15,720
|
|
|
|
|
459,461
|
|
|
|
439,703
|
|
Less
allowance for depreciation
|
|
|
(319,888
|
)
|
|
|
(296,191
|
)
|
|
|
$
|
139,573
|
|
|
$
|
143,512
|
|
Acquisitions- In the first nine months of
2009, the company made no acquisitions. In October 2008, Invacare
Corporation purchased a billing company operating as Homecare Collection
Services (HCS) for $6,268,000. Pursuant to the HCS purchase agreement, the
company agreed to pay contingent consideration based upon earnings before
interest, taxes and depreciation over the three years subsequent to the
acquisition up to a maximum of $3,000,000. When the contingency related to the
acquisition is determinable, any additional consideration paid will increase the
respective purchase price and reported goodwill.
Derivatives - In March
2008, Derivatives and Hedging,
ASC 815, was issued which
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. The company adopted ASC 815
effective January 1, 2009.
ASC
815 requires
companies to recognize all derivative instruments in the consolidated balance
sheet as either assets or liabilities at fair value. The accounting
for changes in fair value of a derivative is dependent upon whether or not the
derivative has been designated and qualifies for hedge accounting treatment and
the type of hedging relationship. For derivatives designated and
qualifying as hedging instruments, the company must designate the hedging
instrument, based upon the exposure being hedged, as a fair value hedge, cash
flow hedge, or a hedge of a net investment in a foreign operation.
Cash Flow Hedging
Strategy
The
company uses derivative instruments in an attempt to manage its exposure to
commodity price risk, foreign currency exchange risk and interest rate
risk. Foreign exchange contracts are used to manage the price risk
associated with forecasted sales denominated in foreign currencies and the price
risk associated with forecasted purchases of inventory over the next twelve
months. Interest rate swaps are utilized to manage interest rate risk
associated with the company’s fixed and floating-rate borrowings.
The
company recognizes its derivative instruments as assets or liabilities in the
consolidated balance sheet measured at fair value. A majority of the company’s
derivative instruments are designated and qualify as cash flow hedges.
Accordingly, the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the fair value of the hedged
item, if any, is recognized in current earnings during the period of
change.
During
2009, the company was a party to interest rate swap agreements that qualified as
cash flow hedges and effectively converted floating-rate debt to fixed-rate
debt, so the company could avoid the risk of changes in market interest
rates. The gains and or losses on interest rate swaps are reflected in
interest expense on the consolidated statement of operations. As of
September 30, 2009, none of the company’s debt had its interest payments
designated as the hedged forecasted transactions to interest rate swap
agreements.
To
protect against increases/decreases in forecasted foreign currency cash flows
resulting from inventory purchases/sales over the next year, the company
utilizes foreign currency forward contracts to hedge portions of its forecasted
purchases/sales denominated in foreign currencies. The gains and losses are
included in cost of products sold and selling, general and administrative
expenses on the consolidated statement of operations. If it is later
determined that a hedged forecasted transaction is unlikely to occur, any gains
or losses on the forward contracts would be reclassified from other
comprehensive income into earnings. The company does not expect this to occur
during the next twelve months.
The
company has historically not recognized any ineffectiveness related to forward
contract cash flow hedges because the Company generally limits it hedges to
between 60% and 90% of total forecasted transactions for a given entity’s
exposure to currency rate changes and the transactions hedged are recurring in
nature. Forward contracts with a total notional amount in USD of
$48,588,000 and $82,212,000 matured during the three and nine months ended
September 30, 2009.
As of
September 30, 2009, foreign exchange forward contracts qualifying and designated
for hedge accounting treatment were as follows (in thousands USD):
|
|
Notional
Amount
|
|
|
Unrealized
Gain (Loss)
|
|
USD
/ AUD
|
|
$
|
2,124
|
|
|
$
|
(544
|
)
|
USD
/ CAD
|
|
|
12,612
|
|
|
|
106
|
|
USD
/ EUR
|
|
|
11,841
|
|
|
|
(601
|
)
|
USD
/ GBP
|
|
|
4,257
|
|
|
|
(498
|
)
|
USD
/ NZD
|
|
|
2,794
|
|
|
|
461
|
|
USD
/ SEK
|
|
|
1,369
|
|
|
|
234
|
|
USD
/ MXN
|
|
|
2,326
|
|
|
|
204
|
|
EUR
/ CHF
|
|
|
2,733
|
|
|
|
(24
|
)
|
EUR
/ GBP
|
|
|
2,592
|
|
|
|
(94
|
)
|
EUR
/ SEK
|
|
|
4,711
|
|
|
|
279
|
|
EUR
/ NZD
|
|
|
2,581
|
|
|
|
428
|
|
GBP
/ CHF
|
|
|
519
|
|
|
|
4
|
|
GBP
/ SEK
|
|
|
991
|
|
|
|
64
|
|
GBP
/ DKK
|
|
|
800
|
|
|
|
(34
|
)
|
DKK
/ SEK
|
|
|
1,669
|
|
|
|
64
|
|
DKK
/ NOK
|
|
|
582
|
|
|
|
(4
|
)
|
NOK
/ CHF
|
|
|
912
|
|
|
|
(31
|
)
|
NOK
/ SEK
|
|
|
956
|
|
|
|
12
|
|
|
|
$
|
56,369
|
|
|
$
|
26
|
|
Fair Value Hedging
Strategy
In 2009
and 2008, the company did not utilize any derivatives designated as fair value
hedges. However, the company has in the past utilized fair value
hedges in the form of forward contracts to manage the foreign exchange risk
associated with certain firm commitments and has entered into interest rate
swaps to effectively convert fixed-rate debt to floating-rate debt in an attempt
to avoid paying higher than market interest rates. For derivative
instruments designated and qualifying as fair value hedges, the gain or loss on
the derivative instrument as well as the offsetting gain or loss on the hedged
item associated with the hedged risk are recognized in the same line item
associated with the hedged item in earnings.
Derivatives Not Qualifying
or Designated for Hedge Accounting Treatment
The
company utilizes foreign currency forward or option contracts that do not
qualify for hedge accounting treatment in an attempt to manage the risk
associated with the conversion of earnings in foreign currencies into U.S.
Dollars. While these derivative instruments do not qualify for hedge
accounting treatment in accordance with ASC 815, these derivatives do provide
the company with a means to manage the risk associated with currency
translation. These instruments are recorded at fair value in the
consolidated balance sheet and any gains or losses are recorded as part of
earnings in the current period. No such contracts were outstanding
and a gain of $32,000 was recorded by the company for the quarter and nine
months ended September 30, 2009 related to any derivatives not qualifying for
hedge accounting treatment.
The
company also utilizes foreign currency forward contracts that are not designated
as hedges in accordance with ASC 815 although they could qualify for hedge
accounting treatment. These contracts are entered into to eliminate
the risk associated with the settlement of short-term intercompany trading
receivables and payables between Invacare Corporation and its foreign
subsidiaries. The currency forward contracts are entered into at the
same time as the intercompany receivables or payables are created so that upon
settlement, the gain / loss on the settlement is offset by the gain / loss on
the foreign currency forward contract accordingly no material net gain or loss
was realized by the company for the quarter or nine months ended September 30,
2009 related to these forward contracts and the associated short-term
intercompany trading receivables and payables.
As of
September 30, 2009, foreign exchange forward contracts not qualifying or
designated for hedge accounting treatment entered into in the first nine months
of 2009 and outstanding were as follows (in thousands USD):
|
|
Notional
Amount
|
|
|
Unrealized
Gain (Loss)
|
|
CAD
/ USD
|
|
$
|
16,052
|
|
|
$
|
289
|
|
EUR
/ USD
|
|
|
12,022
|
|
|
|
202
|
|
SEK
/ USD
|
|
|
24,799
|
|
|
|
25
|
|
NZD
/ USD
|
|
|
6,161
|
|
|
|
(37
|
)
|
|
|
$
|
59,034
|
|
|
$
|
479
|
|
As of
September 30, 2009, the fair values of the company’s derivative instruments were
as follows (in thousands):
|
|
Assets
|
|
|
Liabilities
|
|
Derivatives
designated as hedging instruments under ASC 815
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
$
|
3,102
|
|
|
$
|
3,076
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under ASC 815
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
|
537
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
$
|
3,639
|
|
|
$
|
3,135
|
|
The fair
values of the company’s foreign currency forward assets and liabilities are
included in Other Current Assets and Accrued Expenses, respectively in the
Consolidated Balance Sheets. Swap assets are recorded in either Other
Current Assets or Other Assets, while swap liabilities are recorded in Accrued
Expenses or Other Long-Term Obligations in the Consolidated Balance
Sheets. For the quarter ended September 30, 2009, no swaps were
outstanding.
The
effect of derivative instruments on the Statement of Operations for the three
and nine months ended September 30, 2009 was as follows (in
thousands):
Derivatives
in ASC 815 cash flow hedge relationships
|
|
Amount
of Gain (Loss) Recognized in OCI on Derivatives (Effective
Portion)
|
|
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
Amount
of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
Three
months ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
$
|
954
|
|
|
$
|
(345
|
)
|
|
$
|
-
|
|
Interest
rate swap contracts
|
|
|
857
|
|
|
|
(426
|
)
|
|
|
-
|
|
|
|
$
|
1,811
|
|
|
$
|
(771
|
)
|
|
$
|
-
|
|
Nine
months ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
$
|
587
|
|
|
$
|
(277
|
)
|
|
$
|
-
|
|
Interest
rate swap contracts
|
|
|
5,556
|
|
|
|
(2,819
|
)
|
|
|
-
|
|
|
|
$
|
6,143
|
|
|
$
|
(3,096
|
)
|
|
$
|
-
|
|
Derivatives
not designated as hedging instruments under ASC 815
|
|
Amount
of Gain (Loss) Recognized in Income on Derivatives
|
|
Three
months ended September 30
|
|
|
|
|
Foreign
currency forward contracts
|
|
$
|
(78
|
)
|
|
|
|
|
|
Nine
months ended September 30
|
|
|
|
|
Foreign
currency forward contracts
|
|
$
|
2,425
|
|
The gains
or losses recognized as the result of the settlement of cash flow hedge foreign
currency forward contracts are recognized in net sales for hedges of inventory
sales or cost of product sold for hedges of inventory purchases. For
the quarter and nine months ended September 30, 2009, net sales were increased
by $1,583,000 and $2,413,000, respectively, and cost of product sold was
increased by $1,927,000 and $2,690,000, respectively for net realized losses of
$345,000 and $277,000, respectively. The $426,000 and $2,819,000
losses for the quarter and nine months ended September 30, 2009 related to
interest rate swap agreements were recorded in interest expense for the
period. There was an immaterial amount reported in interest expense
due to ineffectiveness related to the interest rate swap
contracts. The $78,000 loss and $2,425,000 gain recognized on foreign
currency forward contracts not designated as hedging instruments was recognized
in selling, general and administrative (SG&A) expenses for the quarter and
nine months ended September 30, 2009 were offset by gains/losses of comparable
amounts also recorded in SG&A expenses on the intercompany trade payables
for which the derivatives were entered into to offset.
Fair Value Measurements
- The Company has adopted Fair Value Measurements and
Disclosures, ASC 820, as of January 1, 2008 for assets and
liabilities measured at fair value on a recurring basis and the adoption had no
material impact on the company’s financial position, results of operations or
cash flows. For assets and liabilities measured at fair value on a nonrecurring
basis, such as goodwill and intangibles, the company deferred its adoption until
January 1, 2009, as allowed under the provisions of ASC 820. The
adoption of ASC 820 for assets and liabilities measured at fair value on a
nonrecurring basis had no material impact on the company’s financial position,
results of operations or cash flows.
Pursuant
to ASC 820, 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 unobservable.
The
following table provides a summary of the company’s assets and liabilities that
are measured on a recurring basis (in thousands).
|
|
|
|
|
Basis
for Fair Value Measurements at Reporting Date
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets /
(Liabilities)
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Other Unobservable Inputs
|
|
|
|
September
30, 2009
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
Marketable
Securities
|
|
$
|
316
|
|
|
$
|
316
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forward
Exchange Contracts
|
|
|
504
|
|
|
|
-
|
|
|
|
504
|
|
|
|
-
|
|
Total
|
|
$
|
820
|
|
|
$
|
316
|
|
|
$
|
504
|
|
|
$
|
-
|
|
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 was a party to interest rate swap
agreements, which were entered into in the normal course of business, to reduce
exposure to fluctuations in interest rates. The agreements were with major
financial institutions, which were expected to fully perform under the terms of
the agreements thereby mitigating the credit risk from the transactions. The
agreements were contracts to exchange floating rate payments for fixed rate
payments without the exchange of the underlying notional amounts. The notional
amounts of such agreements are used to measure interest to be paid or received
and do not represent the amount of exposure to credit loss. The amounts to be
paid or received under the interest rate swap agreements are accrued consistent
with the terms of the agreements and market interest rates. Fair value for the
company’s interest rate swaps are based on pricing models in which all
significant inputs, such as interest rates and yield curves, are observable in
active markets. No swaps were outstanding as of September 30, 2009.
Forward
Contracts: The Company operates internationally and as a
result is exposed to foreign currency fluctuations. Specifically, the exposure
includes intercompany loans and third party sales or payments. In an attempt to
reduce this exposure, foreign currency forward contracts are utilized and
accounted for as hedging instruments. The forward contracts are used to hedge
the following currencies: AUD, CAD, CHF, CNY, DKK, EUR, GBP, MXP, 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
carrying amounts and fair values of the company’s financial instruments at
September 30, 2009 and December 31, 2008 are as follows (in
thousands):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Cash
and cash equivalents
|
|
$
|
27,821
|
|
|
$
|
27,821
|
|
|
$
|
47,516
|
|
|
$
|
47,516
|
|
Marketable
securities
|
|
|
316
|
|
|
|
316
|
|
|
|
72
|
|
|
|
72
|
|
Other
investments
|
|
|
7,470
|
|
|
|
7,470
|
|
|
|
8,657
|
|
|
|
8,657
|
|
Installment
receivables, net
|
|
|
8,065
|
|
|
|
8,065
|
|
|
|
9,946
|
|
|
|
9,946
|
|
Long-term
debt (including current maturities of long-term debt)
|
|
|
(323,496
|
)
|
|
|
(451,870
|
)
|
|
|
(426,406
|
)
|
|
|
(321,729
|
)
|
Interest
rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,737
|
)
|
|
|
(2,737
|
)
|
Forward
contracts in Other Current Assets
|
|
|
3,639
|
|
|
|
3,639
|
|
|
|
1,413
|
|
|
|
1,413
|
|
Forward
contracts in accrued expenses
|
|
|
(3,135
|
)
|
|
|
(3,135
|
)
|
|
|
(1,719
|
)
|
|
|
(1,719
|
)
|
Long-term
debt carrying value and fair value as of December 31, 2008 have been restated to
reflect the company’s adoption of ASC 470-20.
The
aggregate cost of the Company’s cost-method investments totaled $7,470,000 as of
September 30, 2009. These investments were not evaluated for
impairment because the Company did not identify any events or changes in
circumstances that may have had a significant adverse effect on the fair value
of those investments.
Income Taxes - The
Company had an effective tax rate of 24.2% and 28.2% on earnings before tax for
the three and nine month periods ended September 30, 2009, respectively,
compared to an expected rate at the US statutory rate of 35%. For the
three and nine month periods ended September 30, 2008, the company
had an effective rate of 26.8% and 36.0%, respectively, compared to
an expected rate at the US statutory rate of 35%. The company’s
effective tax rate for the three and nine month periods ended September 30, 2009
and three month period ending September 30, 2008 was lower than the U.S. federal
statutory rate as a result of the company not being able to record tax benefits
related to losses in countries which had tax valuation allowances, while normal
tax expense was recognized in countries without tax allowances and earnings
abroad being taxed at rates generally lower than the U.S. federal statutory
rate. For the nine month period ended September 30, 2008, the
effective tax rate was higher than the U.S. federal statutory rate as a result
of the company not being able to record tax benefits related to losses in
countries which had tax valuation allowances, while normal tax expense was
recognized in countries without tax valuation allowances.
Supplemental Guarantor Information
- Effective February 12, 2007, many of the non-domestic subsidiaries
(the “Guarantor Subsidiaries”) of the company became guarantors of the
indebtedness of Invacare Corporation under its 9 ¾% Senior Notes due 2015 (the
“Senior Notes”) with an aggregate principal amount of $175,000,000 and under its
4.125% Convertible Senior Subordinated Debentures due 2027 (the “Debentures”)
with an aggregate principal amount of $135,000,000. The majority of
the company’s subsidiaries are not guaranteeing the indebtedness of the Senior
Notes or Debentures (the “Non-Guarantor Subsidiaries”). Each of the
Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and
several basis, to pay principal, premium, and interest related to the Senior
Notes and to the Debentures and each of the Guarantor Subsidiaries are directly
or indirectly wholly-owned subsidiaries of the company.
Presented
below are the consolidating condensed financial statements of Invacare
Corporation (Parent), its combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for
using the equity method. The company does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors and
accordingly, separate financial statements and other disclosures related to the
Guarantor Subsidiaries are not presented.
CONSOLIDATING
CONDENSED STATEMENTS OF OPERATIONS
(in
thousands)
Three
month period ended September 30, 2009
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net
sales
|
|
$
|
104,511
|
|
|
$
|
171,241
|
|
|
$
|
181,938
|
|
|
$
|
(23,659
|
)
|
|
$
|
434,031
|
|
Cost
of products sold
|
|
|
74,084
|
|
|
|
133,629
|
|
|
|
118,540
|
|
|
|
(23,676
|
)
|
|
|
302,577
|
|
Gross
Profit
|
|
|
30,427
|
|
|
|
37,612
|
|
|
|
63,398
|
|
|
|
17
|
|
|
|
131,454
|
|
Selling,
general and administrative expenses
|
|
|
43,607
|
|
|
|
21,650
|
|
|
|
39,087
|
|
|
|
-
|
|
|
|
104,344
|
|
Charge
related to restructuring activities
|
|
|
(80
|
)
|
|
|
60
|
|
|
|
1,877
|
|
|
|
-
|
|
|
|
1,857
|
|
Income
(loss) from equity investee
|
|
|
33,209
|
|
|
|
9,365
|
|
|
|
(3,615
|
)
|
|
|
(38,959
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
6,277
|
|
|
|
(849
|
)
|
|
|
2,049
|
|
|
|
-
|
|
|
|
7,477
|
|
Earnings
(loss) before Income Taxes
|
|
|
13,832
|
|
|
|
26,116
|
|
|
|
16,770
|
|
|
|
(38,942
|
)
|
|
|
17,776
|
|
Income
taxes
|
|
|
356
|
|
|
|
100
|
|
|
|
3,844
|
|
|
|
-
|
|
|
|
4,300
|
|
Net
Earnings (loss)
|
|
$
|
13,476
|
|
|
$
|
26,016
|
|
|
$
|
12,926
|
|
|
$
|
(38,942
|
)
|
|
$
|
13,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
month period ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
100,366
|
|
|
$
|
169,877
|
|
|
$
|
210,841
|
|
|
$
|
(19,248
|
)
|
|
$
|
461,836
|
|
Cost
of products sold
|
|
|
74,605
|
|
|
|
136,829
|
|
|
|
138,637
|
|
|
|
(19,166
|
)
|
|
|
330,905
|
|
Gross
Profit
|
|
|
25,761
|
|
|
|
33,048
|
|
|
|
72,204
|
|
|
|
(82
|
)
|
|
|
130,931
|
|
Selling,
general and administrative expenses
|
|
|
29,717
|
|
|
|
34,062
|
|
|
|
42,402
|
|
|
|
-
|
|
|
|
106,181
|
|
Charge
related to restructuring activities
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
438
|
|
|
|
-
|
|
|
|
283
|
|
Income
(loss) from equity investee
|
|
|
22,561
|
|
|
|
12,097
|
|
|
|
16,205
|
|
|
|
(50,863
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
8,024
|
|
|
|
(451
|
)
|
|
|
2,244
|
|
|
|
-
|
|
|
|
9,817
|
|
Earnings
(loss) before Income Taxes
|
|
|
10,736
|
|
|
|
11,534
|
|
|
|
43,325
|
|
|
|
(50,945
|
)
|
|
|
14,650
|
|
Income
taxes
|
|
|
11
|
|
|
|
300
|
|
|
|
3,614
|
|
|
|
-
|
|
|
|
3,925
|
|
Net
Earnings (loss)
|
|
$
|
10,725
|
|
|
$
|
11,234
|
|
|
$
|
39,711
|
|
|
$
|
(50,945
|
)
|
|
$
|
10,725
|
|
CONSOLIDATING
CONDENSED STATEMENTS OF OPERATIONS
(in
thousands)
Nine
month period ended September 30, 2009
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net
sales
|
|
$
|
288,590
|
|
|
$
|
522,818
|
|
|
$
|
491,486
|
|
|
$
|
(58,327
|
)
|
|
$
|
1,244,567
|
|
Cost
of products sold
|
|
|
205,662
|
|
|
|
411,488
|
|
|
|
327,891
|
|
|
|
(58,451
|
)
|
|
|
886,590
|
|
Gross
Profit
|
|
|
82,928
|
|
|
|
111,330
|
|
|
|
163,595
|
|
|
|
124
|
|
|
|
357,977
|
|
Selling,
general and administrative expenses
|
|
|
103,802
|
|
|
|
80,907
|
|
|
|
111,707
|
|
|
|
-
|
|
|
|
296,416
|
|
Charge
related to restructuring activities
|
|
|
255
|
|
|
|
60
|
|
|
|
3,442
|
|
|
|
-
|
|
|
|
3,757
|
|
Income
(loss) from equity investee
|
|
|
67,216
|
|
|
|
15,661
|
|
|
|
(9,848
|
)
|
|
|
(73,029
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
21,467
|
|
|
|
(2,085
|
)
|
|
|
5,638
|
|
|
|
-
|
|
|
|
25,020
|
|
Earnings
(loss) before Income Taxes
|
|
|
24,620
|
|
|
|
48,109
|
|
|
|
32,960
|
|
|
|
(72,905
|
)
|
|
|
32,784
|
|
Income
taxes
|
|
|
1,086
|
|
|
|
300
|
|
|
|
7,864
|
|
|
|
-
|
|
|
|
9,250
|
|
Net
Earnings (loss)
|
|
$
|
23,534
|
|
|
$
|
47,809
|
|
|
$
|
25,096
|
|
|
$
|
(72,905
|
)
|
|
$
|
23,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
month period ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
272,946
|
|
|
$
|
509,923
|
|
|
$
|
599,262
|
|
|
$
|
(56,865
|
)
|
|
$
|
1,325,266
|
|
Cost
of products sold
|
|
|
204,993
|
|
|
|
409,707
|
|
|
|
399,078
|
|
|
|
(56,824
|
)
|
|
|
956,954
|
|
Gross
Profit
|
|
|
67,953
|
|
|
|
100,216
|
|
|
|
200,184
|
|
|
|
(41
|
)
|
|
|
368,312
|
|
Selling,
general and administrative expenses
|
|
|
87,256
|
|
|
|
93,193
|
|
|
|
127,947
|
|
|
|
-
|
|
|
|
308,396
|
|
Charge
related to restructuring activities
|
|
|
100
|
|
|
|
-
|
|
|
|
1,553
|
|
|
|
-
|
|
|
|
1,653
|
|
Income
(loss) from equity investee
|
|
|
61,570
|
|
|
|
31,448
|
|
|
|
8,750
|
|
|
|
(101,768
|
)
|
|
|
-
|
|
Interest
expense - net
|
|
|
23,036
|
|
|
|
(1,124
|
)
|
|
|
7,805
|
|
|
|
-
|
|
|
|
29,717
|
|
Earnings
(loss) before Income Taxes
|
|
|
19,131
|
|
|
|
39,595
|
|
|
|
71,629
|
|
|
|
(101,809
|
)
|
|
|
28,546
|
|
Income
taxes
|
|
|
850
|
|
|
|
900
|
|
|
|
8,515
|
|
|
|
-
|
|
|
|
10,265
|
|
Net
Earnings (loss)
|
|
$
|
18,281
|
|
|
$
|
38,695
|
|
|
$
|
63,114
|
|
|
$
|
(101,809
|
)
|
|
$
|
18,281
|
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
September
30, 2009
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,583
|
|
|
$
|
2,477
|
|
|
$
|
21,761
|
|
|
$
|
-
|
|
|
$
|
27,821
|
|
Marketable
securities
|
|
|
316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316
|
|
Trade
receivables, net
|
|
|
98,526
|
|
|
|
65,518
|
|
|
|
101,427
|
|
|
|
(6,248
|
)
|
|
|
259,223
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
1,163
|
|
|
|
2,657
|
|
|
|
-
|
|
|
|
3,820
|
|
Inventories,
net
|
|
|
45,924
|
|
|
|
38,610
|
|
|
|
100,199
|
|
|
|
(1,307
|
)
|
|
|
183,426
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,310
|
|
|
|
-
|
|
|
|
2,310
|
|
Other
current assets
|
|
|
17,467
|
|
|
|
6,703
|
|
|
|
24,616
|
|
|
|
(1,388
|
)
|
|
|
47,398
|
|
Total
Current Assets
|
|
|
165,816
|
|
|
|
114,471
|
|
|
|
252,970
|
|
|
|
(8,943
|
)
|
|
|
524,314
|
|
Investment
in subsidiaries
|
|
|
1,451,170
|
|
|
|
648,542
|
|
|
|
-
|
|
|
|
(2,099,712
|
)
|
|
|
-
|
|
Intercompany
advances, net
|
|
|
132,328
|
|
|
|
949,522
|
|
|
|
90,961
|
|
|
|
(1,172,811
|
)
|
|
|
-
|
|
Other
Assets
|
|
|
52,216
|
|
|
|
4,101
|
|
|
|
1,204
|
|
|
|
-
|
|
|
|
57,521
|
|
Other
Intangibles
|
|
|
1,519
|
|
|
|
8,448
|
|
|
|
76,059
|
|
|
|
-
|
|
|
|
86,026
|
|
Property
and Equipment, net
|
|
|
49,195
|
|
|
|
9,335
|
|
|
|
81,043
|
|
|
|
-
|
|
|
|
139,573
|
|
Goodwill
|
|
|
4,868
|
|
|
|
24,634
|
|
|
|
504,863
|
|
|
|
-
|
|
|
|
534,365
|
|
Total
Assets
|
|
$
|
1,857,112
|
|
|
$
|
1,759,053
|
|
|
$
|
1,007,100
|
|
|
$
|
(3,281,466
|
)
|
|
$
|
1,341,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
73,146
|
|
|
$
|
13,688
|
|
|
$
|
48,249
|
|
|
$
|
-
|
|
|
$
|
135,083
|
|
Accrued
expenses
|
|
|
34,982
|
|
|
|
22,448
|
|
|
|
78,485
|
|
|
|
(7,636
|
)
|
|
|
128,279
|
|
Accrued
income taxes
|
|
|
500
|
|
|
|
-
|
|
|
|
1,883
|
|
|
|
-
|
|
|
|
2,383
|
|
Short-term
debt and current maturities of long-term obligations
|
|
|
2,191
|
|
|
|
-
|
|
|
|
609
|
|
|
|
-
|
|
|
|
2,800
|
|
Total
Current Liabilities
|
|
|
110,819
|
|
|
|
36,136
|
|
|
|
129,226
|
|
|
|
(7,636
|
)
|
|
|
268,545
|
|
Long-Term
Debt
|
|
|
310,580
|
|
|
|
-
|
|
|
|
10,116
|
|
|
|
-
|
|
|
|
320,696
|
|
Other
Long-Term Obligations
|
|
|
46,997
|
|
|
|
2,040
|
|
|
|
46,039
|
|
|
|
-
|
|
|
|
95,076
|
|
Intercompany
advances, net
|
|
|
731,234
|
|
|
|
403,262
|
|
|
|
38,315
|
|
|
|
(1,172,811
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
657,482
|
|
|
|
1,317,615
|
|
|
|
783,404
|
|
|
|
(2,101,019
|
)
|
|
|
657,482
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,857,112
|
|
|
$
|
1,759,053
|
|
|
$
|
1,007,100
|
|
|
$
|
(3,281,466
|
)
|
|
$
|
1,341,799
|
|
CONSOLIDATING
CONDENSED BALANCE SHEETS
(in
thousands)
December
31, 2008
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,920
|
|
|
$
|
2,284
|
|
|
$
|
34,312
|
|
|
$
|
-
|
|
|
$
|
47,516
|
|
Marketable
securities
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
Trade
receivables, net
|
|
|
114,961
|
|
|
|
56,037
|
|
|
|
101,301
|
|
|
|
(5,816
|
)
|
|
|
266,483
|
|
Installment
receivables, net
|
|
|
-
|
|
|
|
1,559
|
|
|
|
2,708
|
|
|
|
-
|
|
|
|
4,267
|
|
Inventories,
net
|
|
|
49,243
|
|
|
|
37,320
|
|
|
|
93,586
|
|
|
|
(1,412
|
)
|
|
|
178,737
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,051
|
|
|
|
-
|
|
|
|
2,051
|
|
Other
current assets
|
|
|
15,210
|
|
|
|
6,358
|
|
|
|
30,364
|
|
|
|
-
|
|
|
|
51,932
|
|
Total
Current Assets
|
|
|
190,406
|
|
|
|
103,558
|
|
|
|
264,322
|
|
|
|
(7,228
|
)
|
|
|
551,058
|
|
Investment
in subsidiaries
|
|
|
1,350,463
|
|
|
|
683,148
|
|
|
|
-
|
|
|
|
(2,033,611
|
)
|
|
|
-
|
|
Intercompany
advances, net
|
|
|
191,209
|
|
|
|
844,433
|
|
|
|
66,851
|
|
|
|
(1,102,493
|
)
|
|
|
-
|
|
Other
Assets
|
|
|
53,793
|
|
|
|
5,425
|
|
|
|
1,233
|
|
|
|
-
|
|
|
|
60,451
|
|
Other
Intangibles
|
|
|
2,778
|
|
|
|
9,722
|
|
|
|
72,266
|
|
|
|
-
|
|
|
|
84,766
|
|
Property
and Equipment, net
|
|
|
52,632
|
|
|
|
9,753
|
|
|
|
81,127
|
|
|
|
-
|
|
|
|
143,512
|
|
Goodwill
|
|
|
4,975
|
|
|
|
24,293
|
|
|
|
445,418
|
|
|
|
-
|
|
|
|
474,686
|
|
Total
Assets
|
|
|
1,846,256
|
|
|
$
|
1,680,332
|
|
|
$
|
931,217
|
|
|
$
|
(3,143,332
|
)
|
|
$
|
1,314,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
59,779
|
|
|
$
|
12,734
|
|
|
$
|
47,120
|
|
|
$
|
-
|
|
|
$
|
119,633
|
|
Accrued
expenses
|
|
|
50,034
|
|
|
|
24,208
|
|
|
|
75,186
|
|
|
|
(5,816
|
)
|
|
|
143,612
|
|
Accrued
income taxes
|
|
|
500
|
|
|
|
-
|
|
|
|
2,554
|
|
|
|
-
|
|
|
|
3,054
|
|
Short-term
debt and current maturities of long-term obligations
|
|
|
17,793
|
|
|
|
-
|
|
|
|
906
|
|
|
|
-
|
|
|
|
18,699
|
|
Total
Current Liabilities
|
|
|
128,106
|
|
|
|
36,942
|
|
|
|
125,766
|
|
|
|
(5,816
|
)
|
|
|
284,998
|
|
Long-Term
Debt
|
|
|
398,328
|
|
|
|
-
|
|
|
|
9,379
|
|
|
|
-
|
|
|
|
407,707
|
|
Other
Long-Term Obligations
|
|
|
45,290
|
|
|
|
2,040
|
|
|
|
41,496
|
|
|
|
-
|
|
|
|
88,826
|
|
Intercompany
advances, net
|
|
|
741,590
|
|
|
|
335,125
|
|
|
|
25,778
|
|
|
|
(1,102,493
|
)
|
|
|
-
|
|
Total
Shareholders’ Equity
|
|
|
532,942
|
|
|
|
1,306,225
|
|
|
|
728,798
|
|
|
|
(2,035,023
|
)
|
|
|
532,942
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,846,256
|
|
|
$
|
1,680,332
|
|
|
$
|
931,217
|
|
|
$
|
(3,143,332
|
)
|
|
$
|
1,314,473
|
|
CONSOLIDATING
CONDENSED STATEMENTS OF CASH FLOWS
(in
thousands)
Nine
month period ended September 30, 2009
|
|
The
Company (Parent)
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
$
|
95,736
|
|
|
$
|
1,453
|
|
|
$
|
(11,182
|
)
|
|
$
|
-
|
|
|
$
|
86,007
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,926
|
)
|
|
|
(1,479
|
)
|
|
|
(5,111
|
)
|
|
|
-
|
|
|
|
(10,516
|
)
|
Proceeds
from sale of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,111
|
|
|
|
-
|
|
|
|
1,111
|
|
Increase
in other long-term assets
|
|
|
(350
|
)
|
|
|
(122
|
)
|
|
|
11
|
|
|
|
-
|
|
|
|
(461
|
)
|
Other
|
|
|
(523
|
)
|
|
|
341
|
|
|
|
(88
|
)
|
|
|
-
|
|
|
|
(270
|
)
|
Net
Cash Used for Investing Activities
|
|
|
(4,799
|
)
|
|
|
(1,260
|
)
|
|
|
(4,077
|
)
|
|
|
-
|
|
|
|
(10,136
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines of credit and long-term
borrowings
|
|
|
274,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
274,420
|
|
Payments on revolving lines of credit and long-term
borrowings
|
|
|
(372,494
|
)
|
|
|
-
|
|
|
|
(841
|
)
|
|
|
-
|
|
|
|
(373,335
|
)
|
Proceeds
from exercise of stock options
|
|
|
1,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001
|
|
Payment
of dividends
|
|
|
(1,201
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,201
|
)
|
Net
Cash Used by Financing Activities
|
|
|
(98,274
|
)
|
|
|
-
|
|
|
|
(841
|
)
|
|
|
-
|
|
|
|
(99,115
|
)
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
3,549
|
|
|
|
-
|
|
|
|
3,549
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(7,337
|
)
|
|
|
193
|
|
|
|
(12,551
|
)
|
|
|
-
|
|
|
|
(19,695
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
10,920
|
|
|
|
2,284
|
|
|
|
34,312
|
|
|
|
-
|
|
|
|
47,516
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,583
|
|
|
$
|
2,477
|
|
|
$
|
21,761
|
|
|
$
|
-
|
|
|
$
|
27,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine month period ended
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
$
|
(13,939
|
)
|
|
$
|
2,340
|
|
|
$
|
27,233
|
|
|
$
|
-
|
|
|
$
|
15,634
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,292
|
)
|
|
|
(916
|
)
|
|
|
(10,799
|
)
|
|
|
-
|
|
|
|
(15,007
|
)
|
Proceeds
from sale of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
58
|
|
Increase
in other long-term assets
|
|
|
4,470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,470
|
|
Business
acquisitions, net of cash acquired
|
|
|
-
|
|
|
|
(2,152
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,152
|
|
Other
|
|
|
(1,499
|
)
|
|
|
1,521
|
|
|
|
1,326
|
|
|
|
-
|
|
|
|
1,348
|
|
Net
Cash Used for Investing Activities
|
|
|
(321
|
)
|
|
|
(1,547
|
)
|
|
|
(9,415
|
)
|
|
|
-
|
|
|
|
(11,283
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving lines of credit and long-term
borrowings
|
|
|
243,919
|
|
|
|
-
|
|
|
|
22,135
|
|
|
|
-
|
|
|
|
266,054
|
|
Payments on revolving lines of credit and long-term
borrowings
|
|
|
(252,096
|
)
|
|
|
-
|
|
|
|
(42,352
|
)
|
|
|
-
|
|
|
|
(294,448
|
)
|
Proceeds
from exercise of stock options
|
|
|
834
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
834
|
|
Payment
of dividends
|
|
|
(1,199
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,199
|
)
|
Net
Cash Used by Financing Activities
|
|
|
(8,542
|
)
|
|
|
-
|
|
|
|
(20,217
|
)
|
|
|
-
|
|
|
|
(28,759
|
)
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
(412
|
)
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(22,802
|
)
|
|
|
793
|
|
|
|
(2,811
|
)
|
|
|
-
|
|
|
|
(24,820
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
27,133
|
|
|
|
1,773
|
|
|
|
33,294
|
|
|
|
-
|
|
|
|
62,200
|
|
Cash
and cash equivalents at end of period
|
|
$
|
4,331
|
|
|
$
|
2,566
|
|
|
$
|
30,483
|
|
|
$
|
-
|
|
|
$
|
37,380
|
|
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations.
|
The
following discussion and analysis should be read in conjunction with the
company’s Condensed Consolidated Financial Statements and related notes thereto
included elsewhere in this Quarterly Report on Form 10-Q and in the company’s
Current Report on Form 8-K as furnished to the Securities and Exchange
Commission on October 22, 2009.
OUTLOOK
For the
nine months ended September 30, 2009, the Company’s earnings were in line with
internal planning on a consolidated basis and ahead of plan on both cash flow
and debt repayment. For the fourth quarter, the Company expects
continued improvements from cost reduction activities compared to last
year. However, commodity costs have started to rise recently compared
to earlier in 2009. Compared to the third quarter, these higher costs
will pressure margins in the fourth quarter. Offsetting that impact,
foreign currency rates have recently strengthened against the U.S.
dollar.
The
Company remains more focused on delivering cash flow and operating performance
over sales growth, in some cases, limiting business with customers who do not
provide an adequate return. Additionally, pricing and reimbursement
pressures are expected to continue in certain European markets, particularly in
France where funding rules have changed for nursing homes. For the
IPG business and the Australian distribution business, delays in purchases by
long-term care facilities will likely continue to negatively impact sales
growth. In the NA/HME region, organic sales growth in the fourth
quarter should improve compared to the third quarter in part due to higher
Respiratory product line sales. The Company’s organic
sales growth, effective tax rate, earnings and cash flow for 2009 are expected,
as of the date of this filing, to be consistent with the guidance provided in
the Company’s October 22, 2009 press release.
RESULTS OF
OPERATIONS
NET
SALES
Net sales
for the three months ended September 30, 2009 were $434,031,000, compared to
$461,836,000 for the same period a year ago, representing a 6.0%
decrease. Foreign currency translation decreased net sales by four
percentage points while acquisitions increased net sales by less than a
percentage point. Organic net sales for the quarter declined 2.2% compared to
the same period last year driven by organic net sales declines in North
America/Home Medical Equipment, Asia/Pacific and Institutional Products Group,
which were partially offset by an organic net sales increase for Invacare Supply
Group. For the nine months ended September 30, 2009, net sales
decreased 6.1% to $1,244,567,000 compared to $1,325,266,000 for the same period
a year ago. Foreign currency translation decreased net sales by six
percentage points while acquisitions increased net sales by less than a
percentage point. Organic net sales for the nine months ended September 30, 2009
decreased 0.3% compared to the same period last year.
North American/Home Medical
Equipment (NA/HME)
NA/HME
net sales decreased 3.2% for the quarter to $185,072,000 as compared to
$191,218,000 for the same period a year ago. Foreign currency
translation decreased net sales by less than one percentage point while
acquisitions increased net sales by approximately one percentage
point. The decrease for the quarter was principally due to net sales
decreases in Respiratory and Rehab product lines. For the first nine
months of 2009, net sales increased 1.0% to $559,851,000 as compared to
$554,162,000 for the same period a year ago. Foreign currency
translation decreased net sales by approximately one percentage point while
acquisitions increased net sales by approximately one percentage
point.
Standard
product line net sales for the third quarter increased 2.5% compared to the
third quarter of last year, driven by increased volumes in home care beds and
low air loss therapy products. Rehab product line net sales decreased
by 1.8% compared to the third quarter last year, driven primarily by declines in
sales of the Top End®
sports wheelchair, custom manual and consumer power product
lines. Primarily driven by cash sales, Top End® has
been negatively impacted by the economic downturn. Reliant on reimbursement,
sales of custom manual wheelchairs have been negatively impacted by coverage
rules, such as the State of Ohio’s recent change related to ceasing
reimbursement at nursing homes for HME products. Respiratory product
line net sales decreased 20.2%, primarily driven by lower sales of HomeFill®
oxygen delivery systems, largely due to continued inventory adjustments by some
customers.
Invacare Supply Group
(ISG)
ISG net
sales for the quarter increased 4.8% to $70,825,000 compared to $67,604,000 in
the third quarter last year. The net sales increase was primarily in
wound care, incontinence and enteral products. In addition, increased
home delivery program sales were offset in part by decreased sales to larger
providers. For the first nine months of 2009, net sales increased
3.7% to $204,688,000 as compared to $197,383,000 for the same period a year
ago.
Institutional Products Group
(IPG)
IPG net
sales for the quarter decreased by 10.9% to $23,462,000 compared to $26,320,000
for the third quarter last year. Foreign currency translation
decreased net sales by less than one percentage point. The net sales
decrease was largely driven by continued weakness in capital expenditures by
nursing home customers, due primarily to budgetary pressures in state Medicaid
programs. For the first nine months of 2009, net sales decreased 9.8%
to $67,469,000 as compared to $74,794,000 for the same period a year
ago. Foreign currency translation decreased net sales by two
percentage points.
Europe
European
net sales decreased 11.1% for the quarter to $134,604,000 as compared to
$151,478,000 for the same period a year ago. Foreign currency translation
decreased net sales by eleven percentage points. Organic net sales
for the quarter were basically flat, with sales growth in the U.K. and certain
other markets, offset primarily by a sales decline in France, where the sales of
beds and wheelchairs into nursing homes continued to weaken as a result of
changed funding rules. European net sales for the first nine months of 2009
decreased 14.9% to $360,209,000 as compared to $423,458,000 for the same period
a year ago. Foreign currency translation decreased net sales by
fourteen percentage points.
Asia/Pacific
Asia/Pacific
net sales decreased 20.4% for the quarter to $20,068,000 as compared to
$25,216,000 for the same period a year ago. Foreign currency
translation decreased net sales by five percentage points. The sales
decline at the Company’s subsidiary which manufactures controllers was largely
due to external customers whose demand for inventory remained weak in the
current economic environment. The Company’s Australian distribution
business had lower sales due in large part to weak demand from long-term care
facilities which continue to delay capital purchases. For the first
nine months of 2009, net sales decreased 30.6% to $52,350,000 as compared to
$75,469,000 for the same period a year ago. Foreign currency
translation decreased net sales by sixteen percentage
points.
GROSS
PROFIT
Gross
profit as a percentage of net sales for the three and nine-month periods ended
September 30, 2009 was 30.3% and 28.8%, respectively, compared to 28.4% and
27.8%, respectively, in the same periods last year. The margin
improvement compared to the prior year in virtually all segments was the result
of cost reduction activities, including commodity cost and freight reductions,
along with a favorable customer mix toward higher margin customers, which were
partially offset by volume declines and currency weakness in Asia Pacific
related to purchases of sourced product.
For the
first nine months of the year, NA/HME margins as a percentage of net sales
increased to 33.5% compared with 30.7% in the same period last year primarily
due to cost reduction activities, including commodity cost and freight
reductions, along with a favorable customer mix toward higher margin
customers. ISG gross margins increased by 1.5 percentage points
primarily due to benefits from cost reduction activities, including freight
reduction programs, and favorable customer mix towards higher margin
customers. IPG gross margin increased by 6.7 percentage points
primarily as a result of cost reduction activities, including the benefits of
freight recovery programs. In Europe, gross margin as a percentage of
net sales declined by 1.2 percentage points primarily due to the unfavorable
foreign currency impact from the weakness of the British pound as compared to
the Euro and the Euro as compared to the U.S. dollar. Gross margin,
as a percentage of net sales in Asia/Pacific, decreased by 8.3 percentage
points, primarily due to unfavorable foreign currency impact due to the
strengthening of the U.S. dollar.
SELLING, GENERAL AND
ADMINISTRATIVE
Selling,
general and administrative (“SG&A”) expense as a percentage of net sales for
the three and nine months ended September 30, 2009 was 24.0% and 23.8%,
respectively, compared to 23.0% and 23.3% for the same periods a year
ago. The dollar decreases were $1,837,000 and $11,980,000, or 1.7%
and 3.9%, respectively, for the quarter and first nine months of the year, as
compared to the same period a year ago. Acquisitions increased these
expenses by $574,000 in the quarter and $1,804,000 in the first nine months of
the year, while foreign currency translation decreased these expenses by
$3,879,000 in the quarter and $19,017,000 in the first nine months of the year
compared to the same periods a year ago. Excluding the impact of
foreign currency translation and acquisitions, selling, general and
administrative expense increased 1.4% for the quarter and 1.7% for the first
nine months of 2009 as compared to the same periods a year ago. The dollar
increase, excluding foreign currency translation and acquisitions, was
$1,468,000 and $5,233,000 for the quarter and first nine months of the year, as
compared to the same periods a year ago. The year to date increase is
primarily attributable to increases in bad debt and stock compensation expense
as well as unfavorable foreign currency transactions related to the Euro and the
British Pound.
North
American/HME SG&A expense increased $2,621,000, or 4.9%, for the quarter and
$5,249,000, or 3.4%, in the first nine months of 2009 compared to the same
periods a year ago. For the quarter, foreign currency translation
decreased SG&A expense by $225,000, or .4%, while acquisitions increased
SG&A expense by $574,000, or 1.1%. For the first nine months of
2009, foreign currency translation decreased SG&A expense by $1,578,000 or
1.0% while acquisitions increased SG&A by $1,804,000 or
1.2%. Excluding the impact of foreign currency translation and
acquisitions, SG&A expense increased by 4.3% for the quarter and increased
by 3.3% year to date. The year to date increase is primarily
attributable to increased bad debt expense and stock compensation
expense.
Invacare
Supply Group SG&A expense increased $509,000, or 7.6%, for the quarter and
increased by $1,065,000, or 5.4%, in the first nine months of 2009 compared to
the same periods a year ago with the year to date increase primarily due to
increased bad debt expense.
Institutional
Products Group SG&A expense decreased $336,000, or 8.6%, for the quarter and
decreased $399,000, or 3.3%, in the first nine months of 2009 compared to the
same periods a year ago. Foreign currency translation decreased
SG&A expense by $32,000, or 0.8%, for the quarter and $224,000, or 1.9%, for
the first nine months of the year. Excluding the impact of foreign
currency translation, SG&A expense decreased 7.8% and 1.5% for the quarter
and first nine months of 2009, respectively, as compared to last
year. The year to date decline is attributable to reduced commission
expense driven by the net sales decline.
European
SG&A expense decreased $3,457,000, or 9.9%, for the quarter and $14,725,000,
or 14.4%, for the first nine months of 2009 compared to the same periods a year
ago. For the quarter, foreign currency translation decreased SG&A
by $3,195,000, or 9.2%. For the first nine months of 2009, foreign
currency translation decreased SG&A expense by $12,483,000, or
12.2%. Excluding the impact of foreign currency translation, SG&A
expense decreased by 0.8% and 2.2% for the quarter and first nine months of the
year, respectively, as compared to the same periods a year ago.
Asia/Pacific
SG&A expense decreased $1,174,000, or 15.8%, for the quarter and $3,170,000,
or 14.4%, in the first nine months of the year compared to the same periods a
year ago. For the quarter, foreign currency translation decreased
SG&A expense by $427,000, or 5.8%. For the first nine months of
2009, foreign currency translation decreased SG&A by $4,732,000, or
21.4%. Excluding the impact of foreign currency translation, SG&A
expense decreased 10.1% for the quarter and increased by 7.1% for first nine
months of 2009, respectively as compared to last year. The year
to date decrease is primarily attributable to unfavorable foreign currency
transactions related to the Euro.
CHARGE RELATED TO
RESTRUCTURING ACTIVITIES
In 2005,
the company announced multi-year cost reductions and profit improvement actions,
which included: reducing global headcount, outsourcing improvements utilizing
the company’s China manufacturing capability and third parties, shifting
substantial resources from product development to manufacturing cost reduction
activities and product rationalization, reducing freight exposure through
freight auctions and changing the freight policy and general expense
reductions. 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 $2,155,000 and $4,055,000 were incurred in the three and nine month
periods ended September 30, 2009, including $298,000 for the three and nine
month periods ended September 30, 2009 which was recorded in cost of products
sold as it related to inventory markdowns. The remaining charge
amount is included on the Charge Related to Restructuring Activities in the
Condensed Consolidated Statement of Operations as part of
operations.
For the
first nine months of 2009, restructuring charges included $255,000 in NA/HME,
$60,000 in ISG, $171,000 in IPG, $2,434,000 in Europe and $1,135,000 in
Asia/Pacific. Of the total charges incurred to date, $1,509,000
remained unpaid as of September 30, 2009 with $107,000 unpaid related to NA/HME;
$115,000 unpaid related to IPG; and $1,287,000 unpaid related to
Europe. There have been no material changes in accrued balances
related to the charge, either as a result of revisions in the plan or changes in
estimates, and the company expects to utilize the accruals recorded through
September 30, 2009 during 2009. With additional actions to be
undertaken during the remainder of 2009, the company anticipates recognizing
pre-tax restructuring charges of approximately $6,000,000 for the
year.
INTEREST
Interest
expense decreased $2,810,000 and $5,964,000 for the third quarter and first nine
months of 2009, respectively, compared to the same periods last year due to
lower debt levels and lower interest rates. Interest income for the
third quarter and first nine months of 2009 decreased $470,000 and $1,267,000,
respectively, compared to the same periods last year, which was primarily on the
result of maintaining lower average foreign cash balances.
INCOME
TAXES
The
Company had an effective tax rate of 24.2% and 28.2% on earnings before tax for
the three and nine month periods ended September 30, 2009, respectively,
compared to an expected rate at the US statutory rate of 35%. For the
three and nine month periods ended September 30, 2008, the company
had an effective rate of 26.8% and 36.0%, respectively, compared to
an expected rate at the US statutory rate of 35%. The company’s
effective tax rate for the three and nine month periods ended September 30, 2009
and three month period ending September 30, 2008 was lower than the U.S. federal
statutory rate as a result of the company not being able to record tax benefits
related to losses in countries which had tax valuation allowances, while normal
tax expense was recognized in countries without tax allowances and earnings
abroad being taxed at rates generally lower than the U.S. federal statutory
rate. For the nine month period ended September 30, 2008, the
effective tax rate was higher than the U.S. federal statutory rate as a result
of the company not being able to record tax benefits related to losses in
countries which had tax valuation allowances, while normal tax expense was
recognized in countries without tax valuation allowances.
LIQUIDITY AND CAPITAL
RESOURCES
The
company’s debt decreased by $105,972,000 from December 31, 2008 to $372,848,000
at September 30, 2009, excluding the impact of adoption of ASC 470-20, as a
result of improved cash flow generation. The company’s balance sheet
reflects the adoption of ASC 470-20. As a result of
adopting ASC 470-20, the company recorded a debt discount, which reduced debt
and increased equity by $49,352,000 as of September 30, 2009 and $52,414,000 as
of December 31, 2008, respectively.
The
company’s cash and cash equivalents were $27,821,000 at September 30, 2009, down
from $47,516,000 at the end of the year.
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. There
are three significant financial covenants: leverage ratio, interest
coverage ratio and fixed charge ratio. As of September 30, 2009, the
company was in compliance with all covenant requirements. Under the
most restrictive covenant of the company’s borrowing arrangements as of
September 30, 2009, the company had the capacity to borrow up to an additional
$146,747,000.
The
leverage ratio is defined as Consolidated Funded Indebtedness at the balance
sheet date as compared to Consolidated Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) for the previous twelve
months. As of September 30, 2009, the maximum leverage ratio
permitted by the borrowing arrangements was 5.0 to 1.0. The actual
leverage ratio as of September 30, 2009 was 2.64 to 1.0. On October
1, 2009, the maximum leverage ratio permitted by the borrowing arrangements
decreased to 4.0 to 1.0.
The
interest coverage ratio is defined as Consolidated EBITDA for the previous
twelve months as compared to Consolidated Interest Charges for the previous
twelve months. As of September 30, 2009, the minimum interest
coverage ratio permitted by the borrowing arrangements was 2.5 to
1.0. The actual interest coverage ratio as of September 30, 2009 was
4.34 to 1.0. On October 1, 2009, the minimum interest coverage ratio
permitted by the borrowing arrangements decreased to 3.0 to
1.0.
The fixed
charge ratio takes into consideration several items
including: Consolidated EBITDA, rent and lease expense, capital
expenditures, interest charges, regularly scheduled principal payments and
federal, state and local taxes paid. As of September 30, 2009, the
minimum fixed charge ratio permitted by the borrowing arrangements was 1.4 to
1.0. The actual fixed charge ratio as of September 30, 2009 was 2.07
to 1.0. On October 1, 2009, the minimum interest coverage ratio
permitted by the borrowing arrangements increased to 1.6 to 1.0.
CAPITAL
EXPENDITURES
The
company had no individually material capital expenditure commitments outstanding
as of September 30, 2009. The company estimates that capital investments for
2009 could approximate $15,000,000 to $17,000,000 as compared to $19,957,000 in
2008. The company believes that its balances of cash and cash
equivalents, together with funds generated from operations and existing
borrowing facilities will be sufficient to meet its operating cash requirements
and to fund required capital expenditures for the foreseeable
future.
CASH
FLOWS
Cash
flows provided by operating activities were $86,007,000 for the first nine
months of 2009 compared to cash provided by operating activities of $15,634,000
in the first nine months of 2008. Operating cash flows for the first
nine months of 2009 were significantly improved compared to the same period a
year ago primarily due to improved profitability and better working capital
management as accounts receivable collections were higher, inventory levels were
reduced and accounts payable increased primarily in NA/HME as a result of
improved asset management.
Cash used
for investing activities was $10,136,000 for the first nine months of 2009
compared to $11,283,000 used in the first nine months of
2008. Purchases of property, plant and equipment in the first nine
months of 2009 were less than in the first nine months of 2008 while the first
nine months of 2008 included a benefit of cash received from company-owned life
insurance policies.
Cash used
by financing activities was $99,115,000 for the first nine months of 2009
compared to cash used of $28,759,000 in the first nine months of
2008. The increase in cash flow used by financing activities is the
result of a reduction in debt outstanding from strong cash flow generated during
the year and utilization of cash on the balance sheet.
During
the first nine months of 2009, the company generated free cash flow of
$79,814,000 compared to $3,394,000 generated by the company in the first nine
months of 2008. The increase was primarily attributable to the same
items as noted above which impacted operating cash flows. Free cash
flow is a non-GAAP financial measure that is comprised of net cash provided by
operating activities, excluding net cash impact related to restructuring
activities, less net purchases of property and equipment, net of proceeds from
sales of property and equipment. Management believes that this
financial measure provides meaningful information for evaluating the overall
financial performance of the company and its ability to repay debt or make
future investments (including, for example, acquisitions). However,
it should be noted that the company’s definition of free cash flow may not be
comparable to similar measures disclosed by other companies because not all
companies calculate free cash flow in the same manner.
The
non-GAAP financial measure is reconciled to the GAAP measure as follows (in
thousands):
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$
|
86,007
|
|
|
$
|
15,634
|
|
Net
cash impact related to restructuring activities
|
|
|
3,212
|
|
|
|
2,709
|
|
Less: Purchases
of property and equipment - net
|
|
|
(9,405
|
)
|
|
|
(14,949
|
)
|
Free
Cash Flow
|
|
$
|
79,814
|
|
|
$
|
3,394
|
|
DIVIDEND
POLICY
On August
19, 2009, the company’s Board of Directors declared a quarterly cash dividend of
$0.0125 per Common Share to shareholders of record as of October 5, 2009, which
was paid on October 13, 2009. At the current rate, the cash dividend
will amount to $0.05 per Common Share on an annual basis.
CRITICAL ACCOUNTING
POLICIES
The
Consolidated Financial Statements included in this Quarterly Report on Form 10-Q
include accounts of the company and all wholly-owned subsidiaries. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying Consolidated Financial Statements and related footnotes. In
preparing the financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
The
following critical accounting policies, among others, affect the more
significant judgments and estimates used in preparation of the company’s
consolidated financial statements.
Revenue
Recognition
Invacare’s
revenues are recognized when products are shipped to unaffiliated customers.
Revenue Recognition,
ASC 605, provides guidance on the application of generally accepted accounting
principles to selected revenue recognition issues. The company has
concluded that its revenue recognition policy is appropriate and in accordance
with GAAP and ASC 605. 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 the revenue
recognition guidance in ASC 605-45-05. 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 De Lage Landen, Inc. (“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 home
health care dealers, medical equipment dealers and long term care facilities
located throughout the United States, Australia, Canada, New Zealand and Europe.
A significant portion of products sold to dealers, both foreign and domestic, is
ultimately funded through government reimbursement programs such as Medicare and
Medicaid. As a consequence, changes in these programs can have an adverse impact
on dealer liquidity and profitability. The estimated allowance for uncollectible
amounts is based primarily on management’s evaluation of the financial condition
of the customer. In addition, as a result of the third party financing
arrangement, management monitors the collection status of these contracts in
accordance with the company’s limited recourse obligations and provides amounts
necessary for estimated losses in the allowance for doubtful
accounts.
The
company continues to closely monitor the credit-worthiness of its customers and
adhere to tight credit policies. Due to delays in the implementation of
various government reimbursement policies, including national competitive
bidding, there still remains significant uncertainty as to the impact that those
changes will have on the company’s customers.
Invacare
has an agreement with DLL, a third party financing company, to provide the
majority of future lease financing to Invacare’s North America customers. The
DLL agreement provides for direct leasing between DLL and the Invacare customer.
The company retains a recourse obligation for events of default under the
contracts. The company monitors the collections status of these contracts and
has provided amounts for estimated losses in its allowances for doubtful
accounts.
Inventories and Related
Allowance for Obsolete and Excess Inventory
Inventories
are stated at the lower of cost or market with cost determined by the first-in,
first-out method. Inventories have been reduced by an allowance for excess
and obsolete inventories. The estimated allowance is based on management’s
review of inventories on hand compared to estimated future usage and
sales. A provision for excess and obsolete inventory is recorded as needed
based upon the discontinuation of products, redesigning of existing products,
new product introductions, market changes and safety issues. Both raw
materials and finished goods are reserved for on the balance sheet.
In general, Invacare reviews inventory
turns as an indicator of obsolescence or slow moving product as well as the
impact of new product introductions. Depending on the situation, the company may
partially or fully reserve for the individual item. The company continues
to increase its overseas sourcing efforts, increase its emphasis on the
development and introduction of new products, and decrease the cycle time to
bring new product offerings to market. These initiatives are sources of
inventory obsolescence for both raw material and finished goods.
Goodwill, Intangible and
Other Long-Lived Assets
Property,
equipment, intangibles and certain other long-lived assets are amortized over
their useful lives. Useful lives are based on management’s estimates of the
period that the assets will generate revenue. Under Intangibles – Goodwill and
Other, ASC 350, goodwill and intangible assets deemed to have indefinite
lives are subject to annual impairment tests. Furthermore, goodwill and other
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The company completes its annual impairment tests in the fourth
quarter of each year. The discount rates used have a significant impact upon the
discounted cash flow methodology utilized in our annual impairment testing as
higher discount rates decrease the fair value estimates used in our
testing.
The
company utilizes a discounted cash flow method model to analyze reporting units
for impairment in which the company forecasts income statement and balance sheet
amounts based on assumptions regarding future sales growth, profitability,
inventory turns, days’ sales outstanding, etc. to forecast future cash
flows. The cash flows are discounted using a weighted average cost of
capital discount rate where the cost of debt is based on quoted rates for
20-year debt of companies of similar credit risk and the cost of equity is based
upon the 20-year treasury rate for the risk free rate, a market risk premium,
the industry average beta, a small cap stock adjustment and company specific
risk premiums. The assumptions used are based on a market participant’s
point of view and yielded a discount rate of 8.90% to 9.90% in 2008 compared to
9.25% to 10.25% in 2007. The discount rate has fluctuated in the last 3
years by less than 50 basis points. If the discount rate used were 50 basis
points higher for the 2008 impairment analysis, the company would still not have
an impairment for any of the reporting units.
While
there was no indication of impairment in 2008 related to goodwill or intangibles
for any reporting units, a future potential impairment is possible for any of
the company’s reporting units should actual results differ materially from
forecasted results used in the valuation analysis. Furthermore, the company’s
annual valuation of goodwill can differ materially if the market inputs used to
determine the discount rate change significantly. For instance, higher interest
rates or greater stock price volatility would increase the discount rate and
thus increase the chance of impairment.
Product
Liability
The
company’s captive insurance company, Invatection Insurance Co., currently has a
policy year that runs from September 1 to August 31 and insures annual
policy losses of $10,000,000 per occurrence and $13,000,000 in the
aggregate of the company’s North American product liability exposure. The
company also has additional layers of external insurance coverage insuring up to
$75,000,000 in annual aggregate losses arising from individual claims anywhere
in the world that exceed the captive insurance company policy limits or the
limits of the company’s per country foreign liability limits, as applicable.
There can be no assurance that Invacare’s current insurance levels will continue
to be adequate or available at affordable rates.
Product
liability reserves are recorded for individual claims based upon historical
experience, industry expertise and indications from the third-party actuary.
Additional reserves, in excess of the specific individual case reserves, are
provided for incurred but not reported claims based upon third-party actuarial
valuations at the time such valuations are conducted. Historical claims
experience and other assumptions are taken into consideration by the third-party
actuary to estimate the ultimate reserves. For example, the actuarial analysis
assumes that historical loss experience is an indicator of future experience,
that the distribution of exposures by geographic area and nature of operations
for ongoing operations is expected to be very similar to historical operations
with no dramatic changes and that the government indices used to trend losses
and exposures are appropriate.
Estimates
made are adjusted on a regular basis and can be impacted by actual loss award
settlements on claims. While actuarial analysis is used to help determine
adequate reserves, the company accepts responsibility for the determination and
recording of adequate reserves in accordance with accepted loss reserving
standards and practices.
Warranty
Generally,
the company’s products are covered from the date of sale to the customer by
warranties against defects in material and workmanship for various periods
depending on the product. Certain components carry a lifetime warranty. A
provision for estimated warranty cost is recorded at the time of sale based upon
actual experience. The company continuously assesses the adequacy of its product
warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company’s warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty reserves were
necessary in the current year. See Warranty Costs in the Notes to the Condensed
Consolidated Financial Statements included in this report for a reconciliation
of the changes in the warranty accrual.
Accounting for Stock-Based
Compensation
The
company accounts for share based compensation under the provisions of Compensation – Stock
Compensation, ASC 718. The company has not made any
modifications to the terms of any previously granted options and no changes have
been made regarding the valuation methodologies or assumptions used to determine
the fair value of options granted since 2005 and the company continues to use a
Black-Scholes valuation model. As of September 30, 2009, there was $16,077,000
of total unrecognized compensation cost from stock-based compensation
arrangements granted under the plans, which is related to non-vested options and
shares, and includes $5,534,000 related to restricted stock awards. The company
expects the compensation expense to be recognized over a weighted-average period
of approximately two years.
The
majority of the options awarded have been granted at exercise prices equal to
the market value of the underlying stock on the date of grant. Restricted stock
awards granted without cost to the recipients are expensed on a straight-line
basis over the vesting periods.
Income
Taxes
As part
of the process of preparing its financial statements, the company is required to
estimate income taxes in various jurisdictions. The process requires estimating
the company’s current tax exposure, including assessing the risks associated
with tax audits, as well as estimating temporary differences due to the
different treatment of items for tax and accounting policies. The temporary
differences are reported as deferred tax assets and or liabilities. The company
also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be
established. In the event that actual results differ from its estimates, the
company’s provision for income taxes could be materially impacted.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In
December 2007, Business
Combinations, ASC 805, changed the accounting for business
acquisitions. ASC 805 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. ASC 805 also requires expanded disclosure regarding the nature
and financial effects of a business combination. The company adopted ASC
805 as of January 1, 2009 and the adoption had no material impact on the
company’s financial position, results of operations or cash flows. ASC 805 could
have a material impact on the company’s financial statements in future periods
if the company completes significant acquisitions in the
future.
In March
2008, Derivatives and Hedging,
ASC 815 was issued which requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. The company adopted ASC 815 effective January 1, 2009 and the
adoption had no material impact on the company’s financial position, results of
operations or cash flows.
On
May 9, 2008, Convertible
Debt, ASC 470-20, was issued to provide clarification of the accounting
for convertible debt that can be settled in cash upon conversion. The FASB
believed this clarification was needed because the accounting that was being
applied for convertible debt prior to ASC 470-20 did not fully reflect the true
economic impact on the issuer since the conversion option was not captured as a
borrowing cost and its full dilutive effect was not included in earnings per
share. ASC 470-20 requires separate accounting for the liability and
equity components of the convertible debt in a manner that would reflect
Invacare’s nonconvertible debt borrowing rate. Accordingly, the company had
to bifurcate a component of its convertible debt as a component of stockholders’
equity ($59,012,000 as of the retrospective adoption date of February 12, 2007)
and will accrete the resulting debt discount as interest expense. The
company adopted ASC 470-20 effective January 1, 2009 and, as a result,
reported interest expense increased and net earnings decreased by $1,050,000
($0.03 per share) and $936,000 ($0.03 per share) for the quarters ended
September 30, 2009 and 2008, respectively; by $3,062,000 ($0.10 per share) and
$2,730,000 ($0.09 per share) for the nine month periods ended September 30, 2009
and 2008, respectively and by $3,695,000 ($0.12 per share) and $2,904,000 ($0.09
per share) for the years 2008 and 2007, respectively. ASC 470-20
required retrospective application upon adoption and accordingly, amounts for
2008 and 2007 are being and will continue to be restated in the 2009 financial
statements.
In May
2009, Subsequent Events,
ASC 855, was issued that provides authoritative guidance regarding
subsequent events as this guidance was previously only addressed in auditing
literature. The company adopted ASC 855 effective June 30, 2009 and the adoption
had no material impact on the company’s financial position, results of
operations or cash flows. The company has evaluated subsequent events
through the date of filing of this report with the Securities and Exchange
Commission.
On July
1, 2009, the FASB issued ASC 105, The Accounting Standards Codification
(Codification) is the single source of authoritative U.S. accounting and
reporting standards, with the exception of guidance issued by the
SEC. Although the Codification is not intended to change U.S. GAAP,
it does reorganize and supersede current U.S. GAAP and therefore all references
to U.S. GAAP in future filings will be changed to Codification references,
beginning with the Company’s third quarter Form 10-Q.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The company uses
interest swap agreements to mitigate its exposure to interest rate fluctuations.
Based on September 30, 2009 debt levels, a 1% change in interest rates would
impact interest expense by approximately $533,000. 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,” “could”, “plan,” “intend,” “expect,”
“continue,” “forecast,” “believe,” “anticipate” and “seek,” as well as similar
comments, are forward-looking in nature. Actual results and events may differ
significantly from those expressed or anticipated as a result of risks and
uncertainties which include, but are not limited to, the following: possible
adverse effects of being substantially leveraged, which could impact our ability
to raise capital, limit our ability to react to changes in the economy or our
industry or expose us to interest rate or event of default risks; adverse
changes in government and other third-party payor reimbursement levels and
practices, including any health care reform legislation that may be enacted
(such as, for example, recently proposed health care reform legislation
contemplating a tax on medical device manufacturers that, if adopted, could have
an adverse impact on the company); consolidation of health care providers and
our competitors; loss of key health care providers; ineffective cost reduction
and restructuring efforts; inability to design, manufacture, distribute and
achieve market acceptance of new products with higher functionality and lower
costs; extensive government regulation of our products; lower cost imports;
increased freight costs; failure to comply with regulatory requirements or
receive regulatory clearance or approval for our products or operations in the
United States or abroad; potential product recalls; uncollectible accounts
receivable; the uncertain impact on our providers, on our suppliers and on the
demand for our products of the recent global economic downturn and general
volatility in the credit and stock markets; difficulties in implementing an
Enterprise Resource Planning system; legal actions or regulatory proceedings and
governmental investigations; product liability claims; inadequate patents or
other intellectual property protection; incorrect assumptions concerning
demographic trends that impact the market for our products; provisions of Ohio
law or in our debt agreements, our shareholder rights plan or our charter
documents that may prevent or delay a change in control; the loss of the
services of our key management and personnel; decreased availability or
increased costs of raw materials which could increase our costs of producing our
products; inability to acquire strategic acquisition candidates because of
limited financing alternatives; risks inherent in managing and operating
businesses in many different foreign jurisdictions; increased security concerns
and potential business interruption risks associated with political and/or
social unrest in foreign countries where the company’s facilities or assets are
located; exchange rate and tax rate fluctuations, as well as the risks described
from time to time in Invacare’s reports as filed with the Securities and
Exchange Commission. Except to the extent required by law, we do not undertake
and specifically decline any obligation to review or update any forward-looking
statements or to publicly announce the results of any revisions to any of such
statements to reflect future events or developments or otherwise.
|
Quantitative and Qualitative
Disclosures About Market
Risk.
|
The
information called for by this item is provided under the same caption under
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
As of
September 30, 2009, an evaluation was performed, under the supervision and with
the participation of the company’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the company’s disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the
company’s management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the company’s disclosure controls and procedures were
effective as of September 30, 2009, in ensuring that information required to be
disclosed by the company in the reports it files and submits under the Exchange
Act is (1) recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms and (2) accumulated
and communicated to the company’s management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate to allow for timely
decisions regarding required disclosure. There were no changes in the
company’s internal control over financial reporting that occurred during the
company’s most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the company’s internal control over
financial reporting.
In
addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed in Item 1A of the company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.
Reduced
government reimbursement levels and changes in reimbursement policies have in
the past added, and could continue to add, significant pressure to the company’s
revenues and profitability. Any health care reform legislation that
is adopted by the U.S. government may increase this pressure. For
example, recently proposed health care reform legislation contemplating a tax on
medical device manufacturers, if adopted, could have an adverse impact on the
company’s profitability.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds.
|
(c)
|
The
following table presents information with respect to repurchases of common
shares made by the company during the three months ended September 30,
2009. In the quarter ended September 30, 2009, shares were repurchased and
surrendered to the company by employees for tax withholding purposes in
conjunction with the vesting of restricted shares held by the employees
under the company’s 2003 Performance
Plan.
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
Paid
Per Share
|
|
|
Total
Number of Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs
|
|
|
Maximum
Number
of
Shares That May Yet
Be
Purchased Under
the
Plans or Programs
|
|
7/1/2009-7/31/09
|
|
|
8,123
|
|
|
$
|
20.12
|
|
|
|
-
|
|
|
|
1,362,900
|
|
8/1/2009-8/31/09
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
9/1/2009-9/30/09
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,362,900
|
|
Total
|
|
|
8,123
|
|
|
$
|
20.12
|
|
|
|
-
|
|
|
|
1,362,900
|
|
Exhibit
No.
|
|
|
|
10.1
|
|
Amendment
No.1 to Invacare Corporation Deferred Compensation Plus Plan (filed
herewith).
|
|
10.2
|
|
Amendment
No.1 to Invacare Corporation Cash Balance Supplemental Executive
Retirement Plan (filed herewith).
|
|
31.1
|
|
Chief
Executive Officer Rule 13a-14(a)/15d-14(a) Certification (filed
herewith).
|
|
31.2
|
|
Chief
Financial Officer Rule 13a-14(a)/15d-14(a) Certification
(filed herewith).
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
INVACARE
CORPORATION
|
|
|
|
|
|
Date:
November 5, 2009
|
By:
|
/s/
Robert K. Gudbranson
|
|
|
|
Name:
Robert K. Gudbranson
|
|
|
|
Title:
Chief Financial Officer
|
|
|
|
(As
Principal Financial and Accounting Officer and on behalf of the
registrant)
|
|