10-Q 1 q203q.txt INVACARE CORPORATION JUNE 30, 2003 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2003 ---------------------------------------------------------- Commission File Number 0-12938 --------------------------------------------------------- Invacare Corporation -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 95-2680965 ------------------------------- ------------------------------- (State or other jurisdiction of (IRS Employer Identification No) incorporation or organization) One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036 -------------------------------------------------------------------------------- (Address of principal executive offices) (440)329-6000 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if change since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12 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 if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: As of August 4, 2003, the company had 29,787,577 Common Shares and 1,112,023 Class B Common Shares outstanding. INVACARE CORPORATION INDEX ----- Part I. FINANCIAL INFORMATION: Page No. ------------------------------ -------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheet - June 30, 2003 and December 31, 2002.........................3 Condensed Consolidated Statement of Earnings - Three and Six Months Ended June 30, 2003 and 2002...........4 Condensed Consolidated Statement of Cash Flows - Six Months Ended June 30, 2003 and 2002.....................5 Notes to Condensed Consolidated Financial Statements - June 30, 2003..................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............10 Item 3. Quantitative and Qualitative Disclosure of Market Risk...............15 Item 4. Controls and Procedures..............................................15 Part II. OTHER INFORMATION: --------------------------- Item 4. Result of Votes of Security Holders..................................15 Item 6. Exhibits and Reports on Form 8-K.....................................15 SIGNATURES....................................................................16 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)
INVACARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheet June 30, December 31, 2003 2002 ---- ---- (unaudited) ASSETS (In thousands) ------ CURRENT ASSETS .........Cash and cash equivalents $7,739 $13,086 .........Marketable securities 1,503 1,350 .........Trade receivables, net 225,368 200,388 .........Installment receivables, net 12,308 20,953 .........Inventories, net 125,539 111,382 .........Deferred income taxes 27,754 26,053 .........Other current assets 22,604 25,600 ------- ------- ......... TOTAL CURRENT ASSETS 422,815 398,812 OTHER ASSETS 56,545 51,031 OTHER INTANGIBLES 3,695 4,779 PROPERTY AND EQUIPMENT, NET 136,518 130,963 GOODWILL, NET 355,991 321,118 ------- ------- ......... TOTAL ASSETS $975,564 $906,703 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES .........Accounts payable $95,189 $80,511 .........Accrued expenses 79,213 66,414 .........Accrued income taxes 13,662 16,049 .........Current maturities of long-term obligations 2,785 4,479 ------- ------- ......... TOTAL CURRENT LIABILITIES 190,849 167,453 LONG-TERM DEBT 210,107 234,134 OTHER LONG-TERM OBLIGATIONS 26,949 24,804 SHAREHOLDERS' EQUITY .........Preferred shares - - .........Common shares 7,629 7,580 .........Class B common shares 278 278 .........Additional paid-in-capital 103,181 98,995 .........Retained earnings 434,182 407,235 .........Accumulated other comprehensive earnings (loss) 27,883 (18,729) .........Treasury shares (23,686) (13,843) .........Unearned compensation on stock awards (1,808) (1,204) ------- ------- ......... TOTAL SHAREHOLDERS' EQUITY 547,659 480,312 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $975,564 $906,703 ======== ========
See notes to condensed consolidated financial statements. 3
INVACARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement of Earnings - (unaudited) Three Months Ended Six Months Ended (In thousands except per share data) June 30, June 30, 2003 2002 2003 2002 ------------------------ ------------------------ Net sales $300,114 $271,846 $576,787 $526,927 Cost of products sold 212,280 191,228 408,502 371,675 ------- ------- ------- ------- Gross profit 87,834 80,618 168,285 155,252 Selling, general and administrative expense 63,589 53,631 124,109 107,048 Interest income 1,433 1,143 2,469 2,072 Interest expense 2,656 4,138 5,356 8,606 ------- ------- ------- ------- Earnings before income taxes 23,022 23,992 41,289 41,670 Income taxes 7,575 7,890 13,585 13,700 ------- ------- ------- ------- NET EARNINGS $ 15,447 $ 16,102 $ 27,704 $ 27,970 ======= ======= ======= ======= DIVIDENDS DECLARED PER COMMON SHARE .0125 .0125 .0250 .0250 ======= ======= ======= ======= Net earnings per share - basic $ 0.50 $ 0.52 $ 0.90 $ 0.91 ======= ======= ======= ======= Weighted average shares outstanding - basic 30,799 30,890 30,815 30,814 ======= ======= ======= ======= Net earnings per share - assuming dilution $ 0.49 $ 0.51 $ 0.88 $ 0.88 ======= ======= ======= ======= Weighted average shares outstanding - assuming dilution 31,507 31,807 31,527 31,677 ======= ======= ======= =======
See notes to condensed consolidated financial statements. 4
INVACARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows - (unaudited) Six Months Ended June 30, 2003 2002 ---- ---- OPERATING ACTIVITIES (In thousands) Net earnings $27,704 $27,970 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 13,697 12,495 Provision for losses on trade and installment receivables 6,200 3,259 Provision for deferred income taxes 891 653 Provision for other deferred liabilities 1,319 1,369 Changes in operating assets and liabilities: Trade receivables (13,745) 5,138 Inventories (5,257) 10,991 Other current assets 2,816 4,585 Accounts payable 8,395 (5,899) Accrued expenses 2,277 1,753 Other deferred liabilities 979 95 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 45,276 62,409 INVESTING ACTIVITIES Purchases of property and equipment (9,884) (9,195) Installment sales contracts, net 5,780 6,331 Increase in other long term assets (3,416) (3,648) Business acquisitions, net of cash acquired (5,808) - Other (1,526) 82 ------- ------- NET CASH REQUIRED BY INVESTING ACTIVITIES (14,854) (6,430) FINANCING ACTIVITIES Proceeds from revolving lines of credit and long-term borrowings 207,374 109,780 Payments on revolving lines of credit, long-term debt and capital lease obligations (238,453) (179,040) Proceeds from exercise of stock options 1,244 4,278 Purchases of treasury stock (8,345) - Payment of dividends (745) (788) ------- ------- NET CASH REQUIRED BY FINANCING ACTIVITIES (38,925) (65,770) Effect of exchange rate changes on cash 3,156 2,681 ------- ------- Decrease in cash and cash equivalents (5,347) (7,110) Cash and cash equivalents at beginning of period 13,086 16,683 ------- ------- Cash and cash equivalents at end of period $ 7,739 $ 9,573 ======= ======= See notes to condensed consolidated financial statements.
5 INVACARE CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2003 Nature of Operations - Invacare Corporation and its subsidiaries ("Invacare" or the "company") is the leading home medical equipment manufacturer in the world based on its distribution channels, the breadth of its product line and net sales. The company designs, manufactures and distributes an extensive line of medical equipment for the home health care, retail and extended care markets. The company's products include standard manual wheelchairs, motorized and lightweight prescription wheelchairs, seating and positioning systems, motorized scooters, patient aids, home care beds, respiratory products and distributed products. Principles of Consolidation - The consolidated financial statements include the accounts of the company and its majority 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 June 30, 2003 and the results of its operations for the three and six months ended June 30, 2003 and 2002, respectively, and changes in its cash flows for the six months ended June 30, 2003 and 2002, respectively. Certain foreign subsidiaries are consolidated using a May 31 quarter end. The results of operations for the three and six months ended June 30, 2003, respectively, are not necessarily indicative of the results to be expected for the full year. All significant intercompany transactions are eliminated. Reclassifications - Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the presentation used for the periods ended June 30, 2003. 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 three primary business segments based on geographical area: North America, Europe and Australasia. The three reportable segments represent operating groups which offer products to different geographic regions. The North America segment sells each of five primary product lines which include: standard, rehab, distributed, respiratory, and continuing care products. Europe and Australasia sell the same product lines with the exception of distributed products. Each business segment sells to the home health care, retail and extended care markets. The company evaluates performance and allocates resources based on profit or loss from operations before income taxes for each reportable segment. The accounting policies of each segment are the same as those for the company's consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element. Therefore, intercompany profit or loss on intersegment net sales and transfers are not considered in evaluating segment performance. Intersegment net sales for reportable segments was $18,863,000 and $34,592,000 for the three and six months ended June 30, 2003, respectively, and $15,494,000 and $29,652,000 for the same periods in the preceding year. 6 The information by segment is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ----- ----- ----- ----- Revenues from external customers North America $212,990 $202,121 $413,373 $393,890 Europe 68,742 59,061 131,181 113,396 Australasia 18,382 10,664 32,233 19,641 ------- ------ ------ ------ Consolidated $300,114 $271,846 $576,787 $526,927 ======= ======== ======== ======== Earnings (loss) before income taxes North America $17,356 $20,291 $33,464 $37,697 Europe 4,295 3,801 6,615 4,707 Australasia 2,012 1,136 3,278 1,574 All Other * (641) (1,236) (2,068) (2,308) ----- ------- ------- ------- Consolidated $23,022 $23,992 $41,289 $41,670 ======= ======= ======= =======
* Consists of the domestic export unit, unallocated corporate selling, general and administrative costs, the Invacare captive insurance unit, and intercompany profits 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.
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ----- ----- ----- ----- (In thousands, except per share data) Basic Average common shares outstanding 30,799 30,890 30,815 30,814 Net earnings $15,447 $16,102 $27,704 $27,970 Net earnings per common share $ .50 $ .52 $ .90 $ .91 Diluted Average common shares outstanding 30,799 30,890 30,815 30,814 Stock options and awards 708 917 712 863 ----- ----- ----- ----- Average common shares assuming dilution 31,507 31,807 31,527 31,677 Net earnings $15,447 $16,102 $27,704 $27,970 Net earnings per common share $ .49 $ .51 $ .88 $ .88
7 Goodwill and Other Intangibles - The change in goodwill reflected on the balance sheet for the year was the result of currency translation, except for goodwill increases of $1,592,000 in North America and $1,391,000 in Europe as the result of strategic acquisitions. All of the Company's other intangible assets have definite lives and are amortized over their useful lives. As of June 30, 2003 and December 31, 2002, other intangibles consisted of the following (in thousands):
June 30, 2003 December 31, 2002 ----------------- ----------------- Historical Accumulated Historical Accumulated Cost Amortization Cost Amortization ---------- ------------ ---------- ------------ License agreements $6,108 $4,165 $6,037 $3,875 Patents 1,718 984 2,396 880 Other 2,688 1,670 2,576 1,475 ------- ------- ------- ------- $10,514 $6,819 $11,009 $6,230 ======= ====== ======= ======
Amortization expense related to other intangibles was $294,000 in the second quarter of 2003, $589,000 for the six months ended June 30, 2003 and is estimated to be $1,127,000 in 2004, $673,000 in 2005, $224,000 in 2006, $210,000 in 2007 and $210,000 in 2008. Accounting for Stock-Based Compensation - The company utilizes the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Accordingly, no compensation cost has been recognized for non-qualified stock options. However, expense was recorded for the 90,203 restricted stock awards granted since 2001. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards in 2003 and 2002 consistent with the provisions of SFAS 123, the company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ------- ------- ------- ------- Net earnings - as reported * $15,447 $16,102 $27,704 $27,970 Less: compensation expense determined based on the fair-value method for all awards granted at market value, net of related tax effects 1,163 945 2,304 1,987 ------- ------- ------- ------- Net earnings - pro forma $14,284 $15,157 $25,400 $25,983 ======= ======= ======= ======= Earnings per share as reported - basic $.50 $.52 $.90 $.91 Earnings per share as reported - assuming dilution $.49 $.51 $.88 $.88 Pro forma earnings per share - basic $.46 $.49 $.82 $.84 Pro forma earnings per share - assuming dilution $.45 $.48 $.81 $.82 * Includes stock compensation expense, net of tax, on restricted awards granted without cost of: $114 $296 $191 $353
Warranty Costs - Generally, the company's products are covered by warranties against defects in material and workmanship for periods up to six years from the date of sale to the customer. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. 8 The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands): Balance as of January 1, 2003 $ 11,448 Warranties issued during the period 4,411 Settlements made during the period (4,309) Changes in liability for pre-existing warranties during the period, including expirations 317 ------ Balance as of June 30, 2003 $11,867 ====== Comprehensive Earnings - Total comprehensive earnings were as follows (in thousands):
Three Months Six Months Ended June 30, Ended June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net earnings $15,447 $16,102 $27,704 $27,970 Foreign currency translation gain 25,833 16,397 47,392 13,302 Unrealized gain (loss) on available for sale securities 154 (17) 133 (20) Current period unrealized gain (loss) on cash flow hedges (61) (681) (913) 123 ------- ------- ------- ------- Total comprehensive earnings $ 41,373 $ 31,801 $74,316 $41,375 ======= ======= ======= =======
Statement of Cash Flows - The company made payments of (in thousands): Six Months Ended June 30, 2003 2002 ------ ------ Interest $4,877 $7,272 Income taxes 16,598 13,390 Inventories - Inventories consist of the following components (in thousands): June 30, December 31, 2003 2002 ------ ------ Raw materials $ 42,978 $ 35,457 Work in process 13,242 12,789 Finished goods 69,319 63,136 ------ ------ $125,539 $111,382 ======= ======= The final inventory determination under the LIFO method is made at the end of each fiscal year based on the inventory levels and cost at that point; therefore, interim LIFO determinations are based on management's estimates of expected year-end inventory levels and costs. 9 Property and Equipment - Property and equipment consist of the following (in thousands): June 30, December 31, 2003 2002 ------- ------- Land, buildings and improvements $ 59,672 $55,232 Machinery and equipment 208,096 199,448 Furniture and fixtures 16,962 15,641 Leasehold improvements 14,241 13,874 ------- ------- 298,971 284,195 Less allowance for depreciatio (162,453) (153,232) ------- ------- $136,518 $ 130,963 ======= ======= Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our Current Report on Form 8-K filed on July 17, 2003. RESULTS OF OPERATIONS NET SALES Net sales for the three months ended June 30, 2003 were $300,114,000, compared to $271,846,000 for the same period a year ago, representing a 10% increase. For the six months ended June 30, 2003, net sales increased 10% to $576,787,000, compared to $526,927,000 for the same period a year ago. The impact of foreign currency translation increased sales by 6% for both the quarter and year to date. Excluding currency, net sales growth was driven by volume increases in North America and Australasia. North American Operations North American net sales, consisting of Rehab (power wheelchairs, custom manual wheelchairs, scooters and seating and positioning), Standard (manual wheelchairs, personal care, home care beds, low air loss therapy and patient transport), Continuing Care (beds and furniture), Respiratory (oxygen concentrators, aerosol therapy, sleep, homefill and associated respiratory) and Distributed (ostomy, incontinence, diabetic, wound care and other medical supplies) products, increased 5% for both the quarter and the first half of the year compared to the same periods a year ago. The increase for the quarter was principally due to sales volume increases in Respiratory products (41%), Rehab products (15%) and Distributed products (11%), which was partially offset by declines in Standard products (12%) and Continuing Care products (8%). The increase year to date likewise was attributable to sales increases in Respiratory products (34%), Rehab products (14%) and Distributed products (8%), which was partially offset by declines in Standard products (9%) and Continuing Care (7%). Net sales improvements were led by strong sales growth in oxygen concentrators, the HomeFill(TM) product line and consumer power products while declines largely were attributable to continued pricing pressures in Standard products and weaker sales to nursing homes through Invacare Continuing Care Group primarily due to continued uncertainty surrounding government reimbursement programs. 10 European Operations European net sales increased 16% to $68,742,000 for the three months ended June 30, 2003 from $59,061,000 for the three months ended June 30, 2002 and increased 16% to $131,181,000 for the six months ended June 30, 2003 from $113,396,000 for the six months ended June 30, 2002. Adjusting for the impact of foreign currency translation, European net sales decreased 4% for the quarter and the first half of the year, when compared to the same periods a year ago primarily due to slower than expected sales in the Nordic region and reimbursement pressures in Germany. Australasia Operations The Australasia operations consists of Invacare Australia, which imports and distributes the Invacare range of products and manufactures and distributes the Rollerchair range of custom power wheelchairs, Dynamic Controls, a New Zealand manufacturer of operating components used in power wheelchairs and Invacare New Zealand, a distribution business. Australasia net sales increased 72% to $18,382,000 from $10,664,000 in the second quarter and 64% to $32,233,000 from $19,641,000 year to date. Adjusting for the impact of foreign currency translation, Australasia net sales increased 43% for the quarter and 33% for the first half of the year, when compared to the same periods a year ago. The growth was primarily the result of increased consumer power product sales and continued larger purchases by a customer of Dynamic Controls. GROSS PROFIT Gross profit as a percentage of net sales for the three and six-month periods ended June 30, 2003 was 29.3% and 29.2% for both periods compared to 29.7% and 29.5%, respectively, in the same periods last year. The overall decrease in margins as a percentage of net sales is principally the result of a shift in demand toward lower margin products and pricing pressures, particularly in North American Standard products. Productivity improvements in the company's manufacturing facilities continued to partially offset these negatives. North American margins declined for the first half to 29.1% compared with 29.7% in the same period in the prior year principally as a result of a shift in product mix to lower margin products and pricing pressure in the Standard products lines as a result of increased competition from low cost imports. Gross profit for Europe improved year to date by 1.9 percentage points primarily due to favorable sales mix towards higher margin products, cost reductions and favorable foreign currency translation. Gross margin in Australasia declined by 3.2 percentage points largely due to unfavorable product mix toward lower margin products in the company's Dynamic Controls subsidiary. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expense as a percentage of net sales for the three and six months ended June 30, 2003 was 21.2% and 21.5%, respectively, compared to 19.7% and 20.3% in the same periods a year ago. The dollar increase was $9,958,000 and $17,061,000, or 19% and 16%, respectively, for the quarter and first half of the year. The increase largely was due to foreign currency translation, additional provisions for bad debts, continued investments in marketing and branding programs and a significant increase in insurance costs. Excluding the impact of foreign currency translation, selling, general and administrative expense increased 11% for the quarter and 9% for the first half of the year. North American selling, general and administrative cost increased $7,433,000 or 21.2% for the quarter and $10,312,000 or 14.6% in the first half, compared to 11 the same periods a year ago, with foreign currency translation accounting for approximately 1% of the increase in both periods. The overall dollar increase for the quarter and the year primarily resulted from additional provisions for bad debts, continued investments in marketing and branding programs and increases in insurance costs. European selling, general and administrative cost increased $2,211,000 or 18.0% for the quarter and $2,315,000 or 9.3% in the first half, compared to the same periods a year ago, excluding the impact of foreign currency translation. The increase was primarily attributable to added cost as the result of a strategic acquisition, additional costs for the new European headquarters in Switzerland and supply chain initiatives. Australasian selling, general and administrative cost grew at a slower rate than net sales for the quarter and declined year to date principally as a result of aggressive expense control. INTEREST For the quarter and first half of the year, interest expense decreased by $1,482,000 and $3,250,000, respectively, compared to the same periods a year ago, as a result of reduced debt levels and lower overall interest rates. Interest income for the quarter and first half of the year remained relatively unchanged compared to the same periods a year ago. INCOME TAXES The company had an effective tax rate of 32.9% for the three and six-month periods ended June 30, 2003, which is the same effective tax rate as for the same periods a year ago. LIQUIDITY AND CAPITAL RESOURCES The company's reported overall level of long-term debt decreased $24.0 million to $210.1 million for the six months ended June 30, 2003. The company continues to maintain an adequate liquidity position to fund its working capital and capital requirements through its bank lines of credit and working capital management. As of June 30, 2003, the company had approximately $325.0 million available under its lines of credit. Under the most restrictive covenant of the company's borrowing arrangements, the company has the capacity to borrow up to an additional $230.3 million as of June 30, 2003. The company's borrowing arrangements contain covenants with respect to interest coverage, net worth, dividend payments, working capital, funded debt to capitalization and interest coverage, as defined in the company's bank agreements and agreement with its note holders. The company is in compliance with all covenant requirements. CAPITAL EXPENDITURES There were no material capital expenditure commitments outstanding as of June 30, 2003. The company expects to continue to invest in capital projects at a rate that equals or exceeds depreciation and amortization in order to maintain and improve the company's competitive position. The company estimates that capital investments for 2003 will approximate $28 million. The company believes that its balances of cash and cash equivalents, together with funds generated from operations and existing borrowing facilities will be sufficient to meet its operating cash requirements and fund required capital expenditures for the foreseeable future. 12 CASH FLOWS Cash flows provided by operating activities were $45.3 million for the first half of 2003 compared to $62.4 million for the first half of 2002. The decrease in operating cash flows is largely due to increases in accounts receivable and inventory resulting from increased revenues, partially offset by increases in accounts payable for the first half of the year, compared to the same period a year ago when accounts receivable and inventory declined. Cash required by investing activities was $14.9 million for the first half of 2003 compared to $6.4 million in the first half of 2002. The increase is primarily due to the strategic acquisition of two companies in the first half of 2003. Cash required by financing activities was $38.9 million for the first half of 2003 compared to cash required of $65.8 million in the first half of 2002. Financing activities for the first six months of 2003 were impacted by the company's repayment of long-term borrowings by $31.1 million and purchases of treasury stock of $8.3 million. The effect of foreign currency translation may result in amounts being shown for cash flows in the Condensed Consolidated Statement of Cash Flows that are different from the changes reflected in the respective balance sheet captions. DIVIDEND POLICY On May 21, 2003, the company's Board of Directors declared a quarterly cash dividend of $.0125 per Common Share to shareholders of record as of July 1, 2003, to be paid on July 18, 2003. At the current rate, the cash dividend will amount to $.05 per Common Share on an annual basis. CRITICAL ACCOUNTING POLICIES The consolidated financial statements include accounts of the company and all majority-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 these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. There has been no change in the company's critical accounting policies as disclosed in its Form 10-K filed for the year ended December 31, 2002. In addition, no new critical accounting policies have been adopted in the first six months of 2003. The Company does not believe that there is a great likelihood that materially different amounts would be reported related to its critical accounting policies. 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. Accounting for Stock-Based Compensation The company accounts for options under its stock-based compensation plans using the intrinsic value method proscribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. 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; thus, no compensation cost has been reflected in the Consolidated Statement of Earnings for these options. In 13 addition, restricted stock awards have been granted without cost to the recipients and are being expensed on a straight-line basis over the vesting periods. If the company had applied the fair value recognition provisions of SFAS No. 123 Accounting for Stock-Based Compensation for all stock options granted, net earnings per share assuming dilution would have been reduced by $.04 in the second quarter and $.07 in the first half of 2003 compared to reductions of $.03 and $.06 for the same periods a year ago. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides guidance for those companies wishing to voluntarily change to the fair value based method of accounting for stock-based compensation. The statement also amends the disclosure requirements of SFAS No. 123. While Invacare continues to utilize the disclosure-only provisions of SFAS No. 123, the company has modified its disclosures to comply with the new statement. See Accounting for Stock-Based Compensation in the Notes to the Condensed Consolidated Financial Statements. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 rate swap agreements to mitigate its exposure to interest rate fluctuations. Based on June 30, 2003 debt levels, a 1% change in interest rates would impact interest expense by approximately $1,201,000 over the next twelve months. Additionally, 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. 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 The statements contained in this Form 10-Q constitute 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," "achieve," "increase," "plan," "can," "expect," "pursue," "benefit," "continue," "exceed," "improve," "believe," "estimate," "anticipate," "build," "strengthen," "new," "lower," "drive," "seek," "hope," and "create," 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: pricing pressures, increasing raw material costs, the consolidations of health care customers and competitors, government reimbursement issues (including those that affect the viability of customers), the ability to design, manufacture and distribute new products with higher functionality and lower costs, the ability to accelerate market acceptance of and transition to new products, the effect of offering customers competitive financing terms, Invacare's ability to successfully identify, acquire and integrate acquisition candidates, the difficulties in managing and operating businesses in many different foreign jurisdictions, the timely and efficient completion of facility consolidation, the vagaries of any litigation or regulatory investigations that the company may be or become involved in at any time, the difficulties in acquiring and maintaining a proprietary intellectual property ownership position, the overall economic, market and industry growth conditions, foreign currency and interest rate risk, Invacare's ability to improve financing terms and reduce working capital, as well as the risks described from time to time in Invacare's reports as filed with the Securities and Exchange Commission. The company undertakes no obligation to 14 revise or update these forward-looking statements or other information contained herein. Item 3. Quantitative and Qualitative Disclosure of 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. Item 4. Controls and Procedures. As of June 30, 2003, an evaluation was performed, under the supervision and with the participation of the company's management, including the CEO and CFO, of the effectiveness of the design and operation of the company's disclosure controls and procedures. Based on that evaluation, the company's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2003 in ensuring that information required to be disclosed by the company in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. 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. Part II. OTHER INFORMATION Item 4. Result of Votes of Security Holders On May 21, 2003, the company held its 2003 Annual Meeting of Shareholders to act on proposals to: 1) fix the size of the Board of Directors at eleven, 2) elect three Directors to the class whose three-year term will expire in 2006, and 3) approve and adopt the Invacare Corporation 2003 Performance Plan. The proposal to fix the size of the Board of Directors at eleven received 34,912,938 affirmative votes, 166,135 negative votes and 46,382 abstained votes. James C. Boland, Whitney Evans and William M. Weber were each re-elected for a three-year term of office expiring in 2006 with 33,225,964, 34,253,697 and 33,226,094 affirmative votes and 1,899,491, 871,758 and 1,899,361 votes withheld, respectively. Gerald B. Blouch, John R. Kasich, Dan T. Moore, III, Joseph B. Richey, II, A. Malachi Mixon, III, Michael F. Delaney, C. Martin Harris, M.D. and Bernadine P. Healy, M.D. are directors with continuing terms. The proposal to approve and adopt the Invacare Corporation 2003 Performance Plan received 25,026,898 affirmative votes, 6,754,649 negative votes and 508,464 abstained votes. Item 6. Exhibits and Reports on Form 8-K A Exhibits: Official Exhibit No. 31.1 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 15 31.2 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 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). 32.2 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). B Reports on Form 8-K: A Form 8-K was furnished on April 17, 2003 under Item 7, Financial Statements and Exhibits and Item 9 Regulation FD Disclosure. The Form 8-K contained Invacare Corporation's earnings release, dated April 17, 2003, which disclosed the company's 2003 first quarter results. SIGNATURES 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 By:/s/ Gregory C. Thompson ----------------------------------------- Gregory C. Thompson Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: August 6, 2003 16