-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S3+zFZQ5ju85VCoxJXWZ1XP4mYlfBhhFzsqPwd7F9j2WgiQlzdPFBK6QKqmuZa36 BjU3Psd9PLcjyIrK4b4y3Q== 0000742112-07-000025.txt : 20070509 0000742112-07-000025.hdr.sgml : 20070509 20070509150522 ACCESSION NUMBER: 0000742112-07-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070509 DATE AS OF CHANGE: 20070509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVACARE CORP CENTRAL INDEX KEY: 0000742112 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 952680965 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15103 FILM NUMBER: 07832022 BUSINESS ADDRESS: STREET 1: ONE INVACARE WAY STREET 2: P O BOX 4028 CITY: ELYRIA STATE: OH ZIP: 44036 BUSINESS PHONE: 4403296000 10-Q 1 q10710q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2007 ------------------------------------------------- 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 (IRS Employer Identification No) incorporation or organization) One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (440) 329-6000 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check One). Large accelerated filer X Accelerated filer Non-accelerated filer ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- As of May 7, 2007, the company had 30,864,771 Common Shares and 1,111,565 Class B Common Shares outstanding. INVACARE CORPORATION INDEX Part I. FINANCIAL INFORMATION: Page No. - ------------------------------ -------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - March 31, 2007 and December 31, 2006.........................3 Condensed Consolidated Statement of Earnings - Three Months Ended March 31, 2007 and 2006...................4 Condensed Consolidated Statement of Cash Flows - Three Months Ended March 31, 2007 and 2006...................5 Notes to Condensed Consolidated Financial Statements - March 31, 2007..................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............21 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........32 Item 4. Controls and Procedures..............................................32 Part II. OTHER INFORMATION: - --------------------------- Item 1A. Risk Factors.........................................................32 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........32 Item 6. Exhibits.............................................................33 SIGNATURES....................................................................33 2 Part I. FINANCIAL INFORMATION Item 1... Financial Statements.
INVACARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets March 31, December 31, 2007 2006 ---- ---- (unaudited) ASSETS (In thousands) - ------ CURRENT ASSETS ..........Cash and cash equivalents $ 56,904 $82,203 ..........Marketable securities 270 190 ..........Trade receivables, net 248,000 261,606 ..........Installment receivables, net 8,451 7,097 ..........Inventories, net 206,555 201,756 ..........Deferred income taxes 13,616 13,512 ..........Other current assets 76,493 89,394 ------- ------- .......... TOTAL CURRENT ASSETS 610,289 655,758 OTHER ASSETS 85,871 67,443 OTHER INTANGIBLES 100,476 102,876 PROPERTY AND EQUIPMENT, NET 168,835 173,945 GOODWILL 493,226 490,429 ------- ------- .......... TOTAL ASSETS $1,458,697 $1,490,451 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES ..........Accounts payable $147,418 $163,041 ..........Accrued expenses 119,907 147,776 ..........Accrued income taxes 3,312 12,916 ..........Short-term debt and current maturities of long-term obligations 5,158 124,243 ------- ------- .......... TOTAL CURRENT LIABILITIES 275,795 447,976 LONG-TERM DEBT 596,741 448,883 OTHER LONG-TERM OBLIGATIONS 114,461 108,228 SHAREHOLDERS' EQUITY ..........Preferred shares - - ..........Common shares 8,013 8,013 ..........Class B common shares 278 278 ..........Additional paid-in-capital 144,324 143,714 ..........Retained earnings 258,845 276,750 ..........Accumulated other comprehensive earnings 102,819 99,188 ..........Treasury shares (42,579) (42,579) ------- ------- .......... TOTAL SHAREHOLDERS' EQUITY 471,700 485,364 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,458,697 $1,490,451 ========= =========
See notes to condensed consolidated financial statements. 3
INVACARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement of Earnings - (unaudited) Three Months Ended (In thousands except per share data) March 31, 2007 2006 ------- ------- Net sales $374,905 $361,704 Cost of products sold 275,849 260,408 ------- ------- Gross profit 99,056 101,296 Selling, general and administrative expense 87,766 83,607 Charge related to restructuring activities 3,152 3,157 Charges, interest and fees associated with debt refinancing 13,373 - Interest expense 10,343 7,695 Interest income (474) (600) ------- ------- Earnings (loss) before Income Taxes (15,104) 7,437 Income taxes 2,400 2,230 ------- ------- NET EARNINGS (LOSS) $ (17,504) $ 5,207 ======= ======= DIVIDENDS DECLARED PER COMMON SHARE 0.0125 0.0125 ======= ======= Net Earnings (loss) per Share - Basic $ (0.55) $ 0.16 ======= ======= Weighted Average Shares Outstanding - Basic 31,827 31,731 ======= ======= Net Earnings (loss) per Share - Assuming Dilution $ (0.55) $ 0.16 ======= ======= Weighted Average Shares Outstanding - Assuming Dilution 31,827 32,190 ======= =======
See notes to condensed consolidated financial statements. 4
INVACARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows - (unaudited) Three Months Ended March 31, 2007 2006 ------- ------- OPERATING ACTIVITIES (In thousands) Net earnings (loss) $ (17,504) $5,207 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Debt finance charges, interest and fees associated with debt refinancing 13,373 - Depreciation and amortization 11,074 9,813 Provision for losses on trade and installment receivables 1,799 1,794 Provision for other deferred liabilities 919 1,222 Provision for deferred income taxes 581 667 Gain on disposals of property and equipment 30 269 Changes in operating assets and liabilities: Trade receivables 12,511 2,440 Installment sales contracts, net (3,916) (253) Inventories (4,423) (4,985) Other current assets 15,074 4,201 Accounts payable (15,493) (2,091) Accrued expenses (29,894) (9,854) Other deferred liabilities (2,474) 99 ------- ------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (18,343) 8,529 INVESTING ACTIVITIES Purchases of property and equipment (3,750) (5,009) Proceeds from sale of property and equipment 423 33 Other long term assets 1,080 (523) Other (1,214) (159) ------- ------- NET CASH USED FOR INVESTING ACTIVITIES (3,461) (5,658) FINANCING ACTIVITIES Proceeds from revolving lines of credit, securitization facility and long-term borrowings 510,316 145,155 Payments on revolving lines of credit, securitization facility and long-term debt and capital lease obligations (494,419) (162,007) Proceeds from exercise of stock options - 1,343 Payment of Financing Costs (19,784) - Payment of dividends (399) (397) ------- ------- NET CASH USED BY FINANCING ACTIVITIES (4,286) (15,906) Effect of exchange rate changes on cash 791 (1,177) ------- ------- Decrease in cash and cash equivalents (25,299) (14,212) Cash and cash equivalents at beginning of period 82,203 25,624 ------- ------- Cash and cash equivalents at end of period $ 56,904 $ 11,412 ======= =======
See notes to condensed consolidated financial statements. 5 INVACARE CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2007 Nature of Operations - Invacare Corporation is the world's leading manufacturer and distributor in the $8.0 billion worldwide market for medical equipment used in the home based upon our distribution channels, breadth of product line and net sales. The company designs, manufactures and distributes an extensive line of health care products for the non-acute care environment, including the home health care, retail and extended care markets. Principles of Consolidation - The consolidated financial statements include the accounts of the company, its majority owned subsidiaries and a variable interest entity for which the company is the primary beneficiary. Certain foreign subsidiaries, represented by the European segment, are consolidated using a February 28 quarter end in order to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company's financial statements. All significant intercompany transactions are eliminated. Reclassifications - Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the presentation used for the period ended March 31, 2007. Use of Estimates - The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. Business Segments - The company operates in five primary business segments: North America / Home Medical Equipment ("NA/HME"), Invacare Supply Group, Institutional Products Group, Europe and Asia/Pacific. The five reportable segments represent operating groups, which offer products to different geographic regions. The NA/HME segment sells each of three primary product lines, which includes: standard, rehab and respiratory products. Invacare Supply Group sells branded medical supplies including ostomy, incontinence, diabetic, wound care, urology and miscellaneous home medical product as well as home medical equipment aids for daily living. The Institutional Products Group sells health care furnishings including beds, case goods and patient handling equipment for the long-term care market as well as accessory products. Europe and Asia/Pacific sell the same product lines with the exception of distributed products. Each business segment may sell to the home health care, retail and extended care markets. The company evaluates performance and allocates resources based on profit or loss from operations before income taxes for each reportable segment. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company's consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element. Therefore, intercompany profit or 6 loss on intersegment sales and transfers is not considered in evaluating segment performance. The information by segment is as follows (in thousands):
Three Months Ended March 31, 2007 2006 ------- ------- Revenues from external customers North America / HME $161,532 $171,694 Invacare Supply Group 61,676 55,085 Institutional Products Group 23,724 23,196 Europe 107,030 95,546 Asia/Pacific 20,943 16,183 ------- ------- Consolidated $374,905 $361,704 ======== ======== Intersegment Revenues North America $11,291 $13,608 Invacare Supply Group 86 13 Institutional Products Group - 464 Europe 2,408 2,769 Asia/Pacific 6,089 8,026 ------- ------- Consolidated $19,874 $24,880 ======== ======== Restructuring charges before income taxes North America / HME $2,430 $2,806 Invacare Supply Group 43 - Institutional Products Group 4 25 Europe 786 338 Asia/Pacific 6 284 ------- ------- Consolidated $3,269 $ 3,453 ======== ======== Charges, interest and fees associated with debt refinancing before income taxes All Other $13,373 $ - ======== ======== Earnings (loss) before income taxes North America / HME $ (2,908) $6,278 Invacare Supply Group 1,055 1,339 Institutional Products Group 595 1,553 Europe 3,924 3,692 Asia/Pacific (1,110) (1,398) All Other (16,660) (4,027) ------- ------- Consolidated $(15,104) $ 7,437 ======== ========
7 "All Other" consists of unallocated corporate selling, general and administrative costs and intercompany profits, which do not meet the quantitative criteria for determining reportable segments. In addition, the "All Other" earnings (loss) before income taxes for the first quarter 2007 includes debt finance charges, interest and fees associated with debt refinancing. Net Earnings Per Common Share - The following table sets forth the computation of basic and diluted net earnings per common share for the periods indicated.
Three Months Ended March 31, 2007 2006 ------- ------- Basic Average common shares outstanding 31,827 31,731 Net earnings (loss) $(17,504) $5,207 Net earnings (loss) per common share $ (.55) $ .16 Diluted Average common shares outstanding 31,827 31,731 Stock options and awards - 459 ------- ------- Average common shares assuming dilution 31,827 32,190 Net earnings (loss) $(17,504) $ 5,207 Net earnings (loss) per common share $ (.55) $ .16
At March 31, 2007, all of the company's shares associated with stock options were anti-dilutive because of the company's net loss in the quarter. At March 31, 2006, 2,336,431 shares were excluded from the average common shares assuming dilution as they were anti-dilutive. For the three months ended March 31, 2006, the majority of the anti-dilutive shares were granted at exercise prices of $41.87 which was higher than the average fair market value prices of $32.13. 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 for periods ranging from 6 to 39 months. In December 2000, Invacare entered into an agreement with De Lage Landen, Inc. ("DLL"), a third party financing company, to provide the majority of future lease financing to Invacare's customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a limited recourse obligation ($42,358,000 at March 31, 2007) to DLL for events of default under the contracts (total balance outstanding of $107,558,000 at March 31, 2007). FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires the company to record a guarantee liability as it relates to the limited recourse obligation. As such, the company has recorded a liability for this guarantee obligation within accrued expenses. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with SFAS No. 5, Accounting for Contingencies. Credit losses are provided for in the financial statements. 8 Substantially all of the company's receivables are due from health care, medical equipment dealers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. 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, 2006 to March 31, 2007 was entirely the result of currency translation. All of the company's other intangible assets have definite lives and are amortized over their useful lives, except for $33,051,000 related to trademarks, which have indefinite lives. As of March 31, 2007 and December 31, 2006, other intangibles consisted of the following (in thousands):
March 31, 2007 December 31, 2006 -------------- ----------------- Historical Accumulated Historical Accumulated Cost Amortization Cost Amortization Customer lists $71,137 $16,036 $71,106 $14,373 Trademarks 33,051 - 33,034 -- License agreements 4,533 4,202 4,489 3,821 Developed technology 6,814 1,058 6,819 940 Patents 6,652 3,982 6,631 3,869 Other 8,013 4,446 8,005 4,205 ------- ------- ------- ------- $130,200 $29,724 $130,084 $27,208 ======= ======= ======== =======
Amortization expense related to other intangibles was $2,178,000 in the first quarter of 2007 and is estimated to be $8,343,000 in 2008, $8,040,000 in 2009, $7,874,000 in 2010, $7,459,000 in 2011 and $7,087,000 in 2012. Investment in Affiliated Company - FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was revised in December 2003, requires consolidation of an entity if the company is subject to a majority of the risk of loss from the variable interest entity's (VIE) activities or entitled to receive a majority of the entity's residual returns, or both. A company that consolidates a VIE is known as the primary beneficiary of that entity. The company consolidates NeuroControl whose product is focused on the treatment of post-stroke shoulder pain in the United States. Certain of the company's officers and directors (or their affiliates) have small minority equity ownership positions in NeuroControl. Based on the provisions of FIN 46 and the company's analysis, the company determined that it was the primary beneficiary of this VIE as of January 1, 2005 due to the company's board of directors' approval of additional funding in 2005. Accordingly, the company has consolidated this investment on a prospective basis since January 1, 2005 and recorded an intangible asset for patented technology of $7,003,000. The other beneficial interest holders have no recourse against the company. 9 In the fourth quarter of 2006, the company's board of directors made a decision to no longer fund the cash needs of NeuroControl, to commence a liquidation process and cease operations as it was decided that the additional investment necessary to commercialize the business was not in the best interest of the company. Therefore, funding of this investment ceased on December 31, 2006. As a result of this decision, the company established a valuation reserve related to the NeuroControl intangible asset of $5,601,000 to fully reserve against the patented technology intangible as it was deemed to be impaired. Accounting for Stock-Based Compensation - Effective January 1, 2006, the company adopted SFAS No. 123R using the modified prospective application method. Under the modified prospective method, compensation cost was recognized for the twelve months ended December 31, 2006 for: 1) all stock-based payments granted subsequent to January 1, 2006 based upon the grant-date fair value calculated in accordance with SFAS No. 123R, and 2) all stock-based payments granted prior to, but not vested as of, January 1, 2006 based upon grant-date fair value as calculated for previously presented pro forma footnote disclosures in accordance with the original provisions of SFAS No. 123, Accounting for Stock Based Compensation. The amounts of stock-based compensation expense recognized were as follows (in thousands):
Three Months Ended March 31, 2007 2006 ------- ------- Stock-based compensation expense recognized as part of Selling, general and administrative expense $ 610 $ 268
The 2007 and 2006 amounts above reflect compensation expense related to restricted stock awards and nonqualified stock options awarded under the 2003 Performance Plan. Stock-based compensation is not allocated to the business segments, but is reported as part of All Other as shown in the company's Business Segment Note to the Consolidated Financial Statements. Stock Incentive Plans - The 2003 Performance Plan (the "2003 Plan") allows the Compensation, Management Development and Corporate Governance Committee of the Board of Directors (the "Committee") to grant up to 3,800,000 Common Shares in connection with incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including the use of restricted stock). The Committee has the authority to determine which employees and directors will receive awards, the amount of the awards and the other terms and conditions of the awards. During the first three months of 2007, the Committee granted 5,500 non-qualified stock options for a term of ten years at the fair market value of the company's Common Shares on the date of grant under the 2003 Plan. There were no restricted stock awards granted in the first three months of 2007 without cost to the recipients. Under the terms of the restricted stock awards, all of the shares granted vest ratably over the four years after the award date. Compensation expense of $353,000 was recognized in the first three months of 2007 and as of March 31, 2007, restricted stock awards totaling 147,085 were not yet vested. 10 Stock option activity during the three months ended March 31, 2007 was as follows:
Weighted Average 2007 Exercise Price --------- ---------------- Options outstanding at January 1 4,724,651 $30.68 Granted 5,500 21.99 Exercised - - Canceled (329,382) 28.31 ------- ------ Options outstanding at March 31 4,400,769 $30.85 ========= ======
Options price range at March 31 $16.03 to $47.80 Options exercisable at March 31 3,910,742 Options available for grant at March 31* 1,837,008 * Options available for grant as of March 31, 2007 reduced by net restricted stock award activity of 241,649. The following table summarizes information about stock options outstanding at March 31, 2007:
Options Outstanding Options Exercisable ----------------------------------------------------------- -------------------------------------- Weighted Number Outstanding Average Remaining Weighted Average Number Exercisable Weighted Average Exercise Prices At 3/31/07 Contractual Life Exercise Price At 3/31/07 Exercise Price --------------- ---------- ---------------- --------------- --------------- -------------- $16.03 - $23.69 1,768,828 4.0 years $22.20 1,340,001 $22.10 $24.43 - $36.40 1,222,476 4.9 $30.99 1,161,276 $30.98 $37.70 - $47.80 1,409,465 7.5 $41.59 1,409,465 $41.59 --------- --- ------ --------- ------ Total 4,400,769 5.5 $30.85 3,910,742 $31.76 ========= =========
The stock options awarded provided a four-year vesting period whereby options vest equally in each year. Options granted with graded vesting are accounted for as single options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2007 ----- Expected dividend yield 2.47% Expected stock price volatility 28.7% Risk-free interest rate 4.70% Expected life (years) 3.9 The assumed expected life used is based on the company's historical analysis of option history. The expected volatility used is also based on actual historical volatility, and expected dividend yield used is based on historical dividends as the company has no current intention of changing its dividend policy. 11 The weighted-average fair value of options granted during the first three months of 2007 was $6.18. The 2003 Plan provides that shares granted come from the company's authorized but unissued Common Shares or treasury shares. In addition, the company's stock-based compensation plans allow participants to exchange shares for withholding taxes, which results in the company acquiring treasury shares. As of March 31, 2007, there was $16,558,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the company's plans, which is related to non-vested shares, and includes $3,306,000 related to restricted stock awards. The company expects the compensation expense to be recognized over a weighted-average period of approximately 2 years. 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. 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 first quarter of 2007. The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands): Balance as of January 1, 2007 $ 15,165 Warranties provided during the period 3,062 Settlements made during the period (2,917) Changes in liability for pre-existing warranties during the period, including expirations 220 ------- Balance as of March 31, 2007 $ 15,530 ======= Charge Related to Restructuring Activities - Previously, the company announced multi-year cost reductions and profit improvement actions, which included: reducing global headcount, outsourcing improvements utilizing the company's China manufacturing capability and third parties, shifting substantial resources from product development to manufacturing cost reduction activities and product rationalization, reducing freight exposure through freight auctions and changing the freight policy, general expense reductions, and exiting four facilities. The restructuring was necessitated by the continued decline in reimbursement by the U.S. government as well as similar reimbursement pressures abroad and continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations. To date, the company has made substantial progress on its restructuring activities, including exiting four facilities and eliminating approximately 650 positions through March 31, 2007, including 50 positions in the first quarter of 2007. Restructuring charges of $3,269,000 and $3,453,000 were incurred in the first quarters of 2007 and 2006, respectively, of which $117,000 and $296,000, 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 Earnings as part of operations. There have been no material changes in accrued balances 12 related to the charge, either as a result of revisions in the plan or changes in estimates, and the company expects to utilize the accruals recorded through March 31, 2007 during 2007. A progression of the accruals by segment recorded as a result of the restructuring is as follows (in thousands):
Balance at Balance at 12/31/06 Accruals Payments 3/31/07 -------- -------- -------- ------- North America/HME Severance $ 1,359 $ 2,430 $ (1,888) $ 1,901 Contract terminations 557 (111) (52) 394 Product line discontinuance 2,037 111 (2,148) - ------- ------- ------- ------- Total $ 3,953 $ 2,430 $ (4,088) $ 2,295 ======= ======= ======= ======= Invacare Supply Group Severance $ 166 $ 43 $ (115) $ 94 ======= ======= ======= ======= Institutional Products Group Severance $ - $ 4 $ - $ 4 ======= ======= ======= ======= Europe Severance $ 3,734 $ 210 $ (1,296) $ 2,648 Product line discontinuance - 6 (6) - Other - 570 (570) - ------- ------- ------- ------- Total $ 3,734 $ 786 $ (1,872) $2,648 ======= ======= ======= ======= Asia/Pacific Contract terminations $ 122 $ 6 $ (5) $ 123 ======= ======= ======= ======= Consolidated Severance $ 5,259 $ 2,687 $ (3,299) $ 4,647 Contract terminations 679 (105) (57) 517 Product line discontinuance 2,037 117 (2,154) - Other - 570 (570) - ------- ------- ------- ------- Total $ 7,975 $ 3,269 $ (6,080) $ 5,164 ======= ======= ======= =======
Comprehensive Earnings (loss) - Total comprehensive earnings were as follows (in thousands):
Three Months Ended March 31, 2007 2006 ---- ---- Net earnings (loss) $ (17,504) $ 5,207 Foreign currency translation gain (loss) 3,858 (788) Unrealized gain on available for sale securities 51 22 SERP/DBO amortization of prior service costs and unrecognized losses 943 - Current period unrealized gain (loss) on cash flow hedges (1,221) 1,083 ------- ----- Total comprehensive earnings (loss) $ (13,873) $5,524 ====== =====
13 Inventories - Inventories determined under the first in, first out method consist of the following components (in thousands): March 31, December 31, 2007 2006 ------- ------- Raw materials $ 65,933 $66,718 Work in process 19,302 16,715 Finished goods 121,320 118,323 ------- ------- $206,555 $201,756 ======= ======= Property and Equipment - Property and equipment consist of the following (in thousands): March 31, December 31, 2007 2006 ------- ------- Machinery and equipment $276,903 $276,062 Land, buildings and improvements 87,045 86,544 Furniture and fixtures 27,344 29,609 Leasehold improvements 15,848 15,943 ------- ------- 407,140 408,158 Less allowance for depreciation (238,305) (234,213) ------- ------- $168,835 $173,945 ======= ======= Financing Arrangements - As previously disclosed, the company completed certain refinancing transactions in February 2007. The company entered into a Credit Agreement which provides for a $400 million senior secured credit facility consisting of a 6-year $250 million term loan facility and a five-year $150 million revolving credit facility with interest at LIBOR plus 2.25%. The company's obligations under the Credit Agreement are secured by substantially all of the company's assets, subject to certain exceptions, and are guaranteed by our material domestic subsidiaries, with certain obligations also guaranteed by our material foreign subsidiaries. The Credit Agreement contains a number of customary restrictive covenants, affirmative covenants and events of default, and financial covenants that require the company to maintain a maximum leverage ratio, a minimum interest coverage ratio, and a minimum fixed charge coverage ratio. The company also consummated the issuance and sale of $135 million aggregate principal amount of convertible subordinated debentures (the "debentures"). The net proceeds to the company from the offering, after deducting the initial gross spread payable by the company, were approximately $132.3 million. The debentures are unsecured senior subordinated obligations of the company, guaranteed by substantially all of the company's domestic subsidiaries and pay interest at 4.125% per annum on each February 1 and August 1. The debentures are convertible into common shares of the company under certain conditions. In addition, the company also consummated the issuance and sale of $175 million aggregate principal amount of 9 3/4% Senior Notes due 2015 (the "senior notes"). The company's net proceeds from the offering of senior notes, after deducting the initial note purchasers' discount and the estimated offering expenses payable by the company, were approximately $167 million. The senior notes are unsecured senior obligations of the company, guaranteed by substantially all of our domestic subsidiaries. 14 The company used the net proceeds from the offerings of the senior notes and the debentures, together with initial borrowings under the Credit Agreement to repay outstanding indebtedness and related expenses and repayment costs aggregating $568 million. In addition, as a result of the refinancing, during the first quarter the company incurred $33.1 million in costs comprised of: debt issuance costs related to the new debt structure of $19.7 million, which the company has capitalized over the respective lives of the debt instruments; one-time make-whole payments to the holders of previously outstanding senior notes and incremental interest totaling $10.9 million; and write-off of costs previously capitalized related to the old debt structure of $2.5 million. The company estimates that the weighted average interest rate of the new facilities and securities combined is approximately 7.3% versus the year-end 2006 weighted average interest rate of approximately 5.9%. In connection with the issuance of the debentures and the senior notes, the company agreed to use commercially reasonable efforts to 1) file a resale registration statement with respect to the debentures and an exchange offer registration statement with respect to the senior notes within 90 days of the closing of each agreement, 2) to cause the resale registration statement to be declared effective within 210 days of the issuance of the debentures and cause the exchange offer registration statement to be declared effective within 180 days of the issuance of the senior notes and consummate the exchange offer within 210 days of the issuance of the notes, and 3) maintain the effectiveness of the resale registration statement until the debentures have been disposed of in accordance with the registration statement, are transferred in compliance with Rule 144 under the Securities Act or are transferable pursuant to Rule 144(k) under the Securities Act, cease to be outstanding or are otherwise disposed of or transferred and new securities not subject to transfer restrictions under the Securities Act have been delivered by the company. If the company does not comply with its registration obligations with respect to the debentures, the company will be obligated to pay additional annual interest of .25% of the principal amount of the debentures to and including the 90th day following the default and, thereafter, additional annual interest of .50% until such time as the default is cured. Similarly, if the company does not comply with its registration obligations with respect to the senior notes, the company will be obligated to pay additional annual interest of .25% of the principal amount of the senior notes to and including the 90th day following the default and, thereafter, an additional .25% of annual interest for each subsequent 90-day period during which the registration default continues, up to a maximum of 1.0% annually. On April 23, 2007, the company filed its S-3 and S-4 registration statements within the 90 days of the issue dates of the convertible debentures and senior notes and fully expects to meet the registration requirements. Acquisitions - In the first three months of 2007, the company made no acquisitions. On September 9, 2004 the company acquired 100% of the shares of WP Domus GmbH (Domus), a European-based holding company that manufactures several complementary product lines to Invacare's product lines, including power add-on products, bath lifts and walking aids, from WP Domus LLC. Domus has three divisions: Alber, Aquatec and Dolomite. In accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, the company previously recorded accruals for severance and exit costs for facility closures and contract terminations. 15 A progression of the accruals recorded in the purchase price allocation is as follows (in thousands):
Exit of Sales Agency Severance Product Lines Terminations --------- ------------- ------------ Balance at 1/1/05 $ 561 $ - $ - Additional accruals 4,445 897 612 Payments (1,957) - (612) ------- ------- ------- Balance at 12/31/05 3,049 897 - Adjustments (1,285) (897) - Payments (566) - - ------- ------- ------- Balance at 12/31/06 1,198 - - Adjustments (1) - - Payments - - - ------- ------- ------- Balance at 3/31/07 $ 1,197 $ - $ - ======= ======= =======
The adjustments for the quarter ended March 31, 2007 represent the impact of currency translation. The company anticipates all of the remaining reserves to be utilized in 2007 with any amounts not utilized adjusted to goodwill. Income Taxes - The company had an effective tax rate of (15.9%) for the three month period ended March 31, 2007 compared with 30.0% for the same period a year ago. The company's effective tax rate differs from the U.S. federal statutory rate primarily due to losses with no corresponding tax benefits and a valuation reserve recorded against domestic deferred tax assets reduced by tax credits and earnings abroad being taxed at rates lower than the U.S. federal statutory rate. The change in the effective rate for the three-month period ended March 31, 2007 compared to the three-month period ended March 31, 2006 is primarily due to domestic losses without benefit as a result of valuation reserves. In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes recognition and measurement of a tax position taken or expected to be taken in a tax return as well as guidance regarding derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation the company did not recognize an adjustment in the liability for unrecognized income tax benefits. As of the adoption date the company had $8.8 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. The company continues to recognize interest and penalties related to uncertain tax positions in income tax expense. As of the adoption date the company had $2 million of accrued interest related to uncertain tax positions. The company files tax returns in numerous jurisdictions around the world. Most tax returns for years after 2002 are open for examination, including the domestic return, and in certain circumstances selective returns in earlier years are also open for examination. 16 SUPPLEMENTAL GUARANTOR INFORMATION Effective February 12, 2007, substantially all of the domestic subsidiaries (the "Guarantor Subsidiaries") of the company became guarantors of the indebtedness of Invacare Corporation under its 9 3/4% 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 Combined Combined Three month period ended The Company Guarantor Non-Guarantor March 31, 2007 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ ----- Net sales $ 75,452 $ 158,954 $ 154,380 $ (13,881) $ 374,905 Cost of products sold 60,063 127,509 102,240 (13,963) 275,849 ------- ------- ------- ------- ------- Gross Profit 15,389 31,445 52,140 82 99,056 Selling, general and administrative expenses 25,221 27,724 34,821 - 87,766 Charge related to restructuring activities 2,295 43 814 - 3,152 Debt finance charges, interest and fees associated with debt refinancing 13,342 - 31 - 13,373 Income (loss) from equity investee 14,734 3,623 (3,155) (15,202) - Interest expense - net 6,639 424 2,806 - 9,869 ------- ------- ------- ------- ------- Earnings (loss) before Income Taxes (17,374) 6,877 10,513 (15,120) (15,104) Income taxes 130 225 2,045 - 2,400 ------- ------- ------- ------- ------- Net Earnings (loss) $ (17,504) $ 6,652 $ 8,468 $ (15,120) $ (17,504) ======= ======= ======= ======= ======= Three month period ended March 31, 2006 (in thousands) Net sales $ 85,521 $ 155,890 $ 138,910 $ (18,617) $ 361,704 Cost of products sold 63,798 121,402 93,865 (18,657) 260,408 ------- ------- ------- ------- ------- Gross Profit 21,723 34,488 45,045 40 101,296 Selling, general and administrative expenses 26,163 23,185 34,259 - 83,607 Charge related to restructuring activities 1,742 18 1,397 - 3,157 Income (loss) from equity investee 13,247 3,870 257 (17,374) - Interest expense - net 3,144 2,540 1,411 - 7,095 ------- ------- ------- ------- ------- Earnings (loss) before Income Taxes 3,921 12,615 8,235 (17,334) 7,437 Income taxes (benefit) (1,286) - 3,516 - 2,230 ------- ------- ------- ------- ------- Net Earnings (loss) $ 5,207 $ 12,615 $ 4,719 $ (17,334) $ 5,207 ======= ======= ======= ======= =======
17
CONSOLIDATING CONDENSED BALANCE SHEETS Combined Combined Combined The Company Guarantor Non-Guarantor March 31, 2007 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ ----- Assets Current Assets Cash and cash equivalents $ 22,596 $ 3,259 $ 31,049 $ - $ 56,904 Marketable securities 270 - - - 270 Trade receivables, net 94,988 53,946 102,666 (3,600) 248,000 Installment receivables, net - 6,461 1,990 - 8,451 Inventories, net 77,414 35,917 94,683 (1,459) 206,555 Deferred income taxes 4,313 394 8,909 - 13,616 Other current assets 26,434 11,598 38,461 - 76,493 ------- ------- ------- ------- ------- Total Current Assets 226,015 111,575 277,758 (5,059) 610,289 Investment in subsidiaries 1,256,803 599,764 - (1,856,567) - Intercompany advances, net 361,881 798,776 39,927 (1,200,584) - Other Assets 49,725 17,232 1,927 - 68,884 Other Intangibles 17,701 12,680 87,082 - 117,463 Property and Equipment, net 62,885 11,181 94,769 - 168,835 Goodwill - 23,541 469,685 - 493,226 ------- ------- ------- ------- ------- Total Assets $1,975,010 $ 1,574,749 $971,148 $(3,062,210) $1,458,697 ========= ========= ========= ========= ========= Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 78,195 $ 13,992 $ 55,231 $ - $ 147,418 Accrued expenses 28,880 17,020 77,607 (3,600) 119,907 Accrued income taxes 2,487 21 804 - 3,312 Short-term debt and current maturities of long-term obligations 4,273 - 885 - 5,158 ------- ------- ------- ------- ------- Total Current Liabilities 113,835 31,033 134,527 (3,600) 275,795 Long-Term Debt 554,775 49 41,917 - 596,741 Other Long-Term Obligations 59,801 2,040 52,620 - 114,461 Intercompany advances, net 774,899 339,873 85,812 (1,200,584) - Total Shareholders' Equity 471,700 1,201,754 656,272 (1,858,026) 471,700 ------- ------- ------- ------- ------- Total Liabilities and Shareholders' Equity $1,975,010 $1,574,749 $971,148 $(3,062,210) $1,458,697 ========= ========= ========= ========= =========
18
Combined Combined Combined The Company Guarantor Non-Guarantor December 31, 2006 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ ----- Assets Current Assets Cash and cash equivalents $ 35,918 $ 2,202 $44,083 $ - $82,203 Marketable securities 190 - - - 190 Trade receivables, net 651 15,888 248,667 (3,600) 261,606 Installment receivables, net - 5,513 1,584 - 7,097 Inventories, net 77,201 37,511 88,585 (1,541) 201,756 Deferred income taxes 4,223 393 8,896 - 13,512 Other current assets 26,353 8,764 55,477 (1,200) 89,394 ------- ------- ------- ------- ------- Total Current Assets 144,536 70,271 447,292 (6,341) 655,758 Investment in subsidiaries 1,293,046 607,559 - (1,900,605) - Intercompany advances, net 354,660 850,121 110,935 (1,315,716) - Other Assets 49,346 15,566 1,434 - 66,346 Other Intangibles 2,113 13,150 88,710 - 103,973 Property and Equipment, net 65,016 11,550 97,379 - 173,945 Goodwill - 23,541 466,888 - 490,429 ------- ------- ------- ------- ------- Total Assets 1,908,717 $1,591,758 $1,212,638 $(3,222,662) $1,490,451 ========= ========= ========= ========= ========= Liabilities and Shareholders' Equity Current Liabilities Accounts payable $89,818 $12,095 $61,128 $ - $ 163,041 Accrued expenses 34,611 17,405 100,560 (4,800) 147,776 Accrued income taxes 10,021 26 2,869 - 12,916 Short-term debt and current maturities of long-term obligations 51,773 - 72,470 - 124,243 ------- ------- ------- ------- ------- Total Current Liabilities 186,223 29,526 237,027 (4,800) 447,976 Long-Term Debt 321,263 70 127,550 - 448,883 Other Long-Term Obligations 53,044 2,040 53,144 - 108,228 Intercompany advances, net 862,823 370,452 82,441 (1,315,716) - Total Shareholders' Equity 485,364 1,189,670 712,476 (1,902,146) 485,364 ------- ------- ------- ------- ------- Total Liabilities and Shareholders' Equity $1,908,717 $1,591,758 1,212,638 $(3,222,662) $ 1,490,451 ========= ========= ========= ========= =========
19
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS Combined Combined Three month period ended The Company Guarantor Non-Guarantor March 31, 2007 (in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ ----- Net Cash Provided by Operating Activities $(162,862) $1,366 $143,153 $ - $(18,343) Investing Activities Purchases of property and equipment (653) (287) (2,810) - (3,750) Proceeds from sale of property and equipment - - 423 - 423 Increase in other long-term assets 1,080 - - - 1,080 Other (3,133) (1) 1,920 - (1,214) ------- ------- ------- ------- ------- Net Cash Used for Investing Activities (2,706) (288) (467) - (3,461) Financing Activities Proceeds from revolving lines of credit, securitization facility and long-term borrowings 580,569 - (70,253) - 510,316 Payments on revolving lines of credit, securitization facility and long-term borrowings (408,140) (21) (86,258) - (494,419) Payment of dividends (399) - - - (399) Payment of financing costs (19,784) - - - (19,784) ------- ------- ------- ------- ------- Net Cash Provided by Financing Activities 152,246 (21) (156,511) - (4,286) Effect of exchange rate changes on cash - - 791 - 791 Increase (decrease) in cash and cash equivalents (13,322) 1,057 (13,034) - (25,299) Cash and cash equivalents at beginning of period 35,918 2,202 44,083 - 82,203 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period $22,596 $3,259 $31,049 $ - $56,904 ========= ========= ========= ========= ========= Three month period ended March 31, 2006 (in thousands) Net Cash Provided by Operating Activities $3,738 $1,863 $2,928 $ - $8,529 Investing Activities Purchases of property and equipment (2,590) (193) (2,226) - (5,009) Proceeds from sale of property and equipment - - 33 - 33 Increase (decrease) in other investments (7,871) (3,000) - 10,856 (15) Increase in other long-term assets (523) - - - (523) Other (180) - 36 - (144) ------- ------- ------- ------- ------- Net Cash Required for Investing Activities (11,164) (3,193) (2,157) 10,856 (5,658) Financing Activities Proceeds from revolving lines of credit, securitization facility and long-term borrowings 129,641 - 15,514 - 145,155 Payments on revolving lines of credit, securitization facility and long-term borrowings (124,794) (76) (37,137) - (162,007) Proceeds from exercise of stock options 1,343 - - - 1,343 Payment of dividends (397) - - - (397) Capital contributions - 3,020 7,836 (10,856) - ------- ------- ------- ------- ------- Net Cash Provided by Financing Activities 5,793 2,944 (13,787) (10,856) (15,906) Effect of exchange rate changes on cash - - (1,177) - (1,177) Increase (decrease) in cash and cash equivalents (1,633) 1,614 (14,193) - (14,212) Cash and cash equivalents at beginning of period 7,270 1,046 17,308 - 25,624 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period $5,637 $2,660 $3,115 $ - $11,412 ========= ========= ========= ========= =========
20 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 thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Current Report on Form 8-K as furnished to the Securities and Exchange Commission on May 1, 2007. OUTLOOK The company continues to execute the numerous cost reduction initiatives previously communicated and as described further below. The company believes that the implementation of these initiatives will improve the company's operating margin and result in approximately $38 million of realized savings in 2007, including the $7 million already realized in the first quarter. The company anticipates restructuring charges of approximately $20 million in 2007 relating to these actions. Annualized savings from these initiatives implemented by the end of 2007 should approximate $56 million thereafter. The core initiatives are as follows: o Product line simplification. The company plans to simplify its product lines and pricing processes to reduce costs and improve service levels. o Improvement of gross margins and reduction of fixed costs through further product and sub-assembly outsourcing. The company expects to accelerate its outsourcing of commodity products and sub-assemblies. Asian sourcing is planned to double over the next three years. o Rationalization of facilities. Today, Invacare's primary manufacturing facilities consist of fourteen integrated fabrication plants and two assembly plants worldwide. Invacare will continue in its strategy to move from integrated fabrication plants to assembly plants worldwide. The company is finalizing plans to close and/or consolidate several locations worldwide beginning this year through 2009. o Standardization of product platforms. To further simplify and reduce production costs, as well as to leverage development and tooling investment, the company has begun the process of standardizing some of its product platforms globally. Cost reduction remains the company's top priority. The competitive pricing conditions driven by reimbursement changes in the U.S. remain and Invacare expects approximately $30 million in net sales reductions in 2007 from the lower pricing. The company expects that the $38 million of cost reductions, which are heavily weighted to the second half of the year, will offset these impacts and result in improved profitability in the second half of the year. The company anticipates second quarter earnings to be sequentially improved from first quarter earnings excluding restructuring charges and debt finance costs associated with the company's debt refinancing which was completed during the quarter ended March 31, 2007. However, the company also anticipates second quarter earnings to be lower than second quarter earnings last year, excluding restructuring charges. For fiscal year 2007, the company expects growth in net sales of between 0% and 2%, excluding the impact of acquisitions and foreign currency; and anticipates operating cash flows of between $65 million and $75 million and net purchases of property, plant and equipment of approximately $25 million. The full year earnings are expected to be consistent with the 21 previously announced guidance by the company in a press release issued on May 1, 2007. As previously communicated, Medicare officially announced earlier this month the 10 Metropolitan Statistical Area test sites for U.S. competitive bidding. Implementation has already begun with the scheduled effective date for competitive bid pricing in April 2008. Invacare has once again demonstrated its industry leadership by sponsorship of the Tanner Hobson bill introduced in the U.S. House of Representatives. This bill would ensure the continued participation of small providers in the supply chain of home medical products. RESULTS OF OPERATIONS NET SALES Net sales for the three months ended March 31, 2007 were $374,905,000, compared to $361,704,000 for the same period a year ago, representing a 4% increase. Foreign currency translation increased net sales by two percentage points while acquisitions increased net sales by one percentage point. The company continued to be impacted during the quarter by the previously disclosed Medicare reimbursement changes in the U.S. related to power mobility devices which were effective in the fourth quarter of 2006. These changes significantly impacted the net sales of the company's North America/HME Operation as further described below. North American/HME Operations North American/HME (NA/HME) net sales decreased 6% for the quarter to $161,532,000 as compared to $171,694,000 for the same period a year ago while foreign currency and acquisitions did not impact results for the quarter. These sales consist of Rehab (power wheelchairs, custom manual wheelchairs, personal mobility and seating and positioning), Standard (manual wheelchairs, personal care, home care beds, low air loss therapy and patient transport) and Respiratory (oxygen concentrators, HomeFillTM transfilling systems, sleep apnea products, aerosol therapy and associated respiratory products). The decrease for the quarter was principally due to net sales decreases in Rehab and Respiratory products. Rehab product line net sales declined by 9% due to Medicare reimbursement changes which drove competitive price reductions and a continued shift away from high-end options that normally drive higher average selling prices and margins. Standard product line net sales increased less than 1% and were driven by increased volumes, particularly in manual wheelchairs and patient aids, partially offset by pricing reductions. Respiratory product line net sales declined 13% due to lower pricing and reduced volumes on oxygen concentrators resulting from the loss of one customer and continued asset management programs by providers along with pricing declines in concentrators. However, HomeFillTM II oxygen system net sales increased for the quarter by 38% due to increased purchases from national and smaller providers. The company's HomeFill technology was granted increased reimbursement by Medicare late in 2006 with the change effective January 1, 2007. This improved reimbursement has further enhanced the cost advantage this technology offers our customers. As previously announced, a large national respiratory provider has launched a large-scale implementation in the first quarter of 2007. 22 Invacare Supply Group (ISG) Operations ISG net sales for the quarter increased 12% to $61,676,000 compared to $55,085,000 last year driven by volume increases primarily in diabetic and incontinence products lines. Institutional Products Group (IPG) Operations IPG net sales for the quarter increased by 2% to $23,724,000 compared to $23,196,000 last year due to increased volumes in its core bed products, along with increases in other offerings such as seating products. European Operations European net sales increased 12% for the quarter to $107,030,000 as compared to $95,546,000 for the same period a year ago, with foreign currency accounting for eight percentage points of the net sales increase, while acquisitions did not impact results for the quarter. There was strong sales performance in most of the regions. Asia/Pacific Operations The company's Asia/Pacific operations consist of Invacare Australia, which imports and distributes the Invacare range of products and manufactures and distributes the Rollerchair range of custom power wheelchairs and Pro Med lifts, DecPac ramps and Australian Healthcare Equipment beds, furniture and pressure care products; Dynamic Controls, a New Zealand manufacturer of electronic operating components used in power wheelchairs and scooters; Invacare New Zealand, a distributor of a wide range of home medical equipment; and Invacare Asia Sales, which imports and distributes home medical equipment to the Asia markets. Asia/Pacific net sales increased 29% in the quarter to $20,943,000 from $16,183,000 in the first quarter of 2006 with acquisitions accounting for twenty-five percentage points of the net sales increase and foreign currency accounting for five percentage points of the net sales increase. Performance in this region continues to be negatively impacted by U.S. reimbursement uncertainty in the consumer power wheelchair market, resulting in decreased sales of microprocessor controllers by Invacare's New Zealand subsidiary. GROSS PROFIT Gross margin as a percentage of net sales for the first quarter was lower by 1.6 percentage points compared to last year's first quarter primarily due to competitive pricing pressures in the U.S. and an unfavorable change in product mix away from high- end options in the U.S. Rehab business. Excluding restructuring charges, the margin percentage also declined by 1.6 percentage points. As compared to the fourth quarter of last year, gross margins as a percentage of sales improved by .7 of a percentage point driven by the cost reduction initiatives. Excluding restructuring charges, the margin percentage improved by .2 of a percentage point. Comparing gross margins as a percentage of net sales in the first quarter of 2007 to the first quarter of 2006, NA/HME margins declined to 28.1% compared with 31.5%, principally due to reduced volumes of higher margin product, largely as a result of government reimbursement uncertainties primarily in Rehab and 23 Respiratory products and to a lesser extent by pricing reductions in Standard products. ISG gross margins decreased by .6 of a percentage point due to sales increases in lower margin products (diabetic and incontinence). IPG gross margins declined by .8 of a percentage point primarily due to increased new product development investments, higher freight and reduced manufacturing absorption. The company has announced the closure of its case good manufacturing facility in St. Louis with consolidation of these activities into the company's other existing manufacturing locations. European gross margin as a percentage of net sales decreased by .8 of a percentage point due to pricing reductions and increased freight costs partially offset by continued cost reduction activities. Asia/Pacific gross margin increased by 9.7 percentage points, largely due to cost reductions initiatives in the region as well as higher than average margins achieved by the businesses acquired in the fourth quarter of last year. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expense as a percentage of net sales for the three months ended March 31, 2007 was 23.4% compared to 23.1% for the same period a year ago. The dollar increase was $4,159,000, or 5.0% for the first quarter of the year. Acquisitions increased the first three months expenses by $1,402,000, while foreign currency translation increased these expenses by $1,922,000 in the quarter compared to the same period a year ago. Excluding the impact of foreign currency translation and acquisitions, selling, general and administrative expense increased 1.0% for the quarter compared to the same period a year ago. North American/HME SG&A cost increased $481,000, or .9%, for the quarter compared to the same period a year ago. Acquisitions did not impact spending while foreign currency translation decreased costs by approximately 0.1%. The increase in spending was primarily attributable to higher distribution and commission costs, the amortization of bank fees related to the company's debt refinancing, and higher stock option expense in the first quarter of 2007 compared to the first quarter of 2006, which had lower expense due to the acceleration of vesting for most stock options at the end of 2005. Invacare Supply Group SG&A expense increased $511,000, or 9.2% for the quarter compared to the same period a year ago due to higher spending incurred to drive future growth. Institutional Products Group SG&A expense increased $496,000, or 14.1%, for the quarter compared to the same period a year ago due to an increase in sales and marketing spending. European SG&A expense increased $1,660,000, or 6.4%, for the quarter compared to the same period a year ago. While acquisitions did not impact the results, foreign currency translation increased SG&A by $1,769,000 or 6.8%. Asia/Pacific SG&A expense increased $2,018,000, or 55.3%, for the quarter compared to the same period a year ago. For the quarter, foreign currency translation increased SG&A expense by $218,000, or 6.0%, while acquisitions contributed $1,403,000 or 38.5%. SG&A expense excluding acquisitions and foreign currency translation increased $398,000 or 10.9%. CHARGE RELATED TO RESTRUCTURING ACTIVITIES Previously, the company announced multi-year cost reductions and profit improvement actions, which included: reducing global headcount, outsourcing improvements utilizing the company's China manufacturing capability and third parties, shifting substantial resources from product development to 24 manufacturing cost reduction activities and product rationalization, reducing freight exposure through freight auctions and changing the freight policy, general expense reductions, and exiting four facilities. The restructuring was necessitated by the continued decline in reimbursement by the U.S. government as well as similar reimbursement pressures abroad and continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations. To date, the company has made substantial progress on its restructuring activities, including exiting four facilities and eliminating approximately 650 positions through March 31, 2007, including 50 positions in the first quarter of 2007. Restructuring charges of $3,269,000 were incurred in the first quarter of 2007, of which $117,000 is 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 Earnings as part of operations. The restructuring charges included charges of $2,430,000 in North America/HME, $43,000 in the Invacare Supply Group, $4,000 in the Institutional Products Group, $786,000 in Europe and $6,000 in Asia/Pacific. Of the total charge incurred to date, $5,164,000 remained unpaid as of March 31, 2007 with $2,295,000 unpaid related to NA/HME; $94,000 unpaid related to ISG; $4,000 unpaid related to IPG; $2,648,000 unpaid related to Europe; and $123,000 unpaid related to Asia Pacific. There have been no material changes in accrued balances related to the charge, either as a result of revisions in the plan or changes in estimates, and the company expects to utilize the accruals recorded through March 31, 2007 during 2007. With additional actions to be undertaken during the remainder of 2007, the company anticipates recognizing restructuring charges of approximately $20,000,000 for the year pre-tax. CHARGES, INTEREST AND FEES ASSOCIATED WITH DEBT REFINANCING As a result of the company's refinancing completed in the first quarter, the company incurred one-time make whole payments to the previous holders of senior notes and incremental interest totaling $10,900,00 and wrote-off costs previously capitalized related to the old debt structure of $2,500,000. INTEREST Interest expense increased $2,648,000 for the first quarter of 2007 compared to the same period last year, primarily due to increases in interest rates and higher debt levels. Interest income for the first quarter of 2007 decreased $126,000, compared to the same period last year, primarily due to extended financing terms provided to our customers. INCOME TAXES The company had an effective tax rate of (15.9%) for the three-month period compared with 30.0% for the same period a year ago. The effective tax rate declined due to a change in estimate in the mix of earnings and permanent deductions. The company's effective tax rate differs from the U.S. federal statutory rate primarily due to losses with no corresponding tax benefits and a valuation reserve recorded against domestic deferred tax assets reduced by tax credits and earnings abroad being taxed at rates lower than the U.S. federal statutory rate. The change in the effective rate for the three-month period ended March 31, 2007 compared to the three-month period ended March 31, 2006 is primarily due to domestic losses without benefit as a result of valuation reserves. 25 LIQUIDITY AND CAPITAL RESOURCES The company's reported level of debt increased by $28,773,000 from December 31, 2006 to $601,899,000 at March 31, 2007, as the company completed its debt refinancing transactions in February 2007. The company's borrowing arrangements contain covenants with respect to maximum amount of debt, minimum loan commitments, interest coverage, net worth, dividend payments, working capital, and funded debt to capitalization, as defined in the company's bank agreements and agreements with its note holders. As of March 31, 2007, the company was in compliance with all covenant requirements. Under the most restrictive covenant of the company's borrowing arrangements, the company has the capacity to borrow up to an additional $90,900,000 as of March 31, 2007. CAPITAL EXPENDITURES The company had no individually material capital expenditure commitments outstanding as of March 31, 2007. The company estimates that capital investments for 2007 will approximate $25,000,000 as compared to $21,789,000 in 2006. The company believes that its balances of cash and cash equivalents, together with funds generated from operations and existing borrowing facilities will be sufficient to meet its operating cash requirements and to fund required capital expenditures for the foreseeable future. CASH FLOWS Cash flows used by operating activities were $18,343,000 for the first three months of 2007 compared to cash provided of $8,529,000 in the first three months of 2006. The decrease in operating cash flows for the first three months of 2007 compared to the same period a year ago was primarily the result of lower earnings along with declines in payables and accrued expenses as the balances at the end of 2006 were higher than normal due to the company's refinancing efforts which were then in process. In addition, accelerated interest payments were made in the first quarter of 2007 as a result of the debt refinancing which negatively impacted operating cash flows. Cash used for investing activities was $3,461,000 for the first three months of 2007 compared to $5,658,000 in the first three months of 2006. The decrease in cash used for investing activities is primarily the result of a decrease in the purchases of property, plant and equipment in the first three months of 2007 compared to the first three months of 2006. Cash required by financing activities was $4,286,000 for the first three months of 2007 compared to $15,906,000 in the first three months of 2006. Financing activities for the first three months of 2007 were impacted by the new debt recapitalization, which increased debt levels, but also resulted in the payment of associated financing costs. During the first three months of 2007, the company used free cash flow of $17,299,000 compared to generating free cash flow of $6,330,000 in the first three months of 2006. The decrease was primarily attributable to the same items as noted above which impacted operating cash flows. Free cash flow is a non-GAAP financial measure that is comprised of net cash provided by operating activities, excluding net cash impact related to restructuring activities, less net purchases of property and equipment, net of proceeds from sales of property and equipment. Management believes that this financial measure provides 26 meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including, for example, acquisitions). However, it should be noted that the company's definition of free cash flow may not be comparable to similar measures disclosed by other companies because not all companies calculate free cash flow in the same manner. The non-GAAP financial measure is reconciled to the GAAP measure as follows (in thousands): Three Months Ended March 31, 2007 2006 ------ ------ Net cash (used) provided by operating activities $(18,343) $ 8,529 Net cash impact related to restructuring activities 4,371 2,777 Less: Purchases of property and equipment - net (3,327) (4,976) ------- ------- Free Cash Flow $(17,299) $ 6,330 ======= ======= DIVIDEND POLICY On February 9, 2007, the company's Board of Directors declared a quarterly cash dividend of $0.0125 per Common Share to shareholders of record as of April 3, 2007, which was paid on April 11, 2007. 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 includes accounts of the company, all majority-owned subsidiaries and a variable interest entity for which the company is the primary beneficiary. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The following critical accounting policies, among others, affect the more significant judgments and estimates used in preparation of the company's consolidated financial statements. Revenue Recognition Invacare's revenues are recognized when products are shipped to unaffiliated customers. The SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," as updated by SAB No. 104, provides guidance on the application of generally accepted accounting principles (GAAP) to selected revenue recognition issues. The company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP and SAB No. 101. Sales are only made 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. 27 Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts. The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The company does not sell any goods on consignment. Distributed products sold by the company are accounted for in accordance with Emerging Issues Task Force, or "EITF" No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns. Product sales that give rise to installment receivables are recorded at the time of sale when the risks and rewards of ownership are transferred. In December 2000, the company entered into an agreement with DLL, a third party financing company, to provide the majority of future lease financing to Invacare customers. As such, interest income is recognized based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for using the same methodology, regardless of duration of the installment agreements. Allowance for Uncollectible Accounts Receivable Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all of the company's receivables are due from health care, medical equipment dealers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of the customer. In addition, as a result of the third party financing arrangement with DLL, 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. 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, we review 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 individual item may be partially or fully reserved for. No inventory that was reserved for has been sold at prices above their new cost 28 basis. The company continues to increase its overseas sourcing efforts, increase its emphasis on the development and introduction of new products, and decrease the cycle time to bring new product offerings to market. These initiatives are sources of inventory obsolescence for both raw material and finished goods. Goodwill, Intangible and Other Long-Lived Assets Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. Furthermore, goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company completes its annual impairment tests in the fourth quarter of each year. Interest rates have a significant impact upon the discounted cash flow methodology utilized in its annual impairment testing. Increasing interest rates decrease the fair value estimates used in our testing. 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 29 necessary in the current year. See Current Liabilities in the Notes to the Consolidated Financial Statements included in this report for a reconciliation of the changes in the warranty accrual. Accounting for Stock-Based Compensation Effective January 1, 2006, the company adopted Statement of Financial Accounting Standard No. 123 (Revised 2004), Share Based Payment ("SFAS 123R") using the modified prospective application method. Under the modified prospective method, compensation cost was recognized for: (1) all stock-based payments granted subsequent to January 1, 2006 based upon the grant-date fair value calculated in accordance with SFAS 123R, and (2) all stock-based payments granted prior to, but not vested as of, January 1, 2006 based upon grant-date fair value previously calculated for previously presented pro forma footnote disclosures in accordance with the original provisions of SFAS No. 123, Accounting for Stock Based Compensation. Upon adoption of SFAS 123R, the company did not make any other modifications to the terms of any previously granted options. However, the terms of new awards granted have been modified so that the vesting periods are deemed to be substantive for those who may be retiree eligible. No changes were made regarding the valuation methodologies or assumptions used to determine the fair value of options granted and the company continues to use a Black-Scholes valuation model. As of March 31, 2007, there was $16,558,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the plans, which is related to non-vested shares, and includes $3,306,000 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 and restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods. Income Taxes As part of the process of preparing its financial statements, the company is required to estimate income taxes in various jurisdictions. The process requires estimating the company's current tax exposure, including assessing the risks associated with tax audits, as well as estimating temporary differences due to the different treatment of items for tax and accounting policies. The temporary differences are reported as deferred tax assets and or liabilities. The company also must estimate the likelihood that its deferred tax assets will be recovered from future taxable income and whether or not valuation allowances should be established. In the event that actual results differ from its estimates, the company's provision for income taxes could be materially impacted. The company does not believe that there is a substantial likelihood that materially different amounts would be reported related to its critical accounting policies. RECENTLY ADOPTED ACCOUNTING POLICIES In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes recognition and measurement of a tax position taken or expected to be taken in a tax return as well as guidance regarding derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. 30 The company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation the company did not recognize an adjustment in the liability for unrecognized income tax benefits. As of the adoption date the company had $8.8 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. The company continues to recognize interest and penalties related to uncertain tax positions in income tax expense. As of the adoption date the company had $2 million of accrued interest related to uncertain tax positions. The company files tax returns in numerous jurisdictions around the world. Most tax returns for years after 2002 are open for examination, including the domestic return, and in certain circumstances selective returns in earlier years are also open for examination. 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 swap agreements to mitigate its exposure to interest rate fluctuations. Based on March 31, 2007 debt levels, a 1% change in interest rates would impact interest expense by approximately $2,801,000. Additionally, the company operates internationally and, as a result, is exposed to foreign currency fluctuations. Specifically, the exposure results from intercompany loans and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized. The company does not believe that any potential loss related to these financial instruments would have a material adverse effect on the company's financial condition or results of operations. FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Terms such as "will," "should," "plan," "intend," "expect," "continue," "forecast", "believe," "anticipate" and "seek," as well as similar comments, are forward-looking in nature. Actual results and events may differ significantly from those expressed or anticipated as a result of risks and uncertainties which include, but are not limited to, the following: possible adverse effects of being substantially leveraged, which could impact our ability to raise capital, limit our ability to react to changes in the economy or our industry or expose us to interest rate risks; changes in government and other third-party payor reimbursement levels and practices; consolidation of health care customers and our competitors; 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; difficulties in implementing a new Enterprise Resource Planning system; legal actions or regulatory proceedings and governmental investigations; product liability claims; inadequate patents or other intellectual property protection; incorrect assumptions concerning demographic trends that impact the market for our products; provisions in our bank credit agreements or other debt instruments 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 could increase our costs of producing our products; inability to acquire strategic acquisition candidates because of limited financing alternatives; risks inherent in managing and operating businesses in many different foreign jurisdictions; exchange rate 31 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. 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 March 31, 2007, an evaluation was performed, under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of March 31, 2007, 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. Part II. OTHER INFORMATION Item 1A. Risk Factors. 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, 2006. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) During the quarter ended March 31, 2007, there were no common shares surrendered to the company by employees for tax withholding purposes in conjunction with the vesting of restricted shares held by the employees under the company's 2003 Performance Plan. On August 17, 2001, the Board of Directors authorized the company to purchase up to 2,000,000 Common Shares. To date, the company has purchased 637,100 shares with authorization remaining to purchase 1,362,900 more shares. The company purchased no shares pursuant to this Board authorized program during the first quarter of 2007. 32 Item 6. Exhibits. Exhibit No. ------------- 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). 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 Chief Financial Officer (As Principal Financial and Accounting Officer and on behalf of the registrant) Date: May 9, 2007 33 EX-31 2 exhibit311.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATIONS I, A. Malachi Mixon, III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Invacare Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ A. Malachi Mixon, III --------------------------- A. Malachi Mixon, III Chief Executive Officer (Principal Executive Officer) Date: May 9, 2007 EX-31 3 exhibit312.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATIONS I, Gregory C. Thompson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Invacare Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Gregory C. Thompson ----------------------- Gregory C. Thompson Chief Financial Officer (Principal Financial and Accounting Officer) Date: May 9, 2007 EX-32 4 exhibit321.txt EXHIBIT 32.1 Exhibit 32.1 Certification Pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Invacare Corporation (the "company") on Form 10-Q for the period ending March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, A. Malachi Mixon, III, Chief Executive Officer of the company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company. Dated: May 9, 2007 /s/ A. Malachi Mixon, III --------------------- A. Malachi Mixon, III Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Invacare Corporation and will be retained by Invacare Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 5 exhibit322.txt EXHIBIT 32.2 Exhibit 32.2 Certification Pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Invacare Corporation (the "company") on Form 10-Q for the period ending March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory C. Thompson, Chief Financial Officer of the company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company. Dated: May 9, 2007 /s/ Gregory C. Thompson --------------------- Gregory C. Thompson Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Invacare Corporation and will be retained by Invacare Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----