10-K 1 a2014ivc10-k.htm 10-K 2014 IVC 10-K
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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 1-15103
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INVACARE CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio
95-2680965
(State or other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (440) 329-6000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Common Shares, without par value
Rights to Purchase Preferred Shares, without par value
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such short period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ¨
Accelerated filer ý
Non-accelerated filer  ¨
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).    Yes  ¨    No  ý
As of June 30, 2014, the aggregate market value of the 28,687,335 Common Shares of the Registrant held by non-affiliates was $526,986,344 and the aggregate market value of the 4,573 Class B Common Shares of the Registrant held by non-affiliates was $84,006. While the Class B Common Shares are not listed for public trading on any exchange or market system, shares of that class are convertible into Common Shares at any time on a share-for-share basis. The market values indicated were calculated based upon the last sale price of the Common Shares as reported by The New York Stock Exchange on June 30, 2014, which was $18.37. For purposes of this information, the 2,368,807 Common Shares and 1,080,174 Class B Common Shares which were held by Executive Officers and Directors of the Registrant were deemed to be the Common Shares and Class B Common Shares held by affiliates.
As of February 24, 2015, 31,029,535 Common Shares and 1,084,747 Class B Common Shares were outstanding.
Documents Incorporated By Reference
Portions of the Registrant’s definitive Proxy Statement to be filed in connection with its 2015 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.
Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of December 31, 2014.
 
 
 
 
 




INVACARE CORPORATION
2014 ANNUAL REPORT ON FORM 10-K CONTENTS
 
 
 
 
Item
 
Page
PART I:
1
1A.
1B.
2
3
4
 
 
PART II:
5
6
7
7A.
8
9
9A.
9B.
 
PART III:
10
11
12
13
14
 
PART IV:
15

I-2


PART I

Item 1.        Business.

GENERAL

Invacare Corporation is a leading manufacturer and distributor in its estimated $4.0 billion core global and geographic markets for medical equipment used in the home and long-term care settings, based upon its 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 and extended care markets. The Company revises and expands its product lines to meet changing market demands and currently offers numerous product lines. The Company sells its products principally to home health care and medical equipment providers, distributors and government locations in the United States, Europe, Canada, New Zealand, Australia and Asia. Invacare’s products are sold through its worldwide distribution network by its sales force, telesales associates and independent manufacturers’ representatives and distributors.

Invacare is committed to design and deliver the best value in medical products, which promote recovery and active lifestyles for people requiring home and other non-acute health care. Invacare pursues this vision by:

designing and developing innovative and technologically superior products;
ensuring continued focus on the Company’s primary market—the non-acute health care market;
marketing the Company’s broad range of products;
driving efficiency and innovation through the use of the Company’s global resources;
providing a professional and cost-effective sales, customer service and distribution organization;
supplying innovative provider support and product line extensions;
building a strong referral base among health care professionals;
continuously advancing and recruiting top management candidates;
empowering all employees;
providing a performance-based reward environment;
pursuing excellence through ongoing improvements to its quality systems to achieve sustainable regulatory compliance; and
continually striving for superior quality throughout the organization.

The Company is a corporation organized under the laws of the State of Ohio in 1971. When the Company was acquired in December 1979 by a small group of investors, it had $19.5 million in net sales and a limited product line of lifestyle wheelchairs and patient aids. Invacare's net sales in 2014 were approximately $1.3 billion thus yielding a 13% compound average annual sales growth rate since 1979. Based upon the Company’s distribution channels, breadth of product line and net sales, Invacare is a leading company in many of the following major, non-acute, medical equipment categories: power and manual wheelchairs, homecare bed systems and home respiratory therapy.

The Company’s executive offices are located at One Invacare Way, Elyria, Ohio, 44036 and its telephone number is (440) 329-6000. In this report, “Invacare” and the “Company” refer to Invacare Corporation and, unless the context otherwise indicates, its consolidated subsidiaries.

THE HOME MEDICAL EQUIPMENT INDUSTRY

The home medical equipment (HME) market includes home health care products, physical rehabilitation products and other non-disposable products used for the recovery and long-term care of patients. As healthcare spending continues to escalate around the world, the Company believes that homecare is a significant part of the solution for healthcare reform. A report from the United Nations, World Population Ageing 2013, states that the number of people age 60 years and older will more than double from 841 million people in 2013 to more than 2 billion in 2050. With the costs of healthcare continuing to increase, the Company believes that patients will increasingly seek "the right care, in the right place, at the right cost." Invacare believes that homecare is the "trifecta" of healthcare: it is patient preferred, has better clinical outcomes and is more cost-effective than institutionalized care.  


I-3


North America Market

While institutional care likely will remain an important part of the health care system, the Company believes it is not the best and most cost-effective environment of care for many patients, particularly those with chronic medical conditions. It appears that the steady growth in United States Medicare-aged patients with chronic illnesses is placing unprecedented pressure on the financial stability and sustainability of the Medicare program. The Company believes that these patients largely prefer care and treatment provided to them in their home. Initiatives by the United States government, such as patient-centered medical homes and Accountable Care Organizations, can align incentives for healthcare providers to partner closely across all medical specialties and settings and have the potential to significantly alter the trajectory of rising health care costs.
 
The Company believes that many medical professionals and patients prefer home health care over institutional care, when appropriate, because home health care results in greater patient independence, increased patient responsibility and improved responsiveness to treatment. An article in the New England Journal of Medicine notes that several engineering and electronics companies have developed products for monitoring health at home and that Massachusetts General Hospital in Boston is experimenting with Internet video-conferencing to permit virtual visits from patients' homes. Furthermore, health care professionals, public payors and private payors appear to favor homecare as a cost-effective, clinically appropriate alternative to facility-based care.

Technological advances have made medical equipment increasingly adaptable for use in the home. Current hospital procedures often allow for earlier patient discharge, thereby lengthening recuperation periods outside of the traditional institutional setting. In addition, continuing medical advances prolong the lives of adults and children, thus increasing the demand for home medical care equipment. As health care consumers, the baby boomer population likely will have strong opinions and preferences about their treatment settings. Data from the AARP Public Policy Institute and a Harris Interactive poll suggest that 89 percent of people aged 50 and older want to receive medical services in their home as they age and 65 percent would prefer home care while recuperating from surgery.

The Company believes that home health care and home medical equipment will play a significant role in reducing health care costs. The Agency of Healthcare Research & Quality, along with Johns Hopkins, examined extensively the benefits of Hospital at Home and those studies indicate that the Hospital at Home program results in lower length of stay, costs, readmission rates and complications than traditional inpatient care. In addition, surveys indicate higher levels of patient and family member satisfaction with homecare than with traditional care. Costs of care were 32% lower for Hospital at Home patients than for hospital inpatients, and ever critical readmission rates were 42% for Hospital at Home patients, compared with 87% for hospital inpatients.

Europe/Asia/Pacific Market

The Company believes that, while many of the market factors influencing demand in North America are also present in Europe and Asia/Pacific—aging of the population, growing number of patients with chronic illnesses, as well as technological trends—each of the markets of Europe and in Asia/Pacific has distinctive characteristics. The health care industry tends to be more heavily socialized and, therefore, is more influenced by regulation and fiscal policy. Variations in product specifications, regulatory approval processes, distribution requirements and reimbursement policies require the Company to tailor its approach to the local market. Management believes that as the European markets develop more common product requirements and the Company continues to refine its distribution channels, the Company can more effectively penetrate these markets with global product platforms that are localized with region-specific adjustments as necessary. Likewise, the Company expects to increase its sales in the highly fragmented Australian, New Zealand and Asian markets as these markets, and the Company’s distribution within them, develop.

Reimbursement

The Company is affected by government regulation and reimbursement policies in virtually every country in which the Company operates. In the United States, the growth of health care costs has increased at rates in excess of the rate of inflation and as a percentage of GDP for several decades. A number of efforts to control the federal deficit have impacted reimbursement levels for government sponsored health care programs, and private insurance companies and state Medicaid programs often peg their reimbursement levels to Medicare.

Reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end-user can obtain and, thus, affect the product mix, pricing and payment patterns of the Company’s customers who are medical equipment providers. The Company believes its strong market position and technical expertise will allow it to respond to ongoing reimbursement changes. However, the issues described above will likely continue to have significant impacts on the pricing of the Company’s products.

I-4


GEOGRAPHICAL SEGMENTS AND PRODUCT CATEGORIES

North America

North America includes the following segments in the United States and Canada: North America/Home Medical Equipment (North America/HME) and Institutional Products Group (IPG).

North America/HME

This segment primarily includes: Mobility and Seating, Lifestyle and Respiratory Therapy product lines as discussed below. This segment comprised 40.0%, 44.2% and 47.7% of the net sales from continuing operations in 2014, 2013 and 2012, respectively.

MOBILITY AND SEATING PRODUCTS

Power Wheelchairs. Invacare manufactures a complete line of power wheelchairs for individuals who require independent powered mobility. The range includes products that can be significantly customized to meet an individual’s specific needs, as well as products that are inherently versatile and meet a broad range of individual requirements. Center-wheel drive power wheelchair lines are marketed under the Invacare® TDX® brand name. The TDX line of power wheelchairs offers a combination of power, stability and maneuverability. Power tilt and recline seating systems are offered as well. The Pronto® series of power wheelchairs with SureStep® stability feature center-wheel drive performance.

Custom Manual Wheelchairs. Invacare manufactures and markets a range of custom manual wheelchairs for everyday, sports and recreational uses. These lightweight chairs are marketed under the Invacare® and Invacare® Top End® brand names. The chairs provide mobility for people with moderate to severe disabilities in their everyday activities as well as for use in various sports such as basketball, racing and tennis.

Seating and Positioning Products. Invacare manufactures and markets seat cushions, back supports and accessories under three series: the Invacare® Seating & Positioning series provides simple seating solutions; the Invacare® Matrx® Series includes versatile modular seating; and the Invacare® PinDot® series offers custom seating solutions.

LIFESTYLE PRODUCTS

Manual Wheelchairs. Invacare’s manual wheelchairs are sold for use inside and outside the home, institutional settings or public places. Users include people who are chronically or temporarily disabled and require basic mobility performance with little or no frame modification. Examples of the Company’s manual wheelchair lines, which are marketed under the Invacare® brand name, include the 9000, the Tracer® and the Veranda wheelchairs. These wheelchairs are designed to accommodate the diverse capabilities and unique needs of the individual.

Personal Care. Invacare is principally a distributor of a full line of personal care products, including ambulatory aids such as crutches, canes, rollators, walkers, knee walkers and wheeled walkers. Also available are safety aids such as tub transfer benches, shower chairs and grab bars, and patient care products such as commodes and other toilet assist aids.

Homecare Beds. Invacare manufactures and distributes a wide variety of manual, semi-electric and fully-electric beds for home use under the Invacare® brand name. Homecare bed accessories include bedside rails, mattresses, overbed tables and trapeze bars. Also available are bariatric beds and accompanying accessories to serve the special needs of bariatric patients.

Pressure Relieving Sleep Surfaces.  Invacare distributes a complete line of therapeutic pressure relieving overlays and mattress replacement systems for the prevention and treatment of pressure ulcers. The Invacare® Softform® and microAIR® brand names feature a broad range of pressure relieving foam mattresses or powered mattress replacements with alternating pressure, low-air-loss or rotational mattresses, which redistribute weight and assist with moisture management. These mattresses are designed to provide comfort, support and relief to those patients who are immobile or have limited mobility and spend a great deal of time in bed.

Patient Transport. Invacare manufactures and/or distributes products needed to assist in transferring individuals from surface to surface (bed to chair) or transporting from room to room. Designed for use in the home or institutional settings, these products include patient lifts and slings, and a series of mobile, multi-functional recliners.


I-5


RESPIRATORY THERAPY PRODUCTS

Non-Delivery Oxygen. Trends in the industry continue to be toward a non-delivery oxygen therapy model. The Invacare® HomeFill® Oxygen System is an ambulatory oxygen technology that forms the basis for a non-delivery model and allows patients to fill their own high-pressure cylinders from an oxygen concentrator within the home. Published industry data suggests a large portion of the costs associated with home oxygen therapy are directly associated with the delivery and delivery-related activities required to meet the ambulatory oxygen therapy needs of patients. Technology such as the Invacare® HomeFill® Oxygen System allows providers to virtually eliminate time-consuming and costly service calls associated with cylinder and/or liquid oxygen deliveries while at the same time enhancing patient care.

Rounding out Invacare’s non-delivery respiratory offerings are the Invacare® SOLO2® portable oxygen Concentrator and the Invacare® XPO2 portable oxygen concentrator, both of which have been approved by the U.S. Federal Aviation Administration (FAA) for use on board commercial jets while in flight. The SOLO2® portable concentrator offers continuous flow oxygen up to three liters per minute or pulse dose oxygen delivery in settings 1-5 and is portable and easy to operate. The XPO2 portable concentrator is a small, lightweight portable product that offers oxygen in pulse dose settings of 1-5.

Stationary Oxygen Concentrators. Invacare oxygen concentrators are manufactured under the Perfecto2 and Platinum brand names and are available in five and 10 liter models. All Invacare stationary concentrators are designed to provide patients with durable equipment and reliable oxygen either in the home or a healthcare setting.

OTHER PRODUCTS AND SERVICES

Invacare also provides its customers with service offerings, including repair services and replacement parts.

Institutional Products Group (IPG)

Invacare, operating as Invacare Continuing Care, Invacare Continuing Care Canada, Invacare Outcomes Management and Dynamic Medical Systems, is a manufacturer and distributor of healthcare furnishings including beds, case goods, safe patient handling equipment and negative pressure wound therapy into the long-term care markets, and certain other home medical equipment and accessory products. In addition, this segment includes rental of certain home medical equipment through providers and institutions for the North American market. This segment also provides interior design services for nursing homes and assisted living facilities involved in renovation and new construction. This segment comprised 8.1%, 8.4% and 8.9% of the net sales from continuing operations in 2014, 2013 and 2012, respectively.

Asia/Pacific

The Company’s Asia/Pacific operations consist of Invacare Australia and Invacare New Zealand, which distribute a range of home medical equipment including mobility and seating, lifestyle and respiratory therapy products to homecare and long-term care markets; and Dynamic Controls, a manufacturer of electronic operating components used in power wheelchairs, scooters, respiratory and other products. This segment comprised 3.8%, 3.7% and 4.8% of the net sales from continuing operations in 2014, 2013 and 2012, respectively.

Europe

The Company’s European operations operate as a “common market” with sales throughout Europe. The European segment comprised 48.1%, 43.7% and 38.6% of the net sales from continuing operations in 2014, 2013 and 2012, respectively.

The Company manufactures and/or assembles or refurbishes both manual and power wheelchair products at the following European facilities: Invacare UK Ltd. in the United Kingdom, Invacare Poirier S.A.S. in France, Invacare (Deutschland) GmbH in Germany and Alber GmbH in Germany. Manual wheelchair products are also manufactured and/or assembled at Invacare Portugal, Kuschall AG in Switzerland and Invacare Rea AB in Sweden. The Company's facility in Portugal continues to assemble beds, mainly for the Southern European markets and patient lifts for the whole of Europe. Personal care products are manufactured at Aquatec GmbH in Germany, Invacare REA Sweden manufactures Dolomite products and Invacare UK Ltd. manufactures therapeutic support surfaces products. Seating and positioning products are manufactured at Invacare UK Ltd. or imported from Invacare’s Motion Concepts in Canada. Oxygen products, such as concentrators and HomeFill® oxygen systems, are imported from Invacare U.S. or China operations.


I-6


Discontinued Operations

Invacare distributed numerous lines of branded medical supplies including ostomy, incontinence, diabetic, enteral, wound care and urology products as well as home medical equipment, including lifestyle products through Invacare Supply Group, Inc. (ISG), which was sold on January 18, 2013. Invacare manufactured and sold medical recliners for dialysis clinics through Champion Manufacturing, Inc. (Champion), a subsidiary of Invacare that was sold on August 6, 2013. Invacare also manufactured and sold stationary standing assistive devices for use in patient rehabilitation through Altimate Medical, Inc., a subsidiary that was divested on August 29, 2014. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Discontinued Operations.

For financial information regarding reportable segments, including revenues from external customers, products, segment profitability, assets and other information by segments, see Business Segments in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.

WARRANTY

Generally, the Company’s products are covered by warranties against defects in material and workmanship from the date of sale to the customer for various periods depending on the product. Certain components carry a lifetime warranty.

COMPETITION

North America and Asia/Pacific

The home medical equipment market is highly competitive and Invacare products face significant competition from other well-established manufacturers and distributors. The Company believes that its success in increasing market share is dependent on providing value to the customer based on the quality, performance and price of the Company's products, the range of products offered, the technical expertise of the sales force, the effectiveness of the Company's distribution system, the strength of the dealer and distributor network and the availability of prompt and reliable service for its products. Various competitors, from time to time, have instituted price-cutting programs in an effort to gain market share and may do so again in the future.

Europe

As a result of the differences encountered in the European marketplace, competition generally varies from one country to another. The Company typically encounters one or two strong competitors in each country, some of whom are becoming regional leaders in specific product lines.

MARKETING AND DISTRIBUTION

North America

In the United States, Invacare products are marketed primarily to home medical equipment (HME) providers or long-term care providers who in turn sell or rent these products directly to consumers or residents within the non-acute care settings. The Company also employs a “pull-through” marketing strategy to medical professionals, including physical and occupational therapists, who refer their patients to HME providers to obtain specific types of home medical equipment.

Invacare’s North America/HME sales and marketing organization consists primarily of a sales force which markets and sells Invacare® branded products to HME providers. Each member of Invacare’s HME sales force functions as a Territory Business Manager (TBM) and handles all product and service needs for an account, thus saving customers’ valuable time. The TBM also provides training and servicing information to providers, as well as product literature, point-of-sale materials and other advertising and merchandising aids. In Canada, products are sold by a sales force and distributed through regional distribution centers to health care providers throughout Canada.

TBMs are supported by the Inside Sales Department that provides increased sales coverage of smaller accounts. Inside sales offers cost-effective sales coverage through a targeted telesales effort. The Company's Technical Education department offers educational programs that place emphasis on improving the productivity of HME repair technicians. The Service Referral Network includes numerous providers who honor the Company's product warranties regardless of where the product was purchased. This network of servicing providers seeks to ensure that all consumers using Invacare products receive quality service and support that is consistent with the Invacare brand promise - Making Life's Experiences Possible.


I-7


Invacare has urged providers to take a ‘fleet management’ approach, utilizing one manufacturer for a provider’s product fleet, which results in a number of efficiencies and a solid foundation for their business model. The Company continued to add resources to a dedicated page on its website focused on ‘Business Solutions’ promoting both fleet management and enhanced patient care with blog posts, videos, eBooks and product information.

While fleet management is still the Company's preferred marketing route, pressures from National Competitive Bidding (NCB) and government reimbursement audits have become significant considerations for durable medical equipment providers in the United States. In 2014, Invacare recognized that some providers needed additional product options, including single-user products. As a result, Invacare began to leverage low-cost single user products from its ProBasics® brand products business across its North American sales force.

The Company also markets products and services to the continuing care market through a specialized sales force, a national rentals and services organization and a team of clinical professionals who call on clinical decision makers. Products from the Institutional Product Group (IPG) include beds and resident room furnishings, safe patient handling equipment, bathing, durable medical equipment and clinical therapies, such as therapeutic support surfaces and negative pressure wound therapy. IPG sales and marketing organizations consist of field sales representatives and independent representative agencies supported by a marketing group that generates awareness and demand at skilled nursing facilities for Invacare products and services. IPG also provides interior design services and products for nursing homes and assisted living facilities involved with renovation and new construction.

The Company contributes extensively to editorial coverage in trade publications concerning the products the Company manufactures, and Company representatives attend numerous trade shows and conferences on a national and regional basis in which Invacare products are displayed to providers, health care professionals, managed care professionals and consumers. “Yes, you can.®” continues to be Invacare's global tagline and is used in Company advertisements and on the Invacare global website, as it is indicative of the “can do” attitude of many of the people who use the Company's products. In everything it does, the Company strives to leave its stakeholders with its brand promise - Making Life's Experiences Possible™.

The Company also continues to improve performance and usability of www.invacare.com and its related websites. In addition, the Company uses the Internet to drive consumer awareness of its products. In 2014, the Company continued its focus on the Do More With Oxygen™ website, Invacare's online community targeted towards those who are affected by respiratory ailments, specifically COPD. The audience includes people with respiratory ailments, caregivers and respiratory therapists. Visitors to the site can view videos, download guides for topics like "COPD 101", read daily blog posts to learn more about traveling with COPD, learn how to live a healthy lifestyle and how to care for a loved one dealing with COPD. Invacare is taking the lead by creating an environment for those dealing with similar ailments to come together and learn more. Ultimately, the website advocates an active lifestyle that can be achieved through use of oxygen devices such as the Invacare® HomeFill® oxygen system and the Invacare® XPO2® and Invacare® SOLO2® portable oxygen concentrators. Leads generated by this website are shared with approved home medical equipment providers.

The Company also drives consumer awareness of its products through its sponsorship of a variety of wheelchair sporting events and support of various philanthropic causes benefiting the consumers of the Company's products. The Company continued its sponsorships of individual wheelchair athletes and teams, including several of the top-ranked male and female racers, hand cyclists and wheelchair tennis players in the world. The Company continued its support of disabled veterans through its sponsorship of the 34th National Veterans Wheelchair Games, the largest annual wheelchair sports event in the world. The games bring a competitive and recreational sports experience to military service veterans who use wheelchairs for their mobility needs due to spinal cord injury, neurological conditions or amputation.

Europe

The Company’s European operations consist primarily of manufacturing, marketing and distribution operations in Western Europe and export sales activities through local distributors elsewhere in the world. The Company has a sales force and, where appropriate, distribution centers in the United Kingdom, France, Germany, Belgium, Portugal, Spain, Italy, Denmark, Sweden, Switzerland, Austria, Norway and the Netherlands, and sells through distributors elsewhere in Europe, Russia, the Middle East and Africa. In markets where the Company has its own sales force, product sales are typically made through dealers of medical equipment and, in certain markets, directly to government agencies. In 2014, as in previous years, pricing comparison across borders along with regionalization of customers and consolidation of customers is driving the development of pan European pricing policies and control. The Company has partially centralized its product distribution through its European Distribution Center which is focused on further optimizing logistics and increasing service levels to customers.

Invacare continues to sponsor wheelchair sporting events including European Hand cycling Federation (EHF) and FIPFA (power chair football association) events, as well as high-profile individuals and athletes with disabilities.

I-8



Asia/Pacific

The Company's Asia/Pacific segment is comprised of Australia, New Zealand, Japan, Korea and South East Asia related to its Australia and New Zealand distribution businesses.

Invacare Australia and Invacare New Zealand both sell through three distribution channels:

Mobility and Seating products are sold via a dealer network in Australia and directly in New Zealand. Almost all sales are directly government funded;
Homecare products are sold via a dealer network that sells products to the consumer market; and
Long-Term Care products are sold via a dealer network in Australia and directly to aged care facilities in New Zealand

2014 was a year of consolidation of the indirect business model for Australia with double-digit growth in sales being experienced. Invacare New Zealand is a market leader for mobility and rehabilitation products in New Zealand. A significant portion of the direct sales are government funded and controlled by capped budgets.

Invacare Australia and New Zealand continued marketing efforts to increase demand for Invacare product in 2014. Customer relationship management and marketing automation tools have been used extensively to increase customer demand of Invacare products. Invacare Australia and New Zealand focused their respective sponsorship efforts around a small number of key athletes who participated in premier sporting events. Invacare also is a sponsor of the "Oz Day 10K" classic where the streets of Sydney are closed for a wheelchair race on Australia Day. Invacare is a sponsor of the Attitude Trust and is naming sponsor for the Disabled Sports Person of the Year award that is held as part of the Attitude Awards on World Disability Day in New Zealand.

Invacare China sells almost exclusively through the homecare channel via a distributor and dealer network focused in the major provinces and cities of Shanghai, Beijing and Guangzhou. The primary product sold is oxygen concentrators, with some minor sales in wheelchairs and bathing aids. Invacare China has established a government affairs team to capitalize on the increasing levels and localized funding of aids and equipment for the elderly and disabled. Marketing efforts are focused on supporting the dealer network to increase consumer sales. The other Asian markets are supported by dealers and distributors and Invacare supplies directly to those customers.

Dynamic Controls, the Company's subsidiary which produces electronic components for use in power wheelchairs, scooters, respiratory and other products, sells to customers in North America, Europe and Asia/Pacific.

PRODUCT LIABILITY COSTS

The Company is self-insured in North America for product liability exposures through its captive insurance company, Invatection Insurance Company, which currently has a policy year that runs from September 1 to August 31 and insures annual policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The Company also has additional layers of external insurance coverage insuring up to $75,000,000 in aggregate losses per policy year 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 actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration 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 awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves, the Company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.


I-9


PRODUCT DEVELOPMENT AND ENGINEERING
In 2014, Invacare was proud to introduce select products that improved upon and renewed its current offerings. The following are some of Invacare's notable new products for 2014:

Invacare Europe introduced the Invacare® TDX® SP2 power wheelchair. This next-generation center-wheel drive power wheelchair is an enhancement of the previous version and comes in two different wheelbase sizes, utilizing the Invacare® Modulite seating system. With a brand new design and improved serviceability, the TDX® SP2 power wheelchair maintains the strengths of Invacare® SureStep® and Stability Lock suspension systems.

The Invacare® Dahlia® passive manual wheelchair was introduced in Europe with both 30-degree and 45-degree tilt option. This wheelchair meets the demand for a passive wheelchair with a smaller footprint and more active consumer.

The Company introduced the Invacare® Fox foldable power wheelchair in Europe. The Fox® power wheelchair is packed with innovation to make life more manageable for everyday consumers. Featuring a modular, lightweight and compact design, it offers excellent maneuverability indoors with adjustable seating for different consumer needs. Its pendulum axis and optimized battery position ensure excellent outdoor traction.

Invacare introduced the Aquatec® Dot shower stool in the European segment in September 2014. The Dot is a lightweight, height adjustable shower stool for added safety and comfort in the shower. With a wide height adjustment range and high load capacity, the Dot covers a broad range of consumers and usage scenarios.

The Invacare® Accent bed, which was launched in the United Kingdom in August, is a new variant of the successful Invacare® Medley Ergo product family. The Medley Ergo is known as the most ergonomic bed solution in a home care situation and the Accent expands these features into the value segment.

Invacare Europe introduced the Alber® Twion® power assist for manual wheelchairs in April 2014. This is the fastest power-assist with up to 10km/h (6.2 mph), lightweight, quiet and offers the option of Smartphone connectivity with Bluetooth interface.

Invacare Europe also introduced the Invacare® Colibri scooter. This line of stylish, simple and colorful micro-scooters was awarded the prestigious Reddot design award. With the unique Invacare LiteLockTM system the scooter can easily be taken apart without any tools and it fits neatly into any car trunk.

MANUFACTURING AND SUPPLIERS

The Company’s objective is to continue to reduce costs and possibly consolidate facilities to maintain its high quality supply. The Company seeks to achieve this objective through a strategic combination of Invacare manufacturing facilities, contract manufacturing facilities and key suppliers.

The supply chain is focused on providing custom-configured, made-to-order manufactured products as well as high-quality, cost-effective solutions for standard stock products. As strategic choices are made globally, the Company will continue to be focused on providing quick product delivery to the market as a specific competitive advantage to the marketing and sales teams in these regions.

The Company continues to emphasize reducing the costs of its global manufacturing and distribution operations. Access to sourcing opportunities has been facilitated by the Company’s establishment of a test and design engineering facility in the Company’s Suzhou, China location.

Best practices in lean manufacturing are used throughout the Company’s operations to eliminate waste, shorten lead times, optimize inventory, improve productivity, drive quality and engage supply chain associates in the defining and implementation of needed change.

The Company purchases raw materials, components, sub-assemblies and finished goods from a variety of suppliers around the world. The Company’s Asian sourcing and purchasing office has proven to be an asset to the Company’s supply chain through the identification, development and management of suppliers across Asia. Where appropriate, Invacare utilizes contracts with suppliers in all regions to increase the guarantees of delivery, cost, quality and responsiveness. In those situations where contracts are not advantageous, Invacare works to manage multiple sources of supply and relationships that provide increased flexibility to the supply chain.

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North America

The Company has focused its factories in North America on the production of powered mobility and custom manual wheelchairs and seating products, the fully integrated manufacture of homecare and institutional care beds, the final assembly of respiratory therapy products and the integrated component fabrication, painting and final assembly of a variety of standard manual wheelchairs and personal care products. The Company operates three major factories located in Elyria, Ohio; Sanford, Florida; and Reynosa, Mexico. During 2014, the Company closed its major facility in London, Ontario. Production of case goods manufactured in London were transferred to the Invacare plant in Sanford, Florida. The long-term care beds production in London, Ontario was outsourced to a third-party with established FDA-registered manufacturing capabilities around the world. The third-party manufacturer has a significant focus on medical devices, including acute care bed production.

Asia/Pacific

Invacare manufactures products that serve regional market opportunities through the Company’s wholly-owned factories in Suzhou, Jiangsu Province, China. The Suzhou facilities supply products to the major geographic regions of the world served by Invacare: North America, Europe and Asia/Pacific.

Europe

The Company has eight manufacturing/assembly facilities spread throughout Europe with the capability to manufacture patient aid, wheelchair, powered mobility, bath safety, beds and patient transport products. The European manufacturing and logistics facilities are focused on opportunities to gain productivity improvements in cost and quality over the next few years.

GOVERNMENT REGULATION

The Company is affected by government regulation and reimbursement policies in virtually every country in which it operates. Government regulations and health care policy differ from country to country, and within some countries (most notably the U.S., European Union, Australia and Canada), from state to state or province to province. Changes in regulations and health care policy take place frequently and can impact the size, growth potential and profitability of products sold in each market.

In the U.S., the growth of health care costs has increased at rates in excess of the rate of inflation and as a percentage of GDP for several decades. A number of efforts to control the federal deficit have impacted reimbursement levels for government sponsored health care programs and private insurance companies often imitate changes made in federal programs. Reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment a consumer can obtain and thus, affect the product mix, pricing and payment patterns of the Company’s customers who are the HME providers.

The Company has continued its proactive efforts to try to influence public policy that impacts home and community-based, non-acute health care. The Company has been very active with federal legislation and regulatory policy makers. The Company believes that these efforts have given the Company a competitive advantage in two ways. First, customers frequently express appreciation for the Company’s efforts on behalf of the entire industry. Second, sometimes the Company has the ability to anticipate and plan for changes in public policy, unlike most other HME manufacturers who must react to change after it occurs.

FDA.

The United States Food and Drug Administration (the “FDA”) regulates the manufacture and sale of medical devices. Under such regulation, medical devices are classified as Class I, Class II or Class III devices, depending on the level of risk posed to patients, with Class III designating the highest-risk devices. The Company’s principal products are designated as Class I or Class II devices. In general, Class I devices must comply with labeling and recordkeeping requirements and are subject to other general controls. In addition to general controls, certain Class II devices must comply with product design and manufacturing controls in compliance with regulations established by the FDA. Domestic and foreign manufacturers of medical devices distributed commercially in the U.S. are subject to periodic inspections by the FDA. Furthermore, state, local and foreign governments have adopted regulations relating to the design, manufacture and marketing of health care products.

Consent Decree.

In December 2012, the Company reached an agreement with the FDA on the terms of a consent decree of injunction with respect to the Company's corporate facility and its Taylor Street wheelchair manufacturing facility in Elyria, Ohio. The consent decree, which was filed as an exhibit to the Company's Form 8-K filed on December 20, 2012, became effective December 21, 2012. The injunction limits the Company's manufacture and distribution of power and manual wheelchairs, wheelchair components

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and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility. The decree also temporarily limited design activities related to wheelchairs and power beds that took place at the impacted Elyria, Ohio facilities. The Company is entitled to continue to produce from the Taylor Street manufacturing facility certain medically necessary wheelchairs provided that documentation and recordkeeping requirements are followed, as well as ongoing replacement, service and repair of products already in use, under terms delineated in the consent decree. In addition, the Company was able to fulfill purchase orders and quotes that were in the Company's order fulfillment system prior to the effective date of the decree. Under the terms of the consent decree, in order to resume full operations at the impacted facilities, the Company must successfully complete a third-party expert certification audit and receive written notification from the FDA. The expert certification audit will be followed by an FDA inspection of the Company's compliance with the FDA's Quality System Regulation (QSR) governing manufacturing of medical devices. The certification audit is comprised of three distinct reports, which include:

First, the third-party expert inspected the qualification and validation procedures and documentation for equipment and processes at the Taylor Street manufacturing facility. The first certification audit was successfully completed during 2013. The FDA notified the Company on May 13, 2013 that it had accepted the first certification report. Following receipt of that notification, the Company's Taylor Street facility was permitted to resume supplying parts and components for the future manufacturing of medical devices at other Company facilities.

Second, the third-party expert reviewed the Company’s design control systems at the Corporate and Taylor Street facilities. The second certification audit also was successfully completed during 2013. The FDA notified the Company on July 16, 2013 that it had accepted the second certification report, after which the Company was permitted to resume design activities at the Corporate and Taylor Street facilities related to power wheelchairs and power beds.

The third, expert certification audit is an overall review of the Company's compliance with the FDA's QSR at the impacted Elyria facilities. This audit process is the most comprehensive and challenging of the three expert certification audits, and it encompasses all areas of the Company's Corporate and Taylor Street quality system. As part of the process, the Company has determined that it needs to better demonstrate that its quality system is sustainably compliant and that each subsystem is properly integrated. With the help of a consulting firm the Company engaged in 2014, the Company's internal subject matter experts are executing on its action plans to improve the functionality and capabilities of certain quality subsystems, most notably complaint handling and corrective and preventative actions (CAPA). The Company has identified the root causes of the issues that need to be addressed in order to achieve sustainable compliance and is working through quality implementation plans that will enable the Company to achieve the appropriate solution. As of the date of this Annual Report on Form 10-K, the Company is making progress, but the Company still has work to do, including process improvements for addressing complaint data, before the Company can verify the effectiveness of its solutions and complete the third-party expert certification audit.

The Company cannot predict the timing or the outcome of the final expert certification audit. According to the consent decree, once the expert's third certification audit is completed and the certification report is submitted to the FDA, as well as the Company’s own report related to its compliance status, together with its responses to any observations in the certification report, the FDA will inspect the Company's Corporate and Taylor Street facilities to determine whether they are in compliance with the FDA's QSR. If the FDA is satisfied with the Company's compliance, the FDA will provide written notification that the Company is permitted to resume full operations at the impacted facilities.
After resumption of full operations, the Company must undergo five years of audits by a third-party expert auditor to determine whether the facilities are in continuous compliance with FDA's QSR and the consent decree. The auditor will inspect the Corporate and Taylor Street facilities’ activities every six months during the first year following the resumption of full operations and then every 12 months for the next four years thereafter.
Under the consent decree, the FDA has the authority to inspect the Corporate and Taylor Street facilities at any time. The FDA also has the authority to order the Company to take a wide variety of actions if the FDA finds that the Company is not in compliance with the consent decree or FDA regulations, including requiring the Company to shut down all operations relating to Taylor Street products. The FDA can also order the Company to undertake a partial shutdown or a recall, issue a safety alert, public health advisory, or press release, or to take any other corrective action the FDA deems necessary with respect to Taylor Street products.
The FDA also has authority under the consent decree to assess liquidated damages of $15,000 per violation per day for any violations of the consent decree, FDA regulations or the federal Food, Drug, and Cosmetic Act. The FDA may also assess liquidated damages for shipments of adulterated or misbranded devices, except as permitted by the consent decree, in the amount of twice the sale price of any such adulterated or misbranded device. The liquidated damages are capped at $7,000,000 for each calendar year. The liquidated damages are in addition to any other remedies otherwise available to the FDA, including civil money penalties.

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See Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of these matters.
Other FDA Matters.

In December 2010, the Company received a warning letter from the FDA related to quality system processes and procedures at the Company's Sanford, Florida facility. In October 2014, the FDA conducted an inspection at the Sanford facility and, at the conclusion, issued its Form 483 containing four inspectional observations, three of which related to complaint handling and CAPA and a fourth related to production process controls. The Company has timely filed its response with the FDA and continues to work on addressing the FDA observations. At the time of filing of this Annual Report on Form 10-K, this matter remains pending. See Item 1A. Risk Factors.

In January 2014, the FDA conducted inspections at the Company’s manufacturing facility in Suzhou, China and at the Company’s electronic components subsidiary in Christchurch, New Zealand, covering quality systems and current Good Manufacturing Practice regulations. In August 2014, the FDA inspected Alber GmbH in Albstadt, Germany. The FDA issued its inspectional observations on Form 483 to the Company after these inspections, and the Company submitted its responses to the agency in a timely manner.

From time to time, the Company may undertake voluntary recalls or field corrective actions of the Company’s products to correct product issues that may arise. These actions are necessary to ensure the Company's products adhere to high standards of quality and safety. The Company continues to strengthen its programs to better ensure compliance with applicable regulations and actively keeps abreast of proposed regulations, particularly those which could have a material adverse effect on the Company.

During 2014, the Company initiated a recall related to a component in a stationary oxygen concentrator that was manufactured in the Company’s facility in Suzhou, China, and sold globally. In addition, the Company initiated a recall of a sieve bed component used within stationary oxygen concentrators manufactured in the Company's facility in Sanford, Florida during August 2014 and impacted the North America/HME segment. Finally, the Company continued to conduct the joystick recall that was launched in 2013, which involved the replacement of potentially affected joysticks due to an anomaly discovered in a portion of the joystick components in the field. This recall impacted the North America/HME and Asia/Pacific segments. The Company has warranty reserves for these recalls, which are discussed further in the "Current Liabilities" and “Contingencies” Notes to the Condensed Consolidated Financial Statements included in this Annual Report on Form 10-K.

National Competitive Bidding.

With respect to reimbursement in the United States, the Centers for Medicare and Medicaid Services (CMS) began implementation on January 1, 2011 of the National Competitive Bidding (NCB) program in nine metropolitan areas across the country (Round 1). On July 1, 2013, CMS expanded the program to an additional 91 metropolitan areas (Round 2). These bid programs have resulted in new, lower Medicare payment rates in these 100 areas. CMS rebids these areas every three years and hence a second round of contracts began in the nine Round 1 areas on January 1, 2014. The Company remains judicious in its extension of credit to customers and monitors whether other payors begin to model their payments on the NCB program. The Company also closely watches state Medicaid budgets and how deficits may impact coverage and payments for home medical equipment and institutional care products.

Although reductions in Medicare payments are not beneficial to the homecare industry, the Company believes that, over the long term, it can still grow and thrive in this environment. No significant cost-of-living adjustments have been made over the last few years to the reimbursement and payment amounts permitted under Medicare with respect to the Company’s products, but the Company intends to respond with improved productivity. In addition, the Company’s respiratory therapy products (for example, the low-cost HomeFill® oxygen delivery system) can help offset the Medicare reimbursement cuts to the homecare provider. The Company intends to focus on developing products that help the provider improve profitability. Additionally, the Company continues to focus on low-cost country sourcing and/or manufacturing to help ensure that the Company is one of the lowest cost manufacturers and distributors.

BACKLOG

The Company generally manufactures most of its products to meet near-term demands by shipping from stock or by building to order based on the specialty nature of certain products. Therefore, the Company does not have substantial backlog of orders of any particular product nor does it believe that backlog is a significant factor for its business.


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EMPLOYEES

As of December 31, 2014, the Company had approximately 5,200 employees.

FOREIGN OPERATIONS AND EXPORT SALES

The Company also markets its products for export to other foreign countries. In 2014, the Company's products were sold in over 100 countries. For information relating to net sales, operating income and identifiable assets of the Company’s foreign operations, see Business Segments in the Notes to the Consolidated Financial Statements.

AVAILABLE INFORMATION

The Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto, as well as proxy statements and other documents with the Securities and Exchange Commission (SEC). The public may read and copy any material that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website, www.sec.gov, which contains all reports, proxy statements and other information filed by the Company with the SEC.

Additionally, Invacare’s filings with the SEC are available on or through the Company’s website, www.invacare.com, as soon as reasonably practicable after they are filed electronically with, or furnished to, the SEC. Copies of the Company’s filings also can be requested, free of charge, by writing to: Shareholder Relations Department, Invacare Corporation, One Invacare Way, P.O. Box 4028, Elyria, OH 44036-2125. The contents of the Company's website is not part of this Annual Report on Form 10-K.


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FORWARD-LOOKING INFORMATION

This Form 10-K contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “could,” “plan,” “intend,” “expect,” “continue,” “believe” and “anticipate,” as well as similar comments, denote forward-looking statements that are subject to inherent uncertainties that are difficult to predict. 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: legal actions, including adverse judgments or settlements of litigation or claims in excess of available insurance limits; regulatory proceedings or the Company's failure to comply with regulatory requirements or receive regulatory clearance or approval for the Company's products or operations in the United States or abroad; adverse effects of regulatory or governmental inspections of Company facilities and governmental enforcement actions; product liability or warranty claims; product recalls, including more extensive recall experience than expected; compliance costs, limitations on the production and/or distribution of the Company's products, inability to bid on or win certain contracts, unabsorbed capacity utilization, including fixed costs and overhead, or other adverse effects of the FDA consent decree of injunction; any circumstances or developments that might further delay or adversely impact the results of the final, most comprehensive third-party expert certification audit or FDA inspection of the Company's quality systems at the Elyria, Ohio, facilities impacted by the FDA consent decree, including any possible requirement to perform additional remediation activities or further resultant delays in receipt of the written notification to resume operations (which could have a material adverse effect on the Company's business, financial condition, liquidity or results of operations); the failure or refusal of customers or healthcare professionals to sign verification of medical necessity (VMN) documentation or other certification forms required by the exceptions to the FDA consent decree; possible adverse effects of being leveraged, including interest rate or event of default risks; the Company's inability to satisfy its liquidity needs in light of monthly borrowing base movements and daily cash needs of the business under its new asset-based lending credit facility; adverse changes in government and other third-party payor reimbursement levels and practices both in the U.S. and in other countries (such as, for example, more extensive pre-payment reviews and post-payment audits by payors, or the Medicare National Competitive Bidding program); impacts of the U.S. Affordable Care Act of 2010 (such as, for example, the impact on the Company of the excise tax on certain medical devices, and the Company's ability to successfully offset such impact); ineffective cost reduction and restructuring efforts or inability to realize anticipated cost savings or achieve desired efficiencies from such efforts; delays, disruptions or excessive costs incurred in facility closures or consolidations; exchange rate or tax rate fluctuations; inability to design, manufacture, distribute and achieve market acceptance of new products with greater functionality or lower costs or new product platforms that deliver the anticipated benefits; consolidation of health care providers; lower cost imports; uncollectible accounts receivable; difficulties in implementing/upgrading Enterprise Resource Planning systems; risks inherent in managing and operating businesses in many different foreign jurisdictions; decreased availability or increased costs of materials which could increase the Company's costs of producing or acquiring the Company's products, including possible increases in commodity costs or freight costs; heightened vulnerability to a hostile takeover attempt arising from depressed market prices for Company shares; provisions of Ohio law or in the Company's debt agreements, shareholder rights plan or charter documents that may prevent or delay a change in control, as well as the risks described from time to time in the Company's reports as filed with the Securities and Exchange Commission. Except to the extent required by law, the Company does not undertake and specifically declines 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.




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Item 1A.    Risk Factors.

The Company’s business, operations and financial condition are subject to various risks and uncertainties. One should carefully consider the risks and uncertainties described below, together with all of the other information in this annual report on Form 10-K and in the Company’s other filings with the SEC, before making any investment decision with respect to the Company’s securities. The risks and uncertainties described below may not be the only ones the Company faces. Additional risks and uncertainties not presently known by the Company or that the Company currently deems immaterial may also affect the Company’s business. If any of these known or unknown risks or uncertainties actually occur, develop or worsen, the Company’s business, financial condition, results of operations and future growth prospects could change substantially.

The Company is subject to a consent decree of injunction ("consent decree") with the U.S. Food and Drug Administration (“FDA”), the effects of which are costly to the Company and could result in continued adverse consequences to the Company's business.
The consent decree, which was filed as an exhibit to the Company's Form 8-K filed on December 20, 2012, became effective December 21, 2012. The injunction limits the Company's manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility in Elyria, Ohio. The decree also temporarily limited design activities related to wheelchairs and power beds that take place at the impacted Elyria, Ohio facilities. However, the Company is entitled to continue to produce from the Taylor Street manufacturing facility certain medically necessary wheelchairs provided that documentation and record-keeping requirements are followed, as well as ongoing replacement, service and repair of products already in use, under terms delineated in the consent decree. In addition, the Company was able to fulfill purchase orders and quotes that were in the Company's order fulfillment system prior to the effective date of the decree. Under the terms of the consent decree, in order to resume full operations at the impacted facilities, the Company must successfully complete a third-party expert certification audit and receive written notification from the FDA. The certification audit is comprised of three distinct reports. The first two of the three certification reports were completed and accepted by the FDA during 2013. The final and most comprehensive certification audit was initiated during 2013, but has not yet been completed. The timing of the third certification audit is uncertain. After completion of the third certification report, the Company then must submit its own report related to its compliance status and its responses to any observations by the third-party expert or by the FDA from prior inspections. The Company will not be able to resume full operations at the corporate and Taylor Street facilities until the FDA issues written notice that it has found the facilities to be in compliance. Within 30 days of receiving the Company’s report, according to the terms of the consent decree, the FDA will begin a comprehensive inspection of the corporate and Taylor Street facilities.
It is not possible for the Company to estimate the timing of completion of the third certification report, or the timing or potential response of the FDA's inspection and subsequent written notification. Further significant delays in the timing of the completion of the final third-party expert certification audit, the FDA's inspection or written notification to resume operations, or any need to complete significant additional remediation as a result of the final third-party expert certification audit or the FDA inspection could have a material adverse effect on the Company's business, financial condition, liquidity or results of operations.
After resumption of full operations, the Company must undergo five years of audits by a third-party expert auditor, who will issue reports to the Company and the FDA identifying whether the facilities are operated and administered in continuous compliance with FDA regulations and the consent decree. Under the consent decree, the FDA has the authority to inspect the corporate and Taylor Street facilities at any time. The FDA also has the authority to order the Company to take a wide variety of actions if the FDA finds that the Company is not in compliance with the consent decree or FDA regulations. The FDA also has authority under the consent decree to assess liquidated damages for any violations of the consent decree, FDA regulations or the federal Food, Drug and Cosmetic Act. See Item 1. Business -- Government Regulation. Any such failure by the Company to comply with the consent decree or FDA regulations, or any need to complete significant remediation as a result of any such audits or inspections, or actions taken by the FDA as a result of any such failure to comply, could have a material adverse effect on the Company’s business, financial condition, liquidity or results of operations.
During the pendency of the consent decree negotiations in 2012, and during its effectiveness since December 21, 2012, the Company has experienced significant pressures on its net sales and operating results. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company expects to continue to experience pressure on net sales and profitability, particularly in the North America/HME segment, until it has successfully completed the previously described final third-party expert certification audit and FDA inspection and has received written notification from the FDA that the Company may resume full operations. Even after the Company receives the FDA notification, it is uncertain as to whether, or how quickly, the Company will be able to rebuild net sales and profitability to more typical historical levels, irrespective of market conditions. If the Company is unable to obtain FDA approval to resume full operations, the Company may be required to restructure its business strategy to rebuild profitability, and there can be no assurance that it would be successful in doing so.

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The Company’s failure to comply with medical device regulatory requirements or receive regulatory clearance or approval for the Company’s products or operations in the United States or abroad could adversely affect the Company’s business.
The Company’s medical devices are subject to extensive regulation in the United States by the FDA, and by similar governmental authorities in the foreign countries where the Company does business. The FDA regulates virtually all aspects of a medical device’s development, testing, manufacturing, labeling, promotion, distribution and marketing. In addition, the Company is required to file reports with the FDA if the Company’s products may have caused, or contributed to, a death or serious injury, or if they malfunction and would be likely to cause, or contribute to, a death or serious injury if the malfunction were to recur. In general, unless an exemption applies, the Company’s mobility and respiratory therapy products must receive a pre-market clearance from the FDA before they can be marketed in the United States. The FDA also regulates the export of medical devices to foreign countries. The Company cannot be assured that any of the Company’s devices, to the extent required, will be cleared by the FDA through the pre-market clearance process or that the FDA will provide export certificates that are necessary to export certain of the Company’s products. Export certificates are required for the Company to have its products registered for sale in certain foreign countries. In connection with the FDA warning letter received by the Company's Sanford, Florida facility in December 2010, as described below, the FDA has refused to provide new export certificates for Company products until the matters covered in the warning letter are resolved. Currently, the Company cannot obtain new certificates of export for Sanford, Florida facility products until the warning letter has been closed and for Taylor Street facility products until the Company has exited the injunctive phase of the consent decree. The inability to obtain export certificates for products produced at its Taylor Street or Sanford facilities has limited the Company's ability to support new foreign markets with such products.

Additionally, the Company is required to obtain pre-market clearances to market modifications to the Company’s existing products or market its existing products for new indications. The FDA requires device manufacturers themselves to make and document a determination as to whether or not a modification requires a new clearance; however, the FDA can review and disagree with a manufacturer’s decision. The Company has applied for, and received, a number of pre-market clearances for modifications to marketed devices. The Company may not be successful in receiving clearances in the future or the FDA may not agree with the Company’s decisions not to seek clearances for any particular device modification. The FDA may require a clearance for any past or future modification or a new indication for the Company’s existing products. Such submissions may require the submission of additional data and may be time consuming and costly, and ultimately may not be cleared by the FDA.

If the FDA requires the Company to obtain pre-market clearances for any modification to a previously cleared device, the Company may be required to cease manufacturing and marketing the modified device or to recall the modified device until the Company obtains FDA clearance, and the Company may be subject to significant regulatory fines or penalties. In addition, the FDA may not clear these submissions in a timely manner, if at all. The FDA also may change its policies, adopt additional regulations or revise existing regulations, each of which could prevent or delay pre-market clearance of the Company’s devices, or could impact the Company’s ability to market a device that was previously cleared. Any of the foregoing could adversely affect the Company’s business.

The Company’s failure to comply with the regulatory requirements of the FDA and other applicable U.S. regulatory requirements may subject the Company to administrative or judicially imposed sanctions. These sanctions include warning letters, civil penalties, criminal penalties, injunctions, consent decrees, product seizure or detention, product recalls and total or partial suspension of production.

As part of its regulatory function, the FDA routinely inspects the sites of medical device companies, and in 2010, 2011 and 2014, the FDA inspected certain of the Company's facilities. In December 2012, the Company and the FDA agreed to a consent decree of injunction affecting the Company's Corporate facility and its Taylor Street manufacturing facility in Elyria, Ohio. See the previous Risk Factor regarding the FDA consent decree. In addition, in December 2010, the Company received a warning letter from the FDA related to quality system processes and procedures at the Company's Sanford, Florida facility. In October 2014, the FDA conducted an inspection at the Sanford facility and, at the conclusion, issued its Form 483 containing four inspectional observations, three of which related to complaint handling and corrective and preventative actions (CAPA) and a fourth related to production process controls. The Company is executing a comprehensive quality systems remediation plan that is intended to address all of the FDA's concerns in the warning letter and Form 483. In January 2014, the FDA conducted inspections at the Company’s manufacturing facility in Suzhou, China and at the Company’s electronic components subsidiary in Christchurch, New Zealand, covering quality systems and current Good Manufacturing Practice regulations. In August 2014, the FDA inspected Alber GmbH in Albstadt, Germany. The FDA issued its inspectional observations on Form 483 to the Company after these inspections, and the Company submitted its responses to the agency in a timely manner. However, the results of regulatory claims, proceedings or investigations are difficult to predict. An unfavorable resolution or outcome of the FDA warning letter, or any other matter that may arise out of any FDA inspection of the Company's sites, could materially and adversely affect the Company's business, financial condition and results of operations.


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In many of the foreign countries in which the Company manufactures or markets its products, the Company is subject to extensive medical device regulations that are similar to those of the FDA, including those in Europe. The regulation of the Company’s products in Europe falls primarily within the European Economic Area, which consists of the 27 member states of the European Union, as well as Iceland, Liechtenstein and Norway. Only medical devices that comply with certain conformity requirements of the Medical Device Directive are allowed to be marketed within the European Economic Area. In addition, the national health or social security organizations of certain foreign countries, including those outside Europe, require the Company’s products to be qualified before they can be marketed in those countries. Failure to receive, or delays in the receipt of, relevant foreign qualifications in the European Economic Area or other foreign countries could have a material adverse effect on the Company’s business.

Being in the health care industry, the Company is subject to extensive government regulation, and if the Company fails to comply with applicable health care laws or regulations, the Company could suffer severe civil or criminal sanctions or be required to make significant changes to the Company’s operations that could have a material adverse effect on the Company’s results of operations.
The Company sells its products principally to medical equipment and home health care providers who resell or rent those products to consumers. Many of those providers (the Company’s customers) are reimbursed by third-party payors, including Medicare and Medicaid, for the Invacare products sold to their customers and patients. The U.S. federal government and the governments in the states and other countries in which the Company operates regulate many aspects of the Company’s business and the business of the Company's customers. As a part of the health care industry, the Company and its customers are subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, invoicing, documenting and other practices of health care suppliers and manufacturers are all subject to government scrutiny. Government agencies periodically open investigations and obtain information from health care suppliers and manufacturers pursuant to the legal process. Violations of law or regulations can result in severe administrative, civil and criminal penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could have a material adverse effect on the Company’s business. While the Company has established numerous policies and procedures to address compliance with these laws and regulations, there can be no assurance that the Company's efforts will be effective to prevent a material adverse effect on the Company’s business from noncompliance issues. For example, as discussed in the preceding Risk Factors, the Company is subject to a FDA consent decree affecting its corporate facility and Taylor Street manufacturing facility in Elyria, Ohio and received a FDA warning letter related to its Sanford, Florida facility.

Health care is an area of rapid regulatory change. Changes in the law and new interpretations of existing laws may affect permissible activities, the costs associated with doing business, and reimbursement amounts paid by federal, state and other third-party payors, all of which may affect the Company and its customers. The Company cannot predict the future of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or possible changes in health care policies in any country in which the Company conducts business. Future legislation and regulatory changes could have a material adverse effect on the Company’s business.

Changes in government and other third-party payor reimbursement levels and practices have negatively impacted and could continue to negatively impact the Company’s revenues and profitability.
The Company’s products are sold primarily through a network of medical equipment and home health care providers, extended care facilities, hospital and HMO-based stores and other providers. In addition, the Company sells directly to various government providers throughout the world. Many of these providers (the Company’s customers) are reimbursed for the products and services provided to their customers and patients by third-party payors, such as government programs, including Medicare and Medicaid, private insurance plans and managed care programs. Most of these programs set maximum reimbursement levels for some of the products sold by the Company in the United States and abroad. If third-party payors deny coverage, make the reimbursement process or documentation requirements more uncertain or further reduce their current levels of reimbursement (i.e., beyond the reductions described below), or if the Company’s costs of production do not decrease to keep pace with decreases in reimbursement levels, the Company may be unable to sell the affected product(s) through its distribution channels on a profitable basis.

Reduced government reimbursement levels and changes in reimbursement policies have in the past added, and could continue to add, significant pressure to the Company’s revenues and profitability. For example, in 100 metropolitan areas, CMS introduced a national competitive bidding program (NCB) which set new, lower payment rates for medical equipment and supplies. Round one of NCB for nine metropolitan areas in the U.S. went into effect in January 2011. The reimbursement rates for nine product categories were reduced by an average of 32 percent in these nine metropolitan areas. Effective July 2013, CMS commenced round two of the NCB program, which was expanded to include an additional 91 metropolitan areas. By January 1, 2016, CMS

I-18


expects to begin expanding NCB to 100% of the Medicare population. CMS announced that Medicare reimbursement rates were cut an average of 45 percent for those providers participating in the round two of the NCB program. CMS announced that the NCB program has resulted in $202.1 million in savings in its first year of implementation in the nine metropolitan areas with significant savings primarily in oxygen and oxygen supplies, mail-order diabetic supplies and standard power wheelchairs. The CMS Office of the Actuary estimates that this program will save Medicare an estimated $25.8 billion, and beneficiaries an estimated $17.2 billion, over the next ten years.

Similar trends and concerns are occurring in state Medicaid programs. These recent changes to reimbursement policies, and any additional unfavorable reimbursement policies or budgetary cuts that may be adopted in the future, could adversely affect the demand for the Company’s products by customers who depend on reimbursement from the government-funded programs. The percentage of the Company’s overall sales that are dependent on Medicare or other insurance programs may increase as the portion of the U.S. population over age 65 continues to grow, making the Company more vulnerable to reimbursement level reductions by these organizations. Reduced government reimbursement levels also could result in reduced private payor reimbursement levels because some third-party payors index their reimbursement schedules to Medicare fee schedules. Reductions in reimbursement levels also may affect the profitability of the Company’s customers and ultimately force some customers without strong financial resources to become unable to pay their bills as they come due or go out of business. The reimbursement reductions may prove to be so dramatic that some of the Company’s customers may not be able to adapt quickly enough to survive. The Company is the industry’s largest creditor and an increase in bankruptcies or financial weakness in the Company’s customer base could have an adverse effect on the Company’s financial results.

Outside the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed health care systems that govern reimbursement for home health care products. The ability of hospitals and other providers supported by such systems to purchase the Company’s products is dependent, in part, upon public budgetary constraints. Various countries have tightened reimbursement rates and other countries may follow. If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of the Company’s products may decline, which could adversely affect the Company’s net sales.

The impact of all the changes discussed above is uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations.

The adoption of healthcare reform and other legislative developments in the United States may adversely affect the Company’s business, results of operations and/or financial condition.
The U.S. Affordable Care Act enacted in 2010 includes provisions intended to expand access to health insurance coverage, improve the quality and reduce the costs of healthcare over time. Specifically, as one means to pay for the costs of the Affordable Care Act, the law imposes a 2.3% sales-based excise tax on U.S. sales by manufacturers or importers of most medical devices. The excise tax is deductible by the manufacturer or importer on its federal income tax return. The Company has determined that most of its products are exempt from the tax based on the retail exemption provided in the Affordable Care Act as defined by the regulations. However, certain products that it sells for institutional use are subject to the excise tax. Based on its interpretation of the regulations, the impact from the tax was immaterial for the Company in 2014 and 2013. However, the excise tax may increase the Company’s cost of doing business, particularly if the exemptions do not ultimately apply as the Company expects based on its interpretations of the regulations.

The Affordable Care Act and the programs implemented by the law may reduce reimbursements for the Company's products, may impact the demand for the Company’s products and may impact the prices at which the Company sells its products. In addition, various healthcare programs and regulations may be ultimately implemented at the federal or state level. Such changes could have a material adverse effect on the Company’s business, results of operations and/or financial condition.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted in 2010, and the rules and regulations enacted thereunder by the SEC and the Commodity Futures Trading Commission (CFTC), institute a wide range of reforms, certain of which may impact the Company. Among other things, the Dodd-Frank Act contains significant corporate governance and executive compensation-related provisions that authorize or require the SEC to adopt additional rules and regulations in these areas, such as shareholder “say on pay” voting and proxy access. The Dodd-Frank Act also provides for new statutory and regulatory requirements for derivative transactions, including foreign exchange and interest rate hedging transactions, and new requirements will be implemented over time. The Company enters into foreign exchange contracts, interest rate swaps and foreign currency forward contracts from time to time to manage its exposure to commodity price risk, foreign currency exchange risk and interest rate risk. The Company does not enter into derivative transactions for speculative purposes. Unless exempt, certain of these transactions, such as interest rate swaps and foreign exchange swaps, are required to be cleared by a registered derivatives clearing organization and subject to exchange trading requirements. If a derivative is required to be cleared,

I-19


the Company would be subject to cash and securities initial and variation margin posting, increasing the cost to the Company of mitigating commercial risk and impacting its strategic hedging activity. The contractual counterparties in hedging arrangements are likewise subject to increased costs as a result of compliance with the Dodd-Frank Act and it is anticipated these costs will be passed on to their customers. The Company will continue to analyze the suitability of particular hedging arrangements and to invest appropriate resources to comply with both existing and evolving standards.

In addition, the Dodd-Frank Act contains provisions to improve transparency and accountability concerning the sourcing of “conflict minerals” from mines located in the conflict zones of the Democratic Republic of Congo (DRC) and its adjoining countries. The term “conflict minerals” currently encompasses tantalum, tin, tungsten (or their ores) and gold. Conflict minerals can be found in a vast array of products. This legislation requires manufacturers, such as the Company, to investigate and disclose their use of any conflict minerals originating in the DRC or adjoining countries in an annual filing with the SEC. It also implements guidelines to assist the manufacturer in preventing, by way of performing due diligence in its supply chain, any such sourcing from, or potentially financing or benefiting, armed groups in this area. The Company's initial conflict materials report was filed with the SEC before the May 31, 2014 deadline. As standards for the production of the annual conflict minerals report evolve, the Company may be required to undertake significant due diligence processes requiring considerable investments of human resources and finances in order to comply with the conflict minerals due diligence and disclosure requirements. If the Company's suppliers are unable or unwilling to provide it with requested information and to take other steps to ensure that there is no financing or benefiting of armed groups in the DRC and there are no conflict minerals included in materials or components supplied to the Company, it may be forced to disclose in its SEC filings about the use of conflict minerals in its supply chain, which may expose the Company to reputational risks, which in turn could materially adversely affect its business, financial condition and results of operations.

The Company’s revenues and profits are subject to exchange rate and interest rate fluctuations that could adversely affect its results of operations or financial position.
Currency exchange rates are subject to fluctuation due to, among other things, changes in local, regional or global economic conditions, the imposition of currency exchange restrictions and unexpected changes in regulatory or taxation environments. The predominant currency used by the Company’s subsidiaries outside the United States to transact business is the functional currency used for each subsidiary. Through the Company’s international operations, the Company is exposed to foreign currency fluctuations, and changes in exchange rates can have a significant impact on net sales and elements of cost. The Company conducts a significant number of transactions in currencies other than the U.S. dollar. In addition, because certain of the Company’s costs and revenues are denominated in other currencies, in particular costs and revenues from its European operations, the Company’s results of operations are exposed to foreign exchange rate fluctuations as the financial results of those operations are translated from local currency into U.S. dollars upon consolidation. For example, the recent devaluation of the Euro has had a negative impact on the translation of Company's European segment net income into U.S. Dollars.

The Company uses foreign exchange forward contracts primarily to help reduce its exposure to transactional exchange rate risk. Despite the Company’s efforts to mitigate these risks, however, the Company’s revenues and profitability may be materially adversely affected by exchange rate fluctuations. The Company does not have the ability to meaningfully hedge translation.

The Company also is exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. The Company does at times use interest rate swap contracts to mitigate its exposure to interest rate fluctuations, but those efforts may not adequately protect the Company from significant interest rate risks. Interest on much of the Company’s debt is based on the London Interbank Offered Rate (LIBOR), which is currently historically low. Increases in LIBOR could have a significant impact on the Company’s reported interest expense.

If the Company’s cost reduction efforts are ineffective, the Company’s profitability could be negatively impacted.
In response to reimbursement reductions and competitive pricing pressures, the Company continues to initiate numerous cost reduction and organizational efficiency efforts, including globalization of its product lines. The Company may not be successful in achieving the operating efficiencies and operating cost reductions expected from these efforts, and the Company may experience business disruptions associated with the restructuring and cost reduction activities. These efforts may not produce the full efficiency and cost reduction benefits that the Company expects. Further, these benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated. If these measures are not successful, the Company may undertake additional cost reduction efforts, which could result in future charges. Moreover, the Company’s ability to achieve other strategic goals and business plans and the Company’s financial performance may be adversely affected and the Company could experience business disruptions with customers and elsewhere if the Company’s cost reduction and restructuring efforts prove ineffective.


I-20


If the Company's information technology systems fail, or if the Company experiences an interruption in the operation of its information technology systems, then the Company's business, financial condition and results of operations could be materially adversely affected.
The Company relies upon the capacity, reliability and security of its information technology, or IT, systems across all of its major business functions, including research and development, manufacturing, sales, financial and administrative functions. Since the Company is geographically diverse, has various business segments and has grown over the years through various acquisitions, it also has many disparate versions of IT systems across its organization. As a result of these disparate IT systems, the Company faces the challenge of supporting older systems, implementing upgrades when necessary and aggregating data that is timely and accurate. The failure of the Company's information technology systems, whether resulting from the disparate versions of IT systems across its various segments, business functions or otherwise, its inability to successfully maintain, enhance and/or replace its information technology systems, or any compromise of the integrity or security of the data that is generated from information technology systems, or any shortcomings in the Company's disaster recovery platforms, could adversely affect the Company's results of operations, disrupt business and make the Company unable, or severely limit the Company's ability to respond to customer demands. In addition, the Company's information technology systems are vulnerable to damage or interruption from: earthquake, fire, flood and other natural disasters; employee or other theft; attacks by computer viruses or hackers; power outages; and computer systems, internet, telecommunications or data network failure.
Any interruption of the Company's information technology systems could result in decreased revenue, increased expenses, increased capital expenditures, customer dissatisfaction and potential lawsuits, any of which could have a material adverse effect on the Company's results of operations or financial condition.

The industry in which the Company operates is highly competitive and some of the Company’s competitors may have greater financial resources than the Company does, a more appropriate market strategy or better strategic execution.
The home medical equipment market is highly competitive and the Company’s products face significant competition from other well-established manufacturers. Reduced government reimbursement levels and changes in reimbursement policies, such as the National Competitive Bidding program implemented by CMS, may drive competitors, particularly those that have greater financial resources than the Company's to offer drastically reduced pricing terms in an effort to secure government acceptance of their products and pricing. Any increase in competition may cause the Company to lose market share or compel the Company to reduce prices to remain competitive, which could have a material adverse effect on the Company’s results of operations. The Company's failure to recognize changing market demands, such as an increase in single-user products, or a failure to develop or execute a strategy to meet such changes could also result in a material adverse effect on the Company’s results of operations.

The consolidation of health care customers and the Company’s competitors could result in a loss of customers or in additional competitive pricing pressures.
Numerous initiatives and reforms instituted by legislators, regulators and third-party payors to reduce home medical equipment costs have resulted in a consolidation trend in the home medical equipment industry as well as among the Company’s customers, including home health care providers. In the past, some of the Company’s competitors, which may include distributors, have been lowering the purchase prices of their products in an effort to attract customers. This in turn has resulted in greater pricing pressures, including pressure to offer customers more competitive pricing terms, and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of the Company’s customers. Further consolidation could result in a loss of customers, increased collectability risks, or increased competitive pricing pressures.

The Company’s products are subject to recalls, which could be costly and harm the Company’s reputation and business.
The Company is subject to ongoing medical device reporting regulations that require the Company to report to the FDA or similar governmental authorities in other countries if the Company’s products cause, or contribute to, death or serious injury, or if they malfunction and would be likely to cause, or contribute to, death or serious injury if the malfunction were to recur. In light of a deficiency, defect in design or manufacturing or defect in labeling, the Company may voluntarily elect to recall or correct the Company’s products. In addition, The FDA and similar governmental authorities in other countries could force the Company to do a field correction or recall the Company’s products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary recall/field correction by the Company could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall/field correction would divert managerial and financial resources and could harm the Company’s reputation with its customers, product users and the health care professionals that use, prescribe and recommend the Company’s products. The Company could have product recalls or field actions that result in significant costs to the Company in the future, and these actions could have a material adverse effect on the Company’s business.

I-21


As an example, the Company recorded incremental warranty expense of $11,493,000 and $7,264,000 in 2014 and 2013, respectively, as a result of three product recalls. The Company will continue to review the adequacy of its recall accruals as the recalls progress.

The Company maintains cash balances globally in various financial institutions.

While the Company monitors its accounts with financial institutions both domestically and internationally, recovery of funds cannot be assured in the event the financial institution would fail. In addition, the Company may be limited by foreign governments in the amount and timing of funds to be repatriated from foreign financial institutions. As a result, this could adversely impact the Company's ability to fund normal operations, capital expenditures, or service debt, which could adversely affect the Company's results.

The Company is subject to certain risks inherent in managing and operating businesses in many different foreign jurisdictions.
The Company has significant international operations, including operations in Australia, Canada, New Zealand, Mexico, Asia (primarily China) and Europe. There are risks inherent in operating and selling products internationally, including:

different regulatory environments and reimbursement systems;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
foreign customers who may have longer payment cycles than customers in the United States;
fluctuations in foreign currency exchange rates;
tax rates in certain foreign countries that may exceed those in the United States and foreign earnings that may be subject to withholding requirements;
the imposition of tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country;
general economic and political conditions in countries where the Company operates or where end users of the Company’s products reside;
government control of capital transactions, including the borrowing of funds for operations or the expatriation of cash;
potential adverse tax consequences;
security concerns and potential business interruption risks associated with political and/or social unrest in foreign countries where the Company’s facilities or assets are located;
difficulties associated with managing a large organization spread throughout various countries;
difficulties in enforcing intellectual property rights and weaker intellectual property rights protection in some countries;
required compliance with a variety of foreign laws and regulations; and
differing consumer product preferences.

The factors described above also could disrupt the Company’s product manufacturing/assembling and key suppliers located outside of the United States. For example, the Company increasingly relies on its manufacturing and sourcing operations in China for the production of its products. Disruptions in the Company’s foreign operations, particularly those in China or Mexico, may impact the Company’s revenues and profitability.

The Company may be adversely affected by legal actions or regulatory proceedings.
In addition to the risks associated with the impact of the FDA consent decree, the Company may be subject to claims, litigation, governmental or regulatory investigations, or other liabilities as a result of injuries caused by allegedly defective products, or disputes arising out of acquisitions or dispositions the Company has completed or relating to the Company's intellectual property. Any such claims or litigation against the Company, regardless of the merits, could result in substantial costs and could harm the Company's business or its reputation.
The results of legal or regulatory actions or regulatory proceedings are difficult to predict and the Company cannot provide any assurance that an action or proceeding will not be commenced against the Company, or that the Company will prevail in any such action or proceeding. An unfavorable resolution of any legal action or proceeding could materially and adversely affect the Company's business, results of operations, liquidity or financial condition or its reputation.

I-22


Product liability claims may harm the Company’s business, particularly if the number of claims increases significantly or the Company’s product liability insurance proves inadequate.
The manufacture and sale of home health care devices and related products exposes the Company to a significant risk of product liability claims. From time to time, the Company has been, and is currently, subject to a number of product liability claims alleging that the use of the Company’s products has resulted in serious injury or even death.

Even if the Company is successful in defending against any liability claims, these claims could nevertheless distract the Company’s management, result in substantial costs, harm the Company’s reputation, adversely affect the sales of all the Company’s products and otherwise harm the Company’s business. If there is a significant increase in the number of product liability claims, the Company’s business could be adversely affected.

The Company is self-insured in North America for product liability exposures through its captive insurance company, Invatection Insurance Company, which currently has a policy year that runs from September 1 to August 31 and insures annual policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The Company also has additional layers of external insurance coverage, related to all lines of insurance coverage, insuring up to $75,000,000 in aggregate losses per policy year 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 actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration 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 awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves, the Company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices. If the Company's reserves are not adequate to cover actual claims experience, the Company's financial results could be adversely affected.

In addition, as a result of a product liability claim or if the Company’s products are alleged to be defective, the Company may have to recall some of its products, may have to incur significant costs or may suffer harm to its business reputation.

Decreased availability or increased costs of raw materials could increase the Company’s costs of producing its products.
The Company purchases raw materials, fabricated components, some finished goods and services from a variety of suppliers. Raw materials such as plastics, steel and aluminum are considered key raw materials. Where appropriate, the Company employs contracts with its suppliers, both domestic and international. In those situations in which contracts are not advantageous, the Company believes that its relationships with its suppliers are satisfactory and that alternative sources of supply are readily available. From time to time, however, the prices and availability of these raw materials fluctuate due to global market demands, which could impair the Company’s ability to procure necessary materials, or increase the cost of these materials. Inflationary and other increases in costs of these raw materials have occurred in the past and may recur from time to time. In addition, freight costs associated with shipping and receiving product and sales are impacted by fluctuations in the cost of oil and gas. A slowdown in the processing of shipments at U.S. ports may also delay deliveries of components and finished goods. A reduction in the supply or increase in the cost of those raw materials could impact the Company’s ability to manufacture its products and could increase the cost of production. Additionally, the Company may not be able to increase the prices of its products due to competitive pricing pressure or other factors. As an example, inflation in China has in the past and may in the future increase costs and an appreciation of the Yuan or an increase in labor rates could have an unfavorable impact on the cost of key components and some finished goods. Demand in China and other developing countries for raw materials may result in increases in the cost of key commodities and could have a negative impact on the profits of the Company if these increases cannot be passed onto the Company’s customers.

Lower cost imports could negatively impact the Company’s profitability.
Competition from lower cost imports sourced from low cost countries, such as Asia, may negatively impact the Company’s sales volumes. In the past, competition from certain of these products has caused the Company to lower its prices, cutting into the Company’s profit margins and reducing the Company’s overall profitability.


I-23


The Company’s success depends on the Company’s ability to design, manufacture, distribute and achieve market acceptance of new products with higher functionality and lower costs.
The Company sells products to customers primarily in markets that are characterized by technological change, product innovation and evolving industry standards, yet in which product price is increasingly a primary consideration in customers’ purchasing decisions. The Company historically has been engaged in product development and improvement programs. However, beginning in 2012 as a result of the FDA consent decree, which is described elsewhere in this Annual Report on Form 10-K, the Company's engineering resources had been focused primarily on quality remediation and not on the design of new products. The Company has received the FDA's approval to resume design activities at the impacted Elyria facilities in 2013 and has refocused certain of its engineering resources on new product development.

The Company must continue to design and improve innovative products, effectively distribute and achieve market acceptance of those products, and reduce the costs of producing the Company’s products, in order to compete successfully with the Company’s competitors. If competitors’ product development capabilities become more effective than the Company’s product development capabilities, if competitors’ new or improved products are accepted by the market before the Company’s products or if competitors are able to produce products at a lower cost and thus offer products for sale at a lower price, the Company’s business, financial condition and results of operation could be adversely affected.

The Company’s business strategy relies on certain assumptions concerning demographic trends that impact the market for its products. If these assumptions prove to be incorrect, demand for the Company’s products may be lower than expected.
The Company’s ability to achieve its business objectives is subject to a variety of factors, including the relative increase in the aging of the general population. The Company believes that these trends will increase the need for its products. The projected demand for the Company’s products could materially differ from actual demand if the Company’s assumptions regarding these trends and acceptance of its products by health care professionals and patients prove to be incorrect or do not materialize. If the Company’s assumptions regarding these factors prove to be incorrect, the Company may not be able to successfully implement the Company’s business strategy, which could adversely affect the Company’s results of operations. In addition, the perceived benefits of these trends may be offset by competitive or business factors, such as the introduction of new products by the Company’s competitors or the emergence of other countervailing trends, including lower reimbursement and pricing.

The terms of the Company’s debt facilities and financing arrangements may limit the Company’s flexibility in operating its business.
On January 16, 2015, the Company entered into a Revolving Credit and Security Agreement (the “New Credit Agreement”), which provides for an asset-based lending senior secured revolving credit facility which matures in January 2018 and represents the Company's principal source of financing for much of its liquidity needs. The New Credit Agreement provides the Company with the ability to borrow under a senior secured revolving credit, letter of credit and swing line loan facility (the “Credit Facility”). The aggregate borrowing availability under the Credit Facility is determined based on a borrowing base formula set forth in the New Credit Agreement. The Credit Facility is secured by substantially all of the Company’s domestic and Canadian assets, other than real estate. The New Credit Agreement contains customary default provisions, with certain grace periods and exceptions, that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than ten consecutive days.
The borrowing availability under of the Company's credit agreements may be inadequate to finance the Company's future operations or capital needs. Furthermore, the restrictive terms of the credit agreements may limit the Company’s ability to conduct and expand its business and pursue its business strategies. The Company’s ability to comply with the provisions of its credit agreements can be affected by events beyond its control, including changes in general economic and business conditions, or by government enforcement actions, such as, for example, adverse impacts from the FDA consent decree of injunction. If the Company is unable to comply with the provisions in the New Credit Agreement, it could result in a default which could trigger acceleration of, or the right to accelerate, the related debt. Because of cross-default provisions in its agreements and instruments governing certain of the Company's indebtedness, a default under the New Credit Agreement could result in a default under, and the acceleration of, certain other Company indebtedness. In addition, the Company's lenders would be entitled to proceed against the collateral securing the indebtedness.
The Company's ability to meet its liquidity needs will depend on many factors, including the operating performance of the business, the Company's ability to successfully complete in a timely manner the third-party expert certification audit and FDA inspection contemplated under the consent decree and receipt of the written notification from the FDA permitting the Company to resume full operations, as well as the Company's continued compliance with the covenants under its credit agreements.

I-24


Notwithstanding the Company's expectations, if the Company's operating results decline more than it currently anticipates, or if the Company is unable to successfully complete the final consent decree-related third-party expert certification audit and FDA inspection within the currently estimated time frame, the Company may be unable to comply with the financial covenants, and its lenders could demand repayment of the amounts outstanding under the Company's credit facility.

If necessary to maintain compliance with the Company's credit agreements, the Company may examine raising additional capital, which may be dilutive to the Company's results. In addition, if necessary or advisable, the Company may seek to renegotiate its New Credit Agreement in order to remain in compliance. The Company can make no assurances that under such circumstances its financing arrangements could be renegotiated, or that alternative financing would be available on terms acceptable to the Company, if at all.

The Company also has an agreement with De Lage Landen, Inc. (“DLL”), a third party financing company, to provide the majority of future lease financing to the Company's North America customers. Either party could terminate this agreement with 180 days' notice or 90 days' notice by DLL upon the occurrence of certain events. Should this agreement be terminated, the Company's borrowing needs under the New Credit Agreement could increase.

The holders of the Company’s Class B Common Shares own shares representing a substantial percentage of the Company’s voting power, and their interests may differ from other shareholders.
The Company has two classes of common stock. The Common Shares have one vote per share and the Class B Common Shares have 10 votes per share. As of December 31, 2014, the Class B Common Shares represented approximately 24% of the combined voting power of the Company’s Common Shares and Class B Common Shares. Substantially all of such Class B Common Shares are beneficially owned by a director of the Company and by a former executive. Together, their beneficial ownership (including the right to acquire) of approximately 28% of the combined voting power could influence the outcome of a corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of the Company’s assets. They also will have the power to influence or make more difficult a change in control. It is possible that the interests of some or all of the holders of Class B Common Shares may differ from the interests of the other shareholders, and they could take actions with which some shareholder may disagree.

The Company's capital expenditures could be higher than anticipated.

Unanticipated maintenance issues, changes in government regulations or significant investments in technology and new product development could result in higher than anticipated capital expenditures, which could impact the Company's debt, interest expense and cash flows.

The Company’s operating results and financial condition could be adversely affected if the Company becomes involved in litigation regarding its patents or other intellectual property rights.
Litigation involving patents and other intellectual property rights is common in the Company’s industry, and other companies within the Company’s industry have used intellectual property litigation in an attempt to gain a competitive advantage. The Company in the past has been, and in the future may become, a party to lawsuits involving patents or other intellectual property. If the Company receives an adverse judgment in any of these proceedings, a court or a similar foreign governing body could invalidate or render unenforceable the Company’s owned or licensed patents, require the Company to pay significant damages, seek licenses and/or pay ongoing royalties to third parties, require the Company to redesign its products, or prevent the Company from manufacturing, using or selling its products, any of which would have an adverse effect on the Company’s results of operations and financial condition. The Company in the past has brought, and may in the future also bring, actions against third parties for infringement of the Company’s intellectual property rights. The Company may not succeed in these actions. The defense and prosecution of intellectual property suits, proceedings before the U.S. Patent and Trademark Office or its foreign equivalents and related legal and administrative proceedings are both costly and time consuming. Protracted litigation to defend or prosecute the Company’s intellectual property rights could seriously detract from the time the Company’s management would otherwise devote to running its business. Intellectual property litigation relating to the Company’s products could cause its customers or potential customers to defer or limit their purchase or use of the affected products until resolution of the litigation.

If the Company is unable to protect its intellectual property rights or resolve successfully claims of infringement brought against it, the Company's product sales and business could be affected adversely.
The Company's business depends in part on its ability to establish, protect, safeguard and enforce its intellectual property and contractual rights and to defend against any claims of infringement, both of which involve complex legal, factual and marketplace uncertainties. The Company relies on a combination of patent, trade secret, copyright and trademark law and security

I-25


measures to protect its intellectual property, but effective intellectual property protection may not be available in all places that the Company sells its products or services, particularly in certain foreign jurisdictions. In addition, the Company uses nondisclosure, confidentiality agreements and invention assignment agreements with many of its employees, and nondisclosure and confidentiality agreements with certain third parties, in an effort to help protect its proprietary technology and know-how. If these agreements are breached or the Company's intellectual property is otherwise misappropriated, the Company may have to rely on litigation to enforce its intellectual property rights. If any of these measures are unsuccessful in protecting the Company's intellectual property, the Company's business may be affected adversely.

In addition, the Company may face claims of infringement that could interfere with its ability to use technology or other intellectual property rights that are material to the Company's business operations. In the event that a claim of infringement against the Company is successful, the Company may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that the Company was using, or the Company may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable time. If the Company is unable to obtain licenses on reasonable terms, it may be forced to cease selling or using the products that incorporate the challenged intellectual property, or to redesign or, in the case of trademark claims, rename its products to avoid infringing the intellectual property rights of third parties, which may not be possible, or if possible, may be time-consuming. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to the Company and adversely affect the Company's business and financial condition.

The Company also holds patent and other intellectual property licenses from third parties for some of its products and on technologies that are necessary in the design and manufacture of some of the Company's products. The loss of these licenses could prevent the Company from, or could cause additional disruption or expense in, manufacturing, marketing and selling these products, which could harm the Company's business.

The Company’s research and development and manufacturing processes are subject to federal, state, local and foreign environmental requirements.
The Company’s research and development and manufacturing processes are subject to federal, state, local and foreign environmental requirements, including requirements governing the discharge of pollutants into the air or water, the use, handling, storage and disposal of hazardous substances and the responsibility to investigate and clean up contaminated sites. Under some of these laws, the Company also could be held responsible for costs relating to any contamination at the Company’s past or present facilities and at third-party waste disposal sites. These could include costs relating to contamination that did not result from any violation of law and, in some circumstances, contamination that the Company did not cause. The Company may incur significant expenses relating to the failure to comply with environmental laws. The enactment of stricter laws or regulations, the stricter interpretation of existing laws and regulations or the requirement to undertake the investigation or remediation of currently unknown environmental contamination at the Company’s own or third-party sites may require the Company to make additional expenditures, which could be material.

Since the Company’s ability to obtain further financing may be limited, the Company may be unable to make strategic acquisitions.
The Company’s business plans historically included identifying, analyzing, acquiring, and integrating other strategic businesses. There are various reasons for the Company to acquire businesses or product lines, including providing new products or new manufacturing and service capabilities, to add new customers, to increase penetration with existing customers, and to expand into new geographic markets. The provisions of the New Credit Agreement prevent acquisitions unless the Company is able to negotiate and obtain amendments with regard to those provisions. If the Company is unable to obtain the necessary financing, it may miss opportunities to grow its business through strategic acquisitions.

In addition, an acquisition could materially impair the Company’s operating results by causing the Company to incur debt or requiring the amortization of acquisition expenses and acquired assets.

Additional tax expense or additional tax exposures could affect the Company's future profitability and cash flow.
The Company is subject to income taxes in both the United States and various non-U.S. jurisdictions. The domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. The Company's tax expense includes estimates of additional tax which may be incurred for tax exposures and reflects various estimates and assumptions. In addition, the assumptions include assessments of future earnings of the Company that could impact the valuation of its deferred tax assets. The Company’s future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax

I-26


assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of its tax exposures. The Company's future cash flows may be negatively impacted by cash payments required to settle tax liabilities, including the potential settlement of disputed tax liabilities. Corporate tax reform and tax law changes continue to be analyzed in the United States and in many other jurisdictions.
The Company’s reported results may be adversely affected by increases in reserves for uncollectible accounts receivable.
The Company has a large balance of accounts receivable and has established a reserve for the portion of such accounts receivable that the Company estimates will not be collected because of the Company’s customers’ non-payment. The specific reserve is based on historical trends and current relationships with the Company’s customers and providers. Changes in the Company’s collection rates can result from a number of factors, including turnover in personnel, changes in the payment policies or practices of payors, changes in industry rates or pace of reimbursement or changes in the financial health of the Company’s customers. As a result of past changes in Medicare reimbursement regulations, specifically changes to the qualification processes and reimbursement levels of consumer power wheelchairs and custom power wheelchairs, the business viability of some the Company’s customers may be at risk. Further, as National Competitive Bidding is implemented in additional areas, the number of start-up or new providers who have three-year contracted pricing will increase. The Company’s reserve for uncollectible receivables has fluctuated in the past and will continue to fluctuate in the future. Changes in rates of collection, even if they are small in absolute terms, could require the Company to increase its reserve for uncollectible receivables beyond its current level. The Company has reviewed the accounts receivables, including those receivables financed through DLL, associated with many of its customers that are most exposed to these issues. If the business viability of certain of the Company’s customers deteriorates or the Company’s credit policies are ineffective in reducing the Company’s exposures to credit risk, additional increases in reserves for uncollectible accounts may be necessary, which could adversely affect the Company’s financial results.

The loss of the services of the Company’s key management and personnel could adversely affect its ability to operate the Company’s business.
The Company’s future success will depend, in part, upon the continued service of key managerial, research and development staff and sales and technical personnel. In addition, the Company’s future success will depend on its ability to continue to attract and retain other highly qualified personnel, including personnel experienced in quality systems and regulatory affairs. If the Company is not successful in retaining its current personnel or in hiring or retaining qualified personnel in the future, the Company’s business may be adversely affected. The Company’s future success depends, to a significant extent, on the abilities and efforts of its executive officers and other members of its management team, such as the Company's new incoming President and Chief Executive Officer and its interim President and Chief Executive Officer and Chief Financial Officer, as well as other members of its management team. The Company had significant turnover in its management team during 2014 and cannot be certain that its executive officers and other key employees will continue in their respective capacities for any period of time, and these employees may be difficult to replace. If the Company loses the services of any of its management team, the Company’s business may be adversely affected.

Certain provisions of the Company’s debt agreements, its charter documents, and Ohio law could delay or prevent the sale or change in control of the Company.
Provisions of the Company’s credit agreements, its charter documents, and Ohio law may make it more difficult for a third party to acquire, or attempt to acquire, control of the Company even if a change in control would result in the purchase of shares of the Company at a premium to market price. In addition, these provisions may limit the ability of shareholders of the Company to approve transactions that they may deem to be in their best interest.

Item 1B.    Unresolved Staff Comments.
Not applicable.


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Item 2.        Properties.

The Company owns or leases its warehouses, offices and manufacturing facilities and believes that these facilities are well maintained, adequately insured and suitable for their present and intended uses. Information concerning certain leased facilities of the Company as of December 31, 2014 is set forth in Leases and Commitments in the Notes to the Consolidated Financial Statements of the Company included in this report and in the table below:
 
Square
Feet
 
Ownership
Or Expiration
Date of Lease
 
Renewal
Options
 
Use
North American/HME Operations
 
 
 
 
 
 
 
Alpharetta, Georgia
11,665

 
March 2016
 
One (2 yr.)
 
Warehouse and Offices
Arlington, Texas
63,626

 
May 2015
 
One (3 yr.)
 
Warehouse and Offices
Atlanta, Georgia
91,418

 
April 2016
 
One (3 yr.)
 
Warehouse and Offices
Cranbury, New Jersey
111,987

 
April 2018
 
Two (3 yr.)
 
Warehouse and Offices
Cranbury, New Jersey
127,963

 
April 2018
 
Two (3 yr.)
 
Warehouse and Offices
Elyria, Ohio
 
 
 
 
 
 
 
—1200 Taylor Street
251,656

 
Own
 
 
Manufacturing and Offices
—899 Cleveland Street
100,264

 
November 2015
 
None
 
Warehouse
—One Invacare Way
50,000

 
Own
 
 
Headquarters
—1320 Taylor Street
30,000

 
January 2018
 
One (3 yr.)
 
Offices
—1166 Taylor Street
4,800

 
Own
 
 
Warehouse and Offices
—56 Ternes Avenue
12,001

 
December 2015
 
One (1 yr.)
 
Warehouse
Grand Prairie, Texas
87,508

 
August 2015
 
One (5 yr.)
 
Warehouse and Offices
Guangzhou, China
895

 
April 2016
 
None
 
Offices
Kirkland, Quebec
26,196

 
November 2015
 
None
 
Manufacturing, Warehouse and Offices
Lawrenceville, Georgia
74,140

 
July 2019
 
One (5 yr.)
 
Warehouse and Offices
Marlboro, New Jersey
2,800

 
June 2015
 
None
 
Offices
Milford, Massachusetts
29,582

 
December 2015
 
None
 
Offices
Mississauga, Ontario
61,375

 
February 2016
 
None
 
Warehouse and Offices
North Ridgeville, Ohio
152,861

 
Own
 
 
Warehouse and Offices
Ontario, California
97,618

 
May 2018
 
Two (3 yr.)
 
Warehouse and Offices
Ontario, California
121,900

 
May 2018
 
Two (3 yr.)
 
Warehouse and Offices
Pharr, Texas
4,375

 
November 2017
 
None
 
Warehouse and Offices
Pinellas Park, Florida
11,400

 
Month to Month
 
None
 
Manufacturing and Offices
Pinellas Park, Florida
3,200

 
Month to Month
 
None
 
Manufacturing
Pinellas Park, Florida
3,200

 
Month to Month
 
None
 
Manufacturing
Reynosa, Mexico
152,256

 
Own
 
 
Manufacturing and Offices
Sanford, Florida
116,272

 
Own
 
 
Manufacturing and Offices
Scarborough, Ontario
5,428

 
February 2017
 
None
 
Manufacturing and Offices
Shanghai, China
1,615

 
May 2015
 
None
 
Offices
Shenzheng, China
1,054

 
August 2016
 
None

Offices
Simi Valley, California
38,501

 
February 2019
 
None
 
Manufacturing, Warehouse and Offices
Spicewood, Texas
6,500

 
Month to Month
 
None
 
Manufacturing and Offices
St. Petersburg, Florida
600

 
Month to Month
 
None
 
Warehouse
Suzhou, China
129,824

 
April 2017
 
None
 
Manufacturing, Warehouse and Offices
Tonawanda, New York
7,515

 
March 2018
 
None
 
Warehouse and Offices
Vaughan, Ontario
26,637

 
December 2015
 
None
 
Manufacturing and Offices

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Square
Feet
 
Ownership
Or Expiration
Date of Lease
 
Renewal
Options
 
Use
Institutional Products Group
 

 
 
 
 
 
 
Albuquerque, New Mexico
3,888

 
December 2015
 
One (2 yr.)
 
Warehouse and Offices
Boise, Idaho
1,670

 
Month to Month
 
None
 
Warehouse and Offices
Chicopee, Massachusetts
4,800

 
December 2015
 
Two (3 yr.)
 
Warehouse and Offices
Eden Prairie, Minnesota
3,764

 
September 2015
 
One (3 yr.)
 
Warehouse and Offices
Franklin, Wisconsin
4,800

 
February 2017
 
One (3 yr.)
 
Warehouse and Offices
Fredericksburg, Virginia
3,000

 
July 2016
 
One (3 yr.)

Warehouse and Offices
Fresno, California
3,000

 
April 2016
 
None
 
Warehouse and Offices
Gastonia, North Carolina
3,000

 
October 2016
 
One (3 yr.)
 
Warehouse and Offices
Hampden, Maine
4,800

 
September 2015
 
Four (1 yr.)
 
Warehouse and Offices
Hayward, California
4,950

 
July 2017
 
None
 
Warehouse and Offices
Indianapolis, Indiana
2,400

 
December 2015
 
Two (3 yr.)
 
Warehouse and Offices
Kansas City, Missouri
3,840

 
February 2016
 
One (3 yr.)
 
Warehouse and Offices
Knoxville, Tennessee
2,400

 
May 2015
 
None
 
Warehouse and Offices
Lakewood, Washington
4,500

 
June 2015
 
One (3 yr.)
 
Warehouse and Offices
Las Vegas, Nevada
1,609

 
December 2015
 
None
 
Warehouse and Offices
Lithia Springs, Georgia
4,000

 
December 2015
 
None
 
Warehouse and Offices
Maryland Heights, Missouri
 
 
 
 
 
 
 
—15 Worthington Access Drive
10,786

 
November 2019
 
One (3 yr.)
 
Offices
—320 Fee Fee Road
1,500

 
March 2016
 
One (3 yr.)
 
Warehouse and Offices
Memphis, Tennessee
3,450

 
June 2016
 
None
 
Warehouse and Offices
Modesto, California
4,535

 
January 2016
 
One (3 yr.)
 
Warehouse and Offices
Nashville, Tennessee
1,946

 
November 2015
 
One (3 yr.)
 
Warehouse and Offices
Norristown, Pennsylvania
3,790

 
February 2016
 
None
 
Warehouse and Offices
North Highlands, California
3,925

 
May 2015
 
One (3 yr.)
 
Warehouse and Offices
Norwood, Massachusetts
15,000

 
August 2015
 
One (3 yr.)
 
Warehouse and Offices
Orlando, Florida
2,206

 
October 2015
 
None
 
Warehouse and Offices
Phoenix, Arizona
2,289

 
Month to Month
 
None
 
Warehouse and Offices
Pittsburgh, Pennsylvania
2,912

 
August 2017
 
None
 
Warehouse and Offices
Portland, Oregon
2,500

 
November 2015
 
None
 
Warehouse and Offices
Rancho Dominguez, California
25,087

 
April 2018
 
One (5 yr.)
 
Warehouse and Offices
Redlands, California
3,568

 
December 2015
 
One (3 yr.)
 
Warehouse and Offices
Salt Lake City, Utah
4,000

 
December 2015
 
One (3 yr.)
 
Warehouse and Offices
San Diego, California
3,499

 
August 2015
 
None
 
Warehouse and Offices
Springfield, Oregon
3,264

 
November 2015
 
None
 
Warehouse and Offices
Spokane Valley, Washington
3,200

 
May 2015
 
None
 
Warehouse and Offices
Spokane Valley, Washington
8,760

 
Month to Month
 
None
 
Warehouse
Tea, South Dakota
1,782

 
December 2015
 
One (3 yr.)
 
Warehouse and Offices
Wallingford, Connecticut
4,000

 
Month to Month
 
None
 
Warehouse and Offices
Weston, Wisconsin
1,832

 
April 2016
 
One (3 yr.)
 
Warehouse and Offices
Woburn, Massachusetts
5,200

 
Month to Month
 
None
 
Warehouse and Offices
 
 
 
 
 
 
 
 

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Square
Feet
 
Ownership
Or Expiration
Date of Lease
 
Renewal
Options
 
Use
Asia/Pacific Operations
 

 
 
 
 
 
 
Auckland, New Zealand
30,518

 
September 2017
 
None
 
Manufacturing, Warehouse and Offices
Christchurch, New Zealand
72,269

 
December 2020
 
One (3 yr.)
 
Manufacturing, Warehouse and Offices
Kidderminster, United Kingdom
6,200

 
January 2018
 
None
 
Warehouse and Offices
North Olmsted, Ohio
2,280

 
October 2016
 
One (3 yr.)
 
Warehouse and Offices
North Rocks, NSW, Australia
45,714

 
August 2017
 
Two (3 yr.)
 
Warehouse and Offices
Suzhou, China
41,290

 
November 2016
 
None
 
Manufacturing, Warehouse and Offices
 
 
 
 
 
 
 
 
European Operations
 

 
 
 
 
 
 
Albstadt, Germany
73,894

 
February 2018
 
Two (5 yr.)
 
Manufacturing, Warehouse and Offices
Albstadt, Germany
12,917

 
November 2015
 
One (1 yr.)
 
Warehouse
Albstadt, Germany
19,375

 
Month to Month
 
None
 
Warehouse and Offices
Albstadt, Germany
5,382

 
Month to Month
 
None
 
Warehouse and Offices
Backemarks, Sweden
35,521

 
December 2015
 
One (6 mos.)
 
Warehouse
Backemarks, Sweden
35,521

 
December 2015
 
One (6 mos.)
 
Warehouse
Bergen, Norway
1,076

 
April 2015
 
One (6 mos.)
 
Warehouse and Offices
Bodo, Norway
2,153

 
May 2015
 
One (6 mos.)
 
Services and Offices
Brondby, Denmark
17,922

 
Month to Month
 
One (1 yr.)
 
Warehouse and Offices
Brondby, Denmark
3,767

 
Month to Month
 
One (1 yr.)
 
Warehouse
Dihult, Sweden
5,382

 
Month to Month
 
One (3 mos.)
 
Warehouse
Dio, Sweden
110,524

 
Own
 
 
Manufacturing, Warehouse and Offices
Dublin, Ireland
5,000

 
May 2024
 
Three (5 yr.)
 
Warehouse and Offices
Ede, The Netherlands
12,917

 
November 2016
 
One (5 yr.)
 
Warehouse
Ede, The Netherlands
9,257

 
November 2016
 
One (5 yr.)
 
Offices
Erniss, Sweden
17,502

 
Month to Month
 
One (3 mos.)
 
Warehouse
Fondettes, France
191,856

 
Own
 
 
Manufacturing and Warehouse
Girona, Spain
14,639

 
November 2015
 
One (1 yr.)
 
Warehouse and Offices
Gland, Switzerland
5,586

 
September 2015
 
One (1 yr.)
 
Offices
Gland, Switzerland
1,184

 
September 2015
 
One (1 yr.)
 
Offices
Goteborg, Sweden
2,691

 
September 2018
 
One (3 yr.)
 
Warehouse
Isny, Germany
47,232

 
Own
 
 
Manufacturing, Warehouse and Offices
Isny, Germany
1,615

 
Own
 
 
Warehouse
Kinross, United Kingdom
4,800

 
August 2015
 
One (6 mos.)
 
Warehouse and Offices
Kristiansand, Norway
646

 
January 2016
 
One (6 mos.)
 
Services and Offices
Landskrona, Sweden
5,382

 
January 2018
 
One (3 yr.)
 
Warehouse
Loppem, Belgium
4,036

 
March 2015
 
 
Warehouse and Offices
Mondsee, Austria
1,508

 
March 2015
 
One (3 yr.)
 
Warehouse and Offices
Mondsee, Austria
767

 
December 2016
 
One (3 yr.)
 
Offices
Mondsee, Austria
377

 
Month to Month
 
None
 
Warehouse
Mondsee, Austria
624

 
Month to Month
 
None
 
Warehouse
Neuville en Ferrain, France
1,399

 
April 2016
 
One (3 yr.)
 
Offices
Oporto, Portugal
88,270

 
November 2015
 
One (1 yr.)
 
Manufacturing, Warehouse and Offices
Oskarshamn, Sweden
1,076

 
December 2015
 
One (1 yr.)
 
Warehouse
Oslo, Norway
24,262

 
April 2016
 
One (6 mos.)
 
Manufacturing, Warehouse and Offices

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Square
Feet
 
Ownership
Or Expiration
Date of Lease
 
Renewal
Options
 
Use
European Operations
 
 
 
 
 
 
 
Pencoed, United Kingdom
150,000

 
December 2019
 
None
 
Manufacturing and Offices
Porta Westfalica, Germany
134,563

 
November 2021
 
Two (5yr.)
 
Manufacturing, Warehouse and Offices
Porta Westfalica, Germany
8,930

 
May 2015
 
One (1 yr.)
 
Warehouse
Porta Westfalica, Germany
13,455

 
Month to Month
 
None
 
Warehouse and Offices
Spanga, Sweden
16,146

 
Own
 
 
Warehouse and Offices
Thiene, Italy
21,528

 
Own
 
 
Warehouse and Offices
Trondheim, Norway
5,027

 
December 2018
 
One (6 mos.)
 
Services and Offices
Witterswil, Switzerland
40,343

 
March 2018
 
One (1 yr.)
 
Manufacturing, Warehouse and Offices
Witterswil, Switzerland
2,241

 
Month to Month
 
None
 
Warehouse
Witterswil, Switzerland
2,241

 
Month to Month
 
None
 
Warehouse
Witterswil, Switzerland
4,306

 
Month to Month
 
One (3 mos.)
 
Warehouse

Item 3.        Legal Proceedings.

In the ordinary course of its business, the Company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of the product liability lawsuits that the Company faces in the United States have been referred to the Company's captive insurance company and/or excess insurance carriers while all non-U.S. lawsuits have been referred to the Company's commercial insurance carriers. All such lawsuits are generally contested vigorously. The coverage territory of the Company's insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. Management does not believe that the outcome of any of these actions will have a material adverse effect upon the Company's business or financial condition.
In December 2012, the Company reached agreement with the FDA on the terms of the consent decree of injunction with respect to the Company's Corporate facility and its Taylor Street wheelchair manufacturing facility in Elyria, Ohio. A complaint and consent decree were filed in the U.S. District Court for the Northern District of Ohio, and on December 21, 2012, the Court approved the consent decree and it became effective. The consent decree limited the Company's manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility. The decree also initially limited design activities related to wheelchairs and power beds that take place at the impacted Elyria, Ohio facilities. The Company is entitled to continue to produce from the Taylor Street manufacturing facility certain medically necessary wheelchairs provided that documentation and record-keeping requirements are followed, as well as ongoing replacement, service and repair of products already in use, under terms delineated in the consent decree. Under the terms of the consent decree, in order to resume full operations at the impacted facilities, the Company must successfully complete a third-party expert certification audit at the impacted Elyria facilities, which is comprised of three distinct reports that must be submitted to, and accepted by, the FDA. After the final certification report is submitted to the FDA, along with the Company’s own report as to its compliance as well as responses to any observations in the certification report, the FDA will perform an inspection of the Company's Corporate and Taylor Street facilities to determine whether they are in compliance with the Quality System Regulation (QSR). The FDA has the authority to inspect at any time. Once satisfied with the Company's compliance, the FDA will provide written notification that the Company is permitted to resume full operations at the impacted facilities.
During 2013, the Company completed the first two of the third-party expert certification audits, and the FDA found the results of both to be acceptable. In these reports, the third-party expert certified that the Company's equipment and process validation procedures and its design control systems are compliant with the FDA's QSR. As a result of the FDA's acceptance of the first certification report on May 13, 2013, the Taylor Street facility was able to resume supplying parts and components for the further manufacturing of medical devices at other Company facilities. The Company's receipt of the FDA's acceptance of the second certification report on July 15, 2013, resulted in the Company being able to resume design activities at the impacted facilities related to power wheelchairs and power beds. The third, most comprehensive third-party certification audit is a comprehensive review of the Company's compliance with the FDA's QSR at the impacted Elyria facilities.
With the help of a consulting firm the Company engaged in 2014, the Company's internal subject matter experts are executing on its action plans to improve the functionality and capabilities of certain quality subsystems, most notably complaint handling

I-31


and corrective and preventative actions (CAPA). The Company has identified the root causes of the issues that need to be addressed in order to achieve sustainable compliance and is working through quality implementation plans that will enable the Company to achieve the appropriate solution. As of the date of this Annual Report on Form 10-K, the Company is making progress, but the Company still has work to do, including process improvements for addressing complaint data, before the Company can verify the effectiveness of its solutions and complete the third-party expert certification audit.
The Company cannot predict the timing of the third-party expert’s final certification audit. After the expert's certification report is completed and submitted to the FDA, along with the Company’s own report related to its compliance status together with its responses to any observations in the certification report, the FDA is expected to inspect the Company's corporate and Taylor Street facilities to determine whether they are in compliance with the FDA's QSR. If the FDA is satisfied with the Company's compliance, the FDA will provide written notification that the Company is permitted to resume full operations at the impacted facilities.
After resumption of full operations, the Company must undergo five years of audits by a third-party expert auditor to determine whether the facilities are in continuous compliance with FDA regulations and the consent decree. The auditor will inspect the Corporate and Taylor Street facilities’ activities every six months in the first year following the resumption of full operations and then once every 12 months for the next four years.
Under the consent decree, the FDA has the authority to inspect the corporate and Taylor Street facilities at any time. The FDA also has the authority to order the Company to take a wide variety of actions if the FDA finds that the Company is not in compliance with the consent decree or FDA regulations, including requiring the Company to cease all operations relating to Taylor Street products. The FDA can also order the Company to undertake a partial cessation of operations or a recall, issue a safety alert, public health advisory, or press release, or to take any other corrective action the FDA deems necessary with respect to Taylor Street products.
The FDA also has authority under the consent decree to assess liquidated damages of $15,000 per violation per day for any violations of the consent decree, FDA regulations or the federal Food, Drug, and Cosmetic Act. The FDA may also assess liquidated damages for shipments of adulterated or misbranded devices, except as permitted by the consent decree, in the amount of twice the sale price of any such adulterated or misbranded device. The liquidated damages are capped at $7,000,000 for each calendar year. The liquidated damages are in addition to any other remedies otherwise available to the FDA, including civil money penalties.
For additional information regarding the consent decree, please see the following sections of this Annual Report on Form 10-K: Item 1. Business - Government Regulation; Item 1A. Risk Factors; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook and - Liquidity and Capital Resources.
In December 2010, the Company received a warning letter from the FDA related to quality system processes and procedures at the Company's Sanford, Florida facility. In October 2014, the FDA conducted an inspection at the Sanford facility and, at the conclusion, issued its Form 483 containing four inspectional observations, three of which related to complaint handling and CAPA and a fourth related to production process controls. In January 2014, the FDA conducted inspections at the Company’s manufacturing facility in Suzhou, China and at the Company’s electronic components subsidiary in Christchurch, New Zealand, covering quality systems and current Good Manufacturing Practice regulations. In August 2014, the FDA inspected Alber GmbH in Albstadt, Germany. The FDA issued its inspectional observations on Form 483 to the Company after these inspections, and the Company submitted its responses to the agency in a timely manner. The Company has timely filed its response with the FDA and continues to work on addressing the FDA observations. At the time of filing of this Annual Report on Form 10-K, this matter remains pending. See Item Item 1. Business - Government Regulation - Other FDA Matters and 1A. Risk Factors in this Annual Report on Form 10-K.
On November 15, 2013, an amended complaint, in a lawsuit originally instituted on May 24, 2013, was filed against Invacare Corporation, Gerald B. Blouch and A. Malachi Mixon III in the U.S. District Court for the Northern District of Ohio, alleging that the defendants violated federal securities laws by failing to properly disclose the issues that the Company faced with the FDA. The lawsuit seeks class certification and unspecified damages and attorneys' fees for purchasers of the Company's common shares between February 5, 2009 and December 7, 2011. This lawsuit has been referred to the Company's insurance carriers. The Company intends to vigorously defend this lawsuit.

On September 12, 2014, a second amended complaint, in a lawsuit originally instituted on August 26, 2013, was filed against Invacare Corporation, Gerald B. Blouch, A. Malachi Mixon III and Patricia Stumpp, as well as outside directors Dale C. LaPorte, Michael F. Delaney and Charles S. Robb, in the U.S. District Court for the Northern District of Ohio, alleging that the defendants breached their fiduciary duties and violated the Employment Retirement Security Act (ERISA) in the administration and maintenance of the Company stock fund in the Company’s Retirement Savings Plan (401(k) Plan). The lawsuit seeks class

I-32


certification and unspecified damages and attorneys' fees for participants in the Company's stock fund of the 401(k) Plan between July 22, 2010 and the present. This lawsuit has been referred to the Company's insurance carriers. The Company intends to vigorously defend this lawsuit.

Additional information regarding the Company's commitments and contingencies is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Contingencies in the Notes to the Condensed Consolidated Financial Statements included in this Annual Report on Form 10-K.
Item 4.        Mine Safety Disclosures.
None.

Executive Officers of the Registrant.*

The following table sets forth the names of the executive officers of Invacare, each of whom serves at the pleasure of the Board of Directors, as well as certain other information.
Name
Age
Position
Matthew E. Monaghan**
47
Appointed President and Chief Executive Officer
Robert K. Gudbranson
51
Interim President and Chief Executive Officer
 
 
Senior Vice President, Chief Financial Officer and Treasurer
Anthony C. LaPlaca
56
Senior Vice President, General Counsel and Secretary
John M. Remmers
53
Executive Vice President & General Manager, North America and Global Product Development
Patricia A. Stumpp
53
Senior Vice President—Human Resources
 ________________________
*
The description of executive officers is included pursuant to Instruction 3 to Section (b) of Item 401 of Regulation S-K.
**
Effective April 1, 2015.

Matthew E. Monaghan was appointed as President and Chief Executive Officer, effective April 1, 2015. Since January 2014, Mr. Monaghan has served as Senior Vice President, Global Hips and Reconstructive Research of Zimmer Holdings, Inc. (NYSE: ZMH) where he has led the global hips business and large joint reconstruction research. He has been responsible for the division’s new product development, engineering, clinical studies, quality, regulatory affairs and marketing functions. From December 2009 to January 2014, Mr. Monaghan served as Vice President and General Manager, Global Hips Business of Zimmer. Prior to joining Zimmer in 2009, Mr. Monaghan spent eight years as an operating executive for two leading private equity firms, Texas Pacific Group (TPG) and Cerberus Capital Management, where he led acquisitions and operational improvements of portfolio companies. Over the prior 13 years, Mr. Monaghan held various positions at General Electric Company (NYSE: GE).

Robert K. Gudbranson was appointed Interim President and Chief Executive Officer on August 1, 2014 and has been Senior Vice President and Chief Financial Officer since April 2008. From October 2005 until his appointment at Invacare, Mr. Gudbranson served as Vice President of Strategic Planning and Acquisitions at Lincoln Electric Holdings, Inc. (NASDAQ: LECO), a global manufacturer of welding, brazing and soldering products located in Cleveland, Ohio. Prior to joining Lincoln Electric, Mr. Gudbranson served as Director of Business Development and Investor Relations at Invacare from June 2002 to October 2005. Mr. Gudbranson has also served as Invacare’s Assistant Treasurer and as the European Finance Director.

Anthony C. LaPlaca was appointed Senior Vice President, General Counsel and Secretary effective January 2009. Previously, Mr. LaPlaca served as Vice President and General Counsel for six and a half years with Bendix Commercial Vehicle Systems LLC, a member of the Knorr-Bremse group, a supplier of commercial vehicle safety systems. Prior to that, he served as Vice President and General Counsel to Honeywell Transportation & Power Systems and General Counsel to Honeywell Commercial Vehicle Systems LLC.

John M. Remmers was appointed Executive Vice President & General Manager, North America and Global Product Development in March 2014. From September 2010 to March 2014, he served as the Company's Senior Vice President, Global Supply Chain and Operations. From March 2007 until September 2010, Mr. Remmers was Executive Vice President and General Manager at TTI Floor Care where he was responsible for select business units, product marketing, engineering, operations and supply chain. Prior to that, he spent thirteen years with Robert Bosch Tool Corporation, where he served as the Sr. Vice President of New Product Development. Mr. Remmers holds a B.S. in Metallurgical Engineering from Missouri University of Science and Technology and obtained his M.B.A. from the University of Chicago’s Booth School of Business.

I-33


Patricia A. Stumpp has been the Senior Vice President—Human Resources since September 2009. Mrs. Stumpp joined Invacare in 1991 and was promoted to her current position in 2009. Previously, Mrs. Stumpp served as Director of Compensation & Benefits from January 2001 to August 2006 and as Director of the Human Resources Group from August 2006 until August 2009. She also has prior experience in healthcare, small business and the services industry. She holds a B.A. in Psychology and M.B.A. from The University of Toledo.

I-34


PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Invacare’s Common Shares, without par value, trade on the New York Stock Exchange (NYSE) under the symbol “IVC.” Ownership of the Company’s Class B Common Shares (which are not listed on NYSE) cannot be transferred, except, in general, to family members without first being converted into Common Shares. Class B Common Shares may be converted into Common Shares at any time on a share-for-share basis. The number of record holders of the Company Common Shares and Class B Common Shares at February 24, 2015 was 2,485 and 27, respectively. The closing sale price for the Common Shares on February 24, 2015 as reported by NYSE was $18.52. The prices set forth below do not include retail markups, markdowns or commissions.

The range of high and low quarterly prices of the Common Shares and dividends in each of the two most recent fiscal years were as follows:
 
2014
 
2013
 
High
 
Low
 
Cash Dividends
Declared
 
High
 
Low
 
Cash Dividends
Declared
Quarter Ended:
 
 
 
 
 
 
 
 
 
 
 
December 31
$
17.11

 
$
11.93

 
$
0.0125

 
$
23.21

 
$
16.54

 
$
0.0125

September 30
18.78

 
11.81

 
0.0125

 
17.46

 
14.53

 
0.0125

June 30
19.71

 
15.80

 
0.0125

 
16.23

 
11.11

 
0.0125

March 31
25.30

 
18.47

 
0.0125

 
17.18

 
12.84

 
0.0125


During 2014 and 2013, the Board of Directors also declared annualized dividends of $0.045 per Class B Common Share. For information regarding limitations on the payment of dividends in the Company loan and note agreements, see Long Term Debt in the Notes to the Consolidated Financial Statements included in this report. The Common Shares are entitled to receive cash dividends at a rate of at least 110% of cash dividends paid on the Class B Common Shares. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, regarding covenants in the Company's senior credit facility with respect to the payment of dividends.


I-35


SHAREHOLDER RETURN PERFORMANCE GRAPH

The following graph compares the yearly cumulative total return on Invacare’s common shares against the yearly cumulative total return of the companies listed on the Standard & Poor’s 500 Stock Index, the Russell 2000 Stock Index and the S&P Healthcare Equipment & Supplies Index*.

 
12/09
 
12/10
 
12/11
 
12/12
 
12/13
 
12/14
Invacare Corporation
$
100.00

 
$
121.12

 
$
61.56

 
$
65.79

 
$
94.03

 
$
68.11

S&P 500
100.00

 
115.06

 
117.49

 
136.30

 
180.44

 
205.14

Russell 2000
100.00

 
126.86

 
121.56

 
141.43

 
196.34

 
205.95

S&P Healthcare Equipment & Supplies
100.00

 
99.50

 
103.48

 
123.25

 
157.82

 
196.33


Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Copyright© 2015 Russell Investment Group. All rights reserved.
________________________
*
The S&P Healthcare Equipment & Supplies Index is a capitalization-weighted average index comprised of health care companies in the S&P 500 Index.

The graph assumes $100 invested on December 31, 2009 in the common shares of Invacare Corporation, S&P 500 Index, Russell 2000 Index and the S&P Healthcare Equipment & Supplies Index, including reinvestment of dividends, through December 31, 2014.


I-36


The following table presents information with respect to repurchases of common shares made by the Company during the three months ended December 31, 2014.
 
Period
 
 
Total Number of
Shares  Purchased (1)
 
Average Price
Paid Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number
of Shares That May Yet
Be Purchased Under
the Plans or Programs (2)
10/1/2014
-
10/31/14

 
$

 

 
2,453,978

11/1/2014
-
11/30/14
13,913

 
16.44

 

 
2,453,978

12/1/2014
-
12/31/14
9,386

 
16.11

 

 
2,453,978

Total
 
 
23,299

 
$
16.30

 

 
2,453,978

________________________ 
(1)
All 23,299 shares repurchased between November 1, 2014 and December 31, 2014 were surrendered to the Company by employees for minimum tax withholding purposes in conjunction with the vesting of restricted shares awarded to the employees under the Company’s equity compensation plans.

(2)
In 2001, the Board of Directors authorized the Company to purchase up to 2,000,000 Common Shares, excluding any shares acquired from employees or directors as a result of the exercise of options or vesting of restricted shares pursuant to the Company’s performance plans. The Board of Directors reaffirmed its authorization of this repurchase program on November 5, 2010, and on August 17, 2011 authorized an additional 2,046,500 shares for repurchase under the plan. To date, the Company has purchased 1,592,522 shares under this program, with authorization remaining to purchase 2,453,978 shares. The Company did not purchase any shares pursuant to this Board authorized program during 2014.

The equity compensation plan information required under Item 201(d) of Regulation S-K is incorporated by reference to the information under the caption "Equity Compensation Plan Information" in the Company's definitive Proxy Statement on Schedule 14A for the 2015 Annual Meeting of Shareholders.

Item 6.        Selected Financial Data.

The selected consolidated financial data set forth below with respect to the Company’s consolidated statements of comprehensive income (loss), cash flows and shareholders’ equity for the fiscal years ended December 31, 2014, 2013 and 2012, and the consolidated balance sheets as of December 31, 2014 and 2013 are derived from the Consolidated Financial Statements included elsewhere in this Form 10-K or as adjusted to reflect the impact of discontinued operations. The consolidated statements of comprehensive income (loss), cash flows and shareholders’ equity data for the fiscal years ended December 31, 2011 and 2010 and consolidated balance sheet data for the fiscal years ended December 31, 2012, 2011 and 2010 are derived from the Company’s previously filed Consolidated Financial Statements or as adjusted to reflect the impact of discontinued operations. The data set forth below should be read in conjunction with Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. The Balance Sheet, Other Data and Key Ratios reflect the impact of discontinued operations to the extent included in the Consolidated Balance Sheets and Consolidated Statement of Cash Flows.


I-37


 
2014 *
 
2013 **
 
2012 ***
 
2011 ****
 
2010 *****
 
(In thousands, except per share and ratio data)
Earnings
 
 
 
 
 
 
 
 
 
Net Sales from continuing operations
$
1,270,163

 
$
1,334,505

 
$
1,415,818

 
$
1,466,092

 
$
1,392,903

 
 
 
 
 
 
 
 
 
 
Net Earnings (loss) from continuing operations
(68,760
)
 
(54,334
)
 
(14,083
)
 
(26,684
)
 
3,438

Net Earnings from discontinued operations
12,690

 
87,385

 
15,910

 
22,571

 
21,903

Net Earnings (loss)
(56,070
)
 
33,051

 
1,827

 
(4,113
)
 
25,341

 
 
 
 
 
 
 
 
 
 
Net Earnings (loss) per Share—Basic:
 
 
 
 
 
 
 
 
 
Net Earnings (loss) from Continuing Operations
(2.15
)
 
(1.70
)
 
(0.45
)
 
(0.83
)
 
0.11

Net Earnings from Discontinued Operations
0.40

 
2.74

 
0.50

 
0.71

 
0.68

Net Earnings (loss) per Share—Basic
(1.75
)
 
1.04

 
0.06

 
(0.13
)
 
0.78

 
 
 
 
 
 
 
 
 
 
Net Earnings (loss) per Share—Assuming Dilution:
 
 
 
 
 
 
 
 
 
Net Earnings (loss) from Continuing Operations
(2.15
)
 
(1.70
)
 
(0.45
)
 
(0.83
)
 
0.11

Net Earnings from Discontinued Operations
0.39

 
2.73

 
0.50

 
0.70

 
0.67

Net Earnings (loss) per Share—Assuming Dilution
(1.75
)
 
1.03

 
0.06

 
(0.13
)
 
0.78

 
 
 
 
 
 
 
 
 
 
Dividends per Common Share
0.05

 
0.05

 
0.05

 
0.05

 
0.05

Dividends per Class B Common Share
0.04545

 
0.04545

 
0.04545

 
0.04545

 
0.04545

 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
Current Assets
$
395,342

 
$
419,539

 
$
567,949

 
$
528,770

 
$
526,159

Total Assets
963,731

 
1,096,434

 
1,262,294

 
1,281,054

 
1,280,400

Current Liabilities
290,227

 
276,165

 
299,735

 
287,939

 
290,308

Working Capital
105,115

 
143,374

 
268,214

 
240,831

 
235,851

Long-Term Debt
19,377

 
31,184

 
229,375

 
260,440

 
238,090

Other Long-Term Obligations
88,805

 
118,276

 
112,195

 
106,150

 
99,591

Shareholders’ Equity
565,322

 
670,809

 
620,989

 
626,525

 
652,411

 
 
 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
 
 
Research and Development Expenditures
$
23,149

 
$
24,075

 
$
23,851

 
$
27,556

 
$
25,954

Capital Expenditures
12,327

 
14,158

 
20,091

 
22,160

 
17,353

Depreciation and Amortization
32,789

 
36,789

 
38,593

 
38,883

 
36,804

 
 
 
 
 
 
 
 
 
 
Key Ratios
 
 
 
 
 
 
 
 
 
Return on Sales % from continuing operations
(5.4
)
 
(4.1
)
 
(1.0
)
 
(1.8
)
 
0.2

Return on Average Assets %
(5.4
)
 
2.8

 
0.1

 
(0.3
)
 
1.9

Return on Beginning Shareholders’ Equity %
(8.4
)
 
5.3

 
0.3

 
(0.6
)
 
3.6

Current Ratio
1.4:1

 
1.5:1

 
1.9:1

 
1.8:1

 
1.8:1

Debt-to-Equity Ratio
0.04:1

 
0.07:1

 
0.38:1

 
0.42:1

 
0.38:1




I-38


  ________________________
*
Reflects charges related to restructuring from continuing operations of $11,112,000 ($10,096,000 after-tax expense or $0.32 per share assuming dilution), incremental warranty expense of $11,493,000 ($10,801,000 after-tax expense or $0.34 per share assuming dilution related to three product recalls), asset write-downs to intangible assets of $13,041,000 ($13,041,000 after-tax expense or $0.41 per share assuming dilution) and the positive impact of an intraperiod tax allocation associated with discontinued operations of $7,175,000 or $0.22 per share assuming dilution.

**
Reflects charges related to restructuring from continuing operations of $9,336,000 ($7,493,000 after-tax expense or $0.23 per share assuming dilution), incremental warranty expense of $7,264,000 ($7,170,000 after-tax expense or $0.22 per share assuming dilution related to the power wheelchair joystick recall), asset write-downs to intangible assets of $1,523,000 ($1,322,000 after-tax expense or $0.04 per share assuming dilution) and the positive impact of an intraperiod tax allocation associated with discontinued operations of $1,220,000 or $0.04 per share assuming dilution.

***
Reflects charges related to restructuring from continuing operations of $11,395,000 ($11,255,000 after-tax expense or $0.36 per share assuming dilution), a discrete 2012 tax expense related to prior years of $9,336,000 or $0.30 per share assuming dilution which is a non-cash charge in 2012 for a matter that is under audit and being contested by the Company, early debt extinguishment charges of $312,000 ($312,000 after-tax expense or $0.01 per share assuming dilution), asset write-downs to intangible assets of $773,000 ($698,000 after-tax expense or $0.02 per share assuming dilution) and the positive impact of an intraperiod tax allocation associated with discontinued operations of $7,126,000 or $0.23 per share assuming dilution.

****
Reflects asset write-downs for goodwill and intangibles of $49,480,000 ($48,719,000 after tax or $1.52 per share assuming dilution), loss on debt extinguishment including debt finance charges and associated fees of $24,200,000 ($24,200,000 after tax or $0.76 per share assuming dilution) as a result of the Company’s extinguishment of higher interest rate debt, restructuring charge of $10,534,000 ($10,263,000 after tax or $0.32 per share assuming dilution) and a tax benefit in Germany of $4,947,000 ($4,947,000 after tax or $0.15 per share assuming dilution).

*****
Reflects loss on debt extinguishment including debt finance charges and associated fees of $40,164,000 ($40,164,000 after tax or $1.23 per share assuming dilution) as a result of the Company’s extinguishment of higher interest rate debt.



I-39


Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations.

OUTLOOK

The Company's financial results were negatively impacted in 2014 and will continue to be pressured in 2015 as a result of its consent decree with the United States Food and Drug Administration (FDA) affecting operations at the Corporate and Taylor Street facilities in Elyria, Ohio, which requires that a third-party expert perform three separate certification audits. Before the FDA will inspect the Company's facilities and consider whether to permit the Company to resume full operations, the third-party certification audit reports must be completed and submitted to the FDA for review and acceptance. The Company has received the FDA's acceptance of the first two certification reports. However, the Company cannot predict the timing or the outcome of the third expert certification audit.

With the help of a consulting firm the Company engaged in 2014, the Company's internal subject matter experts are executing action plans to improve the functionality and capabilities of certain quality subsystems, most notably complaint handling and corrective and preventative actions (CAPA). The Company has identified the root causes of the issues that need to be addressed in order to achieve sustainable compliance and the Company is working through quality implementation plans that are intended to help the Company achieve the appropriate solution. The Company is making progress, but there is still work to do, including process improvements for addressing complaint data, before the Company can verify the effectiveness of its solutions and complete the third-party expert certification audit.

According to the consent decree, once the expert's third certification audit is completed and its certification report is submitted to the FDA, as well as the Company’s own report related to its compliance status together with its responses to any observations in the certification report, the FDA will inspect the Company's corporate and Taylor Street facilities to determine whether they are in compliance with the FDA's Quality System Regulation (QSR). Once the FDA is satisfied with the Company's compliance, the FDA will provide written notification that the Company is permitted to resume full operations at the impacted facilities.

The Company's European segment reported strong earnings again in 2014 while the Company's Institutional Products Group, excluding intangible impairment charges, and Asia/Pacific segment had improved results as well, particularly in the fourth quarter of 2014. However, if the Euro continues to be weak in 2015 relative to the U.S. dollar in comparison to 2014, the Company's performance will be negatively impacted as the European segment was the Company's main driver of profitability and cash flow in 2014. In addition, the Company must make Supplemental Executive Retirement Plan and deferred compensation payments of approximately $24,700,000 in 2015 as the result of the retirement of four senior executives during 2014 which will negatively impact operating cash flows for the Company. Accordingly, the Company will monitor and manage cash flow particularly closely in 2015 while working diligently toward improving the profitability of the North America/HME and Asia/Pacific businesses, and continuing its quality systems remediation.

In January 2015, the Company finalized its New Credit Agreement which provides for an asset-based lending senior secured revolving credit facility which matures in January 2018. The New Credit Agreement provides the Company with the ability to borrow up to an aggregate principal amount of $100 million under the related Credit Facility, which includes a senior secured revolving credit, letter of credit and swing line loan facility. The aggregate borrowing availability under the Credit Facility is determined based on a borrowing base formula set forth in the New Credit Agreement. See “Subsequent Event” in the Notes to the Condensed Consolidated Financial Statements. Continued compliance with the Company's credit agreements is a high priority, which means the Company remains focused on generating sufficient cash and managing its expenditures. The Company also may examine alternatives such as raising additional capital through permitted asset sales or sale leaseback transactions. Such alternatives, if available on terms satisfactory to the Company, could be dilutive to the Company's results.

As described elsewhere in this Annual Report on Form 10-K, for the fiscal quarter and the fiscal year ended December 31, 2014, the Company had a net loss from continuing operations of $0.21 per share and $2.15 per share, respectively. These results are indicative of the pressures on the Company's net sales and margins that were present throughout 2014. During 2014, the net sales of the Company’s North America/HME segment were negatively impacted by external factors principally related to National Competitive Bidding (NCB). Lifestyle products in this segment were primarily impacted by a shift toward lower cost products that are subject to the Centers for Medicare and Medicaid Services’ National Competitive Bidding (NCB) program and pre- and post-payment audits. The Company is addressing its product portfolio in an effort to minimize declines in this product segment into 2015. In addition, the Company continued to closely monitor the roll-out of NCB, which is effective in 100 metropolitan statistical areas (MSAs) of the United States.

The Company estimates that, for the full year of 2014, approximately $299,000,000 in net sales of its U.S. HME equipment business, the major division within the North America/HME segment, were products sold to homecare providers that were included

I-40


in the competitive bidding product categories. When the Company's products are ordered by homecare providers, the Company is not informed as to whether the provider is paid for the product through Medicare, Medicaid or private pay reimbursement or through direct cash sales. However, industry studies have shown historically that approximately 40% of HME providers' revenues on average are from sales paid by Medicare. Additionally, it is estimated that the 100 MSA's which implemented NCB, account for approximately 50% of Medicare's spending on durable medical equipment. Taking the $299,000,000 of U.S. HME net sales for the full year of 2014 of NCB bid categorized product and applying the previously mentioned 40% and then the 50% estimates, the Company's revenues from products potentially exposed to NCB could be approximately $60,000,000. By January 1, 2016, CMS expects to begin expanding NCB to 100% of the Medicare population. It also is worth noting that this estimate does not include other potential pricing pressures that also could impact homecare providers from other payors. The impact of NCB on net sales is hard to measure, as the Company does not have zip code level visibility into customers' sales, rental data or Medicare fulfillment data. The Company continues to remain judicious in its extension of credit to customers in these areas. The Company has worked closely with providers in recent years in preparation for NCB, offering programs to assist them in improving their operational efficiency, as well as offering products that serve to expand market opportunities. The Company believes that products such as the HomeFill® oxygen systems can enable providers an opportunity to reduce costs and transform their business model.

The Company does not expect to experience significant increased net sales in the North America/HME segment for custom power wheelchairs and seating systems until it has successfully completed the previously described third-party expert certification audit and FDA inspection and has received written notification from the FDA that the Company may resume full operations at its corporate and Taylor Street manufacturing facilities. Regarding products manufactured at the Taylor Street facility, which have been impacted by the Company's consent decree with the FDA and include some products sold outside of the North America/HME segment, net sales were approximately $43.2 million in 2014 compared to approximately $55.5 million in 2013. Even if the Company receives the FDA notification that it may resume full operations at its Taylor Street facility, it is uncertain as to whether, or how quickly, the Company will be able to rebuild net sales, irrespective of market conditions, to more typical historical levels such as when Taylor Street production accounted for approximately $172 million and $147 million in net sales in 2011 and 2012, respectively. Accordingly, the Company expects that these challenges are likely to pressure the Company's operating results in 2015.

See “Contingencies” in the Notes to the Condensed Consolidated Financial Statements and “Forward-Looking Statements” included in this Annual Report on Form 10-K.

DISCONTINUED OPERATIONS

On December 21, 2012, in order to focus on its core equipment product lines, the Company entered into an agreement to sell ISG and determined on that date that the "held for sale" criteria of ASC 360-10-45-9 were met. On January 18, 2013, the Company completed the sale of the ISG medical supplies business to AssuraMed, Inc. for a purchase price of $150,800,000 in cash. ISG had been operated on a stand-alone basis and reported as a reportable segment of the Company. The Company recorded a gain of $59,402,000 pre-tax in 2013 which represented the excess of the net sales price over the book value of the assets and liabilities of ISG, excluding cash. The sale of this business was dilutive to the Company's results. The Company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the first quarter of 2013.

The net sales of the discontinued operation of ISG were $18,498,000 and $341,606,000 for 2013 and 2012, respectively. Earnings before income taxes for the discontinued operation of ISG were $402,000 and $16,238,000 for 2013 and 2012, respectively.

On January 17, 2014, the Company received a claim for approximately $1,352,000 from the acquirer of ISG. The claim alleged a breach of the purchase agreement, specifically that the inventories sold were not entirely useable or saleable in the ordinary course of business. The Company believes this claim is without merit and intends to contest this claim vigorously. As of the date of this filing, the Company is unable to estimate the outcome of this matter.

On August 6, 2013, the Company sold Champion, its domestic medical recliner business for dialysis clinics, to Champion Equity Holdings, LLC for $45,000,000 in cash, which was subject to final post-closing adjustments. Champion had been operated on a stand-alone basis and reported as part of the IPG segment of the Company. The Company recorded a gain of $22,761,000 pre-tax in the third quarter of 2013, which represented the excess of the net sales price over the book value of the assets and liabilities of Champion. The sale of this business was dilutive to the Company's results. The Company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the third quarter of 2013. The gain recorded by the Company reflects the Company's estimated final purchase adjustments.


I-41


The assets and liabilities of Champion were the following as of the date of the sale, August 6, 2013 (in thousands):
 
 
August 6,
2013
Trade receivables, net
 
$
3,030

Inventories, net
 
1,689

Other current assets
 
92

Property and Equipment, net
 
309

Goodwill
 
16,277

Assets sold
 
$
21,397

 
 
 
Accounts payable
 
$
936

Accrued expenses
 
352

Liabilities sold
 
$
1,288


The net sales of the discontinued operation of Champion were $15,857,000 and $22,767,000 for 2013 and 2012, respectively. Earnings before income taxes for the discontinued operation of Champion were $3,156,000 and $4,274,000, respectively. Results for Champion include an interest expense allocation from continuing operations to discontinued operations of $449,000 and $792,000, respectively, as proceeds from the sale were required to be utilized to pay down debt. The interest allocation was based on the net proceeds assumed to pay down debt applying the Company's average interest rates for the periods presented.

In addition, in accordance with ASC 350, when a portion of a reporting entity that constitutes a business is disposed of, goodwill associated with that business should be included in the carrying amount of the net assets of the business sold in determining the gain or loss on the disposal. As such, the Company allocated additional goodwill of $16,205,000 to Champion from the continuing operations of the IPG segment based on the relative fair value of Champion as compared to the remaining IPG reporting unit.

On August 29, 2014, the Company sold Altimate Medical, Inc. (Altimate), its manufacturer of stationary standing assistive devices for use in patient rehabilitation, to REP Acquisition Corporation for $23,000,000 in cash, which is subject to final post-closing adjustments. Altimate had been operated on a stand-alone basis and reported as part of the North America/HME segment of the Company. The Company recorded a gain of $17,069,000 pre-tax in the third quarter of 2014, which represented the excess of the net sales price over the book value of the assets and liabilities of Altimate. The sale of this business was dilutive to the Company's results. The Company utilized the proceeds from the sale to reduce debt outstanding under its revolving credit facility in the third quarter of 2014. The gain recorded by the Company reflects the Company's estimated final purchase adjustments.

The assets and liabilities of Altimate were the following as of the date of the sale, August 29, 2014, and as of December 31, 2013 (in thousands):
 
 
August 29,
2014
 
December 31,
2013
Trade receivables, net
 
$
2,019

 
$
2,055

Inventories, net
 
1,954

 
1,703

Other current assets
 
246

 
10

Property and Equipment, net
 
176

 
181

Other Intangibles
 
1,047

 
1,530

Assets sold
 
$
5,442

 
$
5,479

 
 
 
 
 
Accounts payable
 
$
425

 
$
544

Accrued expenses
 
316

 
220

Liabilities sold
 
$
741

 
$
764


The net sales of the Altimate discontinued operations were $11,778,000, $17,854,000 and $16,876,000 for 2014, 2013 and 2012, respectively, and earnings before income taxes were $2,796,000, $5,118,000 and $4,628,000, respectively for the same periods. Results for Altimate include an interest expense allocation from continuing operations to discontinued operations of

I-42


$202,000, $323,000 and $378,000 for 2014, 2013 and 2012, respectively, as proceeds from the sale were required to be utilized to pay down debt. The interest allocation was based on the net proceeds assumed to pay down debt applying the Company's average interest rates for the periods presented.

The Company recorded total expenses related to the discontinued operations noted above of $8,801,000, of which $7,790,000 were paid as of December 31, 2014.

The Company recorded an incremental intra-period tax allocation expense to discontinued operations for 2014 and 2013 representing the cumulative intra-period allocation expense to discontinued operations based on the Company's domestic taxable loss related to continuing operations for 2014 and 2013.

The Company has classified ISG, Champion and Altimate as a discontinued operations for all periods presented. Unless otherwise noted, the following discussion of the Company and its segments exclude the discontinued operations of ISG, Champion and Altimate.

RESULTS OF CONTINUING OPERATIONS

2014 Versus 2013

Net Sales. Consolidated net sales for 2014 decreased 4.8% for the year, to $1,270,163,000 from $1,334,505,000 in 2013. Foreign currency translation increased net sales by 0.2 of a percentage point. Organic net sales decreased 5.0% as a result of declines in the North America/HME, IPG and Asia/Pacific segments being offset by increases in the European segment.

Europe

European net sales increased 4.7% in 2014 compared to the prior year to $610,555,000 from $583,143,000 as foreign currency translation increased net sales by 1.1 percentage points. Organic net sales increased 3.6% principally due to increases in lifestyle and mobility and seating products, which were partially offset by declines in respiratory products.

 
North America/Home Medical Equipment (North America/HME)

North America/HME net sales decreased 13.8% in 2014 versus the prior year to $507,867,000 from $589,240,000 with foreign currency translation decreasing net sales by 0.5 of a percentage point. The organic net sales decrease of 13.3% was driven by declines in all product categories. The net sales decline in respiratory products is primarily attributable to a significant shipment of Invacare® HomeFill® oxygen systems to a large national account in 2013 that did not repeat in 2014. The net sales decline in lifestyle products was primarily impacted by a shift toward lower cost products for certain lifestyle products that are subject to the Centers for Medicare and Medicaid Services' National Competitive Bidding program and pre- and post-payment audits. The net sales decline in mobility and seating products was primarily driven by reduced net sales of scooter products, which the Company decided to exit domestically. In addition, the mobility and seating product category continued to be impacted by the FDA consent decree, which limits production of custom power wheelchairs and seating systems at the Taylor Street manufacturing facility to products having properly completed verification of medical necessity (VMN) documentation. The VMN is a signed document from a clinician, and in some instances a physician, that certifies that the product is deemed medically necessary for a particular patient's condition, which cannot be adequately addressed by another manufacturer's product or which is a replacement of the patient's existing product.

Institutional Products Group (IPG)

IPG net sales decreased 8.5% in 2014 over the prior year to $102,796,000 from $112,290,000 with foreign currency translation decreasing sales by 0.3 of a percentage point. The organic net sales decrease of 8.2% was driven primarily by declines in all product categories except therapeutic support surfaces and patient transport products.

 Asia/Pacific

Asia/Pacific net sales decreased 1.8% in 2014 from the prior year to $48,945,000 from $49,832,000. Foreign currency translation decreased net sales by 1.4 percentage points. Organic net sales decreased 0.4% largely due to declines at the Company's subsidiary that produces microprocessor controllers primarily related to its decision to exit the contract manufacturing business for customers outside of the healthcare industry. This was partially offset by growth in the Company's Australian distribution

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business. Changes in exchange rates, particularly with the Euro and U.S. Dollar, have had, and may continue to have, a significant impact on sales in this segment.
 
Gross Profit. Consolidated gross profit as a percentage of net sales was 27.3% in 2014 as compared to 27.5% in 2013. The margin decline was principally related to reduced volumes, sales mix favoring lower margin product lines and lower margin customers and an incremental warranty expense related to three recalls. Gross profit as a percentage of net sales for the Europe, IPG and Asia/Pacific segments was favorable as compared to the prior year with the North America/HME segment unfavorable compared to the prior year. The 2014 gross margin reflects an incremental warranty expense for three previously disclosed recalls of $11,493,000 or 0.9 of a percentage point. The incremental warranty expense was recorded in the North America/HME, Europe and Asia/Pacific reporting segments. The Company's warranty reserve is subject to adjustment as new developments change the Company's estimates. The 2013 gross margin reflects an incremental warranty expense for a power wheelchair joystick recall of $7,264,000 or 0.5 of a percentage point. The incremental warranty expense was recorded in the North America/HME and Asia/Pacific reporting segments. In addition, the 2013 gross margin benefited by $1,389,000 or 0.1 of a percentage point, related to an amended value added tax (VAT) filing recognized in the European segment.

Gross profit in Europe as a percentage of net sales increased 1.0 percentage point in 2014 from the prior year. The increase in margin was principally due to favorable customer and product mix and lower product costs partially offset by increased warranty and freight expense. The 2014 gross margin reflects an incremental warranty expense of $3,395,000 pre-tax or 0.6 of a percentage point for a previously disclosed recall. Gross margin in 2013 benefited by $1,389,000 or 0.2 of a percentage point, related to an amended VAT filing recognized in the fourth quarter of 2013.
 
North America/HME gross profit as a percentage of net sales decreased 2.5 percentage points in 2014 from the prior year. The decline in margins was principally due to an unfavorable sales mix favoring lower margin products, increased warranty expense and asset write-offs attributable to canceled product launches. The 2014 gross margin reflects an incremental recall expense of $6,833,000 or 1.3 of a percentage point for three recalls compared to $2,625,000 or 0.4 of a percentage point for the joystick recall initiated in 2013.

IPG gross profit as a percentage of net sales increased 0.9 of a percentage point in 2014 from the prior year. The increase in margin is primarily attributable to lower R&D and warranty expense.

Gross profit in Asia/Pacific as a percentage of net sales increased 2.4 percentage points in 2014 from the prior year. The increase was primarily as a result of reduced warranty expense and a favorable product mix related to the Company's decision to exit the contract manufacturing business for customers outside of the healthcare industry partially offset by unfavorable absorption of fixed costs at the Company's subsidiary which produces microprocessor controllers. The 2014 gross margin reflects an incremental warranty expense for the power wheelchair joystick recall of $1,265,000 pre-tax, or 2.6 percentage points compared an incremental warranty expense for the power wheelchair joystick recall of $4,639,000 pre-tax, or 9.3 percentage points, recorded in 2013.

See “Current Liabilities” in the Notes to the Consolidated Financial Statements included elsewhere in this report for the total provision amounts and a reconciliation of the changes in the warranty accrual.

Selling, General and Administrative. Consolidated selling, general and administrative (SG&A) expenses as a percentage of net sales were 30.2% in 2014 and 29.8% in 2013. The overall dollar decrease was $13,419,000, or 3.4%, with foreign currency translation increasing expense by $85,000. Excluding the impact of foreign currency translation, SG&A expenses decreased $13,504,000, or 3.4%. This decrease is primarily attributable to reduced associate, bad debt and consulting expense, including lower regulatory and compliance costs related to quality systems improvements.

European SG&A expenses increased by 5.2%, or $6,917,000, in 2014 compared to 2013. Foreign currency translation increased expense by approximately $1,569,000 or 1.2 percentage points. Excluding the foreign currency translation impact, SG&A expenses increased by $5,348,000, or 4.0%, primarily due to higher associate costs.

SG&A expenses for North America/HME decreased 8.3%, or $16,415,000, in 2014 compared to 2013 with foreign currency translation decreasing expense by $1,009,000 or 0.5 of a percentage point. Excluding the foreign currency translation, SG&A expense decreased $15,406,000, or 7.8%, due principally to reduced associate, bad debt and consulting expense, including lower regulatory and compliance costs related to quality systems improvements.

SG&A expenses for IPG decreased by 6.5%, or $2,862,000, in 2014 compared to 2013 with foreign currency translation decreasing expense by $144,000, or 0.3 of a percentage point. Excluding the impact of foreign currency translation, SG&A expenses decreased by $2,718,000, or 6.2%, primarily due to reduced associate costs. 

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Asia/Pacific SG&A expenses decreased 4.7%, or $1,059,000, in 2014 compared to 2013. Foreign currency translation decreased expense by $331,000 or 1.5 percentage points. Excluding the foreign currency translation impact, SG&A expenses decreased $728,000, or 3.2%, principally as a result of reduced associate costs and depreciation expense.

 Asset write-downs to intangible assets. In accordance with ASC 350, Intangibles - Goodwill and Other, the Company reviews intangibles for impairment. As a result of the Company's 2014 intangible review, the Company recognized intangible write-down charges in the IPG segment of $13,041,000 comprised of a customer list impairment of $12,826,000 and a non-compete agreement of $215,000 as the actual and remaining cash flows associated with the intangibles were less than the cash flows originally used to value the intangibles, primarily driven by reduced net sales. The after-tax and pre-tax impairment amounts were the same for each of the above impairments.

As a result of the Company's 2013 intangible impairment review, the Company recognized intangible write-down charges of $1,523,000 comprised of trademarks with indefinite lives impairment of $568,000, a trademark with a definite life impairment of $123,000, customer list impairment of $442,000 and developed technology impairment of $223,000 all recorded in the IPG segment and a customer list impairment of $167,000 recorded in the North America/HME segment. The after-tax and pre-tax impairment amounts were the same for each of the above impairments except for the indefinite-lived trademark impairments in the IPG segment, which were $496,000 after-tax.

 Charge Related to Restructuring Activities. The Company's restructuring charges were necessitated primarily by continued declines in Medicare and Medicaid reimbursement by the U.S. government, as well as similar healthcare reimbursement pressures abroad, which negatively affect the Company's customers (e.g. home health care providers) and continued pricing pressures faced by the Company as a result of outsourcing by competitors to lower cost locations. In addition, restructuring decisions were also the result of reduced profitability in the North America/HME segment impacted by the FDA consent decree. While the Company's restructuring efforts have been executed on a timely basis resulting in operating cost savings, the savings have been more than offset by continued margin decline, principally as a result of product mix, reduced volumes and regulatory and compliance costs related to quality system improvements which are unrelated to the restructuring actions. The Company expects any near-term cost savings from restructuring will be offset by other costs as a result of pressures on the business.

Charges for the year ended December 31, 2014 totaled $11,112,000 including charges for severance ($9,841,000), other charges in IPG and Europe ($1,286,000) principally related to building write-downs and lease termination cost reversals ($15,000). Severance charges were incurred in the North America/HME segment ($4,404,000), Other ($2,978,000), IPG segment ($1,163,000), Asia/Pacific segment ($769,000) and Europe segment ($527,000). The North America/HME segment severance was principally related to additional positions eliminated due to lost sales volumes resulting from the impact of the FDA consent decree. The Other severance related to the elimination of two senior corporate executive positions. IPG segment severance related principally to the closure of the London, Ontario facility. Europe and Asia/Pacific severance related to the elimination of certain positions as a result of general restructuring efforts. The costs related to the building write-downs related to two plant closures. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the Company. Payments for the year ended December 31, 2014 were $11,131,000 and were funded with operating cash flows and the Company's revolving credit facility. The majority of the 2014 charges are expected to be paid out within the next 12 months.

Charges for the year ended December 31, 2013 totaled $9,336,000, including charges for severance ($8,282,000), lease termination costs ($698,000) and other miscellaneous charges ($356,000). Severance charges were primarily incurred in the North America/HME segment ($5,405,000), Europe segment ($1,640,000) and Asia/Pacific segment ($970,000). The charges were incurred as a result of the elimination of various positions as part of the Company's globalization initiatives. North America/HME segment severance was principally related to positions eliminated due to lost sales volumes resulting from the impact of the FDA consent decree. In Europe, severance was incurred for elimination of certain sales and supply chain positions. In Asia/Pacific, severance was principally incurred at the Company's subsidiary, which produces microprocessor controllers, as a result of the Company's decision in 2012 to cease the contract manufacturing business for companies outside of the healthcare industry. The lease termination costs were principally related to Australia as a result of the restructuring announced in 2012. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the Company. Payments for the year ended December 31, 2013 totaled were $11,844,000 and were funded with operating cash flows and the Company's revolving credit facility. The 2013 charges have been paid out.

To date, the Company's liquidity has not been materially impacted; however, the Company's disclosure in Liquidity and Capital Resources highlights risks that could negatively impact the Company's liquidity. See also "Charges Related to Restructuring Activities" in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.


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Interest. Interest expense decreased to $3,039,000 in 2014 from $3,078,000 in 2013, representing a 1.3% decrease. This decrease was attributable primarily to debt reduction during the year as proceeds from the sale of a business were utilized to reduce debt, which was principally offset by higher borrowing rates and reduced supplier cash discounts. Interest income in 2014 was $507,000 as compared to $384,000 in 2013, primarily due to interest income earned in Europe on a VAT receivable.

Income Taxes. The Company had an effective tax rate of 8.8% in 2014 compared to an expected benefit of 35% on the continuing operations pre-tax loss and 25.0% in 2013 compared to an expected benefit of 35% on the pre-tax loss from continuing operations. The Company's effective tax rate in 2014 was unfavorable to the expected U.S. federal statutory rate benefit due to the negative impact of the Company not being able to record tax benefits related to losses in countries which had tax valuation allowances for the year, except in the U.S. where a benefit of $7,175,000 was recognized as an intra-period allocation with discontinued operations against a portion of the domestic taxable loss from continuing operations, more than offsetting the benefit of foreign income taxed at rates below the U.S. statutory rate. The Company's effective tax rate in 2013 was unfavorable to the expected U.S. federal statutory rate benefit due to the negative impact of the Company not being able to record tax benefits related to losses in countries which had tax valuation allowances for the year, except in the U.S. where a benefit of $3,445,000 was recognized as an intra-period allocation with discontinued operations, more than offsetting the benefit of foreign income taxed at rates below the U.S. statutory rate. In 2013, the Company's losses without benefit and valuation allowances existed in the United States, Australia and New Zealand, and for 2014 also existed for one company in Switzerland. During 2013 a Danish valuation allowance of $390,000 was reversed due to a pattern of profitability. See “Income Taxes” in the Notes to the Consolidated Financial Statements included elsewhere in this report for more detail.
 
Research and Development. The Company continues to invest in research and development activities to maintain its competitive advantage. The Company dedicates funds to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures, which are included in costs of products sold, increased to $23,149,000 in 2014 from $24,075,000 in 2013. The expenditures, as a percentage of net sales, were 1.8% and 1.8% in 2014 and 2013, respectively.


2013 Versus 2012

Net Sales. Consolidated net sales for 2013 decreased 5.7% for the year, to $1,334,505,000 from $1,415,818,000 in 2012. Foreign currency translation increased net sales by 0.8 of a percentage point. Organic net sales decreased 6.5% as a result of increases for the European segment being more than offset by declines for all other segments.
 
North America/Home Medical Equipment (North America/HME)

North America/HME net sales decreased 12.8% in 2013 versus the prior year to $589,240,000 from $675,782,000 with foreign currency translation decreasing net sales by 0.2 of a percentage point. The organic net sales decrease of 12.6% was primarily driven by declines in the mobility and seating and lifestyle products partially offset by increases in respiratory products. The increase in respiratory product was partially driven by a large order of HomeFill® oxygen systems by a national account which was fulfilled in 2013. The sales decline in mobility and seating products was primarily driven by the impact of the FDA consent decree, which limits sales of mobility products from the Taylor Street manufacturing facility to products having properly completed VMN documentation.

Institutional Products Group (IPG)

IPG net sales decreased 11.2% in 2013 to $112,290,000 from $126,508,000 in the prior year. Foreign currency translation had no material impact on net sales. The organic net sales decrease of 11.1% was driven primarily by declines in all product categories as a result of delay in new product introductions and higher volume in 2012 for interior design projects.

Europe

European net sales increased 6.7% in 2013 to $583,143,000 from $546,543,000 as foreign currency translation increased net sales by 2.3 percentage points. Organic net sales increased 4.4 percentage points, principally due to increases in lifestyle and mobility and seating products partially offset by a decline in respiratory products.
 
Asia/Pacific

Asia/Pacific net sales decreased 25.6% in 2013 to $49,832,000 from $66,985,000 in the prior year. Foreign currency translation decreased net sales by 1.4 percentage points. Organic net sales decreased 24.2%. The decline in the Company's subsidiary

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which produces microprocessor controllers was primarily related to its decision to exit the contract manufacturing business for companies outside of the healthcare industry, as well as reduced sales of electronic components for mobility products. The Company's Australian and New Zealand distribution businesses experienced a decline in net sales, primarily in lifestyle and mobility and seating products. Changes in exchange rates, particularly with the Euro and U.S. Dollar, have had, and may continue to have, a significant impact on sales in this segment.

Gross Profit. Consolidated gross profit as a percentage of net sales was 27.5% in 2013 as compared to 30.2% in 2012. The margin decline was principally related to reduced volumes, sales mix favoring lower margin product lines and lower margin customers and an incremental warranty expense related to a power wheelchair recall. Gross profit as a percentage of net sales for the Europe and IPG segments was favorable as compared to the prior year with North America/HME and Asia/Pacific segments unfavorable to the prior year. The 2013 gross margin reflected an incremental warranty expense for a power wheelchair joystick recall of $7,264,000 or 0.5 of a percentage point. The incremental warranty expense was recorded in the North America/HME and Asia/Pacific reporting segments. The customer response to the joystick recall, which officially launched in October 2013, surpassed the anticipated response rate, which was based on historic recalls, and accordingly the reserve was adjusted in the fourth quarter of 2013. The reserve is subject to adjustment as new developments change the Company's estimate of the total cost of this matter. The 2013 gross margin benefited by $1,389,000 or 0.1 of a percentage point, related to an amended VAT filing recognized in the European segment.
 
North America/HME gross profit as a percentage of net sales decreased by 6.0 percentage points in 2013 from the prior year. The decline in margins was principally due to an unfavorable sales mix favoring lower margin customers and product lines and unfavorable absorption of fixed costs at the Taylor Street manufacturing facility as a result of reduced volumes resulting principally from the impact of the FDA consent decree. The 2013 decrease in gross margin reflected an incremental warranty expense for the power wheelchair joystick recall of $2,625,000 pre-tax or 0.4 of a percentage point.   
 
IPG gross profit as a percentage of net sales increased 2.5 percentage points in 2013 from the prior year. The increase in margin was primarily attributable to favorable product mix toward high margin products and reduced freight costs, partially offset by lower volumes.
 
Gross profit in Europe as a percentage of net sales increased 1.1 percentage points in 2013 from the prior year. The increase was primarily a result of higher sales volumes as well as reduced purchasing and freight costs. Gross margin in 2013 also benefited by $1,389,000 or 0.2 of a percentage point, related to an amended VAT filing recognized in the fourth quarter of 2013.
 
Gross profit in Asia/Pacific as a percentage of net sales decreased 16.1 percentage points in 2013 from the prior year. The decline was primarily as a result of the significant volume declines in each of the businesses in this segment, higher warranty expense and increased research and development expenses. The 2013 gross margin reflected an incremental warranty expense for the power wheelchair joystick recall of $4,639,000 pre-tax, or 9.3 percentage points.

See “Current Liabilities” in the Notes to the Consolidated Financial Statements included elsewhere in this report for the total provision amounts and a reconciliation of the changes in the warranty accrual.
 
Selling, General and Administrative. Consolidated selling, general and administrative (SG&A) expenses as a percentage of net sales were 29.8% in 2013 and 28.7% in 2012. The overall dollar decrease was $9,491,000, or 2.3%, with foreign currency translation increasing expenses by $1,613,000, or 0.4 of a percentage point. Excluding the impact of foreign currency translation, SG&A expenses decreased $11,104,000, or 2.7%. This decrease was primarily attributable to decreased regulatory and compliance costs related to quality systems improvements.
 
SG&A expenses for North America/HME decreased 4.5%, or $9,297,000, in 2013 compared to 2012 with foreign currency translation decreasing SG&A expense by $546,000. Excluding the foreign currency translation, SG&A expense decreased $8,751,000, or 4.2%, primarily due to increased associate costs.

SG&A expenses for IPG increased by 2.5%, or $1,079,000, in 2013 compared to 2012 with foreign currency translation decreasing expense by $47,000, or 0.1 of a percentage point. Excluding the impact of foreign currency translation, SG&A expenses increased by $1,126,000, or 2.6%, primarily due to increased associate costs.
 
European SG&A expenses increased by 6.3%, or $7,876,000, in 2013 compared to 2012. Foreign currency translation increased SG&A expenses by approximately $2,712,000. Excluding the foreign currency translation impact, SG&A expenses increased by $5,164,000, or 4.1% primarily due to increased associate costs and unfavorable foreign currency transactions.
 

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Asia/Pacific SG&A expenses decreased 29.0%, or $9,149,000, in 2013 compared to 2012. Foreign currency translation decreased expenses by $506,000. Excluding the foreign currency translation impact, SG&A expenses decreased $8,643,000, or 27.4%, principally as a result of reduced personnel costs resulting from restructuring activities implemented in 2012.

 Asset write-downs to goodwill and intangible assets. In 2013, the Company recognized intangible write-down charges of $1,523,000 comprised of trademarks with indefinite lives impairment of $568,000, a trademark with a definite life impairment of $123,000, customer list impairment of $442,000 and developed technology impairment of $223,000 all recorded in the IPG segment and a customer list impairment of $167,000 recorded in the North America/HME segment. The after-tax and pre-tax impairment amounts were the same for each of the above impairments except for the indefinite-lived trademark impairments in the IPG segment, which were $496,000 after-tax.

In 2012, the Company recognized intangible write-down charges of $773,000 comprised of: trademark with an indefinite life impairment of $279,000 and developed technology impairment of $398,000 in the IPG segment and a patent impairment of $96,000 in the North America/HME segment. The pre-tax and after-tax impairment amounts were the same for each of the above impairments except for the trademark impairment in the IPG segment, which was $204,000 after-tax.

Debt Finance Charges and Fees. There were no debt extinguishments in 2013. In 2012, the Company extinguished $500,000 in principal amount of its outstanding 4.125% convertible senior subordinated debentures due in February 2027. This early debt extinguishment resulted in debt fees and premium expenses of $312,000 comprised of $301,000 of premiums paid and losses recorded as a result of early debt extinguishment and $11,000 of expense related to deferred financing fee write-offs, which were previously capitalized.

All of the debt finance charges and fees in 2012 are included in the All Other segment.

 Charge Related to Restructuring Activities. The Company's restructuring charges were necessitated primarily by continued declines in Medicare and Medicaid reimbursement by the U.S. government, as well as similar healthcare reimbursement pressures abroad, which negatively affect the Company's customers (e.g. home health care providers) and continued pricing pressures faced by the Company as a result of outsourcing by competitors to lower cost locations. In addition, restructuring decisions were also the result of reduced profitability in the North America/HME segment impacted by the FDA consent decree. While the Company's restructuring efforts were executed on a timely basis resulting in operating cost savings, the savings have been more than offset by continued margin decline, principally as a result of product mix, reduced volumes and other costs related to quality system improvements which are unrelated to the restructuring actions. The Company expects any near-term cost savings from restructuring will be offset by other costs as a result of pressures on the business.

Charges for the year ended December 31, 2013 totaled $9,336,000, including charges for severance ($8,282,000), lease termination costs ($698,000) and other miscellaneous charges ($356,000). Severance charges were primarily incurred in the North America/HME segment ($5,405,000), Europe segment ($1,640,000) and Asia/Pacific segment ($970,000). The charges were incurred as a result of the elimination of various positions as part of the Company's globalization initiatives. North America/HME segment severance was principally related to positions eliminated due to lost sales volumes resulting from the impact of the FDA consent decree. In Europe, severance was incurred for elimination of certain sales and supply chain positions. In Asia/Pacific, severance was principally incurred at the Company's subsidiary, which produces microprocessor controllers, as a result of the Company's decision in 2012 to cease the contract manufacturing business for companies outside of the healthcare industry. The lease termination costs were principally related to Australia as a result of the restructuring announced in 2012. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the Company. Payments for the year ended December 31, 2013 were $11,844,000 and were funded with operating cash flows and cash on hand. The 2013 charges have now been paid out.

Charges for the year ended December 31, 2012 totaled $11,395,000, including charges for severance ($6,775,000), lease termination costs ($1,725,000), building and asset write-downs, primarily related to the closure of the Hong, Denmark assembly facility, and other miscellaneous charges in Europe and Asia/Pacific ($2,404,000) and inventory write-offs ($491,000) in Asia/Pacific recorded in cost of products sold. Severance charges were primarily incurred in the North America/HME segment ($4,242,000), Asia/Pacific segment ($1,681,000) and Europe segment ($817,000). The charges were incurred as a result of the elimination of various positions as part of the Company's globalization initiatives. In addition, a portion of the North America/HME segment severance was related to positions eliminated, principally in sales and marketing as well as manufacturing, at the Company's Taylor Street facility as a result of the FDA consent decree. The savings from these charges will be reflected primarily in reduced selling, general and administrative expenses and manufacturing expenses for the Company. In Europe, positions were eliminated as a result of finalizing the exit from the manufacturing facility in Denmark and an elimination of a senior management position in Switzerland. In Asia/Pacific, at the end of October 2012, the Company's management approved a plan to restructure the Company's operations in this segment. In Australia, the Company consolidated offices / warehouses, decrease staffing and

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exited various activities while returning to a focus on distribution. At the Company's subsidiary, which produces microprocessor controllers, the Company decided to cease the contract manufacturing business for companies outside of the healthcare industry. Payments for the year ended December 31, 2012 were $9,381,000 and were funded with operating cash flows. The 2012 charges have now been paid out.

Interest. Interest expense decreased to $3,078,000 in 2013 from $7,739,000 in 2012, representing a 60.2% decrease. This decrease was attributable primarily to debt reduction during the year as proceeds from the sales of businesses were utilized to reduce debt. Interest income in 2013 was $384,000 as compared to $686,000 in 2012, primarily due to a reduction in volume of financing provided to customers.
  
 Income Taxes. The Company had an effective tax rate of 25.0% in 2013 compared to an expected benefit of 35% on the continuing operations pre-tax loss and 1,413.7% in 2012 on the pre-tax loss from continuing operations. The Company's effective tax rate in 2013 was unfavorable to the expected U.S. federal statutory rate benefit due to the negative impact of the Company not being able to record tax benefits related to losses in countries which had tax valuation allowances for the year, except in the U.S. where a benefit of $3,445,000 was recognized as an intra-period allocation with discontinued operations, more than offsetting the benefit of foreign income taxed at rates below the U.S. statutory rate. The Company's effective tax rate in 2012 was higher than the expected U.S. federal statutory rate due to the negative impact of the Company not being able to record tax benefits related to losses in countries which had tax valuation allowances for the year, except in the U.S. where a benefit of $9,230,000 was recognized as an intra-period allocation with discontinued operations against a portion of the domestic taxable loss from continuing operations, more than offsetting the benefit of foreign income taxed at rates below the U.S. statutory rate. In 2012, the Company also recorded a foreign discrete tax adjustment of $9,336,000 including interest related to prior year periods under audit, which is being contested by the Company. In 2013, the Company's losses without benefit and valuation allowances existed in the United States, Australia and New Zealand, and for 2012 also existed for Denmark. During 2013 the Danish valuation allowance of $390,000 was reversed due to a pattern of profitability. See “Income Taxes” in the Notes to the Consolidated Financial Statements included elsewhere in this report for more detail.
 
Research and Development. Research and development expenditures, which are included in costs of products sold, decreased to $24,075,000 in 2013 from $23,851,000 in 2012. The expenditures, as a percentage of net sales, were 1.8% and 1.7% in 2013 and 2012, respectively.
INFLATION 
Although the Company cannot determine the precise effects of inflation, management believes that inflation does continue to have an influence on the cost of materials, salaries and benefits, utilities and outside services. The Company attempts to minimize or offset the effects through increased sales volumes, capital expenditure programs designed to improve productivity, alternative sourcing of material and other cost control measures.
LIQUIDITY AND CAPITAL RESOURCES

The Company continues to maintain an adequate liquidity position through its unused bank lines of credit (see Long-Term Debt in the Notes to Consolidated Financial Statements included in this report) and working capital management.

The Company's total debt outstanding, inclusive of the debt discount included in equity in accordance with FSB APB 14-1, decreased by $25,652,000 to $22,343,000 at December 31, 2014 from $47,995,000 as of December 31, 2013. The Company's balance sheet reflects the impact of ASC 470-20, which reduced debt and increased equity by $1,999,000 and $2,709,000 as of December 31, 2014 and December 31, 2013, respectively. The debt discount decreased $710,000 during 2014, as a result of amortization of the convertible debt discount. The debt decrease during the year was principally the result of using the proceeds from the sale of Altimate in the third quarter of 2014 to reduce debt outstanding under the Company's revolving credit facility. The Company's cash and cash equivalents were $38,931,000 at December 31, 2014 compared to $29,785,000 at December 31, 2013. At December 31, 2014, the Company had $4,000,000 outstanding on its revolving credit facility compared to $28,109,000 as of December 31, 2013.

During 2014, the Company's borrowing capacity and cash on hand were utilized for normal operations. Debt repurchases, acquisitions, divestitures, the timing of vendor payments, the granting of extended payment terms to significant national accounts and other activity can have a significant impact on the Company's cash flow and borrowings outstanding such that the debt reported at the end of a given period may be materially different than debt levels during a different given period. During 2014, the outstanding borrowings on the Company's revolving credit facility varied from a low of $4,000,000 to a high of $66,300,000. While the Company has cash balances in various jurisdictions around the world, there are no material restrictions regarding the use of such cash for dividends within the Company, loans or other purposes, except in China where the cash balance as of December 31, 2014 was approximately $4,800,000.

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On January 31, 2014, the Company entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") which contained certain covenants relating to, among other things, financial reporting and notification, compliance with laws, preservation of existence, maintenance of books and records, use of proceeds, maintenance of properties and insurance, and limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions, transactions with affiliates, and capital expenditures. There also were financial covenants that required the Company to maintain a maximum leverage ratio (consolidated funded indebtedness to consolidated EBITDA, each as defined in the Amended and Restated Credit Agreement, as amended) and a minimum interest coverage ratio (consolidated EBITDA to consolidated interest charges, each as defined in the Amended and Restated Credit Agreement, as amended). The Company incurred $351,000 in fees in the first quarter of 2014 which were capitalized and are being amortized through October, 2015. In addition, as a result of reducing the capacity of the facility from $250,000,000 to $100,000,000 in the Amended and Restated Credit Agreement, the Company wrote-off $1,070,000 in previously capitalized fees in the first quarter of 2014, which was reflected in the expense of the North America / HME segment.

On September 30, 2014, the Company entered into a First Amendment to the Amended and Restated Credit Agreement (the "Amendment") which provided the Company with additional flexibility on its financial covenants through the duration of the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement, as amended by the Amendment, among other things, provided for the following:
An increase in the maximum leverage ratio for the first three quarters of 2014 and a ratio of 3.50 to 1.00 as of December 31, 2014. The quarterly minimum interest coverage ratio remained 3.5 to 1.00 in the Amended and Restated Credit Agreement.
In calculating the Company’s EBITDA for purposes of determining the leverage and interest coverage ratios, the Amended and Restated Credit Agreement allowed the Company to add back to EBITDA up to $20,000,000 for one-time cash restructuring charges incurred after May 30, 2013, which was an incremental increase of $5,000,000 from the terms of the Company's prior credit agreement. The Amendment on September 30, 2014 allowed for an additional add back to EBITDA for warranty expense accrued up to $10,000,000 and subtraction of related cash payments when made in future periods.
A decrease in the aggregate principal amount of the revolving credit facility to $100,000,000 from $250,000,000 through the maturity date of the facility in October 2015, as well as reductions in the facility’s swing line loan, optional currency and foreign-borrower sublimits.
Reductions in the allowances under the facility for capital expenditures (down to $25,000,000 annually), dividends, other indebtedness and liens.
An increase of 25 basis points in the margin applicable to determining the interest rate on borrowings under the revolving credit facility.
The Amended and Restated Credit Agreement also provided for the issuance of swing line loans with borrowings under the Credit Agreement bearing interest, at the Company's election, at (i) the London Inter-Bank Offer Rate (“LIBOR”) plus a margin; or (ii) a Base Rate Option plus a margin. The applicable margin, as of December 31, 2014, was 2.00% per annum for LIBOR loans and 1.00% for the Base Rate Option loans based on the Company's leverage ratio. In addition to interest, the Company was required to pay commitment fees on the unused portion of the Credit Agreement. The commitment fee rate, as of December 31, 2014, was 0.30% per annum. Like the interest rate spreads, the commitment fee was subject to adjustment based on the Company's leverage ratio. As of December 31, 2014, the obligations of the borrowers under the Credit Agreement were secured by substantially all of the Company's U.S. assets and were guaranteed by substantially all of the Company's material domestic and foreign subsidiaries.

As of December 31, 2014, the Company's leverage ratio was 1.59 and the Company's interest coverage ratio was 7.02 compared to a leverage ratio of 2.30 and an interest coverage ratio of 7.51 as of December 31, 2013. The December 31, 2014 leverage ratio reflects a net positive adjustment to adjusted EBITDA (as defined in the Amended and Restated Credit Agreement) of $8,228,000 as permitted under the provision of the Amendment allowing for the add back of warranty expense accruals up to $10,000,000 and the subtraction of related cash payments when paid. This net positive adjustment was comprised of warranty expense of $9,256,000 offset by cash payments of $1,028,000 related to the three specific product issues accrued for in the third quarter of 2014. As of December 31, 2014, the Company was in compliance with all covenant requirements and, under the most restrictive covenant of the Amended and Restated Credit Agreement, the Company had the capacity to borrow up to an additional $35,303,000.

On January 16, 2015, the Company entered into a Revolving Credit and Security Agreement (the “New Credit Agreement”). The proceeds of the New Credit Agreement were used to repay approximately $17,000,000 in aggregate principal amount of borrowings and terminate the Amended and Restated Credit Agreement, which was scheduled to mature in October 2015. As

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determined pursuant to the borrowing base formula, the Company’s initial aggregate borrowing base as of January 15, 2015 under the Credit Facility of the New Credit Agreement was approximately $76,000,000, with aggregate borrowing availability of approximately $57,000,000, taking into account the $10,000,000 minimum availability reserve, then outstanding letters of credit and other reserves. See Subsequent Events in the Notes to the Consolidated Financial Statements for more details regarding the New Credit Agreement.

The New Credit Agreement contains customary representations, warranties and covenants including dominion triggers requiring the Company to maintain borrowing capacity of not less than $11,250,000 on an given business day or $12,500,000 for 5 consecutive days. If the Company is unable to comply with the provisions in the New Credit Agreement, it could result in a default which could trigger acceleration of, or the right to accelerate, the related debt. Because of cross-default provisions in its agreements and instruments governing certain of the Company's indebtedness, a default under the New Credit Agreement could result in a default under, and the acceleration of, certain other Company indebtedness. In addition, the Company's lenders would be entitled to proceed against the collateral securing the indebtedness.

Based on the Company's current expectations, the Company believes that its cash balances, cash generated by operations and available borrowing capacity under its New Credit Agreement should be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. However, the Company's ability to satisfy its liquidity needs will depend on many factors, including the operating performance of the business, the Company's ability to successfully complete in a timely manner the third-party expert certification audit and FDA inspection contemplated under the consent decree and receipt of the written notification from the FDA permitting the Company to resume full operations, as well as the Company's compliance with the provisions under its New Credit Agreement. In addition, the Company must make SERP and deferred compensation payments of approximately $24,700,000 in 2015 as the result of the retirement of four senior executives during 2014 which will negatively impact operating cash flows for the Company. As of December 31, 2014, the Company has approximately $12,000,000 in life insurance policies that can be sold to partially fund these executive payments. Notwithstanding the Company's expectations, if the Company's operating results decline as the result of pressures on the business due to, for example, currency fluctuations or regulatory issues or the Company's failure to execute its business plans, the Company may be unable to comply with its obligations under the New Credit Agreement, and its lenders could demand repayment of the amounts outstanding under the Company's credit facility.

As a result, continued compliance with the Company's credit agreements is a high priority, which means the Company remains focused on generating sufficient cash and managing its expenditures. The Company also may examine alternatives such as raising additional capital through permitted asset sales or sales and leaseback of properties. Such items, if available on terms satisfactory to the Company, could be dilutive to the Company's results. In addition, if necessary and advisable, the Company may seek to renegotiate its New Credit Agreement in order to remain in compliance with its obligations. The Company can make no assurances that under such circumstances its financing arrangements could be renegotiated, or that alternative financing would be available on terms acceptable to the Company, if at all.

The Company's New Credit Agreement prohibits the Company from retiring or purchasing its 4.125% Convertible Senior Subordinated Debentures due 2027. The Company did not repurchase and extinguish any of its Convertible Senior Subordinated Debentures in 2014 or 2013 compared to repurchase and extinguishment of a principal amount of $500,000 in 2012. As of December 31, 2014, the Company had $13,350,000 remaining of Convertible Senior Subordinated Debentures.

While there is general concern about the potential for rising interest rates, the Company believes that its exposure to interest rate fluctuations is manageable. The Company has the ability to utilize swaps to exchange variable rate debt to fixed rate debt, if needed, and the Company's free cash flow should allow it to absorb any modest rate increases in the months ahead without any material impact on its liquidity or capital resources. As of December 31, 2014, the weighted average floating interest rate on revolving credit borrowing was 2.25% compared to 2.39% as of December 31, 2013.

CAPITAL EXPENDITURES

There are no individually material capital expenditure commitments outstanding as of December 31, 2014. The Company estimates that capital investments for 2015 will be approximately $15,000,000 compared to actual capital expenditures of $12,327,000 in 2014. The Company believes that its balances of cash and cash equivalents and existing borrowing facilities, will be sufficient to meet its operating cash requirements and fund required capital expenditures for the foreseeable future. On January 16, 2015, the Company entered into the New Credit Agreement which limits the Company's annual capital expenditures to $20,000,000.


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CASH FLOWS

Cash flows provided by operating activities were $8,892,000 in 2014, compared to $10,054,000 in the previous year. The decline in operating cash flows in 2014 was primarily attributable to a decline in net earnings excluding the gain on the sale of businesses in 2014 and 2013, which more than offset the net positive cash flow impact of working capital items with declines in receivables and increased payables partially offset by increased inventories.

Cash flows provided by investing activities were $33,582,000 in 2014, compared to cash flows provided by investing activities of $175,345,000 in 2013. Cash flows provided by investing activities in 2014 were driven by the proceeds from the sale of a business of $21,870,000. In addition, the Company sold life insurance assets of $21,338,000 in 2014 to fund payments as a result of the retirement of certain executives officers of the Company. The majority of the future payments are expected to be paid out by the end of the third quarter of 2015 which will negatively impact operating cash flows for the Company. Cash flows provided by investing activities in 2013 were primarily related to the proceeds from sale of two businesses of $187,552,000.

Cash flows used by financing activities in 2014 were $32,158,000 compared to $194,488,000 in 2013. The decrease in cash used was primarily attributable to repayment of debt.

During 2014, the Company generated free cash flow of $8,412,000 compared to free cash flow of $6,254,000 in 2013. The increase is due primarily to a decrease in the purchase of property and equipment. Free cash flow is a non-GAAP financial measure that is comprised of net cash provided by operating activities, excluding net cash impact related to restructuring activities, less net purchases of property and equipment, net of proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the Company and its ability to repay debt or make future investments (including acquisitions, etc.).

The non-GAAP financial measure is reconciled to the GAAP measure as follows (in thousands):
 
Twelve Months Ended
December 31,
 
2014
 
2013
Net cash provided by operating activities
$
8,892

 
$
10,054

Plus: Net cash impact related to restructuring activities
9,326

 
9,473

Less: Purchases of property and equipment—net
(9,806
)
 
(13,273
)
Free Cash Flow
$
8,412

 
$
6,254


CONTRACTUAL OBLIGATIONS

The Company’s contractual obligations as of December 31, 2014 are as follows (in thousands):
 
Payments due by period
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
4.125% Convertible Senior Subordinated Debentures due 2027
$
20,027

 
$
551

 
$
1,101

 
$
1,101

 
$
17,274

Revolving Credit Agreement due 2018
4,263

 
86

 
173

 
4,004

 

Operating lease obligations
44,815

 
18,549

 
18,956

 
6,204

 
1,106

Capital lease obligations
6,053

 
1,315

 
2,619

 
1,163

 
956

Purchase obligations (primarily computer systems contracts)
28,711

 
9,328

 
13,139

 
6,244

 

Product liability
23,194

 
4,334

 
9,103

 
4,238

 
5,519

Supplemental Executive Retirement Plan
27,584

 
21,517

 
782

 
782

 
4,503

Other, principally deferred compensation
8,250

 
3,583

 
310

 
293

 
4,064

Total
$
162,897

 
$
59,263

 
$
46,183

 
$
24,029

 
$
33,422


The table does not include any payments related to liabilities recorded for uncertain tax positions as the Company cannot make a reasonably reliable estimate as to the timing of any other payments. See Income Taxes in the Notes to the Consolidated Financial Statements included in this report.

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DIVIDEND POLICY

It is the Company’s policy to pay a nominal dividend in order for its stock to be more attractive to a broader range of investors. The current annual dividend rate remains at $0.05 per Common Share and $0.045 per Class B Common Share. It is not anticipated that this will change materially as the Company believes that capital should be kept available for use in growth opportunities through internal development and acquisitions. For 2014, annualized dividends of $0.05 per Common Share and $0.045 per Class B Common Share were declared and paid.

CRITICAL ACCOUNTING ESTIMATES

The Consolidated Financial Statements included in the report include accounts of the Company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related footnotes. In preparing 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 or services provided to unaffiliated customers. Revenue Recognition, ASC 605, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP and ASC 605. Shipping and handling costs are included in cost of goods sold.

Sales are made only to customers with whom the Company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.

The Company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The Company does not ship any goods on consignment.

Distributed products sold by the Company are accounted for in accordance with the revenue recognition guidance in ASC 605-45-05.