10-Q 1 tenq.htm tenq.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011

OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
           For the transition period from            to                                          

Commission File Number  001-15103

INVACARE CORPORATION
(Exact name of registrant as specified in its charter)

 Ohio
95-2680965
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No)
   
One Invacare Way, P.O. Box 4028, Elyria, Ohio
44036
(Address of principal executive offices)
(Zip Code)
   
  (440) 329-6000
  (Registrant's telephone number, including area code)
  
_____________________________________________________________
 (Former name, former address and former fiscal year, if changed since last report)
                       

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X   No__

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes        No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and ”small reporting company” in Rule 12b-2 of the Exchange Act. (Check One):   Large accelerated filer         Accelerated filer  X    Non-accelerated filer       (Do not check if a smaller reporting company)  Smaller reporting company     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes        No     X  

As of May 2, 2011, the registrant had 30,841,838 Common Shares and 1,084,747 Class B Common Shares outstanding.
 






 
 
 
 

 


INVACARE CORPORATION



 
Page No.
 
     
   
3
 
   
4
 
   
5
 
   
6
 
   
24
 
   
33
 
   
33
 
       
Item 1.  Legal Proceedings     33  
   
33
 
   
33
 
   
34
 
   
34
 





 
 
 
 
 
 
 

 
 
 



 Part I.
 Item 1. 

INVACARE CORPORATION AND SUBSIDIARIES

   
March 31,
2011
   
December 31,
2010
 
ASSETS
 
(In thousands)
 
CURRENT ASSETS
           
Cash and cash equivalents
 
$
32,632
   
$
48,462
 
Trade receivables, net
   
251,732
     
252,004
 
Installment receivables, net
   
4,686
     
3,959
 
Inventories, net
   
183,254
     
174,375
 
Deferred income taxes
   
6,151
     
5,778
 
Other current assets
   
43,137
     
41,581
 
TOTAL CURRENT ASSETS
   
521,592
     
526,159
 
                 
OTHER ASSETS
   
45,343
     
45,484
 
OTHER INTANGIBLES
   
72,286
     
70,911
 
PROPERTY AND EQUIPMENT, NET
   
131,332
     
130,763
 
GOODWILL
   
533,388
     
507,083
 
TOTAL ASSETS
 
$
1,303,941
   
$
1,280,400
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
 
$
145,756
   
$
143,753
 
Accrued expenses
   
123,311
     
130,079
 
Accrued income taxes
   
4,934
     
8,502
 
               Short-term debt and current maturities of long-term obligations
   
4,838
     
7,974
 
TOTAL CURRENT LIABILITIES
   
278,839
     
290,308
 
                 
LONG-TERM DEBT
   
242,016
     
238,090
 
OTHER LONG-TERM OBLIGATIONS
   
105,114
     
99,591
 
SHAREHOLDERS' EQUITY
               
Preferred shares
   
0
     
0
 
Common shares
   
8,423
     
8,401
 
Class B common shares
   
272
     
272
 
Additional paid-in-capital
   
230,876
     
231,685
 
Retained earnings
   
377,055
     
370,001
 
Accumulated other comprehensive earnings
   
146,569
     
112,631
 
Treasury shares
   
(85,223
)
   
(70,579
)
TOTAL SHAREHOLDERS' EQUITY
   
677,972
     
652,411
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,303,941
   
$
1,280,400
 
 
 
See notes to condensed consolidated financial statements.




 
 
 

 
 

INVACARE CORPORATION AND SUBSIDIARIES

   
Three Months Ended
March 31,
   
(In thousands except per share data)
 
2011
   
2010
   
Net sales
 
$
428,498
   
$
402,240
   
Cost of products sold
   
305,492
     
284,527
   
Gross profit
   
123,006
     
117,713
   
Selling, general and administrative expense
   
105,777
     
101,777
   
Loss on debt extinguishment including debt finance charges and associated fees
   
4,881
     
4,386
   
Interest expense
   
2,611
     
6,392
   
Interest income
   
(267
)
   
(148
)
 
Earnings before income taxes
   
10,004
     
5,306
   
Income taxes
   
2,550
     
2,200
   
NET EARNINGS
 
$
7,454
   
$
3,106
   
DIVIDENDS DECLARED PER COMMON SHARE
   
.0125
     
.0125
   
Net earnings per share – basic
 
$
0.23
   
$
0.10
   
Weighted average shares outstanding - basic
   
32,174
     
32,349
   
Net earnings per share – assuming dilution
 
$
0.23
   
$
0.09
   
Weighted average shares outstanding - assuming dilution
   
33,015
     
32,969
   
 
See notes to condensed consolidated financial statements.







 
 
 

 
 

INVACARE CORPORATION AND SUBSIDIARIES
 
   
Three Months Ended
 March 31,
 
   
2011
   
2010
 
OPERATING ACTIVITIES
 
(In thousands)
 
Net earnings
 
$
7,454
   
$
3,106
 
               Adjustments to reconcile net earnings  to net cash provided by operating activities:
               
Amortization of convertible debt discount
   
593
     
1,000
 
                     Loss on debt extinguishment including debt finance charges and associated fees
   
4,881
     
4,386
 
Depreciation and amortization
   
8,795
     
9,107
 
Provision for losses on trade and installment receivables
   
3,392
     
2,702
 
Provision for other deferred liabilities
   
694
     
602
 
Provision (benefit) for deferred income taxes
   
(233
   
275
 
Provision for stock-based compensation
   
1,412
     
1,557
 
Gain (loss) on disposals of property and equipment
   
158
     
(1
Changes in operating assets and liabilities:
               
Trade receivables
   
1,412
     
6,909
 
Installment sales contracts, net
   
(320
)
   
(511
)
Inventories
   
(4,660
)
   
(6,293
Other current assets
   
(316
)
   
4,804
 
Accounts payable
   
(575
)
   
(4,919
Accrued expenses
   
(15,278
)
   
(14,200
)
Other deferred liabilities
   
1,534
     
1,725
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
8,943
     
10,249
 
                 
INVESTING ACTIVITIES
               
Purchases of property and equipment
   
(3,353
)
   
(4,471
)
Proceeds from sale of property and equipment
   
14
     
6
 
Other long term assets
   
(206
)
   
786
 
Other
   
(161
)
   
(363
)
NET CASH USED FOR INVESTING ACTIVITIES
   
(3,706
)
   
(4,042
)
                 
FINANCING ACTIVITIES
               
Proceeds from revolving lines of credit and long-term borrowings
   
112,292
     
75,275
 
              Payments on revolving lines of credit and long-term debt and capital lease obligations
   
(117,558
)
   
(87,051
Proceeds from exercise of stock options
   
2,068
     
931
 
Payment of financing costs
   
(4,507
)
   
(3,972
)
Payment of dividends
   
(401
)
   
(404
)
Purchase of treasury stock
   
(14,644
)
   
0
 
NET CASH USED BY FINANCING ACTIVITIES
   
(22,750
)
   
(15,221
)
Effect of exchange rate changes on cash
   
1,683
     
(2,420
Decrease in cash and cash equivalents
   
(15,830
)
   
(11,434
Cash and cash equivalents at beginning of period
   
48,462
     
37,501
 
Cash and cash equivalents at end of period
 
$
32,632
   
$
26,067
 
  
See notes to condensed consolidated financial statements.





 
 
 

 
 

INVACARE CORPORATION AND SUBSIDIARIES
Financial Statements
(Unaudited)
March 31, 2011

Nature of Operations - Invacare Corporation is the world’s leading manufacturer and distributor in the estimated $11.0 billion worldwide market for medical equipment and supplies used in the home based upon the Company’s distribution channels, breadth of product line and net sales. The Company designs, manufactures and distributes an extensive line of health care products for the non-acute care environment, including the home health care, retail and extended care markets.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and include all adjustments, which were of a normal recurring nature, necessary to present fairly the financial position of the Company as of March 31, 2011, the results of its operations for the three months ended March 31, 2011 and changes in its cash flow for the three months ended March 31, 2011 and 2010, respectively. Certain foreign subsidiaries, represented by the European segment, are consolidated using a February 28 quarter end in order to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the Company’s financial statements other than disclosed in the Subsequent Event note to these financial statements. All significant intercompany transactions are eliminated.  The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year. 

Use of Estimates - The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates.

Accounting for Stock-Based Compensation - The Company accounts for share based compensation under the provisions of Compensation—Stock Compensation, ASC 718. The Company has not made any modifications to the terms of any previously granted options and no significant changes have been made regarding the valuation methodologies used to determine the fair value of options granted since 2005 and the Company continues to use a Black-Scholes valuation model.

The substantial majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods.

For the three months ended March 31, 2011 and 2010, the Company recognized stock-based compensation of $1,412,000 and $1,557,000, respectively, as part of selling, general and administrative expense.  These amounts reflect compensation expense related to restricted stock awards and nonqualified stock options awarded under the 2003 Performance Plan (the “2003 Plan”).  Stock-based compensation is not allocated to the business segments, but is reported as part of “All Other” as shown in the Company’s Business Segment Note to the Consolidated Financial Statements.
 
Receivables - Accounts receivable and installment receivables are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all of the Company’s receivables are due from health care, medical equipment providers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to providers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid in the U.S. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. The estimated allowance for uncollectible amounts for both trade accounts receivable and installment receivables ($29,215,000 and $30,168,000 at March 31, 2011 and December 31, 2010, respectively) is based primarily on management’s evaluation of the financial condition of specific customers. In addition, as a result of the third party financing arrangement with De Lage Landen, Inc. (DLL), a third party financing company which the Company has worked with since 2000, management monitors the collection status of these contracts in accordance with the Company’s limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishing reserves for specific customers as needed.  The Company charges off uncollectible trade accounts receivable after such receivables are moved to collection status and legal remedies are exhausted. See Concentration of Credit Risk in the Notes to the Consolidated Financial Statements for a description of the financing arrangement. Long-term installment receivables are included in “Other Assets” on the consolidated balance sheet.
 
The Company’s U.S. customers electing to finance their purchases can do so using DLL. In addition, Invacare often provides financing directly for its Canadian customers for which DLL is not an option, as DLL typically provides financing to Canadian customers only on a limited basis. The installment receivables recorded on the books of the Company represent a single portfolio segment of finance receivables to the independent provider channel. The portfolio segment is comprised of two classes of receivables distinguished by geography and credit quality. The U.S. installment receivables are the first class and represent installment receivables re-purchased from DLL because the customers were in
 
 
 
6

 
default. Default with DLL is defined as a customer being delinquent by three payments. The Canadian installment receivables represent the second class of installment receivables which were originally financed by Invacare because third party financing was not available to the HME providers. The Canadian installment receivables are typically financed for twelve months and historically have had a very low risk of default.
 
The estimated allowance for uncollectible amounts and evaluation for impairment for both classes of installment receivables is based on the Company’s quarterly review of the financial condition of each individual customer with the allowance for doubtful accounts adjusted accordingly. Installments are individually and not collectively reviewed for impairment. The Company assesses the bad debt reserve levels based upon the status of the customer’s adherence to a legally negotiated payment schedule and the Company’s ability to enforce judgments, liens, etc.

For purposes of granting or extending credit, the Company utilizes a scoring model to generate a composite score that considers each customer’s consumer credit score and or D&B credit rating, payment history, security collateral and time in business. Additional analysis is performed for customers desiring credit greater than $250,000 which includes a detailed review of the customer’s financials as well as consideration of other factors such as exposure to changing reimbursement laws.
 
Interest income is recognized on installment receivables based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments and is moved to collection, interest income is no longer recognized. Subsequent payments received once an account is put on non-accrual status are generally first applied to the principal balance and then to the interest. Accruing of interest on collection accounts does not occur and accruing of interest would only be restarted if the account became current again. All installment accounts are accounted for using the same methodology regardless of the duration of the installment agreements. When an account is placed in collection status, the Company initiates a legal process of adjudication of the delinquency, the duration of which is typically approximately 18 months. Any write-offs of uncollectible amounts are made after the legal process has been completed. The Company has not made any changes to either its accounting policies or methodology to estimation allowances for doubtful accounts in the last twelve months.
 
Installment receivables consist of the following (in thousands):
  
 
March 31, 2011
   
 
December 31, 2010
 
   
Current
   
Long-
Term
   
Total
   
Current
   
Long-
Term
   
Total
 
Installment receivables
 
$
6,575
   
$
3,687
   
$
10,262
   
$
5,777
   
$
4,854
   
$
10,631
 
Less:  Unearned interest
   
(137
   
     
(137
   
(118
   
0
     
(118
     
6,438
     
3,687
     
10,125
     
5,659
     
4,854
     
10,513
 
Allowance for doubtful accounts
   
(1,752
   
(2,264
   
(4,016
   
(1,700
   
(3,141
   
(4,841
   
$
4,686
   
$
1,423
   
$
6,109
   
$
3,959
   
$
1,713
   
$
5,672
 
                                                 
 
Installment receivable purchased from DLL during the three months ended March 31, 2011 increased the gross installment receivables balance by $336,000. No sales of installment receivables were made by the Company during the year.
 
The movement in the installment receivables allowance for doubtful accounts was as follows (in thousands):
 
   
Three Months Ended
March 31, 2011
   
Year Ended
December 31, 2010
 
Beginning Balance
 
$
4,841
   
$
6,080
 
Current period provision
   
491
     
4,022
 
Direct write-offs charged against the allowance
   
(1,316
)
   
(5,261
)
Ending Balance
 
$
4,016
   
$
4,841
 
 

 
 
 

 
 

Installment receivables by class as of March 31, 2011 consist of the following (in thousands):
U.S. 
 
 
Total
Installment
Receivables
   
Unpaid
Principal
Balance
   
Related
Allowance
for
Doubtful
Accounts
   
Interest
Income
Recognized
 
Impaired Installment receivables with a related allowance recorded
 
$
6,110
   
$
6,110
   
$
3,845
   
$
0
 
                                 
Canada
                               
Non-Impaired Installment receivables with no related allowance recorded
   
3,914
     
3,777
     
0
     
41
 
Impaired Installment receivables with a related allowance recorded
   
238
     
238
     
171
     
0
 
Total Canadian Installment Receivables
 
$
4,152
   
$
4,015
   
$
171
   
$
41
 
                                 
Total
                               
Non-Impaired Installment receivables with no related allowance recorded
   
3,914
     
3,777
     
0
     
41
 
Impaired Installment receivables with a related allowance recorded
   
6,348
     
6,348
     
4,016
     
0
 
Total Installment Receivables
 
$
10,262
   
$
10,125
   
$
4,016
   
$
41
 
 
Installment receivables by class as of December 31, 2010 consist of the following (in thousands):
 U.S.
 
Total
Installment
Receivables
   
Unpaid
Principal
Balance
   
Related
Allowance
for
Doubtful
Accounts
   
Interest
Income
Recognized
 
Impaired Installment receivables with a related allowance recorded
 
$
7,153
   
$
7,153
   
$
4,822
   
$
0
 
                                 
Canada
                               
Non-Impaired Installment receivables with no related allowance recorded
   
3,222
     
3,104
     
0
     
109
 
Impaired Installment receivables with a related allowance recorded
   
256
     
256
     
19
     
0
 
Total Canadian Installment Receivables
 
$
3,478
   
$
3,360
   
$
19
   
$
109
 
                                 
Total
                               
Non-Impaired Installment receivables with no related allowance recorded
   
3,222
     
3,104
     
0
     
109
 
Impaired Installment receivables with a related allowance recorded
   
7,409
     
7,409
     
4,841
     
0
 
Total Installment Receivables
 
$
10,631
   
$
10,513
   
$
4,841
   
$
109
 
 
Installment receivables with a related allowance recorded as noted in the table above represent those installment receivables on a non-accrual basis in accordance with ASU 2010-20. As of March 31, 2011 and December 31, 2010, the Company had no U.S. installment receivables past due of 90 days or more for which the Company is still accruing interest. Individually, all U.S. installment receivables are assigned a specific allowance for doubtful accounts based on management’s review when the Company does not expect to receive both the contractual principal and interest payments as specified in the loan agreement. However, while the full balance may be deemed to be impaired, the Company does historically collect a large percentage of the principal of its U.S. installment receivables.
 
The Company had an immaterial amount of Canadian installment receivables which were past due of 90 days or more as of March 31, 2011 and December 31, 2010, respectively, for which the Company is still accruing interest.

 
 
 

 
 

 
The aging of the Company’s installment receivables was as follows (in thousands):
  
 
 
March 31, 2011
   
December 31, 2010
 
   
Total
   
U.S.
   
Canada
   
Total
   
U.S.
   
Canada
 
Current
 
$
3,821
   
$
0
   
$
3,821
   
$
3,097
   
$
0
   
$
3,097
 
0-30 Days Past Due
   
35
     
0
     
35
     
89
     
0
     
89
 
31-60 Days Past Due
   
40
     
0
     
40
     
31
     
0
     
31
 
61-90 Days Past Due
   
18
     
0
     
18
     
5
     
0
     
5
 
90+ Days Past Due
   
6,348
     
6,110
     
238
     
7,409
     
7,153
     
256
 
   
$
10,262
   
$
6,110
   
$
4,152
   
$
10,631
   
$
7,153
   
$
3,478
 

Inventories - Inventories determined under the first in, first out method consist of the following components (in thousands):
 
   
March 31, 2011
   
December 31, 2010
 
Finished goods
 
$
105,343
   
$
101,243
 
Raw Materials
   
65,944
     
59,921
 
Work in Process
   
11,967
     
13,211
 
   
$
183,254
   
$
174,375
 

Property and Equipment - Property and equipment consist of the following (in thousands):

   
March 31, 2011
   
December 31, 2010
 
Machinery and equipment
 
$
341,422
   
$
332,687
 
Land, buildings and improvements
   
96,111
     
91,956
 
Furniture and fixtures
   
27,216
     
27,775
 
Leasehold improvements
   
15,883
     
15,705
 
     
480,632
     
468,123
 
Less allowance for depreciation
   
(349,300
)
   
(337,360
)
   
$
131,332
   
$
130,763
 

Goodwill and Other Intangibles - The change in goodwill reflected on the balance sheet from December 31, 2010 to March 31, 2011 was entirely the result of foreign currency translation.

All of the Company’s other intangible assets have been assigned definite lives and continue to be amortized over their useful lives, except for $32,925,000 related to trademarks, which have indefinite lives. The changes in intangible balances reflected on the balance sheet from December 31, 2010 to March 31, 2011 were the result of foreign currency translation and amortization.

As of March 31, 2011 and December 31, 2010, other intangibles consisted of the following (in thousands):

   
March 31, 2011
   
December 31, 2010
 
   
 Historical
 Cost
   
Accumulated
Amortization
   
 Historical
 Cost
   
Accumulated
Amortization
 
Customer lists
 
$
77,770
   
$
44,595
   
$
72,998
   
$
40,071
 
Trademarks
   
32,925
     
0
     
31,246
     
0
 
License agreements
   
3,201
     
2,986
     
3,183
     
2,958
 
Developed technology
   
9,220
     
4,455
     
8,521
     
3,988
 
Patents
   
6,003
     
5,058
     
7,518
     
5,863
 
Other
   
6,189
     
5,928
     
6,092
     
5,767
 
   
$
135,308
   
$
63,022
   
$
129,558
   
$
58,647
 

Amortization expense related to other intangibles was $2,220,000 in the first three months of 2011 and is estimated to be $8,090,000 in 2012, $7,218,000 in 2013, $6,619,000 in 2014, $5,288,000 in 2015 and $4,280,000 in 2016.  Definite lived intangibles are being amortized on a straight-line basis for periods from 3 to 20 years with the majority of the intangibles being amortized over a life of between 10 and 13 years.

 
9

 

Warranty Costs - Generally, the Company’s products are covered from the date of sale to the customer by warranties against defects in material and workmanship for various periods depending on the product. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The Company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the Company’s warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the Company does consider other events, such as a product recall, which could warrant additional warranty reserve provision. No material adjustments to warranty reserves were necessary in the first three months of 2011.

The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):

Balance as of January 1, 2011
 
$
18,252
 
Warranties provided during the period
   
2,469
 
Settlements made during the period
   
(2,235
)
Changes in liability for pre-existing warranties during the period, including expirations
   
337
 
Balance as of March 31, 2011
 
$
18,823
 

Long-Term Debt - On May 9, 2008, Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1) as codified in Debt with Conversion and Other Options, ASC 470-20, was issued to provide clarification of the accounting for convertible debt that can be settled in cash upon conversion. The FASB believed this clarification was needed because the accounting that was being applied for convertible debt prior to FSP APB 14-1 did not fully reflect the true economic impact on the issuer since the conversion option was not captured as a borrowing cost and its full dilutive effect was not included in earnings per share.  ASC 470-20 required separate accounting for the liability and equity components of the convertible debt in a manner that would reflect Invacare’s nonconvertible debt borrowing rate. Accordingly, the Company initially split the total debt amount of $135,000,000 attributable to its 4.125% Convertible Senior Subordinated Debentures due 2027 into a convertible debt amount of $75,988,000 and a stockholders’ equity (debt discount) amount of $59,012,000 as of the retrospective adoption date of February 12, 2007 and is accreting the resulting debt discount as interest expense over a ten year life. The Consolidated Balance Sheet as of March 31, 2011 reflects a decrease in long-term debt of $20,239,000 and a deferred tax liability of $7,084,000 compared to comparable amounts of $25,137,000 and $8,798,000, respectively, as of December 31, 2010.

During the three months ended March 31, 2011, the Company repurchased $13,514,000 ($8,615,000 reduction of debt and $4,898,000 reduction of equity) par value of its 4.125% Convertible Senior Subordinated Debentures due 2027. The Company retired the debt at a premium above par.  In accordance with Convertible Debt, ASC 470-20, the Company utilized the inducement method of accounting to calculate the loss associated with the early retirement of the convertible debt.  For the three months ended March 31, 2011, the Company recorded pre-tax expense of $4,881,000 related to the loss on the debt extinguishment including the write-off of $336,000 of pre-tax of deferred financing fees, which were previously capitalized.

The Company utilized primarily its cash and cash flows from operations as well as its revolving line of credit to pay down the debt noted above.  At March 31, 2011, the Company had outstanding $194,029,000 on its revolving line of credit compared to $184,932,000 as of December 31, 2010.

During the first quarter of 2011, the Company entered into interest rate swap agreements to effectively convert a portion of floating rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest rates.  Specifically, interest rate swap agreements for notional amounts of $20,000,000 through May 2013 and $15,000,000 through February 2013 were entered into that fix the LIBOR component of the interest rate on that portion of the revolving credit facility debt at rates of 1.08% and 1.05%, respectively, for an all-in rates of 3.58% and 3.55%, respectively.  Effective April 5, 2011, the all-in rates changed to 2.83% and 2.80% respectively, as a result of the amendment to the Company’s credit agreement that reduced the applicable interest rate related to both LIBOR and Base Rate Option borrowings by 75 basis points.

Shareholders’ Equity Transactions - The 2003 Plan allows the Compensation and Management Development Committee of the Board of Directors (the “Committee”) to grant up to 6,800,000 Common Shares in connection with incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including the use of restricted stock).  The maximum aggregate number of Common Shares that may be granted during the term of the 2003 Plan pursuant to all awards, other than stock options, is 1,300,000 Common Shares.  The Committee has the authority to determine which employees and directors will receive awards, the amount of the awards and the other terms and conditions of the awards.  During the first three months of 2011, the Committee granted non-qualified stock options to purchase 5,000 Common Shares with a term of ten years at the fair market value of the Company’s Common Shares on the date of grant under the 2003 Plan, which vest ratably in annual installments over the four years following the grant date.

Under the terms of the Company’s outstanding restricted stock awards, all of the shares granted vest ratably over the four years after the grant date.  Compensation expense of $498,000 was recognized related to restricted stock awards in the first three months of 2011 and, as of March 31, 2011, outstanding restricted stock awards totaling 238,870 shares were not yet vested.  
 
 
10

 
As of March 31, 2011, there was $13,876,000 of total unrecognized compensation cost from stock-based compensation arrangements granted under the 2003 Plan, which is related to non-vested options and shares, and includes $4,451,000 related to restricted stock awards. The Company expects the compensation expense to be recognized over a four-year period for a weighted-average period of approximately two years.

Stock option activity during the three months ended March 31, 2011was as follows:
   
2011
   
Weighted Average
Exercise Price
 
Options outstanding at January 1
   
4,484,195
   
$
29.60
 
Granted
   
5,000
     
30.66
 
Exercised
   
(89,311
)
   
23.16
 
Canceled
   
(57,671
)
   
30.84
 
Options outstanding at March 31
   
4,342,213
   
$
29.73
 
                 
Options price range at March 31
 
$
10.70 to
         
   
$
47.80
         
Options exercisable at March 31
   
2,827,986
         
Options available for grant at March 31*
   
2,509,381
         

* Options available for grant as of March 31, 2011 reduced by net restricted stock award activity of 482,678.

The following table summarizes information about stock options outstanding at March 31, 2011:
 
     
Options Outstanding
   
Options Exercisable
 
           
Weighted
                   
     
Number Outstanding
   
Average Remaining
   
Weighted Average
   
Number Exercisable
   
Weighted Average
 
Exercise Prices
   
At 3/31/11
   
Contractual Life
   
Exercise Price
   
At 3/31/11
   
Exercise Price
 
$
10.70 - $15.00
     
20,175
     
1.6 years
   
$
10.85
     
19,675
   
$
10.75
 
$
15.00 - $25.00
     
1,364,800
   
7.2
   
$
21.66
     
726,222
   
$
22.31
 
$
25.01 - $35.00
     
1,590,997
     
6.4
   
$
27.50
     
715,848
   
$
29.95
 
$
35.01 - $47.80
     
1,366,241
     
3.1
   
$
40.67
     
1,366,241
   
$
40.67
 
Total
     
4,342,213
     
5.6
   
$
29.73
     
2,827,986
   
$
33.03
 

When stock options are awarded, they generally become exercisable over a four-year vesting period whereby options vest in equal installments each year.  Options granted with graded vesting are accounted for as single options.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate and expected life. The assumed expected life is based on the Company’s historical analysis of option history.  The expected stock price volatility is also based on actual historical volatility, and expected dividend yield is based on historical dividends as the Company has no current intention of changing its dividend policy.

The 2003 Plan provides that shares granted come from the Company’s authorized but unissued Common Shares or treasury shares.  In addition, the Company’s stock-based compensation plans allow employee participants to exchange shares for minimum withholding taxes, which results in the Company acquiring treasury shares.

Pursuant to the Company’s Board of Directors authorized plan 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 Company purchased a total of 492,500 shares for an aggregate purchase price of $14,644,000 during the first three months of 2011.

Comprehensive Earnings (loss) - Total comprehensive earnings (loss) were as follows (in thousands):

   
Three Months Ended
 March 31,
 
   
2011
   
2010
 
Net earnings
 
$
   7,454
   
$
3,106
 
Foreign currency translation gain (loss)
   
35,433
     
(50,140
SERP/DBO amortization of prior service costs and unrecognized gain (loss)
   
(211
   
157
 
Current period unrealized gain (loss) on cash flow hedges, net of tax
   
(1,284
)
   
2,513
 
Total comprehensive earnings (loss)
 
$
41,392
   
$
(44,364

 
11

 
Income Taxes - The Company had an effective tax rate of 25.5% on earnings before tax for the three month periods ended March 31, 2011 compared to an expected rate at the US statutory rate of 35%.  The Company’s effective tax rate for the three months ended March 31, 2011 was lower than the U.S. federal statutory rate principally due to foreign taxes recognized at rates below the U.S. statutory rate.  The net impact of tax benefit from countries with valuation allowances on the Company’s effective tax rate was minimal for the first quarter of 2011.    For the three month periods ended March 31, 2010, the Company had an effective rate of 41.5% compared to an expected rate at the U.S. statutory rate of 35%.  The Company’s effective tax rate for the three months ended March 31, 2010 was higher than the U.S. federal statutory rate as a result of the Company not being able to record tax benefits related to losses in countries which have tax valuation allowances, while normal tax expense was recorded in countries without tax valuation allowances.  The Company continued to be in a loss position in the U.S. principally as a result of recording pre-tax expense of $4,881,000 for the three months ended March 31, 2011 related to the extinguishment of convertible debt at a premium.

Net Earnings Per Common Share - The following table sets forth the computation of basic and diluted net earnings per common share for the periods indicated (amounts in thousands, except per share amounts).
 
   
Three Months Ended
 March 31,
   
   
2011
   
2010
   
Basic
             
   Average common shares outstanding
   
32,174
     
32,349
   
                   
   Net earnings
 
$
7,454
   
$
3,106
   
                   
   Net earnings per common share
 
$
0.23
   
 
$
0.10
   
                   
Diluted
                 
   Average common shares outstanding
   
32,174
     
32,349
   
   Stock options and awards
   
353
     
195
   
   Shares related to convertible debt
   
488
     
425
   
   Average common shares assuming dilution
   
33,015
     
32,969
   
                   
   Net earnings
 
$
7,454
   
 
$
3,106
   
                   
   Net earnings per common share
 
$
0.23
   
 
$
0.09
   

At March 31, 2011, 2,163,436 shares were excluded from the average common shares assuming dilution for the three months ended March 31, 2011 as they were anti-dilutive since the majority of the anti-dilutive shares were granted at an exercise price of $41.87, which was higher than the average fair market value price of $29.74. At March 31, 2010, 2,014,268 shares were excluded from the average common shares assuming dilution for the three months ended March 31, 2010 as they were anti-dilutive since the majority of the anti-dilutive shares were granted at an exercise price of $41.87, which was higher than the average fair market value price of $26.96. For the three months ended March 31, 2011 and 2010, respectively, the Company included the impact of 488,000 and 425,000 shares necessary to settle the conversion spread related to the Company’s 4.125% Senior Subordinated Convertible Debentures due 2027.  This is attributable to the Company’s average stock price during the first three months of both years being greater than the conversion price of $24.79, established under the indenture governing the convertible debentures.  The dilutive impact of the convertible debt on diluted earnings per share is directly affected by changes in the Company’s stock price and thus increased dilution in the future is possible if the Company’s stock price increases.

Concentration of Credit Risk - The Company manufactures and distributes durable medical equipment and supplies to the home health care, retail and extended care markets. The Company performs credit evaluations of its customers’ financial condition. In December 2000, Invacare entered into an agreement with DLL, a third party financing company, to provide the majority of future lease financing to Invacare’s North America customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The Company retains a recourse obligation to DLL, which was $27,656,000 at March 31, 2011, for events of default under the contracts, which total $71,713,000 at March 31, 2011. Guarantees, ASC 460, requires the Company to record a guarantee liability as it relates to the limited recourse obligation. As such, the Company has recorded a liability of $625,000 for this guarantee obligation within accrued expenses. The Company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with Receivables, ASC 310-10-05-4. Credit losses are provided for in the financial statements.

 
12

 
Substantially all of the Company’s receivables are due from health care, medical equipment providers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. In addition, the Company has also seen a significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. In addition, reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain as well as the timing of reimbursement and, thus, affect the product mix, pricing and payment patterns of the Company’s customers.

Derivatives -Derivatives and Hedging, ASC 815, requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or liabilities at fair value.  The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship.  For derivatives designated and qualifying as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

Cash Flow Hedging Strategy
The Company uses derivative instruments in an attempt to manage its exposure to commodity price risk, foreign currency exchange risk and interest rate risk.  Foreign exchange contracts are used to manage the price risk associated with forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months.  Interest rate swaps are, at times, utilized to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.

The Company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. A majority of the Company’s derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change.

During the first quarter of 2011, the Company entered into interest rate swap agreements to effectively convert a portion of floating rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest rates.  Specifically, interest rate swap agreements for notional amounts of $20,000,000 through May 2013 and $15,000,000 through February 2013 were entered into that fix the LIBOR component of the interest rate on that portion of the revolving credit facility debt at rates of 1.08% and 1.05%, respectively, for an all-in rates of 3.58% and 3.55%, respectively.  Effective April 5, 2011, the all-in rates changed to 2.83% and 2.80% respectively, as a result of the amendment to the Company’s credit agreement that reduced the applicable interest rate related to both LIBOR and Base Rate Option borrowings by 75 basis points.  The gains and or losses on interest rate swaps are reflected in interest expense on the consolidated statement of earnings. The Company was not a party to any interest rate swap agreements during 2010.  

To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the Company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of earnings.  If it is later determined that a hedged forecasted transaction is unlikely to occur, any gains or losses on the forward contracts associated with the forecasted transactions that are no longer probable of occurring would be reclassified from other comprehensive income into earnings. The Company does not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve months. 

The Company has historically not recognized any material amount of ineffectiveness related to forward contract cash flow hedges because the Company generally limits it hedges to between 60% and 90% of total forecasted transactions for a given entity’s exposure to currency rate changes and the transactions hedged are recurring in nature.  Furthermore, the majority of the hedged transactions are related to intercompany sales and purchases for which settlement occurs on a specific day each month.  Forward contracts with a total notional amount in USD of $39,381,000 and $40,398,000 matured during the three months ended March 31, 2011 and 2010, respectively.

 
 
 
13 

 
 

Foreign exchange forward contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):

     
March 31, 2011
   
December 31, 2010
 
     
Notional Amount
   
Unrealized Gain (Loss)
   
Notional Amount
 
Unrealized Gain (Loss)
 
USD / AUD
 
$
2,304
 
$
(225
 
$
3,072
 
$
(223
)
USD / CAD
   
25,101
   
(29
   
32,974
   
(14
USD / CNY
   
10,706
   
(7
   
0
   
0
 
USD / EUR
   
25,042
   
(614
   
32,419
   
927
 
USD / GBP
   
3,159
   
(86
   
4,212
   
86
 
USD / NZD
   
10,776
   
271
     
9,577
   
202
 
USD / SEK
   
7,966
   
44
     
10,395
   
95
 
USD / MXP
   
4,546
   
89
     
0
   
0
 
EUR / AUD
   
971
   
(18
   
0
   
0
 
EUR / CHF
   
4,756
   
(15
   
8,768
   
54
 
EUR / GBP
   
18,941
   
(282
)
   
18,068
   
(577
EUR / SEK
   
8,665
   
339
     
8,045
   
92
 
EUR / NOK
   
1,787
   
(15
   
0
   
0
 
EUR / NZD
   
6,370
   
(81
   
2,630
   
5
 
GBP / CHF
   
1,196
   
12
     
770
   
(3
GBP / SEK
   
1,688
   
63
     
2,014
   
(43
GBP / DKK
   
857
   
(10
   
1,016
   
(27
CHF / SEK
   
327
   
7
     
6,937
   
(3
DKK / CHF
   
490
   
(8
)
   
514
   
1
 
DKK / NOK
   
1,347
   
(13
)
   
0
   
0
 
DKK / SEK
   
5,178
   
(21
)
   
1,465
   
18
 
NOK / SEK
   
613
   
2
     
0
   
0
 
   
$
142,786
 
$
(597
 
$
142,876
 
$
590
 

Fair Value Hedging Strategy
In 2011 and 2010, the Company did not utilize any derivatives designated as fair value hedges.  However, the Company has in the past utilized fair value hedges in the form of forward contracts to manage the foreign exchange risk associated with certain firm commitments and has entered into interest rate swaps to effectively convert fixed-rate debt to floating-rate debt in an attempt to avoid paying higher than market interest rates.  For derivative instruments designated and qualifying as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk are recognized in the same line item associated with the hedged item in earnings.

Derivatives Not Qualifying or Designated for Hedge Accounting Treatment
The Company utilizes foreign currency forward or option contracts that do not qualify for hedge accounting treatment in an attempt to manage the risk associated with the conversion of earnings in foreign currencies into U.S. Dollars. While these derivative instruments do not qualify for hedge accounting treatment in accordance with ASC 815, these derivatives do provide the Company with a means to manage the risk associated with currency translation. These instruments are recorded at fair value in the consolidated balance sheet and any gains or losses are recorded as part of earnings in the current period.  Gains of $6,000 and $26,000 were recorded by the Company for the three months ended March 31, 2011 and 2010, respectively, related to derivatives not qualifying for hedge accounting treatment.

The Company also utilizes foreign currency forward contracts that are not designated as hedges in accordance with ASC 815 although they could qualify for hedge accounting treatment.  These contracts are entered into to eliminate the risk associated with the settlement of short-term intercompany trading receivables and payables between Invacare Corporation and its foreign subsidiaries.  The currency forward contracts are entered into at the same time as the intercompany receivables or payables are created so that upon settlement, the gain/loss on the settlement is offset by the gain/loss on the foreign currency forward contract.  No material net gain or loss was realized by the Company for the three month periods ended March 31, 2011 and 2010, respectively, related to these forward contracts and the associated short-term intercompany trading receivables and payables.

 
 
 
14 

 
 

Foreign exchange forward contracts not qualifying or designated for hedge accounting treatment entered into in and outstanding as of March 31, 2011 and 2010 were as follows (in thousands USD):

 
March 31, 2011
 
March 31, 2010
 
   
Notional Amount
   
Gain
 
Notional Amount
   
Gain (Loss)
 
CAD / USD
$
17,131
 
$
404
 
$
3,356
   
$
90
 
CHF / USD
 
0
   
0
   
943
     
6
 
CHF / GBP
 
7,107
   
256
   
0
     
0
 
NZD / USD
 
0
   
0
   
11,191
     
280
 
NOK / USD
 
5,268
   
157
   
2,018
     
2
 
SEK / USD
 
0
   
0
   
7,657
     
99
 
DKK / USD
 
0
   
0
   
7,232
     
(156
EUR / GBP
 
0
   
0
   
2,366
     
20
 
EUR / NOK
 
0
   
0
   
140
     
(6
EUR / NZD
 
145
   
6
   
255
     
(14
 
$
29,651
 
$
823
 
$
35,158
   
$
321
 

The fair values of the Company’s derivative instruments were as follows (in thousands):

   
March 31, 2011
   
December 31, 2010
 
  
 
Assets
   
Liabilities
   
Assets
   
Liabilities
 
Derivatives designated as hedging instruments under ASC 815
                       
Foreign currency forward contracts
 
$
2,511
   
$
3,108
   
$
2,518
   
$
1,928
 
Interest rate swap contracts
   
0
     
129
     
0
     
0
 
                                 
Derivatives not designated as hedging instruments under ASC 815
                               
Foreign currency forward contracts
   
823
     
0
     
366
     
1
 
                                 
 Total derivatives
 
$
3,334
   
$
3,237
   
$
2,884
   
$
1,929
 

The fair values of the Company’s foreign currency forward assets and liabilities are included in Other Current Assets and Accrued Expenses, respectively in the Consolidated Balance Sheets.

The effect of derivative instruments on the Statement of Earnings and Other Comprehensive Income (OCI) was as follows (in thousands):
 
Derivatives in ASC 815 cash flow hedge relationships
   
Amount of Loss Recognized in OCI on Derivatives (Effective Portion)
     
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
     
Amount of Gain Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) 
   
                           
Three months ended March 31, 2011:
                         
Foreign currency forward contracts
 
$
(1,249
 
)
 
$
62
   
$
6
   
Interest rate swap contracts
   
(129
   
0
     
0
   
   
$
(1,378
 
$
62
   
$
6
   
                           
Three months ended March 31, 2010:
                         
Foreign currency forward contracts
 
$
2,256
   
$
(61
 
 
$
26
   
 

Derivatives not designated as hedging instruments under ASC 815
   
 Amount of Gain Recognized in Income on Derivatives
 
Three months ended March 31, 2011:
       
Foreign currency forward contracts 
 
$
 823
 
         
Three months ended March 31, 2010:
       
Foreign currency forward contracts
 
$
321
 

 
15 

 

The gains or losses recognized as the result of the settlement of cash flow hedge foreign currency forward contracts are recognized in net sales for hedges of inventory sales or cost of product sold for hedges of inventory purchases.  For the three months ended March 31, 2011, net sales were increased by $213,000 and cost of product sold was increased by $151,000 for a net realized gain of $62,000. For the three months ended March 31, 2010, net sales were increased by $113,000 and cost of product sold was increased by $174,000 for a net realized loss of $61,000.   As the result of swap agreements outstanding in 2011, a loss of $42,000 was recorded for the three months ended March 31, 2011 which was recorded in interest expense.  No swap agreements were outstanding in 2010.

A gain of $817,000 was recognized in selling, general and administrative (SG&A) expenses for the three months ended March 31, 2011 compared to a gain of $295,000 for the three months ended March 31, 2010 on foreign currency forward contracts not designated as hedging instruments, which were substantially offset by foreign currency gains/losses also recorded in SG&A expenses on the intercompany trade payables for which the derivatives were entered into to offset.  In addition, gains of $6,000 and $26,000 were recognized for the three months ended March 31, 2011 and 2010, respectively, related to derivatives no longer qualifying for hedge accounting treatment as the forecasted transactions hedged by those derivatives were no longer probable of occurring and as a result, the hedging relationship was ineffective.  

Fair Value Measurements - Pursuant to ASC 820, the inputs used to derive the fair value of assets and liabilities are analyzed and assigned a level of I, II or III, with level I being the highest and level III being the lowest in the hierarchy. Level I inputs are quoted prices in active markets for identical assets or liabilities.  Level II inputs are quoted prices for similar assets or liabilities in active markets: quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.  Level III inputs are based on valuations derived from valuation techniques in which one or more significant inputs are unobservable.

The following table provides a summary of the Company’s assets and liabilities that are measured on a recurring basis (in thousands):

         
Basis for Fair Value Measurements at Reporting Date
 
         
Quoted Prices in Active Markets for Identical Assets / (Liabilities)
   
Significant Other Observable Inputs
   
Significant Other Unobservable Inputs
 
   
Total
   
Level I
   
Level II
   
Level III
 
March 31, 2011
                               
Forward Exchange
  Forward Contracts-net
 
$
226
   
$
0
   
$
226
   
$
0
 
Swaps
   
(129
)
   
0
     
(129
)
   
0
 
                                 
December 31, 2010
                               
Forward Exchange
  Forward Contracts-net
 
$
955
   
$
0
   
$
955
   
$
0
 

Forward Contracts:  The Company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany trade receivables/payables and loans as well as third party sales or purchases. In an attempt to reduce this exposure, foreign currency forward contracts are utilized and accounted for as hedging instruments. The forward contracts are used to hedge various currencies. The Company does not use derivative financial instruments for speculative purposes. Fair values for the Company’s foreign exchange forward contracts are based on quoted market prices for contracts with similar maturities.
 
 

 
 
 
16 

 
 

The carrying amounts and fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010 are as follows (in thousands):
 
  
 
March 31, 2011
   
December 31, 2010
 
   
 Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
Cash and cash equivalents
 
$
32,632
   
$
32,632
   
$
48,462
   
$
48,462
 
Other investments
   
1,558
     
1,558
     
1,588
     
1,588
 
Installment receivables, net
   
6,109
     
6,109
     
5,672
     
5,672
 
Long-term debt (including current maturities of long-term debt) *
   
   (246,854
)
   
          (261,141
)
   
(246,064
   
(264,382
)
Forward contracts in other current assets
   
3,334
     
3,334
     
2,884
     
2,884
 
Interest rate swap agreements in accrued expenses
   
(129
)
   
(129
)
   
0
     
0
 
Forward contracts in accrued expenses
   
(3,108
)
   
(3,108
)
   
(1,929
)
   
(1,929
)

* The carrying amounts and fair values exclude convertible debt classified as equity in accordance with FSP APB 14-1 ($20,239,000 and $25,137,000 as of March 31, 2011 and December 31, 2010, respectively).

Business Segments - The Company operates in five primary business segments: North America/Home Medical Equipment (NA/HME), Invacare Supply Group (ISG), Institutional Products Group (IPG), Europe and Asia/Pacific.  The NA/HME segment sells each of three primary product lines, which includes: standard, rehab and respiratory products. Invacare Supply Group sells distributed product and the Institutional Products Group sells health care furnishings and accessory products. Europe and Asia/Pacific sell the same product lines as NA/HME and the Institutional Products Group. Each business segment sells to the home health care, retail and extended care markets.
 
The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes for each reportable segment. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the Company’s consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element. Therefore, intercompany profit or loss on intersegment sales and transfers is not considered in evaluating segment performance, except for Asia/Pacific due to its significant intercompany sales volume. The information by segment is as follows (in thousands):
 
   
Three Months Ended
March 31,
   
   
2011
   
2010
   
Revenues from external customers
             
     North America / HME
 
$
185,613
   
$
174,986
   
     Invacare Supply Group
   
74,046
     
69,718
   
     Institutional Products Group
   
27,641
     
22,278
   
     Europe
   
121,387
     
117,728
   
     Asia/Pacific
   
19,811
     
17,530
   
     Consolidated
 
$
428,498
   
$
402,240
   
Intersegment Revenues
                 
     North America / HME
 
$
20,867
   
$
20,948
   
     Invacare Supply Group
   
16
     
13
   
     Institutional Products Group
   
2,136
     
1,457
   
     Europe
   
1,846
     
2,842
   
     Asia/Pacific
   
7,946
     
7,236
   
     Consolidated
 
$
32,811
   
$
32,496
   
Earnings (loss) before income taxes
                 
     North America / HME
 
$
13,252
   
$
11,547
   
     Invacare Supply Group
   
1,195
     
868
   
     Institutional Products Group
   
4,121
     
1,807
   
     Europe
   
4,960
     
4,534
   
     Asia/Pacific
   
1,051
     
817
   
     All Other *
   
(14,575
)
   
(14,267
)
 
     Consolidated
 
$
10,004
   
$
5,306
   

* “All Other” consists of un-allocated corporate selling, general and administrative costs, which do not meet the quantitative criteria for determining reportable segments.  In addition, “All Other” loss before income taxes includes loss on debt extinguishment including finance charges and associated fees.
 
 
17

 
Contingencies – 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 have been referred to the company’s captive insurance company and/or excess insurance carriers and generally are 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. The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in estimating future contingent liability costs, the company does not expect that any sum it may have to pay in connection with these matters in excess of the amounts recorded will have a materially adverse effect on its financial position, results of operations or liquidity.

As a medical device manufacturer, the company is 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, documentation and other practices of health care suppliers and manufacturers are all subject to government scrutiny. Violations of law, regulations, licensing or registration requirements can result in administrative, civil and criminal penalties and sanctions, including disqualification from the licensing or certification required for the sale of products or for the reimbursement therefor, in the U.S., Canada, Australia, New Zealand, relevant European countries and China, which could have a material adverse effect on the Company’s business. By way of further example, the FDA regulates virtually all aspects of a medical device’s development, testing, manufacturing, labeling, promotion, distribution and marketing in the U.S. The Company’s failure to comply with the regulatory requirements of the FDA or other applicable 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 seizures or detention, product recalls and total or partial suspensions of production.
 
In terms of regulatory compliance concerns raised by the FDA, the Company is providing updates to the FDA regarding the improvements that it is making in response to the regulatory compliance concerns raised by the FDA, including as a result of the FDA warning letter that was previously disclosed by the Company. The Company is in the process of adding resources to its regulatory affairs and corporate compliance departments and is engaging outside experts to accelerate implementation of various corrective actions. At the time of this filing, the matter remains pending and the Company views its regulatory compliance actions to be among its highest priorities.

The Company continues to closely monitor the tragedy in Japan and its impact on the global supply chain.  The company sources a few key electronic components from suppliers in Japan.  As uncertainties continue to exist in the region that could possibly lead to disruption in the company’s supply chain, the Company is developing supplier and component alternatives to be implemented if necessary.  However, there can be no assurance that disruptions will not arise.

Any of the above contingencies could have an adverse impact on the company’s financial condition or results of operations.

Subsequent Event – During the second quarter of 2011, the Company was notified that the German government agreed to follow a European Court of Justice case and a German Tax Court case that impacted an open tax return year.  As a result, the Company will recognize a tax benefit in the second quarter of approximately $5,000,000 that will include a refund and the creation of a tax loss carryforward deferred tax asset in relatively equal amounts.

Supplemental Guarantor Information - Effective February 12, 2007, substantially all of the domestic subsidiaries (the “Guarantor Subsidiaries”) of the Company became guarantors of the indebtedness of Invacare Corporation under its 4.125% Senior Subordinated Debentures due 2027 (the “Convertible Notes”) with an initial aggregate principal amount of $135,000,000.  The majority of the Company’s subsidiaries, which are primarily foreign subsidiaries of the Company, are not guaranteeing the repayment of the Convertible Notes (the “Non-Guarantor Subsidiaries”).  Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium, and interest related to the Convertible Notes and each of the Guarantor Subsidiaries are directly or indirectly wholly-owned subsidiaries of the Company.

Presented below are the consolidating condensed financial statements of Invacare Corporation (Parent), its combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method.  The Company does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors and accordingly, separate financial statements and other disclosures related to the Guarantor Subsidiaries are not presented.


 
18

 


CONSOLIDATING CONDENSED STATEMENTS OF EARNINGS

 (in thousands)
 
Three month period ended 
March 31, 2011
 
The Company (Parent)
   
Combined Guarantor Subsidiaries
   
Combined Non-Guarantor Subsidiaries
   
Eliminations
   
Total
 
Net sales
 
$
92,232
   
$
189,627
   
$
170,813
   
$
(24,174
)
 
$
428,498
 
Cost of products sold
   
66,338
     
149,050
     
114,362
     
(24,258
)
   
305,492
 
Gross Profit
   
25,894
     
40,577
     
56,451
     
84
     
123,006
 
Selling, general and administrative expenses
   
32,700
     
14,193
     
45,510
     
13,374
     
105,777
 
Loss on debt extinguishment including debt finance charges and associated fees
   
4,881
     
0
     
0
     
0
     
4,881
 
Income (loss) from equity investee
   
20,824
     
4,335
     
(21
)
 
 
(25,138
)
   
0
 
Interest expense - net
   
1,063
     
377
     
904
     
0
     
2,344
 
Earnings (loss) before Income Taxes
   
8,074
     
30,342
     
10,016
     
(38,428
 
)
   
10,004
 
Income taxes
   
620
     
100
     
1,830
     
-
     
2,550
 
Net Earnings (loss)
 
$
7,454
   
$
30,242
   
$
8,186
   
$
(38,428
)
 
$
7,454
 
                                         
Three month period ended
March 31, 2010
                                       
Net sales
 
$
93,838
   
$
171,247
   
$
161,445
   
$
(24,290
 
)
 
$
402,240
 
Cost of products sold
   
66,138
     
135,207
     
107,546
     
(24,364
)
   
284,527
 
Gross Profit
   
27,700
     
36,040
     
53,899
     
74
     
117,713
 
Selling, general and administrative expenses
   
31,713
     
24,836
     
45,228
     
0
     
101,777
 
Loss on debt extinguishment including debt finance charges and associated fees
   
4,386
     
0
     
0
     
0
     
4,386
 
Income (loss) from equity investee
   
17,243
     
1,594
     
12
     
(18,849
)
   
0
 
Interest expense - net
   
5,077
     
106
     
1,061
     
0
     
6,244
 
Earnings (loss) before Income Taxes
   
3,767
     
12,692
     
7,622
     
(18,775
 
)
   
5,306
 
Income taxes
   
661
     
150
     
1,389
     
0
     
2,200
 
Net Earnings (loss)
 
$
3,106
   
$
12,542
   
$
6,233
   
$
(18,775
)
 
$
3,106
 




 
 
 
19 

 
 

CONSOLIDATING CONDENSED BALANCE SHEETS

 (in thousands)
 
March 31, 2011
 
The Company (Parent)
   
Combined Guarantor Subsidiaries
   
Combined Non-Guarantor Subsidiaries
   
Eliminations
   
Total
 
Assets
                             
Current Assets
                             
Cash and cash equivalents
 
$
5,113
   
$
1,317
   
$
26,202
   
$
0
   
$
32,632
 
Trade receivables, net
   
89,731
     
67,797
     
94,204
     
0
     
251,732
 
Installment receivables, net
   
0
     
1,075
     
3,611
     
0
     
4,686
 
Inventories, net
   
39,565
     
41,404
     
103,479
     
(1,194
)
   
183,254
 
Deferred income taxes
   
3,500
     
0
     
2,651
     
0
     
6,151
 
Other current assets
   
13,147
     
4,963
     
28,323
     
(3,296
)
   
43,137
 
Total Current Assets
   
151,056
     
116,556
     
258,470
     
(4,490
)
   
521,592
 
Investment in subsidiaries
   
1,545,387
     
564,422
     
0
     
(2,109,809
)
   
0
 
Intercompany advances, net
   
77,651
     
796,567
     
223,196
     
(1,097,414