UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 20042005
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 0-12938
INVACARE CORPORATION
--------------------
(Exact name of Registrant as specified in its charter)
Ohio 95-2680965
_______________________________ ______________________- ------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization) 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
------------------
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 New York Stock Exchange
Rights to Purchase CommonsPreferred Shares, New York Stock Exchange
without par value
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined by Rule 405 of the Securities Act.
Yes X No
----- -----
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 X
----- -----
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 X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy of 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 ifwhether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer Non-accelerated filer
-- -- --
Indicate by check mark whether the registrant is a shell company (as
defined inby Rule 12b-2 of the Act).
Yes No X No
----- -----
As of June 30, 2004,2005, the aggregate market value of the 27,329,71027,957,693 Common Shares
of the Registrant held by non-affiliates was $1,222,184,631$1,240,203,261 and the aggregate
market value of the 31,80331,791 Class B Common Shares of the Registrant held by
non-affiliates was $1,422,230.$1,410,249. 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, 2004,2005, which
was $44.72.$44.36. For purposes of this information, the 2,724,4952,623,460 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, 2005, 30,322,5732006, 30,683,389 Common Shares and 1,111,965 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 20052006 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, 2004.2005.
I-1
INVACARE CORPORATION
20042005 ANNUAL REPORT ON FORM 10-K CONTENTS
Page
Item
PART I:
1. Business I-3
1A. Risk Factors I-14
1B. Unresolved Staff Comments I-17
2. Properties I-14I-17
3. Legal Proceedings I-17I-20
4. Submission of Matters to a Vote of Security Holders I-17I-20
Executive Officers of the Registrant I-17I-21
PART II:
5. Market for the Registrant's Common Equity, Related Stockholder I-19I-22
Matters and Issuer Purchases of Equity Securities
6. Selected Financial Data I-20I-23
7. Management's Discussion and Analysis of Financial Condition and I-21I-24
Results of Operations
7A.Quantitative7A. Quantitative and Qualitative Disclosures About Market Risk I-29I-33
8. Financial Statements and Supplementary Data I-29I-33
9. Changes in and Disagreements with Accountants on Accounting and I-29I-33
Financial Disclosure
9A. Controls and Procedures I-29I-33
9B. Other Information I-34
PART III:
10. Directors and Executive Officers of the Registrant I-30I-34
11. Executive Compensation I-30I-34
12. Security Ownership of Certain Beneficial Owners and Management I-31I-35
and Related Shareholder Matters
13. Certain Relationships and Related Transactions I-31I-35
14. Principal Accounting Fees and Services I-31I-35
PART IV:
15. Exhibits and Financial Statement Schedules I-31I-35
Signatures I-32I-36
I-2
PART I
Item 1. Business.
GENERAL
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Invacare Corporation is the world's leading manufacturer and distributor of
non-acute health care products based upon its distribution channels, the breadth
of its product line and its 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.
Invacare continuously revises and expands its product lines to meet changing
market demands and currently offers over two dozennumerous product lines. The company's
products are sold principally to over 25,000 home health care and medical
equipment provider locations in the U.S., Australia, Canada, Europe and New
Zealand, with the remainder of its sales being primarily to government agencies
and distributors. Invacare's products are sold through its worldwide
distribution network by its sales force, telesales associates and various
organizations of independent manufacturers' representatives and distributors.
The company also distributes medical equipment and related supplies manufactured
by others.
Invacare is committed to design, manufacture 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 our primary market - the non-acute health
care market;
* marketing our broad range of products;
* providing the industry's most professional and cost-effective sales,
customer service and distribution organization;
* supplying superior and innovative provider support and aggressive
product line extensions;
* building a strong referral base among health care professionals;
* building brand preference with consumers;
* continuous advancement and recruitment of top management candidates;
* empowering all employees;
* providing a performance-based reward environment; and
* continually striving for total quality throughout the organization.
When the company was acquired in December 1979 by a group of investors,
including certain of our current officers and Directors, it had $19.5 million in
net sales and a limited product line of standard wheelchairs and patient aids.
In 2004,2005, Invacare reached $1.403$1.530 billion in net sales, representing a 19%an 18%
compound average sales growth rate since 1979, and currently is the leading
company in the industry that manufactures, distributes and markets products in
each of the following major, non-acute, medical equipment categories: power and
manual wheelchairs, patient aids, home care beds, home respiratory products, low
air loss therapy products, seating and positioning products, bathing equipment
and distributed products.
The company operates in a single industry, the home medical equipment (HME)
industry segment. For information relating to net sales, operating income,
identifiable assets and other information for this industry segment, see the
Consolidated Financial Statements of the company.company included in this report.
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"Invacare" and
the company"company" refer to Invacare Corporation and, unless the context otherwise
indicates, its consolidated subsidiaries.
I-3
THE HOME MEDICAL EQUIPMENT INDUSTRY
North America
- -------------
The home medical equipment market includes home health care products, physical
rehabilitation products and other non-disposable products used for the recovery
and long-term care of patients. The company believes that sales ofdemand for domestic
home medical equipment products will continue to grow during the next decade and
beyond as a result of several factors, including:
Growth in population over age 65. The nation's overallOverall life expectancy in the United
States continues to increase. A recent report from the U.S. Department of
Health and Human Services (DHHS) states that the average life expectancy
for men and women who reach the age of 65 is now 8182 and 84,85, respectively,
and life expectancy at birth is now 7475 for men and almost 80 for women. The DHHS
also reports that people age 65 or older represent the vast majority of
home health care patients and will increase from 12% of the population in
20002004 to 20%21% of the population by the year 2050. A significant percentage of
people using home and community-based health care services are 65 years of
age and older.
Treatment trends. Many medical professionals and patients prefer home
health care over institutional care because they believe that home health
care results in greater patient independence, increased patient
responsibility and improved responsiveness to treatment because familiar
surroundings are conducive to improved patient outcomes. Health care
professionals, public payers and private payers agree that home care is a
cost effective, clinically appropriate alternative to facility-based care.
Recent surveys show that approximately 70% of adults would rather recover
from an accident or illness in their home, while approximately 90% of the
older population showed preference for home-based, long-term care.
Technological trends. 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.
Health care cost containment trends. In 2002,2003, health care expenditures in
the U.S. totaled $1.5$1.7 trillion dollars or approximately 14.9%15.3% of the Gross
Domestic Product (GDP), the highest among industrialized countries. In
2013,2014, the nation's health care spending is projected to increase to $3.4$3.6
trillion, growing at an average annual rate of 7.3%7.1%. Over this same period,
spending on health care is expected to increase to approximately 18.4%18.7% as a
share of GDP. The rising cost of health care has caused many payers of
health care expenses to look for ways to contain costs. Home health care
has gained widespread acceptance among health care providers and public
policy makers as a cost effective, clinically appropriate and patient
preferred alternative to facility-based care for a variety of acute and
long-term illnesses and disabilities. Thus, the company believes that home
health care and home medical equipment will play a significant role in
reducing health care costs.
Society's mainstreaming of people with disabilities. People with
disabilities are increasingly a part of the fabric of society, and this has increased, in
large part due
to the 1991 Americans with Disabilities Act (ADA). This legislation
provides mainstream opportunities to people with disabilities. The ADA
imposes requirements on certain components of society to make reasonable
accommodations to integrate people with disabilities into the community and
the workplace.
Distribution channels. The changing home health care market continues to
provide new ways of reaching the end user. The distribution network for
products has expanded to include not only specialized home health care
providers and extended care facilities but retail drug stores, surgical
supply houses, rental, hospital and HMO-based stores, home health agencies,
mass merchandisers, direct sales and the Internet.
Europe/Asia/Pacific
- -------------------
The company believes that, while many of the market factors influencing demand
in the U.S. are also present in Europe and Asia/Pacific - aging of the
population, technological trends and society's acceptance of people with
disabilities - each of the major national markets within Europe and in
Asia/Pacific have distinctive characteristics. The health care industry is more
heavily socialized and, therefore, is more influenced by government regulation
and fiscal policy. Variations in product specifications, regulatory approvals,approval
processes, distribution requirements and reimbursement policies require the
company to tailor its approach to each national market. Management believes that
as the European markets become more homogeneous and the company continues to
refine its distribution channels, the company can more effectively penetrate
these markets. Likewise, the company expects to increase its sales in the highly
fragmented Australian, New Zealand and Asian markets.
I-4
GEOGRAPHICAL SEGMENTS AND PRODUCT CATEGORIES
- --------------------------------------------
North America
- -------------
North American operations are aligned into five primary product groups, which
manufacture and market products in all of the major home medical equipment
categories. In Canada, the company primarily sells Invacare products
manufactured in the U.S.
REHAB 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. Power
wheelchair lines are marketed under the Invacare(R) Storm Series(R) and
Xterra(TM) brand names and include a full range of powered mobility
products. The Storm Series(R) was expanded in 2004 with the introduction of
the TDX(TM) line of power wheelchairs which offer an unprecedented
combination of power, stability and maneuverability. The Pronto(TM) Series
Power Wheelchairs with SureStep(TM), introduced in 2002, feature center-wheel drive performance
for exceptional maneuverability and intuitive driving. The power tilt and
recline systems are now offered also
as a result of the company's acquisition of Motion Concepts, Inc.well.
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(R) and Invacare Top
End(R) 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, skiing and tennis.
Personal Mobility. In 2003,2005, Invacare introduced the HMV(TM) (Highly
Maneuverable Vehicle) product,At'm Quick Transport,
an upgrade to the Invacare At'm Take Along Chair, which is the next
evolution in 2004 replacedportable mobility and has an improved and quicker disassembly
feature. In addition, during 2005, the threecompany acquired Altimate Medical,
Inc., which manufactures standing frames and four-wheeled motorized scooters, including rear-wheel drive models for both
outdoor and indoor use, marketed under the Invacare(R) brand name that
include scooters under the Lynx(TM) and Panther(TM) product names.mobility products.
Seating and positioning products. Invacare markets seat cushions, back
supports and accessories under three series. Invacare(R) Essential(TM)
Series provides simple seating solutions for comfort, fit and function.
Invacare Infinity(TM) Series includes versatile modular seating, providing
optimal rehab solutions. Invacare PinDot(R) Series offers custom seating
solutions personalized for the most challenged clients. The company has
also expanded its product line of seating products and wheelchairs for the
pediatric market with the acquisition of Freedom Designs, Inc.market.
STANDARD PRODUCTS
Manual wheelchairs. Invacare's manual wheelchairs are sold for use inside
and outside the home, institutional settings, or public places (e.g.,
airports, malls, etc.). Our clients include people who are chronically or
temporarily disabled and require basic mobility performance with little or
no frame modification. Examples of Invacare manual wheelchair lines, which
are marketed under the Invacare(R) brand name, include the 9000 and
Tracer(R) product lines. These lines offer wheelchairs that are designed to
accommodate the diverse capabilities and unique needs of the individual
from petite to bariatric sizes.
Personal care. Invacare manufactures and/or distributes a full line of
personal care products, including ambulatory aids such as crutches, canes,
walkers and wheeled walkers. This line also features one of Invacare's
latest product innovations, the Rollite(TM) Rollator, a truly unique
solution in patient mobility. 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.
Home care beds. Invacare manufactures and distributes a wide variety of
manual, semi-electric and fully electric beds for home use under the
Invacare(R) brand name. Home care bed accessories include bedside rails,
mattresses, overbed tables, trapeze bars and traction equipment. Also
available are the new bariatric beds and accompanying accessories to serve
the special needs of bariatric patients.
Low air loss therapy products. Invacare manufactures and markets a complete
line of mattress overlays and replacement products, under the Invacare(R)
brand name. These products, which use air flotation to redistribute weight
and move moisture away from patients, assist in the total care of those who
are immobile and spend a great deal of time in bed.
Patient Transport. Invacare manufactures and markets 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 and
institutional settings, these products include patient lifts and slings,
and a new series of mobile, multi-functional recliners.
I-5
RESPIRATORY PRODUCTS
Home respiratory products. Invacare manufactures and/or distributes home
respiratory products, including oxygen concentrators, nebulizer compressors
and respiratory disposables, sleep therapy products and portable compressed
oxygen systems. Invacare home respiratory products are marketed
predominantly under the Invacare(R) brand name. The Invacare Venture
HomeFill(TM) II Oxygen Compressor enables people to safely and easily make
compressed oxygen in their home and store it in cylinders for future use.
DISTRIBUTED PRODUCTS
Distributed products. Invacare distributes numerous lines of branded
medical supplies including ostomy, incontinence, diabetic, wound care and
miscellaneous home medical products, as well as HME aids for daily living.
In 2004, Invacare introduced its own private label brand of certain medical
supplies.
CONTINUING CARE
Health Care Furnishings. Invacare, operating as Invacare Continuing Care
Group, is a manufacturer and distributor of beds and furnishings for the
long-term care markets. In addition, certain home medical equipment also is
sold through this channel.
OTHER PRODUCTS
Accessory Products. Invacare also manufactures, markets and distributes
many accessory products, including spare parts, wheelchair cushions, arm
rests, wheels and respiratory parts. In some cases, Invacare's accessory
items are built to be interchangeable so that they can be used to replace
parts on products manufactured by others.
Asia/Pacific
- ------------
The company's Asia/Pacific operations consist of Invacare Australia, which
imports and distributes the Invacare range of products and manufactures and
distributes the Rollerchair range of custom power wheelchairs and Pro Med lifts;lifts,
DecPac ramps and Australian Healthcare Equipment beds, furniture and pressure
care products; Dynamic Controls, a New Zealand manufacturer of electronic
operating components used in power wheelchairs and scooters; Invacare New
Zealand, a manufacturer of wheelchairs and beds and a distributor of a wide
range of home medical equipment; and Invacare Asia Sales, which imports and
distributes home medical equipment to the Asia markets.
Europe
- ------
The company's European operations operate as a "common market" company with
sales throughout Europe. The European operations currently sell a line of
products providing significant room for growth as Invacare continues to broaden its product
line offerings to more closely resemble thatthose of theits North American operations.
Most wheelchair products sold in Europe are designed locally to meet specific
market requirements. The company manufactures and/or assembles both manual and
power wheelchair products at the following European facilities: Invacare (UK)UK Ltd.
in the United Kingdom, Invacare Poirier S.A.S. in France, Invacare (Deutschland)
GmbH in Germany, and Invacare
Deutschland GmbHUlrich Alber Gmgh in Germany. Manual wheelchair products
are also manufactured and/or assembled at Invacare Lda. in Portugal, Invacare AG in
Switzerland (the Kuschall Range), and Invacare Rea AB in Sweden. Beds and
patient lifts are manufactured at Invacare HongEC-Hong A/S in Denmark. Personal care products
are manufactured at Aquatec GmbH in Germany, Dolomite AB in Sweden and imported.
A range of patient lifts is also assembled at Invacare (UK)UK Ltd. in the United
Kingdom. Oxygen products are imported from Invacare U.S. operations. In addition to distributing the Invacare
range of products, Invacare Mecc San SrL in Italy manufactures beds, patient
lifts and commodes specifically for the local market.
With the acquisition in September 2004 of WP Domus GmbH (Domus), the European
product range has now been enhanced and market share increased. Domus is a
European-based holding company that manufacturesThe acquired
companies within the group manufacture several complementary product lines to
Invacare's product lines, including power add-on products, bath lifts and
walking aids.
Domus has three divisions: Alber, AquatecIn April 2005, Medical Support Systems Ltd. in the United Kingdom was acquired,
enabling Invacare to fill an important gap in the seating and Dolomite.anti-decubitus
markets.
For information relating to net sales by product group, see Business Segments in
the Notes to the Consolidated Financial Statements.Statements included in this report.
I-6
WARRANTY
- --------
Generally, the company's products are covered from the date of sale to the
customer by warranties against defects in material and workmanship for various
periods up to six years fromdepending on the date of sale to
the customer.product. Certain components carry a lifetime warranty.
I-6
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. 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 products, the range of products offered, the technical expertise of
the sales force, the effectiveness of the company distribution system, the
strength of the dealer and distributor network and the availability of prompt
and reliable service for its products. Various manufacturers, from time to time,
have instituted price-cutting programs in an effort to gain market share. There
can be no assurance that other HME manufacturers will not attempt to implement
such aggressive pricingshare 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 them becoming
regional leaders in specific product lines.
MARKETING AND DISTRIBUTION
- --------------------------
North America and Asia/Pacific
- ------------------------------
Invacare's products are marketed in the United States and Asia/Pacific primarily
to providers who in turn sell or rent these products directly to consumers
within the non-acute care setting. Invacare's primary customer is the home
medical equipment (HME) provider. 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, as well as to consumers, who express a product or
brand preference.
Invacare's domestic sales and marketing organization consists primarily of a
home care sales force, which markets and sells Invacare(R)-branded branded products to
HME providers. Each member of Invacare's home care sales force functions as a
Territory Business Manager (TBM) and handles all product and service needs for
an account, thus saving customerscustomers' 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 in British Columbia, Ontario and Quebec to health care providers
throughout Canada. Manufacturers' representatives market and sell Invacare
products through the company's Invacare Continuing Care Group to the non-acute
care market.
The Inside Sales Department provides increased sales coverage of smaller
accounts and complements the efforts of the field sales force. Inside Sales
offers cost-effective sales coverage through a targeted telesales effort, and
has delivered excellentsolid sales growth in each of its five years of existence.
The Invacare Service and Parts Division (ISP) focuses on improving operations
and enhancing overall service to its customers. Recent initiatives included the
pre-packaging of parts and adding a bar code to the label, the kitting of
upholstery with associated hardware, and introducing 15 new power wheelchair and
scooter accessories. ISP's Technical Education
department recently consolidated
its Power Wheelchair and Respiratory schools into a four-day format and
continued itsoffers education programs that continue to place emphasis on
improving providersthe productivity of repair technicians' productivity.technicians. The Service Referral Network
includes over 600 providers who honor Invacare's product warranties regardless
of where the product was purchased. This network of servicing providers helps
ensure that all consumers using Invacare products receive quality service and
support that is consistent with the Invacare brand promise.
The company sells distributed products, primarily soft goods and disposable
medical supplies, through the Invacare Supply Group (ISG). ISG is an important
component of Invacare's "Total One Stop Shopping" program, through which
Invacare offers HME providers of all sizes a broader range of products and
services at a lower total cost. ISG products include ostomy, incontinence, wound
care and diabetic supplies, as well as other soft goods and disposables which
complement other Invacare products that are purchased by many of the same
customers who buy Invacare equipment. These products are also sold in the retail
market. ISG markets its products through an inside telesales and customer
service department and the InternetInternet. Additionally, ISG entered the long term
care market on a regional basis and Invacare's HME fieldmarkets to those nursing homes utilizing a
direct outside sales force. ISG also markets a Home Delivery Program to HME
providers through which ISG drop-ships supplies in the provider's name to the
customer's address. Thus, providers have no products to stock, no minimum order
requirements and delivery is made within 24 to 48 hours nationwide.
In 2004, ISG completed the
purchase and integration of ACS, a home infusion company, opening up a new
market for ISG. ISG also added more than 150 SKUs to its Invacare-branded
consumable line. The company opened a new state-of-the-art distribution facility
in Jamesburg, New Jersey and closed its existing Edison, New Jersey facility.
The move more than doubled available space, while also enhancing Invacare Supply
Group's ability to effectively pick, pack and ship customer orders.
I-7
In 2004,2005, Invacare, through its co-op advertising program, continued to offer
direct response television commercials designed to generate demand for Invacare
Power Chairs Scooters and the HomeFill Oxygen System sold by the HME provider. These
commercials feature Arnold Palmer, Invacare's worldwide spokesperson, who has
become an integral part of Invacare's "Yes, you can(TM)" promotional and
marketing efforts. This program encourages consumers to achieve personal
independence and participate in the activities of life, facilitated by the home
health care products whichthat Invacare manufactures, distributes and/or markets
throughout the world. The company signedhas an extended agreement with ArnoldMr. Palmer through the
end of 2006.2007. Mr. Palmer, in serving as Invacare's spokesperson, is helping
accomplish three objectives: (i) creating attention and awareness for the
category of home health care products, (ii) accelerating the acceptance of these
products as lifestyle enhancing so that consumers actually want these products
and
don't just needrather than simply needing them, and (iii) establishing the Invacare brand as
the consumer category-brand for home health care products. Mr. Palmer is
featured throughout Invacare's marketing communications, including Invacare
direct-response television commercials, print advertising, point-of-purchase
displays, and other merchandising and marketing materials.
Invacare continues to enhance www.invacare.com, maintaining its position as the
leader in e-commerce in the HME industry. New on-line offerings in 2005 have
included a new product configurator, and contract pricing in the customer's
secured view of the product catalog. Both features are the result of the Oracle
ERP implementation. Upgrades to web channels include new marketing features for
Invacare Canada, performance increases for The Aftermarket Group and Invacare
Service Centers, search enhancements in the Invacare Service Parts on-line
catalog and easier to find Price List updates. These upgrades increase the
flexibility and accuracy of the information available through those web
properties. In 2004,2005, Invacare's website utilization continued to increase. Thirty-two-percentincrease,
resulting in thirty-five-percent of all standard domestic orders were placed overvia the
web. Another 14% of orders wereweb, and approximately twelve percent through EDI, for a total of
46% of all orders being placed electronically, resulting in a significant cost
savings. New online offerings in 2004 included online financing for Invacare
providers, resulting in additional transactional cost savings for the company. A
full transactional web site for Invacare Canada went live in March. Major
enhancements to the administration tools for the online Product Catalog were
developed. A web version of the tool makes updating the online catalog quicker
and easier. Users can make faster updates to product PDF documents in the online
product catalog, streamlining the content management process. The integration of
Invacare's website with the new Oracle ERP system began in 2004 and will
continue into 2005. IncreasingIncreased web transactions are reducingsuch as quotes, orders, pricing inquiries,
as well as document searches and downloads reduced the number of calls to the
customer service call center, which also resultsresulting in significant cost savings. ThisThe
integration of a new web server platform and networking hardware upgrades in
2006 is expected to further improve the onlineon-line customer experience by adding
additional website features such as contract pricing,
financing options, couponsspeed and product security.performance.
In 2004,2005, Invacare continued its strategic advertising campaign in key trade
publications that reach the providers of home medical equipment. The company
also contributed extensively to editorial coverage in trade publications
concerning the products it manufactures. Companymanufactures and company representatives attended
numerous trade shows and conferences on a national and regional basis in which
Invacare products were displayed to providers, health care professionals and
consumers.
Invacare continues to generate greater consumer awareness of the company and its
products. This was evidenced by enhancements made to its consumer-marketing
program in 2004 through sponsorships of a variety of wheelchair sporting
events and support of various philanthropic causes benefiting the consumers of
its products. For the eleventhtwelfth consecutive year, Invacare continued as a National
Corporate Partner with Easter Seals, one of the most recognized charities in the
United States that meets the needs of both children and adults with various
types of disabilities. The company continued its sponsorships of 75 individual
wheelchair athletes and teams, including several of the top-ranked male and
female racers, hand cyclists, and wheelchair tennis players in the world.
Invacare was the title sponsor for the ninthseventh year in a row of the Invacare
World Team Cup of Wheelchair Tennis Tournament, which took place in January in
Christchurch, New Zealand.the Netherlands. The company also continued its support of disabled veterans
through its sponsorship of the 24th25th National Veterans Wheelchair Games, the
largest annual wheelchair sports event in the world, which was held in St.
Louis, Missouri.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.
The year
2004 also was a Paralympic year. Team Invacare had more than 30 athletes
participating in the competition who brought home more than 30 gold, silver and
bronze medals at the games, which were held in September in Athens, Greece,
following the Olympic Games.
The company's top 10 customers accounted for approximately 14%12% of 20042005 net
sales. The loss of business of one or more of these customers or buying groups
may have a significant impact on the company, although no single customer
accounted for more than 5% of the company's 20042005 net sales. Providers who are
part of a buying group generally make individual purchasing decisions and are
invoiced directly by the company.
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, Norway
and the Netherlands, and sells through distributors elsewhere in Europe. 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 2005, the distribution pattern within Europe has evolved
in 2 ways: whereas the Nordic government agencies have moved further towards a
decentralization of their purchasing system, the central and southern markets
experienced a consolidation of big buying groups tending to develop their
business on a European scale. In most markets, government health care and
reimbursement policies play an importantincreasing role in determining the types of
equipment sold and price levels for such products.
I-8
PRODUCT LIABILITY COSTS
- -----------------------
The company's captive insurance company, Invatection Insurance Co., currently
has a policy year that runs from September 1 to August 31 and insures annual
policy losses of $10,000,000 per occurrence and $11,000,000 in the aggregate of
the company's North American product liability exposure. The company also has
additional layers of external insurance coverage insuring up to $100,000,000 in
annual aggregate losses arising from individual claims anywhere in the world
that exceed the captive insurance company policy limits.limits or the limits of the
company's per country foreign liability limits, as applicable. There can be no
assurance that Invacare's current insurance levels will continue to be adequate
or available at affordable rates.
Product liability reserves are recorded for individual claims based upon
historical experience, industry expertise and indications from the third-party
actuary. Additional reserves, in excess of the specific individual case
reserves, are provided for incurred but not reported claims based upon
third-party actuarial valuations at the time such valuations are conducted.
Historical claims experience and other assumptions are taken into consideration
by the third-party actuary to estimate the ultimate reserves. For example, the
actuarial analysis assumes that historical loss experience is an indicator of
future experience, that the distribution of exposures by geographic area and
nature of operations for ongoing operations is expected to be very similar to
historical operations with no dramatic changes and that the government indices
used to trend losses and exposures are appropriate. Estimates made are adjusted
on a regular basis and can be impacted by actual loss award settlements on
claims. While actuarial analysis is used to help determine adequate reserves,
the company accepts responsibility for the determination and recording of
adequate reserves in accordance with accepted loss reserving standards and
practices.
PRODUCT DEVELOPMENT AND ENGINEERING
- -----------------------------------
Invacare is committed to continuously improving, expanding and broadening its
existing product lines. In 2004,2005, new product development continued to receive an
even stronger emphasisbe a focus
as part of Invacare's strategy to gain market share and maintain competitive
advantage. To this end, the company introduced 5337 new products. The following
are some of the most significant 2005 product introductions:developments:
North America
- -------------
The At'm Quick Transport, an upgrade to the Invacare At'm Take Along Chair,
Invacare's newest power wheelchair,that provides consumers a light-weight and compact chair to fit in the
trunk of a car and assemble easily in just 60 seconds. The consumer's
caregiver can open the seat, snap it on the lightweight base, and add the
battery. Assembly requires absolutely no tools.
Formula(TM) Powered Seating, combines three systems: the Formula(TM) PTO
Plus, the Formula(TM) Invisible Super Low(TM) Tilt, and Formula(TM) TREMK Series Electronics, MK6i electronics are expected to meet thetake Invacare's
market leading position in high-end rehab positioning needs of consumers from simple to complex. This
all-new Formula Powered Seating package offers the best integration of
powered seating upon the number-one bases with the number-onewheelchair electronics
in the HME industry, all from a single company, Invacare.
The Zoom 220 HMV(TM), the newest entrant to
the Zoom family of HMVs (Highly
Maneuverable Vehicles),next level. MK6i is compact, portable, lightweighta "plug and economicalplay" system that reduces set-up time
and service complexity for active consumers.the provider while providing a simplified,
intuitive and easier to use system for the consumer.
The Zoom line combines the power wheelchairInTouch(TM) TargIT(TM) Seat Cushion, is designed for today's
reimbursement environment. This product features industry-exclusive
features such as InTouch Zone(TM) and Blend2(TM) foam molding technology
of center-wheel driveand is an excellent solution for customers with the aesthetics of traditional scooter
products for indoor maneuverabilitymoderate skin protection
and outdoor performance.positioning needs.
The HomeFill(TM) II Patient Convenience Pack ML4, is an all-new portable
oxygen supply system that is lightweight --- 3 1/2 pounds - and easy to
transport for oxygen patients. The HomeFill Oxygen System offers HME
providers 3-to-1 cost savings in servicing their ambulatory oxygen patients
since the patientpatients can fill cylinders themselves in their own home, which gives
them freedom and independence - they no longer have to wait for cylinder
deliveries.
The Invacare Polaris(TM)EX(TM) withCPAP features SoftX(TM) Technology, and the Polaris(TM) EX(TM)
Heated Humidifier have been integrated as one product rather than two
separate units. The Polaris EX CPAP features Invacare's SoftX technology, which
tracks the patient's breathing pattern and reduces the patient's work of
breathing during exhalation, providing effortless exhalation for the
patient. Web OxAdditionally, integrated heated humidification can be provided by
the Polaris(TM) EX(TM) Heated Humidifier. Together, these products offer
unparalleled comfort, convenience and proven superior patient compliance.
BAR1000 is a PC-based, high-tech solutionnew 1,000-pound capacity Homecare Bed that is a 48" wide,
split spring bed designed to meet the needs of bariatric patients and yet
still provide easy home delivery and storage for providers. In addition,
the company offers the BAR3500 which is a combination Low Air Loss and
Alternating Pressure mattress replacement system, which will likely prevent
and treat pressure ulcers in bariatric patients.
The WalkLite(TM) line of walkers was expanded in 2005 to reach a wider
range of heights and features including: a flip up seat, spring-loaded rear
glide brakes to provide additional security, nylon backrest for comfort and
the ability to easily fold into a compact unit for transport or storage.
I-9
Pronto M91(TM) and TDX(TM) Total Driving eXperience power wheelchairs were
each enhanced in 2005 with the M91 receiving patented stability lock,
TCD(TM) traction control, adjustable ASBA seat and the Mk5(TM) NX-75
Controller, while TCD(TM), MK5(TM) 3.60 Version Software, and adjustable
ASBA seat was added to the oxygen qualification
problem facing the industry today. For a minimal quarterly fee, Web Ox
allows providers to subscribe to an unlimited number of tests, allowing
faster Medicare billing for oxygen patients, thus improving the provider's
cash flow.
A new Bariatrics Program offers a complete solutions approach for the
bariatric provider and their clients, and features the full line of
Invacare bariatric products. Making it easy to find the right product, the
bariatric catalog employs color-coding to sort products by weight capacity.
The catalog also offers cross-selling or complementary product suggestions
to help educate providers, clinicians and consumers about additional
product they may need, and at the same time establishes Invacare as the
leading manufacturer offering bariatric solutions.
I-9
Court-Side Glides(TM) for Invacare walkers are an innovative product that
takes the homemade tennis ball solution for walker glide tips a step
further. For years, consumers and therapists have been slashing tennis
balls, sometimes injuring themselves in the process, to create makeshift
walker glide tips that are durable for indoor and outdoor use and safe for
flooring surfaces. Invacare has enhanced the homemade tennis ball solution
to create a walker glide tip that is longer lasting, easy to install and
replace.
The Invacare Full Electric Low Bed is ideal for circumstances where rails
are not desirable or appropriate, but injuries from falling out of bed are
still a concern. It is the newest split-spring low bed available on the
market today, allowing easy, one-person delivery to home or long-term care
locations. The split-spring design, which Invacare pioneered, combines
easy, one-person delivery with the benefits of a low bed.TDX(TM).
Asia/Pacific
- ------------
Dynamic Controls continued various range extensions and design improvements to
products during 2004. Additionally, design work was continued on a New
Generation2005. A new Scooter Controller to be introduced in late 2005design was completed and extending
functionality in the "Shark" wheelchair controller, which was introduced in
2004.launched
early 2006. Dynamic Controls is positioning itself for further new product
releases 2006.
Europe
- ------
During 2004,2005, European operations introduced less new products than in 2003, but
updated a substantial number of existing products
as required by the market.appropriate for its markets. Key introductions and updates in 20042005 included:
The new Kuschall K-Series is an ensemble of active manual wheelchairs with
improved user functionality. In particular, adjustable backrest angle,
foldable backrest for compact volume when transporting the wheelchair,
simplified adjustments, mud-guards in carbon fiber and ultra light weight.
The Invacare(R) Dragon Verticalizer is a cost effective rear wheel drivedriven
power wheelchair designed and manufactured in Europe. It is a solid and cost efficient power
wheelchair that provides excellent indoor and outdoor mobility in the
suburban environment. ItIn addition, the Dragon Verticalizer is easyunique in its
verticalizing function. The user can automatically move in a standing
position, while continuing to drive the wheelchair.
The Invacare(R) G50 Power wheelchair is an improved version of the G40
Power wheelchair for outdoor use. An entirely new design, improved
maintenance accessibility, improved motor power to allow steeper slope
tracks, improved driving acceleration and themuch better battery autonomy.
The Invacare(R) Spectra Blitz, is a new power wheelchair for use by
children. The power wheelchair is designed for indoor and outdoor use. The
seat can be adjusted toin height and in angle.
Invacare(R) Legrest for Storm 3 is a side-mounted leg-rest that allows
automatic adjustment by electrical control. It improves the physical requirementsuser ergonomics
of the user.
TheStrom 3 Power wheelchair.
Invacare(R) Robin is a ceiling hoist designed in Europe. It provides
the most innovative way of transfer with care for nursing staff. Ensuring
excellent personal contact, the two-strap design offers comfort and
efficiency in a safe patient handling environment. Without the need for a
spreader bar, a secure and dignified transfer can be achieved.
The Invacare(R) Clematis is a manual wheelchair primarily for use in the
French market. Excellent comfort, quality and elegance describe this
folding chair equipped with pneumatic actuators. The seat positioning of
the Clematis offers the user a real sensation of relaxation and wellbeing.
The Invacare(R) Mistral3 power wheelchairTaurus mini scooter is an updated folding chair with
seat positioning. It replaces the Mistraleasy "take apart" power scooter. This
scooter shows good range and Mistral Plus.
Theperformance for outdoor use.
Invacare(R) Mistral3 JuniorSolar micro scooter is an easy "take apart" micro power
wheelchair is a version of the
Mistral3 with a reclining rigid seat base which is width and length
adjustable from 30cm to 36cm and provides ultimate comfort to children or
younger teenagers whether they are installed in a shell or not.
The Invacare(R) Action3 manual wheelchair, which was released in 2002scooter. This scooter has been improved withdeveloped to best suit the following; new locking pin on hanger and elevating
leg-rest, folding backrest, reclining backrest with gas spring, leg-rest
adaptor, angle adjustable backrest and hemi motion armrest.
The Invacare(R) Action 2000 & MB2 manual wheelchairs have been improved
with the following; new arm-pads - short and long and shorter brake shoe.maneuverability
needs of indoor use.
MANUFACTURING AND SUPPLIERS
- ---------------------------
The company's objective is to bemaintain the lowest cost, highest quality and lowest-cost
manufacturersupply
chain in itsthe industry. The company believes that it canseeks to achieve this objective not only through improved product design, but also by takinga
strategic combination of Invacare manufacturing facilities, contract
manufacturing facilities, and key suppliers. The operational strategy further
supports the marketing strategy with assets that are fast, flexible providers of
new and modified products that respond to the demands of the market.
The Supply Chain is focused on providing custom, configured, made-to-order
products from facilities close to the customers in each of its major markets. As
strategic choices are made on locations globally, those facilities that remain
in higher cost regions of North America and Europe will be very focused
factories that provide these specific competitive advantages to the marketing
and sales teams.
The company has refined its multi-year cost reduction plans initiated in the
first half of 2005 for its global manufacturing and distribution strategy. Once
completed in 2008, these actions are anticipated to generate approximately
$30,000,000 of annual pre-tax savings and to result in pre-tax restructuring
charges totaling $42,000,000. The company expects global reductions of at least
600 additional positions and to exit a number of steps to lower manufacturing costs. During 2004, the company opened
manufacturing locations in China at Suzhou Industrial Park and Kunshan City,
both of which are near Shanghai, to manufacture components, including bases for
consumer power wheelchairs. The company has plans to further utilize its Hong
Kong office to increase local sourcing of components in China in order to lower
costs. With these actions, Invacare expects to regain its position as one of the
lowest cost producers of standard products in the industry.
Of the many opportunities to reduce overall costs, the short-term emphasis will
be on building the professional disciplines in the areas of sourcing, quality
and logistics, with particular focus on sourcing components and finished goods
for each of the business segments.
I-10
North America / Asia/Pacific
- ----------------------------
The company has vertically integrated its manufacturing processes by
fabricating, coating, plating and assembling many of the components of each
product. The company designs and manufactures electronics for power wheelchairs,
from insertion of components into printed circuit boards to final assembly and
testing.
Invacare has focused on value engineering which reduces manufacturing costs by
eliminating product complexity and using common components. Value engineering
has been applied to all product introductions in the last three years, including
the latest generation of oxygen concentrators, electronic controls, wheelchairs,
patient lifts, beds and bath safety products.operations
worldwide.
The company continues to make investmentsplace specific emphasis on shifting 40% to 50% of its
products over the next three to five years to Asian sourcing opportunities,
including China and India which is a component of our multi-year manufacturing
and distribution strategy. Access to sourcing opportunities has been facilitated
by the company's establishment of a full test and design engineering facility in
manufacturing automation.its location in Suzhou. In Asia, Invacare controls products with intellectual
property, high value add margins, and that serve local market opportunities
through its wholly owned factories in Suzhou, China and Kunshan, Jiangsu
Province, China. The company has initiatedfacilities, which were opened in 2004, supply products to
the major regions of the world served by Invacare: North America, Europe, and
Asia/Pacific.
I-10
World class best practices in lean manufacturing programsand six sigma are used
throughout the operations to reduce manufacturing lead
times,eliminate waste, shorten production cycles, increase associate training, encourage
employee involvementlead-times, optimize
inventory, improve productivity, drive quality, and engage supply chain
associates in decision-makingthe definition and improve manufacturing quality.
Associate involvement teams participate in engineering, production and
processing strategies and associates have been given responsibility for their
own quality assurance.
The manufacturingimplementation of wheelchairs, replacement parts, patient aids and home care
beds consists of a variety of metal fabricating procedures, electronics
production, coating, plating and assembly operations. Manufacturing of oxygen
concentrators, nebulizer compressors, and seating and positioning products
consists primarily of assembly operations.needed change.
The company purchases raw materials, fabricated components, sub-assemblies, and servicesfinished
goods from a variety of suppliers.suppliers globally. The company's Hong Kong-based Asian
Sourcing and Purchasing Office has proven to be a significant asset to our
supply chain through its development and management of suppliers across Asia.
Where appropriate, Invacare does employ long-termutilizes contracts with its suppliers both
domesticallyin all regions to
increase the guarantees of delivery, cost, quality, and from the Far East.responsiveness. In those
situations in which long-termwhere contracts are not advantageous, the company believes that its relationships with
those suppliers are satisfactory and that alternativeInvacare works to manage
multiple sources of supply are
readily available.and relationships that provide increased flexibility
to the supply chain.
North America
- -------------
The company has focused its factories in North America on the final assembly of
powered mobility and custom manual wheelchairs, the fully integrated manufacture
of homecare and institutional care beds, the final assembly of respiratory
products, and the integrated component fabrication, painting, and final assembly
of a variety of standard manual wheelchairs and commodes. The company operates
four major factories in Elyria, Ohio; Sanford, Florida; London, Ontario; and
Reynosa, Mexico.
Asia/Pacific
- ------------
The company continues to aggressively integrate its operations in Australia to
maximize the leverage of operational efficiencies.
Europe
- ------
As in other areas,The company has twelve manufacturing facilities spread throughout Europe with a
capability to manufacture patient aid, wheelchair, powered mobility, bath
safety, and operational issues faced in the U.S. are
also present in Europe.patient transport products. The European manufacturing operations have streamlined,
allowingand logistics
facilities are focused on accelerating opportunities for the realization ofstreamlining to gain
significant synergies in cost and additional cost
reductions and improved efficiencies are planned going forward. This process
will continue and will now includequality over the integration of the Domus businesses.next three years.
ACQUISITIONS
- ------------
In 2004,2005, Invacare Corporation acquired for cash the following six businesses, which were
individually and collectively immaterial, at a total cost of $343,554,000:$58,216,000, which
was paid in cash:
o The assets of ACS, a New York distributor of medical supplies
with a focus on infusion therapy.
o The assets of Decpac,Australian Healthcare Equipment Pty Ltd, an Australian based company,
that designs and manufactures portable folding access rampsmanufacturer of beds, related furniture and pressure care products
for use with
wheelchairshome care and scooters.non-acute institutional care.
o Freedom Designs,Altimate Medical, Inc., a California-basedU.S. company, that designs
and manufactures seatingmanufacturer of standing
frames and mobility aids for the rehabilitation market.
o Medical Support Systems Holdings Limited, a U.K. company, and
manufacturer of high quality, foam pressure-reducing products and wheelchairs with a
particular focus onfor the
pediatric marketplace.
o WP Domus GmbH, a European-based holding company which
manufactures several complementary product lines to Invacare's
product lines.
o Champion Manufacturing, LLC , an Indiana company that designs and
manufactures medical recliners.
o The assets of Premier Designs, a California company from which
Invacare acquired assets and designs for a lightweight, easily
transportable power wheelchair.healthcare market.
On September 9, 2004, the company finalized the acquisition ofacquired 100% of the shares of WP Domus GmbH
(Domus), a European-based holding company that manufactures several
complementary product lines to Invacare's product lines, including power add-on
products, bath lifts and walking aids, from WP Domus LLC. Domus has three
divisions: Alber, Aquatec and Dolomite. The acquisition allowshas allowed the company
to expand its product line and reach new markets. The preliminaryfinal purchase price was
$227,382,000$226,806,000, including acquisition costs of $3,670,000,$4,116,000, all of which was paid
in cash, and is subject to final determination of the estimated costs of possible
office closures, sales agency transfers and other consolidation efforts expected
to be finalized by the end of the third quarter of 2005. The acquisition was
consummated after satisfaction of certain conditions, including receipt of all
requisite regulatory approvals. Invacare entered into a 100,000,000 Euro bridge
loan agreement and utilized its existing revolving credit line to fund the
acquisition. Invacare's reported results reflect the operating results of Domus
since the date of the acquisition.
Carroll Healthcare, Inc. was purchased in 2003 and as part of the purchase
agreement, the company agreed to pay additional consideration based upon
earnings before interest, taxes, depreciation and amortization from September 1,
2003 through August 31, 2004 calculated under Canadian generally accepted
accounting principles (U.S. GAAP has been used for company reporting purposes)
in accordance with the purchase agreement, with no defined maximum amount. The
payment amount was finalized and paid in October 2004 at 74,667,000 Canadian
Dollars, or $60,992,335 U.S. Dollars, which increased goodwill.
I-11
cash.
Motion Concepts, Inc. ("Motion") also was purchased in 2003 and, pursuant to the
Motion purchase agreement, the Companycompany agreed to pay contingent consideration
based upon earnings before interest and taxes over the three years subsequent to
the acquisition up to a maximum of approximately $16,000,000. Based upon 2004
and 2005 results, no additional consideration was paid. When the contingency
calculations
are completed in 2005 and 2006 related to the acquisition,acquisitions is settled, any additional consideration paid will
increase the purchase price and reported goodwill.goodwill related to the acquisition.
As a result of the company's ongoing search for acquisition opportunities,
coupled with the industry trend toward consolidation, other potential
acquisitions were evaluated in 2004.2005. The company focuses on acquisitions that
are intended to fulfill the following objectives:
Tactical. Grow market share or extend current product lines.
Strategic. Enter new market segments that complement existing businesses or
utilize the company's distribution strengths.
Geographic. Enable rapid entry into new foreign markets.
I-11
GOVERNMENT REGULATION
- ---------------------
The company is directly 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(most notably the U.S., EU, Australia and Canada,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 an end user can obtain and, thus, affect the product mix, pricing and
payment patterns of the company's customers who are the HME providers.
The company continues its pro-active efforts to shape public policy that impacts
home and community-based, non-acute health care. We are currently very active
with federal legislation and regulatory policy makers. Invacare believes that
these efforts give the company a competitive advantage in two ways. First,
customers frequently express appreciation for our efforts on behalf of the
entire industry. Second, sometimes we have the ability to anticipate and plan
for changes in public policy, unlike most other HME manufacturers who must react
to change after it occurs.
The Safe Medical Devices Act of 1990 and Medical Device Amendments of 1976 to
the Federal Food, Drug and Cosmetics Act of 1938 (the Acts)"Acts") provide for
regulation by the United States Food and Drug Administration (the FDA)"FDA") of the
manufacture and sale of medical devices. Under the Acts, medical devices are
classified as Class I, Class II or Class III devices. The companycompany's principal
products are designated as Class I or Class II devices. In general, Class I
devices must comply with labeling and record keeping 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
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.
During the past year, the company was inspected by the FDA or Health Canada at
multipleseveral locations and found to be acceptable, with none or only minor
inspectional findings needing attention. From time to time, the company may
undertake voluntary recalls of its products to maintain ongoing customer
relationships and to enhance its reputation for adhering to high standards of
quality and safety. The company continues to strengthen its programs to better
ensure compliance with applicable regulations forparticularly those which the failure to comply wouldcould
have a material adverse effect.effect on the company.
Although there are a number of reimbursement related issues in most of the
countries in which Invacare competes, the issues of primary importance are
currently in the United States. There are two critical issues for Invacare:
eligibility for reimbursement of power wheelchairs for elderly patients and the
provisions of the legislation related to prescription drug coverage under
Medicare. With regard to power wheelchairs, there has been a regulatory push by
the Centers for Medicare and
Medicaid Services (CMS) towards limiting("CMS") has started to implement a series of changes to the
eligibility, documentation, codes and other rules that impact the predictability
and access to patients who cannot take a single step on their own. This
limitation has confined many elderly patients, who couldthis benefit, but the transition will not be mobilecomplete until later
in power
wheelchairs, to their beds.2006. Invacare and the home care industry are working hard to convince CMS
and the Bush administration to make pragmatic changes, that this change does not benefit
the elderly and is leadingare consistent with
industry practices, to less active patients who could end up in costly
nursing homes and hospitals, and thereby would counteract any cost savings
attributable to limiting the eligibility for power wheelchairs. The
Administration is scheduled to soon issue new power wheelchair eligibility
criteria, which we expect to provide more predictability and improvedafford seniors appropriate access to this benefit.
I-12
their home medical
equipment.
In November of 2003, Congress passed legislation related to providing
prescription drug coverage for the elderly under the Medicare program. As part
of funding the costs of this new program, a number of changes to Medicare home
care reimbursement rules will take effect over the next few years. First, the
home care provider, who is Invacare's customer, did not receive a cost-of-living
adjustment in 2004 or 2005, and will not receive an update in 2005 and 2006. Second, in
2005, Medicare reimbursement for oxygen, along with certain types of home care
beds, wheelchairs, nebulizers and supplies, will bewas lowered to the median
reimbursement levels in the Federal Employee Health Benefit Plans. Third, in
early 2006, Congress passed the Deficit Reduction Act which includes payment
cuts to home oxygen that will take effect in January 2009, as well as reductions
for certain durable home medical equipment spending that will take effect in
2007. Fourth, starting in 2007, Congress has authorized competitive bidding for home medical items and
services will be authorized in ten of the largest metropolitan regions of the
U.S. for home medical items and services. In 2009, the competitive bidding program wouldwill be extended to eighty of the
largest metropolitan regions.
Although none of these changes are beneficial to the home care industry,
Invacare believes that it can still grow and thrive in this environment. The
home care industry has not received any cost-of-living adjustments over the last
few years and will try to respond with improved productivity to address the lack
of support from Congress. In terms of the 2005 price reductions, although we do
not yet know what price reduction will be applied to oxygen reimbursement, it is
anticipated that the blended cut for all items will be approximately 8%. If we
estimate the impact that the 2005 cuts could have on our revenue stream, they
are expected to be around 1% of consolidated net sales.
However,addition, Invacare's new products (for example, the
HomeFill(TM) low cost oxygen delivery system of HomeFill(TM))system), can help address the cuts the
home care provider has to endure. We will continue to focus on developing
products that help the provider improve profitability. With such products,
Invacare believes that it can grow and offset the risks.reimbursement pressures.
I-12
Additionally, Invacare willplans to accelerate its activities in China to make sure
that we are one of the lowest cost manufacturers and distributors to the home
care provider.
In terms of competitive bidding, Invacare has strong positions with the likely
provider consolidators who will probably gain share as we approach 2007 and
enter the new reimbursement environment. We believe that we are well positioned
to combat pricing pressures with volume gains and productivity improvements.
Nevertheless, there will be ongoing uncertainty in the industry over the extent
and depth of these cuts to the home care industry. Invacare is concerned that,
once implemented, competitive bidding will likely generatecause poorer service in the
home care arena as providers look to remain profitable. Likewise, it will likely
lead to further consolidation of the provider base as small entrepreneurs may
look to exit a less profitable business model. Invacare will keep a close watch on its
extension of credit in this environmentmonitor these
developments and will work with the industry to pressure Congress to reconsider
its actions. We believe that home care is the least costly and most preferred
environment in which an individual can recover from an operation or illness and
that government actions should encourage home care rather than lead to more
expensive alternatives.
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.
EMPLOYEES
- ---------
As of December 31, 2004,2005, the company had approximately 6,100 employees.
FOREIGN OPERATIONS AND EXPORT SALES
- -----------------------------------
The company also markets its products for export to other foreign countries. TheIn
2005, the company had product sales in over 80 countries worldwide. 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 450 Fifth100F Street, NW,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, thatwhich 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.
Forward-Looking Information
- ---------------------------
Statements contained in this Form 10-K may constitute forward-looking statements
within the meaning of the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Terms such as "will," "should," "plan," "intend,"
"expect," "continue," "forecast," "believe," "anticipate" and "seek," as well as
similar comments, are forward-looking in nature. Actual results and events may
differ significantly from those expressed or anticipated as a result of risks
and uncertainties which include, but are not limited to, the following: pricing
pressures, the success of the company's ongoing efforts to reduce costs,
increasing raw material costs, the consolidations of health care customers and
competitors, government budgetary and reimbursement issues at both the federal
and state level (including those that affect the sales of and margins on
product, along with the viability of customers), the ongoing implementation of
the company's North American enterprise resource planning system, the ability to
develop and sell new products with higher functionality and lower costs, the
effect of offering customers competitive financing terms, the ability to
successfully identify, acquire and integrate strategic acquisition candidates,
the difficulties in managing and operating businesses in many different foreign
jurisdictions, the orderly completion of facility consolidations, the vagaries
of any litigation or regulatory investigations that the company may be or become
involved in at any time (including the previously-disclosed litigation with
Respironics), the difficulties in acquiring and maintaining a proprietary
intellectual property ownership position, the overall economic, market and
industry growth conditions, foreign currency and interest rate risks, Invacare's
ability to improve financing terms and reduce working capital, as well as the
risks described in this Form 10-K under the caption "Risk Factors" and other
risks described from time to time in Invacare's reports as filed with the
Securities and Exchange Commission. We undertake no obligation to review or
update these forward-looking statements or other information contained herein.
I-13
Item 1A. Risk Factors.
- -----------------------
The company's business, operations and financial condition are subject to
various risks and uncertainties.
You 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 or develop, the company's
business, financial condition, results of operations and future growth prospects
could change.
The consolidation of health care customers and the company's competitors could
result in a loss of customers or in competitive pricing pressures.
Numerous initiatives and reforms initiated by legislators, regulators and
third-party payors to reduce HME 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. Some of the company's competitors have
been able to reduce production costs and have lowered 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, including increased collectibility risks, or in increased competitive
pricing pressures.
If the company's cost reduction efforts are ineffective, the revenues and
profitability of the company could be negatively impacted.
The company may not be successful in achieving expected operating
efficiencies and operating cost reductions, and may experience business
disruptions, associated with its previously announced restructuring and cost
reduction activities, including the restructuring activities announced in July
2005 and, in particular, the company's facility consolidations initiated in
connection with these activities. These efforts may not produce the full
efficiency and cost reduction benefits that the company expects. Further, such
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 its
other strategic goals and business plans may be adversely affected and the
company could experience business disruptions with customers and elsewhere if
its cost reduction and restructuring efforts prove ineffective.
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 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 domestically and from the Far East. 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 such 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 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.
Changes in government and other third-party payor reimbursement levels could
negatively impact the company's revenues and profitability.
The company's products are sold through a network of specialized home
health care providers, extended care facilities, hospital and HMO-based stores,
and other providers. Many of those providers (the company's customers) are
reimbursed for the healthcare services provided to their patients by third-party
payors, such as government programs, including Medicare and Medicaid, private
insurance plans and managed care programs. Many of these programs set maximum
reimbursement levels for certain of the products sold by the company in the
United States. If third-party payors deny coverage, make the reimbursement
process or documentation requirements more uncertain or reduce their current
levels of reimbursement, or if the company's costs of production increase faster
than increases in reimbursement levels, the company may be unable to sell its
products through its distribution channels on a profitable basis.
In particular, reduced government reimbursement levels and changes in
reimbursement policies could add pressure to the company's revenues and
profitability. Uncertainty related to Medicare's reimbursement policies for
power wheelchairs in particular, and equipment in general, is expected to
continue into 2006. The Centers for Medicare and Medicaid Services are scheduled
to issue a new rule on face-to-face exams and documentation requirements for
power wheelchairs and other mobility devices by April 1, 2006, as well as new
reimbursement codes, possibly later in the year. Additionally, the U.S. Congress
recently passed the Deficit Reduction Act, which includes payment cuts to home
I-14
oxygen that will take effect in January 2009 and reductions for certain durable
home medical equipment spending that will take effect in 2007. Finally, while it
is unclear whether Congress will enact the proposed provisions into law, the
Medicare cuts included in President Bush's fiscal year 2007 budget proposal
include approximately $7.4 billion in cuts to home oxygen therapy and power
wheelchair reimbursements. Similar trends and concerns are occurring in the
states' Medicaid programs. If unfavorable reimbursement policies or budgetary
cuts are adopted, they could adversely affect the demand for the company's
products by customers who depend on reimbursement by the government-funded
programs. The percentage of the company's sales dependent on Medicare or other
insurance programs may increase as the portion of the United States 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 certain third-party payors may 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 go out of business.
Outside the United States, reimbursement systems vary significantly by
country. Many foreign markets have government-managed health care systems that
govern reimbursement for new 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. Canada and some
European countries, for example, have tightened reimbursement rates. 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 and could have a material adverse
effect on the company's business, financial condition and results of operations.
Difficulties in implementing a new Enterprise Resource Planning system have
disrupted the company's business.
During the fourth quarter of 2005, the company implemented the second phase
of its Enterprise Resource Planning, or ERP, system. Due to complexities and
business process changes associated with this implementation, the company
encountered a number of issues related to the start-up of the system, including
difficulties in processing orders, customer disruptions and the loss of some
business. While the company believes that the difficulties associated with
implementing and stabilizing its ERP system were temporary and have been
addressed, there can be no assurance that the company will not experience
additional ongoing disruptions or inefficiencies in its business operations as a
result of this new system implementation. In addition, the final phase
addressing the company's manufacturing system is planned to be implemented
during 2006.
The company's success depends on its ability to design, manufacture, distribute,
and achieve market acceptance of new products with higher functionality and
lower costs.
The company sells its products to customers primarily in markets that are
characterized by technological change, product innovation and evolving industry
standards and in which product price is increasingly the primary consideration
in customers' purchasing decisions. The company is continually engaged in
product development and improvement programs. 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 its
products, in order to compete successfully with the company's competitors. If
competitors' product development capabilities become more effective than those
of the company, 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 may be unable to successfully identify, acquire, and integrate
strategic acquisition candidates.
The company's plans include identifying, 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 company's ability to successfully grow through acquisitions depends upon its
ability to identify, negotiate, complete and integrate suitable acquisitions and
to obtain any necessary financing. The costs of acquiring other businesses could
increase if competition for acquisition candidates increases. Additionally, the
success of the company's acquisition strategy is subject to other risks and
costs, including the following:
o the company's ability to realize operating efficiencies, synergies, or
other benefits expected from an acquisition, and possible delays in
realizing the benefits of the acquired company or products;
o diversion of management's time and attention from other business concerns;
o difficulties in retaining key employees of the acquired businesses who are
necessary to manage these businesses;
o difficulties in maintaining uniform standards, controls, procedures and
policies throughout acquired companies;
o adverse effects on existing business relationships with suppliers or
customers;
o the risks associated with the assumption of contingent or undisclosed
liabilities of acquisition targets; and
o ability to generate future cash flows or the availability of financing.
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. I-15
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, New Zealand, Asia, and Europe. Certain risks are inherent in
operating and selling products internationally, including:
o difficulties in enforcing agreements and collecting receivables
through certain foreign legal systems;
o foreign customers who may have longer payment cycles than customers in
the United States;
o tax rates in certain foreign countries that may exceed those in the
United States and foreign earnings that may be subject to withholding
requirements;
o 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;
o general economic and political conditions in countries where the
company operates or where end users of the company's products reside;
o difficulties associated with managing a large organization spread
throughout various countries;
o difficulties in enforcing intellectual property rights and weaker
intellectual property rights protection in some countries; and
o required compliance with a variety of foreign laws and regulations.
The company's revenues are subject to exchange rate fluctuations that could
adversely affect the company's 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 functional currency of the company's
subsidiaries outside the United States is the predominant currency used by the
subsidiaries to transact business. Through its 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 uses forward contracts to help reduce its exposure to exchange
rate variation risk. Despite the company's efforts to mitigate these risks,
however, the company's revenues may be adversely affected by exchange rate
fluctuations. The company also is exposed to market risk through various
financial instruments, including fixed rate and floating rate debt instruments.
The company uses interest swap agreements to mitigate its exposure to interest
rate fluctuations, but those efforts may not adequately protect the company from
significant interest rate risks.
The company may be adversely affected by legal actions or regulatory
proceedings.
The company may be subject to claims, litigation or other liabilities as a
result of injuries caused by allegedly defective products, acquisitions it has
completed or in the intellectual property area. For example, the company may be
exposed to future litigation by third parties based on intellectual property
infringement claims similar to the ongoing and previously disclosed Respironics
litigation. Any such claims or litigation against the company, regardless of the
merits, could result in substantial costs and could harm the company's business.
Intellectual property litigation or claims also could require the company:
o to cease manufacturing and selling any of its products that
incorporate the challenged intellectual property;
o to obtain a license from the holder of the infringed intellectual
property right alleged to have been infringed, which license may not
be available on commercially reasonable terms, if at all; or
o to redesign or rename its products, which may not be possible and
could be costly and time consuming.
The results of legal proceedings are difficult to predict and the company
cannot provide you with any assurance that an action or proceeding will not be
commenced against it, 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.
The company's business and financial condition could be adversely affected by
the difficulties in acquiring and maintaining a proprietary intellectual
property ownership position.
The company's ability to compete effectively with other companies depends
in part on the company's ability to maintain and enforce its patents and other
proprietary rights, which are essential to the company's business. The company
relies on a combination of patents, trade secrets, know-how and confidentiality
agreements to protect the proprietary aspects of its technology. These measures
afford only limited protection, and competitors may gain access to the company's
intellectual property and proprietary information. The law of patents and trade
secrets is constantly evolving and often involves complex legal and factual
questions. Litigation has been and may continue to be necessary to enforce the
company's intellectual property rights, to protect the company's trade secrets,
and to determine the validity and scope of the company's proprietary rights.
Such litigation can be costly and can divert management's attention from the
growth of the business. The company cannot assure you that its patents and other
proprietary rights will not be successfully challenged or that others will not
independently develop substantially equivalent information and technology or
otherwise gain access to the company's proprietary technology.
I-16
Item 1B. Unresolved Staff Comments.
- ------------------------------------
None
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, 20042005 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:
Ownership
Or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
- ------------------------- ----------- ------------- ------- ---
Alexandria, Virginia 230 September 20052006 None Office
Apharetta, Georgia 9,000 June 2006 None Warehouse and Offices
Arlington, Texas 63,626 April 2008 None Warehouse
Atlanta, Georgia 137,284 February 2008 One (3 yr.) Warehouse and Offices
Atlanta, Georgia 48,000 August 2006 None Sublet
Beltsville, Maryland 33,329 February 2005 One (3 yr.) Manufacturing, Offices, and
Warehouse
Delta, British Columbia 12,000 January 2008 One (3 yr.) Warehouse and Offices
Deer Park,Edison, New York 5,100 January 2006Jersey 75,291 March 2010 None Warehouse and Offices
Edison, New Jersey 105,014 March 2010 None WarehouseElkhart, Indiana 27,600 October 2009 Two (5 yr.) Manufacturing, Warehouses and
Offices
Elyria, Ohio
- - Taylor Street 251,656 Own - Manufacturing and Offices
- - Cleveland Street 107,052150,457 November 2007 One (3 yr.) Warehouse
- - One Invacare Way 50,000 Own - Headquarters
- - 1320 Taylor Street 30,000 January 2010 One (5 yr.) Offices
- - 1160 Taylor Street 4,800 Own - Warehouse and Offices
Fresno, California 2,500 August 2005 - Warehouse and Offices
Grand Prairie, Texas 43,754 April 2008 One (3 yr.) Warehouse and Offices
Holliston, Massachusetts 57,420 August 2006December 2007 None Warehouse and Offices
Kirkland, Quebec 26,196 November 2010 One (5 yr.) Manufacturing, Warehouse and
Offices
Jamesburg, New Jersey 83,200 November 2009 One (5 yr.) Warehouse and Offices
Kunshan City, China 4,80052,700 May 2006 One (2 yr.) Manufacturing and Offices
Longmont, Colorado 2,400 December 2006 -None Offices
London, Ontario 103,200 Own - Manufacturing and Offices
Marlboro, New Jersey 2,100 June 2005April 2006 None Office
Mississauga, Ontario 81,004 January 2005 One (5 yr.) Sublet
Mississauga, Ontario 26,530 November 2011 Two (5 yr.) Warehouse and Offices
North Ridgeville, Ohio 152,861 Own -Morton, Minnesota 26,900 June 2009 Two (4 yr.) Manufacturing, WarehousesWarehouse and
Offices
I-14I-17
Ownership
Or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
- ------------------------- ----------- ------------- ------- ---
North Ridgeville, Ohio 152,861 Own - Manufacturing, Warehouses and
Offices
North Ridgeville, Ohio 66,724 September 2007 Two (3 yr.) Office
Overland, Missouri 67,500 May 2007 Two (3 yr.) Manufacturing, Warehouses and
Offices
Pharr, Texas 2,672 Month to Month - Warehouse
Pinellas Park, Florida 11,400 July 2005 Three (1 yr.)2006 None Manufacturing and Offices
Rancho Cucamonga, California 55,890 June 2009 One (60 day) Warehouse
Reynosa, Mexico 129,690 Own - Manufacturing and Offices
Sacramento, California 26,900 May 2008 One (3 yr.) Manufacturing, Warehouse
and Offices
Sanford, Florida 117,108 Own - Manufacturing and Offices
Sanford, Florida 100,000 Own - Manufacturing and Offices
Scarborough, Ontario 5,428 February 20052008 None Manufacturing and Offices
Simi Valley, California 38,501 February 2009 Two (5 yr.) Manufacturing, Warehouse and
Offices
South Bend, Indiana 48,000 September 2008 Two (5 yr.) Warehouse
Spicewood, Texas 6,500 Month to Month None Manufacturing and Offices
Suzhou, China 5,00045,208 May 2006 None Manufacturing and Offices
Tonawanda, New York 7,515 March 2008 None Warehouse and Offices
Traverse City, Michigan 15,850 AprilJune 2006 None Manufacturing and Offices
Vaughan, Ontario 12,00026,637 June 2008 None Manufacturing and Offices
Asia/Pacific Operations
- -----------------------
Adelaide, Australia 21,668 April 2006 One (5 yr.) Manufacturing, Warehouse and
Offices
Adelaide, Australia 24,000 August 2007 One (5 yr.) Manufacturing, Warehouse and
Offices
Auckland, New Zealand 27,00030,518 September 2008 Two (3 yr.) Manufacturing, Warehouse and
Offices
Brisbane, Australia 2,400 December 2008 One (3 yr.) Warehouse and Offices
Birmingham, United Kingdom 15,845 July 2013 None Warehouse and Offices
Christchurch, New Zealand 57,682 December 2005 TwoJanuary 2009 One (3 yr.) Manufacturing and Offices
Hong Kong, China 600 February 2007 None Offices
Hong Kong, China 600 AprilFebruary 2007 None Offices
I-15I-18
Ownership
Or Expiration Renewal
Asia/PacificNorth American Operations Square Feet Date of Lease Options Use
- ------------------------- ----------- ------------- ------- ---
Hong Kong, China 600 April 2007 None Offices
Melbourne, Australia 19,629 July 2006 One (2 yr.) Manufacturing, Warehouse and
Offices
Melbourne, Australia 20,000 August 2006 None Manufacturing, Warehouse and
Offices
Napier, New Zealand 4,844 March 2009 Two (3 yr.) Warehouse and Offices
North Olmsted, Ohio 2,280 October 2008 None Warehouse and Offices
Sydney, Australia 16,000 February 2009 Two (3 yr.) Warehouse and Offices
Sydney, Australia 25,000 August 2006 Two (2 yr.) Manufacturing, Warehouse and
Offices
European Operations
- -------------------
Albstadt-Tailfi, Germany 78,495 January 2018 Two (5 yr.) Manufacturing, Warehouse and
Offices
Allschwil, Switzerland 36,000 Own - Manufacturing, Warehouse and
Offices
Anderstorp, Sweden 47,527 Own - Manufacturing, Warehouse and
Offices
Bergen, Norway 1,000 May 2009 One (5 yr.) Warehouse and Offices
Bridgend, Wales 131,522 Own - Manufacturing, Warehouse and
Offices
Brondby, Denmark 1,650 July 2007 Two (1 yr.) Offices
Brondby, Denmark 16,142 December 20052006 One (1 yr.) Warehouse and Offices
Dio, Sweden 107,600 Own - Manufacturing and Offices
Dublin, Ireland 5,000 December 2009 Three (5 yr.) Warehouse and Offices
Ede, The Netherlands 16,000 May 2009 One (5 yr.) Warehouse and Offices
Fondettes, France 106,412 November 2007 None Manufacturing, Warehouse, and
Offices
Girona, Spain 13,600 November 20052006 One (1 yr.) Warehouse and Offices
Gland, Switzerland 4,306 September 2007 One (5 yr.) Offices
Gland, Switzerland 1,173 September 2007 One (4 yr.) Offices
Goteberg, Sweden 7,500 June 2006 One (3 yr.) Warehouse and Offices
Hong, Denmark 155,541 Own - Manufacturing, Warehouse and
Offices
I-19
Ownership
Or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
- ------------------------- ----------- ------------- ------- ---
Isny, Germany 197,581 Own - Manufacturing, Warehouse and
Offices
Loppem, Belgium 6,000 December 2009 One (3 yr.) Warehouse and Offices
Landskrona, Sweden 3,099 April 20052008 One (3 yr.) Warehouse
Mondsee, Austria 1,505 March 2005 UnlimitedNovember 2007 One (3 yr.) Warehouse and Offices
Munchen, Germany 2,022 July 2005 None Offices
I-16
Ownership
Or Expiration Renewal
European Operations Square Feet Date of Lease Options Use
- ------------------------- ----------- ------------- ------- ---
Ontario, Canada 14,394 May 2007 None Offices
Oporto, Portugal 27,800 Own - Manufacturing, Warehouse and
Offices
Oskarshamn, Sweden 3,551 December 2005November 2006 One (1 yr.) Warehouse
Oslo, Norway 30,650 September 2006 None Warehouse and Offices
Porta Westfalica, Germany 134,563 October 2021 None Manufacturing, Warehouse and
Offices
Spanga, Sweden 3,228 June 2007 One (3 yr.) Warehouse and Offices
Spanga, Sweden 16,140 Own - Warehouse and Offices
Thiene, Italy 21,520 Own - Warehouse and Offices
Marano, Italy 21,528 May 2005 One (6 yr.) Manufacturing
Fondettes, France 106,412 November 2007 None Manufacturing, Warehouse and Offices
Trondheim, Norway 3,000 December 2007 One (3 yr.) Services and Offices
Venissieux, France 1,409 October 2006 None Offices
Witterswil, Switzerland 40,301 March 2015 Various (5 year) Manufacturing, Warehouse, and
Offices
Wurenlos, Switzerland 3,935 June 2009 One (to be determined) Offices
Item 3. Legal Proceedings.
- --------------------------
In the ordinary course of its business, Invacare 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 insurance carriers and
generally are being contested vigorously. CoverageThe 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 itsthe company's business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
During the fourth quarter of 2004,2005, no matter was submitted to a vote of our
security holders.
I-20
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
- ---- --- --------
A. Malachi Mixon, III 6465 Chairman of the Board of Directors and Chief Executive Officer
Gerald B. Blouch 5859 President, Chief Operating Officer and Director
Gregory C. Thompson 4950 Chief Financial Officer
Dale C. LaPorte 64 Senior Vice President - HME GroupBusiness Development and Chief Financial Officer
I-17
Name Age Position
- ---- --- --------
General Counsel
Joseph B. Richey, II 6869 President - Invacare Technologies, Senior Vice
President - Electronics and Design Engineering and Director
Louis F.J. Slangen 5758 Senior Vice President - Global Market Development
Joseph S. Usaj 5354 Senior Vice President - Human Resources
A. Malachi Mixon, III has been a Director since 1979. Mr. Mixon has been Chief
Executive Officer since 1979 and Chairman of the Board since 1983 and also
served as President until 1996, when Gerald B. Blouch, Chief Operating Officer,
was elected President.
Gerald B. Blouch has been President and a Director of Invacare since November
1996. Mr. Blouch has been Chief Operating Officer since December 1994 and
Chairman-Invacare International since December 1993. Previously, Mr. Blouch was
President-Homecare Division from March 1994 to December 1994 and Senior Vice
President-Homecare Division from September 1992 to March 1994. Mr. Blouch served
as Chief Financial Officer of Invacare from May 1990 to May 1993 and Treasurer
of Invacare from March 1991 to May 1993. Mr. Blouch is also a director of
NeuroControl Corporation, Cleveland,North Ridgeville, Ohio, a privately held company,
which develops and markets electromedical stimulation systems for stroke
patients.
Gregory C. Thompson was named Senior Vice President and Chief Financial Officer
in November 2002. In January 2005, he was assigned the additional position of
President - Home Medical Equipment Group. Before coming to Invacare, Mr. Thompson served as Senior Vice
President and Chief Financial Officer of Sensormatic Electronics Corporation, a
global manufacturer of electronic security products, from October 2000 to
January 2002 and was Vice President and Controller from February 1997 to October
2000. Previously, Mr. Thompson was Vice President and Corporate Controller for
Wang Laboratories from August 1994 to February 1997 and Assistant Corporate
Controller from October 1990 to August 1994.
Dale C. LaPorte has been Senior Vice President for Business Development and
General Counsel since January 1, 2006. Previously, Mr. LaPorte was a partner in
the law firm of Calfee, Halter & Griswold LLP from 1974 to 2005. He served as
Chairman of that firm from 2000 through 2004.
Joseph B. Richey, II has been a Director since 1980 and in September 1992 was
named President - Invacare Technologies and Senior Vice President - Electronics
and Design Engineering. Previously, Mr. Richey was Senior Vice President of
Product Development from July 1984 to September 1992 and Senior Vice President
and General Manager of North American Operations from September 1989 to
September 1992. Mr. Richey is also a director of NeuroControl Corporation, Cleveland,North
Ridgeville, Ohio, a privately held company, which develops and markets
electromedical stimulation systems for stroke patients.
Louis F. J. Slangen was named Senior Vice President - Global Market Development
in June 2004. Previously, Mr. Slangen was Senior Vice President - Sales &
Marketing from December 1994 to June 2004 and from September 1989 to December
1994 was Vice President - Sales and Marketing. Mr. Slangen was previously
President - Rehab Division from March 1994 to December 1994 and Vice President
and General Manager - Rehab Division from September 1992 to March 1994.
I-21
Joseph S. Usaj has been the Senior Vice President - Human Resources since May
2004. Before coming to Invacare, Mr. Usaj served as Vice President - Human
Resources for Ferro Corporation, a global manufacturer of performance materials
in the electronics, automotive, consumer products and pharmaceutical industries,
from August 2002 to December 2003. Previously, Mr. Usaj was Vice President -
Human Resources for Phillips Medical Systems from 1998 to 2002.
* The description of executive officers is included pursuant to Instruction 3 to
Section (b) of Item 401 of Regulation S-K.
I-18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer RepurchasesPurchases of Equity Securities.
- --------------------------------------------------------------------------------
Invacare Common Shares, without par value, trade on the New York Stock Exchange
(NYSE) under the symbol IVC."IVC." Ownership of the companycompany's Class B Common Shares
(which are not listed on NYSE) cannot be transferred, except, in general, to
family members. Class B Common Shares may be converted into Common Shares at any
time on a share-for-share basis. The approximate number of record holders of the company
Common Shares and Class B Common Shares at February 24, 20052006 was 4,8134,432 and 27,
respectively. The closing sale price for the Common Shares on February 24, 20052006
as reported by NYSE, was $46.57.$33.17. 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:
2004 2003
---- ----
Quarter Ended: High Low High Low
------------- ---- --- ---- ---
December 31 $52.00 $43.72 $43.74 $38.78
September 30 47.16 39.74 40.00 32.99
June 30 46.50 39.34 34.00 30.29
March 31 46.50 39.63 34.15 30.02
2005 2004
---- ----
Cash Cash
Dividends Dividends
Quarter Ended: High Low Declared High Low Declared
-------------- ---- --- --------- ---- --- --------
December 31 $41.50 $30.70 $0.0125 $52.00 $43.72 $0.0125
September 30 44.87 37.35 0.0125 47.16 39.74 0.0125
June 30 45.93 40.96 0.0125 46.50 39.34 0.0125
March 31 48.08 43.67 0.0125 46.50 39.63 0.0125
During 20042005 and 2003,2004, the Board of Directors also declared dividends of $0.05 per
Common Share and $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.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.
Information regardingThe following table presents information with respect to repurchases of common
shares made by the securities authorized for issuance under equity
compensation plans is incorporated by referencecompany during the three months ended December 31, 2005. All
of the repurchased shares were surrendered to the informationcompany by employees for tax
withholding purposes in conjunction with the vesting of restricted shares held
by the employees under the company's 2003 Performance Plan.
Total Number of Shares
Total Number Average Purchased as Part of
of Price Publicly Announced Maximum Number
Shares Paid Plans or Programs of Shares That May Yet
Period Purchased Per Share the Plans or Programs Be Purchased Under
------ --------- --------- --------------------- -----------------
10/1/2005-10/31/05 - $ - - $ -
1/1/2005-11/30/05 364 34.95 - -
12/1/2005-12/31/05 - - - -
--------- --------- --------- ---------
--------- --------- --------- ---------
Total 364 $ 34.95 - $ -
========= ========= ========= =========
I-22
Item 6. Selected Financial Data.
- ---------------------------------
The selected consolidated financial data set forth under the captions Compensation of Executive Officers and Compensation of
Directors inbelow with respect to the
company's definitive Proxy Statementconsolidated statements of earnings, cash flows and shareholders'
equity for the fiscal years ended December 31, 2005, Annual
Meeting2004 and 2003, and the
consolidated balance sheets as of Shareholders.
I-19
December 31, 2005 and 2004 are derived from
the Consolidated Financial Statements included elsewhere in this Form 10-K. The
consolidated statements of earnings, cash flows and shareholders' equity data
for the fiscal years ended December 31, 2003, 2002 and 2001 are derived from the
company's previously filed Consolidated Financial Statements. 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 our Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Item 6. Selected Financial Data
2005* 2004 2003 2002 2001* 2000
----*
----- ---- ---- ---- ----
(In thousands, except per share and ratio data)
Earnings
- --------
Net Sales $1,529,732 $1,403,327 $1,247,176 $1,089,161 $1,053,639
$1,013,162
Net Earnings *** 48,852 75,197 71,409 64,770 35,190 59,911
Net Earnings per Share - Basic 1.55 2.41 2.31 2.10 1.15 1.99
Net Earnings per Share -
Assuming Dilution 1.51 2.33 2.25 2.05 1.11
1.95
Dividends per Common Share 0.05000 0.05000 0.05000 0.05000 0.050000.05 0.05 0.05 0.05 0.05
Dividends per Class B Common Share 0.04545 0.04545 0.04545 0.04545 0.04545
2004 2003 2002 2001* 2000
---- ---- ---- ---- ----
Balance Sheet
- -------------
Current Assets $570,647 $565,151 $474,722 $398,812 $ 428,401
$432,408
Total Assets 1,622,953 1,628,124 1,108,213 906,703 914,537
951,855
Current Liabilities 332,888 258,141 223,488 168,226 167,453
197,387
Working Capital 237,759 307,010 251,234 230,586 260,948
235,021
Long-Term Debt 457,753 547,974 232,038 234,134 342,724
384,316Other Long-Term Obligations 79,624 68,571 34,383 24,031 22,810
Shareholders' Equity 752,688 753,438 618,304 480,312 381,550
349,773
Other Data
- ----------
Research and Development
Expenditures $23,247 $21,638 $19,130 $17,934 $17,394
$16,231
Capital Expenditures net of
Disposals 41,400 30,129 19,718 19,486 26,26831,517 41,403 30,660 22,109 20,182
Depreciation and Amortization 40,524 32,316 27,235 26,638 33,448
31,469
Key Ratios
- ----------
Return on Sales 3.2% 5.4% 5.7% 5.9% 3.3%
5.9%
Return on Average Assets 3.0% 5.5% 7.1% 7.1% 3.8% 6.3%
Return on Beginning
Shareholders' Equity 6.5% 12.2% 14.9% 17.0% 10.1%
18.8%
Current Ratio 1.7:1 2.2:1 2.1:1 2.4:1 2.6:1
2.2:1
Debt-to-Equity Ratio 0.6:1 0.7:1 0.4:1 0.5:1 0.9:1 1.1:1
* Reflects restructuring charge of $7,533 ($5,160 after tax or $0.15 per
share assuming dilution).
** Reflects non-recurring and unusual charge of $31,950 ($25,250 after tax or
$0.80 per share assuming dilution).
*** Amortization of goodwill ceased in 2002, net earnings in 2001 and 2002
includeincludes
amortization expense of $8,972 and $8,899, respectively.$8,972.
The comparability of the Selected Financial Data provided in the above table is
limited as acquisitions made, in particular the Domus acquisition in 2004,
materially impacted the company's reported results. See Acquisitions in the
Notes to the Consolidated Financial Statements which provides pro-forma
results.
I-20as provided in the company's Form
10-K for the year ended December 31, 2004.
I-23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
OUTLOOK
- -------
Uncertainty related to Medicare's reimbursement policies for power wheelchairs
in particular, and equipment in general, remains and is now expected to continue
throughout 2005.into 2006. The CMS is currently scheduled to issue a new proposed criteria from CMS
require public comment before implementation. The resulting ambiguity that is
impacting the consumerrule on face-to-face
exams and documentation requirements for power wheelchair market likely will not be clarified
until late 2005, although CMS has recently indicated it will trywheelchairs and finalize
theother mobility
devices by April 1, 2006 along with new criteriareimbursement codes, possibly later in
the firstyear. Additionally, Congress recently passed the Deficit Reduction Act which
includes payment cuts to home oxygen that will take effect in January 2009, as
well as reductions for certain durable home medical equipment spending that will
take effect in 2007. President Bush's just released fiscal year 2007 budget
proposal includes further, potentially significant, cuts to home oxygen, but
whether Congress will enact such payment reductions, particularly in an election
year, is doubtful.
As a result of these reimbursement uncertainties and continuing pricing
pressures, the company continues to reduce its cost structure. The company has
further refined its multi-year plans initiated in the second half of 2005. Adding2005 for
its global manufacturing and distribution strategy. Execution of these cost
reduction actions has begun. Once complete in 2008, these actions are
anticipated to generate approximately $30 million of annual pre-tax savings and
to result in pre-tax restructuring charges totaling $42 million. The company
expects a global reduction of at least 600 additional positions and to exit a
number of its manufacturing operations worldwide. During 2006, the problems arisingcompany will
reduce approximately 300 positions with a pre-tax restructuring charge estimated
at approximately $7 million. Annualized savings anticipated from the reimbursement difficulties, there will be additional confusion resulting
from Medicare's plan to expand coding of the power wheelchair reimbursement
system from 4 codes to 49 codes in January 2006. Despite the reimbursement
pressures, the Company believesthese actions
is approximately $8 million.
The company estimates that it will have a net sales increase of between 18%4% and
20%, with6% and earnings per share of between $2.00 and $2.10 in 2006, excluding the
impact of any new acquisitions contributing between 11% and 13% and
currency translation contributing a minimal amount. Earnings per sharein 2006. The 2006 net sales estimate is expected
to be between $2.75minimally impacted by foreign currency and $2.90 inthe full year inclusion of 2005
excludingacquisitions. This earnings per share range includes the impact from the stock
option accounting standard, recently announcedStatement of Financial Accounting Standard No. 123
(Revised 2004), Share Based Payment ("SFAS 123R") issued by the Financial
Accounting Standards Board.
Invacare believes it can still grow and thrive despite the fact that the home
care industry has not received any cost-of-living adjustments over the last few
years and government regulatory landscapeBoard (FASB). The impact of SFAS 123R on earnings per share
for 2006 is uncertain. The company expects that
the blended cut for the items affected by recent government regulations willestimated to be around 8%, which should negatively affect consolidated net sales by around 1%.
However, Invacare's new products, (for example, the low cost oxygen delivery
system of HomeFill(TM)), can help address the cuts the home care provider has to
endure. We will continue to focus on developing products that help the provider
improve profitability. With such products, Invacare believes it can grow and
offset the risks. Additionally, Invacare will accelerate its activities in China
to make sure that we are one of the lowest cost manufacturers and distributors
to the home care provider.approximately $0.05.
RESULTS OF OPERATIONS
- ---------------------
2005 Versus 2004
Versus 2003
Reclassifications.Charge Related to Restructuring Activities. On July 28, 2005, the company
announced cost reduction and profit improvement actions, which included:
reducing global headcount by 230 personnel, outsourcing improvements utilizing
the company's China manufacturing capability and third parties, shifting
substantial resources from product development to manufacturing cost reduction
activities and product rationalization, reducing freight exposure through
freight auctions and changing the freight policy, general expense reductions,
and exiting four facilities.
The following Management's Discussionrestructuring was necessitated by the continued decline in reimbursement for
medical equipment by U.S. government programs as well as similar reimbursement
pressures abroad and Analysiscontinued pricing pressures faced by the company as a
result of Financial Conditionoutsourcing by competitors to lower cost locations. The company has
already realized a decrease in costs as a result of its restructuring
initiatives since most of the restructuring costs recognized to date have been
comprised of severance for terminated employees.
To date, the company has made substantial progress on its restructuring
activities, including exiting four facilities and Resultseliminating approximately 300
positions through December 31, 2005, which resulted in restructuring charges of
Operations reflect certain reclassifications
made$7,533,000, principally for severance, of which $4,181,000 has been paid as of
December 31, 2005. There have been no material changes in accrued balances
related to the prior years' consolidated financial statementscharge, either as a result of revisions in the plan or changes in
estimates, and the company expects to conformutilize the accruals recorded as of
December 31, 2005 during 2006.
With additional actions planned in 2006, including the elimination of
approximately 300 additional positions, the company anticipates recognizing an
additional charge of $7,000,000 pre-tax. The actions in 2006 are expected to
result in annualized pre-tax savings of at least $8 million.
I-24
In addition, the presentation usedcompany continues to further refine its global manufacturing
and distribution strategy. Execution of these cost reduction actions has begun.
Once complete in 2008, these actions are anticipated to generate approximately
$30 million of annual pre-tax savings and to result in pre-tax restructuring
charges totaling $42 million. The company expects a global reduction of at least
600 additional positions and to exit a number of its manufacturing operations
worldwide.
Net Sales. Consolidated net sales for 2005 increased 9% for the year, endedto
$1,529,732,000 from $1,403,327,000. Acquisitions accounted for nine percentage
points of the net sales increase while foreign currency translation had less
than a one percentage point impact. The overall growth was primarily driven by
growth in Europe resulting from the Domus acquisition in 2004 as well as the
impact of other acquisitions worldwide.
North American Operations
- -------------------------
North American net sales, increased 1% over the prior year to $1,016,212 from
$1,002,273, with acquisitions accounting for two percentage points of the
increase and currency translation having less than a one percentage point
impact. These sales consist of Rehab (power wheelchairs, custom manual
wheelchairs, personal mobility and seating and positioning), Standard (manual
wheelchairs, personal care, home care beds, low air loss therapy and patient
transport), Continuing Care (beds and furniture), Respiratory (oxygen
concentrators, aerosol therapy, sleep, homefill and associated respiratory) and
Distributed (ostomy, incontinence, diabetic, wound care and other medical
supplies) products.
For the year, net sales growth was impacted by the disruption caused by the
implementation of the ERP system in the fourth quarter. The company estimates
that this resulted in lost fourth quarter sales of approximately $30,000,000 in
the company's North American home care division, primarily due to start up
difficulties in processing orders and the inability to ship products to
customers within required lead times.
The net sales increase was attributable to volume increases in Distributed
products (7%), in line with ISG's recent growth pattern; Continuing Care
products (12%) attributable to acquisitions; and other products (16%),
consisting primarily of the company's Canadian and aftermarket parts business.
These increases were partially offset by declines in Respiratory products (2%)
due to reduced purchases from national accounts for the Homefill(TM) II oxygen
system and oxygen concentrators and the disruptions arising out of the ERP
system implementation, Standard products (5%) as a result of reduced pricing and
ERP issues and Rehab products (2%) primarily due to continued Medicare power
wheelchair eligibility pressures and Medicaid related reimbursement pressures.
European Operations
- -------------------
European net sales increased 28% over the prior year to $432,142,000 from
$336,792,000 with acquisitions contributing to almost the entire increase as
foreign currency did not have a material impact. Organic growth in Europe was
minimal and reflected increases throughout Europe offset by declines, primarily
in Germany, as a result of pricing pressures.
Asia/Pacific Operations
- -----------------------
Asia/Pacific net sales increased 27% from the prior year to $81,378,000 from
$64,262,000. Acquisitions contributed sixteen percentage points of the increase
while foreign currency translation contributed four percentage points. The
overall growth was primarily driven by volume increases. The Asia/Pacific
segment transacts a substantial amount of its business with customers outside of
their region in various currencies other than their functional currencies. As a
result, changes in exchange rates, particularly with the Euro and U.S. Dollar,
can have a significant impact on sales and cost of sales.
Gross Profit. Consolidated gross profit as a percentage of net sales was 29.3%
in 2005 versus 29.8% in 2004. The margin decline was primarily attributable to
continued reimbursement issues and competitive pricing pressures as well as
increased freight costs and lower manufacturing volumes, and inefficiencies
resulting from the North American ERP implementation in the fourth quarter. The
factors attributable to the decline were partially offset by the cost reduction
initiatives.
North American gross profit as a percentage of net sales was 28.0% in 2005
versus 30.0% in 2004. The decline was primarily attributable to unfavorable mix
as a result of reduced Rehab and Respiratory volumes, pricing pressures in
Standard products and higher freight costs as a result of the high price of oil,
which were partially offset by continued cost reduction efforts.
Gross profit in Europe as a percentage of net sales increased 2.6 percentage
points from the prior year. The increase was primarily attributable to
acquisitions, in particular the full year impact of the Domus acquisition and
manufacturing cost reductions.
I-25
Gross profit in Asia/Pacific as a percentage of net sales increased 1.2
percentage points from the prior year. The increase was largely due to increased
volumes and cost reduction activities.
Selling, General and Administrative. Consolidated selling, general and
administrative expenses as a percentage of net sales were 22.3% in 2005 and
21.2% in 2004. The overall dollar increase was $44,658,000 or 15%, with
acquisitions increasing selling, general and administrative costs by
approximately $37,455,000 or thirteen percentage points and currency translation
adding $3,245,000 or one percentage point. Excluding acquisitions and currency
translation impact, SG&A increased $3,958,000 or 1% as a result of increased
distribution and commission related costs related to increased volumes,
continuous investment in marketing and higher bad debt and legal costs.
Selling, general and administrative expenses for North American operations
increased 10% or $17,233,000 compared to 2004 with acquisitions accounting for
two percentage points of the increase. The remaining increase is primarily
attributable to continued investments in marketing and branding programs,
increased distribution and commission costs related to increased volume and
higher bad debt and legal costs.
European operations' selling, general and administrative expenses increased 29%
or $24,336,000 from the prior year. European selling, general and administrative
expenses increased due to acquisitions, which caused an increase of $30,978,000
or 36% and foreign currency translation, which increased expenses by $1,556,000
or 2%. The remaining decrease was primarily attributable to a reduced cost
structure.
Asia/Pacific operations' selling, general and administrative expenses increased
85% or $7,777,000 compared to 2004 with acquisitions accounting for 22% and
foreign currency increasing the expense by $599,000 or 7%. The remaining
increase was primarily attributable to cost increases related to increased
depreciation and sales and marketing costs.
Interest. Interest expense increased to $29,809,000 in 2005 from $16,282,000 in
2004, representing an 83% increase. This increase was attributable to increased
borrowings under the company's revolving credit facility, resulting primarily
from 2004 acquisitions, and to increased borrowing rates. The company's
debt-to-equity ratio decreased to 0.6:1 as of December 31, 2005 from 0.7:1 as of
the end of the prior year. Interest income in 2005 was $1,683,000, which was
lower than the prior year amount of $5,186,000 primarily due to reduced interest
rate financing given to customers through De Lage Landen Inc. (DLL). Since
December 2000, Invacare customers primarily utilize the third-party financing
arrangement with DLL, a subsidiary of Rabo Bank of the Netherlands, to provide
financing.
Income Taxes. The company had an effective tax rate of 31.5% in 2005 and 31.9%
in 2004. The effective tax rate declined due to a change in the mix of earnings
and permanent deductions. The company's effective tax rate is lower than the
federal statutory rate primarily due to tax credits and earnings abroad being
taxed at rates lower than the federal statutory rate.
Research and Development. The company continues to invest in research and
development activities to maintain its competitive advantage. The company
dedicates dollars 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
$23,247,000 in 2005 from $21,638,000 in 2004. The expenditures, as a percentage
of net sales, were 1.5% in 2005 and in the prior year.
2004 Versus 2003
Net Sales. Consolidated net sales for 2004 increased 13% for the year, to
$1,403,327,000 from $1,247,176,000. Acquisitions accounted for 8eight percentage
points of the net sales increase while foreign currency translation contributed
an additional 3three percentage points. The overall growth was primarily driven
by volume increases in North America.
North American Operations
- -------------------------
North American net sales, increased 12% over the prior year, with acquisitions
accounting for 8% of the increase and currency translation having less than a
one percentage point impact. These sales consist of Rehab (power wheelchairs,
custom manual wheelchairs, personal mobility and seating and positioning),
Standard (manual wheelchairs, personal care, home care beds, low air loss
therapy and patient transport), Continuing Care (beds and furniture),
Respiratory (oxygen concentrators, aerosol therapy, sleep, homefill and
associated respiratory) and Distributed (ostomy, incontinence, diabetic, wound
care and other medical supplies) products.
I-26
For the year, the net sales increase was attributable to volume increases in:
Respiratory products (37%), largely due to continued strong performance in the
Homefill(TM) oxygen system product line; Distributed products (26%), with
acquisitions contributing 15fifteen percentage points of the improvement; and
Continuing Care products (59%) with acquisitions contributing 52fifty two
percentage points of the improvement. These were partially offset by declines in
Standard products (6%) as a result of reduced pricing and flat Rehab product
sales. Sales of Rehab products were negatively impacted by Medicare and Medicaid
related reimbursement pressures. In particular, although CMS was expected to
release new guidelines for power chairs in the fourth quarter of 2004, it
instead circulated proposed criteria that required public comment before
implementation. While the proposed criteria are favorable and are based on CMS'
own medical study, the ambiguity that is impacting the power wheelchair market
has resulted in significant declines in this market segment.
Other products, consisting primarily of the company's Canadian and aftermarket
parts businesses, had a 10% net sales increase principally as a result of volume
increases.
European Operations
- -------------------
European net sales increased 20% over the prior year to $336,792,000 from
$279,782,000. Acquisitions contributed 12twelve percentage points of the increase
and foreign currency accounted for 10ten percentage points of the increase. The
decline in organic growth was primarily due to reduced volumes in the Nordic
countries and continued reimbursement pressures in Germany.
I-21
Asia/Pacific Operations
- -----------------------
Asia/Pacific net sales declined 8% from the prior year to $64,262,000 from
$70,186,000. Excluding the impact of foreign exchange, net sales declined 18%
for the year. The decline was primarily the result of reduced volumes of
microprocessor controllers, resulting from the global slowdown in the production
of power wheelchairs caused in large part by the Medicare reimbursement
challenges in the United States described above. The Asia/Pacific segment
transacts a substantial amount of its business with customers outside of their
region in various currencies other than their functional currency, the New
Zealand Dollar. As a result, changes in exchange rates, particularly with the
Euro and U.S. Dollar, canhave had and may continue to have a significant impact on
sales and cost of sales.
Gross Profit. Consolidated gross profit as a percentage of net sales was 29.8%
in 2004 and 30.0% in 2003. The 2004 year margin decline was attributable toimpacted by continued
competitive pricing pressures and increased freight costs partially offset by
continued cost reduction initiatives.
North American gross profit as a percentage of net sales was 30.2% in 2004
versus 30.3% in 2003. The decline was primarily attributable to reduced pricing
in Standard products partially offset by continued cost reduction efforts.
Gross profit in Europe as a percentage of net sales in 2004 declined .7 of a
percentage point from the prior year. The decline is attributable to unfavorable
sales mix toward lower margin products and additional costs related to new
product introductions.
Gross profit in Asia/Pacific as a percentage of net sales in 2004 decreased by
3.5 percentage points from the prior year. The decline was due in part to
increased sales of lower margin products in the company's Dynamic Controls
subsidiary, reduced volumes and unfavorable foreign currency associated with
normal operating transactions.
Selling, General and Administrative. Consolidated selling, general and
administrative expenses as a percentage of net sales were 21.2% in 2004 and
21.0% in 2003. The overall dollar increase was $35,109,000 or 13%, with
acquisitions increasing selling, general and administrative costs by
approximately $20,263,000 or 8% and currency translation by $9,409,000 or 4%.
Selling, general and administrative expenses also increased as a result of
increased distribution and commission costs related to increased volumes,
continued investments in marketing and branding programs, and increased legal
costs. These were partially offset by reduced bad debt expense and management
bonuses as a result of reduced profitability from plan.
Selling, general and administrative expenses for North American operations in
2004 increased 9% or $16,562,000 compared to 2003 with acquisitions accounting
for 7seven percentage points of the increase. The remaining increase is primarily
attributable to continued investments in marketing and branding programs,
increased distribution and commission costs related to increased volume and
higher legal costs. These increases were partially offset by reduced bad debt
expense and management bonuses.
European operations' selling, general and administrative expenses increased 26%
or $17,290,000 from the prior year. European selling, general and administrative
expenses increased due to acquisitions and foreign currency translation.
Increases, primarily for acquisitions, were $7,791,000 or 12% and for currency
translation totaled $7,305,000 or 11%. The remaining increase was primarily
attributable to additional programs to re-establish sales growth.
I-27
Asia/Pacific operations' selling, general and administrative expenses increased
16% or $1,257,000 with foreign currency increasing the expense by $961,000 or
12%. The remaining increase was primarily attributable to additional systems
costs related to an Enterprise Resource Planning (ERP)the company's ERP implementation and sales and marketing costs
associated with the development of the Asia market.
Interest. Interest expense increased to $16,282,000 in 2004 from $11,710,000 in
2003, representing a 39% increase. This increase was attributable to increased
borrowings under the Company'scompany's revolving credit facility, and to new borrowings
under an interim bridge loan financing facility. The company's debt-to-equity
ratio increased to 0.7:1 as of December 31, 2004 from 0.4:1 as of the end of the
prior year. Interest income in 2004 was $5,186,000, which was comparable to
$5,473,000 in the prior year. Since December 2000, Invacare customers primarily
utilize the third-party financing arrangement with DLL, a subsidiary of Rabo
Bank of the Netherlands, to provide financing.
Income Taxes. The company had an effective tax rate of 31.9% in 2004 and 32.9%
in 2003. The effective tax rate declined due to a change in the mix of earnings
and permanent deductions. The Company'scompany's effective tax rate is lower than the
federal statutory rate primarily due to tax credits and earnings abroad being
taxed at rates lower than the federal statutory rate.
I-22
Research and Development. The company continues to increase its research and
development activities to maintain its competitive advantage. The company
dedicates dollars 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
$21,638,000 in 2004 from $19,130,000 in 2003. The expenditures, as a percentage2003, representing approximately 1.5% of
net sales were 1.5% in 2004 and 1.5% in the prior year.
2003 Versus 2002
Net Sales. Consolidated net sales for 2003 increased 15% for the year, to
$1,247,176,000 from $1,089,161,000, with net sales increasing in all business
segments on a reported basis. Foreign currency translation accounted for 6% of
the net sales increase, while acquisitions contributed an additional 3%. The
overall growth was primarily driven by volume increases in North America and
Asia/Pacific.
North American Operations
North American net sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs, personal mobility and seating and positioning), Standard (manual
wheelchairs, personal care, home care beds, low air loss therapy and patient
transport), Continuing Care (beds and furniture), Respiratory (oxygen
concentrators, aerosol therapy, sleep, homefill and associated respiratory) and
Distributed (ostomy, incontinence, diabetic, wound care and other medical
supplies) products increased 13% over the prior year, with currency translation
having less than a one percentage point impact and acquisitions accounting for
3%.
For the year, the net sales increase was attributable to increases in
Respiratory products (43%), Rehab products (30%), Distributed products (11%) and
Continuing Care products (20%), which were partially offset by declines in
Standard products (6%). Excluding acquisitions, Rehab product net sales
increased by 26% and Continuing Care product net sales declined by 4%. The net
sales improvements were led by strong sales growth in oxygen concentrators, the
HomeFill(TM) product line and consumer power products. Declines were primarily
attributable to continued pricing pressures in Standard products and weaker
sales to nursing homes through Invacare Continuing Care Group as a result of the
continued uncertainty surrounding government reimbursement programs.
Other products, consisting primarily of the company's Canadian and aftermarket
parts businesses, had an 8% net sales increase primarily as a result of volume
increases.
European Operations
European net sales increased 11% over the prior year to $279,782,000 from
$251,443,000. Foreign currency and acquisitions contributed 16 percentage points
and 3 percentage points, respectively, of the net sales increase. The organic
decline of 8% was primarily due to slower than expected sales in the Nordic
region and reimbursement pressures in Germany.
Asia/Pacific Operations
Asia/Pacific net sales increased 59% from the prior year to $70,186,000 from
$44,254,000. Excluding the impact of foreign exchange, net sales increased 27%
for the year. The increase was primarily the result of sales at Dynamic Controls
due in part to a significant increase in sales to a non-healthcare customer.
Gross Profit. Consolidated gross profit as a percentage of net sales were 30.0%
in 2003 and 30.1% in 2002. Margins remained relatively flat, as the company was
able to offset pricing pressures with improved manufacturing performance.
North American gross profit as a percentage of net sales was 30.3% in 2003
versus 30.0% in 2002. The increase was primarily attributable to continued cost
reduction efforts and improved product and customer mix.
Gross profit in Europe as a percentage of net sales improved 1.0 percentage
point from the prior year. The improvement is attributable to favorable sales
mix towards higher margin products and cost reduction efforts.
Gross profit in Asia/Pacific as a percentage of net sales decreased by 6.1
percentage points from last year. The decline was due in part to increased sales
of lower margin products in the company's Dynamic Controls subsidiary and
increased costs to support the growth in the business.
I-23
Selling, General and Administrative. Consolidated selling, general and
administrative expenses as a percentage of net sales were 21.0% in 2003 and
20.2% in 2002. The overall dollar increase was $41,719,000 or 19% with currency
translation increasing selling, general and administrative costs by
approximately $13,103,000 or 6% and acquisitions by $6,800,000 or 3%. Selling,
general and administrative expenses also increased as a result of accruals for
management bonuses as a result of improved profitability, increased distribution
and commission costs related to increased volumes, continued investments in
marketing and branding programs, and increased insurance costs.
North American operations selling, general and administrative expenses increased
15% or $21,789,000 compared to 2002. The increase is primarily attributable to
acquisitions, continued investments in marketing and branding programs,
additional provisions for bad debt and increases in insurance costs.
European operations selling, general and administrative expenses increased 30%
or $15,721,000 from the prior year. European selling, general and administrative
expenses were negatively impacted by foreign currency translation and
acquisitions, which increased expenses, reported in dollars by $9,993,000 or 19%
and $1,547,000 or 3%, respectively. The remaining increase was primarily
attributable to additional programs to re-establish sales growth.
Asia/Pacific operations' selling, general and administrative expenses increased
40% or $2,264,000 with foreign currency increasing the expense by $1,522,000 or
27%. Asia/Pacific selling, general and administrative costs grew at a slower
rate than sales principally as a result of aggressive expense control.
Interest. Interest expense decreased to $11,710,000 in 2003 from $15,122,000 in
2002, representing a 23% decrease. This decrease was attributable to the
continued favorable interest rate environment in 2003 and to a decrease in the
company's average borrowings outstanding under the company's revolving credit
facility. The company's debt-to-equity ratio decreased to 0.4:1 as of December
31, 2003 from 0.5:1 as of the end of the prior year. Interest income increased
in 2003 to $5,473,000 from $4,550,000 in the prior year, primarily attributable
to an increase in loan origination fees received from De Lage Landen Inc. (DLL).
Since December 2000, Invacare customers primarily utilize the third-party
financing arrangement with DLL, a subsidiary of Rabo Bank of the Netherlands, to
provide financing.
Income Taxes. The company had an effective tax rate of 32.9% in both 2003 and
2002, which is lower than the United States federal statutory rate as a
significant portion of the company earnings are outside of the United States and
taxed at lower rates.
Research and Development. The company continues to increase its research and
development activities to maintain its competitive advantage. The company
dedicates dollars 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
$19,130,000 in 2003 from $17,934,000 in 2002. The expenditures, as a percentage
of net sales, were 1.5% in 2003 and 1.6% in the prior year.these years.
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
volume, capital expenditure programs designed to improve productivity,
alternative sourcing of material and other cost control measures. In 2005, 2004
and 2003, the company was able to offset the majority of the impact of price
increases from suppliers by productivity improvements and other cost reduction
activities.
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 maintains various bank lines of credit to finance its worldwide
operations.
In 2005, the company entered into a $450,000,000 multi-currency, long-term
revolving credit agreement which was increased during the year by $50,000,000 to
an aggregate amount of $500,000,000. The new agreement replaced the $325,000,000
multi-currency, long-term revolving credit agreement entered into in 2001 and a
$100,000,000 bridge loan agreement entered into in 2004. In 2003, the company
issued $100,000,000 in senior notes, which are due between 2007 and 2010.
In 2001,On September 30, 2005, the company completedentered into a $325,000,000 multi-currency, long-term364-day $100 million accounts
receivable securitization facility. The Receivables Purchase Agreement (the
"Receivables Agreement"), provides for, among other things, the transfer from
time to time by Invacare and certain of its subsidiaries of ownership interests
of certain domestic accounts receivable on a revolving basis to the bank
conduit, an asset-backed issuer of commercial paper, and/or the financial
institutions named in the Receivables Agreement. Pursuant to the Receivables
Agreement, the company and certain of its subsidiaries from time to time may
transfer accounts receivable to Invacare Receivables Corporation (IRC), a
special purpose entity and subsidiary of Invacare. IRC then transfers interests
in the receivables to the Conduit and/or the financial institutions named in the
Receivables Agreement and receives funds from the conduit and/or the financial
institutions raised through the issuance of commercial paper (in its own name)
by the conduit and/or the financial institutions. In accordance with U.S.
Generally Accepted Accounting Principles (GAAP), Invacare accounts for the
transaction as a secured borrowing. Borrowings under the facility are
effectively repaid as receivables are collected, with new borrowings created as
additional receivables are sold. As of December 31, 2005, Invacare had
$79,351,000 in borrowings pursuant to the securitization facility at a borrowing
rate of approximately 4.3%. The initial borrowings were used to reduce balances
outstanding on Invacare's revolving credit agreement, which was replaced on January 14, 2005, along with a
100,000,000 Euro bridge agreement entered intofacility. The debt is reflected in
2004, by a new $450,000,000
multi-currency,the short-term debt and current maturities of long-term revolving credit agreement. In February 2005,obligations line of the
new
$450,000,000 multi-currency, long-term revolving credit agreement was also used
to pay off the $20,000,000 senior notescondensed consolidated balance sheet at 6.60%.December 31, 2005.
Additionally, the company maintains various other demand lines of credit
totaling a U.S. dollar equivalent of approximately $4,229,000$4,931,000 as of December 31,
2004.2005. The lines of credit along with cash generated from operations have been
and will continue to be used to fund the company's domestic and foreign working
capital, capital expenditures and acquisition requirements. As of December 31,
2004,2005, the company had approximately $126,734,000$237,801,000 available under its various
lines of credit, excluding debt covenant restrictions.
I-24I-28
The company's borrowing arrangements contain covenants with respect to, among
other items, interest coverage, net worth, dividend payments, working capital,
and funded debt to capitalization, as defined in the company's bank agreements
and agreement with its note holders. The company is in compliance with all
covenant requirements. Under the most restrictive covenant of the company's
borrowing arrangements, the company has the capacity to borrow up to an
additional $60,800,000$72,134,000 as of December 31, 2004 and up to $108,000,000, effective
February 2005 pursuant to the covenants of the
company's new $450,000,000$500,000,000 multi-currency, long-term revolving credit agreement.
While there is general concern about the potential for rising interest rates,
exposure to interest rate fluctuations is manageable given that a portion of the
debt is at fixed rates through 2010. In addition, the ability to terminate
existing swaps that exchange fixed rate debt to variable and to utilize interest
rate swaps to fix a higher percentage of the company's debt coupled with free
cash flow should allow Invacare to absorb the expected modest rate increases in
the months ahead without any material impact on our liquidity or capital
resources. As of December 31, 2004,2005, the weighted average floating interest rate
on U.S. borrowings was 3.36%4.53%.
CAPITAL EXPENDITURES
- --------------------
There are no individually material capital expenditure commitments outstanding
as of December 31, 2004.2005. The company estimates that capital investments for 20052006
could approximate up $37,000,000,$32,000,000, compared to actual capital expenditures of
$41,403,000$31,517,000 in 2004.2005. The company believes that its balances of cash and cash
equivalents, together with funds generated from operations and existing
borrowing facilities, will be sufficient to meet its operating cash requirements
and fund required capital expenditures for the foreseeable future.
CASH FLOWS
- ----------
Cash flows provided by operating activities were $76,947,000 in 2005, compared
to $98,324,000 in 2004, compared
to $116,204,000 lastthe previous year. The decrease is due primarily to increases in
installment receivablesdecreased
earnings, which were impacted by restructuring costs of $7,533,000, and inventory and a decline in accrued expenses
primarily related to reduced customer rebates. These werelower
accounts payable levels, partially offset by an increase in accounts payable.accrued expenses
related to warranty, legal, freight and other accruals.
Cash flows used for investing activities were $86,437,000 in 2005, compared to
$389,022,000 in 2004, compared to
$101,558,0002004. The decrease in 2003. The increasecash used was primarily attributable to
lower acquisition costs associated withcompared to 2004 when the company acquired businesses with the Domus, acquisition being the most
significant.which
was a material acquisition. In addition, purchases of property and equipment
activity in 20042005 was higherlower compared to the prior year as the company isinvested
more in the process of2004 on implementing Enterprise Resource PlanningERP Systems in North America, Europe and
Asia/Pacific.
Cash flows provided by financing activities in 20042005 were $307,051,000,$2,497,000, compared to
cash flows requiredprovided of $13,955,000$307,051,000 in 2003. Financing2004. Cash borrowed for financing
activities forin 2005 was much lower than in 2004 were impacted by an increase inas the company's borrowings of $303,188,000
primarily related tocompany borrowed less for
acquisitions. In addition to acquisition activities, the effect of foreign
currency translation results in amounts being shown in the Consolidated
Statement of Cash Flows that are different from the changes reflected in the
respective balance sheet captions.
During 2004,2005, the company generated free cash flow of $56,921,000$50,795,000 compared to
free cash flow of $85,544,000$56,924,000 in 2003.2004. The decrease was primarily attributable
to additional capital expenditures made in 2004, primarily for enterprise
resource planning systems as well as increases in installment receivableslower earnings, which were impacted by restructuring charges, and inventory coupled with a decline in accrued expenses, primarily related to
reduced customer rebates.lower
accounts payable levels. Free cash flow is a non-GAAP financial measure that is
comprised of net cash provided by operating activities less 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 Companycompany 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,
2005 2004
2003
------------------------------------------------------------------------------------- ---------
Net cash provided by operating activities $76,947 $98,324 $116,204
Adjusted for:
Purchases of property and equipment (41,403) (30,660)
------- -------- net (26,152) (41,400)
--------- ---------
Free Cash Flow $56,921 $85,544
======= =======
I-25$50,795 $56,924
========= =========
I-29
CONTRACTUAL OBLIGATIONS
- -----------------------
(In thousands) Payments due by period
----------------------
Total Less than 1 year 1-3 years 3-5 years More than 5 years
----------------------- ---------------- --------- --------------------- ------------- -----------------
--------------- ---------------- ------------ ------------- -----------------
Long-term debt obligations
Senior Notes $234,595 $8,054 $68,065 $116,629 $41,847$199,576 $9,836 $137,025 $52,715 -
Revolving credit agreements 382,755 10,647 20,648 20,648 330,812309,634 11,086 22,172 276,376 -
Other notes 1,415 162 324 324 60580,731 79,437 172 172 950
Operating lease obligations 37,354 15,680 14,909 5,050 1,71537,744 13,828 15,365 4,549 4,002
Capital lease obligations 21,539 1,751 3,285 3,064 13,43916,835 1,607 2,799 2,584 9,845
Purchase obligations
(primarily computer systems 6,975 6,468 5075,035 4,493 542 - -
contracts)
Other long-term obligations
Product liability 17,045 2,595 7,263 3,227 3,96020,949 2,657 9,683 3,792 4,817
SERP 13,37115,386 424 1,658 1,559 9,7301,752 1,752 11,458
Other, principally deferred
compensation 16,680 339 3,068 612 12,661
-------- ------- -------- -------- ---------12,937 372 907 591 11,067
--------------- ---------------- ------------ ------------- -----------------
--------------- ---------------- ------------ ------------- -----------------
Total $731,729 $46,120 $119,727 $151,113 $414,769$698,827 $123,740 $190,417 $342,531 $42,139
======== =============== ======== ======== ========
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 continues to
have available significant growth opportunities through internal development and
acquisitions. For 2004,2005, dividends of $0.05 per Common Share and $0.045 per Class
B Common Share were declared and paid.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The consolidated financial statementsConsolidated Financial Statements included in the report include accounts of
the company, and all majority-owned subsidiaries.subsidiaries and a variable interest entity for
which the company is the primary beneficiary. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated financial
statementsConsolidated
Financial Statements and related footnotes. In preparing these financial
statements, management has made its best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to
materiality. 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.
Revenue Recognition
Invacare's revenues are recognized when products are shipped to unaffiliated
customers. The Securities and Exchange Commission'sSEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition," as updated by SAB No. 104, provides guidance on the application of
generally accepted accounting principles (GAAP) to selected revenue recognition
issues. The company has concluded that its revenue recognition policy is
appropriate and in accordance with generally accepted
accounting principlesGAAP and SAB No. 101.
Sales are only made to customers with whom the company believes collection is
reasonably assured based upon a credit analysis, which may include obtaining a
credit application, a signed security agreement, personal guarantee and/or a
cross corporate guarantee depending on the credit history of the customer.
Credit lines are established for new customers after an evaluation of their
credit report and/or other relevant financial information. Existing credit lines
are regularly reviewed and adjusted with consideration given to any outstanding
past due amounts.
The company offers discounts and rebates, which are accounted for as reductions
to revenue in the period in which the sale is recognized. Discounts offered
include: cash discounts for prompt payment, base and trade discounts based on
contract level for specific classes of customers. Volume discounts and rebates
are given based on large purchases and the achievement of certain sales volumes.
Product returns are accounted for as a reduction to reported sales with
estimates recorded for anticipated returns at the time of sale. The company does
not sell any goods on consignment.
I-30
Distributed products sold by the company are accounted for in accordance with
EITF 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. The
company records Distributeddistributed product sales gross as a principal since the company
takes title to the products and has the risks of loss for collections, delivery
and returns.
I-26
Product sales that give rise to installment receivables are recorded at the time
of sale when the risks and rewards of ownership are transferred. In December
2000, the company entered into an agreement with DLL, a third party financing
company, to provide the majority of future lease financing to Invacare
customers. As such, interest income is recognized based on the terms of the
installment agreements. Installment accounts are monitored and if a customer
defaults on payments, interest income is no longer recognized. All installment
accounts are accounted for using the same methodology, regardless of duration of
the installment agreements.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. Substantially all of the company's receivables are
due from health care, medical equipment dealers and long term care facilities
located throughout the United States, Australia, Canada, New Zealand and Europe.
A significant portion of products sold to dealers, both foreign and domestic, is
ultimately funded through government reimbursement programs such as Medicare and
Medicaid. In addition, the company has 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. The
estimated allowance for uncollectible amounts is based primarily on management's
evaluation of the financial condition of the customer. In addition, as a result
of the third party financing arrangement with DLL, management monitors the
collection status of these contracts in accordance with the company's limited
recourse obligations and provides amounts necessary for estimated losses in the
allowance for doubtful accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost principally
determined for
domestic manufacturing inventories by the last-in, first-out
(LIFO) method and for non-domestic inventories and domestic finished products
purchased for resale by the first-in, first-out (FIFO) method.
Inventories have been reduced by an allowance for excess and obsolete
inventories. The estimated allowance is based on management's review of
inventories on hand compared to estimated future usage and sales. A provision
for excess and obsolete inventory is recorded as needed based upon the
discontinuation of products, redesigning of existing products, new product
introductions, market changes and safety issues. Both raw materials and finished
goods are reserved for on the balance sheet.
In general, we review inventory turns as an indicator of obsolescence or slow
moving product as well as the impact of new product introductions. Depending on
the situation, the individual item may be partially or fully reserved for. No
inventory that was reserved for has been sold at prices above their new cost
basis. In 2004, individual items were both partially and fully written down. The company continued to increase its overseas sourcing efforts, increase
its emphasis on the development and introduction of new products, and decrease
the cycle time to bring new product offerings to market. These initiatives are
sources of inventory obsolescence for both raw material and finished goods.
Goodwill, Intangible and Other Long-Lived Assets
Property, equipment, intangibles and certain other long-lived assets are
amortized over their useful lives. Useful lives are based on management's
estimates of the period that the assets will generate revenue. As a result of
the adoption of Statement of Financial Accounting Standard (SFAS)SFAS No. 142, Goodwill and Other Intangible Assets in 2002,
goodwill and intangible assets deemed to have indefinite lives are subject to
annual impairment tests in accordance with the Statement. Furthermore, goodwill
and other long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The company completed the required initial analysis of goodwill
as of January 1, 2002 as well as the annual impairment tests in the fourth
quarter of 2002, 2003 and 2004.each subsequent year, including 2005. The results of these analyses
indicated no impairment of goodwill. Interest rates have a significant impact
upon the discounted cash flow methodology utilized in our annual impairment
testing. Increasing interest rates decrease the fair value estimates used in our
testing.
Product Liability
The company's captive insurance company, Invatection Insurance Co., currently
has a policy year that runs from September 1 to August 31 and insures annual
policy losses of $10,000,000 per occurrence and $11,000,000 in the aggregate of
the company's North American product liability exposure. The company also has
additional layers of external insurance coverage insuring up to $100,000,000 in
annual aggregate losses arising from individual claims anywhere in the world
that exceed the captive insurance company policy limits.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.
I-31
Product liability reserves are recorded for individual claims based upon
historical experience, industry expertise and indications from thea third-party
actuary. Additional reserves, in excess of the specific individual case
reserves, are provided for incurred but not reported claims based upon
third-party actuarial valuations at the time such valuations are conducted.
Historical claims experience and other assumptions are taken into consideration
by the third-party actuary to estimate the ultimate reserves. For example, the
actuarial analysis assumes that historical loss experience is an indicator of
future experience, 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 awardawards or settlements on
claims. While actuarial analysis is used to help determine adequate reserves,
the company accepts responsibilityis responsible for the determination and recording of adequate
reserves in accordance with accepted loss reserving standards and practices.
I-27
Warranty
Generally, the company's products are covered from the date of sale to the
customer by warranties against defects in material and workmanship for various
periods up to six years fromdepending on the date of sale to
the customer.product. Certain components carry a lifetime warranty.
A provision for estimated warranty cost is recorded at the time of sale based
upon actual experience. The company continuously assesses the adequacy of its
product warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company's warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty reserves were
necessary in the current year. See Current LiabilitiesWarranty Costs in the Notes to the
Consolidated Financial Statements included in this report for a reconciliation
of the changes in the warranty accrual.
Accounting for Stock-Based Compensation
The company accounts for options under its stock-based compensation plans using
the intrinsic value method proscribed in Accounting Principles Board Opinion
(APBO) No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The majority of the options awarded have been granted at
exercise prices equal to the market value of the underlying stock on the date of
grant; thus, no compensation cost has been reflected in the Consolidated
Statement of Earnings for these options. In addition, restricted stock awards
have been granted without cost to the recipients and are being expensed on a
straight-line basis over the vesting periods. If the company had applied the
fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, for all stock options granted, net earnings per share assuming
dilution would have been reduced by $0.44 in 2005, $0.14 in 2004 and $0.14 in
2003 and $0.152003. The pro forma earnings per share assuming dilution amount of $0.44 in 2002.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This
statement provides guidance for those companies wishing to voluntarily change2005
is due primarily to the acceleration of vesting of "underwater" options (below
fair market value based method of accounting for stock-based compensation. The
statement also amends$30.75) approved by the disclosure requirementsBoard of SFAS No. 123. While
Invacare continues to utilize the disclosure-only provisions of SFAS No. 123,
the company has modified its disclosures to comply with the new statement.Directors on December 21,
2005. See
the company's Accounting Policies and Shareholders' Equity Transactions in the Notes to the Consolidated
Financial Statements.Statements included in this report. Effective January 1, 2006, the
company adopted FAS 123R.
Income Taxes
As part of the process of preparing ourits financial statements, we arethe company is
required to estimate income taxes in various jurisdictions. The process requires
estimating ourthe company's current tax exposure, including assessing the risks
associated with tax audits, as well as estimating temporary differences due to
the different treatment of items for tax and accounting policies. The temporary
differences are reported as deferred tax assets and or liabilities. The company
also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be
established. In the event that actual results differ from ourits estimates, the
company's provision for income taxes could be materially impacted.
The company does not believe that there is a substantial likelihood that
materially different amounts would be reported related to its critical
accounting policies.
ACCOUNTING CHANGES
- ------------------
In the fourth quarter of 2005, the company changed its method of accounting for
domestic manufactured inventories from the lower of cost, as determined by the
last-in, last-out (LIFO) method of accounting, or market to the lower of cost,
as determined by the first-in, first-out (FIFO) method of accounting, or market.
The company believes that this change is preferable because: 1) the change
conforms to a single method of accounting for all of the company's inventories,
2) LIFO inventory values have not been materially different than FIFO inventory
values, and 3) the majority of the company's competitors use FIFO.
The change from LIFO to FIFO did not result in any change to the company's
reported Consolidated Balance Sheets because the inventory valued under LIFO was
at current cost. As a result, there is no impact for the change from LIFO to
FIFO on the company's Consolidated Statement of Earnings and Consolidated
Statement of Shareholders' Equity for all periods presented.
I-32
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In December 2004, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"),123R, which requires companies to expense
stock options and other share-based payments. SFAS 123R supersedes SFAS No. 123,
which permitted either expensing stock options or providing pro forma
disclosure. In April 2005, the SEC announced that the adoption of SFAS 123R
would be delayed. The provisions of this Statement,SFAS 123R, which isare effective Julyfor the
company on January 1, 2005,2006, apply to all awards granted, modified, cancelled or
repurchased after JulyJanuary 1, 20052006 as well as the unvested portion of prior
awards. The company will adoptadopted the standard as of the effective dateJanuary 1, 2006 and estimates
that the impact to the company's reported results in 2006 will be similar toapproximately
$0.05 per diluted share, which is less than the pro forma results shown in the
company's note regarding Accounting Policy Notefor Stock-Based Compensation in the Notes to
its Consolidated Financial Statements included in this report due primarily to
the acceleration of vesting approved by the Board of Directors on December 21,
2005. The Board of Directors approved the acceleration of the vesting of the
company's stock options primarily to partially offset the recent reductions in
other benefits made by the company and to provide additional incentive to those
critical to the company's current cost reduction efforts. See Shareholders'
Equity Transactions in the Notes to the Consolidated Financial Statements.
The American Jobs Creation Act of 2004 (the Act) was signed into lawStatements
included in October
2004. The Act provides for a tax deduction on qualified production activities
and introduced a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer, provided certain
criteria are met. The FASB issued FASB Staff Position 109-1 to provide guidance
on the application of SFAS No. 109, Accounting for Income Taxes, and FASB Staff
Position 109-2 to provide accounting and disclosure guidance for the
repatriation provision. The company is reviewing the implication of the new Act,
recently released treasury guidance, and the FASB staff positions but does not
intend to repatriate any foreign earnings under the Act and does not expect the
Act will have a material impact on the company's financial position, results of
operations or cash flows.
I-28
this report.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk.
- ---------------------------------------------------------------------------------------------------------------------------------------
The company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The company uses
interest swap agreements to mitigate its exposure to interest rate fluctuations.
Based on December 31, 20042005 debt levels, a 1% change in interest rates would
impact interest expense by approximately $5,107,000.$4,742,000. Additionally, the company
operates internationally and, as a result, is exposed to foreign currency
fluctuations. Specifically, the exposure includesresults from intercompany loans and
third party sales or payments. In an attempt to reduce this exposure, foreign
currency forward contracts are utilized. The company does not believe that any
potential loss related to these financial instruments would have a material
adverse effect on the company's financial condition or results of operations.
PRIVATE SECURITIES LITIGATION REFORM ACT
- ----------------------------------------
The statements contained in this Form 10-K constitute forward-looking statements
within the meaning of the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Terms such as as "will," "should," "plan,"
"intend," "expect," "continue," "forecast", "believe," "anticipate" and "seek,"
as well as similar comments, are forward-looking in nature. Actual results and
events may differ significantly from those expressed or anticipated as a result
of risks and uncertainties which include, but are not limited to, the following:
pricing pressures, the success of the Company's ongoing efforts to reduce costs,
increasing raw material costs, the consolidations of health care customers and
competitors, government reimbursement issues (including those that affect the
sales of and margins on products, along with the viability of customers)both at
the federal and state level, the ability to design, manufacture, distribute and
achieve market acceptance of new products with higher functionality and lower
costs, the effect of offering customers competitive financing terms, Invacare's
ability to successfully identify, acquire and integrate strategic acquisition
candidates, the difficulties in managing and operating businesses in many
different foreign jurisdictions (including the recent Domus acquisition), the
timely completion of facility consolidations, the vagaries of any litigation or
regulatory investigations that the Company may be or become involved in at any
time (including the previously-disclosed litigation with Respironics), the
difficulties in acquiring and maintaining a proprietary intellectual property
ownership position, the overall economic, market and industry growth conditions
(including the impact that acts of terrorism may have on such growth
conditions), foreign currency and interest rate risks, Invacare's ability to
improve financing terms and reduce working capital, as well as the risks
described from time to time in Invacare's reports as filed with the Securities
and Exchange Commission. We undertake no obligation to review or update these
forward-looking statements or other information contained herein.
Item 8. Financial Statements and Supplementary DataData.
- ---------------------------------------------------------------------------------------------------------
Reference is made to the Report of Independent Registered Public Accounting
Firm, Consolidated Balance Sheet, Consolidated Statement of Earnings,
Consolidated Statement of Cash Flows, Consolidated Statement of Shareholders'
Equity, Notes to Consolidated Financial Statements and Financial Statement
Schedule, which appear on pages FS-1 to FS-27FS-29 of this Annual Report on Form
10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. - --------------------------------------------------------------------------------
None.
Item 9A. Controls and Procedures.
- ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures
- ----------------------------------------------------
Under the supervision and with the participation of the company's management,
including the Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the company's disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, the
company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the company's disclosure controls and procedures were
effective to provide reasonable assurance that we record, process, summarize and
report the information we must disclose in reports that we file or submit under
the Securities Exchange Act of 1934, as amended, within the time periods
specified by the SEC.
I-29
(b) Management's Report on Internal Control Over Financial Reporting
- --------------------------------------------------------------------
Management is responsible for establishing and maintaining a system of adequate
internal control over financial reporting that provides reasonable assurance
that assets are safeguarded and that transactions are authorized, recorded and
reported properly. The system includes self-monitoring mechanisms; regular
testing by the Company'scompany's internal auditors; a Code of Conduct; written policies
and procedures; and a careful selection and training of employees. Actions are
taken to correct deficiencies as they are identified. An effective internal
control system, no matter how well designed, has inherent limitations -
including the possibility of the circumvention or overriding of controls - and
therefore can provide only reasonable assurance that errors and fraud that can
be material to the financial statements are prevented or would be detected on a
timely basis. Further, because of changes in conditions, internal control system
effectiveness may vary over time.
Management's assessment of the effectiveness of the company's internal control
over financial reporting is based on the Internal Control -Integrated Framework
published by the Committee of Sponsoring Organizations of the Treadway
Commission and was limited as explained in the Scope of Management's Report,
which follows this report.Commission.
In management's opinion, internal control over financial reporting is effective
as of December 31, 2004.2005.
The Company'scompany's independent registered public accounting firm, Ernst & Young LLP,
audited management's assessment of internal control over financial reporting
and, based on that audit, issued theiran attestation report regarding management's
assessment, which is included in this Annual Report.
Scope of Management's Report - ----------------------------
Management's assessment of the effectiveness of internal control over financial
reporting excludes the WP Domus GmbH acquisition, which was finalized on September 9, 2004. WP Domus GmbH represents approximately 19% of the total
assets and approximately 2% of the net sales, respectively, of the consolidated
financial statements as of December 31, 2004 and the year ended December 31,
2004.Form 10-K.
I-33
(c) Changes in Internal Control Over Financial Reporting
- --------------------------------------------------------
There have been noDuring the fourth quarter of 2005, the company implemented a new ERP system in
North America. The implementation resulted in significant lost revenues due to
difficulties in processing orders and the inability to ship products to
customers within required lead times. The implementation also resulted in
additional overtime in manufacturing, distribution centers, and customer
service, along with added costs to expedite product to customers and processing
a higher than normal level of returns.
The changes in the company's internal control over financial reporting that
occurred during our last fiscal quarter thatare not deemed to have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting.reporting, except for the implementation of the ERP
system in North America. Various controls were modified due to the new system
and because various issues were encountered with the system implementation and
the fact that certain controls were not functioning as intended during the
quarter, management took additional actions to ensure the company's financial
statements present fairly, in all material respects, the company's financial
condition and results of operations in accordance with generally accepted
accounting principles. The additional actions included: performing physical
inventory counts at year end in North America, additional substantitive
procedures to validate ending balances as well as additional key control
verifications for financial statement accounts affected by the implementation.
As a result of these additional procedures, the company's management concluded
that the internal control over financial reporting was effective as of December
31, 2005. The company will continue to monitor internal control over financial
reporting and will modify and or implement any controls and procedures that are
needed to ensure the integrity of the company's financial statements.
Item 9B. Other Information.
- ----------------------------
On March 8, 2006, the company's Compensation, Management Development and
Corporate Governance Committee approved a new compensation program, effective
for 2006, for members of the company's Board of Directors. The terms of the new
compensation program are set forth in the Director Compensation Schedule, which
is filed as Exhibit 10(ae) to this Annual Report on Form 10-K and incorporated
by reference into this Item 9B).
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------------------------------------------------------------------
We have adopted a Code of Business Conduct and Ethics that applies to all
Directors, officers and employees. We also have adopted a separate Financial
Code of Ethics that applies to our Chief Executive Officer (our principal
executive officer) and our Chief Financial Officer (our principal financial
officer and principal accounting officer). You can find both codes on our
website at www.invacare.com by clicking on the link for Investor Relations. We
will post any amendments to the codes, as well as any waivers that are required
to be disclosed pursuant to the rules of the Securities and Exchange CommissionSEC and the New York Stock
Exchange, on our website.
Our Board of Directors has adopted Corporate Governance Guidelines and charters
for the Audit Committee, Compensation, Management Development and Corporate
Governance Committee, Nominating Committee and Investment Committee of the Board
of Directors. These documents can be found on our website at www.invacare.com by
clicking on the link for Investor Relations.
You also can obtain printed copies of any of the materials referred to above,
free of charge, by writing to: Shareholder Relations Department, Invacare
Corporation, One Invacare Way, P.O. Box 4028, Elyria, OH 44036-2125.
We submitted the New York Stock Exchange ('NYSE') Section 12(a) Annual CEO
Certification as to our compliance with the NYSE corporate governance listing
standards to the NYSE in June 2004.July 2005. In addition, we have filed the
certifications of our Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality
of our public disclosures as exhibits to this Annual Report on Form 10-K.
Information required by Item 10 as to the executive officers of the company is
included in Part I of this Annual Report on Form 10-K, the10-K. The other information
required by Item 10 as to the directors of the company, the Audit Committee, the
audit committee financial expert, the procedures for recommending nominees to
the Board of Directors, and compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference to the information set forth under the captioncaptions
"Election of Directors"Directors," "Corporate Governance," and "Section 16(a) Beneficial
Ownership Compliance" in the company's definitive Proxy Statement for the 20052006
Annual Meeting of Shareholders.
Item 11. Executive Compensation.
- -----------------------------------------------------------------
The information required by Item 11 is incorporated by reference to the
information set forth under the captions "Compensation of Executive Officers""Executive Compensation" and "Compensation of Directors""Corporate
Governance" in the company's definitive Proxy Statement for the 20052006 Annual
Meeting of Shareholders.
I-30I-34
Item. 12. Security Ownership of Certain Beneficial Owners and Management.
- ---------------------------------------------------------------------------------------------------------------------------------------------------
The information required by Item 12 is incorporated by reference to the
information set forth under the caption "Share Ownership of Principal Holders
and Management" in the company's definitive Proxy Statement for the 20052006 Annual
Meeting of Shareholders.
Information regarding the securities authorized for issuance under the company's
equity compensation plans is incorporated by reference to the information set
forth under the captions "Compensation of Executive Officers" and "Compensation
of Directors" in the company's definitive Proxy Statement for the 2006 Annual
Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
- -----------------------------------------------------------------------------------------------------------------
The information required by Item 13 is incorporated by reference to the
information set forth under the caption "Compensation Committee Interlocks"Certain Relationships and Insider Participation"Related
Transactions" in the company's definitive Proxy Statement for the 20052006 Annual
Meeting of Shareholders.
Item 14. Principal Accounting Fees and Services.
- -------------------------------------------------------------------------------------------------
The information required by Item 14 is incorporated by reference to the
information set forth under the caption "Independent Auditors" and "Pre-Approval
Policies and Procedures" in the company's definitive Proxy Statement for the
20052006 Annual Meeting of Shareholders.
PART IV
-------
Item 15. Exhibits and Financial Statement SchedulesSchedules.
- ---------------------------------------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------Statements.
The following financial statements of the company are included in Part II, Item
8:
Consolidated Statement of Earnings - years ended December 31, 2005, 2004
2003 and 20022003
Consolidated Balance Sheet - December 31, 20042005 and 20032004
Consolidated Statement of Cash Flows - years ended December 31, 2005, 2004,
2003, and 20022003
Consolidated Statement of Shareholders' Equity - years ended December 31,
2005, 2004, 2003, and 20022003
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
-----------------------------Schedules.
The following financial statement schedule of the company is included in
Part II, Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits.
--------
See Exhibit Index at page number I-33I-37 of this Report on Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized as of March 11, 2005.13, 2006.
INVACARE CORPORATION
By: /S//s/ A. Malachi Mixon, III
-------------------------------------
A. Malachi Mixon, III Chairman of the Board of
Directors and Chief Executive Officer
I-31I-35
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated as of March 11, 2005.13, 2006.
Signature Title
- --------- -----
/s/ A. Malachi Mixon, III Chairman of the Board of Directors and
- ------------------------------ Chief Executive Officer
A. Malachi Mixon, III (Principal Executive Officer)
/s/ Gerald B. Blouch President, Chief Operating Officer and
- ------------------------------ Director
Gerald B. Blouch
/s/ Gregory C. Thompson Chief Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
Gregory C. Thompson
/s/ James C. Boland Director
- ------------------------------
James C. Boland
/s/ Michael F. Delaney Director
- ------------------------------
Michael F. Delaney
/s/ Whitney Evans Director
- ------------------------------
Whitney Evans
/s/ C. Martin Harris, M.D. Director
- ------------------------------
C. Martin Harris, M.D.
/s/ Bernadine P. Healy, M.D. Director
- ------------------------------
Bernadine P. Healy, M.D.
/s/ John R. Kasich Director
- ------------------------------
John R. Kasich
/s/ Dan T. Moore, III Director
- ------------------------------
Dan T. Moore, III
/s/ Joseph B. Richey, II Director
- ------------------------------
Joseph B. Richey, II
/s/ William M. Weber Director
- ------------------------------
William M. Weber
I-32I-36
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended December 31, 2004.2005.
Exhibit Index
Official Sequential
Exhibit No Description Page No.
- ------------------- ----------- ----------
2.1 Sale and Purchase Agreement Regarding the Sale and Purchase of All Shares in WP Domus GmbH by (A)
and among WP Domus LLC, Mr. Peter Schultz and Mr. Wilhelm Kaiser, Invacare GmbH & Co. KG and
Invacare Corporation dated as of July 31, 2004
2.2 Guarantee Letter Agreement of Warburg, Pincus Ventures, L.P. and Warburg, Pincus International, (A)
L.P. dated as of September 9, 2004
3(a) ** Amended and Restated Articles of Incorporation, as last amended through February 2, 1996 (K)
3(b) ** Code of Regulations, as amended on May 22, 1996 (K)
3(c) Certificate of Amendment to Amended and Restated Articles of Incorporation, as amended on July (L)
8, 2005
4(a)** Specimen Share Certificate for Common Shares
as revised (B)
4(b)** Specimen Share Certificate for Class B Common Shares
(B)
4(c) Rights agreement between Invacare Corporation and Rights AgentNational City Bank dated as of July 7, 1995 (C)
10(a) Assignment of Patent Application and License of Know-how dated January 14, 1981, and an (D)
amendment thereto dated October 12, 1981, with respect to certain royalty payments to be made to
the former owners of the company's home care bed subsidiary8, 2005 (L)
10(b) ** 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (K)
10(c) ** Deferred Compensation Plan for Non-Employee Directors, adopted in May 1992 (K)
10(d) ** Invacare Corporation 1994 Performance Plan approved January 28, 1994 (K)
10(e) Amendment No. 1 to the Invacare Corporation 1994 Performance Plan approved May 28, 1998 (K)*
10(f) Amendment No. 2 to the Invacare Corporation 1994 Performance Plan approved May 24, 2000 (B)*
10(g) Amendment No. 3 to the Invacare Corporation 1994 Performance Plan (H)(E)*
10(f) **10(h) Note Purchase Agreement dated as of February 27, 1998 for $80,000,000 6.71% Series A Senior (K)
Notes Due February 27, 2008 and $20,000,000 6.60% Series B Senior Notes Due February 27, 2005
10(g) ** Amendment No. 1 to the Invacare Corporation 1994 Performance Plan approved May 28, 1998 *
10(h) Amendment No. 2 to the Invacare Corporation 1994 Performance Plan approved May 24, 2000 (E)*
10(i) Invacare Retirement Savings Plan, effective January 1, 2001 (F)(C)
10(j) Employment Agreement entered into by and between the company and Chief Operating Officer (G)(D)*
10(k) Amendment No. 1 to Invacare Corporation 401(K) Plus Benefit Equalization Plan (L)(I)
10(l) Invacare Corporation 401(K) Plus Benefit Equalization Plan (As amended and restated effective (L)(I)
January 1, 2003)
10(m) Invacare Corporation Note Purchase Agreement dated as of October 1, 2003 for $50,000,000 3.97% (J)(G)
Series A Senior Notes Due October 1, 2007; $30,000,000 4.74% Series B Senior Notes Due October
1, 2009 and $20,000,000 5.05% Series C Senior Notes Due October 1, 2010
I-33
Official Sequential
Exhibit No Description Page No.
- ---------- ----------- ----------
10(n) First Amendment, dated as of October 1, 2003, to Note Purchase Agreement dated as of February (K)(H)
27, 1998 for $80,000,000 6.71% Series A Senior Notes Due February 27, 2008 and $20,000,000 6.60%
Series B Senior Notes Due February 27, 2005
I-37
Official Sequential
Exhibit No Description Page No.
- --------- ----------- ----------
10(o) Invacare Corporation 2003 Performance Plan (I)(F)*
10(p)** Form of Change of Control Agreement entered into by and between the company and certain of (G)* its
executive officers and Schedule of all such agreements with current executive officers
10(q) Form of Indemnity Agreement entered into by and between the company and certain of its Directors (G)(D)*
and executive officers and Schedule of all such Agreements with current Directors and executive officers
10(r) Employment Agreement entered into by and between the company and Chief Financial Officer (G)(D)*
10(s) Credit Agreement dated as of January 14, 2005 among Invacare Corporation and Certain Borrowing (M)(J)
Subsidiaries, the Banks named therein, and JPMorgan Chase Bank, N.A. as Agent, Keybank National
Association as Syndication Agent, J.P. Morgan Securities, Inc. and Keybank National Association,
as Co-Lead Arrangers.Arrangers
10(t)** Invacare Corporation Deferred Compensation Plus Plan, effective January 1, 2005 (K)*
10(u)** Invacare Corporation Death Benefit Only Plan, effective January 1, 2005 (K)*
10(v)** A. Malachi Mixon, III 10b5-1 Plan, effective February 14, 2005 (K)*
10(w)** Gerald B. Blouch 10b5-1 Plan, effective February 22, 2005 (K)*
10(x)** Gregory C. Thompson 10b5-1 Plan, effective February 21, 2005 (K)*
10(y) ** Supplemental Executive Retirement Plan (As amended and restated effective February 1, 2000) (K)*
10(z)** Form of Director Stock Option Award under Invacare Corporation 1994 Performance Plan (K)*
10(aa)** Form of Director Stock Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ab)** Form of Director Deferred Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ac)** Form of Restricted Stock Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ad)** Form of Stock Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ae)** Director Compensation Schedule
10(af) Invacare Corporation Executive Incentive Bonus Plan, effective as of January 1, 2005 (M)*
2110(ag) Letter agreement regarding increase, effective April 4, 2005, of the Aggregate Commitment (N)
under the Credit Agreement dated as of January 14, 2005 among Invacare Corporation and Certain
Borrowing Subsidiaries, the Banks Named Therein, and JPMorgan Chase Bank, N.A. as Agent,
Keybank National Association as Syndication Agent, J.P. Morgan Securities, Inc. and Keybank
National Association, as Co-Lead Arrangers
10(ah) First Amendment, dated as of August 12, 2005, to the Credit Agreement dated as of January 14, (O)
2005 among Invacare Corporation and Certain Borrowing Subsidiaries, the Banks named therein, and
JPMorgan Chase Bank, N.A. as Agent, Keybank National Association as Syndication Agent, J.P.
Morgan Securities, Inc. and Keybank National Association, as Co-Lead Arrangers
10(ai) Receivables Purchase Agreement, dated as of September 30, 2005, among Invacare Receivables (P)
Corporation, as Seller, Invacare Corporation, as Servicer, Park Avenue Receivables company, LLC
and JPMorgan Chase Bank, N.A., as Agent
I-38
Official Sequential
Exhibit No Description Page No.
- --------- ----------- ----------
10(aj) Second Amendment, dated as of September 29, 2005, to Note Purchase Agreement dated as of (Q)
February 27, 1998 relating to $80,000,000
10(ak) First Amendment, dated as of September 29, 2005, to Note Purchase Agreement dated as of October (P)
1, 2003 for $50,000,000 3.97% Series A Senior Notes Due October 1, 2007; $30,000,000 4.74%
Series B Senior Notes Due October 1, 2009 and $20,000,000 5.05% Series C Senior Notes Due
October 1, 2010
18** Letter re: Change in Accounting Principles
21** Subsidiaries of the company
2323** Consent of Independent Registered Public Accounting Firm
31.1 **31.1** Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 **31.2** Certification of the Chief Financial Officer pursuant to Section 302 of the Chief Financial Officer pursuant to Section 302Sarbanes-Oxley Act
of the Sarbanes-Oxley Act
of 2002
I-34
Official Sequential
Exhibit No Description Page No.
- ---------- ----------- ----------
32.1 **2002
32.1** Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 **32.2** Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Management contract, compensatory plan or arrangement
** Filed herein.herewith.
I-39
(A) Reference is made to the appropriate Exhibit to the company report on
Form 8-K, dated September 9, 2004, which Exhibit is incorporated
herein by reference.
(B) Reference is made to the appropriate Exhibit of the company Registration
Statement on Form S-3 (Reg. No. 33-40168), effective as of April 26, 1991,
which Exhibit is incorporated herein by reference.
(C) Reference is made to Exhibit 1 of the company report on Form 8-A, dated
July 18, 1995, which Exhibit is incorporated herein by reference.
(D) Reference is made to the appropriate Exhibit of the company Form 8
Amendment No. 1 (filed on September 23, 1987) to its Registration Statement
on Form 8-A (Reg. No. 0-12938, effective as of October 21, 1986), which
Exhibit is incorporated herein by reference.
(E) Reference is made to the appropriate Exhibit of the company report on
Form S-8, dated March 30, 2001, which Exhibit is incorporated herein
by reference.
(F)(C) Reference is made to Exhibit 10.1 of the company report on Form 10-Q,
datedfor the quarter ended September 30, 2002, which Exhibit is
incorporated herein by reference.
(G)(D) Reference is made to the appropriate Exhibit of the company report on
Form 10-K for the fiscal year ended December 31, 2002, which Exhibit
is incorporated herein by reference.
(H)(E) Reference is made to the appropriate Exhibit of the company report on
Form 10-Q for the quarter ended March 31, 2003, which Exhibit is
incorporated herein by reference.
(I)(F) Reference is made to Exhibit 4.5 of Invacare Corporation Form S-8
filed on October 17, 2003.
(J)2003, which is incorporated herein by reference,
which is incorporated herein by reference.
(G) Reference is made to the appropriate Exhibit of the company report on
Form 10-Q for the quarter ended September 30, 2003, which Exhibit is
incorporated herein by reference.
(K)(H) Reference is made to the appropriate Exhibit of the company report on
Form 10-K for the fiscal year ended December 31, 2003, which Exhibit
is incorporated herein by reference.
(L)(I) Reference is made to the appropriate Exhibit of the company report on
Form 10-Q for the quarter ended June 30, 2004, which Exhibit is
incorporated herein by reference.
(M)(J) Reference is made to the appropriate Exhibit of the company report on
Form 8-K, dated January 14, 2005, which is incorporated herein by
reference.
I-35(K) Reference is made to the appropriate Exhibit of the company report on
Form 10-K for the fiscal year ended December 31, 2004, which Exhibit
is incorporated herein by reference.
(L) Reference is made to the appropriate Exhibit of the company report on
Form 8-K, dated July 8, 2005, which is incorporated herein by
reference.
(M) Reference is made to the appropriate Exhibit of the company report on
Form 8-K, dated April 4, 2005, which is incorporated herein by
reference.
(N) Reference is made to the appropriate Exhibit of the company report on
Form 10-Q for the quarter ended June 30, 2005, which Exhibit is
incorporated herein by reference.
(O) Reference is made to the appropriate Exhibit of the company report on
Form 8-K, dated August 12, 2005, which is incorporated herein by
reference.
(P) Reference is made to the appropriate Exhibit of the company report on
Form 8-K, dated September 29, 2005, which is incorporated herein by
reference.
I-40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Invacare Corporation
We have audited the accompanying consolidated balance sheets of Invacare
Corporation and subsidiaries as of December 31, 20042005 and 2003,2004, and the related
consolidated statements of earnings, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 2004.2005. Our audits also
included the financial statement schedule listed in the Index at Item 15 (a)(2).
These financial statements and schedule are the responsibility of the Company'scompany's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Invacare Corporation and subsidiaries at December 31, 20042005 and 2003,2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004,2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Accounting Policies in the notes to the consolidated financial
statements, in 2005 the company changed its method of accounting for
inventories.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Invacare
Corporation's internal control over financial reporting as of December 31, 2004,2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 4, 20058, 2006 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 4, 20058, 2006
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Invacare Corporation
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Invacare Corporation
maintained effective internal control over financial reporting as of December
31, 2004,2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Invacare Corporation's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As indicated in the accompanying Management Report on Internal Control Over
Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of WP Domus GmbH, which is included in the 2004 consolidated
financial statements of Invacare Corporation and constituted 19% of total assets
as of December 31, 2004 and 2% of net sales for the year then ended. Our audit
of internal control over financial reporting of Invacare Corporation also did
not include an evaluation of the internal control over financial reporting of WP
Domus GmbH.
In our opinion, management's assessment that Invacare Corporation maintained
effective internal control over financial reporting as of December 31, 2004,2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Invacare Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,2005,
based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Invacare Corporation as of December 31, 20042005 and 2003 and2004, the related consolidated
statements of earnings, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 2004 of Invacare
Corporation2005, and the financial statement
schedule for the three years in the period ended December 31, 2005, and our
report dated March 4, 20058, 2006 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 4, 20058, 2006
FS-2
CONSOLIDATED STATEMENT OF EARNINGS
INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31,
2005 2004 2003
2002
---- ---- ------------- --------- ---------
(In thousands, except per share data)
Net sales $1,529,732 $1,403,327 $1,247,176 $1,089,161
Cost of products sold 1,081,227 984,735 872,515
761,763
------- ------- ---------------- --------- ---------
Gross Profit 448,505 418,592 374,661 327,398
Selling, general and administrative expenses 341,782 297,124 262,015
220,296Charge related to restructuring activities 7,295 - -
Interest expense 29,809 16,282 11,710
15,122
Interest income (1,683) (5,186) (5,473)
(4,550)
------- ------- ---------------- --------- ---------
Earnings before Income Taxes 71,302 110,372 106,409
96,530
Income taxes 22,450 35,175 35,000
31,760
------- ------- ---------------- --------- ---------
Net Earnings $48,852 $75,197 $71,409 $64,770
======= ======= =======
Net Earnings per Share - Basic $1.55 $2.41 $2.31 $2.10
======= ======= =======
Weighted Average Shares Outstanding - Basic 31,555 31,153 30,862 30,867
======= ======= =======
Net Earnings per Share - Assuming Dilution $1.51 $2.33 $2.25 $2.05
======= ======= =======
Weighted Average Shares Outstanding -
Assuming Dilution 32,452 32,347 31,729 31,664
======= ======= =======
See notes to consolidated financial statements.
FS-3
CONSOLIDATED BALANCE SHEETS
INVACARE CORPORATION AND SUBSIDIARIES
December 31, December 31,
2005 2004
2003
------- ----------- ----
(In thousands)
Assets
- ------
Current Assets
Cash and cash equivalents $25,624 $32,567 $16,074
Marketable securities 252 199 214
Trade receivables, net 287,955 287,950 255,534
Installment receivables, net 12,935 13,422 7,755
Inventories, net 176,925 175,883 130,979
Deferred income taxes 27,446 21,730 24,573
Other current assets 39,510 33,400 39,593
------- -------
Total Current Assets 570,647 565,151 474,722
Other Assets 47,110 55,634 53,263
Other Intangibles 108,117 98,212 14,678
Property and Equipment, net 176,206 191,163
150,051
Goodwill 720,873 717,964 415,499
------- -------
Total Assets $1,622,953 $1,628,124 $1,108,213
========== ==========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities
Accounts payable $133,106 $149,413 $110,178
Accrued expenses 106,214 98,850 92,032
Accrued income taxes 13,340 7,816
19,107
CurrentShort-term debt and current maturities of long-term debt 80,228 2,062 2,171
------- -------
Total Current Liabilities 332,888 258,141 223,488
Long-Term Debt 457,753 547,974 232,038
Other Long-Term Obligations 79,624 68,571 34,383
Shareholders' Equity
Preferred Shares (Authorized 300 shares; none outstanding) - -
Common Shares (Authorized 100,000 shares; 31,20931,695 and
30,73931,209 issued in 20042005 and 2003,2004, respectively) - no par $0.257,925 7,803 7,686
Class B Common Shares (Authorized 12,000 shares;
1,112, issued and outstanding) - no par $0.25 278 278
Additional paid-in-capital 138,937 123,793 109,015
Retained earnings 598,025 550,753 477,113
Accumulated other comprehensive earnings 47,480 104,629 51,057
Unearned compensation on stock awards (1,692) (1,557) (1,458)
Treasury shares (934(1,058 and 770934 shares in
2005 and 2004, and 2003, respectively) (38,265) (32,261) (25,387)
------- -------
Total Shareholders' Equity 752,688 753,438 618,304
------- -------
Total Liabilities and Shareholders' Equity $1,622,953 $1,628,124 $1,108,213
========== ==========
See notes to consolidated financial statements.
FS-4
CONSOLIDATED STATEMENT OF CASH FLOWS
INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31,
2005 2004 2003
2002- ---- ---- ----
(In thousands)
Operating Activities
Net earnings $48,852 $75,197 $71,409 $64,770
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 40,524 32,316 27,235 26,638
Provision for losses on trade and installment receivables 14,168 11,222 13,760 10,792
Provision for deferred income taxes (100) 4,250 3,205 (3,050)
Provision for other deferred liabilities 3,571 4,091 2,587 3,342
Changes in operating assets and liabilities:
Trade receivables (10,075) (19,978) (37,122) 19,740
Installment sales contracts, net (4,402) (2,911) 6,678
11,435
Inventories (12,919) (15,781) (4,607) 6,208
Other current assets (7,046) (516) (3,447)
(4,193)
Accounts payable (6,923) 19,718 13,351
2,576
Accrued expenses 9,185 (11,281) 17,943 (2,534)
Other long-term liabilities 2,112 1,997 5,212
(108)
------- ------- ------------- ------ ------
Net Cash Provided by Operating Activities 76,947 98,324 116,204 135,616
Investing Activities
Purchases of property and equipment (31,517) (41,403) (30,660) (22,109)
Proceeds from sale of property and equipment 5,365 3 531 2,391
Marketable securities - - 1,130 (43)
Business acquisitions, net of cash acquired (58,216) (343,554) (70,555) -
Increase in other investments (44) (603) (64) (317)
Increase in other long-term assets (1,013) (3,133) (1,898)
(1,834)
Other (1,012) (332) (42)
1,079
------- ------ ------------- ------
Net Cash Required for Investing Activities (86,437) (389,022) (101,558) (20,833)
Financing Activities
Proceeds from revolving lines of credit, securitization facility and
long-term borrowings 796,073 844,432 474,583 254,512
Payments on revolving lines of credit, securitization facility and
long-term borrowings (796,619) (541,244) (483,725) (377,582)
Proceeds from exercise of stock options 4,623 9,850 5,063 6,154
Payment of dividends (1,580) (1,557) (1,531) (1,567)
Purchase of treasury stock - (4,430) (8,345)
(1,674)
------- ------- ------------- ------ ------
Net Cash Provided (Required) by Financing Activities 2,497 307,051 (13,955) (120,157)
Effect of exchange rate changes on cash 50 140 2,297
1,777
------- ------- ------------- ------ ------
Increase (decrease) in cash and cash equivalents (6,943) 16,493 2,988 (3,597)
Cash and cash equivalents at beginning of year 32,567 16,074 13,086
16,683
------- ------- ------------- ------ ------
Cash and cash equivalents at end of year $25,624 $32,567 $16,074 $13,086
======= ======= =======
See notes to consolidated financial statements.
FS-5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
INVACARE CORPORATION AND SUBSIDIARIES
(In thousands)
Accumulated
Additional Other
Common Class B Paid-in- Retained Comprehensive Unearned Treasury
Stock Stock Capital Earnings Earnings(Loss) Compensation Stock Total
------ ------- ---------- -------- -------------- ------------ --------- ---------
January 1, 20022003 Balance $7,466$7,580 $278 $87,980 $344,032 $(48,129) $(771) $(9,306) $381,550
Exercise of stock options, including
tax benefit 105 9,834 (2,863) 7,076
Restricted stock awards 9 1,181 (1,190) -
Restricted stock award expense 757 757
Net earnings 64,770 64,770
Foreign currency translation
adjustments 28,214 28,214
Unrealized gains on cash flow hedges 1,349 1,349
Marketable securities holding loss (163) (163)
-----
Total comprehensive income 94,170
Dividends (1,567) (1,567)
Purchase of treasury shares (1,674) (1,674)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 Balance 7,580 278 98,995 407,235 (18,729) (1,204) (13,843) 480,312$98,995 $407,235 $(18,729) $(1,204) $(13,843) $480,312
Exercise of stock options, including
tax benefit 99 9,130 (3,199) 6,030
Restricted stock awards 7 890 (897) -
Restricted stock award expense 643 643
Net earnings 71,409 71,409
Foreign currency translation
adjustments 66,185 66,185
Unrealized gains on cash flow hedges 3,506 3,506
Marketable securities holding gain 95 95
-----
Total comprehensive income 141,195
Dividends (1,531) (1,531)
Purchase of treasury shares (8,345) (8,345)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 Balance 7,686 278 109,015 477,113 51,057 (1,458) (25,387) 618,304
Exercise of stock options, including
tax benefit 112 13,872 (2,444) 11,540
Restricted stock awards 5 906 (911) -
Restricted stock award expense 812 812
Net earnings 75,197 75,197
Foreign currency translation
adjustments 57,903 57,903
Unrealized losses on cash flow hedges (4,322) (4,322)
Marketable securities holding loss (9) (9)
-----
Total comprehensive income 128,769
Dividends (1,557) (1,557)
Purchase of treasury shares (4,430) (4,430)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2004 Balance $7,8037,803 278 123,793 550,753 104,629 (1,557) (32,261) 753,438
Exercise of stock options, including
tax benefit 117 14,133 (6,004) 8,246
Restricted stock awards 5 1,011 (1,016) -
Restricted stock award expense 881 881
Net earnings 48,852 48,852
Foreign currency translation
adjustments (56,176) (56,176)
Unrealized losses on cash flow hedges (1,008) (1,008)
Marketable securities holding gain 35 35
-----
Total comprehensive loss (8,297)
Dividends (1,580) (1,580)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 Balance $7,925 $278 $123,793 $550,753 $104,629 $(1,557) $(32,261) $753,438
====== ==== ======== ======== ========$138,937 $598,025 $47,480 $(1,692) $(38,265) $752,688
===== === ======= ======= ============== ====== ======= =======
See notes to consolidated financial statements.
FS-6
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
Nature of Operations: Invacare Corporation and its subsidiaries ("Invacare" or
the "company") is the leading home medical equipment manufacturer in the world
based on its distribution channels, the breadth of its product line and net
sales. The company designs, manufactures and distributes an extensive line of
medical equipment for the home health care, retail and extended care markets.
The company's products include standard manual wheelchairs, motorized and
lightweight prescription wheelchairs, seating and positioning systems, motorized
scooters, patient aids, home care beds, low air loss therapy products,
respiratory products and distributed products.
Principles of Consolidation: The consolidated financial statements include the
accounts of the company, and its majority owned subsidiaries.subsidiaries and a variable interest
entity for which the company is the primary beneficiary. Certain foreign
subsidiaries, represented by the European segment, are consolidated using a
November 30 fiscal year end.end in order to meet filing deadlines. No material
subsequent events have occurred related to the European segment, which would
require disclosure or adjustment to the company's financial statements. All
significant intercompany transactions are eliminated.
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.
Marketable Securities: Marketable securities consist of short-term investments
in repurchase agreements, government and corporate securities, certificates of
deposit and equity securities. Marketable securities with original maturities of
less than three months are treated as cash equivalents. The company has
classified its marketable securities as available for sale. The securities are
carried at their fair value and net unrealized holding gains and losses, net of
tax, are carried as a component of accumulated other comprehensive earnings
(loss).
Inventories: Inventories are stated at the lower of cost or market with cost
principally determined for domestic manufacturing inventories by the last-in,
first-out method and for non-domestic inventories and domestic finished products
purchased for resale ($138,845,000 and $99,607,000 at December 2004 and 2003,
respectively) by the first-in, first-out method. Market costs are based on the
lower of replacement cost or estimated net realizable value. The value of
inventory on the LIFO method is approximately equal to its current cost as of
December 31, 2004 and 2003. Inventories have
been reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on management's review of inventories on hand compared to
estimated future usage and sales.
In the fourth quarter of 2005, the company changed its method of accounting for
domestic manufactured inventories from the lower of cost, as determined by the
last-in, first-out (LIFO) method of accounting, or market to the lower of cost,
as determined by the first-in, first-out (FIFO) method of accounting, or market.
The company believes that this change is preferable because: 1) the change
conforms to a single method of accounting for all of the company's inventories,
2) LIFO inventory values have not been materially different than FIFO inventory
values, and 3) the majority of the company's competitors use FIFO.
The change from LIFO to FIFO did not result in any change to the company's
reported Consolidated Balance Sheets because the inventory valued under LIFO was
at current cost. As a result, there is no impact for the change from LIFO to
FIFO on the company's Consolidated Statement of Earnings and Consolidated
Statement of Shareholders' Equity for all periods presented.
Property and Equipment: Property and equipment are stated on the basis of cost.
The company principally uses the straight-line method of depreciation for
financial reporting purposes based on annual rates sufficient to amortize the
cost of the assets over their estimated useful lives. Accelerated methods of
depreciation are used for federal income tax purposes. Expenditures for
maintenance and repairs are charged to expense as incurred.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. The asset
would be considered impaired when the future net undiscounted cash flows
generated by the asset are less than its carrying value. An impairment loss
would be recognized based on the amount by which the carrying value of the asset
exceeds its fair value.
FS-7
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Goodwill and Other Intangibles: Effective January 1, 2002, Invacare adoptedIn accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, and accordingly, discontinued
amortization of goodwill. SFAS No. 142 changed the accounting for goodwill from
an amortization approachis subject to a non-amortization approach requiring periodic
testing for impairment.annual impairment testing. For
purposes of the impairment test, the fair value of each reporting unit is
estimated by forecasting cash flows and discounting those cash flows using
appropriate discount rates. The fair values are then compared to the carrying
value of the net assets of each reporting unit. The company completed the
required initial analysis of goodwill as of January 1, 2002 as well as the
annual impairment tests in the fourth quarter of 2002, 2003 and 2004.each subsequent year, including
2005. The results of these tests indicated no impairment of goodwill.
FS-7
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Accrued Warranty Cost: Generally, the company's products are covered by
warranties against defects in material and workmanship for periods up to six
years from the date of sale to the customer. Certain components carry a lifetime
warranty. A provision for estimated warranty cost is recorded at the time of
sale based upon actual experience. The company continuously assesses the
adequacy of its product warranty accrual and makes adjustments as needed.
Historical analysis is primarily used to determine the company's warranty
reserves. Claims history is reviewed and provisions are adjusted as needed.
However, the company does consider other events, such as a product recall, which
could warrant additional warranty reserve provision. No material adjustments to
warranty reserves were necessary in the current year. See Current Liabilities in
the Notes to the Consolidated Financial Statements for a reconciliation of the
changes in the warranty accrual.
Product Liability Cost: The company's captive insurance company, Invatection
Insurance Co., currently has a policy year that runs from September 1 to August
31 and insures annual policy losses of $10,000,000 per occurrence and
$11,000,000 in the aggregate of the company's North American product liability
exposure. The company also has additional layers of external insurance coverage
insuring up to $100,000,000 in annual aggregate losses arising from individual
claims anywhere in the world that exceed the captive insurance company policy
limits.
There can be no assurance that Invacare's current insurance levels will continue
to be adequatelimits or available at affordable rates.the limits of the company's per country foreign liability limits as
applicable.
Product liability reserves are recorded for individual claims based upon
historical experience, industry expertise and indications from the third-party
actuary. Additional reserves, in excess of the specific individual case
reserves, are provided for incurred but not reported claims based upon
third-party actuarial valuations at the time such valuations are conducted.
Historical claims experience and other assumptions are taken into consideration
by the third-party actuary to estimate the ultimate reserves. For example, the
actuarial analysis assumes that historical loss experience is an indicator of
future experience, the distribution of exposures by geographic area and nature
of operations for ongoing operations is expected to be very similar to
historical operations with no dramatic changes and that the government indices
used to trend losses and exposures are appropriate. Estimates made are adjusted
on a regular basis and can be impacted by actual loss award settlements on
claims. While actuarial analysis is used to help determine adequate reserves,
the company accepts responsibility for the determination and recording of
adequate reserves in accordance with accepted loss reserving standards and
practices.
Revenue Recognition: Invacare's revenues are recognized when products are
shipped to unaffiliated customers. The Securities and Exchange Commission'sSEC's Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition," as updated by SAB No. 104, provides guidance on the
application of generally accepted
accounting principlesGAAP to selected revenue recognition issues. The company has
concluded that its revenue recognition policy is appropriate and in accordance
with generally accepted accounting principlesGAAP and SAB No. 101.
Sales are only made to customers with whom the company believes collection is
reasonably assured based upon a credit analysis, which may include obtaining a
credit application, a signed security agreement, personal guarantee and/or a
cross corporate guarantee depending on the credit history of the customer.
Credit lines are established for new customers after an evaluation of their
credit report and/or other relevant financial information. Existing credit lines
are regularly reviewed and adjusted with consideration given to any outstanding
past due amounts.
The company offers discounts and rebates, which are accounted for as reductions
to revenue in the period in which the sale is recognized. Discounts offered
include: cash discounts for prompt payment, base and trade discounts based on
contract level for specific classes of customers. Volume discounts and rebates
are given based on large purchases and the achievement of certain sales volumes.
Product returns are accounted for as a reduction to reported sales with
estimates recorded for anticipated returns at the time of sale. The company does
not sell any goods on consignment.
FS-8
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Distributed products sold by the company are accounted for in accordance with
EITF 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. The
company records Distributed product sales gross as a principal since the company
takes title to the products and has the risks of loss for collections, delivery
and returns.
FS-8
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Product sales that give rise to installment receivables are recorded at the time
of sale when the risks and rewards of ownership are transferred. In December
2000, the company entered into an agreement with DLL, a third party financing
company, to provide the majority of future lease financing to Invacare
customers. As such, interest income is recognized based on the terms of the
installment agreements. Installment accounts are monitored and if a customer
defaults on payments, interest income is no longer recognized. All installment
accounts are accounted for using the same methodology, regardless of duration of
the installment agreements.
Research and Development: Research and development costs are expensed as
incurred and included in cost of products sold. The company's annual
expenditures for product development and engineering were approximately
$23,247,000, $21,638,000, and $19,130,000 for 2005, 2004, and $17,934,000 for 2004, 2003, and 2002,
respectively.
Advertising: Advertising costs are expensed as incurred and included in selling,
general and administrative expenses. The company has a co-op advertising program
in which the company reimburses customers up to 50% of their costs of qualifying
advertising expenditures. Invacare product, brand logos and corporate
spokesperson, Arnold Palmer, must appear in all advertising. Invacare requires
customers to submit proof of advertising with their claims for reimbursement.
Invacare receives advertising and in return reimburses customers for a portion
of their advertising costs. The company's cost of the program is included in SG&A expense onin the
consolidated statement of earnings at the time the liability is estimated.
Reimbursement is made on an annual basis and within 3 months of submission and
approval of the documentation. The company receives monthly reporting from those
in the program of their qualified advertising dollars spent and accrues based
upon information received. Advertising expenses amounted to $26,621,000,
$24,999,000 and $22,806,000 for 2005, 2004 and $20,905,000 for 2004, 2003, and 2002, respectively.
Stock-Based Compensation Plans: The company accounts for options under its
stock-based compensation plans using the intrinsic value method proscribed in
APBO No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The majority of the options awarded have been granted at
exercise prices equal to the market value of the underlying stock on the date of
grant, thus no compensation cost has been reflected in the consolidated
statement of earnings for these options. In addition, restricted stock awards
have been granted without cost to the recipients and are being expensed on a
straight-line basis over the vesting periods. Invacare continues to utilize the
disclosure-only provisions of SFAS No. 123, Accounting for Stock Based
Compensation. If the company had applied the fair value recognition provisions
of SFAS No. 123, the company's net earnings and earnings per share in 2005, 2004
2003
and 20022003 would have been reduced to the pro forma amounts indicated below (in
thousands except per share data):
2005 2004 2003 2002
---- ---- ----
Net earnings - as reported * $48,852 $75,197 $71,409 $64,770
Less: compensation expense determined based on the
fair-value method for all awards granted at
market value, net of related tax effects 14,272 4,226 4,529
4,504
------- ------- ------------- ------ ------
Net earnings - pro forma $34,580 $70,971 $66,880 $60,266
======= ======= =======
Earnings per share as reported - basic $1.55 $2.41 $2.31 $2.10
Earnings per share as reported - assuming dilution $1.51 $2.33 $2.25 $2.05
Pro forma earnings per share - basic $1.10 $2.28 $2.17 $1.95
Pro forma earnings per share - assuming dilution $1.07 $2.19 $2.11 $1.90
* Includes stock compensation expense, net of tax, on
restricted awards granted without cost of: $573 $528 $418 $492
Pro forma net earnings in 2005 were affected by the acceleration of vesting for
substantially all of the company's previously unvested stock options which were
underwater (below fair market value of $30.75) as of December 21, 2005. The
Board of Directors approved the acceleration of the vesting of the company's
stock options primarily to partially offset the recent reductions in other
benefits made by the company and to provide additional incentive to those
critical to the company's current cost reduction efforts. The decision
accelerated the vesting for a total of 1,368,307 of the company's common shares;
including 646,100 shares underlying options held by the company's named
FS-9
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
executive officers. As a result of the acceleration, the company will avoid
compensation cost of approximately $12,000,000 that would have otherwise been
recognized in earnings between 2006 and 2009. Also, see Shareholders' Equity
Transactions in Notes to the Consolidated Financial Statements.
Income Taxes: The company uses the liability method in measuring the provision
for income taxes and recognizing deferred tax assets and liabilities on the
balance sheet. The liability method requires that deferred income taxes reflect
the tax consequences of currently enacted rates for differences between the tax
and financial reporting bases of assets and liabilities. Undistributed earnings
of the company's foreign subsidiaries are considered to be indefinitely
reinvested and, accordingly, no provision for United States federal income taxes
has been provided.
FS-9
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Derivative Instruments: 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. The derivatives designated as fair value hedges are perfectly effective;
thus, the entire gain or loss associated with the derivative instrument directly
affects the value of the debt by increasing or decreasing its carrying value.
The company has entered into interest rate swap agreements that qualify as fair
value hedges and effectively convert $180,000,000$130,000,000 of fixed-rate debt to
floating-rate debt, so the company can avoid paying higher than market interest
rates. The company also had interest rate swap agreements, which expired in
2004, that qualified as cash flow hedges and effectively converted $20,000,000
of its floating-rate debt to a fixed-rate basis, thus reducing the impact of
interest-rate changes on future interest expense. The company recognized net
gains of $1,230,000, $4,577,000 $2,872,000 and $773,000,$2,872,000, respectively, related to its
swap agreements in 2005, 2004 2003 and 2002,2003, which is reflected in interest expense
on the consolidated statement of earnings.
To protect against decreases/increasesincreases/decreases in forecasted foreign currency cash flows
resulting from inventory purchases/sales over the next year, the company
utilizes cash flow hedges to hedge portions of its forecasted purchases/sales
denominated in foreign currencies. The company recognized a net loss in 2005 of
$280,000 and net gains in 2004 2003 and 20022003 of $6,961,000 $1,410,000 and $1,252,000,$1,410,000,
respectively on foreign currency cash flow hedges. The gains and losses are
included in cost of products sold and selling, general and administrative
expenses on the consolidated statement of earnings.
The company is a party to $150,000,000 in treasury lock agreements to protect
the forecasted receipt of proceeds resulting from the issuance of ten year,
fixed rate debt in March 2006, which are subject to fluctuations in the
benchmark U.S. Treasury rate. The treasury lock agreements are accounted for as
cash flow hedges and changes in the value of the treasury lock are expected to
be effective in offsetting the changes in the proceeds to be received upon
issuance (i.e. changes in principal and interest payments) attributable to
fluctuations in the benchmark U.S. Treasury interest rate. The cumulative
unrealized loss of $2,348,000 at December 31, 2005 associated with the
derivative instruments directly affects the value of the forecasted debt
issuance and is included in accumulated other comprehensive income on the
consolidated balance sheet until the forecasted issuance occurs. In March 2006,
the company exited the treasury locks while they were at break even.
The company has used forward contracts that do not qualify for special hedging
treatment, but do effectively limit the company's exposure to foreign currency
fluctuations between the Mexican Peso and U.S. Dollar. During 2003, and 2002, the company
recognized lossesa loss of $118,000 and $68,000 related to these forward contracts, which arewas
included in costs of products sold on the consolidated statement of earnings. No
Mexican Peso forward contracts were entered into in 2005 or 2004.
The company recognized no gain or loss related to hedge ineffectiveness or
discontinued cash flow hedges. If it is later determined that a hedged
forecasted transaction is unlikely to occur, any gains or losses on the forward
contracts would be reclassified from other comprehensive income into earnings.
The company does not expect this to occur during the next twelve months.
Foreign Currency Translation: The functional currency of the company's
subsidiaries outside the United States is the applicable local currency. The
assets and liabilities of the company's foreign subsidiaries are translated into
U.S. dollars at year-end exchange rates. Revenues and expenses are translated at
weighted average exchange rates. Gains and losses resulting from translation are
included in accumulated other comprehensive earnings (loss).
FS-10
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Net Earnings Per Share: Basic earnings per share are computed based on the
weighted-average number of Common Shares and Class B Common Shares outstanding
during the year. Diluted earnings per share are computed based on the
weighted-average number of Common Shares and Class B Common Shares outstanding
plus the effects of dilutive stock options outstanding during the year.
Reclassifications: Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the presentation used for the
year ended December 31, 2004.
Recently Issued Accounting Pronouncements: In December 2004, FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004),
Share-Based Payment ("SFAS
123R"),123R, which requires companies to expense stock options and other share-based
payments. SFAS 123R supersedes SFAS No. 123, which permitted either expensing
stock options or providing pro forma disclosure. The provisions of this
Statement, which is effective JulyJanuary 1, 2005,2006, apply to all awards granted,
modified, cancelled or repurchased after JulyJanuary 1, 20052006 as well as the unvested
portion of prior awards.
The company will adoptadopted the standard as of
the effective dateJanuary 1, 2006 and estimates that
the impact to the company's reported results will be similar toless than the pro forma
results shown in the company's Accounting Policy Note to the Consolidated
Financial Statements.
FS-10
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
The American Jobs Creation ActStatements because on December 21, 2005, the Board of 2004 (the Act) was signed into law in October
2004. The Act provides, among other things, for a tax deduction on qualified
domestic production activities and introduced a special one-time dividends
received deductionDirectors of
Invacare Corporation based on the repatriationrecommendation of certain foreign earningsthe Compensation, Management
Development and Corporate Governance Committee (the "Committee"), approved the
acceleration of the vesting for substantially all of the company's unvested
stock options which were granted under the 1994 Plan, as amended, and the 2003
Plan, which were then underwater. The Board of Directors decided to a U.S.
taxpayer, provided certain criteria are met. The FASB issued FASB Staff
Positions 109-1approve the
acceleration of the vesting of the company's stock options primarily to
partially offset the recent reductions in other benefits made by the company and
to provide guidance onadditional incentive to those critical to the applicationcompany's current cost
reduction efforts. The decision, which was effective as of SFAS No. 109,
Accounting for Income Taxes, and FASB Staff Positions 109-2 to provide
accounting and disclosure guidance forDecember 21, 2005,
resulted in the repatriation provision. The company
is reviewing the implicationacceleration of nearly all of the new Act, recently released treasury
guidance, and the FASB staff positions but does not intend to repatriate any
foreign earnings under the Act and does not expect the Act will have a material
impact on the company's financial position, results of operations or cash flows.then unvested stock options.
RECEIVABLES
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. Substantially all of the company's receivables are
due from health care, medical equipment dealers and long term care facilities
located throughout the United States, Australia, Canada, New Zealand and Europe.
A significant portion of products sold to dealers, both foreign and domestic, is
ultimately funded through government reimbursement programs such as Medicare and
Medicaid. In addition, the company has 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. The
estimated allowance for uncollectible amounts ($9,857,00012,470,000 in 20042005 and
$16,775,000$9,857,000 in 2003)2004) is based primarily on management's evaluation of the
financial condition of the customer. The decreaseincrease in the allowance for
uncollectible accounts in 20042005 compared to 20032004 is primarily attributable to
significanthigher bad debt expense and less write-offs of accounts previously reservedcompared to 2004.
On September 30, 2005, the company entered into a 364-day $100 million accounts
receivable securitization facility. The Receivables Purchase Agreement (the
"Receivables Agreement"), provides for, among other things, the transfer from
time to time by Invacare and certain of its subsidiaries of ownership interests
of certain domestic accounts receivable on a revolving basis to the bank
conduit, an asset-backed issuer of commercial paper, and/or the financial
institutions named in the Receivables Agreement. Pursuant to the Receivables
Agreement, the company and certain of its subsidiaries from time to time may
transfer accounts receivable to Invacare Receivables Corporation (IRC), a
special purpose entity and subsidiary of Invacare. IRC then transfers interests
in the receivables to the Conduit and/or the financial institutions named in the
Receivables Agreement and receives funds from the conduit and/or the financial
institutions raised through the issuance of commercial paper (in its own name)
by the conduit and/or the financial institutions. In accordance with U.S.
Generally Accepted Accounting Principles (GAAP), Invacare accounts for the
transaction as all collection
effortsa secured borrowing. Borrowings under the facility are
effectively repaid as receivables are collected, with new borrowings created as
additional receivables are sold. As of December 31, 2005, Invacare had
$79,351,000 in borrowings pursuant to the securitization facility at a borrowing
rate of approximately 4.3%. The initial borrowings were exhausted in 2004.used to reduce balances
outstanding on Invacare's revolving credit facility. The debt is reflected on
the short-term debt and current maturities of long-term obligations line of the
condensed consolidated balance sheet at December 31, 2005.
Installment receivables as of December 31, 20042005 and 20032004 consist of the
following (in thousands):
2005 2004 2003
---- -----
Current Long-Term Total Current Long-Term Total
------- ------------------- ------- ------- --------- -------
Installment receivables $23,630 $162 $23,792 $19,576 $1,324 $20,900
$18,930 $578 $19,508
Less: Unearned interest (71) (16) (87) (435) - (435) (246) (54) (300)
Allowance for doubtful accounts (10,624) - (10,624) (5,719) - (5,719)
(10,929) - (10,929)
------- ------ ------- ------ ------ ------------- ------- ------- -------
$12,935 $146 $13,081 $13,422 $1,324 $14,746 $7,755 $524 $8,279
======= ====== ======= ====== ===== ======
FS-11
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
RECEIVABLES--Continued
In addition, as a result of the third party financing arrangement with DLL,
management monitors the collection status of these contracts in accordance with
the company's limited recourse obligations and provides amounts necessary for
estimated losses in the allowance for doubtful accounts. See the "Concentration
of Credit Risk" footnote for a description of the financing arrangement.
Long-term installment receivables are included in "Other Assets" on the
consolidated balance sheet.
INVENTORIES
Inventories as of December 31, 20042005 and 20032004 consist of the following (in
thousands):
2005 2004
2003
------ -------------
Raw materials $59,888 $60,548 $41,573
Work in process 13,544 16,156 18,711
Finished goods 103,493 99,179
70,695
------ -------------
$176,925 $175,883 $130,979
======= ========
PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 20042005 and 20032004 consist of the following
(in thousands):
2005 2004
2003
------ -------------
Machinery and equipment $252,545 $243,335 $216,459
Land, buildings and improvements 84,031 95,041 67,364
Furniture and fixtures 28,788 27,494 20,737
Leasehold improvements 15,194 14,275
14,946
------- ------------- ------
380,558 380,145 319,506
Less allowance for depreciation (204,352) (188,982)
(169,455)
------ -------------
$176,206 $191,163 $150,051
======= =======
FS-11
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACQUISITIONS
In 2004,2005, Invacare Corporation acquired for cash the following six businesses, which were
individually immaterial and in the aggregate, at a total cost of $343,554,000:$58,216,000,
which was paid in cash:
o The assets of ACS, a New York distributor of medical supplies
with a focus on infusion therapy.
o The assets of Decpac,Australian Healthcare Equipment Pty Ltd, an Australian based company,
that designs and manufactures portable folding access rampsmanufacturer of beds, related furniture and pressure care products
for use with
wheelchairshome care and scooters.non-acute institutional care.
o Freedom Designs,Altimate Medical, Inc., a California-basedU.S. company, that designs
and manufactures seatingmanufacturer of standing
frames and mobility aids for the rehabilitation market.
o Medical Support Systems Holdings Limited, a U.K. company, and
manufacturer of high quality, foam pressure-reducing products and wheelchairs with a
particular focus onfor the
pediatric marketplace.
o WP Domus GmbH, a European-based holding company which
manufactures several complementary product lines to Invacare's
product lines.
o Champion Manufacturing, LLC , an Indiana company that designs and
manufactures medical recliners.
o The assets of Premier Designs, a California company from which
Invacare acquired assets and designs for a lightweight, easily
transportable power wheelchair.
Carroll Healthcare, Inc. was purchased in 2003 and as part of the purchase
agreement, the company agreed to pay additional consideration based upon
earnings before interest, taxes, depreciation and amortization from September 1,
2003 through August 31, 2004 calculated under Canadian generally accepted
accounting principles (U.S. GAAP used for company reporting purposes) in
accordance with the purchase agreement with no defined maximum amount. The
payment amount was finalized and paid in October 2004 at 74,667,000 Canadian
Dollars, $60,992,000 U.S. Dollars, which increased goodwill.
Motion Concepts, Inc. ("Motion") was also purchased in 2003 and pursuant to the
Motion purchase agreement, the Company agreed to pay contingent consideration
based upon earnings before interest and taxes over the three years subsequent to
the acquisition up to a maximum of approximately $16,000,000. Based upon 2004
results, no additional consideration was paid. When the contingency related to
the acquisitions is settled, any additional consideration paid will increase the
purchase price and reported goodwill.healthcare market.
On September 9, 2004 the company finalized the acquisition ofacquired 100% of the shares of WP Domus GmbH
(Domus), a European-based holding company that manufactures several
complementary product lines to Invacare's product lines, including power add-on
products, bath lifts and walking aids, from WP Domus LLC. Domus has three
divisions: Alber, Aquatec and Dolomite. The acquisition allows the company to
expand its product line and reach new markets. The preliminaryfinal purchase price was
$227,382,000$226,806,000, including acquisition costs of $3,670,000,$4,116,000, which was paid in cash,cash.
Motion Concepts, Inc. ("Motion") was purchased in 2003 and is subjectpursuant to final determination of the
estimated costs of possible
office closures, sales agency transfersMotion purchase agreement, the company agreed to pay contingent consideration
based upon earnings before interest and other consolidation efforts expectedtaxes over the three years subsequent to
be finalized by the end of the third quarter of 2005. The acquisition was
consummated after satisfaction of certain conditions, including receipt of all
requisite regulatory approvals. Invacare entered into a 100,000,000 Euro bridge
loan agreement and utilized its existing revolving credit line to fund the
acquisition. Invacare's reported results reflect the operating results of Domus
since the date of the acquisition.
Supplemental pro forma information is presented below as though the business
combination had been completed as of the beginning of the period being reported
on. The pro forma information does not necessarily reflect the results of
operations that would have occurred if Domus had been a wholly owned entity of
Invacare as of the beginning of the periods presented (in thousands).
Years Ended December 31
2004 2003
---------- ----------
Net sales $1,490,140 $1,363,763
Net earnings 80,410 75,859
Earnings per share - assuming
dilution $2.49 $2.39
The pro forma results for 2004 included non-recurring stock option plan expense
of $1,410,000. The pro forma results for 2003 included non-recurring stock
option plan expense of $2,208,000 and a one-time shipmentup to a Japanese
distributormaximum of approximately $9,512,000.$16,000,000. Based upon 2004
and 2005 results, no additional consideration was paid. When the contingency
related to the acquisition is settled, any additional consideration paid will
increase the purchase price and reported goodwill.
FS-12
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACQUISITIONS--Continued
The following summarizesDuring the estimated fair valuesthird quarter of 2005, the company finalized the purchase price
allocation related to the Domus acquisition and as a result recorded additional
severance and exit accruals ($5,954,000) and certain pre-acquisition liabilities
for warranty and product liability ($945,000), legal and professional fees
associated with the transaction ($1,303,000), and other valuation adjustments
($502,000) totaling $8,704,000, which increased goodwill by the same amount.
In accordance with EITF Issue No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination," the company recorded accruals
for severance and exit costs for facility closures and contract terminations. A
progression of the assets acquired and
liabilities assumed ataccruals recorded in the date of acquisitionpurchase price allocation is as
follows (in thousands):
Trade receivables $10,845
Inventories 8,470
Other current assets 5,380
Other intangibles 68,965
Property and equipment 17,673
Goodwill 161,486Balance at Additional Balance at
12/31/04 Accruals Payments 12/31/05
------- ------- ------- -------
Severance $ 561 $ 4,445 $ 1,957 $ 3,049
Sales agency terminations - 612 612 -
Exit of product lines - 897 - 897
------- ------- ------- -------
Total assets acquired 272,819
Accounts payable (3,985)
Accrued expenses (17,655)
Long-term debt (7,771)
Other long-term obligations (16,026)
--------
Total liabilities assumed (45,437)
--------
Net assets acquired $227,382
========$ 561 $ 5,954 $ 2,569 $ 3,946
======= ======= ======= =======
The company anticipates all of the remaining reserves to be utilized in 2006.
GOODWILL
The carrying amount of goodwill by operating segment is as follows (in
thousands):
2005 2004
2003
------------------------------------------------------------------------------------------------------ ----------------------------------------------------
North Asia/ North Asia/
America Europe Asia/Pacific Consolidated America Europe Asia/Pacific Consolidated
--------------- ------ ------------------- ------------ ------- ------ ------------------- ------------
Balance as of
January 1 $313,327 $390,611 $14,026 $717,964 $210,047 $192,508 $12,944 $415,499
$153,683 $157,325 $10,110 $321,118
Acquisitions 14,293 22,481 8,984 45,758 95,344 161,486 71 256,901
49,723 3,397 - 53,120
Foreign
currency
translation 4,318 (45,941) (1,226) (42,849) 7,936 36,617 1,011 45,564 6,641 31,786 2,834 41,261
-------- -------- -------- -------- -------- -------- -------- --------
Balance as of
December 31 $331,938 $367,151 $21,784 $720,873 $313,327 $390,611 $14,026 $717,964 $210,047 $192,508 $12,944 $415,499
======== ======== ======= ======== ======== ======== ======= ========
Of the $256,901,000$45,758,000 in goodwill recorded fromdue to acquisitions, $67,557,000$13,363,000 is
expected to be deductible for tax purposes, of which $53,716,000 is deductible
related to the acquisition of Domus.purposes.
OTHER INTANGIBLES
All of the company's other intangible assets have definite lives and continue to
be amortized over their useful lives, except for $27,732,000$30,246,000 related to
trademarks, which have indefinite lives. The company's intangibles consist of
the following (in thousands):
December 31, 20042005 December 31, 20032004
----------------- -----------------
Accumulated Accumulated
Historical Cost Amortization Historical Cost Amortization
--------------- ------------ --------------- ------------
Customer Lists $64,218 $8,270 $57,788 $2,737
$6,105 $ 936
Trademarks 27,73230,246 - 4,26827,732 -
License agreements 7,564 5,821 6,518 5,051
6,455 4,464
Developed Technology 6,260 487 5,842 80
- -
Patents 12,414 2,690 4,137 1,443
2,180 1,109
Other 7,876 3,193 7,348 1,842 3,406 1,227
------- ------- ------- ------
$128,578 $20,461 $109,365 $11,153 $22,414 $7,736
======= ======= ======= ======
FS-13
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
OTHER INTANGIBLES
The intangiblesIntangibles recorded onas the dateresult of acquisition due to the Domus acquisitionacquisitions during 2005 were as follows
(in thousands):
Weighted Average Amortization
Fair Value Amortization Period
---------- -----------------------------
Customer relationships $ 42,731 1311,700 10 years
Trademarks - Indefinite lives 20,5215,330 Indefinite
Developed Technology 5,311 171,040 10 years
Other 402 5Patents 1,400 10 years
---------Trademarks 320 7 years
-------- -------
Total $ 68,965 1319,790 10 years
=========
Amortization expense related to other intangibles was $9,307,000 and $3,417,000
for 2005 and $1,506,000
for 2004, and 2003, respectively. Estimated amortization expense for each of the
next five years is expected to be $7,333,000$8,896,000 for 2005, $6,591,000 in 2006, $6,427,000$8,674,000 in 2007,
$6,128,000$8,308,000 in 2008, $8,045,000 in 2009 and $5,868,000$7,734,000 in 2009.2010.
INVESTMENT IN AFFILIATED COMPANY
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which was revised in December 2003 and,
which among other things, deferred the implementation date of FIN 46 until
periods after March 15, 2004. This interpretation requires consolidation of an
entity if the company is subject to a majority of the risk of loss from the
variable interest entity's (VIE) activities or entitled to receive a majority of
the entity's residual returns, or both. A company that consolidates a VIE is
known as the primary beneficiary of that entity.
As of December 31, 2004, theThe company had an investment inconsolidates NeuroControl, a development stage company, which is
currently pursuing FDA approval to market a product focused on the treatment of
post-stroke shoulder pain in the United States. The amount of
net advances and investment recorded on the company's books is approximately
$3,000,000 at December 31, 2004. Certain of the Company'scompany's
officers and directors (or their affiliates) have small minority equity
ownership positions in this company.NeuroControl. Based on the provisions of FIN 46 and the
company's preliminary analysis, the company does
not believedetermined that its investment is ait was the primary beneficiary
of this VIE as of December 31, 2004. SubsequentJanuary 1, 2005 due to December 31, 2004, the company'scompany board of directors approved andirectors'
approval of additional funding commitment.in 2005. Accordingly, the company will be required to consolidateconsolidated
this investment on a prospective basis since January 1, 2005 and recorded an
intangible asset for patented technology of $7,003,000. The other beneficial
interest holders have no recourse against the quarter ended March 31, 2005 as
the company will be deemed the primary beneficiary of this variable interest
entity.company.
CURRENT LIABILITIES
Accrued expenses as of December 31, 20042005 and 20032004 consist of the following (in
thousands):
2005 2004
2003
------ ---------- ----
Accrued salaries and wages $35,834 $35,280 $31,960
Accrued warranty cost 15,583 13,998 12,688
Accrued rebates 9,434 7,427 13,595
Accrued taxes other than income taxes 7,136 6,419
3,661
Accrued interest 5,274 3,998severance 6,153 561
Accrued legal and professional 6,077 4,761
2,029Accrued interest 5,180 5,274
Accrued freight 4,144 2,894 4,524
Accrued insurance 2,656 2,470
Accrued product liability, current portion 2,657 2,595
2,245Accrued insurance 2,519 2,656
Accrued derivative liability 2,330 780
Other accrued items 17,546 14,8629,167 16,205
------ ------
$106,214 $98,850
$92,032
====== ============= =======
Accrued rebates relate to several volume incentive programs the company offers
its customers. The company accounts for these rebates as a reduction of revenue
when the products are sold in accordance with the guidance in EITF 01-09:
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products). The company has experienced significant
pricing pressure in the U.S. market for standard products in recent years and
has partially reduced prices to our customers in the form of a volume rebate
such that the rebates would typically apply only if customers increased their
standard product purchases from the company.
The decrease in rebates from
December 31, 2003 to December 31, 2004 is attributable to the fact that rebate
programs in place at December 31, 2003 targeted at Standard Products customers
in the U.S. expired during 2004 and were not renewed.
FS-14
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CURRENT LIABILITIES --ContinuedLIABILITIES--Continued
Changes in accrued warranty costs were as follows (in thousands):
2005 2004
2003
------ ---------- ----
Balance as of January 1 $13,998 $12,688 $11,448
Warranties provided during the period 9,811 8,665 8,557
Settlements made during the period (8,931) (7,977) (8,288)
Changes in liability for pre-existing warranties
during the period, including expirations 705 622
971
------ ------------- -------
Balance as of December 31 $15,583 $13,998
$12,688
====== ============= =======
LONG-TERM DEBT
Long-term debtDebt as of December 31, 20042005 and 20032004 consist of the following (in thousands):
2005 2004
2003
------ ---------- ----
$80,000,000 senior notes at 6.71%, due in February 2008 $83,304 $85,462
$20,000,000 senior notes at 6.60%, due in February 2005 20,000 20,000
$50,000,000 senior notes at 3.97%, due in October 2007 50,081 50,560
$30,000,000 senior notes at 4.74%, due in October 2009 30,485 30,532
$20,000,000 senior notes at 5.05%, due in October 2010 20,433 20,386
Revolving credit agreement ($325,000,000500,000,000 multi-currency), at 0.675% to
1.40% above local interbank offered rates, expires January 14, 2010 $264,828 $230,382
$80,000,000 senior notes at 6.71%, due in February 2008 80,553 83,304
$50,000,000 senior notes at 3.97%, due in October 17, 2006 230,382 20,0022007 49,244 50,081
$30,000,000 senior notes at 4.74%, due in October 2009 30,339 30,485
$20,000,000 senior notes at 5.05%, due in October 2010 20,134 20,433
$20,000,000 senior notes at 6.60%, due in February 2005 - 20,000
Short-term borrowings secured by accounts receivable 79,351 -
Bridge Credit Agreementcredit agreement - 100,000 -
Other notes 13,532 15,351
7,267
------ ------------- -------
537,981 550,036
234,209Less short-term borrowings secured by accounts receivable (79,351) -
Less current maturities of long-term debt (877) (2,062)
(2,171)
------ ------------- -------
$457,753 $547,974 $232,038
======== ========
The carrying values of the senior notes have been increasedadjusted by the gains and
losses on the interest rate swaps accounted for as fair value hedges.
On January 14, 2005, Invacare Corporationthe company entered into a $450,000,000 multi-currency,
long-term revolving credit agreement which was increased on April 4, 2005 by
$50,000,000 to an aggregate amount of $500,000,000 and expires on January 14,
2010. The facility provides that Invacare, may, upon consent of its lenders,
increase the amount of the facility by an additional $100,000,000.$50,000,000. The borrowing rates
undernew
agreement replaced the $325,000,000 multi-currency, long-term revolving credit
agreement are determined based on the ratio of debt
to earnings before interest, taxes, depreciation and amortization (EBITDA) of
the company as defined in the agreement, and ranges from LIBOR plus 0.35% to
0.675%.
On September 1, 2004, Invacare Corporation entered into in 2001 and a 364-day,
multi-currency$100,000,000 bridge credit agreement with a group of commercial banks, with an
expiration date of August 31, 2005 or such later date as mutually agreed upon byentered into
in 2004. In 2003, the company and the banks. Pursuant to the agreement, the company borrowed
100,000,000 Euros in order to provide funds for the company's general corporate
purposes, including financing the Domus acquisition and expenses incurred in
connection therewith.
In October 2003, Invacare Corporation issued $100,000,000 in senior notes, maturingwhich are due
between 2007 and 2010. In 2001, the company entered into a $325,000,000
5-year, multi-currency revolving credit agreement with a group of commercial
banks. The multi-currency revolving credit agreement was to expire on October
17, 2006 or such later date as mutually agreed upon by the company and the
banks.
In January 2005, amounts outstanding under both the $325,000,000 revolving
credit agreement and the 100,000,000 Euro bridge credit agreement were paid off
with the $450,000,000 multi-currency revolving credit agreement described above.
In addition, the $20,000,000 senior notes at 6.60%, due in February 2005 were
paid off with the new $450,000,000 facility and thus were classified as
long-term as of December 31, 2004 as the company had the intent and the ability
to pay-off the notes with long-term debt.
Borrowings denominated in foreign currencies aggregated $131,464,000 at December
31, 2005 and $179,084,000 at December 31, 2004 and $872,000 at December 31, 2003.2004. The borrowing rates under the
revolving credit agreement are determined based on the ratio of debt to EBITDA
of the company as defined in the agreement and range from 0.675%0.35% to 1.40%.675% above
the various interbank offered rates. As of December 31, 20042005 and 2003,2004, the
weighted average floating interest rate on U.S. borrowings was 3.36%4.53% and 2.69%3.36%,
respectively.
FS-15
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LONG-TERM DEBT --Continued
The revolving credit agreement, as amended, bridge credit agreement and senior notes all require the company to
maintain certain conditions with respect to net worth, funded debt to
capitalization, and interest coverage as defined in the agreements. Under the
most restrictive covenants of the company's borrowing arrangements, the company
has the capacity to borrow up to an additional $60,800,000$72,134,000 as of December 31,
2004 and up to $108,000,000, effective February
2005, pursuant to the covenants of the new $450,000,000 multi-currency,
long-term revolving credit agreement.2005.
FS-15
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LONG-TERM DEBT--Continued
In October 2003, the company exchanged the fixed rates of 3.97%, 4.74% and 5.05%
on the $50,000,000, $30,000,000 and $20,000,000 Senior Notes due in October
2007, October 2009 and October 2010 for variable rates based on LIBOR plus
0.01%, LIBOR plus 0.14% and LIBOR plus 0.26%, respectively. The effect of these
swaps is to exchange fixed rates for the lower floating rates currently
available. In November 2005, the $30,000,000 and $20,000,000 swaps, exchanging
fixed rates of 4.74% and 5.05% for variable rates, were terminated.
In December 2001, the company exchanged the fixed rate of 6.71% on $50,000,000
of the $80,000,000 in Senior Notes due in February 2008. The three agreements
for $25,000,000, $15,000,000 and $10,000,000 exchanged the fixed rate for
variable rates equal to LIBOR plus 1.9%, 1.71% and 1.62%, respectively. In
January 2002, the company exchanged the fixed rate of 6.71% on the remaining
$30,000,000 of the $80,000,000 in Senior Notes due in February 2008. The two
agreements for $10,000,000 and $20,000,000 exchanged the fixed rate for variable
rates equal to LIBOR plus 1.05% and 1.08%, respectively. The effect of these
swaps is to exchange a fixed rate of 6.71% for the lower floating rates
currently available.
The aggregate minimum maturities of long-term debt for each of the next five
years are as follows: $2,062,000 in 2005, $1,308,000$877,000 in 2006, $217,578,000$50,838,000 in 2007, $81,089,000$80,687,000 in
2008, $30,714,000 in 2009, and $31,108,000$285,688,000 in 2009.2010. Interest paid on borrowings
was $29,017,000, $15,348,000 and $9,450,000 in 2005, 2004 and $13,465,000 in 2004, 2003,
and 2002,
respectively.
OTHER LONG-TERM OBLIGATIONS
Other long-term obligations as of December 31, 20042005 and 20032004 consist of the
following (in thousands):
2005 2004
2003
------ ---------- ----
Supplemental Executive Retirement Plan liability $14,962 $12,947 $11,048
Product liability 18,292 14,450 9,664
Deferred federal income taxes 27,792 24,833 2,337
Other, principally deferred compensation 18,578 16,341
11,334
------ ------------- -------
Total long-term obligations $79,624 $68,571 $34,383
======= =======
LEASES AND COMMITMENTS
The company leases a substantial portion of its facilities, transportation
equipment, data processing equipment and certain other equipment. These leases
have terms of up to 1819 years and provide for renewal options. Generally, the
company is required to pay taxes and normal expenses of operating the facilities
and equipment. As of December 31, 2004,2005, the company is committed under
non-cancelable operating leases, which have initial or remaining terms in excess
of one year and expire on various dates through 2014.2024. Lease expenses were
approximately $18,718,000 in 2005, $18,663,000 in 2004, and $15,803,000 in 2003, and $12,575,000 in 2002.2003.
The amount of buildings and equipment capitalized in connection with capital
leases was $16,545,000$15,592,000 and $7,767,000$16,545,000 at December 31, 20042005 and 2003,2004,
respectively. At December 31, 20042005 and 2003,2004, accumulated amortization was
$3,590,000$4,505,000 and $3,003,000,$3,590,000, respectively.
Future minimum operating and capital lease commitments as of December 31, 2004,2005,
are as follow (in thousands):
Year Capital Leases Operating Leases
---- -------------- ----------------
2005 $1,751 $15,680
2006 1,699 9,039$1,607 $13,828
2007 1,586 5,8701,496 9,691
2008 1,538 3,1781,303 5,674
2009 1,526 1,8721,292 2,910
2010 1,292 1,639
Thereafter 13,439 1,715
------- -------9,845 4,002
------ ------
Total future minimum lease payments 21,539 $37,35416,835 $37,744
=======
Amounts representing interest (8,262)(5,753)
Present value of minimum lease payments $13,277$11,082
=======
FS-16
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
RETIREMENT AND BENEFIT PLANS
Substantially all full-time salaried and hourly domestic employees are included
in the Invacare Retirement Savings Plan sponsored by the company. The company
makes matching cash contributions up to 66.7% of employees' contributions up to
3% of compensation, quarterly contributions based upon 4% of qualified wages and
may make discretionary contributions to the domestic plans based on an annual
resolution byof the Board of Directors.
The company also sponsors a non-qualified 401(k)Deferred Compensation Plus Benefit Equalization Plan covering certain
employees, which provides for employee elective deferrals and the company retirement
deferrals so that the total retirement deferrals equal amounts that would have
been contributed to the company's principal retirement plans if it were not for
limitationslimitation imposed by income tax regulations. Contribution expense for the above
plans in 2005, 2004 and 2003 was $5,811,000, $5,860,000, and 2002 was $5,860,000,
$5,619,000, and $5,444,000,
respectively.
The company also sponsors a non-qualified defined benefit Supplemental Executive
Retirement Plan for certain key executives. The projected benefit obligation
related to this unfunded plan was $30,631,000$31,071,000 and $27,618,000$30,631,000 at December 31,
20042005 and 2003,2004, respectively, of which approximately $13,371,000$15,386,000 and $11,517,000,$13,371,000
at December 31, 20042005 and 2003,2004, respectively, has been accrued. Expense for the
plan in 2005, 2004 and 2003 was $2,439,000, $2,278,000, and 2002 was $2,278,000, $2,108,000, and $2,147,000,
respectively.
In conjunction with these non-qualified plans, the company has invested in life
insurance policies related to certain employees to satisfy certain of these future
obligations. The current cash surrender value of thethese policies approximates the
current benefit obligations. In addition, the projected policy benefits exceed
the projected benefit obligations.
SHAREHOLDERS' EQUITY TRANSACTIONS
The company's Common Shares have a $.25 stated value. The Common Shares and the
Class B Common Shares generally have identical rights, terms and conditions and
vote together as a single class on most issues, except that the Class B Common
Shares have ten votes per share, carry a 10% lower cash dividend rate and, in
general, can only be transferred to family members. Holders of Class B Common
Shares are entitled to convert their shares into Common Shares at any time on a
share-for-share basis.
The 2003 Performance Plan (the "2003 Plan") allows the Compensation Committee of
the Board of Directors (the "Committee") to grant up to 2,000,000 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 1994 Performance Plan (the "1994 Plan"), as amended, expired in 2004 and
allowed the Compensation Committee of the Board of Directors (the "Committee")
to grant up to 5,500,000 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 2004,2005, the
Committee granted 615,450 and 11,000614,962 non-qualified stock options for a term of ten years at
the fair market value of the company's Common Shares on the date of grant under
the 2003 Plan and the 1994 Plan, respectively.Plan. There were no stock appreciation rights outstanding at December
31, 2005, 2004 2003 or 2002.2003.
Restricted stock awards for 21,304, 20,510 28,894 and 37,28928,894 shares were granted in
years 2005, 2004 2003 and 20022003 without cost to the recipients. Under the terms of the
restricted stock awards, which were initially granted in 2001, 104,213125,517 of the
shares granted vest ratably over the four years after the award date and 6,500
of the shares granted vest ratably over the 2 years after the award date.
Unearned restricted stock compensation of $1,016,000 in 2005, $911,000 in 2004
and $897,000 in 2003, and
$1,190,000 in 2002, determined as the market value of the shares at the date
of grant, is being amortized on a straight-line basis over the vesting period.
Compensation expense of $881,000, $812,000 $643,000 and $757,000$643,000 was recognized in 2005,
2004 2003 and 2002,2003, respectively, related to restricted stock awards granted since
2001.
The 1994 Plan and the 2003 Plan have provisions that allow employees to exchange
mature shares to pay the exercise price and surrender shares for the options to
cover the minimum tax withholding obligation. Under these provisions, the
company acquired approximately 124,000 treasury shares for $6,004,000 in 2005,
53,000 treasury shares for $2,444,000 in 2004 and 110,000 treasury shares for
$3,199,000 in 2003 and 85,000 treasury shares for
$2,863,000 in 2002.2003.
FS-17
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SHAREHOLDERS' EQUITY TRANSACTIONS--(Continued)TRANSACTIONS--Continued
On December 21, 2005, the Board of Directors of Invacare Corporation based on
the recommendation of the Compensation, Management Development and Corporate
Governance Committee (the "Committee"), approved the acceleration of the vesting
for substantially all of the company's unvested stock options which were granted
under the 1994 Plan, as amended, and the 2003 Plan, which were then underwater.
The Board of Directors decided to approve the acceleration of the vesting of the
company's stock options primarily to partially offset the recent reductions in
other benefits made by the company and to provide additional incentive to those
critical to the company's current cost reduction efforts.
The decision, which was effective as of December 21, 2005, accelerated the
vesting for a total of 1,368,307 of the company's common shares; including
646,100 shares underlying options held by the company's named executive
officers. The stock options accelerated equate to 29% of the company's total
outstanding stock options. Vesting was not accelerated for the restricted awards
granted under the Plans and no other modifications were made to the awards that
were accelerated. The exercise prices of the accelerated options, all of which
were underwater, were unchanged by the acceleration of the vesting schedules.
All of the company's outstanding unvested options under the Plans, which were
accelerated, had exercise prices ranging from $30.91 to $47.80 which were
greater than the company's stock market price of $30.75 as of the effective date
of the acceleration.
As of December 31, 2004,2005, an aggregate of 10,389,39310,035,066 Common Shares were reserved
for conversion of Class B Common Shares, future rights (as defined below) and
the exercise and future grant of options.
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2005 Price 2004 Price 2003 Price 2002 Price
---- ----- ---- ----- ---- -----
Options outstanding at January 1 4,638,405 $29.81 4,518,890 $27.34 4,257,422 $25.23
4,201,943 $23.27
Granted 614,962 41.59 626,450 43.89 704,617 36.73
619,868 33.59
Exercised (356,676) 23.39 (449,374) 24.13 (340,665) 19.08
(418,432) 18.28
Canceled (120,529) 37.17 (57,561) 34.75 (102,484) 33.02
(145,957) 27.32
----------------- ------ ----------------- ------ ----------------- ------
Options outstanding at December 31 4,776,162 $31.57 4,638,405 $29.81 4,518,890 $27.34 4,257,422 $25.23
========= ====== ========= ====== ========= ======
Options price range at December 31 $16.03 to $16.03 to $15.13 to
$11.88 to$47.80 $47.35 $43.37 $36.84
Options exercisable at December 31 4,745,435 2,963,385 2,796,100 2,347,721
Options available for grant at December 31* 454,142 1,033,858 1,670,600 296,860
* Options available for grant as of December 31, 20042005 reduced by net
restricted stock award activity of 108,713.130,017.
The following table summarizes information about stock options outstanding at
December 31, 2004:2005:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Average Number
Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices At 12/31/0405 Contractual Life Exercise Price At 12/31/0405 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$16.03 - $19.50 513,873 3.8401,505 3.7 years $18.25 513,873 $18.25$18.53 401,505 $18.53
$20.06 - $24.75 1,266,484 3.9 $23.67 1,066,484 $23.721,151,996 3.0 $23.71 1,128,009 $23.71
$25.13 - $29.85 723,042 4.4 $25.30 723,042 $25.30683,421 3.3 $25.31 683,421 $25.31
$30.02 - $34.54 694,753 7.4 $32.54 387,718 $32.82595,610 6.3 $32.75 593,472 $32.76
$36.10 - $37.70 823,891 8.3 $37.29 272,268 $37.06$39.67 772,167 7.3 $37.26 772,167 $37.26
$40.07 - $47.35 616,362 9.7 $44.29 - -$47.80 1,171,463 9.1 $43.23 1,166,861 $43.23
--------- --- ------ --------- ------
Total 4,638,405 6.0 $29.41 2,963,385 $25.574,776,162 5.7 $31.60 4,745,435 $31.64
FS-18
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SHAREHOLDERS' EQUITY TRANSACTIONS--Continued
The company utilizeshas utilized the disclosure-only provisions of SFAS No. 123.123 through
December 31, 2005. Accordingly, no compensation cost has been recognized for the
stock option plans, except the expense recorded related to the 110,713132,017
restricted stock awards granted in years 2001 through 2004.2005.
The assumption regarding the stock options issued in 2005, 2004 2003 and 20022003 was
that 25% of such options vested in the year following issuance. The stock
options awarded during such years provided a four-year vesting period whereby
options vest equally in each year. Current and prior years' pro forma
disclosures may be adjusted for forfeitures of awards that will not vest because
service or employment requirements have not been met.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2005 2004 2003 2002
---- ---- ----
Expected dividend yield .67% .63% .75% .80%
Expected stock price volatility 26.7% 28.8% 29.6% 31.4%
Risk-free interest rate 4.38% 3.67% 3.31% 3.26%
Expected life (years) 5.6 5.6 5.5 5.4
The weighted-average fair value of options granted during 2005, 2004 2003 and 2002,2003,
based upon an expected exercise year of 2010, was $12.41, $13.58 and $11.03,
and $10.71,
respectively.
FS-18
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SHAREHOLDERS' EQUITY TRANSACTIONS --Continued
The plans provide that shares granted come from the company's authorized but
unissued Common Shares or treasury shares. Pursuant to the plans and the
acceleration of all unvested shares underwater as of December 21, 2005, the
Committee has established that the 2004majority of the 2005 grants may not be exercised within one year from
the date grantedare currently
exercisable and options must be exercised within ten years from the date granted. The
weighted-average remaining contractual life of options outstanding at December
31, 20042005 is 6.05.7 years.
OnEffective July 7, 1995,8, 2005, the company adopted a new Rights Plan wherebyAgreement to replace
the company's previous shareholder rights plan, which expired on July 7, 2005.
In order to implement the new Rights Agreement, the Board of Directors declared
a dividend of one Right for each holderoutstanding share of athe company's Common
ShareShares and a Class B Common Share received one purchase right (the
"Rights") for each share owned. Under certain conditions, eachShares to shareholders of record at the close of
business on July 19, 2005. Each Right may be
exercisedentitles the registered holder to purchase
one-tenthfrom the company one one-thousandth of one Commona Series A Participating Serial Preferred
Share, without par value, at a pricePurchase Price of $8.00 per
one-tenth of a share.$180.00 in cash, subject to
adjustment. The Rights may only be exercised 10 dayswill not become exercisable until after a third
partyperson (an
"Acquiring Party") has acquired, or obtained the right to acquire, or commences
a tender offer to acquire, shares representing 30% or more of the company's
outstanding voting power, or 10
days after a third party commences a tender offer for 30% or moresubject to deferral by the Board of Directors. After
the Rights become exercisable, under certain circumstances, the Rights may be
exercisable to purchase Common Shares of the voting
power (an "Acquiring Party"). In addition, ifcompany, or common shares of an
Acquiring Party merges with theacquiring company, and the company's Common Shares are not changed or exchanged, or if an
Acquiring Party engages in one ofat a number of self-dealing transactions, each
holder of a Right (other than the Acquiring Party) will have the right to
receive that number of Common Shares or similar securities of the resulting
entity having a market valueprice equal to two times the exercise price of the Right.Right divided
by 50% of the then current market price per Common Share or acquiring company
common share, as the case may be. The Rights will expire on July 18, 2015 unless
previously redeemed or exchanged by the company. The company may redeem and
terminate the Rights in whole, but not in part, at a price of $0.005$0.001 per Right
at any time prior to 10 days following a public announcement that an Acquiring
Party has acquired beneficial ownership of shares representing 30% or more of
the company's outstanding voting power, and in certain other circumstances
as approved bydescribed in the Board of Directors.
The Rights will expire on July 7, 2005.Agreement.
FS-19
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CAPITAL STOCK
Capital stock activity for 2005, 2004 2003 and 20022003 consisted of the following (in
thousands of shares):
Common Stock Class B Treasury
Shares Shares Shares
----------------------------------------
January 1, 2002 Balance 29,838 1,112 (249)
Exercise of stock options 419 - (85)
Stock awards 37 - -
Repurchase of treasury shares - - (53)
--------------------------------------------------------------------------------------------------------------
December 31, 2002 Balance 30,294 1,112 (387)
Exercise of stock options 416 - (110)
Stock awards 29 - -
Repurchase of treasury shares - - (273)
--------------------------------------------------------------------------------------------------------------
December 31, 2003 Balance 30,739 1,112 (770)
Exercise of stock options 449 - (53)
Stock awards 21 - -
Repurchase of treasury shares - - (111)
--------------------------------------------------------------------------------------------------------------
December 31, 2004 Balance 31,209 1,112 (934)
====== ===== =====
Common Stock Class B Treasury
Shares Shares Shares
-----------------------------------------------------------------------------
January 1, 2003 Balance 30,294 1,112 (387)
Exercise of stock options 416 - (110)
Stock awards 29 - -
Repurchase of treasury shares - - (273)
-----------------------------------------------------------------------------
December 31, 2003 Balance 30,739 1,112 (770)
Exercise of stock options 449 - (53)
Stock awards 21 - -
Repurchase of treasury shares - - (111)
-----------------------------------------------------------------------------
December 31, 2004 Balance 31,209 1,112 (934)
Exercise of stock options 465 - (124)
Stock awards 21 - -
-----------------------------------------------------------------------------
December 31, 2005 Balance 31,695 1,112 (1,058)
====== ====== ======
Stock option exercises in 2005 include deferred share activity, which increased
common shares by 108,000 shares and treasury shares by 14,000 shares. Stock
option exercises in 2003 include deferred share activity, which increased common
shares by 75,000 shares and treasury shares by 5,000 shares.
FS-19FS-20
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--ContinuedSTATEMENTS--(Continued)
OTHER COMPREHENSIVE EARNINGS (LOSS)
The components of other comprehensive earnings (loss) are as follows (in
thousands):
Unrealized Gain
Unrealized Gain (Loss) on
Currency (Loss) on Derivative
Translation Available-for-Sale Financial
Adjustments Securities Instruments Total
---------------------------------------------------------------
Balance at January 1, 2002 $(47,832) $ 743 $(1,040) $(48,129)
Foreign currency translation adjustments 28,214 28,214
Unrealized loss on available for sale securities (251) (251)
Deferred tax benefit relating to unrealized loss on available
for sale securities 88 88
Current period unrealized gain on cash flow hedges, net of
reclassifications 2,074 2,074
Deferred tax expense relating to unrealized gain on derivative
financial instruments (725) (725)
---------------------------------------------------------------
Balance at December 31, 2002 (19,618) 580 309 (18,729)2003 $(19,618) $580 $309 $(18,729)
Foreign currency translation adjustments 66,185 66,185
Unrealized gain on available for sale securities 146 146
Deferred tax liability relating to unrealized gain on available
for sale securities (51) (51)
Current period unrealized gain on cash flow hedges, net of
reclassifications 5,394 5,394
Deferred tax expense relating to unrealized gain on derivative
financial instruments (1,888) (1,888)
---------------------------------------------------------------
Balance at December 31, 2003 46,567 675 3,815 51,057
Foreign currency translation adjustments 57,903 57,903
Unrealized loss on available for sale securities (14) (14)
Deferred tax benefit relating to unrealized loss on available
for sale securities 5 5
Current period unrealized loss on cash flow hedges, net of
reclassifications (6,649) (6,649)
Deferred tax benefit relating to unrealized loss on derivative
financial instruments 2,327 2,327
---------------------------------------------------------------
Balance at December 31, 2004 $104,470 $666 $(507) $104,629
===============================================================104,470 666 (507) 104,629
Foreign currency translation adjustments (56,176) (56,176)
Unrealized gain on available for sale securities 54 54
Deferred tax liability relating to unrealized gain on available
for sale securities (19) (19)
Current period unrealized loss on cash flow hedges, net of
reclassifications (1,551) (1,551)
Deferred tax benefit relating to unrealized loss on derivative
financial instruments 543 543
---------------------------------------------------------------
Balance at December 31, 2005 $48,294 $701 $(1,515) $47,480
================================================================
NetA net loss of $283,000 and net gains of $6,650,000 and $500,000 and a net loss of $402,000 were
reclassified into earnings related to derivative instruments designated and
qualifying as cash flow hedges in 2005, 2004 and 2003, respectively.
FS-21
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CHARGE RELATED TO RESTRUCTURING ACTIVITIES
On July 28, 2005, the company announced cost reductions and 2002,profit improvement
actions, which included: reducing global headcount by 230 personnel, outsourcing
improvements utilizing the company's China manufacturing capability and third
parties, shifting substantial resources from product development to
manufacturing cost reduction activities and product rationalization, reducing
freight exposure through freight auctions and changing the freight policy,
general expense reductions, and exiting four facilities.
The restructuring was necessitated by the continued decline in reimbursement by
the U.S. government as well as similar reimbursement pressures abroad and
continued pricing pressures faced by the company as a result of outsourcing by
competitors to lower cost locations.
To date, the company has made substantial progress on its restructuring
activities, including exiting four facilities and eliminating approximately 300
positions through December 31, 2005, which resulted in restructuring charges of
$7,533,000, of which $238,000 is recorded in cost of products sold as it relates
to inventory markdowns. The restructuring charge included charges of $3,981,000
in North America, $2,718,000 in Europe and $834,000 in Asia/Pacific of which
$2,407,000; $799,000 and $146,000 remains unpaid as of December 31, 2005 for
each of the segments respectively. There have been no material changes in
accrued balances related to the charge, either as a result of revisions in the
plan or changes in estimates, and the company expects to utilize the accruals
recorded as of December 31, 2005 during 2006. A progression of the accruals
recorded as a result of the restructuring is as follows (in thousands):
Balance at Balance at
12/31/04 Accruals Payments 12/31/05
-------- -------- -------- --------
Severance $ - $ 6,667 $ 3,563 $ 3,104
Contract terminations - 292 127 165
Product line discontinuance - 238 238 -
Other - 336 253 83
-------- -------- -------- --------
Total $ - $ 7,533 $ 4,181 $ 3,352
======== ======== ======== ========
The severance incurred was the result the reduction in 300 positions, which was
originally estimated to be 230 positions. Additional severance will be incurred
for the planned reduction of 300 positions in 2006 and another 300 positions
thereafter.
With additional actions in 2006, including the elimination of approximately 300
positions, the company anticipates recognizing an additional charge of
$7,000,000. In addition, the company continues to further refine its global
manufacturing and distribution strategy. Execution of these cost reduction
actions has begun. The company expects a global reduction of at least 600
additional positions and to exit a number of its manufacturing operations
worldwide.
INCOME TAXES
Earnings before income taxes consist of the following (in thousands):
2005 2004 2003
2002---- ---- ----
Domestic $18,605 $57,557 $59,027
Foreign 52,697 52,815 47,382
------- ------- -------
Domestic $57,557 $59,027 $51,512$71,302 $110,372 $106,409
======= ======= =======
The company has provided for income taxes (benefits) as follows (in thousands):
2005 2004 2003
---- ---- ----
Current:
Federal $9,475 $14,075 $16,635
State 600 2,800 3,200
Foreign 52,815 47,382 45,01812,475 14,050 11,960
------- ------- -------
$110,372 $106,409 $96,53022,550 30,925 31,795
Deferred:
Federal (2,225) 2,225 1,625
Foreign 2,125 2,025 1,580
------- ------- -------
(100) 4,250 3,205
------- ------- -------
Income Taxes $22,450 $35,175 $35,000
======= ======= ======
FS-20=======
FS-22
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INCOME TAXES --Continued
The company has provided for income taxes as follows (in thousands):
2004 2003 2002
------- ------- -------
Current:
Federal $14,075 $16,635 $21,415
State 2,800 3,200 2,200
Foreign 14,050 11,960 11,195
------- ------- -------
30,925 31,795 34,810
Deferred:
Federal 2,225 1,625 (4,620)
Foreign 2,025 1,580 1,570
------- ------- -------
4,250 3,205 (3,050)
------- ------- -------
Income Taxes $35,175 $35,000 $31,760
======= ======= =======TAXES--Continued
A reconciliation to the effective income tax rate from the federal statutory
rate follows:
2005 2004 2003 2002
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax benefit 0.5 1.6 2.0
1.5
Tax credits (0.8) (1.6) (1.4) (2.3)
Foreign taxes at less than the federal
statutory rate (5.2) (2.1) (2.9)
(2.6)
Other, net (1 0)- - -
2.0 (1.0) .2 1.3
---- ---- ----
31.5% 31.9% 32.9% 32.9%
==== ==== ====
Significant components of deferred income tax assets and liabilities at December
31, 20042005 and 20032004 are as follows (in thousands):
2005 2004
2003
----- --------- ----
Current deferred income tax assets (liabilities), net:
Loss carryforwards $6,246 $7,620 $1,162
Bad debt 7,386 4,366
7,773
Warranty 4,036 3,157 3,094
State and local taxes 2,764 3,048 2,422
Other accrued expenses and reserves 2,754 2,219
2,118
Inventory 1,361 1,816 1,931
Litigation reserves - 2,177
Compensation and benefits 2,061 1,240 968
Product liability 292 291292
Other, net 546 (2,028)
2,637
----- ----------- ------
$27,446 $21,730 $24,573
FS-21
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INCOME TAXES --Continued
2004 2003
----- -----
(In thousands)
Long-term deferred income tax assets (liabilities), net:
Goodwill & intangibles (36,252) (35,431) (3,310)
Fixed assets (20,030) (15,169) (11,003)
Compensation and benefits 10,344 9,642
8,219
Loss and credit carryforwards 5,674 6,429 1,001
Product liability 3,812 3,391 1,282
State and local taxes 2,4002,428 2,400
Valuation reserveallowance (900) - (1,001)
Other, net 7,132 3,905
75
----- ----------- ------
$(27,792) $ (24,833)
$ (2,337)
----- ----------- ------
Net Deferred Income Taxes $(346) $(3,103) $22,236
====== ======
At December 31, 2004,2005, the company had $900,000 of foreign tax credit
carryforwards and had federal foreign tax loss carryforwards of approximately
$47,625,000$45,200,000 of which $43,990,000$33,100,000 are non-expiring, $890,000 are
expiring$350,000 expire in 2009,
$550,000 expire in 2010, $3,800,000 expire in 2011 and $2,745,000 are expiring$7,400,000 expire in
2010.2012. At December 31, 20042005 the company also has $17,550,000$8,250,000 of local foreign tax
loss carryforwards, which are non-expiring. The loss carryforward amounts
include $43,200,000$32,000,000 of federal and $17,550,000$8,250,000 of local loss carryforwards
acquired in 2004 acquisitions. The company made income tax payments of
$10,435,000, $30,180,000 $25,173,000 and $28,769,000$25,173,000 during the years ended December 31,
2005, 2004 and 2003, and 2002, respectively.
FS-23
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NET EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net earnings
per common share.
2005 2004 2003 2002
---- ---- ----
(In thousands except per
share data)
Basic
Average common shares outstanding 31,555 31,153 30,862
30,867
Net earnings $48,852 $75,197 $71,409 $64,770
Net earnings per common share $1.55 $2.41 $2.31 $2.10
Diluted
Average common shares outstanding 31,555 31,153 30,862
30,867
Stock options 897 1,194 867 797
---- ---- ----
Average common shares assuming dilution 32,452 32,347 31,729
31,664
Net earnings $48,852 $75,197 $71,409 $64,770
Net earnings per common share $1.51 $2.33 $2.25 $2.05
At December 31, 2005, 2004, and 2003, 813,191, 21,167, and 501,067 shares,
respectively were excluded from the average common shares assuming dilution, as
they were anti-dilutive. In 2005, 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 $41.46 for 2005. In 2004, the majority of the
anti-dilutive shares were granted at an exercise price of $47.35, which was
higher than the average fair market value price of $44.39 for 2004. In 2003, the
majority of the anti-dilutive shares were granted at an exercise price of
$37.70, which was higher than the average fair market value price of $35.29 for
2003.
FS-22
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONCENTRATION OF CREDIT RISK
The company manufactures and distributes durable medical equipment and supplies
to the home health care, retail and extended care markets. The company performs
credit evaluations of its customers' financial condition. Prior to December
2000, the company financed equipment to certain customers for periods ranging
from 6 to 39 months. In December 2000, Invacare entered into an agreement with
DLL, a third party financing company, to provide the majority of future lease
financing to Invacare's customers. The DLL agreement provides for direct leasing
between DLL and the Invacare customer. The company retains a limited recourse
obligation ($50,010,00041,170,000 at December 31, 2004)2005) to DLL for events of default under
the contracts (total balance outstanding of $104,447,000$101,977,000 at December 31, 2004)2005).
Financial Accounting Standards Board (FASB)FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
requires the company to record a guarantee liability as it relates to the
limited recourse obligation. As such, the company has recorded a liability for
this guarantee obligation. The company monitors the collections status of these
contracts and has provided amounts for estimated losses in its allowances for
doubtful accounts in accordance with SFAS No. 5, Accounting for Contingencies.
Credit losses are provided for in the financial statements.
Substantially all of the company's receivables are due from health care, medical
equipment dealers and long term care facilities located throughout the United
States, Australia, Canada, New Zealand and Europe. A significant portion of
products sold to dealers, both foreign and domestic, is ultimately funded
through government reimbursement programs such as Medicare and Medicaid. In
addition, the company has also seen a significant shift in reimbursement to
customers from managed care entities. As a consequence, changes in these
programs can have an adverse impact on dealer liquidity and profitability. In
addition, reimbursement guidelines in the home health care industry have a
substantial impact on the nature and type of equipment an end user can obtain as
well as the timing of reimbursement and, thus, affect the product mix, pricing
and payment patterns of the company's customers.
FS-24
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The company in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:
Cash, cash equivalents and marketable securities: The carrying amount reported
in the balance sheet for cash, cash equivalents and marketable securities
approximates its fair value.
Installment receivables: The carrying amount reported in the balance sheet for
installment receivables approximates its fair value. The majority of the
portfolio contains receivables, which are due in less than one year. The
interest rates associated with these receivables have not varied significantly
since inception. Management believes that after consideration of the credit
risk, the net book value of the installment receivables approximates market
value.
Long-term debt: Fair values for the company's senior notes are estimated using
discounted cash flow analyses, based on the company's current incremental
borrowing rate for similar borrowing arrangements.
Interest Rate Swaps: The company is a party to interest rate swap agreements,
which are entered into, in the normal course of business to reduce exposure to
fluctuations in interest rates. The agreements are with major financial
institutions, which are expected to fully perform under the terms of the
agreements thereby mitigating the credit risk from the transactions. The
agreements are contracts to exchange fixed rate payments for floating rate
payments over the life of the agreements without the exchange of the underlying
notional amounts. The notional amounts of such agreements are used to measure
interest to be paid or received and do not represent the amount of exposure to
credit loss. The amounts to be paid or received under the interest rate swap
agreements are accrued consistent with the terms of the agreements and market
interest rates. Fair value for the company's interest rate swaps are based on
independent pricing models.
Treasury Locks: The company was a party to treasury lock agreements to protect
the forecasted receipt of proceeds resulting from the issuance of ten year,
fixed rate debt, subject to fluctuations in the benchmark U.S. Treasury rate.
Fair value for the company's interest rate swaps are based on independent
pricing models.
Other investments: The company has made other investments in limited
partnerships and non-marketable equity securities, which are accounted for using
the cost method, adjusted for any estimated declines in value. These investments
were acquired in private placements and there are no quoted market prices or
stated rates of return.
FS-23The carrying amounts and fair values of the company's financial instruments at
December 31, 2005 and 2004 are as follows (in thousands):
2005 2004
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Cash and cash equivalents $25,624 $25,624 $32,567 $32,567
Marketable securities 252 252 199 199
Other investments 8,342 8,342 8,213 8,213
Installment receivables 13,081 13,081 14,746 14,746
Long-term debt (including short-term
borrowings secured by accounts receivable
and current maturities of long-term debt) 537,981 538,053 550,036 551,431
Interest rate swaps (202) (202) 4,302 4,302
Forward contracts (2,330) (2,330) (780) (780)
FS-25
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS --Continued
The carrying amounts and fair values of the company's financial instruments at
December 31, 2004 and 2003 are as follows (in thousands):
2004 2003
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
------- ------ ------- ------
Cash and cash equivalents $32,567 $32,567 $16,074 $16,074
Marketable securities 199 199 214 214
Other investments 8,213 8,213 7,642 7,642
Installment receivables 14,746 14,746 8,279 8,279
Long-term debt (including
current maturities) 550,036 551,431 234,209 237,584
Interest rate swaps 4,302 4,302 6,615 6,615
Forward contracts (780) (780) 6,196 6,196INSTRUMENTS--Continued
Forward Contracts: The company operates internationally and as a result is
exposed to foreign currency fluctuations. Specifically, the exposure includes
intercompany loans and third party sales or payments. In an attempt to reduce
this exposure, foreign currency forward contracts are utilized and accounted for
as hedging instruments. The forward contracts arein 2005 and 2004 were entered into
to hedgeas hedges of the following currencies: USD, NZD, CAD, GBP, EUR, SEK, DKK and
AUD. The company does not use derivative financial instruments for speculative
purposes.
The gains and losses that result from the majority of the forward contracts are
deferred and recognized when the offsetting gains and losses for the identified
transactions are recognized. The company recognized a loss of $280,000 in 2005
and gains of $6,961,000 in 2004 and $1,292,000 in 2003, and $1,184,000 in 2002,respectively, which were
recognized in cost of products sold and selling, general and administrative
expenses.
BUSINESS SEGMENTS
The company operates in three primary business segments based on geographical
area: North America, Europe and Asia/Pacific. The three reportable segments
represent operating groups, which offer products to different geographic
regions.
The North America segment sells each of five primary product lines, which
includes: standard, rehab, distributed, respiratory, and continuing care
products. Europe and Asia/Pacific sell the same product lines with the exception
of distributed products. Each business segment sells to the home health care,
retail and extended care markets.
The company evaluates performance and allocates resources based on profit or
loss from operations before income taxes for each reportable segment. The
accounting policies of each segment are the same as those 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.
Intersegment revenue for reportable segments are $83,135,000,
$74,835,000 and $61,178,000 for the years ended December 31,The information by segment is as follows (in thousands):
2005 2004 2003
-----------------------------------------------------------------------------
Revenues from external customers
North America $1,016,212 $1,002,273 $897,208
Europe 432,142 336,792 279,782
Asia/Pacific 81,378 64,262 70,186
-------- -------- --------
Consolidated $1,529,732 $1,403,327 $1,247,176
========= ========= =========
Intersegment revenues
North America $48,379 $44,517 $38,385
Europe 12,019 2,825 1,179
Asia/Pacific 36,576 35,793 35,271
-------- -------- --------
Consolidated $96,974 $83,135 $74,835
========= ========= =========
Depreciation and 2002, respectively.
FS-24amortization
North America $20,527 $20,644 $18,551
Europe 15,100 8,687 6,315
Asia/Pacific 4,829 2,911 2,261
All Other (1) 68 74 108
-------- -------- --------
Consolidated $40,524 $32,316 $27,235
======== ======== ========
FS-26
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BUSINESS SEGMENTS--Continued
The information by segment is as follows (in thousands):SEGMENTS --Continued
2005 2004 2003
2002
----------------------------------------------------------------------------
Revenues from external customers
North America $1,002,273 $897,208 $793,464
Europe 336,792 279,782 251,443
Asia/Pacific 64,262 70,186 44,254
--------- --------- ---------
Consolidated $1,403,327 $1,247,176 $1,089,161
========= ========= =========
Depreciation and amortization
North America $20,644 $18,551 $19,232
Europe 8,687 6,315 5,699
Asia/Pacific 2,911 2,261 1,623
All Other (1) 74 108 84
--------- --------- ---------
Consolidated $32,316 $27,235 $26,638
========= ========= =========-----------------------------------------------------------------------------
Net interest expense (income)
North America $20,873 $8,940 $7,780
$11,910
Europe 8,628 4,924 4,220
5,256
Asia/Pacific (432) (664) (602) (282)
All Other (1) (943) (2,104) (5,161) (6,312)
--------- --------- ---------
Consolidated $28,126 $11,096 $6,237 $10,572
========= ========= =========
Earnings (loss) before income taxes
North America $58,621 $95,883 $88,299
$76,548
Europe 29,254 18,705 19,132
19,020
Asia/Pacific (3,818) 1,430 5,997 5,740
All Other (1) (12,755) (5,646) (7,019) (4,778)
--------- --------- ---------
Consolidated $71,302 $110,372 $106,409 $96,530
========= ========= =========
Assets
North America $803,759 $778,820 $616,352
$510,135
Europe 647,823 710,510 348,063
295,085
Asia/Pacific 74,101 69,685 56,403 41,185
All Other (1) 97,270 69,109 87,395 60,298
--------- --------- ---------
Consolidated $1,622,953 $1,628,124 $1,108,213 $906,703
========= ========= =========
Long-lived assets
North America $427,428 $428,308 $307,736
$252,624
Europe 508,196 548,843 236,591
194,212
Asia/Pacific 38,866 31,797 24,492 15,831
All Other (1) 77,816 53,905 64,672 45,224
--------- --------- ---------
Consolidated $1,052,306 $1,062,853 $633,491 $507,891
========= ========= =========
Expenditures for assets
North America $20,600 $14,897 $12,513
$11,172
Europe 5,470 20,064 11,933
7,956
Asia/Pacific 5,438 6,441 6,203 2,381
All Other (1) 9 1 11 600
--------- --------- ---------
Consolidated $31,517 $41,403 $30,660 $22,109
========= ========= =========
(1) Consists of the domestic export unit, un-allocated corporate selling,
general and administrative costs, the Invacare captive insurance unit
and inter-company profits, which do not meet the quantitative criteria
for determining reportable segments.
FS-25Net sales by product, are as follows (in thousands):
North America 2005 2004 2003
------------- ---- ---- ----
Standard $251,331 $257,668 $274,959
Rehab 274,417 280,339 273,063
Distributed 220,004 205,130 162,645
Respiratory 159,300 161,247 118,115
Continuing Care 85,487 76,578 48,321
Other 25,673 21,311 20,105
--------- --------- ---------
$1,016,212 $1,002,273 $897,208
========= ========= =========
FS-27
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BUSINESS SEGMENTS--Continued
Net sales by product, are as follows (in thousands):
North AmericaEurope 2005 2004 2003
2002
------------------- ---- ---- ----
Standard $263,121 $200,064 $142,777
Rehab 161,082 128,316 129,167
Respiratory 7,939 8,412 7,838
--------- -------- --------
Standard $257,668 $274,959 $282,627
Rehab 280,339 273,063 211,096
Distributed 205,130 162,645 146,573
Respiratory 161,247 118,115 82,528
Continuing Care 76,578 48,321 40,452
Other 21,311 20,105 30,188
--------- -------- --------
$1,002,273 $897,208 $793,464---------
$432,142 $336,792 $279,782
========= ======== ========
Europe========= =========
Asia/Pacific 2005 2004 2003
2002
------ --------- -------- --------
Standard $200,064 $142,777 $130,617------------ ---- ---- ----
Rehab 128,316 129,167 113,162
Respiratory 8,412 7,838 7,664
--------- -------- --------
$336,792 $279,782 $251,443
========= ======== ========
Asia/Pacific 2004 2003 2002
------------ --------- -------- --------
Rehab$45,852 $34,273 $46,832
$32,752
Respiratory 9,726 8,162 6,584
4,207
Standard 7,977 7,721 6,427
4,680
Other 17,823 14,106 10,343
2,615
--------- -------- ----------------- ---------
$81,378 $64,262 $70,186
$44,254
========= ======== ================= =========
Total Consolidated $1,529,732 $1,403,327 $1,247,176 $1,089,161
========= ========= =========
No single customer accounted for more than 5% of the company's sales.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-------------
(In thousands, except per share data)
20042005 March 31, June 30, September 30, December 31,
---- --------- --------- --------- ---------
Net sales $321,343 $339,288 $349,507 $393,189$370,944 $396,267 $395,270 $367,251
Gross profit 93,379 102,124 106,076 117,013109,844 113,284 118,687 106,690
Earnings before income taxes 21,041 26,698 32,614 30,01919,890 18,958 22,492 9,962
Net earnings 14,201 18,023 22,529 20,44413,545 12,908 15,317 7,082
Net earnings per share - basic .46 .58 .72 .65.43 .41 .48 .22
Net earnings per share - assuming
dilution .44 .56 .70 .63
2003.42 .40 .47 .22
2004 March 31, June 30, September 30, December 31,
---- --------- --------- --------- ---------
Net sales $276,673 $300,114 $327,366 $343,023$321,343 $339,288 $349,507 $393,189
Gross profit 80,451 87,834 98,452 107,92493,379 102,124 106,076 117,013
Earnings before income taxes 18,267 23,022 29,812 35,30821,041 26,698 32,614 30,019
Net earnings 12,257 15,447 20,007 23,69814,201 18,023 22,529 20,444
Net earnings per share - basic .40 .50.46 .58 .72 .65 .76
Net earnings per share - assuming
dilution .39 .49.44 .56 .70 .63 .74
FS-26FS-28
INVACARE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands) COL A. COL B. COL C. COL D.
------ ------ ------ ------
Balance Charged To Balance
At Beginning Cost And Deductions At End
Of Period Expenses Describe Of Period
----------- ----------- ----------- -----------
Year Ended December 31, 2005
----------------------------
Deducted from asset accounts -
Allowance for doubtful accounts $15,576 $14,168 $(6,650)(A) $23,094
Inventory obsolescence reserve 9,532 4,378 (5,319)(B) 8,591
Investments and related notes 29,540 - (21,201)(D) 8,339
Accrued warranty cost 13,998 10,516 (8,931)(B) 15,583
Accrued product liability 17,045 8,780 (4,876)(C) 20,949
Year Ended December 31, 2004 ------------ -------- ---------- ---------
----------------------------
Deducted from asset accounts -
Allowance for doubtful accounts $27,704 $11,222 $(23,350)(A) $15,576
Inventory obsolescence reserve 8,715 2,609 (1,792)(B) 9,532
Investments and related notes 29,540 - - 29,540
receivable
Accrued warranty cost 12,688 9,287 (7,977)(B) 13,998
Accrued product liability 11,909 8,202 (3,066)(C) 17,045
Year Ended December 31, 2003
----------------------------
Deducted from asset accounts -
Allowance for doubtful accounts $32,732 $13,760 $(18,788)(A) $27,704
Inventory obsolescence reserve 5,337 6,623 (3,245)(B) 8,715
Investments and related notes 29,000 540 - 29,540
receivable
Accrued warranty cost 11,448 9,528 (8,288)(B) 12,688
Accrued product liability 8,272 8,058 (4,421)(C) 11,909
Year Ended December 31, 2002
----------------------------
Deducted from asset accounts -
Allowance for doubtful accounts $28,797 $10,792 $(6,857)(A) $32,732
Inventory obsolescence reserve 5,463 2,137 (2,263)(B) 5,337
Investments and related notes 29,000 - - 29,000
receivable
Accrued warranty cost 7,607 11,695 (7,854)(B) 11,448
Accrued product liability 5,816 5,086 (2,630)(C) 8,272
Note (A) - Uncollectible accounts written off, net of recoveries.
Note (B) - Amounts written off or payments incurred.
Note (C) - Loss and loss adjustment.
FS-27
Exhibit 21
Invacare Corporation SubsidiariesNote (D) - ---------------------------------
1. 2030604 Ontario, Inc., an Ontario corporation and wholly owned subsidiary.
2. 3080359 Nova Scotia Company, a Nova Scotia corporation and wholly owned
subsidiary.
3. 6123449 Canada, Inc., a Canadian corporation and wholly owned subsidiary.
4. Adaptive Switch Laboratories, Inc., a Texas corporation and wholly owned
subsidiary.
5. Alber GmbH, Wurenlos, a Swiss corporation and wholly owned subsidiary.
6. Aquatec GmbH, Isny, a German limited liability company.
7. Carroll Healthcare (USA) Inc., a Nevada corporation and wholly owned
subsidiary.
8. Carroll Healthcare Inc. (Chile) Limitada, a Chilean corporation and wholly
owned subsidiary.
9. Carroll Healthcare, Inc., an Ontario corporation and wholly owned
subsidiary.
10. Champion Manufacturing Inc., a Delaware corporation.
11. Dolomite AB, Gislaved, a Swedish corporation and wholly owned subsidiary.
12. Dolomite Holding AB, Gislaved, a Swedish corporation and wholly owned
subsidiary.
13. Dynamic Controls, a New Zealand corporation and wholly owned subsidiary.
14. Dynamic Europe Limited, a U.K. corporation and wholly owned subsidiary.
15. EC-Hong AS, a Danish corporation and wholly owned subsidiary.
16. Freedom Designs, Inc., a California corporation and wholly owned subsidiary
17. Garden City Medical Inc., a Delaware corporation and wholly owned
subsidiary.
18. Groas A/S, a Norwegian corporation and wholly owned subsidiary.
19. Healthtech, Inc., a Missouri corporation and wholly owned subsidiary.
20. Invacare AB, a Swedish corporation and wholly owned subsidiary.
21. Invacare AG, a Swiss corporation and wholly owned subsidiary.
22. Invacare AS, a Danish corporation and wholly owned subsidiary.
23. Invacare AS, a Norwegian corporation and wholly owned subsidiary.
24. Invacare Australia Pty Limited, an Australian corporation and wholly owned
subsidiary.
25. Invacare Bencraft, a U.K. corporation and wholly owned subsidiary.
26. Invacare BV, a Netherlands corporation and wholly owned subsidiary.
27. Invacare Canada Holdings, Inc., a Canadian corporation and wholly owned
subsidiary.
I-36
Invacare Corporation Subsidiaries
- ---------------------------------
28. Invacare Canada Inc., an Ontario corporation and wholly owned subsidiary.
29. Invacare Canadian Holdings, Inc., a Delaware corporation and wholly owned
subsidiary.
30. Invacare Credit Corporation, an Ohio corporation and wholly owned
subsidiary.
31. Invacare Deutschland GmbH, a German corporation and wholly owned
subsidiary.
32. Invacare Florida Corporation, a Delaware corporation and wholly owned
subsidiary.
33. Invacare Germany Holding GmbH, a German corporation and wholly owned
subsidiary
34. Invacare GmbH and Co. KG, a German corporation and wholly owned subsidiary.
35. Invacare Holding AB, a Swedish corporation and wholly owned subsidiary.
36. Invacare Holding BV, a Netherlands corporation and wholly owned subsidiary.
37. Invacare Holding Two AB, a Swedish corporation and wholly owned subsidiary.
38. Invacare Holdings AS, a Norwegian corporation and wholly owned subsidiary.
39. Invacare Holdings CV, a Netherlands wholly owned partnership subsidiary.
40. Invacare Holdings LLC, an Ohio limited liability corporation and wholly
owned subsidiary.
41. Invacare Holdings New Zealand, a New Zealand corporation and wholly owned
subsidiary.
42. Invacare Holdings Two BV, a Netherlands corporation and wholly owned
subsidiary.
43. Invacare International Corporation, an Ohio corporation and wholly owned
subsidiary.
44. Invacare International SARL, a Swiss corporation and wholly owned
subsidiary.
45. Invacare Ltd., a U.K. corporation and wholly owned subsidiary.
46. Invacare Mauritius Holdings, a RepublicElimination of Mauritius Company and wholly
owned subsidiary.
47. Invacare MeccSan SrL, an Italian corporation and wholly owned subsidiary.
48. Invacare Medical Equipment (Kunshan) Company, Ltd., a Chinese company and
wholly owned subsidiary.
49. Invacare Medical Equipment (Suzhou) Company, Ltd., a Chinese company and
wholly owned subsidiary.
50. Invacare New Zealand, a New Zealand corporation and wholly owned
subsidiary.
51. Invacare NV, a Belgium corporation and wholly owned subsidiary.
52. Invacare Poirier SAS, a French corporation and wholly owned subsidiary.
53. Invacare Rea AB, a Swedish corporation and wholly owned subsidiary.
54. Invacare Supply Group, Inc. (formerly Suburban Ostomy Supply Company,
Inc.), a Massachusetts corporation and wholly owned subsidiary.
55. Invacare Trading Company, Inc., a United States Territoryallowance for investment following consolidation
of the Virgin
Islands corporation and wholly owned subsidiary.
I-37
Invacare Corporation Subsidiaries
- ---------------------------------
56. Invacare Verwaltungs GmbH, a German corporation and wholly owned
subsidiary.
57. Invacare(Portugual) - Sociedade Industrial e Comercial de Ortopedia., Lda.,
a Portugal company and wholly owned subsidiary.
58. Invacare, S.A., a Spanish corporation and wholly owned subsidiary.
59. Invamex S.A. de R.L. de C.V., a Mexican corporation and wholly owned
subsidiary.
60. Invatection Insurance Company, a Vermont corporation and wholly owned
subsidiary.
61. Medbloc, Inc., a Delaware corporation and wholly owned subsidiary.
62. Mobilite Building Corporation, a Florida corporation and wholly owned
subsidiary.
63. Mobitec Mobilitatshilfen Ges.m.b.H., Tiefgraben, an Austrian corporation
and wholly owned subsidiary.
64. Mobitec Rehab AG, Wurenlos, a Swiss corporation and wholly owned
subsidiary.
65. Mobitec S.a.r.l., Venissieux, A French corporation and wholly owned
subsidiary.
66. Motion Concepts, L.P., an Ontario wholly owned partnership.
67. Perpetual Motion Enterprises Inc., an Ontario corporation and wholly owned
subsidiary.
68. Pro-Med Australia Pty. Limited., an Australian corporation and wholly owned
subsidiary.
69. Pro-Med Equipment Pty. Limited, an Australian corporation and wholly owned
subsidiary.
70. Roller Chair Pty. Limited, an Australian corporation and wholly owned
subsidiary.
71. Samarite B.V., a Netherlands corporation and wholly owned subsidiary.
72. Scandinavian Mobility GmbH, a German corporation and wholly owned
subsidiary.
73. Scandinavian Mobility International AS, a Danish corporation and wholly
owned subsidiary.
74. Sci Des Hautes Roches, a French partnership and wholly owned subsidiary.
75. Silcraft Corporation, a Michigan corporation and wholly owned subsidiary.
76. The Aftermarket Group, Inc., a Delaware corporation and wholly owned
subsidiary.
77. Ulrich Alber GmbH, Albstadt, a German limited liability company.
78. WP Domus GmbH, a German corporation and wholly owned subsidiary.
79. WP Gesundheits Verwaltungs GmbH, a German limited liability company .
- --------------------------------------------------------------------------------
Note, "Wholly owned subsidiary" refers to indirect, as well as direct, wholly
owned subsidiaries.
I-38
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, No. 33-45993 dated February 24, 1992, No. 33-87052 dated December 5,
1994, No. 33-57978 dated March 30, 2001 and No. 333-109794 dated October 17,
2003) pertaining to the Invacare Corporation stock option plans of our reports
dated March 4, 2005, with respect to the consolidated financial statements and
schedule of Invacare Corporation and subsidiaries, Invacare Corporation
management's assessment of the effectiveness of internal control over financial
reporting, and the effectiveness of internal control over financial reporting of
Invacare Corporation, included in this Annual Report (Form 10-K) for the year
ended December 31, 2004.
/S/ ERNST & YOUNG LLP
Cleveland, Ohio
March 4, 2005
I-39variable interest entity.
FS-29