SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002
----------------------------------------------------------
Commission File Number 0-12938
---------------------------------------------------------
Invacare Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 95-2680965
- ------------------------------ --------------------------------
(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)
One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(440) 329-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
As of October 30, 2002, the company had 29,877,387 Common Shares and 1,112,023
Class B Common Shares outstanding.
<page>
INVACARE CORPORATION
INDEX
Part I. FINANCIAL INFORMATION: Page No.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 2002 and December 31, 2001.....................3
Condensed Consolidated Statement of Earnings -
Three and Nine Months Ended September 30, 2002 and 2001......4
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2002 and 2001................5
Notes to Condensed Consolidated Financial
Statements - September 30, 2002..............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............10
Item 3. Quantitative and Qualitative Disclosure of Market Risk...............15
Item 4. Controls and Procedures..............................................15
Part II. OTHER INFORMATION:
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K.....................................15
SIGNATURES....................................................................15
CERTIFICATIONS................................................................16
Part I. FINANCIAL INFORMATION
- ------------------------------
Item 1... Financial Statements
<table>
<caption>
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, December 31,
2002 2001
------- -------
<s> <c> <c>
(unaudited)
ASSETS (In thousands)
- ------
CURRENT ASSETS
..........Cash and cash equivalents $ 6,045 $ 16,683
..........Marketable securities 1,351 1,188
..........Trade receivables, net 215,696 219,844
..........Installment receivables, net 23,294 35,423
..........Inventories, net 105,810 111,868
..........Deferred income taxes 23,901 24,125
..........Other current assets 15,668 19,270
------- -------
.......... TOTAL CURRENT ASSETS 391,765 428,401
OTHER ASSETS 48,640 44,492
OTHER INTANGIBLES 5,142 5,906
PROPERTY AND EQUIPMENT, NET 132,415 132,202
GOODWILL, NET 318,205 303,536
------- -------
.......... TOTAL ASSETS $896,167 $914,537
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
..........Accounts payable $67,734 $74,133
..........Accrued expenses 85,076 76,000
..........Accrued income taxes 16,704 16,207
..........Current maturities of long-term obligations 5,236 9,083
------- -------
.......... TOTAL CURRENT LIABILITIES 174,750 175,423
LONG-TERM DEBT 251,749 342,724
OTHER LONG-TERM OBLIGATIONS 14,776 14,840
SHAREHOLDERS' EQUITY
..........Preferred shares 0 0
..........Common shares 7,554 7,466
..........Class B common shares 278 278
..........Additional paid-in-capital 96,599 87,980
..........Retained earnings 389,986 344,032
..........Accumulated other comprehensive earnings (25,510) (48,129)
..........Treasury shares (12,846) (9,306)
..........Unearned compensation on stock awards (1,169) (771)
------- -------
.......... TOTAL SHAREHOLDERS' EQUITY 454,892 381,550
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $896,167 $914,537
======== ========
</table>
See notes to condensed consolidated financial statements.
<page>
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Earnings - (unaudited)
<table>
Three Months Ended Nine Months Ended
(In thousands except per share data) September 30, September 30,
2002 2001 2002 2001
-------- -------- ------- -------
<s> <c> <c> <c> <c>
Net sales $280,253 $272,210 $807,180 $792,063
Cost of products sold 192,900 188,372 564,575 550,480
-------- -------- ------- -------
Gross profit 87,353 83,838 242,605 241,583
Selling, general and administrative expense 56,026 45,785 162,400 145,371
Amortization of goodwill and intangibles 316 2,587 990 7,861
Interest income 992 1,716 3,064 6,392
Interest expense 3,441 5,730 12,047 18,377
-------- -------- ------- -------
Earnings before income taxes 28,562 31,452 70,232 76,366
Income taxes 9,400 12,109 23,100 29,401
-------- -------- ------- -------
NET EARNINGS $ 19,162 $ 19,343 $ 47,132 $ 46,965
======== ======== ======== ========
DIVIDENDS DECLARED PER
COMMON SHARE .0125 .0125 .0375 .0375
======== ======== ======== ========
Net earnings per share - basic $ 0.62 $ 0.63 $ 1.53 $ 1.54
======== ======== ======== ========
Weighted average shares outstanding - basic 30,900 30,700 30,843 30,593
======== ======== ======== ========
Net earnings per share - assuming dilution $ 0.61 $ 0.61 $ 1.49 $ 1.48
======== ======== ======== ========
Weighted average shares outstanding -
assuming dilution 31,652 31,818 31,677 31,704
======== ======== ======== ========
</table>
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - (unaudited)
<table>
Nine Months Ended
September 30,
2002 2001
------ ------
<s> <c> <c>
OPERATING ACTIVITIES (In thousands)
Net earnings $47,132 $ 46,965
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 19,076 24,957
Provision for losses on trade and installment receivables 5,495 3,823
Provision for deferred income taxes 660 (197)
Provision for other deferred liabilities 1,171 108
Changes in operating assets and liabilities:
Trade receivables 6,205 (22,215)
Inventories 10,359 (4,788)
Other current assets 4,702 (538)
Accounts payable (9,064) (1,380)
Accrued expenses 7,248 (1,458)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 92,984 45,277
INVESTING ACTIVITIES
Purchases of property and equipment (15,331) (14,458)
Proceeds from sale of property and equipment 122 680
Installment sales contracts, net 11,077 19,785
Marketable securities (391) 64
Other investments (201) (136)
Other long term assets 707 (9,437)
Other 945 (1,736)
------ ------
NET CASH UTILIZED BY INVESTING ACTIVITIES (3,072) (5,238)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term borrowings 152,762 179,928
Principal payments on revolving lines of credit, long-term debt
and capital lease obligations (256,785) (214,398)
Proceeds from exercise of stock options 4,931 8,139
Purchase of treasury stock (1,674) (5,536)
Payment of dividends (1,182) (1,141)
------ ------
NET CASH UTILIZED BY FINANCING ACTIVITIES (101,948) (33,008)
Effect of exchange rate changes on cash 1,398 (9,356)
------ ------
Decrease in cash and cash equivalents (10,638) (2,325)
Cash and cash equivalents at beginning of period 16,683 12,357
------ ------
Cash and cash equivalents at end of period $ 6,045 $ 10,032
====== ======
</table>
See notes to condensed consolidated financial statements.
INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
September 30, 2002
Nature of Operations - Invacare Corporation and its subsidiaries (the "company")
is the leading home medical equipment manufacturer in the world based on the
breadth of its product line and 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, home
respiratory products and disposable medical supplies.
Principles of Consolidation - The consolidated financial statements include the
accounts of the company and include all adjustments, which were of a normal
recurring nature, necessary to present fairly the financial position of the
company as of September 30, 2002 and the results of its operations for the three
and nine months ended September 30, 2002 and 2001 and changes in its cash flows
for the nine months ended September 30, 2002 and 2001. Certain foreign
subsidiaries are consolidated using a one-month lagging. The results of
operations for the three and nine months ended September 30, 2002, are not
necessarily indicative of the results to be expected for the full year.
Reclassifications - Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the presentation used for the
periods ended September 30, 2002.
Use of Estimates - The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
which require management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results may differ from these estimates.
Business Segments - The company operates in three primary business segments
based on geographical area: North America, Europe and Australasia. The three
reportable segments represent operating groups which offer products to different
geographic regions.
The North America segment consists of five operating groups which sell the
following products: wheelchairs, scooters, seating products, patient aid
products, home care beds, disposable medical supplies, extended care beds and
furniture products, respiratory and other products. The Europe segment consists
of one operating group that sells primarily wheelchairs, scooters, self care
products, beds, patient transport and oxygen therapy products. The Australasia
segment consists of two operating groups which sell primarily custom power
wheelchairs, electronic wheelchair and scooter controllers, manual wheelchairs,
beds, oxygen therapy products and patient aids. Each business segment sells to
the home health care, retail and extended care markets.
The company evaluates performance and allocates resources based on profit or
loss from operations before income taxes for each reportable segment. The
accounting policies of each segment are the same as those for the company's
consolidated financial statements. Intersegment sales and transfers are based on
the costs to manufacture plus a reasonable profit element. Therefore,
intercompany profit or loss on intersegment sales and transfers are not
considered in evaluating segment performance. Intersegment sales for reportable
<page>
segments was $16,052,000 and $45,704,000 for the three and nine months ended
September 30, 2002, respectively, and $18,919,000 and $53,069,000 for the same
periods a year ago.
The information by segment is as follows (in thousands):
<table>
<caption>
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------- ------- ------- -------
<s> <c> <c> <c> <c>
Net sales from external customers
North America $199,333 $200,871 $593,223 $585,216
Europe 68,808 60,128 182,204 174,303
Australasia 12,112 11,211 31,753 32,544
------- ------- ------- -------
Consolidated $280,253 $272,210 $807,180 $792,063
======= ======= ======= =======
Earnings (loss) before income taxes
North America $37,319 $ 34,767 $103,171 $ 98,452
Europe 6,627 3,438 12,293 5,237
Australasia 1,706 1,223 3,280 3,262
All Other * (17,090) (7,976) (48,512) (30,585)
------- ------- ------- -------
Consolidated $28,562 $31,452 $70,232 $76,366
======= ======= ======= =======
</table>
* Consists of the domestic export unit, 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.
Net Earnings Per Common Share - The following table sets forth the computation
of basic and diluted net earnings per common share for the periods indicated.
<table>
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
(In thousands, except per share data)
<s> <c> <c> <c> <c>
Basic
Average common shares outstanding 30,900 30,700 30,843 30,593
Net earnings $19,162 $19,343 $47,132 $46,965
Net earnings per common share $ .62 $ .63 $ 1.53 $ 1.54
Diluted
Average common shares outstanding 30,900 30,700 30,843 30,593
Stock awards 8 0 9 0
Stock options 744 1,118 825 1,111
------ ------ ------ ------
Average common shares assuming 31,652 31,818 31,677 31,704
dilution
Net earnings $19,162 $19,343 $47,132 $46,965
Net earnings per common share $ .61 $ .61 $ 1.49 $ 1.48
</table>
<page>
Adoption of SFAS No. 142-Effective January 1, 2002, Invacare adopted SFAS No.
142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with the Statement. The
company has completed the required initial analysis of goodwill impairment,
which indicated no impairment of goodwill as of January 1, 2002.
In accordance with SFAS No. 142, the effect of no longer amortizing goodwill is
reflected prospectively. The following comparative disclosure shows the impact
of adoption had the change been applied retroactively.
<table>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2002 2001 2002 2001
------------------------------------- -------- -------- -------- --------
<s> <c> <c> <c> <c>
Reported net income $ 19,162 $ 19,343 $ 47,132 $ 46,965
Goodwill amortization - 2,216 - 6,733
-------- -------- -------- --------
Adjusted net income $ 19,162 $ 21,559 $ 47,132 $ 53,698
======== ======== ======== ========
Basic earning per share:
Reported net income $0.62 $0.63 $1.53 $1.54
Goodwill amortization - 0.07 - 0.22
-------- -------- -------- --------
Adjusted net income $0.62 $0.70 $1.53 $1.76
======== ======== ======== ========
Diluted earning per share:
Reported net income $0.61 $0.61 $1.49 $1.48
Goodwill amortization - 0.07 - 0.21
-------- -------- -------- --------
Adjusted net income $0.61 $0.68 $1.49 $1.69
======== ======== ======== ========
</table>
All of the company's other intangible assets have definite lives and will
continue to be amortized over their useful lives. As of September 30, 2002 and
December 31, 2001, other intangibles consisted of the following:
September 30, 2002 December 31, 2001
----------------------- ----------------------
(In thousands) Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
License agreements $ 5,948 $ 3,726 $ 5,882 $ 3,185
Patents 2,554 826 2,450 679
Customer list 1,000 438 1,000 250
Non-compete agreements 692 362 689 315
Trademarks and other 880 580 827 513
------ ------ ------ ------
Other intangibles $11,074 $ 5,932 $10,848 $ 4,942
Amortization expense related to other intangibles is expected to be $1,260,000
for 2002, $1,070,000 in 2003, $1,053,000 in 2004, $801,000 in 2005 and $317,000
in 2006. The change in goodwill reflected on the balance sheet for the quarter
was entirely due to currency translation.
<page>
Comprehensive Earnings - Total comprehensive earnings were as follows (in
thousands):
<table>
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
<s> <c> <c> <c> <c>
Net earnings $19,162 $19,343 $47,132 $46,965
Foreign currency translation gain (loss) 8,772 4,657 22,074 (3,261)
Unrealized loss on available for sale securities (210) (226) (230) (317)
Cumulative effect upon adoption of FAS 133 0 0 0 521
Current period unrealized gain (loss) on cash flow
hedges 652 142 775 (1,551)
------ ------ ------ ------
Total comprehensive earnings $28,376 $23,916 $69,751 $42,357
====== ====== ====== ======
</table>
Statement of Cash Flows - The company made payments (in thousands) of:
Nine Months Ended
September 30,
2002 2001
------ ------
Interest $15,706 $23,692
Income taxes 20,505 18,632
Accounts Receivable - On August 1, 2002, American HomePatient Inc. (AHP)
announced that it had filed for reorganization under Chapter 11 of the United
States Bankruptcy Code in order to restructure its bank debt. As of September
30, 2002, Invacare had receivables outstanding due from AHP of approximately
$5,000,000 related to pre-petition debt. Under the AHP proposed reorganization
plan, creditors and vendors would ultimately receive all that they are owed. The
company expects the bankruptcy court to act on the AHP reorganization proposed
by the end of the year.
Inventories - Inventories consist of the following components (in thousands):
September 30, December 31,
2002 2001
------- -------
Raw materials $ 35,393 $ 35,333
Work in process 10,744 11,326
Finished goods 59,673 65,209
------- -------
$105,810 $111,868
======= =======
The final inventory determination under the LIFO method is made at the end of
each fiscal year based on the inventory levels and cost at that point.
Therefore, interim LIFO determinations are based on management's estimates of
expected year-end inventory levels and costs.
<page>
Property and Equipment - Property and equipment consist of the following (in
thousands):
September 30, December 31,
2002 2001
------- -------
Land, buildings and improvements $ 57,254 $ 54,308
Machinery and equipment 196,612 186,622
Furniture and fixtures 15,477 14,516
Leasehold improvements 12,737 11,648
------- -------
282,080 267,094
Less allowance for depreciation (149,665) (134,892)
------- -------
$132,415 $132,202
======= =======
Income Taxes - The company had an effective tax rate of 32.9% for the three
months and nine months ended September 30, 2002 and 38.5% for the same periods a
year ago. The reduction in rates is the result of tax restructuring completed in
the fourth quarter of 2001 and the benefit of the change in accounting for
goodwill.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended September 30, 2002 were $280,253,000,
compared to $272,210,000 for the same period a year ago, representing a 3%
increase. The increase was attributable to higher sales in both Europe and
Australasia, while net sales declined in North America. Year to date net sales
increased 2% to $807,180,000, compared to $792,063,000 for the same period a
year ago. The increase was driven by increases in Europe and North America
partially offset by declines in Australasia. Foreign currency translation had a
3% positive impact on the reported consolidated sales increase for the quarter
and a 1% positive impact for the first nine months.
North American Operations
North American net sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs, seating and scooters), Standard (manual wheelchairs, personal care,
bed products, patient transport and low air loss therapy), Continuing Care (beds
and furniture), Respiratory (oxygen concentrators, aerosol therapy, sleep
therapy and associated products) and Medical Supplies (ostomy, incontinence,
wound care and other medical supplies), decreased 1% for the quarter and
increased 1% for the first nine months of the year compared to the same periods
a year ago. Excluding the impact of two product lines exited by the company this
year, North American net sales grew by 1% in the quarter and 2% year-to-date,
compared to the same periods a year ago. The gain for the quarter was
principally due to sales volume increases in medical supplies (12%) and power
wheelchairs (5%), driven by strong demand for the low-end consumer power
offerings. However, Respiratory and Standard Products sales declined for the
quarter by 17% and 4%, respectively. The Respiratory sales decline was driven by
<page>
slow purchases by national accounts and the company's exit from the liquid
oxygen product line. The decline in Standard Products is due to continued
pricing pressure from low-cost imports from the Far East, the company's exit
from the lift-out chair product line, and weaker demand due to concerns over
"competitive bidding" proposals in Congress related to Medicare reform. With
reimbursement and economic uncertainty, many dealers have limited their
purchases of replacement products for their rental fleets in order to preserve
cash. The gain year-to-date was likewise attributable to sales increases in
Medical Supplies (15%) and Power Wheelchairs (8%) offset by reduced volumes in
Respiratory (12%) and Standard Products (2%).
European Operations
European sales increased to $68,808,000 from $60,128,000 for the quarter and
increased to $182,204,000 from $174,303,000 year to date, compared to the same
periods a year ago. Adjusting for the impact of exchange rate differences,
European sales increased 3% for the quarter and 2% for the first nine months,
when compared to the same periods a year ago. Sales were in line with the
company's expectations for the quarter and year-to-date and new product launches
should continue to contribute to improved sales for the remainder of the year.
Australasia Operations
The Australasia products group consists of Invacare Australia, which imports and
distributes the Invacare range of products and also manufactures and distributes
the Rollerchair range of custom power wheelchairs and Pro Med lifts; Dynamic
Controls, a New Zealand manufacturer of operating components used in power
wheelchairs and scooters; and Invacare New Zealand, a manufacturer of
wheelchairs and beds and a distributor of a wide range of home medical
equipment. Excluding the impact of foreign currency, Australasia sales decreased
2% in the third quarter and 9% for the first nine months, when compared to the
same periods a year ago. Sales continued to be negatively impacted by weak
global economic conditions, which tend to have a more significant impact on this
business than the other businesses of the company.
GROSS PROFIT
Gross profit as a percentage of net sales for the three and nine-month periods
ended September 30, 2002 was 31.2% and 30.1%, respectively, compared to 30.8%
and 30.5% in the same periods last year. For the quarter, the increase in
margins as a percentage of net sales is the result of continued productivity
improvements in the company's manufacturing facilities and favorable product mix
in Europe, offset by pricing pressure, primarily in the standard products line.
The overall decrease in margins as a percentage of net sales for the year is
principally due to a shift in demand toward lower margin products, pricing
pressure in the standard products line and increases in freight costs.
North American margins declined for the quarter and year-to-date by .3% and by
..9% respectively, compared to the same periods a year ago. The declines are
principally the result of a shift in product mix to lower margin products and
pricing pressures in the standard products line coming from increased
competition from low-cost imports. Gross profit in Europe improved for the
quarter and year-to-date by 3.2% and 1.9% respectively, largely due to favorable
product mix from higher margin product, continued cost reductions, and a
strengthening Euro. Gross margin in Australasia declined by approximately 4% and
5%, for the quarter and year-to-date, primarily due to reduced sales in the
company's Dynamic Controls subsidiary.
<page>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense as a percentage of net sales for the
three and nine months ended September 30, 2002 was 20.0% and 20.1%,
respectively, compared to 16.8% and 18.4% in the same periods a year ago.
Foreign currency translation caused an increase in reported spending in the
quarter by 2.9% and had a minimal impact year-to-date.
North American selling, general and administrative costs as a percentage of net
sales increased approximately 4.1 percentage points for the quarter and 2.4
percentage points for the first nine months compared to the same periods a year
ago. North American selling, general and administrative costs include the North
American as well as the other classification as disclosed in the segment
reporting. The overall dollar increase was $7,907,000 for the quarter and
$15,596,000 for the year compared to the same periods a year ago, with foreign
currency having an immaterial impact. The increase primarily resulted from
continued investment in sales and marketing and branding programs implemented to
drive future growth, higher employee benefit costs and insurance costs,
increased investment in additional headcount, and increased bad debt and
depreciation expense. European selling, general and administrative costs grew at
a higher rate than net sales for the quarter and year to date, when compared to
the same periods a year ago. Australasian selling, general and administrative
costs grew at a slower rate than net sales for the quarter and year to date
principally as a result of continued aggressive expense control.
INTEREST
Interest income in the three months ended September 30, 2002 decreased by
approximately $724,000 and by $3,328,000 for the first nine months, when
compared to the same periods a year ago. The decrease was a result of our
third-party financing arrangement with DLL, a subsidiary of Rabo Bank of the
Netherlands, in which the company realizes loan origination fees which are much
lower than the interest income recognized when the company did the financing
itself.
For the quarter and first nine months, interest expense decreased by $2,289,000
and $6,330,000, respectively, compared to the same periods a year ago, as a
result of reduced debt levels and lower effective rates.
INCOME TAXES
The company had an effective tax rate of 32.9% for the three and nine-month
periods ended September 30, 2002 compared to an effective tax rate of 38.5% for
the same periods a year ago. The reduction in rates is the result of tax
restructuring completed in the fourth quarter of 2001 and the benefit of the
change in accounting for goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The company's reported overall level of long-term debt decreased $91.0 million
to $251.7 million for the nine months ended September 30, 2002. After adjusting
for the impact of foreign currency translation and adjusting to market the fair
value hedges, debt decreased by $104.0 million. The company continues to
maintain an adequate liquidity position to fund its working capital and capital
<page>
requirements through its bank lines of credit and working capital management. As
of September 30, 2002, the company had approximately $290.0 million available
under its lines of credit. Under the most restrictive covenant of the company's
borrowing arrangements, the company has the capacity to borrow up to an
additional $204.3 million as of September 30, 2002.
On October 16, 2002, the Company renewed its $100 million 364 day facility which
runs from October 16, 2002 through October 15, 2003. The terms and lenders
involved remained unchanged from the original agreement signed in October of
last year.
The company's borrowing arrangements contain covenants with respect to interest
coverage, net worth, dividend payments, working capital, funded debt to
capitalization and interest coverage, as defined in the company's bank
agreements and agreement with its note holders. As of September 30, 2002, the
company was in compliance with all covenant requirements.
CAPITAL EXPENDITURES
There were no material capital expenditure commitments outstanding as of
September 30, 2002. The company expects to invest in capital projects at a rate
that approximates depreciation and amortization. The company estimates that
capital investments for 2002 will approximate $20 million. The company believes
that its balances of cash and cash equivalents, together with funds generated
from operations and existing borrowing facilities, will be sufficient to meet
its operating cash requirements and fund required capital expenditures for the
foreseeable future.
CASH FLOWS
Cash flows provided by operating activities were $93.0 million for the first
nine months of 2002 compared to $45.3 million in 2001. Operating cash flows
increased in 2002 primarily due to a decrease in inventory and receivables, and
an increase in accrued expenses. These cash inflows were partially offset by
decreased accounts payable. The inventory decrease resulted from an improvement
in inventory turns to 6.2 from 5.7 at year-end, while the accounts receivable
decrease resulted from a decrease in days sales outstanding to 73 days, down
significantly from year-end.
Cash flows utilized by investing activities were $3.1 million for the first nine
months of 2002 compared to $5.2 million in 2001. In 2002, the company purchased
$15.3 million of property and equipment ($14.5 million in 2001) and received
$11.1 million from payments on installment receivables ($19.8 million in 2001).
The decrease in payments received on installment receivables is the result of
the company's agreement with DLL, which now provides lease financing to
Invacare's customers that the company used to provide itself.
Cash flows utilized by financing activities were $101.9 million compared to cash
utilized of $33.0 million in 2001. Financing activities for the first nine
months of 2002 were impacted by the company's continued ability to reduce
long-term borrowings.
The effect of foreign currency translation may result in amounts being shown for
cash flows in the Condensed Consolidated Statement of Cash Flows that are
different from the changes reflected in the respective balance sheet captions.
<page>
DIVIDEND POLICY
On August 15, 2002, the company's Board of Directors declared a quarterly cash
dividend of $.0125 per Common Share to shareholders of record as of October 1,
2002, to be paid on October 15, 2002. At the current rate, the cash dividend
will amount to $.05 per Common Share on an annual basis.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements include accounts of the company and all
majority-owned subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements and related footnotes. In preparing these financial statements,
management has made its best estimates and judgments of certain amounts included
in the financial statements, giving due consideration to materiality. There has
been no change in the company's critical accounting policies as disclosed in the
Form 10-K filed for the year ended December 31, 2001. In addition, no new
critical accounting policies have been adopted in the first nine months of 2002.
The company does not believe that there is a significant likelihood that
materially different amounts would be reported related to its critical
accounting policies. However, application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties and,
as a result, actual results could differ from these estimates.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The company uses
interest rate swap agreements to mitigate its exposure to interest rate
fluctuations. Based on September 30, 2002 debt levels, a 1% change in interest
rates would impact interest expense by approximately $2,089,000 over the next
twelve months. Additionally, the company operates internationally and as a
result is exposed to foreign currency fluctuations. Specifically, the exposure
includes intercompany loans and third party sales or payments. In an attempt to
reduce this exposure, foreign currency forward contracts are utilized. The
company does not believe that any potential loss related to these financial
instruments would have a material adverse effect on the company's financial
condition or results of operations.
FORWARD-LOOKING STATEMENTS
The statements contained in this form 10-Q constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Terms such as "will," "should," "achieve," "estimate," "increase," "plan,"
"can," "expect," "pursue," "benefit," "continue," "exceed," "improve,"
"believe," "anticipate," "build," "strengthen," "new," "lower," "drive," "seek,"
"hope," and "create," as well as similar comments, are forward-looking in
nature. Actual results and events may differ significantly from those expressed
or anticipated as a result of risks and uncertainties which include, but are not
limited to, the following: pricing pressures, increasing raw material costs, the
consolidations of health care customers and competitors, government
reimbursement issues including those that affect the viability of customers, the
ability to design, manufacture and distribute new products with improved
functionality and lower costs, the effect of offering customers competitive
financing terms, Invacare's ability to effectively identify, acquire and
integrate strategic acquisition candidates, the difficulties and risks of
managing and operating businesses in many different foreign jurisdictions, the
timely and efficient completion of facility consolidations, the difficulties in
<page>
acquiring and maintaining a proprietary intellectual property ownership
position, the overall economic, market and industry growth conditions, foreign
currency and interest rate risk, Invacare's ability to improve financing terms
and reduce working capital, as well as the risks described from time to time in
Invacare's reports as filed with the Securities and Exchange Commission (the
"Commission"). The company undertakes no obligation to update any of the
forward-looking or other information contained herein.
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
The information called for by this item is provided under the same caption under
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 4. Controls and Procedures.
As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of the company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the company's disclosure
controls and procedures. Based on that evaluation, the company's management,
including the CEO and CFO, concluded that the company's disclosure controls and
procedures were effective as of September 30, 2002 in ensuring that information
required to be disclosed by the company in the reports it files and submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. There have been
no significant changes subsequent to September 30, 2002 and prior to the date of
this filing in the company's internal controls or in other factors that could
significantly affect internal controls.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A Exhibits: Exhibit 10.1 Invacare Retirement Savings Plan
B Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVACARE CORPORATION
By: /s/ Gerald B. Blouch
-------------------------------------
Gerald B. Blouch
President and Chief Operating Officer
Acting Chief Financial Officer
Date: November 1, 2002
CERTIFICATIONS
I, Gerald B. Blouch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Invacare
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a). designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b). evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c). presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a). all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b). any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
<page>
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
INVACARE CORPORATION
By: /s/ Gerald B. Blouch
-------------------------------------
Gerald B. Blouch
President and Chief Operating Officer
Acting Chief Financial Officer
Date: November 1, 2002
CERTIFICATIONS
I, A. Malachi Mixon, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Invacare
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a). designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b). evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c). presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a). all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b). any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
<page>
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
INVACARE CORPORATION
By: /s/ A. Malachi Mixon, III
-----------------------------
A. Malachi Mixon, III
Chief Executive Officer
Date: November 1, 2002